Good afternoon, ladies and gentlemen. Welcome to AAR's fiscal 2022 First Quarter Earnings Call. We're joined today by John Holmes, President and Chief Executive Officer and Sean Gillen, Chief Financial Officer. Before we begin, I would like to remind you that the comments made during the call may include forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward looking statements involve risks and uncertainties that could cause Actual results could differ materially from the forward looking statements.
Accordingly, these statements are no guarantee of future performance. These risks and uncertainties are discussed in the company's earnings release and the Risk Factors section of the company's Form 10 ks for the fiscal year ended May 31, 2021. In providing the forward looking statements, the company assumes no obligation to provide to reflect future circumstances or anticipated or unanticipated events. Certain non GAAP financial information will be discussed on the call today. A reconciliation of these non GAAP measures to the most comparable GAAP measures is set forth in the company's earnings release.
At this time, I would like to call over to AAR's President and CEO, John Holmes.
Great. Thank you very much and good afternoon everyone. I appreciate you joining us today to discuss our Q1 fiscal year 2022 results. Our positive momentum continued with another quarter of solid results despite the continuing impact of the COVID-nineteen pandemic. Compared to the prior year period, sales were up 14% from $401,000,000 to $455,000,000 And adjusted diluted earnings per share from continuing operations were up 206% from $0.17 per share to $0.52 per share.
Our sales to commercial customers increased 52% and our sales to government and defense customers decreased 17%. We are particularly pleased that our sequential growth from Q4 to Q1 was 4%, notwithstanding the fact that our Q1 typically declines from our Q4 as a result of seasonality in our business. Sequential growth in our commercial activities was 17%. This improvement was driven by our parts businesses, which is an encouraging indicator of returning demand. The strong performance in the quarter was also due to the robust demand for our airframe MRO services.
Notably, the significant majority of our MRO volume has been on standard maintenance work as opposed to catch up work. Our operating margin was 5.5% for the quarter on an adjusted basis, up from 2.5% last year And 5.2% in the 4th quarter. For context, our margin this quarter was actually higher than 2 years ago prior to the pandemic, even though our revenue was down $86,000,000 or 16%. This performance demonstrates the operating leverage that we have created over the last 18 months by optimizing our MRO operations, exiting underperforming activities and reducing indirect and overhead costs. Turning to cash, it was another strong quarter as we generated $18,000,000 from operating activities from continuing operations.
We also continue to reduce the usage of our accounts receivable financing program. Excluding the impact of that AAR program, Our cash flow from operating activities from continuing operations was $26,000,000 Subsequent to the end of the quarter, we announced several new business wins. First, we announced an exclusive agreement with Arquin, a TransDigm company, to distribute engine actuation and other commercial aviation products. This award reflects the power of our independent distribution offering to component OEMs as well as the strength of our balance sheet. 2nd, we announced the contract with the Department of Energy for the conversion and delivery of a 730seven-seven 100 aircraft to allow the DOE to quickly transition between passenger and cargo modes.
Like our prior C-forty aircraft delivery contract with the U. S. Marine Corps, This contract demonstrates the significant cost savings available to government customers by procuring in the aftermarket. Finally, we announced an extension of our component support program with Volotea, a growing low cost Spanish carrier, which reflects the market's continued demand for this offering and our ability to drive lower operating costs with superior operating performance. Before turning it over to Sean, I would like to comment on the critical role that AAR played in the U.
S. Withdrawal from Afghanistan. We had over 150 people stationed in country, primarily in support of our WASS program. Over a 36 hour period, our WASS team transported approximately 2,000 U. S.
Embassy personnel to Cabo International Airport to support their evacuation from the country. All of our employees subsequently departed the And I'm exceptionally proud of our team's support of State Department personnel under very difficult circumstances. With that, I'll turn it over to our CFO, Sean Gillan to discuss the quarter in more detail.
Thanks, John. Our sales in the quarter of 455,100,000 8% driven by recovery in our commercial markets. Sales in our expeditionary services segment were down 17,700,000 reflecting the divestiture of our composites business and strong performance of the U. S. Air Force Pallet contract in the prior year quarter.
