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DATE
- Wednesday, July 16, 2025 at 5 p.m. ET
CALL PARTICIPANTS
- Chairman, President and Chief Executive Officer — John Holmes
- Chief Financial Officer — Sean Gillen
- Vice President, Investor Relations — Denise Pacioni
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RISKS
- The repair and engineering segment experienced lower adjusted EBITDA and margins in Q4 FY2025 due to “higher costs at our New York component repair facility as we complete the integration and move toward fully closing it in Q1 FY2026,” with management expecting these costs to end after exiting the facility.
- Integrated Solutions faces “certain near-term headwinds driven by the Department of State cost efforts,” expected to impact aviation operations under the WAS contract in Iraq, though management aims to offset this with growth in other programs.
TAKEAWAYS
- Revenue: $736 million in adjusted sales for Q4 fiscal year 2025, a 12% year-over-year increase for Q4 fiscal year 2025, setting a record for Q4 FY2025 adjusted sales.
- Organic Sales Growth: 14% organic sales growth for Q4 FY2025, excluding the impact of the landing gear divestiture.
- Full-Year Revenue: $2.8 billion in FY2025, representing a 20% increase over the prior year.
- Adjusted EBITDA: $90.9 million in adjusted EBITDA for Q4 fiscal year 2025, 19% higher compared to the same quarter last year; Adjusted EBITDA margin rose to 12.4% from 11.6% in Q4 fiscal year 2024.
- Adjusted Diluted EPS: $1.16 in adjusted diluted EPS for Q4 FY2025, a 32% increase from $0.88 last year (adjusted); Full-year adjusted diluted EPS was $3.91 in FY2025 compared to $3.33 for the prior year.
- Government Sales: Grew 21% year over year in Q4 FY2025; commercial sales rose 12% in Q4 fiscal year 2025 compared to the same period last year and represented 69% of total sales in Q4 FY2025.
- Parts Supply Segment: Sales rose 17% to $306 million in Q4 FY2025; new parts distribution grew over 20% in Q4 FY2025, with strong results in both commercial and government; adjusted EBITDA in this segment rose 36% in Q4 FY2025, adjusted operating income rose 41% in Q4 fiscal year 2025 compared to the same quarter last year
- Repair and Engineering Segment: Organic sales rose 8% excluding landing gear in Q4 FY2025; adjusted EBITDA and operating income each declined 6% in Q4 FY2025, primarily due to fixed costs at the New York facility being closed.
- Integrated Solutions Segment: Adjusted sales rose 10% to $181.5 million in Q4 FY2025; adjusted EBITDA in the Integrated Solutions segment rose 13% in Q4 fiscal year 2025 compared to the same period last year, and adjusted operating income in the Integrated Solutions segment rose 15% in Q4 fiscal year 2025 compared to the same period last year
- Net Leverage: Reduced from 3.06x to 2.72x during the quarter; management targets net leverage of 2.0x–2.5x by FY2026, absent material M&A.
- Cost Synergies: Product support acquisition integration was substantially complete as of Q4 FY2025, with the full $10 million of cost synergies expected to be realized in FY2026.
- Trax Business: Trax annual revenue grew to about $50 million from $25 million over the two years since acquisition. A recent Delta Airlines “multi-year implementation” contract was cited by Holmes as the business’s “most significant” win, as discussed on the Q4 FY2025 earnings call.
- Divestiture: Landing gear overhaul business was sold for $48 million in cash in FY2025, described as margin accretive.
- Share Repurchase: $10 million was repurchased in Q4 FY2025 at an average price of $52.37 per share.
- Capacity Expansion: Oklahoma City and Miami MRO expansions will add 15% to network capacity in CY2026; facilities are already sold out prior to coming online in 2026.
- Guidance: Management expects organic sales growth in FY2026 to approach the prior year’s 9% organic growth rate, with adjusted operating margin expected to improve from the 9.6% delivered in FY2025; Q1 FY2026 sales are expected to grow 6%-11% (excluding landing gear), with adjusted operating margin of 9.6%-10% for Q1 FY2026.
SUMMARY
AAR Corp. (AIR 2.17%) reported new Q4 and full-year revenue records for FY2025, driven by strong organic growth and margin expansion following recent portfolio optimization. Management emphasized the positive impact of completed acquisitions, divestitures, and cost synergies, as well as above-market growth and rising IP contributions from digital investments including Trax, as discussed for FY2025. Capital allocation remained disciplined with leverage decreasing, select share repurchases executed, and further investment capacity supported by robust operating cash flow.
