AAR (AIR) Q1 2027 Earnings Call Transcript

DATE

Sept. 29, 2026

CALL PARTICIPANTS

• Vice President of Investor Relations - Christopher Tillett
• Chairman, President and Chief Executive Officer - John Holmes
• Chief Financial Officer - Dylan Wolin

TAKEAWAYS

• Total Sales -- $918.0 million, representing a 24% year-over-year increase driven by 10.8% organic growth and contributions from recent acquisitions.
• Adjusted Diluted EPS -- $1.49, increasing 38% from $1.08 in the prior year quarter due to strong operating performance across all core segments.
• Adjusted EBITDA Margin -- 12.7%, representing a 100-basis-point expansion from 11.7% in the previous year.
• Parts Supply Sales -- $414.8 million, up 31% year over year reflecting 23% organic growth in new parts distribution to both commercial and government markets.
• Parts Supply Adjusted EBITDA Margin -- 15.3%, expanding 150 basis points due to improved performance in new serviceable material and continued distribution growth.
• RE&S Sales -- $297.5 million, an increase of 31% year over year driven by the acquisition of HAECO Americas and organic growth in airframe and component maintenance.
• RE&S Adjusted EBITDA Margin -- 11.9%, declining 120 basis points year over year due to expected dilution from the ongoing integration of HAECO Americas.
• Government Solutions Sales -- $138.8 million, rising 4% year over year primarily on strength in Mobility Systems and new government programs.
• Government Solutions Adjusted EBITDA Margin -- 15.3%, a 460-basis-point expansion resulting from a mix shift toward higher-margin programs.
• Adjusted Cash from Operations -- $56.5 million, compared to $47.9 million used in the prior year quarter, reflecting improved working capital management and strong operating results.
• Net Leverage -- 1.81x at the end of the first quarter, demonstrating continued debt reduction from a prior leverage profile.
• MRO Holdings EV -- $4 billion, representing an implied enterprise value for the acquisition of a 65% controlling interest at a 10.7x adjusted EBITDA multiple.
• Synergy Target -- $75 million, consisting of run-rate cost savings in procurement and SG&A expected to be realized within three to four years of the MRO Holdings close.
• Pro Forma Sales -- $4.3 billion, representing the combined annual revenue scale following the integration of MRO Holdings.
• Medium-Term Margin Target -- 19% to 20%, representing the projected adjusted EBITDA margin for the combined entity over the next three to four years.
• Q2 Sales Growth Guidance -- 14% to 16%, excluding Legacy Commercial Programs, reflecting continued strong demand across the aftermarket platform.
• Q2 Adjusted EBITDA Margin Guidance -- 13.0% to 13.4%, excluding Legacy Commercial Programs, supported by the ongoing mix shift toward distribution and high-margin services.
• Full Year Sales Growth Guidance -- low teens, which management increased from a prior range of low double digits to low teens.
• Commercial Sales Growth -- 28% year over year, totaling an increase of $147.5 million due to acquisition contributions and above-market distribution performance.
• Government Sales Growth -- 14% year over year, or $30.9 million, driven by increased volume in new parts distribution activities.
• PIPE Transaction -- 2.2 million shares, issued to support the financing of the MRO Holdings acquisition.
• MRO Holdings CY2026 Forecast -- $1 billion in sales and $285 million in adjusted EBITDA, representing a 27% margin before synergies.
• Maintenance Scale -- nearly 3,000 aircraft, maintained annually across the combined network of 12 facilities in five countries.
• Legacy Commercial Programs -- $66.9 million in sales, including $24 million from the liquidation of rotable assets.

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RISKS

• Dylan Wolin stated, "As expected, the ongoing HAECO Americas integration was dilutive to the segment while we continue to see growth and margin improvement in Component MRO," noting the temporary negative impact on Repair, Engineering and Software margins.
• Dylan Wolin warned that AAR Corp. expects "net leverage to be approximately 3.6x at closing" of the MRO Holdings deal, representing a material increase in debt from the current 1.81x level.
• John Holmes indicated that the Indianapolis facility is the company's "highest cost facility," requiring its exit by the end of the calendar year to recover segment margins.

SUMMARY

Management at AAR Corp. (NYSE:AIR) reported a step change in the company's financial and operational profile following strong fiscal first quarter results and the announced acquisition of a 65% controlling interest in MRO Holdings. The transaction is designed to create a global aviation aftermarket platform by integrating heavy maintenance facilities in the Americas with AAR Corp.'s existing parts distribution and software capabilities. Management stated that the combination will increase pro forma annual revenue to approximately $4.3 billion and significantly enhance adjusted EBITDA margins through $75 million in identified cost synergies. For the fiscal first quarter, the company reported 24% revenue growth and 10.8% organic growth, leading management to increase its full-year sales outlook to the low teens. The company continues to experience strong demand from commercial airlines and government customers, which supported a 38% increase in adjusted diluted EPS and record first quarter cash flow.

