Slide 1: AAR CORP. Investor Day October 5, 2011
AAR CORP. Investor Day October 5, 2011
Slide 2: Forward-Looking Statements
This presentation includes certain statements relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on beliefs of Company management, as well as assumptions and esti
Slide 3: Agenda
Agenda Time Topic Presenter 8:00 AM AAR CORP. Overview David Storch Chairman and Chief Executive Officer 8:20 AM Aviation Supply Chain John Holmes Vice President 8:40 AM Maintenance, Repair & Overhaul Dany Kleiman Group Vice President 9:00 AM Government & Defense Services Randy Martinez Group Vice P
Slide 4: AAR CORP. Overview
AAR CORP. Overview David Storch Chairman and Chief Executive Officer
Slide 5: Overview
Diversified and balanced portfolio of Aerospace & Defense businesses Commercial 49% | Government & Defense 51% Aftermarket & Support Services 81% | Manufacturing 19% Growth opportunities in both Commercial and Government & Defense markets Continued recovery in Commercial markets Well positioned in g
Slide 6: Diversified Business Mix
Diversified Business Mix May 31, 2001 August 31, 2011 TTM Strong portfolio of Aerospace & Defense businesses provides balance, strength and consistency through the cycles Commercial 49% Government 51% Commercial 83% Government 17% Aftermarket & Support Services 81% Manufacturing 19% Aftermarket & Su
Slide 7: Balanced Portfolio
Balanced Portfolio 49% 32% 19% Commercial Parts Supply Component Repair Supply Logistics Programs Aircraft Maintenance Landing Gear Repairs Commercial Services Government & Defense Services Structures & Systems Aviation Supply Chain Maintenance, Repair & Overhaul Mobility Systems Cargo Systems Preci
Slide 8: Strong FY 2011 Performance
Strong FY 2011 Performance Invested to support new aircraft platforms Launched aftermarket distribution relationship Aviation Supply Chain Government & Defense Services Structures & Systems Maintenance, Repair & Overhaul Won and expanded new customers #1 ranked MRO in North America Integration of Ai
Slide 9: FY 2012 Performance
FY 2012 Performance Q1 Performance Balance of FY 2012 Long-Term Drivers Aviation Supply Chain Maintenance, Repair & Overhaul Government & Defense Services Structures & Systems Lower capacity utilization Mission capable rates Timing of Mobility product shipments Strong Q1 performance New customer win
Slide 10: Government & Defense: The AAR Thesis
Government & Defense: The AAR Thesis 1. Well positioned around funding areas that are more stable 2. Value proposition about lowering cost which will help governments do more without more 3. Recent wins for AAR Cost reductions and efficiency gains a central strategy in future budgets Will benefit co
Slide 11: Key Strategic Principles
Maintain Portfolio Balance Commercial / Defense Services / Front-end manufacturing U.S. / International Deepen Relationships with Customers Align with key OEM’s Transition to a Tier I supplier Provide complete end-to-end solutions Improve Operating Margins Build scale across businesses Leverage core
Slide 12: Deep Management Team to Execute Strategy
Rick Poulton Chief Financial Officer and Treasurer 5 years with AAR 21 years in Industry An accomplished and experienced leadership team dedicated to integrity, fiscal responsibility, operational excellence, customer satisfaction and stockholder value Randy Martinez Group Vice President, Government
Slide 13: Aviation Supply Chain
Aviation Supply Chain John Holmes Vice President
Slide 14: John Holmes, Vice President, Aviation Supply Chain
14 Leads AAR’s Allen Asset Management and Aircraft Component Services Joined AAR CORP. in 2001 Solid career with AAR CORP. Vice President, Aviation Supply Chain General Manager, Allen Aircraft Director of Mergers and Acquisitions, AAR CORP. Education Bachelor of Science degree in Finance from Univer
Slide 15: Leading Provider of Supply Chain Solutions
Leading Provider of Supply Chain Solutions Boeing, Airbus and Regional aircraft and engine coverage Sales, leasing and programmatic supply Offices in 12 countries Airframe and Engine Parts Supply Broad technical capability for commercial and defense platforms Reliability engineering and configuratio
Slide 16: Market Overview and Current Trends
Market Overview and Current Trends Global MRO Market of $50B $5B addressable market 3% ten-year CAGR Current Market Trends Very strong demand for new generation assets Airlines: Continued cash focus Lessors: ‘End of life’ strategies OEMs: Aftermarket focus Increasing demand for integrated support se
