GlobeNewswire Inc | Jul 21, 2020 04:05PM EDT

July 21, 2020

-- Fourth quarter sales of $416.5 million, down 26% from $562.7 million in Q4 FY2019 reflecting the impact of COVID-19 -- Full year sales of $2.07 billion, up 1% from $2.05 billion in FY2019 -- Fourth quarter GAAP and adjusted diluted earnings (loss) per share from continuing operations of $(0.43) and $0.26, respectively -- Executed multiple actions toalign costs with demand and position the company forthefuture

WOOD DALE, Ill., July 21, 2020 (GLOBE NEWSWIRE) -- AAR CORP. (NYSE: AIR) today reported fourth quarter Fiscal Year 2020 consolidated sales of $416.5 million and a loss from continuing operations of $15.0 million, or $0.43 per diluted share. Fourth quarter results included pretax charges of $27.9 million related to restructuring actions and exiting underperforming product lines and contracts. For the fourth quarter of the prior year, the Company reported sales of $562.7 million and income from continuing operations of $26.6 million, or $0.76 per diluted share. Our adjusted diluted earnings per share from continuing operations were $0.26 in the current quarter compared to $0.68 in the fourth quarter of the prior year.

Consolidated fourth quarter sales decreased 26% from the prior year period due to the impact of COVID-19 and the unprecedented grounding of the worlds commercial fleet. Sales were also impacted by $7.5 million from restructuring actions related to our exit from certain commercial programs. Sales to government and defense customers in the Aviation Services segment continued to grow and were up 8% over the prior year quarter. Sales to government and defense customers represented 47% of our consolidated sales in the current quarter compared to 35% in the prior year quarter.

In response to the historic reduction in passenger travel resulting from COVID-19, weexecuted numerous cost reduction actions to better align our expenses with revenue. We also took several additional actions to improve our operating efficiencies with a goal towards improving our margins for the long term. These actions include facility consolidation, exit of unprofitable product lines as well as exiting or restructuringunderperforming commercial programs contracts. These actions resulted in predominantly non-cash impairment and other charges of $27.9 million.

Further in keeping with our long-term strategy to focus on aviation services and subsequent to quarter close, we entered into an agreement to sell our Composites manufacturing business. We expect to recognize an impairment charge of approximately $20 million in the first quarter of Fiscal Year 2021 in connection with the transaction. The sale, which we expect to close in the first half of Fiscal Year 2021, will improve margins as the Composites manufacturing business was unprofitable in Fiscal Year 2020.

As we entered our fourth quarter we were on pace for a record sales year. However, our fourth quarter results were significantly affected by the impact of COVID-19. We took early action to mitigate this impact by reducing both our fixed and variable cost structure. We also drove continued strong performance in our government activities and placed an even greater emphasis on the commercial cargo market, said John M. Holmes, President and Chief Executive Officer of AAR CORP.

During the fourth quarter, we announced a sole source firm-fixed-price $125 million contract from the U.S. Air Force to produce and repair 463L cargo pallets. This is a five-year contract which will begin contributing to our results in the first quarter of Fiscal Year 2021. We also announced the formation of a joint venture with Sumitomo Corporation to provide aviation aftermarket supply chain solutions to Japanese defense and global commercial markets. This joint venture is an extension of our successful, long-standing relationship with Sumitomo serving as a distributor for OEM factory-new parts to Japanese defense customers.

Subsequent to the fourth quarter, we announced an extension and expansion of our exclusive worldwide aftermarket distribution agreement with Unison Industries covering their electrical components, sensors, and systems for aircraft and industrial uses. This agreement is valued at more than $1 billion over the 11-year term and validates the robust value proposition that our distribution team provides to OEMs in the aviation aftermarket.

Also, on July 20, 2020, we announced that certain of our subsidiaries expect to receive $57.2 millionfrom the U.S. Treasury Department through the Payroll Support Program under theCoronavirus Aid, Relief, and Economic Security (CARES) Act. This support will enable us to maintain our current skilled workforce in our U.S. airframe and landing gear maintenance, repair and overhaul operations and allow us to continue to provide exceptional service to our customers.

Gross profit margin in the current quarter was 8.7% compared to 16.8% in the prior year quarter due primarily to the impact of COVID-19 and our restructuring actions. Selling, general and administrative expenses decreased by $16.0 million from $63.3 million to $47.3 million reflecting cost reduction actions.

