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AC

AAR CORP (AIR)·Q3 2025 Earnings Summary

Executive Summary

  • Record Q3 FY25 sales of $678.2M (+20% YoY) and adjusted EPS of $0.99 (+16% YoY); GAAP EPS was $(0.25) driven by a $63.7M pre-tax charge tied to the Landing Gear Overhaul divestiture .
  • Mixed vs Wall Street: EPS beat ($0.99 vs $0.964*) while revenue missed ($678.2M vs $699.1M*); EBITDA slightly below consensus ($77.4M vs $79.2M*) but company-reported adjusted EBITDA was $81.2M .
  • Margins expanded: adjusted operating margin 9.7% (up from 8.3% YoY and 9.2% QoQ); strength in Parts Distribution, Trax, and airframe MRO efficiency offset USM volume timing headwinds .
  • Portfolio optimization catalyst: closing of $51M sale of Landing Gear Overhaul post-quarter; management guides Q4 sales growth mid-single digits (high-single digits excluding Landing Gear), adjusted operating margin 9.7%–9.9%, net interest expense ~$18M, tax rate ~30% .

What Went Well and What Went Wrong

What Went Well

  • Parts Distribution and MRO execution drove margin expansion; adjusted EBITDA rose 39% YoY to $81.2M and adjusted operating margin improved to 9.7% from 8.3% .
    Quote: “We are particularly proud of the progress on EBITDA margin… our internal initiatives to drive efficiency improvements continue to produce meaningful results” — CEO John Holmes .
  • Repair & Engineering surged: sales +53% YoY to $215.9M; adjusted EBITDA +110% to $27.9M; integration of Product Support on track; hangars near capacity with good efficiency .
  • Trax momentum: Cathay Pacific win and strong margins (Trax is highest-margin business), pipeline strengthening; integrated solutions’ adjusted EBITDA +11% YoY .

What Went Wrong

  • USM volume timing: engine shop inputs at certain customers deferred, driving lower-than-expected USM demand; management expects temporary effect and signs of material loosening .
  • Higher net interest expense: $18.1M vs $11.3M YoY due to debt for Product Support acquisition; deleveraging progressing but financing cost remains a drag .
  • Operating cash flow used: $(18.7)M in Q3 (adjusted $(15.0)M excluding AR financing), reflecting $56M FCPA settlement payment in the quarter .

Financial Results

Consolidated Financials vs Prior Periods

MetricQ1 FY25Q2 FY25Q3 FY25
Revenue ($USD Millions)$661.7 $686.1 $678.2
GAAP EPS ($)$0.50 $(0.87) $(0.25)
Adjusted EPS ($)$0.85 $0.90 $0.99
Adjusted EBITDA ($USD Millions)$73.7 $78.3 $81.2
Adjusted Operating Margin (%)9.1% 9.2% 9.7%

Q3 FY25 vs Wall Street Estimates (S&P Global)

MetricConsensusActualSurprise
Revenue ($USD Millions)$699.1*$678.2 —$20.9M (miss)*
Primary EPS ($)$0.964*$0.99 +$0.026 (beat)*
EBITDA ($USD Millions)$79.2*$77.4*—$1.8M (miss)*

Values retrieved from S&P Global.*

Segment Sales and Operating Income (Q3 YoY)

SegmentQ3 FY24 Sales ($M)Q3 FY25 Sales ($M)Q3 FY24 Op Inc ($M)Q3 FY25 Op Inc ($M)
Parts Supply$242.3 $270.7 $31.1 $45.4
Repair & Engineering$140.8 $215.9 $11.5 $19.0
Integrated Solutions$165.5 $162.9 $8.6 $9.6
Expeditionary Services$18.7 $28.7 $0.9 $6.4
Corporate & Other——$(19.1) $(9.3)
Total$567.3 $678.2 $33.0 $71.1

KPIs and Balance Sheet Highlights

KPIQ2 FY25Q3 FY25
Cash from Operations ($M)$22.0 $(18.7)
Adjusted Cash from Operations ($M)—$(15.0)
Net Interest Expense ($M)$18.8 $18.1
Net Debt ($M)—$947.6
Net Leverage (x)3.17x 3.06x
Cash & Equivalents ($M)$61.7 $84.4

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Sales Growth (YoY)Q3 FY25+22% to +25% Actual: +20% Delivered slightly below guide due to USM timing
Adjusted Operating MarginQ3 FY259.2%–9.4% Actual: 9.7% Raised outcome vs guide on stronger mix and efficiencies
Sales Growth (YoY)Q4 FY25—Mid-single digits; high-single digits ex-Landing Gear New
Adjusted Operating MarginQ4 FY25—9.7%–9.9% New
Net Interest ExpenseQ4 FY25—~$18M New
Effective Tax RateQ4 FY25—~30% (then ~28% subsequent quarters) New

