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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 2010
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-6263
AAR CORP.
(Exact name of registrant as specified in its charter)
|
Delaware |
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36-2334820 |
|
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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One AAR Place, 1100 N. Wood Dale Road Wood Dale, Illinois |
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60191 |
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(Address of principal executive offices) |
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(Zip Code) |
(630) 227-2000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 30, 2010, there were 39,677,152 shares of the registrant’s Common Stock, $1.00 par value per share, outstanding.
Quarterly Report on Form 10-Q
For the Quarter Ended November 30, 2010
Table of Contents
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3-4 |
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5 |
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6 |
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7 |
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8-19 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
20-26 |
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26 |
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26 |
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27 |
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27 |
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27 |
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28 |
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29 |
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PART I — FINANCIAL INFORMATION
AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of November 30, 2010 and May 31, 2010
(In thousands)
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November 30, |
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May 31, |
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2010 |
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2010 |
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(Unaudited) |
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Assets: |
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Current assets: |
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Cash and cash equivalents |
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$ |
49,320 |
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$ |
79,370 |
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Accounts receivable, less allowances of $5,090 and $4,773, respectively |
|
257,354 |
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238,466 |
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Inventories |
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387,175 |
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370,282 |
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Rotable spares and equipment on or available for short-term lease |
|
137,373 |
|
126,622 |
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Deposits, prepaids and other |
|
29,047 |
|
27,194 |
|
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Deferred tax assets |
|
21,495 |
|
21,495 |
|
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Total current assets |
|
881,764 |
|
863,429 |
|
||
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|
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Property, plant and equipment, net of accumulated depreciation of $213,181 and $194,139, respectively |
|
263,752 |
|
224,866 |
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Other assets: |
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Goodwill and other intangible assets, net |
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161,517 |
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169,253 |
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Equipment on long-term lease |
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105,596 |
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109,564 |
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Investment in joint ventures |
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48,016 |
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48,433 |
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Other |
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96,582 |
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85,497 |
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|
|
411,711 |
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412,747 |
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$ |
1,557,227 |
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$ |
1,501,042 |
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The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of November 30, 2010 and May 31, 2010
(In thousands)
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November 30, |
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May 31, |
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2010 |
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2010 |
|
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(Unaudited) |
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Liabilities and equity: |
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Current liabilities: |
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Short-term debt |
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$ |
60,000 |
|
$ |
45,009 |
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Current maturities of long-term debt |
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53,252 |
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53,292 |
|
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Current maturities of non-recourse long-term debt |
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789 |
|
757 |
|
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Current maturities of long-term capital lease obligations |
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1,858 |
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1,775 |
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Accounts payable |
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129,789 |
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114,906 |
|
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Accrued liabilities |
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106,118 |
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109,811 |
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Total current liabilities |
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351,806 |
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325,550 |
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Long-term debt, less current maturities |
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313,408 |
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317,594 |
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Non-recourse debt |
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11,452 |
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11,855 |
|
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Capital lease obligations |
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5,777 |
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6,742 |
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Deferred tax liabilities |
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59,341 |
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57,335 |
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Other liabilities and deferred income |
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34,551 |
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35,616 |
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424,529 |
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429,142 |
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Equity: |
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Preferred stock, $1.00 par value, authorized 250 shares; none issued |
|
— |
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— |
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Common stock, $1.00 par value, authorized 100,000 shares; issued 44,989 and 44,870 shares, respectively |
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44,989 |
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44,870 |
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Capital surplus |
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417,725 |
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416,842 |
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Retained earnings |
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449,775 |
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419,287 |
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Treasury stock, 5,311 and 5,386 shares at cost, respectively |
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(102,477 |
) |
(104,447 |
) |
||
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Accumulated other comprehensive loss |
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(28,564 |
) |
(29,646 |
) |
||
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Total AAR shareholders’ equity |
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781,448 |
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746,906 |
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Noncontrolling interest |
|
(556 |
) |
(556 |
) |
||
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Total equity |
|
780,892 |
|
746,350 |
|
||
|
|
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$ |
1,557,227 |
|
$ |
1,501,042 |
|
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Income
For the Three and Six Months Ended November 30, 2010 and 2009
(Unaudited)
(In thousands, except per share data)
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Three Months Ended |
|
Six Months Ended |
|
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November 30, |
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November 30, |
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||||||||
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2010 |
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2009 |
|
2010 |
|
2009 |
|
||||
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Sales: |
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Sales from products |
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$ |
317,593 |
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$ |
269,346 |
|
$ |
605,302 |
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$ |
541,875 |
|
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Sales from services |
