Q3 2026 AAR Corp Earnings Call

March 24, 2026

Operator: Hello, and thank you for standing by. Welcome to AAR Corp Q3 Fiscal Year 2026 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. I would now like to hand the conference over to Chris Tillett, Vice President, Investor Relations. You may begin.

Speaker #2: Hello, and thank you for standing by. Welcome to AAR CORP third quarter fiscal year 2026 earnings conference call. At this time, all participants are on a listen-only mode.

Speaker #2: After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone.

Speaker #2: You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one again. I will now like to hand the conference over to Chris Tillett, Vice President, Investor Relations.

Speaker #2: You may begin.

Chris Tillett: Good afternoon, everyone, and welcome to AAR's fiscal year 2026 Q3 earnings conference call. We're 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 Investor Relations 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. Accordingly, 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 31 May 2025.

Christopher Tillett: Good afternoon, everyone, and welcome to AAR's fiscal year 2026 Q3 earnings conference call. We're 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 Investor Relations 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. Accordingly, these statements are no guarantee of future performance.

Speaker #3: Good afternoon, everyone, and welcome to AAR's fiscal year 2026 third quarter earnings conference call. We're joined today by John Holmes, Chairman, President, and Chief Executive Officer; and Dylan Wolan, Chief Financial Officer.

Speaker #3: The presentation we are sharing today is part of this webcast and can be found under the Investor Relations 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.

Speaker #3: 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.

Christopher Tillett: 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 31 May 2025.

Speaker #3: These risks and uncertainties are discussed in the company's earnings release and the Risk Factors section of the company's annual report on Form 10-K for the fiscal year ended May 31, 2025.

Speaker #3: In providing forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. Certain non-gap financial information will be discussed during the call today.

Chris Tillett: 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.

Christopher Tillett: 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.

Speaker #3: Reconciliations of these non-gap measures to the most comparable gap 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.

Speaker #4: Great. Thank you, Chris, and welcome, everyone, to our third quarter fiscal year 2026 earnings conference call. I'll begin with key messages for the quarter on slide three.

John Holmes: Great. Thank you, Chris, and welcome everyone to our Q3 fiscal year 2026 Earnings Conference Call. I'll begin with key messages for the quarter on slide three. First, this was another outstanding quarter for AAR. Our focused business model is driving growth that is delivering durable results in both commercial and government end markets, as evidenced by our Q3 performance. Second, we continued our momentum in the quarter and delivered 25% growth in total sales, 31% growth in adjusted operating income, and 26% growth in both adjusted EBITDA and adjusted earnings per share for the period. We saw growth across each of our parts repair and software platform activities in the quarter. Total sales increase included 14% organic adjusted sales growth, led by 36% organic growth in our new parts distribution activities.

John M. Holmes: Great. Thank you, Chris, and welcome everyone to our Q3 fiscal year 2026 Earnings Conference Call. I'll begin with key messages for the quarter on slide three. First, this was another outstanding quarter for AAR. Our focused business model is driving growth that is delivering durable results in both commercial and government end markets, as evidenced by our Q3 performance. Second, we continued our momentum in the quarter and delivered 25% growth in total sales, 31% growth in adjusted operating income, and 26% growth in both adjusted EBITDA and adjusted earnings per share for the period. We saw growth across each of our parts repair and software platform activities in the quarter. Total sales increase included 14% organic adjusted sales growth, led by 36% organic growth in our new parts distribution activities.

Speaker #4: First, this was another outstanding quarter for AAR. Our focused business model is driving growth that is delivering durable results in both commercial and government end markets, as evidenced by our third quarter performance.

Speaker #4: Second, we continued our momentum in the quarter and delivered 25% growth in total sales, 31% growth in adjusted operating income, and 26% growth in both adjusted EBITDA and adjusted earnings per share for the period.

Speaker #4: We saw growth across each of our parts repair and software platform activities in the quarter. Total sales increased included 14% organic, adjusted sales growth, led by 36% organic growth in our new parts distribution activities.

Speaker #4: Third, we are continuing to execute across key initiatives, advancing our strategic priorities. For example, in repair and engineering, the integration of HACO Americas as a head of schedule, and our Hanger expansions are on track with Oklahoma City now complete and Miami expected to be operational later this summer.

John Holmes: Third, we are continuing to execute across key initiatives advancing our strategic priorities. For example, in repair and engineering, the integration of HAECO Americas is ahead of schedule and our hangar expansions are on track, with Oklahoma City now complete and Miami expected to be operational later this summer. In parts supply, ADI is performing above expectations, and we continue to drive outsized growth in our new parts distribution activities. Also, our Trax software platform continues to gain momentum by growing its base of recurring revenue with new and existing customers. Finally, we are carefully managing our balance sheet to preserve strategic flexibility as we maintain our disciplined approach to capital allocation. We ended Q3 with net leverage within our target range, supported by our strong operating cash flow in the period.

John M. Holmes: Third, we are continuing to execute across key initiatives advancing our strategic priorities. For example, in repair and engineering, the integration of HAECO Americas is ahead of schedule and our hangar expansions are on track, with Oklahoma City now complete and Miami expected to be operational later this summer. In parts supply, ADI is performing above expectations, and we continue to drive outsized growth in our new parts distribution activities. Also, our Trax software platform continues to gain momentum by growing its base of recurring revenue with new and existing customers. Finally, we are carefully managing our balance sheet to preserve strategic flexibility as we maintain our disciplined approach to capital allocation. We ended Q3 with net leverage within our target range, supported by our strong operating cash flow in the period.

Speaker #4: In parts supply, ADI is performing above expectations and we continue to drive outsized growth in our new parts distribution activities. Also, our track software platform continues to gain momentum by growing its base of recurring revenue with new and existing customers.

Speaker #4: Finally, we are carefully managing our balance sheet to preserve strategic flexibility, as we maintain our disciplined approach to capital allocation. We ended the third quarter with net leverage within our target range supported by our strong operating cash flow in the period.

Speaker #4: Before I go to slide four, I would like to welcome Dylan Wolan back to AAR as the company's new Chief Financial Officer. Dylan was with the company from 2017 to 2024.

John Holmes: Before I go to slide four, I would like to welcome Dylan Wolin back to AAR as the company's new Chief Financial Officer. Dylan was with the company from 2017 to 2024 and was instrumental in developing the strategy we are executing today. I would also like to thank Sarah Flanagan for doing an outstanding job as our interim CFO over the last few months. I'm proud to be part of such a strong team. I also want to talk for a moment about the current environment. We are closely monitoring the events in the Middle East and have been in constant contact with our customers. As many of our customers have said publicly, fundamental demand for air travel remains strong, with bookings at record levels even since the start of the conflict.

John M. Holmes: Before I go to slide four, I would like to welcome Dylan Wolin back to AAR as the company's new Chief Financial Officer. Dylan was with the company from 2017 to 2024 and was instrumental in developing the strategy we are executing today. I would also like to thank Sarah Flanagan for doing an outstanding job as our interim CFO over the last few months. I'm proud to be part of such a strong team. I also want to talk for a moment about the current environment. We are closely monitoring the events in the Middle East and have been in constant contact with our customers. As many of our customers have said publicly, fundamental demand for air travel remains strong, with bookings at record levels even since the start of the conflict.

Speaker #4: It was instrumental in developing the strategy we are executing today. I would also like to thank Sarah Flanagan for doing an outstanding job as our interim CFO over the last few months.

Speaker #4: I'm proud to be part of such a strong team. I also want to talk for a moment about the current environment. We are closely monitoring the events in the Middle East and have been in constant contact with our customers.

Speaker #4: As many of our customers have said publicly, fundamental demand for air travel remains strong, with bookings at record levels even since the start of the conflict.

Speaker #4: While some customers may make modest capacity adjustments at this time, we are not anticipating any meaningful impact to their maintenance schedules or need for parts.

