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Press release

March 17, 2009

AAR Reports Slight Increase in EPS for Third Quarter

  • $0.48 diluted earnings per share compared to $0.47 last year
  • Sales of $339 million, down year over year principally due to lower sales in the Aircraft Sales and Leasing segment
  • Backlog remains strong at $580 million, up 25% from May 31, 2008

WOOD DALE, Ill., /PRNewswire-FirstCall/ -- AAR CORP. (NYSE: AIR) today reported net income of $20.0 million, or $0.48 per diluted share for the third quarter ended February 28, 2009, compared to $0.47 per diluted share last year. Year over year, sales declined from $376.6 million to $338.8 million due mainly to lower sales in the Aircraft Sales and Leasing segment. Excluding Aircraft Sales and Leasing, sales were essentially unchanged from last year.

Sales to defense customers increased 3.6%, representing 44% of total sales. Sales to commercial customers decreased 18.6% year over year. Excluding the Aircraft Sales and Leasing segment, sales growth to defense customers was 9.3% while the sales decline to commercial customers was 6.8%, as the Company sold aircraft into both markets in the prior year. The increase in sales to defense customers was attributable to continued growth at the Company's mobility systems and defense logistics businesses. The decline in commercial sales is primarily due to lower demand as a result of airline capacity reductions.

Commenting on third quarter results, David P. Storch, Chairman and Chief Executive Officer stated, "We have seen a softening in demand for heavy maintenance and large ticket items, including whole engines, coming from commercial airlines that have reduced their capacity and capital outlays as they managed through the weakened economy. We remain focused on taking market share through solid execution and reducing costs where appropriate. We had a setback in our landing gear operation where we experienced a temporary shutdown. After making certain adjustments to our operating procedures to comply with requests from the FAA, we resumed operations and expect to recover sales in future periods, beginning with our fourth quarter.

In response to market conditions, we have deemphasized our Aircraft Sales and Leasing business. We have not acquired any aircraft for lease since November 2007 and are committed to further reducing our investment in our aircraft portfolio."

Following are the highlights for each segment.

Aviation Supply Chain - Sales decreased 8.3% to $138.7 million for the third quarter and gross profit decreased 5.3% to $34.4 million. Gross profit margin increased to 24.8% compared to 24.0% last year. The sales decline reflects lower sales of big ticket items, including whole engines, lower volume at the Company's component repair business in Europe and unfavorable foreign currency translation. Together, these items contributed 6.8% of the sales decline in this segment. Sales at the Company's defense logistics business increased 5.2% during the third quarter.

Maintenance, Repair and Overhaul - Sales increased 2.9% to $77.0 million reflecting the impact of the acquisition of Avborne Heavy Maintenance (which now operates as AAR Aircraft Services-Miami) offset by lower sales at the Company's Indianapolis facility. As a result of previously announced issues at AAR Landing Gear Services, approximately $3.4 million in expected third-quarter sales were delayed to future quarters.

Structures and Systems - Sales increased 8.7% to $120.0 million in the third quarter and gross profit increased 8.2% to $17.7 million, resulting in a gross profit margin of 14.8%, consistent with the prior year. Sales were positively impacted by increased demand for military logistics handling systems, new mobility product offerings, and strong demand for command and control equipment as the Company began to manufacture and deliver on several large orders announced earlier in the year. Backlog in this segment increased 50% since May 31, 2008.

Aircraft Sales and Leasing - During the third quarter, the Company's aircraft position was reduced by one joint venture aircraft, which was disassembled, and currently consists of 26 aircraft held in joint ventures and seven held in the Company's wholly-owned portfolio. One additional joint venture aircraft is currently off lease and one wholly-owned aircraft will come off lease during the fourth quarter and will be disassembled. Consistent with our reduced emphasis on this business, the Company is considering combining the activities of this segment with the Aviation Supply Chain segment beginning next fiscal year.

Third quarter consolidated gross profit margin for the Company was 19.1% and the operating margin was 8.7%. Selling, general and administrative expenses as a percentage of sales increased from 9.0% in the prior year to 10.8% and included $1.9 million of severance associated with the elimination of certain positions, principally at the Company's component repair business in Europe. Annual savings from these reductions are expected to be approximately $2.5 million and will be fully realized next fiscal year. The Company does not expect significant severance costs in the fourth quarter.

During the third quarter, the Company retired $6.5 million of its convertible notes for $4.3 million, equating to a 9% yield to maturity. After taking into consideration unamortized debt issuance costs, the Company recorded a $2.1 million pre-tax gain on settlement of the notes. Also during the third quarter, the Company's effective income tax rate decreased to 27% due to a reduction in federal income taxes of $1.9 million primarily from research and development tax credits that it may now claim, and which were carried forward from fiscal years 2005 through 2008. The Company expects its effective income tax rate will be approximately 34% in the fourth quarter.

"We are encouraged by the flow of business from our commercial customers through the first two weeks of the new quarter and we continue to see steady demand for our products and services coming from defense and government customers," said Storch. "Our mobility systems business performed well in the third quarter and based on our visibility, we expect this business to remain strong into early FY2011. Additionally, our defense systems and logistics business is well positioned to assist the Department of Defense and tier-one suppliers as they look for efficient solutions to support their supply chain requirements."