|
129,461 |
|
59,338 |
|
253,949 |
|
128,332 |
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447,054 |
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328,684 |
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859,251 |
|
670,207 |
|
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Costs and operating expenses: |
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Cost of products |
|
273,550 |
|
221,007 |
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515,902 |
|
464,476 |
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Cost of services |
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99,328 |
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43,817 |
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198,285 |
|
87,848 |
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Selling, general and administrative |
|
43,334 |
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37,591 |
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86,039 |
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74,483 |
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||||
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416,212 |
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302,415 |
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800,226 |
|
626,807 |
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Earnings from joint ventures |
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2,529 |
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11 |
|
2,557 |
|
94 |
|
||||
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Operating income |
|
33,371 |
|
26,280 |
|
61,582 |
|
43,494 |
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||||
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Gain on extinguishment of debt |
|
— |
|
— |
|
97 |
|
913 |
|
||||
|
Interest expense |
|
(7,579 |
) |
(6,463 |
) |
(15,010 |
) |
(13,020 |
) |
||||
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Interest income |
|
76 |
|
290 |
|
236 |
|
606 |
|
||||
|
Income before provision for income taxes |
|
25,868 |
|
20,107 |
|
46,905 |
|
31,993 |
|
||||
|
Provision for income taxes |
|
9,054 |
|
6,914 |
|
16,417 |
|
9,642 |
|
||||
|
Net income attributable to AAR and noncontrolling interest |
|
16,814 |
|
13,193 |
|
30,488 |
|
22,351 |
|
||||
|
Loss attributable to noncontrolling interest |
|
— |
|
119 |
|
— |
|
1,165 |
|
||||
|
Net income attributable to AAR |
|
$ |
16,814 |
|
$ |
13,312 |
|
$ |
30,488 |
|
$ |
23,516 |
|
|
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|
|
|
|
|
|
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|
||||
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Earnings per share — basic |
|
$ |
0.44 |
|
$ |
0.35 |
|
$ |
0.80 |
|
$ |
0.62 |
|
|
|
|
|
|
|
|
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|
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|
||||
|
Earnings per share — diluted |
|
$ |
0.42 |
|
$ |
0.34 |
|
$ |
0.77 |
|
$ |
0.61 |
|
|
Weighted average common shares outstanding — basic |
|
38,301 |
|
38,143 |
|
38,335 |
|
38,121 |
|
||||
|
Weighted average common shares outstanding — diluted |
|
43,230 |
|
42,869 |
|
43,092 |
|
42,764 |
|
||||
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended November 30, 2010 and 2009
(Unaudited)
(In thousands)
|
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Six Months Ended |
|
||||
|
|
|
November 30, |
|
||||
|
|
|
2010 |
|
2009 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
||
|
Net income attributable to AAR and noncontrolling interest |
|
$ |
30,488 |
|
$ |
22,351 |
|
|
Adjustments to reconcile net income attributable to AAR and noncontrolling interest to net cash provided from operating activities: |
|
|
|
|
|
||
|
Depreciation and amortization |
|
28,804 |
|
17,478 |
|
||
|
Amortization of debt discount |
|
6,051 |
|
5,755 |
|
||
|
Stock-based compensation |
|
5,828 |
|
4,004 |
|
||
|
Deferred tax provision |
|
2,555 |
|
(5,666 |
) |
||
|
Tax benefits from exercise of stock options |
|
(15 |
) |
(223 |
) |
||
|
Gain on extinguishment of debt |
|
(97 |
) |
(913 |
) |
||
|
Earnings from joint ventures |
|
(2,557 |
) |
(94 |
) |
||
|
Changes in certain assets and liabilities: |
|
|
|
|
|
||
|
Accounts and notes receivable |
|
(14,191 |
) |
30,171 |
|
||
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Inventories |
|
(16,951 |
) |
6,967 |
|
||
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Rotable spares and equipment on or available for short-term lease |
|
(10,926 |
) |
15,413 |
|
||
|
Equipment on long-term lease |
|
(129 |
) |
1,223 |
|
||
|
Accounts payable |
|
14,814 |
|
(18,595 |
) |
||
|
Accrued and other liabilities |
|
(4,667 |
) |
(16,251 |
) |
||
|
Other, primarily deposits and program costs |
|
(9,195 |
) |
(3,484 |
) |
||
|
Net cash provided from operating activities |
|
29,812 |
|
58,136 |
|
||
|
Cash flows from investing activities: |
|
|
|
|
|
||
|
Property, plant and equipment expenditures |
|
(59,930 |
) |
(15,000 |
) |
||
|
Proceeds from disposal of assets |
|
21 |
|
54 |
|
||
|
Proceeds from aircraft joint ventures |
|
4,694 |
|
37 |
|
||
|
Investment in aircraft joint ventures |
|
(4,483 |
) |
(4,117 |
) |
||
|
Proceeds from leveraged leases |
|
— |
|
5,220 |
|
||
|
Other |
|
(1,381 |
) |
(1,302 |
) |
||
|
Net cash used in investing activities |
|
(61,079 |
) |
(15,108 |
) |
||
|
Cash flows from financing activities: |
|
|
|
|
|
||
|
Change in short-term borrowings, net |
|
14,991 |
|
103 |
|
||
|
Reduction in borrowings |
|
(10,482 |
) |
(49,481 |
) |
||
|
Reduction in capital lease obligations |
|
(881 |
) |
(957 |
) |
||
|
Reduction in equity due to convertible bond repurchases |
|
(236 |
) |
(254 |
) |
||
|
Purchase of treasury stock |
|
(2,539 |
) |
— |
|
||
|
Stock option exercises |
|
347 |
|
465 |
|
||
|
Tax benefits from exercise of stock options |
|
15 |
|
223 |
|
||
|
Contributions from noncontrolling interest |
|
— |
|
231 |
|
||
|
Net cash provided from (used in) financing activities |
|
1,215 |
|
(49,670 |
) |
||
|
Effect of exchange rate changes on cash |
|
2 |
|
(160 |
) |
||
|
Decrease in cash and cash equivalents |
|
(30,050 |
) |
(6,802 |
) |
||
|
Cash and cash equivalents, beginning of period |
|
79,370 |
|
112,505 |
|
||
|
Cash and cash equivalents, end of period |
|
$ |
49,320 |
|
$ |
105,703 |
|
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
AAR CORP. and Subsidiaries
Condensed Consolidated Statement of Changes in Equity
For the Six Months Ended November 30, 2010
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
Other |
|
Total AAR |
|
|
|
|
|
||||||||
|
|
|
Common |
|
Capital |
|
Retained |
|
Treasury |
|
Comprehensive |
|
Shareholders’ |
|
Noncontrolling |
|
Total |
|
||||||||
|
|
|
Stock |
|
Surplus |
|
Earnings |
|
Stock |
|
Income (Loss) |
|
Equity |
|
Interest |
|
Equity |
|
||||||||
|
Balance, May 31, 2010 |
|
$ |
44,870 |
|
$ |
416,842 |
|
$ |
419,287 |
|
$ |
(104,447 |
) |
$ |
(29,646 |
) |
$ |
746,906 |
|
$ |
(556 |
) |
$ |
746,350 |
|
|
Net income |
|
— |
|
— |
|
30,488 |
|
— |
|
— |
|
30,488 |
|
— |
|
30,488 |
|
||||||||
|
Exercise of stock options and stock awards |
|
1 |
|
1,972 |
|
— |
|
(573 |
) |
— |
|
1,400 |
|
— |
|
1,400 |
|
||||||||
|
Tax benefit related to share-based plans |
|
— |
|
15 |
|
— |
|
— |
|
— |
|
15 |
|
— |
|
15 |
|
||||||||
|
Restricted stock activity |
|
118 |
|
(1,554 |
) |
— |
|
5,219 |
|
— |
|
3,783 |
|
— |
|
3,783 |
|
||||||||
|
Repurchase of shares |
|
— |
|
— |
|
— |
|
(2,539 |
) |
— |
|
(2,539 |
) |
— |
|
(2,539 |
) |
||||||||
|
Bond hedge and warrant activity |
|
— |
|
137 |
|
— |
|
(137 |
) |
— |
|
— |
|
— |
|
— |
|
||||||||
|
Equity portion of bond repurchase |
|
— |
|
313 |
|
— |
|
— |
|
— |
|
313 |
|
— |
|
313 |
|
||||||||
|
Foreign currency translation gain |
|
— |
|
— |
|
— |
|
— |
|
1,082 |
|
1,082 |
|
— |
|
1,082 |
|
||||||||
|
Balance, November 30, 2010 |
|
$ |
44,989 |
|
$ |
417,725 |
|
$ |
449,775 |
|
$ |
(102,477 |
) |
$ |
(28,564 |
) |
$ |
781,448 |
|
$ |
(556 |
) |
$ |
780,892 |
|
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2010
(Unaudited)
(Dollars in thousands, except per share amounts)
Note 1 — Basis of Presentation
AAR CORP. and its subsidiaries are referred to herein collectively as “AAR,” “Company,” “we,” “us,” and “our” unless the context indicates otherwise. The accompanying condensed consolidated financial statements include the accounts of AAR and its subsidiaries after elimination of intercompany accounts and transactions.
We have prepared these statements without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The condensed consolidated balance sheet as of May 31, 2010 has been derived from audited financial statements. To prepare the financial statements in conformity with U.S. generally accepted accounting principles, management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain information and note disclosures, normally included in comprehensive financial statements prepared in accordance with U.S. generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our latest annual report on Form 10-K.
In the opinion of management, the condensed consolidated financial statements reflect all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the condensed consolidated financial position of AAR CORP. and its subsidiaries as of November 30, 2010, the condensed consolidated statements of income for the three- and six-month periods ended November 30, 2010 and 2009, its cash flows for the six-month periods ended November 30, 2010 and 2009 and the condensed consolidated statement of changes in equity for the six-month period ended November 30, 2010. The results of operations for such interim periods are not necessarily indicative of the results for the full year.
Note 2 — Accounting for Stock-Based Compensation
We provide stock-based awards under the AAR CORP. Stock Benefit Plan (“Stock Benefit Plan”) which has been approved by our stockholders. Under this plan, we are authorized to issue stock options to employees and non-employee directors that allow the grant recipients to purchase shares of common stock at a price not less than the fair market value of the common stock on the date of grant. Generally, stock options awarded expire ten years from the date of grant and are exercisable in three, four or five equal annual increments commencing one year after the date of grant. We issue common stock upon the exercise of stock options. In addition to stock options, the Stock Benefit Plan also provides for the grant of restricted stock awards and performance based restricted stock awards. The amount of performance-based awards earned is based on achievement of certain company wide financial goals or stock price targets. The Stock Benefit Plan also provides for the grant of stock appreciation units; however, to date, no stock appreciation units have been granted.
