AAR CORP Q1 2026 earnings call

Good afternoon, everyone, and welcome to AAR's Fiscal Year 2026 First Quarter Earnings Call. We're joined today by John Holmes, Chairman, President, and Chief Executive Officer, and Sean Gillen, Chief Financial Officer. The presentation material we are sharing today as part of this webcast can also be found under the Investor Relations section on our corporate website. Before we begin, I'd like to remind you that the comments made during the call may 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 factor section of the company's annual report on Form 10-K for the fiscal year ended May 31, 2025.

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. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is set forth in the company's earnings release and slides. A transcript of this conference call will be available shortly after the webcast on AAR's website. At this time, I would like to turn the call over to AAR's Chairman, President, and CEO, John Holmes.

Thank you and welcome, everyone, to our First Quarter Fiscal Year 2026 Earnings Call. This quarter was a very strong start to the year, and we are proud of the results we delivered as we continue to advance the execution of our strategic objectives.

We have accompanying information on the slides that will be referenced as I talk through the details of this release. Turning to slide three, there are three key takeaways from our Q1 FY2026 that I would like to highlight today. First, we delivered significant top-line growth with higher profitability. We are particularly proud of the 17% organic adjusted sales growth that we drove in the quarter. Second, we continue to win and grow in new parts distribution. This has been our fastest growing activity, averaging more than 20% organic growth in each of the last four years. Our exclusive distribution model resonates with OEMs and is helping to drive continued market share gains. Third, our Trax software solution has continued its momentum on the back of the major win we announced with Delta Air Lines in June.

Additionally, we further enhanced our software capabilities with the acquisition of Aerostrat, which we completed in the quarter. Turning now to slide four, I will discuss our strategy execution in more detail. We are executing across our strategic objectives to drive growth through market share capture and new business, improve margins through cost efficiency and synergy realization, increase the intellectual property in our offerings through software and IP investments, and to continue our disciplined portfolio management. Starting with share gains and new business wins in the quarter, in our parts supply segment, we expanded our new parts distribution capabilities through our multi-year exclusive distribution agreement with AmSafe Bridport, a TransDigm company, becoming the exclusive KC-46 and C-40 platform distributor to the global defense and military aftermarket. This win once again demonstrates the strength of our new parts distribution capabilities across both the commercial and government markets.

Also, in repair and engineering, we continue to make progress on our Oklahoma City and Miami Airframe MRO expansions. Both expansions are progressing well and will come online in calendar 2026, adding 15% capacity to our network. Moving to cost efficiency, we are continuing the rollout of our paperless hangar solution, which drove increased throughput, leading to another quarter of sales growth out of the same hangar footprint. We have completed approximately 60% of the paperless rollout to date. In component services, now that we have substantially completed the product support integration, our focus is to drive incremental volume through the acquired sites, which will lead to additional margin expansion. In the quarter, we also maintained consistent cost discipline, reducing SG&A year-over-year.

In our software and IT enabled offerings, we continue to have success in the market with our Trax software solutions, particularly after Trax's selection by Delta validated its ability to scale and support the world's largest airlines. We don't announce all of Trax's wins, but this quarter we're proud to say that JetBlue, a longtime Trax customer, upgraded to e-mobility and our cloud hosting solution. Also during the quarter, we acquired Aerostrat, a maintenance planning software provider, which immediately expands the reach of our software offerings and the enterprise resource planning system capabilities of our Trax software solution. Aerostrat brings exciting opportunities for growth with the potential for further integration and scope expansion among existing Trax customers. We are proud that this was another quarter of both strong execution and new business capture, and with that, I'll turn it over to Sean to discuss the results in more detail.

