(Dollars in thousands)

General Overview

We report our activities in four business segments: Aviation Supply Chain; Government and Defense Services; Maintenance, Repair and Overhaul; and Structures and Systems. The table below sets forth consolidated sales for our four business segments for the three-month periods ended August 31, 2012 and 2011.

                                     Three Months Ended
                                         August 31,
                                      2012         2011
Sales:
Aviation Supply Chain              $    148.7    $  161.1
Government and Defense Services         150.6       150.0
Maintenance, Repair and Overhaul        105.5        93.2
Structures and Systems                  145.7        81.2
                                   $    550.5    $  485.5

During the first quarter of fiscal 2013, sales to commercial customers increased 24.7% compared to the prior year and represented 57.2% of consolidated sales. Commercial sales growth during the first quarter of fiscal 2013 was driven by strong organic growth in the Aviation Supply Chain and Maintenance, Repair and Overhaul business segments and by the inclusion of sales at Telair International GmbH ("Telair") and Nordisk Aviation Products, AS ("Nordisk"). The prior year included approximately $33.3 million in aircraft sales.

During the first quarter of fiscal 2013, sales to global government and defense customers increased 1.1% compared to the prior year and for the three months ended August 31, 2012 represented 42.8% of consolidated sales.

Defense funding is currently facing pressure due to U.S. budget deficit challenges. Congress has enacted the Budget Control Act of 2011 ("BCA") which reduces defense spending by a minimum of $487 billion over a ten-year period starting in government fiscal year 2012. Under the BCA, an automatic sequestration process was triggered when the Joint Select Committee on Deficit Reduction, a committee of twelve members of Congress, failed to agree on a deficit reduction plan for the U.S. federal budget. The sequestration is scheduled to commence on January 2, 2013, absent legislative or other remedial action. Of the $1.2 trillion in reduced spending required by sequestration over the ten-year period beginning in government fiscal 2013, approximately $50 billion per year would be borne by the Department of Defense. Whether or not sequestration goes into effect, we expect the defense budget will be reduced. Although there may be additional opportunities for those business units with our Supply Chain and Maintenance, Repair and Overhaul segments that support the Department of Defense, as a result of defense spending reductions, we expect our businesses that support the Department of Defense within our Structures and Systems segment will be adversely affected.

Based on results of the first quarter and our current view, we are updating our fiscal year 2013 earnings per share guidance to a range of $1.60 to $1.70 from our previous guidance of $1.55 to $1.65.

Results of Operations

Three-Month Period Ended August 31, 2012

Consolidated sales for the first quarter ended August 31, 2012 increased $65.0 million or 13.4% compared to the prior year period. Sales to commercial customers increased 24.7% compared to the prior year and included strong organic growth in our Aviation Supply Chain and Maintenance, Repair and Overhaul segments, as well as sales from the newly acquired businesses, Telair and Nordisk. Sales to government and defense customers increased 1.1% compared to the prior year.

In the Aviation Supply Chain segment, sales decreased $12.4 million or 7.7% compared to the prior year. The prior year included approximately $33.3 million in aircraft sales; there were no aircraft sales for the first quarter of this fiscal year. The current year includes additions for the attainment of a new repair contract and Airinmar Holdings Limited ("Airinmar") sales of $10.1 million. Gross profit in the Aviation Supply Chain segment decreased $2.5 million or 9.5%, and the gross profit margin percentage decreased to 15.9% from 16.3% in the prior year primarily due to the mix of products sold.

In the Government and Defense Services segment, sales remained flat compared to the prior year. Gross profit decreased $1.5 million or 5.5% and the gross profit margin percentage declined to 17.2% from 18.3% in the prior year. The decline in gross profit was due to lower margins on certain programs in the defense logistics business.

In the Maintenance, Repair and Overhaul segment, sales increased $12.3 million or 13.2% versus the prior year due to continued growth and share gains at our airframe maintenance centers, partially offset by lower sales at our landing gear business. Gross profit increased $2.8 million or 27.5%, and the gross profit margin percentage increased to 12.3% from 10.9% due to operational efficiencies and increased billable hours at our airframe maintenance centers.

In the Structures and Systems segment, sales increased $64.5 million or 79.4% compared to the prior year due to the inclusion of sales from Telair and Nordisk, which contributed $56.8 million of revenue during the quarter and the benefit of higher sales in our mobility business. Gross profit in the Structures and Systems segment increased $15.8 million or 132.8% and the gross profit margin percentage increased to 19.0% from 14.7% in the prior year. The increase in the gross profit margin percentage was primarily due to improved product mix resulting from acquisitions.