Gross profit margin in the quarter was 14.2% versus 12.1% in the prior year quarter and adjusted gross profit margin was 15.1% versus 13% in the prior year quarter. This significant improvement reflects the cost takeout and efficiency initiatives we have implemented. As the commercial market recovers, we would expect to continue to generate higher gross margins given the fixed nature of some of our cost of sales and the higher margin nature of our parts business, which has not yet participated in the market recovery to the same degree as our maintenance business. As we indicated during last quarter's call, one of our commercial programs contracts was terminated during the quarter. We recognized $10,000,000 of charges primarily related to this termination and an asset impairment.
SG and A expenses in the quarter were $49,300,000 or 10.8 percent of sales. Excluding severance of about $1,000,000 this would have been closer to 10.6 percent of sales. This was down from 11.3% in the year ago quarter and 11.2% in Q4. As a reminder, last year's results had the temporary cost savings due to salary and benefit reductions that were in place through Q2 of last year. Net interest expense for the quarter was $700,000 compared to $1,600,000 last year, driven by lower borrowings.
Average diluted share count for the quarter was 35,700,000 versus 35,000,000 for the prior year quarter. With respect to Afghanistan, as we discussed on last quarter's call, we had in country activity on 2 programs, our WASS program supporting the State Department and our C-one hundred and thirty program supporting 4 Afghan Air Force aircraft. In conjunction with the State Department's exit from Afghanistan, we are winding down related activities and expect that to be completed later this quarter. The C-one hundred and thirty program is currently continuing with support of 2 of the 4 aircrafts based in the UAE. In total, our FY 'twenty one sales in Afghanistan were $67,000,000 The margins on these activities were consistent with the overall loss program, which we have described in the past as being high single digit operating margin.
As John indicated, we generated cash flow from our operating activities from $8,400,000 in the quarter. Our balance sheet remains exceptionally strong with net debt of $80,200,000 and net leverage of only 0.6 times. Thank you for your attention and I will now turn the call back over to John.
Great. Thank you, Sean. Looking forward, we expect that demand for our MRO The next question comes from the line of the line of the line of sight. Please go ahead. Thanks, Bill.
Thanks, Bill. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone.
Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone.
Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone.
Good morning, everyone. With respect to parts supply, while we saw increasing levels of activity during the quarter, we expect stable performance in the near term as a result of the uncertainty created by the Delta variant. On the government side, the exit from Afghanistan as well as the Programs nearing natural completion points will have a near term impact on our business. However, our Department of Energy contract is an offsetting award that demonstrates the fundamental value proposition of our commercial best practices business model. In addition, we continue to build a solid past performance history.
As such, we believe that over time, we remain in an excellent position to grow our government business through additional program wins and expansions of our current positions. Based on these near term dynamics, we currently expect overall Q2 performance to be similar to Q1. While there remains uncertainty over the timing of the recovery, we are confident that a recovery will occur and we believe we are exceptionally well positioned. We have emerged from the crisis with an even stronger balance sheet, our government and commercial pipelines are full, and the operating leverage we have created positions us
Thank you, speakers. Participants, we will now begin the question and answer session. Speakers' first question is from the line of Michael Ciarmoli of Pura Securities. Your line is now open.
Hey, good evening guys. Thanks for taking the questions here. Nice results as well. Maybe just the last comments Just made there, 2Q looking similar to 1Q. Are you talking both top and bottom line or is that more just The revenue side you were referencing?
I think at this point, we're thinking up and down, but I would highlight that, Again, we remain in an uncertain environment, but when we say similar, we mean top and down.
Okay. Okay. And is that do you think I mean
just trying to get a sense
and maybe I'll feather this in, but I mean you had really strong, I guess the implied sequential commercial growth in Aviation Services looked really strong. I mean was that from Some of your additional maybe international customers and maybe I'm thinking Air Canada specifically online and as some of these other markets open up, does that Continue to grow and are we just looking at the top line kind of headwind all stemming from the WASA contract Would that be helpful specifically?
