AAR CORP Q2 FY2025 earnings call

• AAR reported strong Q2 results with sales of $686 million, up 26% year-over-year, and adjusted earnings per share of $0.90, a 11% increase from the same period last year. - All three core business segments contributed to growth: parts supply saw 20% y/y sales growth, repair and engineering grew 57% y/y, and integrated solutions increased 4% y/y. - Announced resolutions with the Department of Justice and Securities Exchange Commission regarding Foreign Corrupt Practices Act violations, with a $55.6 million settlement recognized in Q2. - Agreed to sell the landing gear overhaul business to GA Telesis for $51 million, expected to close in Q1 2025 and be accretive to margins. - The product support acquisition integration is on schedule, with expected $10 million cost synergies realized by FY26 Q1.

Parts supply was the largest segment, with Q2 sales of $274 million, a 20% year-over-year increase, contributing nearly 40% of total sales. Repair and engineering segment had Q2 sales of $229 million, up 57% year-over-year. Integrated Solutions segment reported Q2 sales of $163 million, a 4% year-over-year increase.

• Anticipates Q3 year-over-year sales growth of 22% to 25% and adjusted operating margin in the range of 9.2% to 9.4%. - Expects continued strong demand for services, driven by factors such as strong commercial aviation demand, new distribution contracts, and hangar expansions in repair and engineering. - Aims to continue deleveraging, with net debt leverage expected to move towards 2 times in two years, having already reduced from 3.6 times to 3.17 times during the quarter.

• FCPA settlement of $55.6 million recognized in Q2, with the payment reflected in Q3 cash flows. - Potential market risks related to macroeconomic factors, including impact of interest rates on leverage and M&A appetite.

Q: Scott Mikus asked about Chromalloy's PMA portfolio and revenue exposure to ultra-low-cost carriers (ULCCs).

A: John Holmes stated AAR is heavily skewed towards larger carriers like United, Delta, and American, with limited exposure to ULCCs in North America, and they are in discussions with Chromalloy and Eftai to grow the business together.

Q: Ken Herbert inquired about USM growth and part supply margins.

A: John Holmes said USM growth accelerated with more assets available, and part supply margins are expected to expand driven by distribution, with Q3 margins expected to improve and further expansion in Q4.

Q: Michael Ciarmoli asked about part supply EBITDA margins and R&E margins.

A: John Holmes explained part supply margins down largely due to whole asset mix, and Sean Gillan discussed R&E margins related to product support synergies and upcoming hangar expansions in FY26.

Q: Louie DiPalma asked about USM inflection and net leverage.

A: John Holmes noted USM showing signs of improvement with more assets available, and Sean Gillan discussed deleveraging progress, with net leverage moving from 3.6 times at acquisition close to 3.17 times, and plans to continue deleveraging towards 2 times in two years.

Q: Josh Sullivan asked about DOD efficiency and PMA.

A: John Holmes discussed using commercial solutions like used parts for government efficiency, citing examples like the C-40 aircraft conversion, and mentioned PMA can be part of government efficiency efforts.

Q: Ken Herbert followed up on PMA conflicts and free cash flow.

A: John Holmes said managing relationships carefully to avoid OEM conflicts, and Sean Gillan discussed free cash flow outlook similar to prior years, with strong Q4 expected to contribute to deleveraging.