John Holmes: While some customers may make modest capacity adjustments, at this time, we are not anticipating any meaningful impact to their maintenance schedules or need for parts. They continue to tell us they are preparing for a busy summer travel season, and we are planning accordingly. What's more, AAR is competitively positioned as an independent, value-added aftermarket solution provider, which makes us a compelling solution for our customers as they look to reduce spending when fuel costs rise. Additionally, one of the benefits of AAR's portfolio is our exposure to government and defense end markets. Over the decade, this balance between government and commercial markets has been a real advantage. On that note, the government side of our business is benefiting from a general need for increased operational readiness in the US military.

John M. Holmes: While some customers may make modest capacity adjustments, at this time, we are not anticipating any meaningful impact to their maintenance schedules or need for parts. They continue to tell us they are preparing for a busy summer travel season, and we are planning accordingly. What's more, AAR is competitively positioned as an independent, value-added aftermarket solution provider, which makes us a compelling solution for our customers as they look to reduce spending when fuel costs rise. Additionally, one of the benefits of AAR's portfolio is our exposure to government and defense end markets. Over the decade, this balance between government and commercial markets has been a real advantage. On that note, the government side of our business is benefiting from a general need for increased operational readiness in the US military.

Speaker #4: They continue to tell us they are preparing for a busy summer travel season, and we are planning a accordingly. What's more, AAR is competitively positioned as an independent, value-added aftermarket solution provider which makes us a compelling solution for our customers as they look to reduce spending when fuel costs rise.

Speaker #4: Additionally, one of the benefits of AAR's portfolio is an exposure to government and defense end markets. Over the decade, this balance between government and commercial markets has been a real advantage.

Speaker #4: On that note, the government side of our business is benefiting from a general need for increased operational readiness in the U.S. military. Our government customers today comprise roughly 30% of our sales and are represented across all segments.

John Holmes: Our government customers today comprise roughly 30% of our sales and are represented across all segments. AAR has a long history of working on some of the most critical aircraft for the US military, including the C-17, the P-8, the C-40, the F-16, and the C-130. It was programs like these that helped drive 19% increase in government sales this quarter and contributed to the strength of our results. Now on to slide 4. We achieved 36% organic growth in new parts distribution, driven by our two-way exclusive distribution model. Volume and government distribution have been increasing steadily over the last year, and this quarter represented a 55% organic increase over this period last year. Also in parts supply, our acquisition of ADI outpaced expectations for the second quarter in a row, and ADI's adjusted margins were accretive to the company in the quarter.

John M. Holmes: Our government customers today comprise roughly 30% of our sales and are represented across all segments. AAR has a long history of working on some of the most critical aircraft for the US military, including the C-17, the P-8, the C-40, the F-16, and the C-130. It was programs like these that helped drive 19% increase in government sales this quarter and contributed to the strength of our results. Now on to slide 4. We achieved 36% organic growth in new parts distribution, driven by our two-way exclusive distribution model. Volume and government distribution have been increasing steadily over the last year, and this quarter represented a 55% organic increase over this period last year. Also in parts supply, our acquisition of ADI outpaced expectations for the second quarter in a row, and ADI's adjusted margins were accretive to the company in the quarter.

Speaker #4: AAR has a long history of working on some of the most critical aircraft for the US military. Including the C-17, the P-8, the C-40, the F-16, and the C-130.

Speaker #4: And it was programs like these that helped drive a 19% increase in government sales this quarter and contributed to the strength of our results. Now, on to slide four.

Speaker #4: We achieved 36% organic growth in new parts distribution. Driven by our two-way exclusive distribution model. Volume in government distribution has been increasing steadily over the last year, and this quarter represented a 55% organic increase over this period last year.

Speaker #4: Also in parts supply, our acquisition of ADI outpaced expectations for the second quarter in a row, and ADI's adjusted margins were accretive to the company in the quarter.

Speaker #4: In repair and engineering, our Oklahoma City facility completed its hangar capacity expansion in the quarter and began aircraft inductions in early March. We expect first revenues from these maintenance lines in our fourth quarter.

John Holmes: In repair and engineering, our Oklahoma City facility completed its hangar capacity expansion in the quarter and began aircraft inductions in early March. We expect first revenues from these maintenance lines in our Q4. Our component MRO business saw key wins from major US and international carriers for expanded scopes of work, and this is a testament to our strategy to utilize our whole portfolio to drive more business to the higher-margin component MRO activity. Our HAECO Americas integration is progressing ahead of schedule, and we expect the full integration process to be complete in the earlier part of the twelve to eighteen-month window we provided previously. We also expect our acquisition of Aircraft Reconfig Technologies, or ART, to close in Q4.

John M. Holmes: In repair and engineering, our Oklahoma City facility completed its hangar capacity expansion in the quarter and began aircraft inductions in early March. We expect first revenues from these maintenance lines in our Q4. Our component MRO business saw key wins from major US and international carriers for expanded scopes of work, and this is a testament to our strategy to utilize our whole portfolio to drive more business to the higher-margin component MRO activity. Our HAECO Americas integration is progressing ahead of schedule, and we expect the full integration process to be complete in the earlier part of the twelve to eighteen-month window we provided previously. We also expect our acquisition of Aircraft Reconfig Technologies, or ART, to close in Q4.

Speaker #4: Our component MRO business saw key wins from major US and international carriers for expanded scopes of work, and this is a testament to our strategy to utilize our whole portfolio to drive more business to the higher margin component MRO activity.

Speaker #4: Our HACO Americas integration is progressing ahead of schedule, and we expect the full integration process to be complete in the earlier part of the 12- to 18-month window we provided previously.

Speaker #4: We also expect our acquisition of aircraft reconfig technologies, or ART, to close in the fourth quarter. In our software activities, track had another record quarter as a result of growth with the addition of new customers as well as existing customer upgrades.

John Holmes: In our software activities, Trax had another record quarter as a result of growth with the addition of new customers as well as existing customer upgrades. Trax's agreement with Delta continues to ramp. Already, Trax has been deployed to more than 2,000 users across Delta, and we expect this to increase to more than 6,000 users in the coming months. Our expeditionary services business was recently awarded $450 million in a multi-year government contract to provide specialized pallets to forward deployed military units as a result of increased operational tempo overseas. We are pleased with our results this quarter and the growth that we saw across the company. I would now like to turn the call over to Dylan to go through the financial results in more detail.

John M. Holmes: In our software activities, Trax had another record quarter as a result of growth with the addition of new customers as well as existing customer upgrades. Trax's agreement with Delta continues to ramp. Already, Trax has been deployed to more than 2,000 users across Delta, and we expect this to increase to more than 6,000 users in the coming months. Our expeditionary services business was recently awarded $450 million in a multi-year government contract to provide specialized pallets to forward deployed military units as a result of increased operational tempo overseas. We are pleased with our results this quarter and the growth that we saw across the company. I would now like to turn the call over to Dylan to go through the financial results in more detail.

Speaker #4: Track's agreement with Delta continues to ramp. Already, Track has been deployed to more than 2,000 users across Delta, and we expect this to increase to more than 6,000 users in the coming months.

Speaker #4: Our expeditionary services business was recently awarded $450 million in a multi-year government contract to provide specialized pallets to forward-deploy military units as a result of increased operational tempo overseas.

Speaker #4: We are pleased with our results this quarter, and the growth that we saw across the company. I would now like to turn the call over to Dylan to go through the financial results in more detail.

Speaker #5: Thanks, John. Looking at slide five, total sales in the quarter grew 25% year-over-year, including 14% organic adjusted sales growth to $845 million.

Dylan Wolin: Thanks, John. Looking at slide five, total sales in the quarter grew 25% year over year, including 14% organic adjusted sales growth to $845 million. We drove revenue growth in each of our parts supply, repair and engineering, and integrated solutions segments. Sales to commercial customers were up 27%, while sales to government customers were up 19% over the same period last year. For the quarter, 73% of our sales were to commercial customers, and the remaining 27% were to government customers. Adjusted EBITDA in the quarter increased 26% year over year to $102.1 million, and adjusted EBITDA margin increased to 12.1% from 12.0% a year ago.

Speaker #5: We drove revenue growth in each of our parts supply, repair and engineering, and integrated solutions segments. Sales to commercial customers were up 27%, while sales to government customers were up 19% over the same period last year.

