Weak Results from AAR Corp.

Yesterday, after market closed, AAR Corporation (AIR - Analyst Report) posted discouraging results for the first quarter of FY2010 results.

Revenue was $341.5 million, down from $359.9 million in the year ago quarter. Net income of $10.2 million was also down from $15.0 million in the second quarter of FY2009. Earnings were 27 cents down from 39 cents during the same period of FY2009. However, it was above the Zacks Consensus Estimate of 25 cents.

Sales to defense and government customers represent 46% of total sales and sales to commercial customers responsible for the remaining. Sales to defense and government customers increased 4% year-over-year, while the later decreased 12% year-over-year, as airlines further reduced inventory levels and maintenance visits in response to weak economic conditions and tight credit markets.

The company's consolidated gross profit margin was 15.8% compared to 18.7% in the same quarter last year, reflecting lower margins in the aviation supply chain and maintenance, repair and overhaul segments.

During the first quarter of fiscal year 2010, the company sold its interest in its aircraft leveraged lease for $5.3 million in cash, further reducing its number of wholly-owned aircraft to 5.

During the first quarter, the company generated $34 million of cash flow from operations and ended the first quarter with $122.8 million of cash and cash equivalents on hand from $112.5 million in the first quarter of FY2009. Net interest expense decreased $1.5 million year-over-year as a result of a decline in debt outstanding. Total debt was $346.1 million from $353.0 million in the previous quarter.

Weak conditions in commercial markets have stretched on sales and margins in the aftermarket businesses supporting commercial airlines. Additionally, the recent surge in oil prices also remains a problem. Furthermore, we do not expect a significant recovery in the global airline industry even in 2010.