Chris Mason - Director of Corporate Communications David P. Storch - Executive Chairman, Chief Executive Officer and Chairman of Executive Committee Michael J. Sharp - Chief Financial Officer, Chief Accounting Officer, Vice President, Controller and Treasurer

Tyler Hojo - Sidoti & Company, LLC Lawrence Solow - CJS Securities, Inc. J. B. Groh - D.A. Davidson & Co., Research Division Michael Callahan - Topeka Capital Markets Inc., Research Division

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the AAR Corp. Third Quarter Fiscal 2013 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce our host for today, Mr. Chris Mason, Director of Corporate Communications. Sir, please go ahead.

Thank you, Karen, and good afternoon, ladies and gentlemen, and welcome to AAR's Third Quarter Fiscal Year 2013 Earnings Conference Call. Before we begin, I'd like to remind you that comments made this afternoon 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, 2012. In providing forward-looking statements, 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 AAR's Chairman and CEO, David Storch. David P. Storch: Thanks, Chris, and good afternoon. Thank you for joining us today to discuss our third quarter results, which in general was another solid quarter. With me today, in beautiful Chicago, is Tim Romenesko, our President, Chief Operating Officer; and Mike Sharp, our Chief Financial Officer. I'd like to start with some of the major financial highlights. Consolidated sales in the quarter were $520 million, which is down slightly 2.6% compared to the prior year. Similar to our second quarter, we saw continued positive trends in the commercial aftermarket and solid performance at Airlift, offset by reduced sales at our Mobility Products unit. Consolidated operating margins in the quarter were 7.2%, which compares favorably to last year's margin of 6.7%. We expect to continue to drive margin improvement in the fourth quarter. Earnings per share in the third quarter were $0.46, which compares favorably with last year's result of $0.41 when you adjust for the tax benefit of $0.09 that was recorded last year during the third quarter. We generated strong cash flow in the quarter and continued use of cash to reduce debt and provide value to our shareholders. Since the end of February last year, we reduced net debt by $86 million, saving approximately $7 million in annualized interest cost. Also since last February, we've purchased 620,000 shares of our stock on the open market for $8.4 million and have paid $12 million in dividends. The number of shares used in the diluted earnings per share calculation will be 3.1 million shares lower, as a result of the third quarter convertible bond repurchase. We estimate the year-end diluted share count to be 38.6 million shares compared to 42.6 million shares in the fourth quarter of last year. With regard to our operating environment, our global commercial business continues to benefit from a generally healthy airline industry and to a lesser degree, a strong OEM build cycle. Further, there are a number of beneficial dynamics that are playing to our competitive strengths, mostly there's a clear continuation of the trend towards outsourcing. As customers seek a more comprehensive solution, which drives them to larger, better capitalized, more diversified service providers like AAR. We have experienced navigating the defense cycle both up and down. Flexibility is key and we are confident that we can make the necessary changes to the business to achieve acceptable returns. We will continue to manage our exposure to operational tempo in our portfolio and remain well positioned to capture the opportunities as they exist in the market, even during a downturn. Now I would like to provide some comments around specific segment performance. Within our Aviation Services segment, the strong commercial aftermarket advances our airframe maintenance and parts support businesses. Each is performing well and continues to demonstrate an ability to grow. We've been successful in growing our MRO profitability, as each of our established facilities is operating close to capacity and Duluth is ramping up. Demand remains high. Our efficiency and quality levels are good and our customers continue to be happy with our cost savings value proposition. We believe this is the right formula to continue to build market share, create scale and further improve on our margins. Our strategy across our commercial air freight services business is to build on the strong relationships we have with the airlines and leasing companies by doing higher quality work faster and with deep attention to detail and a greater level of efficiency and our customers can do for themselves or their competitors can offer. We believe that this value-added position also creates an opportunity to build our services business with the U.S. government, as they look to do more with less. Over time, we are confident we can leverage these relationships to create additional growth both in our airframe MRO and parts support businesses. While they offer separate services, these businesses have a common customer base. We're demonstrating an excellent broad side capabilities to our customers and we believe we can win incremental business. This includes for our supply chain, some discreet higher-margin aftermarket services. One good example is our recent signing of a contract, the Medical Logistics Support, which puts us in the same logistics market with a new product offering. We focus on executing it well to demonstrate our ability to efficiently manage supply chains regardless of the category. Our Airlift business performed well in the third quarter, meeting or exceeding all customer performance measures. This is a significant mission critical business. And I would note that funding for the contracts within this unit are coming out of the overseas contingency fund, which is not subject to sequestration. We have continued to provide superior levels of operational readiness and performance, have