We measure share-based compensation based on the fair value of the award at the grant date, and recognize the cost of share-based awards over the applicable service period, which is generally the vesting period. Performance-based restricted stock compensation is recognized over the applicable service period and based on the level of achievement that is considered probable.
During the six-month periods ended November 30, 2010 and 2009, we granted stock options representing 708,970 shares and 687,000 shares, respectively.
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2010
(Unaudited)
(Dollars in thousands, except per share amounts)
The weighted average fair value of stock options granted during the six-month periods ended November 30, 2010 and 2009 was $7.98 and $7.40, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
|
|
|
Six Months Ended |
|
||
|
|
|
November 30, |
|
||
|
|
|
2010 |
|
2009 |
|
|
Risk-free interest rate |
|
1.8 |
% |
2.3 |
% |
|
Expected volatility of common stock |
|
47.0 |
% |
49.2 |
% |
|
Dividend yield |
|
0.0 |
% |
0.0 |
% |
|
Expected option term in years |
|
5.8 |
|
6.0 |
|
The following table summarizes stock option activity for the six-month period ended November 30, 2010:
|
|
|
|
|
|
|
Weighted |
|
|
|
||
|
|
|
|
|
Weighted |
|
Average |
|
|
|
||
|
|
|
Number of |
|
Average |
|
Remaining |
|
Aggregate |
|
||
|
|
|
Options |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
||
|
|
|
(in thousands) |
|
Price |
|
Life (years) |
|
Value |
|
||
|
Outstanding at May 31, 2010 |
|
1,543 |
|
$ |
19.28 |
|
|
|
|
|
|
|
Granted |
|
709 |
|
$ |
17.37 |
|
|
|
|
|
|
|
Exercised |
|
(22 |
) |
$ |
15.75 |
|
|
|
|
|
|
|
Cancelled |
|
(110 |
) |
$ |
23.00 |
|
|
|
|
|
|
|
Outstanding at November 30, 2010 |
|
2,120 |
|
$ |
18.38 |
|
8.3 |
|
$ |
15,788 |
|
|
Exercisable at November 30, 2010 |
|
827 |
|
$ |
19.59 |
|
5.0 |
|
$ |
5,973 |
|
The total fair value of stock options that vested during the six-month periods ended November 30, 2010 and 2009 was $2,275 and $690, respectively. The total intrinsic value of stock options exercised during the six-month periods ended November 30, 2010 and 2009 was $87 and $631, respectively. The tax benefit realized from stock options exercised during the six-month periods ended November 30, 2010 and 2009 was $15 and $223, respectively. Expense charged to operations for stock options during the three-month periods ended November 30, 2010 and 2009 was $1,157 and $619, respectively. Expense charged to operations for stock options during the six-month periods ended November 30, 2010 and 2009 was $2,045 and $1,027, respectively. As of November 30, 2010, we had $8,939 of unearned compensation related to stock options that will be amortized over an average remaining period of 2.2 years.
The fair value of restricted stock awards is the market value of our common stock on the date of grant. Amortization expense related to restricted stock awards during the three-month periods ended November 30, 2010 and 2009 was $2,048 and $1,562, respectively. Amortization expense related to restricted stock awards during the six-month periods ended November 30, 2010 and 2009 was $3,783 and $2,977, respectively.
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2010
(Unaudited)
(Dollars in thousands, except per share amounts)
Restricted share activity during the six-month period ended November 30, 2010 is as follows:
|
|
|
Number of |
|
Weighted Average |
|
|
|
|
|
Shares |
|
Fair Value |
|
|
|
|
|
(in thousands) |
|
on Grant Date |
|
|
|
Unvested at May 31, 2010 |
|
1,205 |
|
$ |
23.93 |
|
|
Granted |
|
402 |
|
$ |
17.35 |
|
|
Vested |
|
(216 |
) |
$ |
17.74 |
|
|
Forfeited |
|
(15 |
) |
$ |
19.29 |
|
|
Unvested at November 30, 2010 |
|
1,376 |
|
$ |
23.05 |
|
During the six-month period ended November 30, 2010, we granted a total of 36,000 restricted shares to members of the Board of Directors. As of November 30, 2010 we had $16,480 of unearned compensation related to restricted shares that will be amortized to expense over a weighted average period of 2.5 years.
Stock Repurchase Authorization
On June 20, 2006 our Board of Directors authorized us to purchase up to 1,500,000 shares of our common stock on the open market. During the six-month period ended November 30, 2010, we purchased 150,000 shares of our common stock on the open market at an average price of $16.92, leaving 1,028,300 shares still available for repurchase.
Note 3 — Inventory
The summary of inventories is as follows:
|
|
|
November 30, |
|
May 31, |
|
||
|
|
|
2010 |
|
2010 |
|
||
|
Raw materials and parts |
|
$ |
65,115 |
|
$ |
62,737 |
|
|
Work-in-process |
|
62,870 |
|
51,523 |
|
||
|
Purchased aircraft, parts, engines and components held for sale |
|
259,190 |
|
256,022 |
|
||
|
|
|
$ |
387,175 |
|
$ |
370,282 |
|
Note 4 — Supplemental Cash Flow Information
|
|
|
Six Months Ended |
|
||||
|
|
|
November 30, |
|
||||
|
|
|
2010 |
|
2009 |
|
||
|
Interest paid |
|
$ |
6,834 |
|
$ |
5,495 |
|
|
Income taxes paid |
|
8,875 |
|
15,243 |
|
||
|
Income tax refunds received |
|
67 |
|
441 |
|
||
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2010
(Unaudited)
(Dollars in thousands, except per share amounts)
Note 5 — Comprehensive Income
A summary of the components of comprehensive income (loss) is as follows:
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
November 30, |
|
November 30, |
|
||||||||
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
Net income attributable to AAR and noncontrolling interest |
|
$ |
16,814 |
|
$ |
13,193 |
|
$ |
30,488 |
|
$ |
22,351 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Other comprehensive income (loss) — |
|
|
|
|
|
|
|
|
|
||||
|
Cumulative translation adjustments |
|
972 |
|
952 |
|
1,082 |
|
1,384 |
|
||||
|
Unrealized loss on investment, net of tax |
|
— |
|
(297 |
) |
— |
|
(297 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total comprehensive income |
|
$ |
17,786 |
|
$ |
13,848 |
|
$ |
31,570 |
|
$ |
23,438 |
|
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2010
(Unaudited)
(Dollars in thousands, except per share amounts)
Note 6 — Financing Arrangements
A summary of our recourse and non-recourse long-term debt is as follows:
|
|
|
November 30, |
|
May 31, |
|
||
|
|
|
2010 |
|
2010 |
|
||
|
Recourse debt |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Notes payable due May 15, 2011 with interest at 8.39% payable semi-annually on June 1 and December 1 |
|
$ |
42,000 |
|
$ |
42,000 |
|
|
Note payable due July 19, 2012 with interest at 7.22%, payable monthly |
|
3,188 |
|
4,116 |
|
||
|
Note payable due May 1, 2015 with interest at 3.5%, payable monthly |
|
59,583 |
|
64,225 |
|
||
|
Mortgage loan (secured by Wood Dale, Illinois facility) due August 1, 2015 with interest at 5.01% |
|
11,000 |
|
11,000 |
|
||
|
Convertible notes payable due March 1, 2014 with interest at 1.625% payable semi-annually on March 1 and September 1 |
|
71,659 |
|
69,957 |
|
||
|
Convertible notes payable due March 1, 2016 with interest at 2.25% payable semi-annually on March 1 and September 1 |
|
50,175 |
|
53,652 |
|
||
|
Convertible notes payable due February 1, 2026 with interest at 1.75% payable semi-annually on February 1 and August 1 |
|
104,055 |
|
100,828 |
|
||
|
Industrial revenue bond (secured by trust indenture on property, plant and equipment) due August 1, 2018 with floating interest rate, payable monthly |
|
25,000 |
|
25,108 |
|
||
|
Total recourse debt |
|
366,660 |
|
370,886 |
|
||
|
Current maturities of recourse debt |
|
(53,252 |
) |
(53,292 |
) |
||
|
Long-term recourse debt |
|
$ |
313,408 |
|
$ |
317,594 |
|
|
|
|
|
|
|
|
||
|
Non-recourse debt |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Non-recourse note payable due July 19, 2012 with interest at 7.22% |
|
$ |
8,201 |
|
$ |
8,201 |
|
|
Non-recourse note payable due April 3, 2015 with interest at 8.38% |
|
4,040 |
|
4,411 |
|
||
|
Total non-recourse debt |
|
12,241 |
|
12,612 |
|
||
|
Current maturities of non-recourse debt |
|
(789 |
) |
(757 |
) |
||
|
Long-term non-recourse debt |
|
$ |
11,452 |
|
$ |
11,855 |
|
During the six-month period ended November 30, 2010, we retired $6,000 par value of our 2.25% convertible notes due March 1, 2016. The notes were retired for $4,667 cash, and the gain of $97, after consideration of unamortized discount and debt issuance costs, is recorded in gain on extinguishment of debt on the condensed consolidated statements of income.
