AAR Corp (NYSE: AIR)
Market Cap: $1,218mm
Net Debt: $147mm
Summary: AAR Corp is a sum-of-parts (good company/bad company) story that has a strong catalyst in
2017. The Aviation Services segment is a growing business with a high incremental ROI worth more than
the total enterprise value. The Expeditionary Services segment has been a disaster for three years and has
produced consistently negative EBITA over that time. The Expeditionary Services business is being valued
at a negative value even though the long journey regarding the INL/A contract should come to a close
soon. That, combined with the guidance as to the profitability of the Expeditionary Services business, will
provide the catalyst to a revaluation.
The basic thesis is that the Aviation Services business is worth $1.4bn, and the Expeditionary Services is
worth $600mm once the INL/A contract is implemented.
Background: AAR has gone through significant changes over the past several years, and its valuation has
suffered due to the confusion. 2018 (or FY 2019) will finally see this confusion clear. First, AAR has
significantly simplified its businesses to two segments. It sold off or closed non-core businesses. Second,
the Expeditionary Services business is extremely lumpy and a core contract (Afghanistan) volume
plummeted three years ago. Management had expected the two major wins (Falklands and INL/A) to bring
the business back to profitability a year ago, but legal fighting by the incumbents (esp regarding the INL/A
contract) has delayed this resurrection.
The financials are complicated for several reasons:
1) The cash flow statement is difficult to follow. The best way to understand is that Depreciation
plus Amortization of Overhaul Costs is essentially maintenance capex. Further, Amortization of
Overhaul Costs are completely associated with the Airlift business.
2) SG&A is not broken down between the segments. We offer a detailed analysis below. If anything,
we believe that this over-allocates SG&A to Aviation Services.
3) There is an extreme amount of operational leverage in the Expeditionary Services business model
as many resources have been kept after the contract loss three years ago with the expectation of
quickly ramping up with a new contract win.
4) The Aviation Services segment is lumpy and the Expeditionary Services segment is extremely
lumpy. Single contract wins and losses can significantly change growth rates and add non-