AAR Corp.

Good afternoon, everyone, and welcome to the AAR's Fiscal 2020 Second Quarter Earnings Call. We're 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 risk factors section of the company's Form 10-K for the fiscal year ended May 31, 2019, In providing the forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. At this time, I would like to turn the call over to AARP's President and CEO, John Holmes.

Great. Thank you very much. And good afternoon, everyone. We really appreciate you all being here to join us today to discuss our second quarter FY20 results. In the second quarter FY20, sales grew by 13.7%. from $493.3 million to $560.9 million. Our adjusted diluted earnings per share from continuing operations increased from $0.60 a share to $0.64 per share. We had a great quarter, and I am really pleased with our overall results. Once again, we saw exceptionally strong performance from our trading activities as we continued to use our global network to source the highest demand material to support our long-term customer contracts. We saw strong results from our distribution activities as well, having benefited from the maturation of contracts secured over the last several quarters. We also continued to see solid growth from our government programs activities. The WASP and landing gear PBL contracts in particular are performing very well operationally and are allowing us to build solid past performance as a foundation to capture more government opportunities. The second quarter was also our fourth consecutive quarter of improved performance in our MRO business. The actions taken to address the shortage of mechanics, such as enhancing our recruiting efforts, partnering with various schools, and repositioning elements of our workforce across our network have paid off, and we are seeing benefits of those actions now. In addition to the strong financial performance, we also announced several new awards during the quarter. Our Aaron Mars subsidiary, a provider of component repair cycle management solutions, announced two new contracts. The first was with Alaska Airlines for Airvolution, which is a software platform that enables the customer to increase efficiency and reduce costs by increasing visibility into their component repair cycle. Airvolution is our first software as a service offering, or SaaS, and I'm thrilled to have Alaska using our platform. In addition to this award, we continue to see very significant revenue growth for our other businesses, through the digital channels that we have built over the last two years. Aramar also signed a contract with JetBlue to provide component value engineering to help reduce repair costs. We're excited about these two awards as they represent new services to existing customers, which validates our integrated services model. Finally, we expanded our component repair services agreement with BAE Systems to include a wider range of components for its regional jet support programs. BAA cited our consistent cost savings and the high quality delivered by our Amsterdam facility as the basis for this expansion. Before turning it over to Sean, I would like to provide an update on the sale of our airlift COCO business, which is in discontinued operations. I'm pleased to share that we have completed the sale of all of our DOD contracts and are awaiting regulatory approval for one remaining foreign contract, which we expect to receive soon. Once received, the exit of our airlift COCO business in discontinued operations will be complete. With that, I'll turn it over to our CFO, Sean Gillen.

Thanks, John. Our sales in the quarter of $560.9 million were up 13.7% or $67.6 million year over year. This included a $69.1 million or 14.9% increase in aviation services revenues driven by execution on new contract awards and strong demand in our parts supply activities. Gross profit increased 9.7% or $7.6 million to $85.9 million. Gross margin within aviation services remained relatively flat at 16.1% for the quarter, which was favorably impacted by improvement in MRO and offset by some mix in government services and increased costs in certain commercial PBH programs. While we did see increased costs in certain programs, some of the increase can be attributed to improving the operational turnaround time by more quickly closing repair orders. We are taking actions to address these increased costs, such as optimizing our vendor network and inventory pool, as well as insourcing repair work. Consolidated gross margin was 15.3% versus 15.9% in the prior year period, primarily due to expeditionary services. Our mobility activities had a softer quarter due to a contract war not being finalized in the period and some operational challenges, including raw material inflation and warranty issues. Our composite activities also had weaker performance due to mixed labor inefficiency and higher freight costs. While overall performance should recover in the second half of the year, we are taking action to reduce overhead as well as evaluating opportunities to reduce fixed costs. SG&A expenses were 10.2% of sales versus 10.0% in the prior period, which was largely driven by investigation and compliance-related costs. Excluding investigation and severance costs, which totaled $3.3 million, SG&A would have been 9.6% of sales in the quarter. Our income tax expense during the quarter was $6 million, resulting in an effective tax rate of 23%. Net interest expense was $1.8 million compared to $2.4 million last year due to lower borrowings and rates. During the quarter, our cash flow provided from operating activities from continuing operations was $19.9 million, which improves $35.3 million from the prior year, excluding the impact of the accounts receivable financing program, which was relatively flat this quarter. During the quarter, we returned $6.7 million to shareholders via a dividend for $0.075 per share, or $2.6 million, and repurchased 100,000 shares for $4.1 million. The balance sheet remains strong with net debt at $160.1 million and net leverage at 0.9 times. Before handing the call back to John, I want to provide an update on the Department of Justice investigation at Airlift regarding potential violations of the False Blames Act. which we disclosed in 2018 and with which we have been cooperating. We have recently entered into settlement discussions with the DOJ. We are happy to take a step towards resolving this matter. However, there is no assurance that any settlement will be achieved. We will keep you updated as these discussions progress. Thank you for your attention, and I will now turn the call back over to John.