• John Holmes stated, "The addition of MRO Holdings gives us access to an even broader pool of maintenance and repair data, which can help us enhance our software solutions."
• The company plans to expand into wide-body aircraft maintenance at MRO Holdings facilities, aiming to repatriate work currently performed by U.S. customers in Asian markets.
• Management expects to complete the integration and restructuring of the HAECO Americas operations by the fourth quarter of fiscal 2027.
• Dylan Wolin noted that for the first two years following the MRO Holdings close, 100% of excess cash flow from that entity will be used to repay an intercompany loan to accelerate deleveraging.
• The company will maintain an option to acquire the remaining 35% interest in MRO Holdings in equal tranches on the second, third, and fourth anniversaries of the initial closing.

INDUSTRY GLOSSARY

• MRO: Maintenance, Repair, and Overhaul services for aircraft and components.
• LCP (Legacy Commercial Programs): A segment focused on managing and liquidating older aircraft parts and engine programs.
• WASS (Worldwide Aviation Support Services): A major government program providing aviation logistics and maintenance support.
• PIPE (Private Investment in Public Equity): A mechanism for raising capital by selling shares directly to institutional or private investors.
• Rotable Assets: Aircraft parts that can be repeatedly repaired and returned to service.
• C-check: An extensive aircraft maintenance inspection performed at specific time intervals regardless of flight hours.

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the AAR Corp. First Quarter Fiscal Year 2027 Business Update Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Tillett, Vice President of Investor Relations. Please go ahead.

Christopher Tillett: Good morning, everyone, and welcome to the business update call covering AAR's fiscal year 2027 first quarter earnings and the announced acquisition of a controlling interest in MRO Holdings. We're joined today by John Holmes, Chairman, President and Chief Executive Officer; and Dylan Wolin, Chief Financial Officer. The presentation we are sharing today as part of this webcast can be found under the Investors section on our corporate website. Comments made during the call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance.

These risks and uncertainties are discussed in the company's earnings release and the Risk Factors section of the company's Annual Report on Form 10-K for the fiscal year ended May 31, 2026. In providing the forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. Certain non-GAAP financial information will be discussed during the call today, and reconciliations of these non-GAAP measures to the most comparable GAAP measures are set forth in the company's earnings release and slides. At this time, I would like to turn the call over to John Holmes.

John Holmes: Thank you, Chris, and good morning, everyone. I'm very excited to talk to you today about an important development for AAR. Alongside our earnings release yesterday afternoon, we announced an agreement to acquire a 65% controlling interest in MRO Holdings, a leading airframe heavy maintenance provider with a significant footprint across the Americas and a blue-chip U.S. customer base. This is a combination we have been talking about with MRO Holdings in various ways for about 8 years. The transaction marks a major milestone in AAR's evolution and in building out our parts, repair and software aftermarket platform.

As a result of the highly strategic combination of AAR's aftermarket solutions and MRO Holdings' footprint, we will achieve a scale that accelerates the growth across all of our activities. It is a significant step in our executing our strategy, and it will meaningfully strengthen AAR's financial position through higher margins and stronger, more consistent cash flow. Before I discuss the transaction in more detail, I want to review our fiscal first quarter 2027 results. We had a strong start to the year with continued above-market growth, margin expansion and record first quarter cash flow.

These results reflect the continued strength of demand across our businesses and the progress we have made against the strategy we have been executing over the last several years. Turning to Slide 3. Total sales were $918 million, up 24% year-over-year, including 11% organic growth. Importantly, growth was broad-based with each of our 3 key segments contributing to the increase. Sales to commercial customers were up 28%, while sales to government customers increased 14%. Commercial customers represented 73% of total sales in the quarter with government customers representing the remaining 27%. Adjusted EBITDA margin expanded 100 basis points to 12.7%.

Excluding Legacy Commercial Programs, adjusted EBITDA margin was 13.3%, already within the 3-year target range that we established at our Investor Day a few months ago in May. Margin expansion was driven by growth in Parts Supply and the continued mix shift towards newer, higher-margin programs in Government Solutions. In Repair, Engineering and Software, we continue to see growth and margin improvement in component MRO, partially offset by the expected short-term dilution from the HAECO Americas integration. We continue to expect that integration to be complete by the first -- fourth quarter of this fiscal year. Adjusted diluted EPS increased 38% year-over-year to $1.49 per share, reflecting our strong operating performance.

