AAR Reports Record Third Quarter Fiscal Year 2020 Results

WOOD DALE, Ill., March 24, 2020 /PRNewswire/ -- AAR CORP. (NYSE: AIR) today reported third quarter Fiscal Year 2020 consolidated sales of $553.1 million and income from continuing operations of $2.6 million, or $0.07 per diluted share. Third quarter results included a predominantly non-cash pretax charge of $24.7 million primarily resulting from restructuring and exiting underperforming contracts in commercial programs. For the third quarter of the prior year, the Company reported sales of $529.5 million and income from continuing operations of $27.4 million, or $0.78 per diluted share. Our adjusted diluted earnings per share from continuing operations were $0.67 in the current quarter compared to $0.62 in the third quarter of the prior year.

Consolidated sales increased 4% over the prior year period due to continued growth across our Aviation Services segment, which experienced sales growth of 7%. Excluding the sales impact of the restructuring actions of $9.8 million, Aviation Services sales grew 9% during the quarter primarily from execution on our government contracts. Sales to government and defense customers represented 35% of our consolidated sales in the current quarter compared to 33% in the prior year quarter reflecting growth from new government programs.

"While we saw record results during our third quarter, our attention is focused on the unprecedented impact to our airline customers from COVID-19. Our strategy to maintain a balanced portfolio across the government, commercial and cargo markets, along with our strong balance sheet, including net leverage of 0.9x, liquidity of over $425 million and no meaningful debt maturities until September 2024, sets us up well to navigate the COVID-19 impact. We are in discussions with our airline customers and will actively manage our costs to align with the current reality," said John M. Holmes, President and Chief Executive Officer of AAR CORP.

As indicated earlier, during the third quarter, we took actions to improve the long-term operating performance in our commercial programs activities. These actions will reduce our costs, free up capital and allow for margin improvement upon the recovery of the commercial airline market.

In the fourth quarter, we will be taking actions to reduce our fixed costs and overhead by consolidating facilities with the goal to improve our operating efficiencies. Further, in response to the impact of COVID-19, we have taken actions including reducing executive compensation, freezing new hiring, reducing or eliminating all non-essential spend, furloughs and, unfortunately, reducing our workforce. We expect the cost of these fourth quarter actions to be approximately $15 to $20 million with the payback of these actions realized within one year. We remain prepared to take additional action as warranted to respond to the evolving airline demand environment.

Also during the third quarter, we announced multiple new contract wins including:

    --  Multiyear distribution agreement with AeroControlex, a large
        manufacturer of critical components to the aviation industry
    --  Expansion of our airframe maintenance services with Air Canada including
        plans to add A330 maintenance capability to our operations in Quebec
    --  Sole-source Indefinite Delivery/Indefinite Quantity contract award with
        an estimated value of $90 million from the Defense Logistics Agency
        Troop Support to produce specialized shipping/storage containers and
        accessories

Holmes concluded, "We have worked very hard to build an exceptional team at AAR and I am very proud of our accomplishments. As we enter this uncertain time, we are making very difficult decisions that involve sacrifices by our employees and I want to thank our people for their commitment and flexibility. I also have been in dialogue with members of the House, Senate and the Administration regarding potential aid to the broader aviation industry and we are particularly supportive of any measures aimed at preserving jobs. I am confident we will emerge as an even stronger company as a result of the quality and dedication of our team."

Outlook

Given the current macro uncertainty from the impact of COVID-19, we believe it is prudent to withdraw our guidance for the balance of the year.

Conference Call Information

AAR will hold its quarterly conference call at 3:45 p.m. CDT on March 24, 2020. The conference call can be accessed by calling 866-802-4322 from inside the U.S. or 703-639-1319 from outside the U.S. A replay of the conference call will also be available by calling 855-859-2056 from inside the U.S. or 404-537-3406 from outside the U.S. (access code 1826378). The replay will be available from 7:15 p.m. CST on March 24, 2020 until 10:59 p.m. CST on March 29, 2020.

About AAR

AAR is a global aerospace and defense aftermarket solutions company that employs more than 6,000 people in over 20 countries. Headquartered in the Chicago area, AAR supports commercial and government customers through two operating segments: Aviation Services and Expeditionary Services. AAR's Aviation Services include parts supply; OEM solutions; integrated solutions; maintenance, repair, overhaul; and engineering. AAR's Expeditionary Services include mobility systems and composite manufacturing operations. Additional information can be found at www.aarcorp.com.


