AAR Corp (AIR) 2004 Q3 法說會逐字稿

Good day, everyone and welcome to the AAR Corp third quarter earnings release conference call. Just a reminder, this call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Greg Moore, Director of Investor Relations. Please go ahead, sir.

Thank you, Cynthia.

Good morning, ladies and gentlemen and thank you for taking the time to participate in this morning's conference call. Before we begin, we'd like to remind you that certain of the comments made today relate to future events which are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Please refer to the forward-looking statement disclaimer contained in the press release issued this morning as well as those factors discussed under item 7, entitled "factors which may affect future results," included in the company's May 21, 2003, form 10K. By providing forward-looking statements, the company assumes no obligation to update the forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

At this time, I would like to turn the call over to our President and CEO, David Storch.

Thank you, Greg and good morning, everyone. With me today in Chicago is Tim Romenesko, our Chief Financial Officer.

By now, I believe you've had the opportunity to review the third quarter fiscal 2004 results which we released earlier today. We're pleased to report the company's third consecutive quarter of sales growth and improved profitability. For the third quarter of this fiscal year, the company reported net sales of $161.2 million and net income of $3 million or 9 cents per share. The results are an improvement over our profitable second quarter of this year when the company reported sales of $159.5 million and earnings of 3 cents per share and compare very favorably with the third quarter of last fiscal year, when the company reported sales of $157 million and earnings of 2 cents per share. Third quarter results represent the highest quarterly sales, gross profit, operating income, and net income and the lowest selling, general and administrative expenses as a percentage of sales since the events of September 11, 2001. As discussed in the release, the results for the quarter also include the benefit of a lower effective income tax rate, which I will cover in more detail later in the call.

In our manufacturing segment, net sales of 44.2 million were 10.3 million or 30.4% higher than our previous year. The year-over-year sales growth improved profitability for the company, were driven primarily by record shipments of manufactured products that support the U.S. military's mobility requirements. We do expect continued strength of our mobility systems unit during the fourth quarter, although likely not at the level experienced in the just-completed quarter. Although sales were down at our composite structures and cargo systems businesses, going forward we do expect improved results from these units as combined backlog for these businesses more than doubled during the quarter and proposal activity remains exceptionally high.

In the inventory and logistics services segment, net sales of 61.1 million were $2.5 million lower than prior year. Overall, the year-over-year decline in quarterly sales is tied largely to steps we've taken to increase the profitability of our new parts distribution business. Within this business, we continue to de-emphasize lower margin sales, primarily to piston powered general aviation customers while expanding program activity with airline customers. We are seeing the benefits of this strategy as operating margins significantly improved year-over-year at our distribution unit. In addition, our parts trading businesses experienced improvement in its operating income. Sales to our military and government customers increased compared to last year as demand for performance-based logistics and supply chain management services remain strong.

In our maintenance repair and overhaul segment, net sales of $49.9 million were 4.9% lower than the previous year, mainly due to lower sales at the company's component repair facilities. Sales at the company's airframe maintenance facility did increase year-over-year due to an increase in long-term maintenance contracts, and we expect that trend to continue. We also expect results of our component repair facilities will strengthen as the airline industry improves and as we continue to invest in new capabilities and as more recently delivered aircraft come off warranty.

Enhancing gross margins is one of the company's top priorities, and we have a number of initiatives in place across our businesses to improve labor utilization and materials management. We are investing in people and technologies to increase the engineering content of the product we deliver to our customers. During the quarter we achieved higher margins with gross profit margin increases to 16.5% from 15.6% in the prior year and operating income increasing 34.3% year over year.

Asset efficiency and return on capital are also our top priorities. And during the quarter, we improved our working capital turnover to 3.1 times from 2.6 times in the prior year. Still not at levels where we'd like to be, but we continue to work at improving those working capital turns. In addition, smart inventory buys resulted in inventory turnover of 3.2 times for parts purchased in our parts trading operation since November 2001.

Now I'd like to discuss the third quarter tax benefit. During the quarter, the company filed its fiscal 2003 federal tax return and determined that it was entitled to $600,000 of additional tax benefits, primarily related to higher than estimated margin on export sales. This benefit was recorded in the third quarter. Further, the company now expects that the current year tax benefit related to export sales will offset tax expense for fiscal 2004 resulting in essentially a zero effective tax rate on current fiscal year earnings. As you can see in our press release, net income is comprised of pretax income of 2 million,965 plus a tax benefit of $84,000, totaling net income of $3 million,49 or nine cents per share.

