AAR CORP. Form 10-Q Summary
Business Context and Reporting Period
AAR CORP. reported results for the three months ended August 31, 2012, the first quarter of fiscal 2013. The company operates through Aviation Supply Chain, Government and Defense Services, Maintenance, Repair and Overhaul, and Structures and Systems segments. The filing is unaudited and should be read with the fiscal 2012 Form 10-K.
Financial Performance and Position
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Sales | $550.5 million | $485.5 million | 13.4% increase |
| Operating income | $38.4 million | $32.8 million | 17.1% increase |
| Net income attributable to AAR | $18.2 million | $16.6 million | 9.6% increase |
| Diluted EPS | $0.45 | $0.41 | Increase |
| Operating cash flow | $33.2 million | $(25.6) million | Improved by $58.8 million |
- Gross profit was $90.3 million versus $75.7 million; the consolidated gross margin was approximately 16.4% versus 15.6%.
- Operating margin was approximately 7.0% versus 6.8%. Net margin was approximately 3.3% versus 3.4%.
- Cash was $67.7 million at August 31, 2012, unchanged from May 31, 2012. Working capital was $617.0 million.
- Total debt was $787.6 million, including $108.2 million of current maturities. Long-term debt was $679.4 million.
- The unsecured revolving credit facility had $300.0 million outstanding and approximately $254.3 million available after letters of credit. The secured facility had $31.2 million outstanding and $33.8 million available.
- Investing activities used $16.9 million, primarily for the final $16.5 million payment related to the Telair and Nordisk acquisitions. Financing activities used $17.0 million, including debt reduction, dividends, and share repurchases.
Material Changes Versus the Prior Comparable Period
- Commercial sales increased 24.7% and represented 57.2% of consolidated sales. Government and defense sales increased 1.1% and represented 42.8%.
- Structures and Systems sales increased 79.4% to $145.7 million, primarily due to $56.8 million of revenue from acquired Telair and Nordisk businesses. Segment gross margin increased to 19.0% from 14.7%.
- Maintenance, Repair and Overhaul sales increased 13.2%, with gross margin improving to 12.3% from 10.9% due to operational efficiencies and higher billable hours.
- Aviation Supply Chain sales declined 7.7%, partly because the prior-year period included approximately $33.3 million of aircraft sales. Segment gross margin declined to 15.9% from 16.3%.
- Government and Defense Services sales were essentially flat, while gross margin declined to 17.2% from 18.3% because of lower margins on certain defense logistics programs.
- Selling, general and administrative expense increased 23.7%, reflecting the acquired businesses and higher intangible-asset amortization. Net interest expense increased 37.8%, primarily due to borrowings used to fund the acquisitions.
- The company repurchased $5.0 million face value of 2.25% convertible notes and $8.0 million face value of 1.75% convertible notes, recognizing a $0.2 million extinguishment loss.
- AAR repurchased 475,000 shares under its program for approximately $6.1 million. Approximately $43.9 million remained available under the $50.0 million authorization.
Guidance, Outlook, Risks, and Unusual Items
- Management raised fiscal 2013 EPS guidance to $1.60 to $1.70 from the prior range of $1.55 to $1.65.
- Management expects defense spending reductions. The filing identifies potential adverse effects on Structures and Systems businesses supporting the Department of Defense, while Supply Chain and Maintenance, Repair and Overhaul businesses may have additional opportunities.
- The filing highlights risks from the scheduled January 2, 2013 sequestration process, federal budget uncertainty, airline industry conditions, economic conditions, foreign exchange, interest rates, and access to credit markets.
- At August 31, 2012, AAR had $30.7 million of unbilled receivables and $28.9 million of costs in excess of billings related to a defense supply-chain support agreement. Recovery depends on future customer paperwork and billings.
- Capitalized A400M program development costs totaled $101.7 million. Recoverability depends on expected program revenues and manufacturing costs; unfavorable differences could result in impairment or other charges.
- The purchase price allocation for Telair and Nordisk remained preliminary, with potential material adjustments to acquired asset values, liabilities, goodwill, depreciation, and amortization.
- The company entered into interest-rate derivatives covering $50 million of notional principal each for a swap and a cap. The interest-rate swap had a $5.0 million liability fair value at quarter-end.
- Management stated that all financial covenants were satisfied, disclosure controls were effective, and there were no material changes to previously disclosed risk factors.
- Beginning in the second quarter of fiscal 2013, the company expected to report two segments: Aviation Services and Manufacturing and Systems.
Important Facts for Investors to Verify
- Confirm the contribution, integration, and final purchase accounting for Telair, Nordisk, and Airinmar.
- Assess whether the improved operating cash flow is sustainable, particularly as inventories increased and accounts payable declined during the quarter.
- Monitor debt maturities, convertible-note repurchases, variable-rate exposure, and available revolving-credit capacity.
- Evaluate the effect of U.S. defense-budget reductions and sequestration on Structures and Systems and defense logistics programs.
- Track the recoverability of the A400M capitalized development costs and the defense supply-chain unbilled receivables and costs in excess of billings.
- Compare subsequent results with the raised fiscal 2013 EPS guidance of $1.60 to $1.70 and examine the effect of the new segment presentation.