AAR Corp. (AIR) Earnings Call Transcript & Summary

Hello, everyone, and thanks for joining us on this call to discuss AAR's results for the second quarter of fiscal 2026. With us this afternoon are John Holmes, our Chairman, President, and Chief Executive Officer, along with Sarah Flanagan, who is serving as Interim Chief Financial Officer. You can find the presentation accompanying today's webcast in the Investor Relations area of our company website. Before we get started, please note that what we say today will include forward-looking statements under the definition set out in the Private Securities Litigation Reform Act of 1995. Because such statements carry risks and uncertainties, actual outcomes may differ materially from what those statements suggest. As a result, they should not be treated as assurances of future results. The company's earnings release, together with the Risk Factors portion of our annual report on Form 10-Ks covering the fiscal year that ended 05/31/2025, describes these risks and uncertainties. In offering forward-looking statements, the company takes on no duty to issue updates reflecting later circumstances or events, whether expected or not. We will also touch on certain non-GAAP financial information today. A reconciliation between those non-GAAP measures and the closest comparable GAAP measure appears in the company's earnings release and slides. Shortly after this webcast, a transcript of the conference call will be posted on AAR's website. I'll now hand things over to AAR's Chairman, President, and CEO, John Holmes.

Okay, thank you, Chris, and good morning, everyone — appreciate you being here for our second-quarter fiscal 2026 earnings call. AAR turned in another outstanding quarter, with strong results across all areas of the business. We also completed two significant strategic acquisitions, and we've already shared news of a third, which we expect to close in our fiscal Q4. These transactions have us excited, since they allow us to accelerate our strategic priorities in two key parts of the company: the fast-growing parts supply business — especially new parts distribution — along with our repair and engineering segment. Turning to slide three, I'll start with the main takeaways from the quarter. First, we generated strong financial performance, with revenue up in each segment. Our parts supply operation powered total sales growth of 16%, climbing 29% in the quarter. Behind that was organic sales growth of 32% in our new parts distribution activities, which outpaced the market; that business has expanded faster than any other, averaging more than 20% organic growth annually over the last four years. OEMs respond favorably to our two-way exclusive distribution model, which continues to drive additional market share gains. Second, we strengthened our portfolio with two strategic acquisitions; as we've said before, we're committed to enhancing our offerings through targeted acquisitions that advance our strategy, and we're delivering on that promise. Third, we continue to win new business across the company, including renewing key exclusive new parts distribution agreements, as well as adding new Traxx customers. In addition, we're further developing our digital capabilities, including through the partnership just announced with Arrow Exchange, the top secure network provider for the commercial aviation supply chain. Fourth, we're carefully managing our balance sheet to preserve strategic flexibility, and we ended the quarter with lower leverage, now within our long-term target range — supported in part by $138 million in cash generation. Now on to slide four — during the quarter we accomplished a great deal related to our four strategic objectives: new business wins, operational efficiency, software and IP-enabled offerings, and disciplined portfolio management. Here I'll highlight two of those objectives: new business wins, along with software and IT-enabled offerings, and we'll address other items later in the presentation. First, our distribution model is unique in the industry because nearly all our distribution contracts — typically running five to ten years — are two-way exclusive. That means we don't stock competing products in any given market, and our OEM partners don't engage a rival distributor. Through this model, we develop stronger relationships with our OEM partners, gain deep technical knowledge of their products, and help them win market share. That contrasts with the traditional distribution approach, where you purchase inventory and essentially operate as a call center. We developed this approach more than ten years ago, and over the past several years, our contracts have achieved a 100% renewal rate. About renewals — during the quarter we made an announcement that a pair of important exclusive agreements had been extended: one involving Collins Aerospace, and another involving Arkwin Industries, which is part of TransDigm. We are likewise capitalizing on synergies that connect our repair offering with what we do in distribution. Additionally, during the quarter Eaton — a significant new parts distribution OEM partner for us — named our Amsterdam location an authorized service center to support their hydraulic components across Europe, the Middle East, and Africa. That is a great example of how vital our parts supply, repair, and engineering businesses are within the aviation value chain, and of the synergies present across our operating activities. Now in our repair and engineering business, we continue to gain momentum on the airframe heavy maintenance expansions in Oklahoma City and Miami. Both are progressing well and are set to come online in calendar 2026, adding approximately $60 million in yearly revenue. During the quarter, Trax announced an agreement with Aero Exchange. Air Exchange is a leading provider of secure commercial aviation supply networks, and this deal will bolster our integration capabilities with our customers. By means of Trax applications, Trax customers will be able to access Arrow Exchange's broad networks of parts, repair, inventory pool, and consignment service suppliers. This collaboration advances our strategy of making it simpler for Trax customers to buy parts and repairs. One additional Trax item. We're delighted to share that yesterday Trax was selected by Thai Airways, one of the most important Asian carriers, to supply its EMRO enterprise resource planning system suite of e-mobility apps together with the cloud hosting solution. Moving now to slide five for more detail. Let me provide you with further detail on our recent acquisition of ADI. We purchased ADI in September for $108 million. ADI is a leading distributor of electronic components and assemblies, and it aligns closely with our strategic objective of expanding our fast-growing new parts distribution activities within our parts supply segment. As I mentioned, new parts distribution has grown at over 20% for the last four years, and ADI will bring a new growth vector to this activity. Adding ADI moves AAR up the value chain, up the supply chain, through ADI's production-facing distribution channel. What that means is we will now supply parts to our OEM partners for use in their own manufacturing, and we intend to leverage our OEM relationships to grow ADI's business. With approximately $150 million in sales over the last twelve months and a team of 400 skilled employees, we're expanding our access to a substantial, rapidly growing total addressable market. Beyond that, over time we see opportunities to improve margins through higher volumes and operational efficiencies. ADI has performed above expectations in the first few months, and the integration is progressing as planned. Turning now to slide six, I'd like to give an overview of our acquisition of HAYCO Americas. We acquired HAYCO Americas in November for $77 million, extending our leadership position in airframe heavy maintenance. Additionally, we recorded $138 million in the quarter. Because of the investments we've made in our own systems and processes, we're now the industry leader when it comes to quality and turnaround time, and we've become the number one option for airframe heavy maintenance in North America. New parts distribution might be our fastest-growing business, but if you're asking what has driven the biggest expansion of our margin over the last four years, it's airframe heavy maintenance. This deal pushes that success even further. HACO Americas operates in Greensboro, North Carolina, and also in Lake City, Florida. While we integrate, we'll apply our proven operating model at these locations so that their operational and financial results get better. That work takes twelve to eighteen months and depends on three key elements: revenue optimization, cost reduction and process improvements, and footprint rationalization. On the revenue front, together with the acquisition, we announced about $850 million in new contract awards with multiple customers across five years. Those contracts will replace the existing revenue base at HAECO and line up more closely with the key terms we have with our other current airframe heavy maintenance customers; when it comes to cost reduction and process improvements, at the HAYCO facilities, the actions we're taking to bring the cost structure in line with the new revenue base are already well underway. This includes $138 million in expected annual revenue.

