GlobeNewswire Inc | Dec 17, 2020 04:24PM EST

December 17, 2020

-- Second quarter sales of $404 million, down 28% from the prior year reflecting the impact of COVID-19

-- Second quarter GAAP diluted earnings per share from continuing operations of $0.41

-- Adjusted diluted earnings per share from continuing operations of $0.31, which excludes the impact of CARES Act support and other items

-- Cash flow from operating activities from continuing operations of $28 million

WOOD DALE, Ill., Dec. 17, 2020 (GLOBE NEWSWIRE) -- AAR CORP. (NYSE: AIR) today reported second quarter Fiscal Year 2021 consolidated sales of $403.6 million and income from continuing operations of $14.4 million, or $0.41 per diluted share. For the second quarter of the prior year, the Company reported sales of $560.9 million and income from continuing operations of $20.1 million, or $0.57 per diluted share. Our adjusted diluted earnings per share from continuing operations in the second quarter of Fiscal Year 2021 were $0.31 compared to $0.64 in the second quarter of the prior year. Current quarter results included net pretax adjustments of $4.7 million, or $0.10 per share, primarily related to the exclusion of CARES Act support partially offset by contract restructuring and exit costs.

Consolidated second quarter sales decreased 28% from the prior year quarter. Our consolidated sales to commercial customers decreased 48% from the prior year quarter primarily due to the continued impact of COVID-19. Our consolidated sales to government customers increased 13% due to strong performance on existing government contracts.

Sales to government and defense customers were 52% of consolidated sales compared to 33% in the prior years quarter reflecting growth from government contract awards and the continued impact of COVID-19 on commercial volumes.

Gross profit margins increased to 17.2% in the current quarter from 15.3% in the prior year quarter due primarily to the CARES Act payroll support. Gross profit margins also increased sequentially from 12.1% in the first quarter primarily due to improved operating efficiencies.

During the quarter, we were awarded a five-year, $148.4 million follow-on contract by the Naval Air Systems Command to perform contractor logistics services for the U.S. Navys C-40A fleet. This expanded award introduces additional services including new operating sites, commercial line maintenance and scheduled engine overhauls, which reinforce our role as a trusted partner applying commercial best practices to provide quality and value to our government customers.

Subsequent to the end of the quarter, we announced several new contract awards including:

-- Exclusive seven-year partnership with Fortress Transportation and Infrastructure Investors to manage the teardown, repair, marketing and sales from its growing CFM56 engine pool which currently totals over 200 engines -- Ten-year agreement with Honeywell to be the sole licensee for component repair and overhaul services for its suite of Electronic Bleed Air Systems on the B737 MAX aircraft -- Extension of our agreement with Viasat to provide logistics, repair and aftermarket management services for its in-flight connectivity products -- Three-year Airinmar agreement to provide aircraft warranty solutions for Volaris, Mexicos leading domestic airline

The actions we have taken over the past three quarters during the pandemic drove a meaningful sequential improvement to our margins in a stable revenue environment. We expect the combination of our improved operating efficiency, growth from new business wins, and the commercial market recovery will continue to drive margin expansion, said John M. Holmes, President and Chief Executive Officer of AAR CORP.

Selling, general and administrative expenses decreased to $43.4 million from $57.1 million reflecting the impact of our actions to reduce both our fixed and variable cost structure. As a percentage of sales, selling, general and administrative expenses were 10.8% for the quarter compared to 10.2% last year as a result of the significant decrease in commercial sales more than offsetting the favorable impact from the cost reduction actions.

Net interest expense for the quarter was $1.3 million compared to $1.8 million last year. Average diluted share count was 35.0 million in both the current and prior year quarters.

Cash flow provided by operating activities from continuing operations was $27.6 million during the current quarter compared to cash flow of $19.9 million in the prior year quarter. Excluding our accounts receivable financing program, our cash flow provided by operating activities from continuing operations was $34.4 million in the current quarter compared to cash flow of $20.4 million in the prior year quarter.

Holmes concluded, As a result of the strength of our government business, significant cost reductions and our focus on managing working capital, we have generated cash and preserved our low cost debt capital structure despite the impact of COVID-19 on our commercial business. Additionally, the funds received under the CARES Act have allowed us to retain our skilled workforce. We believe our strong balance sheet and the increased customer focus on our lower cost, value-add solutions will enable us to continue to capitalize on growth opportunities as the commercial market recovers.

Conference Call Information

AAR will hold its quarterly conference call at 3:45 p.m. CT on December 17, 2020. The conference call can be accessed by calling 866-802-4322 from inside the U.S. or +1-703-639-1319 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 +1-404-537-3406 from outside the U.S. (access code 7094273). The replay will be available from 7:15 p.m. CT on December 17, 2020 until 10:59 p.m. CT on December 22, 2020.