Net interest expense for the quarter was $2.6 million compared to $2.1 million in the prior year quarter as we maintained higher cash reserves during the quarter. Cash flow used in operating activities from continuing operations was $18.6 million during the current quarter driven by timing of customer collections and vendor payments.

Fiscal Year 2020 Results

Full Fiscal Year 2020 consolidated sales were $2.07 billion, an increase of 1.0% over Fiscal Year 2019. Aviation Services sales grew by 2.3% with successful execution of recent contract awards in our government and defense activities driving exceptional growth of 20.2%in these end markets which was largely offset by the decrease in commercial airline volumes in the fourth quarter due to COVID-19. Expeditionary Services sales decreased 17.8% in Fiscal Year 2020 as delayed contract awards, including the previously discussed cargo pallet contract at our Mobility operation, significantly impacted results in Fiscal Year 2020.

Full Fiscal Year 2020 income from continuing operations was $24.8 million, or $0.71 per diluted share. In Fiscal Year 2019, income from continuing operations was $84.1 million, or $2.40 per share. Our adjusted diluted earnings per share from continuing operations was $2.15 in the current year compared to $2.44 last year reflecting the significance of the fourth quarter impact of COVID-19.

Sales to government and defense customers were 38% of consolidated sales compared to 33% in the prior year reflecting growth from the WASS program and other government programs. Sales to commercial customers represented 62% of consolidated sales compared to 67% last year.

Net debt at May 31, 2020 was $197.3 million compared to $121.6 million at May 31, 2019. Our net leverage was 1.3x at May 31, 2020 compared to 0.7x at May 31, 2019. Cash flow from operating activities from continuing operations was a use of cash of $19.1 million in Fiscal Year 2020 compared to cash provided from operations of $60.5 million in Fiscal Year 2019. Our accounts receivable financing program was a use of cash of $11.9 million in Fiscal Year 2020 compared to a benefit of $14.5 million in the prior year.

Holmes concluded, During this time of uncertainty in the commercial passenger airline industry, we are experiencing growth in our government and defense activities and are capitalizing on opportunities in the commercial cargo market. Our balance sheet remains strong and we have taken numerous actions to not only successfully navigate the current downturn but to emerge as an even stronger Company with a better margin profile.

Outlook

Given the continued macro uncertainty from the impact of COVID-19, we will not be providing financial guidance for Fiscal Year 2021 at this time.

Conference Call Information

AAR will hold its quarterly conference call at 3:45 p.m. CDT on July 21, 2020. The conference call can be accessed by calling 833-983-1515 from inside the U.S. or +1-956-394-3030 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 9866865). The replay will be available from 7:15 p.m. CT on July 21, 2020 until 10:59 p.m. CT on July 27, 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 and composite manufacturing 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 Private Securities Litigation Reform Act of 1995, including but not limited to, our actions to reduce costs and improve operating efficiencies and their anticipated impact on our results, the availability of potential aid to the broader aviation industry, in particular our expectation to receive $57.2 million in financial aid under the CARES Act, our ability to maintain our current skilled workforce to continue to provide exceptional service to our customers, our ability to mitigate the impact of COVID-19, our ability to drive continued strong performance in our government activities and place an even greater emphasis on the commercial cargo market, the expectation that the sale of the Composites manufacturing business will improve margins, the expectation that the five-year U.S. Air Force contract to produce and repair 463L cargo pallets will contribute to our results in the first quarter of Fiscal Year 2021, the expectation that the Sumitomo joint venture will extend our successful, long-standing relationship with Sumitomo serving as a distributor for OEM factory-new parts to Japanese defense customers, the expectation that the Unison Industries agreement will be valued at more than $1 billion over the 11-year term, the continued growth in our government, and defense activities and capitalizing on opportunities in the commercial cargo market, our ability to successfully navigate the current downturn and emerge an even stronger company with a better profit margin. Forward-looking statements may also be identified because they contain words such as anticipate, believe, continue, could, estimate, expect, intend, likely, may, might, plan, potential, predict, project, seek, should, target, will, would, or similar expressions and the negatives of those terms. 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 Companys 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 Companys 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 Companys 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 AARs filings with the Securities and Exchange Commission.