Thanks, John. Looking now to slide five, total adjusted sales in the quarter grew 13% to $740 million year-over-year. However, excluding the sale of landing gear, which contributed sales of $19 million in last year's quarter, Q1 organic sales growth is 17%. We drove growth in each of our segments with particular strength in parts supply. Adjusted sales growth to government customers increased 21%, and adjusted organic sales to commercial customers increased 15% over the same period last year. For the quarter, total commercial sales made up 71% of total sales, while government sales made up the remaining 29%. Compared to the same quarter last year, adjusted EBITDA increased 18% to $86.7 million, and adjusted EBITDA margins increased to 11.7% from 11.3%. Adjusted operating income increased 21% to $71.6 million, with adjusted operating margins improving to 9.7% from 9.1%.

Our focus on improving operating efficiencies and strong performance in our parts supply segment was a key driver of the improved margins. The combination of sales growth and margin expansion resulted in a year-over-year adjusted diluted EPS increase of 27% to $1.08 from $0.85 in the same quarter last year. With that, I'll turn to the detailed results by segment, starting with parts supply on slide six. Parts supply sales grew 27% to $318 million from the same quarter last year. We once again saw above-market growth of over 20% in our new parts distribution activities, with strong growth across both the commercial and government end markets. In the quarter, we also saw a meaningful pickup in USM sales. First quarter parts supply adjusted EBITDA of $43.8 million was higher by 34%, and adjusted EBITDA margin increased to 13.8% from 13.1% in the same quarter last year.

Adjusted operating income rose 36% to $40.9 million, and adjusted operating margins also increased from 12.1% to 12.9%. Turning now to slide seven for repair and engineering. Sales decreased 1% to $215 million year-over-year. However, excluding the impact of the landing gear divestiture, organic sales growth in repair and engineering was 8%, as demand remained strong for our MRO activities, and we continued to drive efficiency to increase throughput. Adjusted EBITDA of $28.1 million was 1% higher than in the same period last year, with adjusted EBITDA margins increasing to 13.1% from 12.8%. First quarter adjusted operating income of $24.9 million was 2% higher from the same period last year, and adjusted operating margin increased to 11.6% from 11.2%. These increases were primarily driven by continued strong efficiencies in our operations.

Going forward, we expect to continue to drive margin expansion in this segment from the realization of product support synergies, continued rollout of our paperless hangar initiatives, and the capacity expansions that are in process. Looking now to slide eight. Integrated solution sales increased by 10% year-over-year to $185 million. We saw strong growth in our government end markets as recent new wins ramped up in the quarter. Integrated solutions adjusted EBITDA of $14.2 million was 5% higher than the same period last year. Adjusted operating income of $11 million was 5% higher, with the adjusted operating margin decreasing from 6.2% to 5.9%. Turning to slide nine of the presentation. During the quarter, our net debt leverage increased slightly from 2.72x in the fourth quarter to 2.82x. This increase was driven by both organic and inorganic investments we made in the quarter.

We invested over $50 million in inventory in the quarter to support future growth, particularly in our parts supply segment, as we saw opportunities in both new parts distribution and USM. Additionally, we invested $15 million in the acquisition of Aerostrat, which was signed and closed on August 12th. While these investments drove a cash use in the quarter, we expect to be cash positive in Q2 and for the full fiscal year. With that, I will turn the call back over to John.

Great. Thank you, Sean. Turning to slide 10, we have an update on our outlook for Q2. For Q2, we expect sales growth of 7%-10%, which excludes the impact of landing gear, which generated $20.4 million in sales in Q2 of last year. We expect adjusted operating margin of 9.6%-10%. For the full fiscal year, given our strong start, we expect organic sales growth approaching 10% as compared to the 9% we cited back in July. In closing, I would like to highlight the strengths of AAR as a business and as an investment. We are well positioned in the most attractive segments of the growing aviation aftermarket. We have broad, unique distribution and repair capabilities, including our Trax software solutions that are unmatched in our industry. We have also continued to optimize our portfolio to deliver stronger growth at higher margins.

Finally, we expect to continue to strengthen our offering with targeted acquisitions to accelerate our strategy. I would like to thank our global team of employees for their dedication and hard work, as well as our customers and our shareholders for your continued interest and support of AAR. With that, we'll turn it over to the operator for questions.