AAR Corp.

Good afternoon, ladies and gentlemen, and welcome to AAR's fiscal 2021 second quarter earnings call. We are joined today by John Holmes, President and Chief Executive Officer, and Sean Gillen, Chief Financial Officer. Before we begin, I would like to remind you that comments made during the call may include forward-looking statements as defined in the private security litigation format 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 31st, 2020, and Form 10-Q for the fiscal quarter ended August 31st, 2020. In providing the forward-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 very much, and good afternoon, everyone. I appreciate you all joining us today to discuss our second quarter fiscal 2021 results. Before we discuss the results themselves, I would like to thank all of our employees for the continued resiliency and courage they have shown over the last three quarters as we've navigated this pandemic. In particular, more than two-thirds of our people are essential workers, and they have continued to come to work every day, enabling us to continue to deliver for our customers. I'm very proud of our entire team. I also want to thank Congress once again for its work on the CARES Act, which has allowed companies like ours to preserve their skilled workforce. Regarding the business, as we indicated last quarter, overall we have seen our commercial volume stabilize and continued strong performance out of our government business. While we remain in a difficult and uncertain environment, we are encouraged by the stabilization as well as the positive developments regarding the vaccines, which not only will protect our people, but should also ultimately lead to more travel and a recovery in our commercial markets. With that, turning to the quarter, our sales decreased 28% year over year from $561 million to $404 million, and our adjusted diluted earnings per share from continuing operations decreased 52% from 64 cents per share to 31 cents per share. Our sales to commercial customers decreased 48%, and our sales to government and defense customers increased 13%. For the quarter, sales to government and defense customers were 52% of our total sales. Our aviation services segment grew 6% sequentially from our first quarter. This was a result of increased volume in our MRO business, which is decently higher in Q2 over Q1, as well as the continued strength of our government business. Our commercial parts volumes overall were relatively stable throughout the quarter and remained above the lows we saw in April and May. That said, I am particularly encouraged by our margin improvement progress. Over the last several quarters, we have reduced our footprint across the enterprise, decreased our indirect and overhead spending, exited or restructured several underperforming contracts, and divested a loss-making non-core business. You are now starting to see the results of these actions in our adjusted operating margins, which improved meaningfully from 2.5% to 4% sequentially on stable revenue. With respect to cash, we generated $28 million from operating activities from continuing operations and also reduced our accounts receivable financing program by nearly $7 million, further improving our already strong balance sheet position and putting our net leverage below one times EBITDA. We also continue to add significant new business that positions us for growth going forward. Our CFM56 partnership with Fortress solidifies the source of supply to meet growing demand for used serviceable material on the Dash 5B and the Dash 7B engine variants. We expect demand for USM to increase across the board as we emerge from the pandemic and to be particularly strong for these engine platforms. Also, our follow-on contract from the Navy to support the C-40 aircraft recognizes our performance over the last five years and provides for an expanded statement of work over the next five years. It's worth noting that this was the first time that this contract was awarded to an incumbent, which speaks to the high quality of our service. Additionally, our 10-year agreement with Honeywell to be a sole authorized service center for 737 MAX electronic bleed air system components positions us to support MAX operators worldwide so that aircraft is returned to service. These new contracts, along with others we have announced over the last several months, such as the Unison expansion and extension, represent nearly $1.7 billion in total contract value captured so far this fiscal year. This demonstrates the unique value of our aviation services offering, and these business wins will help accelerate our recovery coming out of the downturn. With that, I'll turn it over to our CFO, Sean Gillen, to review the quarter's results in more detail. Thanks, John.

Our sales in the quarter of $403.6 million were down 28% or $157.3 million year-over-year, driven by the impacts of the pandemic on commercial passenger flying activity. Sequentially, aviation services sales were up 5.9% or $21.4 million, while sales in expeditionary services were down 50% or $18.6 million. The sequential decline in expeditionary services was driven by two factors. First, the exit of the composites business was completed at the end of Q1, and this business generated $7 million of revenue in Q1 and zero in the current quarter. Second, as previously discussed, mobility had a particularly strong Q1 due to elevated shipments of pallets. Within aviation services, our government and defense business was up 19% or $30 million year-over-year, reflecting strong performance on existing contracts. In the quarter, as well as in Q1, our program to deliver two C-40 aircraft to the U.S. Marine Corps generated strong revenue due to elevated activity on the program. Gross profit margin in the quarter increased to 17.2% from 15.3% in the prior year quarter, driven by the CARES Act payroll support. On a sequential basis, gross profit margin was up from 12.1% in our first quarter reflecting the actions we have taken to reduce our indirect costs and to exit underperforming contracts and product lines. SG&A expenses were $43.4 million for the quarter. On an adjusted basis, SG&A was $38 million, or 9.4% of sales, down $13 million from the prior year quarter, reflecting the reduction of our overhead cost structure. Of this improvement, approximately $3.2 million was the result of temporary reductions in compensation and benefits, which we restored beginning on December 1st. As an update on our previous disclosure, we have been in settlement discussions with the Department of Justice regarding an investigation of airlift under the False Claims Act. During the quarter, we recorded 6 million of additional accrual and discontinued operations, which brings our total reserve for this matter to 8 million based on our latest settlement offer. We generated 27.6 million of cash in our operating activities from continuing operations for the quarter. This is net of a use of cash of 6.8 million as we continue to reduce the size of our accounts receivable financing program. Excluding the accounts receivable financing program, cash flow provided by operating activities from continuing operations was 34.4 million. Inventory decreased 12.7 million during the quarter. Our net debt at quarter end was 112.1 million, down 37 million from 149.3 million at the end of Q1. Our balance sheet and liquidity remain strong with net leverage of 0.95 times adjusted EBITDA, unrestricted cash of $110 million, and unused capacity under our revolver of approximately $390 million. As such, we're well positioned to fund what we expect to be unique opportunities to grow our business over the coming quarters. Thank you for your attention, and I'll now turn the call back over to John.