Speaker #5: For the quarter, 73% of our sales were to commercial customers, and the remaining 27% were to government customers. Adjusted EBITDA in the quarter increased 26% year over year to $102.1 million, and adjusted EBITDA margin increased to 12.1% from 12.0% a year ago.

Speaker #5: Adjusted operating income was up 31% to $86.2 million, and adjusted operating income margin improved 50 basis points to 10.2%. The margin improvement in the quarter was driven by parts supply and integrated solutions, including tracks and government programs, despite the expected short-term impact on margins from our recently acquired HACO Americas business, at which we are in the process of right-sizing the revenue base, adjusting the cost structure, and deploying our proprietary processes.

Dylan Wolin: Adjusted operating income was up 31% to $86.2 million, and adjusted operating income margin improved 50 basis points to 10.2%. The margin improvement in the quarter was driven by parts supply and integrated solutions, including Trax and government programs, despite the expected short-term impact on margins from our recently acquired HAECO Americas business, at which we are in the process of rightsizing the revenue base, adjusting the cost structure, and deploying our proprietary processes. Excluding HAECO Americas, adjusted EBITDA margin in the quarter would have been 70 basis points higher, or 12.8%. This was the most critical integration quarter for HAECO Americas, and we expect sequential margin improvement going forward as we move through the remainder of the integration process.

Speaker #5: Excluding HACO Americas, adjusted EBITDA margin in the quarter would have been 70 basis points higher or 12.8%. This was the most critical integration quarter for HACO Americas, and we expect sequential margin improvement going forward as we move through the remainder of the integration process.

Speaker #5: Finally, I'll mention that we recorded a gain in the quarter due to the accounting for our HACO Americas acquisition resulting in a bargain purchase.

Dylan Wolin: Finally, I'll mention that we recorded a gain in the quarter due to the accounting for our HAECO Americas acquisition resulting in a bargain purchase. The gain reflects the excess of the fair value of the assets acquired over the purchase price and is excluded from our adjusted results. Adjusted diluted EPS was up 26% year-over-year to $1.25 per share, driven by our strong operational performance. Turning to parts supply on slide six. Total parts supply sales grew 45% from the same period last year to $392.5 million. We had yet another quarter of above-market growth in new parts distribution, which grew 62% in total and 36% organically, excluding the impact of our ADI acquisition.

Speaker #5: The gain reflects the excess of the fair value of the assets acquired over the purchase price, and is excluded from our adjusted results. Adjusted diluted EPS was up 26% year over year to $1.25 per share, driven by our strong operational performance.

Speaker #5: Turning to parts supply on slide six, total parts supply sales grew 45% from the same period last year to $392.5 million. We had yet another quarter of above-market growth in new parts distribution, which grew 62% in total and 36% organically, excluding the impact of our ADI acquisition.

Speaker #5: Sales to commercial customers were up 36%, and sales to government customers were up 86%, driven by 55% organic growth in government distribution sales. Third quarter adjusted EBITDA up 59 million was up 59%, and adjusted EBITDA margin grew 130 basis points to 14.9%.

Dylan Wolin: Sales to commercial customers were up 36%, and sales to government customers were up 86%, driven by 55% organic growth in government distribution sales. Q3 adjusted EBITDA of $59 million was up 59%, and adjusted EBITDA margin grew 130 basis points to 14.9%. Adjusted operating income rose 56% to $53.6 million, and adjusted operating margin increased 100 basis points to 13.7%. Higher margins in the period were driven by both the performance of the existing business and the addition of ADI. Now on slide 7 for repair and engineering. Total sales increased 23% to $265 million.

Speaker #5: Adjusted operating income rose 56% to $53.6 million, and adjusted operating margin increased 100 basis points to 13.7%. Higher margins in the period were driven by both the performance of the existing business and the addition of ADI.

Speaker #5: Now on slide seven for Repair and Engineering. Total sales increased 23% to $265 million. Sales growth was driven by the existing hanger operations, growth at our component repair shops as we continue to add new capabilities and customers, and the year-over-year impact of the HACO Americas acquisition.

Dylan Wolin: Sales growth was driven by the existing hangar operations, growth at our component repair shops as we continue to add new capabilities and customers, and the year-over-year impact of the HAECO Americas acquisition. As I mentioned earlier, and consistent with the outlook we described on last quarter's call, margins were negatively impacted in the quarter as we take actions at the recently acquired HAECO Americas operation to rightsize the revenue base, adjust the cost structure, and improve processes. Segment margins were also impacted by the transition of work out of our Indianapolis facility, which we are in the process of exiting. Specifically, adjusted EBITDA margin decreased 190 basis points to 11.0%, and adjusted operating margin decreased 150 basis points to 9.6%.

Speaker #5: As I mentioned earlier, and consistent with the outlook we described on last quarter's call, margins were negatively impacted in the quarter as we take actions at the recently acquired HACO Americas operation to right-size the revenue base, adjust the cost structure, and improve processes.

Speaker #5: Segment margins were also impacted by the transition of work out of our Indianapolis facility, which we are in the process of exiting. Specifically, adjusted EBITDA margin decreased 190 basis points to 11.0%, and adjusted operating margin decreased 150 basis points to 9.6%.

Speaker #5: We expect our revenue shaping, cost structure, and process improvement actions to be completed toward the earlier end of the 12- to 18-month post-closing timeline that we articulated previously, and for the quarter that we just ended to be the low point in terms of margin impact.

Dylan Wolin: We expect our revenue shaping, cost structure, and process improvement actions to be completed toward the earlier end of the 12- to 18-month post-closing timeline that we articulated previously, and for the quarter that we just ended to be the low point in terms of margin impact. Accordingly, we expect in the Q3 of fiscal 2027, our actions will result in the same quality and efficiency levels as we have achieved in our other airframe MRO facilities, and for repair and engineering margins to return to pre-acquisition levels. We expect the transition out of the Indianapolis facility, which is our highest cost site, to continue into the Q4 of our fiscal 2027 and to realize further margin improvement once that issue is safe.

Speaker #5: Accordingly, we expect in the third quarter of fiscal 2027, our actions will result in the same quality and efficiency levels as we have achieved in our other airframe MRO facilities, and for repair and engineering margins to return to pre-acquisition levels.

Speaker #5: We expect the transition out of the Indianapolis facility, which is our highest cost site, to continue into the fourth quarter of our fiscal 2027 and to realize further margin improvement once that is complete.

Dylan Wolin: Looking at integrated solutions on slide 8, sales increased 3% year on year to $167.8 million, driven by Trax and government programs. Q3 adjusted EBITDA of $19 million was up 18% and adjusted EBITDA margin grew 150 basis points to 11.4%. Adjusted operating income of $15.5 million was 25% higher, with adjusted operating margin increasing from 7.6% to 9.2%. Improved margins were driven by mix shift towards higher margin contracts within government programs, as well as by growth and higher margins at Trax. Turning to the balance sheet on slide 9, we had a strong cash flow quarter, generating $75 million in cash from operating activities.

Speaker #5: Looking at integrated solutions on slide eight, sales increased 3% year on year to $167.8 million, driven by tracks and government programs. Third quarter adjusted EBITDA of $19 million was up 18%, and adjusted EBITDA margin grew 150 basis points to 11.4%.

Speaker #5: Adjusted operating income of $15.5 million was 25% higher, with adjusted operating margin increasing from 7.6% to 9.2%. Improved margins were driven by a mix shift towards higher margin contracts within government programs, as well as by growth and higher margins at tracks.

Speaker #5: Turning to the balance sheet on slide nine, we had a strong cash flow quarter, generating $75 million in cash from operating activities. Net leverage decreased to 2.17 times net debt to adjusted EBITDA, comfortably within our target range of 2.0 times to 2.5 times.

Dylan Wolin: Net leverage decreased to 2.17x net debt to adjusted EBITDA, comfortably within our target range of 2.0x to 2.5x. With that, I'll turn the call back over to John.

Speaker #5: With that, I'll turn the call back over to John. Thank you, Dylan. Turning now to slide 10 for an update on our outlook for the remainder of the fiscal year.

