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Press release

March 16, 2005

AAR Reports Significant Growth in Third Quarter Fiscal Year 2005

  • 24% sales growth; 29% earnings growth
  • Commercial aviation sales growth of 41%
  • Strong sales in Asia and Europe
  • $19.5 million cash flow from operations

WOOD DALE, Ill., /PRNewswire-FirstCall/ -- AAR (NYSE: AIR) today reported net sales from continuing operations of $197.7 million for the third quarter ended February 28, 2005, an increase of 24% over prior year. These results include the sale of the Company's interest in certain aircraft for approximately $15 million in cash proceeds and no gain. Income from continuing operations was $5.2 million or $0.15 per diluted share during the quarter, which includes a $0.5 million federal income tax benefit ($0.01 per diluted share) related to tax benefits from export activities. For the third quarter of last fiscal year, the Company reported net sales of $159.2 million and income of $2.2 million or $0.07 per diluted share from continuing operations. As previously announced, during the third quarter of this year, the Company completed the sale of a business, resulting in a loss from discontinued operations of $2.6 million, net of tax, or $0.07 per diluted share. Net income was $2.6 million or $0.08 per diluted share compared to $2.0 million or $0.06 per diluted share last year. Cash flow from operations was $19.5 million during the quarter.

Sales to customers in Asia and Europe increased 45% and 35%, respectively, reflecting continued progress on our strategy to grow our business in these regions. Also, sales of parts and services to commercial aviation customers and continued strong demand for the Company's specialized mobility products supporting defense customers contributed to the year-over-year sales growth.

"During the quarter we experienced sequential and year-over-year sales growth in each of our segments with particular strength in our Inventory and Logistic Services segment where sales increased 18% over last year," said David P. Storch, President and CEO of AAR. "This has been an eventful quarter that included significant new business wins, strong growth in international markets, divestiture of an underperforming business and the generation of $19.5 million of cash from operations. Since the beginning of the year, we reduced our debt by $17.6 million, which led to a reduction in net interest expense of $0.7 million during the third quarter versus the prior year. Additionally, selling, general and administrative expense as a percentage of sales improved from 12.8% to 10.7% year-over-year."

Significant Events for Third Quarter 2005:

  • Signed an exclusive multi-year contract with United Airlines to provide heavy maintenance on its fleet of 737 aircraft at AAR Aircraft Services - Indianapolis.
  • Awarded a contract to provide inventory supply chain management and airframe maintenance services in support of the U.S. Navy C40-A aircraft. The contract is a one-year agreement with 4 one-year renewal options.
  • Formed a joint venture with AIROD, a Malaysian-based aircraft maintenance company, to establish a landing gear repair and overhaul facility in Malaysia. This venture will strengthen our presence in Asia and better serve our airline customers in that region.
  • Established a parts exchange pool in Hong Kong with HAECO to service airlines in the Asia/Pacific region. Cathay Pacific is the initial customer.
  • Received orders for more than 25 cargo systems since the beginning of the calendar year, totaling more than $8 million in future revenue. We expect to deliver these systems from April 2005 to February 2006.

As previously announced, the Company completed the sale of its engine component repair business to Chromalloy Gas Turbine Corporation on February 17, 2005. As part of the transaction, AAR received cash consideration of $7.7 million, acquired inventory and entered into a multi-year parts supply agreement with Chromalloy.

Upon completing its fiscal 2004 federal income tax return in February 2005, the Company determined that it qualified for additional tax benefits related to its export activities and therefore recorded a $0.5M tax benefit during the third quarter ended February 28, 2005. Similarly, the Company recorded a $0.6 million benefit during the third quarter ended February 29, 2004 related to additional tax benefits from export activities as identified upon filing the fiscal 2003 federal income tax return.

The Company adopted the provisions of EITF 04-08, "The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share." EITF 04-08 requires companies to account for contingently convertible debt using the 'if converted' method set forth in SFAS No. 128 "Earnings Per Share" for calculating diluted earnings per share. Under the 'if converted' method, the after-tax effect of interest expense related to the convertible securities is added back to net income, and the convertible debt is assumed to have been converted to equity at the beginning of the period and is added to outstanding common shares. For comparative purposes, diluted earnings per share information for all periods since the convertible debt securities were issued in February 2004 have been restated as required by EITF 04-08.

AAR is a leading provider of products and value-added services to the worldwide aviation/aerospace industry. Products and services include parts supply, customized inventory management and logistics programs; maintenance, repair and overhaul of aircraft and aircraft components; engine and aircraft sales and leasing; and the manufacture of mobility systems, cargo systems and composite structures. Headquartered in Wood Dale, Illinois, AAR serves commercial and government aircraft fleet operators, original equipment manufacturers and independent service customers throughout the world. Further information can be found at http://www.aarcorp.com .

