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Press release

December 20, 2006

AAR Reports Record Fiscal Year 2007 Second Quarter Results

  • Record quarterly net income of $13.8 million
  • 13% sales growth; 75% income growth
  • Operating margin increased to 9.5%
  • Significant new business wins

WOOD DALE, Ill., /PRNewswire-FirstCall/ -- AAR (NYSE: AIR) today reported net sales of $246.1 million and income from continuing operations of $13.8 million, or $0.33 per diluted share, for the second quarter of fiscal 2007. Sales grew 13% from $218.2 million in the second quarter of last year, and income from continuing operations increased 75% from $7.9 million in the prior year.

Following are highlights for each segment:

Aviation Supply Chain -- Sales grew 24% to $133.9 million, and gross profit increased 32% to $29.9 million in the Company's largest segment. AAR continued to capture business from customers looking to reduce costs and improve efficiencies. The segment further benefited from strength in existing programs for commercial and defense customers. During the second quarter, the Company announced a new end-to-end supply chain program to support 24 CRJ 200 regional jets for Chautauqua Airlines, a regional airline owned by Republic Airways Holdings, which begins January 2007. Demand for products supporting customer supply chain requirements remains strong as the Company continues to invest in assets to support this activity and position the segment for future growth.

Maintenance, Repair and Overhaul -- Sales for the quarter increased 3% to $44.5 million and gross profit for the segment increased 24% to $6.1 million.

Sales at the Company's Indianapolis operation were lower due primarily to fewer scheduled maintenance visits from a major airline customer. The Company announced today a new three-year agreement to perform heavy maintenance services and winglet installations for Southwest Airlines. The Company announced in early November a contract award for heavy maintenance work and interior modifications for Northwest Airlines. The increase from one base load customer at fiscal year-end to four starting in January solidifies the positive outlook for this business.

The Company's landing gear and Oklahoma City MRO businesses significantly improved their operating profit during the quarter, reflecting robust demand for these services and increased operational efficiencies.

Structures and Systems -- Sales in this segment were $64.3 million, relatively flat year-over-year, and gross profit decreased 10% to $8.8 million. Demand for specialized mobility products remained steady, and volumes for composite products increased during the quarter. The Company received a $68 million pallet order from the U.S. Air Force in September 2006, with deliveries scheduled to begin in the Company's fiscal third quarter.

Sales of cargo systems were 23% lower as the Company began relocating production to the previously-announced, new manufacturing facility in North Carolina. Sales and margins are expected to increase in the fiscal fourth quarter as the business completes its move to the new facility, and further improvement is anticipated once shipments begin for the Airbus A400M military transport aircraft in early fiscal 2008.

Aircraft Sales and Leasing -- Operating income, which includes earnings from aircraft joint ventures, grew $3.2 million year-over-year as the segment continued to benefit from the Company's strategy to increase its activity in this growing market.

During the quarter, the Company sold its interest in two aircraft and acquired two aircraft through a joint venture. The increase in earnings from aircraft joint ventures was primarily driven by the sale of the Company's interest in these two aircraft. The total number of aircraft held in joint ventures remained at seventeen as of November 30, 2006, all of which are currently on lease. Also as of November 30, the Company directly owned eight aircraft, two of which were purchased earlier this year and are expected to be sold in the fiscal third quarter.

The Company's consolidated gross profit margin increased to 18.6% from 17.4% in the prior year. Selling, general and administrative costs increased $2.6 million year-over-year and declined to 10.6% of sales. Operating profit margin was 9.5%, up from 6.9% in the prior year.

"AAR achieved strong overall results while managing through a business relocation and preparing for our new customers at the Indianapolis facility," said David P. Storch, Chairman, President and Chief Executive Officer of AAR CORP. "During the quarter, we made meaningful progress toward our near-term goal of 10% and our longer-term goal of 12.5% operating margin. Increased volume, continued focus on higher margin activities and leveraging our cost structure all contributed to these results. As we enter the second half of the year, we believe we are well-positioned to execute on our commitments, attract new business and supplement the Company's organic growth with new and expanded capabilities."