During the quarter, we completed an attractive financing, the issuance of $75 million, principal amount of 2.875% convertible notes which mature on February 1, 2004. These senior unsecured notes are convertible under certain circumstances into approximately 4.03 million shares of our common stock at a conversion price of $18.59 per share. During the third quarter, we used a portion of the proceeds to repurchase $35 million of accounts receivable, which had previously been sold under our accounts receivable securitization facility to repay $16.9 million of our 8% notes prior to their maturity and to repay $4 million outstanding under our revolving credit facility. In addition, on March 12, we repaid $13.5 million of notes due in July of 2005. In addition to enabling us to increase our operating flexibility, this financing enhanced our liquidity and will lower interest expense in future periods. We entered the quarter with $100.6 million of cash and available lines of credit and expect to save approximately $1.3 million in annual interest expenses as a result of these debt repayments.

For third quarter, cash flow from operations was approximately 2.2 million before consideration of the repurchase of the $35 million accounts receivable. The increase in shipments to government customers and the timing of collections increased the accounts receivable and impacted cash from operations during the period. We do expect going forward to improve the cash flow from -- or be back to more recent traditional levels of cash flow from our operations.

Overall, we are pleased to report another solid quarter with sales and earnings growth. Last quarter I indicated AAR would experience increased demand for our manufacturing product and logistics service supporting the U.S. military. That demand materialized as expected, and we anticipate it will continue. The recovery in the commercial airline industry is progressing more slowly than we'd like, however we're stepping up our efforts to identify more strategic customers for additional long-term sales programs, similar to the recently-announced Avio and Vietnam airlines programs. And we continue to look to differentiate our products by increasing the amounts of engineering and technical content. Overall, we continue to make progress. Our team is performing well in what continues to be a challenging marketplace, and we are winning our share of new business.

I would thank you for your time this morning and for your ongoing support of AAR. I would like to now open up the line for any questions you may have.

Thank you, gentlemen. Today's question-and-answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on your touch-tone telephone. If you are using a speaker phone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, if you would like to ask a question, please press star one. And we will pause for a moment to give everyone an opportunity to signal. We will take our first question from Tom Lewis with Rockhouse Securities. Please go ahead.

Yeah, good morning, David.

Good morning, Tom.

I wondered if you could talk a little bit about, you know, what's holding component overhaul business down and how concerned should we be that through all we've been through in the last few years, that a lot of what you'd know how to do, new -- new -- new competition is either -- has developed either, you know, in the form of customers taking it back or -- or things that can be done in -- in other parts of the world.

I wouldn't be overly concerned. I think there's more of a timing issue than anything else. I think you will see improved results in those businesses this quarter. Backlog of both businesses is improving. Inflows are improving. I think you've had a combination of -- let's call it situations as well as I think you've had some cannibalization still taking place at some of the air carriers. But I think our position with the likes of American and Southwest and Federal Express is stronger today than it has been before. I think you will start seeing improved and increased inputs and better results from both, you know, from our -- our main, you know, component businesses.

Yeah, I -- I -- we're all aware that a certain amount of cannibalization went on, and it seems reasonable to expect that at -- at some point that produces a snapback. If we hope for it in the quarter just done, we haven't seen it yet, but would it be unreasonable to say in your -- the outlook that you just described that we're starting to see it in -- as we come down the last few months of the year?

Yeah, I think you're starting to see an -- an increase in activity in the shops and I think you'll continue to see that for -- for a while. We also will be announcing soon one win of significance that will kick in, actually, later in the calendar year, but I think indicative of the company's position and capability in this respect.

Okay. And can we assume that -- just focusing on the trading part -- parts trading that -- that -- that both pricing and volume continue to reflect the -- the overall gradual improvement of the industry?

We're doing well in our parts trading businesses, and we expect that trond continue. So we think we have, you know, we've made some prudent investments. Our margins have improved very nicely in that business, and we anticipate that that trend will continue.

Okay. Let's let somebody else ask a question. Thanks.

Thanks, Tom.

Ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad. We will go next to Peter Arment with JSA Research. Please go ahead.

Good morning, David, Tim.

Good morning, Peter.

Question on just the new parts distribution business. What -- what was the overall mix, if you had to give a percentage of your level of piston or GA customers versus the commercial? I mean, is it a 50/50 mix or do you have more commercial than the piston?

