AAR Corp.

Good afternoon, everyone, and welcome to AAR's fiscal 2023 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, 2022, and Form 10-Q for the fiscal quarter ended August 31, 2022. 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 in the call today.

reconciliation of these non-gap measures the most comparable gap measures that 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 and good afternoon everybody i appreciate you joining us today to discuss our second quarter fiscal year 2023 results sales for the quarter were up eight percent from 437 million dollars in the prior year quarter to 470 million dollars And adjusted diluted earnings per share from continuing operations were up 30%, from $0.53 per share to $0.69 per share. Our sales to commercial customers increased 21%, and our sales to government and defense customers decreased 12%. Sequentially, sales to commercial customers increased 6%, and sales to government customers increased 3%. I'm pleased that we continue to see progress in the recovery of our commercial volumes, notwithstanding the fact that global flights are still down approximately 20% from 2019 levels. In particular, in our parts activities, we saw sequential improvement in the demand for both USM and new parts distribution. While this is encouraging, we are even more encouraged by the opportunity for further improvement as the volume in these activities is still down over 20% from our FY20 levels. On top of this, we expect the full ramp-up of our new distribution agreements and the increased adoption of USM to provide growth opportunities beyond the market recovery. In MRO, we were able to generate sequential growth driven by facility optimization and growth in the non-hanger portions of our MRO operations. Our government sales continue to reflect the prior wind-down of certain programs, including Afghanistan, but I am pleased that we returned to sequential growth this quarter. With respect to margin, we delivered another strong quarter as our operating margin was 7.6% on an adjusted basis, up from 6.1% last year and 6.9% last quarter. This reflects our commitment to cost discipline, a mixed shift towards parts, which is our highest margin activity, and outperformance on certain programs. We do continue to experience labor market tightness, but that appears to be stabilizing, and the programs that we established years ago to create a proprietary set of labor pipelines continue to serve us well. In addition, we are engaging with our customers regarding price increases for calendar year 2023 in order to address the higher labor costs we are experiencing. As we indicated during last quarter's call, we had compelling opportunities during the quarter to invest in new long-term business and in attractive USM assets. These investments totaled approximately $60 million in the quarter, which drove a use of cash in operating activities from continuing operations of $46 million. We also repurchased $28 million of stock in the quarter under our share repurchase program. Even after the investments and the share repurchase, our net leverage was 0.9 times EBITDA, and we continue to have significant balance sheet strength and flexibility. Among the investments in new long-term business, that we announced during the quarter was the expansion of our distribution relationship with Unison. This significant new agreement broadens our long-term distribution of select Unison igniter plugs, ignition leads, harnesses, and related spare parts to now cover all aftermarket customers worldwide. Also during the quarter, we announced a new multi-year flight hour component support agreement with FlightEvi, which expands our support to include the new addition of FlightEvi's growing fleet of 737 MAX aircraft. Finally, we signed a new RMR agreement with Philippines-based low-cost carrier Cebu Pacific to provide a full suite of services covering both aircraft, warranty management, and value engineering. Before I turn it over to Sean, I would like to comment on the inclusion in the DOD's FY23 National Defense Authorization Act of a provision stating that the Navy and Air Force will implement processes and procedures for acquiring used serviceable material to support their commercial, derivatives, aircraft, and engines. Historically, the U.S. government has acquired mainly new aircraft and new aircraft parts. This legislation institutionalizes the process for the DOD to consider the use of USM as a better value solution whenever it's available and is an initial step in the unlocking of a significant untapped market for our used parts offerings. Over the years, we have found great partners in Congress on a variety of initiatives, and I would like to thank them for their work on this important opportunity to drive taxpayer value. With that, I'll turn it over to our CFO, Sean Gillen, to discuss the results in more detail.

Thanks, John. Our sales in the quarter of $469.8 million were up 7.6% for $33.2 million year-over-year. Our commercial sales were up 21%, while our government sales were down 11.7% due to the completion of certain government programs, including our Afghanistan contracts. Sequentially, our commercial sales were up 6.2%, and our government sales were up 3.5%. Gross profit margin in the quarter was 18.3% versus 18% in the prior year quarter, and adjusted gross profit margin was 18.8% versus 16.7% in the prior year quarter. Gross profit margin in our commercial business was 18.4%, and gross profit margin in our government business was 18%. The increased margins in the quarter reflect continued strong performance in our parts supply and MRO activities, as well as favorable cost performance on certain commercial and government contracts, driving higher contract profitability in the period. Net G&A expenses in the quarter were $52.8 million. This figure includes continuing investments in our digital initiatives, as well as $1.1 million related to investigation and remediation matters. Net interest expense for the quarter was $2 million compared to $0.4 million last year, driven by higher interest rates and borrowings. As John indicated, cash used in operating activities from continuing operations was $45.9 million, driven by investment in new long-term business wins and the acquisition of inventory to support our USM activities. In addition, we bought back approximately 700,000 shares, or $28.2 million, which is higher than prior quarters as we took advantage of favorable market dynamics in our open window. We have the balance sheet strength to continue to invest in our business as well as to continue to execute on our share repurchase program on which we have 57.6 million of authorization remaining. We ended the quarter with net debt of 149 million and net leverage of only 0.9 times. In addition, last week we extended the maturity of our revolving credit facility for another five years and increased the size from 600 million to 620 million, which gives us significant liquidity. We appreciate the continued support of our bank group in executing that extension and upsizing. Thank you for your attention, and I will now turn the call back over to John.