AAR Corp. (AIR) Earnings Call Transcript & Summary

Hello, everybody, and thanks for joining the update on our business, which covers AAR's results for the first quarter of fiscal 2027 along with news of our agreement to buy a controlling stake in MRO Holdings. With us on the line are John Holmes, our Chairman, President and Chief Executive Officer, and Dylan Wolin, our Chief Financial Officer. You can find the deck we're presenting during this webcast in the Investors area of our company website. Anything we say on this call may include forward-looking statements, which the Private Securities Litigation Reform Act of 1995 defines as such. Such forward-looking statements carry risks and uncertainties, and actual outcomes could therefore differ materially from what those statements suggest. As a result, they should not be treated as assurances of how the future will turn out. The earnings release we issued and the Risk Factors portion of our Annual Report on Form 10-K, covering the fiscal year that closed on May 31, 2026, describe these risks and uncertainties. When offering forward-looking statements, the company takes on no duty to issue updates in light of later circumstances or events, whether expected or not. We'll also be talking about some non-GAAP financial information today, and you can find reconciliations of those non-GAAP figures to the closest GAAP equivalents in the company's earnings release and slides. I'll now hand the call over to John Holmes.

Chris, thanks, and good morning, everyone. It's a real pleasure to be here with you today to discuss something important that's taking place at AAR. Alongside the earnings release we issued yesterday afternoon, we announced an agreement to acquire a 65% controlling interest in MRO Holdings, a leading supplier of airframe heavy maintenance with a significant footprint across the Americas and a roster of blue-chip customers based here in the U.S.; this is a combination that MRO Holdings and we have been discussing in one form or another for roughly 8 years. For AAR's evolution and for the expansion of our aftermarket platform spanning parts, repair and software, this transaction marks a major milestone. Thanks to the very strategic fit between AAR's aftermarket solutions and the footprint that MRO Holdings brings, we're going to reach a scale that speeds up growth throughout every one of our activities. This marks a major move in carrying out our strategy, and it will substantially bolster AAR's financial position by lifting margins and delivering cash flow that is stronger and more consistent. But before I get into the specifics of the deal, let me walk through what we saw in the first quarter of fiscal 2027; the year got off to a solid start, with growth that kept outpacing the market, expanding margins and cash flow that set a first-quarter record. What you're seeing in these numbers is that demand has stayed robust throughout our business lines, and we've kept moving forward on the plan we set out to carry out several years back. Now, if you'll go with me to Slide 3. We brought in $918 million in total sales, which is a 24% jump compared to the same period last year, and 11% of that came from organic growth. A key point here is that this growth showed up pretty much everywhere, with all 3 of our main segments adding to the gains. Our commercial customer sales climbed 28%, and government customer sales were up 14%. In terms of mix, commercial made up 73% of sales for the quarter, and government accounted for the other 27%. Adjusted EBITDA margin came in at 12.7%, which is 100 basis points higher than before. If you set aside Legacy Commercial Programs, our adjusted EBITDA margin came in at 13.3%. That's already inside the three-year target range we laid out during our Investor Day back in May. Two things drove the margin expansion: growth in Parts Supply, plus a continuing mix shift toward newer programs with better margins in Government Solutions. Over in Repair, Engineering and Software, component MRO keeps delivering both growth and margin improvement, though that's partly offset by the short-term dilution we anticipated from the HAECO Americas integration. We still expect that integration to wrap up by the fourth quarter of this fiscal year. Adjusted diluted EPS rose 38% compared with a year earlier, reaching $1.49 per share, which reflects how strongly we performed operationally. On top of that, we posted our best-ever first-quarter cash flow, with adjusted cash from operations hitting $57 million — equal to 48% of adjusted EBITDA — thanks to solid operating results and better management of working capital. That robust cash generation allowed us to bring net leverage down to 1.81x by quarter's end. With that said, I'll hand things over to Dylan, who will cover the segments and our revised outlook, and after that I'll return to go through the MRO Holdings transaction more thoroughly.