earned the support and trust of our customers. And we expect, longer term, we'll open other doors in new regions, new contracts and adjacent markets. I'd like to now turn to our Technology Products segment. We're pleased with the overall performance on our Cargo Systems business. We've recently consolidated the leadership structure for these businesses and our position to take better advantage of the strong OEM build cycle. Our goal is to be the clear leader in the Cargo Systems category through a combination of innovative intellectual property, Tier 1 relationships with the OEMs and strong engineering and aftermarket support capability. We are on a number of platforms, including the Airbus A320 family, the A330, the A340 and the soon to be certified A350. On Boeing, we are working on the 747-400, 767, and the new 747-8. On the A400M program, our customer recently accepted our first entry into service Cargo Systems, bringing that program 1 step closer to contributing to results. Our Nordics business has developed a low-age shipping container that is beginning to gain traction in the market. We recently won a meaningful order for this product that will begin shipping in our fourth quarter. During the period, we also completed the sale of 10 737-400s to the lessee during the -- which further reduced our investment in aircraft leasing. We're now down to 4 aircraft [indiscernible] joint ventures and 2 that are wholly-owned. I'd note that while we've made a conscious decision to drive down our invested capital in this business, our mix of capabilities puts us in an excellent position to continue to target aircraft modification, remarketing and sales. Along these lines, we'll be delivering the first of the commercial derivative aircraft for the Colombian Air Force in the fourth quarter, with the second aircraft scheduled for delivery in Q1 of fiscal 2014. Before I turn the call over to Mike, I'd like to stress, we have a leadership position in each of our core businesses to create significant organic growth opportunities and enables them to contribute to strong cash flow generation for the company. We've been able to use this cash to consistently drive value to our equity shareholders in a number of ways, including reducing our leverage. I'll reserve a few comments for closing. I would like to now turn the call over to Mike to take a closer look at our third quarter financials. Michael J. Sharp: Thank you, David, and good afternoon, everyone. As is customary at this time, I would like to provide more color around the financial performance of the company during the third quarter including comments around interest, cash flow, capital expenditures and capital structure. And I will be around the rest of the day to answer any questions that you may have. Consolidated revenues for the third quarter, as David mentioned, were $520 million, which is down from last year due to the reduction in sales to the government and defense market. In the Aviation Services segment, sales increased 9% to $408 million with the increase all coming from organic growth. We saw strength at our parts support businesses driven by program activity. And as David described, each of our major airframe facilities are operating well and at high-capacity utilization. As you know, we recently opened a fifth MRO in Duluth to add 4 maintenance lines at peak capacity, or approximately 400,000 man-hours. Late in the third quarter, our customer added a second line to the facility, and we expect this facility to ramp at a measured pace over the balance of the calendar year. The reported gross profit margin in the Aviation Services segment was 14.5%. After you adjust for the loss on inventory, the gross margin is 16.7. This compares favorably to the prior year, but down on a sequential basis, primarily due to lower MRO margins as we bring in new work. We expect our margins to improve in the fourth quarter in this segment. Turning to the Technology Products segment. We've now lapped the timing of our Telair and Nordisk acquisitions, so their sales are included in both the current and prior years. The year-over-year decline in sales reported in this segment was due to lower sales at our Mobility Products unit, although sales at mobility were stable on a sequential basis. We also experienced a reduction in sales and earnings at our Cargo Systems businesses due to the timing of systems and spares sales, which we expect to see in the fourth quarter. Gross profit margin in the Technology Products segment was 15.4% and was unfavorably impacted by the softer results at Cargo Systems. We do expect improved gross margin performance in Q4 in this segment as well. I'd like to provide a bit more detail on the 2 transactions discussed in this afternoon's release. Although the 2 items largely offset each other, they did impact certain reported ratios, including gross profit margin and SG&A as a percent of sales. During the quarter, we were able to negotiate a final payment and the earn-out liability that we had established for the Airinmar acquisition. The final settlement was $9 million less than we had accrued. And accordingly, $9 million was recorded as a gain, and we recorded it as a reduction in SG&A expense. Also, we entered into a sales agreement with a buyer to acquire certain airframe inventory and entered into a separate agreement with the same buyer to market the inventory for a commission. We received $9.1 million cash in the third quarter and recorded a $9.1 million loss on inventory as a result of the transaction. We will recognize revenue from this transaction as the inventory is sold to third parties. After you adjust for the $9 million gain on the settlement of the Airinmar earnout, SG&A as a percent of sales was 9.8%, which is up slightly with last year but in line with our overall expectations. SG&A expenses were $500,000 less than the prior year, so we're doing an effective job of controlling, and in some categories, reducing our spend. Net interest expense for the third quarter was $9.8 million, a