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Press release

December 22, 2005

AAR Reports Fiscal Year 2006 Second Quarter Results

  • 24% sales growth; 149% growth in pretax income
  • 20% commercial sales growth; 32% defense sales growth
  • Net income of $7.9 million or $0.22 per diluted share
  • Continued sales growth in Europe and Asia

WOOD DALE, Ill., /PRNewswire-FirstCall/ -- AAR (NYSE: AIR) today reported net sales from continuing operations of $218.2 million for the second quarter of fiscal 2006, an increase of 24% compared to the prior year. Income from continuing operations was $7.9 million or $0.22 per diluted share compared to $5.0 million or $0.15 per diluted share a year ago. Prior year second quarter results included a $1.6 million or $0.05 per diluted share federal income tax benefit. Pretax income from continuing operations was $11.0 million in the second quarter compared with $4.4 million in the second quarter of last year, an increase of 149%.

A recap of our four segments is as follows:

  • Aviation Supply Chain -- Sales increased 17% driven by customer acceptance of our innovative and comprehensive product offerings. During the second quarter, the Company announced an additional supply chain management program with Mesa Air Group and a contract with BAE Systems to perform component repair and overhaul services. The Company continued to make strategic investments, including assets to support the Mesa program and other inventory purchases. The Company funded the investment in the new Mesa program during the last week of the second quarter and expects revenue and income beginning in its third quarter.
  • Maintenance, Repair and Overhaul -- Sales increased 73% primarily due to the success of the Indianapolis Maintenance Center and increased activity at the Company's Oklahoma facility. During the quarter the Company's MRO segment experienced a three week power outage at its Miami operation due to hurricane Wilma and incurred higher training costs associated with the integration of approximately 225 new employees. The Company estimates that the impact of the hurricane and added training costs reduced operating income by approximately $1.0 million in the quarter. The Miami operation was fully operational by the end of November, and the Company expects higher training costs to continue through the balance of the fiscal year as it grows this segment and positions this business for the future.
  • Structures and Systems -- Sales increased 30% fueled by robust demand for specialized mobility products and cargo systems. In September 2005, the Company announced that it had received a $30 million pallet order from the U.S. Air Force. Shipments under this contract began in the second quarter and will continue through the balance of this fiscal year.
  • Aircraft Sales and Leasing -- Sales were lower compared to the prior year due to joint venture accounting, which excludes joint venture revenues from consolidated net sales. Operating income increased due to additional deal flow in the Company's joint ventures. One of the Company's aircraft joint ventures purchased five aircraft and sold one aircraft in the quarter, bringing the total number of aircraft held in joint ventures to ten. The Company's strategy post 9/11 has been to participate in aircraft transactions through joint ventures. Additionally, the Company owns seven aircraft outside of the joint ventures, mostly acquired prior to September 11, 2001.

Sales to commercial and defense customers grew 20% and 32%, respectively, in the second quarter versus the same quarter a year ago, and sales in both Asia and Europe increased year over year. Gross profit margin increased from 16.1% to 17.4% in the quarter primarily driven by higher sales volumes. SG&A costs as a percentage of sales decreased from 11.5% to 10.8% during the quarter. While SG&A spending increased over the prior year, it declined modestly from the first quarter of fiscal 2006. Operating income margin improved from 4.7% to 6.9% year over year.

"Our investments in facilities, assets and training have positioned the Company to benefit from outsourcing trends in both the commercial and defense markets," said David P. Storch, Chairman and CEO of AAR. "As a result of our successful campaigns, our biggest challenge is executing across the enterprise, and the results show we are making progress on this front."

AAR is a leading provider of products and value-added services to the worldwide aviation/aerospace industry. With facilities and sales locations around the world, AAR uses its close-to-the-customer business model to serve airline and defense customers through four operating segments: Aviation Supply Chain; Maintenance, Repair and Overhaul; Structures and Systems and Aircraft Sales and Leasing. More information can be found at

AAR will hold its quarterly conference call at 10:30 a.m. CST on December 22, 2005. The conference call can be accessed by calling 866-244-4526 from inside the U.S. or 800-4363-7976 from outside the U.S. A replay of the call will be available by calling 888-266-2081 from inside the U.S. or 703-925-2533 from outside the U.S. (access code 813850). The replay will be available from 1:30 p.m. CST on December 22, 2005 until 11:59 p.m. CST on December 29, 2005.