During the six-month period ended November 30, 2009, we retired $10,500 par value of our 1.625% convertible notes due March 1, 2014 and $2,000 par value of our 2.25% convertible notes due March 1, 2016. Collectively, the convertible notes were retired for $9,115 cash, and the gain of $913, after consideration of unamortized discount and debt issuance costs, is recorded in gain on extinguishment of debt on the condensed consolidated statements of income.
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2010
(Unaudited)
(Dollars in thousands, except per share amounts)
At November 30, 2010, the face value of our long-term recourse debt was $409,151 and the estimated fair value was approximately $409,000. The fair value was estimated using available market information.
Change in method of accounting for Convertible Notes
On June 1, 2009, we adopted a new accounting standard that clarifies the accounting for convertible debt instruments that may be settled wholly or partly in cash when converted, and requires convertible debt to be accounted for as two components: (i) a debt component which is recorded upon issuance at the estimated fair value of a similar straight-debt instrument without the debt-for-equity conversion feature; and (ii) an equity component that is included in capital surplus and represents the estimated fair value of the conversion feature at issuance. The bifurcation of the debt and equity components results in a discounted carrying value of the debt component compared to the principal amount. The discount is accreted to the carrying value of the debt component through interest expense over the expected life of the debt using the effective interest method.
As of November 30, 2010 and May 31, 2010, the long-term debt and equity component (recorded in capital surplus, net of income tax benefit) consisted of the following:
|
|
|
November 30, |
|
May 31, |
|
||
|
|
|
2010 |
|
2010 |
|
||
|
Long-term debt: |
|
|
|
|
|
||
|
Principal amount |
|
$ |
268,380 |
|
$ |
274,380 |
|
|
Unamortized discount |
|
(42,491 |
) |
(49,943 |
) |
||
|
Net carrying amount |
|
$ |
225,889 |
|
$ |
224,437 |
|
|
|
|
|
|
|
|
||
|
Equity component, net of tax |
|
$ |
74,966 |
|
$ |
74,653 |
|
The discount on the liability component of long-term debt is being amortized using the effective interest method based on an effective rate of 8.48% for our 1.75% convertible notes; 6.82% for our 1.625% convertible notes and 7.41% for our 2.25% convertible notes. For our 1.75% convertible notes, the discount is being amortized through February 1, 2013, which is the first put date for those notes. For our 1.625% and 2.25% convertible notes, the discount is being amortized through their respective maturity dates of March 1, 2014 and March 1, 2016.
As of November 30, 2010 and 2009, for each of our convertible note issuances, the “if converted” value does not exceed its principal amount.
The interest expense associated with the convertible notes was as follows:
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
November 30, |
|
November 30, |
|
||||||||
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
Coupon interest |
|
$ |
1,228 |
|
$ |
1,273 |
|
$ |
2,475 |
|
$ |
2,561 |
|
|
Amortization of deferred financing fees |
|
188 |
|
194 |
|
377 |
|
389 |
|
||||
|
Amortization of discount |
|
3,040 |
|
2,888 |
|
6,051 |
|
5,755 |
|
||||
|
Interest expense related to convertible notes |
|
$ |
4,456 |
|
$ |
4,355 |
|
$ |
8,903 |
|
$ |
8,705 |
|
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2010
(Unaudited)
(Dollars in thousands, except per share amounts)
Note 7 — Earnings per Share
The computation of basic earnings per share is based on the weighted average number of common shares outstanding during each period. The computation of diluted earnings per share is based on the weighted average number of common shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options, shares issuable upon vesting of restricted stock awards and shares to be issued upon conversion of convertible debt.
We use the “if-converted” method in calculating the diluted earnings per share effect of the assumed conversion of our contingently convertible debt issued in fiscal 2006 because the principal for that issuance can be settled in stock, cash or a combination thereof. Under the “if converted” method, the after-tax effect of interest expense related to the convertible securities is added back to net income, and the convertible debt is assumed to have been converted into common shares at the beginning of the period.
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2010
(Unaudited)
(Dollars in thousands, except per share amounts)
The following table provides a reconciliation of the computations of basic and diluted earnings per share information for the three- and six-month periods ended November 30, 2010 and 2009.
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
November 30, |
|
November 30, |
|
||||||||
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income attributable to AAR and noncontrolling interest |
|
$ |
16,814 |
|
$ |
13,193 |
|
$ |
30,488 |
|
$ |
22,351 |
|
|
Loss attributable to noncontrolling interest |
|
— |
|
119 |
|
— |
|
1,165 |
|
||||
|
Net income attributable to AAR |
|
$ |
16,814 |
|
$ |
13,312 |
|
$ |
30,488 |
|
$ |
23,516 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic shares: |
|
|
|
|
|
|
|
|
|
||||
|
Weighted average common shares outstanding |
|
38,301 |
|
38,143 |
|
38,335 |
|
38,121 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Earnings per share — basic |
|
$ |
0.44 |
|
$ |
0.35 |
|
$ |
0.80 |
|
$ |
0.62 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income attributable to AAR |
|
$ |
16,814 |
|
$ |
13,312 |
|
$ |
30,488 |
|
$ |
23,516 |
|
|
Add: After-tax interest on convertible debt |
|
1,392 |
|
1,308 |
|
2,763 |
|
2,596 |
|
||||
|
Net income for diluted EPS calculation |
|
$ |
18,206 |
|
$ |
14,620 |
|
$ |
33,251 |
|
$ |
26,112 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted shares: |
|
|
|
|
|
|
|
|
|
||||
|
Weighted average common shares outstanding |
|
38,301 |
|
38,143 |
|
38,335 |
|
38,121 |
|
||||
|
Additional shares from the assumed exercise of stock options |
|
274 |
|
214 |
|
172 |
|
156 |
|
||||
|
Additional shares from the assumed vesting of restricted stock |
|
587 |
|
444 |
|
517 |
|
419 |
|
||||
|
Additional shares from the assumed conversion of convertible debt |
|
4,068 |
|
4,068 |
|
4,068 |
|
4,068 |
|
||||
|
Weighted average common shares outstanding — diluted |
|
43,230 |
|
42,869 |
|
43,092 |
|
42,764 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Earnings per share — diluted |
|
$ |
0.42 |
|
$ |
0.34 |
|
$ |
0.77 |
|
$ |
0.61 |
|
At November 30, 2010 and 2009, respectively, stock options to purchase 449,000 and 562,000 shares of common stock were outstanding, but were not included in the computation of diluted earnings per share because the exercise price of each of these options was greater than the average market price of the common shares during the interim periods then ended.