AAR will hold its quarterly conference call at 10:30 a.m. CST on March 16, 2005. The conference call can be accessed via dial-in (1-866-243-8959). A replay of the call will be available (1-888-266-2081; access code 662930) from approximately 1:30 p.m. CST on March 16, 2005 until 11:59 p.m. CST on March 23, 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, 2004 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 Operations

    (In thousands except        Three Months Ended        Nine Months Ended
     per share data)             February 28/29,           February 28/29,
                               2005          2004         2005         2004
                                  (Unaudited)                (Unaudited)
    Sales                   $ 197,701     $ 159,233    $ 537,922    $ 467,634
    Cost and Expenses:
    Cost of sales             166,768       132,677      451,984      394,450
    Selling, general
     and administrative        21,182        20,429       61,460       58,890

    Operating income            9,751         6,127       24,478       14,294

    Interest expense            4,163         4,688       11,860       14,297
    Interest income               438           284        1,103        1,200

    Income from continuing
     operations before
     income taxes               6,026         1,723       13,721        1,197

    Income tax
     expense (benefit)            841          (522)         977         (706)

    Income from continuing
     operations                 5,185         2,245       12,744        1,903

    Discontinued Operations:
     Operating loss,
      net of tax                 (364)         (233)        (798)        (971)
     Loss on disposal,
      net of tax               (2,226)          ---       (2,226)         ---
     Loss from discontinued
      operations               (2,590)         (233)      (3,024)        (971)
     Net income               $ 2,595       $ 2,012      $ 9,720        $ 932

    Share Data:
    Earnings (loss) per share
     - Basic:
     Earnings from continuing
      operations               $ 0.16        $ 0.07       $ 0.39       $ 0.06
     Loss from discontinued
      operations                (0.08)        (0.01)       (0.09)       (0.03)
     Earnings per share
      - Basic                  $ 0.08        $ 0.06       $ 0.30       $ 0.03

    Earnings (loss) per share
     - Diluted
     Earnings from
      continuing operations    $ 0.15        $ 0.07       $ 0.37       $ 0.06
     Loss from discontinued
      operations                (0.07)        (0.01)       (0.08)       (0.03)
     Earnings per share
      - Diluted                $ 0.08         $0.06       $ 0.29       $ 0.03

    Average shares outstanding
     - Basic                   32,258        32,168       32,249       31,999
    Average shares outstanding
     - Diluted                 36,417        34,077       36,334       32,694


    Consolidated Balance Sheet Highlights

    (In thousands except per share data)    February 28,        May 31,
                                               2005              2004
                                            (Unaudited) (Derived from audited
                                                         financial statements)
    Cash and cash equivalents                 $ 32,091         $ 41,010
    Current assets                             441,165          432,204
    Current maturities of recourse LTD           2,309            2,656
    Current liabilities
    (excl current maturities)                  126,069          127,869
    Net property, plant and equipment           72,380           81,866
    Total assets                               707,467          709,292
    Recourse long-term debt                    200,204          217,434
    Total recourse debt                        202,513          220,090
    Total non-recourse debt                     31,496           31,968
    Stockholders' equity                       315,409          301,684
    Book value per share                        $ 9.78           $ 9.36
    Shares outstanding                          32,261           32,245


    Sales By Business Segment   Three Months Ended        Nine Months Ended
    (In thousands - unaudited)    February 28/29,           February 28/29,
                                 2005         2004         2005         2004
    Inventory & Logistic
     Services                 $ 72,010     $ 61,148    $ 200,828    $ 192,142
    Maintenance, Repair
     & Overhaul                 53,179       47,981      149,021      151,174
    Manufacturing               51,759       44,246      143,069      101,212
    Aircraft & Engine
     Sales & Leasing            20,753        5,858       45,004       23,106
                             $ 197,701    $ 159,233    $ 537,922    $ 467,634


    Diluted Earnings Per
     Share Calculation           Three Months Ended        Nine Months Ended
    (In thousands except           February 28/29,          February 28/29,
      per share data)             2005         2004        2005         2004
                                      (Unaudited)              (Unaudited)

    Net income as reported      $ 2,595      $ 2,012     $ 9,720        $ 932
    Add: After-tax interest
     on convertible debt            306          114         924          114
    Net income for diluted
     EPS calculation            $ 2,901      $ 2,126    $ 10,644      $ 1,046

    Basic shares outstanding     32,258       32,168      32,249       31,999
    Additional shares due to:
    Assumed exercise of
     stock options                  555          564         481          247
    Assumed conversion of
     convertible debt             3,604        1,345       3,604          448
    Diluted shares outstanding   36,417       34,077      36,334       32,694
    Diluted earnings per share    $0.08        $0.06       $0.29        $0.03

SOURCE AAR CORP.

CONTACT: Timothy J. Romenesko, Vice President, Chief Financial Officer of AAR, +1-630-227-2090, or tromenesko@aarcorp.com

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