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Article Excerpt
OPERATOR: Good day, ladies and gentlemen. Welcome to the AAR Corporation's fiscal 2009 second quarter conference call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder this conference call is being recorded.
I would now like to introduce your host for today's presentation. Ms. Miriam Barreto. Ms. Barreto, you may begin, ma'am.
MIRIAM BARRETO, DIRECTOR, FINANCIAL PLANNING & ANALYSIS, IR, AAR CORP.: Thank you, Howard. Good morning, ladies and gentlemen, and thank you for joining this morning's conference call. Before we begin, we would like to remind you that certain of the comments made today relate to future events, which are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
Please refer to the forward-looking statement disclaimer contained in the press release issued yesterday as well as those factors discussed under Item 1 A entitled Risk Factors included in the May 31, 2008 Form 10-K. By providing forward-looking statements, the Company assumes no obligation to update the forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events. At this time, I'd like to turn the call over to our Chairman and CEO, David Storch.
DAVID STORCH, CHAIRMAN, CEO, AAR CORP.: Thank you, Miriam and good morning, everyone. Joining me today in the boardroom at AAR is Tim Romenesko, our President and Chief Operating Officer, and Rick Poulton, our Chief Financial Officer. Since we last spoke in mid September, the economy has been upside down and we formally entered a recession. Unemployment continues to rise and there's been unprecedented weakness in credit markets. Further, certain large well known enterprises have either failed or sought federal assistance and the nation's auto industry has come under acute pressure. Closer to our markets, many airlines reduced capacity in the Fall and some are announcing new cuts for 2009.
In spite of these current events, we delivered a solid quarter. Sales increased 14% over the prior year to $354 million and diluted earnings per share from continuing operations increased a very respectable 21% to $0.51 per share. Virtually all of the sales growth was from acquisitions with organic sales increasing 3.5%, excluding aircraft sales and leasing. Sales to defense customers increased a robust 32% and represented 43% of total sales for the second quarter. Sales to commercial customers increased 3% while excluding the aircraft sales and leasing segment, the commercial sales growth was 10%.
Let me begin today by addressing our cash and liquidity position. We're very focused on maintaining a strong balance sheet and liquidity position. We generated $18.6 million of cash from operations and ended the quarter with almost $122 million of cash on hand. Cash on hand and borrowing available under our credit agreement totaled $281 million. We have $9.6 million of debt for an equipment purchase that is due in the fourth quarter, and after that, our next significant debt maturity is for $42 million and is not due until May 15, 2011.
As we get into the businesses in the aviation supply chain segment, sales were relatively flat and grew by 1% to $146 million and the gross profit margin improved to 24.6%. We experienced double digit sales growth at our defense-related performance base logistics business and nearly double digit sales growth in our largest after market parts business and we continue to invest in that to support our leadership positions in both these businesses. Consistent with our communications in September, we experienced reduced volumes to Mesa Airlines during the period. and foreign currency translation also unfavorably impacted sales numbers. Together, these had an approximate three percentage point impact on the growth rate in the segment. Sales were also impacted by lower sales of big ticket items. such as engines and major structural components. and sales pressure at our European component repair shop. and we are currently evaluating a number of different alternatives to improve this business over in Amsterdam.
Sales in our maintenance repair and overhaul segment increased 27% to $87 million, and our gross profit margin improved to 15.4% compared to 14.4% last year. The sales increase was attributable to the inclusion of sales from Avborne, which was acquired in March 2008, and which reported improved results over the first quarter of this year. Our landing gear business produced record results and is benefiting from expanded relationships with numerous US carriers as well as productivity initiatives implemented in prior quarters.
In our structures and systems segment, sales increased 44% to $115 million and the gross profit margin improved to 16.4% from 13.5% last year, so nice improvement. The sales increase was driven by the inclusion of SUMMA, which was acquired in December 2007, and continued strength in our mobility systems unit, reflecting increased market penetration. We announced a number of new contracts in this segment, including a contract for up to $300 million to repair pallets for the US Army in which we not currently count in our backlog because of the nature of the contract and the work, $115 million contract to manufacture shelters as a subcontractor for BAE Systems for its family of tactical vehicles, and a $40 million contract to manufacture containerized roll in, roll out platforms for the US Army.
During the second quarter we sold two aircraft from our joint venture portfolio, which drove the $2.4 million increase in earnings from joint ventures reported on our income statement. As discussed in our release, due to the economic slowdown and credit crisis, we performed a very comprehensive assessment of our aircraft portfolio. Based on that review and the desire to enhance liquidity, we recorded a $21 million impairment charge to writedown to net realizable value three aircraft from our wholly owned portfolio. All of these aircraft were acquired before September 11, 2001. The balance of our portfolio requires no adjustment. During the second quarter one of the aircraft was sold and the other two were offered for sale. In addition to two aircraft sold from our joint venture portfolio, and the sale of one aircraft from our wholly owned portfolio, we paid off $7.8 million of non-recourse debt associated with a wholly owned A320 aircraft which is on lease to Air Canada for seven more years, and the unlevered return on the investment on this aircraft is 15%.
At November 30, our aircraft position includes...
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