AAR Corp. (AIR) Earnings Call Transcript & Summary

Good day, and thanks for joining us for AAR Corp.'s conference call covering fourth quarter 2025 results. Right now, everyone is in listen-only mode. Following the speakers' presentation, we'll hold a question and answer session. If you'd like to ask something during that session, press star one one on your phone. An automated message will then confirm that your hand is raised. Should you wish to pull your question, just press star one one once more. I'll now hand the conference over to management. Please go ahead.

Good afternoon, everyone, and welcome to AAR's earnings call for the fourth quarter of fiscal year 2025. Joining us today are John Holmes, our Chairman, President, and Chief Executive Officer, along with Sean Gillen, our Chief Financial Officer. The presentation materials we're sharing during this webcast are also available in the Investor Relations section of our corporate website. Before we get started, I want to remind you that remarks made on this call might contain forward-looking statements, as outlined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements carry risks and uncertainties that may lead to actual results differing materially from what those statements suggest. Consequently, they don't guarantee future performance. Those risks and uncertainties are addressed in the company's earnings release, as well as in the Risk Factors portion of the company's Annual Report on Form 10-K covering the fiscal year that concluded May 31, 2024. In offering forward-looking statements, the company undertakes no duty to provide updates reflecting future circumstances or events, whether anticipated or not. We'll be discussing certain non-GAAP financial information today. A reconciliation of those non-GAAP measures to the closest comparable GAAP measures appears in the company's earnings release and slides. A transcript of this conference call will be posted shortly after the webcast and will also be on AAR's website. At this point, I'd like to hand the call over to AAR's Chairman, President, and CEO, John Holmes.

Thanks, and good day to everyone joining us for the earnings call covering the fourth quarter of fiscal year 2025. The record-setting year we've just closed makes us extremely proud, and as you'll observe, our strategy's execution keeps moving forward; slides accompany this discussion, and I'll refer to them while walking through the specifics of this release. If you'll turn to slide three, I'd like to address five main highlights from fiscal year 2025 today. To begin, the quarter and the entire year produced exceptional financial results. On that point, the 14% organic sales growth we achieved during the quarter, which leaves out landing gear, is something we're especially proud of. Next, our portfolio has been further refined and optimized. The Product Support acquisition's integration is essentially finished, and we've wrapped up the divestiture of the landing gear overhaul business. Third, we're achieving growth above the market in our new parts distribution operations. Fourth, new business wins are being captured by our Trax software solution, which is producing results, and fifth, we keep lowering net leverage through both adjusted EBITDA growth and net debt reduction; the quarter closed at 2.7x, and with no M&A activity, we remain on track to hit our leverage target of 2.0 to 2.5x. Now on slide four, you'll find a high-level summary of our financial results for fiscal year 2025. Record full-year results of $2.8 billion were delivered, a 20% increase versus the prior year. Adjusted EBITDA margin rose 140 basis points to 11.8% in fiscal 2025, reflecting robust growth across our core segments, and we produced record adjusted diluted earnings per share of $3.91, compared with $3.33 last year. Net leverage continues to come down, and our solid balance sheet, together with a disciplined approach to capital allocation, leaves us well positioned for investments that will fuel ongoing growth. Moving to slide five now, I'll go deeper into how our strategy is being executed; across our strategic objectives we're making progress—driving growth via market share capture and new business, enhancing margin through cost efficiency and synergy realization, expanding the intellectual property in our offerings via digital and other investments, and maintaining disciplined portfolio management. The strong performance seen in fiscal 2025 came from the actions we're taking, and we anticipate that carrying into 2026. Beginning with growth, during the quarter we announced multiple new business wins within our parts supply segment. Our multi-year agreement with FTAI was extended so that we exclusively distribute CFM56 engine material to the aviation aftermarket through 2030. Additionally, a supply chain alliance agreement was signed with the U.S. Defense Logistics Agency, allowing AAR to deliver comprehensive new parts distribution services addressing the DLA's needs. Within integrated solutions, a joint venture was formed with KIRA, and that joint venture received the award for the U.S. Navy's pilot training program on the E-6B aircraft. On top of that, we're still moving forward with the expansions of our airframe MRO operations in Oklahoma City and Miami, both of which are scheduled to begin operating during calendar 2026 and will bring an additional 15% of capacity into our network. These fresh contract awards and facility expansions show how solid our portfolio is and how much demand our customers have for what we provide. When it comes to cost efficiency and synergy realization, the integration of the Product Support acquisition is now largely behind us. As a reminder, one element of that Product Support integration involves leaving our facility in Long Island, New York and moving that work into our sites in Dallas, Texas and Wellington, Kansas. The final pieces of equipment and work were moved out of New York in Q4, and we expect to be fully out of the New York facility during our fiscal Q1. At this point we can capture the entire $10 million of cost synergies, which will help drive additional margin expansion. Turning to our digital and IP-enabled offerings, momentum remained strong for our Trax software solution, and we announced a number of new business wins, among them our biggest win to date, with Delta Air Lines. Delta chose Trax to modernize the maintenance and engineering systems at Delta TechOps. Under this arrangement, Trax will swap out Delta TechOps legacy systems in favor of its eMRO and eMobility solutions. This implementation, which spans multiple years, will end up being the biggest of its kind within the maintenance ERP space. This is a textbook illustration of the thesis behind our Trax acquisition, in which AAR is able to use its customer relationships to create opportunities for Trax. What's more, this win proves that, with the investments AAR has made, Trax is capable of scaling up to serve the biggest airlines globally. Lastly, in line with our disciplined approach to portfolio management, we finished divesting our landing gear overhaul business. That transaction brought in $48 million of cash and is accretive to margin. As noted earlier, all of this execution produced outstanding results in our fiscal year 2025, with robust double-digit growth in sales, adjusted EBITDA, and adjusted EPS. With that, I'll hand things over to Sean, who will walk through the results in greater detail.

