AAR Corp. (AIR) has decided to acquire Aviation Worldwide Services, a leading provider of expeditionary airlift services and aircraft modifications for the U.S. and other governments, from Xe Services LLC for $200 million. The acquisition is expected to close by April 2010.
Management expects the acquired business to be accretive to earnings and margins in its first year of ownership and generate $175 million of revenue on an annual basis.
Through this acquisition AAR is expected to expand its products, services and capabilities to government customers in the United States and abroad in the long term. The company generates a majority of its revenue through sales to government and defense customers.
In the third quarter of fiscal 2010, AAR generated approximately 50% of its total revenue from sales to government and defense customers. Also in the first quarter, AAR Global Solutions, a joint venture company, was formed, which will provide value-added solutions for the U.S. and friendly foreign governments’ defense and nation-building initiatives. This will also enhance revenue in AAR ’s government and defense segment.
Through this joint venture, AAR will be able to complement AAR’s MRO, logistics and mobility capabilities with a team that has extensive experience in winning and managing large-scale government programs as a prime contractor. We are bullish about the scope of the business as the bid pipeline is robust.
We believe that the company will perform well once the market recovers due to its industry leading supply chain and MRO positions. The company’s strict cost control initiative is another benefit. New products, equipment and methods, as well as acquisitions and joint venture will help the company get numerous contracts from the government.
However the cyclical nature of the aviation industry is discouraging. Moreover, the company’s huge capital requirement is a drawback. Thus, we reiterate our neutral recommendation.
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