- Holmes said, “we are particularly proud of the 14% organic sales growth, which excludes land and gear, that we drove in the quarter.”
- Management stated Trax has doubled its revenue from $25 million two years ago at acquisition to about $50 million today, as of the Q4 FY2025 earnings call. Management is projecting another doubling as ramped implementations and customer upgrades proceed.
- The product support acquisition’s integration is nearly finished; Holmes confirmed the anticipated full $10 million of cost synergies, to be realized across FY2026.
- Management reported new business wins, including a long-term exclusive distribution agreement with Eptai through February 2030 and a US Defense Logistics Agency contract for new parts distribution.
- Gillen said share repurchase would take priority over a dividend if leverage converges toward the lower end of target range, noting that $10 million was recently repurchased on price weakness in Q4 FY2025.
- The company’s government business returned to growth in Q4 FY2025, with the largest opportunity for incremental margin improvement in repair and engineering expected after the New York facility closure eliminates stranded fixed costs.
- Management noted capacity is already sold for the upcoming Oklahoma City and Miami hangars, with phased openings in calendar Q1 2026 (Oklahoma City) and calendar Q3 2026 (Miami).
INDUSTRY GLOSSARY
- CFM56: A widely used commercial aircraft engine family manufactured by CFM International, referenced for engine parts distribution.
- USM: Used Serviceable Material, referring to sales of previously used, refurbished parts in the aviation aftermarket.
- Trax: A software platform offering maintenance and engineering operations management for airlines and MRO providers.
- MRO: Maintenance, Repair, and Overhaul—services provided to maintain and restore aircraft to safe and operational condition.
- ERP: Enterprise Resource Planning, referencing the digital backbone for business operations, here applied to maintenance services.
- OEM: Original Equipment Manufacturer; in this context, refers to manufacturers of original aircraft and components.
Full Conference Call Transcript
Denise Pacioni: Fiscal Year 2025 Fourth Quarter Earnings Call. We are joined today by John Holmes, Chairman, President and Chief Executive Officer, and Sean Gillen, Chief Financial Officer. The presentation material we are sharing today as part of this webcast can also be found under the Investor Relations section on our corporate website. Before we begin, I would like to remind you that the comments made during the call may 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 and the Risk Factors section of the company’s annual report on Form 10-Ks for the fiscal year ended 05/31/2024. 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. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is set forth in the company’s earnings release and slides. A transcript of this conference call will be available shortly after the webcast on AAR’s website. At this time, I would like to turn the call over to AAR’s Chairman, President and CEO, John Holmes.
John Holmes: Thank you, and welcome, everyone, to our fourth quarter fiscal year 2025 earnings call. We are very proud of the record year we just delivered, and as you will see, we are continuing to advance the execution of our strategy. We have accompanying information on the slides I will be referencing as I talk through the details of this release. Turning to slide three, there are five key highlights from the fiscal year 2025 that I would like to cover today. First, we delivered outstanding financial performance in the quarter and the full year. On that note, we are particularly proud of the 14% organic sales growth, which excludes land and gear, that we drove in the quarter.
Second, we have continued to refine and optimize our portfolio. We have substantially completed the integration of the Product Support acquisition and completed the divestiture of our landing gear overhaul business. Third, we are successfully driving above-market growth in our new parts distribution activities. Fourth, our track software solution is capturing new business wins and is delivering results. And fifth, we are continuing to reduce net leverage by both growing adjusted EBITDA and reducing net debt. We ended the quarter at 2.7 times, and absent any M&A, are on track to meet our leverage target of 2.0 to 2.5 times. Turning to slide four, is a high-level view of our financial results for fiscal year 2025.
We delivered record full-year results of $2.8 billion, up 20% over the prior year. Adjusted EBITDA margin increased 140 basis points to 11.8% in fiscal 2025, which reflects strong growth across our core segments. We generated record adjusted diluted earnings per share of $3.91 compared to $3.33 last year. We continue to reduce our net leverage, and our strong balance sheet, along with our disciplined capital allocation strategy, has us well-positioned for investments that will drive continued growth. Turning now to slide five, I will discuss our strategy execution in more detail.
We are executing across our strategic objectives to drive growth through market share capture and new business, improve margin through cost efficiency and synergy realization, increase the intellectual property in our offerings through digital and other investments, and to continue our disciplined portfolio management. The actions we are taking delivered the strong performance we saw in fiscal 2025, and we expect this to continue in 2026. Starting with growth, we announced several new business wins in the quarter. In our Parts Supply segment, we extended our multi-year agreement with Eptai to exclusively distribute CFM56 engine material to the aviation aftermarket through 02/1930.
