Scott Mikus

Scott Mikus asked about the aftermarket dynamics for LEAP engines, specifically how Woodward differentiates between aftermarket and OE channels for component sales and the pricing strategy. He also inquired if there are any structural impediments preventing LEAP or GTF aftermarket margins from reaching CFM56 or V2500 levels, considering Woodward's automation investments.

Answer

Chairman and CEO Chip Blankenship clarified that Woodward has clear visibility into the PO status (install vs. spare end item) and the ordering customer. Regarding margins, Mr. Blankenship stated there are no structural impediments, emphasizing that achieving profitability depends on understanding customer needs and developing effective repair and service solutions.

Scott Mikus asked about the aftermarket dynamics for LEAP engines, specifically how Woodward differentiates between aftermarket and OE channels for component sales and the pricing strategy. He also inquired if there are any structural impediments for LEAP or GTF aftermarket margins to reach levels comparable to CFM56 or V2500, considering automation investments.

Answer

Chairman and CEO Chip Blankenship clarified that Woodward has clear visibility into the PO status, distinguishing between install and spare end items and the ordering customer. Regarding margins, Mr. Blankenship stated there are no structural impediments, emphasizing that achieving profitability depends on understanding customer needs and developing effective repair and service solutions. CFO Bill Lacey also participated in the call.

Scott Mikus of Melius Research inquired about the strategic implications of the A350 spoiler actuation win, asking if it signals more opportunities to displace incumbents and if Woodward intends to pursue more Tier 1 supplier work. He also asked for the quarter's price realization.

Answer

CEO Chip Blankenship described mid-program displacements as 'rare' but noted the win solidifies Woodward's position as a Tier 1 supplier to Airbus, which is strategic for future aircraft programs. CFO Bill Lacey stated that price realization was approximately 7% for the total company in the quarter, prompting an increase in the full-year forecast to nearly 7%.

Scott Mikus questioned the strategic fit of the volatile China on-highway business within Woodward's portfolio and asked for an update on production rates for the Boeing 787 program.

Answer

CEO Charles Blankenship stated that while the portfolio is always under review, the current focus for the China on-highway business is on operational readiness for market upticks. Regarding the 787, he confirmed they are meeting GE's demand for the GEnx engine and have the capacity to support future rate increases.

Scott Mikus inquired about the wide sales growth guidance for the Aerospace segment, the expected growth hierarchy among its end markets, and the current state of the supply chain compared to pre-pandemic levels.

Answer

CEO Charles Blankenship explained the wide guidance reflects uncertainty around Boeing's production ramp. He affirmed that Defense OE is expected to be the fastest-growing market for the year, despite a strong Q1 for commercial aftermarket which benefited from an easy comparison and is expected to moderate. He also noted that the supply chain has not returned to pre-COVID norms, with ongoing labor and quality challenges affecting about 15-20 key suppliers across both Aerospace and Industrial segments.

Scott Mikus asked about Woodward's potential to enter the Parts Manufacturer Approval (PMA) market for the CFM56-7B engine and questioned the drivers behind the strong Q4 defense OEM growth, specifically the role of JDAMs.

Answer

CEO Charles Blankenship stated that Woodward has no plans to become a PMA supplier, preferring to focus on its existing and future OEM content. CFO William Lacey confirmed that JDAMs contributed to the 40% defense OEM growth in Q4, but noted that growth was broad-based across the smart defense portfolio and is expected to continue in fiscal 2025.

Scott Mikus asked if Leidos would consider exploring a spin-off of Dynetics, given its strong track record and the potential for it to attract a higher valuation outside the broader Leidos portfolio.

Answer

CEO Tom Bell described Dynetics as a 'golden jewel' and expressed confidence that as analysts better understand its value, Leidos' overall valuation will improve. He highlighted Dynetics' unique ability to combine rapid prototyping and fielding of platforms with mission systems and software, differentiating it from competitors. He stated there are no plans to spin it off, intending instead to invest in it and use it to enhance Leidos' overall valuation.

Scott Mikus asked if Leidos would consider spinning off its Dynetics defense tech business, given its strong track record and the high valuations seen by other defense tech companies.

Answer

CEO Tom Bell viewed Dynetics as a 'golden jewel' that enhances Leidos' overall valuation. He highlighted Dynetics' unique ability to combine rapid prototyping and fielding of platforms with mission systems and software, making it highly effective for warfighters. He stated there are no plans to spin off Dynetics, only to continue investing in it and promoting its value as a crown jewel within the Leidos portfolio.