We also delivered record first quarter cash flow with adjusted cash from operations of $57 million, or 48% of adjusted EBITDA, driven by strong operating performance and improved working capital management. The strong cash generation helped to reduce our net leverage to 1.81x by the end of the quarter. With that, I'll turn the call over to Dylan to discuss the segments and our updated outlook, and then I'll come back to walk through the MRO Holdings transaction in more detail.

Dylan Wolin: Thanks, John. Turning to the segment results on Slide 4. Parts Supply had another strong quarter with sales increasing 31% year-over-year to $414.8 million. New parts distribution continued to deliver above-market growth, increasing 23% organically with commercial distribution up 21% organically and government distribution up 28% organically. Adjusted EBITDA margin expanded 150 basis points to 15.3%, driven by improved performance in new serviceable material and continued growth in distribution. In Repair, Engineering and Software, sales increased 31% to $297.5 million, reflecting the year-over-year impact of the HAECO Americas acquisition as well as organic growth across Airframe MRO, Component MRO and Software. Adjusted EBITDA margin was 11.9%, down 120 basis points from the prior year.

As expected, the ongoing HAECO Americas integration was dilutive to the segment while we continue to see growth and margin improvement in Component MRO. In Government Solutions, sales increased 4% to $138.8 million, while adjusted EBITDA margin expanded 460 basis points to 15.3%. Growth in Mobility Systems and in the newer higher-margin government programs more than offset the decline in WASS activity. Importantly, that mix shift also drove the significant improvement in segment margins during the quarter. Finally, in Legacy Commercial Programs, we liquidated $24 million of rotable assets, which contributed approximately $5 million of margin in the quarter.

We estimate run rate revenue in that segment today is $35 million to $40 million per quarter, and you can expect that we will continue to pursue these rotable asset sales as opportunities become available. Turning to our outlook on Slide 5. For the second quarter, we expect total sales growth, excluding Legacy Commercial Programs, of 14% to 16% and adjusted EBITDA margin, also excluding LCP, of 13.0% to 13.4%. This outlook implies a higher level of organic growth, excluding LCP, in the second quarter than what we delivered in the first with similar margin levels.

I would also note that we will close the PIPE associated with the MRO Holdings transaction this week and issued 2.2 million shares, which will be reflected in our Q2 share count for approximately 2/3 of the quarter and associated interest savings from the proceeds. For the full year, we are increasing our sales outlook and now expect growth, excluding LCP, in the low teens. This reflects our strong first quarter performance and our continued confidence in demand environment, supported by durable passenger volumes and a customer list that includes some of the world's largest airlines. Importantly, both our second quarter and full year fiscal 2027 outlooks exclude any impact from the MRO Holdings acquisition.

With that, I will turn the call back to John to walk through the transaction in more detail.

John Holmes: Thank you, Dylan. Turning to Slide 6. I want to start with the key strategic and financial takeaways from the transaction. First, we have agreed to acquire a 65% controlling interest in MRO Holdings, a leading provider of airframe heavy maintenance with facilities across Central and South America and the United States for an implied enterprise value of $4 billion. Second, the transaction significantly advances our strategy to become the leading aviation aftermarket platform, creating substantial avenues for growth across parts, repair and software. Third, the combination represents a step change in AAR's financial profile, significantly increasing our scale while enhancing margins and cash flow.

And fourth, we will apply the same disciplined approach to M&A that has guided our prior acquisitions to integration and deleveraging. We see compelling synergy opportunities across our platform, and the strong cash generation of the combined business will support our path back towards our target leverage range within the medium term. Turning to Slide 7. By combining AAR's capabilities with MRO Holdings heavy maintenance footprint, we are adding a very well-respected Airframe MRO operation and achieving significantly greater scale across our broader parts, repair and software platform.

We will approach market as one company, and this scale will create tremendous advantages for our customers as we can offer a broad range of maintenance solutions for more aircraft types in strategic geographies. The deal also creates advantages for the rest of AAR. First, by expanding our Airframe MRO presence, we have an opportunity to drive additional volume into our high-margin Component MRO facilities and offer customers a single, more comprehensive repair solution. Second, the combination strengthens our position with existing OEM distribution partners and create new opportunities to win additional distribution agreements.

