AAR Corp. (AIR) Earnings Call Transcript & Summary

Good afternoon, everybody, and thank you for joining AAR's conference call covering results for the fourth quarter of Fiscal Year 2026. With us on the line are John Holmes, our Chairman, President, and Chief Executive Officer, along with Dylan Wolin, our Chief Financial Officer. You can locate the presentation accompanying today's webcast in the Investors area of our company website. During this call, we will make forward-looking statements, which are defined under the Private Securities Litigation Reform Act of 1995; such forward-looking statements carry risks and uncertainties that might lead actual results to differ materially from what those forward-looking statements suggest. Such statements do not represent a guarantee regarding future performance. The company's earnings release addresses these risks and uncertainties, as does the Risk Factors section within the company's annual report on Form 10-K covering the fiscal year that ended May 31st, 2025. When offering forward-looking statements, the company undertakes no obligation to provide updates reflecting future circumstances or anticipated or unanticipated events. We will also discuss certain non-GAAP financial information today. Reconciliations between these non-GAAP measures and the most comparable GAAP measures appear in the company's earnings release and slides. I would now like to hand the call over to John Holmes.

Okay, thank you, Chris, and greetings to all of you joining our fourth quarter fiscal year 2026 earnings call. To begin, I'll walk through the main points shown on slide three. Our momentum carried forward, and we delivered another strong quarter, demonstrating how our strategy of a connected platform spanning parts, repair, and software is producing growth that is both larger and more profitable. During the quarter, adjusted sales rose 26%, adjusted EBITDA rose 27%, and adjusted earnings per share rose 32%. On the adjusted sales side, we saw an increase made up of 13% growth in organic adjusted sales. That was powered by a 19% organic gain in our new parts distribution operations, plus considerable growth at Trax. When we leave out the Legacy Commercial Programs segment, our adjusted EBITDA margin for the quarter landed at 13%, and that already demonstrates our ability to reach the three-year range we laid out during our Investor Day in May. While the path forward won't be a straight line, what we delivered this quarter makes clear just how strongly we believe we'll ultimately reach or exceed the upper bound of that range as we continue carrying out our strategy. For the entire year, adjusted EBITDA margin, again excluding Commercial Programs, was 12.7%. Third, as we execute our strategy, we continue to anticipate double-digit growth in sales along with further margin improvement. And finally, robust cash flow during the quarter allowed us to reduce net leverage even more; we remain diligent in how we oversee the balance sheet so that it supports a disciplined capital allocation strategy and keeps our financial flexibility intact. Now, if you'll turn to slide four, quarterly sales hit a record $928 million, marking a 26% increase versus a year ago, with 13% of that from organic growth; during this period, revenue grew across all four of our key segments — repair and software operations included. Compared with the prior-year period, commercial customer sales climbed 31%, whereas government customer sales were up 5%. During the quarter, commercial customers accounted for 73% of sales, while government customers made up the remaining 27%. Adjusted EBITDA climbed 27% year-over-year, reaching $116 million, while the adjusted EBITDA margin moved up from 12.4% to 12.5%. The margin improvement this quarter came from growth in new parts distribution as well as an ongoing mix shift within government programs. Even with the prior-year comparable effect of a one-time gain in used serviceable material, we continue to grow EBITDA margins. The integration of HAECO Americas, which we discussed at length last quarter, is progressing ahead of schedule and is slightly dilutive to margins in the near term. During the previous quarter, HAECO accounted for about 70 basis points, which we referred to as the low end, while in the quarter just reported, that figure came in at approximately 40 basis points. On an adjusted diluted basis, EPS rose 32% compared with the prior year to $1.53 per share, reflecting how well we performed operationally. Finally, cash generation was robust, with adjusted cash from operations reaching $58 million in the first quarter, or $94 million across the full year. Turning to slide five, you'll find our results for full year fiscal 2026. Every one of our key performance metrics expanded this year, demonstrating both how effectively we're executing with discipline and how solid our parts repair and software platform truly is. Our results this year make me incredibly proud, since we reached all-time highs in sales, adjusted EBITDA, and adjusted EPS. During 2026 we completed four distinct acquisitions, and we've been carrying out complex integrations successfully — those involve consolidating sites, repositioning our workforce, and coordinating closely with customers. What our team has accomplished reflects their commitment, and it also speaks to how well our growth strategy works; adjusted sales for the year rose 20%, reaching $3.3 billion, and that figure includes organic adjusted sales growth of 14%. Full-year adjusted EBITDA increased 24%, and margins climbed 30 basis points to 12.1% — or 12.7% once you exclude our Legacy Commercial Programs segment. At $5.05, adjusted EPS rose 29%, which makes this our fifth year in a row of adjusted EPS growth in the mid-teens or better. Moving to slide six, we're still carrying out our core strategic objectives. This quarter we signed one more exclusive distribution agreement, this time with Woodward, to distribute high-demand parts for the LEAP, GEnx, and CF34 engines. Our ties with Woodward started in defense distribution, and we're thrilled to extend our support into commercial distribution now. We're still advancing our airframe MRO expansions — Oklahoma City wrapped up in March, and our Miami facility is set to come online after this summer. We're continuing to gain ground on expanding our component MRO business as well; we landed several new contracts with major airlines this quarter, which drove organic sales growth in the double digits for the period. In April, we rolled out Airvoyant, our AI-powered procurement tool designed for airlines and MROs. That software is now moving into beta testing with our launch partners, and the strong interest we're seeing is encouraging. At the moment, we're deploying our paperless hangar technology across our Oklahoma City and Greensboro locations. When that rollout wraps up, about 66% of our airframe MRO capacity will be operating on our paperless hangar technology. In March, the U.S. A follow-on contract valued at $305 million was granted to us by the Navy and Marine Corps, covering contractor logistics support for the C-40 fleet they operate. This serves as further evidence that commercial best practices can be delivered to government customers. During our earlier remarks, we pointed out that the HAECO Americas acquisition is being integrated more quickly than originally anticipated, and we expect that deal to reach margins comparable to those at our other airframe MRO locations in the latter half of fiscal 2027. Turning to software, Trax continues to expand its ties with Delta and has reached phase II of implementation. More than 10,000 Delta professionals are now using Trax as of today. To wrap up, in April we closed the deal for Aircraft Reconfig Technologies that we had previously disclosed, adding certification know-how performed internally along with exclusive engineering offerings to what we provide. On that note, I'll pass it to Dylan, who'll take everyone through the numbers more thoroughly.