reduction of $400,000 from last year, due to overall lower debt levels. As David discussed, we remain very focused on generating cash and reducing our debt obligations. We target free cash flow at least equal to net income and are well ahead of that this fiscal year. During the quarter, we generated $27.5 million of cash from operations and our capital expenditures for Q3 were $4.8 million. Our year-to-date cash from operations is $87.8 million and year-to-date free cash flow is $75 million. Net debt to capital was 41% at February 28, 2013, down from 44% a year ago. Depreciation and amortization, including amortization of stock-based compensation, was $23 million for the third quarter. As it relates to our capital structure, in late January, certain holders of the 1 3/4 convertible notes surrendered their securities for purchase by us pursuant to the terms of the indenture. The aggregate amount surrendered by the bondholders and purchased by us was $62.8 million. In order to fund the purchase of these notes, we principally used cash on hand and free cash flow generated during Q3. In addition to these note purchases, we entered into an exchange transaction with another holder of the 1 3/4 convertible notes, whereby the holder exchanged their $22.7 million note plus $7.3 million cash for a new $30 million note. This new note was priced to yield 3.75% and matures on February 1, 2015. The underlying shares on the 1 3/4 convertible notes have historically been included in our share count for diluted earnings per share purposes. As a result of the convertible note transactions in the third quarter, 900,000 shares came out of the share count in Q3, an additional 2.2 million will come out in Q4. As David indicated previously, for modeling purposes, we recommend you use approximately 38.6 million shares for your fourth quarter share count. Lastly, with respect to guidance, as you've seen, we've increased our full year guidance again this quarter. This reflects our third quarter performance and visibility that we have into Q4. We now expect fiscal 2013 diluted earnings per share in the range of $1.78 to $1.82 per share. Thanks for your attention, and I'll now turn the call back over to David for some closing comments. David P. Storch: Thanks, Mike, and solid report. We're pleased to have delivered another good quarter and we expect a strong finish to our fiscal year, even so we are not satisfied. We're driving hard to produce better levels of profitability across our business. And as we look at our growth opportunities, we'll focus on building out our leadership positions to make our value proposition more compelling to our customers. So with that, I'd like to thank you for your participation. And madam operator, we're now ready to take questions.

[Operator Instructions] Our first question comes from the line of Tyler Hojo from Sidoti & Company. Tyler Hojo - Sidoti & Company, LLC: First question, just on the Airlift business. I get you have a great backlog visibility there still. And I also understand kind of the funding comes from the OCO budget, so you've got some production there. But in past quarters, you've talked to us about looking to diversify the Afghan exposure of that business. Can you perhaps talk a little bit about any progress on that front? David P. Storch: Yes. I'd say that we're making progress. All of our assets right now are fully employed, so we're working on a strategy to have assets that can be utilized elsewhere. But, yes, suffice to say that we have some interesting paths that we're exploring at this point. Tyler Hojo - Sidoti & Company, LLC: Okay, David. Now at what point do you need to actually see some of those contracts come in before risking kind of pretty sharp decline in that business? David P. Storch: Well, I think we're expecting the level of activity that we're currently experiencing to continue for a period of time. So our -- the customers indicating to us at least that they don't see a softening of demand for -- through next year. So at this stage, we see that -- the pace continuing. Just to give you a sense, the number of flights and the number of hours that we're logging this December versus last December where -- is approximately 30,000 less troops, are very similar to each other, or in fact, slightly higher this year than prior year. So even with a reduction in force, it feels like that the demand is not tailing off. So I think you've heard me say this before, we don't -- we handle approximately 1,000 passengers a day. So you still have 66,000 American troops, I believe, in [indiscernible], 68,000. So our -- what we -- ideally, what we'd like is we'd like to have similar revenue opportunity -- or have similar revenue flows from other theaters. But right now, for the foreseeable future, this market continues to be relatively strong. Tyler Hojo - Sidoti & Company, LLC: Okay. And just one last follow-on to that, can you remind us of when your big contracts there will be up for rebid, is it December? David P. Storch: Well, I don't know about rebid, but we have a bid that comes due -- we have, I'm sorry, we have an option that comes due in May. It's a fix swing option. We've been verbally told as we have in the past that, that will be exercised. And then we have a couple of meaningful options that come due in October and November later in this calendar year. Tyler Hojo - Sidoti & Company, LLC: Okay, great. And just one other question, if I may. Just as it pertains to the guidance, are there any planned aircraft sales in Q4? If so, could you quantify? David P. Storch: We have that 1 aircraft sale that we've -- that I talked about in my comments, the Colombian Air Force, which will be -- we will be delivering in Q4. And then we have a similar -- a sister ship that we'll be delivering in Q1 through year '14. Tyler Hojo - Sidoti & Company, LLC: But nothing out of any of the JVs? David P. Storch: We have 1 situation that's being worked, too hard for me to handicap, so I wouldn't want to commit to any further aircraft activity.