About AAR

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

Contact: Dylan Wolin Vice President, Strategic & Corporate Development and Treasurer | (630) 227-2017 | dylan.wolin@aarcorp.com

This press release contains certain statements relating to future results,which are forward-looking statements as that term is defined in the PrivateSecurities Litigation Reform Act of 1995, which reflect management?sexpectations about future conditions, including but not limited to, (i) theability to drive meaningful sequential improvement to our margins in a stablerevenue environment, (ii) the ability to maintain our role as a trusted partnerapplying commercial best practices to provide quality and value to ourgovernment customers, (iii) the expectation that the new business wins willaccelerate our recovery as they ramp-up over the coming months, (iv) theexpectation that the combination of our improved operating efficiency, growthfrom new business wins, and the commercial market recovery will continue todrive margin expansion, (v) the expectation that the strength of our governmentbusiness, significant cost reductions and our focus on managing workingcapital, will generate cash and preserve our low cost debt capital structuredespite the impact of COVID-19 on our commercial business, (vi) the expectationthat the funds received under the CARES Act will allow us to retain our skilledworkforce, and (vii) the belief that our strong balance sheet and the increasedcustomer focus on our lower cost, value-add solutions will enable us tocontinue to capitalize on growth opportunities as the commercial marketrecovers.

Forward-looking statements may also be identified because they contain wordssuch as ?anticipate,? ?believe,? ?continue,? ?could,? ?estimate,? ?expect,??intend,? ?likely,? ?may,? ?might,? ?plan,? ?potential,? ?predict,? ?project,??seek,? ?should,? ?target,? ?will,? ?would,? or similar expressions and thenegatives of those terms.

These forward-looking statements are based on beliefs of Company management, aswell as assumptions and estimates based on information currently available tothe Company, and are subject to certain risks and uncertainties that couldcause actual results to differ materially from historical results or thoseanticipated, depending on a variety of factors, including: (i) factors thatadversely affect the commercial aviation industry; (ii) the impact of theCOVID-19 pandemic on air travel, worldwide commercial activity and our and ourcustomers? ability to source parts and components; (iii) a reduction in thelevel of sales to the branches, agencies and departments of the U.S. governmentand their contractors (which were 32.2% of total sales in fiscal 2020); (iv)non-compliance with laws and regulations relating to the formation,administration and performance of our U.S. government contracts; (v) costoverruns and losses on fixed-price contracts; (vi) nonperformance bysubcontractors or suppliers; (vii) changes in or non-compliance with laws andregulations that may affect certain of our aviation and government and defenserelated activities that are subject to licensing, certification and otherregulatory requirements imposed by the FAA, the U.S. State Department and otherregulatory agencies, both domestic and foreign; (viii) a reduction inoutsourcing of maintenance activity by airlines; (ix) a shortage of the skilledpersonnel on whom we depend to operate our business, or work stoppages; (x)competition from other companies, including original equipment manufacturers,some of which have greater financial resources than we do; (xi) financial andoperational risks arising as a result of operating internationally; (xii)inability to integrate acquisitions effectively and execute our operational andfinancial plan related to the acquisitions; (xiii) inability to recover ourcosts due to fluctuations in market values for aviation products and equipmentcaused by various factors, including reductions in air travel, airlinebankruptcies, consolidations and fleet reductions; (xiv) asset impairmentcharges we may be required to recognize to reflect the non-recoverability ofour assets or lowered expectations regarding businesses we have acquired; (xv)limitations on our ability to access the debt and equity capital markets or todraw down funds under loan agreements; (xvi) non-compliance with restrictiveand financial covenants contained in certain of our loan agreements; (xvii)failure to maintain or pay dividends; (xviii) exposure to product liability andproperty claims that may be in excess of our liability insurance coverage;(xix) threats to our systems technology from equipment failures and/orcybersecurity breaches; (xx) the costs of compliance, and liability fornon-compliance, with environmental regulations, including future requirementsregarding climate change; and (xxi) a need to make significant capitalexpenditures to keep pace with technological developments in our industry.

For a discussion of these and other risks and uncertainties, refer to ?RiskFactors? in our most recent Annual Report on Form 10-K and subsequent QuarterlyReports on Form 10-Q. These events and uncertainties are difficult orimpossible to predict accurately and many are beyond the Company?s control. TheCompany assumes no obligation to update any forward-looking statements toreflect events or circumstances after the date of such statements or to reflectthe occurrence of anticipated or unanticipated events.