AAR CORP. and Subsidiaries

Consolidated Statements ofOperations Three Months Ended Twelve Months Ended(In millions except per share May 31, May 31,data - unaudited) 2020 2019 2020 2019 Sales $ 416.5 $ 562.7 $ 2,072.0 $ 2,051.8 Cost and expenses: Cost of sales 380.1 467.9 1,802.8 1,722.0 Provision for doubtful 2.1 2.1 5.4 15.8 accounts Selling, general and 47.3 63.3 220.6 215.4 administrative Loss from joint ventures (1.9 ) (0.1 ) (1.9 ) (0.3 ) Operating income (loss) (14.9 ) 29.3 41.3 98.3 Interest expense, net (2.6 ) (2.1 ) (8.8 ) (8.5 )Other expense, net (1.5 ) (0.4 ) (2.1 ) (0.8 ) Income (Loss) from continuingoperations (19.0 ) 26.8 30.4 89.0 before income tax expense(benefit)Income tax expense (benefit) (4.0 ) 0.2 5.6 4.9 Income (Loss) from continuing (15.0 ) 26.6 24.8 84.1 operationsLoss from discontinued (1.5 ) (3.8 ) (20.4 ) (76.6 )operationsNet income (loss) $ (16.5 ) $ $ 4.4 $ 7.5 22.8 Earnings (Loss) per share ? Basic: Earnings (Loss) from $ ) $ 0.77 $ 0.71 $ 2.42 continuing operations (0.43 Loss from discontinued (0.04 ) (0.11 ) (0.59 ) (2.22 )operations Earnings (Loss) per share ? $ (0.47 ) $ 0.66 $ 0.12 $ 0.20 Basic Earnings (Loss) per share ? Diluted: Earnings (Loss) from $ ) $ 0.76 $ 0.71 $ 2.40 continuing operations (0.43 Loss from discontinued (0.04 ) (0.11 ) (0.58 ) (2.19 )operations Earnings (Loss) per share ? $ (0.47 ) $ 0.65 $ 0.13 $ 0.21 Diluted Share Data: Weighted average shares 34.7 34.3 34.8 34.5 outstanding ? BasicWeighted average shares 34.7 34.6 35.0 34.9 outstanding ? Diluted

AAR CORP. and Subsidiaries

May 31, May 31,Consolidated Balance Sheets (In millions) 2020 2019 (unaudited) ASSETS Cash and cash equivalents $ 404.7 $ 21.3Restricted cash 20.0 19.8Accounts receivable, net 171.9 197.8Contract assets 49.3 59.2Inventories, net 623.1 523.7Rotable assets and equipment on or available for lease 69.6 65.3Assets of discontinued operations 22.9 29.2Other current assets 77.2 36.2 Total current assets 1,438.7 952.5Property, plant, and equipment, net 135.7 132.8Operating lease right-of-use assets, net 89.7 ??Goodwill and intangible assets, net 121.7 138.4Rotable assets supporting long-term programs 211.7 216.0Other non-current assets 81.5 77.5 Total assets $ 2,079.0 $ 1,517.2 LIABILITIES AND EQUITY Accounts payable and accrued liabilities $ 353.2 $ 328.3Liabilities of discontinued operations 29.9 29.2 Total current liabilities 383.1 357.5Long-term debt 600.0 141.7Operating lease liabilities 70.9 ??Other liabilities and deferred income 122.4 112.1 Total liabilities 1,176.4 611.3Equity 902.6 905.9 Total liabilities and equity $ 2,079.0 $ 1,517.2