Thanks, John. Moving to Parts Supply, which is on slide seven. Sales for the total Parts Supply business rose 39% versus the same period a year ago, reaching $424 million. Once again we posted above-market growth in new parts distribution, which came in at 19% organic growth when you set aside the effect of our ADI acquisition. Organic growth was 28% in commercial distribution and 7% in government distribution, even though the year-ago quarter had strong government sales. Adjusted EBITDA came to $61.7 million, an increase of 18% from the prior year. At 14.6%, Adjusted EBITDA margin fell 250 basis points, mostly because of a one-time gain of $6.5 million in our used parts activities in the year-ago quarter. Now on slide eight, Repair, Engineering, and Software. Total sales rose 35% to $314 million, fueled by the HAECO Americas acquisition, record growth in our component MRO activity, higher volumes at our airframe MRO facilities, and increases in recurring revenue at Trax. Adjusted EBITDA was $36 million, up 29%. Adjusted EBITDA margin of 11.5% was 50 basis points lower than the prior year. As John said earlier, in line with our expectations, margins took a negative hit in the quarter from our ongoing integration of HAECO Americas. That acquisition affected segment Adjusted EBITDA margins by roughly 130 basis points in the quarter. This is better than what we saw in the third quarter and matches our expectation that margins will keep improving as we finish our integration activities during the first half of FY 2027. Segment margins also took a hit in the quarter of about 90 basis points from certain costs in our component MRO operations that we don't expect to carry forward. Now looking at Government Solutions on slide nine. Sales declined 8% year-over-year to $130 million. Adjusted EBITDA was $20.8 million, up 58%. Adjusted EBITDA margin rose 670 basis points to 16.0%. The revenue decline came from reduced activity on our WASS program supporting the United States Department of State. We were able to partly offset that impact by expanding other government programs we have won over the last couple of years, and also through strong pallet sales in our Mobility Systems operation. Those other government programs, together with the higher Mobility volumes, drove the segment margin expansion in the quarter. Moving to the balance sheet on slide 10; we had another strong quarter for cash flow, generating $58 million in adjusted cash from operating activities. Importantly, we improved accounts receivable days and inventory turns both year-over-year and quarter-over-quarter. Net leverage went from 2.17x net debt to Adjusted EBITDA at the end of Q3 down to 2.03 times at the end of Q4, even with our funding of the AAR/T acquisition in the quarter. Adjusted operating cash as a percentage of Adjusted EBITDA was 50% for the quarter and 24% for the full year, showing meaningful progress toward our long-term target of 30% plus; with tht, I'll turn the call back to John.

