AAR Corp.

Good afternoon, ladies and gentlemen, and welcome to AAR's FASCAL 2020 Third 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 Reformed Act of 1995, as noted in the company's news release and the risk factor successions of the company's Form 10-K for the fiscal year ended May 31, 2019, and Form 10-Q for the fiscal quarter ended February 29, 2020. 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 AAR's president and CEO, John Holmes. You may begin.

Great. Thank you very much, and good afternoon, everyone. I really appreciate you all joining us today to discuss our Q3 FY20 results. Before I get into the details of the quarter, I'd like to make some comments regarding COVID-19. First, our thoughts are with all of those who have been directly impacted and our appreciation goes out to the healthcare workers around the world who are fighting the front lines on this. As you know, this is an unprecedented situation for the global aviation industry. AAR enters this uncertain period from a position of strength. We have a diverse business mix with approximately 35% of sales from government customers and meaningful commercial sales to cargo carriers. We also have a strong balance sheet with less than one times net leverage significant liquidity, and strong customer relationships. That said, we expect a sizable impact to our commercial airline business as a result of the decrease in commercial air traffic. In order to proactively address the anticipated impact of COVID-19, we are taking steps to ensure that costs remain aligned with the decreasing demand. These steps include a hiring freeze, reducing or eliminating all non-essential spend, reducing executive compensation, furloughs, and unfortunately, reductions in our workforce. That said, we remain prepared to take additional action as warranted to respond to the evolving business environment. With respect to potential government assistance, I have been in direct contact with members of both the House and the Senate, as well as the administration, regarding potential support, not just for the airlines, but also for the broader aviation industry. As you know, we have worked diligently over the last several quarters to enhance our recruiting efforts develop training programs, and partner with various schools to create a pipeline for technicians. Given our focus and success in building and retaining a skilled workforce, we are particularly supportive of all government measures aimed at preserving jobs. The safety and health of our people, as well as our customers and vendors, is a top priority. We are closely following CDC guidelines and have enacted remote working, social distancing, and related business continuity plans across all of our offices and facilities. These measures, combined with the overall business climate, create a great deal of uncertainty and stress for our people, and I really want to take this opportunity to thank the employees at AAR for their hard work, dedication, and flexibility as we go through this difficult time. I'm very proud to be part of the best team in aviation. Turning to our results, we had a record third quarter, and I'm pleased with the overall performance. Sales grew 4% from $530 million to $553 million, and our adjusted diluted earnings per share from continuing operations increased from $0.62 per share to $0.67 per share. These strong results were driven by continued exceptional performance from our government programs, parts supply, and MRO activities. In the quarter, we announced several new business wins, which demonstrate that AR continues to be the partner of choice in the aviation services industry. Specifically, We announced plans to expand our airframe maintenance services with Air Canada to cover its A330 fleet. Additionally, AeroControlX, the large manufacturer of critical components to the aviation industry, selected AAR to be its exclusive global distributor for the APU lube pump product line. We have strong aftermarket expertise in these particular products and are already seeing results from this significant growth opportunity. Finally, we secured a $90 million sole source IDIQ contract with the Defense Logistics Agency for specialized shipping and storage containers as well as accessories. As described in the release, there are several restructuring actions that we have taken and will take to continue to improve the performance and strength of AAR. As we have previously discussed, we have seen increased costs in certain commercial programs contracts, which were adversely impacting our financial results. We've taken decisive action to exit one contract and restructure two others, which will allow us to free up capital, improve cash flow, and increase margins. These actions resulted in a one-time, predominantly non-cash charge of $24.7 million. We've also made the decision to pursue several additional restructuring actions in our fiscal Q4, which involve consolidating facilities to further reduce costs. Before turning over to Sean, I'm pleased to share the subsequent to the quarter end We completed the sale of our final contract within the Cocoa Airlift business. As previously discussed, this completes the exit of that business as part of our strategic shift, and we are pleased to have that element of our plan complete. With that, I'll turn it over to Sean, our CFO.

Thanks. Thanks, John. Our sales in the quarter of $553.1 million were up 4.5% for $23.6 million year over year. This included a 33 million or 6.6% increase in aviation services revenues, primarily driven by execution on government contracts, which represent approximately 35% of our revenue. Improvement in MRO volumes and strong demand in our parts supply activities also contributed to the increase. As John mentioned, in our commercial programs business, we terminated one contract and restructured two other contracts during the quarter. These actions resulted in a one-time, predominantly non-cash charge of $24.7 million, which shows up in the P&L as a reduction in revenue of $9.8 million and the establishment of forward loss reserves and other related charges in cost of sales of $14.9 million. Aviation services gross profit decreased to $16.5 million, which was driven by the one-time $24.7 million charge. Excluding this charge, our profit would have increased by $8 million. Each of government programs, MRO, and parts supplies gross profit increased year over year. Gross profit within expeditionary services decreased 3.5 million. While we had expected a recovery in this segment this quarter, we continued to experience a delay in a large contract award and certain operational challenges. We are taking restructuring actions in Q4 to reduce fixed costs and overheads. Within Expeditionary Services, we will consolidate facilities, which will improve production efficiencies, eliminate excess capacity, and significantly decrease our overhead and fixed costs. We expect these restructuring actions, along with our current backlog, to result in improved performance going forward. Additionally, as John discussed, in the fourth quarter, we have initiated cost reduction actions in light of COVID-19, which include a hiring freeze, reducing or eliminating all nonessential spend, reducing executive compensation, furloughs, and reductions in force. In total, we expect the facilities consolidation and COVID-19 related deaths to result in one-time costs of approximately 15 to 20 million pre-tax in the fourth quarter, with the payback on these actions realized within one year. In the quarter, SG&A expenses were 10.5% of sales versus 10.3% in the prior period, with the increase largely driven by investigation and compliance-related costs. Excluding investigation and severance costs from both periods, SG&A would have been 9.9% of sales in the current quarter compared to 10.1% in the prior year quarter. Net interest expense was $2.3 million compared to $2.4 million last year due to lower borrowings in the current year, partially offset by higher rates. During the quarter, our cash flow provided from operating activities from continuing operations was $9.7 million. We continue to invest in inventory to support our parts supply activities. Additionally, as we performed under a certain government program contract that paid in advance last year, we significantly reduced our deferred revenue on the program, which resulted in less cash flow than the prior year period. During the quarter, we returned 2.6 million to shareholders via a dividend of 7.5 cents per share. Our balance sheet remained strong with net debt at 171.1 million and net leverage 0.9 times. Earlier this year, we upsized our revolver by 100 million to 600 million, and extended the maturity to September 2024. Our only other maturity is a $23 million term loan due November 2021. As of the end of the quarter, we had total liquidity of $432 million, which included unrestricted cash of $37 million and revolver availability of $395 million. In addition, we had net capacity available under our accounts receivable facility of $92 million. Thank you for your attention, and I will now turn the call back over to John.