AAR CORP. and Subsidiaries

Consolidated Statements ofOperations Three Months Ended Six Months Ended(In millions except per share November 30, November 30,data - unaudited) 2020 2019 2020 2019 Sales $403.6 $560.9 $804.4 $1,102.4 Cost and expenses: Cost of sales 334.1 475.0 686.3 934.9 Provision for doubtful accounts 4.4 0.7 4.4 1.4 Selling, general and 43.4 57.1 88.7 115.2 administrativeLoss from joint ventures (0.1 ) ?? (0.2 ) ?? Operating income 21.6 28.1 24.8 50.9 Loss on sale of business ?? ?? (19.5 ) ?? Interest expense, net (1.3 ) (1.8 ) (2.9 ) (3.9 )Other expense, net (0.7 ) (0.2 ) (0.5 ) (0.4 ) Income from continuingoperations before income tax 19.6 26.1 1.9 46.6 expenseIncome tax expense 5.2 6.0 1.4 9.4 Income from continuing 14.4 20.1 0.5 37.2 operationsLoss from discontinued (6.2 ) (5.9 ) (6.8 ) (18.6 )operationsNet income (loss) $8.2 $14.2 $(6.3 ) $18.6 Earnings (Loss) per share ? Basic:Earnings from continuing $0.41 $0.58 $0.01 $1.07 operationsLoss from discontinued (0.18 ) (0.17 ) (0.20 ) (0.54 )operationsEarnings (Loss) per share ? $0.23 $0.41 $ (0.19 ) $0.53 Basic Earnings (Loss) per share ? Diluted:Earnings from continuing $0.41 $0.57 $0.01 $1.06 operationsLoss from discontinued (0.18 ) (0.17 ) (0.19 ) (0.53 )operationsEarnings (Loss) per share ? $0.23 $0.40 $(0.18 ) $0.53 Diluted Share Data: Weighted average shares 34.9 34.6 34.9 34.6 outstanding ? BasicWeighted average shares 35.0 35.0 35.0 35.0 outstanding ? Diluted

AAR CORP. and Subsidiaries

November May 31,Consolidated Balance Sheets 30, 2020(In millions) 2020 (unaudited) ASSETS Cash and cash equivalents $110.0 $404.7Restricted cash 3.0 20.0Accounts receivable, net 169.8 171.9Contract assets 52.8 49.3Inventories, net 585.0 623.1Rotable assets and equipment on or available for 59.4 69.6leaseAssets of discontinued operations 21.2 22.9Other current assets 40.5 77.2Total current assets 1,041.7 1,438.7Property, plant, and equipment, net 125.0 135.7Operating lease right-of-use assets, net 83.3 89.7Goodwill and intangible assets, net 122.6 121.7Rotable assets supporting long-term programs 200.5 211.7Other non-current assets 96.2 81.5Total assets $1,669.3 $2,079.0 LIABILITIES AND EQUITY Accounts payable and accrued liabilities $375.0 $353.2Liabilities of discontinued operations 33.2 29.9Total current liabilities 408.2 383.1Long-term debt 220.3 600.0Operating lease liabilities 66.0 70.9Other liabilities and deferred income 74.1 122.4Total liabilities 768.6 1,176.4Equity 900.7 902.6Total liabilities and equity $1,669.3 $2,079.0