Scott Mikus from Melius Research questioned the decision to reaffirm guidance despite a strong Q1 EPS beat, asking if core fundamentals are expected to deteriorate or if the guidance is simply conservative.

Answer

CFO Chris Cage asserted that core business fundamentals are not a concern and remain strong. He explained that reaffirming guidance allows the company to maintain capacity to invest in critical areas aligned with its NorthStar 2030 strategy and administration priorities, stating it was not the right time to raise the outlook.

Scott Mikus questioned the 2025 EPS guidance, noting that after adjusting for 2024's one-time charges, it implies minimal underlying growth, and asked if this reflected conservatism.

Answer

CFO Chris Cage acknowledged the observation but cited several factors: the need for investment flexibility in a "pivot year," expected headwinds from higher interest rates on refinanced debt, a slightly higher tax rate, and the fact that 2024 benefited from an unusually strong year for program performance (EACs) that may not repeat at the same level.

Scott Mikus asked about the ramp-up of the CHS-6 program, which was won over a year ago, and whether its margins are currently accretive or dilutive to the overall business.

Answer

CFO Chris Cage explained that while the team has done a great job ramping CHS-6, its margins have not yet reached their full long-term potential. He noted that despite this, the National Security and Digital segment is performing well. CEO Thomas Bell added that Leidos is actively working to educate the Army on the full capabilities of the CHS-6 contract vehicle to help "supercharge that program" and drive future growth.

Scott Mikus questioned the decline in L3Harris's IRAD spend as a percentage of sales from 3.5% in 2022 to 2.4% in 2024, asking if this spend is expected to increase in 2026 given the administration's push for contractors to invest more.

Answer

Chairman and CEO Christopher Kubasik clarified that L3Harris views R&D broadly, encompassing IRAD, CRAD, Shield Capital, and other strategic investments, rather than solely as a percentage of revenue. He explained that once new markets are established and portfolios mature into production, the need for initial R&D investment shifts, and current results demonstrate that past investments in IRAD, CapEx, and acquisitions have successfully positioned the company for future growth.

Scott Mikus of Melius Research LLC asked about the new Wolfpack program, its competitive dynamic with Aerojet's customers, and its long-term revenue potential.

Answer

Chairman and CEO Christopher Kubasik clarified that the Wolfpack launch effects program was in development before the Aerojet acquisition. He described it as a unique and affordable offering in the 'attributable' market with both kinetic and EW variants. He sees a revenue opportunity of a 'couple hundred million' in the next few years and noted the specific assets do not use solid rocket motors.

Scott Mikus from Melius Research inquired about the recently announced Wolfpack program, asking about the strategy of competing with Aerojet's largest customers and the potential long-term revenue opportunity.

Answer

Chairman & CEO Christopher Kubasik clarified that the Wolfpack initiative, a unique launch effects capability for kinetic strike and EW, was in development long before the Aerojet acquisition. He described the offerings as affordable and attributable, with over 40 test flights completed. He projected a potential revenue target of a "couple hundred million" in the next several years.

Scott Mikus inquired about the status of Virginia Block IV and Columbia build two negotiations, specifically if government furloughs were causing delays and if splitting the negotiation into smaller awards would be a sensible strategy. He also asked about the timing of wage increases at Ingalls.

Answer

Chris Kastner, President and CEO, confirmed that furloughs were not impacting negotiations, with teams working diligently to finalize agreements by year-end. He stressed that splitting awards would be counterproductive to the industrial base's need for a consistent demand signal, advocating for all 10 ships to be awarded together. Regarding Ingalls, Mr. Kastner noted ongoing discussions with the union, aiming for an agreement by early next year.

Scott Mikus with Melius Research inquired about the status of Virginia Block 6 and Columbia Build 2 submarine negotiations, specifically addressing potential impacts from government shutdowns and the strategic rationale for awarding multiple boats simultaneously versus staggered negotiations. He also asked about the timing of wage increases at Ingalls.

Answer

President and CEO Chris Kastner confirmed that government furloughs are not hindering negotiations, with teams actively working towards year-end agreements. He emphasized the importance of a consistent demand signal for the industrial base, advocating for the award of all 10 submarines at once. Regarding Ingalls, Mr. Kastner noted ongoing discussions with the union, aiming for a wage increase implementation by early next year.

Scott Mikus from Melius Research asked if the previous five-year, $3.6 billion cumulative free cash flow target is now back on the table following recent tax law changes, and inquired about the capital and labor required if Newport News were to build Virginia-class submarines independently.

