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Press release

December 15, 2009

AAR Reports Second Quarter Results - 2009

  • Fiscal year 2010 second quarter sales of $329 million
  • $0.34 diluted earnings per share
  • Second quarter cash flow from operations of $24 million
  • Announced significant new business wins

WOOD DALE, Ill., /PRNewswire-FirstCall via COMTEX/ -- AAR (NYSE: AIR) today reported fiscal year 2010 second quarter sales of $328.7 million and net income attributable to AAR of $13.3 million or $0.34 per diluted share. Sales to defense and government customers increased 4%, year-over-year, and represented 48% of total sales while sales to commercial customers declined 15%. For the second quarter of last fiscal year, the Company reported sales of $353.6 million and net income attributable to AAR of $10.4 million or $0.27 per diluted share. The prior year second quarter results included a $21.0 million impairment charge related to aircraft and a gain on extinguishment of debt of $11.2 million.

"Against a reasonably tough economic environment, the Company delivered solid second quarter results. We achieved strong sequential earnings growth, had solid margin expansion, and generated cash as we gained the benefits of process improvement initiatives, cost reductions, and improved mix," said David P. Storch, Chairman and Chief Executive Officer of AAR CORP. "I am also pleased with several new business wins. The Company won a meaningful contract to provide supply chain services and logistics support for the USAF's KC-10 fleet. Additionally, in the face of a soft commercial market, we increased our market share by winning several previously unannounced awards providing MRO and supply chain services. We will begin to see the benefits of these new business awards in our third quarter and will be fully ramped in our fourth quarter."

Following are the highlights for each segment:

Aviation Supply Chain - Sales declined 11% to $134.5 million for the second quarter and gross profit was $29.2 million, resulting in a gross profit margin of 21.7% compared to 10.9% in last year's second quarter. Excluding the prior year aircraft impairment charge of $21.0 million, last year's second quarter gross profit margin was 24.8%.

During the second quarter of Fiscal Year 2010, the Company won a contract to provide supply chain services and logistics support on the KC-10 Extender Contractor Logistics Support program, as a member of the Northrop Grumman team. The Company's portion of the indefinite delivery/indefinite quantity contract is valued at approximately $600 million over nine years and is expected to begin generating revenue in February 2010.

Maintenance, Repair, and Overhaul - Sales declined 18% to $71.4 million for the second quarter and gross profit declined 35% to $8.8 million, resulting in a gross profit margin of 12.3% compared to 15.4% last year. Revenues and margins in this segment were lower as the Company completed two programs and the Company experienced lower shop inputs from its airline customers in the second quarter.

During the second quarter, the Company won significant maintenance and engineering business from new and existing customers. This work began in December and will increase through January. Once fully operational, the new business is expected to generate incremental revenue at a run rate of between $5 million and $10 million per quarter.

Structures and Systems - Sales increased 7% to $122.8 million for the second quarter and gross profit increased 38% to $25.9 million, resulting in a gross profit margin of 21.1% compared to 16.4% last year. Sales were favorably impacted by increased demand for the Company's specialized mobility products. The gross profit margin improvement was driven by cost reduction and process improvement initiatives, favorable product mix and increased volume.

The Company signed an agreement with Sikorsky Aircraft Corporation naming AAR as the exclusive provider of composite interiors for the Sikorsky S-92 Offshore/Airline Program. In addition, the agreement formalizes an arrangement between the two companies to explore opportunities to align AAR's diverse capabilities with Sikorsky's manufacturing and support requirements, strengthening AAR's presence in the rotorcraft market.

During the second quarter, the Company generated $24 million of cash flow from operations and ended the period with $105.7 million of cash and cash equivalents on hand. The Company also reduced its borrowings under its revolving credit agreement by $30 million. For the six-month period ended November 30, 2009, the Company generated $58 million of cash flow from operations. At November 30, 2009, cash on hand and borrowing capacity under the Company's credit agreements totaled $329 million.

Selling, general and administrative expenses were $37.6 million, 2% lower than the prior year, and included $2.2 million of costs associated with AAR Global Solutions, which was launched in fiscal year 2010. Net interest expense decreased $1.7 million year-over-year as a result of the decline in debt outstanding.