With combined business servicing nearly 3,000 aircraft annually, we will have even greater visibility into parts demand and the needs of airline customers across multiple fleet types. That market insight and direct sales channel is a significant competitive advantage in building and expanding long-term OEM distribution relationships. Third, the expanded footprint creates an opportunity to capture substantially more repair and maintenance data that can enhance our software solutions and help us continue developing tools that address our customers' most critical operational needs. Importantly, the structure of the transaction also creates long-term alignment between AAR and MRO Holdings.

The sellers bring decades of experience operating in strategically important markets and the continued ownership provides continuity while AAR continues to preserve financial flexibility. The financial benefits are equally compelling. On a pro forma basis, the transaction increases AAR's revenue by approximately 30% and improves adjusted EBITDA margin from roughly 12% to 16% before synergies. It also meaningfully enhances our cash conversion profile, and we expect the transaction to be accretive to adjusted EPS in the first full fiscal year following close.

In addition, we expect to generate approximately $75 million of run rate cost synergies within the next 3 to 4 years, consisting of savings in procurement and SG&A as well as savings generated by the sharing of best practices and systems across the combined footprint. And critically, that $75 million does not include the longer-term revenue opportunities we see from the combination, including growth in wide-body maintenance, increased capture of European and Middle Eastern fleets and service in the Americas and cross-selling opportunities over our platform, which I will discuss now. On Slide 8, I want to spend a moment on why we believe this combination makes the entire AAR platform stronger. Parts, repair and software are highly complementary businesses.

Each one creates opportunities for the others. In parts, our position in distribution gives us deep relationship with OEMs and visibility into parts demand across the aftermarket. Extending our Airframe MRO footprint puts AAR closer to the point of consumption for a greater number of aircraft, strengthening our market insight and value proposition to existing and prospective OEM partners. In repair, Airframe MRO is one of those visible activities we perform for airline customers. Increasing the number of aircraft flowing through our network creates opportunities to capture additional high-margin component MRO work, while also providing valuable insight into parts requirements and maintenance trends. In software, thousands of parts buyers and repair planners use our software every day.

The addition of MRO Holdings gives us access to an even broader pool of maintenance and repair data, which can help us enhance our software solutions on their own, but also data available across our platform will help us perform maintenance more efficiently and allow us to provide our OEM partners more insight into their distribution channels. That is the self-reinforcing nature of our platform. Part supports repair, repair supports parts, and the data generated across both markets makes our software business stronger. With the addition of the MRO Holdings, we are materially increasing the scale of that ecosystem, strengthening our leadership in heavy maintenance while creating additional opportunities for growth across the entire company. Turning to Slide 9.

I want to provide some more context on why heavy maintenance is such an important part of the aviation aftermarket. Heavy maintenance is a recurring mission-critical service that aircraft require throughout their useful lives. These extensive events are time-based, meaning they often happen regardless of how much an aircraft has flown and involve inspection, repair, overhaul and modifications. Because the work is required regardless of utilization, it provides a durable and recurring source of demand. It is also a highly specialized business with barriers to entry. Heavy maintenance requires skilled labor, scaled hangar capacity and the system to return aircraft to service quickly and efficiently.

AAR has built a strong position in this market through our operating model, digital and technical capabilities and industry-leading turnaround times and so has MRO Holdings. Just as important, heavy maintenance puts us at a critical point in the customer relationship. It provides visibility into the repair needs, parts requirements and maintenance activity of the aircraft we service, creating opportunities that extend beyond Airframe MRO and into our broader platform. And the long-term demand environment remains very attractive. The global fleet is expected to grow significantly over the next decade, while stronger passenger demand and the existing installed fleet continue to support the need for heavy maintenance.

Against that backdrop, adding MRO Holdings meaningfully expands our position in this attractive, strategically important market. Slide 10. Turning to Slide 10. MRO Holdings is a scaled, highly differentiated heavy maintenance provider with 5 locations across El Salvador, Mexico, Colombia and the United States, and room to expand further in each location as the demand requires. For example, MRO Holdings recently opened its seventh hangar in El Salvador, which is actually the largest hangar in the world. The business has comprehensive capabilities across narrow-body and select wide-body aircraft and serves a blue-chip customer base that includes some of the largest airlines in the Americas.

Approximately 90% of its sales are to U.S. customers, demonstrating the important role these strategically located facilities play in supporting the U.S. aviation market. MRO Holdings also has an impressive track record of growth and profitability. Over the last 12 years, sales have had double-digit compounded annual growth rate, while adjusted EBITDA has grown even faster. The strength of these results is also a testament to the reputation for quality and safety. For calendar 2026, MRO is expected to generate approximately $1 billion of adjusted sales and $285 million of adjusted EBITDA on a pro forma basis, representing 27% adjusted EBITDA margin. That profitability translates into significant cash flow.