Answer

EVP and CFO Thomas Stiehle stated the five-year free cash flow guidance is not back on the table, as HII is focused on meeting its annual targets. President and CEO Christopher Kastner added that building Virginia-class subs alone would require 'significant capital' but that HII would have sufficient skilled labor for such a long-term project and supports the Navy exploring alternatives.

Scott Mikus asked if the cost-plus structure of the new Virginia contract indicates a trend for future orders and inquired about potential radar production constraints for the 'Golden Dome' initiative affecting Navy priorities.

Answer

President and CEO Christopher Kastner stated that the contract type was specific to the situation and not necessarily a future trend, as the priority is delivering wage support to the workforce. Regarding the 'Golden Dome,' Kastner confirmed HII has not been involved in any discussions related to radar supply for that initiative.

Scott Mikus asked about the lessons learned from the post-Katrina recovery that apply today and when investors might expect unfavorable EAC adjustments to turn positive. He also inquired if the 2025 shipbuilding operating income guidance contains a specific assumption for net EACs.

Answer

President and CEO Christopher Kastner highlighted transparency and resolve in negotiations as key lessons. CFO Thomas Stiehle added that success hinges on securing balanced contracts that reflect current economic realities and then executing consistently. Regarding EACs, Kastner noted there is no specific date for a turnaround but expects profitability to improve as the mix shifts away from pre-COVID contracts. Stiehle confirmed the guidance incorporates the current EAC trajectory based on performance and risk, but declined to provide a specific net EAC assumption.

Scott Mikus asked for management's perspective on the Submarine Advance Support (SAS) funding plan and whether a reported $17 billion funding shortfall for the Virginia-class program sounded accurate.

Answer

CEO Christopher Kastner voiced strong support for the SAS plan, calling it an 'excellent idea' and the 'smartest, best way' to unlock necessary investment in the workforce and infrastructure. He confirmed it remains under review. He declined to comment on the specific $17 billion figure or congressional funding actions, reiterating the focus on securing an equitable contract solution.

Scott Mikus asked the new CFO about his early observations and priorities after two and a half months, and how he is thinking about the balance sheet and the use of the cash balance, especially after the Jeppesen sale.

Answer

EVP and CFO Jay Malave clarified that the cash balance after both transactions (Jeppesen and Spirit AeroSystems) is expected to be closer to $28 billion, not $33 billion. His early observations include enthusiasm and commitment from the team towards recovery. His priorities are to get up to speed, maintain focus on restoring balance sheet health, drive sustainable improvements in recovery, and keep an eye on the future while managing short-to-medium-term recovery.

Scott Mikus asked EVP and CFO Jay Malave about his early observations and priorities after two and a half months at the company, and his thoughts on the balance sheet and cash utilization given the projected cash balance after asset sales.

Answer

EVP and CFO Jay Malave clarified that the cash balance after both the Jeppesen and Spirit AeroSystems transactions is expected to be closer to $28 billion. His early observations include enthusiasm and commitment from the team towards the company's recovery. His short-term priorities are getting up to speed, maintaining focus on restoring the balance sheet, enabling sustainable recovery improvements, and balancing future outlook with short-to-medium term recovery efforts.

Scott Mikus asked about the contract structure for the F-47 program, specifically questioning if the low-rate initial production (LRIP) options are fixed-price and how the company is managing potential risks from those options.

Answer

President and CEO Robert Ortberg stated that he could not disclose contract details beyond what the U.S. Air Force has made public. However, he reassured that the company adhered to its strategy of matching contract type to the work, ensuring Boeing did not sign up for undue risk similar to past fixed-price development programs.

Scott Mikus asked if Marine Systems' sales growth could sustainably exceed $1 billion annually given the Columbia and Virginia class programs, and when Marine margins might return to the 8-9% range.

Answer

Phebe Novakovic, Chairman and CEO of General Dynamics, anticipated similar robust growth for Marine Systems as seen in recent years. Danny Deep, EVP of Global Operations, General Dynamics, added that meaningful margin expansion would primarily come from stabilizing the supply chain and increasing throughput, which would also accelerate deliveries.

Scott Mikus asked about the capital and labor required if General Dynamics were to build Virginia-class submarines independently, and whether reinstated bonus depreciation drove the strong aerospace book-to-bill.

Answer

Chairman and CEO Phebe Novakovic stated that skilled labor is not a constraint for Electric Boat and that while some additional capital would be needed for independent production, it would not be an 'enormous amount.' Regarding aerospace demand, she said that while bonus depreciation helps, the strong orders were driven by multiple macroeconomic factors, not just one.