Appreciate that, John. If you turn with me to slide six, our total adjusted sales for the quarter were up 12% versus a year ago, reaching $736 million, which marks a fresh record for fourth quarter sales. That robust increase showed up in every one of our segments, and it was especially pronounced in parts supply — if you set aside the landing gear sale, which brought in $18.6 million of sales in the prior-year quarter and $8.3 million this quarter. Organic sales growth in Q4 came to 14%; across the entire fiscal year, our organic sales growth — leaving out the effects of the Product Support acquisition as well as the landing gear divestiture — was 9%. Sales to government customers rose 21%, while sales to commercial customers were up 12% against the same period a year earlier; within the quarter, commercial sales accounted for 69% of the total, with government sales making up the other 31%. It's encouraging to see our government business back in growth mode relative to the prior-year quarter. Adjusted EBITDA climbed 19% to $90.9 million, and EBITDA margins went from 11.6% to 12.4%. Adjusted operating income was up 25% at $76.9 million, with adjusted operating margins improving from 9.3% to 10.5%. The margin gains were driven by our emphasis on operating efficiencies along with standout strength in parts supply. Sales growth combined with margin expansion produced a year-over-year rise in adjusted diluted EPS of 32%, coming in at $1.16 versus $0.88 in last year's comparable quarter. With that, let me walk through the segment details, beginning with parts supply on slide seven. Parts supply sales were up 17% to $306 million compared with the same quarter a year ago. Once again we delivered above-market growth exceeding 20% in our new parts distribution activities, with solid gains in both the commercial and government end markets. In USM, we again recorded only modest growth, held back by constraints on asset availability. Fourth quarter parts supply adjusted EBITDA came to $52.1 million, an increase of 36%, and adjusted EBITDA margin went from 14.8% to 17.1% against the same quarter last year. Adjusted operating income increased 41% to $49.7 million, while adjusted operating margins also rose, from 13.5% to 16.3%; that meaningful margin gain was driven by both new parts distribution and USM; specifically, USM posted a very strong Q4 margin thanks to certain whole asset transactions. Moving to slide eight now, in repair and engineering, sales rose 3% to $223 million year-over-year. If you exclude the landing gear divestiture impact, organic sales growth for repair and engineering was 8%. With demand still robust for our airframe MRO activities and as we keep pushing efficiency to raise throughput, adjusted EBITDA was $26.7 million, 6% below the same period last year, with adjusted EBITDA margins falling from 13.1% to 12%. Fourth quarter adjusted operating income came in at $23.3 million, also 6% lower than the prior-year period, and adjusted operating margins declined from 11.5% to 10.5%. The main reason for these declines was that our New York component repair facility saw increased costs. Once integration wraps up and we finish shutting it down during Q1, moving forward we anticipate generating additional margin growth in this segment via Product Support synergies being realized, our paperless hangar efforts continuing to roll out, and capacity expansions currently underway. Now if you look at slide nine, Integrated Solutions. Adjusted sales rose 10% compared to the prior year, reaching $181.5 million. Keep in mind adjusted sales come in below the GAAP sales we report because we recorded $19 million in sales tied to a power by the hour contract we exited previously. Just as with other terminated contracts, we remove the financial impact or benefit from our adjusted results. These sales carried no margin; we experienced growth in both our commercial and government end markets, with especially strong performance in our government programs. Integrated Solutions adjusted EBITDA came to $14.2 million, which was 13% above the equivalent period a year ago. Adjusted operating income reached $10.7 million, up 15%, while the adjusted operating margin rose from 5.6% to 5.9%. Moving to slide 10 in the presentation, over the quarter we brought our net debt leverage down from 3.06x during the third quarter to 2.72x. This decrease came from robust Q4 cash flow from operations totaling $51 million, along with net proceeds of $48 million from selling the landing gear business. In addition, during Q4 we took the opportunity to buy back $10 million of stock at an average price of $52.37 per share. For Q1, because of how business investment opportunities are timed seasonally, we do anticipate a cash use in Q1. Our lower net leverage gives us more optionality when it comes to capital allocation moving forward. The strength of our balance sheet leaves us well positioned to invest organically and potentially chase value-accretive acquisitions. If there's no M&A, which stays a component of our growth strategy, we would anticipate continuing to delever and hitting our target net leverage of 2 to 2.5x during fiscal year 2026. With that, I'll hand the call back to John.