The business is expected to generate more than $200 million of adjusted operating cash flow in calendar 2026. Taken together, MRO Holdings brings AAR significant scale, attractive margins, strong cash generation and a strategically important footprint serving many of the world's leading airlines. Now on Slide 11, you can see the scale and geographic reach of the combined airframe network. Together, AAR and MRO Holdings will create the largest MRO operation in the world, expanding our network from 7 to 12 facilities across 5 countries with approximately 19 million service hours and nearly 3,000 aircraft maintained each year. Sorry, I get choked up every time I say that 3,000 number. But the strategic value goes beyond scale.

This footprint gives us greater flexibility to serve customers across a broader range of aircraft types and geographies and adds cost-advantaged options to our hangar network, and it creates a more open runway for future capacity additions. For example, MRO Holdings already has plans underway to add an additional eighth hangar to its location in El Salvador. We believe the combination of scale, flexibility and additional capacity creates a highly differentiated offering for our customers and position us well to capture continued growth. Turning to Slide 12. The transaction immediately transforms AAR's financial profile. On a combined basis, AAR will have approximately $4.3 billion in annual sales and nearly $700 million of adjusted EBITDA.

Our adjusted EBITDA margin increases by 400 basis points from roughly 12% to 16% before synergies. The transaction also enhances our cash generation. Pro forma adjusted operating cash flow increases from approximately $94 million to $272 million, reflecting the attractive working capital profile of the MRO Holdings business. That stronger cash generation will be an important driver of our deleveraging following close and help us to preserve financial flexibility over time. Given the significantly improved earnings profile of the combined business, we are also establishing new medium-term adjusted EBITDA margin targets. At our Investor Day back in May, we laid out a 3-year target of 13% to 14% plus, excluding Legacy Commercial Programs.

Following the close of the trends -- of this acquisition and including the cost synergies we have identified, we now expect adjusted EBITDA margins to reach 19% to 20% over the next 3 to 4 years. Notably, that target does not include the longer-term revenue synergies we see from the combination, including the cross-selling and broader growth opportunities I discussed earlier. Turning to Slide 13. We see significant opportunities to continue growing in a fragmented repair market. Today, the addressable market across component maintenance, heavy maintenance and modifications is more than $50 billion, providing substantial room for continued growth across our repair activities, particularly in the Component MRO space.

The combination of those market dynamics, our industry-leading capabilities and significantly expanded scale of our combined platform puts AAR in an excellent position to capture more work over time. With that, I'll turn the call back over to Dylan to discuss the transaction structure and financing in more detail.

Dylan Wolin: Thanks, John. Turning to Slide 14. I'll walk through some of the key transaction terms. We are acquiring an initial 65% controlling interest in MRO Holdings and an implied enterprise value of approximately $4 billion, representing a 10.7x multiple on adjusted EBITDA, net of the tax benefit and synergies. The acquisition will be financed through a combination of debt and equity. We will issue approximately $1 billion of AAR equity, including approximately $780 million issued to the current MRO Holdings shareholders at $135 per share price and approximately $230 million through the PIPE transaction. Collectively, the current MRO Holdings shareholders will hold approximately 12% of AAR shares.

We also expect to raise approximately $2.1 billion of new debt with fully committed financing in place to support the transaction. At closing, substantially, all existing MRO Holdings' debt will be repaid, and AAR will provide its intercompany loan to MRO Holdings. For the first 2 years following close, 100% of the excess cash flow from MRO Holdings will be used to repay that loan, supporting our deleveraging objectives. The transaction also provides AAR with a clear path to increase our ownership over time. We'll have the option to acquire an additional 5% at any time as well as the remaining 30% in equal tranches on the second, third and fourth anniversaries of the initial closing.

The exercise price for those future purchases will be based on AAR's then current LTM EBITDA multiple subject to the floor and cap outlined on the slide. AAR will control the MRO Holdings Board. We expect to close the transaction in our fiscal third quarter ending February 2027, subject to customary regulatory approvals. Following close, MRO Holdings will be fully consolidated into the AAR financial results. Turning to Slide 15. We expect net leverage to be approximately 3.6x at closing, including the full amount of the run rate synergies.

We have a clear path to reduce that leverage through the strong cash generation of the combined business and the receipt of all MRO Holdings cash flow during the first 2 years following close in order to pay down the intercompany loan, as I described in the previous slide. We expect net leverage to decline to approximately 3x on a realized synergies basis within 24 months following close and to return to our 2 to 2.5x target range over the medium term, including the assumed exercise of the options. Importantly, we expect to maintain a BB category credit rating profile following close.