Scott Mikus asked about potential interest from the DoD in increasing the Columbia-class submarine program of record to maintain SLBM launch capability. He also asked if any Gulfstream customers accelerated deliveries to get ahead of tariffs.

Answer

Phebe Novakovic, Chairman and CEO, responded that the question of increasing the Columbia program size has been a recurring national security topic for over a decade but she hasn't heard anything new recently. Regarding Gulfstream, she stated she was not aware of any customers accelerating deliveries due to tariffs.

Scott Mikus of Melius Research asked about the prevalence of Economic Price Adjustment (EPA) clauses in fixed-price defense contracts to mitigate inflation, particularly at Marine Systems. He also questioned if Gulfstream's new plant in Mexicali was a strategic move to preempt potential tariffs.

Answer

Phebe Novakovic, Chairman and CEO, explained that while Marine contracts have always included escalation clauses, the recent, unexpectedly high level of inflation surpassed what those clauses contemplated. Regarding the Mexicali facility, she described it as part of long-term plans and stated the company would adapt to any future governmental policies as they are implemented.

Scott Mikus asked about Hexcel's approach to Long-Term Agreement (LTA) negotiations, specifically whether the company aims to retain a larger share of productivity benefits as agreements come up for renewal. He also questioned if there's an opportunity for Hexcel to increase its content on the A321XLR program to help extend its range, given recent airline complaints.

Answer

CEO Tom Gentile stated that Hexcel always aims to retain as much as possible from productivity benefits while ensuring win-win negotiations that facilitate necessary engineering resources from customers. Regarding the A321XLR, he noted limited opportunities for material substitution on existing aircraft, as most 'low-hanging fruit' has been captured. However, he highlighted significant opportunities for increased carbon fiber composite content on next-generation narrowbody aircraft, contrasting the A321's 15% composite usage with the A350's 50%.

Scott Mikus inquired about Hexcel's strategy in Long-Term Agreement (LTA) negotiations to retain a larger share of productivity benefits, given historical practices of sharing. He also asked if there's an opportunity to increase Hexcel's material content on the A321XLR program if Airbus aims to extend its range.

Answer

Tom Gentile, CEO, Chairman, and President, stated that Hexcel always aims to maximize its share of productivity benefits while ensuring negotiations are win-win and facilitate necessary engineering resources from customers. He noted that while lightweight materials are always beneficial, most 'low-hanging fruit' for material substitution on the current A321 has been captured, with greater opportunities expected on the next-generation narrowbody aircraft, which will feature a much higher carbon fiber composite ratio.

Scott Mikus from Melius Research LLC asked about pricing protections in LTA negotiations, specifically whether Hexcel retains its internally-driven productivity gains, and inquired about the potential for a restocking benefit in 2026.

Answer

CEO Tom Gentile and CFO Patrick Winterlich explained that while contracts include inflation and volume protections, productivity gains are often shared with customers since their cooperation is required for process changes. They view supply chain synchronization, rather than significant restocking, as the primary goal, describing any potential restocking as a very gradual process.

Scott Mikus of Melius Research asked if Hexcel had approached its major customers, Boeing and Airbus, about repricing long-term agreements to offset inflation and production volatility. He also questioned if the Austrian facility could be repurposed for European defense programs if a sale is not completed.

Answer

Chairman, CEO and President Tom Gentile explained that they negotiate pricing with Boeing as shorter-term contracts expire. For the long-term A350 contract with Airbus, which runs to 2030, the focus is on joint productivity programs to share cost savings rather than repricing. He stated the Austrian facility is tailored for industrial production (wind, recreation) and is not suitable for producing aerospace-grade materials for defense programs.

Scott Mikus asked about potential discussions with Embraer on a new aircraft, the impact of tariffs on precursor chemicals, and whether upcoming union negotiations were factored into guidance.

Answer

Chairman, CEO & President Tom Gentile declined to comment on confidential customer discussions but noted Hexcel has minimal tariff exposure, sourcing 95% of materials from the US, Europe, and Japan. Executive Patrick Winterlich added that nothing out of the ordinary was factored into guidance for the union negotiation, and a mutual agreement is expected.

Scott Mikus from Melius Research questioned the strategy of hiring ahead of uncertain demand versus holding more buffer inventory and asked if incremental margins in 2025 could exceed the historical 30-35% range.

Answer

CEO Tom Gentile defended the hiring strategy, emphasizing that a trained, experienced workforce is a strategic asset that cannot be created quickly, unlike inventory. Executive Patrick Winterlich added that prepreg materials have a finite shelf life, limiting inventory builds. Regarding 2025 incrementals, he stated the company will drive them strongly but did not commit to a specific range above historical norms.