Additionally, over time, we plan to implement our own unique procedures and frameworks within these sites, allowing them to achieve the quality and efficiency standards we've already reached at our remaining airframe heavy maintenance facilities. Regarding our strategy to streamline our footprint, we intend to close our heavy maintenance operation in Indianapolis over the next year and a half, transferring that workload to other AAR locations, with a significant share heading to the HAECO sites. Due to the terms of our lease with the airport, Indianapolis stands as our most expensive site. Furthermore, securing an adequate workforce there has been an ongoing difficulty. Once the lease runs out at that expensive site, we'll move the work to other parts of our network, which should boost the margin profile of our airframe heavy maintenance operations overall. As I said earlier, completing these steps will take between a year and a year and a half, and at first they'll dilute margin. Still, we anticipate margin improving gradually throughout the integration. When the work is finished, our network will have roughly 40% more capacity, our fixed costs will be lower, and we'll have a labor supply that's easier to predict. Above all, our customers back this plan and have made contractual commitments to it. Let's move to slide seven. We've also just shared news of a deal to bring Aircraft Reconfig Technologies, known as ART, into the company for $35 million. ART's focus is on passenger aircraft interior reconfiguration, offering project management along with engineering and certification services. Adding this to what we already do in airframe heavy maintenance is something we're excited about, since it grows our capacity for complex modification projects and delivers proprietary offerings plus a strong IP portfolio. On top of that, it gives us engineering and self-certification abilities that should speed up our parts PMA development work. We're expecting the transaction to be finalized in the fourth quarter of this fiscal year, and we can't wait to have that talented team join AAR. With that, I'll hand things over to Sarah for a closer look at the results.

