David Storch - Chairman and CEO Tim Romenesko - Vice Chairman, CFO John Holmes - President and COO.

Larry Solow - CJS Securities Robert Spingarn - Credit Suisse Ben Klieve - Noble Capital Markets Michael Ciarmoli - SunTrust Robinson Humphrey.

Good afternoon, ladies and gentlemen, and welcome to AAR's Fiscal Year 2017 Fourth Quarter Earnings Call. We are joined today by David Storch, Chairman and Chief Executive Officer; Tim Romenesko, Vice Chairman and Chief Financial Officer; John Holmes, President and Chief Operating 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, 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 would like to turn the call over to AAR's Chairman and Chief Executive Officer, David Storch..

Thank you very much and welcome everyone. Good afternoon. I hope everybody’s having a good day and thank you for joining us today to discuss our fourth quarter and year-end fiscal year 2017 results.

As you can tell by the release early today, we had another solid quarter as diluted earnings per share from continuing operations increased 29% from $0.34 in the prior year to $0.44 in the current period.

Revenue was up 5.1% or 23.7 million for the quarter primarily as a result of increased sales in our Aviation Services segment to commercial customers, partially offset by the wind down of the KC-10 program, which Tim will talk a little bit further about in his comments and our Lake Charles airframe maintenance facility which we’ve discussed in the past.

We’re especially pleased with the performance of our industry-leading integrated supply chain solutions and our aircraft and parts supply activities. During the quarter, we announced significant new business wins including the $909 million fixed-price contract from the U.S. Air Force for the Landing Gear PBL.

Under the contract, we will provide total supply chain management, including purchasing, remanufacturing, distribution, and inventory control to support the Air Force requisitions received for all C-130, KC-135, and E-3 landing gear parts.

Performance on the contract is on hold pending resolution of a protest filed by one of the competitors for the contract. We were also awarded a multi-year component support contract with ASL Group, a growing European-based scheduled and charter carrier.

The new contract for Power-by-the-Hour support for ASL Group’s airlines includes component support and repair for approximately 100 passenger and cargo aircraft, including the ATR aircraft.

And we identify the ATR aircraft in this respect because we also acquired a small little business from them to support ATR aircraft and we’re excited about the possibilities for that product line.

AAR will support contract with inventory purchase from ASL subsidiary, ACLAS Global, which will be incorporated into AAR's existing global supply chain network located in Belgium, Germany, and Singapore. We were also awarded a multi-year component support agreement with Viva Colombia and Viva Air Peru.

AAR will be providing full support to affiliate airlines within the Viva Latin America group including Viva Colombia, Colombia’s first low-cost carrier, and the newly established low-cost carrier Viva Air in Peru. AAR will make inventory available from its facilities in Miami and Chicago, as well as positioning stock in Bogota, Medellin, and Lima.

We are very excited to expand our presence in Latin America with this new contract. We’re continuing with the growth in our integrated supply chain solutions and now supporting approximately 1,400 aircraft new aircraft platforms.

We’re also continuing to expand geographically most recently opening offices in India and New Zealand that position us closer to our customers. We believe that our closer to customer business model remains a strategic advantage for the company.

Before handing the call over to Tim, I would like to take a minute to provide an update on the INL/A contract award to AAR Airlift by the U.S. State Department back in September 2016.

We expect a decision by the United States Court of Federal Claims by October 21 regarding the protest and we remain favorably inclined as a result of our expectations for the outcome from this latest protest effort. With that, I’d like to turn the call over to Tim to discuss the financials in a bit more detail.

I may have said October 30 for October 31, 2017; so apologies on that..

Thanks, David. As David mentioned, we had a strong fourth quarter with sales of $492 million and earnings per share of $0.44 compared to $0.34 in the prior year.

Sales in the quarter grew 5% driven by growth in both segments and this is despite higher sales of 32.8 million in the prior year quarter related to the wind down of the KC-10 contract and the Lake Charles facility. I’m going to give you the quarterly sales on the KC-10 contract that we had in fiscal '17 for your modeling.

Sales in the first quarter were 38.6 million, 29.4 million in the second quarter, 24.3 million in the third quarter, and 18.3 million in the fourth quarter for a total of 110.6 million in fiscal '17. And in fiscal '18, we expect minimal KC-10 revenue.

Gross profit increased 10.3 million for the quarter in the Aviation Services segment on increased sales volumes and margins in parts supply and commercial programs. Gross profit in the Expeditionary Services segment increased 3.9 million with improved profitability across these businesses.

