AAR Corp. Stock

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.

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.

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.

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.

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.

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.

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

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?

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.

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?

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.

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

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?

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.

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?

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.

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

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?

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.

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.

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

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?

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.

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?

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.

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?

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.

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.

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.

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.

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

Hello, and welcome to AAR Corp. Fourth Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to Chris Tillett, Vice President of Investor Relations. You may begin.

Good afternoon, everyone, and welcome to AAR's Fiscal Year 2026 Fourth Quarter Earnings Conference Call. 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, 2025. 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. 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.

Great. Thank you, Chris, and welcome, everybody, to our fourth quarter fiscal year 2026 earnings conference call. I'll begin with key messages on Slide 3. First, our momentum continued with another strong set of results in the quarter, demonstrating how our connected platform approach to parts, repair and software is delivering higher, more profitable growth. Second, we delivered 26% growth in adjusted sales, 27% growth in adjusted EBITDA and 32% growth in adjusted earnings per share for the period. The adjusted sales increase included 13% organic adjusted sales growth, led by 19% organic growth in our new parts distribution activities and significant growth at Trax. Notably, our adjusted EBITDA margin in the quarter, excluding legacy commercial Program segment, was 13%, already demonstrating our ability to achieve the 3-year range provided at our Investor Day event held in May. While progress will not be linear, this quarter's results underscores the high degree of confidence we have that we will ultimately be able to achieve or exceed the high end of our range as we continue to execute on our strategy. For the full year, the adjusted EBITDA margin, excluding commercial programs was 12.7%. Third, we continue to expect double-digit sales growth and further margin expansion as we execute on our plan. Finally, our strong cash flow in the quarter helped us further reduce our net leverage. We continue to carefully manage our balance sheet in order to support our disciplined approach to capital allocation and preserve financial flexibility.

Looking at Slide 4. Total sales in the quarter were a record $928 million and grew 26% year-over-year, including 13% organic growth. We drove revenue growth in each of our four key parts, repair and software activities in the period. Sales to commercial customers were up 31%, while sales to government customers were up 5% over the same period last year. 73% of our sales were to commercial customers and the remaining 27% were to government customers during the quarter. Adjusted EBITDA in the quarter increased 27% year-over-year to $116 million, and adjusted EBITDA margin increased from 12.4% to 12.5%. Margin expansion in the quarter was driven by growth in new parts distribution and continued mix shift in government programs. We continue to expand EBITDA margins despite the year-over-year comparable impact of a onetime gain in used serviceable material in the prior year. Also, as we mentioned in detail last quarter, the integration of HAECO Americas is tracking ahead of schedule and slightly dilutive to near-term margins. Last quarter, the impact of HAECO was roughly 70 basis points, which we cited as below. And this quarter, the impact was roughly 40 basis points. Adjusted diluted EPS was up 32% year-over-year to $1.53 per share, driven by our strong operational performance. Lastly, we had strong cash flow generation with adjusted cash from operations of $58 million in the fourth quarter or $94 million for the full year.

On Slide 5, you will see the results for full year fiscal 2026. We had growth across all key performance metrics this year, demonstrating our disciplined execution and the power of our parts, repair and software platform. I'm extremely proud of our performance this year as we hit a record high on sales, adjusted EBITDA and adjusted EPS. We also closed on 4 separate acquisitions in 2026 and have been successfully executing on complicated integrations that involve site consolidation, workforce repositioning and detailed customer coordination. These achievements are a testament to the dedication of our team and the effectiveness of our growth strategy. For the year, adjusted sales were up 20% to $3.3 billion, which included 14% organic adjusted sales growth. Adjusted EBITDA grew 24% for the full year, while margins were up 30 basis points to 12.1% or 12.7%, excluding our legacy Commercial Programs segment. Adjusted EPS of $5.05 was up 29%, marking our fifth consecutive year of mid-teens or greater adjusted EPS growth.

Turning to Slide 6. We continue to execute on our core strategic objectives. We signed another exclusive agreement with Woodward in the -- distribution agreement with Woodward in the quarter to provide distribution for high-demand parts for the LEAP, GEnX and CF34 engines. Our relationship with Woodward began with defense distribution, and we are excited to now extend our support into commercial distribution. We continue to make progress on our airframe MRO expansions with Oklahoma City completed in March and our Miami facility that will come online after this summer. We also continue to make progress on our strategy to grow our component MRO activity. In this quarter, we won multiple new awards with leading airlines, which drove double-digit organic sales growth for the quarter.

In April, we launched Airvoyant, our AI-driven procurement solution for airlines and MROs. This new software is entering beta testing with our launch partners, and we are encouraged by the broad interest this solution is generating. We are in the progress -- process of rolling out our paperless hanger technology at our Oklahoma City and Greensboro facilities. When complete, this will result in roughly 66% of our airframe MRO capacity using our paperless hanger technology. In March, we were awarded a follow-on contract for $305 million with the U.S. Navy and Marine Corps to provide contractor logistics support for their C-40 fleet, demonstrating once again our ability to bring commercial best practices to government customers. As mentioned previously, the integration of the HAECO Americas acquisition is pacing ahead of schedule, and we expect the acquisition to reach margins consistent with our other airframe MRO sites in the second half of fiscal 2027.

In software of note, Trax continues to expand its relationship with Delta and has now reached Phase 2 of its implementation. Today, more than 10,000 professionals at Delta are using Trax. Lastly, we closed the previously announced acquisition of Aircraft Reconfig Technologies in April, bringing in-house certification capabilities and proprietary engineering solutions into our portfolio.

With that, I'll turn it over to Dylan to discuss the results in more detail.

Thank you, John. Turning to parts supply on Slide 7. Total parts supply sales grew 39% from the same period last year to $424 million. We had another quarter of above-market growth in new parts distribution, which grew 19% organically, excluding the impact of our ADI acquisition. Commercial distribution grew 28% organically and government distribution grew 7% organically despite strong government sales in the year ago quarter. Adjusted EBITDA of $61.7 million was up 18% over the prior year. Adjusted EBITDA margin of 14.6% was down 250 basis points, driven primarily by a onetime gain in the year ago quarter of $6.5 million in our used parts activities.

Now on Slide 8 for repair, Engineering and software. Total sales increased 35% to $314 million, driven by the HAECO Americas acquisition, record growth in our component MRO activity, higher volumes at our airframe MRO facilities and increases in recurring revenue at Trax. Adjusted EBITDA of $36 million was up 29%. Adjusted EBITDA margin of 11.5% was down 50 basis points from the prior year. As John mentioned earlier, consistent with our expectations, margins were negatively impacted in the quarter by our continued integration of HAECO Americas. The acquisition had an approximately 130 basis point impact on segment adjusted EBITDA margins in the quarter. This is an improvement over what we saw in the third quarter and is consistent with our expectation that margins will continue to improve as we complete our integration activities during the first half of FY '27. Segment margins were also impacted in the quarter by approximately 90 basis points by certain costs in our component MRO operations that we do not expect to continue going forward.

Looking at Government Solutions on Slide 9. Sales were down 8% year-over-year to $130 million and adjusted EBITDA of $20.8 million was up 58%. Adjusted EBITDA margin grew 670 basis points to 16.0%. The decline in revenue was driven by reduced activity on our WASS program supporting the State Department. We were able to partially offset this impact through expansion of other government programs that we have won over the last couple of years as well as by strong pallet sales in our mobility operation. The other government programs, along with the greater mobility volumes drove the segment margin expansion in the quarter.

Turning to the balance sheet on Slide 10. We had another strong cash flow quarter, generating $58 million in adjusted cash from operating activities. Importantly, we drove improvement in accounts receivable days and inventory turns both year-over-year and quarter-over-quarter. Net leverage decreased from 2.17x net debt to adjusted EBITDA at the end of Q3 to 2.03x at the end of Q4 despite our funding of the ART acquisition in the quarter. Adjusted operating cash as a percentage of adjusted EBITDA was 50% for the quarter and 24% for the full year, demonstrating meaningful progress toward our long-term target of 30% plus.

With that, I'll turn the call back to John.

Thank you, Dylan. Turning now to Slide 11. The demand environment across our portfolio remains very strong. Commercial passenger volumes have been resilient despite higher ticket prices and the elevated aircraft fleet age continues to drive demand for our core parts and repair offerings. We expect these favorable conditions to continue. In parts supply, order volume remains strong, and we continue to increase our offering with the addition of new distribution agreements. In repair, engineering and software, our airframe MRO facilities remain largely full and demand for our component MRO services continues to increase. In addition, we have strong momentum in our software offerings as we capture additional customers for Trax, Aerostrat and Airvoyant. Finally, in Government Solutions, although we expect a continued decrease in activity on our WASS program, we anticipate being able to more than offset that with growth on other programs at higher margins.

As a result, in FY '27, we expect another year of strong growth. Specifically, in Q1, we are expecting total sales growth, excluding the legacy commercial Programs segment to be 21% to 23%. We expect Q1 adjusted EBITDA margin of 12.25% to 12.75%, also excluding legacy commercial programs. Notably, we are guiding to metrics on an ex legacy commercial programs basis as we believe this more accurately reflects how we are managing the ongoing performance of the company. We expect the legacy commercial programs business to wind down ratably over the next three to four years, and we will continue to provide updates on that progress as they become available. This time line could shift based on the speed with which we exit inventory positions and contracts with customers.

On Slide 12, you will see our outlook for the full fiscal year 2027. We expect another year of strong growth with total sales, excluding legacy commercial programs to be in the range of low double digits to low teens. This full year guidance assumes conditions remain consistent with what I just described. Specifically, we expect continued strength in our new parts distribution activity within parts supply, continued growth in repair, engineering and software as a result of capturing more component work, our facility expansions coming online and growth in our software offering. Finally, we expect to see the benefit of the mix shift in our Government Solutions segment towards newer, higher-margin programs. This FY '27 guidance supports the 3-year revenue growth targets that we issued at our Investor Day, and we are confident in our ability to meet or exceed those targets.

I'll conclude on Slide 13. AR has been driving strategic transformation over the last several years. And today, we are a more focused company offering a complete range of aviation aftermarket solutions in parts, repair and software. I'm very proud of all that we have accomplished in fiscal year 2026 and over the last several years, achieving our level of growth while continuing to expand our margins, completing and integrating six acquisitions, building new airframe capacity and exiting activities that have become noncore is a complex set of activities to execute simultaneously. I'm immensely grateful to our team for their dedication and commitment to AAR. In addition, I'd like to thank our customers and shareholders for their ongoing support.

With that, we'll turn it over to the operator for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Scott Mikus with Melius Research.

Very nice results. A quick question. Based on GE's results, it seems like their spare parts orders at commercial engines and services were very strong in April and May and then kind of started to normalize maybe later June. At parts supply, how have your orders trended for new parts, particularly to commercial customers since the end of May? And then with the recent uptick in hostilities with Iran, are you seeing tailwinds to your new parts distribution sales to government customers?

Yes, great question. Our growth in distribution on the commercial side has been actually relatively consistently strong throughout the year and throughout the recent months. And just to break that down for you, growth in distribution is kind of roughly 50% coming from increase in same-store sales, if you will, existing distribution agreements, a little bit less than 50% is coming from the ramp-up of new agreements and then a little bit is coming from price increase. But the volumes and the demand from the customers have been relatively consistent on the commercial side for the last several quarters.

In defense, in particular, we had a very strong year overall. Organic growth in government distribution was 34% for the year. We started to see an increase more meaningfully last year at this time. So we're starting to lap some tougher comps right now. But we are encouraged by the demand patterns that we're seeing out of our government customers, most notably the DLA.

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

It's Adam Samuelson on for Sheila. I guess the question is, as we look at the 2027 sales guidance ex LCP, up low double digits to low teens, be at the high end of the 8% to 12% 3-year guidance that you provided. So just help us think about the strength in 2027 that you're forecasting? And kind of is there actually an implied slowdown in 2028 or '29? Or is that just a conservative approach to multiyear planning?

Thank you. No, we -- I mean, at this point, we're obviously not thinking about a slowdown in those out years. We're encouraged by the strength that we see in the near term here as we think about the next 12 months. We -- for all the reasons we talked about, I mean, we're very encouraged with the end market demand, the solutions we have, whether it's component repair, certainly new parts distribution, software, et cetera, they all continue to gain traction in the marketplace. So generally speaking, we feel that the first year of that 3-year guide will be strong, and we don't see any reason why a deceleration would occur in '28, '29.

Our next question comes from the line of Ken Herbert with RBC.

I just wanted to ask on parts supply. If I take out the USM impact last year, margins were still down slightly in the quarter. Was this mix? Was this anything else going on in that segment you could specifically call out? And how do we think about margins in the Parts Supply segment as we go through fiscal '27?

Yes, great question. It's USM. As we've talked about, the USM margin has been constrained because asset availability has been constrained, and therefore, we had to pay more for assets and the spread at which we buy assets and sell assets in USM has narrowed. So you actually saw some sales growth throughout the year in USM. So you did see sales growth in USM, but it came at a lower margin. And so that mix shift drove the change that you saw in the fourth quarter.

As we think about FY '27 going through it, we are, as we did this year, have a very conservative expectation for USM and a much more robust expectation for distribution. At this moment, distribution is at higher margin than USM. And so as we see continued growth in distribution, we would expect margins to continue to improve.

Our next question comes from the line of Louie DiPalma with William Blair.

Congrats on the successful fiscal 2026. Your parts distribution business, organic growth remains strong. What is the expected impact from the new Woodward expansion? And what is the pipeline for other expansions from existing customers and also for new logos? I think you mentioned how you had the existing agreement with Woodward on the defense side, but is there potential for other customers to do the same?

Great set of questions. Woodward specific, I think the deal that we did originally on the defense side and the deal that we've now done on the commercial side, both of those relative to all of distribution are good, but relatively small. Having said that, we -- what we like to see is exactly what's happening with Woodward is we start in one area, we're successful, then we move into another area and are successful, and then we see more and more opportunity. So we look at Woodward in general as a potentially large partner for us over time, and we're encouraged that we've already expanded the business.

And as it relates to new logos in the pipeline, absolutely. As we've talked about, the momentum that we've seen in distribution continues. It's a situation where the more we win, the more we can win. Our two-way exclusive distribution model has gained tremendous traction in the model in the market. This is not something two or three years ago, we were known for. We are known for it now, and we have lots of opportunity coming to us. We've got a team over at Farnborough right now. Dylan and I were here stuck in Chicago, but -- the team is at Farnborough right now, and I can tell you, we're having a -- I spoke to them this morning. We're having -- there's lots of opportunity out there, and we're encouraged by the meetings that we're having.

Great. Yes. I'm also stuck in Chicago. At the Analyst Day, John, you discussed how you and AAR currently generate $100 million worth of heavy maintenance revenue with some of your largest customers. However, for some of these same customers, you only generate $3 million of component repair revenue. And I was wondering what is the time frame we should expect in terms of you being able to like cross-sell the heavy maintenance with component repair in order to increase the component repair revenue from that bundling process?

Yes. You're absolutely right. And just to kind of fill everybody else in who may not remember that comment, we -- a big part of the growth in component strategy is cross-selling between where we have leadership positions on heavy maintenance and lesser positions on the component side. And if I think about some of our largest heavy maintenance customers, we could be doing $100 million a year business or more and low single-digit million business on the component side. And interestingly, many airlines actually spend more money on component maintenance than they do on airframe heavy maintenance. So the opportunity there is larger.

I would say we are in the early innings of executing on that strategy. The conversations that we're having with some of our largest customers are just at the beginning stages, but the opportunity is there. Even before though, we get to that cross-selling, we had a really nice growth quarter in component MRO. And that came from not opportunities from cross-selling, but just straight up wins in the marketplace, most notably in our Asia operation in Thailand. So we're encouraged by -- now that we've got the integration done, now that we've got the pieces in place, we're encouraged by the momentum that our sales force is seeing with, I would call it, more traditional wins. And then on top of that would come the larger deals from cross-selling.

Great. And are there any particular areas of the component repair that you're focusing on? Or are you able to share in terms of the success in Thailand, like the particular area that.

Yes. yes, Thailand, in particular, has been more structures repairs, so doing work on the cells, thrust reversers, elements like that on the aircraft. The work that we've been winning here in the U.S. has been mechanical components, particularly around engine accessories.

Our next question comes from the line of Michael Leshock with KeyBanc Capital Markets.

Just wanted to ask on the growth opportunities ahead now that you're at the low end of the targeted leverage range. Could you talk about where you see the future growth opportunities and kind of what your appetite is for organic versus inorganic?

And then maybe secondly, is there any more color you can provide on how the M&A pipeline looks today, whether it's valuations, deal sizes, targeted segments? Any color there would be great.

Absolutely. Thanks for the question. I would say we continue to see opportunities -- first of all, let me take a step back. We're really proud of the progress that we've made on the balance sheet throughout the year. As you noted, we are well within at the low end of our targeted leverage range, which gives us not only capacity to go out there and continue to invest in our growth, but also the confidence that when we make those investments, we can delever and do it again. So we see opportunities certainly to continue to deploy capital inside the company, most notably in support of the parts supply business.

And then -- so from an organic standpoint. But then inorganically, yes, the M&A pipeline remains full. There are a number of opportunities that we've been tracking for years. If I think about the six acquisitions we've done in the last three years, almost all of those were acquisitions that we had known about for some time and the stars aligned and we were able to complete them. And there's a list of more deals out there like that, that we're focused on. And everybody should expect that M&A will be part of our continued growth strategy going forward.

So we're proud of the accomplishments that we've achieved with managing lever to where it is. And again, that gives us the confidence to go out there and continue to deploy capital to fund the growth.

And then maybe on Airvoyant, how has the early adoption been there for that platform? I know it's something that's been in the works for a long time now, but was finally released. So just wondering what the customer feedback has been there so far? And maybe also as we look longer term, are you expecting competitors to adopt the platform? And if you could explain the incentive for them to do so, that would be great.

Yes, great. So a great question, and I would kind of key off of what we said at Investor Day, which was we launched Airvoyant at the MRO conference in April. The enthusiasm was significant. I think we were all very pleasantly surprised by the amount of interest that we had from a very broad range of airlines. And there was not a single airline that we met with or spoke to there or since that have kind of questioned the need for the tool. Everybody understands that this is a problem in our industry that needs to be solved.

The conversation has been more about, great, I like it, but can it also do this, this and this, and that's kind of what we're working on right now. So we've got a number of customers that we've partnered with for beta testing. We're working on getting them all hooked up, if you will, right now. Because it's a software platform that has to integrate with either Trax or the customer's procurement system if they're not on Trax and it needs to access customers' data in order to work, it takes a little bit of effort to get each customer signed up. It's not like you fill in your login credentials and you're ready to go. It is more of an effort. And so the process is moving. It's just taken a little bit of time. But the interest is significant, and we've got a number of great airlines that are signing up or in the process of signing up to be beta users.

And then as for competitors, -- it's -- Airvoyant is not meant to be an AAR-only product by any means. I mean it is meant to allow airlines to leverage AI to source the broad market. And as we've described, we are using the Aeroxchange network that connects roughly 5,000 vendors to hundreds of airlines around the world. And so by sitting on top of that network, we have the ability to leverage our AI tool from the airline's perspective to access those 5,000 vendors that are already on it. They can start responding to quotes that they would receive from Airvoyant. So again, we're very encouraged. It's early days. The product didn't exist a few months ago, but there's a lot of interest.

[Operator Instructions] We have a follow-up question from the line of Scott Mikus with Melius Research.

John, quick question on the software sales. If I -- on my estimates, it was slightly north of $50 million in fiscal '26 with low 20s EBITDA margins. And you talked at the Investor Day about growing the software sales to about $200 million in the future. So as you go from $50 million to more than $200 million, should we be thinking about the incremental margins on those software sales being in the 40% range and that driving further positive mix shift within the business?

The short answer is yes. We've got a clear line of sight to -- we doubled Trax from $25 million when we bought it to $50 million, and we've got a clear line of sight to get it to $100 million. And the quarter we just wrapped up gives us a lot of confidence in getting there. $200 million is, I would say that's an out-year number. But if we think about the growth in Trax, we think about certainly Airvoyant. And the other element of software that we haven't talked about specifically is Aerostrat, and that's the long-range heavy maintenance planning tool that we acquired also in FY '26. That has been -- we can't put out a press release for everyone, but that has been -- that particular offering has had tremendous success in the marketplace. And the team at Aerostrat, they're doing an incredible job of selling that software. So that is definitely exceeding our expectations from when we made the acquisition.

So if we think about it in stages, clear path in the near to medium term to the $100 million and then beyond, as you said, to $200 million. And as we scale, yes, we would expect margins at that point to go from 20% to 30% or 40% as the software offering grows.

Okay. And then one more quick one. So you announced the new distribution agreement with Woodward for parts on various engine platforms. Woodward also sells very similar parts into other industrial end markets to support power gen, oil and gas. Would you consider distributing those non-aerospace parts as well, just given the growth profile we're seeing in electricity to support data centers?

Yes, great question. And yes, we would. It would have to be absolutely the right set of circumstances. We're very focused on being focused and staying in our lane and leveraging the expertise and the relationships that we have in the aerospace market. But to the extent the right opportunity comes along with an OEM that we're good partners with, and we feel like we can be successful for them in another market, we would -- we'd certainly look at that.

I would point that elsewhere in distribution, ADI, for example, our electronics business, while that's -- the vast majority of the sales are to aerospace, being in the business of distributing electronics to manufacturers does open up opportunities for us with other industries. But of course, our focus at this moment is aerospace.

We have a follow-up from the line of Ken Herbert with RBC Capital Markets.

John or Dylan, I just wanted to clarify, Government Solutions, it looks like you benefited significantly from a mix standpoint as WASS sales were down in the quarter and obviously, margins seem to be up very nicely. Was the sales decline and the margin strength in the segment really just WASS? Or was there anything else going on in the segment?

The decline was loss. And as we said, we were actually able to partially offset that. So it gives you a sense for the degree of the -- just the shrinkage in that program. And then from a margin perspective, Mobility Systems, which is obviously a smaller part of that segment had strong margin performance as a function of mix shift towards pallets, which we've talked about being in high demand in the current environment.

Dylan, how do we think about free cash flow in '27 in terms of the pace? And do we maybe see a little more even loading of the cash across the year? Or is it still pretty seasonal? And how do we think about the key opportunities in working capital or other areas that should be sort of headwinds or tailwinds as we think about expectations for '27 free cash flow?

