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Press release

March 21, 2007

AAR Reports Record Third Quarter Fiscal Year 2007 Results

  • Record quarterly sales of $271.0 million
  • Record quarterly income from continuing operations of $15.5 million
  • 21% sales growth; 69% growth in income from continuing operations

WOOD DALE, Ill., /PRNewswire-FirstCall/ -- AAR (NYSE: AIR) today reported net sales of $271.0 million and income from continuing operations of $15.5 million, or $0.37 per diluted share, for the third quarter of fiscal 2007. Sales grew 21% year-over-year, and income from continuing operations increased 69% from $9.2 million in the prior year. Revenue for the quarter included $16.5 million from the sale of two aircraft at book value. Excluding the sale of these two aircraft, consolidated sales grew 14% on a year-over- year basis.

Through the first nine months of fiscal 2007, net sales were $755.5 million, and income from continuing operations was $41.7 million, or $1.00 per diluted share. Sales increased 19% compared to last year, and income from continuing operations grew 86%.

"An improving airline industry and the trend toward outsourcing maintenance and supply chain support contributed to the results for the quarter," said David P. Storch, Chairman, President and Chief Executive Officer of AAR CORP. "We also benefited from investments we've made in assets and capabilities and our relentless focus on execution."

Following are highlights for each segment for the third quarter:

Aviation Supply Chain - Sales grew 16% to $135.7 million, and gross profit increased to $29.9 million or 22.0% of sales. Sales to commercial customers grew 22% with significant growth in the Asia region.

Maintenance, Repair and Overhaul - Sales increased 20% to $52.3 million, and gross profit grew 21% to $7.3 million or 13.9% of sales. All businesses in this segment increased profitability compared to the prior year. Performance at the Indianapolis facility improved as the Company broadened its customer base, including Southwest Airlines. Results are expected to improve in the fourth quarter as the Company forecasts lower training costs and efficiency gains. AAR also acquired the assets of Reebaire Aircraft Inc. in the third quarter, increasing its regional aircraft MRO capacity.

Structures and Systems - Sales grew 6% to $63.0 million, and gross profit increased 8% to $8.9 million or 14.2% of sales. Growth in this segment is attributable to the development and delivery of increasingly complex and specialized shelter products and a higher volume of pallets. The Company decided to exit a non-core business that accounts for less than 1% of consolidated annual sales and classified the results as a discontinued operation.

Aircraft Sales and Leasing - Operating income, which includes earnings from aircraft joint ventures, grew $2.6 million year-over-year principally due to the sale of the Company's interest in two aircraft held in a joint venture. The Company repositioned its fleet with the sale of two aircraft from its wholly-owned portfolio for $16.5 million. As of February 28, 2007, the total number of aircraft held in joint ventures was fifteen, and the number of aircraft in the Company's wholly-owned portfolio was six. All 21 aircraft are on lease, and the fleet is expected to grow in the fourth quarter.

The Company's consolidated gross profit increased 10% to $47.3 million. Gross profit margin declined to 17.4% of sales largely due to the impact of the previously mentioned aircraft transaction which lowered the gross profit margin percentage by approximately 120 basis points. Additionally, the Company expects its gross profit margin to increase in the fourth quarter as results improve in the MRO segment. Selling, general and administrative expenses were below 10% of sales as the Company leveraged its cost structure and further benefited from a $0.7 million bad debt recovery. Operating income grew 41% to $25.5 million or 9.4% of sales.

"Through the first nine months of the year, each of our four segments produced solid financial results," Storch continued. "I am very pleased with our team's ability to innovate and execute as we explore expansion opportunities for our four platforms, both organically and through acquisitions."

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. CDT on March 21, 2007. The conference call can be accessed by calling 866-206-7202 from inside the U.S. or 703-639-1112 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 1053724) from 2:30 p.m. CDT on March 21, 2007 until 11:59 p.m. CDT on March 28, 2007.

