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AC

AAR CORP (AIR)·Q2 2025 Earnings Summary

Executive Summary

  • Record Q2 FY25 sales of $686.1M (+26% YoY) with organic growth accelerating to 12%; adjusted EBITDA margin expanded to 11.4% and adjusted operating margin to 9.2% .
  • GAAP EPS was a loss of $(0.87) driven by after-tax FCPA-related charges of $57.1M; adjusted diluted EPS rose 11% YoY to $0.90 .
  • Parts Supply grew 20% YoY (distribution agreements with Chromalloy, Whippany) and Repair & Engineering grew 57% YoY (Product Support acquisition, heavy maintenance efficiencies) .
  • Management guided Q3 FY25 sales growth to 22–25% and adjusted operating margin to 9.2–9.4%; Q3 tax rate ~27% and net interest expense similar to Q2 levels .
  • S&P Global Wall Street consensus estimates were unavailable due to a data limit; comparisons to consensus are not provided (we default to S&P Global when available).

What Went Well and What Went Wrong

What Went Well

  • “Record second quarter sales of $686 million, up 26% year over year… Adjusted EPS of $0.90, up 11%” demonstrating strong demand and operational efficiencies .
  • Strategic wins in Parts Supply (Chromalloy CF6 PMA blades; Whippany actuation distribution), Integrated Solutions (Airinmar extension with Singapore Airlines), and Repair & Engineering (AFI KLM E&M JV in Thailand) .
  • Margin expansion: adjusted EBITDA margin rose to 11.4% from 10.1% YoY; adjusted operating margin improved to 9.2% from 8.1% YoY; management sees continued expansion from Product Support synergies and hangar expansions .

What Went Wrong

  • GAAP net loss of $30.6M (EPS $(0.87)) driven by $59.2M pre-tax FCPA settlement/investigation costs recognized in SG&A .
  • Parts Supply margins modestly pressured by lower-margin whole asset sales mix; management emphasized this is situational and not a trend .
  • Net interest expense rose to $18.8M vs $5.6M YoY due to debt for Product Support; leverage remains elevated (pro forma net leverage 3.17x), though trending down .

Financial Results

Consolidated performance vs prior quarters

MetricQ4 FY2024Q1 FY2025Q2 FY2025
Sales ($USD Millions)$656.5 $661.7 $686.1
GAAP Diluted EPS ($USD)$0.26 $0.50 $(0.87)
Adjusted Diluted EPS ($USD)$0.88 $0.85 $0.90
Adjusted Operating Margin (%)9.3% 9.1% 9.2%
Adjusted EBITDA ($USD Millions)$76.4 $73.7 $78.4
Adjusted EBITDA Margin (%)11.6% 11.3% 11.4%

Segment performance (sales and operating income)

SegmentQ2 FY2024 Sales ($MM)Q2 FY2025 Sales ($MM)Q2 FY2024 Op Inc ($MM)Q2 FY2025 Op Inc ($MM)
Parts Supply$227.6 $273.7 $28.4 $31.6
Repair & Engineering$145.4 $228.8 $11.3 $22.8
Integrated Solutions$156.6 $163.4 $6.4 $6.5
Expeditionary Services$15.8 $20.2 $0.9 $2.2
Corporate & Other——$(8.7) $(65.4)
Total$545.4 $686.1 $38.3 $(2.3)

KPIs and balance sheet/cash flow

KPIQ4 FY2024Q1 FY2025Q2 FY2025
Commercial Sales Mix (%)70% 71% 73%
Government Sales Mix (%)30% 29% 27%
Net Debt ($MM)$911.2 $942.7 $935.3
Net Leverage (Pro Forma) (x)3.30x 3.31x 3.17x
Cash Flow from Operations ($MM)$24.5 $(18.6) $22.0
Remaining Share Repurchase Authorization ($MM)$52.5 $52.5 $52.5

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Sales growth YoYQ3 FY2025N/A22%–25% Raised visibility (new)
Adjusted operating marginQ3 FY2025N/A9.2%–9.4% Raised visibility (new)
Net interest expenseQ3 FY2025~equal to Q2 levels ~equal to Q2 levels Maintained
Effective tax rateQ3 FY2025FY25 ~28% (Q1 commentary) Q3 ~27% Lower for Q3
Landing Gear Overhaul divestitureQ1 CY2025 closeAnnounced; expected accretive Expected close by end of Feb; immediately accretive; ~$60M noncash pre-tax loss in Q3 Clarified timing/impact