Earnings Call Themes & Trends

TopicQ1 FY25 (Sep 2024)Q2 FY25 (Jan 2025)Q3 FY25 (Mar 2025)Trend
Trax/TechnologyEarly scaling; pipeline with large airlines; parts channel integration longer-dated Pipeline momentum; APAC traction; future parts channel Cathay win; highest-margin business; strong pipeline Strengthening and accretive to margins
Supply Chain/USM AvailabilityIndividual part sales strong; whole assets constrained Whole assets availability improving; FTAI partnership USM demand deferred by engine shop timing; signs of loosening, extended CFM56 deal Volatile but improving asset supply
Tariffs/Macro——Monitoring tariff risks; passing OEM price increases; potential U.S.-based repair benefits Manageable; potential tailwind to domestic MRO
MRO Efficiency/CapacityProcess improvements driving margin; expansions planned Paperless hangar initiatives and expansions to drive margins Near capacity; throughput and margins improved; Oklahoma ahead, Miami slightly delayed Continued margin expansion and capacity adds FY26
Government/RegulatoryConfidence in commercial-derivative military opportunities DoD engine overhaul award ramping; FCPA resolution booked DOGE commission engagement; USM to government upside; tax rate elevated by impairment Growing pipeline; regulatory items winding down
Legal/Portfolio Actions—Announced Landing Gear divestiture; expect accretive margins Recorded $63.7M pre-tax charge; sale closed post-quarter for $51M proceeds Portfolio optimization completed in Q4

Management Commentary

  • “Sales were 20% higher than in the same quarter last year as demand remains elevated for our aftermarket services… Repair & Engineering segment sales increased more than 53% year-over-year, with significant contributions from the Product Support acquisition” — CEO John Holmes .
  • “We expect further margin expansion through growth in new parts Distribution, Trax, Airframe MRO efficiencies and the realization of Product Support synergies… net leverage [down] to 3.06x” — Holmes .
  • “Part supply… new parts distribution continues to drive exceptional growth… better-than-expected margins due to favorable product mix and scaling efficiencies” — Holmes .
  • “We reduced our net debt leverage from 3.17x to 3.06x despite having an operating cash use of $19M due to the FCPA settlement of $56M… expect to continue to delever” — CFO Sean Gillen .

Q&A Highlights

  • USM dynamics: Lower quarter due to customer engine maintenance deferrals; expected to rebound; whole assets supply improving; extended exclusive CFM56 arrangement with FTAI through 2030 .
  • Trax scaling: Cathay and Singapore deals accretive; robust pipeline; Trax poised to become parts sales channel later this calendar year .
  • Tariffs: Not stockpiling ahead of tariffs; confident in passing through OEM price increases; potential benefit to domestic repair volumes .
  • MRO margin drivers: Paperless hangar rollout continuing; throughput gains driving margin expansion; Oklahoma expansion ahead of schedule, Miami slightly delayed .
  • Landing Gear sale: Margins slightly accretive post-divestiture; Q3 included full results; Q4 assumes ~1 month contribution pre-close .

Estimates Context

  • EPS beat: $0.99 vs $0.964*; margin expansion and mix (Trax, MRO) offset USM timing .
  • Revenue miss: $678.2M vs $699.1M*; primarily USM volume timing at certain contracts .
  • EBITDA: Consensus $79.2M* vs actual $77.4M*; company-reported adjusted EBITDA $81.2M indicates non-GAAP adjustments (e.g., legal reversal, acquisition/integration) supporting stronger underlying performance .
    Values retrieved from S&P Global.*

Key Takeaways for Investors

  • Near-term: Expect modest top-line growth in Q4 with margin resilience (9.7%–9.9% guide); watch USM demand normalization and post-divestiture mix shift as potential upside catalysts .
  • Medium-term margin runway: Trax scaling, MRO efficiency initiatives (paperless), capacity expansions, and Product Support synergies support continued margin expansion into FY26 .
  • Portfolio discipline: Landing Gear sale cleanses lower-return activities; proceeds used to delever; net leverage down to 3.06x with target 2.0–2.5x over time .
  • Parts Distribution growth: Exclusive OEM and PMA agreements (Unison, Chromalloy) and DLA programs drive durable, higher-margin distribution growth; key to sustained mix benefits .
  • Estimate revisions: EPS likely nudged higher on margin outperformance; revenue forecasts may be trimmed near-term given USM variability, but improving asset availability supports recovery .
  • Risk watch: Elevated interest expense persists; tariff volatility manageable but monitor pass-through; government USM adoption would be incremental upside not in current run-rate .
  • Stock narrative: Margin expansion and deleveraging, plus software (Trax) optionality and distribution contracts, remain the primary positive catalysts; USM execution is the swing factor quarter-to-quarter .