And our next question comes from the line of Larry Solow from CJS Securities. Lawrence Solow - CJS Securities, Inc.: You guys did a pretty good job explaining the gross margin issues this quarter, I was just curious, on the aviation side, if we strip out the inventory reduction or the sale of inventory, margins were still down sequentially. Was there anything else in there? Or is it just sort of -- revenue was sort of up sequentially, margin was down. Anything in there other than the inventory issue that you can call out? Michael J. Sharp: Larry, it's Mike. What I included in my comments when I talked about Aviation Services was that we had the inventory item and then we had lower margin sequentially at our airframe maintenance facilities principally related to bring in new work in Q3. Lawrence Solow - CJS Securities, Inc.: Okay. So just mostly -- that was in Duluth, I imagine, and that moved the needle that much? Michael J. Sharp: Duluth, and we also ramped up from new customers in Indianapolis, Larry. Lawrence Solow - CJS Securities, Inc.: Okay. That was sort of my next question, how are the other MRO facilities? What's the outlook there? Michael J. Sharp: They are busy. We've taken on some new lines of work for a particular customer that we're kind of in the learning curve on. But we expect to have -- see that turn around here in Q4. Lawrence Solow - CJS Securities, Inc.: Okay. And on the defense side. I know that the -- it looks like the Airlift businesses certainly improved executional. How about the precision on the UN business? That was also having some issues a few quarters back. Michael J. Sharp: It's better. It's -- we've been talking about kind of sequential improvement and we've seen that. Still not where we want it, but we have a leadership team in place there that's committed to getting the business towards generating reasonable returns for us. So I would say that it's better and it continues to get better. But still not where we want it. Lawrence Solow - CJS Securities, Inc.: Okay. And on the -- just on the -- some of the acquisitions, any -- Telair, you mentioned some of the programs you guys are in. Year-over-year, could you tell us how that did and what the outlook is for that business? Michael J. Sharp: So what I mentioned, Larry, in my comments in Technology Products was that the Cargo Systems business had a softer Q3 principally around timing of spares and some system shipments, which we expect to get back to more normal levels in Q4. Lawrence Solow - CJS Securities, Inc.: Okay. And by normal, is that sort of running -- is it sort of low-single digit growth? Or what is it? I know year-over-year, like -- excluding the sort of lumpy year from the timing of orders. Michael J. Sharp: In terms of forecast for that business for Q4? Lawrence Solow - CJS Securities, Inc.: Or just how it's -- yes, or a forecast for 4 as you look out over the next few quarters or what sort of... Michael J. Sharp: No, no, we see a nice improvement in Q4. And Larry, we're also very pleased with -- as David mentioned with our position here. We're on great long-term programs and as the A350 comes online, we're going to be well positioned there. So the future for this business is excellent and it's performed very well since the acquisition and the performance next quarter is going to be very solid as well. Lawrence Solow - CJS Securities, Inc.: And just if I may, just one quick -- on the reduced earn out on Airinmar, is that reflecting that it's not quite performing up to expectations? Or would that earnout have been where it would have been exceeding expectations? Michael J. Sharp: The businesses has been performing very well for us, particularly in helping us with our internal spend on programs. So we've been pleased with the performance of the business. The earnout is a mathematical formula and it was in both parties' interest to negotiate this conclusion. Lawrence Solow - CJS Securities, Inc.: Okay, just lastly. David talked about just macro trends and outsourcing, sort of the stars aligning. It seems like that number should continue to rise. It's been on a secular trend in the last couple of decades. Just in terms of American Air and U.S. Air consolidating. And I know American Air has not normally been a big outsourcer. Any thoughts on that and how that may impact your performance? Michael J. Sharp: I think it's a little early, Larry. My view is that the U.S. Air team will ingest some creative thinking into the American organization, but I'd be hopeful and somewhat optimistic, but I wouldn't be, at this stage, factoring anything in. It's a little bit too early.

