AAR Corp.

Good afternoon, ladies and gentlemen, and welcome to AAR's fiscal 2020 fourth quarter earnings call. We are joined today by John Holmes, President and Chief Executive Officer, and Sean Gillett, Chief Financial Officer. Before we begin, I would like to remind you that the comments made during the call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As noted in the company's News release and the risk factor section of the company's Form 10-K for the fiscal year ended May 31, 2019, and Form 10-Q for the fiscal quarter ended February 29, 2020. In providing the four looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. At this time, I would like to turn the call over to AAR's President and CEO, John Holmes.

Great. Thank you, and good afternoon, everyone. I really appreciate you joining us today to discuss our fourth quarter in our full year 2020 results. Before we get into those results, I'd like to begin by thanking the AAR team for its truly remarkable strength during these unprecedented times. In many cases, we have had to make difficult decisions in order to align our costs with a lower-demand environment. and I'm really proud of my teammates for their professionalism and resilience as we work through the impact of COVID-19. I also want to thank our customers for their unwavering support and for recognizing the unique value that AAR continues to bring. In addition, I'd like to comment on diversity and inclusion. These imperatives have been part of AAR's core values for decades. We have a long history, both internally and within our communities, of supporting and promoting underrepresented groups. However, the events in recent months have prompted us to broaden our efforts to try to understand systemic racism and discrimination and determine how we can continue to improve as a company and as a society. To that end, we are taking several additional steps that will enable us to rebuild our workforce with an even more diverse team as our industry recovers. Much as AAR has played an industry-leading role in addressing the shortage of skilled labor, so too can we play a role a leadership role in building a more diverse and inclusive aviation workforce at all levels in the industry. With that, I want to turn to our results. As you all know, the commercial aviation industry has been significantly impacted by the COVID-19 pandemic. In light of the challenging environment, I'm very pleased with our overall performance. Our sales for the year grew 1% from $2.5 billion to $2.07 billion, and our adjusted diluted earnings per share increased and continuing operations decreased 12% from $2.44 per share to $2.15 per share. Although our earnings for the year were down from 2019 levels, our results reflect three quarters of record sales and earnings performance and a fourth quarter in which we were able to effectively navigate a historic decline in the commercial aviation industry due to the unprecedented grounding of the world's fleet. Sales for the fourth quarter were down 26% from $563 million to $417 million, and adjusted diluted earnings per share from continuing operations were down 62% from $0.68 per share to $0.26 per share. We took numerous cost reduction actions early in the quarter to offset the impact, which we described in our May 21st H8K, including facility closures and consolidations, exiting unprofitable product lines, and exiting or restructuring underperforming commercial programs contracts. These resulted in a pre-tax charge in the quarter of $27.9 million and bring our cost structure into much better alignment with the current revenue base. In addition, our agreement to divest our composites manufacturing operation, which we announced a few weeks ago, was not profitable in FY20, and does not quarter our aviation services offering is a step towards further enhancing our profitability. We had launched the sale process earlier this calendar year and are pleased to have agreed on a transaction that furthers our multi-year strategy to focus on our industry-leading aviation services and reduce complexity in our operations. All of these actions, along with the actions we are continuing to take in the current quarter, produce permanent changes in our cost structure, which we expect to improve margin as our revenue recovers. Even in this environment, we continue to pursue and win new business, and I want to highlight a few examples. During the quarter, we announced an agreement with BASF to distribute and maintain certain aircraft cabin air quality improvement products, as well as a $125 million sole source contract with the U.S. Air Force to produce and repair 463L cargo pallets. We also announced a joint venture with Sumitomo to provide supply chain solutions to the Japanese defense market and to distribute parts from Japanese OEMs to the global aftermarket. In addition, subsequent to the quarter, we announced an extension and meaningful expansion of our agreement with Unison Industries, a subsidiary of GE Aviation. In this agreement, we serve as its exclusive worldwide aftermarket distributor for aviation, military, civil, and land vehicle products. The agreement also includes repair services and is valued at more than $1 billion over 11 years. This award demonstrates the value of AAR's distribution model and connected business strategy, as well as our ability to use our relative strength to extend and grow our business during the pandemic. Before turning it over to Sean, I also want to touch on the expected agreement we announced yesterday with the U.S. Treasury under the Air Carrier Worker Support portion of the CARES Act. Under that agreement, we expect to receive $57.2 million to pay salaries, wages, and benefits to the workforce and currently employed in our U.S. Airframe landing gear MRO operations. Of the $57.2 million, $48.5 million is a grant, and $8.7 million is a low-interest, pre-payable note. As you know, over the last two years, we have worked to successfully build a technical workforce for AAR, and we have launched initiatives to bring new talent into our industry. This grant helps ensure that those efforts will continue, and I really want to thank Congress and in particular the Illinois, Oklahoma, Indiana, and Indiana delegations, as well as the administration, for recognizing the essential services that our employees provide to the commercial aviation industry. With that, I'll turn it over to our CFO, Sean Gillins.