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2010
(Unaudited)
(Dollars in thousands, except per share amounts)
Note 8 —Aircraft Portfolio
Within our Aviation Supply Chain segment, we own commercial aircraft with joint venture partners as well as aircraft that are wholly-owned. These aircraft are available for lease or sale to commercial air carriers.
Joint Ventures
As of November 30, 2010, the Company had ownership interests in 24 aircraft with joint venture partners. As of November 30, 2010, our equity investment in the 24 aircraft owned with joint venture partners was approximately $38,059 and is included in investment in joint ventures on the Condensed Consolidated Balance Sheet. Our aircraft joint ventures represent investments in limited liability companies that are accounted for under the equity method of accounting. Our membership interest in each of these limited liability companies is 50% and the primary business of these companies is the acquisition, ownership, lease and disposition of certain commercial aircraft. Aircraft are purchased with cash contributions by the members of the companies and debt financing provided to the limited liability companies on a limited recourse basis. Under the terms of servicing agreements with certain of the limited liability companies, we provide administrative services and technical advisory services, including aircraft evaluations, oversight and logistical support of the maintenance process and records management. We also provide remarketing services with respect to the divestiture of aircraft by the limited liability companies. For the six-month periods ended November 30, 2010 and 2009, we were paid $452 and $388, respectively, for such services. The income tax benefit or expense related to the operations of the ventures is recorded by the member companies.
Distributions from joint ventures are classified as operating or investing activities in the consolidated statements of cash flows based upon an evaluation of the specific facts and circumstances of each distribution.
Summarized financial information for these limited liability companies is as follows:
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
November 30, |
|
November 30, |
|
||||||||
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
Sales |
|
$ |
25,589 |
|
$ |
11,170 |
|
$ |
37,855 |
|
$ |
22,434 |
|
|
Income before provision for income taxes |
|
5,248 |
|
172 |
|
5,502 |
|
528 |
|
||||
|
|
|
November 30, |
|
May 31, |
|
||
|
|
|
2010 |
|
2010 |
|
||
|
Balance sheet information: |
|
|
|
|
|
||
|
Assets |
|
$ |
239,016 |
|
$ |
259,965 |
|
|
Debt |
|
147,441 |
|
167,255 |
|
||
|
Members’ capital |
|
88,690 |
|
89,449 |
|
||
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2010
(Unaudited)
(Dollars in thousands, except per share amounts)
Wholly-Owned Aircraft
In addition to the aircraft owned with joint venture partners, we own five aircraft for our own account. A former lessee of two of our wholly-owned aircraft is in arrears for amounts due under the leases. We have obtained a judgment against the lessee and its affiliated guarantor and expect to recover past due rental amounts. Our net investments in these two aircraft after consideration of non-recourse financing are $7,833 and $5,605, respectively. Our investment in the five wholly-owned aircraft, after consideration of financing, is comprised of the following components:
|
|
|
November 30, |
|
May 31, |
|
||
|
|
|
2010 |
|
2010 |
|
||
|
Gross carrying value |
|
$ |
49,875 |
|
$ |
50,854 |
|
|
Debt |
|
(15,428 |
) |
(16,728 |
) |
||
|
Capital lease obligation |
|
(7,622 |
) |
(8,492 |
) |
||
|
Net AAR investment |
|
$ |
26,825 |
|
$ |
25,634 |
|
Information relating to aircraft type, year of manufacture, lessee, lease expiration date and expected disposition upon lease expiration for the 24 aircraft owned with joint venture partners and five wholly-owned aircraft is as follows:
Aircraft owned with joint venture partners
|
|
|
|
|
Year |
|
|
|
Lease Expiration |
|
Post-Lease |
|
Quantity |
|
Aircraft Type |
|
Manufactured |
|
Lessee |
|
Date (FY) |
|
Disposition |
|
1 |
|
737-300 |
|
1987 |
|
US Airways |
|
2012 |
|
Re-lease/Disassemble |
|
2 |
|
767-300 |
|
1991 |
|
United Airlines |
|
2016 and 2017 |
|
Re-lease |
|
1 |
|
747-400 |
|
1989 |
|
Delta Airlines |
|
2020 |
|
Re-lease/Disassemble |
|
1 |
|
737-300 |
|
1997 |
|
Small Planet Airlines |
|
2013 |
|
Re-lease |
|
1 |
|
A320 |
|
1992 |
|
Air Canada |
|
2015 |
|
Disassemble |
|
18 |
|
737-400 |
|
1992-1997 |
|
Malaysia Airlines |
|
Various(1) |
|
Re-lease |
|
24 |
|
|
|
|
|
|
|
|
|
|
Wholly-owned aircraft
|
|
|
|
|
Year |
|
|
|
Lease Expiration |
|
Post-Lease |
|
Quantity |
|
Aircraft Type |
|
Manufactured |
|
Lessee |
|
Date (FY) |
|
Disposition |
|
1 |
|
MD83 |
|
1989 |
|
Meridiana |
|
2011 |
|
Sale/Re-lease |
|
2 |
|
A320 |
|
1992, 1997 |
|
Available |
|
— |
|
Re-lease |
|
1 |
|
A320 |
|
1992 |
|
Air Canada |
|
2015 |
|
Re-lease |
|
1 |
|
CRJ 200 |
|
1999 |
|
Air Wisconsin |
|
2017 |
|
Sale/Disassemble |
|
5 |
|
|
|
|
|
|
|
|
|
|
(1) 4 aircraft in 2011 (Subsequent to November 30, 2010, the lessee agreed to extend the lease termination dates to fiscal years 2013 and 2014); 11 aircraft in 2012; 2 aircraft in 2013 and 1 aircraft in 2014
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2010
(Unaudited)
(Dollars in thousands, except per share amounts)
Note 9 — Acquisitions
On April 7, 2010, we acquired Aviation Worldwide Services, a leading provider of expeditionary airlift services and aircraft modifications to the United States and other government customers. The purchase price was approximately $200,000 and was paid in cash. We have made a preliminary purchase price allocation for the acquisition and expect to complete the purchase price allocation in March 2011.
Note 10 — Subsequent Event — Discontinued Operations
Subsequent to the close of the second quarter ended November 30, 2010, the Company concluded that it will exit its Amsterdam component repair facility, and is evaluating a number of strategic alternatives associated with the business unit, including the sale of the unit. The unit operates in a high cost area of Europe and has lost money over the past several quarters. For the six-month period ended November 30, 2010, sales and pre-tax loss for the Amsterdam facility were $14,336 and $2,602, respectively. The aggregate carrying value of the unit is approximately $11,000 and we expect to recover the carrying value. The Company expects to report this unit as a discontinued operation beginning with the third quarter of fiscal 2011.
Note 11 — Business Segment Information
We report our activities in four business segments: Aviation Supply Chain; Government and Defense Services; Maintenance, Repair and Overhaul; and Structures and Systems. In fiscal 2010, we revised our segments to align with the way our Chief Executive Officer evaluates performance and the way we are internally organized. Prior year information was revised to conform with our new segment presentation.
Sales in the Aviation Supply Chain segment are derived from the sale and lease of a wide variety of new, overhauled and repaired engine and airframe parts and components principally to the commercial aviation market. We also offer customized inventory supply chain management programs. Sales also include the sale and lease of commercial aircraft and jet engines and technical and advisory services. Cost of sales consists principally of the cost of product, direct labor, overhead (primarily indirect labor, facility cost and insurance) and the cost of lease revenue (primarily depreciation and insurance).
