Michael Ciarmoli

Michael Ciarmoli with Truist Securities asked about the potential for the CFM56 engine's use in the power generation market to become a significant tailwind for HEICO's parts business, considering HEICO's existing content on these legacy platforms.

Answer

Co-Chairman and Co-Chief Executive Officer Eric Mendelson confirmed that repurposing engines like CFM56s for aeroderivative power generation presents 'tremendous life' and expects the use of HEICO parts in those repairs and overhauls to be 'substantial,' creating a 'very good tailwind.'

Michael Ciarmoli inquired about the potential for the CFM56 engine's use in the power generation market and whether this could serve as a significant tailwind for HEICO's parts business, providing additional life and materially more parts demand beyond its traditional aircraft market role.

Answer

Eric Mendelson, Co-Chairman and Co-CEO, confirmed that the repurposing of engines like the CFM56 for the aeroderivative market presents 'tremendous life' and a 'very good tailwind' for HEICO. He expects the use of HEICO parts in the repairs and overhauls of these repurposed engines to be substantial, indicating a positive outlook for additional demand.

Michael Ciarmoli asked about the reasons for the differing defense growth rates between the ETG and FSG segments and questioned if missile exposure was the primary driver of FSG's strong margin performance.

Answer

Co-CEO Eric Mendelson clarified that FSG's margin strength is broad-based, with parts, distribution, and repair also performing exceptionally well. He explained that while ETG's 9% year-to-date defense growth is strong, its products are typically manufactured in-house, whereas FSG has more sourcing flexibility, leading to different growth dynamics.

Michael Ciarmoli of Truist Securities asked about the lower sequential revenue growth in the Flight Support Group during Q4 and requested the specific organic growth rate for the Electronic Technologies Group for the quarter.

Answer

Co-President Eric Mendelson dismissed the focus on sequential growth, emphasizing that the year-over-year organic growth of 12% was "phenomenal" and the more relevant metric. CFO Carlos Macau provided the ETG figure, stating the segment was down approximately 4% organically in Q4, driven by weakness in other electronics and defense, which was partially offset by space.

Michael Ciarmoli asked about potential headwinds for FSG growth as new aircraft deliveries increase and older planes are retired, and also about Capewell's competitive positioning relative to TransDigm's Airborne Systems.

Answer

Eric Mendelson, Co-President, expressed confidence that growth will continue, arguing that any headwind from retirements is mitigated by the higher maintenance costs and HEICO's greater content on the large fleet of newer-generation aircraft. He also stated that he believes Capewell's products are complementary to TransDigm's, noting that many of Capewell's release mechanisms are sold to TransDigm.

Michael Ciarmoli inquired about the new APU opportunity, asking for details on the OEM, the sales network, and the expected revenue ramp and organic growth contribution. He also asked if this opportunity was related to the PAG acquisition and sought clarification on the breakdown and growth rates between distribution and MRO, and the impact of market share wins.

Answer

CEO John Cuomo preferred not to name the OEM for the APU program but confirmed selling to operators and networks. He noted it's premature to detail the revenue ramp but highlighted a Q1 inventory purchase for a fast transition. He clarified this opportunity was in progress before the PAG acquisition. For growth rates, he indicated that VSE outpaces markets due to share gains, expecting lower organic growth in distribution (high single-digit) than MRO (low double-digit) this year due to an actuation program headwind.

Michael Ciarmoli inquired about the OEM for the APU opportunity, asking if it was Honeywell and if VSE would be selling components into the licensed repair network, along with expectations for revenue ramp and additive organic growth. He also asked if this APU opportunity was related to the PAG acquisition and for a breakdown of distribution versus MRO growth, and if market share wins are driving same-store growth.

Answer

President and CEO John Cuomo preferred not to disclose the OEM but confirmed sales to operators and networks. He noted the Q1 inventory purchase for transition and stated it's premature to commit to revenue figures. He clarified the APU opportunity was being worked on prior to the PAG acquisition. He added that outpacing market growth is due to share gains, and distribution organic growth will be lower than MRO in 2026 due to a program headwind, with MRO likely in the low double-digit range.

Michael Ciarmoli of Truist Securities inquired if the new USM strategy would be accretive to repair margins, asked for a breakdown of the engine revenue exposure, and requested a target for year-end leverage.

Answer

President & CEO John Cuomo confirmed the new USM strategy is designed to be accretive by integrating new, used, and repair offerings to be more customer-friendly and enable insourcing to expand margins. He noted VSE is currently more weighted to legacy engines than next-gen platforms like LEAP. CFO Adam Cohn projected that with current performance, the company's net leverage ratio should be below 2.0x by year-end.

Michael Ciarmoli from Truist Securities, Inc. questioned which metrics best gauge demand trends for VSE's aviation business, the typical lag time for demand impact following airline capacity cuts, and sought clarity on cash flow usage for investments.

Answer

CEO John Cuomo identified air traffic data and direct communication with engine overhaul shops as the strongest demand indicators. He noted the market is less likely to pull back work quickly due to the difficulty of restarting the MRO cycle. CFO Adam Cohn addressed cash flow, explaining that Q1 is a typical high-usage period for inventory and was also impacted by a lease buyout and investments for the Honeywell program transition. He reiterated the expectation for positive cash flow for the rest of the year.

Michael Ciarmoli requested details on the building blocks for VSE's cash flow in 2025 and 2026, considering potential investments in new partnerships. He also asked about the factors driving the subtle upward shift in the company's organic growth forecast to potentially low double-digits.

Answer

CFO Adam Cohn outlined that 2025 cash flow will benefit from the non-recurrence of 2024's Pratt & Whitney inventory provisioning and FDS transaction costs. These tailwinds will be partially offset by real estate payments and inventory buildup for the Honeywell program. He added that the newly acquired TCI and Kellstrom businesses are less working-capital intensive. President and CEO John Cuomo attributed the strong organic growth outlook to a balanced contribution from natural market growth, solving additional problems for OEM partners, and increased exposure to the high-growth commercial engine market.

Michael Ciarmoli questioned the sources of market share gains, specifically asking about opportunities from Boeing Global Services and the impact of MRO capacity shortages. He also asked about the contribution of pricing to the company's above-market growth.

Answer

CEO John Cuomo outlined three primary growth drivers: winning non-traditional work directly from OEMs, gaining share from large traditional competitors, and capitalizing on MRO demand by increasing internal capacity, as turnaround time is a key differentiator. He acknowledged that pricing contributes to growth but noted its impact is moderating compared to the immediate post-COVID period.

Michael Ciarmoli sought clarification on Engine Services (ES) margins, specifically if the underlying ex-pass-through margin of 12.9% (down 30 bps) is primarily due to LEAP and CFM56 dilution, while core business pricing and productivity remain strong. He also asked about the potential for higher Component Repair Services (CRS) margins beyond 2026, given the Q1 drags and expansion efforts.

Answer

Dan Satterfield (CFO) confirmed that the LEAP and CFM56 programs, despite narrowing losses and approaching profitability, will remain dilutive due to doubling revenues, while the core business continues to perform well with pricing and productivity gains. He also affirmed the potential for CRS margins to expand beyond the 2026 guidance of 28.5%-29.5% through new repair development, acquisitions, and insourcing efforts, all of which are accretive.

Michael Ciarmoli sought clarification on Engine Services (ES) margins, specifically if the underlying margins (excluding pass-through) were slightly down due to LEAP and CFM56 dilution, while core business performance remained strong. He also asked about the potential for higher Component Repair Services (CRS) margins beyond 2026, considering the impact of recent disruptions and future expansion.

Answer

Dan Satterfield, Chief Financial Officer, confirmed that ES margins were indeed impacted by the dilution from doubling LEAP and CFM56 revenues, but the underlying core business continued to perform well with pricing and productivity gains. He also affirmed that there is runway to push CRS margins higher beyond the 2026 guidance of 28.5%-29.5%, driven by new repair development (NPI), acquisitions, and insourcing efforts, all of which are accretive.

Michael Ciarmoli asked for a detailed breakdown of the strong Q4 aerospace margins, specifically the impact of reduced litigation, significant spares orders, and pricing actions, and whether mid-to-high teens margins are sustainable. He also sought to quantify the spares benefit, understand 2026 production rate assumptions, and receive an update on the MV-75 program's ramp.

Answer

CFO Nancy Hedges confirmed an adjusted aerospace operating margin of 19.8% for Q4, driven by favorable mix and repricing, and expects mid-to-high teens going forward. Chairman, President, and CEO Peter Gundermann added that the strength is broad-based and not from a single driver, noting Q4 benefited from an 'over and above' spares and repairs element. He stated that 2026 revenue guidance incorporates a conservative discount on OEM production rate increases and that the MV-75 program generated approximately $30 million in 2025 revenue, with an expected step-up to $40 million in 2026.

