GlobeNewswire Inc | Sep 24, 2020 04:10PM EDT

September 24, 2020

-- First quarter sales of $401 million, down 26% from the prior year reflecting the impact of COVID-19 -- First quarter GAAP diluted loss per share from continuing operations of $(0.40) -- Adjusteddiluted earnings per share from continuing operations of $0.17, which exclude the impact of the Composites sale and other items

WOOD DALE, Ill., Sept. 24, 2020 (GLOBE NEWSWIRE) -- AAR CORP. (NYSE: AIR) today reported first quarter Fiscal Year 2021 consolidated sales of $400.8 million and loss from continuing operations of $13.9 million, or $0.40 per diluted share. For the first quarter of the prior year, the Company reported sales of $541.5 million and income from continuing operations of $17.1 million, or $0.49 per diluted share. Our adjusted diluted earnings per share from continuing operations in the first quarter of Fiscal Year 2021 were $0.17 compared to $0.57 in the first quarter of the prior year. Current quarter results included net pretax adjustments of $26.2 million, or $0.57 per share, primarily related to the sale of our Composites business, restructuring costs, and CARES Act support.

Consolidated first quarter sales decreased 26% from the prior year quarter. Our consolidated sales to commercial customers decreased 48% from the prior year quarter due to the continued impact of COVID-19. Our consolidated sales to government customers increased 10% as a result of strong performance on existing government program contracts as well as shipments against the recently awarded U.S. Air Force pallet contract award in our Mobility business.

Sales to government and defense customers were 56% of consolidated sales compared to 38% in the prior years quarter reflecting growth from recent government contract awards and the continued impact of COVID-19 on commercial volumes.

Over the last three quarters, we have taken multiple actions to execute on our strategic plan to focus and improve on our core aviation services offering. We have divested certain non-core businesses, consolidated our facility footprint, and exited or restructured several underperforming contracts. We have also taken steps to permanently reduce our fixed and variable costs. We believe all of these actions have positioned us for improved operating margins as demand recovers in the commercial aviation business, said John M. Holmes, President and Chief Executive Officer of AAR CORP.

Gross profit margins decreased to 12.1% in the current quarter from 15.1% in the prior year quarter due primarily to the reduced commercial volumes. Expeditionary Services profitability increased significantly to 10.8% from 5.4% as execution on the U.S. Air Force pallet contract drove favorability in the Mobility business.

During the quarter, we were awarded a new three-year contract from the Royal Netherlands Air Force to repair F-16 jet fuel starters. Our Airinmar subsidiary also recently announced two contracts to provide component repair cycle management and aircraft warranty solutionsfor Frontier Airlines and Air Methods, the worlds largest civilian helicopter operator.

Selling, general and administrative expenses decreased to $45.3 million from $58.1 million reflecting the impactof our actions to reduce both our fixed and variable cost structure. As a percentage of sales, selling, general and administrative expenses were 11.3% for the quarter compared to 10.7% 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 $1.6 million compared to $2.1 million last year. Average diluted share count was 35.0 million in both the current and prior year quarter.

Cash flow provided by operating activities from continuing operations was $39.8 million during the current quarter, which included $48.5 million related to our receipt of funding from the CARES Act through the Payroll Support Program. Cash flow was also impacted by an $18.6 million reduction in the level of our accounts receivable financing program which we have reduced over the last two quarters. Excluding the impact of the CARES Act and the accounts receivable financing program, cash flow provided by operating activities from continuing operations was $9.9 million.

Holmes concluded, While the environment for the airline industry remains uncertain, we are focused on managing working capital and are pleased with our ability to generate positive cash flow in the quarter. We were also able to make certain investments to support our long-term growth. We are encouraged by the stability we have recently seen in our commercial business and the continued growth in our government business. Additionally, as the commercial aviation market recovers, we expect airlines will be even more focused on cost savings, which aligns with ourlower cost services offering. Our strong industry position and our financial strength allow us tobenefit from these opportunities and deliver for our customers.

Conference Call Information

AAR will hold its quarterly conference call at 3:45 p.m. CT on September 24, 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 8882878). The replay will be available from 7:15 p.m. CT on September 24, 2020 until 10:59 p.m. CT on September 29, 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) thecontinued strong performance on existing government program contracts, as wellas shipments against the recently awarded U.S. Air Force pallet contractin ourMobility business, (ii) the continued growth from recent government contractawards, (iii) our abilityto execute on our strategic plan to focus and improveon our core aviation services offering and to improve operating margins asdemand recovers in the commercial aviation business, (iv) our expectation thatmanaging working capital, and our ability to generate positive cash flowwilllead to investments to support long-term growth, (v) stabilization in ourcommercialbusiness and continued growth in our government business, (vi) theassumption that, as the commercial aviation market recovers, our expectationthat airlines will be even more focused on cost savings, which align with ourlower cost services offering, and (vii) our ability to maintain a strongindustry position and financial strength tobenefit from these opportunitiesanddeliver for our customers.