Appreciate that, Dylan. Moving on to slide 11 now. Across our portfolio, the demand picture continues to look quite robust. Even with ticket prices running higher, commercial passenger traffic has held up well, and the fact that aircraft fleets are older than usual keeps fueling the need for what we offer in Parts Supply and repair. We see these positive conditions carrying forward. Within Parts Supply, order activity is still solid, and by bringing on additional distribution agreements, we keep broadening what we can offer. Over in Repair, Engineering, and Software, capacity at our airframe MRO sites is still mostly booked up, and appetite for our component MRO work keeps climbing. Beyond that, momentum is strong on the software side, where we are bringing in more customers for Trax, Aerostrat, and Airvoyant. Then, looking at Government Solutions, while we do anticipate a further decline in activity related to our WASS program, we think growth in other programs, which carry better margins, will more than make up for it. So for FY 2027, we're looking at yet another year of substantial growth. To be specific, for Q1 we anticipate total sales growth of 21%-23%, leaving out the Legacy Commercial Programs segment. For Q1, we're expecting an adjusted EBITDA margin between 12.25% and 12.75%, again with Legacy Commercial Programs excluded. It's worth noting that we're providing guidance on an ex Legacy Commercial Programs basis because we feel that better captures how we're actually running the company's ongoing performance. We anticipate the Legacy Commercial Programs business winding down in a steady fashion across the coming three to four years, and as updates on that process emerge, we'll keep sharing them. Depending on how quickly we clear out inventory positions and customer contracts, that timeline might move. Turning to slide 12, you'll find our outlook covering the entire fiscal year 2027. We're expecting yet another year of significant growth, with total sales, again excluding Legacy Commercial Programs, landing somewhere between low double digits and low teens. This full year guidance rests on conditions staying in line with what I just walked through. More precisely, we're looking for continued momentum in our new Parts Supply distribution activity within that segment, further expansion in Repair, Engineering, and Software from picking up more component work, our facility expansions starting up, and growth in what we offer on software. And lastly, we anticipate benefiting from the mix shift inside our Government Solutions segment toward newer programs with better margins. This FY 2027 guidance underpins the three-year revenue growth targets we laid out at our investor day, and we feel confident about hitting or beating those targets. I'll wrap up on slide 13. Over the past several years, AAR has been pushing a strategic transformation, and what we are today is a more focused business delivering a full spectrum of aviation aftermarket solutions across parts, repair, and software. I take a lot of pride in everything we achieved in fiscal year 2026 and throughout the last several years. Pulling off the amount of growth we did while still widening margins, closing and folding in 6 acquisitions, adding new airframe capacity, and getting out of businesses that are no longer core — that's a lot of moving pieces to handle all at once. I'm deeply thankful to our team for the hard work and loyalty they've shown to AAR. I also want to express appreciation to our customers and shareholders for sticking with us. With that, we'll hand things to the operator for questions.

Evening, John and Dylan. Those are some really strong results.

Appreciate it, Scott.

One quick thing. Looking at what GE reported, it sounds as though orders for spare parts in commercial engines and services were quite robust across April and May, and then appeared to settle down somewhat around late June. Over at Parts Supply, what's the pattern been for your new parts orders, especially from commercial buyers, from the end of May onward? Given the recent increase in hostilities with Iran, are you noticing any tailwinds for your new parts distribution sales into government customers?

Yeah, that's a great one. On the commercial side, our growth and distribution has actually been fairly steady — consistently solid all year and through the recent months. To lay that out for you, roughly 50% of distribution growth comes from higher same-store sales, so to speak, from existing distribution agreements. Slightly under 50% comes from new agreements ramping up. A small portion comes from price increases. Customer volumes and demand have stayed fairly steady on the commercial side across the last several quarters. In defense especially, we had a really strong year overall. Organic growth and government distribution came in at 34% for the year. We began seeing a more meaningful increase this time last year, so right now we're starting to lap some tougher comps. The demand patterns from our government customers encourage us, most notably the DLA.

yeah, hello — I'm calling in for Sheila. Thanks, and good evening.

Sure thing.

So what I'm trying to get at is this — when we consider that 2027 sales guidance, excluding LCP, which is up somewhere between low double digits and low teens, that would put you at the top end of the 8%-12% three-year guidance you gave us. Can you just walk us through the strength you're projecting for 2027, and should we read an actual deceleration into 2028 or 2029, or is that simply a cautious way of approaching multi-year planning? Thank you.