Yes. I mean I would say we are focused on driving progress towards that 30% plus operating cash flow as a percentage of adjusted EBITDA metric. We talked about it at Investor Day was -- should be measured over multiple periods. We obviously talked about it on a trailing basis this quarter, and I expect we'll continue to do that going forward.

You obviously have quarter-to-quarter, things will happen, and we'll have inventory investments. But it's over time, making progress on that metric. And I would say, in particular, driving lower accounts receivable days and greater inventory turns, and we want to continue to make year-over-year progress in those two metrics.

Our next question comes from the line of Alexandra Mandery with Truist Securities.

Nice results. Sorry if I missed it, but I just wanted to see if you could provide some additional color on the HAECO integration. And I wanted to see if you could quantify any remaining costs or revenue synergies expected to hit in fiscal '27. And I guess maybe what processes or systems might be left to integrate, including the paperless hanger initiative amongst others?

Absolutely. Great question. So I guess a few different ways -- there are a few different things to think about. we're largely through, I would say, the rightsizing of the facilities we acquired with HAECO, meaning we brought the workforce to the level that supports the volume that we anticipate. And that is a lower volume of work than HAECO was performing before because a lot of that work doesn't meet our margin requirements. So nearly all of that work has been closed up and shipped off, and we're now kind of fully in line with the customers that we will support out of those facilities for the long term. So that's kind of part one.

Part two is the shift of work from our Indianapolis facility to mostly the HAECO Greensboro facility. That is underway. We would expect to have that complete by the end of this calendar year. And then we will exit the -- fully close down the HAECO facility and kind of be fully up and running in the HAECO facility with that volume. So that's a lot of activity between now and the end of the calendar year. You get all of that done.

And the last kind of major piece is the implementation of the paperless hangar in the Greensboro facility. That would occur at the back end of this year. We need customer cooperation to get that fully online. But the expectation, I would say, Q4 of FY '27, we'll have the HAECO facilities kind of up and running with consistent margins and performance with the other existing AAR airframe facility. So a few moving parts there, but the headline is we'll have all of the work done and kind of running at the levels we envisioned by the end of this fiscal year.

Awesome. And then I guess with owning Trax, Airvoyant and Aerostrat, you have a good set of software capabilities. Is there anything you see missing in your software capability set you're looking to fill? Or are you remaining focused on further developing and enhancing these businesses and onboarding more customers at this time?

I think it's definitely that. I would say that's the headline, continuing to build out the functionality of Trax, Aerostrat and Airvoyant, and there's lots to do in each of those areas. And the Trax platform in general, I mean, it's a very broad platform. There's a tremendous amount of capability. We're building a lot of new capabilities as part of the Delta integration or the Delta implementation. And then it will be a function of once that capability is built for Delta, you can roll it out to other Trax customers. So there's a lot to get done there.

Having said that, from an M&A standpoint, when we kind of thought about Aerostrat this way, think about Trax is the operating system and then there are applications, apps that you can -- that are out there that you can acquire. Aerostrat could be an example of that. And there are other capabilities that exist out there as independent companies that we see as opportunity for us to add to the portfolio. But then I would say there are discrete things like take Aerostrat, for example. They are the leaders in airframe heavy maintenance planning. There's also engine maintenance planning is something we could look at. There's also a line maintenance planning is an activity that we could look at. And those things all go together.

So there are -- it's a long way to say there are definitely investments that we want to make to strengthen the product offering that we already have, but then additional things we could either build organically or add inorganically over time.

Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to John for closing remarks.

Great. Well, thank you very much. We really appreciate the time and the interest, everybody, and we look forward to being back here in a couple of months with our Q1 results. Thank you.

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

Please welcome Vice President, Investor Relations, Chris Tillett.

Good morning, everyone. It's great to be here with you today at our -- and thank you for coming to AAR's 2026 Investor Day. I see many familiar faces in the crowd, but for those of you I don't know, my name is Chris Tillett. I'm the Vice President of Investor Relations here at AAR.

So before we begin, a couple of mandatory housekeeping items. Today's presentation contains forward-looking statements, which are subject to a number of risks. Actual results may vary for reasons that we cite in our Form 10-K and other SEC filings and reconciliations to any non-GAAP financial measures discussed during today's presentation can be found in the back of the deck.

So on the basis of presentation, you may have seen last week that we announced a resegmenting of our business and repositioning of our portfolio with the intended wind of our commercial programs business. This segment realignment reflects AAR's continued focus on growth, margin expansion and cash flow generation. We have reorganized into 4 reporting segments, which are parts supply, repair, engineering and software, Government Solutions, legacy commercial and legacy commercial programs.

We will report under this new structure beginning with the fourth quarter and fiscal year ending May 31, 2026. The details of the segment reorganization and the wind down of the legacy Commercial Programs segment can be found in the press release and presentation posted to our website last week. For purposes of today's Investor Day presentation, we will present the company aligned to the new segmentation unless otherwise noted. Reconciliations of historical non-GAAP results aligned to the new segmentation can be found in the appendix to the presentation.

This morning, we also reaffirmed our guidance for the fourth fiscal quarter and full year 2026, which we issued with our latest quarterly results on March 24. As you see here on the slide, there has been no change to our prior expectations for the quarter or the year.

Now on to the main event. We will begin the day with an update on the strategic vision from our Chairman, President and CEO, John Holmes. Following John's presentation, we'll have a brief update on the aviation aftermarket, followed by a deeper dive on parts, repair and software. Lastly, we will show you how this platform comes together to work for our government customers. And then our CFO, Dylan Wolin, will bring it home with a financial update and discussion of our revised framework.

We will have a Q&A session after the first few presentations followed by a brief intermission and then another Q&A session at the end of the day before wrapping up, hopefully around noon. And with that, it is my pleasure to welcome our Chairman, President and CEO, John Holmes.

Good morning, everybody. It's awesome to be here with you today. Let's think about all the things that have changed since we were here 3 years ago, and a lot has changed. But I think most notably, now we have professional lighting, professional announcement, music when you come in. I mean, things have been going really well. I hope everybody notices that.

Just for those of you I don't know, and I'm lucky to know most of you in the room, just a little bit about my background. So I started at the company, I was an investment banking analyst and spent a little bit of time in private equity. And my first role at the company was in a strategy role at corporate. And I have the distinct kind of notoriety of accepting the job to come to AAR the night of September 10, 2001, and resigning my job in private equity the morning of 9/11. And so that was a really interesting time to go from the finance industry to the aviation industry.

And in all seriousness, those were very powerful early years of the company and kind of shaped a lot of what we've been driving. And what we've been driving, what you're going to see, and I want to hit on a couple of key themes, but just to finish the background, started in 9/11, moved into an operating role.

My first role that I'll talk about in a minute was taking over our airframe parts trading business and then held various operating roles in the company up until I became President of the company in 2017 and then CEO in 2018. And we've had a consistent playbook that I'll talk about in a minute, but that playbook is driving a lot of change, all kidding aside, a lot has happened since we were here before. And the key messages you're going to hear today are we've got a repositioned and restructured portfolio. We've made a number of structural durable changes to what we do that's driving results.

We have a differentiated culture at AAR. We've been around for 70 years, and our culture underpins everything that we do. And anything you know about leadership in building successful businesses, it comes back to culture, and we're really proud of what we have at AAR. And we have now more than ever a very focused strategy around 3 key activities that we'll talk about. And this strategy has been and will continue to deliver faster and more profitable growth.

Just a couple of highlights, a couple of high-level numbers just to orient everybody. First, obviously, publicly traded under the symbol Air. We love symbol on the New York Stock Exchange. We're actually going to the New York Stock Exchange this afternoon as a management team, never done that before to ring the bell, so that will be cool. We passed over the last 12 months, $3 billion in sales for the first time in our history. So $3.1 billion in trailing 12-month sales.

We have more than 8,000 members on our team and EBITDA margin is roughly 12%. A couple of things to note off to the right, the donut charts there. First, we are active participants in both the commercial and government market. We're about 70% commercial and about 30% of the company is in the government. This balance has served us very well over time. And if you think about moments that we're in right now, as we talked about in the last quarter call, we're seeing a lot of activity on the government side of the business as a result of the conflict in the Middle East. So this balance is important to us.

Below that, not only do we have balances in different markets, but we have balance across the geography. About 65% of the company is North American focused. The remainder is split roughly between Europe and Asia. These are obviously key aviation markets and areas of growth for us. And finally, Chris just mentioned the new segments. This is a breakdown of how the sales split between each of the 4 new segments. So I want to talk for a minute about the journey that we've been on. And I cannot overstate the number of changes that we've made to the company since 2018, but really in the last 3 years. But before I get to that, I just want to talk for a minute about my first operating role at AAR.

So I was 26 years old. I had been accepted to business school, and I was going to leave the company and go to business school. And our CEO at the time gave me the chance of a lifetime, he said, "Hey, listen, if you want to go to business school, that's great. We'll be here when you get out, you can go part time or you can put it off for a couple of years and try something new. And what he offered me was a chance to go run a P&L. I had roommates at the time. I was living in downtown Chicago and my roommates and I thought, oh, running a P&L would be kind of cool. We can lead people.

But the P&L that I stepped into was our airframe parts trading. And this was a business that had been underperforming for years. And what occurred to me is that we didn't have focus in that business. If you're trading parts, your intellectual property is your knowledge of the parts. And we had 3 product lines: airframe, regional and APU. We had no specialization. So we developed specialization. We started the 737 product line and got really knowledgeable on just 737 parts. We got into the 75, 76 business and focused on that platform.

We weren't doing anything in Airbus back then. We got into Airbus and developed an expertise there. So that focus, that playbook of expertise that helped turn that business around in 1 year, we went from a loss to one of the more profitable businesses in the company has kept going. So again, those early lessons form the basis of what we've been doing at the company, which is bringing more focus and expertise into every single thing that we do. So if you think about what's happened since 2018, we've done a lot of portfolio changes. We've made a number of divestitures. We were in composites manufacturing, we got out of that. We were in airlift where we were flying and operating and owning helicopters, we got out of that.

We were landing gear for years that was a challenging business. We divested that a little over a year ago. Other wind downs. We've exited our New York component repair facility, which has been a challenge for a very long time. Most recently, you just heard we're going to wind down our commercial programs activity, which is a market that's moved away from us. So choosing what you're going to not do is just as important as choosing what you're going to do. And we've been making those choices, too.

Since we were here 3 years ago, we've done $1.2 billion of acquisitions, 6 acquisitions across our key markets, and we are deepening our expertise, our strength and our leadership position in each of our areas of focus that I'll talk about in a minute. So what does that mean? It means you should come away today knowing that AAR has transformed. The changes that we've made to the business are structural, they're durable and they're setting ourselves up for growth. We're scaling. We've got more focus than ever.

What's very important is that the businesses that we are in are highly connected, and we'll talk about that in detail. It has been and will continue to deliver higher margins and higher growth. We have an incredible leadership team, and you'll meet many of them today. I'm so proud of the team I get to work with. And we've been making investments, both organic and inorganic to continue to bolster the strategy. And today, we're focused on 3 things, focused on 3 areas: parts, repair and software. Parts, repair and software.

We offer parts, we offer repairs, and we offer software that allows our customers to plan for and buy the parts and repairs that we sell. We do this in the commercial market big time. We want to move further into the government market, and we're building a value chain that does not exist in the aviation aftermarket, and we're really excited about it. And it's working. We've been at this now in a major way for the last 3 years, and you can see the results.

Adjusted sales have been growing at an average of 15% CAGR over the last 4-plus years. Our EBITDA margins have been growing at a 26% CAGR. Our operating margin is growing at a 31% CAGR, and we've been adding roughly 1 point of margin each year for the last 4 years. So we've been growing and expanding margins at the same time. And of course, that's led to 19% EPS CAGR.

When we were here 3 years ago, we gave some targets. I want to remind everybody what those targets were. You can see them here. We -- when we made the Triumph acquisition a year later, we updated those targets. And I'm pleased to report that in many cases, we're exceeding the targets and are on track to achieve the margin targets. And of course, I'm sure you've all flipped to the last page in the deck, and you know what our new targets are already, but we'll be giving new targets today.

This is the team that is making this happen. It's an awesome team. You'll meet most everybody -- most everybody is actually here in the room and several of us will present. But it's a great team. I won't go through everybody, but it's an all-star team. It's a team that is -- we are highly connected. We know each other. We trust each other. But importantly, we like each other. It's a team that spends a lot of time together. We really don't sleep very much. And it's a great team. And a couple of things I'll point out in addition.

One, many of us are still very early in our careers. We've got a long way to go, and we've got something to prove. And we've got something to prove here at AAR, and we are deeply convinced in the opportunity to create real value with this company. It down a little bit, but we got a long way to go. That's a common thread that binds us together. Another thing that binds us together is our culture. I mentioned that at the beginning, which is underpinned by these values. And I'm extraordinary -- we all are extraordinarily proud of the values that drive our company. We've been around a long time.

We're not a business that has come together overnight with a bunch of acquisitions. We've been around a long time, and we have a deep culture that drives everything we do. One of the coolest things that I got to do or participate in about 10 years ago was writing these values. And for years, AAR had this long flowing mission vision statement that was literally on bronze plaques in all of our facilities. And it started out every day, we find a way to use our speed, our strength and then it went on from there. And it was kind of like the U.S. constitution.

Everybody remembered we, the people, but then you kind of didn't know all the other detail. Well, we looked at this about 10 years and we said, "Hey, listen, there are great ideas within this document, but we need to break them down into simple phrases, 2 and 3 word phrases that all of our teammates around the world can remember and use in their everyday activities. And it starts with the first one in the upper left there, quality first and safety always. We have to remember everything we do involves safety of flight. And so nothing is more important when we think about the values and the culture of our company and making sure that quality and safety are at the very top of the list.

Another one that we're particularly proud of is the orange square and the lower orange square there, which is make money have fun. We want our teammates to make money. We want to do well as a company, but we want to have a good time doing it. And if you check out any of our social media and very our communication set is awesome it's social media. There's a lot of fun that happens around AAR, and this keeps our team motivated to come in and perform for our customers every day.

And the last value I want to mention is the last on the lower right there, and that's own it, whether you're the CEO, whether you're a mechanic, whether you're in accounts payable, even though we're 8,000 people in the industry, we're still relatively small. And all of us have got to show up and deliver every day. Otherwise, the company won't move forward. If you don't do it, there's no one else that's going to do it, so you got to show up. and own what you do.

So anyway, you can tell I'm proud about these values and they drive all of our actions. It's how we hire people, it's how we evaluate people, it's how we compensate people. Those values are everything. And that culture has led us to enjoy relationships with some of the largest airlines in the world, some of the very best OEMs in the world and some of the most important government entities in the world. AAR does business with over 3,500 customers. There's a list of them here, and we are extraordinarily proud and grateful for the relationships that we have with our -- and I cannot overstate the visibility that we have within these entities and its growing visibility, too.

We may be a $3 billion company, and there's much larger players than us out in the industry, if you're thinking about OEMs or airlines, but we box above our weight big time in terms of reputation. Just for example, in the last 2 years, we've had the CEOs of several of those airlines at the top come and have breakfast, lunch or drinks with our Board, just so our Board has a chance to meet the CEOs of our largest customers. They know who we are. They're willing to spend their time and talk to us about the value that we bring and the things they need from us.

So we're really proud of the customer relationships that we have. And you'll hear from Frank about the OEM relationships that we've built over the years. These are key to the incredible growth that we've seen in distribution as we are an OEM aligned provider. And of course, Nick will talk about the government side of things and very proud of the relationships that we've got with governments around the world and the opportunities that we see.

And speaking of opportunities, why do we win at those opportunities? Well, first, industry-leading expertise. I mentioned about that focus at the very beginning, driving and building expertise across different platforms and different markets. We have that, and we bring it to work every day. One of the things we've been really focused on since we were last together is driving efficiency and operational excellence throughout everything that we do, being the best and the fastest in our repair shops, delivering parts sooner than everybody else.

Operational efficiency is setting us apart, and you'll hear more about that from Tom Hoferer. We've got a global footprint, and we want to continue to leverage that and expand that. That's important. It's a global industry by definition. And what we want to talk about in a minute is more and more around the unique business model that we have and that value chain I described and the connection between each of our businesses.

Okay. So again, parts, repair and software, getting the message. I'm going to talk about each of these areas in a bit more detail and then hand it over to my teammates. So in parts, 2 activities and parts. I'm going to start at the top of the slide here, 2 activities and parts. First, new parts distribution. New parts distribution has been the fastest-growing business inside of AAR. I think everybody is familiar with it, but in case you are not, we are an end market distributor representing several OEMs, 35 OEMs around the world.

So we take the parts that they manufacture and distribute those parts on their behalf around the world. Distribution is a well-understood industry, well-understood business in all industries, but our approach is a bit different. We only engage in 2-way exclusive distributorships, meaning we are exclusive. We will not represent competing product for a given OEM in a given market. And that OEM will not sign up a competitive distributor in that same market. So that lines us up. Most of these agreements are 5 to 10 years in length, so you're aligned for a long time. But what that commitment allows us to do is become deeply familiar with the products that we're selling.

We are not just a stocking distributor buying inventory every quarter and letting it sit in the warehouse until we get a call. We are active participants in the market, representing our OEM partners and helping them take market share. This model is working really well, and you'll hear more about that later.

On the USM side of the business, that's the other area of parts. That is the original business that founded AAR. We buy dozens of engines, about 80% of that business is engine material. We buy dozens of engines each year. We either sell them as whole, but most often, we tear them down, refurbish the parts, redistribute the parts, and we do the same thing with airframes.

The good thing about this business is it's highly transactional, and it keeps us in touch with the market. You are actively out there buying and trading assets. You're following the way assets values move. You're knowing what parts are in high demand and which parts are not, and it keeps you really close to the market. And by the way, that market expertise that we gain from our USM activities is really interesting to the OEMs when we go and pitch them on a new exclusive distribution relationship. So that's parts.

Repair, 2 activities in Repair. One, heavy maintenance, airframe MRO and the second is component repair. Just to frame this for you quickly, airframe MRO is a low teens EBITDA business. Component MRO is a high teens EBITDA business. So in airframe MRO, we are working on the entire aircraft. I think some of you have visited our hangers. They are really cool to climb around airplanes. We are now the largest in North America for airframe MRO. We have industry-leading turnaround times, particularly on 737s and A320s, the platforms that we focus on. And we are taking share and expanding and acquiring to continue to bolster this. It's a high visibility activity inside of airlines, and it leads to a lot of other opportunities that we'll talk about.

One of the opportunities airframe MRO leads to is component MRO. Component MRO, you're not working on the whole airframe, but you're actually working on the individual components, engine accessories, hydraulics, valves, pneumatics, things like that. With the Triumph acquisition, we became a big player in component MRO, and that's a big support to the USM business, but it also goes with airframe MRO in as much as when we sign long-term airframe contracts, we also can lock up component work, which, as I mentioned, is higher margin. So these things go together.

Third, software. Relatively new for us. 3 years ago, when we were here, we had just made the Trax acquisition. And you might remember, we had the founders with us, et cetera. But software at the time, I was -- I remember talking to a few of those like, well, why did you do that? Well, Trax and getting into the software business had been an idea. Andy Schmidt and I for over 10 years, and I'm not kidding for over 10 years, we spent time trying to acquire the Trax business. There's a lot of dinners out in Miami to get these guys to ultimately sell. We got closed a few times and it fell apart, but we finally got it done. And this is working out exactly as we hoped.

So what is Trax? Andy will go in more in detail, but just at a high level, Trax is a maintenance ERP system. What does that mean? It means it runs every single element of the maintenance organization inside of an airline. You cannot run an airline without a system like Trax. You can't. In fact, you're legally required to have it. So every piece of inventory that's on the shelf, every part that's flying on an aircraft, every part that's out for repair, who's repairing it? How long did it take them to repair it? What did they pay for that repair? All of that information, all of those activities are managed with Trax. It's critical to an airline's operation.

Why did we buy Trax? Because Trax is the software that allows our customers to buy the parts and repairs that we sell. It goes together, goes together. And the data that Trax houses is incredibly rich and incredibly helpful. We also bought Trax because we felt that we could help them grow. If you look at the market for maintenance ERP systems, 50% of the world's aircraft are supported by next-generation systems like Trax. Trax really has 2 competitors. We'll go through that. But the other 50% of the world's fleet is supported by legacy systems. These are 10, 40, in some cases, 50-year-old systems that will be replaced over time. The airlines that are still running on these old systems are the largest airlines in the world. And Trax, while they had the very best solution in the market, they were a sole proprietorship, 100 guys in Miami, and they couldn't break into those larger airlines.

When we bought Trax and in the 3 years we've owned Trax, we've gotten them into Cathay Pacific. We've gotten them into Virgin Atlantic. We've gotten them into Singapore. We've gotten them into Thai. But most importantly, a year ago, we got them into Delta Airlines. The world's largest, most valuable airline chose Trax to modernize their ERP system. It's a 3-year implementation. We're almost 1 year in. It's going really well. Andy will tell you about it. And once we're successful at Delta, it opens up that whole other 50% of the market for us.

In addition to Trax, we've made one acquisition and launched something else. Aerostrat, an acquisition that we made a few months ago, is a company that is engaged in long-range heavy maintenance planning. And if you're one of the largest providers of airframe MRO heavy maintenance, it makes sense that you would want to own the software that airlines are using to plan their heavy maintenance because now you understand how those maintenance decisions are made inside of an airline and you can optimize the flow inside of your hangers. And that's -- again, these things go together.

And the last thing, and we're super excited about this is we launched last month, Airvoyant. Airlines spend $60 billion a year on parts. It's a lot of money. And it is an incredibly manual effort. And we see it every day because you know why? We sell parts. And we are on the receiving end of e-mails and spreadsheets and phone calls, this manual effort conducted by airline procurement teams around the world that takes a lot of time and results in inefficient decisions. So this is a problem we've been thinking about how to solve for a long time.

We have the Trax user base. We have a great partner in Aeroxchange, which provides connectivity between airlines and vendors around the world. And we have AI tools that didn't exist a couple of years ago. And we have experience in selling parts. We put all those things together and what we launched is an AI procurement tool that will automate the purchasing for airlines. We kicked it off with the MRO a couple of weeks ago. The reception has been really cool. It's early. It's really early. We'll we'll tell you more about it, but we were thrilled with the reaction we got from the customer base.

