AAR Corp. (NYSE:AIR) Q1 2025 Earnings Conference Call September 23, 2024 5:00 PM ET Company Participants John Holmes - Chairman, President and CEO Sean Gillen - Chief Financial Officer Conference Call Participants Scott Mikus - Melius Research Michael Ciarmoli - Truist Securities Kenneth Herbert - RBC Capital Markets Louie DiPalma - William Blair Operator Good afternoon, everyone, and welcome to AAR's Fiscal 2025 First Quarter Earnings Call. We're joined today by John Holmes, Chairman, President, and Chief ...

Company Performance - AAR reported quarterly earnings of $0.85 per share, exceeding the Zacks Consensus Estimate of $0.82 per share, and up from $0.78 per share a year ago, representing an earnings surprise of 3.66% [1] - The company posted revenues of $661.7 million for the quarter ended August 2024, surpassing the Zacks Consensus Estimate by 2.46%, compared to year-ago revenues of $549.7 million [1] - Over the last four quarters, AAR has surpassed consensus EPS estimates three times, but has only topped consensus revenue estimates once [1] Future Outlook - The sustainability of AAR's stock price movement will depend on management's commentary during the earnings call and future earnings expectations [2] - Current consensus EPS estimate for the coming quarter is $0.91 on revenues of $654.63 million, and for the current fiscal year, it is $3.72 on revenues of $2.69 billion [4] - The estimate revisions trend for AAR is currently unfavorable, resulting in a Zacks Rank 4 (Sell), indicating expected underperformance in the near future [4] Industry Context - The Aerospace - Defense Equipment industry is currently in the top 34% of Zacks industries, suggesting that stocks in the top 50% outperform those in the bottom 50% by a factor of more than 2 to 1 [5] - Another company in the same industry, FTAI Aviation, is expected to report quarterly earnings of $0.77 per share, reflecting a year-over-year change of +133.3%, with revenues expected to be $429.29 million, up 47.5% from the year-ago quarter [5]

Sales Performance - Consolidated sales for Q1 fiscal 2025 increased by $112.0 million, or 20.4%, compared to the prior year quarter, driven by strong demand from commercial customers and the acquisition of the Product Support business[140] - Sales to commercial customers rose by $80.4 million, or 20.5%, while sales to government customers increased by $31.6 million, or 20.1%[140] - Parts Supply segment sales increased by $12.9 million, or 5.4%, with operating income rising by $15.0 million, or 99.3%[151] - Repair & Engineering segment sales surged by $80.1 million, or 58.3%, with operating income increasing by $12.0 million, or 131.9%[153] - Integrated Solutions segment sales grew by $12.6 million, or 8.1%, with operating income remaining consistent at $7.7 million[155] - Third-party sales in the Expeditionary Services segment increased by $6.4 million, or 33.5%, compared to the prior year period, primarily due to sales recognized from the termination of the Next Generation Pallet contract[158] Profitability - Gross profit for Q1 fiscal 2025 increased by $15.9 million, or 15.7%, with commercial gross profit rising by $17.2 million, or 22.8%[144] - Operating income increased by $18.1 million, or 71.5%, primarily due to the absence of a prior year charge related to an unfavorable Russian court judgment[147] - Operating income in the Expeditionary Services segment decreased by $3.0 million, or 230.8%, from the prior year quarter, mainly due to the impact of the contract termination[159] Expenses and Financial Costs - Selling, general, and administrative expenses increased by $1.2 million, or 1.6%, but decreased as a percentage of sales from 13.6% to 11.5%[146] - Interest expense rose by $13.0 million due to higher interest rates and increased borrowings for business investments[148] - The effective income tax rate for continuing operations was 27.7%, a significant increase from a tax benefit of (92.0)% in the prior year quarter[149] Cash Flow and Liquidity - Net cash used in operating activities for continuing operations was $18.6 million in the first quarter of fiscal 2025, compared to $18.5 million in the prior year quarter[176] - Net cash used in investing activities was $5.3 million during the first quarter of fiscal 2025, a decrease of $6.3 million from the prior year period[176] - Net cash used in financing activities was $9.1 million during the first quarter of fiscal 2025, compared to cash provided of $38.7 million in the prior year quarter, a decrease of $47.8 million[177] - As of August 31, 2024, liquidity and capital resources included working capital of $960.0 million, with cash of $49.3 million[161] - The company expects to meet its cash requirements for at least the next 12 months and foreseeable future with its current cash on hand and future cash flows from operations[161] Debt and Financing - Borrowings outstanding under the Amended Revolving Credit Facility were $442.0 million, with approximately $9.6 million of outstanding letters of credit, reducing availability to $373.4 million[167] - On March 1, 2024, the company issued $550.0 million aggregate principal amount of 6.75% Senior Notes due 2029 to fund part of the acquisition of the Product Support business[167] Currency and Interest Rate Risk - A hypothetical 10 percent devaluation of the U.S. dollar against foreign currencies would not have had a material impact on the company's financial position or continuing operations for the quarter ended August 31, 2024[186] - There were no significant changes in interest rate risk during the quarter ended August 31, 2024, as noted in the Annual Report on Form 10-K for the year ended May 31, 2024[186] Stock Repurchase Program - The company has a stock repurchase program authorized for up to $150 million, with no repurchases made during the three-month period ended August 31, 2024[175]