Overall, we believe the financing structure provides an appropriate balance between funding the transaction, rapidly reducing leverage and preserving financial flexibility. With that, I'll turn it back to John.

John Holmes: Great. Thank you, Dylan. I'll close by coming back to our strategy. Our ambition is to build the leading aviation aftermarket platform, and we believe this transaction represents a major step forward in achieving that vision. By bringing AAR and MRO Holdings together, we are adding significant scale to a mission-critical part of the aftermarket and in doing so, strengthening our entire parts, repair and software platform. The opportunity creates more -- the combination creates more opportunities to serve our customers, expand our avenues for above-market growth, meaningfully increases our margins and cash generation and creates an even stronger foundation for the future. And what makes this combination particularly powerful is that the business reinforce one another.

Part strengthens repair, repair strengthens parts and software both contributes to and benefits from the data and insights generated across the platform. As we increase scale, we believe that model becomes even more valuable. We are incredibly excited about what we are building and the opportunities ahead as demand for our services remains extremely strong. I want to thank the teams at AAR and MRO Holdings whose hard work has brought us to this point, and we look forward to bringing these 2 organizations together. And I want to particularly congratulate the AAR team on such a strong start to our fiscal year 2027. With that, I'll turn it back over to the operator for questions.

Operator: [Operator Instructions] Our first question comes from the line of Louie DiPalma with William Blair.

Louie Dipalma: Congrats on the proposed deal and another strong quarter. John, to summarize the main rationale for the deal, I know you got choked up when you were describing the 3,000 aircraft parked in your hangars, but would you say with these 3,000 aircraft parked that it mainly comes down to the network effect and you guys becoming a one-stop shop for airlines, in that it's not only now cross-selling the distribution, but it's also cross-selling the component repairs. And so for your existing customers and your new airline customers, it can basically just be a one-stop shop, so it's a lot more time efficient versus the airlines flying to many different places to receive these services and new parts?

John Holmes: Thanks, Louie. Yes, it is exciting to think about the scale of the operation as we have 3,000 aircraft or approximately 3,000 aircraft moving through our hangars each year. That's a lot of volume and as we mentioned, it would be the largest maintenance operation in the world. And you're absolutely right. I mean you definitely would think about it as a network effect. We're excited about the opportunities to cross-sell certainly Component MRO. This gives us visibility in demand and aircraft trends that are incredibly valuable to our position as a distributor. We are not just a stocking distributor.

Our goal is to help our OEM partners take market share and giving them a clear view into the demand channel for the parts that they manufacture and sell is important, and heavy maintenance provides a window into that channel. And certainly, the software business, as we scale and collect more data, it allows us to offer more compelling software offerings, which that business continues to grow very, very nicely. And then the software insights, the data that is collected from the broader software offering helps inform what parts we want to have on the shelves, what OEMs, we think can make great distribution partners and what repairs we decide to develop. So you're absolutely right.

All these things work together.

Louie Dipalma: Great. And John, you were already one of the industry leaders for heavy maintenance. Does this acquisition make AAR more a global player in the market? I think, if you take the 3,000 aircraft and divide it by the 29,000 total commercial aircraft, it's roughly 12% of the market. But could you begin like serving European airlines or even some of your Asian customers with the new footprint?

John Holmes: Yes, absolutely. And I'm glad you went there. I mean this really opens up a much -- the world market to us in terms of heavy maintenance in a few different ways. First of all, we are -- AAR today is a narrow-body focused operation. With the capability that comes online with MRO Holdings, we -- they're doing wide-body work today, and we see opportunities to expand that. A number of our U.S. customers performed their wide-body maintenance overseas, particularly in Asia, and there's a desire for many of those customers to bring that wide-body work back to this side of the world, and MRO Holdings has the capacity to do that work.

And so we would look to expand meaningfully into wide-body maintenance in their facilities. Furthermore, if you think of the cost profile that we can offer relative to the cost of heavy maintenance in European markets, we see an opportunity to attract not just widebody, but actually narrow body work over from Europe over time. So this is really the opportunity to create a global heavy maintenance provider, given the combination of our best practices, their best practices and the strategically advantaged locations.

Operator: Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Sheila Kahyaoglu: Congrats on a great quarter and a very exciting deal. Maybe just to go from the revenue synergy potential and expansion to margins. John, this transaction transforms your margin profile of your business with 16% pro forma and 19% to 20% in 3 to 4 years. I guess, what are the major puts and takes now that the business will become almost 50% MRO as you -- and how you think back to your Investor Day targets set in May?