And finally, I did want to touch on our Government Solutions business that Nick Gross will talk about in a little bit. Everything I described that we do on the commercial side, we also do on the government side. Take, for example, a couple of platforms here, the P8 and the C-40, what are those? Those are 737s. They are commercial derivative aircraft. We've worked on thousands and thousands of 737s for airlines like Southwest United, et cetera. If you can do it in the commercial world, you can do it in the government world. So we're applying that expertise.

And guess what, if you can maintain a 737, you can also maintain an F-16. So we're taking this commercial expertise, and we are applying it in the government space and excited about the possibilities there. And again, we like that balance between government and commercial in the portfolio. So I've mentioned a lot of this already, but I did want to highlight a couple of examples. These businesses, parts, repair and software work together very well.

I'll take distribution, for example, I'll start with OEMs. If we're going to go in and we're going to pitch an OEM, and that's where distribution starts, and we're going to sell an OEM to partner with us for 5 or 10 years to represent their product, being able to say to that OEM, I guess what? We work on 1,200 aircraft a year in our hangars. We're supporting 15% of the North American fleet in our hangars. If you're an OEM and you have a new product that replaces a competing product, let's just say you've got a 737 pump you're manufacturing that's going to replace a competitive pump and there's 10 of them on an airplane.

Well, we're going to work on 800 737s this year. We will literally be at the point of sale on the hangar floor with the airline rep, and we can explain the benefits of pulling the pump off while the aircraft is in check and putting your pump on. That goes far with an OEM. Think about Trax. We are on the desktop. of tens of thousands in buyers of planners around the world, they're cutting purchase orders through the system that we own. And if we go to an OEM and say, "Hey, listen, we have visibility of that demand and we can pump your products through that, that's a proprietary channel to market.

So a repair activity and a software activity helps a parts activity. Similarly, I mentioned the connection within parts between USM and OEMs. If we have a line of sight and we find out that, hey, 50 A320s or whatever are going to be torn down in the next 3 months, that's great intel to share with an OEM because it helps them understand the value of their parts in the aftermarket and may even influence their build cycle. So the connection between the USM and the new parts distribution activity is evident.

I want to highlight a connection within repair. We are now the leaders in airframe heavy maintenance in North America, which is the largest market in the world. We got that way because of our, again, incredible customer relationships, but really our performance on the floor. And our hangar slots are in demand. As you know, we've been expanding our sites. We bought HAECO, et cetera. We've been expanding, and we still don't have enough capacity to service the demand. And so we are in a position with our customers who can say, "Hey, listen, we're going to be competitive on price and turnaround time on the heavy maintenance side.

But in order to lock up a hangar with us, we would also like to win component work. And remember, component work is higher margin than the hangar work. And so we're looking at bundling these things and leveraging our position on the heavy maintenance side to win more component work. And again, of course, if you're working on aircraft, et cetera, you're collecting a lot of data, which helps you inform what parts you're going to put on the shelves to support the parts business, et cetera, et cetera.

So I could go on. But this is a great collection of businesses that we continue to drive connectivity across, and that's unique in the industry. so that leads us to our strategy. And our strategy is really 3 elements, and my teammates will talk about how each of these applies to their different area. But clearly, we want to win more core. We're in a great spot right now, where we want to leverage these customer relationships to win more and drive deeper in terms of what we're doing.

Leveraging the platform. I mentioned the connectivity between businesses, leveraging the relationships that we have and this connectivity to win more across all of our business units. And I'll give you an example. One of our largest customers today, we are doing over $100 million a year of heavy maintenance business with that large -- with that customer. We're doing $3 million in component repair. totally out of balance. Just with that customer by aligning and making sure that we can sell across disciplines, there's tens of millions of dollars of business that we can achieve with that customer that we already have a relationship with. That's leveraging the platform.

Similarly, there are customers that we sell tens of millions of dollars of parts to, but we do no heavy maintenance. We can cross-sell there and bring them together. So leveraging the connectivity of our platform. And we want to scale with discipline. Everyone here should expect that we will continue to make organic investments in the company to grow, and we will also make inorganic investments in the company to grow. But we're going to be disciplined. We have been and will be disciplined about the acquisitions that we make. And we are very focused on curating opportunities, not just reacting to banker-led processes, curating opportunities to build out our parts, repair and software disciplines.

Okay. This -- I know everything I said doesn't matter and everybody is just fo -- what does it mean? What does it mean? What are the targets? So we are updating our 3-year targets from where we were in 2024. And I'm going to call your attention to the right of the slide. So we went through the resegmentation. We've got commercial programs, legacy commercial programs, which we are winding down over time. Just to frame that for you, it's a collection of contracts and about $160 million worth of inventory. Those contracts expire and we either they will expire or we will work with the customer to exit sooner.

But our plan is to be out of that segment within 3 to 4 years. It frees up a lot of capital, a lot of bandwidth and it's accretive to our results. So if you set that segment aside, call your attention to the right, forecasting growth -- organic growth of 8% to 12% over the next 3 years, adjusted EBITDA margin of 13% to 14% plus, adjusted EPS CAGR of 15% plus and conversion of EBITDA to operating cash of about 30%. And that concludes my prepared remarks. All right.

So I'm going to turn it over to my esteemed colleague, Chris Joseph, who's going to tell you a little bit about the aviation aftermarket, and then we'll go through each one of those business units in detail. We'll take a break in the middle and do Q&A and really appreciate everybody being here. Thank you.

Good morning, everyone. Chris Jessup, Chief Commercial Officer with AAR. I've been with the company 24 years now. I have a unique history of starting out with a company called Aveborn in 2002, which today is our Miami Airframe MRO facility. AAR acquired that location in 2008, and I expanded with the company over the years, heavy sales marketing background, started repair, evolved in the parts supply, did a little bit of an operational stent and P&L oversight of our airframe network before assuming the role that I sit in today in 2017, starting with the Chief Commercial Officer role.

Let's just kick off with some strong secular trends that are driving the aftermarket growth. that we operate in today. First, global air travel is resilient -- I'm sorry, global air travel growth remains resilient, driving more repair and maintenance cycles. Two, global aircraft fleets are growing and they're aging, which increases the demand for new and used parts. Third, new aircraft deliveries are constrained. And fourth, supply channels are also constrained. Both those constraints are driving aftermarket demand and the need for an independent solution provider like AAR.

Before we go into these in detail, let's first just talk about what makes our market durable and why our independent position helps AAR win in the market and gain market share year-over-year. When we look at what makes the market durable, first, you've got essential safety and reliability. Safety is paramount in this -- it is table stakes for what has to happen day in and day out.

Secondly, reliability. Airlines value the cost of an aircraft out of service at north of $100,000 a day and lost revenue. You'll also hear as we get into some of the data, airlines are stressed with having enough aircraft spares given the market dynamics that are going on with the growing aging fleet and challenges in the new aircraft deliveries. Maintenance is mandatory, number two. Airlines have got to do the maintenance at defined intervals that are set by the manufacturer and the regulatory authorities that are overseeing those airlines in operation.

And third, there's a need for efficiency. Again, we'll talk about this in a few slides coming up, but there's competition, cost and regulatory pressures that are all driving for the need for operational efficiency paramount. More focus on why independent wins for a few minutes for me. Neutral industry partner. AAR is able to compete in the market, and we are not owned or affiliated by an airline entity nor are we owned by an OEM for that matter.

Airlines increasingly value an independent partner who is able to manage sensitive data without competitive conflicts. This cannot be more front and center of mind, and you'll hear this from Andy when he comes up and talks about software. But when John talks about those 3 pillars, software, really key in this area of neutral industry partnership. Broad industry relationships. This, to me, speaks to what you'll hear from Frank in our Parts Supply segment.

Industry is looking for channel partners that can reach a broad customer base. We are able to operate in multiple segments of this space, whether it's business general aviation market, whether it's the airlines, a regional carrier, a mainline carrier, international carrier, cargo airlines to lessors, all the way through to OEMs. Plus with our diversified portfolio of service offerings that we carry, we're able to stay relevant and go see customers on a frequent basis.

We're not just in there only talking about one topic, one subject matter, one product line. We have the ability to go in there throughout the days, the weeks, the months, the quarters and stay relevant and informed on market intel and what is -- what are the challenges facing airlines on a daily basis. And last, cost and efficiency. Speed, reliability and consistency of turnaround times, combined with the ability to leverage data to drive efficiency, speaks wholeheartedly to what you'll hear from Tom when he comes up and speaks about our repair segment of the company.

We're in control of a lot of data. Our ability to look at that data, look for ways to preplan parts, what are we going to be finding when we're overhauling a component or overhauling an aircraft in one of our shops. How we take lessons learned and modify that workflow to get better and smarter all the way through our investments in the paperless journey to automate a lot of what we're doing in the hangar, and you'll hear Tom talk about that more in detail, is critical and key to our ability to maintain a competitive cost profile and drive efficient operations.

Let's now transition to a little bit of detail around the global commercial air travel market and how it remains resilient. Largely global air traffic base supports continued fleet growth and long-term aftermarket demand. Year-to-date, you're seeing the demand side of the market globally up 1% to 2%. You're seeing capacity down 1% to 2%. The key here is those capacity reductions are a function of route profitability, not demand, and that is an important distinction to call out.

We all know what we're facing in the world right now with the Middle East conflict that has been going on for several weeks now. But when you saw IATA put out their March transportation results, it led to a 2.1% rise in demand globally, while capacity was down just 1.7%. So even with a shock like that of what's going on in the market, the demand is resilient, and you still saw a rise of 2.1% year-over-year the month of March. And airlines expect to remain risk adverse to not overly relying on aircraft retirements.

And again, on the next slide, we'll dive into more of that in detail just given the challenges and shortages that are ongoing right now. When you look at the chart on the right, you can see that you've got a very narrow range of 3% on the low side to 5% on the high side, baseline 4%. And this really speaks to a structural resilient demand that we're seeing in the market which we operate in today.

Transitioning over to the global aircraft fleet. We are currently sitting at around circa 29,000 aircraft in operation today. The way AAR defines this fleet is we start with regional aircraft, 70 seats or greater, spanning up their narrow-body and wide-body aircraft is how we get to these numbers. So we're sitting at circa 29,000 aircraft today in the market. And when we get to 2035, we're going to be around 42,000 aircraft in total. When you look at that whole growth from left to right, that is going to require over 22,000 aircraft to be manufactured and delivered in that period of time.

When we look at 2026, in particular, the market is on pace to deliver around 1,700 to 1,800 aircraft in this year. So when you just do the math for the 9 years remaining, the market needs to continue to scale and drive over 2,200 to 2,300 aircraft per year. There's a lot of challenges there. There's a lot that has to be done. Any hiccups that we see in those areas are only going to further promote a strong demand for the aftermarket services that provide and that we support.

The other interesting thing on this page is today, we're sitting at an average fleet age of 13.4 years. While that's going to get elevated as we get into 2030 and '31 at around 14.4 years, even when you get out into 2035, you're still at 14 years of average compared to 13.4 years average today. So again, there's a lot of demand. It's resilient. OEMs have got to do a really good job of making sure they can continue to scale those deliveries. But on the flip side, retirements have been low because of all these challenges. Industry today is only at retiring about 500 to 600 aircraft per year.

Most people talk about the bow wave coming out of COVID. And as OEMs caught up with production, we'd see a huge mass exodus of aircraft retirements. We've not seen that. We've been living in the 500 to 600 aircraft retirement bandwidth, if you will, for the last couple of years. Next year, provided we have a smooth year with the ramp in the deliveries, we should start to tick back up to that 800 and 900 aircraft retirements per year and hopefully stabilize there again if the OEMs can get up to that 2,200 to 2,300 aircraft production range. So a lot to watch there as we navigate all this.

When we look at the addressable market as we sit today and we look at just the parts supply segment and we look at repair when it comes to both components and modification and maintenance on the airframe side of the house. We view that market at an $80 billion market today, growing to $90 billion by 2029. That's a 4% CAGR, and that's assuming 2026 constant U.S. dollars. There is a lot of swim lanes that we can navigate within just these boxes of parts supply and MRO component and MRO airframe and modification repairs that we can navigate.

When you look at us today, and we are less than a 4% market share of this addressable market, it just translates to a long and bright runway that we have to continue to grow and outpace the market taking shares from our competition. We wanted to break software out separately. You heard John speak about that a few minutes ago. It's a fairly new segment to us in the last 3 years. We're really excited about it. But when we look at the foundation of how we got into software, specifically looking at Trax, the core M&E workflow area, we view that addressable market at $3 billion today.

It's a very fragmented landscape with -- with consolidation -- many of you will find it interesting that a lot of airlines around the world that have not decided to upgrade and move to more of the emerging software like Tracks are still operating on 1970s, 1980s era technology software. That's just been kind of updated slowly, if you will. But when you look at the world we live in with advancements in AI, the need to go off-premises to cloud hosting, to the need for mobile apps, the need to connect channels.

There's a lot of investment needed in those areas, and we're really excited about where we sit in that space, and you'll hear a little bit more from Andy as we get into that. But more importantly, if you look at the bottom bullet, the planning and the procurement represents an additional multibillion opportunity for us. We look at Aerostrat and what we did to move into the planning software, expanding out of those maintenance and engineering workflows and the recent Airvoyant where we're now moving into procurement and marketplace. It really helps us tie things in, if you will, end-to-end.

And our overall view is software is not a stand-alone product. We view that connecting software with the parts and repair strategy is going to make those using it a much more informed decision-making process. You're going to be able to navigate decisions at quicker speeds and with better outcomes on cost.

Shifting priorities over to the government sector for a few minutes here. Just like there is positive demand signals for the commercial sector, same is true for government. The presidential budget for FY '27 when compared to FY '26 is showing a 7% to 9% growth in budget spend year-over-year. You can see the breakout on this slide between the different services, whether it's the Air Force, the Navy, the Marine Corps or the Army, there is heavy spend in those high single digits being planned.

The biggest thing that you'll hear Nick talk about when we get into that in more detail is there's a big shift in focus from acquisition to sustainment and overall aircraft readiness. And more importantly, we've got a lot of good track record over the last few years with that defense space being stressed on how we continue to grow and meet the 7% to 9% budget increase, utilizing commercial best practices. You'll hear Nick go into detail about a few of those things that we've been able to expand across our whole pillars to help us succeed there.

Not only in the U.S. market, are we seeing a positive high 7% to 9% growth rate, we're also seeing positive trends in the international markets as well. You've got Europe, in particular, who's averaged 2% GDP spend on their defense budget being pushed to get up to 5% defense spend. You also have the Indo-Pacific region looking to spend accelerate with what's going on in the world as well. So there's a positive view overall, whether it's commercial or whether it's defense.

And so I would just say, in summary, as I wrap up my slides, when you take that all together and you look at our focus of leveraging our independent position to be able to market parts, repair and software to a commercial and to a government sector, it leads to a very attractive growth category and segment for AR to continue to grow in market.

And with that, I will wrap up, and I will turn it over to Frank Landrio, who will go into parts supply for us.

Thank you, Chris. I'm Frank Landrio, Senior Vice President of Distribution. I will be presenting the Parts Supply segment with a focus on the new parts distribution business. But before I begin, a quick background for me. I'm in my 20th year at AAR, 35 years of industry experience, held various leadership roles in areas such as finance accounting, M&A, operations, OEM development. And 3 years ago, I took on the role of leading our new parts distribution business.

I'm just going to say New York, if you couldn't tell.

I'm Italian, too, you'd see that. Okay. Key messages. So we're a large global independent parts provider. I will touch upon the financials, the market position, the size and our ability to capitalize on the growing aviation market. We will then go to differentiated offering. This is in the new parts business, 2-way exclusive distribution model that John started to define. I'll go a step further beyond the definition, but our distribution structure as well as our value proposition is what's resonating right now in the market.

And you've seen -- I know we had a couple of conversations during breakfast. You've seen the growth, and there's a lot more to go. And then that leads to the third point, which is the growth strategy, where do we take the business from this point forward. Okay. Our Parts Supply segment has delivered strong results over the last 12 months, sales of $1.4 billion, 30% growth year-over-year. $200 million of adjusted EBITDA, that's 42% growth year-over-year and 14.7% adjusted EBITDA margin, which is 123 basis points improvement. It's made up of 2 businesses. That's the new parts distribution and our USM used serviceable material.

On the new parts business, about 65% of the total, $900 million of LTM sales. And on a run rate basis, we're over $1 billion from that standpoint. Mainly the commercial and government markets is what we serve and 90% of our OEM agreements are exclusive in nature, and we renewed 100% of our contracts over the last several years. On the USM side, makes up 35% of the total, about $500 million in LTM sales. We are the largest independent provider of USM in both engine and airframe components. And we demonstrate our value by providing cost savings and industry-leading availability to our customers globally.

Okay. So a little deeper dive down on the parts distribution overview. So we distribute over 35,000 parts to 2,500 customers, major airlines like Delta and United, major government customers, as for example, Defense Logistics Agency here in the U.S. and the Japanese Military of Defense and major MROs like Lufthansa Technik. Now our value proposition benefits both our customers and our OEMs.

From a customer standpoint, we simplify complexity is probably the best way of putting this. We do that by fast delivery, reduced inventory costs and a single point of contact for a range of -- for OEMs, we provide access to the customers. We provide global scale and proprietary market intelligence, which I'll go into a little bit deeper. And then we have our proven execution of our 2-way exclusive distribution model, which is kind of the umbrella over all of the value offerings.

Okay. So let's do a little deeper dive into what that means. So the 2-way exclusive distribution model, as John told you, so this is where we partner with an OEM, and we agreed not to distribute a competing product or product line. And in exchange, they would partner only with us. So what does that allow us to do? It allows us to invest in the relationship. So what they get for that and what we've implemented over the 3 years is a market-driven value proposition. So it's all about the process and how we gain our market intelligence.

So think about everything you've heard so far from both John and Chris, we're a global company, market intelligence coming from whether it's commercial markets, military markets, whether it's coming from our component shops, our heavy maintenance shops, even our software businesses. But it's that market intelligence that's important. It allows us to figure out the market share for each OEM by product, by product line and the gap to get the rest of the business, right?

So let's use 100% as that. It's that gap that we focus in on. That's where the strategy comes in. That's where we come in and we figure out maybe it's bundling OEMs, maybe it's PMA threats, maybe it's -- and there's a long list of actions way. And we customized that to gain that market share back for our OEM and of course, with AAR. So that's resonated a lot with our OEMs and AAR.

What I would tell you, it sounds somewhat simple, right? You say, well, you just get the market intelligence and go get the other 30% or 40%. It's the team that we have that one to get that intelligence and then execute that strategy. It is just -- you can't just say it and it just happens, right? And we have demonstrated that by the numbers and by -- you'll see some more of this in a couple of slides. That is the core to our growth.

Another differentiator for us, and I just mentioned some of it, is that AER distribution is part of the fully integrated platform. And we work together, OEMs work with a lot of the other parts of AAR already. So there's a reciprocal arrangement here, again, the market intelligence and how we could work with those OEMs, whether it's on the heavy maintenance side or the component side or the Government Solutions side. So that's a differentiator for us and it provides a lot of value. And then we roll that all together with our digital tools.

So we have customized proprietary digital tools that make it easy for customers and OEMs to work with us. And in addition to that, I'll add the whole tracks and the software that we're working with on Air buoyant and how we bring those OEMs to the desktop of all the airline customers that are out there today.

Okay. This is the structure of distribution. So -- and I'll go through each one of these. But this structure lends itself, it's an integral part of our growth strategy. So each of these market verticals, and again, I'll go through all 5 of them, are stand-alone businesses. So we're not just dabbling in each one of these segments. They're stand-alone businesses. They all share the same value proposition. So we're not changing value propositions. What we're changing is how you go to market in each one of these. So they all have their own infrastructure, their people, experts, I'll say, in that -- in each market. They have the investment, the inventory and then the individual systems from a market capture standpoint.

So for each one, so let's take commercial, starting with commercial. So we have a global technical sales force that is strategically positioned around the world. And again, it's the market intelligence. They know what the markets are doing. They bring that intelligence to us. We figure out what those strategies are, we deploy it back to them and then they go and execute. And again, just an awesome team in how they do that.

On the defense side, same thing here. So we have a captains of industry contract, only non-OEM to have that. We have a DLA supply chain alliance, both on the land and maritime and aviation. You couple that all together, only non-OEM to have that. What that does for us is again about market intelligence to capture. We're close to the customer. We're able to take that information and then relay it back to our OEMs, and we strategize, again, how to capture that market efficiently.

Next is business general aviation. We carved this out in 2023. Independent sales force also huge growth. It's been growing, but a lot more to go. Japanese military. Now this is a unique opportunity that we had. And again, instead of dealing with on a transactional basis, we know it needed a lot more infrastructure. So we invested in a joint venture, and this growth has been an enormous growth for us. And then those 4 are all aftermarket serving. The piece that was missing, but it was part of our strategy was we wanted to help the OEMs on the supply chain side.

So we acquired ADI. As you probably remember, September of 2025. And this is where this tucks in, started out on electronics, but we're looking to broaden it to other parts, and we're going to -- this is just tip of the iceberg. I mean they've been doing well, but there's a lot more to go here. And again, helping OEMs, as we all know about the supply chain constraints out there, this is going to be a focal point for us. So as many of us know, on the larger OEMs, they're structured like this. Many OEMs are just not in one market, right? Their parts go across many of these markets.

So I would tell you right now, so we have 10 or more OEMs that are in 2 or more of these market verticals, and we have one now that's across all 5. Those opportunities today are active. We are talking to our current OEMs. We're executing, and we are expanding across these market verticals.

Okay. So when you execute the value prop and the structure, you wind up with results like this. So over the last 3 years, you could see that aggressive growth. We've added 25 new product lines. We've added -- our CAGR for that period of time is 28% and 100% renewal rate for the last several years. One point I always like to bring out is you'll see the same OEM logo repeated. That is new product lines or new business.

It's not just business. I will also point out that some of those OEMs going back to 2012 and '13 and '14 are still with us today. So that's a testament of execution. You'll start to see new names here over the last 3 years, and that's because in our business development, pitch, they resonate with what I've just said. They want somebody who partners with them, who helps them grow that piece that they're looking, right? So we're not just stocking, we're not just being a distributor, we're a strategic aftermarket partner and not just a distributor.