Michael Ciarmoli of Truist Securities asked for a detailed breakdown of Astronics Corporation's strong aerospace margins, specifically inquiring about the impact of reduced litigation, reserves, and a significant spares order, and whether mid-to-high teens adjusted margins are sustainable. He also sought clarity on 2026 production rate assumptions for revenue guidance and an update on the MV-75 program's ramp and revenue contribution.

Answer

CFO Nancy Hedges confirmed that adjusted aerospace operating margin was 19.8%, attributing it to favorable mix and repricing, and stated that mid-to-high teens margins are expected to be sustainable. Chairman, President, and CEO Peter Gundermann added that margin strength is broad-based. He noted that 2026 revenue guidance incorporates a conservative view on OEM production rate increases. For the MV-75 program, Gundermann reported $30 million in 2025 revenue, projecting $40 million for 2026, with development largely complete by year-end 2026 and fully by H1 2027.

Michael Ciarmoli of Truist Securities inquired if the 16%+ adjusted operating margin in the Aerospace segment is sustainable, considering tariffs and expected volume growth. He also asked about the success of pricing initiatives with both OEMs and airlines, the current state of the aftermarket and retrofit business, and whether the company is considering strategic alternatives for the Test segment to become a pure-play aerospace entity.

Answer

Peter Gundermann, Chairman, CEO & President, stated he is comfortable with the sustainability of the 16% adjusted aerospace margin, supported by sales growth and successful pricing increases, though the tariff impact remains an unknown. He confirmed successful price negotiations with both OEMs and airline customers. Gundermann described the retrofit market as very strong, driven by consumer electronics cycles. On the Test segment's future, he clarified that there are no immediate plans to evaluate strategic alternatives, as the current focus is on improving its performance.

Michael Ciarmoli inquired about the 2025 outlook split between the Aerospace and Test segments, expected adjusted margins, the potential impact of tariffs, and the current demand environment in the aircraft retrofit market.

Answer

Chairman, President & CEO Peter Gundermann projected a continued 90/10 revenue split between Aerospace and Test, with strong Aero margins potentially seeing upside from Boeing production rates. He noted the Test segment's performance hinges on the timing of a key Army radio program. Regarding tariffs, he stated the supply chain has reduced its China dependence but the situation remains fluid. He also confirmed the retrofit market remains strong, driven by new aircraft delivery delays and the constant demand for updated in-cabin electronics.

Michael Ciarmoli of Truist Securities asked for a breakdown of the Q4 revenue forecast between new production and aftermarket, given OEM challenges. He also questioned the opportunity at Southwest Airlines and the potential impact of the large legal damage claim on the balance sheet and competitive position.

Answer

Chairman, President & CEO Peter Gundermann responded that the business mix has been roughly 50/50 between linefit and aftermarket, but the Boeing strike could skew Q4 more toward aftermarket. He confirmed Southwest is a major customer and that Astronics' new USB-C power architecture was developed in partnership with them. Regarding the legal case, he stated the expired patents pose no current competitive threat and that the company's strengthening financial position and the likelihood of a lengthy appeals process mitigate the immediate financial risk.

Michael Ciarmoli asked for details on the ground revenue program rolling off and why growth might decelerate despite a strong funding environment. He also questioned the optimal capital structure given the net cash position and new revolving credit facility.

Answer

EVP and CFO Michael Dippold explained that while some areas like shipbuilding and space are growing, pockets in network computing are growing at a lesser rate, influencing overall growth. President and CEO John Baylouny stated that organic investments in CapEx and IRAD remain the top priority for capital deployment, followed by selective inorganic opportunities.

Michael Ciarmoli inquired about the size of the ground revenue program that is rolling off and if any specific programs are winding down, potentially creating a headwind despite an improving funding environment, questioning why growth might decelerate. He also asked about the optimal capital structure and plans for deploying the balance sheet, given a net cash position and a new $500 million revolver.

Answer

EVP and CFO Michael Dippold explained that a diverse portfolio means different growth rates, with some areas like network computing growing slower. President and CEO John Baylouny stated that organic investments (CapEx, IRAD) remain the top priority to drive future growth, followed by selective inorganic opportunities (M&A).

Michael Ciarmoli asked about the payback and return on elevated R&D investments, including expectations for new programs and accelerated revenue growth. He also sought to quantify DRS's exposure to Counter-UAS programs, the pipeline of opportunities, and the split between kinetic and non-kinetic solutions, as well as the expected margin profile for 2026.

Answer

CFO Michael Dippold explained that R&D investments position DRS to attack adjacent markets and growth opportunities, leading to new opportunities in Counter-UAS and unmanned surface vessels. He quantified force protection, largely Counter-UAS, as 18-20% of revenues. COO and incoming CEO John Baylouny emphasized DRS's battle-proven Counter-UAS solutions and adaptability to evolving threats, expecting proliferation across all echelons and domains, offering both kinetic and non-kinetic capabilities. Michael Dippold anticipated continued trends for 2026, with IMS as the primary profit engine and R&D dampening ASC margins.

Michael Ciarmoli asked about the payback and return on elevated R&D investments, including expectations for new programs and accelerated revenue growth. He also sought to quantify DRS's exposure to Counter-UAS programs, the pipeline of opportunities, and the split between kinetic and non-kinetic solutions, as well as the expected margin profile for 2026.

Answer

CFO Michael Dippold explained that R&D investments position DRS to attack adjacent markets and growth opportunities, leading to new opportunities in Counter-UAS and unmanned surface vessels. He quantified force protection, largely Counter-UAS, as 18-20% of revenues. COO and incoming CEO John Baylouny emphasized DRS's battle-proven Counter-UAS solutions and adaptability to evolving threats, expecting proliferation across all echelons and domains, offering both kinetic and non-kinetic capabilities. Michael Dippold anticipated continued trends for 2026, with IMS as the primary profit engine and R&D dampening ASC margins.

Michael Ciarmoli from Truist Securities asked for more clarification on the Golden Dome initiative, specifically whether initial orders would be for existing systems or new capabilities. He also asked for a long-term perspective on the defense budget trajectory.

Answer

Chairman & CEO William Lynn opined that early orders for Golden Dome would likely be for existing, mature systems due to the time required to develop new requirements and run competitions. Regarding the budget, he suggested that historically, a Republican administration tends to moderately increase defense spending over its predecessor to fund new initiatives and project strength, expecting the budget to be higher over time.

Michael Ciarmoli of Truist Securities inquired about the specific programs driving the material receipt pull-forward, the contribution from international growth, the implications of the Q2 revenue guide for the second half of the year, and the margin outlook for the ASC segment following a supplier issue.

Answer

CEO William Lynn explained that the material acceleration was broad-based, not program-specific, and that Q1 growth was driven by domestic demand. He clarified that the strong first-half performance reflects a strategic push for improved quarterly linearity, not necessarily weakness in the second half. Lynn also stated that the primary financial impact of the ASC margin issue was absorbed in Q1, with margins expected to recover going forward.

Michael Ciarmoli of Truist Securities questioned the potential for headwinds from Army budget cuts given DRS's exposure and asked about the magnitude of the planned increase in IRAD investment for 2025 and its effect on margins.

Answer

CEO William Lynn responded that DRS is now more balanced, with Army exposure at ~30%, and its portfolio is aligned with growth areas like counter-UAS and advanced computing, making it resilient to platform cuts. CFO Michael Dippold added that the IMS segment will drive 2025 margin expansion, and the company plans to increase IRAD by about 20 basis points as a percentage of revenue to support rapid innovation.

Michael Ciarmoli asked if recent outperformance puts upward pressure on the long-term 2026 growth targets, whether DRS could participate in the Replicator 2 initiative, and for an update on the Columbia class program's progress.

Answer

CFO Mike Dippold noted that while 2025 growth is now guided higher to 5-8%, the long-term view remains mid-single digits, with minimal direct impact from Ukraine. CEO Bill Lynn said Replicator 2 has not yet impacted their counter-UAS efforts, which are driven by other factors. Dippold confirmed they are now working on shipset 3 for the Columbia program and are on schedule.

Michael Ciarmoli inquired about the 2026 outlook for Machine Clothing, specifically the persistence of weakness in Asia and the expected run rate. He also asked for clarity on underlying Engineered Composites (AEC) revenues and margins, including the Salt Lake City facility, and the alignment of the LEAP program with production rates. Additionally, he sought details on the revenue impact of European exits in Machine Clothing.

