AAR Corp. (NYSE:AIR) Q4 2019 Earnings Conference Call Transcript

Jul 10, 2019 • 04:45 pm ET

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AAR Corp. (NYSE:AIR) Q4 2019 Earnings Conference Call Transcript

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Presentation
Executive
John M. Holmes

we announced an exclusive distribution arrangement with Woodward to support the US military and a joint repair management contract with Global Aerospace Logistics or GAL, focused on UAE military fleets. We feel very good about what we have accomplished in FY '19, and are particularly pleased with our record fourth quarter results.

With that, I'll turn the call over to our CFO, Sean Gillen.

Executive
Sean Gillen

Thanks, John. Before I comment on the financial results, I would like to mention the 8-K we filed this afternoon. As noted, the Company retained outside counsel to investigate possible violations of the Company's code of conduct, the US Foreign Corrupt Practices Act and other applicable laws relating to the Company's activities in Nepal and South Africa. Based on these investigations, we self reported these matters to the US Department of Justice, The US Securities and Exchange Commission, and the UK Serious Fraud Office. We will fully cooperate in any review by these agencies, although we are unable at this time to predict what action if any they may take. Given that this is now an open matter with the government, we will not be able to offer further detail at this time.

With that, I will discuss the Company's Q4 and full year 2019 financial performance in more detail. Our sales in the quarter of $562.7 million were up 19% or $89.2 million year-over-year. We experienced growth in both segments, including a $78.2 million or 18% increase in Aviation Services revenues, and $11 million or 37% increase in Expeditionary Services revenues. This significant increase in top line growth was primarily driven by sales and our parts supply activities along with the loss program.

Gross profit increased 11.8% or $10 million to $94.7 million. Gross margin was 16.8% versus 17.9% in the prior year period, primarily due to the labor challenges in MRO and mix in Expeditionary Services. SG&A expenses were 11.2% of sales versus 13.1% in the prior period, which reflects the utilization of our existing infrastructure to support loss as well as other growth. However, increased legal cost in the quarter did drive SG&A higher than initially expected.

Fourth quarter reported results include tax benefits related to reversals of state valuation allowances which reduced income tax expense by $5.1 million or $0.15 per diluted share. Adjusted income from continuing operations was $22.3 million or $0.64 per diluted share. This compares to $16.7 million or $0.48 per diluted share in the prior year. Note that Q4 adjusted income from continuing operations and diluted EPS exclude the aforementioned state tax benefits.

Additionally, full year adjusted results exclude these Q4 state tax benefits as well as the Q3 federal tax benefits discussed on the previous call. This change in presentation is to more clearly reflect the underlying performance of the business. As John mentioned, in the quarter, we took action to reposition certain elements of the workforce across our network. We incurred after-tax cost of $0.7 million associated with these actions which we have excluded from our