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AAR Corporation (AIR) posted upbeat results for the first quarter of fiscal 2011 based on the huge leap in revenue from the Government and Defense Services attributable to the acquisition of Aviation Worldwide Services (AWS) in April 2010.

During the quarter, net income was $13.7 million or EPS of 35 cents, up 34.3% from the net income of $10.2 million or EPS of 27 cents in the corresponding period of fiscal 2010. Reported EPS beat the Zacks Consensus Estimate of 30 cents.

Revenues were $412.2 million, a 20.7% increase from $341.5 million in the first quarter of fiscal 2010 based on three times the revenue generated from the Government and Defense Services segment compared to the year-ago level. Total revenues were well above the Zacks Consensus Estimate of $372 million.

Revenues in the Government and Defense Services segment reached $129.3 million from $36.3 million in the first quarter of fiscal 2010. Organic revenue growth was 2.0% year over year.

The increase was primarily driven by the acquisition of Aviation Worldwide Services (AWS) in April 2010, which added five aircraft to its fleet. Another reason for the rise in revenue is the growth in the company's defense logistics business driven by the contract for USAF's KC-10 fleet in February 2010.

However, revenues from all other segments declined. Revenues in the Aviation Supply Chain segment dropped 2.3% to $108.1 million due to the decline in demand for parts support in comparison with the year-ago level. Revenues in the Maintenance, Repair, and Overhaul segment also skipped 3.0% to $76.8 million due to reduced maintenance requirements across the industry caused by fleet reductions and lower discretionary maintenance spending.

Structures and Systems segmental revenues decreased 14.7% to $98.0 million due to weaker sales of cargo systems and composite structure products.

The company’s cost reduction strategy has led to significant results during the first quarter. Cost of sales and Selling, General and Administrative expense (SG&A) as a percentage of revenue improved by 140 bps and 40 bps, respectively. Operating margin inched up by 180 bps to reach 6.8%.

During the first quarter, AAR Corp. repurchased 0.15 million shares at $16.92 per share leaving approximately one million shares for repurchase later. On account of the AWS acquisition, cash and cash equivalents declined to $52.2 million from $79.4 million in the previous quarter and total debt rose to $429.9 million from $419.7 million in the fourth quarter of fiscal 2010.

Outlook

For fiscal 2011, revenue is expected in the range of $1.5 to $1.6 billion and EPS within $1.25 to $1.40. The AWS acquisition is expected to be accretive to earnings and margins in fiscal 2011 and beyond. Moreover, the company is expected to perform well once the market recovers due to its industry leading supply chain and MRO positions. New products, equipment and methods will also help the company get numerous contracts.

However, the increase in net debt and uncertain macro economic conditions are matters of concern specifically, the cyclical nature of the aviation industry, huge capital requirement and fluctuating fuel prices. We reiterate our Neutral recommendation and the stock retains its Zacks #3 Rank (short term “Hold” rating).

Disclosure: No positions

Source: AAR Corp. Posts Upbeat 1Q Results