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Illinois based aerospace/defense products and services supplier, AAR Corp. (AIR - Analyst Report) reported fiscal second quarter 2014 (ending Nov 30, 2013) earnings of 50 cents a share, in line with the Zacks Consensus Estimate. The reported figure improved 13.6% from the year-ago profit level of 44 cents. The upsurge mainly reflects solid contribution from the company’s Aviation Services segment and strong overall revenue growth.


In the fiscal second quarter of 2014, consolidated sales were $540.7 million, an increase of 5.4% year over year and on par with our projection of $540.0 million. The company’s top-line growth mainly came from its Aviation division.

In the quarter, Aviation Services’ revenues of $424.7 million comprised almost 79% of total revenue. Segment revenues surged 8.7% from the year-ago quarter. The uptrend was driven by the company's supply chain operations including the delivery of two aircraft to the U.S. Marshals Service, increased MRO activity and continued steady demand for airlift support.

The Technology Products segment contributed approximately 21% to total revenue in the quarter, corresponding to $116.0 million (down 3.3% year over year). The decrease was mainly due to lower contribution from cargo systems and containers.  


Cost of sales in the reported quarter increased 5.7% year over year to $449.7 million and represented 83% of total revenue. Selling, general and administrative expense edged up 0.6% to $51.1 million from the year-ago level. As a percentage of sales, selling, general and administrative expenses stood at 9.5% for the second quarter compared with 9.9% a year ago.  The improvement reflects the combination of higher sales and proficient cost management.

The company's operating margin improved 10 basis points to 7.5% in the reported quarter from 7.4% in the year-ago comparable quarter.

Balance Sheet/Cash Flow

Exiting the fiscal second quarter 2014, AAR Corp's cash and cash equivalents were approximately $98.5 million, up from $75.3 million at fiscal 2013 end. Net property, plant and equipment were $344.4 million, down from $361.7 million at the end of fiscal 2013. Total outstanding debt was $680.8 million.

Cash flow from operations in fiscal second quarter 2014 was $38.8 million and free cash flow was $31.7 million. Capital expenditure was $7.1 million and AAR paid cash dividends of $3.0 million in the reported quarter.


With the expectation of fewer aircraft positions in AAR’s airlift operations during the latter half, the company lowered its top and bottom line forecast for fiscal year 2014.

The company now expects earnings per share for fiscal 2014 in the range of $1.95–$2.00 versus its prior guidance of $2.00–$2.05. Total revenues are expected in the band of $2,100 million to $2,150 million compared its previous forecast of $2,175 million to $2,225 million.

Zacks Rank

Currently, AAR Corp. has a Zacks Rank #3 (Hold). However, other aviation companies like Alliant Techsystems Inc. (ATK - Analyst Report), Raytheon Co. (RTN - Analyst Report) and Teledyne Technologies Inc. (TDY - Snapshot Report) are worth looking into now. While Alliant Techsystems and Raytheon sport a Zacks Rank #1 (Strong Buy), Teledyne Technologies carries a Zacks Rank #2 (Buy).

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