Thanks, John. Now let's look at how each segment performed, starting with Slide 4. In Parts Supply, we posted another solid quarter, with sales up 31% compared to the same period last year, reaching $414.8 million. Our new parts distribution business kept growing faster than the market, with a 23% organic increase; commercial distribution rose 21% organically, while government distribution was up 28% organically. Adjusted EBITDA margin came in at 15.3%, 150 basis points higher, thanks to better results in new serviceable material and ongoing expansion in distribution. Over in Repair, Engineering and Software, sales climbed 31% to $297.5 million, which captures the full year-over-year effect of buying HAECO Americas plus organic gains across Airframe MRO, Component MRO and Software. Adjusted EBITDA margin there was 11.9%, a decline of 120 basis points versus last year. This dilution was anticipated as we work through integrating HAECO Americas, even though Component MRO keeps showing growth and better margins. Moving to Government Solutions, sales were up 4% to $138.8 million, and adjusted EBITDA margin rose 460 basis points to 15.3%. Higher revenue from Mobility Systems and from newer government programs carrying better margins more than made up for lower WASS activity. Just as important, that change in mix was a major driver of the big margin gain for the segment this quarter. Last, in Legacy Commercial Programs, we sold off $24 million in rotable assets, adding roughly $5 million of margin during the quarter. We figure the current run rate revenue for that segment sits at $35 million to $40 million each quarter, and you should expect us to keep chasing these rotable asset sales whenever opportunities come up. Now for our outlook, which is on Slide 5: in the second quarter, we anticipate total sales growth, leaving out Legacy Commercial Programs, of 14% to 16%, along with adjusted EBITDA margin, again excluding LCP, of 13.0% to 13.4%. That guidance points to a higher level of organic growth, excluding LCP, in Q2 than what we achieved in Q1, with margins at a similar level. I should also mention that the PIPE tied to the MRO Holdings deal closes this week, and we issued 2.2 million shares, which will show up in our Q2 share count for roughly 2/3 of the quarter, along with the interest savings from the proceeds. For the whole year, we're raising our sales outlook and now anticipate growth, excluding LCP, in the low teens. That mirrors our strong Q1 results and our ongoing confidence in the demand environment, backed by resilient passenger volumes and a customer list featuring some of the world's largest airlines. One more thing: both our second quarter and full year fiscal 2027 outlooks leave out any impact from the MRO Holdings acquisition. With that, I'll hand the call back to John so he can walk through the transaction in more detail.

