AAR CORP Q4 2026 earnings call

Good afternoon, everyone, welcome to AAR's Fiscal Year 2026 Fourth Quarter Earnings Conference Call. We are 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. 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 31st, 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. 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.

Great. Thank you, Chris, welcome everybody to our fourth quarter fiscal year 2026 earnings conference call. I will begin with key messages on slide three. Our momentum continued with another strong set of results in the quarter, demonstrating how our connected platform approach to parts, repair, and software is delivering higher, more profitable growth. We delivered 26% growth in adjusted sales, 27% growth in adjusted EBITDA, and 32% growth in adjusted earnings per share for the period. The adjusted sales increase included 13% organic adjusted sales growth, led by 19% organic growth in our new parts distribution activities and significant growth at Trax. Our adjusted EBITDA margin in the quarter, excluding Legacy Commercial Programs segment, was 13%, already demonstrating our ability to achieve the three-year range provided at our Investor Day event held in May.

While progress will not be linear, this quarter's results underscores the high degree of confidence we have that we will ultimately be able to achieve or exceed the high end of our range as we continue to execute on our strategy. For the full year, the adjusted EBITDA margin excluding Commercial Programs was 12.7%. Third, we continue to expect double-digit sales growth and further margin expansion as we execute on our plan. Finally, our strong cash flow in the quarter helped us further reduce our net leverage. We continue to carefully manage our balance sheet in order to support our disciplined approach to capital allocation and preserve financial flexibility. Looking at slide four, total sales in the quarter were a record $928 million and grew 26% year-over-year, including 13% organic growth.

We drove revenue growth in each of our four key parts, repair, and software activities in the period. Sales to commercial customers were up 31%, while sales to government customers were up 5% over the same period last year. 73% of our sales were to commercial customers, and the remaining 27% were to government customers during the quarter. Adjusted EBITDA in the quarter increased 27% year-over-year to $116 million, and adjusted EBITDA margin increased from 12.4% to 12.5%. Margin expansion in the quarter was driven by growth in new parts distribution and continued mix shift in government programs. We continue to expand EBITDA margins despite the year-over-year comparable impact of a one-time gain in used serviceable material in the prior year. As we mentioned in detail last quarter, the integration of HAECO Americas is tracking ahead of schedule and slightly dilutive to near-term margins.

Last quarter, the impact of HAECO was roughly 70 basis points, which we cited as the low, and this quarter the impact was roughly 40 basis points. Adjusted diluted EPS was up 32% year-over-year to $1.53 per share, driven by our strong operational performance. Lastly, we had strong cash flow generation with adjusted cash from operations of $58 million in the first quarter or $94 million for the full year. On slide five, you will see the results for full year fiscal 2026. We had growth across all key performance metrics this year, demonstrating our disciplined execution and the power of our parts repair and software platform. I'm extremely proud of our performance this year as we hit a record high on sales, adjusted EBITDA, and adjusted EPS.

We closed on four separate acquisitions in 2026 and have been successfully executing on complicated integrations that involve site consolidation, workforce repositioning, and detailed customer coordination. These achievements are a testament to the dedication of our team and the effectiveness of our growth strategy. For the year, adjusted sales were up 20% to $3.3 billion, which included 14% organic adjusted sales growth. Adjusted EBITDA grew 24% for the full year, while margins were up 30 basis points to 12.1%, or 12.7% excluding our Legacy Commercial Programs segment. Adjusted EPS of $5.05 was up 29%, marking our fifth consecutive year of mid-teens or greater adjusted EPS growth. Turning to slide six, we continue to execute on our core strategic objectives. We signed another exclusive distribution agreement with Woodward in the quarter to provide distribution for high-demand parts for the LEAP, GEnx, and CF34 engines.

Our relationship with Woodward began with defense distribution, and we are excited to now extend our support into commercial distribution. We continue to make progress on our airframe MRO expansions, with Oklahoma City completed in March and our Miami facility that will come online after this summer. We also continue to make progress on our strategy to grow our component MRO activity. In this quarter, we won multiple new awards with leading airlines, which drove double-digit organic sales growth for the quarter. In April, we launched Airvoyant, our AI-driven procurement solution for airlines and MROs. This new software is entering beta testing with our launch partners, and we are encouraged by the broad interest this solution is generating. We are in the process of rolling out our paperless hangar technology at our Oklahoma City and Greensboro facilities.

When complete, this will result in roughly 66% of our airframe MRO capacity using our paperless hangar technology. In March, we were awarded a follow-on contract for $305 million with the U.S. Navy and Marine Corps to provide contractor logistics support for their C-40 fleet, demonstrating once again our ability to bring commercial best practices to government customers. As mentioned previously, the integration of the HAECO Americas acquisition is pacing ahead of schedule, and we expect the acquisition to reach margins consistent with our other airframe MRO sites in the second half of fiscal 2027. In software of note, Trax continues to expand its relationship with Delta and has now reached phase II of its implementation. Today, more than 10,000 professionals at Delta are using Trax. Lastly, we closed the previously announced acquisition of Aircraft Reconfig Technologies in April, bringing in-house certification capabilities and proprietary engineering solutions into our portfolio.