Thanks, John. Our sales in the quarter of $416.5 million were down 26% or $146.2 million year-over-year, including a $7.5 million impact related to the exit of certain contracts. Sales to government and defense customers were 47% of consolidated sales versus 35% in the prior year quarter as our commercial activities were significantly impacted by COVID-19. Specifically, our commercial sales were down 40% year over year. As John mentioned, we took a number of steps in the quarter to reduce our fixed costs and overhead, including closing our Goldsboro and Duluth facilities and exiting or restructuring underperforming contracts and product lines, primarily in our commercial programs business. These actions resulted in a predominantly non-cash charge of $27.9 million, which is recorded in the P&L as a reduction in revenue of $7.5 million, an increase in the cost of sales of $15.7 million, an increase in SG&A of $2.8 million, and a loss from joint ventures of $1.9 million. We are continuing to take additional actions in Q1 to reduce costs and improve margins. These include the composites divestiture, as well as continuing to address underperforming programs and additional footprint rationalization. We estimate that all of our actions will reduce ISG&A by over $50 million on an annualized basis, and we will remain disciplined about maintaining these cost savings, enabling margin expansion as demand recovers. Gross profit margin in the quarter was 8.7% versus 16.8% in the prior year quarter. Excluding the charges, gross profit margin was 14.1% versus 17.0% in the prior year period, which reflects $0.9 million of adjustments in the prior year period related to facility repositioning costs. Aviation services gross profit decreased 53.2 million. Our government business across parts, repair, and integrated solutions remained relatively stable, and we were able to emphasize our cargo end markets. However, demand in our commercial airline businesses was down as a result of the pandemic, including in both parts and maintenance services. Within our heavy maintenance business, although we began the quarter with full hangars, work slowed throughout the quarter and remained at reduced levels, which we expect to continue during our seasonally low Q1. In expeditionary services, gross profit decreased $5.1 million. We expect performance in this segment will improve as mobility executes on the Air Force pallet contract, and we complete the divestiture of composites. SG&A expenses were $47.3 million for the quarter. Adjusted SG&A was $46.5 million, down $10.8 million from the prior year quarter. This reduction was primarily driven by the COVID-19-related overhead cost actions we took. During the quarter, we elected to draw the remaining available balance under our revolving credit facility as a precautionary measure, which resulted in net interest expense increasing 0.5 million to 2.6 million. We expect to repay the facility this quarter such that we maintain cash on hand going forward consistent with historical levels. In the quarter, we used 18.6 million of cash in our operating activities from continuing operations. primarily due to a decrease in accounts payable, partially offset by a decrease in accounts receivable, contract assets, and inventory. Also during the quarter, we returned $2.6 million to shareholders via a dividend of $0.75 per share. As a condition of accepting payroll funding from the U.S. Treasury under the CARES Act, we are not permitted to pay additional dividends through September 30th of 2021. Our balance sheet remains strong with net debt of $197.3 million. and net leverage of 1.3 turns. We have no near-term maturities, and as of the end of the quarter, we had unrestricted cash of $404.7 million. With respect to the CARES Act funding, we expect to receive the funds during our fiscal first quarter. Upon receipt, we will record an increase to unrestricted cash and corresponding liabilities for labor costs pursuant to the grant portion and for the unsecured note. The benefit will flow through the P&L. Specifically, as we incur salary, wages, and benefit costs in our U.S. airframe and landing gear operations, we will offset the expense on the income statement until the funds are depleted, which is expected to take approximately two to three quarters. Similar to other government workforce subsidies, we will exclude the income from our adjusted earnings. Acceptance of the funds does not undo any of the cost actions taken in the fourth quarter. Thank you for your attention, and I will now turn the call back over to John.