             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,
              including but not limited to, our
              position of strength, our actions
              to reduce costs and their
              anticipated impact on our results,
              the availability of potential aid
              to the broader aviation industry,
              the anticipated payback timeframe
              for our cost-reduction
              initiatives, and our ability to
              navigate the impact of COVID-19.
              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 Form 10-K for the
              fiscal year ended May 31, 2019, as
              well as the risks presented by
              COVID-19, which are more
              particularly described in the
              Company's Form 10-Q for the fiscal
              quarter ended February 29, 2020.
              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                                  Three Months Ended                        Nine Months Ended

          (In millions except
           per share data -
           unaudited)                                                 February 29/28,                        February 29/28,

    ---

                                                       2020    2019                2020       2019

                                                                                            ---



          Sales                                      $553.1          $529.5              $1,655.5   $1,489.1



       
     Cost and expenses:


               Cost of sales                          487.8           444.2               1,422.7    1,254.3


               Provision for doubtful
                accounts                                1.9             0.7                   3.3       13.7


               Selling, general and
                administrative                         58.1            54.8                 173.3      152.1




          Operating income                              5.3            29.8                  56.2       69.0




          Interest expense, net                       (2.3)          (2.4)                (6.2)     (6.4)


          Other expense, net                          (0.2)          (0.6)                (0.6)     (0.4)




          Income from continuing
           operations before
           income tax expense                           2.8            26.8                  49.4       62.2


          Income tax expense
           (benefit)                                    0.2           (0.6)                  9.6        4.7

                                                                                                      ---

          Income from continuing
           operations                                   2.6            27.4                  39.8       57.5


          Loss from discontinued
           operations                                 (0.3)         (64.8)               (18.9)    (72.8)

                                                                                                      ---

          Net income (loss)                            $2.3         $(37.4)                $20.9    $(15.3)

                                                                                                      ===



          Earnings (Loss) per share - Basic:


               Earnings from
                continuing operations                 $0.08           $0.79                 $1.14      $1.66


               Loss from discontinued
                operations                           (0.01)         (1.87)               (0.54)    (2.11)

                                                                                                      ---

               Earnings (Loss) per
                share - Basic                         $0.07         $(1.08)                $0.60    $(0.45)

                                                                                                      ===



          Earnings (Loss) per share - Diluted:


               Earnings from
                continuing operations                 $0.07           $0.78                 $1.13      $1.63


               Loss from discontinued
                operations                           (0.01)         (1.86)               (0.54)    (2.08)

                                                                                                      ---

               Earnings (Loss) per
                share - Diluted                       $0.06         $(1.08)                $0.59    $(0.45)

                                                                                                      ===




       
     Share Data:


          Weighted average
           shares outstanding -
           Basic                                       34.7            34.5                  34.8       34.6


          Weighted average
           shares outstanding -
           Diluted                                     35.1            34.9                  35.1       35.0



                          
              
     AAR CORP. and Subsidiaries






                          Consolidated
                          Balance
                          Sheets                       February 29, May 31,

          (In
           millions)                                           2020     2019

    ---                                                                 ---

                                                       (unaudited)



       
     ASSETS


          Cash and
           cash
           equivalents                                        $37.0    $21.3


          Restricted
           cash                                                27.9     19.8


          Accounts
           receivable,
           net                                                225.7    197.8


          Contract
           assets                                              64.7     59.2


           Inventories,
           net                                                621.6    523.7


          Rotable
           assets and
           equipment
           on or
           available
           for lease                                           69.0     65.3


          Assets of
           discontinued
           operations                                          26.3     29.2


          Other
           current
           assets                                              85.9     36.2



               Total
                current
                assets                                      1,158.1    952.5


          Property,
           plant, and
           equipment,
           net                                                136.7    132.8


          Operating
           lease
           right-of-
           use
           assets,
           net                                                 99.4       --


          Goodwill
           and
           intangible
           assets,
           net                                                128.5    138.4


          Rotable
           assets
           supporting
           long-term
           programs                                           225.3    216.0


          Other non-
           current
           assets                                              80.9     77.5



               Total
                assets                                     $1,828.9 $1,517.2