Thanks for that, John. Let’s turn to slide eight together. Compared with the same period last year, our overall revenue grew 16% in the quarter, and within that, organic growth accounted for 12%, which brought the total to $795 million. Growth showed up in every segment we report, with parts supply standing out in particular. Government customer revenue increased 23%, whereas commercial customer revenue was 13% higher than in the comparable quarter last year; during the quarter, commercial made up 71% of total sales, while government represented 29%. Relative to the equivalent quarter a year earlier, adjusted EBITDA increased 23%, reaching $96.5 million, and adjusted EBITDA margin improved to 12.1% from 11.4%. Adjusted operating income climbed 28% to $81.2 million, while adjusted operating margin gained 100 basis points, rising from 9.2% to 10.2%. The primary drivers behind those margin improvements were stronger operating efficiencies, an excellent performance in our Parts Supply segment, and government programs. Revenue growth together with margin expansion yielded a 31% year-over-year rise in adjusted diluted EPS, to $1.18 per share, compared with $0.90 per share in last year’s same quarter. With that, I’ll walk through segment-level results in more detail, starting with parts supply on slide nine. Parts supply revenue as a whole increased 29% year over year to $354 million; again, we achieved above-market growth in our new parts distribution operations, which rose 32% versus last year, excluding ADI’s contributions. For the second quarter, parts supply adjusted EBITDA came in at $46.5 million, up 37%, and adjusted EBITDA margin increased to 13.2% from 12.4% a year earlier. Adjusted operating income rose 35% to $42.8 million, and adjusted operating margin also improved, from 11.5% to 12.1%. Those stronger margins were largely the result of greater operating leverage, as we are scaling the business effectively while maintaining cost discipline. Moving now to slide 10 for repair and engineering. Total revenue increased 7% year over year to $245 million. Demand for our airframe heavy maintenance work continues to be robust, and we keep improving efficiency to boost throughput. Adjusted EBITDA was $31.2 million, 1% above the same period last year, while adjusted EBITDA margin declined to 12.8% from 13.5%. In the second quarter, adjusted operating income was $27.4 million, in line with the prior-year period, as adjusted operating margin decreased to 11.2% from 12%; that was primarily due to the mix of work across our airframe heavy maintenance network, one-time costs, and component repair, along with a modest effect from the HAYCO Americas acquisition, because only one month of HAYCO operations was included in the quarter. As John mentioned earlier, we have begun our integration efforts and expect to enhance their operating margin over the next twelve to eighteen months, moving them from low single-digit EBITDA margin to margins consistent with our current repair and engineering margins. Going forward, within this segment we expect further margin improvement, supported by better performance at the two HAECO facilities we acquired recently. This is going to be driven by work on integration and synergies, by rolling out the paperless hangar program even further, by more volume moving through our component repair shops, and by the hangar capacity we're adding right now. Turning to slide 11. Integrated Solutions sales were up 8% compared with a year ago, hitting $170 million, driven mainly by government programs. Integrated Solutions adjusted EBITDA was $18.5 million, which is 50% higher than the prior-year period. Adjusted operating income reached $15.1 million, an 82% gain, while adjusted operating margin improved to 8.6% from 5.1%. Those stronger margins came from favorable mix as well as certain government contracts reaching key program milestones during the quarter. Onto slide 12. During the quarter, net debt leverage dropped to 2.49 times from 2.82 times in the first quarter, which places us within our target range of 2.0 to 2.5 times. That decrease was driven by double-digit earnings growth, continued balance sheet management, and our equity offering. Now slide 13. When it comes to capital allocation, our priorities remain the same. First, we'll continue funding organic growth in each of our three core areas: our high-growth new parts distribution business, our airframe heavy maintenance and component repair operations, and our software and IP-enabled offerings. Second, we'll steer capital toward M&A opportunities that meet our strategic and financial criteria and strengthen our core segments. The three acquisitions we've discussed today — ADI, HAECO Americas, and ART — all align well with the criteria we've laid out and will help accelerate our growth strategy of bringing our unique platform to market as a premier independent provider of aviation parts, repair, and software, with $176 million supporting these efforts.