Okay. So when you look at our market size now, right, some of the key market drivers, I'll start with that, airlines, you've got oil prices. We talked about that already. But they want to reduce cost. They want to destock inventory. They want to improve the supplier reliability from a port standpoint. On an OEM side, they have supply chain challenges. They're going to hand for the foreseeable future. We've talked about this. Everybody says that will live in the 3 to 5 years? I don't know. I think it's going to go a long, longer than that. But what's increasingly happened, they are talking to companies like AAR where they're saying, "I used to go direct. I think now I want to go and embrace the distribution model.

So although we have critical scale here at $900 million over $1 billion, we're still only 4% of our addressable market at $25 billion. So a long way to go here, a lot of runway in front of us.

Okay. So now we go to the growth strategy, where do we go from here. First thing I want to reiterate is our core business is growing still. So we don't need to look at these other options. But I want to make sure that we're very clear that our core business is absolutely growing at a healthy rate. But in addition to that, we want to further penetrate adjacent aftermarket opportunities, which includes our business general aviation, foreign military, where we're very selective in what regions of the world will work in, but huge opportunities. We're going to keep driving international expansion, mainly on the commercial side. APAC region has been a huge region for us, but there's a lot more to go, and we'll be strategic about that.

To expand the OEM supply that I just mentioned on the supply chain constraints, we could play a bigger role with our OEMs on the supply side and the ADI acquisition obviously gives us that critical mass. So as we execute our growth strategy, we're going to be very disciplined. I think John brought that up about being disciplined. We're already doing that in our business where we're using tools and increasing automation, where we're looking at our workflow to get more throughput in a very efficient way. We want to maintain our margins and grow them as we grow the top line.

So let me put it in summary here. I believe we have the right strategy, we have the right model. We have the right structure. More importantly, we have the right team. The team and the results that you've seen, they're executing -- they understand the mission. They understand the market intelligence, what it's needed, what to do with it and how to execute it. So I am very -- I think we're going to just gain more market share for the foreseeasble future. I'll leave it at that. Thank you very much. And next is Tom Hoferer, who will tell us about repair and engineering.

All right. Good morning. My name is Tom Hoferer. I'm the Senior Vice President of repair and engineering. I've been with AAR about 3 years. Prior to that, I was at GE Aviation for 32 years. So I survived Jack Welch. And I also learned some things from Larry Coke. So all good. I'm also a retired Chief Financial Officer from the National Guard.

So 3 years ago, again, my first Investors Day, I was 2 months into the role. I was just talking to slides, right? So I'm still grateful no one asked any questions back then because I had the depth of a petri dish back then. So thank you. Deeper now, and a lot has been accomplished since then. That was the cool part about preparing for this is sometimes you forget what happened in the past year, past 2 years, 3 years, and when I looked back and we talked about these are the strategies we are going to go after. These are things we're going to do and now to look and see that we actually did them, we executed. Our safety ratio is like 100%. It was super exciting. Super energized and I can't wait to share with my team because they probably forget to everything they've been doing. So pretty cool stuff that we've, again, reflected on the past months preparing for this.

So repair, $950 million business, and a very highly fragmented $50 billion market. So you got to deliver. You got to be laser focused on your customer, you've got to deliver on safety, quality, delivery and cost every day. In addition to that, we are part of the integrated group, component MRO, same customers as Frank. Frank talked about the OEM relationships, super important on component MRO. Andy will talk about software. We provide data for software. And Nick will talk about Government Solutions. We support next group by preparing the [ Navy ], the Marine C40, and we also do some flight testing with the [ USA 86 ]. So we are all together looking to win and we also know when we win, we all went together. So a pretty cool culture that John has created

All right. Key messages that I'm going to cover today. Number one, in this highly fragmented market, we are the #1 leading independent global provider. Even though it's highly fragmented. I'll talk about the size of that market and how much we play. We lead independently with MRO, so I'm repeating myself, but we deliver high-quality, safe products with a lot of labor efficiency and industry-leading turnaround time. Our offering is differentiated. Again, labor efficiency turn or find deep experience with our workforce and a global footprint that is tied to what our customers need. Our growth strategy has been very profitable. We deliver that growth through different value propositions, both on component and an airframe. We've added capacity with Taco and also organically with Oklahoma City and Miami, and we are constantly developing more solutions for the next-gen engines and airframes.

And finally, margin expansion, the efficiency, the productivities that we see, both through mix and our productivity improvements a focus on lean and investments in digital solutions like a paperless hanger system have proven to be margin accretive to the airframe and component MRO businesses. So the segment that you saw announced last week, repair engineering and software, $1 billion in LTM sales, $127 million of EBITDA, LTM, and 12.7% margins. You see the parentheses, we do not like parenthesis. That small blip on the BPS is driven by the HAECO acquisition. I'll talk later about the integration of where we are with that. We're clearly on a path to make that parenthesis go away and make the HAECO sites, Greensburg, Lake City, which have been a slight drag on our margins, they will be margin accretive as planned and why we made that acquisition.

Making up the segment, Airframe MRO of $575 million of LTM sales, focused, like John mentioned, on narrow-body and regional jets, 737, A320s, [ 75 ]. It's a product focus, and it's also with customer focus because of the geographic concentration of narrow bodies and regional jets in North America. It also has provided a straight efficiency gains with our labor -- with our workforce, our technicians, they come in every day and they know they're going to be working on a narrow body. There are obvious benefits to that. When you work on the same product day in, day out, you get really good at it.

We have multiyear agreements with those blue chip customers that extends well into 2030, and our proprietary operating model delivers superior performance. We deliver all that by heavy -- maintenance facilities across the U.S. and Canada. Component MRO, $375 million of LTM sales, focused on engine accessories, structures and components. We pride ourselves on high value, very complex repairs that are created by our engineering teams, working with OEMs, and we enjoy really strong OEM relationships with the likes of GE, Boeing, Woodward, Collins, which enables us to do those engineering development. We also have a growing portfolio of DER repairs where OEMs do not provide that. We deliver all that from 6 facilities globally.

And finally, software. We welcome Andy and the team to our segment, $50 million of LTM sales. You might say why is software in the segment, MRO, fleet management, procurement software. Andy's going to talk a lot about that. We have the same customers. We work with the same data, and there are some synergies that really get us super excited about what those solutions are going to enable from a digital standpoint.

Repairs just flat out about execution, execution for our customers. We've got to meet them where they are and meet them where they -- what they expect us to do. So 7 million labor hours annually. This number is a pretty cool stat actually. So 7 million because of the acquisition, right, Greensburg Lake City added about 1.6 million hours to that.

In the previous 3 years, with the same footprint, same capacity. Our team went from 5 million hours to 5.3 million to 5.5 million. That's throughput, that's execution, without expanding our footprint. And that's also why we're expanding our footprint, that's why we're good at this. 1,000 aircraft serviced annually and 15,000 components. The value prop is pretty consistent with what you would expect from a repair business, decades of experience customer focus, global footprint, differentiated offerings, but I'm thinking back to the very top one, industry-leading labor efficiency and turnaround times driven by continuous improvement and meeting again what our customers' expectations are. and driving to exceed those expectations. It is all about turnaround times, right? The biggest financial lever in this business is turning aircraft back to our customers, right? It means revenue for them. And it means they are very happy customer and they'll send us more aircraft.

So some of you may be familiar with D-checks, C checks, I see some familiar faces from the Miami visit. You saw and we're able to go through a couple of the aircraft. So the C-checks and D-checks are required by regulatory requirements, right? C-checks have 1 to 3 years, D-checks every 6 to 10 years, and we also do modifications beyond that, whether it's cabin -- StarLink installations now. So we have that flexibility. But the primary core of our business is C-checks and D-checks, and we've reduced those turnaround times of almost 15% in the past couple of years. So we are focused on that, right? Maintenance, visits, taking days out. We've implemented Tizen. We've done over 75 Tizen events, over 200 projects are in process across our network. And we got our proprietary paperless hanger system, which also has yielded efficiency and productivity gains.

And then finally, you may recall, you may not recall, we had the first safety management system implemented by an independent MRO in the entire world. customer benefits, like I said, nothing more important, right, getting their aircraft back flying passengers on it, pay money to fly. That's revenue, improve first-time yield quality, again, by reducing our quality escapes and our damages. We get a quality aircraft back to the customer. They make money, and the safe quality of product is always top of mind for both of us.

Benefits for us, if we get more aircraft through, good for us too. Like I mentioned, 5 million to 5.3 million to 5.5 million hours in the same footprint. Now we're at 7 million with the acquisition. That's more revenue per AAR. And it expands our customer relationships, right? My team does well, Nick does well. My team does well, Andy does well. My team doe well, Frank does well. We're all -- we all win because we're all the same customers. And those customers, if they're happy with what they're getting from an airframe MRO standpoint or component MRO that makes the conversation a lot of ease of the -- that they have -- run as a customer.

Since last Investor Day, 16% CAGR. So very proud of those results. but we've been super busy also like it means at the very beginning. So in March of '24, we acquired the Triumph product support business. November of '25, we acquired HAECO Americas. And a couple of weeks ago, we closed the acquisition of Aircraft Reconfig Technologies, or ART. We also, as John mentioned, divested of a noncore business landing gear. We're expanding our footprint have expanded in Oklahoma City. I'll talk a little about the expansion of Oklahoma City of Miami in a couple of slides here.

The additional revenue streams from enhancing our offerings, like I said, being very flexible with what the airline customers need while their airplanes come in for C-checks and D-checks and doing more than just that. And also on the component side, developing, like I said, more complex and advanced solutions and then operational excellence, just mailed it on lean, the paperless the -- I'll talk about an SMS.

So as I opened, a crazy big market, $50 billion, very fragmented. And with all we're doing well and everything we've been doing, we still only have 2% market share. So huge runway, huge opportunity for us to continue to go after and it's real, right? So the market size is real, and we believe the market drivers that Chris touched on are real also. Air travel is increasing which means there's more demand for airlines to have their planes and have them back and they have a quality playing back. Regulations are not going away, right? Regular maintenance is required. Fleets continue to age every day, and the delivery constraints on new aircraft still in. And then finally, for limited network capacity.

So let me take a moment to talk about the acquisitions. John mentioned, we've been very busy acquiring and doing a lot of really strategic acquisitions. 3 of which have been in the business that I'm responsible to lead.

Number one, Triumph product support. Again, March of '24, $725 million value, and we've realized about $21 million in cost synergies. In addition to these cost synergies, we've unlocked a lot of new repair capabilities. We've got much more increased presence in the Asia Pacific with our Thailand facility, and we can serve our customers better with Thailand, Amsterdam and our facilities in United States. So it's the business has been successfully integrated and sort of fully, like I said, delivering similarly nice synergies there.

Aircraft Reconfig Technologies, smaller in size, but not smaller in strategic port. So $35 million value, 100-plus employees, which is almost 3x the size of the pre-engineering services business, right? So this is a big one for us and for that business unit within my team. The exciting part about this is, with this 100 employees, we also pick up 100 STC, supplemental price certificates sorry, 400 STCs, 100 PMAs, parts manufacturing approvals and 33 patents. So we pick up a really nice group of smart people who know what they're doing, big pipelines. So there's revenue synergies with the pipeline that we also acquired from this business, and we believe there's cost synergies from the ODA self certification that we have now to certify our own PMAs and STCs, but also in-house manufacturing that's been outsourced to date to make the monuments and the cabin reconfig products that go into our engineering solution. So pretty excited about this one. HAECO Americas, you all know about this one. So to me, the strategic rationale and this one was going with crystal. It was crystal clear, right? We needed more hangar capacity. Our customers need to more hanger capacity. Greensburg is absolutely huge, and Lake City has also got a nice footprint. So we picked up capacity to meet that customer demand. It's in North America, where we like to operate, their bodies right? Everybody is in 175. So North America, again, where our core customers are, and we're asking for, we need more space. We needed to do more work for us. And deepen those customer relationships. We found while looking at this business that a lot of the customers were already customers we had on the air crane MRO side.

And then the opportunity for synergies, we saw that there was a clear opportunity for us to apply the operating model, our systems, our procedures and really take a, I'd say, a low profit business to more of the levels of what we expect like I mentioned at the very beginning. It's a little bit of a drag right now, but we're well on a way to make it very profitable.

So 3 pieces of that playbook, revenue optimization. Chris and his team went out secured $850 million in contracts takes us through 2030. So we knew, all right, we're going to get this new footprint and we could fill it up and customers want to come and now they're committed.

Cost reductions and process improvements. We've already replaced all the old IT systems that at Greensboro and Lake City put our systems in place, and those are all operating, and we will go paperless in Greensburg here in the next few months. And they also able to adjust the cost structure -- so there was a lot of, I'd say, just in different approach to business, right? Volume was good no matter what kind, that's not how we work. We'd like to, I'd say, rationalize the volume to where we know we can run an operation that we want to run it and be profitable. And that's where we're well on a path to do that.

The footprint rationalization, you've heard in previous meetings or in the news. As a result of this acquisition, we are exiting the Indianapolis facility. It was our highest cost facility. So we are -- just by nature of that, we're reducing our total airframe MRO cost structure. By exiting Indi and moving most of that work to what were to at those sites.

And the improvements are clear. We had a review with a very big customer a couple of weeks ago from a safety, quality, delivery standpoint, they shared with us, say, we're feeling the change. We see the sense -- the chain when you walk out of the hangar. So we are well on our way to, again, doing what we said we were going to do. We were going to acquire this business, apply our operating process procedures and make it more -- make it as profitable as the rest of our facilities.

So inorganic growth, organic growth. So you've heard about the expansions. We're super excited about this also. Oklahoma City opened up for business on March 1 rolled in the first customer aircraft and things are going great. As you would imagine, it's like when you get a new house, the team loves working there, right? We literally had to we were able to select, the guys that were going to -- guys and ladies, I should say, that are working in the new facility. So 200,000 square feet between Oklahoma City and Miami. Miami will open in September. Incremental revenue with the same fixed base cost. So this is all margin accretive. Customer demand was there, like I said, is already spoken for. And the labor pools of these 2 facilities is -- the big reason why we did this. We have great labor pools in Oklahoma City, in Miami and fully expect us to be able to add the emissions that we need to execute and deliver for our customers. More organic growth, components.

So adding repair capabilities for next-gen components. Capabilities on LEAP, GTF, NEO, MAX, these are a result of the OEM relationships we have and also the engineering expertise that we've built in the second -- in the middle piece there you see, we quickly discovered that we had to have really good engineers to work with the OEMs who, quite frankly, also needed us, right? There's -- with all the new or next-gen engines and airframes coming to the market. they just don't have the capacity to keep repairing the older aircraft and engines. So we had an engineering expertise. We've collaborated with several of those OEMs to develop these complex, very highly valued repairs. And that part of the business is really doing well.

And this speaks again to the third one around these OEM relationships. You cannot do OEM repairs the OEM working with you, right? They own the IP, they own the manuals and they'd like to keep that. So it really speaks to the need and the value of making having those OEM partnerships, which again ties back to Frank doing well for him, right? Andy work with them, et cetera, so we can have those relationships and that they're strong from an AAR standpoint so we can work together with those OEMs to deliver.

PMA, DER. So customers have told us over and over again, sure a lot of you know this. There are challenges out there in supply chain constraints. Supply chain is not coming back from COVID, right? This is the new normal. You hear all those tag lines, if you will, about what's going on with the supply chain. So they've come to -- many companies out there now us and saying, hey, how can you help us with, we don't have availability. We can't do these repairs, competitors struggle with just doing the repairs. Our solution is PMA, DER, again, parts manufacturing approval, does it native engine repair.

We're working with our own engineering teams, we can and have and are going to continue to develop these repairs that are proprietary for us, but FAA approved, again, to address this customer need of -- they just need parts, they need components, and they can't get them right now. So the outcomes are our parts availability, increased uptime, predictable, lower cost outcomes and for us, improved margins without additional fixed costs. We're doing this within our fixed cost structure of component repair Paperless Hanger, super proud about this. So the picture says it, right? I mean we had -- and some of you saw this in Miami. Actually, I think you saw it after we had already got rid of the planning room, right? But that's a picture of it. Tons of paper gone, right? The resources and costs required to administer all that paper. By the way, 9 million pieces of paper safe since we went paperless. We're saving trees. We're saving space. And we have technicians walk around with tablets now. And I should say, not walking around as much. You used to have to go to a home base, get their assignments for the day. Go complete the assignment and go back, get another one. Now it's all on the tablet.

So decreased downtime for our customers. Mains turnaround times have improved. All these digital records enhances our ability to have records about safety, quality, compliance. You see the margin improvement of 200 bps and 38% of our 38% of our network is currently paperless. That's 100% of Miami and Rockford, Oklahoma City will be by August. And our plan now with our digital technology team is to have the entire network paperless by the end of fiscal year '27. So this keeps us super excited. We've seen, again, big efficiency gains. Our technicians absolutely love this system.

So I think beyond all these numbers and savings from a retention and recruitment standpoint, this is how you get new technicians, right? Because when you were newer generation -- younger generation shows up and you give them a book a manual to how you do your job, they're really gone. So having an on tablet, this is how you work in the digital world. We're seeing the impact also on our stability of our workforces at this facilities. So wrapping up, expanding hanger capacity, meet the customer where they need us to be. The demand is there. We're expanding capacity both inorganically, HAECO Americas, organically with Oklahoma City and Miami.

Utilizing our range of repairs, both on the airframe and component standpoint. Again, we need to stay flexible, again, meet the customer where they are. They're asking for StarLink installations now, as I mentioned before, which is pretty cool. If you have a flowing on a StarLink aircraft, you're happy we're doing that. It is amazing. So we're doing those geographic expansions. We're always looking at expansions, right? We know our biggest competition, especially on the airframe MRO side is lower cost, I'd say, countries and a place where you can -- where you enjoy a lower cost of labor. And we've also been approached to look at potential wide-body solutions where companies are looking to reduce our exposure to the China region.

We have invested. We will invest in service next-gen components and efficiencies, like I said, that's the name of the game. Digital solutions, whether it's paperless, signing with Andy Schmidt team with -- you talked about Aerostrat, our customers use Aerostrat. So when I heard the news we acquired Aerostrat, I was excited because I literally get screen prints of Aerostat fleet schedules from our customers, and I'm confident Andy's team are going to help me digital right?

So look, it's sustainable growth, it's margin accretion and a strong return on invested capital, and that's how we're going to continue -- have been growing and how we're going to continue to grow. So that completes, I think, the first half. Q&A time, right?

Thanks, Tom. And thank you, everyone. Just a quick reminder. As we get into Q&A here, please state your name before you ask your question. And also, finally, a friendly reminder to you, please keep your questions to the sections we just discussed. And -- obviously going to go into the financial framework within more detail later. So if we can hold those as well. I appreciate it.

Yes, your question on the first half -- if you think about your 10% sort of top line outlook, excluding the legacy commercial services piece, can you give any more detail as to how we should think about that by segment or for some of the broader buckets, heavy MRO component MRO, maybe parts distribution versus USM?

Sure, we can. If it's okay, I'd like to talk about the framework after doing at the end go into more detail on a lot of assumptions. So if we're going to pick that back up I know you'll ask it again.

Okay. Perfect. Well, maybe then if I could, on the Parts Supply segment. Can you talk about for the industry today, what percent do you see going through distribution. How does that look in 5 years and -- because I think it's a nice secular sort of industry tailwind, you're obviously taking share. What's the environment like? What are the conversations like with OEM partners? Why are they looking to go more through -- just how do you see that market evolving? And obviously, your ability to get to [indiscernible].

Sure. I can start and then Frank, do you want to fill there. So generally speaking, obviously, we've been taking share. And I'd like to remind everybody that our -- if I think about our 2 biggest competitors, the combined revenue of our 2 largest competitors is about $6 million or $7 million. So we had a lot of runway from where we are in $1 billion roughly into distribution where we get to relative to certain of our competitors.

We do see a trend amongst the OEMs that we talk to of being more confident in distribution and looking at that at a more efficient way to approach the market. We have been taking share, but what we've also found is that when we get into an OEM, they say, okay, we're going to give you this market to focus on, but we're -- and you're going to focus on that, but we're still direct over here. But over time, they see the efficiency in which we approach that market and they'll move more work that's direct over to us.

I'd like to add that 50% of our growth is where OEMs have gone direct. So I think they're looking at the market and saying, how can I serve it better?" -- and I think they're going back to investing in new technology, producing parts and whatever, but not trying to increase their sales force, for example, increase on the military side, hold inventory for the DLA win is better companies that are equipped already to do this and give them that return.

Great. And if I could, just 1 follow-up. On the PMA, DER piece, can you size that for us? And then just moving forward, how better continue to manage sort of conflicts between that and your OEM partners if that's along issue?

Sure. PMA is still very, very small. You're talking about single-digit millions in terms of revenue inside the portfolio. What we are excited about with the ART acquisition is now we've got this OTA capability and we can self-certify so we can bring PMAs faster to market. So that's important. But it would still from an organic standpoint, be it might be high growth, but it's going to be small in terms of its percentage of the total.

In terms of the conflict, there are an lots of parts out there that we deal -- a lot of the parts that are not in conflict with our distribution partners, our distribution partners. So we are not confirmed concerned about planning areas to PMA. I like to remind everybody, I think Tom and I mentioned that our biggest product line is Window Shade. We're selling millions of dollars of PMA window shades each year. And we've got 4 young sons and every time around an aircraft and sell to pull those things down, stand, et cetera. So replacement. But interior parts like that are low tech, high margin and not in conflict with any of the OEMs we work with.

John, a quick question on the parts supply business. you have about 4% market share right now, still a lot of room to grow. We think 3 to 5 years from now, where do you see your market share? And do you view that industry is right for consolidation?

So I'd like to pick up a couple of points in market share over that period of time. Frank and I talk about -- it's $1 billion business today. There's no reason why it shouldn't be a $2 billion business. And as you know, we have been growing meaningfully faster than the market. We've been putting up 25%, 30% organic growth in that business over the last several years. we would expect above-market growth to continue, and therefore, we end up with a couple of points of market share. So excited about that.

And in terms of consolidation, yes, I think there have been and will be consolidation opportunities for us, not just necessarily just in the end market distribution space, but also the electronics world that we -- where we made the ADI acquisition. And that's a whole new growth vector for us. Now we're selling parts to the OEMs themselves or use to manufacture as opposed to distributing end products, which is the core business today.