Slide 17: Programs provide assets to fuel the parts supply business
Programs provide assets to fuel the parts supply business Programs fund capability development Programs drive geographic expansion Programs Repair Parts Supply Engine and airframe parts supply is foundation Reduces inventory investment requirement for programs Provides repair volume for in-house cap
Slide 18: Strategy – Commercial Parts Supply
Strategy – Commercial Parts Supply New Generation Products | New Sources Continue to improve market position in newer generation platforms Adjust balance between asset acquisition and asset consignment Long-term alignment with lessors combined with opportunistic transactions Acquire long-term exclus
Slide 19: Strategy – Repair
Strategy – Repair Capability rationalization – NY and Amsterdam Focused Capability Development JETSTR BAE146 J31 PC12 ERJ135 ERJ145 DHC7 737C DC9 717 L1011 B1900 FALCON DC8 MD11 MD80/90 DO328 B727 A300 A310 DC10 B707 CESSNA METRO AW109 DHC6 CITATION C-131 EMB110 KC10 H-60 KC135 A320 737NG EJET ATR 7
Slide 20: Strategy – Programs
Strategy – Programs Unison: Ten year global exclusive distributorship $600M contract Sales ramp up on track Platform for distribution growth Finnair: Supply chain support First 757 support program Foundation for growth into A320 & EJets Access to Russian market Component and Distribution Programs Le
Slide 21: Q1 Performance and Outlook
Q1 Performance Strongest quarter in ten years Sales of new generation trading assets and continued reduction of aircraft portfolio Secured Unison distributorship Financial Trends Revenue = $154.8M Gross Profit = $25.3M (16.3% Margin) Balance of FY2012 Benefit from Q1 investments Continued demand for
Slide 22: Long-Term Drivers
Industry leading position 60-year history of innovation and technical advancement Unmatched global sourcing and relationship network Continued trend towards outsourcing and integrated asset management programs Robust integrated program offering covering all areas of the supply chain Ongoing commitme
Slide 23: Maintenance, Repair & Overhaul
Maintenance, Repair & Overhaul Dany Kleiman Group Vice President
Slide 24: Dany Kleiman, Group Vice President, MRO
Dany Kleiman Group Vice President, MRO Leads AAR’s Maintenance, Repair and Overhaul business to include airframe maintenance and modifications, Landing Gear, Engineering Services and Structural Products Joined AAR CORP. in 2009 Career Highlights Israel Aerospace Industries Corporate VP & GM Bedek Av
Slide 25: MRO Overview
Provide full range of airframe heavy maintenance service at four MRO facilities across the U.S. Landing Gear Services facility in Miami Engineering Services, Structural Products and Technical Services in Indianapolis Portal for AAR businesses 25 Ranked as #3 in the world for third-party airframe man
Slide 26: MRO Operations
MRO Operations Structural Products Engineering Services Technical Services 10 hangars 1.1 Million SF Narrow body aircraft 6 hangars 300,000 SF Narrow body and regional aircraft 2 hangars 60,000 SF Regional aircraft 3 hangars 226,000 SF in three hangars Narrow and wide body aircraft Oklahoma City + 3
Slide 27: Market Overview and Current Trends
Source: AeroStrategy Increased demand for outsourced maintenance will augment growth for third party providers Engine $17.6B Heavy $10.0B Component $11.5B Line $11.0B Stable North American market with increased outsourcing, and expanding international markets Mergers driving additional outsourcing,
Slide 28: Recent Airframe MRO Wins
Continue to expand relationship Supporting MD-90 fleet inductions and B767 engineering integration services Bundling of service offerings across multiple business units Exclusive D-check and IFE installation agreement running through January 2013 Strengthens AAR’s position as a leader in A320 family
Slide 29: Airframe MRO
Enhance execution to reduce TAT’s and improve “first-time” quality Increase efficiencies through floor utilization and drive additional capacity to support strategic customers Continuous improvement under “One-MRO” concept Develop “centers-of-excellence” across facilities Effective management of cos
Slide 30: Landing Gear Services
