David Storch - Chairman, President & CEO Tim Romenesko - CFO John Holmes - VP & COO of Aviation Services.

Larry Solow - CJS Securities Michael Ciarmoli - SunTrust Robinson Humphrey Shannon Burke - Gabelli and Co..

Good afternoon, ladies and gentlemen, and welcome to AAR's Fiscal Year 2017 Third Quarter Earnings Call. We are joined today by David Storch, Chairman, President and Chief Executive Officer; Tim Romenesko, Vice Chairman and Chief Financial Officer, John Holmes, Vice President and Chief Operating Officer of Aviation Services.

Before we begin, I'd 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, 2016.

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, President and Chief Executive Officer, David Storch..

Thank you, Star and good afternoon. Thanks for all for joining us here today to discuss our third quarter 2017 results. We're pleased with the growth coming from our inventory programs activity, supporting commercial airline and during the quarter we captured several important new contracts. Let me start with Allegiant.

Allegiant has a fleet of A320 aircraft, currently 36 with a plan to expand up to 100 and we signed a contract with them to provide power by the hour component support in support of that fleet.

Also, SkyWest, we build on our relationship that dates back to the 90s whereby we signed a three-year agreement to provide landing gear overhaul and exchange services for SkyWest. The agreement covers landing gear assembly, subassemblies on fleet of more than 400 Bombardier CRJ aircraft. It's a contract that as an option to expand up to five years.

Subsequent to the end of the quarter, we signed an agreement with India's largest airline, IndiGo, to provide landing gear overall services on their fleet of A320, which is 49. These will be for full ship sets. The agreement expands both our footprint, the Asia-Pacific region and our relationship with IndiGo.

These contract awards build on the momentum from earlier in the year as we were successful winning work across a broad geographic footprint in addition to expanding our customer base and the aircraft fleet type coverage.

Last quarter we announced a new five-year contract valued at $125 million with South African Airways to provide power by the hour component inventory, management repair services across their fleet of aircraft.

We also previously announced a new long-term contract with Air New Zealand to provide nose-to-tail cost for flight hour notable inventory support for 15 of their fleet of 777. They’ll start providing services under these contracts and are excited about the opportunity that these wins provide to the company.

Our geographic reach expanded during the quarter as we opened a parts warehouse at Dubai World Central Airport. The supply chain hub closes the gap between central aircraft components and the growing list of commercial and regional carriers operating in a growing Gulf State region.

The warehouse enables us to leverage our partnerships with industry-leading OEM such as Eaton, Unison, Meggitt and Lord to stock the warehouse with a wide array of factory-new parts. So, when an operator has an aircraft as grounded, we can get them the needed part to the aircraft quickly.

We're starting to see an uptick in activity around our businesses that are impacted by the government's operational tempo. We've had a pickup in business in our palette throughout the whole fiscal year and that work continues and we're getting noise coming out of the commanders in the Middle East about need for support in the regions there as well.

Before we begin our financial recap of the quarter, I would like to give an update on the INL/A Contract awarded to AAR Airlift by the US State Department. The incumbent contract continues to protest the award is currently being heard by the U.S.

Court of Federal Claims for final resolution and we expect to file decision from the court no later than August 2017. We are highly confident that the court will dismiss the claims made by DynCorp and will stand by the State Department's decision to award AAR the contract. You may recall, we are originally selected by the state on September 1.

We cleared the first protest with a ruling by the GAO in December.

The lawyers in the COFC case remanded the decision back to the State Department contracting officer who then reaffirmed his decision once again in the selection of AAR as the contract for this contract and as I indicated the ruling is now in front of the COFC and we do expect a ruling before August is out.

Now back to Q3 results, we had another solid quarter as diluted earnings per share from continuing operations increased 31% from $0.29 last year and $0.38 in the current period. Revenue was up 8.4% or $34.6 million for the quarter primarily as a result of increased sales in our aviation services segment.

We had considerable strength in our supply chain businesses to commercial airlines, partially offset by the downsizing of our Lake Charles facility and a reduction in sales from our phaseout of the KC10 program.

So, as we sit here today, overall, we're very pleased with the progress during the quarter and we have strong momentum coming into our fourth quarter and feel really good about our overall positioning in the market. With that, I'd like to turn it over the Tim for a little bit more detail..

Thanks a lot David. So, I'll give a little bit more detail on the quarter. As David mentioned, we had strong quarter with earnings per share of $0.38 compared to $0.29 last year, which is a 31% increase. Good sales growth, 9.6% growth in aviation services. Income from continuing operations was up by $3.2 million in the quarter.

The gross profit increased $4.8 million at aviation services segment due to the increased sales volumes and gross profit in expeditionary services increased $4.9 million with improved profitability across our businesses there.

SG&A expenses increased $4.3 million in the quarter reflecting increased legal fees related to the INL program that David talked about as well as investments in other business development activities. Interest expense in the quarter is $1.4 million down a bit from last year, primarily as a result of retirement of some of our convertible notes.

CapEx in the quarter was $9.1 million, depreciation and amortization $14.7. Also during the quarter, we paid dividends of $2.5 million or $0.075 a share and we repurchased approximately 52,000 shares in the open market for $1.7 million.

