AAR Reports Third Quarter Fiscal Year 2013 Results

AAR (NYSE: AIR) today reported third quarter fiscal year 2013 consolidated sales of $520.2 million and net income of $18.4 million, or $0.46 per diluted share. This compares to year-ago sales of $534.2 million and net income of $20.6 million, or $0.50 per diluted share. The prior year’s third quarter included an income tax benefit of $4.0 million, or $0.09 per share.

Sales in the Aviation Services segment increased 9% to $408.2 million and sales in the Technology Products segment declined 30% to $112 million. Commercial sales increased 7% over the prior year’s third quarter, increasing to 62% of consolidated sales as compared to 57% of consolidated sales in the same period last year. Increased sales in the commercial market were driven by growth in the Company’s parts supply businesses and airframe maintenance centers, including a modest contribution from the Company’s recently opened Duluth MRO facility. The Company noted that revenues from the Telair and Nordisk acquisitions were included, for the first time, in both current and prior year quarter results.

Sales to government and defense customers represented 38% of consolidated sales and declined 15% compared to the year-ago third quarter. As expected and as experienced in the second quarter of this fiscal year, the reduction was primarily due to lower mobility product revenues.

“We are pleased to report another solid quarter driven by continued positive trends in the commercial aftermarket and our ability to drive strong cash flow and improved profitability,” said David P. Storch, Chairman and Chief Executive Officer of AAR CORP.

This quarter’s results include two unrelated transactions that impacted operating results but essentially offset each other. First, the Company finalized a payment on an earn-out liability related to a recent acquisition, which resulted in a $9.0 million gain. This was recorded as a reduction to selling, general and administrative expenses. Second, the Company entered into a sales agreement with a buyer to acquire certain inventory and entered into a separate agreement with the buyer to market the inventory for a commission. The Company received $9.1 million cash and recorded a $9.1 million loss on inventory as a result of the transaction. Revenue will be recognized on this transaction as the inventory is sold to third parties.

Consolidated gross profit margin for the third quarter, excluding the 1.7 percentage point impact for the above inventory transaction, was consistent with the prior year, but was reported as 14.6% compared to 16.3% in the year-ago period. Operating income in the third quarter was $37.6 million, a margin of 7.2% as compared to $35.8 million, or 6.7% of sales in the prior year.

Net interest expense in the third quarter declined $0.4 million to $9.8 million reflecting lower interest costs on reduced debt levels.

The Company generated $27.5 million in cash flow from operations and had capital expenditures of $4.8 million in the third quarter. The Company declared and paid dividends of $3.0 million and further reported that it has reduced its net indebtedness by $86 million since the third quarter of last fiscal year when it made the Telair and Nordisk acquisitions.

On January 31, 2013, certain holders of the 1.75% Convertible Senior Notes (the “Notes”) surrendered their securities for purchase by AAR pursuant to the terms of the indenture. The aggregate purchase price for the Notes surrendered was $62.8 million. The Company also entered into an exchange transaction with a holder of $22.7 million of the Notes whereby the holder exchanged its Note and $7.3 million cash, for a new $30 million note due February 1, 2015, priced to yield 3.75%. These transactions reduced the number of shares used in the diluted earnings per share calculation by approximately 0.9 million shares in the third quarter, and will reduce the number of shares used in the fourth quarter diluted earnings per share calculation by an additional 2.2 million shares.

The Company increased full year earnings guidance to $1.78 to $1.82 earnings per share and expects full year revenues to be approximately $2.15 billion.