AAR Q1 2027 Earnings Call Transcript

On Tuesday, AAR (NYSE: AIR ) discussed first-quarter financial results during its earnings call. The full transcript is provided below. APIs provide real-time access to earnings call transcripts and financial data. Visit to learn more.

Access the full call at Summary AAR Corp. 7%. The company announced the acquisition of a 65% controlling interest in MRO Holdings, significantly enhancing its aviation aftermarket platform and expected to boost margins and cash flow. AAR's future outlook includes continued sales growth, with a projected increase of 14% to 16% in Q2, excluding legacy commercial programs, and new medium-term adjusted EBITDA margin targets of 19% to 20% post-acquisition.

Operational highlights include broad-based sales growth, particularly in parts supply and repair, engineering, and software segments, with notable margin improvements. Management emphasized the strategic importance of the MRO Holdings acquisition, citing enhanced scale, new growth avenues, and substantial synergy opportunities, while maintaining a disciplined approach to integration and deleveraging. Full Transcript OPERATOR Good day and thank you for standing by. 's first quarter fiscal year 2027 business update call.

At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised.

To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Tillett, Vice President of Investor Relations. Please go ahead.

Chris Tillett, Vice President of Investor Relations 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 and 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. John M. Holmes, Chairman, President, and Chief Executive Officer Thank you, Chris, and good morning, everyone.

I'm very excited to talk to you today about an important development for AAR. S. customer base. This is the 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 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%. 7%. 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. 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. 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. Dylan Wolin, Chief Financial Officer Thanks, John.

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. 3%, driven by improved performance, new serviceable material, and continued growth in distribution. 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.

9%, down 120 basis points from the prior year. As expected, the ongoing HAECO Americas integration was dilutive to this segment, while we continue to see growth and margin improvement in component MRO. 3%. Growth in mobility systems and in the newer, higher-margin government programs more than offset the decline in WAS 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 to 40 million per quarter, and you can expect that we will continue to pursue these rotable asset sales as opportunities become available. 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. 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. John M. Holmes, Chairman, President, and Chief Executive Officer Thank you, Dylan.

Turning to Slide 6, I want to start with the key strategic and financial takeaways from the transaction. First, we've 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 United States, 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. And fourth, we will apply the same disciplined approach to M&A that has guided our prior acquisitions to integration and deleveraging. We see compelling synergy opportunities across our platform, and the strong cash generation of the combined business will support our path back towards our target leverage range within the medium term.

Turning to Slide 7, by combining AAR's capability with MRO Holdings' heavy maintenance footprint, we are adding a very well-respected airframe MRO operation and achieving significantly greater scale across our broader parts, repair, and software platform. We will approach the market as one company, and this scale creates tremendous advantages for our customers as we can offer a broad range of maintenance solutions for more aircraft types in strategic geographies. The scale also creates advantages for the rest of AAR.

First, by expanding our airframe MRO presence, we have an opportunity to drive additional volume into our high-margin component MRO facilities and offer customers a single, more comprehensive repair solution. Second, the combination strengthens our position with existing OEM distribution partners and creates new opportunities to win additional distribution agreements. With the combined business servicing nearly 3,000 aircraft annually, we will have even greater visibility into parts demand and the needs of airline customers across multiple fleet types.

That market insight and direct sales channel is a significant competitive advantage in building and expanding long-term OEM distribution relationships. Third, the expanded footprint creates an opportunity to capture substantially more repair and maintenance data that can enhance our software solutions on their own, but also data available across our platform will help us perform maintenance more efficiently and allow us to provide our OEM partners more insight into their distribution channels. That is the self-reinforcing nature of our platform. Parts support repair, repair supports parts, and the data generated across both markets makes our software business stronger.