Financial Performance - First quarter sales of $662 million, up 20% over the prior year[1] - First quarter GAAP diluted earnings per share of $0.50 compared to a loss per share of $0.02 in Q1 FY2024[1] - First quarter adjusted diluted earnings per share of $0.85, up 9% from $0.78 in Q1 FY2024[1] - Sales growth of 20% in both commercial and government businesses[2] - Net income improved to $18.0 million from a loss of $0.6 million in the prior year period[13] - Third-party sales increased to $661.7 million from $549.7 million, a 20.4% growth[14] - Adjusted net income rose to $30.3 million from $27.3 million, an 11.0% increase[18] - Adjusted diluted earnings per share increased to $0.85 from $0.78, a 9.0% rise[19] - Sales for the three months ended August 31, 2024, were $661.7 million, compared to $656.5 million for the same period in 2023, representing a 0.8% increase[20] - Adjusted operating income for the three months ended August 31, 2024, was $59.2 million, compared to $61.3 million for the same period in 2023, a decrease of 3.4%[20] - Adjusted EBITDA for the three months ended August 31, 2024, was $73.7 million, compared to $52.1 million for the same period in 2023, a 41.5% increase[21] - Adjusted EBITDA for the twelve months ended August 31, 2024, was $264.0 million, compared to $242.4 million for the year ended May 31, 2024, an 8.9% increase[23] - Pro forma adjusted EBITDA for the twelve months ended August 31, 2024, was $284.4 million, including $20.4 million from Product Support for the six months ended February 29, 2024[24] Operating Margins and Expenses - Operating margins were 6.6% in the current quarter, compared to 4.6% in the prior year quarter[4] - Adjusted operating margin increased from 7.3% in the prior year quarter to 9.1% in the current year quarter[4] - Net interest expense for the quarter was $18.3 million, compared to $5.4 million last year[4] - Adjusted operating margin for the three months ended August 31, 2024, was 9.1%, compared to 9.3% for the same period in 2023, a slight decrease of 0.2 percentage points[20] Cash Flow and Debt - Cash flow used in operating activities was $18.6 million during the current quarter compared to $18.7 million in the prior year quarter[6] - Net debt was $942.7 million as of August 31, 2024[6] - Cash and cash equivalents decreased to $49.3 million from $85.8 million, a 42.5% decline[12] - Net cash used in operating activities was $18.6 million, similar to $18.7 million in the prior year[13] - Net debt as of August 31, 2024, was $942.7 million, compared to $236.7 million as of August 31, 2023, a significant increase of 298.3%[22] - Net debt to pro forma adjusted EBITDA ratio as of August 31, 2024, was 3.31, indicating a higher leverage position compared to previous periods[24] - Cash flows used in operating activities for the three months ended August 31, 2024, were $(18.6) million, slightly improved from $(18.7) million for the same period in 2023[21] - Total debt as of August 31, 2024, was $992.0 million, compared to $307.0 million as of August 31, 2023, a 223.1% increase[22] Segment Performance - Parts Supply segment sales grew to $249.7 million from $236.8 million, a 5.4% increase[14] - Repair & Engineering segment sales surged to $217.6 million from $137.5 million, a 58.3% jump[14] Contracts and Receivables - Received multiple new contract awards, including two five-year firm fixed price IDIQ contracts with an aggregate ceiling value of approximately $1.2 billion each from the U.S. Navy's NAVAIR[4] - Accounts receivable increased to $310.9 million from $287.2 million, an 8.2% rise[12] Assets and Liabilities - Total assets remained stable at $2,783.3 million compared to $2,770.0 million in the prior quarter[12]

Core Insights - AAR CORP. reported first quarter fiscal year 2025 sales of $661.7 million, a 20% increase compared to the prior year, with net income of $18.0 million or $0.50 per diluted share, compared to a net loss of $0.6 million or $0.02 per diluted share in the same quarter last year [1][2][12] - Adjusted diluted earnings per share rose to $0.85, up 9% from $0.78 in the first quarter of the previous fiscal year [1][2][22] - The sales growth was driven by a 20% increase in both commercial and government sectors, attributed to the acquisition of the Product Support business and organic growth [2][12] Financial Performance - Consolidated sales to commercial and government customers both increased by 20% year-over-year, with commercial sales representing 71% of total sales [2] - The company achieved 26% organic growth in new parts distribution activities and saw strong operational performance in hangars [2] - Selling, general, and administrative expenses were $75.9 million, slightly up from $74.7 million in the prior year [3] - Operating margins improved to 6.6% from 4.6% in the prior year, with adjusted operating margins increasing from 7.3% to 9.1% [3][23] Contracts and Acquisitions - AAR CORP. secured multiple new contracts, including two five-year firm fixed price IDIQ contracts with a total ceiling value of approximately $2.4 billion from the U.S. Navy for maintenance and repair of the P-8A Poseidon Aircraft fleet [3][4] - The recent acquisition of the Product Support business has exceeded expectations and contributed significantly to sales growth [2][3] Debt and Cash Flow - Net interest expense for the quarter was $18.3 million, up from $5.4 million in the previous year, primarily due to increased debt levels from the Product Support acquisition [3][4] - As of August 31, 2024, net debt stood at $942.7 million, with a net leverage ratio of 3.31x when adjusted for the last twelve months of adjusted EBITDA from the Product Support business [4][25] Operational Highlights - Cash flow used in operating activities was $18.6 million, consistent with the prior year [4][15] - The company continues to prioritize debt repayment while evaluating share repurchases and other investment opportunities, with $52.5 million remaining on its $150 million share repurchase program [3][4]