One of the largest independent providers for landing gear repair and overhaul Full service in-house capabilities Growth in wheels and brakes capability Availability of rotable assets Expected growth in regional market Reduce TAT’s through continuous improvement and operational excellence Capture gro
Slide 31: Engineering Services
Engineering Services Business has performed strongly against previous major awards Revenue remains cyclical Airline consolidation driving demand for engineering services related to fleet standardization and upgrades Business and Market Overview Strategy Leverage AAR’s deep commercial relationships t
Slide 32: Q1 Performance and Outlook
Q1 Performance Lower contribution from Engineering Services Lower capacity utilization during summer Protected workforce for increased volumes in balance of year New customer programs - start-up costs and learning curve impacts Financial Trends Revenue = $93.2M Gross Profit = $10.3M (11.1% Margin) B
Slide 33: Long-Term Drivers
Leading provider of MRO services in North America Continued trends towards outsourcing Low capital intensive business with flexible capacity Strong relationships with leading U.S. airlines Expanding service offering with value-added products for existing customers MRO acts as portal for other AAR bu
Slide 34: Government & Defense Services
Government & Defense Services Randy Martinez Group Vice President
Slide 35: Randy Martinez, Group Vice President, Government & Defense Services
Leads AAR’s Defense Systems and Logistics, Airlift Group and Integrated Technologies businesses Joined AAR CORP. in 2009 Formerly served as CEO and board member of World Air Holdings, Inc. Publicly traded $1B global enterprise with 2,200 employees Distinguished 21-year career with the U.S. Air Force
Slide 36: Government & Defense Services (GDS)
Two major businesses Defense Systems and Logistics (DSL) Airlift Group (Airlift) Provider of critical services and products to government and defense customers 92% Domestic and 8% International Over 1,300 employees (48% overseas) Strong future growth opportunities Government & Defense Services (GDS)
Slide 37: Strengths, Business Highlights and Initiatives
DSL revenue growth of 94% Airlift pro forma revenue growth of 52% Start-up and growth of KC-10 program Relocation and re-branding of Airlift Acquired 14 new aircraft Strengths, Business Highlights and Initiatives Support U.S. and foreign governments and OEMs for mission critical programs Defensible
Slide 38: Government/Defense Budget Trends
Government/Defense Budget Trends Operations & Maintenance (O&M) budgets less susceptible to funding cuts AAR provides more cost effective solutions for governments Reduction of ownership costs Supply chain efficiencies Improved capabilities of existing systems DoS and DHS budgets to provide some off
Slide 39: Defense Systems and Logistics
Comprehensive maintenance, supply and logistics support Department of Defense (DoD) Major defense integrators Allied military services Supply Chain Management (~80%) Complete inventory management Information systems integration with DoD legacy systems Distribution (~20%) Optimize KC-10 program Diver
Slide 40: AAR Airlift Group
Proven capability operating in austere environments Turnkey solutions including flight operations, maintenance, modifications, logistical support and training Presidential Airways renamed AAR Airlift Group, Inc. on January 1, 2011 Since 2005: Flown more than 90,000 missions worldwide Transported ove
Slide 41: Jeff Schloesser, President, AAR Airlift Group
Leads Airlift and Aircraft Services - Melbourne businesses Joined AAR CORP. in 2010, 14 months in job Distinguished 34-year career with the U.S. Army, retiring as a Major General Led U.S. Army’s $6 billion annual modernization and transformation plan for a fleet of 4,000 aircraft and 76,000 personne
Slide 42: Afghanistan Outlook
Currently expanding footprint based on customer demand Reduction of 33k U.S. troops in 2012, phasing out by end of 2014 Continued reliance on contract air services Revenue will remain strong through 2014 Transition in 2015 to other government and commercial opportunities Afghanistan Outlook Governme
Slide 43: Q1 Performance and Outlook
Q1 Performance Financial Results Gross Profit Margin % 21.2% 22.7% 21.7% 18.5% 18.5% - 19.0% Delayed aircraft conformity due to relocation Convergence of heavy maintenance checks Aircraft serviceability (Mission Capable rates) $615 – $635 Financial Trends Revenue = $150.0M Gross Profit = $27.4M (18.
