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Press release

July 09, 2008

AAR Reports Record Fourth Quarter and Fiscal 2008 Results

  • Record quarterly sales of $391.7 million (28% sales growth)
  • Record quarterly net income of $22.0 million (23% net income growth)
  • Record quarterly diluted earnings per share of $0.52
  • $44 million of cash flow from operations

WOOD DALE, Ill., /PRNewswire-FirstCall/ -- AAR (NYSE: AIR) today reported fiscal 2008 fourth quarter net sales of $391.7 million and net income of $22.0 million, or $0.52 diluted earnings per share. Sales increased 28% from $305.7 million in the fourth quarter of last year, and net income increased 23%. Organic sales growth was 13% in the fourth quarter despite no aircraft sales.

For the Company's fiscal year 2008, sales were a record $1,384.9 million, an increase of 31% over the prior fiscal year and net income increased 28% to $75.1 million, or $1.76 per diluted share. Organic sales growth was 20% for fiscal 2008.

"We achieved superior sales and earnings growth powered by market share gains through solid execution across our business and broad market acceptance of the Company's value proposition," said David P. Storch, Chairman and Chief Executive Officer of AAR CORP. "We also increased our liquidity, diversified our business and expanded our customer base."

During fiscal 2008, each segment achieved double digit sales growth driven by a 28% increase in sales to commercial customers and a 37% increase in sales to defense customers. Sales to Defense customers have increased 24% on a compounded annual basis over the past three fiscal years and represent 37% of consolidated revenues. The strong sales growth across each of the Company's markets reflects increased market share in MRO and parts support, solid execution, geographic expansion and the impact of acquisitions. At May 31, 2008, total backlog increased to $465 million from $315 million at May 31, 2007. Backlog excludes expected sales of A400M cargo systems.

Consolidated gross profit margin was 19.6% for the fourth quarter compared to 18.2% last year. For fiscal 2008, the consolidated gross profit margin was 19.1% compared to 17.4% last year. Improving gross margins has been a key focus at the Company the past few years and the year-over-year improvement was driven by increased volumes, higher margin product mix and operational performance. For the fourth quarter, operating income increased $10.1 million to $38.3 million or 9.8% of sales and for fiscal 2008, operating income increased $39.2 million to $134.5 million or 9.7% of sales compared to 9.0% last year.

    Following are the highlights for each segment:
      Aviation Supply Chain - Sales grew 14% to $167.8 million for the fourth
      quarter and gross profit increased 29% to $41.8 million, resulting in a
      gross profit margin of 24.9%.  For fiscal 2008, sales increased 12% to
      $606.5 million and gross profit increased 27% to $145.1 million,
      resulting in a gross profit margin for the year of 23.9%. Growth in this
      segment was fueled by the Company's industry leading position and value
      proposition offering airline and maintenance providers cost-effective
      supply solutions. The Company also increased its international business
      and benefited from strength in the Company's performance-based logistics
      programs for defense customers.

      Maintenance, Repair and Overhaul - Sales increased 45% to $94.8 million
      for the fourth quarter and gross profit increased 59% to $14.9 million,
      resulting in a gross profit margin of 15.7%. For fiscal 2008, sales
      increased 42% to $300.9 million and gross profit increased 47% to
      $44.0 million, resulting in a gross profit margin for the year of 14.6%.
      The sales growth reflects strong performance at the Company's aircraft
      maintenance center in Indianapolis, which expanded its relationship with
      Southwest Airlines to provide heavy maintenance for its fleet of 737
      aircraft, and the inclusion of Avborne Heavy Maintenance, which was
      acquired in early March 2008. Avborne adds 226,000 square feet of modern
      hanger space at Miami International Airport and brings Airbus experience
      and wide-body capabilities. The Company's landing gear business
      experienced record fourth quarter and fiscal 2008 sales.

      Structures and Systems - Sales grew 53% to $122.7 million for the
      quarter and gross profit increased 69% to $18.4 million, resulting in a
      gross profit margin of 15.0%. For fiscal 2008, sales increased 47% to
      $389.4 million and gross profit increased 52% to $54.7 million,
      resulting in a gross profit margin for the year of 14.0%. Organic sales
      growth was 14% and 13% for the fourth quarter and fiscal 2008,
      respectively. The sales growth reflects the Company's leading position
      in specialized mobility products for defense and humanitarian customers
      and steady demand for cargo systems and composite structures. In
      December 2007, the Company acquired SUMMA Technology, Inc. adding to our
      precision-machining and fabrication capabilities. The Company also
      announced a significant expansion to its composites manufacturing
      capability by opening a 90,000-square-foot facility located at McClellan
      Business Park in Sacramento, California, and which should be operational
      by August.