Scott Mikus asked about the challenge posed by fiber optic cables in drones for counter-UAS solutions and CACI's strategy to address this evolving threat. He also requested a breakdown of the 17% year-over-year growth in Federal Civilian agency sales, distinguishing between organic and inorganic contributions, and the growth within DHS versus non-DHS agencies.

Answer

CEO John Mengucci detailed CACI's decades of counter-UAS experience, highlighting the Merlin system's ability to detect drones up to 75km, providing critical time for operators. He explained that CACI's software-based solutions are adaptable to evolving threats, including cellular-network-operating and fiber-trailing drones, differentiating CACI from newer market entrants. CFO Jeff MacLauchlan clarified that the Federal Civilian growth was primarily organic, with approximately 10% from DHS and significant ramping on the NASA NCAPS program.

Scott Mikus inquired about the 17% year-over-year growth in CACI's Fed civilian agency sales, asking for a breakdown between organic and inorganic growth, and the contribution from DHS versus non-DHS agencies.

Answer

CFO Jeff MacLauchlan clarified that the growth was almost entirely organic, driven by strong performance in DHS and the ramping up of the NASA NCAPS program. He specified that approximately 10% of the growth on a percentage basis was attributable to DHS.

Scott Mikus of Melius Research LLC asked about CACI's competitive approach to its bid pipeline, particularly the mix of new programs versus 'takeaway' work from incumbents, and questioned the impact of the ITAS contract's ceiling reduction.

Answer

President and CEO John Mengucci stated that CACI focuses on differentiated, high-value bids rather than being a traditional government services company pursuing a massive pipeline. He clarified that the majority of the pipeline is new work for CACI. Both Mengucci and CFO Jeffrey MacLauchlan affirmed that the ITAS ceiling reduction has zero impact on backlog, revenue, margins, or financial targets.

Scott Mikus inquired about contract growth trends since the change in administration and asked about the revenue backlog and major recompetes for fiscal year 2026.

Answer

CEO John Mengucci stated that CACI has not seen a material slowdown in contract growth, citing a strong Q3 book-to-bill and a growing pipeline of RFPs. For FY26, he noted it will be a moderate recompete year with no single program representing more than 5% of revenue. CFO Jeff MacLauchlan added that the business rhythm remains aligned with the company's 3-year financial targets.

Scott Mikus of Melius Research asked for CACI's recommendations to the new administration's Department of Government Efficiency (DOGE) and inquired about the impact of recent valuation deratings on the M&A market.

Answer

CEO John Mengucci recommended accelerating IT modernization with proper funding, establishing a national counter-UAS strategy, and improving acquisition official training to reduce protests. CFO Jeffrey MacLauchlan added that M&A valuation multiples have already moderated, but CACI's near-term capital deployment focus is on deleveraging after recent acquisitions.

Scott Mikus asked about potential market share gains for CACI's optical communications terminals due to a competitor's production issues and inquired if the Azure Summit acquisition could open up foreign military sales opportunities.

Answer

CEO John Mengucci confirmed that CACI has had discussions with other prime contractors regarding optical communications terminals, highlighting CACI's mature, U.S.-manufactured technology and reaffirming delivery targets. Regarding Azure Summit, he explained that its technology is applicable to Five Eyes nations and is a key part of CACI's strategy to expand internationally by integrating its software with Azure's hardware for U.S. customers first, then allies.

Scott Mikus asked for clarification on whether the B-21 reconciliation funding for production rate acceleration is separate from a potential negotiation to increase the program of record to 150 or 200 units.

Answer

Kathy Warden, Chair, CEO, and President, confirmed that increasing the B-21 program of record beyond the current plan would be a separate discussion and decision by the department, which has not yet been made.

Scott Mikus asked about the operational impact of a recent explosion at a Utah plant on the Defense Systems outlook. He also inquired about the potential for a previously canceled classified space program to be restarted.

Answer

CEO Kathy Warden clarified the incident was at a Space Systems facility and there would be no impact on any programs, including Sentinel, as they have other sources of supply. Regarding the canceled space program, she said that if the requirement still exists, the program could be reevaluated, but this is not in current-year expectations.

Scott Mikus of Melius Research asked if a potential reevaluation of the NGAD program by the Air Force could free up funding to increase the B-21 bomber inventory from the planned 100 units to the desired 150 units.

