What happened
Aerospace and defense supplier AAR (AIR 1.88%) reported mixed results in its most recent fiscal quarter. In a brutal environment for stocks, investors are tending to see the glass half empty, sending shares of AAR down more than 10% early Friday afternoon.
So what
AAR provides spare parts and other aftermarket services to defense and commercial aerospace companies and has operations in more than 20 countries. The company's most recent quarterly results, announced after the market closed Thursday, contained good and bad news for investors.
AAR reported fiscal first-quarter adjusted earnings per share of $0.61, beating the consensus estimate for $0.57 per share. But revenue came in a little light at $446.3 million, compared with expectations for $455 million.
Sales were down 2% year over year, with commercial sales up 10% from a year ago and government revenue off by 19%. AAR attributed the drop in government sales to "the natural completion of certain government programs," including AAR's contribution to the U.S. government's operations in Afghanistan.
"During the quarter, we drove strong commercial performance as recent new parts distribution contracts started to mature and our hangars remained largely full throughout the summer," CEO John M. Holmes said in a statement. "Also in the quarter, our government business saw the full impact of the wind down in Afghanistan as well as the completion of certain other programs."
Sales to commercial customers were 66% of AAR's total sales, compared with 59% in the prior year's quarter.
Now what
AAR is showing steady progress in its effort to streamline operations. Gross profit margins were 18.4% in the quarter, compared with 14.2% a year ago, and operating margin improved to 7% from 3.3% a year ago. And although Afghanistan-related contracts are on the decline, Holmes pointed to new contracts including a U.S. Air Force deal to produce aluminum cargo pallets and a contract with the Norwegian Defence Logistics Organisation as signs that there is growth up ahead for the government business.
But there are potential headwinds up ahead as well. A large number of defense contractors have complained in recent quarters about slowness in government procurement, and most expect it to continue through the U.S. elections in November. Meanwhile, commercial aerospace growth could be crimped by a potential U.S. or global recession.
AAR is a company moving in the right direction, but it might take a little longer than management had hoped to make progress. Investors right now are in no mood for patience, but for those with a long-term mindset, this sell-off could be a buying opportunity.