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 of Operations Three Months Ended(In millions except per share data - unaudited) August 31, 2020 2019 Sales $400.8 $541.5 Cost and expenses: Cost of sales 352.2 459.9 Provision for doubtful accounts ?? 0.7 Selling, general and administrative 45.3 58.1 Loss from joint ventures (0.1 ) ?? Operating income 3.2 22.8 Loss on sale of business (19.5 ) ?? Interest expense, net (1.6 ) (2.1 )Other income (expense), net 0.2 (0.2 )Income (Loss) from continuing operations before income (17.7 ) 20.5 taxesIncome tax expense (benefit) (3.8 ) 3.4 Income (Loss) from continuing operations (13.9 ) 17.1 Loss from discontinued operations (0.6 ) (12.7 )Net income (loss) $(14.5 ) $4.4 Earnings (Loss) per share ? Basic Earnings (Loss) from continuing operations $(0.40 ) $0.49 Earnings (Loss) from discontinued operations (0.02 ) (0.37 )Earnings (Loss) per share ? Basic $(0.42 ) $0.12 Earnings (Loss) per share ? Diluted Earnings (Loss) from continuing operations $(0.40 ) $0.49 Earnings (Loss) from discontinued operations (0.02 ) (0.36 )Earnings (Loss) per share ? Diluted $(0.42 ) $0.13 Share Data: Weighted average shares outstanding ? Basic 34.9 34.7 Weighted average shares outstanding ? Diluted 35.0 35.0

AAR CORP. and Subsidiaries

Consolidated Balance Sheets August 31, May 31,(In millions) 2020 2020 (unaudited) ASSETS Cash and cash equivalents $ 107.7 $ 404.7 Restricted cash 6.4 20.0 Accounts receivable, net 166.7 171.9 Contract assets 45.2 49.3 Inventories, net 597.7 623.1 Rotable assets and equipment on or available 66.9 69.6 for leaseAssets of discontinued operations 22.0 22.9 Other current assets 61.6 77.2 Total current assets 1,074.2 1,438.7 Property, plant, and equipment, net 127.0 135.7 Operating lease right-of-use assets, net 85.8 89.7 Goodwill and intangible assets, net 123.1 121.7 Rotable assets supporting long-term programs 201.9 211.7 Other non-current assets 101.8 81.5 Total assets $ 1,713.8 $ 2,079.0 LIABILITIES AND EQUITY Accounts payable and accrued liabilities $ 365.6 $ 353.2 Liabilities of discontinued operations 28.7 29.9 Total current liabilities 394.3 383.1 Long-term debt 255.1 600.0 Operating lease liabilities 68.0 70.9 Other liabilities and deferred income 105.8 122.4 Total liabilities 823.2 1,176.4 Equity 890.6 902.6 Total liabilities and equity $ 1,713.8 $ 2,079.0

AAR CORP. and Subsidiaries

Consolidated Statements of Cash Flows Three Months Ended(In millions ? unaudited) August 31, 2020 2019 Cash flows provided by (used in) operating activities: Net income (loss) $ (14.5 ) $ 4.4 Less: Loss from discontinued operations 0.6 12.7 Income (Loss) from continuing operations (13.9 ) 17.1 Adjustments to reconcile income from continuing operations to net cashused in operating activitiesDepreciation and intangible amortization 9.0 10.8 Stock-based compensation 2.7 4.3 Provision for doubtful accounts ?? 0.7 Loss on sale of business 19.5 ?? Customer contract termination costs 2.2 ?? Impairment charges 5.8 ?? Changes in certain assets and liabilities: Accounts receivable 2.7 (0.6 )Inventories 18.8 (30.0 )Rotable assets supporting long-term programs 1.0 (13.8 )Accounts payable and accrued liabilities (25.1 ) 5.0 Payroll Support Program deferred credit 40.8 ?? Deferred revenue on long-term programs (17.9 ) (16.2 )Other (5.8 ) (7.4 )Net cash provided by (used in) operating activities ? 39.8 (30.1 )continuing operationsNet cash used in operating activities ? discontinued (0.9 ) (2.3 )operationsNet cash provided by (used in) operating activities 38.9 (32.4 ) Cash flows used in investing activities: Property, plant and equipment expenditures (3.3 ) (4.5 )Other 1.6 1.0 Net cash used in investing activities ? continuing (1.7 ) (3.5 )operations Cash flows provided from (used in) financing activities:Proceeds (Repayments) from borrowings, net (346.3 ) 60.0 Cash dividends (0.1 ) (2.9 )Other (1.5 ) (4.3 )Net cash provided from (used in) financing activities (347.9 ) 52.8 ? continuing operationsEffect of exchange rate changes on cash 0.1 ?? Increase (Decrease) in cash and cash equivalents (310.6 ) 16.9 Cash, cash equivalents, and restricted cash at 424.7 41.1 beginning of periodCash, cash equivalents, and restricted cash at end of $ 114.1 $ 58.0 period