John Holmes: Certainly, as you pointed out, the margin profile of MRO Holdings is highly attractive. It moves the combined total up. We get to that 19% to 20% by realizing those synergies. Those synergies come from SG&A savings. They come from volume discounts on procurement because we're buying a lot of parts to support our maintenance operations. They're buying a lot of parts to support their maintenance operation. There's great savings by improved sourcing across the two.

And then ultimately, as I mentioned, we have highly differentiated systems, proprietary systems at AAR that have allowed us to achieve industry-leading margins in our business here as well as industry-leading turnaround times, and they've got proprietary systems in their operations, and we intend to deploy -- share best practices, which we expect will improve the margin profile of both their business and our business even further. That's the heavy maintenance. What we're not factoring in, even in the targets that we just gave, are the network effects that we see from additional revenue capture, additional revenue capture in components through cross-selling. We see very clear connection there that's not factored into the model right now.

We also see significant appeal to additional OEM partners for distribution. This scale, this visibility, this data that we're collecting is incredibly valuable to OEMs and our pitch to them as an exclusive distribution partner. Growth in that business as a result of this acquisition is not factored into that model. And additionally, we think about the software business. The data that we collect, the improvements we can make -- further improvements we can make to the software offering, given we've got -- we sell MRO software, and now we've got a much greater window to the MRO world can help make that software solution set even more exciting and growth there.

I mean, obviously, we're counting on growth there, but the potential acceleration of that growth isn't factored into the model either. So it's exciting on its own. The cost synergies get us to that 19% to 20% over time. But the network effect, we think can be very powerful beyond that.

Sheila Kahyaoglu: That's super helpful. And then maybe if I could just follow up on Repair ,Engineering and Software margins in the quarter, down 100 bps. Can you talk about the puts and takes there? What's going on with the HAECO acquisition and how we should think about adjusted EBITDA margins to the business unit into 2027?

John Holmes: Yes, that step down is due to the expected HAECO dilution. 2 quarters ago, you saw the most meaningful impact from the dilution of the HAECO acquisition. And just to remind everybody, I mean, that is a meaningful restructuring effort where we bought a business that was significantly underperforming in terms of margin. We're restructuring the business. We're taking the revenue down. We're executing -- exiting work that was not profitable and bringing in contracts that make a lot more sense. And the goal was to get the HAECO operation EBITDA wise to be margin consistent with the other facilities that we have in North America. So you saw the biggest impact from that exercise 2 quarters ago.

We saw an improvement from that low point last quarter. This quarter was relatively even with last quarter in terms of the dilution. And that's because the next big step is the full exit of our Indianapolis facility. Just as a reminder, that's our highest cost facility. We will exit it by the end of this calendar year. And once we complete that exit, you'll start to see the margin trend back up towards where it was before we complete takeout. And we're on track to achieve that by the end of this fiscal year.

Operator: Our next question comes from the line of Michael Ciarmoli with Guggenheim Securities.

Michael Ciarmoli: Congrats on the results and the transaction, pretty exciting stuff. John, just to maybe think about the margins that this business is generating. I mean sort of best-in-class when we think about some of the other aerospace aftermarket companies, and I'm just curious how you ended up getting this asset for such a reasonable multiple? And then just the other one I had, the labor difference in labor arbitrage, I mean, I guess, I could go 1 of 2 ways.

I mean, I think Louie called out how much scale and breadth of presence you have, which kind of begs the question, maybe you can get even more pricing and have some pricing power to kind of drive that one-stop shop and convenience for the airlines. And on the flip side, just if we're trying to think about from a modeling standpoint, do we have to worry any bit about those kind of wages maybe creeping up? Can you offset kind of price increases and maybe that goes to what I was just asking about the pricing power?

John Holmes: Thanks, Mike. Great set of questions. First of all, I would say -- I'd kind of go back to what I said at the beginning. I mean, we've got tremendous respect for the Kriete family and the others that have built this incredible, as you said, best-in-class MRO operation down south. And we've known them now for many, many years. It's an amazing business, and they have a really impressive reputation. And yes, they do have a significant labor cost advantage, which is a key contributor to their margin profile. But similar to us, they've got great systems. They turn aircraft very quickly with industry-leading turnaround time.

And that performance, safety and quality, et cetera, is what has allowed them to grow. And since we've gotten to know them, they've always had an attractive margin profile, and we expect that to continue. So with respect to different wage pressure, et cetera, we don't see that in these markets. They've been there for decades. We've obviously spent a lot of time talking to them and understanding those dynamics. And so we don't see any sort of meaningful wage differential in the future that would impact that margin profile.

