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Aerospace and defense products and services supplier, AAR Corp. (AIR - Analyst Report) reported fiscal third quarter 2014 (ending Feb 28, 2014) earnings of 38 cents per share, down 17.4% from 46 cents earned in the year-ago quarter. The reported figure missed the Zacks Consensus Estimate of 50 cents by 24.0%.

Revenue

In the fiscal third quarter of 2014, consolidated sales were $474.4 million, down 11.2% year over year and below the Zacks Consensus Estimate of $534.0 million. The company’s top line declined due to lower contribution from its Aviation Services and Technology Products segments.

Segment Details

In the reported quarter, Aviation Services’ revenues of $367.8 million comprised 77.5% of total revenues. Segment revenues declined 9.9% from the year-ago quarter.

The downtrend was due to lower landing gear revenue from the adverse timing of gear removals and decline in MRO (Maintenance, repair and operations) sales resulting from the completion of a significant engineering service program in the second quarter of fiscal year 2014. In addition, the company restructured a supply chain management program to convert the “Time and material” based contract into the “Power- by-the-Hour” program. This change decreased the company’s revenue as well as profitability during the reported quarter.

The Technology Products segment contributed 22.5% to total revenues in the quarter, corresponding to $106.6 million (down 4.8% year over year). The decrease was mainly due to lower contribution from the mobility product business, partially offset by sales growth in cargo system.

Margins

Cost of sales in the reported quarter decreased 10.9% year over year to $395.7 million and represented 83.4% of total revenues. Selling, general and administrative expense edged up 9.0% to $45.6 million from the year-ago level. As a percentage of sales, selling, general and administrative expenses stood at 9.6% this quarter as against 8.0% in the year-ago quarter.  

The company's operating margin decreased nominally to 7.1% in the reported quarter from 7.2% in the year-ago comparable quarter.

Financial Update

In the fiscal third quarter 2014, cash and cash equivalents were approximately $114.7 million, up from $75.3 million at fiscal 2013 end. Net property, plant and equipment were $336.0 million, down from $361.7 million at the end of fiscal 2013. Total outstanding debt was $714.4 million.

Cash flow from operations in third quarter fiscal 2014 was $10.3 million and free cash flow was $3.4 million. Capital expenditure was $6.9 million while AAR paid cash dividends of $3.0 million in the reported quarter.

Guidance

As the company continues to face continued pressure in airlift and MRO services, partly offset by supply chain efficiencies, it lowered its top- and bottom-line forecast for fiscal 2014.

The company cut its earnings guidance for fiscal 2014 to the range of $1.79–$1.82 per share from $1.95–$2.00 per share projected earlier. Total revenues are expected in the band of $2.0 billion to $2.05 billion compared its previous forecast of $2.1 billion to $2.2 billion.

Zacks Rank

Currently, AAR Corp. has a Zacks Rank #3 (Hold). Players in the aerospace and defense industry with a favorable Zacks Rank include Astronics Corporation (ATRO - Snapshot Report), Huntington Ingalls Industries, Inc. (HII - Snapshot Report) and Raytheon Co. (RTN - Analyst Report). All of these stocks hold a Zacks Rank #1 (Strong Buy).

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