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 its operating segments: Aviation Supply Chain; Maintenance, Repair and Overhaul; and Structures and Systems. More information can be found at www.aarcorp.com.

AAR will hold its quarterly conference call at 7:30 a.m. CST on December 16, 2009. The conference call can be accessed by calling 866-219-5631 from inside the U.S. or 703-639-1122 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 1417889) from 11:30 a.m. CST on December 16, 2009 until 11:59 p.m. CDT on December 23, 2009.

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, 2009 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
    --------------------------     Three Months Ended   Six Months Ended
    (In thousands except per share    November 30,        November 30,
     data -unaudited)                 ------------        ------------
                                      2009     2008      2009     2008
                                      ----     ----      ----     ----

    Sales                           $328,684 $353,572  $670,207 $713,476
    Cost and expenses:
         Cost of sales               264,824  283,730   552,324  576,496
         Cost of sales - impairment
          charges                        ---   21,033       ---   21,033
         Selling, general and
          administrative              37,591   38,205    74,483   75,003

    Earnings from aircraft
     joint ventures                       11    4,364        94    5,812
                                         ---    -----       ---    -----

    Operating income                  26,280   14,968    43,494   46,756

    Gain on extinguishment of
     debt                                ---   11,187       913   10,503

    Interest expense                   6,463    8,418    13,020   16,567
    Interest income                      290      496       606      862
                                         ---      ---       ---      ---

    Income from continuing
     operations before
     income taxes                     20,107   18,233    31,993   41,554

    Income tax expense                 6,914    6,208     9,642   14,223
                                       -----    -----     -----   ------

    Income from continuing
     operations                       13,193   12,025    22,351   27,331

    Discontinued operations,
     net or tax                          ---   (1,618)      ---   (1,949)
                                       -----   ------     -----   ------
    Net income attributable to
     AAR and noncontrolling
     interest                         13,193   10,407    22,351   25,382

    Loss attributable to
     noncontrolling interest             119      ---     1,165      ---


    Net income attributable to
     AAR                             $13,312  $10,407   $23,516  $25,382
                                     =======  =======   =======  =======

    Share Data:

    Earnings per share -
     Basic:
         Earnings from continuing
          operations                   $0.35    $0.32     $0.62    $0.72
         Loss from discontinued
          operations                     ---    (0.04)      ---    (0.05)
                                       -----    -----     -----    -----
         Earnings per share - Basic    $0.35    $0.27     $0.62    $0.67
                                       =====    =====     =====    =====

    Earnings per share -
     Diluted:
         Earnings from continuing
          operations                   $0.34    $0.31     $0.61    $0.70
         Loss from discontinued
          operations                     ---    (0.04)      ---    (0.04)
                                       -----    -----     -----    -----
         Earnings per share -
          Diluted                      $0.34    $0.27     $0.61    $0.66
                                       =====    =====     =====    =====

    Share Data:

    Average shares outstanding
     - Basic                          38,143   38,079    38,121   38,088
    Average shares outstanding
     - Diluted                        42,869   42,802    42,764   42,877
    --------------------------        ------   ------    ------   ------




    Consolidated Balance Sheet Highlights      November 30,  May 31,
    -------------------------------------      ------------  -------
    (In thousands except per share data)          2009        2009
                                                  ----        ----
                                               (Unaudited)
    Cash and cash equivalents                   $105,703    $112,505
    Current assets                               794,590     851,312
    Current liabilities (excluding debt
     accounts)                                   158,364     190,818
    Net property, plant and equipment            130,020     125,048
    Total assets                               1,317,706   1,375,905
    Total recourse debt                          318,921     353,028
    Total non-recourse obligations                27,360      38,781
    Stockholders' equity                         724,777     696,734
    Book value per share                          $18.62      $17.92
    Shares outstanding                            38,932      38,884




    Sales By Business
     Segment
    -----------------           Three Months Ended      Six Months Ended
    (In thousands -                November 30,            November 30,
     unaudited)                    ------------            ------------
                               2009         2008       2009          2008
                               ----         ----       ----          ----
    Aviation Supply Chain    $134,471     $151,423   $275,556      $308,248
    Maintenance, Repair &
     Overhaul                  71,373       87,437    150,117       173,747
    Structures and
     Systems                  122,840      114,712    244,534       231,481
                              -------      -------    -------       -------
                             $328,684     $353,572   $670,207      $713,476
                             ========     ========   ========      ========