Dylan Wolin: Mike, maybe I'll just add as it relates to your question on value. I think transaction structure was an important part of the overall equation. It was important to the sellers to continue to participate here in value creation through their stake as well as the ownership in AAR going forward.

John Holmes: Yes. I'm glad you said that, Dylan. They were not for sale. We approached them. And it took us some time to convince them that they've got a great business that's been performing really well, and it took us some time to convince them. But as Dylan pointed out, they're retaining the 35% stake, becoming shareholders of AAR and participating in the combined upside was a big part of the reason they agreed to do the deal.

Operator: [Operator Instructions] Our next question comes from the line of Scott Mikus with Melius Research.

Scott Mikus: Congrats on the deal. John, you did 4 acquisitions in fiscal '26. This is AAR's largest ever acquisition. I'm just -- is there any concern about trying to digest all these deals at once? Do you feel like the management bandwidth might be a little bit stretched. And Dylan, you talked about how the financing structure provides the company with financial flexibility. Should we just assume the path going forward now is delevering? And then deals could pop up in the medium term once you're back in your target leverage range?

John Holmes: Yes. Great set of questions, and glad you asked about the bandwidth. Yes, we've been very active in the M&A world over the last several years, and the deals have gone very well. And the fact that we've performed so well on the transactions we've done over the last 4 years gave us the confidence to go and pursue something like this. But I wouldn't necessarily conflate the value of the transaction with the integration difficulty. HAECO, for example, that's a big turnaround project. That's a lot of intensive effort moving sites around, restructuring operations, massive deployment of systems, restructuring customer contracts, et cetera. That was a real effort, small purchase price, but a lot of integration effort.

MRO Holdings is very different. I mean, this is a business that is performing exceptionally well. This is about bringing 2 high-performing companies together and growing from here. And so we're very confident in our ability to do that. The other thing I would point out is even though we've done a number of acquisitions, they've been in different areas of AAR. Obviously, you've seen acquisitions in parts, you've seen acquisitions in software and now in repair.

And we are very disciplined in terms of the financial capital allocation and a disciplined approach to capital allocation here, but we're certainly also very disciplined in terms of what we can take on operationally, and we feel very comfortable with the spacing here and the deal that we just announced.

Scott Mikus: Okay. Got it. And then you mentioned the turnaround times previously. I think at a recent conference, you mentioned you guys can do a C-check at your hangars in the high 20s of days. I'm just curious what are the turnaround times at MRO Holdings right now? And then as you implement your paperless hangar initiatives and their hangars, can you also get their turnaround times in line with AAR's turnaround times?

John Holmes: Yes. Yes, you're correct. And we're very proud of the industry-leading turnaround times that we've built. MRO Holdings also performs exceptionally well in terms of their turnaround times. I think it's important to note that actually, the maintenance profile of the aircraft they work on can be different than the maintenance profile of the aircraft we work on. So for example, they are in a lower-cost labor environment. And therefore, they will see more labor-intensive work as a result of that. And so it's a little bit of apples and oranges in terms of comparing to our turnaround times and their turnaround times.

So I would look at us as we're best-in-class for the type of maintenance work that we do, and they are best-in-class for the type of maintenance work that they do. And there, as you mentioned, will be opportunities to share best practices across both organizations and make each other stronger.

Scott Mikus: Okay. And then one last question for Dylan. The F1Q revenue growth was very good. You provided the outlook for the second quarter. The full year guide kind of implies that growth decelerates to roughly 8% in the back half of fiscal '27. Is that kind of just conservatism? Or are you seeing any changes in demand signals from customers?

Dylan Wolin: Yes, Scott, I would not think about a deceleration generally in growth or demand. We are continuing to see strong demand that's been reflected in our bookings and what we're hearing from our customers. So yes, I don't think you're hearing anything that would suggest we're decelerating.

John Holmes: Yes. And if you look at the guidance that we just provided for Q2, it actually implies an increase in organic growth from Q1 to Q2. And obviously, we've just raised the guide for the full year. And just on that point, just to amplify what Dylan said, we are not seeing a slowdown anywhere in our bookings in parts and more importantly, we're not hearing from any of our customers that we should expect to slow down on the maintenance side. So we continue to feel very good about the demand environment that we're in.

Operator: And I'm currently showing no further questions at this time. I'd now like to hand the call back over to John Holmes for closing remarks.

John Holmes: All right, everybody. We really appreciate the time and flexibility given the change in the conference call time here, and we look forward to providing another update from next quarter. Thank you.

Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.

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