Sales in the Government and Defense Services segment are derived from the sale of new and overhauled engine and airframe parts and components, customized performance based logistics programs, expeditionary airlift services, aircraft modifications and engineering, design, and integration services to our government and defense customers. Cost of sales consists principally of the cost of the product (primarily aircraft and engine parts), direct labor, overhead and aircraft maintenance costs.
Sales in the Maintenance, Repair and Overhaul segment are principally derived from aircraft maintenance, including painting, and the repair and overhaul of landing gear. Cost of sales consists principally of the cost of product (primarily replacement aircraft parts), direct labor and overhead.
Sales in the Structures and Systems segment are derived from the engineering, design and manufacture of containers, pallets and shelters used to support the U.S. military’s tactical deployment requirements, complex machined and fabricated parts, components and sub-systems for various aerospace and defense programs and other applications, in-plane cargo loading and handling systems for commercial and military applications and composite products for aviation and industrial use. Cost of sales consists principally of the cost of product, direct labor and overhead.
The accounting policies for the segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements included in our annual report on Form 10-K for the year ended May 31, 2010. Our chief operating decision making officer (Chief Executive Officer) evaluates performance based on the reportable segments and utilizes gross profit as a primary profitability measure. The expenses and assets related to corporate activities are not allocated to the segments. Our reportable segments are aligned principally around differences in products and services.
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2010
(Unaudited)
(Dollars in thousands, except per share amounts)
Gross profit is calculated by subtracting cost of sales from sales. Selected financial information for each reportable segment is as follows:
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
November 30, |
|
November 30, |
|
||||||||
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
Sales: |
|
|
|
|
|
|
|
|
|
||||
|
Aviation Supply Chain |
|
$ |
117,856 |
|
$ |
102,159 |
|
$ |
225,926 |
|
$ |
212,796 |
|
|
Government and Defense Services |
|
134,406 |
|
39,329 |
|
263,736 |
|
76,072 |
|
||||
|
Maintenance, Repair and Overhaul |
|
99,041 |
|
71,805 |
|
175,860 |
|
151,022 |
|
||||
|
Structures and Systems |
|
95,751 |
|
115,391 |
|
193,729 |
|
230,317 |
|
||||
|
|
|
$ |
447,054 |
|
$ |
328,684 |
|
$ |
859,251 |
|
$ |
670,207 |
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
November 30, |
|
November 30, |
|
||||||||
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
Gross profit: |
|
|
|
|
|
|
|
|
|
||||
|
Aviation Supply Chain |
|
$ |
19,838 |
|
$ |
21,850 |
|
$ |
39,965 |
|
$ |
37,815 |
|
|
Government and Defense Services |
|
24,129 |
|
8,450 |
|
47,151 |
|
16,155 |
|
||||
|
Maintenance, Repair and Overhaul |
|
12,290 |
|
8,577 |
|
22,397 |
|
19,116 |
|
||||
|
Structures and Systems |
|
17,919 |
|
24,983 |
|
35,551 |
|
44,797 |
|
||||
|
|
|
$ |
74,176 |
|
$ |
63,860 |
|
$ |
145,064 |
|
$ |
117,883 |
|
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands)
General Overview
We report our activities in four business segments: Aviation Supply Chain; Government and Defense Services; Maintenance, Repair and Overhaul; and Structures and Systems. The table below sets forth consolidated sales for our four business segments for the three- and six-month periods ended November 30, 2010 and 2009.
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
November 30, |
|
November 30, |
|
||||||||
|
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
||||
|
Sales: |
|
|
|
|
|
|
|
|
|
||||
|
Aviation Supply Chain |
|
$ |
117,856 |
|
$ |
102,159 |
|
$ |
225,926 |
|
$ |
212,796 |
|
|
Government and Defense Services |
|
134,406 |
|
39,329 |
|
263,736 |
|
76,072 |
|
||||
|
Maintenance, Repair and Overhaul |
|
99,041 |
|
71,805 |
|
175,860 |
|
151,022 |
|
||||
|
Structures and Systems |
|
95,751 |
|
115,391 |
|
193,729 |
|
230,317 |
|
||||
|
|
|
$ |
447,054 |
|
$ |
328,684 |
|
$ |
859,251 |
|
$ |
670,207 |
|
Over the last few quarters, many commercial airlines have reported increased revenues and profits, along with improving aircraft fleet capacity and utilization rates. The improved commercial airline environment in large part correlates with the improving U.S. economy, which emerged from a deep recession in late 2009. Beginning with our first quarter of fiscal 2011 ended August 31, 2010, we began to see the early signs of a recovery in demand for the products and services we offer our commercial customers. This recovery gained momentum during our second quarter, as we experienced a 26.9% year-over-year increase in sales to commercial customers.
We expect many carriers will continue to seek ways to reduce their cost structure, including outsourcing more of their maintenance and support functions to third parties, while we believe other carriers who have historically outsourced their maintenance requirements will continue to do so. We believe we remain well-positioned to respond to the commercial market with our broad range of products and services.
During the second quarter of fiscal 2011, sales to global government and defense customers increased 46.0% compared to prior year and at November 30, 2010 represented 51.1% of consolidated sales. The increase was largely driven by sales attributable to Aviation Worldwide Services (“Airlift”), which the Company acquired on April 7, 2010. Although our airlift business today solely supports the U.S. Department of Defense, we are targeting other U.S. governmental agencies, as we believe our airlift services will be useful as the U.S. broadens its interest in non-military activities, including nation building.
Results of Operations
Three-Month Period Ended November 30, 2010
Consolidated sales for the second quarter ended November 30, 2010 increased $118,370 or 36.0% compared to the prior year period. Sales to commercial customers increased 26.9% compared to the prior year due to strong demand for supply chain and MRO services, while sales to government and defense customers increased 46.0% reflecting the inclusion of Airlift and increased sales at the Company’s defense logistics business.
In the Aviation Supply Chain segment, sales increased $15,697 or 15.4% compared to the prior year as our parts supply businesses benefitted from the improving airline environment and recent investments in high demand products. Gross profit in the Aviation Supply Chain segment decreased $2,012 or 9.2% and the gross profit margin percentage decreased to 16.8% from 21.4% in the prior year due to the mix of products sold.
In the Government and Defense Services segment, sales increased $95,077 or 241.7% compared to the prior year. The sales increase reflects the inclusion of revenue from Airlift which contributed $66,660 of revenue during the second quarter, as well as growth in the Company’s defense logistics business due to the ramp-up of a new performance-based logistics program. Gross profit increased $15,679 or 185.6% and the gross profit margin percentage declined to 18.0% from 21.5% in the prior year reflecting lower margins in the defense logistics business due to transition costs associated with a new performance-based logistics program and a contract adjustment which lowered the pricing for services we deliver under another supply chain program.
In the Maintenance, Repair and Overhaul segment, sales increased $27,236 or 37.9% versus the prior year due to strong sales growth at our heavy maintenance and landing gear facilities as well as at our engineering services business. Gross profit increased $3,713 or 43.3%, and the gross profit margin percentage increased to 12.4% from 11.9% in the prior year primarily due to increased volume.
In the Structures and Systems segment, sales decreased $19,640 or 17.0% over the prior year reflecting an expected decline in the volume at our mobility products business. Gross profit in the Structures and Systems segment decreased $7,064 or 28.3% and the gross profit margin percentage decreased to 18.7% from 21.7% in the prior year due to the mix of products sold and lower volume.