SG&A expenses increased in Q4 reflecting several special items including increased legal fees related to INL, acquisition diligence costs and compensation costs including some severance. These special costs were approximately 4 million in the quarter.

Consolidated net income was up 3.3 million in the quarter and our results included a $2.2 million reduction in income tax expense related to the recognition of previously reserved income tax benefits. This item helped to offset some of the increase in the SG&A expense that we experienced related to the special items.

CapEx in the quarter were $5.6 million and depreciation and amortization was $13.9 million. During the quarter, we paid dividends of 2.9 million or $0.075 per share and we repurchased 96,000 shares for 3.2 million in the quarter. And for the year, we repurchased 767,000 shares for 19.8 million.

Our average diluted share count for the quarter was 34.3 million compared to 34.2 million in the fourth quarter last year. And as David mentioned, yesterday our Board of Directors authorized the repurchase of up to $250 million of our stock. And just a couple of comments on the full fiscal year.

Our earnings per share was $1.45 compared to $1.10 in fiscal 2016, so up a healthy 32% for the year. Sales grew 4% for the fiscal year to 1.767 billion, driven by sales growth in both segments. And again, this reflects overcoming $80 million in higher sales in the prior year from KC-10 and Lake Charles.

Gross profit increased 18.4 million in the fiscal year in Aviation Services segment and 22.2 million in Expeditionary Services segment.

Net debt increased 30.1 million for fiscal 2016 as we continued to make strategic investments in our business, including assets to support new multi-year supply chain management programs supporting our customers as well as for dividends and share repurchases. So thanks again for your interest. Now I’ll turn the call back over to David..

We completed our Board meetings this morning. We’ve had two days of productive Board meetings as you can see from some of our announcements. I’m pleased to announce that John Holmes was elected a Board member and you should know that John is off to a very strong start as our President and Chief Operating Officer.

We also announced the hiring of Mike Milligan to be our new Chief Financial Officer. Mike will join the company on September 1.

He will have tough shoes to fill with Tim’s retirement but Tim will hang around for the end of the calendar year to give ample of time for him to share with Mike some of his knowledge and make the transition a little bit smoother. So I would like to at this moment thank Tim for his 36 years of service to the company and his valued counsel.

But I’m pleased to know that he will be the company full time through the end of the year and then will stay on as a consultant into next year for the full calendar year. So all-in-all, our company finished up with a very strong year.

We go into the new year with a fair amount of momentum; feel very good about some of the skill sets that we’ve developed this past year and feel good about the investments we made to fund our future growth. With that, I’d like to turn the call back to you folks to see if there’s any questions you might have that we might be able to answer..

Thank you. [Operator Instructions]. Our first question comes from Larry Solow with CJS Securities..

Great. Thanks. Really, a good quarter. Can you just give us – it looks like obviously a lot of these new supply chain contracts are really helping in the Aviation Services, even 5% growth with the KC-10 loss.

Could you just tell us what the Q4 '16 was for KC-10 so we know how much sales you lost year-over-year in the quarter? Do you have that number?.

Yes, just one second. Let’s see if we can get it real quick. It’s 41 million..

Okay. So it would have been obviously much better growth. I guess a few questions around that. Your aircraft under contract in the supply chain are up almost 50% year-over-year I think. I realize that’s only a third of Aviation Services. I know there are also some puts and takes there too.

But I guess that should support a pretty good – is it fair to say – Dave, you’ve sort of not given guidance for this but you’ve always sort of targeted a mid-to-high single-digit top line growth in the Aviation Services.

Is that a fair outlook for '18 or maybe a little backend loaded as you got to get through some – a little higher KC-10 sales earlier in the year but how do you look at that?.

Yes, I think we can say with – what we shared in the past, I think 5% to 10% range is a range we’re comfortable with..

Okay.

And Lake Charles, are you guys completely out of that now? Is there any residual expenses related to that or you’ve sort of exited that completely?.

Yes, by the end of this quarter..

Okay.

And then how is the ramp up I guess at the other MRO facilities? Is that happening a little offset – a little bit of the shift ongoing too, right?.

Yes, so as you know, the summer months are weaker months from a maintenance standpoint because the airplanes are flying. But we’re setting ourselves up to have another pretty decent year for MRO and we feel we have pretty good alignment that we’re looking at in terms of customers and facilities. And we’ve brought the Rockford facilities online now.

It’s doing work. It was profitable in the Q4 period and we’re kind of excited about what the prospects might be for that as well..

Okay.

And on the Expeditionary side, it sounds like obviously we’re all waiting for the INL decision, but outside of that I guess the Airlift, it sounds like maybe you’ve lost a little bit more positions there? And then how about mobility, maybe that’s doing a little better?.