Answer

CFO Will Station confirmed expectations for Machine Clothing to recover from a Q1 equipment failure, with a $0.10-$0.15 EPS impact in Q1 but full recovery by year-end. For AEC, he noted a strong quarter, resolution of CH-53K issues, and an expected 10% overall margin for 2026. President and CEO Gunnar Kleveland added that Salt Lake City continues to grow due to CH-53K and Boeing programs, while other AEC growth is driven by missile programs and LEAP. Will Station further stated that LEAP volume is up approximately 27% year-over-year and is fully aligned with OEM production ramps. Regarding European exits, Will Station explained they were intentional, targeting low-margin businesses and network optimization as part of Heimbach synergies.

Michael Ciarmoli inquired about the 2026 outlook for Machine Clothing, specifically the persistence of weakness in Asia and the expected run rate. He also asked for clarity on the underlying revenues and margins for the Engineered Composites (AEC) business, including the Salt Lake City facility, and sought an update on alignment with LEAP program production increases and the impact of European exits in Machine Clothing.

Answer

Will Station, CFO, stated that Machine Clothing's Q1 EPS would be impacted by an equipment failure but expected full recovery by year-end, with Asian demand stabilizing at a lower run rate. For AEC, he confirmed strong performance, resolution of CH-53K issues, and an expected 10% overall margin for 2026. Gunnar Kleveland, President and CEO, added that the Salt Lake site is growing due to CH-53K and Boeing, while other AEC growth is driven by missile programs and significant LEAP expansion. Station confirmed LEAP volume is up 27% year-over-year and aligned with OEM ramps. Regarding European exits in Machine Clothing, Station explained they were intentional, targeting low-margin businesses and network optimization as part of Heimbach synergies.

Michael Ciarmoli questioned the decision to not lower the full-year guidance given recent challenges, asked about the swing factors in the wide AEC guidance range, and sought clarity on the AEC program pipeline to build confidence in its future profile.

Answer

President & CEO Gunnar Kleveland defended the guidance by expressing confidence that the AEC team can now achieve its performance targets, particularly on the CH-53K program, as operational readiness has improved. He highlighted that other AEC programs are also ramping up in the second half, including Bell, LEAP, and JASSM, which provides a basis for the expected growth.

Michael Ciarmoli asked for details on the new Bell 525 contract's risk profile, clarification on the LEAP program's revenue and full-year outlook amidst destocking, and an update on the Heimbach integration's progress toward its original EBITDA targets.

Answer

President and CEO Gunnar Kleveland clarified the Bell contract involves simpler parts than the Gulfstream program and stemmed from a supplier exiting the business, not failing. He stated they are targeting high-teen returns for AEC. On LEAP, executive Robert Starr noted Q1 would be the low point for the year but did not disclose specific revenue. Kleveland added that current margin pressure in the Machine Clothing segment is a temporary effect of significant Heimbach integration actions, and the company remains confident in hitting its long-term synergy goals.

Michael Ciarmoli from Truist Securities sought to understand the LEAP volume outlook, asking if the projected decline was primarily due to destocking. He also questioned the new executive compensation structure, specifically why EBITDA remains a key metric given recent margin pressures from EAC adjustments.

Answer

CEO Gunnar Kleveland confirmed destocking in the first half of the year is a factor for the LEAP outlook and that the new compensation plan is healthier, balancing EBITDA dollars with relative TSR and ROIC for long-term value. CFO Robert Starr added that the company is being conservative on LEAP after 2024's downward revisions and that the new long-term incentive plan's EBITDA targets are set by the Board to be challenging and success-oriented.

Michael Ciarmoli of Truist Securities, Inc. questioned the long-term margin trajectory for AEC given new defense work, asked about contract structures, probed the LEAP program's revised ramp and potential inventory, and checked the status of the 2026 revenue target.

Answer

Robert Starr expressed confidence in long-term margins, citing a favorable mix of high-margin programs and prudent risk management on development contracts. President and CEO Gunnar Kleveland explained the LEAP production plan is a balance between meeting Safran's needs and maintaining ramp-up capability. Starr deferred the question on the 2026 revenue target to the company's upcoming Investor Day.

Michael Ciarmoli asked if the current CapEx represents a peak, if Kratos is comfortable with its balance sheet post-Orbit acquisition, and if there has been engagement with the Department of War or Office of Strategic Capital. He also inquired about which of Kratos' initiatives offers the most potential for revenue growth and EBITDA generation, tying it to the $13.7 billion pipeline.

Answer

Deanna Lund, EVP and CFO, Kratos Defense & Security Solutions, clarified that the CapEx table shows gross numbers and does not include potential government funding. Eric DeMarco, President and CEO, Kratos Defense & Security Solutions, added that Kratos is actively pursuing Title III funding and expects significant offsets. He identified the hypersonic franchise as offering the most potential for revenue growth and profitability, citing new facilities and expected program funding.

Michael Ciarmoli asked if the current CapEx levels represent a peak for Kratos and about the comfort level with the balance sheet post-Orbit acquisition. He also inquired about potential engagement with the Department of War or Office of Strategic Capital for creative transactions and which initiatives offer the most potential for revenue growth and EBITDA generation.

Answer

Deanna Lund, EVP and CFO, clarified that the CapEx table presents gross numbers and does not include potential government funding, aiming to show a worst-case scenario for 2027. Eric DeMarco, President and CEO, added that Kratos is actively pursuing Title III and IBAS funding, expecting significant offsets. DeMarco identified the hypersonic franchise as offering the most potential for revenue growth and profitability, with a strong demand to test and fly, and potential for upside beyond the $700 million line of sight.

Michael Ciarmoli asked for more details on the accelerating organic growth and the increased guidance for 2026 and 2027, seeking clarification on the specific drivers and the growth breakdown between Kratos Unmanned Systems (KUS) and Kratos Government Solutions (KGS). He also asked if the Valkyrie program with the Marine Corps was included in the current forecasts and about the GEK engine's inclusion.

Answer

Eric DeMarco, Kratos' President and CEO, confirmed that Valkyrie sales to the Marine Corps are not included in current forecasts and would represent significant upside. He identified the hypersonic franchise, rocket system business, space business, microwave electronics, small jet engines, and C5ISR hardware as key growth drivers. Mr. DeMarco noted that the GEK engine program is not in the current forecast but is expected to be a major contributor in 2028.

Michael Ciarmoli inquired about the specific drivers behind Kratos's accelerating organic growth forecast for 2026-2027, the growth breakdown between KUS and KGS, and whether Valkyrie sales to the Marine Corps are included in current forecasts.

Answer

Eric DeMarco, President and CEO of Kratos, clarified that Valkyrie Marine Corps sales are not in current forecasts, representing potential upside. He identified hypersonics, rocket systems, space business, microwave electronics, jet engines (turbojets/turbofans), and C5ISR hardware as key drivers for accelerated growth. He also noted the GEK800 engine is not in the current forecast but will contribute from 2028. Deanna Lund, EVP and CFO, provided organic growth rates for KUS and KGS.

Michael Ciarmoli of Truist Securities inquired about the lower second-half revenue guidance, the mechanics of revenue recognition for the Valkyrie program, and the company's confidence in the MachTB program following recent legislation.

Answer

CFO Deanna Lund clarified that the second-half guidance reflects the pull-forward of a hypersonic mission into Q2. She also detailed the revenue recognition process for pre-built Valkyries upon contract award. CEO Eric DeMarco affirmed strong confidence in the MachTB program and the broader hypersonic franchise, citing significant funding in the recent reconciliation bill.

Michael Ciarmoli of Truist Securities inquired if the engine and propulsion opportunity is based on winning new programs or taking share on existing ones, and asked to identify the biggest revenue growth contributor for Kratos over the next 2-3 years.

Answer

CEO Eric DeMarco clarified that the primary engine opportunity is on "greenfield" new programs where Kratos's engines are designed in from the start. He identified the hypersonic franchise as the #1 growth driver, followed by engines and microwave electronics, noting that tactical drones represent a significant "call option" if major contracts are awarded.

Michael Ciarmoli questioned the opportunity for share gains in propulsion/engines and what will spark the growth inflection, plus the biggest revenue growth contributor.

Answer

CEO Eric DeMarco sees the primary opportunity in greenfield programs. He identified the hypersonic franchise as the number one growth driver.

Michael Ciarmoli of Truist Securities asked for an update on the Boom Supersonic partnership and questioned whether the Prometheus JV is targeting new programs or aiming to take share from existing ones.

Answer

CEO Eric DeMarco described the Boom partnership as progressing well but not a major near-term growth driver. For Prometheus, he stated the primary focus is servicing anchor customer RAFAEL, followed by pursuing new 'white-field' opportunities by leveraging its pre-qualified status, rather than directly targeting market share from incumbents.