      Aircraft Sales and Leasing - During the fourth quarter, the Company's
      aircraft position remained unchanged at 37, with 29 aircraft held in
      joint ventures and eight held in the Company's wholly-owned portfolio.
      For the quarter, sales declined $7.3 million and gross profit and
      earnings from aircraft joint ventures decreased $0.9 million compared to
      the prior year as the Company had no aircraft sales. For fiscal 2008,
      sales increased $46.2 million due to sales of aircraft from the
      Company's wholly-owned portfolio. Gross profit and earnings from
      aircraft joint ventures increased from $15.1 million in fiscal 2007 to
      $27.2 million in fiscal 2008.

During the fourth quarter, selling, general and administrative costs increased to 10.2% of sales as the Company increased spending to support growth and investments in operational improvement initiatives. The increase also reflects the impact from acquisitions and an increase in the allowance for doubtful accounts of $1.5 million over the prior year. For fiscal 2008, selling, general and administrative expenses increased $30.4 million or 29%, however decreased slightly as a percentage of sales to 9.8% from 9.9% last year.

During fiscal 2008, the Company strengthened its liquidity position with the issuance of $250 million of convertible notes consisting of $137.5 million of 1.625% convertible senior notes due 2014 and $112.5 million of 2.25% convertible senior notes due 2016. A portion of these proceeds was used to fund the acquisitions of SUMMA and Avborne, as well as the repayment of $50 million of debt that matured during fiscal 2008. In addition, the Company retired $13 million of its 8.39% senior notes due May 15, 2011 during the fourth quarter.

The Company generated $66 million of cash flow from operations during the second half of fiscal 2008 and ended the year with approximately $109 million cash on hand. Net interest expense increased from $10.9 million in fiscal 2007 to $18.2 million in fiscal 2008 as a result of investments in working capital, capacity expansion and acquisitions.

Storch continued, "I am particularly pleased with the $66 million in cash we generated from operations in the last half of fiscal 2008, including the $44 million during our fourth quarter. As we enter the new fiscal year, I am encouraged by our culture of innovation, our team's commitment to achieving operational excellence through flawless execution and our history of navigating through periods of uncertainty."

AAR is a leading provider of products and value-added services to the worldwide aerospace and defense industry. With facilities and sales locations around the world, AAR uses its close-to-the-customer business model to serve aviation 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 http://www.aarcorp.com.

AAR will hold its quarterly conference call at 7:30 a.m. CDT on July 10, 2008. The conference call can be accessed by calling 866-219-5894 from inside the U.S. or 703-639-1125 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 1257901) from 10:30 a.m. CDT on July 10, 2008 until 11:59 p.m. CDT on July 17, 2008.

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, 2007 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 update 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 per share data)
                      Three Months Ended              Twelve Months Ended
                            May 31,                         May 31,
                        2008           2007           2008           2007

    Sales             $391,686       $305,677      $1,384,919     $1,061,169
    Cost and expenses:
      Cost of sales    314,809        250,079       1,120,847        869,370
      Cost of sales
       - impairment
         charges           ---            ---             ---          7,652
      Selling, general
       and
       administrative   39,892         28,582         135,502        105,091

    Gain on sale of
     product line          ---            ---             ---          5,358
    Earnings from
     joint ventures      1,295          1,167           5,948         10,952

    Operating income    38,280         28,183         134,518         95,366

    Gain/(loss) on
     extinguishment
     of debt               422            ---            (205)         2,927

    Interest expense     4,892          3,731          20,578         16,701
    Interest income
     and other             583          1,897           2,353          5,829

    Income from continuing
     operations before
     income taxes       34,393         26,349         116,088         87,421

    Income tax expense  12,076          8,632          40,343         27,974

    Income from
     continuing
     operations         22,317         17,717          75,745         59,447

    Discontinued
     operations:
         Operating
          earnings/
          (loss), net
          of tax          (276)           130            (601)          (787)

    Net income         $22,041        $17,847         $75,144        $58,660

    Earnings per share
     - Basic:
     Earnings from
      continuing
      operations         $0.59          $0.49           $2.04          $1.63
     Loss from
      discontinued
      operations         (0.01)           ---           (0.02)         (0.02)
     Earnings per
      share - Basic      $0.58          $0.49           $2.02          $1.61

