AAR Q1 FY27 earnings call AIR

AAR announced the acquisition of a 65% controlling interest in MRO Holdings for an implied enterprise value of $4 billion, marking a significant step in building a leading aviation aftermarket platform. This combination, discussed for eight years, is expected to accelerate growth across AAR's parts, repair, and software activities by expanding its airframe MRO footprint, driving additional volume into component MRO facilities, strengthening OEM distribution partnerships, and enhancing software solutions with more maintenance data. The transaction creates the world's largest MRO operation with 12 facilities and nearly 3,000 aircraft maintained annually.

The MRO Holdings acquisition is projected to increase AAR's revenue by approximately 30% and improve adjusted EBITDA margin from roughly 12% to 16% pro forma before synergies. It is expected to be accretive to adjusted EPS in the first full fiscal year post-close. Management anticipates approximately $75 million of run-rate cost synergies within 3-4 years, primarily from procurement and SG&A savings, as well as sharing best practices. This does not include longer-term revenue opportunities from wide-body maintenance expansion, increased capture of European/Middle Eastern fleets, and cross-selling.

AAR reported a strong start to FY27 with total sales of $918 million, up 24% year-over-year, including 11% organic growth. This growth was broad-based across all three key segments. Adjusted EBITDA margin expanded 100 basis points to 12.7%, reaching 13.3% excluding legacy commercial programs, already within the previously established 3-year target range. Adjusted diluted EPS increased 38% to $1.49 per share, and the company delivered record first-quarter cash flow with $57 million in adjusted cash from operations, reducing net leverage to 1.8x.

Part Supply sales increased 31% to $414.8 million, with new parts distribution growing 23% organically. Repair, Engineering and Software sales rose 31% to $297.5 million, reflecting the HAECO Americas acquisition and organic growth. Government Solutions sales increased 4% to $138.8 million, with a significant 460 basis point expansion in adjusted EBITDA margin due to a mix shift towards newer, higher-margin programs. Legacy commercial programs liquidated $24 million of rotable assets, contributing $5 million in margin.

The Repair, Engineering and Software segment's adjusted EBITDA margin was down 120 basis points year-over-year, primarily due to the expected dilutive impact of the HAECO Americas integration. Management confirmed that the integration is on track, with the full exit of the high-cost Indianapolis facility expected by the end of the calendar year. This exit is anticipated to allow margins to trend back towards pre-acquisition levels, with integration completion expected by Q4 FY27.

Management expressed continued confidence in the demand environment, supported by durable passenger volumes and strong customer relationships. The Q2 FY27 outlook implies an increase in organic growth compared to Q1, and the full-year FY27 sales outlook (excluding legacy commercial programs) has been raised to low teens growth. Bookings remain strong across all businesses, with no signs of a slowdown from customers.