Slide 44: Long-Term Drivers
Leading provider of expeditionary airlift in austere environments World class supply chain management capabilities Businesses operate under long-term government contracts Ongoing need for governments to reduce operating costs via third party providers Industry leader in flight safety and regulatory
Slide 45: Structures & Systems
Structures & Systems Terry Stinson Group Vice President
Slide 46: Terry Stinson, Group Vice President, Structures & Systems
46 Leads AAR’s Mobility Systems, Precision Systems and Cargo Systems businesses Joined AAR CORP. in 2007 An Aerospace industry veteran Chairman and Chief Executive Officer of Bell Helicopter Textron Inc. President and Chief Executive Officer of Hamilton Standard, a UTC division Fully qualified fixed
Slide 47: Key Supplier to Aerospace & Defense Industry
Three major businesses Manufacture broad spectrum of products with a diverse customer base Growth opportunities in Commercial & International markets 12 facilities in 7 States Over 1,600 employees Key Supplier to Aerospace & Defense Industry 47 Mobility Systems Cargo Systems Key Program Wins Mobilit
Slide 48: FY2012 Remain Focused on 6 Strategic Initiatives
Build balance across business units Develop closer relationships with customers and win larger program work Road towards Tier I Supplier with more proprietary content & “end to end” solutions Drive cost reductions through operational improvements & leveraging synergies across operating units Invest
Slide 49: Key Programs Help Balance Market Dynamics
Key Programs Mobility Domestic Products F-35 Key Programs Spirit Programs C-Series S-92 Gulfstream G650 A400M C-X Mobility International Products 49 Key Programs are also aligned with Strategic Initiatives Balance - commercial, military, Int’l Stronger customer relationships Tier I opportunities Pro
Slide 50: New Platforms/Customers
New Platforms/Customers G-650 – Composite Interiors, Machined Components & Assemblies (FY2011 – FY2025) C-Series – Composite Flap Track Fairings & Machined Components (FY2012 – FY2030) F-35 – Composite & Machined Components (FY2012 – FY2017) S-92 – Composite Interiors & Machined Flooring Assemblies
Slide 51: Cargo Handling Systems
Cargo Handling Systems for military & commercial aircraft Well positioned on major military programs A400M – 200+ Aircraft C-X – 30+ Aircraft Cargo Handling Systems C-130 Flight Tests High Altitude Aerial Delivery A400M Cargo Compartment 51 C-130 – 30+ new Aircraft & retrofits C-27J – 75+ Aircraft C
Slide 52: Cargo Systems - Airbus A400M Program
April 2011 - 7 launch customer nations confirmed their continued support for the A400M Program Flight Test Program has over 2,100 flight hours A400M Cargo Loading/Unloading Features Optimized for single-person operation: On-board crane Powered winches Kneeling undercarriage Cross-loading from ramp w
Slide 53: Mobility Systems
53 Rapid deployment equipment to aid the mobilization of troops, gear and specialized workspaces: Shelters, pallets, containers and services Leadership position across product lines State of the art manufacturing capabilities Focused on strategic growth Services Commercial & International Markets Do
Slide 54: Mobility Systems – Growth Strategy
54 Encampments – rapid deployment Aid Missions Temporary Hospitals Maintenance Workshops Leverage our strong market position & manufacturing capabilities to expand into new areas Commercial Market Downstream Integration Focused on Aftermarket Maintenance, Repair & Overhaul Technical & Logistic Servi
Slide 55: Financial Trends
Financial Trends 55 14.1% 18.5% 16.0% - 16.5% 20.6% 15.4% Gross Profit Margin % Q1 Performance Lower revenue due to completion of several contracts at Mobility Systems in FY11 Ramp-up of FMTV Program at Mobility Systems New program launches at Precision Systems Revenue = $81.2M Gross Profit = $11.9M
Slide 56: Operational Review
Operational Review Tim Romenesko President and Chief Operating Officer
Slide 57: Timothy Romenesko, President and COO
58 Timothy Romenesko President and Chief Operating Officer Responsible for maximizing the performance of AAR’s operating units and implementing the Company’s strategies for growth Joined AAR CORP. in 1981 Named Vice President and Chief Financial Officer in 1994 Named President and Chief Operating Of
Slide 58: Key Operational Initiatives
Key Operational Initiatives Cost Cash Margin Quality Capture Continued investments in company-wide quality systems Significant new business wins Robust deal flow Strong balance sheet and liquidity position Focused on cash generation from recent investments Total SG&A flat YOY on 18.5% increase in sa
Slide 59: Operational Focus – Capture
