AAR Corp.

Good afternoon, ladies and gentlemen. Welcome to AAR's fiscal 2021 fourth quarter earnings call. We're 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 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, 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, and good afternoon, everyone. I appreciate you joining us today to discuss our fourth quarter and full year fiscal 2021 results. Before I comment on the results, I would like to take a moment to reflect on the last fiscal year. The reduction of commercial passenger air travel to nearly zero shortly before our fiscal year began and the persistently depressed levels of commercial traffic throughout the year tested our industry and our company to agree that was previously hard to imagine. At AAR, we have a strong set of values. It's to every day find a way. That has never been more important than it has been over the last 16 months, and I am proud of the results we have delivered. I want to thank our employees for their commitment and endurance and our customers for their continuing to support. And I'm pleased to be able to say that we are now emerging from this crisis an even stronger, more focused company. Turning to our results, sales for the year decreased 20% from $2.07 billion to $1.65 billion, and our adjusted diluted earnings per share from continuing operations decreased 39% from $2.15 per share to $1.31 per share. These results reflect the impact of COVID-19 on the demand for commercial air travel, but also our team's ability to reduce costs and increase efficiency to mitigate that impact. As you may recall, our Q4 of last year was only partially impacted by COVID as our hangars completed work on aircraft that were already in the hangar when the pandemic began. As such, I'm particularly pleased to report that sales for the fourth quarter were up 5%, 417 million, $438 million, and I'm even more pleased to report that adjusted diluted earnings per share from continuing operations were up 81% from $0.26 per share to $0.47 per share. Our sales to commercial customers increased 3%, and our sales to government and defense customers increased 7%. Sequentially, our total sales growth was adjusted diluted EPS growth of 27%. The EPS growth was driven by our operating margin, which was 5.2% for the quarter on an adjusted basis, up from 3.2% last year and 5.0% in the third quarter. We saw strong performance in our MRO operations as airlines performed maintenance in advance of the anticipated return to summer leisure travel, as well as the strong performance in our government programs contracts. Notably, we have not seen much of a recovery in our commercial parts supply businesses, as operators continued to consume their existing inventory. Part supply is one of our higher margin activities, and the performance in the quarter did not yet reflect a recovery of that business. Turning to cash, it was another strong quarter as we generated $23.5 million from operating activities from continuing operations. We also continued to reduce the usage of our accounts receivable financing program. Excluding the impact of that AR program, our cash flow from operating activities from continuing operations was $33.3 million. The results for the year reflect our accomplishments in three key areas. First, we moved quickly at the outset of the pandemic to reduce costs and optimize our portfolio for efficiency. We did this by consolidating multiple facilities, making permanent reductions to our fixed and variable costs, exiting or restructuring several underperforming commercial programs contracts, and completing the divestiture of our composites business, which had been unprofitable in recent quarters. Second, we continue to win important new business. In particular, we created a partnership with Fortress to supply used serviceable material on the CFM 56-5B and 7B engine types. We were awarded a follow-on contract from the Navy that extended and expanded our support of its C-40 fleet. We expanded our distribution relationship with GE subsidiary Unison. We entered into a 10-year agreement with Honeywell to be an exclusive repair provider for certain 737 MAX components. And most recently, we signed a multi-year agreement with United to provide 737 heavy maintenance in our Rockford facility. Finally, we focused on our balance sheet and working capital management, which allowed us to generate over $100 million of cash from operating activities from continuing operations, notwithstanding the investments that we made to support new business growth. We demonstrated that we can generate cash even in a down market, and as a result, we are now well under one times levered and exceptionally well positioned to fund our growth going forward. There are very few companies in commercial aviation that are emerging from the pandemic with a debt level that is actually lower than when they entered. With that, I'll turn it over to our CFO, Sean Gillen, to discuss the results in more detail.

Thanks, John. Our sales in the quarter of $437.6 million were up 5% or $21.1 million year over year. Sales in our aviation services segment were up 6.5%, driven by continued strong performance in government, as well as the recovery in commercial. Sales in our expeditionary services segment were down slightly, reflecting the divestiture of our composite business. Gross profit margin in the quarter was 16.4% versus 8.7% in the prior year quarter, and adjusted gross profit margin was 16.5% versus 13.6% in the prior year quarter. Aviation services gross profit increased $32.9 million, and expeditionary services gross profit increased $2.5 million. Gross profit margin in our commercial activities was 13.4%. This reflects the relative strength in MRO, where we've been able to drive margin improvement through the efficiency actions we have taken. As the commercial market continues to recover, we would expect higher overall commercial gross margins. Gross profit margin in our government activities was 19.7%, which was driven by continued strong performance as well as certain events that occurred during the quarter. The adjustments in the quarter include 2.1 million related to the closure of our Goldsboro facility, which had supported our mobility business within Expeditionary Services. We have completed our consolidation of those operations into Mobility's Cadillac, Michigan facility, and the adjustment reflects our current estimate of sale proceeds from the building. Looking forward, subsequent to the end of Q4, one of our commercial programs contracts was terminated. As a result, we expect to recognize impairment charge of between $5 and $10 million in the first quarter of fiscal 22. This contract had been underperforming for us in recent quarters, and with this termination, our restructuring actions and commercial programs are largely complete. As John described, we have taken steps over the last year to rationalize certain underperforming operations, including the divestiture of our composites business, the closure of our Duluth heavy maintenance facility, and the exit or restructuring of certain contracts. These activities, along with the terminated contracts I just described, collectively contributed approximately 140 million of annualized pre-COVID sales, which will not return as commercial markets recover. However, the absence of these operations is now part of what's driving our increasing profitability. SG&A expenses in the quarter were 48.8 million. On an adjusted basis, SG&A was 46.7 million. up only 0.2 million from the prior year quarter, despite the increase in sales. As a reminder, SG&A in the prior year quarter already reflected our cost reduction actions. For fiscal year 22, we would expect a modest increase in SG&A compared to FY21 as we invest in certain initiatives, such as digital, that will drive improved performance in future years. We continue to focus on driving SG&A as a percent of sales to 10% or lower as our top line recovers. As John indicated, we generated cash flow from our operating activities from continuing operations of $23.5 million as we continued to reduce our inventory balance. In addition, we reduced our accounts receivable financing program by $9.8 million in the quarter from $48.4 million to $38.6 million. As a result, our balance sheet remains exceptionally strong with net debt of $83.4 million versus $197.3 million at the end of last year. and our net leverage as of year end was only 0.7 times. Thank you for your attention, and I'll now turn the call back over to John.