Scott Blumenthal from Emerald Advisors. My question is for Frank. Frank, it hasn't been lost on us that your part supply business started to accelerate after the acquisition of Trax. Maybe you can give us a few examples of how you've been able to leverage tracks to drive the business until now.

Well, I think we're just starting on the Trax. So I think what we had to do is first prove out our model that I spoke about, right, the execution of our model, everything from the market intelligence piece, which is a differentiator, leveraging the team. And now what we're doing working with air bouyant and Trax to now bring that model and those OEMs into the Trax system. So this is an ongoing event right now.

Coincidence that the business started to accelerate when we bought track, it's not necessarily related and tracks can be and will be an accelerant going forward, now that we've got it integrated and connected and particularly with airborne.

Sheila Kahyaoglu with Jefferies. Maybe, John, if you could talk about the parts distribution market, and you mentioned in your strategy slide, Business and General Aviation is your third growth lever. So your business mix is currently commercial and defense. How do you think about leaning into BGA, what the growth rate looks like in that market? And how do you think about expanding share?

Good question. So the 4 areas of commercial, we've been growing significantly there. We've also seen accelerated growth in the defense market. So very happy with the position there and expect that growth continue. We do very little in BG&A today. It's relatively small. However, that market has consolidated in a way where it now makes sense for us to pursue, meaning that in the business jet world, you now have large fleets concentrated with fractional operators, et cetera, where we are set up to be able to go after them. So we see that as a meaningful growth opportunity -- to size that as a percentage, it could grow faster than the core commercial and defense. But that's another area where we would look at inorganic opportunities as well to build a bigger presence. And I don't know, Frank, do you want to add anything.

The only thing I'll say, it's a fragmented market, right? So we needed the tools in order to capitalize on that, and we have those now. So I think the growth will be continuing on at this point.

Great. So we got to ask Tom a question because last time, he got off.

Great. I did right.

So yes, Tom, you referred to the Thailand and Amsterdam facilities, you have beachhead, APAC and also in Europe, but we don't really hear too much about them. How can you kind of leverage those and grow in those areas as well.

Yes. I'd say a lot of the focus is on Thailand and growing the capacity and the footprint there, Scott. So it's a unique facility where meaning at the U.S. facilities, they concentrate on edge components or structures, right, Thailand, they can do it all. And they do it well. It's a very, let's say, young and energetic and pretty fired up workforce, highly educated. So our strategy there is grow the footprint and expand all the capabilities that we have there -- no, not yet. Okay.

Yes, maybe 2 questions then. On the heavy MRO side, in particular, how far out are you sold? Like what are you seeing in terms of bookings today from your customers? And then related to that, obviously, I know you've addressed this multiple times, John, but if you think about sort of the higher crude pricing and ultimately impact on your business or the market in general, where would you start to see that? Like how would you think about your portfolio and sort of what's backlog driven, what short cycle? Just anything else around that as you think about maybe some of the scenario planning. I'm sure you're going through back half of this year due to '27?

Sure. 2 questions there. So from a heavy maintenance standpoint, we're sold out essentially through the end of the decade. So we've got customer commitments through 2030, that's unique. Our competitors do not have that level of commitment. There are minimums in terms of hours that are guaranteed to us by our customers. Certainly, if we have capacity, they can do more, but we've got -- we're sold out through the end of the decade, which is a good position to be in. As it relates to -- if we think about past cycles where we would see things, we would see it in the daily parts volume first. That's where you could actually see it in the business first in terms of if there was going to be a slowdown. We have not seen that. Across our parts businesses, volume has remained very, very steady, and we are continuing to have -- we're continuing to see growth. So we haven't seen that. where you would hear it first, though, this will be your first indication would be the signals, the demand signals from the customers around heavy maintenance.

In other words, the hangers go down a little bit in the summer it's seasonal because the aircraft fly. And then usually you then you fill back up in the fall. You would be seeing things from the customer saying, hey, we were going to give you this many aircraft in the fall, but you're going to see a little bit less. We have over those demand signals from our customers either. So you hear it in heavy maintenance, what you'd see in parts and again, at this moment, we're still feeling very good. Any other questions?

Tom -- I'm sorry, Frank, what's your expectation for part supply growth once all of the capacity is up and running fully at both Oklahoma and Miami. The direct -- I guess, is there a direct correlation between capacity and what we can expect in the parts -- I guess, parts and MRO pull-through once all those facilities are up and online.

So, yes. Maybe some clarity, in the airplane, we have our own -- our team does its own purchasing material. A lot of them -- some of the material is also customer furnished. So we're not connected into Frank's business from a parts supply standpoint, we do that within each of the MROs.

So I mean, the parts supply won't actually grow because we have more aircraft, right? So we have 3 additional lines in Oklahoma City and 3 in Miami. So, yes, it's incremental to -- I don't know the exact numbers, but it's incremental to overall revenue and op profit because of the material that comes from the natural prepared cycle.

Noah Levitz from William Blair. Tom and John, in the slide about repair and engineering with margin expansion, you noted greater than 200 basis points, largely driven by the paperless initiative. It's still 62% of the initiative left. Was that greater than 200 basis points, really the low-hanging fruit? Or could you not -- is there anything preventing you from getting that level of margin expansion? As you finish that, I think, through 2027.

You had a few things going that contributed to that 200% expansion, not just paperless. It was a big contributor, but we had a lot of other things -- Tom mentioned the Kaizen events et cetera, some other efficiencies that we brought across the hanger, some favorable contractual terms from the customers. So there were a number of things that helps with that. But we would expect further margin expansion beyond that as we continue to roll out paperless. So it was a portion of that 200%, but it wasn't the whole thing.

Great. If there are no further questions, I think it's time for a break. Thanks, everyone, for your attention this morning, and we'll be back in about 20, 25 minutes. Thank you.

We will resume part 2 of our program at 10:25. We will now take a 20-minute break.

[Break]

And to kick things off, we'll start with Andrew Schmidt, our SVP of Software.

Thank you, Chris. Good morning, everybody. My name is Andrew Schmidt, and I run our software business I've been with AAR for 11 years. And of those 11 years, 10 years have been spent with John taking the track owners out to dinner on a recurring basis. So we've had one.

Seriously, of my 11 years with AAR, the majority of it has been spent taking technology and initially rolling it out at AAR to improve operations. John and I then figured out or we might be able to commercialize some of this stuff. So we began building digital services and eventually build up the portfolio of software companies that we have today.

35 years of experience in the industry. I worked with Oliver Wyman. I was a partner there in co-led the aviation and aerospace group. We did a considerable amount of work, helping our clients understand technology and the benefits that it could bring to their operations. In some cases, we help those airlines, select technology and then in many cases, where we help them select the technology and implement it. Also spent time with Seabury Capital, where I co-led an investment fund that was started to focus on investments and aviation aftermarket software and TravelTech more broadly.

So 3 key messages that I'll deliver today. The first one is that we believe hands down. We have the most comprehensive portfolio of software in the business today. It's focused on the aviation aftermarket. And specifically, we're looking at technical operations. As John mentioned, with tracks at our core, we -- maintenance workflow and then we capture data on our customers' behalf at each and every 1 of those maintenance workflows.

We're focused on growth, and we'll go through the stats for both Aerostrat and Trax since we bought them, but we're focused on bringing in new customers since we purchased the company -- we've 24 new customers. For Trax, we've added about 2,500 aircraft to what we support for Aerostat, they brought on about 2,000 new tails since we bought them. We're also very focused, and this is part of our investment thesis was to expand and get to new customers that are legacy systems, but then also to take our existing customers and upgrade them.

So a good portion of Trax's customers. We'll talk about this more specifically, they're still using legacy ERP system. So we've got a big opportunity to upgrade all of those customers to the latest technology. And now with Aerostrat and AirBouyant, we also have opportunities to cross-sell.

The last key message here is that we will continue to use AAR scale in connections with airlines around the world to accelerate the growth of all of our software -- so John mentioned Delta that would not have happened without the AAR acquisition. This would not have happened.

Recently, Aerostrat, one, American Airlines that may have happened without our support, but where we're taking Aerostrat over into Europe and Asia, we'll make the introductions and help them win the work. So it has been a big differentiator for us has been a big accelerator for us. Most of the software companies, there's a few big ones out there that we compete with on a regular basis, but for the most part, they're small.

Okay. Diving into the portfolio. John has already introduced this. We've talked about it a lot -- but we have 3 software companies today. Trax is very much our flagship software company. They have the most customers. They operate in 35 countries, the most revenue. They have the most application. It is our flagship product. We'll go through the applications that they sell shortly here.

The second product is Aerostrat. Aerostrat today focuses on long-range heavy maintenance check plan. So Tom gets the output of Aerostrat, and there are a lot of other MROs they get as well. The key thing, though, with Aerostrat is we want them to be the cornerstone of our MRO planning software. So there is a big opportunity to help airlines plan better, get more utilization out of the assets that they have, reduce their maintenance costs and ensure they have capacity to do the maintenance they need. So big growth opportunity for us in planning.

We've talked about Airbouyant. This opportunity has been sitting out there for a long term. I've been involved in the industry 35 years, and we've been talking about it for 35 years. So with the confluence of a bunch of different things, AI being one of them, we believe we can transform the way that airlines and MRO buy parts. So now is the time for us to shine with Airbouyant.

Last thing on this page. All of the products are integrated. All the products of all the companies are integrated. We invested heavily in integrating track and Aerostrat, why did we do it? We did it because we can roll it out faster that tracks as customers. We can share data more completely on, same story, very integrated with tracks. So if the customer says that they want to implant, Airbouyant, we can take loads of historical purchasing data send it over to Airbouyant, let the agents crunch away on it, get smarter about past decisions that have been made, they can understand why airlines make decisions to go with certain parts suppliers in the past.

The data that could be shipped to an Aerostrat -- sorry, to an Airbouyant, very rich, very rich. We know who they bought the part from. We know who they bought apart from. We know a lot of information about the suppliers' performance, do they deliver the part on time? Did it come across at the price that they promised.

Okay. Focusing now on Trax. Again, flagship software product. It has over 100 customers that operate in 35 countries. We support 6,000 aircraft which is about 20% of the commercial industries aircraft. So we see 20% of the industry's aircraft. The average tenure of the customer is 14 years. It's a very sticky product. It costs a lot of money to replace tracks, as long as we do a good job, we meet our customers' needs, help them meet their regulatory requirements. They're happy, they'll stick with us.

Since we bought Trax, this was March of '23, a little over 3 years ago, we've grown the top line by 90% and another key metric that's not on the page here is we've grown our annual recurring revenue by over 100%, over 100%. So we spent a lot of time looking for ways to convert old revenue streams to SaaS recurring revenue streams.

Key customers here. We've talked a lot about Delta Cathay Pacific Thai. These are all new wins since we bought the company. With Delta, we went live in a year. We went live in a year. So we're live under line. We support over 13,000 users, 1,000 aircraft, a bunch of turns every day. So they're very happy with the product. They want us to accelerate the rollout.

So our first phase with Delta is on the line, the second phase with Delta is in the hangers, third phase is potentially in the component and engine shops. We're working through that with them now. And then the final phase is in engineering when we replace their legacy ERP system.

Trax 3 products. We have EMRO that we sell today aero-mobility and Trax Cloud. EMRO, as John mentioned, that's the MRO ERP system. So this is the system. You could call it the regulatory system of record, but you can also call it the system of work execution. So all workflows get managed through tracks, which means we're collecting data at every step of process.

So an example of what might happen is our customers, they have a tech comes in, turns on the iPad, tells him what work needs to be done in parts need to be collected. He can go collect those parts. Tell them what aircraft. He needs to go to what hanger it's in, tells him what he needs to replace a part, the procedures to replace that part are there, the procedures to install the part whether or not it needs inspected. They're all there. But we are capturing data for our customers every step of the way where that part come from. We repaired it. What are they supposed to do with the part that just came off the airplanes. It's supposed to be routed to somebody for repair. So all of that information is in the Trax system for our customers to use.

The second product is e-mobility, and this is a suite of 14 mobile applications. Right around the time that Trax was building EMRO, talked with a number of customers who said they wanted mobile applications. because it would enable them to be paperless. So we built 3 applications in the first round, and then every year thereafter, we built a mobile application couple of reasons. One, super easy to use, super easy to use, super intuitive.

All of our mobile apps are rule-based. If you're a technician, there's maybe 2 or 3 mobile apps that you use. If you're working in a warehouse there is one application that you use. If you're a production planner, 3 applications that you use, if you work in quality, there's an application that you use. So instead of logging into a bigger system and navigating around all of that. You come in, you have your iPad, you turn it on and it tells you what to do.

So again, 14 of those will look to add to those as we go. And then the last product that we have is Trax Cloud, I mentioned that we grew our recurring revenue by over 100%. Our cloud revenue, our hosting revenue has gone up by 160%. So this business is growing because our customers are pushing to offer the service. Customers want to get out of data centers if they're using third parties to host their software, they find that we can host it better. We can do it more cost effectively, which allows them to reduce their IT cost, and we can also provide service level when we host our software.

So those are the 3 products. Key takeaways then for tax. We are, as John mentioned, legal regulatory system of record. So you need -- if you're using tracks, this is what you need to ensure that you're running a compliant operation. We enable 100% paperless digital workflows. Breeze, one of our first customers 100% paperless. They don't use any paper in their technical operations. So we can facilitate that allows better information and with the mobile apps, it's very much a 2-way street. We can give information to the user and the user can send information back to the system. So we capture data real time, typically better information, we facilitate efficient workflows.

Other big things that our customers get from the application, clearly, efficiency across their operations and better asset utilization. Okay. Second, product. Aerostrat, as I mentioned, big growth vehicle for us, and we'll go through how they're going to help us grow. But at their core is planning at their core is planning.

So they've got a whole bunch of data scientists, a whole bunch of smart people that are figuring out how to build a forecast airline that does -- these are all the line checks that you need to do, and this is when you should do them, and that's going to optimize your workforce, and it's going to optimize your maintenance program to make sure that you're getting the most out of the components have.

So a few ways to grow Aerostrat. One is today, they only offer one product. Their customers have been pushing them to develop a long-range planning product for components and engines. We're developing that now. We'll roll that out in FY '27. With this product, we don't quite double the revenue at all their existing customers, but we increased it by about 80% or 90%.

Looking over the stats on the right, the bottom 2, 2/3 of the revenue is coming from non-Trax customers. So if you look at Trax customers, only 10% of them are using Aerostrat today, and we have over 100 customers. So with this integration that I talked about that we developed, we can implement Aerostat it tracks customers in weeks instead of months.

So it's a matter of flipping a switch. And the way Aerostrat sells to its customers is through a trial program. Customers, Trax customers get to use it for a couple of months, see if they like it. If they like it, they start paying for it. So another big area where we expect to grow. The last area where we want to grow Aerostrat is the stat here bottom right box. Right now, the majority of their customers operate aircraft or their aircraft are based in the Americas their market share in the Americas is quite high. So what we want to do is bring them to Europe. We want to bring them to Asia. We're talking with some of the largest airlines in Europe today.

Hopefully, we'll announce a win there soon. APAC, Trax was able to bring Aerostrat into that new business win there. So when TI bought Trax, they also bought Aerostrat. So that was an addition that we made at the very end of the sales process. So great opportunity to cross-sell them. Since we purchased Aerostrat less than a year, their annual recurring revenue has grown by 60%. They pulled into American Airlines as a big customer, TI, and they pulled in 4 other customers as well.

Okay. Aervoyant, our new product. And I know some of you in the room actually got a demo of Aervoyant. But just quickly, what are we trying to do? The process today, very fragmented, very manual, systems are disconnected. So the gray shaded boxes up here, this is where all the manual activity is occurring. And you can see there's a whole bunch of Trax logos above all the other steps.

So if this customer that we're talking about here is using Trax, Trax is constantly looking to see what parts are needed to support the operation. And they put that on to a requisition list. So today, what happens is that requisition list gets put in a spreadsheet, printed out and you got a whole bunch of buyers that are trying to source the parts that the airline doesn't have.

So they're sending e-mails, they're making phone calls. They're getting on to websites. They're going to third-party marketplaces to try and find those parts. They then will get a quote for the part. And once they have a quote, they have to make a decision, which one are they going to choose. Not a lot of science behind it unless they did something in an Excel spreadsheet.

So those 3 activities are what we are trying to go after and everybody has been trying to go after for years. Opportunity is huge. So airlines, MRO spend about $60 billion on parts and materials, and this is across the gamut every year. Trax's customers represent about -- and their suppliers, Trax's customers, the airline customers and their suppliers represent 20% of that spend. So our system is capturing all that information.

So big opportunity, great place to start with Trax sitting right at the core of our software business. So where is this going? Where is this going? So all those 3 steps get boiled down to one screen and picking one pink button up there to click. On screen, one button to click. So the parts go into the Aervoyant platform. John mentioned that we're working with A-Xchange. They have access to over 5,000 suppliers. So all that part requirement goes out to the 5,000 suppliers. They come back with quotes and then our platform starts to crunch away and make recommendations. So up here, kind of hard to see. But on the bottom right, you'll see we sent out a request for a part. We ended up getting 5 quotes back. And what our system will do, it's going to rank order those quotes, and they're actually going to evaluate and score every response.

So that's the first thing we do. The second thing that we do is we deploy our agent, our agent. So we built this on the AWS Bedrock platform using agent core. And at this point, we're using an AWS LLM, but we can shift over to any large language model that we'd like to shift over to, but that comes back with buy this part, buy this part. And then in plain English, it could be any language for that matter, it says this is why we're recommending you buy that part. And then we come up with a confidence score. So we're 92% -- our agent is 92% confident that this is the right supplier for you to go with. This is the right place for you to buy that part.

So if you agree, you click that button. If you disagree, you click one of the buttons down on the bottom. If you click one of the buttons down on the bottom, you have to tell it why you didn't pick it. Why didn't you pick a recommendation? So as John mentioned, though, where we want to go is we want to automate this. So the confidence score can be used by the customer to say, if you come back with 92% or above, just buy it for us. Let the agent buy it for us. So that's what we're doing. We're trying to take that very fragmented process, simplify it, put it all into their [ Voyant ] and come back with one screen that you can click or eventually, you let the system buy it on your behalf. All right. So what did we hear? We launched on April 21, very positive feedback.

As John mentioned, everybody validated the issue. Everybody validated the opportunity for improvement. We demoed before we launched to many customers, but we also demoed at the show. Everybody loved the user experience. It's totally different. So it's designed to manage an agentic workforce, right? So it's no longer you have to look at a whole bunch of information and make a decision, it comes back with a recommendation. So what the application is all about is managing the agentic workforce. If you want to make -- you want to let them do something or do you want to keep monitoring their performance. Once you let them do stuff, you want to be able to monitor their performance. So that's the way the application is designed.

The other big piece of feedback that we have is just the acceptance by everybody that we talk to that an agentic workforce is something they've been thinking about and they would support. So this is what we have to build out quickly. On the right side of the page up here is we're not just going to build one agent, but we want to build, again, a workforce of agents. So the first one is helping make decisions about what part to select. We'll build an agent to order it. We'll also build a demand agent. And this is big. This is big. So look at the supply chain, are there shortages of parts. If you know you need a part, so we have Aerostrat, it knows what you need 5 years out. If you know next year, you're going to need a part and the supply chain is all clogged up, buy it now. So that's where we want to go with the demand agent and then there's some other agents that we have on here.

All right. I'm running out of time. So we'll go through this quickly. It's exciting stuff to talk about. So our growth, 2 axis, 2 axes. We want to go after customers, as John mentioned, that are still using legacy systems to support their fleets. Big opportunity for us there. We've been going at it. A lot of our wins. Delta is a great example. They are on a legacy ERP. They've chosen us. We've got a long-term process to replace that legacy ERP.

We want to go after that. The other big opportunity for us is even for the customers that are off those legacy platforms, we believe, and it's our goal to have the best software in the business, use us, use us. Delta has over 160 software applications that they use to support their technical operations. They want to skinny that down. They'd like us to be one of the partners that provides the same functionality that they get out of that 160 applications with MRO, e-mobility, Aervoyant and Aerostrat. So that's where we believe the industry is going. So a big growth opportunity for us.

Our growth strategy looks a little bit different than everybody else is here, but we basically have 3 pillars: one, bring on new customers, bring on new customers. Second part is to land and expand at existing customers. We've increased the size of our sales team. They're very consultative. You have to be consultative to help customers make a decision on whether or not they want to go with your software. And then we want to sell more stuff. So we have to build more applications that our customers like, our customers love. So that's what we're doing through partnerships, organic efforts like Aervoyant and acquisitions like Arostrat.

So these are some examples of customers that we won. Delta, Biggie, we've talked a lot about them. But in the APAC region, significant expansion over the last 3 years, brought in Singapore Airlines, Cathay Pacific and Thai. There's more for us to go after in the APAC region. American Airlines, a big win for Aerostrat. They now support 3 of the 4 majors in the U.S. Hopefully, the other one will come shortly. And then again, we're looking over in Europe, and we're looking at APAC to expand them.

Expanding at existing customers. These are some examples where we increased our annual recurring revenue to 4 to 5x by getting them on to Trax's new products. And then lastly, we'll just continue to look for organic opportunities to build new software. We'll also look for opportunities to acquire additional companies that fit well with us in our very strategic in nature.

So in summary, we have a very complete and compelling portfolio of software to offer our customers. We're very focused on growth. And lastly, we are looking to expand wherever we can, and we're looking to continue to leverage AAR's scale and capabilities to do that.

Thanks. Up next is Mr. Nick.

All right. Thank you, Andy. I promise I will not use the word agentic in my overview. No, but thanks again, and welcome. Good morning. I am Nicholas Gross. I'm Senior Vice President for our Government Solutions business. I've had the pleasure to be at AAR for the last 10 years, mostly in the government space and spent the last 30 years basically in the government market between my military and industry time frame.

You've heard a lot this morning about this incredible platform that we built at AAR and how our solutions help deliver value and create better results for our customers, our employees and our shareholders. And I get the -- just great benefit here to talk a little bit about the Government Solutions story, how we go to market, why it's differentiated, why it's durable and then also why it's just an important growth piece of the overall AAR portfolio. And really, it's one that brings together everything you heard about from my colleagues here, all the capabilities you heard about from from Frank, from Andy, everything that we do more broadly across the commercial side, we do the same thing for the government side as well.

