Business Context and Reporting Period
Company: AAR CORP.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended November 30, 1998 (Fiscal Year 1999)
Business Segment: Aviation Services (Aircraft and Engines, Airframe and Accessories, Manufacturing)
Key Financial Metrics
| Metric (000s omitted) | 3 Months Ended Nov 30, 1998 | 6 Months Ended Nov 30, 1998 | 6 Months Ended Nov 30, 1997 |
|---|---|---|---|
| Net Sales | $228,798 | $444,696 | $351,062 |
| Operating Income | $18,901 | $36,940 | $27,810 |
| Net Income | $10,035 | $19,658 | $15,721 |
| Diluted EPS | $0.36 | $0.70 | $0.56 |
| Cash from Operations (6mo) | $5,611 (vs. $(17,902) prior year) | ||
| Working Capital | $347,314 (as of Nov 30, 1998) | ||
| Long-Term Debt | $178,927 (less current maturities) | ||
| Debt to Capitalization | 36.2% (down from 37.1%) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 27.0% for the quarter and 26.7% for the six-month period compared to the prior year. Growth was driven by strong demand and acquisitions (AVSCO and ATR).
- Profitability: Net income rose 19.3% for the quarter and 25.0% for the six-month period. Operating income increased 26.7% (quarter) and 32.8% (six months).
- Margins: Consolidated gross profit margin decreased slightly to 18.7% for the quarter (from 18.9%) due to inventory mix and lower margins in new parts distribution. The six-month margin remained stable at 18.8%.
- Cash Flow: Operating cash flow improved significantly from a use of $17.9 million in the prior year to a generation of $5.6 million, attributed to timing of accounts payable and higher net income.
- Investing Activities: Investing cash flow turned positive ($12.6 million) due to $11.7 million in proceeds from the divestiture of the floor maintenance products subsidiary and sales of leased equipment.
Outlook, Risks, and Management Commentary
- Divestiture: The Company sold substantially all assets of its floor maintenance products manufacturing subsidiary in the second quarter for approximately $11.7 million.
- Joint Ventures: Formed two new joint ventures: Turbine Engine Asset Management (TEAM) and Aviation Inventory Management Co. (AIMCO) to distribute engine parts and offer aircraft rotable spares alternatives.
- Year 2000 Compliance: The Company is replacing business application systems to be Year 2000 compliant by June 1999. Estimated total capital outlay is approximately $10.4 million, with $4.8 million paid in the first six months of fiscal 1999. Additional sub-system compliance costs are estimated at less than $1.0 million.
- Liquidity: Management maintains $186.3 million in unused bank lines and a universal shelf registration for up to $200 million in securities. An accounts receivable securitization program allows for up to $35 million in sales.
- Risks: Forward-looking statements are subject to risks including system implementation problems, unidentified Year 2000 issues, third-party non-compliance, and market stability.
Investor Verification Checklist
- Verify the impact of the AVSCO and ATR acquisitions on future organic growth rates.
- Monitor the timeline and cost overruns associated with the Year 2000 system replacement project.
- Assess the sustainability of the gross margin compression in the new parts distribution business.
- Review the performance of the new joint ventures (TEAM and AIMCO) under the equity method of accounting.
- Confirm the utilization of the $186.3 million in available credit lines versus actual borrowing needs.