Thank you. No. Right now, we clearly aren't contemplating any deceleration in those later years; what we're seeing in the near term, as we look ahead to the next 12 months, gives us encouragement. Because of everything we've discussed, we're quite optimistic about end market demand and about the solutions we offer, whether that's component repair, and of course new parts distribution, software, et cetera. All of them keep building momentum in the marketplace. Broadly put, our view is that the initial year of that three-year guide will be strong, and nothing suggests to us that a deceleration would occur in 2028 and 2029.

Hi John and Dylan. Regarding Parts Supply, if I exclude the USM effect from the prior year and margins still declined a bit during the quarter, did mix cause that? Was there something additional happening within that segment that you could point to specifically? How should we view margins for the Parts Supply segment as we move through fiscal 2027?

Yes, excellent question. It comes down to USM. Like we discussed, USM's margin has been held back since asset availability has been limited, which meant we paid higher prices for assets, and the gap between what we pay for assets and what we sell them for in USM has gotten smaller. You did observe some sales growth across the year in USM. Sales growth in USM did occur, yet it arrived with a reduced margin. That shift in mix produced the change you noticed in the fourth quarter. When we consider FY 2027 moving forward, we hold, just as we did this year, a highly cautious outlook for USM alongside a far stronger outlook for distribution. Currently, distribution carries a greater margin than USM. As distribution keeps expanding, we would anticipate margins to keep getting better.

Great. Thank you.

Thanks, Ken.

John, Dylan, and Chris, good afternoon, and congratulations on a successful fiscal 2026.

Thanks.

In your Parts Distribution segment, organic growth is still robust. What effect do you anticipate from the new Woodward expansion, and what does the pipeline look like for additional expansions with current customers as well as for new logos? I believe you referenced the existing agreement-

Yeah

-regarding Woodward on the defense side, could other customers potentially follow suit?

Those are excellent questions. When it comes to Woodward specifically, I'd say the agreement we initially completed on defense and the one we've since completed on the commercial side—both are solid relative to all of distribution, yet each is fairly modest. That said, what we hope to see is precisely what Woodward is demonstrating: we enter one segment, achieve success, then enter another segment and achieve success, and then additional opportunities keep appearing; we regard Woodward overall as a partner with the potential to be significant for us down the road, and it's encouraging that we've already grown the business. Regarding new logos in the pipeline, without a doubt. As we've mentioned, the momentum in distribution is ongoing. This is the kind of situation where each win opens the door to more wins. Our two-way exclusive distribution model has picked up enormous traction in the marketplace; two or three years back, this wasn't something we were recognized for. Now we are recognized for it, plenty of opportunity is coming our way; we have a team at Farnborough at this moment. Dylan and I are here, stuck in Chicago, while the team is at Farnborough at this moment, and I can share that I talked with them this morning. There's abundant opportunity out there, and the meetings we're having are encouraging.

Good. Yeah. Chicago has me trapped as well. During the Analyst Day, John, you talked about the way you and AAR right now bring in $100 million in heavy maintenance revenue from a few of your biggest customers. Yet with certain of those very same customers, you bring in just $3 million from component repair-

Correct.

-revenue. What I'd like to know is, over what period should we be looking for you to begin selling heavy maintenance together with component repair, so that bundling drives up the component repair revenue?

Yeah. That's exactly right. For everyone else who might not recall that remark, a major piece of the growth and component strategy involves cross-selling where we hold leadership positions on heavy maintenance and weaker positions on the component side. Take some of our biggest heavy maintenance customers: we might be doing $100 million a year in business with them, or more, while on the component side it's only low single-digit million business. Here's something people might not realize: for many airlines, the money going toward component maintenance actually exceeds what they spend on heavy airframe work. That makes the upside here even bigger. I'd characterize our progress on this strategy as still being in the early innings. With several of our biggest customers, the discussions are only now getting underway, though the potential is clearly there. That said, even ahead of reaching that cross-selling stage, we posted a strong growth quarter in component MRO — and that didn't come from cross-selling at all. It came from straightforward wins in the market, with our Asia operation in Thailand standing out as the most notable example. Now that the integration is finished and all the components are set up, we feel good about the traction our sales team is getting from what I'd describe as more standard victories, with the bigger cross-selling opportunities layering on top of that.

Great. Within component repair, are there specific areas you're zeroing in on?

Or can you tell us about how things are going in Thailand — for instance, which particular area— John Holmes: Yeah.

You were saying