Thanks, Dylan. Now let's look at Slide 6. I'd like to begin by covering the main strategic and financial points this deal delivers. To start, we've reached an agreement to buy a 65% controlling stake in MRO Holdings — a top airframe heavy maintenance provider operating facilities throughout Central and South America as well as the United States — at an implied enterprise value of $4 billion. Next, this transaction moves us considerably closer to our goal of becoming the premier aviation aftermarket platform, opening up meaningful growth opportunities in parts, repair and software. Then, this combination marks a major shift in AAR's financial picture, boosting our scale considerably while also improving margins and cash flow. And last, we'll take the same disciplined M&A approach that guided our earlier acquisitions through integration and deleveraging; we see strong synergy potential throughout our platform, and the robust cash generation of the combined company will help us move back toward our target leverage range over the medium term. Now on to Slide 7. By pairing AAR's capabilities with the heavy maintenance footprint of MRO Holdings, we're bringing in a highly regarded Airframe MRO business and gaining much greater scale across our wider parts, repair and software platform. We'll go to market as a single company, and that scale will deliver enormous benefits to our customers, since we can provide a wide array of maintenance solutions covering more aircraft types in key geographies. This deal also brings benefits to the rest of AAR. First, by growing our Airframe MRO presence, we can push more volume into our high-margin Component MRO facilities and give customers one more complete repair offering. Second, this combination bolsters our standing with current OEM distribution partners and opens new chances to secure additional distribution agreements; with the combined business serving close to 3,000 aircraft each year, we'll gain even better visibility into parts demand and what airline customers need across numerous fleet types; that market insight and direct sales channel represents a major competitive edge when it comes to building and growing long-term OEM distribution relationships. Third, the larger footprint lets us capture considerably more repair and maintenance data, which can strengthen our software solutions and help us keep building tools that meet our customers' most essential operational requirements. Crucially, how this transaction is structured also builds long-term alignment between AAR and MRO Holdings. The sellers carry decades of experience running operations in strategically vital markets, and their continued ownership delivers continuity while AAR keeps preserving financial flexibility. The financial upsides are just as attractive. On a pro forma basis, this transaction lifts AAR's revenue by roughly 30% and raises adjusted EBITDA margin from about 12% to 16% before synergies. It also substantially improves our cash conversion profile, and we anticipate the deal will be accretive to adjusted EPS in the first full fiscal year after close. Beyond that, we anticipate producing roughly $75 million in run-rate cost synergies over the coming 3 to 4 years. Those will come from procurement and SG&A savings, plus savings that arise when best practices and systems are shared throughout the combined footprint. And importantly, that $75 million leaves out the longer-term revenue opportunities the combination presents, such as growth in wide-body maintenance, greater capture of European and Middle Eastern fleets and service in the Americas, and cross-selling opportunities across our platform, all of which I will cover now. On Slide 8, let me take a moment to explain why we think this combination strengthens the whole AAR platform. Parts, repair and software are businesses that complement one another strongly. Each creates openings for the others. In parts, our distribution position gives us deep ties with OEMs and visibility into parts demand throughout the aftermarket. Expanding our Airframe MRO footprint brings AAR nearer to the point of consumption for more aircraft, which sharpens our market insight and our value proposition for current and prospective OEM partners. In repair, Airframe MRO is among the visible activities we carry out for airline customers. As more aircraft move through our network, we gain chances to win additional high-margin component MRO work, while also gaining valuable insight into parts requirements and maintenance trends. In software, thousands of parts buyers and repair planners rely on our software daily. Adding MRO Holdings opens access to an even broader pool of maintenance and repair data, which can help us improve our software solutions by themselves, but data available across our platform will also help us carry out maintenance more efficiently and let us give our OEM partners more insight into their distribution channels. That is the self-reinforcing character of our platform. Parts supports repair, repair supports parts, and the data generated across both markets makes our software business stronger; with the addition of MRO Holdings, we are substantially increasing the scale of that ecosystem, reinforcing our leadership in heavy maintenance while opening further opportunities for growth throughout the entire company. Moving to Slide 9, I want to give some further context on why heavy maintenance matters so much within the aviation aftermarket. Heavy maintenance is a recurring, mission-critical service that aircraft need across their useful lives. These extensive events are time-based, so they frequently occur no matter how much an aircraft has flown, and they involve inspection, repair, overhaul and modifications. Since the work is needed regardless of utilization, it offers a durable and recurring source of demand. It is also a highly specialized business with barriers to entry. Heavy maintenance demands skilled labor, scaled hangar capacity and the system to return aircraft to service quickly and efficiently. AAR has established a strong position in this market through our operating model, digital and technical capabilities and industry-leading turnaround times, and so has MRO Holdings. Equally significant, the fact that we handle heavy maintenance work places the customer relationship at a pivotal juncture. Through it, we gain insight into what repairs are needed, which parts are required, and how the aircraft we serve are being maintained — opening doors that go past Airframe MRO and reach into our wider platform. On top of that, the demand picture over the long run stays quite appealing. Over the coming decade, the worldwide fleet should see substantial growth, and with passenger demand strengthening alongside the fleet already in service, the case for heavy maintenance holds up. Given that setting, bringing MRO Holdings in substantially strengthens where we stand in this appealing, strategically vital market. Slide 10. Now let's move to Slide 10. MRO Holdings operates as a large-scale, sharply differentiated provider of heavy maintenance, with 5 sites spanning El Salvador, Mexico, Colombia and the United States, plus additional room at every site to grow should demand call for it. As one illustration, MRO Holdings just unveiled its seventh hangar in El Salvador — in fact the biggest hangar anywhere in the world. The company holds wide-ranging capabilities covering narrow-body jets and certain wide-body aircraft, and its customer list is blue-chip, counting several of the biggest carriers in the Americas. Roughly 90% of what it sells goes to U.S. customers, which shows how vital these strategically positioned facilities are to the U.S. aviation market. MRO Holdings likewise boasts a strong history of both growth and profitability. Across the past 12 years, its sales achieved a double-digit compound annual growth rate, and adjusted EBITDA rose at an even quicker pace.