Software.

Turning our attention toward Q3, we anticipate generating positive cash flow during that period. On top of that, we're looking for interest expense to come in a bit below what we saw last quarter. With that said, I'll hand things back over to John.

Okay, thanks, Sarah. If you go to slide 14, we've got an update there regarding what we expect for Q3 and the balance of this fiscal year. When it comes to Q3, total sales growth should land somewhere between 20% and 22%, and that figure accounts for the effect of the two acquisitions we recently completed. As a point of reference, organic sales growth during Q3 is projected at 8% to 11%, and that number leaves out the Land and Gear divestiture along with the contribution from the ADI and HAECO acquisitions. On the margin side, we're looking at Q3 adjusted operating margin between 9.8% and 10.1%. Looking at the whole fiscal year, because the first half went so well, and factoring in those two recent acquisitions, we anticipate total sales growth nearing 17%, with organic sales growth nearing 11%. To wrap up, I want to emphasize how strong AAR is, both as a business and as an investment. We hold a solid position across the most appealing parts of an aviation aftermarket that keeps expanding. As a supplier of parts, repair, and software, we've built a broad and distinctive platform that no one else in this industry can match. Every one of our aftermarket offerings fits together, fueling a growth cycle that sustains itself and reinforces itself. Through quality acquisitions, we've strengthened our portfolio, and the result is faster growth and better margin. I want to express gratitude to our skilled global workforce, especially Sarah, for the commitment they show in delivering excellence, quality, safety, and the essential work we perform for customers daily. I'm also grateful to our customers and shareholders for the ongoing interest you show in AAR and the support you give us. Having said that, let's hand things to the operator so we can take questions.

Yes. Hello there. Good afternoon. Hi, John and Sarah, what a strong quarter. Hi, John, perhaps to begin with parts supply, how should we interpret that 32% growth? Could you break it down further, perhaps between volume and price? And if anything unusual is showing up on the pricing front from an airline's point of view, then regarding volume, how should we view, maybe, same-store sales for that versus, maybe, new contract wins or portfolio expansions during the quarter?

Yes. That's a great question, I'd say. I'd say that, on the whole, volume is what's driving that growth. So most of that growth comes from volume. Certainly. We've experienced some, you know, some price increases with certain OEM partners of ours, but that, you know, wouldn't represent most of it. And then when it comes to same-store sales, we're seeing considerable growth from existing distribution contracts that are, once again, in that, you know, roughly 20 to 30% range, which clearly is fueling the overall growth. So it is volume. It is new contracts ramping up. But it's also truly healthy same-store sales performance.

That's useful. So when you look ahead to calendar 2026, which is the back half of your fiscal year, do you have any worries or are you noticing any risk of destocking among your airline customers, given that for several years now there seems to have been some buildup of buffer inventory?

Yes. Excellent question. The answer is no. We aren't seeing evidence of that. The backlog in that business gives us confidence that the growth rates we're seeing there will continue; and right now, you know, there are no signals that would suggest any destocking.

Great. Then one last thing, if I may — the margin you're implying for the third quarter is a bit of a decline from the prior quarter. My assumption is that it's mostly mix when you factor in the acquisitions, but is there anything beyond mix at play when you look at margins from the second to the third quarter sequentially?

No. Mix is what's behind it. Like we said, over the long run the HAECO acquisition will be accretive to margin; as a matter of fact, from the time we entered into it, our expectation is that it will be more accretive to margin than what we anticipated at the time of the deal, and that's a wonderful thing. However, getting there will require us to work through the integration over a couple of quarters, and that impact is something you'll observe in Q3 and Q4.

Great. Thanks, John.

Great. Thanks, Ken.

Good afternoon to John, Sarah, and Christopher — and a happy 2026 to you all.

Hi there, Louis. Happy 2026.

John, through the HEICO Americas transaction, you turned into the top player in heavy maintenance across the industry. Do you perceive synergies linking heavy maintenance and your remaining operations, for instance your component repair operation, and additionally with Trax?