This press release contains 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 estimates based on information currently available to the Company, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, including those factors discussed under Item 7, entitled "Factors Which May Affect Future Results", included in the Company's May 31, 2005 Form 10-K. Should one or more of these risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. These events and uncertainties are difficult or impossible to predict accurately and many are beyond the Company's control. The Company assumes no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. For additional information, see the comments included in AAR's filings with the Securities and Exchange Commission.

                          AAR CORP. and Subsidiaries

    Consolidated Statements of     Three Months Ended      Six Months Ended
     Operations                       November 30,           November 30,
    (In thousands except per         2005        2004       2005      2004
     share data)

    Sales                        $218,230    $176,448   $417,818   $340,221
    Cost and expenses:
         Cost of sales            180,240     147,976    345,146    285,224
         Selling, general and
          administrative           23,621      20,240     47,522     40,279

    Equity in earnings of joint
     ventures                         593           8        798          8

    Operating income               14,962       8,240     25,948     14,726

    Gain on extinguishment of
     debt                             ---         ---        ---        995

    Interest expense                4,507       4,227      8,629      8,691
    Interest income                   503         382        962        665

    Income from continuing
     operations before
     income taxes                  10,958       4,395     18,281      7,695

    Income tax expense (benefit)    3,082        (651)     5,147        136

    Income from continuing
     operations                     7,876       5,046     13,134      7,559

    Discontinued operations:
         Operating loss, net of
          tax                         ---        (207)       ---       (434)
         Loss on disposal, net of
          tax                         ---         ---        ---        ---
    Loss from discontinued
     operations                       ---        (207)       ---       (434)

    Net income                     $7,876      $4,839    $13,134     $7,125

    Share Data:

    Earnings (loss) per share -
         Earnings from continuing
          operations                $0.24       $0.16      $0.40      $0.23
         Loss from discontinued
          operations                  ---       (0.01)       ---      (0.01)
         Earnings per share -
          Basic                     $0.24       $0.15      $0.40      $0.22

    Earnings (loss) per share -
         Earnings from continuing
          operations                $0.22       $0.15      $0.37      $0.23
         Loss from discontinued
          operations                  ---       (0.01)       ---      (0.01)
         Earnings per share -
          Diluted                   $0.22       $0.14      $0.37      $0.21

    Average shares outstanding -
     Basic                         33,048      32,246     33,005     32,244
    Average shares outstanding -
     Diluted                       37,137      36,412     37,073     36,311

    Consolidated Balance Sheet Highlights       November 30,        May 31,
    (In thousands except per share data)            2005             2005
                                                (Unaudited)      (Derived from

    Cash and cash equivalents                      $23,081           $50,338
    Current assets                                 471,535           474,542
    Current maturities of recourse LTD              16,739             2,123
    Current liabilities (excluding debt accounts)  181,004           156,280
    Net property, plant and equipment               72,665            71,474
    Total assets                                   798,781           732,230
    Recourse long-term debt                        197,228           199,919
    Total recourse debt                            213,967           202,042
    Total non-recourse debt                         28,162            28,862
    Stockholders' equity                           328,334           314,744
    Book value per share                             $9.92             $9.66
    Shares outstanding                              33,092            32,586

    Sales By Business Segment        Three Months Ended    Six Months Ended
    (In thousands - unaudited)          November 30,          November 30,
                                     2005         2004       2005       2004

    Aviation Supply Chain        $107,993      $92,323   $215,104   $178,169
    Maintenance, Repair and
     Overhaul                      43,257       25,022     81,229     46,303
    Structures and Systems         63,817       49,194    115,177     94,142
    Aircraft Sales and Leasing      3,163        9,909      6,308     21,607
                                 $218,230     $176,448   $417,818   $340,221

    Diluted Earnings Per Share      Three Months Ended     Six Months Ended
     Calculation                       November 30,          November 30,
    (In thousands except per          2005       2004       2005      2004
     share data)

    Net income as reported         $7,876      $4,839    $13,134     $7,125
    Add: After-tax interest on
     convertible debt                 306         306        612        618
    Net income for diluted EPS
     calculation                   $8,182      $5,145    $13,746     $7,743

    Basic shares outstanding       33,048      32,246     33,005     32,244
    Additional shares due to:
    Assumed exercise of stock
     options                          485         562        464        463
    Assumed conversion of
     convertible debt               3,604       3,604      3,604      3,604
    Diluted shares outstanding     37,137      36,412     37,073     36,311

    Diluted earnings per share      $0.22       $0.14      $0.37      $0.21


CONTACT: Timothy J. Romenesko, Vice President, Chief Financial Officer, +1-630-227-2090,

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