Michael Ciarmoli of Truist Securities inquired about the drivers behind the wide Q4 guidance range, the primary growth engines for the 2025 outlook, and the potential impact of a new administration's spending philosophy on the defense sector and non-traditional contractors like Kratos.

Answer

CEO Eric DeMarco explained the Q4 guidance range is due to unpredictable year-end government data purchases from Kratos's space domain awareness network. For 2025, he identified air defense systems, the solid rocket motor business (catalyzed by Zeus), and propulsion systems as key growth drivers. DeMarco views a potential shift in government spending towards affordability as a significant benefit for non-traditional defense companies like Kratos, aligning with their core strategy.

Michael Ciarmoli asked for an update on BWXT's NASA and military microreactor programs, and their outlook on the TRISO fuel market, including its current state and future opportunities. He also inquired about the status of the Canadian Competition Bureau's investigation into the Kinectrics acquisition and any updates on the approval timeline for the Tech 99 product.

Answer

CEO Rex Geveden reported that the Pele microreactor is proceeding, with fuel delivered and testing expected in 2027-2028, serving as a precursor to the Janus program. For NASA, while nuclear thermal propulsion work continues, fission surface power for a lunar base presents a larger opportunity. He sees strong demand for TRISO fuel from government programs like Janus and an interesting commercial play for sub-grid/remote applications, prompting evaluation of larger-scale investment. He stated there's no new information on the Kinectrics investigation. Regarding Tech 99, he noted being in the 'grueling last mile' due to product quality issues, with new leadership exploring commercial strategy. Tech 99 revenue is not included in 2026 guidance and would represent an upside.

Michael Ciarmoli requested an update on the naval nuclear propulsion business, including Navy subs, shipbuilding cadence (VA, Columbia), the AUKUS program, and capacity needs. He also asked if the implied decline in government EBITDA margins for next year is due to front-end loading of lower-margin work or changes in the core Navy business.

Answer

Rex Geveden, BWX Technologies' President and CEO, noted a positive turn in the naval nuclear propulsion business, with AUKUS moving forward, improved shipyard production, and potential opportunities from a South Korean nuclear submarine shipyard. He confirmed the need for more capacity for AUKUS, with CapEx projects underway. Chase Jacobson, Vice President of Investor Relations, clarified that the lower government EBITDA margins for 2026 are primarily due to mixed pressure from the DUSE and HBDU contracts starting at lower margins and the burn-off of pre-COVID pricing arrangements, not changes in the core Navy business. The company is focused on operational excellence and margin improvement.

Michael Ciarmoli requested an update on the naval nuclear propulsion business, including shipbuilding cadence, AUKUS program status, and capacity needs.

Answer

Rex Geveden, President and CEO, reported a positive turn, with AUKUS moving forward, improved production at shipyards (GD and HII), and potential opportunities from a South Korean shipyard for nuclear-powered submarines. He confirmed the need for more capacity for AUKUS, with CapEx projects underway. Michael Ciarmoli also asked about the implied decline in government EBITDA margins for 2026, questioning if it's due to lower-margin startup work or changes in the core Navy business. Mike Fitzgerald, Senior Vice President and CFO, confirmed it's primarily due to mix pressure from DUSE and HBDU starting at lower margins, along with the burn-off of older pricing agreements. He emphasized a strong focus on operational excellence and margin improvement.

Michael Ciarmoli of Truist Securities questioned the implied weaker second-half outlook for Government Operations and sought confirmation on the drivers for the expected margin recovery in the Commercial segment.

Answer

SVP & CFO Mike Fitzgerald explained the Government Operations outlook is due to the timing of material procurements and contract performance being pulled forward into Q2. President, CEO & Director Rex Geveden added that operational performance remains strong. Fitzgerald confirmed that the second-half Commercial margin improvement will be driven by a favorable mix shift as higher-margin field services revenue increases seasonally.

Michael Ciarmoli from Truist Securities questioned if early AUKUS scope and a potential second Virginia-class submarine would alter the long-term growth outlook for naval propulsion. He also sought an update on the ANPI microreactor program's cadence and revenue potential.

Answer

CEO Rex Geveden responded that these developments do not fundamentally change the 3-5% long-term revenue CAGR for naval propulsion but do de-risk the forecast. Regarding the ANPI program, he noted there is significant uncertainty as negotiations with the eight selected suppliers are just beginning, making it too early to project funding or cadence.

Michael Ciarmoli of Truist Securities questioned the assumed EBITDA contribution from the pending Kinectrics acquisition in the 2025 guidance and asked for an update on the DRACO program's status.

Answer

EVP & CFO Robb LeMasters confirmed a half-year contribution from Kinectrics is a reasonable assumption and explained the commercial margin guidance reflects a mix of accretive medical sales and acquired revenue. President & CEO Rex Geveden clarified that the DRACO program is seeing an increase in scope for more ground testing, which represents additional business for BWXT, not a headwind.

Michael Ciarmoli asked for more detail on the specific factors diluting EBITDA margins and requested an update on the Project Pele contract timeline and potential for additional funding beyond the initial $300 million.

Answer

CFO Robb LeMasters explained that margin mix is impacted by lower-margin, early-stage programs like the microreactor prototypes (Pele and DRACO) and certain special materials contracts. The aircraft carrier lull also creates volume softness that pressures margins. On Project Pele, LeMasters confirmed the program will not end in 2025, as the customer has expanded the scope, and he would not be surprised if the total value ultimately runs higher than the initial $300 million.

Michael Ciarmoli noted a significant deceleration in Curtiss-Wright's pure defense revenue growth, from an average of 13% to a 6% guide, and inquired if factors beyond timing and strong direct foreign military sales were at play.

Answer

Chair and CEO Lynn Bamford expressed strong optimism for continued defense growth, attributing the deceleration primarily to timing issues caused by the multi-month continuing resolution and government shutdown. She cited over $100 million in defense electronics orders expected in 2025 that were pushed into 2026, with the C-17 order being a recent example. Ms. Bamford highlighted Curtiss-Wright's strong technological alignment (Fabric100, MOSA/SOSA/CMOSS, NVIDIA, Microsoft Azure), involvement in Iron Dome, and critical supplier status for the Navy, evidenced by increased Maritime Industrial Base funding from $15 million to $55 million. Mr. Ciarmoli also asked about the $60 million in OE revenue on new nuclear builds for 2026, specifically inquiring about other SMR reactors or partnerships driving this growth beyond X-energy. Ms. Bamford mentioned ongoing partnerships with Rolls-Royce and TerraPower, with expectations for more SMR content announcements in 2026. EVP and CFO K. Christopher Farkas added that content on South Korea's APR-1400 reactors, with $10-$20 million per new build, also contributed to new build splits, with order activity in Q4.

Michael Ciarmoli asked about the deceleration in Curtiss-Wright's pure defense revenue growth, from an average of 13% to a guided 6%, and a decline in naval growth, questioning if factors beyond timing and strong direct foreign military sales were at play. He also inquired about the specific drivers of SMR growth, such as X-energy transitioning to prototype build, and other platforms or partnerships contributing to the projected new nuclear builds OE revenue.

Answer

Chair and CEO Lynn M. Bamford expressed strong optimism for defense growth, attributing the current deceleration primarily to timing issues from the multi-month continuing resolution and government shutdown, which delayed over $100 million in defense electronics orders. She highlighted strong technology alignment, new product introductions (Fabric 100, MOSA/SOSA/CMOS-compliant products), and partnerships (NVIDIA, Microsoft Azure) as future growth drivers. She also pointed to the increased maritime industrial base funding as a tangible sign of Navy confidence. Regarding SMRs, she mentioned partnerships with Rolls-Royce and TerraPower, with early prototyping revenues expected in 2026, and noted that the AP1000 order is still strongly anticipated in 2026. EVP and CFO K. Christopher Farkas added that new build order activity for APR-1400 reactors in South Korea also contributes to new nuclear build splits.

Michael Ciarmoli of Truist Securities requested an update on the Columbia-class submarine program's production profile and asked for clarification on the certainty of supplying reactor coolant pumps to Westinghouse for the AP1000.

Answer

VP & CFO K. Christopher Farkas clarified the Columbia profile in H2 reflects a shift from material to labor as production cadence increases. President, CEO & Chair Lynn Bamford explained her cautious language on Westinghouse was not to be presumptive, but noted that as the sole supplier for the proven AP1000 design, the signs for future business are good.

Michael Ciarmoli questioned the slight deceleration in the 2025 organic growth outlook despite record orders and backlog. He also asked about the company's preparedness for potential tariff headwinds and sought an update on the expected timing for a reactor cooling pump (RCP) order for the AP1000.