Operating income increased $7,091 or 27.0% compared with the prior year due the increase in sales. Selling, general and administrative expenses increased $5,743 or 15.3% reflecting the inclusion of selling, general and administrative expenses of Airlift, and approximately $1,000 in severance costs at our Amsterdam component repair facility. Earnings from aircraft joint ventures increased $2,518 compared to the prior year principally due to an aircraft sale from our joint venture aircraft portfolio. Net interest expense increased $1,330 or 21.5% compared to the prior year primarily due to an increase in outstanding borrowings. Our effective income tax rate increased slightly to 35.0% in the second quarter of fiscal 2011 compared to 34.4% last year.
Net income attributable to AAR was $16,814 compared to $13,312 in the prior year due to the factors discussed above.
Six-Month Period Ended November 30, 2010
Consolidated sales for the six-months ended November 30, 2010 increased $189,044 or 28.2% compared to the prior year period. Sales to commercial customers increased 13.1% compared to the prior year due to increased demand for supply chain and MRO and engineering services, while sales to government and defense customers increased 45.4% reflecting the inclusion of Airlift and increased sales at the Company’s defense logistics business.
In the Aviation Supply Chain segment, sales increased $13,130 or 6.2% compared to the prior year as our parts supply businesses benefitted from the improving airline environment and recent investments in high demand products. Prior year sales included a $5,329 sale of an interest in an aircraft leveraged lease. Gross profit in the Aviation Supply Chain segment increased $2,150 or 5.7% and the gross profit margin percentage declined slightly to 17.7% from 17.8% in the prior year due to the mix of products sold. Prior year gross profit was negatively impacted by the sale of the interest in a leveraged lease, in which the Company recorded a $3,800 negative gross profit margin.
In the Government and Defense Services segment, sales increased $187,664 or 246.7% compared to the prior year. The sales increase reflects the inclusion of revenue from Airlift which contributed $131,928 of revenue during the first six month of fiscal 2011, as well as growth in the Company’s defense logistics business due to the ramp-up of a new performance-based logistics program. Gross profit increased $30,996 or 191.9% and the gross profit margin percentage declined to 17.9% from 21.2% in the prior year reflecting lower margins in the defense logistics business due to transition costs associated with a new performance-based logistics program and a contract adjustment which lowered the pricing for services we deliver under another supply chain program.
In the Maintenance, Repair and Overhaul segment, sales increased $24,838 or 16.4% versus the prior year due to strong sales growth at our heavy maintenance and landing gear facilities as well as at our engineering services business. Gross profit increased $3,281 or 17.2% due to increased volume and the gross profit margin percentage remained flat at 12.7%.
In the Structures and Systems segment, sales decreased $36,588 or 15.9% over the prior year reflecting an expected decline in the volume of our mobility products business. Gross profit in the Structures and Systems segment decreased $9,246 or 20.6% and the gross profit margin percentage decreased to 18.4% from 19.5% in the prior year due to the mix of products sold and lower volume.
Operating income increased $18,088 or 41.6% compared with the prior year due to the increase in sales, primarily in the Government and Defense Services segment. Selling, general and administrative expenses increased $11,556 or 15.5% reflecting the inclusion of selling, general and administrative expenses of Airlift. Earnings from aircraft joint ventures increased $2,463 compared to the prior year due to an aircraft sale from our joint venture aircraft portfolio during our second quarter. Net interest expense increased $2,360 or 19.0% compared to the prior year primarily due to an increase in outstanding borrowings. Our effective income tax rate increased to 35.0% in the second quarter of fiscal 2011 compared to 30.1% last year, as the prior year rate reflected a favorable tax impact from the sale of the interest in the aircraft leveraged lease discussed above.
During the six months ended November 30, 2010, we retired $6,000 par value of our 2.25% convertible notes resulting in a net gain on extinguishment of debt of $97.
Net income attributable to AAR was $30,488 compared to $23,516 in the prior year due to the factors discussed above.
Liquidity and Capital Resources
Historically, we have funded our operating activities and met our commitments through the generation of cash from operations, augmented by the periodic issuance of common stock and debt in the public and private markets. In addition to these cash sources, our current capital resources include our unsecured credit facility. We regularly evaluate various financing arrangements, including the issuance of common stock or debt, which would allow us to improve our liquidity position and finance future growth on commercially reasonable terms. Our continuing ability to borrow from our lenders and issue debt and equity securities to the public and private markets in the future may be negatively affected by a number of factors, including the overall health of the credit markets, general economic conditions, airline industry conditions, geo-political events, and our operating performance. Our ability to generate cash from operations is influenced primarily by our operating performance and changes in working capital. Under a universal shelf registration statement filed with the Securities and Exchange Commission that became effective on December 12, 2008, we may offer and sell up to $300,000 of various types of securities, including common stock, preferred stock and medium-term or long-term debt securities, subject to market conditions.
At November 30, 2010, our liquidity and capital resources included cash of $49,320 and working capital of $529,958. Our revolving credit agreement, as amended (the “Credit Agreement”) with various financial institutions, as lenders, and Bank of America National Association as successor by merger to LaSalle Bank National Association (“Bank of America”), as administrative agent for the lenders, provides us with unsecured revolving borrowing capacity of up to $250,000. Under certain circumstances, we may request an increase to the revolving commitment by an aggregate amount of up to $75,000, not to exceed $325,000 in total. The term of our Credit Agreement extends to August 31, 2011. Borrowings under the Credit Agreement bear interest at the London Interbank Offered Rate (“LIBOR”) plus 100 to 237.5 basis points based on certain financial measurements. Borrowings outstanding under this facility at November 30, 2010 were $60,000, and there were approximately $10,381 of outstanding letters of credit which reduced the availability of this facility. In addition to our Credit Agreement, we also have $3,247 available under a foreign line of credit.
During the six-month period ended November 30, 2010, cash flow from operations was $29,812 primarily as a result of net income attributable to AAR and noncontrolling interest and depreciation and amortization of $65,343, partially offset by a net increase in certain assets and liabilities of $35,417, primarily reflecting investments in inventory and equipment on or available for short-term lease to support growth initiatives in several of the Company’s business units.
During the six-month period ended November 30, 2010, our investing activities used $61,079 of cash principally as a result of capital expenditures of $59,930, which mainly represents helicopters and other equipment purchased to support growth and improve operating performance in our Government and Defense Services segment.
During the six-month period ended November 30, 2010, our financing activities generated $1,215 of cash primarily due to an increase in short-term borrowings of $14,991, partially offset by a reduction in other borrowings of $10,482 which includes the retirement of convertible notes for $4,667 cash, and the purchase of treasury stock for $2,539.
Critical Accounting Policies and Significant Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Management has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare the consolidated financial statements. The most significant estimates made by management include those related to the allowance for doubtful accounts, assumptions used in assessing goodwill impairment, adjustments to reduce the value of inventories and aviation equipment on or available for lease, revenue recognition, loss accruals for aviation equipment operating leases, program development costs and assumptions used in determining pension plan obligations. Accordingly, actual results could differ materially from those estimates. The following is a summary of the accounting policies considered critical by management.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts is intended to reduce the value of customer accounts receivable to amounts expected to be collected. In determining the required allowance, we consider factors such as general and industry-specific economic conditions, customer credit history, and our customer’s current and expected future financial performance.
Goodwill and Other Intangible Assets
Under accounting standards for goodwill and other intangible assets, goodwill and other intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. The Company reviews and evaluates its goodwill and indefinite life intangible assets for potential impairment at a minimum annually, on May 31, or more frequently if circumstances indicate that impairment is possible. We use a two step process to evaluate goodwill for impairment. In the first step, we compare the fair value of each reporting unit with the carrying value of the reporting unit, including goodwill. We estimate the fair value of each reporting unit using a valuation technique based on a multiple of earnings or discounted cash flows. If the estimated fair value of the reporting unit is less than the carrying value of the reporting unit, we would be required to complete a second step to determine the amount of goodwill impairment. In the second step, we would determine an implied fair value of the reporting unit’s goodwill by allocating the reporting unit’s fair value to all of the assets and liabilities other than goodwill. We then would compare the implied fair value of goodwill to the carrying amount and recognize the difference as an impairment charge.