Mobility is doing a little bit better. Airlift, you’re correct. We’ve lost some positions. But the mobility business has seen a little bit more order flow, so not where it’s been but better than recent past..

Right. It seems like for a few quarters at least it’s showing a little bit – maybe a little stability there at least hopefully..

Yes..

Okay. And just for housekeeping, I know you basically had a $0.06 benefit on the lower income tax and then I know you called out this 4.1 million total which it sounds like it’s basically a bunch of nonrecurring stuff, the biggest piece being legal.

And is it all related to INL or is there some other stuff in there?.

The legal is 98%. It’s mostly related to that..

Okay. And I guess obviously that could go on another quarter or two hopefully if things go your way at October 31, it’s anybody’s guess at this point or – how long can it go on, right? I don’t know if you have an answer to that..

We’re technically an intervener in DynCorp’s lawsuit against the U.S. government, and we will continue to spend money in that role and hopefully the process will conclude by the October 31 date. We won’t expect much in the way of legal expense after that unless Dyncorp continues to protest..

Okay. And just last question, I know you put out your new authorization approval – a pretty large authorization. I realize there’s no timeframe but it seems like you’ve talked a lot – you’ve through the years returned a lot of cash to shareholders. It sounds like that will continue.

Do you feel more ambitious to repurchase more shares? I know you’ve been a little bit slow on that front?.

No, I think we’re – the strategy is no different than it’s been. What we were looking to do was kind of replenish the authorization. We have had a $250 million authorization back in '2014 and we went to about – maybe that was '15 actually. But we went through 187 million of it.

To give us the maximum flexibility, the Board thought wise to go ahead and bring it back up to the old -- to the level it was before. No change though in terms of motivation or outlook in this regard. And obviously, we don’t buy shares in as a strategy, we buy shares in opportunistically as we see fit..

Understood, great. I appreciate it. Thanks, Dave..

Thank you. Our next question comes from Robert Spingarn with Credit Suisse..

Hi, everybody..

Hi, Rob..

So I guess if we do the math on that that was just discussed between the tax and the SG&A, you did, I don’t know, $0.49, $0.50 in the quarter. Is that about right? Tim, would that be the --.

Yes, we had – the benefit from the taxes were a little less than the after-tax impact of kind of the special..

Yes, I was thinking like $0.06 and $0.10 for two items, something like that. Okay.

So, David, if you’re running around this $0.49, $0.50 here just to get an idea of what your earnings power is if you adjust for anything in the quarter that’s nonrecurring or maybe seasonal or what have you? If you think about the aftermarket Aviation Services as we go forward here in the various businesses, you’ve already touched a little bit on supply chain and on MRO.

And then if we think about Expeditionary, its run rate ex-INL, is this the right earnings power or would you say it’s a little higher, a little lower as we go forward here?.

Yes, what I’d like to – first of all, fourth quarter is historically a strong quarter. So you have airlines getting ready to service their customers for the summer months, so you have the – shops are pretty full and the spare parts supply is pretty robust. So that’s been a trend for the last 15, maybe 20 years here as a company.

What I would like to do, Rob, is we have our Investor Day in October. We’ll be coming out with a date here pretty soon. What I’d like to do is kind of give you – share at that point a little bit more feel for how we see the trend, if you will, in the business.

Right now we feel pretty bullish on things but I just want to let a couple of time pass, let John get a little bit more ensconced in his position. And then by around October we should be able to give a little bit more color..

Okay. I’ve asked you in the past, we’ve had this – I don’t want to accelerate things for you, David, but I get the impression that you’re kind of getting to that point where you’re about $0.50 a quarter even if this fourth quarter was a little bit call it seasonally strong.

And it’s not an unreasonable way to think about the future maybe adjusting a bit for seasonality.

Is that a fair --?.

Yes..

Okay.

While I have you here, just on the authorization, were you intending to release that during market hours today or is that supposed to come out tonight?.

We released it – when we released it we were putting together our minutes from the Board meeting and we just released it as part of the normal course of business. So we got the authorization yesterday during the day.

It was something we meant to get out last night, didn’t get around to it and we got it written up this morning during our session with the Board and got it out today. So we weren’t thinking about after hours or before hours..

Okay. With INL and I know you can’t quantify yet until this thing is decided but we’re all thinking about it if you win it, it’s additive.

Are there any negative considerations from a management perspective or bandwidth vantage point that we should take into consideration just given the significance of this contract if and win it starts to contribute?.

Not that we’ve seen, nothing that is a parent but I guess I would reserve my comments on that until after the actual execution. But nothing that is a parent..