Yes. Without a doubt. That's an excellent question; certainly, synergies exist linking the heavy maintenance operation and the component operation. One element of our approach involves using the leading position we hold in airframe heavy maintenance to push volume toward our component shops. A portion of that results simply from having the aircraft in our hands; at this point we have considerably more than a thousand aircraft passing through our sites annually, and that produces specific component repairs we are able to carry out; yet primarily, it will come about by striking agreements with our clients in which we secure long-term commitments on the heavy maintenance side paired with long-term commitments on the component repair side. And, as you know, I simply want to point out that we've put substantial investment into proprietary systems and processes within our hangars, and we have by now attained turnaround time and quality that lead the industry. Our turnaround times matter especially to the clients since, let's say, a heavy maintenance visit will require thirty days, normally it will require thirty days. If we can hand that aircraft back to our client within twenty-eight days or twenty-seven days, they're delighted, because those are additional days available to place that aircraft into revenue service, and that carries significant value; and that operational performance within our hangars is fueling the demand we are experiencing. And, as you know, as I stated, once everything is finished, we will have increased capacity by 40%, and that is fully committed through the end of the decade. So that represents substantial demand. And we intend to use that leading position once more to push volume through the component shops. Regarding Trax specifically, Trax has synergy mainly with our parts supply operation. We plan to build proprietary channels to market for selling new and used parts via Trax. And afterward also via component repair. The AeroStrat acquisition we completed last quarter does possess direct synergy with heavy maintenance since that software enables clients to plan long-range heavy maintenance visits, which, naturally, feeds straight into the heavy maintenance offering we deliver.

Great. Thank you, John. You also revealed the Thai Airways victory yesterday. I'm curious — did that major Delta Airline deal you told us about during the summer get the pipeline moving, since a lot of airlines tend to do what Delta does, because Delta is both among the biggest MROs and among the biggest carriers?

Yes. Without a doubt. That's partly why we put so much emphasis on locking in Delta as a win early in our TRAX journey, since Delta isn't just the biggest — it's also a carrier that every other carrier holds in very high regard. So the fact that Delta picked Trax and put its stamp of approval on it as something able to scale to Delta's size is enormously valuable. And yes, it has definitely created opportunities for Trax. One more point: the implementation at Delta runs roughly 3 years. We're around 7 months in at this stage; things are going quite well. And Delta has been ready to act as a reference for us with other customers, which we appreciate.

Wonderful, that covers everything I had. Appreciate it, everybody.

All right. Thank you, Louis.

I'd like to ask about M&A. You've made a lot of acquisitions recently, and you said capital allocation priorities haven't changed. Do you expect more M&A possibilities in the coming six to twelve months? Or are things shifting more toward integration? Any insight you can give about the M&A pipeline and what you're observing? And then perhaps which segments you could focus on later?

Sure. Yes is the brief answer. We still think that, and we still view M&A as a crucial element of our growth. And, you know, something I take particular pride in is that among the several deals we've completed recently, every one was self-sourced. We approached these companies, we built relationships with the owners, and so every deal we've closed over the past three years was sourced by us. So we have very specific criteria that acquisitions must satisfy. There are a number of other companies out there that we think can satisfy those criteria, and we are actively chasing them. We believe we have the integration muscle, so to speak, developing within the company. We're certainly aware of our own bandwidth, so we want to ensure we succeed with the integrations currently in progress; but we also want to be positioned to curate appealing M&A opportunities and complete them.

Great. Then I have another Trax question. Could you give us some detail about the customer upgrade cycle for Trax—either what share of customers have made the switch already, or when you think additional upgrades will happen? I realize this is something that plays out over multiple years, but any further detail on Trax would be appreciated.

Thank you. Thanks, Michael. That's a really good question. We're roughly, I would say, 30% to 35% of the way through those customer upgrades, and those are upgrades customers have agreed to that may not have been implemented yet. So many upgrades are underway right now and are at different points of implementation. Our aim is for all of it to be finished by 2028. You know, as with any software upgrade cycle, it might take more time, but our aim is for the bulk of this to be done by 2028.

Great. Thank you.

Great. Thank you.

Yes. Are you able to hear me?

Yeah. Hi there, Scott. How are you doing?

Hello. My apologies for that. John, I'd like to ask about the ART acquisition; a number of airlines are announcing cabin interior upgrades as they work to segment their cabins more effectively and boost premium offerings. I'm just curious whether you could share what the revenue is at present? What sort of growth CAGR do you expect there, let's say, across the coming 3, 4 years? And what margin potential does that business have?