As of the end of the quarter, we had 6.1 million remaining available under our Board authorized share repurchase plan. Our average diluted share count for the quarter was 34.2 million compared to 34.4 million in the third quarter last year.

Net debt increased $22.4 million from the second quarter as we continue to make strategic investments in our business, including assets to support our new multi-year supply chain management programs supporting our customers. Thanks again for your interest and I'll turn the call back over to David for concluding comments..

Well done, Tim. Once again good quarter and what I'd like to do now is open up and take questions that you may have out there..

[Operator instructions] Our first question comes from the line of Larry Solow of CJS Securities. Your line is open..

Great. Thanks. Good afternoon. David I was wondering if you could or Tim could just help just give us a little more color on the very strong quarter in aviation services. I was expecting a solid quarter, but I thought after last quarter KC10 you might see a little more impact from that.

Well perhaps there was, but it looks like maybe some of your other contracts ramped up, but normally is seasonally a little slow quarter to sequentially a pretty nice improvement and obviously a 10% growth with the impact of KC10 and also Lake Charles. So maybe you can just give us a little more color on that..

Lots of strength in the parts businesses across the Board to commercial customers. So, we're getting traction from some of our program wins, but I believe we're doing really good job across all the different businesses in that segment..

Is this kind of high single-digit growth even forgetting the KC10 impact which actually would make it even higher maybe as you look out, but is this something you think is sustainable or was there some timing relation anything in this quarter that made it a little bit of an aberration or not?.

Nothing that stands out. I think we had a good results throughout the businesses. I think we're starting to benefit from some of the investments we've made and some of the actions we've taken in prior periods. So yeah, I think you can see hopefully continued performance coming from our parts businesses..

Great. Excellent. Really strong quarter and then just on the expeditionary services, just a little weaker sequentially.

I think I know you get lost a couple positions in Afghanistan, but anything else that does sound like really materialistic sound like that should be hopefully getting better and then obviously until the INL contract comes in, but that's independent of that?.

Right. Larry, so there is a lot of noise coming out of the market that is kind of indicative of demand about to come. We haven’t seen it yet, but we're getting a sense that there may be some positive stuff out there for us. Now we've had before, but currently at least there is some noise indicating that there may be some interest in our services..

Okay. Great. And just one last question, just on the cost side, did the $1.4 million, I guess that's included in your numbers right. That's like a recent impact or whatever..

Yes..

And I know you've incurred some costs for that, just in terms of building up the program, but in terms of legal costs, this is probably higher than the normal run rate I would imaging..

Yes. That's correct. That's correct. We've had legal expenses throughout on this program, but we're pointing it out and that's correct. That's already absorbed in our results.

And just how about the growth in SG&A still pretty high. I realize you had pretty nice revenue growth, but I think if you take out that charge or that expense, it was still like 8%, 9%. So, close to your revenue growth. Any thoughts on that and is that….

Well, we're very driven to bring our SG&A down to historical levels below 10%. So, we would be happy being in the 9% and 9.5% range. Today we're at 10.6%. If you take out the legal expenses, you get a few basis point reduction, but basically what we're counting on right here is to get some sales growth..

Got it. Okay. Fair enough. Thanks. I appreciate it..

Thank you. Our next question comes from Michael Ciarmoli of SunTrust. Your line is open..

Hey, good evening, guys. Thanks for taking my questions.

Maybe just to stay on the topic of legal, do you guys expect that that sort of expense level to continue at least until this decision has been made in that August timeframe?.

Yeah, I would say so..

Okay.

And then staying on INL, anything obviously early stages of budget planning, looking at Trump's proposals, planning on you really taking the hatchet to the Department of State, I would assume this would be something that would be this level of spend given the importance to order security drug interdiction, is there any concern about the funding level for INL going forward?.

We've been led to believe no, but obviously, the current planning is outside of our purview if you will, but we've been led to believe that there will be little to no impact..

Okay. Perfect. And then just on back to that growth in the aviation services, can you guys give any color, certainly you're seeing strength, you mentioned the parts business, are you guys seeing, we've had sort of this deferral of shop visits over the prior years.

Are you guys starting to see some of these airline customers start to spend given where fuel prices are or just any color you guys are seeing on the behavioral patterns of your airline customers?.

I think what you're seeing from our vantage point is more of a market share grab on our part. You've seen some new wins and growth with new customers. So, I think the spending patterns with our customer base that may be noticeable in that regard. I just think in AAR's case, I think what you're seeing is growth in our market share..

Okay.

And what's driving those market share gains and who are you taking the share from?.

Well, we made a significant investment in BD capability around this program activity and you're seeing some of the fruits of that effort in energy and I think we're just doing a better job geographic dispersion of our -- the balance of our supply businesses.

There's a reason for opening up a plant in Dubai and I think our guys are executing -- our guys and gals are executing beautifully..

Got it. Fair enough. And then last one, just any thoughts, Boeing making some pretty aggressive statements about coming into the product support business. I don't know how they're going to get to their targeted revenue levels unless they actually start to buy their way into the aftermarket.

