WOOD DALE, Ill., Dec. 16 /PRNewswire-FirstCall/ -- AAR today reported income from continuing operations of $21.4 million, or $0.51 per diluted share for the second quarter ended November 30, 2008. Second quarter results include a $21.0 million impairment charge related to aircraft and a $22.1 million gain on extinguishment of debt. Sales increased 14% to $353.6 million from $310.6 million in the prior year due to the impact of acquisitions. Organic sales increased 3.5% excluding the Aircraft Sales and Leasing segment.
Sales to defense customers increased 32% and represented 43% of total sales. The growth in sales to defense customers was attributable to strong performance at the Company's mobility business, strength in performance-based logistics programs and the impact of the acquisition of SUMMA Technology. Sales to commercial customers increased 3% year over year, while excluding the Aircraft Sales and Leasing segment, the sales growth to commercial customers was 10%. Sales to commercial customers reflect increased aftermarket part sales and the impact of the acquisition of Avborne Heavy Maintenance, offset by lower sales at the Company's component repair business.
In late November, the Company closed on the sale of its industrial gas turbine business, which had previously been reported as a discontinued operation. The after-tax loss from operations and on sale of the discontinued operation was $1.6 million, resulting in second quarter net income of $19.7 million, or $0.47 per diluted share.
During the second quarter, the Company generated $18.6 million of cash from operations and ended the second quarter with $121.8 million of cash on hand. At November 30, 2008, cash on hand and borrowing capacity available under the Company's credit agreement totaled $281 million. Except for $9.6 million of equipment-related financing due in April 2009, the Company's next significant debt maturity is $42.0 million and is not due until May 15, 2011.
"Overall, I am pleased with our second quarter results which were achieved in a challenging economic environment and as many airlines reduced capacity and credit markets tightened. We generated $18.6 million of cash from operations, achieved a 10.2% operating margin excluding the impact of the aircraft impairment, reduced our long-term indebtedness, continued to win new business and took steps to reduce costs," said David P. Storch, Chairman and Chief Executive Officer of AAR CORP.
Following are the highlights for each segment.
Aviation Supply Chain - Sales grew 1% to $146.1 million for the second quarter and gross profit increased 3% to $36.0 million, resulting in a gross profit margin of 24.6% compared to 24.2% last year. The Company's defense logistics business achieved double-digit sales growth during the second quarter while segment sales were unfavorably impacted by a planned reduction in sales to a major regional airline customer and foreign currency translation. Sales growth was also impacted by weakness at the Company's component repair business in Europe.
Maintenance, Repair and Overhaul - Sales grew 27% to $87.4 million for the second quarter and gross profit increased 36% to $13.5 million, resulting in a gross profit margin of 15.4% compared to 14.4% last year. The sales growth reflects the impact of the acquisition of Avborne Heavy Maintenance (now known as AAR Aircraft Services-Miami) and record results at the Company's landing gear business which benefited from investments in assets and productivity improvement initiatives implemented in prior quarters.
Structures and Systems - Sales grew 44% to $114.7 million for the second quarter and gross profit increased 75% to $18.9 million, resulting in a gross profit margin of 16.4% compared to 13.5% in the prior year. Sales were positively impacted by increased market penetration at Mobility Systems and the acquisition of SUMMA Technology. The gross profit margin improvement was driven by the favorable mix of products sold and improved performance at the Company's cargo systems business. During the second quarter, the Company announced a $115 million contract to manufacture shelters as a subcontractor for BAE Systems for its family of medium tactical vehicles for the U.S. Army, a $40 million contract to manufacture containerized roll in/roll out platforms for the U.S. Army and a $300 million pallet repair contract. The $300 million repair contract is not in the Company's backlog.
