AAR Corp. 2027 Q1 Earnings Call

Please go ahead. Good morning, everyone, and welcome to the business update call covering AAR's fiscal year 2027 first quarter earnings and the announced acquisition of a controlling interest in MRO Holdings.

We're joined today by John Holmes, Chairman, President, and Chief Executive Officer, and Dylan Wolin, Chief Financial Officer. The presentation we are sharing today as part of this webcast can be found under the Investors section on our corporate website. Comments made during the call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. These risks and uncertainties are discussed in the company's earnings release in the Risk Factors section of the company's annual report on Form 10-K for the fiscal year ended May 31, 2026.

In providing the forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. Certain non-GAAP financial information will be discussed during the call today, and reconciliations of these non-GAAP measures to the most comparable GAAP measures are set forth in the company's earnings release and slides. At this time, I would like to turn the call over to John Holmes.

Thank you, Chris. Good morning, everyone. I am very excited to talk to you today about an important development for AAR. Alongside our earnings release yesterday afternoon, we announced an agreement to acquire a 65% controlling interest in MRO Holdings, a leading airframe heavy maintenance provider with a significant footprint across the Americas and a blue-chip U.S. customer base. This is a combination we have been talking about with MRO Holdings in various ways for about eight years. The transaction marks a major milestone in AAR's evolution and in building out our parts repair and software aftermarket platform. As a result of the highly strategic combination of AAR's aftermarket solutions and MRO Holdings footprint, we will achieve a scale that accelerates the growth across all of our activities.

It is a significant step in our executing our strategy, and it will meaningfully strengthen AAR's financial position through higher margins and stronger, more consistent cash flow. Before I discuss the transaction in more detail, I want to review our fiscal first quarter 2027 results. We had a strong start to the year with continued above-market growth, margin expansion, and record first-quarter cash flow. These results reflect the continued strength of demand across our businesses and the progress we have made against the strategy we have been executing over the last several years. Turning to slide 3, total sales were $918 million, up 24% year-over-year, including 11% organic growth. Importantly, growth was broad-based, with each of our three key segments contributing to the increase. Sales to commercial customers were up 28%, while sales to government customers increased 14%.

Commercial customers represented 73% of total sales in the quarter, with government customers representing the remaining 27%. Adjusted EBITDA margin expanded 100 basis points to 12.7%. Excluding Legacy Commercial Programs, adjusted EBITDA margin was 13.3%, already within the three-year target range that we established at our Investor Day a few months ago in May. Margin expansion was driven by growth in Parts Supply and the continued mix shift towards newer, higher-margin programs and Government Solutions. In Repair, Engineering, and Software, we continue to see growth and margin improvement in Component MRO, partially offset by the expected short-term dilution from the HAECO Americas integration. We continue to expect that integration to be complete by the fourth quarter of this fiscal year. Adjusted diluted EPS increased 38% year-over-year to $1.49 per share, reflecting our strong operating performance.

We also delivered record first-quarter cash flow, with adjusted cash from operations of $57 million or 48% of adjusted EBITDA, driven by strong operating performance and improved working capital management. The strong cash generation helped to reduce our net leverage to 1.81 times by the end of the quarter. With that, I'll turn the call over to Dylan to discuss the segments and our updated outlook, and then I'll come back to walk through the MRO Holdings transaction in more detail.

Thanks, John. Turning to the segment results on slide 4. Parts Supply had another strong quarter, with sales increasing 31% year-over-year to $414.8 million. New parts distribution continued to deliver above-market growth, increasing 23% organically, with commercial distribution up 21% organically and government distribution up 28% organically. Adjusted EBITDA margin expanded 150 basis points to 15.3%, driven by improved performance in used serviceable material and continued growth in distribution. In Repair, Engineering, and Software, sales increased 31% to $297.5 million, reflecting the year-over-year impact of the HAECO Americas acquisition, as well as organic growth across Airframe MRO, Component MRO, and software. Adjusted EBITDA margin was 11.9%, down 120 basis points from the prior year.

As expected, the ongoing HAECO Americas integration was dilutive to the segment, while we continue to see growth and margin improvement in Component MRO.

In Government Solutions, sales increased 4% to $138.8 million, while adjusted EBITDA margin expanded 460 basis points to 15.3%. Growth in Mobility Systems and in the newer, higher-margin government programs more than offset the decline in WOS activity. Importantly, that mix shift also drove the significant improvement in segment margins during the quarter. Finally, in Legacy Commercial Programs, we liquidated $24 million of rotable assets, which contributed approximately $5 million of margin in the quarter. We estimate run rate revenue in that segment today is $35 million-$40 million per quarter, and you can expect that we will continue to pursue these rotable asset sales as opportunities become available. Turning to our outlook on Slide 5. For the second quarter, we expect total sales growth, excluding Legacy Commercial Programs, of 14%-16%, and adjusted EBITDA margin, also excluding LCP, of 13.0%-13.4%.

This outlook implies a higher level of organic growth excluding LCP in the second quarter than what we delivered in the first, with similar margin levels. I would also note that we will close the PIPE associated with the MRO Holdings transaction this week and issue 2.2 million shares, which will be reflected in our Q2 share count for approximately two-thirds of the quarter and have associated interest savings from the proceeds. For the full year, we are increasing our sales outlook and now expect growth excluding LCP in the low teens. This reflects our strong first quarter performance and our continued confidence in the demand environment, supported by durable passenger volumes and a customer list that includes some of the world's largest airlines. Importantly, both our second quarter and full-year fiscal 2027 outlooks exclude any impact from the MRO Holdings acquisition.

With that, I will turn the call back to John to walk through the transaction in more detail.

Thank you, Dylan. Turning to Slide 6, I want to start with the key strategic and financial takeaways from the transaction. First, we have agreed to acquire a 65% controlling interest in MRO Holdings, a leading provider of airframe heavy maintenance with facilities across Central and South America and the U.S. for an implied enterprise value of $4 billion. Second, the transaction significantly advances our strategy to become the leading aviation aftermarket platform, creating substantial new avenues for growth across parts, repair, and software. Third, the combination represents a step change in AAR's financial profile, significantly increasing our scale while enhancing margins and cash flow. Fourth, we will apply the same disciplined approach to M&A that has guided our prior acquisitions to integration and deleveraging.