Thank you, Sean. Now if you'll turn with me to slide 11, you'll see the goals we've set for fiscal year 2026, which flow from our strategy. We're aiming to keep growing our share of the market in new parts distribution as well as in parts supply across repair and engineering. Our hangar expansion in Oklahoma City will let us add capacity to the heavy maintenance network. Another priority is pursuing cross-selling chances that push more volume into our component services sites. And lastly, we want to turn the opportunities sitting in our integrated solutions government pipeline into signed awards. On the margin side, our plan is to keep widening it by realizing synergies and improving cost efficiency, and we look for the Product Support integration to wrap up, with the complete $10 million of yearly cost synergies captured as the year goes on. Beyond that, we'll keep moving forward on bringing paperless into our hangars. Roughly one third of our facilities have that done already, and the rollout will carry on across the network for the rest of the year. The upshot of all this is additional margin gains in our operations. Growing the intellectual property held in our portfolio is another thing we'll concentrate on this year, mainly by way of digital spending on Trax so we can win new customers and move current ones up to the newest Trax products; we'll stay proactive and disciplined when it comes to acquisitions that are accretive, and we'll review our portfolio to see where more optimization is possible. If you'll go to slide 12, to give some background as we head into the coming year, we want to offer extra commentary about the trends showing up in the end markets we've chosen. As you observed, during fiscal year 2025 our new parts distribution business posted 25% organic growth, well ahead of the market, and we believe that outperformance will carry on in USM. Our expectation is that the market stays dynamic over FY26, though our position in this space remains strong. When it comes to airframe MRO, we anticipate running at full utilization, with the extra capacity that's already been sold arriving in the back half of fiscal year 2026 and then in fiscal year 2027. For component services, we expect the integration to be entirely finished, and those sites are positioned well to take on more volume generated by cross-selling within integrated solutions; we do face some short term headwinds stemming from the Department of State's cost reduction push, which we believe will affect the Iraq aviation operations conducted under our WASS contract, yet we expect growth in other programs and new business wins to counter those headwinds as the year moves along. Digital Trax is a differentiated capability with high margins and high growth that will stay a key focus for us. In light of the broader macro picture, guidance will keep coming on a quarterly basis. That said, judging by what we can see right now, we expect our organic sales growth to come in near the 9% level we achieved in fiscal year 2025. That increase comes off adjusted sales of $2.68 billion for our fiscal year 2025, leaving out what the landing gear divestiture contributed. On top of that, we currently have a robust pipeline of M&A possibilities that would add to that rate of growth. I'd also anticipate that our adjusted operating margins will keep getting better than the 9.6% we posted in fiscal year 2025; when it comes to Q1, our expectation is sales growth between 6% and 11%, and that figure leaves out landing gear, which brought in $19.2 million of sales during Q1 a year ago. Our forecast for adjusted operating margin is 9.6% to 10%. Worth pointing out that for AAR, Q1 tends to be a seasonally slower quarter for sales when measured against Q4. To wrap up, I want to emphasize how strong AAR is, both as a business and as an investment. We hold a well-positioned spot in appealing, expanding aviation end markets. Our capabilities are unique and without equal anywhere in our industry; we are carrying out our growth and efficiency initiatives; we have streamlined and fine-tuned our portfolio so it delivers stronger growth at higher margins. Net leverage is coming down and we are allocating capital thoughtfully. We are meeting our strategic objectives while putting up consistent financial performance. Before I hand things to the operator for questions, I want to express thanks to our team of dedicated employees, to our customers, and to our shareholders for your continued interest in and support of AAR. With that, let's open it up for questions.

Thanks. Just a quick note, everyone: if you'd like to pose a question, hit star one one on your phone, and then hold until your name gets called. If you want to take your question back, just hit star one one a second time. Hang tight while we put together the Q&A list. The first person in the queue is Ken Herbert from RBC. Your line is open.

Yeah. Hey, good afternoon, John and Sean.

Hey, Ken.

