AAR Corp. Q2 FY2026 earnings call

Management Statement and Operational Highlights

• Financial Results: Delivered strong financial results with 16% total sales growth, led by the parts supply business up 29% in the quarter, with new parts distribution organic growth of 32%.
• Acquisitions: Completed two key strategic acquisitions (ADI in September for $108 million and HAYCO Americas in November for $77 million) and announced the third (Aircraft Reconfig Technologies) expected to close in fiscal fourth quarter. ADI aligns with new parts distribution growth, and HAYCO Americas extends leadership in airframe heavy maintenance.
• New Business and Synergies: Captured new business, including renewal of key exclusive new parts distribution agreements and new customers for Trax. Leveraged synergies between parts supply and repair activities, e.g., Eaton naming AAR's Amsterdam facility as an authorized service center.
• Digital Capabilities: Partnership with Arrow Exchange to enhance integration capabilities for Trax customers.
• Balance Sheet: Ended the quarter with lower leverage within long-term target range.

Segment Performance

• Parts Supply: Total parts supply sales grew 29% from the same quarter last year to $354 million. New parts distribution activities grew 32% organically, with second quarter parts supply adjusted EBITDA of $46.5 million, up 37%, and adjusted EBITDA margin increased to 13.2% from 12.4% in the same quarter last year. Adjusted operating income rose 35% to $42.8 million, and adjusted operating margins increased from 11.5% to 12.1%.
• Repair and Engineering: Total sales increased 7% year over year to $245 million. Adjusted EBITDA of $31.2 million was 1% higher than in the same period last year, while adjusted EBITDA margins decreased to 12.8% from 13.5%. Second quarter adjusted operating income of $27.4 million remained consistent with the same period last year, with adjusted operating margins decreasing to 11.2% from 12%.
• Integrated Solutions: Sales increased 8% year over year to $170 million. Integrated Solutions adjusted EBITDA of $18.5 million was 50% higher than the same period last year. Adjusted operating income of $15.1 million was 82% higher, with the adjusted operating margin increasing from 5.1% to 8.6%.

Guidance

• Q3: Expect total sales growth in the range of 20% to 22%, including impact of recent acquisitions. Organic sales growth expected to be 8% to 11% (excluding divestiture of Land and Gear and impact of ADI and HAYCO acquisitions). Expected Q3 adjusted operating margin of 9.8% to 10.1%.
• Full Fiscal Year: Expect total sales growth approaching 17% and organic sales growth approaching 11% given strong first half performance and recent acquisitions.

Q: Ken Herbert asked about parsing the 32% growth in parts supply by volume vs price and same-store sales.

A: John Holmes responded that the majority of growth is driven by volume. Some price escalation with OEM partners, but not the majority. Significant growth from existing distribution contracts with same-store sales in the 20-30% range.

Q: Ken Herbert asked about concerns of destocking at airline customers.

A: John Holmes said there's no evidence of destocking, and backlog gives confidence in continued growth rates.

Q: Ken Herbert asked about third-quarter margin step down.

A: John Holmes said it's due to the HAECO acquisition, which will be margin accretive long term but impactful in Q3 and Q4 during integration.

Q: Louis DePalma asked about synergies between heavy maintenance and other businesses.

A: John Holmes said there are synergies with component business, leveraging heavy maintenance leadership to drive component repair volume. Trax has synergy with parts supply, and AeroStrat acquisition has synergy with heavy maintenance.

Q: Louis DePalma asked about Thai Airways win stimulating Trax pipeline.

A: John Holmes said Delta win has opened doors for Trax, with Delta serving as a reference and a three-year implementation in progress.

Q: Michael Luchak asked about M&A pipeline.

A: John Holmes said they continue to see M&A as key, actively pursuing companies meeting criteria, cognizant of integration bandwidth but aiming to curate attractive opportunities.

Q: Michael Luchak asked about Trax customer upgrade cycle.

A: John Holmes said they're approximately 30%-35% through customer upgrades, goal to have bulk completed by 2028.

Q: Scott Micas asked about ART acquisition revenue growth and USM trend.

A: John Holmes said ART acquisition positions AAR to participate in growing interior refresh market. USM activity this quarter was about same as last quarter, status quo.

Q: Scott Micas asked to parse new parts distribution organic growth 32% between commercial and government.

A: Sarah Flanagan said roughly 50% came from commercial and 50% from defense in the quarter.

Q: Ken Herbert asked about USM and Eftai aero derivative IGT offering.

A: John Holmes said AAR's USM team can source CFM material in market to make up for volume decline with Eftai, not seeing it as a long-term risk.

Q: Michael Ciarmoli asked about adjusted operating margin and revenue outlook.

A: John Holmes said they're pleased with trajectory, expect to punch above 10% over time, with HAYCO integration causing near-term dilution but long-term margin expansion. Revenue outlook for the year has more pronounced positive impact in FY '27 from new capacity coming online.

Q: Michael Ciarmoli asked about heavy maintenance margin perception.

A: John Holmes said heavy maintenance is not a low-margin business, has made margin gains, and with HAYCO acquisition, expects further margin expansion, utilizing processes to improve turnaround and sell out through end of decade.

Q: Sheila asked about margin expansion in repair and engineering and HAYCO integration.

A: John Holmes said repair and engineering is at a low point currently, with margin expected to go up from there, leveraging heavy maintenance leadership to drive component repair volume, and HAYCO integration involving revenue realignment and cost takeout.