With that, I'll turn it over to Dylan to discuss the results in more detail.

Thank you, John. Turning to Parts Supply on slide seven. Total Parts Supply sales grew 39% from the same period last year to $424 million. We had another quarter of above-market growth in new parts distribution, which grew 19% organically, excluding the impact of our ADI acquisition. Commercial distribution grew 28% organically, and government distribution grew 7% organically, despite strong government sales in the year-ago quarter. Adjusted EBITDA of $61.7 million was up 18% over the prior year. Adjusted EBITDA margin of 14.6% was down 250 basis points, driven primarily by a one-time gain in the year-ago quarter of $6.5 million in our used parts activities. Now on slide eight, Repair, Engineering, and Software. Total sales increased 35% to $314 million, driven 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 of $36 million was up 29%. Adjusted EBITDA margin of 11.5% was down 50 basis points from the prior year. As John mentioned earlier, consistent with our expectations, margins were negatively impacted in the quarter by our continued integration of HAECO Americas. The acquisition had an approximately 130-basis point impact on segment Adjusted EBITDA margins in the quarter. This is an improvement over what we saw in the third quarter and is consistent with our expectation that margins will continue to improve as we complete our integration activities during the first half of FY 2027. Segment margins were also impacted in the quarter by approximately 90 basis points by certain costs in our component MRO operations that we do not expect to continue going forward. Looking at Government Solutions on slide nine.

Sales were down 8% year-over-year to $130 million. Adjusted EBITDA of $20.8 million was up 58%. Adjusted EBITDA margin grew 670 basis points to 16.0%. The decline in revenue was driven by reduced activity on our WASS program supporting the United States Department of State. We were able to partially offset this impact through expansion of other government programs that we have won over the last couple of years, as well as by strong pallet sales in our Mobility Systems operation. The other government programs, along with the greater Mobility volumes, drove the segment margin expansion in the quarter. Turning to the balance sheet on slide 10. We had another strong cash flow quarter, generating $58 million in adjusted cash from operating activities. Importantly, we drove improvement in accounts receivable days and inventory turns both year-over-year and quarter-over-quarter.

Net leverage decreased from 2.17x net debt to Adjusted EBITDA at the end of Q3 to 2.03times at the end of Q4, despite 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, demonstrating meaningful progress toward our long-term target of 30% plus. With tht, I'll turn the call back to John.

Thank you, Dylan. Turning now to slide 11. The demand environment across our portfolio remains very strong. Commercial passenger volumes have been resilient despite higher ticket prices, and the elevated aircraft fleet age continues to drive demand for our core Parts Supply and repair offerings. We expect these favorable conditions to continue. In Parts Supply, order volume remains strong, and we continue to increase our offering with the addition of new distribution agreements. In Repair, Engineering, and Software, our airframe MRO facilities remain largely full, and demand for our component MRO services continues to increase. In addition, we have strong momentum in our software offerings as we capture additional customers for Trax, Aerostrat, and Airvoyant. Finally, in Government Solutions, although we expect a continued decrease in activity on our WASS program, we anticipate being able to more than offset that with growth on other programs at higher margins.

As a result, in FY 2027, we expect another year of strong growth. Specifically, in Q1, we're expecting total sales growth, excluding the Legacy Commercial Programs segment, to be 21%-23%. We expect Q1 adjusted EBITDA margin of 12.25%-12.75%, also excluding Legacy Commercial Programs. Notably, we are guiding to metrics on an ex Legacy Commercial Programs basis, as we believe this more accurately reflects how we are managing the ongoing performance of the company. We expect the Legacy Commercial Programs business to wind down ratably over the next three to four years, and we will continue to provide updates on that progress as they become available. This timeline could shift based on the speed with which we exit inventory positions and contracts with customers. On slide 12, you will see our outlook for the full fiscal year 2027.

We expect another year of strong growth with total sales, excluding Legacy Commercial Programs, to be in the range of low double digits to low teens. This full year guidance assumes conditions remain consistent with what I just described. Specifically, we expect continued strength in our new Parts Supply distribution activity within Parts Supply, continued growth in Repair, Engineering, and Software as a result of capturing more component work, our facility expansions coming online, and growth in our software offering. Finally, we expect to see the benefit of the mix shift in our Government Solutions segment towards newer, higher-margin programs. This FY 2027 guidance supports the three-year revenue growth targets that we issued at our investor day, and we are confident in our ability to meet or exceed those targets. I'll conclude on slide 13.

AAR has been driving strategic transformation over the last several years, and today we are a more focused company offering a complete range of aviation aftermarket solutions in parts, repair, and software. I'm very proud of all that we have accomplished in fiscal year 2026 and over the last several years. Achieving our level of growth while continuing to expand our margins, completing and integrating six acquisitions, building new airframe capacity, and exiting activities that have become non-core is a complex set of activities to execute simultaneously. I'm immensely grateful to our team for their dedication and commitment to AAR. In addition, I'd like to thank our customers and shareholders for their ongoing support. With that, we'll turn it over to the operator for questions.