We also entered into a supply chain alliance agreement with the US Defense Logistics Agency, which will enable AAR to provide comprehensive new parts distribution services to meet the needs of the DLA. In integrated solutions, we established a joint venture with Kira. The joint venture was awarded the US Navy’s pilot training program on the E-6B aircraft. Additionally, we continue to make progress on our Oklahoma City and our Miami MRO airframe MRO expansions, which will come online in calendar 2026, adding 15% capacity to our network. These new business wins and expansions demonstrate the strength of our portfolio and the strong demand our customers have for our services.
In cost efficiency and synergy realization, we have substantially completed the integration of the product support acquisition. As a reminder, as part of the product support integration, we are exiting our Long Island, New York facility, consolidating that work into our locations in Dallas, Texas, and Wellington, Kansas. We transferred the last pieces of equipment and worked in New York in Q4, intending to fully exit the New York facility in our fiscal Q1. We are now in a position to realize the full $10 million of cost synergies, which should contribute to further margin expansion.
In our digital and IP-enabled offerings, we saw continued strong traction for our track software solution, as we announced several new business wins, including our largest win yet with Delta Airlines. Trax was selected by Delta to modernize Delta TechOps maintenance and engineering systems. Trax will replace Delta TechOps legacy systems with its EMRO and eMobility solutions. This multi-year implementation will ultimately be the largest of its kind in the maintenance ERP space. This win is a perfect example of our Trax acquisition thesis, whereby AAR can leverage its customer relationships to open doors for Trax. Furthermore, this win demonstrates that with AAR’s investments, Trax can scale to support the largest airlines in the world.
Finally, as part of our disciplined portfolio management, we completed the divestiture of our landing gear overhaul business. This move generated $48 million in cash and is margin accretive. As previously mentioned, all of this execution delivered excellent results in our fiscal year 2025, strong double-digit growth across sales, adjusted EBITDA, and adjusted EPS. With that, I will now turn it over to Sean to discuss the results in more detail.
Sean Gillen: Thanks, John. Looking now to slide six. Total adjusted sales in the quarter grew 12% to $736 million year over year, setting a new fourth-quarter sales record. This strong growth was across all of our segments, with particular strength in parts supply. Excluding the sale of landing gear, which contributed sales of $18.6 million in last year’s quarter and $8.3 million in this quarter, Q4 organic sales growth was 14%. For the full fiscal year, our organic sales growth, excluding the impact of both the product support acquisition and landing gear divestiture, was 9%. Sales to government customers increased 21%, and sales to commercial customers increased 12% from the same period last year.
For the quarter, total commercial sales made up 69% of total sales, while government sales made up the remaining 31%. We are pleased to see the return to growth in our government business. Compared to the same quarter last year, adjusted EBITDA increased 19% to $90.9 million, and EBITDA margins increased to 12.4% from 11.6%. Adjusted operating income increased 25% to $70.9 million, with adjusted operating margins improving to 10.5% from 9.3%. Our focus on improving operating efficiencies, particularly strength in our parts supply segment, drove the improved margins. The combination of sales growth and margin expansion resulted in a year-over-year adjusted diluted EPS increase of 32% to $1.16 from $0.88 in the same quarter last year.
With that, I will turn to the detailed results by segment, starting with parts supply, on Slide seven. Parts supply sales grew 17% to $306 million from the same quarter last year. We once again saw above-market growth of over 20% in our new parts distribution activities, with strong growth across both the commercial and government end markets. In USM, we once again saw modest growth due to the constraints in asset availability. Fourth-quarter Parts Supply adjusted EBITDA was up $52.1 million, higher by 36%, and adjusted EBITDA margin increased to 17.1% from 14.8% the same quarter last year. Adjusted operating income rose 41% to $49.7 million, and adjusted operating margins also increased from 13.5% to 16.3%.
This significant margin improvement came from both new parts distribution and USM. In particular, USM had a very strong Q4 margin due to certain whole asset transactions. Turning now to slide eight, repair and engineering. Sales increased 3% to $223 million year over year. Excluding the impact of the Landing Gear divestiture, the organic sales growth in repair and engineering was 8%, as demand remained strong for our airframe MRO activities, and we continue to drive efficiency to increase throughput. Adjusted EBITDA of $26.7 million was 6% lower than in the same period last year, with adjusted EBITDA margins decreasing to 12% from 13.1%.