    Earnings per share
     - Diluted:
     Earnings from
      continuing
      operations         $0.52          $0.42           $1.77          $1.42
     Loss from
      discontinued
      operations           ---            ---           (0.01)         (0.02)
     Earnings per
      share - Diluted    $0.52          $0.42           $1.76          $1.40

    Share Data:

    Average shares
     outstanding -
     Basic              37,832         36,701          37,194         36,389
    Average shares
     outstanding -
     Diluted            43,553         43,744          43,745         43,309


    Consolidated Balance Sheet Highlights          May 31,           May 31,
    (In thousands except per share data)            2008              2007
                                                                 (Derived from
                                                                  audited
                                                                  financial
                                                                  statements)
    Cash and cash equivalents                     $109,391           $83,317
    Current assets                                 783,430           645,721
    Current liabilities (excluding debt accounts)  195,504           182,261
    Net property, plant and equipment              146,435            88,187
    Total assets                                 1,362,010         1,067,633
    Total recourse debt                            479,544           284,229
    Total non-recourse obligations                  51,368            43,627
    Stockholders' equity                           585,255           494,243
    Book value per share                            $15.09            $13.10
    Shares outstanding                              38,773            37,729


    Sales By Business Segment      Three Months Ended   Twelve Months Ended
    (In thousands)                      May 31,               May 31,
                                     2008      2007        2008        2007
    Aviation Supply Chain          $167,771  $146,567    $606,490    $543,674
    Maintenance, Repair & Overhaul   94,780    65,179     300,871     211,516
    Structures and Systems          122,695    80,211     389,428     264,083
    Aircraft Sales and Leasing        6,440    13,720      88,130      41,896
                                   $391,686  $305,677  $1,384,919  $1,061,169


    Gross Profit By Business Segment  Three Months Ended   Twelve Months Ended
    (In thousands)                         May 31,               May 31,
                                      2008      2007        2008        2007
    Aviation Supply Chain           $41,827   $32,370    $145,091    $114,383
    Maintenance, Repair & Overhaul   14,892     9,351      43,967      29,915
    Structures and Systems           18,366    10,859      54,673      36,021
    Aircraft Sales and Leasing        1,792     3,018      20,341       3,828
                                    $76,877   $55,598    $264,072    $184,147

    Note:  Gross Profit for the Twelve Months Ended May 31, 2007 includes
    impairment charges of $4.8 million in Aviation Supply Chain and $2.9
    million in Aircraft Sales & Leasing.


    Diluted Earnings Per Share
    Calculation
    (In thousands except per  Three Months Ended         Twelve Months Ended
    share data)                    May 31,                      May 31,
                                2008     2007             2008      2007

    Net income as reported     $22,041  $17,847        $75,144        $58,660
    Add: After-tax interest on
     convertible debt              417      491          1,866          1,965
    Net income for diluted EPS
     calculation               $22,458  $18,338        $77,010        $60,625

    Diluted shares outstanding  43,553   43,744         43,745         43,309

    Diluted earnings per share   $0.52    $0.42          $1.76          $1.40

Note: Pursuant to SEC Regulation G, the Company has included the following reconciliations of financial measures reported on a non-GAAP basis to comparable financial measures reported on the basis of Generally Accepted Accounting Principles ("GAAP"). The Company believes that the adjusted sales growth for the three and twelve months ended May 31, 2008 is more representative of the Company's and the Structures and Systems segment's organic sales growth as it excludes sales related to acquisitions.

    AAR CORP.                          Three Months Ended  Twelve Months Ended
    (In thousands)                       May 31, 2008            May 31, 2008
    Sales as reported                     $391,686                $1,384,919
    Less: sales from acquisitions           47,354                   114,281
    Adjusted sales                        $344,332                $1,270,638

    Sales growth as reported                    28%                       31%

    Organic sales growth                        13%                       20%


    Structures and Systems Segment     Three Months Ended  Twelve Months Ended
    (In thousands)                     May 31, 2008              May 31, 2008
    Sales as reported                    $122,695                   $389,428
    Less: sales from acquisitions          31,108                     89,946
    Adjusted sales                        $91,587                   $299,482

    Sales growth as reported                   53%                        47%

    Organic sales growth                       14%                        13%



CONTACT:
Richard J. Poulton, Vice President, Chief Financial Officer of AAR
+1-630-227-2075
rpoulton@aarcorp.com

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