Answer

CFO Chris Farkas clarified that the 2025 outlook accounts for the multiyear nature of recent large orders and ongoing capacity management initiatives, particularly in ground defense. CEO Lynn Bamford stated that the company is actively managing potential tariff impacts through mitigation teams, drawing on its experience with past disruptions. She reaffirmed the 1-to-2-year timeline for the first AP1000 RCP order, expected by the end of 2026, likely from Poland.

Michael Ciarmoli asked for quantification of the revenue opportunity from nuclear plant restarts versus life extensions and requested an update on the potential for Westinghouse's AP1000 reactors in Canada.

Answer

CEO Lynn Bamford stated that a plant restart is more lucrative than a typical life extension but noted revenue per plant varies too widely to provide a specific dollar figure. Regarding Canada, she and CFO Chris Farkas described the AP1000 opportunity as being in its early days, but noted that Westinghouse's new ownership by Canadian company Cameco could shift dynamics favorably.

Michael Ciarmoli asked for quantification of the revenue drag caused by capacity allocated to unbilled receivables and identified potential choke points or watch items on the material list that might hinder consistent revenue acceleration.

Answer

EVP and CFO Dave Farnsworth did not quantify the revenue drag from unbilled receivables but confirmed it remains a focus. Chairman and CEO Bill Ballhaus explained that acceleration depends on unpredictable material availability, but the company has built a consistent 'muscle' for managing these constraints.

Michael Ciarmoli from Truist Securities asked for quantification of the capacity allocated to unbilled receivables and its revenue drag. He also inquired about specific material choke points (e.g., semiconductors, circuit boards) that limit consistent revenue acceleration.

Answer

EVP and CFO Dave Farnsworth stated that the company does not quantify the revenue impact of allocating capacity to unbilled receivables, but acknowledged it creates a drag and remains a focus for reduction. Chairman and CEO Bill Ballhaus explained that material choke points vary by program, and while teams aggressively work to accelerate kit completion, the uncertainty of supplier deliveries prevents baking accelerations into the outlook, despite a demonstrated ability to consistently pull forward deliveries.

Michael Ciarmoli from Truist Securities asked about Mercury's target for net working capital as a percentage of revenue, its long-term free cash flow conversion goals, and whether the low-margin backlog will continue to impact results into fiscal 2026.

Answer

CFO Dave Farnsworth reaffirmed the long-term 50% free cash flow conversion target from adjusted EBITDA and stated the goal for net working capital is 35-40% of revenue, down from the current low 50s. He clarified that margin improvement from burning off old backlog will be gradual as new, higher-margin bookings replace older contracts over time, meaning Q4 is a step in that direction, not a final launching point.

Michael Ciarmoli questioned the nature of the revenue pull-forward and asked what would drive margin expansion in the second half, particularly in Q4, if sequential revenue remains relatively flat.

Answer

CEO Bill Ballhaus explained that normalizing for revenue pull-forwards in both Q1 and Q2 reveals a more balanced growth profile for the full year. He stated that Q4 margin expansion is expected from two sources: the continued replacement of lower-margin backlog with higher-margin new bookings, and positive operating leverage from seasonally higher volume in Q4. CFO Dave Farnsworth added that completing and moving past low-margin contracts naturally raises the average margin of the remaining backlog.

Michael Ciarmoli sought clarification on the Q2 revenue outlook, given the flat first-half guidance, and asked for quantification of the margin benefits from reaching full CPA capacity. He also inquired about the margin potential on new production bookings.

Answer

CEO William Ballhaus emphasized that the company's focus is on the fiscal year-end exit run rate, driven by improved execution, CPA ramp-up, and accretive bookings, rather than providing specific quarterly guidance. Executive David Farnsworth confirmed that new production bookings are coming in with margins aligned with the company's target model, and the increasing mix toward production is a positive factor for future margins.

Michael Ciarmoli requested more detail on the unwinding of Aerojet and MSL, specifically whether MSL will operate as a 100% merchant supplier model and if the Department of War (DOW) mandated any stipulations or conditions to that effect.

Answer

CEO Chris Kubasik confirmed there were no stipulations from the DOW, as they prioritize competition, scale, and speed. He described MSL as a 'one-stop shop' supplier for missiles, focusing on solid rocket motors, seekers, and weapon release systems. While L3Harris has the capability to prime new missile programs, the current focus is on growth as a supplier, given the extensive work and opportunities available. He emphasized concentrating on top-line and bottom-line growth and cash generation without distraction.

Michael Ciarmoli sought more detail on the unwinding of Aerojet and MSL, specifically whether MSL will operate as a 100% merchant supplier model and if the Department of War (DOW) mandated any stipulations regarding this.

Answer

CEO Chris Kubasik confirmed there were no stipulations from the DOW, which prioritizes competition, scale, and speed. He explained that while MSL, a $4 billion-plus entity, focuses heavily on solid rocket motors, it also includes seekers and weapon release systems, acting primarily as a supplier. He noted the potential to act as a prime for new missile programs but emphasized the current focus on significant growth as a supplier, avoiding distractions.

Michael Ciarmoli asked if L3Harris, particularly with its Aerojet Rocketdyne capabilities, plans to compete as a prime contractor for missile programs, especially given the high demand for low-cost missiles and increased capacity needs.

Answer

Chairman and CEO Christopher Kubasik stated that L3Harris maintains a flexible approach, evaluating opportunities to prime, sub, or act as a merchant supplier based on customer and shareholder value. He highlighted significant demand and record backlog at Aerojet Rocketdyne. SVP, CFO, and President of Aerojet Rocketdyne Kenneth Bedingfield added that the immediate focus is on delivering needed capacity for existing solid rocket motor and space propulsion programs, while future partnerships for space-based interceptors are being firmed up.

Michael Ciarmoli asked about the expected international growth trajectory through 2026 and whether any further material portfolio shaping should be anticipated.

Answer

Executive Kenneth Bedingfield confirmed that international revenue is growing faster than the overall business and is a key factor in their confidence for the 2026 outlook. CEO Christopher Kubasik added that while no significant divestitures are planned, the company is always refining its portfolio and may prune smaller, non-core entities. He emphasized that the current portfolio, shaped by $3B in divestitures and $3B in acquisitions since the merger, is perfectly aligned with administration priorities.

Michael Ciarmoli asked what backlog drivers support the doubling of the organic growth rate from 2025 to 2026, particularly after excluding the CAS business.

Answer

CEO Christopher Kubasik pointed to the portfolio's alignment with defense priorities (space, maritime, comms), recovering Space Force budgets, a lower cost base enabling more wins, and opportunities in international, border security, and AI partnerships. CFO Kenneth Bedingfield added specific program drivers like the F-35 TR-3 hardware ramp, Next-Gen Jammer volume, and growth at Aerojet Rocketdyne.

Michael Ciarmoli asked for clarification on any net positive or negative EAC adjustments in the quarter and for an update on the competitive environment for solid rocket motors, particularly regarding new entrants targeting programs like GMLRS.

Answer

CFO Kenneth Bedingfield stated there were positive EACs in three of four segments, with IMS being a notable positive, while SAS was negative due to challenges on classified space programs. Regarding solid rocket motors, CEO Christopher Kubasik noted that for GMLRS, the Army's demand of 32,000 motors per year far exceeds L3Harris's current and planned capacity of around 12,000. He welcomed the competition, expressing confidence in their technology, infrastructure, and ability to capture their fair share of a significantly growing market.

Michael Ciarmoli requested a revenue guidance breakdown for 2026 by end market (commercial aerospace vs. space and defense). He also asked for an update on the price-cost equation, specifically regarding acrylonitrile prices and their potential impact on margins.

Answer

Tom Gentile, Chairman, CEO, and President of Hexcel, provided revenue guidance: commercial aerospace is expected to grow low to mid double digits, while defense is projected for low to mid single digits (with the overall defense, space, and other segment flat to slightly negative due to divestitures). On the price-cost equation, Gentile explained that acrylonitrile prices are hedged, smoothing out volatility, so no significant variation is anticipated. He reiterated Hexcel's path to 18% margins by the end of the decade, driven by increased production rates and operating leverage.

Michael Ciarmoli requested a breakdown of Hexcel's 2026 revenue guidance by end market (commercial aerospace vs. space and defense) and an update on the price-cost equation, specifically regarding acrylonitrile prices and their potential impact on margins, considering Hexcel's hedging strategy.