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 20, 2006. The conference call can be accessed by calling 866-793-1344 from inside the U.S. or 703-639-1315 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 1008742) from 1:30 p.m. CST on December 20, 2006 until 11:59 p.m. CST on December 27, 2006.

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 1A, entitled "Risk Factors", included in the Company's May 31, 2006 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               2006       2005       2006       2005
     per share data)                      (Unaudited)          (Unaudited)

    Sales                           $ 246,067  $ 218,230  $ 488,265  $ 417,818
    Cost and expenses:
      Cost of sales                   200,208    180,240    399,662    345,146
      Cost of sales - impairment
       charges                            ---        ---      7,652        ---
      Selling, general and
      administrative                   26,198     23,621     52,179     47,522

    Earnings from aircraft joint
     ventures                           3,761        593      6,802        798
    Gain on sale of product line          ---        ---      5,358        ---

    Operating income                   23,422     14,962     40,932     25,948

    Gain on extinguishment of debt        ---        ---      2,927        ---

    Interest expense                    4,737      4,507      9,403      8,629
    Interest income                     1,300        503      2,639        962

    Income from continuing
     operations before income taxes    19,985     10,958     37,095     18,281

    Income tax expense                  6,217      3,082     11,381      5,147

    Income from continuing operations  13,768      7,876     25,714     13,134

    Discontinued operations:
      Operating loss, net of tax          ---        ---        162        ---

    Net income                       $ 13,768    $ 7,876   $ 25,552   $ 13,134

    Share Data:

    Earnings per share - Basic:
      Earnings from continuing
       operations                      $ 0.38     $ 0.24     $ 0.71     $ 0.40
      Loss from discontinued
       operations                         ---        ---        ---        ---
      Earnings per share - Basic       $ 0.38     $ 0.24     $ 0.71     $ 0.40

    Earnings per share - Diluted
      Earnings from continuing
       operations                      $ 0.33     $ 0.22     $ 0.62     $ 0.37
      Loss from discontinued
       operations                         ---        ---        ---        ---
      Earnings per share - Diluted     $ 0.33     $ 0.22     $ 0.62     $ 0.37

    Average shares outstanding -
      Basic                            36,250     33,048     36,161     33,005
    Average shares outstanding -
     Diluted                           43,145     37,137     42,969     37,073

    Consolidated Balance Sheet Highlights        November 30,      May 31,
    (In thousands except per share data)             2006           2006
                                                 (Unaudited)   (Derived from
                                                             audited financial

    Cash and cash equivalents                     $ 117,192      $ 121,738
    Current assets                                  655,057        624,454
    Current liabilities (excluding debt accounts)   176,209        185,499
    Net property, plant and equipment                78,910         72,637
    Total assets                                  1,001,031        978,819
    Total recourse debt                             289,354        293,624
    Total non-recourse debt                          30,419         27,241
    Stockholders' equity                            451,251        422,717
    Book value per share                            $ 12.23        $ 11.53
    Shares outstanding                               36,912         36,654

    Sales By Business Segment
    (In thousands -- unaudited)   Three Months Ended     Six Months Ended
                                     November 30,           November 30,
                                  2006         2005       2006       2005

    Aviation Supply Chain      $133,904     $107,993   $261,420   $215,104
    Maintenance, Repair and
     Overhaul                    44,477       43,257     94,073     81,229
    Structures and Systems       64,268       63,817    124,631    115,177
    Aircraft Sales and Leasing    3,418        3,163      8,141      6,308
                               $246,067     $218,230   $488,265   $417,818

    Diluted Earnings Per Share Calculation
    (In thousands except per share data)

                                  Three Months Ended     Six Months Ended
                                     November 30,           November 30,
                                   2006        2005       2006       2005
                                     (Unaudited)            (Unaudited)

    Net income as reported       $13,768      $7,876    $25,552    $13,134
    Add: After-tax interest on
     convertible debt                491         306        983        612
    Net income for diluted EPS
     calculation                 $14,259      $8,182    $26,535    $13,746

    Diluted shares outstanding    43,145      37,137     42,969     37,073

    Diluted earnings per share     $0.33       $0.22      $0.62      $0.37


Timothy J. Romenesko
Vice President
Chief Financial Officer of AAR

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