Okay.

And then the last thing I want to ask you is if we can run through the Aviation Services businesses on a more individual level, talk about maybe with some more clarity what the growth is there in each of those pieces and how you think about that at least somewhat qualitatively going forward? So what’s driving the strength right now? Is it the supply chain contracts? Obviously you’ve said that MRO right now is a little bit lighter because the aircraft are in use.

How do we think about these sub businesses in 2018 from a growth perspective, revenue?.

So let me share with you how we’re thinking about the businesses because we’re really thinking about the businesses as being integrated and having an integrated solution. So as we think about our strategy, we think about these pieces and how they’re connected to each other.

And as we think about growing the company, we think about growing them in this fashion. So at this stage I would prefer to focus more around thinking of these businesses as a collective group of businesses designed to give us a powerful value proposition for our customers.

And I believe that that strategy is working and I don’t think at this stage it would be wise to deviate from that. So I’d prefer to speak in terms of the businesses in their totality..

Let me ask you this if I can, I don’t want to pry but I think you said earlier – somebody said earlier Aviation Services gross should be in the 5% to 10% range if I caught that right.

Are you then saying that each of the businesses should track that way or not necessarily? They could be far different within that but the aggregate is 5% to 10%?.

Yes, right. I’m saying the aggregate is 5% to 10%. Yes, that’s what I’m saying..

Okay.

Can you give us a hierarchy of growth among the three these days?.

I’m just going to keep trying but --.

So we’ll drill down a little bit further at the Investor Day, so why don’t we kind of wait on that until then and leave it at that..

Okay, all right. Thank you very much..

Thank you..

Thank you. Our next question comes from Ben Klieve from Noble Capital Markets..

All right. Thank you. A few questions for me. First, a couple on the INL award.

First, correct me if I’m wrong but is that legal decision that you expect on October 31, is that a bit later than you previously expected? I think I remember that you were looking at August or September earlier but I could be --?.

The last date was August 9. We then went out with a 8-K filing and laid out the dates between now and October 31, so there was a delay in the process and we articulated that through a way in the 8-K filing..

Got you. I just missed the K then. Okay. Thanks for that.

So sticking with the INL, given the prolonged nature of the protest and multiple ongoing litigations that you guys have had to deal with, have you been able to speak ultimately with the customers you can kind of reasonably plan for the ramping of this award or have those communications been – maybe not shutdown but maybe minimized that would prevent you from kind of ramping that up pretty quickly once this is resolved?.

Shutdown..

Shutdown, okay.

I guess do you anticipate then because of them, because of the way that this will maybe take another – that the ramp will take a little bit longer than you’d previously hoped?.

No. We would be hopeful that we could get on schedule on the ramp. We’ve had enough time to think about it. So we’re pretty prepared. We’re pretty prepared..

All right. Next, I was wondering if you could provide any context around the timing of the protest on the Air Force Landing Gear awards.

Do you have any visibility for that?.

We have reason to believe that a decision will be known before the month is out. So we’re hopeful that we’ll hear something on that before July 31..

Perfect, very good. And then this may be a question that you’d like to discuss on your Investor Day but I’m wondering you talked a bit about the strength in the mobility business and some weaker – a bit of softness out of the Airlift side.

I’m wondering if you can just provide a little bit of context as to what you’re seeing from both those businesses and any thoughts than can help us think about how those two businesses are going to perform in '18..

So on the mobility, we’re seeing an increase in dialogue around opportunities with the customers, some new product development actually as well as some of the traditional products. On the Airlift, we’ve won some – we’ve been named on some IDIQs but we haven’t won any past quarters.

So we’re a little bit – we’re short there in terms of positions as we mentioned earlier in this call. So again, I think we can get into a lot deeper – more deeper dive at the October Investor Day..

Okay. Thank you. I look forward to that. And then one final question and then I’ll hop back in queue here.

Back to the INL award, do you think that there is any potential for the state to add to the ceiling value on the existing contract at all, or does it seem like that’s pretty set?.

We have no visibility on that..

Okay, very good. Thanks for taking my questions. I’ll jump back in..

Thanks, Ben..

Thank you. Our next question comes from Michael Ciarmoli with SunTrust..

Good afternoon, guys. Thanks for taking my questions here. Maybe, David, just to go back to Rob’s line of questioning, I know you mentioned the 5% to 10% Aviation growth and I think in the past, maybe at the last Investor Day, you guys had 5% to 10% at the company level. Obviously Aviation is growing pretty rapidly right now.

Should we expect that to decelerate to that 5% to 10%? I’m just trying to get a sense for the growth rate.