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     Nine Months Ended
     Operations                        February 28,             February 28,
    (In thousands except per share
                                       2007       2006       2007       2006
                                         (Unaudited)           (Unaudited)
    Sales                           $270,978   $223,398   $755,492   $635,865
    Cost and expenses:
         Cost of sales               223,703    180,292    619,291    520,720
         Cost of sales - impairment
          charges                        ---        ---      7,652        ---
         Selling, general and
          administrative              24,770     25,340     76,509     72,007

    Earnings from aircraft joint
     ventures                          2,983        262      9,785      1,060
    Gain on sale of product line         ---        ---      5,358        ---

    Operating income                  25,488     18,028     67,183     44,198

    Gain (loss) on extinguishment
     of debt                             ---     (3,893)     2,927     (3,893)

    Interest expense                   3,568      4,806     12,970     13,434
    Interest income                    1,293        849      3,932      1,811

    Income from continuing
     operations before income taxes   23,213     10,178     61,072     28,682

    Income tax expense                 7,694        983     19,342      6,208

    Income from continuing
     operations                       15,519      9,195     41,730     22,474

    Discontinued operations:
         Operating loss, net of tax     (258)       (65)      (917)      (210)
    Loss from discontinued
     operations                         (258)       (65)      (917)      (210)

    Net income                       $15,261     $9,130    $40,813    $22,264

    Share Data:

    Earnings per share - Basic:
         Earnings from continuing
          operations                   $0.43      $0.27      $1.15      $0.69
         Loss from discontinued
          operations                   (0.01)       ---      (0.03)     (0.01)
         Earnings per share - Basic    $0.42      $0.27      $1.12      $0.68

    Earnings per share - Diluted
         Earnings from continuing
          operations                   $0.37      $0.24      $1.00      $0.63
         Loss from discontinued
          operations                   (0.01)       ---      (0.02)     (0.01)
         Earnings per share -
          Diluted                      $0.36      $0.24      $0.98      $0.62

    Average shares outstanding -
     Basic                            36,534     33,709     36,285     32,723
    Average shares outstanding -
     Diluted                          43,496     39,150     43,092     37,397

    Consolidated Balance Sheet Highlights     February 28,     May 31,
    (In thousands except per share data)         2007           2006
                                              (Unaudited)  (Derived from
                                                            audited financial
    Cash and cash equivalents                  $105,111      $121,738
    Current assets                              645,483       624,454
    Current liabilities (excluding debt
     accounts)                                  178,785       185,499
    Net property, plant and equipment            81,816        72,637
    Total assets                              1,010,849       978,819
    Total recourse debt                         284,343       293,624
    Total non-recourse debt                      22,794        27,241
    Stockholders' equity                        469,701       422,717
    Book value per share                         $12.62        $11.53
    Shares outstanding                           37,228        36,654

    Sales By Business Segment    Three Months Ended      Nine Months Ended
    (In thousands - unaudited)      February 28,            February 28,
                                     2007         2006       2007       2006
    Aviation Supply Chain        $135,687     $117,170   $397,107   $332,274
    Maintenance, Repair and
     Overhaul                      52,265       43,591    146,337    124,820
    Structures and Systems         62,992       59,276    183,872    169,102
    Aircraft Sales and Leasing     20,034        3,361     28,176      9,669
                                 $270,978     $223,398   $755,492   $635,865

    Diluted Earnings Per Share       Three Months Ended     Nine Months Ended
     Calculation - Earnings from         February 28,          February 28,
    Continuing Operations
    (In thousands except per share
      data)                          2007        2006       2007       2006
                                        (Unaudited)            (Unaudited)
    Income from continuing
     operations as reported        $15,519      $9,195    $41,730    $22,474
    Add: After-tax interest on
     convertible debt                  491         358      1,474        969
    Income from continuing
     operations for diluted
     EPS calculation               $16,010      $9,553    $43,204    $23,443

    Diluted shares outstanding      43,496      39,150     43,092     37,397

    Diluted earnings per share
     from continuing operations      $0.37       $0.24      $1.00      $0.63

Note: Pursuant to SEC Regulation G, the Company has included the following reconciliation of financial measures reported on the basis of Generally Accepted Accounting Principles ("GAAP") to comparable financial measures reported on a non-GAAP basis. The Company believes that the adjusted non-GAAP sales growth is more representative of the Company's true sales growth as it excludes the sale of aircraft from its wholly-owned portfolio.

    (In thousands)                                        Three Months Ended
                                                              February 28,
                                                            2007       2006
    Sales as reported                                    $270,978   $223,398
         Less: aircraft sale at breakeven                  16,500        ---
    Adjusted sales                                       $254,478   $223,398

    Percentage sales growth as reported                       21%
    Adjusted percentage sales growth excluding aircraft
     sale at breakeven                                        14%


Timothy J. Romenesko
Vice President
Chief Financial Officer of AAR

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