Answer

Tom Gentile, Chairman, CEO, and President, guided that commercial aerospace growth for 2026 is expected to be in the low to mid-double digits, while defense and space (on its own) will see low to mid-single-digit growth. The 'defense, space, and other' segment will be flat to slightly negative due to divestitures. Regarding the price-cost equation, Gentile explained that acrylonitrile prices are currently down, but Hexcel hedges propylene, smoothing out price volatility, so no significant variation is expected. He reiterated that increased production rates and operating leverage, along with productivity initiatives, are key to achieving 18% margins before the end of the decade.

Michael Ciarmoli asked if it's reasonable to expect incremental margins in the 40%+ range to achieve the 18% target, considering potential labor add-backs and confidence in pricing with contract renewals. He also sought clarification on the ASR's dilutive impact, specifically regarding interest headwinds in Q4, Q1, and Q2, and the net benefit for 2026.

Answer

CEO Tom Gentile emphasized that increased volumes and revenue will drive significant operating leverage, leading to enhanced margins and a recovery to 16% initially, then 18% with the full impact of target rate productions. He noted that productivity programs aim to offset inflation. EVP and CFO Patrick Winterlich stated that the ASR should be positive on a full-year basis for 2026, as the immediate reduction in share count will largely offset the interest charges as debt is paid down quickly.

Michael Ciarmoli of Truist Securities sought clarification on whether the full-year guidance incorporates an A350 delivery forecast in the low sixties, the expected severity of Q3 seasonality, and how potential tariffs affect the earnings guidance.

Answer

CEO Tom Gentile confirmed Q3 will be softer than usual due to destocking and European holidays, with the full-year A350 outlook in the low-to-mid sixties. He clarified that the potential $3-4 million quarterly tariff impact was excluded from guidance due to uncertainty but acknowledged it could pressure EPS toward the lower end of the range.

Michael Ciarmoli of Truist Securities followed up on the tariff discussion, asking about Hexcel's ability to use pricing as a lever to offset tariff costs. He also questioned whether the tariffs could create an opportunity for Hexcel to gain domestic market share from foreign competitors.

Answer

Chairman, CEO and President Tom Gentile stated that many of Hexcel's contracts, particularly out of Europe, are on an 'Ex Works' basis, making the buyer responsible for tariffs. Additionally, some contracts for major commodities have pass-through clauses that allow for cost adjustments, including tariffs. Gentile acknowledged that gaining domestic share is a possibility but noted it remains an uncertainty dependent on the final impact of tariffs on foreign suppliers.

Michael Ciarmoli inquired about the possibility of extending the company's currency hedging policy to lock in favorable rates and asked for more detail on the strategy to engage more directly with defense prime contractors.

Answer

Executive Patrick Winterlich noted that while the company remains vigilant, there are no imminent plans to alter the current 10-quarter hedging policy. Chairman, CEO & President Tom Gentile explained that direct engagement with defense primes means strengthening relationships to get involved earlier in their innovation cycles, ensuring Hexcel's materials are designed into future programs from the outset.

Michael Ciarmoli of Truist Securities asked for clarification on the Boeing MAX production rate impact, specifically questioning the risk of inventory destocking for the LEAP engine given recent forecast reductions from suppliers.

Answer

CEO Tom Gentile explained that Hexcel aligns LEAP production with both the MAX and A320 programs. He stated that while Hexcel took a conservative view on the MAX for Q4, they expect rates to be higher next year and are not aware of any significant excess inventory or destocking risk for the LEAP engine program at this time.

Michael Ciarmoli asked for an expectation on the share count for the current year and sought more details on the $1 billion strategic investment planned for F-35 sustainment.

Answer

Evan Scott, CFO, stated that the share count would be reported quarterly. Jim Taiclet, Chairman, President, and CEO, explained that the $1 billion F-35 sustainment investment is aimed at addressing past underfunding of spare parts and repair capacity to improve the aircraft's mission capable rates. Evan Scott added that this elevated investment is already factored into the company's free cash flow guidance.

Michael Ciarmoli asked for expectations on Lockheed Martin's share count (flat or decreasing) and sought more details on the $1 billion strategic investment in F-35 sustainment, including whether it was directed by the government.

Answer

Evan Scott, CFO, stated that the share count will be reported quarterly. Jim Taiclet, Chairman, President and CEO, explained that the $1 billion investment in F-35 sustainment is a company initiative to address prior underfunding of spare parts and repair capacity, aiming to improve mission capable rates. He noted that this investment is considered within the higher free cash flow guidance, reflecting strong underlying operational cash flow.

Michael Ciarmoli asked if the stronger multi-year growth outlook accounts for potentially weaker domestic F-35 volumes and whether the enhanced F-35 could be sold internationally.

Answer

Maria Lee, an executive, confirmed the improved outlook is fueled by strong missile orders, higher international budgets, and better supply chain performance, which offset the NGAD impact. James Taiclet, CEO, stated that exportability of the F-35 upgrades would be a U.S. government decision but that they design with exportability in mind. He also highlighted other growth drivers like F-35 sustainment, CH-53K, and FBM.

Michael Ciarmoli of Truist Securities asked for an update on supply chain performance and whether the company's multiyear financial framework is now firmly in the mid-single-digit range for revenue and cash flow.

Answer

CFO Jesus Malave reported that while supply chain performance improved in 2024, discrete issues still pace certain programs like MFC munitions and the CH-53K. He stated that while encouraged, he needs more time in 2025 to see if trends hold before committing to a firm 4-5% growth outlook for 2026 and beyond, though confidence is growing.

Michael Ciarmoli (Truist Securities, Inc.) asked about the future trajectory of AAR's adjusted operating margin, specifically when it might firmly exceed the 10% ceiling, considering acquisition dilution and future synergies. He also inquired whether the new capacity coming online contributes to the current fiscal year 2026 revenue guidance or if its positive impact will be more pronounced in the next fiscal year. Finally, he sought clarification on the rationale for expanding AAR's heavy maintenance business, often perceived as a lower-margin segment.

Answer

Chairman, President, and CEO John Holmes expressed confidence in exceeding the 10% adjusted operating margin over time, despite near-term dilution from HAECO integration, due to integration benefits and exiting higher-cost locations. He clarified that the more pronounced positive impact from new capacity will be in fiscal year 2027. Mr. Holmes strongly refuted the 'low-margin' perception of heavy maintenance, stating it has seen significant margin gains post-COVID, now operating at low double-digit margins with potential for expansion due to AAR's market share and operational efficiency.

Michael Ciarmoli asked about the trajectory of AAR's adjusted operating margin, specifically when it might firmly exceed the 10% level, considering the near-term dilution from HAECO and future synergies. He also inquired about the revenue contribution from new capacity expansions (Oklahoma City, Miami) in the current fiscal year versus next year, and sought clarification on the rationale for expanding the heavy maintenance business, often perceived as lower-margin.

Answer

CEO John Holmes expressed satisfaction with the margin trajectory, noting it's the second time above 10% and up a full point year-over-year, with potential for a couple more points of expansion. He confirmed HAECO integration is a near-term dilutive factor but expects to punch above 10% over time due to integration and exiting the high-cost Indianapolis location. Holmes clarified that new capacity revenue will be more pronounced in FY27, with only a slight contribution from Oklahoma City in FY26. He strongly refuted the 'low-margin' perception of heavy maintenance, stating it's a low double-digit margin business with further expansion potential, driven by AAR's market share, operational performance, and its role in driving volume to the higher-margin component repair business.

Michael Ciarmoli sought to confirm that weaker USM sales drove the top-line miss and questioned if engine maintenance deferrals were an ominous sign. He also asked about the potential for an increase in USM supply from accelerated airline retirements.

Answer

CEO John Holmes confirmed USM sales were below expectations but stated the deferrals were not ominous, attributing them to airlines needing aircraft for lift, which suggests strong demand. While AAR is seeing more assets come to market, he noted the long-predicted 'bow wave' of retirements has not yet materialized in full. CFO Sean Gillen provided the quarter's organic growth figure of 6%.

Michael Ciarmoli of Truist Securities questioned the year-over-year and sequential decline in Parts Supply EBITDA margins, asking if it was solely due to whole asset sales mix. He also asked what was driving the increased availability of assets for USM and requested a recalibration of Repair & Engineering margins following the landing gear business divestiture.

Answer

Executive John Holmes attributed the Parts Supply margin dip entirely to the mix of whole asset sales, stating it was not a trend and that the asset pipeline is now stronger. He suggested availability is situational and a result of strong sourcing. Executive Sean Gillen added that future Repair & Engineering margin expansion will primarily come from product support synergies and hangar expansions in FY26, with the landing gear divestiture providing a benefit starting in Q4 after the deal closes.