I just want to start off with a question. When it comes to your revenue growth guidance for the first quarter, the range looks pretty wide — usually it's narrower than what you've provided before. Could you walk through the pluses and minuses, and how we ought to frame what would push you toward the bottom of that range as opposed to the top, in terms of revenue growth for the quarter?

Yeah, we have. I'd attribute that partly to the conditions around USM; certain deals of a bigger size can shift from one period to another. Clearly, Q4 was a very solid quarter for us, and we definitely expect expansion in Q1, though that expectation rests mostly on what I just described.

Alright, thank you. Regarding the repair and engineering segment specifically, adjusted EBITDA margins declined during the quarter — could you walk through some of the factors behind that, and also share how we ought to view the rate of improvement for that segment especially when considering fiscal 2026?

Right, the drop we saw this quarter on the repair and engineering margin side really came entirely from wrapping up the last work tied to shutting down the New York site. That work has shifted over to the two Triumph plants, one in Kansas and one in Texas, yet the fixed costs stayed put. So during the quarter you had stranded costs dragging the margins down. Once we're fully out of that site this quarter, we'd look for things to get better, and that drag won't be sitting in our numbers for the rest of the year.

All right, that's excellent. Sean, one last thing on that point — when you look at the entire year, after you kind of adjust for that, and take into account what the extra capacity brings you, I realize you don't provide guidance at a very detailed level here, but as we examine the different segments, in which areas might we see the greatest margin gains in 2026 among the various businesses?

Yeah, I'd say repair and engineering offers the greatest chance to pick up margin bit by bit. Like we mentioned, with the integration now basically complete, we anticipate beginning to capture more of those synergies. That $10 million in synergies, along with the hangars, keeps delivering really strong results, and we might get some extra throughput and margin from there. My view is that repair and engineering holds the largest opportunity, followed by part supply. Q4 came in really, really strong, though across the whole year, I'd think you'd see that segment keep performing well and expanding, since it's our highest margin segment.

Perfect, thanks. Nice quarter. I'll pass it back there.

Great, thanks again.

Kindly remain on the line as we take the following inquiry. That inquiry is from Louis DiPalma of William Blair. Your line is now available.

John and Sean. Hello, and good afternoon. John, you shared that Trax just went past the $50 million mark for revenue. You also told us about the marquee win with Delta, plus earlier wins with Virgin Atlantic, Amerijet, and Rolls-Royce. What I want to ask is, given all that momentum and the plan to roll out the supplier portal, how do you see Trax's revenue potential over the long term, and how do you think about the TAM for Trax?

Yes, so to start, it makes us very proud that we've doubled Trax's revenue since 2020 — from $25 million two years back, when we bought it, to roughly $50 million now. The wins we keep announcing add further to that growth. Delta is the biggest one. It's a multi-year implementation, so reaching full run rate will take a few years, but it will lift Trax's revenue in a meaningful way. Given the momentum from new business, as those contracts get implemented and ramp up, and given the other initiative we've discussed — moving current Trax users up to the new suite of Trax services, which brings extra revenue opportunity — our aim is to double Trax's revenue once again, and all those opportunities excite us.

Great. Turning to Sean, do you expect meaningful expenses tied to rolling out the supplier marketplace you brought up during the slide presentation, and is that rollout supposed to happen during this year?

Yes, expenses come along with it, and as we've discussed, Trax's revenue has increased quite well since we bought the business. Costs have been added to the business; margins remain high, though we've also brought in some expenses to back the growth. A portion of that involves certain new digital initiatives, in particular part of this supplier portal we're developing, and I would anticipate those expenses landing in this year, in this fiscal year, as we roll it out and hopefully sort of make some announcements throughout the year.

Great. One last question. I could probably figure this out myself, but what was the latest growth rate for the Triumph business? It's now going to be counted within your organic growth. What's the latest growth rate?

Yeah, so regarding that growth rate, everything is organic at this point since it was fully reflected in the Q4 results of last year. If you look at the repair and engineering segment, it expanded 8%, not counting landing gear. That 8% includes a contribution from the Triumph Product Support business. Growth occurred in both the airframe MRO and Triumph Product Support. We're aiming to stop separating the TPS sites from the non-TPS sites, because right now, with the integration finished and the, let's say, inorganic period behind us, it's simply part of the growth, which will appear in the repair and engineering segment.

Alright, just one more. How long do you expect it will take before the Oklahoma City and Miami hangars are full? And what does demand look like for those sites?

We've already sold that capacity. The moment the building is finished, we've got customers ready to put aircraft to work. Just to recap, we expect the Oklahoma City location to come online during calendar Q1 2026, while the Miami facility should come online in the third calendar quarter of 2026.

Sounds good. Thanks, John. Thanks, John.