At a high level, you'll see a business that is scaling, expanding in margins and aligning closely with structural trends in defense around commercial companies and commercial capabilities, improve readiness and total life cycle cost. At its core, really, what we try to do is bring those commercial best practices into mission-critical government operations, all about improving performance, accelerating readiness and again, lowering total life cycle costs. And I think those 3 themes are really something that's going to underpin a lot of what I'm talking about today.

In addition to those 3 themes, there are 3 key messages that I want to highlight. First, this is a scaled and growing segment, about $500 million today with a very substantial pipeline of opportunity of approximately $48 billion. And that opportunity, again, is supported by long-term structural tailwinds, including increased defense funding, procurement reform and this really push toward overall commercial solutions.

Second, we are differentiated in how we approach the market. AAR brings commercial best practices. I know we talk about a lot, but speed, efficiency, cost discipline into government environments. And frankly, that's why we win in the government space. And those requirements and capabilities are becoming increasingly more and more valuable to our global customers as they look to find ways to increase the readiness of their fleets, but at the same time, and those costs for readiness are going up at the same time, managing their overall budgets.

And third, our growth strategy is focused and it's disciplined and really focused on profitability. We have purposely targeted areas where AAR or the AAR portfolio has a clear advantage. So drive towards commercial solutions, higher value modification work, growing our foreign military sales and then finally, software integration through Trax. And the final piece I do want to mention is for the government business, it's not only a growth story, it's also a margin expansion and return profile story as well.

So let me just put some metrics behind that real quick. So as I mentioned before, the Government Solutions business is roughly $0.5 billion and has grown by low double digits over the last year. More importantly, though, our earnings are growing significantly faster. So our LTM EBITDA of $56 million is up 50% year-over-year, which has translated to margins of 11%, which is up 300 basis points over that same time. What that means is we're scaling efficiency, and we're more profitable as we replace some of our legacy work with more profitable new work. Our role are basically key offerings and our embedded positions in some of the most critical platforms in use today, and that's key tactical tanker and mobility fleets is really what gives us a competitive advantage.

And frankly, our ability to support both U.S. and allied customers through our global footprint also brings us a competitive advantage. Our role, so what we do really spans, again, everything you heard of today. So maintenance, supply chain, logistics, even in some case, flight operations. So on the supply chain side, everything from 3PL warehousing to add demand planning, demand forecasting, point-of-use availability, so performance-based logistics, maintenance, everything from OI&D level maintenance. So think flight line to depot, everything in between. pilot training, flight operations, flying aircraft for government, everything in between. A lot of what we do is organically, but a lot of what we do relies on other parts of the business as well. So our touch points into the broader AAR is actually really significant. And really, this combination of platform relevance and expanding margin is what underpins the quality of ordering profiles that we have.

I do want to highlight, we are not a niche service provider. We really are an increasingly integrated mission-critical partner in sustaining global seats. So I'd like to talk a little bit about what makes us different. And really, our differentiation is at how we operate. At the end of the day, we apply commercial, again, commercial operating principles, speed, efficiency and cost discipline into environments where traditional defense companies have struggled to produce these outcomes in that market. We operate on more than 30 platforms across more than 35 different countries, which not only gives us scale, but also gives us geographic presence to many of our global customers. But at the end of the day, our real benefit and our real advantage is that we can deliver.

So we deliver faster turnaround times. We deliver lower cost structures and efficient cost structures. We deliver tailored customized solutions that help our customers meet their end requirement to increase the overall fleet availability. In short, we're able to simplify complex global operations by doing what AAR does best. Also critically, we're able to leverage the entire AAR platform, meaning we bring together multiple aspects of the value chain rather than be a point of solution single provider. In many cases, because of our ability to wrap in the larger part of AAR, we're able to solve problems, frankly, that our government customers have struggled with for years over traditional structures. And I think this, again, allows us to win work and expand our share.

If you've heard John speak before, you hear him say a lot that no one in the industry does what AAR does in the way that we do it. And that's especially true in the government space. No one can wrap together all the pieces of the aviation market like we can and bring them together in a customized tailored solution to solve our government customer challenges. And again, that's allowing us to win work.

All this kind of directly feeds into the size and durability of the opportunity ahead. And if you see the number on the page, $48 billion, that opportunity is pretty significant. The pipeline for us is divided into time horizon. So $12 billion in the near term, $16 billion in the midterm defined by 1 to 3 years and 3 to 5 years. And I do want to highlight that when we look at this $48 billion, these are opportunities that fit within AAR's current capability set.

So this isn't just like the broad duty or broad aviation modification or fleet budgets. These are specific opportunities that fit directly within our capability set. I also want to highlight, too, that the underlying drivers behind this pipeline are structural and durable. And what I mean by that is really 4 kind of key things. One, an increasing and sustained focus on readiness and total life cycle costs. If you follow the President's budget, that obviously was a key theme of some of the increase in defense spending is how do we not only buy new, but how are we making sure that we keep the fleets that we have in service longer.

Two, policy-driven commercialization of the defense industrial base. Again, another key theme, I'd say, in this administration specifically is how do we think and act more commercially. If you've heard any of us at AAR talk in the government space before, and we've been saying that for a decade. How do we get the commercial or how do we get the military industry, Department of War, especially on aviation, to think and act more like Delta. And regardless of administrations, I do believe that some of the things that they're doing with procurement reform and FA reform and those sort of things will hold regardless of who the next administration is.

Third, a rise in global defense spending. You've heard Chris [indiscernible] mention a little bit about defense spending in INDOPACOM in Europe. I remember not too long ago, we were talking about 2% basically for NATO, right, 2% defense budgets for NATO and our European allies. Now they're talking 5%, which I think would have been unheard of back in the day. And I don't see that changing anytime soon. And then finally, the extension of existing fleet life cycles. A lot has talked about on the commercial side about how long aircraft are flying and new aircraft deliveries. I mean that's been status quo in the government for decades. I mean they fly very old aircraft, and they've always flown very old aircraft, and they continually have to find ways to make sure that supply chain can keep those aircraft flying longer and longer.

So for us, when we look at these, these are not short-cycle dynamics. These are long-term shifts, what we believe in how the government procures and sustain their fleets. So with expanding needs in global defense, never-ending budget pressures, I mean, we honestly see the opportunity for this to continue long into the future. And I think those elements are really what give us confidence that this is really a durable growth strategy for a company like AAR to apply a commercial best practices approach and not just a temporary upswing.

In addition to the growth aspect of it, I do want to just quickly highlight the value that the government business brings to the overall portfolio. Our Government Solutions business really is a key component of AAR's balanced portfolio. It drives incremental work across other parts of AAR and requires very limited to no capital investment, which obviously is a great value creation story. And if we think about that, before this meeting, I actually got asked the question is how does the interconnect in this work between the government and other parts of the business? I'd say probably 50% of our work in the government touches another part of AAR.

So whether that's Tom, who does the heavy maintenance on the P8s and C-40s and others or Frank, who's supplying parts into some of our long-term supply chain contracts or a component repair facility who's working on the aircraft that we support, all of this is so interconnected. And at the end of the day, it is a growth driver for other parts of the business. So it also provides a stable revenue stream. Government customers obviously provide consistent demand and reliable payment, which helps mitigate cyclicality in the other parts of the business. And if we think about cyclicality, obviously, during market downturns, it provides resilience. Obviously, the most recent example of COVID, which is an extreme example of it, but it is a great example of obviously that resilience. I believe our commercial business was down 90% during that time frame, where our government business remains strong and steady. And then finally, because of the size and scale of AAR, we're able to leverage our infrastructure efficiently in the sense that we can bring on and take on new work with, again, relatively little investment.

So all this translates into what we would consider a high-quality revenue stream that contributes to growth, profitability and stability. So let me just quickly connect to how we're executing that strategically now. So as I mentioned before, our focus for strategy is really trying to scale where we have clear competitive advantage. First, we're expanding our commercial services for the military offerings, and that's trying to increase the adoption of commercial parts, repair and software. And that's really been the story of AAR for the last decade since I've been here. And if you think of over that time, we have successfully secured and gotten to allow USM and broader commercial services on just about every single commercially derivative fleet aircraft that's out there today, including new aircraft such as the KC-46 and P8, which is really unheard of just 10 years ago. And additionally to that, if you look at the commercially derivative sustainment contracts, we own, i.e., we're the prime or we support most of those that are currently fielded today. Now there are a few basically that we're not on, but we are laser-focused basically. We believe we're the market leader in that market, and we're laser-focused on bringing those back on board, but we do touch or support almost all of them that are out.

Second, when we think about -- sorry, excuse me, moving into higher-value work. So the classified model work is something that's new. Actually, this is -- I think about the last time we had this presentation that was not on here. But as we really kind of refocus the business and how do we reshape who we are and find ways where our operating ethos, our mentality brings a clear advantage, this is one area that came about that is kind of a new area for us. But that's expansion of our classified model work and a further push into kind of key noncommercially derivative fleets.

We'll talk a little bit about F-16s in an upcoming slide, but we've really targeted fleets that not only are broadly in service across the U.S., but more broadly in service globally. So I think F-16, C-130, UH-60, those sort of aircraft. And F-16 specifically over the course of the last 2 years, we've built probably one of the largest global avionics contract field teams workforce in the world. So again, something we're very proud of.

Third, we're growing our foreign military sales business, and that's really by leveraging our existing relationships and commercial infrastructure that we have. I mentioned the defense budgets in Europe. And I think that's important because we see great opportunity not only to sell directly to these foreign governments, but also if you think of the European defense industrial base specifically, they've expressed concern about their ability to ramp up to meet these long-term support trends as well.

So we see an opportunity not only to sell to the governments, but also support their local industrial base, which I think is important because there is an inward push basically in Europe right now to try to keep things intercontinent, so to speak. But we can be a value add to them to help them scale and help them support those actions long. And then finally, we're integrating Trax. And this is probably one of the ones I'm most excited about. Obviously, Trax provides not only efficiency, data visibility, but also stickiness with some of these customers long term. And that's including not only implementing Trax on our internal contracts where we support government customers, but also Trax. Trax currently supports the KC-46 and VC-25 fleets, and we see a tremendous amount of opportunity for further adoption of that software platform across the Department of War. This is a need, whether it be Air Force, Navy, whoever it is, they have just a dramatic, drastic need for a new and enhanced kind of eMRO software solution. And this is exactly what they're looking for, a commercial off-the-shelf solution in use by some of the major best airlines in the world today, constantly updated, security parameters in place that allow them to secure their data.

So again, we're pretty excited about that and see just a great opportunity there. And then all this is really anchored in disciplined execution focused on win rates, retention and then scaling selectively. So I do want to just briefly talk about this case study real quick. And to me, this kind of highlights our execution. We talk a lot about our commercial offerings and our commercial driven offerings, but this really highlights our execution and kind of complex mission-critical programs and how our commercial operating ethos or mindset transforms into more military-specific fleets. Just to set the stage here a little bit, the Air Force was facing significant cost overruns and schedule delays across their F-16 modification program. So there's a variety of different models that they do. I mean if you know these aircraft, basically, it's just one mod after another year after year where they're just constantly upgrading those aircraft. As part of our -- we had awarded a 10-year $365 million IDIQ for F-16 maintenance. They basically had to stand up one site. They needed some help they had to stand up one site. We very quickly established the trust and confidence in that, one, we're able to deliver quality aircraft; but two, we're able to do it much more efficiently and rapidly than we've seen in the past.

In less than 2 years, that has grown to over 200 mechanics worldwide at 12 global sites. I think the results have been fantastic. We've delivered over 240 aircraft for modification. We have accelerated that fleet modification time line by years. And I think most importantly, we've improved the delivery of advanced war fighter capabilities that are currently being used in action today, and we've earned the trust and confidence of our Air Force partners to look to give us more work on the F-16 as well as ancillary fleets.

So just in closing, I just want to highlight these key points again. First, we have a scaled business with a large and durable pipeline that is backed by structural defense. Second, we're differentiated. We bring commercially speed, efficiency and integration into government end markets. And then finally, we're executing a disciplined strategy focused on profitable margin-accretive growth. So if you take all that together, our Government Solutions business is a high confidence growth platform that enhances both the performance and the resilience of AAR.

And I'd like to turn it over now to Dylan Wolin, our Chief Financial Officer.

Thanks, Nick. I'm Dylan Wolin, Chief Financial Officer. By way of background, I have 7 years with AAR, 19 years in aerospace and 24 years of finance experience overall. That includes 4 years actually covering Investor Relations at AAR. And as many of you know, I actually left AAR about 20 months ago. I had a very unique opportunity to go to an operational role outside of the industry. And while I was gone, I sort of was able to observe from a far, this team really kind of accelerate its pace of execution. And it was exciting to see when the opportunity came up to come back in this role, I was excited to rejoin the team and really be part of the momentum that we are continuing to drive here.

So with that, I will start with a few key points. First, over the last several years, we have delivered consistent and exceptional financial results. That's across sales, margin expansion and adjusted EPS growth. Second, we've done that while demonstrating balance sheet flexibility and strength, and we're very well positioned to continue to fund our growth. Third, we've been using M&A successfully as a tool to support execution of our strategy and to add to shareholder value creation, and we expect to continue to do so.

Finally, as I just said, we have been executing at an accelerated rate, and we plan to continue to do that to drive further growth and margin expansion and deliver additional cash conversion. I want to take a minute to summarize further the actions we've taken over the past several years. We've added differentiated capability through acquisitions in each of parts, repair and software that have bolstered our integrated business model and improved our financial performance. We've simplified and strengthened the portfolio by exiting or restructuring operations that were underperforming or did not fit our model. So that's airlift, composites, landing gear and most recently, commercial programs.

Finally, we've extended our leadership position organically by strengthening our core activities, particularly in distribution and airframe MRO, where we have continued to innovate our offerings and drive efficiency. And it has resulted, as I said, in exceptional financial performance. Since FY '22, we have grown sales at a 15% CAGR. We have grown adjusted EBITDA at a 26% CAGR. We've expanded adjusted EBITDA margin by 350 basis points, and we have grown adjusted EPS at a 19% CAGR. We've been doing what we said we would do, and it has translated into results. We've done that while keeping our balance sheet strong. We ended Q3 with less than 2.2x net debt to adjusted EBITDA. We have over $800 million of liquidity and no near-term maturities. Our leverage is within our target range of 2 to 2.5x.

Turning to cash. Improving our conversion from adjusted EBITDA to cash from operations is a key priority. We've already set ourselves up to be more cash generative through our portfolio actions. As we grow our more cash-generative activities and importantly, drive higher inventory turns in certain of our businesses and lower AAR days, we expect to drive further cash conversion. We're targeting run rate operating cash as a percentage of EBITDA by 30% plus by 2029 and expect to ramp to that level over the 3-year window. Our capital allocation priorities have not changed. First, we're going to continue to invest in organic growth. That means supporting new distribution wins, additional repair capability and have warranted capacity, PMA or proprietary parts development and building out our software platform.

Second, as I mentioned, we'll continue to use M&A as a tool to accelerate execution of our strategy. We'll continue to be disciplined, both strategically and financially as we do it, and I'll touch on that further in a few minutes. Third, we'll continue to prioritize a strong balance sheet with a target leverage ratio of 2 to 2.5x, as I mentioned, with willingness to go higher temporarily to support M&A and then rapidly delever, which we have demonstrated the ability to do.

And finally, we will look to return capital to shareholders through share repurchase opportunistically. I want to spend a moment on where we are in terms of being able to create value through M&A. We've done 6 acquisitions over the last 3 years. They've added margin, growth and scale. Importantly, they've accelerated the build-out of our parts, repair and software platform and all are on track to generate returns in excess of the cost of capital. At the same time, we've developed a reputation as an acquirer that can be trusted to execute in a fair way. And as a result, we've become a buyer of choice in the market, which positions us favorably to continue to use M&A as a tool to drive execution and shareholder value creation.

Importantly, we've also exited a number of businesses over the last few years that were either not core or not meeting our return thresholds. The result is a simplified, enhanced and higher-performing portfolio today. In terms of our M&A approach going forward, we will continue to be disciplined, as I mentioned. We'll focus on the 3 key legs of our platform. So in parts, that will be distribution, which could be new end markets or new product lines. In repair, that could be capability, capacity or improved cost position. In software, we'll look to continue to expand our offering. Strategically, anything that we do has to accelerate execution against our overall strategic objectives. We want to add differentiated capabilities or offerings that complement what we have. And accordingly, there have to be clear synergy opportunities.

Financially, we will target accretion to both growth and margin. Of course, any acquisition must have expected returns in excess of the cost of capital. And finally, we'll prioritize targets with strong cash flow profiles.

Turning to the financial framework that John introduced earlier in the presentation. With respect to sales, we're targeting a CAGR of 6% to 10% over the 3-year window off of a full year FY '26 base. Excluding commercial programs, which we will be winding down over this time frame, we are targeting an 8% to 12% CAGR. In both cases, we would expect growth next year to be around the top end of those ranges as we get a full year of the FY '26 acquisitions. We are targeting adjusted EBITDA margin by FY '29 of 13-plus percent and excluding commercial programs, 13% to 14% plus. We're targeting adjusted EPS CAGR of 15%. And as I mentioned earlier, we're targeting operating cash as a percentage of EBITDA of 30% plus. Note that over a short measurement period, that metric will vary, particularly as we make strategic growth investments in inventory. This framework does not reflect any additional M&A, which would be upside opportunity.

Regarding the drivers of our growth, they will come from each of our parts supply, repair engineering software and government businesses. Our commercial growth is supported by extremely resilient demand for air travel and aircraft fleet age that is expected to remain elevated well beyond the forecast period, which supports continued demand for parts and repair. We expect to continue to get above-market growth in distribution as that offering continues to resonate with OEMs, as Frank described. We expect continued penetration by our software offerings. As airframe MRO efficiency continues to increase, that creates growth capacity. We have capacity today to do more component MRO volumes. And finally, our government businesses are well supported by the administration's prioritization of operational readiness, as Nick described.

In terms of potential headwinds, I'll note this does not assume any meaningful impact from elevated fuel prices, although so far, that is not something our customers are seeing or expecting or seeking to pass to us. Finally, turning to our margin expansion walk. First, mix shift. That means mix shift towards higher-margin parts, software and component repair work as well as improved mix within Government Solutions, as Nick described, which we're already starting to see. Second, more efficiency in the hangar, as Tom described.

That includes completing our work at Greensboro, closing Indianapolis and rolling paperless out to the rest of our facilities. And then finally, we expect to continue to leverage our fixed cost base through scale and growth. Based on those growth drivers, excluding commercial programs, which we expect to still be in the process of winding down in FY '29, we are targeting 13% to 14% plus adjusted EBITDA margin. And with that, we will turn to another round of Q&A.

I get the chairs set up here, just a reminder to please state your name before you ask the question.

I point out that Dylan and I completely coordinated our outfit day for everybody. It shows you how aligned we are as a team.

All right, who wants to go first?

You touch on CapEx sales or CapEx ratio -- sorry...

Brian [indiscernible]

Can you touch on -- you said 30% operating cash flow, I guess, EBITDA, but can you touch a little bit on the implied CapEx to sales or total CapEx dollar that you kind of expect over that period and the shape of it?

Sure. So CapEx is not part of that, that the guidance is related to cash from operations. We've historically not been a particularly intensive CapEx business. We run kind of between 1% and sometimes up to 1.5% of sales. So I'd expect that to continue generally going forward. We don't have particular CapEx requirements. As I mentioned, the efficiency in the hangars actually create additional capacity there. We have additional capacity in the component repair shops. So I expect to continue to run at that level.

Josh Ben with Wethere Capital. Could you talk a little bit more about Trax? You're talking about and we heard on the government side that there might be an opportunity there. So what are the discussions that have happened with Trax so far with the Department of War and other parts of the government? And then what are they using today? We talked about these ancient systems. I imagine the government may be more agents still. So just talk about what are they using today? What discussions have happened? And what would you need to do to Trax to kind of make it meet government demands?

Sure. I don't necessarily want to get into too much of the discussions happen today, but currently, the Air Force -- I'll talk about the Air Force first. The Air Force, I think, has been on a 10-year implementation of a software system that I don't think has ever fully been implemented. So I think they've had 2 iterations now of basically trying to implement something that hasn't worked necessarily worked out. I will say that the Air Force and specifically the Department of Water as they look to the commercial industry, one of the companies that they revere and look up to is Delta, right? And they say, how do we -- how can we treat our aviation assets and look and act more like Delta. When we announced the Delta win through that Trax recently had, they actually reached out to us and talk about the Trax platform. And I guess I'll leave it there for right now, but we just do think there's great opportunity because they have a need for it, and we have a great product.

Kylecloiak at Jefferies. Within the sort of 100 bps of margin expansion that you have planned in there over the forecast period, it seems like the largest lift is probably in heavy MRO as well as software. So when you think of sort of the composite of what is contributing to the expansion. Can you sort of bucket that between the segments and where you think the greatest areas of opportunity are?

Yes. As you said, it actually comes in all of the segments. With parts that probably have the greatest opportunity for growth driven by distribution. That's among our highest margin activities, airframe efficiencies, as I said, in repair as well as growth of the component work. And in Government Solutions, although we've already seen some of this, we haven't fully seen the mix shift that Nick described. So it will come from all the segments.

Sheila Khali with Jefferies, and I'm going to follow up on Kyle's question. Can you -- just specifically on the airframe MRO. Can you talk about the heavy maintenance? And I know that maybe has more labor hours than the component, but how do you think about low double digits ever getting high teens? And what's the runway for component MRO?

I make sure I understand the question. You're asking about the potential for margin expansion airframe.

In airframe on the heavy trucks, where can those low double-digit margins go again?

Yes. So low teens margin. Can we get into mid-teens margin in the airframe business? We believe so. And so that is continued rollout of our paperless system that's leveraging the the expansion over the fixed cost base, completing the integration of HECO and making sure that we're attracting the right work. In other words, not all heavy maintenance visits are created equal. We want to make sure that we are getting those that allow us the greatest opportunity from a margin perspective, and that is an ongoing dialogue with the customer.