          LIABILITIES AND EQUITY


          Accounts
           payable
           and
           accrued
           liabilities                                       $444.9   $328.3


          Liabilities
           of
           discontinued
           operations                                          40.4     29.2



               Total
                current
                liabilities                                   485.3    357.5


          Long-term
           debt                                               206.0    141.7


          Operating
           lease
           liabilities                                         80.0       --


          Other
           liabilities
           and
           deferred
           income                                             128.2    112.1



               Total
                liabilities                                   899.5    611.3


          Equity                                              929.4    905.9



               Total
                liabilities
                and equity                                 $1,828.9 $1,517.2


                                                                                            
     
     AAR CORP. and Subsidiaries







       
     
                  Consolidated Statements of Cash Flows                                                                 Three Months Ended            Nine Months Ended


       
     (In millions - unaudited)                                                                                            February 29/28,            February 29/28,

    ---

                                                                                                                             2020                    2019          2020             2019

                                                                                                                                                                                  ---


       
     Cash flows provided from operating activities:



       
       Net income (loss)                                                                                                $2.3                 $(37.4)        $20.9          $(15.3)



       
       Loss from discontinued operations                                                                                 0.3                    64.8          18.9             72.8

                                                                                                                                                                                  ---


       
       Income from continuing operations                                                                                 2.6                    27.4          39.8             57.5



       
       Adjustments to reconcile income from continuing operations to net cash


       
         provided from (used in) operating activities



       
         Depreciation and intangible amortization                                                                       11.0                    10.8          32.8             31.3



       
         Amortization of stock-based compensation                                                                        3.2                     3.6          10.3              8.8



       
         Customer contract restructuring/exit costs                                                                     24.7                      --         24.7               --



       
         Provision for doubtful accounts                                                                                 1.9                     0.7           3.3             13.7



       
         Changes in certain assets and liabilities:



       
           Accounts receivable                                                                                        (23.6)                 (21.2)       (34.6)          (73.3)



       
           Contract assets                                                                                             (2.6)                    8.2         (5.4)           (5.2)



       
           Inventories                                                                                                (41.2)                 (19.7)       (98.0)          (71.8)



       
           Rotable assets supporting long-term programs                                                                (4.6)                 (11.5)       (23.7)          (38.2)



       
           Accounts payable and accrued liabilities                                                                     72.9                    44.8          97.5             50.5



       
           Deferred revenue on long-term programs                                                                     (22.2)                   24.1           1.1             51.9



       
           Other                                                                                                      (12.4)                  (9.6)       (48.3)           (8.8)

                                                                                                                                                                                  ---


       
       Net cash provided from (used in) operating activities - continuing operations                                     9.7                    57.6         (0.5)            16.4



       
       Net cash provided from (used in) operating activities - discontinued operations                                 (0.7)                    2.4         (8.4)             8.1

                                                                                                                                                                                  ---


       
       Net cash provided from (used in) operating activities                                                             9.0                    60.0         (8.9)            24.5





       
     Cash flows used in investing activities:



       
       Property, plant and equipment expenditures                                                                      (8.1)                  (4.3)       (18.3)          (12.3)



       
       Other                                                                                                           (0.2)                     --        (1.7)           (1.0)




       
       Net cash used in investing activities - continuing operations                                                   (8.3)                  (4.3)       (20.0)          (13.3)



       
       Net cash used in investing activities - discontinued operations                                                    --                  (0.1)           --           (0.5)




       
       Net cash used in investing activities                                                                           (8.3)                  (4.4)       (20.0)          (13.8)





       
     Cash flows provided from financing activities:



       
       Proceeds from (repayments on) borrowings, net                                                                    10.0                  (42.0)         65.0               --



       
       Cash dividends                                                                                                  (2.6)                  (2.6)        (8.1)           (7.9)



       
       Purchase of treasury stock                                                                                         --                  (0.8)        (4.1)           (0.8)



       
       Other                                                                                                             4.1                     0.1         (0.2)             8.3

                                                                                                                                                                                  ---


       
     Net cash provided from (used in) financing activities - continuing operations                                      11.5                  (45.3)         52.6            (0.4)



       
     Net cash used in financing activities - discontinued operations                                                      --                  (0.7)           --           (1.4)




       
     Net cash provided from (used in) financing activities                                                              11.5                  (46.0)         52.6            (1.8)



