AAR Corp.'s Chief Executive David Storch was in good spirits the week after the company reported its yearly earnings.
AAR's earnings for the 2007 fiscal year ended in May climbed 51% to $1.42 a share. Sales grew 20% to $1.06 billion.
"This was a really good year for the company," said Storch.
AAR provides products and services to the aviation/aerospace industry. They include inventory management and logistics, parts repair, maintenance and overhaul, aircraft sales and leasing. Customers include airlines, aircraft manufacturers and governments.
Lately, the company has been on a roll. For 10 straight quarters, earnings have grown at least 35% over the prior year and sales by at least 13%. In the fourth quarter, earnings leapt 35% to 42 cents a share. Sales were up 22% to $305.7 million.
The company had good sales growth across the board, says Storch. The company's biggest business, at about half of total sales, is in aviation supply chain. Here it provides services such as logistics, inventory management, just-in-time delivery and component repair to commercial airlines as well as the Defense Department.
Sales Growth
During the quarter, that segment's sales grew 14% from the prior year largely due to continued work on existing contracts. In one contract, signed in 2005, AAR was selected as part of the Northrop Grumman team to provide aircraft maintenance and design engineering support services to the U.K.'s Royal Air Force fleet of E-3 D Sentry Airborne Warning and Control System aircraft.
The quarter's fastest growing segment was the structures and systems business. This segment makes mobility products, including specialized pallets, containers and shelters used in defense and humanitarian applications. Its sales climbed 34%.
The company continued to see higher demand for specialized mobility products.
Some of the segment's growth came from AAR's acquisition of privately held Brown International in April. Brown is a defense contractor that provides design and equips tactical operation centers, data links and support trailers, mainly for the U.S. armed services and defense contractors.
Brown, now a part of the structures and systems business, extends the level of services and value AAR provides its defense customers, the company says. It allows AAR to provide the communication systems and other technical capabilities within the shelters the company builds.
AAR paid about $26.7 million for Brown. It stands to be well worth the price. On an annual basis, Brown will contribute around $40 million in sales, estimates analyst Peter Arment of JSA Research.
Another AAR business is maintenance, repair and overhaul, or MRO, services. That includes heavy airframe maintenance checks and aircraft modifications and upgrades.
About three months before buying Brown, AAR acquired Reebaire Aircraft for an undisclosed amount. Reebaire is a regional MRO operation based in Hot Springs, Ark.
"Reebaire was a small deal," said Arment. "It gives them a nice exposure to the regional jet market."
Buying Brown is a part of AAR's strategy to expand its MRO business and its support of regional aircraft operators. The purchase doubled the size of AAR's regional MRO capacity, says Storch, and increases its penetration of the regional aircraft market.
Arment pegs Reebaire's annual sales contribution at about $15 million.
In the fourth quarter, sales from AAR's MRO segment grew 13%. The company benefited from growth in its commercial and regional aircraft maintenance and landing gear business.
Followers expect AAR to sustain its momentum. Analysts polled by Thomson Financial expect earnings for fiscal 2008, which ends next May, to rise 26% to $1.79 a share, then another 26% in 2009.
The biggest growth driver continues to be outsourcing on the part of airlines, says Arment.
"The outsourcing trend is here to stay," he said. "In a post 9-11 environment airlines are more focused on their core competency of transporting people and they're shedding noncore competencies."
Airlines are outsourcing tasks like plane maintenance, which aren't core to their focus.
"AAR continues to see increased demand for maintenance, repair and overhaul services," he said.
An area of great growth for AAR is aircraft sales and leasing, says Storch. AAR acquires aircraft through joint ventures or its own account. It helps customers locate and acquire aircraft and provides financing. It matches sellers with buyers.
In the fourth quarter, operating income from this business climbed 144%.
"The market for redeploying commercial aircraft is very active, particularly in international markets," said Storch. "Our competitive strengths include our institutional knowledge of aircraft and markets and our ability to source, technically assess, structure and finance aircraft transactions."
The company is increasing its fleet of aircraft. In the first quarter of fiscal 2008, it entered into an accord to acquire 21 aircraft, which doubled the size of its fleet to 42.
Meanwhile, AAR has landed some nice business in its various segments.
In December 2006, Southwest Airlines selected AAR to provide heavy maintenance and winglet installations for its fleet of Boeing 737 aircraft.
Armor Contract
In January of this year, it announced an accord for with Armor Holdingsto provide logistics support services for the repair of tactical military trucks at the Red River Army Depot in Texarkana, Tex. Under the agreement, AAR will provide logistics and inventory management to Armor for two years with an option to extend it to a third year. The value of the accord was not disclosed.
"Although the dollar value of this program is modest, it does represent an expansion of the supply chain services we provide to the DOD and represents the first time we've provided these types of services outside of aviation," said Storch.
More recently, in July, it said it received an order to provide shelters to be used by the U.S. Army, valued at $31 million. The shelters are scheduled to be delivered over the next 12 to 18 months.