Storch continued, "During the third quarter, we were a net investor, acquiring inventory and rotable assets and investing in fixed assets to support and grow our market position. As we enter the fourth quarter, we remain keenly focused on cash generation, liquidity and strengthening our balance sheet. Keeping this in mind, we will consider future purchases of our convertible notes as available at attractive terms."

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

AAR will hold its quarterly conference call at 7:30 a.m. CDT on March 18, 2009. The conference call can be accessed by calling 866-802-4355 from inside the U.S. or 703-639-1323 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 1335719) from 11:15 a.m. CDT on March 18, 2009 until 11:59 p.m. CST on March 25, 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, 2008 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            Three Months Ended          Nine Months Ended
     except per                February 28/29,            February 28/29,
     share data)              2009         2008          2009         2008
                                 (Unaudited)                (Unaudited)

    Sales                    $338,792     $376,626     $1,052,268     993,233
    Cost and expenses:
      Cost of sales           274,167      306,321        850,663     806,038
      Cost of sales
       - impairment
       charges                    ---          ---         21,033         ---
      Selling, General
       and administrative      36,579       34,007        111,582      95,610

    Earnings from Aircraft
     joint ventures             1,401        1,668          7,213       4,653

    Operating income           29,447       37,966         76,203      96,238

    Gain/(loss) on
     extinguishment of debt     2,109         (627)        25,317        (627)

    Interest expense            4,439        6,322         14,093      15,686
    Interest income
     and other                    308          184          1,170       1,770

    Income from
     continuing operations
     before income taxes       27,425       31,201         88,597      81,695

    Income tax expense          7,401       10,916         28,490      28,267
    Income from
     continuing operations     20,024       20,285         60,107      53,428

    Discontinued operations:
      Operating loss,
       net of tax                 ---          190            546         325
      Loss on disposal,
       net of tax                 ---          ---          1,403         ---
    Net income                $20,024      $20,095        $58,158     $53,103

    Earnings per share
     - Basic:
      Earnings from
       continuing operations    $0.53        $0.54          $1.58       $1.44
      Loss from
       operations                 ---          ---          (0.05)        ---
      Earnings per
       share - Basic            $0.53        $0.54          $1.53       $1.44

    Earnings per share
     - Diluted
      Earnings from
       operations               $0.48        $0.47          $1.43       $1.25
      Loss from
       operations                 ---          ---          (0.05)        ---
      Earnings per
       share - Diluted          $0.48        $0.47          $1.38       $1.25

    Average shares
     outstanding - Basic       38,043       37,228         38,067      36,991
    Average shares
     outstanding - Diluted     42,570       43,819         42,830      43,757

    Consolidated Balance Sheet Highlights      February 28,      May 31,
    (In thousands except per share data)          2009            2008
                                               (Unaudited)   (Derived from
                                                           audited financial

    Cash and cash equivalents                    $93,742        $109,391
    Current assets                               874,809         783,431
    Current liabilities (excluding debt
     accounts)                                   180,756         195,505
    Net property, plant and equipment            155,446         146,435
    Total assets                               1,399,356       1,362,010
    Total recourse debt                          478,517         479,544
    Total non-recourse obligations                39,979          51,368
    Stockholders' equity                         641,758         585,255
    Book value per share                          $16.58          $15.09
    Shares outstanding                            38,697          38,773

    Sales By Business Segment     Three Months Ended     Nine Months Ended
    (In thousands - unaudited)      February 28/29,       February 28/29,
                                   2009        2008       2009       2008

    Aviation Supply Chain       $138,737    $151,227   $438,333    $438,719
    Maintenance, Repair
     & Overhaul                   76,951      74,765    250,698     206,091
    Structures and Systems       120,033     110,452    351,514     266,733
    Aircraft Sales and Leasing     3,071      40,182     11,723      81,690
                                $338,792    $376,626 $1,052,268    $993,233

    Gross Profit (Loss) By
     Business Segment             Three Months Ended      Nine Months Ended
    (In thousands - unaudited)      February 28/29,         February 28/29,
                                    2009       2008        2009        2008

    Aviation Supply Chain         $34,394    $36,330    $105,756    $103,264
    Maintenance, Repair
     & Overhaul                    10,856     11,114      37,112      29,075
    Structures and Systems         17,748     16,402      54,058      36,307
    Aircraft Sales and Leasing      1,627      6,459   * (16,354)     18,549
                                  $64,625    $70,305    $180,572    $187,195

    * Includes $21 million aircraft impairment charge

    Diluted Earnings Per Share
     Calculation                   Three Months Ended    Nine Months Ended
    (In thousands except per share    February 28/29,     February 28/29,
     data)                           2009       2008      2009       2008
                                        (Unaudited)        (Unaudited)

    Income from continued
     operations                    $20,024    $20,285   $60,107    $53,428
    Add: After-tax interest on
     convertible debt                  346        466     1,107      1,449
    Income from continuing
     operations for diluted EPS
                                   $20,370    $20,751   $61,214    $54,877

    Diluted shares outstanding      42,570     43,819    42,830     43,757

    Diluted earnings per
     share from continuing
     operations                      $0.48      $0.47     $1.43      $1.25


Richard J. Poulton, Vice President, Chief Financial Officer of AAR CORP.

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