Answer

Chair, CEO and President Kathy Warden acknowledged that the Air Force is conducting a force structure review that includes both NGAD and B-21. While it is premature to predict the outcome, she emphasized that Northrop Grumman's focus is on executing the B-21 program with strong performance and cost efficiency, thereby providing the Air Force with valuable options for its future force structure.

Scott Mikus asked about the low V2500 retirements, domestic ASK growth, new narrowbody deliveries, and GTF-powered aircraft returning to service, specifically if customers are required to put down deposits for V2500 shop visits to ensure stickiness.

Answer

CEO Chris Calio stated that V2500 demand remains strong due to the fleet's relatively young age (15% haven't seen a first shop visit, 40% haven't seen a second) and significant aftermarket runway. He noted strong customer application and demand exceeding prior expectations, but did not directly address the deposit question.

Scott Mikus noted low V2500 retirements and asked about V2500 shop visit visibility into next year, specifically if customers are required to put down deposits to reserve shop visits to ensure stickiness.

Answer

CEO and Chairman Chris Calio reiterated strong demand for the V2500, attributing it to the fleet's relatively young age (average 15 years) and significant aftermarket runway, with many engines yet to see first or second shop visits. He emphasized continued customer demand for the application.

Scott Mikus of Melius Research inquired about the GTF Hot Section Plus offering, asking if the retrofit cost is covered by RTX or the customer and whether to expect favorable EAC adjustments from the time-on-wing benefits.

Answer

CEO Christopher Calio explained that the cost arrangement will be a customer-by-customer determination, but RTX's intention is to receive value for the significant investment and its substantial time-on-wing benefits. CFO Neil Mitchill added that while the upgrade will drive benefits, the company is taking a prudent approach to program margins and is not getting ahead of itself on recognizing favorable contract adjustments.

Scott Mikus asked about the company's approach to the upcoming labor negotiation at Pratt & Whitney and if any contingency plans are in place to manage GTF AOGs in the event of a strike.

Answer

Executive Chairman and CEO Christopher Calio expressed cautious optimism about reaching an agreement without interruption. He cited a good track record in recent negotiations and a long-standing relationship with the union, emphasizing the shared interest in meeting strong customer demand.

Scott Mikus of Melius Research asked for details on the aircraft production rates (737, A320, 787) implied in RTX's guidance and requested an update on the certification timing for new business class seats at Collins.

Answer

Executive Christopher Calio declined to provide specific production rates ahead of airframer announcements but reiterated the company's mid-single-digit commercial OE growth forecast and its readiness to support customers. On the seating certification, he stated that while the requirements are complex, the company has a clear path forward.

Scott Mikus inquired about the "meaningful uptick" in USM sales, asking if this trend continued into the current quarter and if visibility on whole assets coming to market was improving. He also questioned the margin accretiveness of USM sales to parts supply and the potential for parts supply operating margins to reach 14-15% this year. Finally, Mikus asked about employee retention agreements for the Aerostrat acquisition.

Answer

Chairman, President, and CEO John Holmes confirmed that the loosening of supply in Q4 and Q1 drove meaningful USM growth, and AAR is encouraged by additional assets. Holmes clarified that while USM is historically high-margin, recent quarters saw depressed margins due to tight supply, but expects expansion as more supply enters the market. Regarding Aerostrat, Holmes stated there's a three-year earnout for key team members, highlighting two-way revenue synergies with Trax.

Scott Mikus asked about the 'meaningful uptick' in USM sales, whether this trend continued into the current quarter, and if visibility on whole assets is improving. He also questioned the margin opportunity for parts supply if more USM becomes available and the employee retention strategy for the Aerostrat acquisition.

Answer

Chairman, President, and CEO John Holmes confirmed a loosening of USM supply in Q4 and Q1, driving growth, and expressed encouragement about additional assets. He noted that USM margins have been depressed but are expected to expand with increased supply. For Aerostrat, he highlighted a three-year earnout for key team members and anticipated two-way revenue synergies.

Scott Mikus (Melius Research) inquired about the "meaningful uptick" in USM sales, asking if the trend continued into the current quarter, about improving visibility on whole assets, and the potential for USM to be margin accretive to parts supply, specifically if parts supply could reach 14-15% operating margins this year. He also asked about employee retention agreements for the Aerostrat acquisition.

Answer

Chairman, President, and CEO John Holmes confirmed that the loosening of supply in Q4 FY2025 continued into Q1 FY2026, driving meaningful USM growth, and expressed encouragement about additional assets matching AAR's criteria. He clarified that while USM is historically high-margin, current margins are depressed due to tight supply, but are expected to expand as more supply enters the market. Regarding Aerostrat, he noted a three-year earnout for key team members, ensuring financial incentive for retention, and highlighted two-way revenue synergies by leveraging Aerostrat's existing customer base for Trax and vice-versa.