       
     Effect of exchange rate changes on cash                                                                              --                    0.1           0.1            (0.1)




       
     Increase in cash and cash equivalents                                                                              12.2                     9.7          23.8              8.8



       
     Cash, cash equivalents, and restricted cash at beginning of period                                                 52.7                    40.7          41.1             41.6

                                                                                                                                                                                  ---


       
     Cash, cash equivalents, and restricted cash at end of period                                                      $64.9                   $50.4         $64.9            $50.4

                                                                                                                                                                                  ===


        
        
                AAR CORP. and Subsidiaries






          Sales By Business
           Segment                                     Three Months Ended                  Nine Months Ended

          (In millions -
           unaudited)                                  February 29/28,                  February 29/28,

    ---

                                     2020          2019                   2020     2019

                                                                                 ---

          Aviation Services        $530.3        $497.3               $1,574.1 $1,398.6


          Expeditionary
           Services                  22.8          32.2                   81.4     90.5

                                                                                 ---

                                   $553.1        $529.5               $1,655.5 $1,489.1

                                                                                 ===



          Gross Profit by
           Business Segment                            Three Months Ended                  Nine Months Ended

          (In millions-
           unaudited)                                  February 29/28,                  February 29/28,

    ---

                                     2020          2019                   2020     2019

                                                                                 ---

          Aviation Services         $65.2         $81.7                 $230.9   $223.7


          Expeditionary
           Services                   0.1           3.6                    1.9     11.1

                                                                                 ---

                                    $65.3         $85.3                 $232.8   $234.8

                                                                                 ===

Adjusted income from continuing operations, adjusted diluted earnings per share from continuing operations, adjusted selling, general, and administrative expenses, adjusted cash used in operating activities from continuing operations, adjusted EBITDA, and net debt are "non-GAAP financial measures" as defined in Regulation G of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We believe these non-GAAP financial measures are relevant and useful for investors as they provide a better understanding of our actual operating performance unaffected by the impact of certain items. When reviewed in conjunction with our GAAP results and the accompanying reconciliations, we believe these non-GAAP financial measures provide additional information that is useful to gain an understanding of the factors and trends affecting our business and provide a means by which to compare our operating performance against that of other companies in the industries we compete. These non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP. Adjusted EBITDA is income from continuing operations before interest income (expense), other income (expense), income taxes, depreciation and amortization, stock-based compensation and other items of an unusual nature including but not limited to severance, facility repositioning costs, investigation and remediation compliance costs, and significant customer events such as early terminations, contract restructurings, and bankruptcies.

Pursuant to the requirements of Regulation G of the Exchange Act, we are providing the following tables that reconcile the above mentioned non-GAAP financial measures to the most directly comparable GAAP financial measures:


        Adjusted Income from
         Continuing Operations                                     Three Months Ended             Nine Months Ended

        (In millions -unaudited)                                    February 29/28,                     February 29/28,

    ---

                                                                 2020             2019       2020                         2019

                                                                                                                        ---

        Income from continuing
         operations                                              $2.6            $27.4      $39.8                        $57.5


        Investigation and
         remediation compliance
         costs, net of tax                                        2.1              0.9        6.3                          1.0


        Customer contract
         restructuring/exit costs,
         net of tax                                              18.8    
              --      18.8                           --


        Recognition of previously
         reserved income tax
         benefits                                                  --           (6.5)        --                       (6.5)


        Customer bankruptcy charge,
         net of tax                                                --   
              --        --                         9.6


        Severance charges, net of
         tax                                                      0.4              0.2        1.6                          0.1

                                                                                                                        ---

        Adjusted income from
         continuing operations                                  $23.9            $22.0      $66.5                        $61.7

                                                                                                                        ===





        Adjusted Diluted Earnings
         per Share from Continuing
                                                                                                                      Ended
                                        Operations                 Three Months Ended                Nine Months

        (In millions -unaudited)                                    February 29/28,                     February 29/28,

    ---

                                                                 2020             2019       2020                         2019

                                                                                                                        ---

        Diluted earnings per share
         from continuing operations                             $0.07            $0.78      $1.13                        $1.63


        Investigation and
         remediation compliance
         costs, net of tax                                       0.06             0.02       0.18                         0.04


        Customer contract
         restructuring/exit costs,
         net of tax                                              0.53    
              --      0.53                
              --