Is the whole company still expected to grow 5% to 10% as well?.

Yes. Tim just laid out for you some of the headwinds we faced with the KC-10 wind down..

Right.

And that’s still going to be – that’s going to be roughly a 100 million headwind next year, correct?.

That’s right, yes..

Okay.

Just thinking about maybe the other headwind, should we expect the level of legal spend, this 4 million, to kind of sustain through next quarter? And basically if this does get resolved sooner obviously but if we don’t hear anything until the end of October, is that sort of a good level of expense that’s going to be sustained and then you’ll have to absorb into the P&L?.

We would expect the legal expenses to be lower..

Would be lower, okay, got it. And then just from a margin standpoint, you obviously have this KC headwind but yet the Aviation gross margin is 17.4%.

How should we think about once you guys sort of absorb this wind down, is there room for further improvement in that aviation gross margin?.

We believe that there’s room for improvement, yes. We believe as we succeed more providing integrated solutions that it not just creates more value for our customer but we also think it creates more value for our shareholders as well..

And should that be – do you expect that gross margin to be flattish or expand next year just given that $100 million headwind or do you not see that as much of an impact into next year?.

I think as it relates to next year because of the item you mentioned, I think we’re expecting relatively flat..

Flat, okay, got it. And then maybe just the last one for me, on the share repurchase, I know you said you’d be opportunistic. I think last time you guys did sort of a Dutch auction at – 250 million could theoretically buy maybe 17% or so of the shares outstanding.

But how is the Board thinking about funding this? Are we going to see a debt offering here in the near term? I know you’ve had a target leverage ratio out there or target leverage of 3.5 times.

But what are the thoughts about funding this buyback?.

Yes, so first of all, we and one of the – as you’ve seen me indicate, we have different – we look at the application of capital across a few different possibilities. And one of the possibilities of course is investing in the business itself.

So if you look at the year that just ended, we spent money buying inventory to support some of these programs that we’ve recently won. We will maintain a balanced approach based on the cash needed to fund the growth of the business and look at the cash that is available and the ratios that are available to us in terms of EBITDA to debt.

We’ll keep surveying that and make determinations based on the share price, based on other uses of our capital as to when the right times to be investing in the stock. We do not expect to have a debt offering or there has been no discussion at all about a debt offering to fund the purchases of the stock.

And I want to be careful in not signaling any changes from how we’ve been behaving to-date just that we’re looking to refresh what we had previously authorized and giving the company some flexibility as it relates to applications of capital. So please don’t be expecting anything unusual to take place..

Got it. That’s helpful. I will jump back in the queue. Thanks, guys..

Thank you. [Operator Instructions]. We have a follow-up question from Larry Solow with CJS Securities..

If I just can real quick on the profitability of the KC-10, I thought it was at least below average on the – I don’t know, maybe on the gross line.

So was that actually accretive to your – in other words I thought maybe losing that, sales would not be – would actually may be accretive to the relative margin I should say?.

Let me – my recollection is that it’s slightly – it’s two components to the KC-10. There’s the flight hour piece which is below – you may recall we’re reporting it at zero margin. And then there’s the over and above which have a healthier margin. So my sense is that the gross profit line is probably below our blended rate..

Right, okay. And then just lastly, did you give the cash flow from the operations in Q4? You gave the CapEx. I was just trying to figure out what the free cash flow was for the year? And then I guess there’s some working capital I guess still building out inventory..

Cash flow from operations was 33 million in Q4..

Okay..

Larry, did you get that?.

Yes, I got that. And then just on the outlook, obviously I think somewhat of a high class problem in terms of building inventory purchases to support these contracts, any target for free cash flow? It’s been sort of a little bit all over the board the last few years I know..

Yes, what I’d like to do again here is I’d like to have a chance – in this regard that might have to be a little later than October. I want to have a chance to see the impact of the ramp of all these different contracts, because the pace of ingestion has been pretty rapid here.

And the first step for us is to make sure we can satisfy the requirements that the customer has and so we’re making the investments we feel are necessary for that. And now we have to give these programs a chance to ramp and take a look what the ongoing costs are against the revenues that come in.

So I’d prefer at this stage to give ourselves a little bit more time to see how that evolves. We have internal targets but I prefer to see how we actually perform before I comment..

Okay, great. I appreciate it. Thanks..

Thank you. Speakers, I’m showing no further questions at this time. I’ll turn the call back over to you..

Okay. Well, thank you. Thank you for your participation today and your interest in our company. Have a nice afternoon..

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may all disconnect and have a wonderful day..