AAR CORP. and Subsidiaries

Three Months Ended Twelve Months EndedConsolidated Statements of Cash May 31, May 31,Flows (In millions ? unaudited) 2020 2019 2020 2019 Cash flows provided from (used in) operating activities: Net income (loss) $ (16.5 ) $ 22.8 $ 4.4 $ 7.5 Loss from discontinued 1.5 3.8 20.4 76.6 operations Income (Loss) from continuing (15.0 ) 26.6 24.8 84.1 operations Adjustments to reconcile income(loss) from continuing operationsto net cash provided from (used in)operating activities Depreciation and intangible 10.9 11.5 43.7 42.8 amortization Stock-based compensation (3.0 ) 4.7 7.3 13.5 Customer contract termination 6.6 ?? 31.3 ?? and restructuring costs Impairment charges 8.1 ?? 8.1 ?? Provision for doubtful 2.1 2.1 5.4 15.8 accounts Changes in certain assets and liabilities: Accounts receivable 49.4 38.9 14.8 (34.4 ) Contract assets 15.3 (4.5 ) 9.9 (9.7 ) Inventories 3.5 (9.1 ) (94.5 ) (80.9 ) Rotable assets supporting 1.6 (11.0 ) (22.1 ) (49.2 )long-term programs Accounts payable and accrued (92.9 ) (10.1 ) 4.6 40.4 liabilities Deferred revenue on long-term (15.7 ) (7.5 ) (14.6 ) 44.4 programs Other 10.5 2.5 (37.8 ) (6.3 ) Net cash provided from (usedin) operating activities ? (18.6 ) 44.1 (19.1 ) 60.5 continuing operations Net cash provided from (usedin) operating activities ? (8.6 ) (1.2 ) (17.0 ) 6.9 discontinued operations Net cash provided from (used (27.2 ) 42.9 (36.1 ) 67.4 in) operating activities Cash flows used in investing activities: Property, plant and equipment (5.3 ) (5.1 ) (23.6 ) (17.4 )expenditures Other 0.5 (0.1 ) (1.2 ) (1.1 ) Net cash used in investingactivities ? continuing (4.8 ) (5.2 ) (24.8 ) (18.5 )operations Net cash used in investingactivities ? discontinued ?? ?? ?? (0.5 )operations Net cash used in investing (4.8 ) (5.2 ) (24.8 ) (19.0 )activities Cash flows provided from (used in) financing activities: Proceeds from (repayments on) 394.5 (35.0 ) 459.5 (35.0 )borrowings, net Cash dividends (2.6 ) (2.6 ) (10.7 ) (10.5 ) Purchase of treasury stock ?? (9.5 ) (4.1 ) (10.3 ) Other ?? 0.2 (0.2 ) 8.5 Net cash provided from (used in)financing activities ? continuing 391.9 (46.9 ) 444.5 (47.3 )operationsNet cash used in financingactivities ? discontinued ?? ?? ?? (1.4 )operationsNet cash provided from (used in) 391.9 (46.9 ) 444.5 (48.7 )financing activitiesEffect of exchange rate changes (0.1 ) (0.1 ) ?? (0.2 )on cashIncrease (Decrease) in cash and 359.8 (9.3 ) 383.6 (0.5 )cash equivalentsCash, cash equivalents, andrestricted cash at beginning of 64.9 50.4 41.1 41.6 periodCash, cash equivalents, and $ 424.7 $ 41.1 $ 424.7 $ 41.1 restricted cash at end of period



AAR CORP. and Subsidiaries

Sales By Business Segment Three Months Ended Twelve Months Ended(In millions - unaudited) May 31, May 31, 2020 2019 2020 2019Aviation Services $ 390.1 $ 522.0 $ 1,964.2 $ 1,920.6Expeditionary Services 26.4 40.7 107.8 131.2 $ 416.5 $ 562.7 $ 2,072.0 $ 2,051.8

Gross Profit by Business Segment Three Months Ended Twelve Months Ended(In millions- unaudited) May 31, May 31, 2020 2019 2020 2019Aviation Services $ 36.4 $ 89.6 $ 267.3 $ 313.6Expeditionary Services ?? 5.1 1.9 16.2 $ 36.4 $ 94.7 $ 269.2 $ 329.8

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 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 workforce actions 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 Ended Twelve Months(In millions - unaudited) May 31, Ended May 31, 2020 2019 2020 2019 Income from continuing operations $ ) $ 26.6 $ $ (15.0 24.8 84.1Investigation and remediation compliance 1.4 1.8 7.7 costs, net of tax 2.8Customer contract termination and 5.2 ?? 24.0 ?? restructuring costs, net of taxImpairment charges related to exited 8.7 ?? 8.7 ?? product lines, net of taxFacility consolidation and repositioning 3.9 0.7 3.9 costs, net of tax 0.7Severance, furlough and pension settlement 5.1 0.1 6.7 charges, net of tax 0.3Customer bankruptcy charges, net of tax 1.3 ?? 1.3 9.6 Government workforce subsidies (2.2 ) ?? (2.2 ) ?? State income tax benefit ?? ) ?? ) (5.1 (5.1Recognition of previously reserved income ?? ?? ?? )tax benefits (6.5Strategic financing evaluation costs, net 0.3 ?? 0.3 ?? of taxAdjusted income from continuing operations $ 8.7 $ 24.1 $ $ 85.9 75.2