Earnings Call Themes & Trends

TopicQ4 FY2024 (Q-2)Q1 FY2025 (Q-1)Q2 FY2025 (Current)Trend
USM supply & whole assetsParts sales strong; whole assets constrained; expect easing over “next few years” USM down on whole asset scarcity; part sales at record levels; Boeing/GTF dynamics tightening supply USM showing early inflection; more assets available; pricing “very strong” Improving availability, still tight pricing
Distribution growth10th straight quarter double-digit organic growth; new OEM lines +26% organic growth; pipeline strong; government distribution rebounding New agreements (Chromalloy, Whippany); immediate ramp on Chromalloy, multi-quarter on Whippany Sustained double-digit growth; layering of new lines
Product Support integration & synergiesAcquisition exceeded initial expectations; $10M run-rate synergies by Q1 FY26 On track; consolidations progressing; in-sourcing to USM & commercial programs On track for $10M run-rate synergies by Q1 FY26; Repair & Engineering margin expansion Executing to plan; margin accretive
Hangar expansions (Miami/OKC)Ground broken; ~$60M annual revenue addition; late CY2025 online Hiring and ramp plans in place; baseload customers secured Expect FY26 contribution; drive mix and margin expansion Capacity adds on track
Government programsState Dept and F-16 volumes higher Navy P-8 airframe award continuation; new P-8 engine overhaul IDIQ (~$1.2B ceiling) P-8 engine program to ramp; opportunities to support efficiency via used parts/PMA Growing pipeline; integrated solutions
Compliance/legalOngoing FCPA investigation costs Investigation costs continued; contract termination loss in Expeditionary Services FCPA settled ($55.6M); GAAP net loss recognized; compliance program strengthened Resolution complete; one-time impact

Management Commentary

  • “We anticipate continued strong sales growth in the second half of fiscal year 2025… further margin expansion… and remain on track to reduce leverage” (CEO John Holmes) .
  • “Adjusted EBITDA of $78.3 million was higher by 42%… adjusted operating margin increased from 8.1% last year to 9.2% this year” (CEO John Holmes) .
  • “Net leverage… reduced from 3.6x at deal close to 3.17x… we are on track to get towards 2x net leverage in 2 years” (CFO Sean Gillen) .
  • “Landing Gear Overhaul divestiture… will be immediately accretive to margins and earnings upon closing” (CEO John Holmes) .

Q&A Highlights

  • USM dynamics: asset availability improving; pricing for legacy engines (CFM56, V2500) remains “very, very strong”; spreads preserved despite slower acceleration in pricing .
  • Distribution ramp: Chromalloy contributes immediately; Whippany ramps over multiple quarters given channel inventory; broader takeaway of distribution lines supports compounding growth .
  • Exposure to ULCCs: AAR is “heavily skewed towards the larger carriers… ULCC exposure very small” in North America .
  • Government efficiency and PMA: AAR can drive savings via used parts; example: converting used 737s to C-40s saved ~$60M (illustrative of potential efficiencies) .
  • Free cash flow cadence: typical stronger Q4; Q3 positive; note Q3 cash impact from FCPA payment and divestiture proceeds; deleveraging priority remains .

Estimates Context

  • S&P Global consensus estimates for AIR Q2 FY25 could not be retrieved due to a daily request limit; therefore, comparisons to consensus EPS and revenue are not presented. When available, we default to S&P Global consensus for estimate benchmarking.

Key Takeaways for Investors

  • Organic momentum and mix benefits: Double-digit organic growth (12%) and higher-margin distribution/repair mix drove margin expansion; sustained layering of new OEM lines should continue compounding through FY25–26 .
  • One-time legal resolution cleans up GAAP optics: FCPA settlement created GAAP loss, but adjusted EPS and margins improved; forward periods should see smaller non-GAAP adjustments, aiding earnings quality .
  • Repair & Engineering margin story intact: Product Support synergies and hangar expansions (Miami/OKC) underpin a credible path to higher segment margins and consolidated adjusted operating margin targets .
  • Government growth vector: P-8 engine overhaul award and broader DoD interest in commercial best practices support Integrated Solutions and Parts Supply volume/earnings over FY26+ .
  • Leverage reduction on track: Net leverage moved from 3.6x at acquisition close to 3.17x; planned to approach ~2x in two years, aided by EBITDA growth and cash generation in H2/FY26 .
  • Trading implications: Near-term could focus on adjusted margin trajectory and execution on OEM distribution ramps; GAAP noise likely discounted post-FCPA settlement with visibility into Q3 guide (22–25% sales growth; 9.2–9.4% margin) .
  • Medium-term thesis: Structural aftermarket tailwinds (aging fleets, tight new-build supply) support both USM and distribution; Product Support and digital initiatives (TRAX) add differentiated capabilities and cross-sell potential .