And our next question comes from the line of Michael Callahan from Topeka Capital Markets. And it seems that he has removed himself. Our next question comes from the line of J. B. Groh from D.A. Davidson. J. B. Groh - D.A. Davidson & Co., Research Division: Did you address sort of MRO and sort of where you are in terms of capacity utilization there? I don't know if Duluth is contributing yet or not, but could you kind of go over that? Michael J. Sharp: Yes, we touched on it actually and Duluth is contributing. The shop there are all very busy. We are ramping up some new programs across our various facilities that have a little bit of drag on margins this quarter. We expect better margins next quarter. Duluth is, I think, been a terrific story in terms of going from a mothball plant to a plant that has 2 lines of work going today. But still, we're looking for people and we want to get the ramp to 3 and then 4 lines as quickly as possible. But the MRO business is doing well. There's good demand for our services and our performance has been balanced very good. J. B. Groh - D.A. Davidson & Co., Research Division: Okay. What do you think on the acquisition front that you're -- how's that pipeline looking, what's the appetite like currently, versus what it's been in the past? David P. Storch: There are some interesting things, J. B., so we're kind of -- we have our finger in -- out there, kind of in the mix, if you will. And I think what I'm saying is that any acquisitions we do will be to strengthen the leadership positions we have in the -- from markets we've been discussing. So anything that comes up that improves our supply chain deliverables, anything that improves our MRO capability, anything that improves our Cargo Systems, we'll be looking at those opportunities very closely. J. B. Groh - D.A. Davidson & Co., Research Division: And then lastly, could you talk about sort of what you think? You guys have a sort of unique perspective on, I think, airline inventory levels? Could you talk about what you're seeing there in terms of burned down, or rebuild, or steady-state? David P. Storch: I think the airlines are watching their inventory levels very closely. And my sense is that you're probably going through a little bit of a burn down at present. And I would imagine that, that will -- should continue for a short period, but then they'll probably get their inventory positions ready for the strong summer season they're expecting. J. B. Groh - D.A. Davidson & Co., Research Division: So when do you expect that to kind of bottom? David P. Storch: Say that again? J. B. Groh - D.A. Davidson & Co., Research Division: When do you expect that to bottom, the... David P. Storch: I think as we sit here today, it's probably bottomed.

[Operator Instructions] And we have Michael Callahan, again, from Topeka Capital Markets. Michael Callahan - Topeka Capital Markets Inc., Research Division: So I apologize if this was asked while I was signing back in here, but I don't know about the structures business, did you guys give any -- or do you guys have any insight, I guess, with respect to assuming the current budget passes, or the Appropriations Bill passes the House and Senate and goes through. Does that lead you guys to believe there will be any improvement in that business? Or have orders been held back at all? Or is this just kind of the result of, I guess, the drawdown on Iraq and Afghanistan? David P. Storch: Yes, I think it's a combination. I think we're -- the business is giving us a -- continues to give us a good return on capital and the business continues to operate efficiently. I believe that the requirements are down as a result of both factors you indicated. And we were planning on those requirements staying down for a period of time. So as we look at Q4 for instance, we don't see any major changes. You might have slightly up, slightly down, but nothing -- no significant directional changes. And as we enter the new fiscal year, I think we're looking at relatively flat to where we are today. So we've been in this situation before with this business. We're a little bit, I think, stronger this cycle than we've been other cycles. So I would anticipate there will be a tough slide for this business for a period of time. Michael Callahan - Topeka Capital Markets Inc., Research Division: Okay. That was helpful. Maybe one last one here, just as far as the aftermarket trends what you're seeing throughout the quarter, it seems like you guys reported a little bit stronger of a quarter maybe than the guys who finished at a normal calendar year for this kind of same time period. So did you see strengthening, as the quarter progressed? Or -- and how did things look towards the end? Or can you give any color there? David P. Storch: I think it was fairly consistent throughout. I can't say that we saw any change. Keep in mind now, our -- this quarter is a low quarter to begin with, because you're dealing with the December, January and February period. So December is typically soft, due to the holidays. And February's soft, because it only has 28 days. So historically, this has been our softest quarter. Now that said, we had nice growth over prior year and I think a lot of that is due to some of the stuff that we've been talking about in terms of our positioning and our customer interaction and our performance. So I think as we look out into Q4, I think if you look at our commercial growth rates, versus many of our people also selling to the commercial markets over the last 3 or 4 years, I think you'll see that we've given a pretty good accounting for ourselves. So I would anticipate that, that will continue.

And we have no further questions at this time. David P. Storch: Okay. Well, thank you very much for participating. I wish everybody a very pleasant day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.