The assumptions we used to estimate the fair value of our reporting units are based on historical performance as well as forecasts used in our current business plan.
The amount reported under the caption “Goodwill and other intangible assets, net” is comprised of goodwill and intangible assets associated with acquisitions we made, principally since the beginning of fiscal 1998.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by the specific identification, average cost or first-in, first-out methods. Provisions are made for excess and obsolete inventories and inventories that have been impaired as a result of industry conditions. We have utilized certain assumptions when determining the market value of inventories, such as historical sales of inventory, current and expected future aviation usage trends, replacement values and expected future demand. Reductions in demand for certain of our inventories or declining market values, as well as differences between actual results and the assumptions utilized by us when determining the market value of our inventories, could result in the recognition of impairment charges in future periods.
Revenue Recognition
Certain supply chain management programs that we provide to our customers contain multiple elements or deliverables, such as program and warehouse management, parts distribution and maintenance and repair services. We recognize revenue for each element or deliverable that can be identified as a separate unit of accounting at the time of delivery based upon the relative fair value of the products and services. In connection with these programs, we are required to make certain judgments and estimates concerning the overall profitability of the program and the relative fair value of each element of the arrangement. Differences may occur between the judgments and estimates made by management and actual program results.
Equipment on or Available for Lease
The cost of assets under lease is original purchase price plus overhaul costs. Depreciation is computed using the straight-line method over the estimated service life of the equipment, and maintenance costs are expensed as incurred.
We are required to test for impairment of long-lived assets whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable from its undiscounted cash flows. When applying accounting standards addressing impairment to equipment on or available for lease, we have utilized certain assumptions to estimate future undiscounted cash flows, including current and future lease rates, lease terms, residual values and market conditions and trends impacting future demand. Differences between actual results and the assumptions utilized by us when determining undiscounted cash flows could result in future impairments of aircraft and engines which are currently being leased or are available for lease.
Program Development Costs
In June 2005, we announced that our Cargo Systems business was selected to provide cargo handling systems for the new Airbus A400M Military Transport Aircraft (“A400M”). We are a subcontractor to Pfalz Flugzeugwerke GmbH (“PFW”) on this Airbus program. Our portion of the revenue from this program is expected to exceed $300,000 through fiscal 2020, based on sales projections of the A400M. As of November 30, 2010, we have capitalized, net of reimbursements, approximately $59,000 of costs associated with the engineering and development of the cargo system. Sales and related cost of sales will be recognized on the units of delivery method. In determining the recoverability of the capitalized program development costs, we have utilized certain judgments and estimates concerning expected revenues and the cost to manufacture the A400M cargo system. Differences between actual results and the assumptions utilized by us may result in us not fully recovering the value of the program development costs, which would unfavorably impact our financial condition and results of operations.
Pension Plans
The liabilities and net periodic cost of our pension plans are determined utilizing several actuarial assumptions, the most significant of which are the discount rate and the expected long-term rate of return on plan assets.
Our discount rate is determined based on a review of long-term, high quality corporate bonds as of May 31, 2010, and models that match projected benefit payments to coupons and maturities from the high quality bonds. The assumption for the expected long-term return on plan assets is developed through analysis of historical asset returns by investment category, our fund’s actual return experience and current market conditions. Changes in the discount rate and differences between expected and actual return on
plan assets may impact the amount of net periodic pension expense recognized in our consolidated statement of income.
Forward-Looking Statements
This report contains certain 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 our management, as well as assumptions and estimates based on information available to us as of the dates such assumptions and estimates are made, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors, including those factors discussed under Part II, Item 1A under the heading “Risk Factors” and to those set forth under Part I, Item 1A in our Annual Report on Form 10-K for the year ended May 31, 2010. Should one or more of those risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. Those events and uncertainties are difficult or impossible to predict accurately and many are beyond our control. We assume 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.
Item 3 — Quantitative and Qualitative Disclosures About Market Risk
There were no material changes to our market risk as set forth in Item 7A of our Annual Report on Form 10-K for the year ended May 31, 2010.
Item 4 — Controls and Procedures
As required by Rules 13a-15(e) and 15d-15(e) of the Exchange Act, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of November 30, 2010. This evaluation was carried out under the supervision and with participation of our Chief Executive Officer and Chief Financial Officer. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Therefore, effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of November 30, 2010.
There were no changes in our internal control over financial reporting during the second quarter ended November 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On October 29, 2010, the Company entered into a settlement agreement with Liberty Mutual Insurance Company, which resulted in the dismissal of the lawsuit filed by Liberty Mutual in the Circuit Court of Cook County, Illinois with respect to defense costs incurred in the Company’s previously settled environmental proceedings brought by the Michigan Department of National Resources and Environment involving the Company’s Cadillac, Michigan facility.
There have been no material changes to our risk factors as set forth in our Annual Report on Form 10-K for the year ended May 31, 2010.
The exhibits to this report are listed on the Exhibit Index included elsewhere herein. Management contracts and compensatory arrangements have been marked with an asterisk (*) on the Exhibit Index.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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AAR CORP. |
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(Registrant) |
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Date: |
December 21, 2010 |
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/s/ RICHARD J. POULTON |
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Richard J. Poulton |
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Vice President, Chief Financial Officer and Treasurer |
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(Principal Financial Officer and officer duly |
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authorized to sign on behalf of registrant) |
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/s/ MICHAEL J. SHARP |
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Michael J. Sharp |
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Vice President, Controller and Chief Accounting Officer |
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(Principal Accounting Officer) |
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Exhibit
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Description |
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Exhibits |
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4. |
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Instruments defining the rights of security holders |
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4.1 |
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Indenture providing for Issuance of Debt Securities between AAR CORP. as Issuer and U.S. Bank National Association, as Trustee dated as of December 1, 2010 (filed herewith). |
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4.2 |
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Indenture providing for Issuance of Subordinated Debt Securities between AAR CORP. as Issuer and U.S. Bank National Association, as Trustee dated as of December 1, 2010 (filed herewith). |
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31. |
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Rule 13a-14(a)/15(d)-14(a) Certifications |
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31.1 |
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Section 302 Certification dated December 21, 2010 of David P. Storch, Chairman and Chief Executive Officer of Registrant (filed herewith). |
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31.2 |
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Section 302 Certification dated December 21, 2010 of Richard J. Poulton, Vice President, Chief Financial Officer and Treasurer of Registrant (filed herewith). |
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32. |
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Section 1350 Certifications |
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32.1 |
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Section 906 Certification dated December 21, 2010 of David P. Storch, Chairman and Chief Executive Officer of Registrant (filed herewith). |
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32.2 |
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Section 906 Certification dated December 21, 2010 of Richard J. Poulton, Vice President, Chief Financial Officer and Treasurer of Registrant (filed herewith). |
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101. |
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Interactive Data File |
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101 |
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The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2010, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at November 30, 2010 and May 31, 2010, (ii) Condensed Consolidated Statements of Income for the three- and six months ended November 30, 2010 and 2009, (iii) Condensed Consolidated Statements of Cash Flows for the six months ended November 30, 2010 and 2009, (iv) Condensed Consolidated Statement of Changes in Equity for the six months ended November 30, 2010 and (v) Notes to Condensed Consolidated Financial Statements.* |
* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
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| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
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No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
|---|