Our customers use multiple providers. They send out lots of different work to each of those providers, and we want to make sure that the best work is coming coming to us. And we earn that through performance. So if we're turning aircraft faster than everybody else at the highest level of qualities, we're going to get rewarded with better mix shift. So all of those things -- and Sheila, you and I have talked about this, heavy maintenance has come a long way, particularly for us. I mean this is a critical service. The engine guys and their overhaul shop, they get a lot of attention, but airframe heavy maintenance is a critical service, and we are a critical partner to the airlines. And as we've seen recently, only recently, we've seen that they will pay more for performance. And so we're counting on getting some price over time as well.

So short answer to your question is, yes, we see opportunity ultimately to get that business to the mid -- and then on components, similarly, we are operating -- if you look at our shops right now, we're at about 1.25, 1.5 shifts per shop. And so we've got capacity to essentially double throughput through our fixed cost base, and that's a higher margin gross margin activity than heavy maintenance. And so as we increase throughput, we could see high teens margins getting into the low 20s. Ken, I keep waiting.

Ken Herbert with RBC. I'll ask a high-level growth question, but I'd be really interested, particularly in the parts supply business and sort of the underlying assumptions for distribution relative to USM in terms of growth and how to think about that? Because I think the high-level number implies clearly some normalization of what's been probably one of your fastest-growing businesses over the last few years as we think about that over the next few years. So how should we think about parts supply in particular and the pieces within that?

Yes. So the growth is coming from distribution. USM is a business we're very happy with it. As I mentioned, there's a lot of ties with USM to the other businesses that keeps us in touch with the markets. But in terms of growth, we can expect very modest growth in USM. What you would get out of USM over time is margin expansion. Margins in USM are about half of what they normally would be, and that's because material is so tight and it costs so much to acquire material that you eventually sell. So we would expect margin improvement in USM, not necessarily a lot of growth.

And then your point on growth from distribution, it is true. I mean we've been putting up some very impressive numbers, we believe, 25% to 30% organic growth. It's north of $1 billion business now. So you start to lap some tougher comps, but we would absolutely expect our distribution business to continue to grow at meaningfully above market rates.

And just real quick within that, what's the underlying assumption for like sort of new distribution contracts relative to sort of same-store sales, so to speak?

Yes. At this point, I would say, and I think it's. Consistent with the last couple of quarters, we're about half same-store sales, call it, 40% from the ramp-up of new contracts and then the balance is price.

Mikeeleschak, KeyBanc. You talked about the divestitures and winding down this commercial business. Do you see more room to go on that front? And if so, is incremental? Could that -- is that incorporated in your guidance at all for the long-term targets?

Yes. I would say from the portfolio, we are always evaluating the portfolio. 15 years ago, commercial programs was a growth area for us. That market moved away and the returns no longer met our thresholds. So this was an action we decided to take. And as you can see in the numbers, it's going to be accretive in all respects. In terms of the remaining portfolio, at this point, we feel like we're in a pretty good spot. Again, we're always evaluating things, but we've dealt with the significant areas of the portfolio that are a drag on our returns. I'll answer this just because I know it's on everybody's -- the Mobility Systems business, the manufacturing business that we have, that's a good business. It's good cash flow. It's good margins. It doesn't require a lot of management time. To remind everybody, that's a legacy manufacturing business where we manufacture shelters, pallets and containers. It's 100% U.S. They perform well for the government. And as you've seen from recent press releases, they're getting a lot of orders right now as a result of what's going on. So even though it doesn't fit neatly on the page, it's a good business to be in, and it's not dilutive to us in any way as the businesses were that we've gotten out of.

Scott Mikus from Melius Research. John, Dylan, quick question. What is the revenue right now for Aircraft reconfig? What's the EBITDA margins? What is the growth outlook and margin expansion there over the 3-year targets? And how should we be thinking about the cadence of expanding the PMA catalog there?

I'll we haven't disclosed aircraft big financial specifically, so I probably won't get into that. I think you can think about it broadly as both a higher margin and higher growth business than much of the rest of the portfolio. [indiscernible] you want to talk about expansion on proprietary elements.

Growth opportunity. So we bought the business with a very healthy backlog and a built-in ramp to revenue that's meaningful. Again, it's small relative to the total, but as a percentage, it actually is expected to ramp up really nicely over the next couple of years based on work they've already done. But similar to our other businesses, we made the acquisition because we believe we can open doors for them. And we believe that their technology, their capabilities are significant, and we believe we can introduce them to other around the world. And as Dylan pointed out, this is good high-margin work. Going back to your point on PMA opportunity, that is something -- I mean, we sell parts. We have an incredible commercial front end and defense front end to put parts out. We like keeping PMA in the portfolio because it's very, very high margin. The ART acquisition will accelerate our ability to develop more PMAs. Even so, it is a -- it will remain a small part of the revenue for some time as we ramp.

Any further questions?

Matthew with G2 Investment Partners. You've been pretty clear about having a line of sight for Trex going from $50 million in revenue to $100 million with all we've learned about software today with Air buoyant? And how should we think about the software growth algorithm once you hit the $100 million feet?

Yes. I mean we -- I think I've said publicly that we see -- we've doubled it since we've added from $25 million to $50 million. You just said we've got a clear path to go from $50 million to $100 million. And based on what we see, we see a path to go from $100 million to $200 million. And the $50 million to $100 million is that's kind of already captured. That's upgrading new -- existing customers to eMRO. It's ramping the implementations that we've already won. That gets you there. What we're able -- we didn't talk about the business model -- specific business model for [indiscernible]

Our goal right now is to get it out there and get users, thousands of users at airlines around the world using this platform and transacting this platform. We want this to be the standard by which airlines are making purchase decisions and buying -- and ultimately, we see this as a -- I hate the term, but it's accurate, a marketplace model where you've got subscription fees by buyers and transaction fees by sellers. And certainly, we've got our own internal models of what that could be, but it's very, very early days. As you heard from Andy, we're extremely encouraged by the response that we got both in terms of saying, yes, that is a problem that needs to be solved.

And then the next question was, okay, great, but can it also do this? Can it also do this? Can it also do this? And then the second thing, and we weren't sure how this was going to go over was -- and I don't think it would have been this way a year ago. I think we came out with this at just the right time. Airlines looking at this going, I'm willing to turn key purchasing decisions over to an Agentic purchasing agent. I'm willing to do that. I don't think we were there a year ago. The conversations we've had with airlines is kind of like, yes, all right, let's try this out. And so that's encouraging. But just to go back to your question, all of those things, those new offerings, the scaling of Aerostrat would contribute to go from $100 million to $200 million.

Yes, John, just to follow up on the software offering. The whole story when you bought Trax was it had underinvested for several years. You put a lot of money into Trax, you really upgraded the offering. And since then, you've seen sort of a real acceleration in market adoption. Where are you today with the broader software package in terms of the competitive position? Are there more sort of significant upgrades you need to make? Or should this really be a real sort of accelerator from a margin standpoint as you go from 0 from a revenue side?

Yes. We believe that we have the best offering in the market. Since we have made these investments, since we made the acquisition and made the subsequent investments, our win rate has been materially higher. And it's hard to explain the significance of the Delta win. I mean that opens so many doors for us. And the cool thing is Delta has been a willing advocate out there for us in the market. We were concerned that some of our existing customers when we won Delta, we're going to be like, "Oh, wow, I'm worried that Trax resources are now going to be diverted towards Delta as opposed to me an existing customer. It's actually the opposite because those customers know that we are building new additional functionality for Delta that they will ultimately benefit from.

So the profile of Trax and the fact that we're spending -- I mean, think about this. I mean 3 years ago, we had this meeting here. We had just bought the company. I don't believe any notes that came after our Analyst Day mentioned Trax. And now it's at the forefront or a key point. So we're excited about the market adoption. In terms of building the program out, we -- there are still investments that we need to make. Obviously, Aervoyance has just launched, and we got a ton of feedback over the last couple of weeks of, okay, this is awesome, but what else can it do? That's going to require more investment. Similarly, as we enter into the remaining stages of Delta implementation, we'll be investing in Delta and capability for Delta, but then we can then sell it to other customers. So a lot of work has been done, but this is a situation where the more we get into it, the more opportunity that we see.

Any further questions?

All right. Maybe with that, I'll take it back to you, John, for concluding comments.

Sure. I would just say that very happy that everybody joined us here today. It's great to be back in New York and kind of tell the full story. I know we've had lots of meetings with all -- many of you over the last several months talking about the parts, repair and software strategy. It was great to be together and bring it home all in one place and talk about the way our businesses work together. Hopefully, it's coming through that the changes that we've made to the company are structural and durable and will continue to drive improved growth and improved margins. And we're very happy that you were here and appreciate the interest and support. So thanks.

Hello, and thank you for standing by. Welcome to AAR Corp. Third Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions].

I would now like to hand the conference over to Chris Tillett, Vice President, Investor Relations. You may begin.

Good afternoon, everyone, and welcome to AAR's Fiscal Year 2026 Third Quarter Earnings Conference Call. We're joined today by John Holmes, Chairman, President and Chief Executive Officer; and Dylan Wolin, Chief Financial Officer.

Presentation we are sharing today as part of this webcast can be found under the Investor Relations 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, 2025.

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. 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.

Great. Thank you, Chris, and welcome, everyone, to our third quarter fiscal year 2026 earnings conference call. I'll begin with key messages for the quarter on Slide 3. First, this was another outstanding quarter for AAR. Our focused business model is driving growth that is delivering durable results in both commercial and government end markets as evidenced by our third quarter performance. .

Second, we continued our momentum in the quarter and delivered 25% growth in total sales, 31% growth in adjusted operating income and 26% growth in both adjusted EBITDA and adjusted earnings per share for the period. We saw growth across each of our parts, repair and software platform activities in the quarter. Total sales increase included 14% organic adjusted sales growth led by 36% organic growth in our new parts distribution activity. Third, we are continuing to execute across key initiatives advancing our strategic priorities.

For example, in Repair & Engineering, the integration of HAECO Americas is ahead of schedule, and our hanger expansions are on track with Oklahoma City now complete, and I am expected to be operational later this summer. In parts supply, ADI is performing above expectations, and we continue to drive outsized growth in our new parts distribution activities. Also, our Trax software platform continues to gain momentum by growing its base of recurring revenue with new and existing customers. Finally, we are carefully managing our balance sheet for their strategic flexibility as we maintain our disciplined approach to capital allocation. We ended the third quarter with net leverage within our target range, supported by our strong operating cash flow in the period.

Before I go to Slide 4, I would like to welcome Dylan Wolin back to AAR as the company's new Chief Financial Officer. Dylan was with the company from 2017 to 2024, it was instrumental in developing the strategy we are executing today. I would also like to thank Sarah Flan again for doing an outstanding job as our interim CFO over the last few months.

I'm proud to be part of such a strong team. I also want to talk for a moment about the current environment. We are closely monitoring the events in the Middle East that have been in constant contact with our customers. And many of our customers have said publicly, Fundamental demand for air travel remains wrong with bookings at record levels even since the start of the conflict. While some customers may make modest capacity adjustments, at this time, we are not anticipating any meaningful impact to their maintenance schedules or need for parts.

They continue to tell us they are preparing for a busy summer travel season, and we are planning accordingly. What's more, AAR is competitively positioned as an independent value-added aftermarket solution provider, which makes us a compelling solution for our customers as they look to reduce spending when fuel costs rise. Additionally, one of the benefits of AAR portfolio is our exposure to government and defense end markets. Over the decade, this balance between government and commercial markets has been a real advantage. On that note, the government side of our business is benefiting from a general need for increased operational readiness in the U.S. military. Our government customers today comprise roughly 30% of our sales and represented across all segments.

AAR has a long history of working on some of the most critical aircraft for the U.S. military, including the C-17, the P-8, the C-40, the F-16 and the C-130, and it was programs like these that helped drive 19% increase in government sales this quarter and contributed to the strength of our results. Now on to Slide 4. We achieved 36% organic growth in new parts distribution driven by our 2-way exclusive distribution model. Volume and government distribution have been increasing steadily over the last year, and this quarter represented a 55% organic increase over this period last year.

Also in Parts Supply, our acquisition of ADI outpaced expectations for the second quarter in a row, and ADI's adjusted margins were accretive to the company in the quarter. In repair and engineering, our Oklahama City facility completed its hangar capacity expansion in the quarter and began aircraft inductions in early March. We expect first revenues from these maintenance lines in our fourth quarter. Our component MRO business saw key wins from major U.S. and international carriers for expanded scopes of work, and this is a testament to our strategy to utilize our whole portfolio to drive more business to the higher-margin component MRO activity.

Our HAECO Americas integration is progressing ahead of schedule, and we expect the full integration process to be complete in the earlier part of the 12- to 18-month window we provided previously. We also expect our acquisition of Aircraft Reconfig Technologies, or ART, to close in the fourth quarter. In our software activities, Trax had another record quarter as a result of growth with the addition of new customers as well as existing customer upgrades. Trax's agreement with Delta continues to ramp, already Trax has been deployed to more than 2,000 users across Delta, and we expect this to increase to more than 6,000 users in the coming months. Our Expeditionary Services business was recently awarded $450 million in a multiyear government contract to provide specialized talents to forward deployed military units as a result of increased operational tempo overseas. We are pleased with our results this quarter and the growth that we saw across the company. And I would now like to turn the call over to Dylan to go through the financial results in more detail.

Thanks, John. Looking at Slide 5. Total sales in the quarter grew 25% year-over-year, including 14% organic adjusted sales growth to $845 million. We drove revenue growth in each of our parts supply, Repair & Engineering and Integrated Solutions segments. Sales to commercial customers were up 27%, while sales to government customers were up 19% over the same period last year.

For the quarter, 73% of our sales were to commercial customers and the remaining 27% were to government customers. Adjusted EBITDA in the quarter increased 26% year-over-year to $102.1 million and adjusted EBITDA margin increased to 12.1% from 12.0% a year ago. Adjusted operating income was up 31% to $86.2 million and adjusted operating income margin improved 50 basis points to 10.2%. The margin improvement in the quarter was driven by part supply and integrated solutions, including tracks and government programs, despite the expected short-term impact on margins from our recently acquired HAECO Americas business, at which we are in the process of rightsizing the revenue base, adjusting the cost structure and deploying our proprietary processes.

Excluding HAECO Americas, adjusted EBITDA margin in the quarter would have been 70 basis points higher or 12.8%. This was the most critical integration quarter for HAECO Americas, and we expect sequential margin improvement going forward as we move through the remainder of the integration process. Finally, I'll mention that we recorded a gain in the quarter due to the accounting for our HAECO Americas acquisition, resulting in a bargain purchase. The gain reflects the excess of the fair value of the assets acquired over the purchase price and is excluded from our adjusted results.

Adjusted diluted EPS was up 26% year-over-year to $1.25 per share, driven by our strong operational performance. Turning to parts supply on Slide 6. Total part supply sales grew 45% from the same period last year to $392.5 million. We had yet another quarter of above market growth in new parts distribution, which grew 62% in total and 36% organically, excluding the impact of our ADI acquisition. Sales to commercial customers were up 36% and sales to government customers were up 86%, driven by 55% organic growth in government distribution sales. Third quarter adjusted EBITDA of $59 million, was up 59% and adjusted EBITDA margin grew 130 basis points to 14.9%.

Adjusted operating income rose 56% to $53.6 million, and adjusted operating margin increased 100 basis points to 13.7%. Higher margins in the period were driven by both the performance of the existing business and the addition of ADI. Now on Slide 7, for Repair & Engineering. Total sales increased 23% to $265 million. Sales growth was driven by the existing hanger operations, growth in our component repair shops as we continue to add new capabilities and customers and the year-over-year impact of the HAECO Americas acquisition. As I mentioned earlier and consistent with the outlook we described in last quarter's call, margins were negatively impacted in the quarter as we take actions at the recently acquired HAECO Americas operation to rightsize the revenue base, adjust the cost structure and improve processes.

Segment margins were also impacted by the transition of work out of our Indianapolis facility, which we are in the process of exiting. Specifically, adjusted EBITDA margin decreased 190 basis points to 11.0% and adjusted operating margin decreased 150 basis points to 9.6%. We expect our revenue shaping, cost structure and process improvement actions to be completed towards the earlier end of the 12 to 18-month post-closing time line that we articulated previously, and for the quarter that we just ended to be the low point in terms of margin impact.

Accordingly, we expect in the third quarter of fiscal 2027, our actions will result in the same quality and efficiency levels as we have achieved in our other airframe MRO facilities. And for Repair & Engineering margins to return to pre-acquisition levels. We expect the transition out of the Indianapolis facility, which is our highest cost site to continue into the fourth quarter of our fiscal 2027 and to realize further margin improvement once that is complete. Looking at Integrated Solutions on Slide 8. Sales increased 3% year-on-year to $167.8 million, driven by Trax and government programs.

Third quarter adjusted EBITDA of $19 million was up 18%, and adjusted EBITDA margin grew 150 basis points to 11.4%. Adjusted operating income of $15.5 million was 25% higher with adjusted operating margin increasing from 7.6% to 9.2%. Improved margins were driven by mix shifts towards higher-margin contracts within government programs as well as by growth and higher margins at track. Turning to the balance sheet on Slide 9. We had a strong cash flow quarter, generating $75 million in cash from operating activities. Net large decreased to 2.17x net debt to adjusted EBITDA, comfortably within our target range of 2.0x to 2.5x.

With that, I'll turn the call back over to John.

Thank you, Dylan. Turning now to Slide 10 for an update on our outlook for the remainder of the fiscal year. For Q4, we are expecting total adjusted sales growth of 19% to 21%. Organic adjusted sales growth for Q4 is expected to be between 6% and 8% as we lap what was a very strong Q4 last year. This excludes the debenture of landing gear as well as the impact of fiscal 2026 acquisitions. We expect Q4 operating margin of 10.2% to 10.5%. Our outlook for Q4 has improved from what was implied in our guidance last quarter, given the ongoing strength we see across our markets. As a result, our full year expectation is for total sales growth of approximately 19% and for organic sales growth of approximately 12%, which is up from our prior outlook. .

Finally, on Slide 11, I'm excited to share that AAR will be hosting an Investor Day on May 12 in New York City. AAR has been driving strategic transformation over the last several years, and we have a more focused, complete range of aftermarket solutions in parts repair and a software platform that worked together to drive growth. As the last several quarters have shown, this strategy has yielded results. At our event in May, we plan to share our strategic vision of how we will continue to cement our position as the independent leader in aviation aftermarket through our repositioned portfolio, focused strategy and differentiated culture. We hope to see many of you there. Before we open it up for questions, I'd like to thank our talented team members around the world as they drive excellence in quality, safety and service and the work we do for our customers. I'd also like to extend a thank you to our customers and shareholders for their ongoing support of the AAR.

With that, we'll turn it over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Michael Ciarmoli with Truist.

I guess, John, just on the topic everybody is asking about with oil prices kind of what we're seeing with some of the carriers trimming capacity. I mean historically, you've been in this business long enough. I mean, is there some sort of proxy you could give us how long do we need to see elevated fuel or once we start seeing some of these capacity cuts by the airlines, will that -- if it will at all translate into your business and fully realizing nobody is parking planes yet. They're just maybe trimming some routes. But any color you could give us there from a historical context?

Yes. I would say that the #1 thing is -- and I appreciate the question. The #1 thing is that fundamental demand for air travel remains very strong. That's what you're hearing from all of our major customers. And obviously, we're hearing that from them every time we talk. And they've continued to see record bookings even after the conflict started. I would say, just to your point, what you're seeing now are modest capacity adjustments and they're not impacting any airlines individual fleets. .

And so adjustments like that are not going to have any meaningful impact on the demand for Parts or Maintenance. So at this point, we feel very good. All the customers are talking to us about strong bookings and being prepared for a very busy summer, and they're making those plans with an assumption that fuel prices are going to remain elevated through that period of time, which we view as encouraging because they're factoring that in, yet their demand signals to us are still very strong.

Okay. Okay. That's helpful. And then maybe just on the more positive side, I mean, you guys continue to do really, really well on distribution that organic 36% on new parts, can you maybe just disaggregate that for us a bit? I mean, what was kind of new wins? What was same sale -- same-store sales, maybe pricing? I mean, just really strong growth. I mean you guys are doing a great job there.

Yes, we're very proud of the continued growth we see in distribution, and our model there is clearly resonating. To your question, about 2/3 of the growth was same-store sales, so continued growth from contracts that have been in place for some time. And the remaining 1/3 was mostly new contract wins a little bit of price across all of them, but the majority of the growth, about 2/3 of the growth came from growth from existing contracts.

Got it. Is it -- the name jump out. Was it engine-related, airframe-related avionics, any -- or strength across the board that you're seeing?

Great, across the board. But again, I would highlight the continued growth in Defense distribution. We've got a great offering there, and that was 55% organic in the quarter. And that though, we've been seeing a build. That wasn't a one-off. We've been seeing a build in growth in defense sales to the government. And certainly, our offering is resonating, and it reflects this administration's clear prioritization of sustainment and readiness. .

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

Maybe to follow up on Mike's question. As you think about your new parts distribution business in Repair & Engineering, I know we're only seeing modest capacity cuts. How do you think about how quickly behavior has changed historically and what your visibility looks like in each?

Yes. I mean we've got solid visibility currently through the quarter and the guidance we just provided, and I would extend that to the summer as well because that's what everybody is planning for right now. We've been in constant contact with the customers, -- we have not seen any material change in demand for maintenance lines or component repair.

And you would have to see, I would say, a much more significant changes to their fleet plans for that to have any meaningful impact on our results. The other thing I would say is that if I think about this moment that we're in relative to historical mods, AAR is in a much different position in the marketplace. And I would say that we've been so focused on delivering superior service and quality to our customers that we feel pretty confident that they would deprioritize other vendors before they did anything with us.

Got it. And maybe if I could ask another one, really great execution this quarter. You held margins flat sequentially and are guiding to an improvement in Q4 given -- even with the HAECO dilution that's ongoing. So maybe can you give us some flavor into the sources of the outperformance? You called out ADI and HAECO outpacing expectations. Anything else notable?

Those would be the big ones. ADI, the second quarter there of outperformance. HAECO, it's a lot of work. It's a lot of work to complete that integration. As we mentioned, this was the most critical quarter and we've been able to move some of our timetables up. So happy to say if we're going to be at the earlier window. I would also highlight this was a really strong quarter for Trax. Great momentum from a sales and margin perspective with Trax. And that's something we've been focused on growing, as you know. .

Our next question comes from the line of Ken Herbert with RBC Capital Markets.