    Gross Profit By Business
     Segment
    ------------------------   Three Months Ended     Six Months Ended
    (In thousands -              November 30,           November 30,
     unaudited)                  ------------           ------------
                               2009         2008     2009          2008
                               ----         ----     ----          ----
    Aviation Supply Chain    $29,151      $16,450  $51,887       $53,381
    Maintenance, Repair &
     Overhaul                  8,759       13,503   19,354        26,256
    Structures and Systems    25,950       18,856   46,642        36,310
                              ------       ------   ------        ------
                             $63,860      $48,809 $117,883      $115,947
                             =======      ======= ========      ========




    Diluted Earnings Per
     Share Calculation
    --------------------       Three Months Ended     Six Months Ended
    (In thousands except per   ------------------     ----------------
     share data -unauditied)      November 30,          November 30,
                                  ------------          ------------
                               2009          2008    2009          2008
                               ----          ----    ----          ----
    Net income attributable
     to AAR                  $13,312     $10,407   $23,516       $25,382
    Add: After-tax interest
     on convertible debt       1,308       1,398     2,596         2,807
                               -----       -----     -----         -----
    Net income for diluted
     EPS calculation         $14,620     $11,805   $26,112       $28,189
                             =======     =======   =======       =======

    Diluted shares
     outstanding              42,869      42,802    42,764        42,877

    Diluted earnings per
     share                     $0.34       $0.27     $0.61         $0.66
                               =====       =====     =====         =====




Adoption of New Accounting Standards:

Effective June 1, 2009, we adopted a new accounting standard that requires companies that have issued convertible debt that may be settled wholly or partly in cash when converted, to account for the debt and equity components separately. The value assigned to the bond liability is the estimated value of a similar bond without the conversion feature as of the issuance date. The difference between the proceeds received for the convertible debt and the amount reflected as a bond liability is recorded as Capital Surplus, net of tax. The bifurcation of the debt and equity components results in a discounted carrying value of the debt component compared to the principal amount. The discount is accreted to the carrying value of the debt component through interest expense over the expected life of the debt using the effective interest method. The standard requires retrospective application and impacts the accounting for our 1.625% and 2.25% convertible notes issued in February 2008 and our 1.75% convertible notes issued in February 2006.

The following table sets forth the impact of retrospective application of the new standard on certain previously reported items for the three-month period ended November 30, 2008.

                                 Previously    FSP APB 14-1
                                  Reported        Impact       As Adjusted
                                 ----------    ------------    -----------
    Gain on extinguishment of
     debt                           $22,098       ($10,911)       11,187
    Interest expense                  4,981          3,437         8,418
    Income tax expense               11,229         (5,021)        6,208
    Income from continuing
     operations                      21,352         (9,327)       12,025
    Net income attributable to
     AAR                             19,734         (9,327)       10,407

    Earnings per share - basic
       Continuing operations          $0.56         ($0.24)        $0.32
       Discontinued operations        (0.04)           ---         (0.04)
                                      -----          -----         -----
                                      $0.52         ($0.24)        $0.27
    Earnings per share -
     diluted
       Continuing operations          $0.51         ($0.20)        $0.31
       Discontinued operations        (0.04)           ---         (0.04)
                                      -----          -----         -----
                                      $0.47         ($0.20)        $0.27

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 gross margin percentage for the three-month period ended November 30, 2008 is an important ratio to use for comparison purposes to the current year's gross profit margin.

    Aviation Supply Chain                              Three Months Ended
    ---------------------                              November 30, 2008
    (In thousands)                                     -----------------

    Sales                                                   $151,423
                                                            ========

    Gross margin as reported                                 $16,450
    Impairment charge                                         21,033
                                                              ------
    Gross margin adjusted for impairment charge              $37,483
                                                             =======

    Gross margin % as reported                                  10.9%

    Gross margin % adjusted for impairment charge               24.8%

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