These results also speak volumes about the reputation this company has built for quality and safety. For calendar 2026, MRO is projected to produce roughly $1 billion in adjusted sales along with $285 million in adjusted EBITDA on a pro forma basis, which works out to a 27% adjusted EBITDA margin, and that level of profitability converts into meaningful cash flow. Over calendar 2026, the business should throw off over $200 million in adjusted operating cash flow. When you put it all together, MRO Holdings delivers to AAR considerable scale, appealing margins, robust cash generation, and a strategically vital footprint that serves numerous leading airlines around the globe. Moving to Slide 11, you can observe the size and geographic spread of the combined airframe network. AAR and MRO Holdings together will build the biggest MRO operation anywhere in the world, taking our network from 7 facilities up to 12, spanning 5 countries, with about 19 million service hours and close to 3,000 aircraft serviced annually. Excuse me, that 3,000 figure gets me emotional whenever I mention it. Yet the strategic worth extends past mere size. This footprint affords us more flexibility to serve customers across a wider variety of aircraft types and regions, brings cost-advantaged choices into our hangar network, and opens a clearer path for adding capacity down the road. To illustrate, MRO Holdings already has initiatives in motion to build a further eighth hangar at its El Salvador site. We think this mix of scale, flexibility, and extra capacity produces a highly distinctive offering for our customers and leaves us well positioned to seize ongoing growth. Now to Slide 12. This transaction instantly reshapes AAR's financial picture; combined, AAR will post around $4.3 billion in yearly sales and close to $700 million of adjusted EBITDA. Our adjusted EBITDA margin rises by 400 basis points, going from about 12% to 16% prior to synergies. Cash generation gets a boost as well from this deal. Pro forma adjusted operating cash flow climbs from roughly $94 million to $272 million, which mirrors the appealing working capital characteristics of the MRO Holdings business; that improved cash generation will serve as a key catalyst for deleveraging after closing and assist us in maintaining financial flexibility going forward. Because the combined company's earnings profile is so much stronger, we are also setting fresh medium-term adjusted EBITDA margin goals. At our Investor Day last May, we presented a 3-year target of 13% to 14% plus, excluding Legacy Commercial Programs. After the close of the trends — of this acquisition, and factoring in the cost synergies we have pinpointed, we now anticipate adjusted EBITDA margins hitting 19% to 20% within the next 3 to 4 years. Importantly, that goal leaves out the longer-term revenue synergies we anticipate from the combination, such as the cross-selling and wider growth possibilities I mentioned before. Now to Slide 13. We see substantial chances to keep expanding within a fragmented repair market. At present, the total market we can serve — spanning component upkeep, heavy checks, and modification work — exceeds 50 billion dollars, which leaves us plenty of space to keep expanding our repair operations, especially within Component MRO. Those market forces, together with our best-in-class abilities and the much larger footprint of our merged business, mean AAR is well placed to win additional business as time goes on. With that said, I'll hand things back to Dylan so he can walk through the deal's structure and how it's being financed in greater depth.