Scott Mikus of Melius Research LLC asked for a breakdown of the Parts Supply segment's strong growth, whether airlines were pre-ordering ahead of tariffs, the sustainability of Parts Supply margins, and capital allocation priorities after reaching leverage targets.

Answer

CEO John Holmes reported that new parts distribution led growth at over 20% and saw no evidence of abnormal pre-ordering due to tariffs. He affirmed that Parts Supply can be a low-teens margin business with potential for mid-to-high teens with strong whole asset sales. CFO Sean Gillen outlined capital allocation priorities as organic investment, M&A, and then share repurchases over reinstating a dividend.

Scott Mikus of Melius Research LLC asked for details on the Parts Supply segment's strong growth, inquiring about a breakdown by end market and whether airlines were over-ordering ahead of tariffs. He also asked about the margin impact from a whole asset sale and future capital allocation plans once leverage targets are met.

Answer

CEO John Holmes clarified that new parts distribution led the segment's growth at over 20% and that there was no evidence of abnormal ordering due to tariffs. He described whole asset sales as a normal part of the USM business. CFO Sean Gillen stated that once leverage targets are met and absent M&A, the company would prioritize share repurchases over reinitiating a dividend for capital return to shareholders.

Scott Mikus questioned if the extended partnership with FTAI on CFM56 engines involved new economics and asked about AAR's strategy regarding potential tariffs, including pre-buying parts or potential benefits to the repair business.

Answer

CEO John Holmes explained the FTAI partnership extension continues a similar, successful arrangement with expectations for volume growth as FTAI's portfolio expands. On tariffs, he stated AAR is not pre-buying inventory but is focused on passing through price increases, a practice they've managed successfully in the current inflationary environment. He also noted tariffs could potentially benefit AAR's domestic repair business.

Scott Mikus inquired about the new distribution agreement with Chromalloy, asking if AAR could distribute PMA parts for CFM56 and V2500 engines and how that aligns with its FTAI joint venture. He also asked about AAR's revenue exposure to U.S. low-cost carriers and requested a breakdown of organic growth for the commercial and government segments.

Answer

John Holmes, an executive, explained that AAR is in discussions with both Chromalloy and FTAI to explore mutual growth opportunities. He clarified that AAR's exposure to low-cost carriers is minimal, as its business is heavily skewed towards major airlines like United, Delta, and American. Sean Gillen, an executive, noted that a specific organic growth breakdown by segment was not readily available.

Scott Mikus of Melius Research asked for a specific breakdown of the growth rates for defense and commercial sales within the new parts distribution business for the quarter.

Answer

Sean Gillen, VP and CFO, responded that he did not have the specific growth rates at his fingertips but indicated the information would be available in the forthcoming 10-Q filing.

Scott Mikus of Melius Research LLC asked if TransDigm prioritizes engine content for M&A given its strong growth. He also questioned if selling assets to repurchase stock was a consideration, given high industry valuations.

Answer

Co-COO Mike Lisman stated that M&A is not prioritized by specific content like engines; the primary focus remains on proprietary components and achieving a 20% IRR target. He affirmed that the company is happy with its current portfolio of businesses and did not suggest any plans to sell assets.

Scott Mikus asked if share repurchases or special dividends are becoming a more regular component of capital allocation and questioned if a significant margin differential exists between engine and airframe components in the commercial aftermarket.

Answer

President and CEO Kevin Stein reiterated the company's established capital allocation priorities, confirming that returning capital via special dividends or buybacks remains a key option after funding internal projects and M&A. He characterized recent repurchases as opportunistic. Co-COO Mike Lisman stated there is "no meaningful difference" in margins between engine and non-engine aftermarket products.

Scott Mikus asked if orders from Boeing support its aggressive production ramp plans and questioned if the Q1 share buyback signals elevated M&A valuations or an attractive stock price.

Answer

Co-COO Joel Reiss stated they are not yet receiving orders for the back half of the year but are prepared to support the ramp. CEO Kevin Stein described the share buyback as an opportunistic move to return capital during market turmoil, clarifying it does not reflect a change in their M&A outlook or view on valuations.

Scott Mikus, on for Rob Spingarn, asked about capital deployment strategy, confirming if deploying over $7 billion was the right way to think about returning to the target leverage ratio of 6x, and inquired about the potential mix of M&A versus shareholder returns.