        Recognition of previously
         reserved income tax
         benefits                                            
         --          (0.19)  
         --                      (0.19)


        Customer bankruptcy charge,
         net of tax                                          
         --   
              --  
         --                        0.27


        Severance charges, net of
         tax                                                     0.01             0.01       0.04                
              --

                                                                                                                        ---

        Adjusted diluted earnings
         per share from continuing
         operations                                             $0.67            $0.62      $1.88                        $1.75

                                                                                                                        ===





        Adjusted Selling, General                                  Three Months Ended                Nine Months
         and Administrative Expenses
                                                                                                                      Ended

        (In millions -unaudited)                                    February 29/28,                     February 29/28,

    ---

                                                                 2020             2019       2020                         2019

                                                                                                                        ---

        Selling, general and
         administrative expenses                                $58.1            $54.8     $173.3                       $152.1


        Investigation and
         remediation compliance
         costs                                                  (2.7)           (1.1)     (7.9)                       (1.3)


        Severance charges                                       (0.4)           (0.2)     (2.2)                       (0.1)


        Stock-based compensation                                (3.2)           (3.6)    (10.3)                       (8.8)

                                                                                                                        ---

        Adjusted selling, general
         and administrative expenses                            $51.7            $49.9     $152.9                       $141.9

                                                                                                                        ===





        Adjusted Cash Provided by
         (Used in) Operating
         Activities from                                                                                              Ended

                               Continuing Operations               Three Months Ended                Nine Months

        (In millions -unaudited)                                    February 29/28,                     February 29/28,

    ---

                                                                 2020             2019       2020                         2019

                                                                                                                        ---

        Cash provided by (used in) operating activities from

           continuing operations                                 $9.7            $57.6     $(0.5)                       $16.4


        Amounts outstanding on accounts receivable financing
         program:


             Beginning of period                                 85.7             95.2       86.2                         71.7


             End of period                                     (85.6)          (99.5)    (85.6)                      (99.5)

                                                                                                                        ---

        Adjusted cash provided by (used in) operating
         activities

           from continuing operations                            $9.8            $53.3       $1.0                      $(11.4)


        Adjusted EBITDA                          Three Months Ended              Nine Months Ended                Year Ended
                                                                                                   May 31,
        (In millions -unaudited)                 February 29/28,               February 29/28,

    ---

                                        2020       2019               2020           2019                       2019



        Net income (loss)               $2.3    $(37.4)             $20.9        $(15.3)                      $7.5


        Loss from discontinued
         operations                      0.3       64.8               18.9           72.8                       76.6


        Income tax expense (benefit)     0.2      (0.6)               9.6            4.7                        4.9


        Other expense, net               0.2        0.6                0.6            0.4                        0.8


        Interest expense, net            2.3        2.4                6.2            6.4                        8.5


        Depreciation and intangible
         amortization                   11.0       10.8               32.8           31.3                       42.8


        Customer contract
         restructuring/exit costs       24.7  
          --              24.7    
            --                   
        --


        Customer bankruptcy charge   
        -- 
          --                --          12.4                       12.4


        Investigation and
         remediation costs               2.7        1.1                8.3            1.3                        3.5


        Severance charges                0.5        0.2                2.1            0.1                        0.2


        Facility repositioning costs 
        -- 
          --                --   
            --                       0.9


        Stock-based compensation         3.2        3.6               10.3            8.8                       13.5



        Adjusted EBITDA                $47.4      $45.5             $134.4         $122.9                     $171.6


        Net Debt                        February 29, February 29,
                                                2020          2019
        (In millions- unaudited)

    ---

        Total debt                            $208.1        $178.5


        Less: Cash and cash equivalents       (37.0)       (28.9)



        Net debt                              $171.1        $149.6


        Net Debt to Adjusted EBITDA

        (In millions -unaudited)

    ---

        Adjusted EBITDA for the year
         ended May 31, 2019           $171.6


        Less:  Adjusted EBITDA for
         the nine months ended
         February 28, 2019           (122.9)


        Plus:  Adjusted EBITDA for
         the nine months ended
         February 29, 2020             134.4



        Adjusted EBITDA for the
         twelve months ended
         February 29, 2020             183.1



        Net debt at February 29,
         2020                         $171.1


        Net debt to Adjusted EBITDA     0.93

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SOURCE AAR CORP.