AAR Reports In-Line: Defense Sales Up 82%

| About: AAR Corporation (AIR)

AAR Corporation (NYSE:AIR) posted in-line results for the fourth quarter and fiscal 2010.

Quarterly Details

During the quarter, AAR Corp. recorded a 21.9% decrease in net income to $11.1 million from $14.2 million in the year-ago quarter. Earnings per share (EPS) were 29 cents, 7 cents below the reported EPS in the same quarter of the previous year and a penny below the Zacks Consensus Estimate of 30 cents. The decline is attributable to the increase in operating cost during the quarter.

Sales were $372.3 million, marginally up from $371.7 million in the fourth quarter of fiscal 2009. Sales to defense and government customers represented an 82.0% growth year over year and reached $80.5 million from $44.2 million in the same period of 2009.

This huge growth stems from the supply chain services and logistics support contract for USAF's KC-10 fleet in February 2010 and the acquisition of Aviation Worldwide Services (AWS). USAF's KC-10 fleet business became fully operational in the fourth quarter.

AWS is a leading provider of expeditionary airlift services and aircraft modifications for the U.S. and other governments.

Sales in the Aviation Supply Chain segment declined 9.0% to $103.3 million due to the decline in demand for parts support in comparison with the year-ago level.

Sales in the Maintenance, Repair, and Overhaul segment also skipped 18.0% to $79.7 million. Reduced maintenance requirements across the industry caused by fleet reductions and lower discretionary maintenance spending were the major reason behind the decline.

Sales in the Structures and Systems segment decreased 7% to $108.9 million due to weaker sales of cargo systems and composite structure products.

Cost of sales and Selling, General and Administrative expense (SG&A) as a percentage of revenues stretched by 120 bps and 190 bps, respectively. During the quarter, AAR Corp. incurred expenses of $1.1 million related to the acquisition of AWS.

Annual Details

During fiscal 2010, net income and EPS declined to $43.2 million and $1.16 from $58.7 million and $1.45, respectively in fiscal 2009. Sales also slipped to $1,352.2 million from $1,424.0 million in the previous year.

Cost of sales and SG&A expense as a percentage of revenues grew by 120 bps and 100 bps, respectively.

During 2010, the company generated $153 million of cash from operations and ended the period with $79.4 million of cash and cash equivalents compared to $112.5 million at the end of fiscal year 2009.


For fiscal 2011, revenues are expected in the range of $1.5 to $1.6 billion and EPS within $1.25 to $1.40.

The AWS is expected to be accretive to earnings and will help expand the company’s products, services and capabilities for government customers in the United States and abroad in the long term. However, we reiterate our Neutral recommendation on the stock based on the cyclical nature of the aviation industry. Moreover, with gyrating fuel prices, we do not expect better prospects of the industry even in 2010. Thus, the short term rating on the stock is Strong Sell, which implies the Zacks #5 Rank.