AAR CORP Q3 FY2025 earnings call

• Strong third quarter with record sales and adjusted EPS. Sales grew 20% to $678 million, adjusted EBITDA $81.2 million, up 39%.
• Parts Supply's new parts Distribution grew organically for 13 quarters, now ~60% of the segment.
• Repair & Engineering saw strong sales growth and margin improvement from Product Support acquisition, with site integration on schedule.
• Integrated Solutions had Trax contributing strong margins despite slight sales decline.

Parts Supply was the largest business segment, contributing nearly 40% of company sales. Third quarter sales were approximately $271 million, 12% higher year-over-year, driven by new parts Distribution. Third quarter adjusted EBITDA for Parts Supply was $36.8 million, 12% higher. Repair & Engineering third quarter sales were $216 million, growing 53% year-over-year, with adjusted EBITDA of $27.9 million, up 110% year-over-year. Integrated Solutions sales were $163 million, slightly lower by 1.6% year-over-year, but adjusted EBITDA was $16.2 million, 11% higher year-over-year.

• Expect Q4 FY'25 sales growth in mid-single-digits (including one month of Landing Gear revenue), excluding Landing Gear, high-single-digit growth.
• Adjusted operating margin expected in range of 9.7% to 9.9% in Q4.
• Net interest expense expected consistent with Q3 ($18 million).
• Effective tax rate expected ~30% in Q4, ~28% in future quarters.
• Expect growth and margin expansion through FY'26.

• Potential impact of tariffs on OEM pricing and ability to pass along increases.
• Market dynamics affecting USM business, though temporary issues expected to resolve.
• Execution risks related to integration of Product Support and completion of facility expansions.

Q: Ken Herbert asked about USM, its temporary nature and impact of airline capacity growth.

A: USM had temporary situational issues due to maintenance deferrals, but demand expected to return. No meaningful impact from airline capacity growth yet as demand for services remains strong.

Q: Louie DiPalma asked about Landing Gear divestiture impact on EBITDA margin and Trax deals.

A: Landing Gear divestiture is breakeven to slightly positive on operating profit. Trax deals with Cathay Pacific and Singapore Airlines contribute to margin expansion with strong pipeline.

Q: Michael Leshock asked about MRO efficiency improvement and defense opportunities.

A: MRO efficiency improved via paperless initiatives and facility expansions. Defense opportunities with DOGE USM parts have not seen notable increase yet but hopeful for uptake.

Q: Scott Mikus asked about FTAI partnership extension and tariffs.

A: FTAI partnership extension continues with expected growth. Not buying ahead of tariffs, but repair work could benefit from tariffs if kept in US.

Q: Joshua Sullivan asked about BELAC distribution agreement and DOGE.

A: Lessors open to PMAs, but focus on USM side for DOGE opportunities. Trax platform development ongoing with hope for more activity later in the year.

Q: Michael Ciarmoli asked about USM top-line and airline retirements.

A: USM top-line was below expectation temporarily, but demand still strong. No bow wave yet, but seeing more whole assets and parts packages in USM.