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Text: 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, one of them is to Every Day, Find a Way.
That has never been more important than it has been over the last 16 months, and I'm proud of the results we have delivered.
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% from $417 million to $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 7% and our adjusted diluted earnings per share growth was 27%.
The earnings per share 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% 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 continue to consume their existing inventory.
Parts supply is one of our higher margin activities, and the performance in the quarter did not yet reflect the recovery of that business.
It was another strong quarter, as we generated $23.5 million from operating activities from continuing operations.
We also continue 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 continued to win important new business.
In particular, we created a partnership with Fortress to supply used serviceable material on the CFM56-5B 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 downmarket.
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.
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 Composites 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 million 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 in 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 FY '21 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.
Looking forward, we are optimistic that the significant recent increase in US domestic leisure flying is both enduring and a leading indicator of return to business in international travel.
We've seen a nice recovery in heavy maintenance and expect that performance to continue.
On that note, while we are aware of the tight labor market, we believe that the labor-related programs that we have established to recruit, train and retain skilled technicians will continue to serve us well, particularly when those programs are coupled with our ongoing investment in innovation to drive efficiency and differentiation inside of our hangars.
Also, although the commercial parts supply business has lagged behind the recovery, we have recently seen some early and modest signs of a rebound in that market as well, both in our USM and new parts activities.
On the government side, which has been very strong for us, we do expect a moderation in the pace of growth as buying under previous administration normalizes and some of our programs come to a natural completion, such as the C-40 aircraft procurement program for the Marine Corps, but the valuable past performance that we have continued to build and the cost reduction actions that we've taken put us in a strong position to continue to take market share, and our government pipeline remains strong.
The path and pace of the commercial air travel recovery continue to remain uncertain, which is underscored by the emergence of the delta variants.
As such, we are not issuing full-year guidance.
However, in the immediate term, we expect to see performance in Q1 that is similar to or modestly better than Q4.
As you know, Q1 is typically our slowest quarter, whereas Q4 is typically our strongest quarter.
So normally, you would see a decline from Q4 to Q1.
However, this year's expectation of similar performance reflects our belief that our commercial markets will continue their recovery.
Over the medium and longer term, we are exceptionally well positioned, we are stronger today than where we were when we entered the pandemic, and we are excited to leverage our efficiency gains, optimize portfolio and strong balance sheet to continue to drive growth and margin expansion going forward.

user
q4 adjusted earnings per share $0.47 from continuing operations.
q4 sales $438 million versus refinitiv ibes estimate of $422.6 million.

assistant