John Holmes: Thank you, Dylan. Turning now to slide 10 for an update on our outlook for the remainder of the fiscal year. For Q4, we are expecting total adjusted sales growth of 19% to 21%. Organic adjusted sales growth for Q4 is expected to be between 6% and 8% as we lap what was a very strong Q4 last year. This excludes the divestiture of Landing Gear as well as the impact of fiscal 2026 acquisitions. We expect Q4 operating margin of 10.2% to 10.5%. Our outlook for Q4 has improved from what was implied in our guidance last quarter, given the ongoing strength we see across our markets. As a result, our full year expectation is for total sales growth of approximately 19% and for organic sales growth of approximately 12%, which is up from our prior outlook.

John M. Holmes: Thank you, Dylan. Turning now to slide 10 for an update on our outlook for the remainder of the fiscal year. For Q4, we are expecting total adjusted sales growth of 19% to 21%. Organic adjusted sales growth for Q4 is expected to be between 6% and 8% as we lap what was a very strong Q4 last year. This excludes the divestiture of Landing Gear as well as the impact of fiscal 2026 acquisitions. We expect Q4 operating margin of 10.2% to 10.5%. Our outlook for Q4 has improved from what was implied in our guidance last quarter, given the ongoing strength we see across our markets. As a result, our full year expectation is for total sales growth of approximately 19% and for organic sales growth of approximately 12%, which is up from our prior outlook.

Speaker #5: For Q4, we are expecting total adjusted sales growth of 19 to 21 percent. Organic adjusted sales growth for Q4 is expected to be between 6 and 8 percent, as we lap what was a very strong Q4 last year.

Speaker #5: This excludes the divestiture of Landing Gear, as well as the impact of fiscal 2026 acquisitions. We expect Q4 operating margin of 10.2 to 10.5 percent.

Speaker #5: Our outlook for Q4 has improved from what was implied in our guidance last quarter, given the ongoing strength we see across our markets. As a result, our full-year expectation is for total sales growth of approximately 19%, and for organic sales growth of approximately 12%, which is up from our prior outlook.

Speaker #5: Finally, on slide 11, I'm excited to share that AAR will be hosting an investor day on May 12th in New York City. AAR has been driving strategic transformation over the last several years, and we have a more focused, complete range of aftermarket solutions in parts, repair, and a software platform that work together to drive growth.

John Holmes: Finally, on slide 11, I'm excited to share that AAR will be hosting an investor day on 12 May in New York City. AAR has been driving strategic transformation over the last several years, and we have a more focused, complete range of aftermarket solutions in parts repair and a software platform that work together to drive growth. As the last several quarters have shown, this strategy has yielded results. At our event in May, we plan to share our strategic vision of how we will continue to cement our position as the independent leader in aviation aftermarket through our repositioned portfolio, focused strategy, and differentiated culture. We hope to see many of you there. Before we open it up for questions, I'd like to thank our talented team members around the world as they drive excellence in quality, safety, and service in the work we do for our customers.

John M. Holmes: Finally, on slide 11, I'm excited to share that AAR will be hosting an investor day on 12 May in New York City. AAR has been driving strategic transformation over the last several years, and we have a more focused, complete range of aftermarket solutions in parts repair and a software platform that work together to drive growth. As the last several quarters have shown, this strategy has yielded results. At our event in May, we plan to share our strategic vision of how we will continue to cement our position as the independent leader in aviation aftermarket through our repositioned portfolio, focused strategy, and differentiated culture. We hope to see many of you there. Before we open it up for questions, I'd like to thank our talented team members around the world as they drive excellence in quality, safety, and service in the work we do for our customers.

Speaker #5: As the last several quarters have shown, this strategy has yielded results. At our event in May, we plan to share our strategic vision of how we will continue to cement our position as the independent leader in aviation aftermarket through our repositioned portfolio, focused strategy, and differentiated culture.

Speaker #5: We hope to see many of you there. Before we open it up for questions, I'd like to thank our talented team members around the world as they drive excellence in quality, safety, and service, and the work we do for our customers.

Speaker #5: I'd also like to extend a thank you to our customers and shareholders for their ongoing support of AAR. With that, we'll turn it over to the operator for questions.

John Holmes: I'd also like to extend a thank you to our customers and shareholders for their ongoing support of AAR. With that, we'll turn it over to the operator for questions.

John M. Holmes: I'd also like to extend a thank you to our customers and shareholders for their ongoing support of AAR. With that, we'll turn it over to the operator for questions.

Speaker #1: Thank you. Ladies and gentlemen, as a reminder, to ask a question please first press one-one on your telephone. Then wait for your name to be announced.

Operator: Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star one one on your telephone, then wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Ciarmoli with Truist. Your line is open.

Speaker #1: To withdraw your question, please first start one-on-one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Sirmoli with Truist. Your line is open.

Michael Ciarmoli: Hey. Good evening, guys. Thanks for taking the question. Nice results. Welcome, Dylan. Welcome back.

Speaker #6: Hey, good evening, guys. Thanks for taking the question. Nice results. Welcome, Dylan. Welcome back. I guess, John, just on the topic everybody's asking about with oil prices, kind of what we're seeing with some of the carriers trimming capacity.

John Holmes: Thanks, Mike.

Dylan Wolin: Thanks, Mike.

Michael Ciarmoli: I guess, John, just on the, you know, topic everybody's asking about with oil prices, kind of what we're seeing with some of the carriers trimming capacity. I mean, historically, you've been in this business long enough. I mean, you know, is there some sort of proxy you could give us? How long do we need to see elevated fuel? Or once we start seeing some of these capacity cuts by the airlines, you know, will that, if it will at all, translate into your business? And, you know, fully realizing nobody's parking planes yet, they're just maybe trimming some routes. Any color you could give us there from a historical context?

Speaker #6: I mean, historically, you've been in this business long enough. I mean, is there some sort of proxy you could give us—how long do we need to see elevated fuel, or once we start seeing some of these capacity cuts by the airlines?

Speaker #6: Will that, if it will at all, translate into your business and fully realizing nobody's parking planes yet? They're just maybe trimming some routes. But any color you could give us there from a historical context?

Speaker #5: Yeah, I would say the number one thing is—and I appreciate the question—the number one thing is that fundamental demand for air travel remains very strong.

John Holmes: Yeah. I would say the number one thing is. Appreciate the question. The number one thing is that fundamental demand for air travel remains very strong, and that's what you're hearing from all of our major customers, and obviously we're hearing that from them, you know, every time we talk. You know, they've continued to see record bookings even after the conflict, you know, started. I would say, just to your point, you know, what you're seeing now are modest capacity adjustments, and they're not impacting any airline's individual fleets. Adjustments like that are not gonna have any meaningful impact on the demand for parts or maintenance. So at this point, we feel very good.

John M. Holmes: Yeah. I would say the number one thing is. Appreciate the question. The number one thing is that fundamental demand for air travel remains very strong, and that's what you're hearing from all of our major customers, and obviously we're hearing that from them, you know, every time we talk. You know, they've continued to see record bookings even after the conflict, you know, started. I would say, just to your point, you know, what you're seeing now are modest capacity adjustments, and they're not impacting any airline's individual fleets. Adjustments like that are not gonna have any meaningful impact on the demand for parts or maintenance. So at this point, we feel very good.

Speaker #5: And that's what you're hearing from all of our major customers and obviously, we're hearing that from them every time we talk. And they've continued to see record bookings, even after the conflict started.

Speaker #5: I would say, just to your point, what you're seeing now are modest capacity adjustments, and they're not impacting any airline's individual fleets. And so, adjustments like that are not going to have any meaningful impact on the demand for parts or maintenance.

Speaker #5: So at this point, we feel very good. All the customers are talking to us about strong bookings and being prepared for a very busy summer.

John Holmes: All the customers are talking to us about strong bookings and being prepared for a very, very busy summer, and they're making those plans with an assumption that fuel prices are gonna remain elevated through that period of time, which we view as encouraging because they're factoring that in, yet their demand signals to us are still very strong.

John M. Holmes: All the customers are talking to us about strong bookings and being prepared for a very, very busy summer, and they're making those plans with an assumption that fuel prices are gonna remain elevated through that period of time, which we view as encouraging because they're factoring that in, yet their demand signals to us are still very strong.