Thanks, John. Now moving to Slide 14, I want to take you through several of the main deal terms. Under this transaction, we're picking up an initial 65% controlling stake in MRO Holdings, with an implied enterprise value of roughly $4 billion, which works out to a 10.7x multiple on adjusted EBITDA, net of the tax benefit and synergies. We'll fund this acquisition using a mix of debt and equity. We plan to issue about $1 billion of AAR equity — roughly $780 million of that going to the existing MRO Holdings shareholders at a price of $135 per share, plus about $230 million via the PIPE transaction. When you add it all up, the existing MRO Holdings shareholders will own around 12% of AAR shares. We also anticipate raising approximately $2.1 billion in new debt, and fully committed financing is already in place to back the deal. Once we close, essentially all of MRO Holdings' outstanding debt gets repaid, and AAR will extend its intercompany loan to MRO Holdings. During the first 2 years after close, 100% of MRO Holdings' excess cash flow will go toward paying down that loan, which supports our deleveraging goals. This deal also gives AAR a clear route to raise our ownership stake over time. We'll hold the option to buy an extra 5% whenever we choose, plus the remaining 30% in equal tranches on the second, third, and fourth anniversaries of the initial closing. Pricing for those future purchases will be tied to AAR's then current LTM EBITDA multiple, subject to the floor and cap laid out on the slide. The MRO Holdings Board will be controlled by AAR. We anticipate closing in our fiscal third quarter, which ends February 2027, assuming we receive the customary regulatory approvals. After close, MRO Holdings will be fully consolidated into AAR's financial results. Now to Slide 15 — we expect net leverage of about 3.6x at closing, factoring in the full amount of the run rate synergies. We have a clear path to bring that leverage down, thanks to the strong cash generation of the combined business and because we'll receive all of MRO Holdings' cash flow during the first 2 years after close so we can pay down the intercompany loan, just as I explained on the prior slide. We expect net leverage to fall to roughly 3x on a realized synergies basis within 24 months after close, and to get back to our 2 to 2.5x target range over the medium term, including the assumed exercise of the options. Importantly, we expect to keep a BB category credit rating profile after close. All in all, we believe this financing structure strikes the right balance between funding the transaction, quickly reducing leverage, and preserving financial flexibility. With that, I'll hand it back to John.

Alright, thanks, Dylan. To wrap up, I want to return to the strategy we've laid out. What we're aiming for is to create the top platform in aviation aftermarket services, and this deal, in our view, marks a significant leap toward realizing that goal. Through combining AAR with MRO Holdings, we're adding considerable scale to a part of the aftermarket that is mission critical, and by doing so, we're bolstering our whole platform across parts, repair, and software. This opportunity generates more — putting these companies together generates more chances to serve our customers, widens our paths to growth that outpaces the market, substantially lifts our margins along with cash generation, and builds an even sturdier base for what lies ahead. What makes this pairing so potent is the way these businesses bolster each other. Parts bolsters repair, repair bolsters parts, and software contributes to and gains from the data and insights produced throughout the platform. As our scale grows, we think that model grows even more valuable; we couldn't be more excited about what we're constructing and the possibilities in front of us, since demand for what we offer remains exceptionally robust. I'd like to thank the teams at AAR and MRO Holdings, whose efforts have gotten us here, and we're eager to unite these 2 organizations. And I especially want to congratulate the AAR team for such a robust beginning to our fiscal year 2027. With that, I'll hand things back to the operator so we can take questions.

Nice work on the planned transaction and yet another solid quarter. John, to put the core logic behind this deal in a nutshell — I realize you became emotional while talking about those 3,000 planes sitting in your hangars — but given those 3,000 parked aircraft, would you agree it mostly boils down to the network effect and your company turning into a single-stop destination for carriers, since now it isn't just distribution being cross-sold, but component repairs as well? That way, for the airlines you already serve plus the new ones coming aboard, it can essentially serve as one single stop, making it far more time efficient compared with carriers flying off to numerous locations to get those services and new parts?