Answer

CEO Kevin Stein confirmed the math was 'directionally the right way to look at it' and reiterated the company's capital allocation priorities: first, reinvesting in the business; second, pursuing disciplined M&A; and third, returning capital to shareholders. CFO Sarah Wynne also confirmed the math was correct.

Scott Mikus of Melius Research LLC asked if there have been any discussions with the U.S. Department of Defense (DoD) about constructing or upgrading new heavy forging presses, given Howmet owns two of the four unique, large-scale presses in the country.

Answer

Executive Chairman and CEO John Plant responded that there have not been any such conversations. He acknowledged the critical importance of these assets to the defense industry, particularly for future fighter jet programs. Plant found the question interesting and suggested it might stimulate the company to initiate that conversation with the DoD regarding support for these vital national assets.

Scott Mikus of Melius Research LLC asked if it would be logical to sell the F-35 technical data rights to the DOD to secure a minimum annual production rate and protect the program from being crowded out by other defense priorities.

Answer

CEO James Taiclet responded that such a deal is not necessary. He explained that Lockheed Martin has already provided the U.S. government with all the data it controls for aircraft maintenance. Furthermore, he believes the fundamental demand for the F-35 is secure, as retiring 4th-generation aircraft are 'incredibly unsurvivable' in modern combat, making the F-35 an essential capability.

Scott Mikus of Melius Research asked if it would be logical to sell the F-35's technical data rights to the DOD as part of a broader deal to secure a minimum annual purchase rate and protect the program from being crowded out by other modernization priorities.

Answer

CEO James Taiclet stated that such a deal is not necessary. He explained that Lockheed Martin has already provided the U.S. government with all the data it controls to maintain the aircraft. He also asserted that strong base demand for the F-35 will persist due to its unique survivability and capabilities compared to retiring 4th-generation aircraft.

Scott Mikus from Melius Research LLC inquired about the new HPT blades for the LEAP engine, asking about the fleet retrofit timeline and the potential for favorable contract margin reviews.

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Chairman & CEO Lawrence Culp stated that the retrofit will be a multi-year process, occurring as engines naturally come in for shop visits rather than a dedicated campaign. He highlighted that the more producible blade is already helping improve output and contributed to the strong Q2 services revenue, which underpins the positive financial outlook for the program.

Scott Mikus of Melius Research asked how GE is balancing the need for aftermarket price increases against the risk of causing demand destruction or premature engine retirements, especially as some airlines see softening travel demand.

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Chairman and CEO H. Culp acknowledged it is a balancing act guided by principles of sharing in value creation and earning returns on investment. He reiterated the multi-faceted pricing approach, including standard increases and temporary tariff surcharges. He expressed optimism that GE can manage these competing priorities constructively with customers without disrupting underlying demand for its services.

Scott Mikus from Melius Research asked if the current push for government efficiency could trigger another wave of industry consolidation and questioned if there was upside to margin guidance from further non-client-facing headcount cuts.

Answer

Horacio Rozanski, Chairman, CEO and President, acknowledged the industry is fragmented and expects share shifts but emphasized Booz Allen is aggressively positioning itself to win. Matthew Calderone, EVP and CFO, stated that while they are managing costs to protect margins during the Civil reset and preserve investment capacity, he would not anticipate near-term margin upside beyond the current guidance, though a long-term shift to outcome-based work could be accretive.

Scott Mikus of Melius Research asked about HEICO's leverage philosophy, questioning if there was a fundamental shift in how much leverage the company would operate with, and also inquired about supply chain performance at both FSG and ETG.

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Laurans Mendelson, Chairman and CEO, stated there is no change in their leverage philosophy, remaining comfortable operating around 2x EBITDA but willing to go to 3x for a desirable acquisition due to strong cash flow. Victor Mendelson, Co-President, described supply chain issues as being at "noise level" now, with significant improvement. Eric Mendelson, Co-President, noted the supply chain is getting better but not great, with labor being a key issue for suppliers.

Scott Mikus from Melius Research, on for Rob Spingarn, asked for the percentage of Flight Support Group sales to the DoD, whether a list of potential parts for the DoD has been created, and the progress on in-sourcing manufacturing from Wencor's former build-to-print shops.

Answer

Co-President Eric Mendelson stated that defense sales are approximately one-quarter of the Flight Support Group's total sales and confirmed that HEICO has identified substantial opportunities for the DoD. Regarding Wencor, he affirmed that HEICO is leveraging its broad manufacturing capabilities for Wencor's new product development, seeing a very strong opportunity for further in-sourcing and cost savings.