Speaker #5: And they're making those plans with an assumption that fuel prices are going to remain elevated through that period of time, which we view as encouraging because they're factoring that in, yet their demand signals to us are still very strong.

Speaker #6: Okay. Okay. That's helpful. And then maybe just on the more positive side, I mean, you guys continue to do really, really well on distribution.

Michael Ciarmoli: Okay. Okay, that's helpful. Maybe just on the more positive side, I mean, you guys continue to do really, really well on distribution. That organic 36% on new parts, can you maybe just disaggregate that for us a bit? I mean, what was kind of new wins? What was same-store sales, maybe pricing? I mean, just really strong growth. I mean, you guys are doing a great job there.

Speaker #6: That organic 36% on new parts, can you maybe just disaggregate that for us a bit? I mean, what was kind of new wins? What was same-store sales?

Speaker #6: Maybe pricing? I mean, just really strong growth. I mean, you guys are doing a great job there.

Speaker #5: Thank you, Mike. Really appreciate that. Yeah, we're very proud of the continued growth we see in distribution, and our model there is clearly resonating.

John Holmes: Thank you, Mike. Really appreciate that. Yeah, we're very proud of the continued growth we see in distribution. You know, our model there is clearly resonating. To your question, about two-thirds of the growth was same-store sales, so continued growth from contracts that have been in place for some time. The remaining third was mostly new contract wins. A little bit of price across all of them, but majority of the growth, about two-thirds of the growth came from growth from existing contracts.

John M. Holmes: Thank you, Mike. Really appreciate that. Yeah, we're very proud of the continued growth we see in distribution. You know, our model there is clearly resonating. To your question, about two-thirds of the growth was same-store sales, so continued growth from contracts that have been in place for some time. The remaining third was mostly new contract wins. A little bit of price across all of them, but majority of the growth, about two-thirds of the growth came from growth from existing contracts.

Speaker #5: To your question, about two-thirds of the growth was same-store sales. So continued growth from contract that had been in place for some time. And the remaining third was mostly new contract wins, a little bit of price across all of them, but the majority of the growth, about two-thirds of the growth, came from growth from existing contracts.

Michael Ciarmoli: Got it. Well, did anything jump out? Was it engine-related, airframe-related, you know, the avionics, any, you know, or strength across the board that you're seeing?

Speaker #6: Got it. Is it did anything jump out? Was it engine-related, airframe-related, avionics? Any strength across the board that you're seeing?

Speaker #5: Strength across the board. But again, I would highlight the continued growth in defense distribution. We've got a great offering there, and that was 55% organic.

John Holmes: Strength across the board. Again, I would highlight, you know, the continued growth in defense distribution. We've got a great offering there.

John M. Holmes: Strength across the board. Again, I would highlight, you know, the continued growth in defense distribution. We've got a great offering there.

Michael Ciarmoli: Okay.

John Holmes: That was 55% organic in the quarter. That, though, we've been seeing it build. That wasn't a one-off. We've been seeing it build in growth in defense sales to the government. You know, certainly our offering is resonating, and it reflects this administration's clear prioritization of sustainment and readiness.

John M. Holmes: That was 55% organic in the quarter. That, though, we've been seeing it build. That wasn't a one-off. We've been seeing it build in growth in defense sales to the government. You know, certainly our offering is resonating, and it reflects this administration's clear prioritization of sustainment and readiness.

Speaker #5: In the quarter. And that, though, we've been seeing a build. That wasn't a one-off. We've been seeing a build in growth in defense sales to the government.

Speaker #5: And certainly, our offering is resonating. And it reflects this administration's clear prioritization of sustainment and readiness.

Speaker #6: Got it. Great. Good stuff, guys. I'll jump back in the queue.

Michael Ciarmoli: Got it. Great. Good stuff, guys. I'll jump back in the queue.

Speaker #5: Great. Thanks so much.

John Holmes: Great. Thanks so much.

John M. Holmes: Great. Thanks so much.

Speaker #1: Thank you. Our next question comes from the line of Sheila Cayoglu with Jefferies. Your line is open.

Operator: Thank you. Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is open.

Speaker #7: Good afternoon, guys, and welcome back, Dylan.

Sheila Kahyaoglu: Good afternoon, guys, and welcome back, Dylan.

John Holmes: Thanks, Sheila.

Dylan Wolin: Thanks, Sheila.

Speaker #5: Thanks, Sheila.

Sheila Kahyaoglu: John, maybe to follow up on Mike's question, you know, as you think about your new parts distribution business and repair and engineering, I know we're only seeing modest capacity cuts. How do you think about how quickly behavior has changed historically, and what your visibility looks like in each?

Speaker #7: Maybe to follow up on Mike's question, as you think about your new parts distribution business and repair and engineering, I know we're only seeing modest capacity cuts.

Speaker #7: How do you think about how quickly behavior has changed historically? And what your visibility looks like in each?

Speaker #5: Yeah. I mean, we've got solid visibility—certainly through the quarter and the guidance we just provided. And I would extend that to the summer as well.

John Holmes: Yeah, I mean, we've got solid visibility, you know, certainly through the quarter and the guidance we just provided, and I would extend that to the summer as well, 'cause that's what everybody's planning for right now. You know, we've been in constant contact with the customers. We have not seen any material change in demand for maintenance lines or, you know, or component repair. You know, you would have to see, I would say, much more significant changes to their fleet plans for that to have any meaningful impact on our results.

John M. Holmes: Yeah, I mean, we've got solid visibility, you know, certainly through the quarter and the guidance we just provided, and I would extend that to the summer as well, 'cause that's what everybody's planning for right now. You know, we've been in constant contact with the customers. We have not seen any material change in demand for maintenance lines or, you know, or component repair. You know, you would have to see, I would say, much more significant changes to their fleet plans for that to have any meaningful impact on our results.

Speaker #5: Because that's what everybody's planning for right now. We've been in constant contact with the customers. We have not seen any material change in demand for maintenance lines or component repair.

Speaker #5: And you would have to see, I would say, much more significant changes to their fleet plans for that to have any meaningful impact on our results.

John Holmes: The other thing I would say is that, you know, if I think about this, you know, moment that we're in relative to historical moments, you know, AAR is in a much different position in the marketplace. I would say that, you know, we've been so focused on delivering superior service and quality to our customers that we feel pretty confident that, you know, they would deprioritize other vendors before they did anything with us.

Speaker #5: The other thing I would say is that, if I think about this moment that we're in relative to historical moments, AAR is in a much different position in the marketplace.

John M. Holmes: The other thing I would say is that, you know, if I think about this, you know, moment that we're in relative to historical moments, you know, AAR is in a much different position in the marketplace. I would say that, you know, we've been so focused on delivering superior service and quality to our customers that we feel pretty confident that, you know, they would deprioritize other vendors before they did anything with us.

Speaker #5: And I would say that we've been so focused on delivering superior service and quality to our customers that we feel pretty confident that they would deprioritize other vendors before they did anything with us.

Speaker #7: Got it. Maybe if I could ask another one, really great execution this quarter. You held margins flat sequentially. And our guiding to an improvement in Q4, given even with the HACO dilution that's ongoing.

Sheila Kahyaoglu: Got it. Maybe if I could ask another one. Really great execution this quarter. You held margins flat sequentially, and are guiding to an improvement in Q4 given even with the HAECO dilution that's ongoing. Maybe can you give us some flavor into the sources of the outperformance? You called out ADI and HAECO outpacing expectations. Anything else notable?

Speaker #7: So, maybe can you give us some flavor into the sources of the outperformance? You called out ADI and HACO outpacing expectations. Anything else notable?

John Holmes: Those would be the big ones. ADI, that you know, we're Q2 there of outperformance. HAECO, it's a lot of work to complete that integration. As we mentioned, this was the most critical quarter, and we've been able to move some of our timetables up. Happy to say that we're gonna be at the earlier window. I would also highlight this was a really strong quarter for Trax. You know, great momentum from a sales and margin perspective with Trax. That's something we've been focused on growing, as you know.

