AAR CORP. Form 10-Q Summary
Business Context and Reporting Period
AAR CORP. reported results for the quarter and six months ended November 30, 2014, representing the second quarter and first six months of fiscal 2015. The company operates through Aviation Services and Technology Products, serving commercial aviation, government and defense, aerospace, and related markets.
Financial Performance and Position
| Metric | Three Months Ended Nov. 30, 2014 | Prior Year | Six Months Ended Nov. 30, 2014 | Prior Year |
|---|---|---|---|---|
| Sales | $490.0 million | $540.7 million | $959.2 million | $1,055.2 million |
| Operating income | $32.1 million | $40.7 million | $63.1 million | $78.9 million |
| Net income attributable to AAR | $15.2 million | $20.0 million | $29.6 million | $37.9 million |
| Diluted EPS | $0.38 | $0.50 | $0.74 | $0.95 |
- Consolidated gross profit was $78.5 million for the quarter and $153.8 million for the six-month period, implying gross margins of approximately 16.0% and 16.0%, respectively, versus approximately 16.8% and 16.7% in the comparable periods.
- Quarterly operating margin was approximately 6.6%, compared with 7.5% in the prior year; six-month operating margin was approximately 6.6%, compared with 7.5%.
- Interest expense declined to $9.6 million for the quarter and $19.2 million for six months, from $10.5 million and $21.5 million, respectively.
- The effective tax rate was 32.7% for both the quarter and six-month period, compared with 34.4% and 34.5%, respectively.
- Cash and cash equivalents were $92.6 million at November 30, 2014, compared with $89.2 million at May 31, 2014. Reported working capital was $814.9 million.
- Cash flow from operating activities was $31.0 million for the six months, compared with $66.3 million in the prior year. The MD&A section separately states $30.8 million; the filing does not explain the difference.
- Investing activities used $17.3 million, principally for $17.1 million of property, plant, and equipment expenditures. Financing activities used $8.6 million.
- Total debt was $635.3 million at November 30, 2014, including $46.3 million of current maturities and $589.0 million of long-term debt. The company had $170.0 million outstanding under its $475.0 million unsecured revolving facility, approximately $15.0 million of letters of credit, and approximately $290.0 million of remaining availability.
- The company also had $25.3 million outstanding under a $40.0 million secured credit facility expiring April 23, 2015, and $5.1 million available under a foreign line of credit. Management stated that it intended to fund maturities due within 12 months through cash on hand and revolving-credit borrowings.
Material Changes Versus the Prior Comparable Period
- Six-month sales declined 9.1%, primarily because government and defense sales fell $109.9 million, or 24.5%, following reduced U.S. Department of Defense demand for expeditionary airlift services in Afghanistan and the absence of aircraft deliveries made in the prior year.
- Aviation Services sales decreased 9.4% for six months, while commercial Aviation Services sales increased 4.4%. Defense Aviation Services sales decreased 27.5%.
- Technology Products sales decreased 8.0% for six months. Defense sales declined 13.1%, while commercial sales declined 4.6%.
- Aviation Services commercial gross profit increased 9.4% for six months, but defense gross profit decreased 31.2%. Technology Products gross profit decreased 20.8%, reflecting lower volumes and unfavorable product mix.
- At November 30, 2014, 17 aircraft were in revenue service versus 40 at the beginning of fiscal 2014. Sixteen aircraft were actively marketed for sale, including eight fixed-wing and eight rotary-wing aircraft; total aircraft held for sale increased to 16 from nine at May 31, 2014.
- SG&A declined $6.8 million for the six-month period due to cost-control actions, partially offsetting lower segment gross profit.
- Capitalized A400M program development costs, net of reimbursements and amortization, declined to $128.5 million from $139.8 million at May 31, 2014. Six-month amortization increased to $16.5 million from $2.8 million.
- During the quarter, the company repurchased all outstanding 1.75% convertible notes due February 1, 2015, with a $30.0 million face value, for $31.1 million including accrued interest.
- Accumulated other comprehensive loss increased to $52.8 million from $29.3 million, primarily due to currency translation losses.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- The filing provides no specific revenue, earnings, or cash-flow guidance.
- Management expects commercial aftermarket parts demand and supply-chain volumes to support growth, but results remain exposed to lower defense demand, particularly the drawdown of U.S. forces in Afghanistan.
- Additional aircraft may be offered for sale if they are not utilized in new contract awards. Aircraft sale timing and realizable values may affect earnings, cash flow, and asset carrying values.
- Recovery of the A400M capitalized program costs depends on expected future revenue and manufacturing costs. Differences between assumptions and actual results could result in impairment or adverse effects on operating results and financial condition.
- Working-capital investment increased materially, including higher accounts receivable and inventories associated with new supply-chain contracts. This contributed to the decline in operating cash flow.
- Key risks include government and defense budget changes, contract demand and execution, aircraft utilization and resale values, commercial aviation conditions, foreign-exchange movements, variable interest rates, access to credit markets, and compliance with debt covenants.
- A hypothetical 10% devaluation of the U.S. dollar against foreign currencies would have reduced quarterly pretax income by approximately $3 million, according to the filing.
- The company reported compliance with all financial and other debt covenants. Disclosure controls were deemed effective, and management reported no material changes in internal control over financial reporting.
- The company maintained an authorized share-repurchase program with approximately $34.4 million remaining available at November 30, 2014; 70,000 shares were repurchased under the program during the quarter.
Important Facts for Investors to Verify
- Reconcile the $31.0 million operating cash-flow amount in the financial statements with the $30.8 million amount cited in MD&A.
- Assess whether the decline in Afghanistan-related expeditionary airlift activity is stabilizing and whether replacement contracts or aircraft sales can offset the reduction.
- Monitor the 16 aircraft held for sale, including valuation, sale timing, and potential impairment or disposal gains and losses.
- Evaluate the recoverability of the $128.5 million of capitalized A400M program costs and the impact of substantially higher amortization.
- Review refinancing and liquidity plans for the secured facility expiring April 23, 2015 and other current debt maturities.
- Track working-capital requirements, particularly inventories, accounts receivable, and unbilled or costs-in-excess-of-billings balances related to the KC-10 supply agreement.
- Confirm the effect of defense-budget trends, commercial aftermarket demand, product mix, foreign-currency movements, and variable interest rates on future margins and cash generation.