Sales By Business Segment Three Months Ended(In millions - unaudited) August 31, 2020 2019 Aviation Services $363.6 $511.8 Expeditionary Services 37.2 29.7 $400.8 $541.5

Gross Profit by Business Segment Three Months Ended(In millions- unaudited) August 31, 2020 2019 Aviation Services $44.6 $80.0 Expeditionary Services 4.0 1.6 $48.6 $81.6

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 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 (a) Three Months Ended(In millions - unaudited) August 31, 2020 2019 Income (Loss) from continuing operations $(13.9 ) $17.1 Investigation and remediation compliance costs 1.0 2.4 Loss on sale of business 14.8 ?? Rotable asset impairment charges 4.4 ?? Customer contract termination costs 1.8 ?? Customer bankruptcy charges 0.1 ?? Government workforce subsidies (8.4 ) ?? Facility consolidation and repositioning costs 1.5 ?? Severance and furlough costs 4.5 0.5 Strategic financing evaluation costs 0.2 ?? Adjusted income from continuing operations $6.0 $20.0

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

Adjusted Diluted Earnings per Share from Continuing Three Months EndedOperations (a) August 31,(In millions - unaudited) 2020 2019 Diluted earnings (loss) per share from continuing $(0.40 ) $0.49 operationsInvestigation and remediation compliance costs 0.03 0.07 Loss on sale of business 0.42 ?? Rotable asset impairment charges 0.13 ?? Customer contract termination costs 0.05 ?? Government workforce subsidies (0.24 ) ?? Facility consolidation and repositioning costs 0.04 ?? Severance and furlough costs 0.13 0.01 Strategic financing evaluation costs 0.01 ?? Adjusted diluted earnings per share from continuing $0.17 $0.57 operations

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

Adjusted Selling, General and Administrative Expenses Three Months Ended(In millions - unaudited) August 31, 2020 2019 Selling, general and administrative expenses $45.3 $58.1 Investigation and remediation compliance costs (1.3 ) (2.8 )Severance and furlough costs (2.3 ) (0.8 )Government workforce subsidies 1.0 ?? Strategic financing evaluation costs (0.3 ) ?? Stock-based compensation (2.7 ) (4.3 )Adjusted selling, general and administrative expenses $39.7 $50.2

Adjusted Cash Provided By (Used in) Operating Three Months EndedActivities From Continuing Operations August 31,(In millions - unaudited) 2020 2019 Cash provided by (used in) operating activities $39.8 $(30.1 )from continuing operationsAmounts outstanding on accounts receivable financing program:Beginning of period 74.3 86.2 End of period (55.7 ) (86.2 )Adjusted cash provided by (used in) operating $58.4 $(30.1 )activities from continuing operations

Adjusted EBITDA Three Months Ended(In millions - unaudited) August 31, 2020 2019 Net income (loss) $ (14.5 ) $4.4 Loss from discontinued operations 0.6 12.7 Income tax expense (benefit) (3.8 ) 3.4 Other (income) expense, net (0.2 ) 0.2 Interest expense, net 1.6 2.1 Depreciation and intangible amortization 9.0 10.8 Investigation and remediation compliance costs 1.3 3.1 Loss on sale of business 19.5 ?? Rotable asset impairment charges 5.8 ?? Customer contract termination costs 2.2 ?? Customer bankruptcy charges 0.2 ?? Government workforce subsidies (11.1 ) ?? Facility consolidation and repositioning costs 2.0 ?? Severance and furlough costs 6.0 0.7 Strategic financing evaluation costs 0.3 ?? Stock-based compensation 2.7 4.3 Adjusted EBITDA $21.6 $41.7

Net Debt August 31, May 31,(In millions- unaudited) 2020 2020Total debt $257.0 $602.0 Less: Cash and cash equivalents (107.7 ) (404.7 )Net debt $149.3 $197.3

Net Debt to Adjusted EBITDA (In millions - unaudited)Adjusted EBITDA for the year ended May 31, 2020 $ 155.9 Less: Adjusted EBITDA for the three months ended (41.7 ) August 31, 2019Plus: Adjusted EBITDA for the three months ended 21.6 August 31, 2020Adjusted EBITDA for the twelve months ended August 31, 135.8 2020Net debt at August 31, 2020 $ 149.3 Net debt to Adjusted EBITDA 1.10