AAR Reports Third Quarter Fiscal Year 2014 Results

• Third quarter sales of $474.4 million, down 8.8% from prior year
• Diluted earnings per share of $0.45, down $0.01 from prior year
• Several new contract awards valued at $215.0 - $230.0 million in annual revenue

WOOD DALE, ILLINOIS — AAR (NYSE: AIR) today reported third quarter fiscal year 2014 consolidated sales of $474.4 million and net income of $17.9 million, or $0.45 per diluted share. For the third quarter of the prior fiscal year, the Company reported sales of $520.2 million and net income of $18.4 million, or $0.46 per diluted share. Third quarter fiscal year 2014 results included a $2.7 million tax benefit and a $0.7 million reduction in net income due to the impact of a weaker U.S. dollar.

“After strong second quarter results, we experienced a challenging third quarter in both of our segments,” said David P. Storch, Chairman and Chief Executive Officer of AAR CORP. “The decline in sales in the Aviation Services segment resulted from lower MRO sales principally due to the completion of a significant engineering services program in the second quarter of fiscal year 2014, and lower landing gear revenues from unfavorable timing of gear removals. Also, as anticipated, our airlift business experienced reduced sales due to a lower number of contracted positions during the period. Finally, we restructured a supply chain management program with a key airline customer converting it from a “Time and Material” based contract to a “Power-by-the-Hour” program. This change reduced revenues and had modest impact on program profitability. In our Technology Products segment, as expected, we experienced lower sales in our mobility products business that were partially offset by sales growth in cargo systems.”

Storch continued, “Historically, our business activities experience rotations driven by customer requirements and shifting markets. As the near term demand for airlift and certain MRO services decline, we see an increase in supply chain activity, including new deals signed during and after quarter end, that will contribute to future revenues. Also, the impact of the revenue decline on earnings this quarter was reduced by aggressive cost management and operational efficiencies, particularly at airlift where we experienced a revenue decline, but higher operating margins.”

Sales in the Aviation Services segment declined 9.9% to $367.8 million, and sales in Technology Products were $106.6 million, a decline of 4.8% in comparison to the prior year quarter sales of $112.0 million.

During the quarter, and subsequent to the quarter end, the Company announced the following wins with aggregate value of $215.0 - $230.0 million in annual revenue:

• On December 11th, a five-year contract to become the sole supplier of a select group of consumable and expendable parts for a major U.S. airline. This program began in the third quarter and will be fully transitioned by the end of the fourth quarter.
• On December 18th, an exclusive agreement with EATON to supply fluid distribution products to the Defense Logistics Agency. Revenues under this program will begin in the fourth quarter of this fiscal year and will be fully transitioned by the first quarter of fiscal 2015.
• On February 20th, a contract with the U.S. Air Force and on February 27th a contract with the U.K. Ministry of Defense for production and repair of cargo pallets. Revenues under these programs will start at the end of the fourth quarter and are expected to fully ramp in fiscal 2015.
• On March 20th, acquisition of inventory and customer contracts from Sabena technics Brussels, including ongoing power-by-the-hour support for 13 customers, across Europe, Middle East and Africa region. The Company expects to close the transaction in the first week of April 2014.
• On March 20th, a 12-year agreement including rotable inventory power-by-the-hour support, heavy maintenance, and wheel and brake services for a fleet of 30 new Embraer 175 aircraft operated by Mesa Airlines. The program will begin in the fourth quarter and ramp up as the customer takes delivery of aircraft and the fleet matures.

Third quarter sales to commercial customers represented 61% of consolidated sales, compared to 62% of consolidated sales in the third quarter of last year, while sales to government and defense customers represented the balance. In Aviation Services, sales to commercial customers represented 62% of segment sales, while in Technology Products sales to commercial customers represented 58% of segment sales.

Consolidated gross profit margin was 16.6% for the third quarter compared to 14.6% last year. Aviation Services segment gross profit margin was 16.2%, up from 14.5% in the prior year period, and Technology Products gross profit margin improved to 18.1% from 15.4% in the prior year period.

Selling, general and administrative expenses as a percentage of sales were 9.6% for the third quarter compared to 8.0% last year. Operating income in the third quarter was $33.7 million, a margin of 7.1%, compared to $37.6 million, or 7.2% of sales in the prior year period.

Net interest expense for the quarter was $10.4 million compared to $9.8 million in the third quarter of last year. As of February 28, 2014, net debt was $599.7 million, representing a reduction of $75.7 million from the end of the third fiscal quarter in 2013 and $33.6 million from May 31, 2013. Subsequent to the quarter end, the Company retired its previously outstanding $68.4 million of 1.625% convertible notes. As a result, the Company expects reduced interest expense of approximately $1.3 million in the fourth quarter.

In the third quarter, the Company generated $10.3 million in cash flow from operations, despite making significant investments to support new program wins. Further, AAR’s free cash flow was $3.4 million with capital expenditures of $6.9 million. The Company paid cash dividends of $3.0 million in the quarter.

Storch concluded, “While I am disappointed with our revenue performance in the quarter, I am pleased about several new program wins that will position the Company for future growth. For the remainder of this fiscal year, we expect our Aviation Services segment to experience continued pressure in airlift and MRO operations, and renewed strength in supply chain. In Technology Products, we expect stronger results in the fourth quarter for mobility products and continued good performance in cargo systems. We remain very optimistic about the long-term opportunities and prospects for the Company.”

Company Guidance

The Company is adjusting its full year 2014 revenue guidance down to $2.000 - $2.050 billion while reducing its diluted earnings per share guidance to $1.79 to $1.82 per share. This revision reflects the actual third quarter results and expectations for fourth quarter performance.

Conference Call Information

AAR will hold its quarterly conference call at 3:45 p.m. CST on March 20, 2014. The conference call can be accessed by calling 866-802-4322 from inside the U.S. or 703-639-1319 from outside the U.S. A replay of the conference 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 1623126). The replay will be available from 8:15 p.m. CST on March 20, 2014, until 11:59 p.m. CST on March 27, 2014.