Any thoughts on what Boeing's decision to get more aggressive in the product support aftermarket for you guys? Have you seen anything at Boeing or do you view that as a risk and opportunity?.

Yes, our relationship with Boeing, which would be similar to some of the other large OEs would be in some cases we compete, in some cases we supply, in some cases, we purchase.

So, to date, our relationship with Boeing have not really been impacted by any of their announcements in any meaningful fashion and we would anticipate -- we don't see much in a way of change. We're very cognizant of their statements and we're focused on execution here at the company and expanding our capabilities and continue doing our things.

So yes, we're aware of them. We're aware of their ambitions, but yet we've not seen any change in terms of our relationship with them..

Got it. Helpful. Thanks a lot guys..

[Operator instructions] Our next question comes from the line of [Ben Cleave of Noble Capital Markets]. Your question please..

All right. Thank you. So, couple of questions for you guys. First regarding the pipeline, I am wondering in the past you've kind of alluded to the fact that you want to diversify your expeditionary services business through your pipeline expansion.

I'm wondering your existing pipeline right now, if you could kind of give us rough estimate of what you have in aviation services versus expeditionary? And then the expeditionary pipeline, to what degree would that continue to diversify that business?.

Well, let me first start by saying that I think what you're seeing in our announcement is a bullish attitude around our aviation service business particularly sporting commercial customers. We also see opportunities supporting government customers and are awaiting hopefully some positive news on a few different fronts that we're working on.

In terms of our expeditionary service work last year, you may recall that we expanded with the search and rescue contract down in the Falklands in support of the British MOD and we continue to look for opportunities of that nature pretty much around the globe. Our BD team is working fairly aggressively.

I'm not in position today report on any progress per se, but I would be hopeful that a year from now or so that we would have some successful stories to communicate..

Okay. Thank you.

And with regards to the flurry of activity you've seen over the last couple of quarters with these new contracts, looking into Q4, I am wondering on if you expect any of these contracts to be particularly dilutive or meaningful cash consumers and I am really curious any in particular I am wondering about the South African Airways in fact..

Yes, so we would be hopeful that most of -- in terms of the contracts that we've announced that most of the spend has already taken place. So, we would anticipate positive cash flows coming from those investments. That's said, I wouldn't want to limit us to around new contracts that might be in the pipeline as well.

So, we have been growing at fairly significant clip. Some of these programs require capital. Some programs require less capital, but we are to answer your question in terms of the current order book, we would anticipate positive cash flows and then we may be making similar investments if we're successful in another contracts of this nature..

Okay. Thank you. And so, I guess along that line then, expect for any potential new awards that come up and it's fair to say that your CapEx spend for Q4 isn't going to be enough kind of legacy $7 million or $10 million..

Yes, I think that's a good way to look at yes..

Okay. Perfect. That does it for me. Thank you, guys..

Okay. Thank you..

Thank you. Our next question comes from Shannon Burke of Gabelli. Your line is open..

Hi. Good afternoon. Thanks for taking my question..

Hi Shannon..

So just starting with the aviation services segment and the new contract with IndiGo, so did you win this contact away from a competitor or were they currently doing it in house and do you think that your expansion with the Dubai center had anything to do with that?.

Yes, so the IndiGo contract is more of a labor contract. So, it's a maintenance contract to support their island gear and that would've been business we won away from competition..

Okay. Great. Thank you so much.

And then switching to expeditionary, so could you just go over how many fine positions you had at the end of the quarter versus in 2016?.

I think we had 16 at the end of the quarter and I'm not sure what we had in 2016? And we can get back to you on that Shannon. We'll get back to you..

Okay. Great. Thanks so much.

And so, is this gross profit level, is that about little under 9%, is that the new run rate level given the number five position under the INL contact comes on or how should we think about that?.

Yes, so there is a little bit of volatility quarter-to-quarter just based on how the other businesses within that segment perform. So, I would say plus or minus where we should be in that range..

Okay. But the Falkland Island contract is still performing well..

It is..

Okay. Great. And then in the mobility business, you said you're seeing some noise.

Is there anything that you are seeing in the budget given the recapitalization of military? Is there any prospects you see and then I guess that also goes a long way to what Michael was asking?.

Yes, so we haven’t seen the details of the budget related to spend on the type of things we produce. We are seeing an uptick in activity around some of our container product lines and there's noise elsewhere in that business as well, but the influx of orders is -- we've had steady flow, not a huge influx of orders for that business.

In terms of the mobility, the airlift business, which is the other part of our expeditionary services, that's where we're seeing noise coming out of the theater from commanders looking for support..

Okay. Great.

And would those be the government funded, the government owned company operated contract?.

No. And that would be stuff that we would own and that would be in the operational budget of DOD..

Okay. Great. Okay. Thank you so much. That's all I had..

Thank you..

Thank you. And as there are no further questions in queue, I would like to turn the call back over to Mr. Storch for any closing remarks.

Sir?.

Thank you very much and thank you for your participation today and I wish everybody a nice, a pleasant afternoon. Thank you..

Thank you, Sir. And thank you ladies and gentlemen. That does conclude your program. You may disconnect your lines at this time. Have a wonderful day..