Speaker #5: Those would be the big ones. ADI, that we're second quarter there of outperformance. HACO, it's a lot of work. It's a lot of work to complete that integration, as we mentioned.

John M. Holmes: Those would be the big ones. ADI, that you know, we're Q2 there of outperformance. HAECO, it's a lot of work to complete that integration. As we mentioned, this was the most critical quarter, and we've been able to move some of our timetables up. Happy to say that we're gonna be at the earlier window. I would also highlight this was a really strong quarter for Trax. You know, great momentum from a sales and margin perspective with Trax. That's something we've been focused on growing, as you know.

Speaker #5: This was the most critical quarter, and we've been able to move some of our timetables up. So, happy to say that we're going to be at the earlier window.

Speaker #5: And I would also highlight this was a really strong quarter for tracks. Great momentum from a sales and margin perspective with tracks. And that's something we've been focused on growing, as you know.

Speaker #7: Awesome. Thank you so much.

Dylan Wolin: Awesome. Thank you so much.

Sheila Kahyaoglu: Awesome. Thank you so much.

Speaker #5: Great. Thank you.

John Holmes: Great. Thank you.

John M. Holmes: Great. Thank you.

Operator: Our next question comes from the line of Ken Herbert with RBC Capital Markets. Your line is open.

Speaker #1: Our next question comes from the line of Ken Herbert with RBC Capital Markets. Your line is open.

Speaker #6: Hey, John. Really nice results. And welcome back, Dylan. Hey, maybe first, if we look at your commercial aftermarket, John, the commercial business broadly, how much of that business would you characterize as book and ship or short cycle versus more sort of backlog-driven?

Ken Herbert: Hey, John. Really nice results, and welcome back, Dylan.

John Holmes: Thanks, Ken.

Dylan Wolin: Thanks, Ken.

Ken Herbert: Hey, maybe first, if we look at your commercial aftermarket, John, the commercial business broadly, how much of that business would you characterize as book and ship or short cycle versus more sort of backlog driven? I know obviously a lot of the heavy MRO piece of the business is now much more backlog driven than maybe it was previously. Is there a way you would frame up that maybe that way to look at your business?

Speaker #6: And I know, obviously, a lot of the heavy MRO piece of the business is now much more backlog-driven than maybe it was previously. But is there a way you would frame up that—maybe that way to look at your business?

Speaker #5: Yeah, as you pointed out, heavy maintenance is definitely backlog-driven. Much of the distribution business is backlog-driven. Those are, I would say, the two, and obviously, tracks is in its own category.

John Holmes: Yeah. As you pointed out, heavy maintenance is definitely backlog driven. Much of the distribution business is backlog driven. You know, those are, I would say the two, you know, long and obviously, Trax is in its own category. Those would be the two, you know, long cycle elements of the business. Component repair tends to be a bit more short cycle, and also, obviously, you know, USM is a shorter cycle business. The majority of the revenue now in commercial between distribution and heavy maintenance is longer cycle.

John M. Holmes: Yeah. As you pointed out, heavy maintenance is definitely backlog driven. Much of the distribution business is backlog driven. You know, those are, I would say the two, you know, long and obviously, Trax is in its own category. Those would be the two, you know, long cycle elements of the business. Component repair tends to be a bit more short cycle, and also, obviously, you know, USM is a shorter cycle business. The majority of the revenue now in commercial between distribution and heavy maintenance is longer cycle.

Speaker #5: But those would be the two long-cycle elements of the business. Component repair tends to be a bit more short cycle. And also, obviously, USM is a shorter cycle business.

Speaker #5: But the majority of the revenue now in commercial between distribution and heavy maintenance is longer cycle.

Speaker #6: Okay, helpful. And obviously, really nice cash generation in the quarter. Can you give any commentary on what we should expect for the fourth quarter, which typically, seasonally, is very strong from a cash generation standpoint?

Ken Herbert: Okay. Helpful. Obviously, really nice cash generation in the quarter. Can you give any commentary on what we should expect Q4, which, you know, typically seasonally is very strong from a cash generation standpoint? Maybe any highlights either for you or Dylan on specifically some of the what we saw in Q3 in terms of the strength.

Speaker #6: And maybe any highlights, either for you or Dylan, on specifically some of what we saw in the third quarter in terms of the strength?

Speaker #5: Great. Yeah, no, we were really pleased with the cash flow results. And customers paid us on time, so we're appreciative of that. And as it relates to the outlook for the rest of the year, we are planning to be cash flow positive in Q4.

John Holmes: Great. Yeah, no, we were really pleased with the cash flow results and, you know, customers, you know, paid us on time, so we're appreciative of that. As it relates to the outlook for the rest of the year, we are planning to be cash flow positive in Q4 and then again, you know, cash flow positive for the whole year.

John M. Holmes: Great. Yeah, no, we were really pleased with the cash flow results and, you know, customers, you know, paid us on time, so we're appreciative of that. As it relates to the outlook for the rest of the year, we are planning to be cash flow positive in Q4 and then again, you know, cash flow positive for the whole year.

Speaker #5: And then again, in cash flow positive for the whole year.

Speaker #6: Okay, thanks. I'll pass it back there.

Ken Herbert: Okay. Thanks. I'll pass it back there.

Speaker #5: Great. Thanks, Ken.

John Holmes: Great. Thanks, Ken.

John M. Holmes: Great. Thanks, Ken.

Speaker #1: Our next question comes from the line of Scott Mikus with Melius Research. Your line is open.

Operator: Our next question comes from the line of Scott Mikus with Melius Research. Your line is open.

Speaker #8: Hey, John and Dylan. Quick question.

Scott Mikus: Hey, John and Dylan. Quick question.

Speaker #5: Hey, John.

Speaker #8: Just I know it's still I know it's still early in the war in Iran. How long does this potentially have to drag on before it starts maybe impacting your ability to source any of the parts you need in your parts supply business?

John Holmes: Hey, Scott.

John M. Holmes: Hey, Scott.

Scott Mikus: I know it's still early in the war in Iran. How long does this potentially have to drag on before it starts maybe impacting your ability to source any of the parts you need in your parts supply business? In contrast, could the war stimulate demand for your component repair business if airlines are seeking to reduce maintenance costs to offset the higher fuel costs?

Speaker #8: And then, in contrast, could the war stimulate demand for your component repair business if airlines are seeking to reduce maintenance costs to offset the higher fuel costs?

Speaker #5: Yeah, great question. I wouldn't expect at this point that the war or the conflict, at any length of time, would impact the supply of material.

John Holmes: Yeah, great question. I wouldn't expect at this point that, you know, the war or the conflict at any length of time would impact the supply of, you know, material. I mean, unless you're talking about USM specifically, and certainly, if for any reason you see more aircraft retirements and subsequent tear downs, you know, that would result in more supply for that material. You know, but in terms of the war or the conflict stimulating demand, yes. I mean, it could stimulate demand in a number of ways, obviously, on the defense side, and we're highlighting a few of those in the results. But then also, I mean, we are in many ways a, you know, a lower cost alternative to OEMs and other providers.

John M. Holmes: Yeah, great question. I wouldn't expect at this point that, you know, the war or the conflict at any length of time would impact the supply of, you know, material. I mean, unless you're talking about USM specifically, and certainly, if for any reason you see more aircraft retirements and subsequent tear downs, you know, that would result in more supply for that material. You know, but in terms of the war or the conflict stimulating demand, yes. I mean, it could stimulate demand in a number of ways, obviously, on the defense side, and we're highlighting a few of those in the results. But then also, I mean, we are in many ways a, you know, a lower cost alternative to OEMs and other providers.

Speaker #5: I mean, unless you're talking about USM specifically—and certainly if, for any reason, you see more aircraft retirements and subsequent teardowns—that would result in more supply for that material.

Speaker #5: But in terms of the war or the conflict, stimulating demand, yes. I mean, it could stimulate demand in a number of ways. Obviously, on the defense side, and we're highlighting a few of those in the results.

Speaker #5: But then also, I mean, we are in many ways a lower-cost alternative to OEMs and other providers. And we have seen this in prior cycles where we're able to win business as an alternative to OEMs.