Michael Ciarmoli of Truist Securities asked about the challenges in forecasting whole asset sales for the USM business, the potential impact of the Boeing strike, the breakdown of USM sales, the current asset acquisition environment, and sought details on Q1's investigation and contract termination costs.

Answer

John Holmes, Chairman, President and CEO, acknowledged that forecasting whole asset sales is difficult and that market tightness, while a headwind for USM supply, creates robust demand for the other 80%+ of AAR's business. He added that individual USM piece-part sales are at near-record highs. Sean Gillen, VP and CFO, clarified that the investigation costs are related to an ongoing matter and the termination costs stem from an Expeditionary Services contract.

Michael Ciarmoli asked if the Spartanburg CapEx facility has enough capacity to support programs beyond the A350, specifically contemplating next-gen single aisle. He also inquired about aerospace absolute margins, asking if there is margin dilution on LEAP and GTF services due to learning curves, or if straight spare sales are highly accretive.

Answer

Chairman and CEO Chip Blankenship confirmed that the Spartanburg facility has additional capacity for select synergistic product lines beyond A350, and while they are betting on NSA, the current facility alone wouldn't support NSA volumes. They have acquired land for a sister facility for NSA support, but no major NSA capacity investments are planned yet. CFO Bill Lacey stated that LEAP and GTF service margins are good, and the primary factor influencing the margin rate expansion is the overall OE mix. Mr. Blankenship added that Woodward intends to expand margins through productivity and automation benefits in 2026.

Michael Ciarmoli asked if the Spartanburg facility's capacity extends beyond the A350 program and if it contemplates next-generation single aisle support. He also inquired about absolute margins, specifically if there's margin dilution in LEAP and GTF services due to learning curves, or if straight spare sales are highly accretive.

Answer

Chairman and CEO Chip Blankenship confirmed that the Spartanburg facility has additional capacity for synergistic product lines beyond A350 and enough land for a sister facility to support next-generation single aisle, though no large NSA capacity investment is planned yet. CFO Bill Lacey stated that LEAP and GTF service margins are good, and the primary driver of the aerospace segment's rate expansion in the guidance is the overall OEM mix. Mr. Blankenship added that Woodward intends to expand margins and has plans for productivity and automation benefits in 2026.

Michael Ciarmoli of Truist Securities requested detailed information on the Airbus A350 spoiler win, including shipset content, sales timing, margin profile, and whether the significant investment positions Woodward for a broader actuation strategy.

Answer

CEO Chip Blankenship provided specifics, noting Woodward will supply 12 of the 14 actuators per wing with a target entry-into-service of 2028. He stated that while the investment is substantial, it is justified by the A350 program alone and strategically positions the company for future opportunities, such as the next-generation narrow-body aircraft.

Michael Ciarmoli sought clarification on the full-year growth outlook for commercial OE versus aftermarket and questioned the expected moderation in Aerospace segment incremental margins.

Answer

CEO Charles Blankenship clarified the growth hierarchy, stating defense OE would lead, followed by commercial aftermarket, and then commercial OE. CFO William Lacey reiterated that a second-half mix shift toward higher volumes of defense OE and commercial OE would normalize incremental margins to their 30-35% target range.

Michael Ciarmoli asked about the drivers of strong Aerospace margins despite an OE sales decline, the potential for negative mix as OE ramps, and the company's direct labor hiring needs.

Answer

CEO Charles Blankenship and CFO William Lacey attributed the robust 19.2% margin to lean transformation benefits, improved productivity, and strong pricing, which offset mix headwinds from growing Defense OE. They reaffirmed the 20-21% full-year margin guide. Mr. Blankenship also mentioned needing a "couple of months' worth of hiring" to meet the resurgent demand signal after allowing attrition to lower staffing during the Boeing pause.

Michael Ciarmoli asked for a distinction between commercial and defense aerospace pricing and inquired about the expected quarterly cadence in fiscal 2025, particularly for Q1, given recent disruptions.

Answer

CFO William Lacey noted that overall aerospace pricing would be slightly above the company's 5% average, helped by carryover from FY24 negotiations and new pricing on some defense contracts. CEO Charles Blankenship confirmed Q1 is expected to be seasonally softer due to fewer workdays, OEM inventory management, and the timing of contract escalations.

Michael Ciarmoli followed up on the landing gear business's performance and asked about TAT's progress in penetrating the market for the APU 131.

Answer

President and CEO Igal Zamir acknowledged several bidding opportunities for APU 131 but noted no meaningful RFP wins yet. He indicated a learning curve and that TAT is in the early stages of substantial growth in this segment.

Michael Ciarmoli of Truist Securities asked for more detail on the dynamics of APU maintenance deferrals, the company's M&A strategy after its equity raise, and the revenue outlook for core MRO services.

Answer

CEO & President Igal Zamir clarified that APU deferrals are a global trend, particularly among cargo carriers concerned about tariffs, who use their spare parts inventory to delay overhauls. Regarding M&A, Zamir stated the company will be disciplined, seeking to expand into related mechanical systems to become a more valuable vendor for customers. He also noted that MRO intake has seen a significant increase in the last month and a half, signaling a positive trend.

Michael Ciarmoli asked for an update on the Beacon program, its impact on future financial performance and growth, and inquired about the opening of microelectronics capacity for industry and its potential to boost Mission Systems (MS) margins.

Answer

Kathy Warden, Chair, CEO, and President, expressed excitement about the Beacon program, which is demonstrating accelerated autonomous systems and mission capability through partnerships, expecting new competitions across U.S. services and international partners. She confirmed that Northrop Grumman has opened its advanced microelectronics foundries to additional customers, including commercial ones, due to significant interest in domestic sources, which will build on the existing $1 billion annual sales to national security customers.

Michael Ciarmoli inquired if the B-21 process change was requested by the customer and if higher material consumption was due to scrap and waste. He also asked about the status of the previously announced $200 million in cost savings.

Answer

CEO Kathy Warden confirmed the process change was a joint decision with the Air Force to reduce risk. She acknowledged that material consumption estimates include factors like scrap and waste. She also stated the company remains on track to achieve its $200 million in enterprise-wide cost efficiencies.

Michael Ciarmoli of Truist Securities questioned if increased domestic procurement by NATO countries could threaten Northrop's international growth and asked about the company's view on potential contracting changes.

Answer

CEO Kathy Warden expressed confidence in continued strong demand from NATO allies for U.S. systems like IBCS, E-2, and Triton, which can be fielded quickly while Europe's industrial base rebuilds. Regarding contracting, she noted that she sees more opportunity than risk in working with new entrants and embraces collaborating with the government to improve cost efficiency and timeliness.

Michael Ciarmoli from Truist Securities requested specific modeling details for the recent VACCO acquisition, including revenue contribution, segment allocation, and margin impact. He also asked for commentary on current trends in the commercial aerospace market, such as destocking and build rates.

Answer

VP & CFO Robert Sullivan provided initial guidance for VACCO, projecting $15 to $20 million in revenue for Q2 with gross margins between 25-30%, noting it was still early. He confirmed all VACCO revenue will be reported in the Aerospace & Defense segment. Chairman, President & CEO Dr. Michael Hartnett added that commercial aerospace contract negotiations are positive and that RBC expects to expand its content on key aircraft platforms.

Michael Ciarmoli from Truist Securities requested modeling details for the recent VACCO acquisition, including revenue contribution, segment allocation, and margin impact. He also asked for an update on commercial aerospace trends like destocking and build rates.

Answer

Robert Sullivan, VP & CFO, provided Q2 guidance for VACCO, projecting $15-20 million in revenue at 25-30% gross margins, and confirmed all revenue will be allocated to the Aerospace & Defense segment. Dr. Michael Hartnett, Chairman, President & CEO, added that commercial aerospace trends are positive, with ongoing negotiations to expand work statements with major OEMs over the next five years.

Michael Ciarmoli from Truist Securities asked for modeling details for the recent VACCO acquisition, including revenue contribution, margin impact, and segment allocation. He also inquired about current trends in commercial aerospace, such as potential destocking and order patterns.

Answer

VP & CFO Robert Sullivan provided Q2 guidance for VACCO, projecting $15-20 million in revenue at 25-30% gross margins, and confirmed all revenue would be reported in the A&D segment. Chairman, President & CEO Michael Hartnett added that in commercial aerospace, RBC expects to expand its content on certain aircraft over the next 6-12 months and is in positive negotiations for long-term contracts.

Michael Ciarmoli from Truist Securities asked for the quarterly gross margins by segment, questioned the conservatism of the FY26 margin expansion guidance, sought a full-year revenue target, and inquired about the company's current view on the impact of tariffs.