AAR CORP. and Subsidiaries

Consolidated Statements of Cash Three Months Ended Six Months EndedFlows November 30, November 30,(In millions ? unaudited) 2020 2019 2020 2019 Cash flows provided from operating activities:Net income (loss) $8.2 $14.2 $(6.3 ) $18.6 Loss from discontinued 6.2 5.9 6.8 18.6 operationsIncome from continuing 14.4 20.1 0.5 37.2 operationsAdjustments to reconcile incomefrom continuing operations to net cashprovided from (used in)operating activitiesDepreciation and intangible 9.2 11.0 18.2 21.8 amortizationAmortization of stock-based 1.8 2.8 4.5 7.1 compensationProvision for doubtful accounts 4.4 0.7 4.4 1.4 Loss on sale of business ?? ?? 19.5 ?? Customer contract termination ?? ?? 2.2 ?? costsImpairment charges 1.2 ?? 7.0 ?? Changes in certain assets and liabilities:Accounts receivable (7.5 ) (10.4 ) (4.8 ) (11.0 )Contract assets (7.4 ) (0.1 ) (7.5 ) (2.8 )Inventories 11.4 (26.8 ) 30.2 (56.8 )Rotable assets supporting (1.9 ) (5.3 ) (0.9 ) (19.1 )long-term programsAccounts payable and accrued 34.1 19.6 9.0 24.6 liabilitiesPayroll Support Program deferred (17.2 ) ?? 23.6 ?? creditDeferred revenue on long-term (42.5 ) 39.5 (60.4 ) 23.3 programsOther 27.6 (31.2 ) 21.9 (35.9 )Net cash provided from (used in)operating activities ? 27.6 19.9 67.4 (10.2 )continuing operationsNet cash provided from (used in)operating activities ? (1.0 ) (5.4 ) (1.9 ) (7.7 )discontinued operationsNet cash provided from (used in) 26.6 14.5 65.5 (17.9 )operating activities Cash flows provide from (used in) investing activities:Property, plant and equipment (2.7 ) (5.7 ) (6.0 ) (10.2 )expendituresProceeds from termination of 10.0 ?? 10.0 ?? life insurance policiesOther ?? (2.5 ) 1.6 (1.5 )Net cash provided from (used in)investing activities ? 7.3 (8.2 ) 5.6 (11.7 )continuing operations Cash flows provided from financing activities:Proceeds from (repayments on) (35.0 ) (5.0 ) (381.3 ) 55.0 borrowings, netCash dividends ?? (2.6 ) (0.1 ) (5.5 )Purchase of treasury stock ?? (4.1 ) ?? (4.1 )Other ?? ?? (1.5 ) (4.3 )Net cash provided from (used in)financing activities ? (35.0 ) (11.7 ) (382.9 ) 41.1 continuing operationsEffect of exchange rate changes ?? 0.1 0.1 0.1 on cashIncrease (Decrease) in cash and (1.1 ) (5.3 ) (311.7 ) 11.6 cash equivalentsCash, cash equivalents, andrestricted cash at beginning of 114.1 58.0 424.7 41.1 periodCash, cash equivalents, and $113.0 $52.7 $113.0 $52.7 restricted cash at end of period

AAR CORP. and Subsidiaries

Sales By Business Segment Three Months Ended Six Months Ended(In millions - unaudited) November 30, November 30, 2020 2019 2020 2019Aviation Services $385.0 $532.0 $748.6 $1,043.8Expeditionary Services 18.6 28.9 55.8 58.6 $403.6 $560.9 $804.4 $1,102.4

Gross Profit by Business Segment Three Months Ended Six Months Ended(In millions- unaudited) November 30, November 30, 2020 2019 2020 2019Aviation Services $66.8 $85.7 $111.4 $165.7Expeditionary Services 2.7 0.2 6.7 1.8 $69.5 $85.9 $118.1 $167.5

Adjusted income from continuing operations, adjusted diluted earnings per share from continuing operations, adjusted operating income, adjusted operating income margin, adjusted sales, adjusted selling, general, and administrative expenses, adjusted cash flow from provided by (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 illustrate 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 business divestitures, workforce actions, subsidies and costs, impairment charges, facility consolidation and 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 Six Months Ended^(a) Ended November 30,(In millions - unaudited) November 30, 2020 2019 2020 2019Income from continuing operations $14.4 $20.1 $0.5 $37.2Investigation and remediation compliance 2.1 1.8 3.1 4.2costsLoss on sale of business ?? ?? 14.8 ??Contract termination and restructuring 3.3 ?? 5.1 ??costs, netCustomer bankruptcy charges 1.0 ?? 1.1 ??Asset impairment charges 1.0 ?? 5.4 ??Government workforce subsidies (14.2 ) ?? (22.6 ) ??Facility consolidation and repositioning 0.3 ?? 1.8 ??costsSeverance, furlough and pension settlement 2.4 0.7 6.9 1.2chargesStrategic financing evaluation costs 0.6 ?? 0.8 ??Adjusted income from continuing operations $10.9 $22.6 $16.9 $42.6

(a)All adjustments are presented net of applicable income taxes.

Adjusted Diluted Earnings per Share from Three Months Six MonthsContinuing Operations ^(a) Ended Ended(In millions - unaudited) November 30, November 30, 2020 2019 2020 2019Diluted earnings per share from continuing $0.41 $0.57 $0.01 $1.06operationsInvestigation and remediation compliance 0.06 0.05 0.09 0.12costsLoss on sale of business ?? ?? 0.42 ??Contract termination and restructuring 0.10 ?? 0.15 ??costs, netCustomer bankruptcy charge 0.04 ?? 0.04 ??Asset impairment charges 0.02 ?? 0.15 ??Government workforce subsidies (0.41 ) ?? (0.65 ) ??Facility consolidation and repositioning 0.01 ?? 0.05 ??costsSeverance, furlough and pension settlement 0.07 0.02 0.20 0.03chargesStrategic financing evaluation costs 0.01 ?? 0.02 ??Adjusted diluted earnings per share from $0.31 $0.64 $0.48 $1.21continuing operations

(a)All adjustments are presented net of applicable income taxes.