John Holmes: We have seen this in prior cycles where we're able to win business as an alternative to OEMs, you know, as airlines look to reduce their costs.

John M. Holmes: We have seen this in prior cycles where we're able to win business as an alternative to OEMs, you know, as airlines look to reduce their costs.

Speaker #5: As airlines look to reduce their costs.

Speaker #8: Okay, got it. And then I wanted to follow up. The organic growth guide in the fourth quarter implies a deceleration, but you should be getting some revenue contribution from the OKC.

Scott Mikus: Okay. Got it. I wanted to follow up. The organic growth guidance in the Q4 implies a deceleration, but you should be getting some revenue contribution from the OKC capacity expansion. Is that kind of just some conservatism baked into the guidance, or is there any pull forward into this quarter from a top line perspective?

Speaker #8: Capacity expansion—so is that kind of just some conservatism baked into the guidance? Or is there any pull-forward into this quarter from a top-line perspective?

Speaker #5: Yeah. No, no pull forward into this quarter. Really, the impact you're seeing in Q4 is just lapping a really tough comp from last year.

John Holmes: Yeah. No pull forward into this quarter. Really, the impact you're seeing in Q4 is just lapping a really tough comp from last year. We had a really strong quarter in Q4 last year in a number of ways. You know, the guide there is reflective of that. The guide is improved from what we implied with the Q3 guidance we gave last quarter.

John M. Holmes: Yeah. No pull forward into this quarter. Really, the impact you're seeing in Q4 is just lapping a really tough comp from last year. We had a really strong quarter in Q4 last year in a number of ways. You know, the guide there is reflective of that. The guide is improved from what we implied with the Q3 guidance we gave last quarter.

Speaker #5: We had a really strong quarter in Q4 last year in a number of ways, and the guide there is reflective of that. But the guide is improved.

Speaker #5: From what we implied with the Q3 guidance we gave last quarter.

Speaker #8: Okay. Got it. Thank you very much. Nice results.

Scott Mikus: Okay. Got it. Thank you very much. Nice results.

Speaker #5: Great. Thank you very much.

John Holmes: Great. Thank you very much.

John M. Holmes: Great. Thank you very much.

Speaker #1: Our next question comes from the line of Noah Levitz with William Blair. Your line is open.

Operator: Our next question comes from the line of Noah Poponak with William Blair. Your line is open.

Noah Poponak: Awesome. John, Dylan, and Chris, thanks for taking my questions. Dylan, welcome back to the AAR team.

Speaker #9: Hi, it's me, John Dylan and Chris. Thanks for taking my questions and Dylan, welcome back to the AAR team.

Speaker #5: Thanks, Noah.

John Holmes: Thanks, Noah.

Dylan Wolin: Thanks, Noah.

Noah Poponak: To start off, you gave a lot of good color on Trax and the implementation. But kind of drilling in on that, you mentioned that Delta, the partnership with them has been deployed to 2,000 users, and you expect 6,000 in the coming months. I'm curious, like, is 6,000 like the ninth inning, or are you still early innings in the Delta deployment? And then following off of that, can you give a little bit more color on the timeline for, you know, Trax establishing kind of that parts marketplace aspect of the business? Thanks.

Speaker #9: Yeah. To start off, you gave a lot of good color on tracks and the implementation. But kind of drilling in on that, you mentioned that Delta, the partnership with them, has been deployed to 2,000 users.

Speaker #9: And you expect 6,000 in the coming months. I'm curious, is 6,000 the ninth inning? Or are you still early innings in the Delta deployment?

Speaker #9: And then, following up on that, can you give a little bit more color on the timeline for Tracks establishing kind of that parts marketplace aspect of the business?

Speaker #9: Thanks.

Speaker #5: Yeah, great. Great set of questions. So I'm glad you asked about the Delta implementation. So, kind of two ways to think about the Delta implementation.

John Holmes: Yeah. Great set of questions. I'm glad you asked about the Delta implementation. Kind of two ways to think about the Delta implementation. It's the whole thing will take approximately 3 years, and we're coming up on 1 year into that. There's three modules. The first module is, I would say, basic functionality deployed across a large user base. We've got basic functionality up and running, and we're deployed roughly, you know, one-third of the way across the user base at Delta. Once all those 6,000 users have this first module in hand and working, that completes the first phase. The next two phases two and three, will be focused on deploying additional functionality to that large user base.

John M. Holmes: Yeah. Great set of questions. I'm glad you asked about the Delta implementation. Kind of two ways to think about the Delta implementation. It's the whole thing will take approximately 3 years, and we're coming up on 1 year into that. There's three modules. The first module is, I would say, basic functionality deployed across a large user base. We've got basic functionality up and running, and we're deployed roughly, you know, one-third of the way across the user base at Delta. Once all those 6,000 users have this first module in hand and working, that completes the first phase. The next two phases two and three, will be focused on deploying additional functionality to that large user base.

Speaker #5: The whole thing will take approximately three years, and we're coming up on one year into that. And there are three modules. The first module is, I would say, basic functionality deployed across a large user base.

Speaker #5: So we've got basic functionality up and running. And we've deployed roughly one-third of the way across the user base at Delta. So once all those 6,000 users have this first module in hand and working, that completes the first phase.

Speaker #5: The next two phases, phase two and phase three, will be focused on deploying additional functionality to that large user base. And that's where the material ramp-up in the activity and the revenue with Delta will occur.

John Holmes: That's where the material ramp-up and the activity and the revenue with Delta will occur. That'll start a few months from now and ramp over the following, you know, call it six or seven quarters. As it relates to the parts marketplace, something we are still very focused on, and we do expect to go live on that and launch it this calendar year.

John M. Holmes: That's where the material ramp-up and the activity and the revenue with Delta will occur. That'll start a few months from now and ramp over the following, you know, call it six or seven quarters. As it relates to the parts marketplace, something we are still very focused on, and we do expect to go live on that and launch it this calendar year.

Speaker #5: And so that'll start a few months from now and ramp through over the following, call it, six or seven quarters. And then, as it relates to the parts marketplace, that's something we are still very focused on, and we do expect to go live on that and launch it yet this calendar year.

Speaker #9: Awesome. And then just one follow-up. The defense business is, I mean, more or less killing it. The 55% organic growth and government distribution is really impressive.

Noah Poponak: Awesome. Then just one follow-up. The defense business is, I mean, more or less killing it. The 55% organic growth in government distribution is, you know, really impressive. In the slide deck, you do mention that higher margin government work was a positive contributor, I think more so in the Integrated Solutions segment. Is that something that you're expecting to continue as more or less like a new norm, or was that more like a positive benefit this quarter that was somewhat unexpected? How should we think about specifically government margins on an improving basis going forward? Thanks.

Speaker #9: In the slide deck, you do mention that higher-margin government work was a positive contributor—I think more so in the Integrated Solutions segment.

Speaker #9: Is that something that you're expecting to continue as more or less like a new norm, or was that more like a positive benefit this quarter that was somewhat unexpected?

Speaker #9: How should we think about, specifically, government margins on an improving basis going forward? Thanks.

Speaker #5: Yeah. You are referring to the margin improvement and the government portion of Integrated Solutions, or government program specifically. And that reflects sort of a mix shift toward higher-margin programs within government programs.

John Holmes: Yeah. You are referring to the margin improvement in the government portion of Integrated Solutions or government programs specifically. That reflects sort of a mix shift towards higher margin programs within government programs. We do expect the benefits of that mix shift to continue going forward.

Dylan Wolin: Yeah. You are referring to the margin improvement in the government portion of Integrated Solutions or government programs specifically. That reflects sort of a mix shift towards higher margin programs within government programs. We do expect the benefits of that mix shift to continue going forward.

Speaker #5: And we do expect the benefits of that mixed shift to continue going forward.

Speaker #9: Great. Thanks, guys.

Noah Poponak: Great. Thanks, guys.

Speaker #5: Thank you.

John Holmes: Thank you.

John M. Holmes: Thank you.

Operator: Our next question comes from the line of Michael Leshock with KeyBanc Capital Markets. Your line is open.