Adjusted Diluted Earnings per Share Three Months Ended Twelve MonthsEndedfrom ContinuingOperations May 31, May 31,(In millions - unaudited) 2020 2019 2020 2019 Diluted earnings (loss) per share $ (0.43 ) $ 0.76 $ 0.71 $ from continuing operations 2.40Investigation and remediation 0.04 0.22 compliance costs, net of tax 0.04 0.08Customer contract termination and 0.15 ?? 0.68 ?? restructuring costs, net of taxImpairment charges related to exited ?? 0.25 ?? product lines, net of tax 0.25Facility consolidation and 0.11 repositioning costs, net of tax 0.11 0.02 0.02Severance, furlough and pension 0.19 settlement charges, net of tax 0.15 0.01 0.01Customer bankruptcy charges, net of ?? 0.04 0.27 tax 0.04Government workforce subsidies (0.06 ) ?? (0.06 ) ?? State income tax benefit ?? ) ?? ) (0.15 (0.15Recognition of previously reserved ?? ?? ?? )income tax benefits (0.19Strategic financing evaluation costs, ?? 0.01 ?? net of tax 0.01Adjusted diluted earnings per share $ 0.26 $ 0.68 $ 2.15 $ from continuing operations 2.44

Adjusted Selling, General and Three Months Twelve MonthsEndedAdministrative Expenses Ended May 31,(In millions - unaudited) May 31, 2020 2019 2020 2019 Selling, general and administrative $ 47.3 $ 63.3 $ 220.6 $ 215.4 expensesInvestigation and remediation compliance (1.8 ) ) (9.7 ) )costs (1.2 (3.5Severance and furlough costs (2.4 ) ) (4.6 ) ) (0.1 (0.2Government workforce subsidies 0.8 ?? 0.8 ?? Strategic financing evaluation costs (0.4 ) ?? (0.4 ) ?? Stock-based compensation 3.0 ) (7.3 ) ) (4.7 (13.5Adjusted selling, general and $ 46.5 $ 57.3 $ 199.4 $ 198.2 administrative expenses

Adjusted Cash Provided by(Used in) Operating Three Months Ended Twelve MonthsEndedActivities from May 31, May 31,Continuing Operations(In millions - unaudited) 2020 2019 2020 2019 Cash provided by (used in) operating activities from continuing operations $ (18.6 ) $ $ (19.1 ) $ 60.5 44.1Amounts outstanding onaccounts receivable financing program: Beginning of period 85.6 99.5 86.2 71.7 End of period (74.3 ) (86.2 ) (74.3 ) ) (86.2Adjusted cash provided by(used in) operating activities from continuing $ (7.3 ) $ 57.4 $ (7.2 ) $ 46.0operations

Adjusted EBITDA Three Months Twelve MonthsEnded(In millions - unaudited) Ended May 31, May 31, 2020 2019 2020 2019Net income (loss) $ (16.5 ) $ 22.8 $ 4.4 $ 7.5Loss from discontinued operations 1.5 3.8 20.4 76.6Income tax expense (benefit) (4.0 ) 5.6 4.9 0.2Other expense, net 1.5 0.4 2.1 0.8Interest expense, net 2.6 2.1 8.8 8.5Depreciation and intangible amortization 10.9 11.5 43.7 42.8Investigation and remediation costs 1.8 1.2 10.1 3.5Customer contract termination and 6.6 ?? ??restructuring costs 31.3Impairment charges related to exited 11.0 ?? 11.0 ??product linesFacility consolidation and repositioning 4.9 0.9 4.9 0.9costsSeverance and furlough costs 5.0 0.1 7.1 0.2Customer bankruptcy charges 1.6 ?? 1.6 12.4Government workforce subsidies (2.8 ) ?? (2.8 ) ??Strategic financing evaluation costs 0.4 ?? 0.4 ??Stock-based compensation (3.0 ) 4.7 7.3 13.5Adjusted EBITDA $ 21.5 $ 47.7 $ $ 171.6 155.9

Net Debt May 31, 2020 May 31, 2019(In millions- unaudited)Total debt $ 602.0 $ 142.9 Less: Cash and cash equivalents (404.7 ) (21.3 )Net debt $ 197.3 $ 121.6

Net Debt to Adjusted EBITDA May 31, 2020 May 31, 2019(In millions - unaudited)Adjusted EBITDA for the twelve months ended $ 155.9 $ 171.6 Net debt at period end 197.3 121.6 Net debt to Adjusted EBITDA 1.27 0.71