Thanks, Louie. Yeah, it's thrilling to consider how big this operation would be, since roughly 3,000 aircraft, or about 3,000, pass through our hangars annually. That's a huge amount of volume, and as we said, it would rank as the biggest maintenance operation globally; and you're completely correct. I mean, you certainly would frame it as a network effect. We're eager about the chances to cross-sell Component MRO in particular. This hands us visibility into demand and aircraft trends that are tremendously valuable to where we stand as a distributor. We aren't merely a stocking distributor. Our aim is to assist our OEM partners in gaining market share, and providing them a clear view into the demand channel for the parts they build and sell matters, and heavy maintenance offers a window into that channel. And of course, the software business, as we grow and gather more data, lets us present more compelling software offerings, and that business keeps expanding very, very nicely. And then the software insights, the data gathered from the wider software offering, help shape which parts we want stocked on the shelves, which OEMs we believe can make great distribution partners, and which repairs we choose to develop. So you're completely correct. All these pieces fit together.

Great. And John, AAR was already among the top players in heavy maintenance within the industry. With this acquisition, does AAR become more of a global contender in the market? If I take those 3,000 aircraft and divide by the 29,000 total commercial aircraft, that comes to roughly 12% of the market. But could you start, say, serving European airlines or even some of your Asian customers using the new footprint?

Yes, absolutely. And I'm glad you raised that. What I mean is this genuinely opens up a much — the world market to us when it comes to heavy maintenance, in a few different ways. First of all, we are — AAR today is an operation focused on narrow-body. With the capability that MRO Holdings brings online, we — they're performing wide-body work today, and we see opportunities to grow that. A number of our U.S. customers did their wide-body maintenance overseas, particularly in Asia, and many of those customers want to bring that wide-body work back to this side of the world, and MRO Holdings has the capacity to handle that work. And so we would look to expand meaningfully into wide-body maintenance in their facilities. Furthermore, if you consider the cost profile we can offer relative to the cost of heavy maintenance in European markets, we see an opportunity to attract not just widebody, but actually narrow body work over from Europe over time; so this is really the opportunity to create a global heavy maintenance provider, given the combination of our best practices, their best practices and the strategically advantaged locations.

Nice work on such a strong quarter and this really thrilling deal. Perhaps to begin with the possible revenue synergy and how it expands margins. John, this deal reshapes the margin picture for your company, at 16% pro forma and 19% to 20% within 3 to 4 years. So I suppose the question is, what are the key puts and takes now that the business is going to be nearly 50% MRO as you — and how does that square with the Investor Day targets you set back in May?

For sure, as you mentioned, MRO Holdings brings a very appealing margin profile. It lifts the combined total higher. We reach that 19% to 20% by capturing those synergies. Those synergies come from SG&A savings. They come from volume discounts on procurement since we purchase a large number of parts to support our maintenance operations. They purchase a large number of parts to support their maintenance operation. There's substantial savings from better sourcing across both; and then in the end, as I said, we have highly differentiated systems, proprietary systems at AAR that have enabled us to deliver industry-leading margins in our business here as well as industry-leading turnaround times, and they have proprietary systems in their operations, and we intend to deploy — share best practices, which we expect will enhance the margin profile of both their business and our business even more; that's the heavy maintenance. What we are not including, even in the targets we just provided, are the network effects that we see from additional revenue capture, additional revenue capture in components through cross-selling. We see a very clear connection there that is not included in the model at this point. We also see significant appeal to additional OEM partners for distribution. This scale, this visibility, this data that we are gathering is incredibly valuable to OEMs and our pitch to them as an exclusive distribution partner. Growth in that business as a result of this acquisition is not included in that model. And on top of that, we think about the software business. The data that we gather, the improvements we can make — further improvements we can make to the software offering, given we have — we sell MRO software, and now we have a much greater window to the MRO world can help make that software solution set even more exciting and growth there. I mean, obviously, we are counting on growth there, but the potential acceleration of that growth is not included in the model either. So it's exciting on its own. The cost synergies get us to that 19% to 20% over time. But the network effect, we think can be very powerful beyond that.

That's really useful. So perhaps I could also ask about the margins for Repair, Engineering and Software this quarter, which fell 100 bps. Could you walk through the pluses and minuses there? What's happening with the HAECO acquisition, and how ought we to view adjusted EBITDA margins for that business unit going into 2027?