Adjusted Operating Margin Three Months Ended (In millions - unaudited) November August 31, 30, 2020 2020Operating income $21.6 $3.2 Investigation and remediation compliance costs 2.8 1.3 Contract termination and restructuring costs, net 4.5 2.2 Customer bankruptcy charge 1.3 0.2 Asset impairment charges 1.2 5.8 Government workforce subsidies (18.7 ) (11.1 ) Facility consolidation and repositioning costs 0.4 2.0 Severance and furlough costs 2.2 6.0 Strategic financing evaluation costs 0.7 0.3 Adjusted operating income $16.0 $9.9 Sales $403.6 $400.8 Contract termination and restructuring costs, net (2.3 ) 1.9 Customer bankruptcy charge 0.4 ?? Adjusted sales $401.7 $402.7 Adjusted operating margin 4.0 % 2.5 %

Adjusted Selling, General and Three Months Six MonthsAdministrative Expenses Ended Ended(In millions - unaudited) November 30, November 30, 2020 2019 2020 2019 Selling, general and administrative $43.4 $57.1 $88.7 $115.2 expensesInvestigation and remediation compliance (2.8 ) (2.4 ) (4.1 ) (5.2 )costsSeverance and furlough costs (0.7 ) (0.9 ) (3.0 ) (1.7 )Government workforce subsidies 0.6 ?? 1.6 ?? Strategic financing evaluation costs (0.7 ) ?? (1.0 ) ?? Stock-based compensation (1.8 ) (2.8 ) (4.5 ) (7.1 )Adjusted selling, general and $38.0 $51.0 $77.7 $101.2 administrative expenses

Adjusted Cash Provided by(Used in) Operating Three Months Six MonthsActivities from Ended Ended Continuing Operations November 30, November 30,(In millions - unaudited) 2020 2019 2020 2019 Cash provided by (used in)operating activities from $27.6 $19.9 $67.4 $(10.2 )continuing operationsAmounts outstanding onaccounts receivable financing program:Beginning of period 55.7 86.2 74.3 86.2 End of period (48.9 ) (85.7 ) (48.9 ) (85.7 )Adjusted cash provided by(used in) operating $34.4 $20.4 $92.8 $(9.7 )activitiesfrom continuingoperations

Adjusted EBITDA Three Months Six Months Ended Year(In millions - unaudited) Ended November 30, Ended November 30, May 31, 2020 2019 2020 2019 2020 Net income (loss) $8.2 $14.2 $(6.3 ) $18.6 $4.4 Loss from discontinued operations 6.2 5.9 6.8 18.6 20.4 Income tax expense 5.2 6.0 1.4 9.4 5.6 Other expense, net 0.7 0.2 0.5 0.4 2.1 Interest expense, net 1.3 1.8 2.9 3.9 8.8 Depreciation and intangible 9.2 11.0 18.2 21.8 43.7 amortizationInvestigation and remediation 2.8 2.4 4.1 5.5 10.1 costsLoss on sale of business ?? ?? 19.5 ?? ?? Asset impairment charges 1.2 ?? 7.0 ?? 11.0 Contract termination and 4.5 ?? 6.7 ?? 31.3 restructuring costs, netCustomer bankruptcy charge 1.3 ?? 1.5 ?? 1.6 Government workforce subsidies (18.7 ) ?? (29.8 ) ?? (2.8 )Facility consolidation and 0.4 ?? 2.4 ?? 4.9 repositioning costsSeverance and furlough costs 2.2 0.9 8.2 1.6 7.1 Strategic financing evaluation 0.7 ?? 1.0 ?? 0.4 costsStock-based compensation 1.8 2.8 4.5 7.1 7.3 Adjusted EBITDA $27.0 $45.2 $48.6 $86.9 $155.9

Net Debt November 30, November 30, (In millions- unaudited) 2020 2019Total debt $222.1 $198.3 Less: Cash and cash equivalents (110.0 ) (38.2 ) Net debt $112.1 $160.1

Net Debt to Adjusted EBITDA (In millions - unaudited)Adjusted EBITDA for the year ended May 31, 2020 $155.9 Less: Adjusted EBITDA for the six months ended November 30, 2019 (86.9 ) Plus: Adjusted EBITDA for the six months ended November 30, 2020 48.6 Adjusted EBITDA for the twelve months ended November 30, 2020 $117.6 Net debt at November 30, 2020 $112.1 Net debt to Adjusted EBITDA 0.95