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Press release

September 15, 2010

AAR Reports First Quarter Fiscal Year 2011 Results

  • First quarter sales of $412 million, up 21% year-over-year and 11% sequentially
  • Diluted earnings per share of $0.35, up 30% year-over-year and 21% sequentially

WOOD DALE, Ill., /PRNewswire via COMTEX/ --AAR (NYSE: AIR) today reported fiscal year 2011 first quarter consolidated sales of $412.2 million and net income of $13.7 million, or diluted earnings per share of $0.35. During the first quarter of the prior fiscal year, the Company reported sales of $341.5 million and net income of $10.2 million, or diluted earnings per share of $0.27.

Sales to government and defense customers increased 45% over last year and were driven from sales at Aviation Worldwide Services (AWS), which was acquired in the fourth quarter of fiscal 2010, and growth at the Company's defense logistics business. Sales to commercial customers were flat versus a year ago. On a consolidated basis, organic sales growth was 2% compared to the prior year period.

Following are the first quarter highlights for each segment:

Aviation Supply Chain - Sales were $108.1 million versus $110.6 million in the prior year. Prior year's sales in this segment included a $5.3 million sale of the Company's interest in an aircraft leveraged lease. Gross profit was $20.1 million compared to $16.0 million in the prior year, and the gross profit margin was 18.6% compared to 14.4%. Prior year's gross profit was unfavorably impacted by the sale of the interest in the aircraft leveraged lease.

On a sequential basis, sales and gross profit increased 5% and 18%, respectively, as sales in the Company's aftermarket parts business improved reflecting a modest recovery in the commercial market, as well as the Company's industry leading position.

Government and Defense Services - Sales were $129.3 million versus $36.7 million last year. Gross profit was $23.0 million compared to $7.7 million in the prior year, and the gross profit margin was 17.8% compared to 21.0%. On a sequential basis, sales and gross profit increased 61% and 36%, respectively.

The increase in sales was largely driven by revenue from AWS, which was acquired in April 2010, as well as growth in the Company's defense logistics business due to the ramp up of the KC-10 program. The decline in the gross profit margin was due to lower margins at the defense logistics business.

During the first quarter, AWS added five aircraft to its fleet to support recently awarded contracts. Four of these five aircraft were deployed during the first quarter and contributed to first quarter results, and the fifth aircraft is expected to be deployed in the second quarter.

Maintenance, Repair and Overhaul(MRO) - Sales were $76.8 million versus $79.2 million last year. Gross profit was $10.1 million compared to $10.5 million in the prior year, and the gross profit margin was 13.2% compared to 13.3%. On a sequential basis, sales and gross profit declined 4% and 5%, respectively. Based on aircraft currently in the Company's hangars and customer commitments for heavy maintenance checks, the Company expects year-over-year and sequential sales and margin growth in the MRO segment in the second quarter of this fiscal year.

Structures and Systems - Sales were $98.0 million versus $114.9 million last year. Gross profit was $17.6 million compared to $19.8 million in the prior year, and the gross profit margin was 18.0% compared to 17.2%. On a sequential basis, sales and gross profit declined 10% and 20%, respectively. The decrease in sales and gross profit was due to the expected decline at the Company's mobility products business.

Operating income margin improved to 6.8% in the first quarter from 5.0% last year and 6.4% in the fourth quarter. Selling, general and administrative expenses improved as a percentage of sales to 10.4% compared to 10.8% in the prior year, and 11.5% in the fourth quarter.

The Company generated $7.2 million in cash flow from operations during the first quarter while investing in inventory and rotable spares to support future growth. Net interest expense increased $1.0 million year-over-year, principally due to an increase in average outstanding borrowings compared to a year ago, as well as non-cash interest expense on the Company's outstanding convertible notes. The effective income tax rate increased to 35.0% during the first quarter from 23.0% a year ago as the prior year's effective tax rate benefited from the tax impact of the sale of the Company's interest in the aircraft leveraged lease.

During the first quarter, the Company purchased 150,000 shares of its common stock on the open market pursuant to a Board of Directors stock repurchase authorization, at an average acquisition price of $16.92. There are approximately one million shares remaining under the current stock repurchase authorization. Additionally, the Company retired $6 million par value of its 2.25% convertible notes for approximately $4.7 million in cash. The resulting gain on extinguishment of debt, after applying the provisions of the accounting standards for convertible debt, was $0.1 million.

"We are encouraged by our first quarter results and believe they reflect the early stages of recovery in demand for commercial aviation products and services. As the commercial market recovery continues to develop, we expect that our financial results will continue to improve," said David P. Storch, Chairman and Chief Executive Officer of AAR CORP.