Aircraft Sales and Leasing - During the second quarter, the Company performed a comprehensive review of its aircraft portfolio to assess the impact of the economic slowdown and credit crisis on market conditions. Based upon that review, and taking into consideration the desire to improve liquidity and generate cash, the Company made the decision to sell one of its four wholly-owned aircraft which had been acquired before September 11, 2001, and offer two of the remaining three aircraft for sale. There is no outstanding debt associated with the two aircraft now offered for sale. As a result of this decision, the Company recorded a $21 million pre-tax impairment charge to reduce the carrying value of the three aircraft to their net realizable value based on current market conditions. In addition, the Company sold two aircraft from its joint venture portfolio resulting in an increase in earnings from joint ventures. At November 30, 2008, the Company's aircraft position includes 27 aircraft held in joint ventures and seven aircraft held in the Company's wholly-owned portfolio. The Company has not acquired any aircraft for lease since November 2007.
Excluding the impact of the impairment charge associated with the aircraft, the consolidated gross profit margin for the Company was 19.8% and the operating margin was 10.2%. Selling, general and administrative expenses as a percentage of sales increased from 10.0% to 10.8% and includes $0.8 million of severance associated with the elimination of certain positions. Annual savings from these reductions is expected to be approximately $3.6 million. The Company also recognized increased bad debt expense of $1.7 million compared to the prior year. Together, the severance and the increase in the provision unfavorably impacted SG&A as a percent of sales by 70 basis points.
The Company retired $56.6 million of its convertible notes for $33.3 million cash. After taking into consideration unamortized debt issuance costs, the Company recorded a $22.1 million pre-tax gain on settlement of the notes. As a result of these transactions, the number of shares used to calculate diluted earnings per share will be reduced by approximately 500,000 and result in $0.03 accretion to diluted earnings per share on an annual basis.
"The results for the first half of the year reflect our intense focus on execution and maintaining a strong balance sheet and liquidity position." Storch continued, "Since December 1, we have invested in certain assets to support our supply chain customers that will contribute to our results in the second half of the fiscal year and given our backlog and our assessment of the risks and opportunities in our markets, we are encouraged with our prospects."
AAR is a leading provider of products and value-added services to the worldwide aerospace and defense industry. With facilities and sales locations around the world, AAR uses its close-to-the-customer business model to serve aviation and defense customers through four operating segments: Aviation Supply Chain; Maintenance, Repair and Overhaul; Structures and Systems and Aircraft Sales and Leasing. More information can be found at http://www.aarcorp.com/.
AAR will hold its quarterly conference call at 7:30 a.m. CST on December 17, 2008. The conference call can be accessed by calling 866-227-1582 from inside the U.S. or 703-639-1129 from outside the U.S. A replay of the call will be available by calling 888-266-2081 from inside the U.S. or 703-925-2533 from outside the U.S. (access code 1307543) from 11:00 a.m. CST on December 17, 2008 until 11:59 p.m. CST on December 24, 2008.
This press release contains certain statements relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on beliefs of Company management, as well as assumptions and estimates based on information currently available to the Company, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, including those factors discussed under Item 1A, entitled "Risk Factors", included in the Company's May 31, 2008 Form 10-K. Should one or more of these risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. These events and uncertainties are difficult or impossible to predict accurately and many are beyond the Company's control. The Company assumes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. For additional information, see the comments included in AAR's filings with the Securities and Exchange Commission.