Answer

Executive Robert Sullivan provided the segment gross margins (Industrial at 45.7%, A&D at 41.5%) and confirmed there is significant runway for A&D margin expansion, though he declined to provide a full-year revenue target. Executive Mike Hartnett added that while the short-term tariff impact is neutral, significant long-term tariffs would be a net benefit to RBC by creating domestic supply shortages.

Michael Ciarmoli of Truist Securities questioned if 'drill baby drill' policies would translate to actual spending in oil and gas, the impact of upcoming contract renewals on Aerospace growth, the true effect of China tariffs on RBC's niche markets, and the current M&A strategy.

Answer

CEO Dr. Michael Hartnett stated that while it's hard to predict oil and gas spending, unpredictable supply interruptions often drive investment. He confirmed new Aerospace contracts effective January 2026 will be 'better,' reflecting significant producer price index increases. On M&A, he emphasized a focus on organic growth and seeking a high-quality target like Dodge, noting that private equity activity is making deals expensive. Rob Moffatt, Director of Corporate Development, added that strong organic growth allows them to be patient and not take risks on M&A.

Michael Ciarmoli of Truist Securities inquired about the quantifiable gross margin impact from the Boeing strike and hurricane, the potential for an inventory destock once Boeing production ramps, and details on the drivers behind the urgent demand for fixed-wing munitions.

Answer

CEO Mike Hartnett explained that while a precise margin impact couldn't be provided on the call, the consolidated gross margin is a fair proxy. He does not foresee a destocking issue with Boeing, anticipating a 'big vacuum' on the system upon production restart. Hartnett attributed the strong munitions demand to a domestic capacity shortage for specialized U.S.-made miniature bearings required for guided weapons.

Michael Ciarmoli of Truist Securities requested more detail on the full-year revenue guidance, specifically the expected growth rates for Commercial Aero versus Defense, the contribution from the A220 program, and the outlook for the in-flight entertainment business.

Answer

CEO Stephen Oswald stated that while Q2 would be flattish, he anticipates a strong second half driven by the commercial aerospace recovery and continued respectable growth in defense. Suman Mookerji added that programs like TOW, Tomahawk, and 737 spoilers coming back online will provide a lift. Oswald confirmed the A220 program remains strong with no headwinds seen. Suman Mookerji noted the in-flight entertainment business is a small part of revenue and will likely see continued softness, though Stephen Oswald mentioned the year-over-year comparisons become easier.

Michael Ciarmoli asked for clarification on the revised revenue guidance, the implied Q4 margin impact from the Boeing strike, the recovery timeline into 2025, and the status of pruning the industrial business portfolio.

Answer

Suman Mookerji, an executive, attributed the guidance revision to lower-than-expected 737 MAX build rates and the Boeing strike's impact on shipments. Stephen Oswald, Chairman, President and CEO, added that OEM approval delays for program transfers also played a role. Suman Mookerji stated that Q4 margins should remain in the 'same ballpark' without material changes, as the diversified portfolio and ongoing production activity provide a buffer. Stephen Oswald confirmed the industrial business is being actively wound down, with revenue down approximately 50% year-over-year.

Michael Ciarmoli asked about the typical lead times for the commercial aftermarket order book to understand how quickly changes in airline capacity might affect orders. He also asked which metric, such as traffic or takeoffs, best correlates with the aftermarket business.

Answer

Co-COO Mike Lisman explained that a large percentage of commercial aftermarket orders book and ship within the same quarter, making booking rates a key short-term indicator. He confirmed they monitor bookings closely and have seen continued strength. He also noted that while they look at all metrics, takeoffs and landings are "probably the best" proxy for their aftermarket business.

Michael Ciarmoli of Truist Financial Corporation inquired about the progress of the AerAware system, including recent enhancements and partner readiness, and also asked for an update on the feedstock acquisition market and the AerSafe order backlog.

Answer

CEO Nicolas Finazzo detailed AerAware's software and hardware enhancements, such as foldable displays, runway length indicators, tail strike warnings, and the development of ADS-B In for traffic visibility, which are being developed with partner Elbit. Regarding feedstock, he explained the market remains tight but AerSale's integrated model allows it to win deals on assets requiring work, noting a 17.2% win rate in Q4. He also stated the AerSafe backlog is growing and expects it to peak towards the end of the year as the 2026 compliance deadline nears.

Sought more detail on the drivers of the high second-half margin forecast, questioning the role of the OEM settlement versus aftermarket, and asked about production rates and the outlook for aftermarket growth acceleration.

Answer

The margin improvement is primarily driven by a higher mix of high-margin aftermarket sales, although the equitable adjustment in Interiors also contributes. The 787 landing gear overhaul "bow wave" is just beginning and is expected to help drive future aftermarket growth.

Questioned whether the Interiors loss was part of the 'exceeded plan' claim, the confidence in the second-half MAX ramp, potential risks from the MAX door plug redesign, and the materiality of the Kratos XQ58 landing gear win.

Answer

The company exceeded plans on a consolidated basis, with other segments offsetting the Interiors weakness. Confidence in the second half is based on the MAX ramp, but the company is diversified. The door plug issue is being addressed by Boeing. The XQ58 win is strategic but not a huge contract.

Asked about the impact of the divestiture on long-term free cash flow conversion targets and the magnitude of the revenue headwind from delayed shipments in Q3.

Answer

The long-term targets of 10%+ free cash flow conversion and 20%+ EBITDA margins remain the same, with the potential to be achieved earlier due to cost savings and lower interest. The revenue headwind from shipment delays in Q3 was quantified at approximately $20 million, which is expected to be recovered in Q4.

Asked about potential disruptions from pilot labor negotiations, competitive pressure from passenger belly cargo capacity, and the source of the $25 million in asset sale proceeds.

Answer

Pilot attrition has dropped significantly and there are no operational disruptions. The company does not see pressure from passenger belly capacity as its customers primarily operate in dedicated integrator networks. The $25 million in proceeds came from the opportunistic sale of five airframes, and while similar sales could occur, it is not a regular part of the business strategy.

Questioned the rationale for using ABX for the new Amazon flying, the deal's profitability, the necessity of issuing warrants to Amazon, and sought clarification on the remaining EBITDA upside potential for the year.

Answer

The new ABX pilot contract was critical for staffing the new Amazon aircraft quickly. Profitability is managed despite different cost structures between airlines. Warrants are a standard negotiation point in significant deals with Amazon. The previously mentioned upside potential remains, contingent on the timing of placing 13 more aircraft this year.

Asked for a specific explanation of how the conflict in Israel is impacting Omni's operations, questioned the long-term EBITDA impact of cutting CapEx, and strongly challenged management on what he perceived as a failure of internal controls and real-time monitoring that should have foreseen the issues before Investor Day.

Answer

Management explained the Israel conflict caused a deferral of troop movements that typically peak in October, impacting timing but not necessarily losing the business. They stated that cutting CapEx has a minor near-term EBITDA impact but significantly improves free cash flow. They countered the 'internal controls failure' point by explaining that some issues were about unforeseen downstream costs (like passenger accommodation) and that some data (like power-by-cycle hours) is only available monthly, not in real-time.

Michael Ciarmoli of Truist Securities asked what percentage of assets in Wichita are already owned by Boeing, and why selling to Boeing is a good move for shareholders given the ongoing operational improvements.

Answer

CFO Mark Suchinski clarified that OEMs typically own the tooling, while Spirit owns the physical facilities and equipment. CEO Pat Shanahan addressed the rationale for a sale, arguing that the full value of reintegration, including supply chain optimization and operational efficiency, can 'only be unlocked by the OEM.' He also cited the value of combining engineering and manufacturing expertise.

Michael Ciarmoli of Truist Securities asked what percentage of assets and IP in Wichita are already owned by Boeing and why, given planned improvements, a sale to Boeing would be a good move for shareholders now.

Answer

CFO Mark Suchinski clarified that OEMs typically own program-specific tooling, while Spirit owns the facilities and equipment. CEO Pat Shanahan addressed the second point, explaining that the full value of reintegration, including supply chain optimization and engineering efficiencies, can 'only be unlocked by the OEM,' representing a significant value proposition.

Asked for clarification on the MB Aerospace accretion timeline, the high operational EPS impact from the divestiture, the confidence in the industrial organic growth outlook, and whether new aerospace LTAs require upfront investments.

Answer

Confirmed MB Aerospace is expected to be neutral to accretive by the end of 2024. The divested businesses' high margin in 2023 was temporary due to end-of-life programs; the underlying margin going out the door is ~12-13%. Confidence in industrial growth stems from internal streamlining, commercial initiatives, and full-year pricing benefits. The new aerospace LTAs do not require significant upfront investments.