AAR Corp.

Good afternoon, ladies and gentlemen, and welcome to AAR's fiscal 2022 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. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. These risks and uncertainties are discussed in the company's earnings release and the risk factor sections of the company's Form 10-K for the fiscal year ended May 31, 2021, and Form 10-Q for the fiscal quarter of August 31, 2021. In providing the forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. Certain non-GAAP financial information will be discussed on the call today. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is set forth in the company's earnings release. At this time, I would like to turn the call over to AAR's President and CEO, John Holmes.

Great. Thank you very much, and good afternoon, everyone. I appreciate you joining us today to discuss our second quarter fiscal year 2022 results. Before discussing the results, I would like to comment on the overall environment. As you know, we're now seeing the spread of the Omicron variant, which is resulting in government restrictions that are impacting commercial passenger traffic. While the overall commercial passenger traffic market is recovering, the Delta variant and now the Omicron variant highlight that that path to full recovery will not be a straight line. Despite this dynamic environment, we have remained focused on our own execution and are proud of the multiple quarters of margin expansion and strong cash flows that we have delivered. Turning to this most recent quarter, Our sales increased 8% year over year from $404 million to $437 million, and our adjusted diluted earnings per share from continuing operations increased 71% from 31 cents per share to 53 cents per share. Demand for our MRO services has remained strong. Even as our MRO customers deal with changes to the bookings and schedules, they have remained focused on keeping the maintenance supply chain running smoothly. Our customers have also been supportive in recent price negotiations as we look to address the tightness in the labor market together. Part supply, which is our highest margin activity, had stable volumes throughout the quarter, albeit down from the levels we saw early in Q1 before the onset of the Delta variant. While overall the supply chain that supports our own operations at AAR is functioning well, we have seen extended turnaround times from some of our repair subcontractors as well as freight delays, which did cause some sales to move from Q2 to Q3. Regarding earnings, we delivered another quarter of margin expansion as our adjusted operating margin was 6.1% for the quarter. Sequentially, this is up from 5.5% in the first quarter despite a decline in sales. Even more importantly, our margin exceeded pre-COVID levels, even though our top line is still down significantly. To illustrate this, Our adjusted margin this quarter increased from 5.6% to 6.1% compared to two years ago prior to the pandemic, even though our adjusted revenue was down $127 million over that same period. This quarter's margin performance continues to validate the actions that we have taken over the past two years to drive efficiency in our operations, prioritize more profitable offerings, and exit underperforming activities. We expect continued margin expansion as our commercial parts demand fully recovers. Turning to cash, we had another strong quarter as we generated $16 million from operating activities from continuing operations. We also continued to reduce the usage of our accounts receivable financing program. Excluding the impact of the AR program, our cash flow from operating activities from continuing operations was $26 million. Over the last six quarters, we have generated a total of $142 million of cash flow from operating activities from continuing operations. Regarding new business, during the quarter, we announced a five-year renewal of our Fly D. By with Fly D. By to provide power-by-the-hour component support for a suite of 33 737 NGs. We also announced a sustainability initiative with Fortress Transportation and Infrastructure under which we will contribute a percentage of all USM sales from our CFM56 partnership to purchase carbon offset credits on behalf of our customers. This initiative both reflects our commitment to helping our customers reduce their carbon footprint and the fact that USM is a low-cost, green alternative to purchasing new parts. Finally, subsequent to the end of the quarter, we announced a 10-year, $365 million contract with the US Air Force to provide double level maintenance and repairs primarily for the F-16 aircraft based in Europe. We've been supporting F-16 for decades, but this program takes that support to a new level. The complexity and duration of this contract is a meaningful step above our prior F-16 support and will build past performance that allows us to pursue other programs of a similar nature. Before turning it over to Sean, I would like to also comment on the share repurchase program that we announced earlier this afternoon. As we've said before, our priorities for capital allocation are first, organic investment in our business, second, the addition of synergistic capabilities via acquisition, and third, with the return of capital to our shareholders. Our consistent cash flow generation and the strength of our balance sheet allow us to pursue all three, and this share repurchase program is part of our plan for driving long-term shareholder value. With that, I'd like to turn it over to our CFO, Sean Dillon, to discuss the quarter in more detail.

Thanks, John. Our sales in the quarter for $436.6 million were up 8.2% or $33 million year-over-year. Sales in our aviation services segment were up 8.9%, driven by recovery in our commercial markets, and sales in our expeditionary services segment were down $1.3 million. Our commercial sales were up 33% while our government sales were down 15. The decline in government sales was driven primarily by the level of activity on our program for the modification and sale of two C-40 aircraft to the U.S. Marine Corps in the year-ago quarter. Sequentially, our commercial sales declined 3.6% due primarily to the impact of the Delta variant on our parts supply activities, and our government sales declined 4.7% driven by the wind down of certain programs and the reduction of activity in Afghanistan. Gross profit margin in the quarter was 18% versus 17.2% in the prior year quarter, and adjusted gross profit margin was 16.7% versus 13.9% in the prior year quarter. This significant margin expansion was driven by the efficiency improvement and portfolio refinement actions that we have taken, and also reflects the benefit of closing out certain contracts in our commercial and government businesses. Gross profit margin in our commercial businesses was 17.3%, and gross profit margin in our government businesses was 18.9%. The adjustments in the corridor applied to both the commercial and government end markets, but were more heavily weighted towards commercial. SG&A expenses in the corridor were 47.1 million or 10.8% of sales. Excluding adjustments of 1.1 million related to severance and investigation and remediation costs, this would have been closer to 10.6% of sales in line with Q1 despite the decline in sales. SG&A is still approximately 10 million below the pre-COVID amount from Q2 of FY20. Going forward, we do not expect SG&A to grow in proportion to revenue. As a result, as the commercial demand environment recovers and we continue to win additional government business, we expect to be able to drive SG&A to 10% of sales or lower. Net interest expense for the quarter was $0.4 million compared to $1.3 million last year, driven by lower borrowings. Average diluted share count for the quarter was $35.6 million versus $35 million for the prior year quarter. As John indicated, we generated cash flow from our operating activities and continuing operations of $15.9 million and also reduced our accounts receivable financing program by $10 million in the quarter. During the quarter, we repaid our Canadian term loan of $24.7 million using our revolving credit facility, which further simplifies our debt capital structure. Our balance sheet remains exceptionally strong with net debt of $61.8 million and net leverage of 0.4 times. Regarding the share repurchase program, as indicated in our release earlier this afternoon, it's a $150 million authorization to acquire shares at management's discretion during open trading windows. and we intend to fully deploy the authorized amount over approximately the next two years. Thank you for your attention, and I will now turn the call back over to John.