With the addition of MRO Holdings, we are materially increasing the scale of that ecosystem, strengthening our leadership in heavy maintenance while creating additional opportunities for growth across the entire company. Turning to Slide 9, I want to provide more context on why heavy maintenance is such an important part of the aviation aftermarket. Heavy maintenance is a recurring, mission-critical service that aircraft require throughout their useful lives. These extensive events are time-based, meaning they often happen regardless of how much an aircraft has flown, and involve inspection, repair, overhaul, and modifications.

Because the work is required regardless of utilization, it provides a durable and recurring source of demand. It is also a highly specialized business with barriers to entry. Heavy maintenance requires skilled labor, scaled hangar capacity, and the systems to return aircraft to service quickly and efficiently. AAR has built a strong position in this market through our operating model, digital and technical capabilities, and industry-leading turnaround times, and so has MRO Holdings.

Just as important, heavy maintenance puts us at a critical point in the customer relationship. It provides visibility into the repair needs, parts requirements, and maintenance activity of the aircraft we service, creating opportunities that extend beyond airframe MRO and into our broader platform. And the long-term demand environment remains very attractive. The global fleet is expected to grow significantly over the next decade, while stronger passenger demand and the existing installed fleet continue to support the need for heavy maintenance.

Against that backdrop, adding MRO Holdings meaningfully expands our position in this attractive, strategically important market. Turning to Slide 10, MRO Holdings is a scaled, highly differentiated heavy maintenance provider with five locations across El Salvador, Mexico, Colombia, and the United States, and room to expand further in each location as demand requires. For example, MRO Holdings recently opened its seventh hangar in El Salvador, which is actually the largest hangar in the world.

The business has comprehensive capabilities across narrowbody and select widebody aircraft and serves a blue-chip customer base that includes some of the largest airlines in the Americas. S. S. aviation market.

MRO Holdings also has an impressive track record of growth and profitability. Over the last 12 years, sales have had a double-digit compounded annual growth rate, while adjusted EBITDA has grown even faster. The strength of these results is also a testament to their reputation for quality and safety. For calendar 2026, MRO is expected to generate approximately $1 billion of adjusted sales and $285 million of adjusted EBITDA on a pro forma basis, representing a 27% adjusted EBITDA margin.

That profitability translates into significant cash flow. The business is expected to generate more than $200 million of adjusted operating cash flow in calendar 2026. Taken together, MRO Holdings brings AAR significant scale, attractive margins, strong cash generation, and a strategically important footprint serving many of the world's leading airlines. Now on Slide 11, you can see the scale and geographic reach of the combined airframe network.

Together, AAR and MRO Holdings will create the largest MRO operation in the world, expanding our network from seven to 12 facilities across five countries with approximately 19 million service hours and nearly 3,000 aircraft maintained each year. Sorry, I get choked up every time I say that 3,000 number. But the strategic value goes beyond scale. This footprint gives us greater flexibility to serve customers across a broader range of aircraft types and geographies.

It adds cost-advantaged options to our hangar network, and it creates a more open runway for future capacity additions. For example, MRO Holdings already has plans underway to add an additional eighth hangar to its location in El Salvador. We believe the combination of scale, flexibility, and additional capacity creates a highly differentiated offering for our customers and positions us well to capture continued growth. Turning to Slide 12, the transaction immediately transforms AAR's financial profile.

3 billion in annual sales and nearly $700 million of adjusted EBITDA. Our adjusted EBITDA margin increases by 400 basis points from roughly 12% to 16% before synergies. The transaction also enhances our cash generation. Pro forma adjusted operating cash flow increases from approximately $94 million to $272 million, reflecting the attractive working capital profile of the MRO Holdings business.

That stronger cash generation will be an important driver of our deleveraging following close and help us to preserve financial flexibility over time. Given the significantly improved earnings profile of the combined business, we are also establishing new medium-term adjusted EBITDA margin targets. At our investor day back in May, we laid out a three-year target of 13% to 14%+, excluding legacy commercial programs. Following the close of this acquisition and including the cost synergies we have identified, we now expect adjusted EBITDA margins to reach 19% to 20% over the next three to four years.