Yes. So it was largely the demand. We had a great quarter in the commercial business across the board. The majority of it was really driven by the trading business, which is still considerably far off Pre pandemic levels, but they did have a nice sequential improvement. What we are seeing is that, while we had Increasing levels of activity throughout the quarter, we have seen more stability and the pace of that recovery moderate in the last few weeks And we attribute that to the pullback in the bookings that you've seen from our commercial customers.
Your comments on Canada are right on. We're really happy that Canada has opened up and that our customers there notably Air Canada are seeing more activity. That was not a considerable contributor to this quarter, but we do expect it to contribute to results going forward.
Okay, got it. Got it. Just on the gross margin, I know you obviously had on the adjusted gross margin Good
year over year growth, but
sequentially, it dipped down a bit and you just said parts Was actually strengthening a little bit or recovering a little bit. What else went into the gross margin Sequentially declining given the strong top line. Was it just more MRO general mix Sir, anything any more color you can add there?
Yes. Hey, it's Sean. It was a little mix on the government side. That was down a touch sequentially. As we talked on our Q4 call, there was a few events in Q4 that drove outsized profitability on some government activity.
So you saw a little bit of a decrease on that, which is what drove the sequential decrease from 16.5% to 16.1%, But still feel very good about the overall profitability. And as we talked about as parts continues to grow, that will be accretive to the margin.
Got it. Just on the parts and I mean I'll take a stab here. I'm not sure if you guys will give much color, but any thoughts or anything you could provide on how How the relationship with Fortress is trending and sort of expectations there?
Yes. The relationship is going very well. That program is performing exactly how we expected. Fortress is a great partner and Doing everything they said they were going to do. And that program at this point is a full contributor.
I would say it's basically a full run rate in the quarter And we expect those levels to be consistent throughout the rest of the year.
Got it. Helpful. All right. I'll jump back in the queue. Thanks, guys.
Next question is from the line of Ken Herbert of RBC. Your line is now open.
Hey, John. Hey, Sean.
How are you? Hey, great, Ken. How are you doing?
Pretty good. Hey, John, I wanted to first see if I could ask you about retirements. And has your view changed on when I see or start to See a more meaningful uptick in retirements and subsequently sort of USM availability or what are you currently seeing in that marketplace?
We have seen more assets become available to us in the last few weeks. And there are some and again, for competitive reasons, I don't want to get into too much detail, but we have seen more things come available that are interesting to us. I would not characterize that as too anecdotal and too soon to call it any sort of trend that would suggest a meaningful uptick And retirementtear downs. But anecdotally, we have seen a few more come out recently. The activity that we saw this past quarter was largely due to material in stock.
Okay. Okay, that's helpful. And as you talk about your MRO business, it sounds like it's seeing some nice uptick. Is that all volume? Or are you starting to see some better pricing reflected in labor rates in that business?
The pricing that we've seen has actually been consistent over the last few quarters. We've worked very hard over the last few years to get Our customer base down to a more focused long term contract Customers. So we're operating under long term contracts in almost all of that business. So the pricing has been relatively stable. What we have been able to do and this was by design based on the changes that we made during the pandemic is really improve our efficiency inside the hangars.
And by optimizing our footprint and aligning our hangar space with where we see the most labor availability And that's full time labor availability as opposed to contract labor. We've been able to achieve superior performance inside the hangers.
Okay. That's great. And just bouncing around, I know you had a program, a contract that you exited in the quarter. Can you just comment on Sort of incremental risk you see and what's left of your programs business and how we should think about any of that risk moving forward?
Good question. We feel good about the remaining portfolio. That was something that happened right after The end of the Q4, and we characterized that when we announced the end of year results. And so, in terms of anything new happening in this quarter, there wasn't anything. But that program contract, that was situational.
And I would say kind of a one off and we feel good about the remaining portfolio and very excited that we extended with Volotea. They've been a long term customer. That airline is a great success story and the volume of work that we've done with them has grown as they've grown And we're excited to be on that contract for another few years.
Great. Well, thank you very much.
Thanks, Ken. Okay.
Thank you, participants. I'll now turn the call back
Listen, we really appreciate everyone's interest and support And I look forward to being back here in 90 days to talk about our Q2. Thank you.
And that concludes today's conference. Thank you all for joining. You may now disconnect.