Yeah, I would say right now that it's 50/50. If you were to ask me the question a couple of years back, I would have told you it was 65 GA and 35 commercial. I would say today you're closer to 50/50, and the trend will be more towards airlines/regionals as well as business jet business and a lot less piston aircraft activity.

All right. So -- and -- in emphasizing the commercials, you know, you're looking to grow this on an organic basis, you know, by adding new product lines? Or is there, I guess external opportunities there, also?

Organic.

Organic?

Yep.

Okay, so, it's not anything else. And I guess following up on Tom's comment about the component repair business, you -- you say -- you classified it more as it was a one-time issue this quarter than you see as timing issues versus, I guess, an overall improvement in end demand --

Yes, I think there's a little sluggishness still. You had timing on certain things relating to, you know, particularly to our company and our businesses. But I -- I think, you know, based on the inputs for this quarter so far and based on our forecast, we should -- we should see strength -- stronger results, better results this period than the period just ended.

Okay. And just one final, on -- on your connection by Boeing announcement. Can you give us a little color, I guess, on the impact you potentially could see there?

I think it's going to be further out there, you know, obviously. I think there was an article today about a connection going on to Lufthansa airplanes that appeared in "Chicago Tribune," I think it was. And the prospects for the connection we think are -- are pretty good. The -- I think you're going to look at some of the customers that Boeing has right now: China Airlines, Japan, Singapore signed a letter of intent, SAS, British Airways, and then today's announcement about Lufthsansa. I think as the units get into this -- get into the -- get out there, I think it's a great little product, you know, allows for the Internet use on these airplanes at a very attractive pricing. And I think particularly for the longer haul carriers, you can see most of these guys are longer haul carriers. I think the product is a good product, and we'll be there to provide some servicing. I think it's beneficial from two perspectives. One is it shows the investments the company is making in technology. And secondly in this regard, we are looking to get closer to Boeing and do more things to support their products out in the market. We are also -- as we look to get closer to Boeing, we are also looking to get a lot closer to Airbus, particularly as they continue to do so well in the commercial markets. So, you know, our strategy is to align ourselves with these major players and be in a position of support, particularly some of their newer technology, you know, offerings.

Okay, great. And Tim, just quickly, do you have any of the sort of just housekeeping items? Any of the accounts receivable inventory numbers for -- that you could give us?

Yes, accounts receivable ended at $110 million, and that reflects the -- the addback of the $35 million that we repurchased on the securitization. Inventory was 197, down a couple of million dollars. Cash flow from operations after consideration of the $35 million was $2.3 million, and -- and $32 million, you know, as reported. And -- anything else you want?

Just payables, if you've got that.

Yeah. Hold on a second. Just one second. Payables were $61 million, 3.

Okay. Great. Thanks very much, guys, nice quarter.

Thanks.

As a final reminder, if you'd like to ask a question or if you have a follow-up question, please press star one at this time. We will go next to Michael Stern with Bain Capital. Please go ahead.

Did you give the depreciation and amortization numbers for the quarter, as well? Did I miss this?

It was $6.6 million for the quarter and $19.8 million year-to-date.

19.8 year-to-date?

Right.

Okay, thanks.

We will take our next question from Brad Bryan with Jeffries and company. Please go ahead.

Hi, gentlemen, just a couple of quick housekeeping items. Can you say what your capital expenditures were in the quarter?

They were $3.1 million and $7.4 million year-to-date.

Okay. Great. And can you just detail, you know, I say as of quarter end, what your various debt facilities outstandings were?

Sure. First of all, we had no secured lines drawn at the end of the -- at the end of the quarter, so, we paid our -- our accounts receivable securitization down to zero and our secured revolver down to zero. We have -- our next maturity is December of '07, and that is $57 million of notes that are due. And then we have $75 million that's due in -- $20 million of the 75 is due in 2008, and $55 million is due in 2011. We have $10 million due in July of '08 related to a mortgage, and then the -- and then the -- the $75 million that we just issued.

Okay. Great. And what is the total size of your revolver now?

The revolver is -- we have a $35 million securitization facility and then a $30 million revolver.

Okay.

A total of $65 million.

Okay. Very good. Thank you.

Yep.

At this time, there are no additional questions. Mr. Storch, I'll turn the call back over to you, sir, for closing comments.

Well, thank you for your participation today, and I hope you're enjoying our story. And things appear to be going along smoothly here. Thank you.

This does conclude today's conference call. We do thank you for your participation, and you may disconnect at this time.