Selling, general and administrative expenses increased $10.2 million or 23.7% due to the inclusion of the three acquired companies and higher amortization of intangible assets. Operating income increased $5.6 million or 17.1% compared with the prior year primarily due to contributions from the acquired companies and other factors noted above. Net interest expense increased $2.8 million or 37.8% compared to the prior year primarily due to an increase in outstanding borrowings for the purchase of Telair and Nordisk. Our effective income tax rate was approximately 34.5% for both fiscal year first quarters.

Net income attributable to AAR was $18.2 million compared to $16.6 million in the prior year due to the factors discussed above.

Liquidity and Capital Resources

Historically, we have funded our operating activities and met our commitments through the generation of cash from operations, augmented by the periodic issuance of common stock and debt in the public and private markets. In addition to these cash sources, our current capital resources include an unsecured credit facility, as well as a separate secured credit facility. We continually evaluate various financing arrangements, including the issuance of common stock and/or debt, which would allow us to improve our liquidity position and finance future growth on commercially reasonable terms. Our continuing ability to borrow from our lenders and issue debt and equity securities to the public and private markets in the future may be negatively affected by a number of factors, including the overall health of the credit markets, general economic conditions, airline industry conditions, geo-political events, and our operating performance. Our ability to generate cash from operations is influenced primarily by our operating performance and changes in working capital. Under our universal shelf registration statement filed with the Securities and Exchange Commission that be became effective on May 4, 2012, we registered an indeterminate number of principal amount of shares of common stock, shares of preferred stock, debt securities, warrants, stock purchase contracts and stock purchase units which may be sold from time to time, subject to market conditions.

At August 31, 2012, our liquidity and capital resources included cash of $67.7 million and working capital of $617.0 million. We have an agreement with various financial institutions, as lenders and Bank of America, N.A., as administrative agent for the lenders (as amended, the "Credit Agreement") providing for an unsecured revolving credit facility of $580.0 million that we can draw upon for general corporate purposes. Under certain circumstances, we may request an increase to the revolving commitment by an aggregate amount of up to $100.0 million, not to exceed $680.0 million in total. The Credit Agreement expires on April 12, 2016. Borrowings under the Credit Agreement bear interest at the offered Eurodollar Rate (defined as the British Bankers Association LIBOR Rate) plus 125 to 225 basis points based on certain financial measurements if a Eurodollar Rate loan, or at the offered fluctuating Base Rate plus 25 to 125 basis points based on certain financial measurements if a Base Rate loan.

Borrowings outstanding under the Credit Agreement at August 31, 2012 were $300.0 million, and there was approximately $25.7 million of outstanding letter of credit which reduced the availability of this facility to $254.3 million. There are no other terms or covenants limiting the availability of this facility. We also have $4.4 million available under a foreign line of credit.

In addition to our unsecured Credit Agreement, we have a $65.0 million secured revolving credit facility with The Huntington National Bank (the "Huntington Loan Agreement"). Borrowings under the Huntington Loan Agreement are secured by aircraft and related engines and components owned by us. The Huntington Loan Agreement expires on April 23, 2015. Borrowings bear interest at LIBOR plus 325 basis points. As of August 31, 2012, $31.2 million was outstanding under this agreement resulting in $33.8 million remaining available. There are no other terms or covenants limiting the availability of this facility.

We are in compliance with all financial covenants under each of our financing arrangements.

During the three-month period ended August 31, 2012, our cash flow from operations was $33.2 million primarily as a result of net income attributable to AAR and noncontrolling interest and aggregate depreciation and amortization of $50.3 million and the reduction in accounts and notes receivable. These positive impacts were partially offset by a decrease in accounts and trade notes payable.

During the three-month period ended August 31, 2012, our investing activities used $16.9 million of cash principally as a result of our final payment for the acquisitions of Telair and Nordisk.

During the three-month period ended August 31, 2012, our financing activities used $17.0 million of cash primarily due to a net reduction in borrowings, the repurchase of common stock under our share repurchase program and payment of dividends.

Critical Accounting Policies and Significant Estimates

We make a number of significant estimates, assumptions and judgments in the preparation of our financial statements. See Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2012 Form 10-K for a discussion of our critical accounting policies. There have been no significant changes to the application of our critical accounting policies during the first quarter for fiscal 2013.

Forward-Looking Statements

This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on beliefs of our management, as well as assumptions and estimates based on information available to us as of the dates such assumptions and estimates are made, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors, including those factors discussed under Part II, Item 1A under the heading "Risk Factors" and to those set forth under Part I, Item 1A in our Annual Report on Form 10-K for the year ended May 31, 2012. Should one or more of those risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. Those events and uncertainties are difficult or impossible to predict accurately and many are beyond our control. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.