Core Viewpoint - AAR CORP. has secured a five-year indefinite delivery/indefinite quantity contract valued at approximately $1.2 billion from the U.S. Navy's Naval Air Systems Command to provide maintenance and support for the P-8A Poseidon aircraft, reinforcing its strategic partnership with NAVAIR [1][2]. Group 1: Contract Details - The contract includes scheduled and unscheduled maintenance, in-service repair, technical directive incorporation, airframe modifications, and aircraft-on-ground (AOG) support for the U.S. Navy, the government of Australia, and foreign military sales customers [1][2]. - This contract solidifies AAR's leadership in commercial derivative airframe maintenance for the U.S. Department of Defense and enhances the Navy's operational readiness through the repair of the P-8A Poseidon [2]. Group 2: Company Overview - AAR is a global aerospace and defense aftermarket solutions provider with operations in over 20 countries, headquartered in the Chicago area [3]. - The company supports both commercial and government customers through four operating segments: Parts Supply, Repair & Engineering, Integrated Solutions, and Expeditionary Services [3].

Core Points - AAR CORP. has formalized a Supply Chain Alliance charter with the U.S. Defense Logistics Agency (DLA) to enhance support for the nation's warfighter [1][2] - The partnership aims to improve responsiveness, reduce customer wait times, and streamline administrative lead times [2] - AAR will benefit from a dedicated resource within the DLA to expedite contract processes, enhancing efficiency and support for OEM customers [2] Company Overview - AAR is a global aerospace and defense aftermarket solutions provider with operations in over 20 countries [3] - The company operates through four segments: Parts Supply, Repair & Engineering, Integrated Solutions, and Expeditionary Services [3]

Core Points - AAR CORP. will release its financial results for the first quarter of fiscal year 2025, which ended on August 31, 2024, after the close of trading on September 23, 2024 [1] - A conference call to discuss the financial results will be held on September 23, 2024, at 4 p.m. Central time, with access available via a listen-only webcast [1] - A replay of the conference call will be available for on-demand listening shortly after the call and will remain accessible for approximately one year [2] Company Overview - AAR is a global aerospace and defense aftermarket solutions company with operations in over 20 countries [3] - The company is headquartered in the Chicago area and supports commercial and government customers through four operating segments: Parts Supply, Repair & Engineering, Integrated Solutions, and Expeditionary Services [3]

Group 1 - AAR CORP. is a leading provider of aviation services to commercial and government operators, MROs, and OEMs [1] - The company will participate in two investor conferences in September 2024, highlighting its engagement with investors [1] - Sean Gillen, AAR's CFO, will attend the 30th Annual Gabelli Aerospace & Defense Symposium on September 5, 2024 [1] - John M. Holmes, AAR's Chairman, President and CEO, along with Gillen, will participate in the RBC Capital Markets 2024 Global Industrials Conference on September 24, 2024 [1] Group 2 - AAR operates in over 20 countries and supports commercial and government customers through four operating segments: Parts Supply, Repair & Engineering, Integrated Solutions, and Expeditionary Services [2] - The company is headquartered in the Chicago area, emphasizing its strategic location in the aerospace and defense sector [2]

Core Insights - Ultrahuman has launched the Ultrahuman Ring AIR in select Verizon stores, expanding its reach in the wearable technology market [1][2] - The Ring AIR is part of a broader Ultrahuman ecosystem that includes various health monitoring devices, enhancing the company's product offerings [1][5] - Verizon's introduction of the Ultrahuman Ring AIR marks its first foray into smart rings, showcasing its commitment to providing cutting-edge technology to consumers [2][3] Company Overview - Ultrahuman is recognized as a comprehensive self-quantification platform, offering products like the Ultrahuman Ring AIR, Ultrahuman M1 for glucose monitoring, and Blood Vision for preventive blood testing [5][6] - The Ultrahuman Ring AIR features advanced sensors and algorithms to provide real-time health insights, focusing on sleep, movement, and recovery [3][4] - Verizon, as the largest carrier in the US, generated revenues of $134.0 billion in 2023 and continues to innovate in the technology space to enhance customer experiences [7]