AAR Corp.

Good afternoon, ladies and gentlemen, and welcome to AAR's Fiscal 2020 First Quarter Earnings Call. We are joined today by John Holmes, President and Chief Executive Officer, and Sean Gillen, Chief Financial Officer. Before we begin, I would like to remind you that the comments made during the call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, as noted in our news release and the As noted in our news release and the risk factor sections of the company's form, 10K for the fiscal year ended May 31, 2019. In providing a forward-looking statement, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. At this time, I'd like to turn the call over to AARP's President and CEO, John Holmes.

Great. Thank you very much. Good afternoon, everybody. I really appreciate you all being here and joining us today to discuss our Q1 FY20 result. Our positive momentum continued with another quarter of double-digit sales growth. In the first quarter of FY20, sales grew 16% from $466.3 million to $541.5 million. Our adjusted diluted earnings per share from continuing operations increased from $0.54 per share to $0.57 per share. We continue to see exceptional performance from our Park Supply and Government Programs activities. In MRO, as you know, we took several actions last year to address labor shortages, such as enhancing our recruiting efforts, partnering with various schools, and repositioning elements of our workforce across our network. We are pleased with the positive impact of these actions, which resulted in our third quarter of improvement in MRO. We are also pleased with the support that we received from our customers to better level-load the maintenance schedule throughout the year. This allowed us to keep more of the workforce in place during the slower summer season. During the quarter, we were awarded a $118 million contract from the Naval Air Systems Command in support of the U.S. Marine Corps for the procurement, modification, and delivery of two C-40 aircraft. This award demonstrates the power of our integrated services model by combining the strengths of our parts supply, government programs, MRO, and engineering teams to deliver a creative solution to the U.S. Marine Corps. The ability to deliver an overhaul versus factory new solution not only differentiates AAR from our competitors in the defense space, but also demonstrates our ability to once again apply commercial best practices to deliver a more cost-effective solution to the U.S. government. We began work under this contract this past quarter, and we expect to deliver the aircraft in our fiscal 2021. Subsequent to the quarter end, we announced a new parts distribution award from Leach Corporation, which is a wholly owned subsidiary of Transdime. As part of this agreement, AAR OEM Solutions will be the company's main distributor for electromechanical and solid-state switchgears to OEMs for new production, as well as to both the commercial and military aftermarket. This is an important win for the company and reaffirms the strength of our value proposition in parts supply and distribution. We also announced a new agreement with Mitsubishi Heavy Industries Aero Engines to supply PW4000 engine parts in support of their engine overhaul business. This is our largest commercial contract in Japan to date, and we're particularly proud about this win because it allows us to support the demand for engine parts in this growing market. We continue to execute on our growth strategy, and we're pleased with the progress as we continue to secure and execute on new business wins, and we're very excited about the strong start to FY20. With that, I'll turn it over to our CFO, Sean Gilton.

Thanks, John. Our sales in the quarter of $541.5 million were up 16% or $75.2 million year-over-year. This included a $73.4 million or 17% increase in aviation services revenues driven by execution on new contract awards and strong demand in our parts supply activities. The C40 award contributed approximately $19 million of sales in the quarter. Gross profit increased 14.6%, or $10 million, to $81.6 million. Gross margin was 15.1% versus 15.3% in the prior year period, primarily due to expeditionary services. Gross margin within aviation services, however, improved from 15.3% to 15.6%. I would note that the C40 award, while relatively in line with operating income margins and accretive to ROIC, is a bit dilutive to gross margins. SG&A expenses were 10.7% of sales versus 10.3% in the prior period, which reflects increased investigation and compliance-related costs mentioned in the previous quarter, as well as some additional sales and quality resources. Excluding the investigation and severance costs, which totaled $3.6 million, SG&A would have been 10.1% of sales in the quarter. Regarding the investigation, we have received requests for information from the government agencies involved, which we are fully cooperating with. Beyond that, we cannot provide further detail at this time. Our income tax expense during the quarter was favorably impacted by tax benefits of 1.4 million related to the vesting of restricted shares and stock option exercises. This compares to a similar tax benefit of 2.5 million related to stock compensation prior year's quarter. Net interest expense was 2.1 million compared to 1.6 million last year. During the quarter, our cash flow used from operating activities from continuing operations was 30 million which improved $20 million from the prior year, excluding the impact of the accounts receivable financing program, which was flat in this quarter. The cash used in this quarter was primarily driven by investments in inventory to support our parts supply activities, as well as some normal seasonality in MRO. We feel good about the strength of the balance sheet. Net debt ended the quarter at $163.4 million, with net leverage below one-turn. In addition, I am pleased to share that we entered into an extension of our revolving credit facility, which will add an additional three years to the term and $100 million of borrowing capacity. Our lowest pricing will also decrease from LIBOR plus 100 basis points to LIBOR plus 87.5 basis points, with no other significant changes. Details of the extension will be filed this week. Finally, we are still on target to close the sale of our COCO business before the end of calendar 2019. The exit of this business is consistent with the realignment of our strategy to COCO. Thank you for your attention, and I will now turn the call back over to John.