AAR CORP. and Subsidiaries Consolidated Statements of Operations (In thousands except per share data) Three Months Ended Six Months Ended November 30, November 30, 2008 2007 2008 2007 (Unaudited) (Unaudited) Sales $353,572 $310,647 $713,476 $616,607 Cost and Expenses: Cost of sales 283,730 250,297 576,496 499,717 Cost of sales, impairment 21,033 ---- 21,033 ---- Selling, general and administrative 38,205 30,941 75,003 61,603 Earnings from joint ventures 4,364 1,965 5,812 2,985 Operating income 14,968 31,374 46,756 58,272 Gain on extinguishment of debt 22,098 0 23,208 0 Interest expense 4,981 5,026 9,654 9,364 Interest income and other 496 1,003 862 1,586 Income from continuing operations before income taxes 32,581 27,351 61,172 50,494 Income tax expense 11,229 9,463 21,089 17,351 Income from continuing operations 21,352 17,888 40,083 33,143 Discontinued Operations: Operating loss, net of tax 215 33 546 135 Loss on disposal, net of tax 1,403 ---- 1,403 ---- Net income $19,734 $17,855 $38,134 $33,008 Share Data: Earnings per share - Basic: Earnings from continuing operations $0.56 $0.49 $1.05 $0.90 Loss from discontinued operations (0.04) ---- (0.05) ---- Earnings per share - Basic $0.52 $0.49 $1.00 $0.90 Earnings per share - - Diluted: Earnings from continuing operations $0.51 $0.42 $0.95 $0.78 Loss from discontinued operations (0.04) --- (0.04) --- Earnings per share - Diluted $0.47 $0.42 $0.91 $0.78 Average shares outstanding - Basic 38,079 36,841 38,088 36,858 Average shares outstanding - Diluted 42,802 43,732 42,877 43,770 Consolidated Balance Sheet Highlights (In thousands except per share data) November 30, May 31, 2008 2008 (Derived from Audited financial (Unaudited) statements) Cash and cash equivalents $121,764 $109,391 Current assets 837,808 783,431 Current liabilities (excluding debt accounts) 176,807 195,505 Net property, plant and equipment 149,753 146,435 Total assets 1,382,013 1,362,010 Total recourse debt 485,597 479,544 Total non-recourse obligations 41,321 51,368 Stockholders' equity 620,794 585,255 Book value per share $16.05 $15.09 Shares outstanding 38,670 38,773 Sales By Business Segment (In thousands - unaudited) Three Months Ended Six Months Ended November 30, November 30, 2008 2007 2008 2007 Aviation Supply Chain $146,082 $144,784 $299,596 $287,492 Maintenance, Repair & Overhaul 87,437 68,679 173,747 131,326 Structures and Systems 114,712 79,783 231,481 156,281 Aircraft Sales and Leasing 5,341 17,401 8,652 41,508 $353,572 $310,647 $713,476 $616,607 Gross Profit By Business Segment (In thousands - unaudited) Three Months Ended Six Months Ended November 30, November 30, 2008 2007 2008 2007 Aviation Supply Chain $35,965 $34,970 $71,362 $66,934 Maintenance, Repair & Overhaul 13,503 9,921 26,256 17,961 Structures and Systems 18,856 10,784 36,310 19,905 Aircraft Sales and Leasing (19,515)* 4,675 (17,981)* 12,090 $48,809 $60,350 $115,947 $116,890 * Includes $21 million aircraft impairment charge Diluted Earnings Per Share Calculation - Earnings from Continuing Operations (In thousands except per share data - unaudited) Three Months Ended Six Months Ended November 30, November 30, 2008 2007 2008 2007 Income from continuing operations as reported $21,352 $17,888 $40,083 $33,143 Add: After-tax interest on convertible debt 377 491 761 983 Income from continuing operations for diluted EPS calculation $21,729 $18,379 $40,844 $34,126 Diluted shares outstanding 42,802 43,732 42,877 43,770 Diluted earnings per share from continuing operations $0.51 $0.42 $0.95 $0.78
Note: Pursuant to SEC Regulation G, the Company has included the following reconciliations of financial measures reported on a non-GAAP basis to comparable financial measures reported on the basis of Generally Accepted Accounting Principles ("GAAP"). The Company believes that the adjusted gross and operating profit margin percentages for the three month period ended November 30, 2008 are more representative of the Company's ongoing performance as it excludes the impairment charge
AAR CORP. Three Months Ended (In thousands) November 30, 2008 Gross margin as reported 48,809 Impairment charge 21,033 Gross margin adjusted for impairment charge 69,842 Gross margin % as reported 13.8% Gross margin % adjusted for impairment charge 19.8% Operating Income as reported $14,968 Impairment charge 21,033 Operating Income adjusted for impairment charge $36,001 Operating margin as reported 4.2% Operating margin adjusted for impairment charge 10.2%