Storch continued, "We are also pleased with the results of AWS which is performing ahead of plan. This acquisition allows us to achieve a more strategic balance between products and services offered to our government and defense customers. During the first quarter, in this business we made additional investments in new aircraft to support recent contract awards and in rotable spares to improve the operational readiness of the existing fleet."

AAR is a leading provider of products and value-added services to the worldwide aerospace and government/defense industry. With facilities and sales locations around the world, AAR uses its close-to-the-customer business model to serve aviation and government/defense customers through four operating segments: Aviation Supply Chain; Government and Defense Services; 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. CDT on September 16, 2010. The conference call can be accessed by calling 866-802-4321 from inside the U.S. or 703-639-1318 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 1479894) from 11:30 a.m. CDT on September 16, 2010 until 11:59 p.m. CDT on September 23, 2010.

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, 2010 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
    (In thousands except per share data -
     unaudited)                                         August 31,
    -------------------------------------
                                                     2010          2009
                                                     ----          ----

    Sales                                        $412,197      $341,523
    Cost and expenses:
         Cost of sales                            341,309       287,500
         Selling, general and administrative       42,705        36,892

    Earnings from aircraft joint ventures              28            83
                                                      ---           ---

    Operating income                               28,211        17,214

    Gain on extinguishment of debt                     97           913

    Interest expense                                7,431         6,557
    Interest income                                   160           316

    Income from continuing operations before
     income taxes                                  21,037        11,886
    Income tax expense                              7,363         2,728
                                                    -----         -----
    Net income attributable to AAR and
     noncontrolling interest                       13,674         9,158
    Loss attributable to noncontrolling
     interest                                         ---         1,046
                                                      ---         -----
    Net income attributable to AAR                $13,674       $10,204
                                                  =======       =======

    Share Data:
    Earnings per share - Basic:
         Earnings per share - Basic                 $0.36         $0.27
                                                    =====         =====

    Earnings per share - Diluted:
         Earnings per share - Diluted               $0.35         $0.27
                                                    =====         =====


    Average shares outstanding - Basic             38,411        38,090
    Average shares outstanding - Diluted           42,854        42,574
    ====================================           ======        ======





    Consolidated Balance Sheet Highlights        August 31,         May 31,
    (In thousands except per share data -
     unaudited)                                         2010             2010
    -------------------------------------               ----             ----

    Cash and cash equivalents                        $52,155          $79,370
    Current assets                                   872,263          863,429
    Current liabilities (excluding debt
     accounts)                                       233,355          224,717
    Net property, plant and equipment                250,492          224,866
    Total assets                                   1,532,733        1,501,042
    Total recourse debt                              429,876          419,732
    Total non-recourse obligations                    17,101           17,292
    Stockholders' equity                             759,659          746,350
    Book value per share                              $19.15           $18.90
    Shares outstanding                                39,663           39,484



    Sales By Business Segment                   Three Months Ended
    (In thousands)                                August 31,
    --------------                                ----------
                                                        2010             2009
                                                        ----             ----
    Aviation Supply Chain                           $108,070         $110,637
    Government and Defense Services                  129,330           36,743
    Maintenance, Repair & Overhaul                    76,819           79,217
    Structures and Systems                            97,978          114,926
                                                      ------          -------
                                                    $412,197         $341,523
                                                    ========         ========



    Gross Profit by Business Segment            Three Months Ended
    (In thousands)                                August 31,
    --------------                                ----------
                                                        2010             2009
                                                        ----             ----
    Aviation Supply Chain                            $20,127          $15,965
    Government and Defense Services                   23,022            7,705
    Maintenance, Repair & Overhaul                    10,107           10,539
    Structures and Systems                            17,632           19,814
                                                      ------           ------
                                                     $70,888          $54,023
                                                     =======          =======



    Diluted Earnings Per Share Calculation      Three Months Ended
    (In thousands except per share data)          August 31,
    ------------------------------------          ----------
                                                        2010             2009
                                                        ----             ----
    Net income as reported                           $13,674          $10,204
    Add: After-tax interest on convertible
     debt                                              1,371            1,288
                                                       -----            -----
    Net income for diluted EPS calculation           $15,045          $11,492
                                                     =======          =======

    Diluted shares outstanding                        42,854           42,574

    Diluted earnings per share                         $0.35            $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 sales growth for the three months ended August 31, 2010 is more representative of the Company's and the Government and Defense Services Segment's organic sales growth as it excludes sales related to acquisitions.

    AAR CORP.                                             Three Months Ended
    (In thousands)                                            August 31,
    --------------                                            ----------
                                                          2010           2009
                                                          ----           ----

    Sales as reported                                 $412,197       $341,523
    Less: sales from acquisitions                       65,269            ---
    Adjusted sales                                    $346,928       $341,523
                                                      ========       ========

    Sales growth as reported                                21%

    Organic sales growth                                     2%

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