Speaker #1: Our next question comes from the line of Michael Leshock with KeyBanc Capital Markets. Your line is open.

Speaker #10: Hey, good afternoon. I wanted to follow up on the HACO question, just given that that's progressing ahead of schedule. I know there was a cost element to the synergies there.

Michael Leshock: Hey, good afternoon. I wanted to follow up on the HAECO question, just given that that's progressing ahead of schedule. I know there was a cost element to the synergies there, but could you talk about how that integration is progressing in terms of cost outs or operational efficiencies or just overall utilization? Is there any way to bucket the primary drivers of that integration going ahead of schedule?

Speaker #10: But could you talk about how that integration is progressing in terms of cost-outs, operational efficiencies, or just overall utilization? Is there any way to bucket the primary drivers of that integration going ahead of schedule?

Speaker #5: Yeah, so just to describe it in a little bit more detail, we've got to right-size the business in a couple of different ways. They had a much larger business in terms of revenue than how we intend to run it, because that revenue was not profitable.

John Holmes: Yeah. Just to describe it in a little bit more detail. We, you know, we've got to rightsize the business in a couple of different ways. You know, it was a much larger business in terms of revenue than how we intend to run it, because that revenue was not profitable. We are continuing to close up those aircraft that, you know, will no longer be customers with us and ship them off. That work is getting done. At the same time, we're also, you know, making, you know, difficult decisions around the size of the workforce because we wanna size the workforce to the new revenue base that we have. Those changes have been made.

John M. Holmes: Yeah. Just to describe it in a little bit more detail. We, you know, we've got to rightsize the business in a couple of different ways. You know, it was a much larger business in terms of revenue than how we intend to run it, because that revenue was not profitable. We are continuing to close up those aircraft that, you know, will no longer be customers with us and ship them off. That work is getting done. At the same time, we're also, you know, making, you know, difficult decisions around the size of the workforce because we wanna size the workforce to the new revenue base that we have. Those changes have been made.

Speaker #5: So we are continuing to close up those aircraft that will no longer be customers with us, and ship them off. So that work is getting done.

Speaker #5: At the same time, we're also making difficult decisions around the size of the workforce, because we want to size the workforce to the new revenue base that we have.

Speaker #5: Those changes have been made. And when we say this was the most critical quarter—the changes to the size of the workforce to align with the new revenue base—all of those changes have been made.

John Holmes: When we say this was the most critical quarter, the changes to the size of the workforce to align with the new revenue base, all of those changes, have been made, so that's in place. The last two major pieces are moving the work out of our Indianapolis facility, and moving that into other AAR facilities, majority of which will go to HAECO in the Greensboro site. That's happening now. That's the next significant phase. The final phase that will be complete, you know, after all of that, but is all going on in parallel is the implementation of our systems. We are certainly taking our rigor and our, you know, expertise and deploying it on the floor today.

John M. Holmes: When we say this was the most critical quarter, the changes to the size of the workforce to align with the new revenue base, all of those changes, have been made, so that's in place. The last two major pieces are moving the work out of our Indianapolis facility, and moving that into other AAR facilities, majority of which will go to HAECO in the Greensboro site. That's happening now. That's the next significant phase. The final phase that will be complete, you know, after all of that, but is all going on in parallel is the implementation of our systems. We are certainly taking our rigor and our, you know, expertise and deploying it on the floor today.

Speaker #5: So that's in place. The last two major pieces are moving the work out of our Indianapolis facility and moving that into other AAR facilities.

Speaker #5: The majority of which will go to HACO in the Greensboro site. And that's happening now. So that's the next significant phase. And the final phase that we'll complete after all of that, but is all going on in parallel, is the implementation of our systems.

Speaker #5: We are certainly taking our rigor and our expertise and deploying it on the floor today. But ultimately, the paperless systems that we've developed and utilize in most of our AAR hangars, we want that fully deployed inside of the HACO facilities as well.

John Holmes: Ultimately, the paperless systems that we've developed and utilize in most of our AAR hangars, we want that fully deployed inside of the HAECO facilities as well. That would be the very last piece to complete. Again, all of that at this point is pacing ahead of schedule. It's a really heavy lift. You got a lot of moving parts there, but very proud of the way the team is executing. Also really happy with the way the HAECO team has embraced the culture that we're promoting. It's been a really good fit.

John M. Holmes: Ultimately, the paperless systems that we've developed and utilize in most of our AAR hangars, we want that fully deployed inside of the HAECO facilities as well. That would be the very last piece to complete. Again, all of that at this point is pacing ahead of schedule. It's a really heavy lift. You got a lot of moving parts there, but very proud of the way the team is executing. Also really happy with the way the HAECO team has embraced the culture that we're promoting. It's been a really good fit.

Speaker #5: So that would be the very last piece to complete. But again, all of that at this point is pacing ahead of schedule. And it's a really heavy lift.

Speaker #5: You’ve got a lot of moving parts there, but very proud of the way the team is executing. And also really happy with the way the HACO team has embraced the culture that we're promoting.

Speaker #5: It's been a really good fit.

Michael Leshock: Great. Within Integrated Solutions, just given the recurring revenue nature of the Trax business as well as the new customer integration and ongoing upgrade cycle, should we expect growth there to be fairly linear going forward within the segment? Or is there anything that could drive, you know, lumpiness ahead?

Speaker #10: Great. And then within integrated solutions, just given the recurring revenue nature of the Trax business as well as the new customer integration and ongoing upgrade cycle, should we expect growth there to be fairly linear going forward within the segment?

Speaker #10: Or is there anything that could drive lumpiness ahead?

John Holmes: Overall linear, you do get lumpiness every now and then because of the way we book new implementations just based on the software and milestone accounting. That does create some lumpiness in the results there. The recurring revenue, which is the base of the business that we're most focused on growing, that we expect to be linear. Again, we've doubled the size of Trax since we bought it. They were a $25 million business when we closed. It's, you know, pacing north of $50 million now. You know, based on the customer updates, their upgrades, as well as new customers that we've captured, we see a path to doubling that again from $50 million to $100 million.

Speaker #5: Overall, linear. You do get lumpiness every now and then because of the way we book new implementations, just based on the software and milestone accounting.

John M. Holmes: Overall linear, you do get lumpiness every now and then because of the way we book new implementations just based on the software and milestone accounting. That does create some lumpiness in the results there. The recurring revenue, which is the base of the business that we're most focused on growing, that we expect to be linear. Again, we've doubled the size of Trax since we bought it. They were a $25 million business when we closed. It's, you know, pacing north of $50 million now. You know, based on the customer updates, their upgrades, as well as new customers that we've captured, we see a path to doubling that again from $50 million to $100 million.

Speaker #5: So that does create some lumpiness in the results there. But the recurring revenue, which is the base of the business that we're most focused on growing, we expect to be limited—to be linear.

Speaker #5: And again, we've doubled the size of Tracks since we bought it. They were a $25 million business when we closed. It's pacing north of $50 million now.

Speaker #5: And based on the customer updates, their upgrades, as well as new customers that we've captured, we see a path to doubling that again from 50 to 100.

Speaker #10: Great. Thank you.

Michael Leshock: Great. Thank you.

Speaker #5: Thank you.

Speaker #1: Thank you. Ladies and gentlemen, at this time, I would like to turn the call back over to John for closing remarks.

John Holmes: Thank you.

John M. Holmes: Thank you.

Operator: Thank you. Ladies and gentlemen, at this time, I would like to turn the call back over to John for closing remarks.

Speaker #5: Great, thank you very much. And thank you for joining us today. We continue to execute with a high degree of discipline, and we are energized by the opportunities in front of us. We really appreciate the support and interest in AAR.

John Holmes: Great. Thank you very much, and thank you for joining us today. We continue to execute with a high degree of discipline, and we are energized by the opportunities in front of us and really appreciate the support and interest in AAR.

John M. Holmes: Great. Thank you very much, and thank you for joining us today. We continue to execute with a high degree of discipline, and we are energized by the opportunities in front of us and really appreciate the support and interest in AAR.

Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

Q3 2026 AAR Corp Earnings Call

Request a DemoDemo

AIR

AAR

Earnings