AAR Corp.

Our stable outlook on AAR Corp. reflects our expectation that credit metrics will remain fairly stable as revenue growth driven by the INL/A contract and other new wins, as well as contributions from bolt-on acquisitions, will be offset by slight margin declines from labor issues and acquisitions. We expect debt to EBITDA of 1.6x-2.2x and funds from operations (FFO) to debt of 37%-44% over the next 12 months. Although unlikely, we could raise the rating on AAR in the next 12 months if it commits to maintaining FFO to debt above 45% and debt to EBITDA below 2x despite dividends, share repurchases, and acquisitions. This could occur if the company's revenue outpaces expectations, has strong new contract wins, effectively reduces

...Operating performance in the maintenance, repair, and overhaul (MRO )business is being hindered by a lack of skilled labor. AAR Corp. has had difficulty meeting customer demand due to low unemployment rates in key cities, which is affecting revenue and earnings. This is an issue across the industry. We expect this constraint to continue, but its effect should be somewhat reduced as the company rolls out new initiatives to attract skilled labor. The INL contract is now fully ramped up and contributing to revenue and earnings. After being delayed by appeals, the International Narcotics and Law Enforcement Affairs, Office of Aviation for Worldwide Aviation Support Services (INL/A-WASS) contract is now at full run-rate. We expect the 10-year contract to provide flight operations, aircraft maintenance, supply chain logistics, and other services to contribute about $200 million in annual revenue. We further expect the company to continue actively pursuing similar government-owned, contractor-operated...

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