Fourth-quarter adjusted operating income of $23.3 million was also 6% lower than the same period last year, and adjusted operating margins decreased to 10.5% from 11.5%. These decreases were primarily driven by higher costs at our New York component repair facility as we complete the integration and progress toward fully closing it in Q1. Going forward, we expect to drive further margin expansion in this segment from the realization of product support synergies, continued rollout of our paperless hangar initiatives, and the capacity expansions that are in process. Looking now to slide nine. Integrated Solutions adjusted sales increased by 10% year over year to $181.5 million.
Note that adjusted sales are lower than our reported GAAP sales as we recognize $19 million in sales related to a previously exited power by the hour contract. Consistent with previous terminated contracts, we exclude the financial impact or benefit from our adjusted results. There was no margin on these sales. We saw growth across both our commercial and government end markets, with particular strength in our government programs. Integrated Solutions adjusted EBITDA of $14.2 million was 13% higher than the same period last year. Adjusted operating income of $10.7 million was 15% higher, with the adjusted operating margin increasing from 5.6% to 5.9%. Turning to Slide 10 of the presentation.
During the quarter, we reduced our net debt leverage from 3.06 in the third quarter to 2.72 times. This reduction was driven by strong Q4 cash flow from operations, $51 million, as well as net proceeds of $48 million from the Landing Gear divestiture. Additionally, in Q4, we did opportunistically repurchase $10 million worth of stock at an average price of $52.37 per share. In Q1, given the seasonality of the business and investment opportunities, we do expect a Q1 cash use. Our reduced net leverage provides us increased optionality for capital allocation going forward. Our strong balance sheet has us well-positioned to invest organically and to potentially pursue value-accretive acquisitions.
Absent any M&A, which remains part of our growth strategy, we would expect to continue to delever and achieve our target net leverage of two to 2.5 times in fiscal year 2026. With that, I will turn the call back over to John.
John Holmes: Great. Thank you, Sean. Turning to slide 11. Based on our strategy, these are our objectives for fiscal year 2026. We intend to continue expanding our market share in new parts and parts supply. In repair and engineering, we will add capacity to our heavy maintenance network with our hangar expansion in Oklahoma City. We will also focus on cross-selling opportunities to drive volume to our component services facilities. Finally, we will look to convert our pipeline of opportunities in integrated solutions government to new awards.
We plan to continue to expand margin through cost efficiency and synergy realization, and we expect to complete the product support integration and realize the full $10 million in annual cost synergies throughout the year. We will also make progress on our implementation of paperless in our hangars. We have completed about one-third of our facilities to date, and we will continue to roll this out throughout the network through the balance of the year. All of this will lead to further margin improvement in our operations. Increasing intellectual property in our portfolio will also be a focus this year, and will principally be driven through digital investments.
In 12, for context, as we look at the year ahead, we are providing some additional commentary on trends that we see in our selected end markets. As you saw throughout fiscal year 2025, our new parts distribution business grew 25% organically, which was significantly above market, and we expect that above-market growth to continue. In USM, we anticipate the market will remain dynamic during our FY ’26, but we remain well-positioned in this space. In airframe MRO, we expect to continue to operate at full utilization with the additional capacity that’s already sold coming online in 2026 and in fiscal year 2027.
In component services, we expect to fully complete the integration, and the sites are well-positioned for additional volume coming from cross-selling. In Integrated Solutions, we have certain near-term headwinds driven by the Department of State cost efforts, which we expect to impact the Iraq aviation operations under our WAS contract. But we expect to offset those headwinds with growth in other programs and new business wins as the year progresses. And digital tracks as a differentiated high-margin, high-growth capability that will continue to be a major focus for us. Given the overall macro environment, we will continue to provide guidance on a quarterly basis.
Having said that, and based on what we see today, we expect our organic sales growth to approach the 9% level that we drove in fiscal year 2025. This growth rate is from our fiscal year 2025 adjusted sales of $2.68 billion, excluding the impact of the Landing Gear divestiture. Additionally, we have an active pipeline of M&A opportunities that would augment this growth rate. I would also expect our adjusted operating margins to continue to improve from the 9.6% that we delivered in fiscal year 2025. For Q1, we expect sales growth of 6% to 11%, which excludes the impact of landing gear, which generated $19.2 million in sales in Q1 last year.