Operational Focus – Capture Cost Cash Margin Quality Capture Distribution agreement for electrical components Valued at approximately $600M over 10 years JT8D and CF6-80A parts support Engineering integration program HMV and modifications for MD-90 and 737 Pinnacle CRJ award TRANSCOM renewal and awa
Slide 60: Capture – Customer Overview
Cost Cash Margin Quality Capture Large Commercial Carriers Small Carriers / Business Aviation Government OEMs / Repair Centers $1,776M in Sales ~$400M ~$250M ~$500M ~$650M Southwest Delta United FedEx Air France / KLM Air Wisconsin Jazz Allegiant SkyWest / ASA Sikorsky Spirit AeroSystems Unison MTU
Slide 61: Operational Focus – Cost
Q1 SG&A flat YOY on higher sales Leveraging customer touch points Driving productivity gains Strategic sourcing and consolidation of repair spend Leveraging technology to improve efficiency Operational Focus – Cost Cost Cash Margin Quality Capture Achieved targeted SG&A <10% of sales SG&A as a % of
Slide 62: Operational Focus – Cash
63 Operational Focus – Cash Cost Cash Margin Quality Capture Over $325M in operating cash flow during past three fiscal years Q1 investments to support future sales: Unison relationship Mobility inventory supporting Q2-Q4 growth Supply chain assets A400M program Well positioned to generate positive
Slide 63: Operational Focus – Margin
64 Operational Focus – Margin Cost Cash Quality Capture Margin Driving margin improvement for balance of fiscal year Consolidated Operating Margin Bridge 7.1% 8.0% 7.8% 8.2% 0.7% -1.1% -0.5% -0.3% 7.0% 5.0% 6.0% 7.0% 8.0% 9.0% Q1FY11 Q2FY11 Q3FY11 Q4FY11 Supply Chain Structures MRO GDS Q1FY12
Slide 64: Operational Focus – Margin Expansion
65 Operational Focus – Margin Expansion Cost Cash Margin Quality Capture Top Line Growth Sales growth and program wins in Supply Chain Higher throughput at MRO centers and additional value-added services New contract wins at Airlift Operational Efficiency Cost management Streamline operations; Lean
Slide 65: Drive Quality in Everything We Do
Drive Quality in Everything We Do Operational Focus – Quality Cost Cash Margin Quality Capture “One-MRO” Increase first-time quality Goals: Lower span times in maintenance shops Higher throughput in manufacturing facilities Improved aircraft uptime in flying and flight support operations Lower cost
Slide 66: Operational Focus
Operational Focus Cost Cash Margin Quality Capture Continuing to drive performance in each key area
Slide 67: Financial Highlights
Financial Highlights Rick Poulton Vice President, Chief Financial Officer and Treasurer
Slide 68: Rick Poulton, CFO and Treasurer
69 Appointed Chief Financial Officer and Treasurer in June 2007 Joined AAR CORP. in 2006 Responsible for strategic development Previous 12 years with UAL Corp. and United Airlines Senior Vice President Business Development Senior Vice President Strategic Sourcing President and Chief Financial Office
Slide 69: Key Financial Highlights
Near-term visibility solid Diverse revenue stream with consistent value proposition Strong balance sheet with low leverage Outlook for the year Key Financial Highlights
Slide 70: Near-Term Visibility
Trading businesses had strong 1st quarter Inventory positions should support performance over the remainder of the year Near-Term Visibility Aviation Supply Chain Government & Defense Services Structures & Systems Maintenance, Repair & Overhaul 3.8 million man hour plan largely sold Substantially al
Slide 71: Diversified Revenue Stream
Aviation Supply Chain Maintenance, Repair & Overhaul Structures & Systems Government & Defense Services All businesses drive to lower costs of materials, material handling, and services for their end customers $1,328M $1,381M $1,316M Diversified Revenue Stream $1,776M $1,851M
Slide 72: Strong Balance Sheet with Low Leverage
Strong Balance Sheet with Low Leverage Total Debt / Total Capitalization Net Debt / EBITDA Equity Pro Forma EBITDA for full year Airlift in FY 2010. TTM is for the twelve months ending August 31, 2011. (2) (1) Debt (2) 1.7x 1.5x 2.0x 1.8x 2.1x 0.0x 0.5x 1.0x 1.5x 2.0x 2.5x 3.0x FY 2008 FY 2009 FY 20
Slide 73: FY2012 Outlook
FY2012 Outlook FY2012 Range FY2011 Revenue 1,885M - 1,965M 1,776M EBITDA 220M - 240M 211M EPS from Continuing Ops $1.85 - $2.05 $1.75 * Free Cash Flow 40M - 65M (16M) * FY2011 pro-forma to exclude the impact of three unusual items in Q4; aggregate $0.06 impact.
Slide 74: Non-GAAP Disclosure Reconciliation
Non-GAAP Disclosure Reconciliation Pursuant to SEC Regulation G, the Company has included the following reconciliation of operating income reported on the basis of Generally Accepted Accounting Principles (“GAAP”) to EBITDA on a non-GAAP basis. The Company believes the non-GAAP EBITDA and ratios usi