Maybe first, If we look at your commercial aftermarket, John, the commercial business broadly, how much of that business would you characterize as book and shift for short cycle versus more sort of backlog driven? And I know, obviously, a lot of the heavy MRO piece of the business is now much more backlog-driven than maybe it was previously. But is there a way you would frame up that maybe that way to look at your business?

Yes. As you pointed out, heavy maintenance is definitely backlog-driven. Much of the distribution business is backlog driven. Those are, I would say, the 2 -- and obviously Trax with us in its own category, but those would be the 2 long-cycle elements of the business. component repair tends to be a bit more short cycle.

And also -- and obviously, USM is a shorter-cycle business. But the majority of the revenue now in commercial between distribution and heavy maintenance is longer cycle.

Okay. Helpful. And obviously, really nice cash generation in the quarter. Can you give any commentary on what we should expect fourth quarter, which typically seasonally is very strong from a cash generation standpoint? And maybe any highlights either for you or Dylan on specifically some of the -- what we saw in the third quarter in terms of the strength?

Great. Yes. No, we were really pleased with the cash flow results and customers paid us on time. So we're appreciative of that. And as it relates to the outlook for the rest of the year, we are planning to be cash flow positive in Q4 and again -- and cash flow positive for the whole year. .

Our next question comes from the line of Scott Mikus with Melius Research.

Quick question. I know it's still early in the war in Iran. How long does this potentially have to drag on before it starts maybe impacting your ability to source any of the parts you need in your part supply business? And then in contrast, could the worst stimulate demand for your component repair business if airlines are seeking to reduce maintenance costs to offset the higher fuel costs?

Yes, great question. I wouldn't expect at this point that the war or the conflict at any length of time would impact the supply of material. I mean, unless you're talking about USM specifically and certainly, if for any reason, you see more aircraft retirements and subsequent teardowns, how that would result in more supply for that material. But in terms of the war or the conflict stimulating demand, Yes, I mean it could stimulate demand in a number of ways, obviously, on the defense side, and we're highlighting a few of those in the results. But then also, I mean, we are in many ways, a lower cost alternative to OEMs and other providers. We have seen this in prior cycles where we're able to win business as an alternative to OEMs with airlines what to reduce their costs.

Okay. Got it. And then I wanted to follow up, the organic growth guide in the fourth quarter implies a deceleration but you should be getting some revenue contribution from the OKC capacity expansion. So is that kind of just some conservatism baked into the guidance? Or is there any pull forward into this quarter from a top line perspective?

Yes. No pull forward into this quarter. Really, the impact you're seeing in Q4 is just lapping a really tough comp from last year. We had a really strong quarter in Q4 last year in a number of ways. And the guide there is reflective of that. But the guide is improved from what we implied with the Q3 guidance we gave last quarter.

Next question comes from the line of Noah Levitz with William Blair.

Yes. To start off, you gave a lot of good color on Trax and the implementation. But kind of drilling in on that, you mentioned that Delta, that the partnership with them has been deployed to 2,000 users and you expect 6,000 in the coming months. I'm curious like the 6,000 like the ninth inning? Or are you still early innings in the Delta deployment? And then following off of that, can you give a little bit more color on the time line for track establishing kind of that part Smartplace aspect of the business?

Yes. Great set of questions. So I'm glad you asked about the Delta implementation. So kind of two ways to think about the Delta implementation. It's the whole thing will take approximately 3 years, and we're coming up on 1 year into that, and there's 3 modules. The first module is, I would say, basic functionality deployed across a large user base. So we've got basic functionality up and running. .

And were deployed roughly 1/3 of the way across the user base of Delta. So that -- once all those 6,000 users have this first module in hand and working, that completes the first phase. The next 2 phases, Phase II and III, we'll be focused on deploying additional functionality to that large user base. And that is still -- and that's where the material ramp-up in the activity and the revenue delta will occur.

And so that will start a few months from now and ramp through over the following, call it, 6 or 7 quarters. And then as it relates to the parts marketplace, something we are still very focused on and we do expect to go live on that and launch it yet this calendar year.

Awesome. And then just 1 follow-up. The defense business is, I mean, more or less killing it, the 55% organic growth and government distribution is really impressive. In the slide deck, you do mention that higher-margin government work was a positive contributor. I think more so in the Integrated Solutions segment, is that something that you're expecting to continue as more or less like a new norm? Or was that more like a positive benefit this quarter that was somewhat unexpected. How should we think about specifically government margins on an improving basis going forward?

Yes. You are referring to the margin improvement in the government portion of integrated solution government programs specifically. And that reflects sort of a mix shift towards higher-margin programs within government programs, and we do expect the benefit of that mix shift to continue going forward.

Our next question comes from the line of Michael Leshock with KeyBanc Capital Markets.

I wanted to follow up on the HAECO question, just given that that's progressing ahead of schedule. I know there was a cost element to the synergies there, but could you talk about how that integration is progressing in terms of cost-outs or operational efficiencies or just overall utilization, is there any way to bucket the primary drivers of that integration going ahead of schedule? .

Yes. So just to describe it in a little bit more detail. We've got to rightsize the business in a couple of different ways. They had -- it was a much larger business in terms of revenue than how we intend to run it. because that revenue was not profitable. So we are continuing to close up those aircraft that we no longer be customers with us and ship them off. That work is getting done. At the same time, we're also making difficult decisions around the size of the workforce because we want to size the workforce to the new revenue base that we have.

Those changes have been made. And when we say this was the most critical quarter. The changes to the size of the workforce to align with the new revenue base, all of those changes have been made. So that's in place. The last 2 major pieces are moving the work out of our Indianapolis facility and moving that into other AAR facilities, majority of which will go to HAECO and the GreenVille site and the happening now. And that's happening now. So that's the next significant phase. In the final phase that will be complete after all of that, but it's all going on in parallel is the implementation of our systems.

We are certainly taking our rigor and our expertise in deploying it on the floor today. But ultimately, the paperless system that we've developed and utilized most of our AAR hinders, we want that fully deployed inside of the HAECO facilities as well. So that would be the very last piece to complete. But again, all of that at this point is pacing ahead of schedule. And it's a really heavy lift. You got a lot of moving parts there, but very proud of the way the team is executing. And also really happy with the way the HAECO team has embraced the culture that we're promoting. It's been a really good fit.

Great. And then within Integrated Solutions, just given the recurring revenue nature of the Trax business as well as the new customer integration and ongoing upgrade cycle, should we expect growth there to be fairly linear going forward within the segment? Or is there anything that could drive lumpiness ahead?

Overall, Linear, you do get lumpiness every now and then because of the way we book new implementations just based on the software and milestone accounting. So that does create some lumpiness in the results there. But the recurring revenue, which is the base of the business that we're most focused on growing that we expect to be linear. And again, we've doubled the size of track since we bought it. They were a $25 million business when we closed that pacing north of $50 million now. And based on the customer updates, their upgrades as well as new customers that we've captured we see a path to doubling that again from $50 million to $100 million.

Thank you. Ladies and gentlemen, at this time, I would like to turn the call back over to John for closing remarks.

Great. Thank you very much, and thank you for joining us today. We continue to execute with a high degree of discipline, and we are energized by the opportunities in front of us and really appreciate the support and interest in AAR. .

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

Hello, and thank you for standing by. Welcome to AAR Corp.'s Second Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Chris Tillett, Vice President of Investor Relations. You may begin.

Good afternoon, everyone, and welcome to AAR's Fiscal Year 2026 Second Quarter Earnings Call. We're joined today by John Holmes, Chairman, President and Chief Executive Officer; and Sarah Flanagan, Interim Chief Financial Officer. The presentation we are sharing today as part of this webcast can be found under the Investor Relations section on our corporate website.

Before we begin, I'd like to remind you that the comments made during the call 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, 2025. 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. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is set forth in the company's earnings release and slides. A transcript of this conference call will be available shortly after the webcast on AAR's website.

At this time, we'd like to turn the call over to AAR's Chairman, President and CEO, John Holmes.

Great. Thank you, Chris, and welcome, everyone, to our second quarter fiscal year 2026 earnings call. This was another outstanding quarter for AAR as we generated strong results across all areas of our business. We also completed 2 key strategic acquisitions and announced the third, which is expected to close in our fiscal fourth quarter.

We are excited about these acquisitions as they enable us to accelerate our strategic objectives in 2 key areas of our business: our high-growth Parts Supply business segment, specifically new parts distribution and in our Repair and Engineering segment. Turning to Slide 3. I would like to start with the key takeaways from the quarter. First, we delivered strong financial results with sales growth across all segments.

Our 16% total sales growth was led by our parts supply business, which was up 29% in the quarter. This growth was driven by above-market organic sales growth of 32% in our new parts distribution activities. This has been our fastest-growing activity, averaging more than 20% organic growth in each of the last 4 years. Our 2-way exclusive distribution model resonates with OEMs and is helping to drive continued market share gains.

Second, we strengthened our portfolio with 2 strategic acquisitions. We previously shared that we are committed to enhancing our offerings with targeted acquisitions that advance our strategy, and we are delivering on that promise. Third, we continue to capture new business across the company, including the renewal of key exclusive new parts distribution agreements as well as new customers for Trax.

In addition, we are continuing to enhance our digital capabilities, including through our newly announced partnership with Aeroxchange, the premier commercial aviation supply chain secure network provider. Fourth, we are carefully managing our balance sheet to maintain strategic flexibility, and we ended the quarter with lower leverage, which is now within our long-term target range.

Turning to Slide 4. We have a number of accomplishments within the quarter regarding our 4 strategic objectives, which are new business wins, operational efficiency, software and IP-enabled offerings and disciplined portfolio management. I will highlight 2 of the objectives on this side, new business wins as well as software and IP-enabled offerings with additional items to be discussed later in the presentation.

First, our distribution model is unique in the industry, in that nearly all of our distribution contracts, which typically range from 5 to 10 years are 2-way exclusive, meaning we do not represent competing product in a given market and our OEM partners do not use a competing distributor. This model allows us to develop deeper relationships with our OEM partners, become technically proficient in their products and help them take market share.

This differs from a traditional distribution model where you acquire inventory and essentially act as a call center. We developed this approach more than 10 years ago and over the last several years, have seen a 100% renewal rate in our contracts. Speaking of renewals, during the quarter, we announced the renewal of 2 key exclusive contracts with Collins Aerospace and Arkwin Industries, which is a unit of TransDigm.

We are also leveraging synergies between our repair offering and our distribution activities. During the quarter, Eaton, one of our key new parts distribution OEM partners, named our Amsterdam facility as an authorized service center to support their hydraulic components across Europe, the Middle East and Africa. This is a great example of the critical role our parts supply and repair and engineering businesses play in the aviation value chain and the synergies that exist within our operating activities.

Within our repair and engineering business, we continue to make progress on our Oklahoma City and Miami airframe heavy maintenance expansions.

Both expansions are progressing well and will come online in calendar 2026, adding approximately $60 million in annual revenue. During the quarter, Trax announced an agreement with Aeroxchange. Aeroxchange is a leading provider of secure commercial aviation supply networks, and this agreement will enhance our integration capabilities with our customers.

Trax customers will gain access to Aeroxchange's extensive networks of parts, repair, inventory pool and consignment service suppliers through Trax applications. This collaboration advances our strategy to make it easier for Trax customers to buy parts and repairs. One more thing on Trax. We were excited to announce yesterday that Trax has been selected by Thai Airways, one of the most important Asian carriers, to provide its eMRO enterprise resource planning system, suite of eMobility apps and a cloud hosting solution.

Turning now to Slide 5 with more detail -- I'll provide more detail on our recent acquisition of ADI. We acquired ADI in September for $138 million. ADI is a leading distributor of electronic components and assemblies, and it closely aligns with our strategic objective to expand our rapidly growing new parts distribution activities within our Parts Supply segment.

As mentioned, new parts distribution has been growing at over 20% for the last 4 years, and ADI will add a new growth vector to this activity. The addition of ADI moves AAR up the value chain -- up the supply chain through ADI's production-facing distribution channel. This means we will now supply parts to our OEM partners for use in their own manufacturing. We plan to leverage our OEM relationships to grow ADI's business.

With approximately $150 million in sales over the last 12 months and a team of 400 skilled employees, we are increasing our access to a substantial and rapidly growing total addressable market. Additionally, over time, we see opportunities to improve margins through higher volumes and operational efficiencies. ADI has performed above expectations in the first few months, and the integration is progressing as planned.

Turning now to Slide 6. I would like to provide an overview of our acquisition of HAECO Americas. We acquired HAECO Americas in November for $77 million, extending our leadership position in airframe heavy maintenance. Through our investments in proprietary systems and processes, we have achieved industry-leading quality and turnaround times and have become the most sought-after airframe heavy maintenance provider in North America.

While new parts distribution has been our fastest-growing business, airframe heavy maintenance has been the largest contributor to our margin expansion over the last 4 years. This acquisition builds on that success. HAECO Americas operates facilities in Greensboro, North Carolina and Lake City, Florida. As part of the integration process, we will be applying our successful operating model to these facilities to improve their operational and financial performance.

This process will take 12 to 18 months and has 3 key elements: revenue optimization, cost reduction and process improvements and footprint rationalization. With respect to optimizing revenue, as part of the acquisition, we announced approximately $850 million of new contract awards with several customers over 5 years. These contracts will replace the existing revenue base at HAECO and more closely match the key terms we have with our current other airframe heavy maintenance customers.

With respect to cost reduction and process improvements at the HAECO facilities, our actions to adjust the cost structure to match the new revenue base are already well underway. Additionally, over time, we will deploy our proprietary processes and systems to the facilities to achieve the same quality and efficiency levels we have achieved at our other airframe heavy maintenance facilities. Regarding footprint rationalization, we will be exiting our heavy maintenance site in Indianapolis over the next 18 months and transferring that work to other AAR sites with much of it moving to the HAECO facilities.

As a result of our lease agreement with the airport, Indianapolis is our highest cost location. Additionally, labor availability has been a persistent challenge. By exiting this high-cost location when the lease expires and redistributing the work throughout the rest of our network, we will further improve the overall margin profile of our airframe heavy maintenance activities.

As mentioned, all these actions will take 12 to 18 months to complete and will initially be margin dilutive. However, we expect the margin to steadily improve as we move through the integration process. Once this work is complete, we will have added approximately 40% additional capacity to our network, lowered our fixed cost and gained access to a more predictable labor supply. Most importantly, we have the support and contractual commitments from our customers to execute this plan.

Turning now to Slide 7. We also recently announced an agreement to acquire Aircraft Reconfig Technologies, or ART, for $35 million. ART specializes in reconfiguring passenger aircraft interiors, providing project management, engineering and certification solutions. This is an exciting addition to our airframe heavy maintenance capabilities that expands our ability to perform complex aircraft modification work while bringing proprietary solutions and a robust IP portfolio.

It also brings engineering and self-certification capability that can accelerate our parts PMA development efforts. We expect this acquisition to close in the fourth quarter of this fiscal year, and we look forward to welcoming the skilled team to AAR. With that, I'll turn it over to Sarah to discuss the results in more detail.

Thanks, John. Looking now to Slide 8. Total sales in the quarter grew 16% year-over-year, including 12% organic growth to $795 million. We drove growth in each of our segments with particular strength in parts supply. Sales growth to government customers increased 23% and sales to commercial customers increased 13% over the same period last year. For the quarter, total commercial sales made up 71% of total sales, while government sales made up the remaining 29%.

Compared to the same quarter last year, adjusted EBITDA increased 23% to $96.5 million and adjusted EBITDA margins increased to 12.1% from 11.4%, adjusted operating income increased 28% to $81.2 million, with adjusted operating margins improving 100 basis points from 9.2% to 10.2%. Our focus on improving operating efficiencies, strong performance in our Parts Supply segment and government programs were key drivers of the improved margins.

The combination of sales growth and margin expansion resulted in a year-over-year adjusted diluted EPS increase of 31% to $1.18 a share from $0.90 a share in the same quarter last year. With that, I'll turn to the detailed results by segment, starting with Parts Supply on Slide 9.

Total parts supply sales grew 29% from the same quarter last year to $354 million. We once again saw above-market growth in our new parts distribution activities, which grew 32% as compared to last year, excluding the contributions from ADI. Second quarter parts supply adjusted EBITDA of $46.5 million, was higher by 37% and adjusted EBITDA margin increased to 13.2% from 12.4% in the same quarter last year. Adjusted operating income rose 35% to $42.8 million and adjusted operating margins also increased from 11.5% to 12.1%.

Higher margins were largely driven by increased operating leverage as we are successfully scaling our business while maintaining cost discipline. Turning now to Slide 10 for Repair and Engineering. Total sales increased 7% year-over-year to $245 million. Demand remains strong for our airframe heavy maintenance activities, and we continue to drive efficiency to increase [ throughput. ] Adjusted EBITDA of $31.2 million was 1% higher than in the same period last year, while adjusted EBITDA margins decreased to 12.8% from 13.5%.

Second quarter adjusted operating income of $27.4 million, remained consistent to the same period last year, with adjusted operating margins decreasing to 11.2% from 12.0%. This was largely due to the mix of work within our heavy -- airframe heavy maintenance network, onetime costs and component repair as well as a slight impact from the HAECO Americas acquisition, as we only had 1 month of HAECO operations included in the quarter.

As John mentioned earlier, we have initiated our integration activities and expect to improve their operating margin over the next 12 to 18 months, taking them from low single-digit EBITDA margin to margins in line with our current repair and engineering margins. Going forward, we expect to continue to drive margin expansion in this segment through the improved performance of our 2 newly acquired HAECO facilities, driven by integration and synergy actions, continued rollout of our paperless hangar initiatives, increased volume into our component repair facilities and the hangar capacity expansions that are in process.

Looking now to Slide 11. Integrated Solutions sales increased 8% year-over-year to $176 million, primarily driven by government programs. Integrated Solutions adjusted EBITDA of $18.5 million, was 50% higher than the same period last year. Adjusted operating income of $15.1 million, was 82% higher with the adjusted operating margin increasing from 5.1% to 8.6%. Higher margins were driven by favorable mix and certain government contracts achieving key program milestones during the quarter.

Turning to Slide 12 of the presentation. During the quarter, our net debt leverage decreased from 2.82x in the first quarter to 2.49x, achieving our target range of 2.0 to 2.5x. This decrease was driven by double-digit earnings growth, continued balance sheet management and our equity offering. Turning to Slide 13 of the presentation. With respect to our capital allocation strategy, our priorities remain unchanged.

First, we will continue to fund organic growth in each of our 3 core areas: our high-growth new parts distribution activities, our airframe heavy maintenance and component repair activities and our software and IP-enabled offerings. Second, we will allocate capital to M&A opportunities to meet our strategic and financial criteria and support our core segments.

The 3 acquisitions we have discussed today, ADI, HAECO Americas and ART are all well aligned with our stated criteria and will help to accelerate our growth strategy of bringing our unique platform to market as a premier independent provider of aviation parts, repair and software. As we look to Q3, we expect to be cash positive in the quarter. We also expect interest expense to be slightly lower than the prior quarter. With that, I'll turn it back to John.

Great. Thank you, Sarah. Turning to Slide 14. We have an update on our outlook for Q3 and for the rest of our fiscal year. For Q3, we are expecting total sales growth in the range of 20% to 22%, which includes the impact of our 2 recent acquisitions. For reference, organic sales growth for Q3 is expected to be 8% to 11%, which excludes the divestiture of Landing Gear as well as the impact of the ADI and HAECO acquisitions.

For margin, we expect Q3 adjusted operating margin of 9.8% to 10.1%. For the full fiscal year, given our strong performance in the first half and including our 2 recent acquisitions, we expect total sales growth approaching 17% and organic sales growth approaching 11%. In closing, I would like to highlight AAR strength as a business and as an investment. We are well positioned in the most attractive segments of a growing aviation aftermarket.

We have a broad, unique platform as a provider of parts, repair and software that is unmatched in our industry. Our complete range of aftermarket solutions work together to drive a sustainable, self-reinforcing cycle of growth. We have enhanced our portfolio with high-quality acquisitions, and we are delivering stronger growth and higher margins.

I would like to thank our talented team of global employees, particularly Sarah, for their dedication as they deliver excellence, quality, safety and the critical work that we do for our customers every day. I would also like to thank our customers and our shareholders for your continued interest and support of AAR. And with that, we'll turn it over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Ken Herbert with RBC.

Really nice quarter. John, maybe just to start on the parts supply, how do we think about with the 32% growth, is it possible to parse that out a little bit more by, say, volume versus price? And if you're seeing anything unique on the price side from an airline perspective? And then within volume, how we think about maybe sort of same-store sales of that versus sort of new contract wins or expansions to the portfolio in the quarter?

Yes. I would say -- great question. I would say, overall, it's volume driving that growth. So the majority of that growth is driven by volume. Sure, we've had some price escalation with certain of our OEM partners, but that would be not the majority of that. And then in terms of same-store sales, we are seeing significant growth out of existing distribution contracts that are, again, in that kind of 20% to 30% range, which is obviously driving the overall growth. So it is volume. It is new contracts ramping up, but it's also really healthy same-store sales performance.

That's helpful. And as you think about moving here to calendar '26, the second half of your fiscal year, are there any concerns or are you seeing any risk about destocking at your airline customers after obviously several years of what seems to be maybe some buffer inventory level building there?

Yes, great question. And the answer is no. We're not seeing evidence of that. The backlog for that business gives us confidence that the growth rates that we're seeing there are going to continue. And at this point, no signals that would imply destocking.

Perfect. And just finally, if I could, the implied third quarter margin represents a bit of a step down sequentially. I'm guessing this is really mix as you think about the acquisitions. But anything else going on besides mix in terms of sequentially second to third quarter on the margins?

No, that's the driver. As we mentioned, around the HAECO acquisition, long term, that will be margin accretive. In fact, since we've gotten into it, we expect it will be even more margin accretive than we thought when we did the deal, which is a great thing. But it is going to take us a couple of quarters to move through that integration to get there, and you're going to see the impact of that in Q3 and Q4.

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

John, you became the heavy maintenance industry leader with the HAECO Americas deal. Do you see synergies with heavy maintenance and your other businesses such as your component repair business and also with Trax?

Yes, absolutely, and great question. For sure, there are synergies between the heavy maintenance business and the component business. And we -- part of our strategy is to leverage the leadership position that we have in airframe heavy maintenance to drive volume to our component shops.

Some of that comes from just having possession of the aircraft themselves. We now have well more than 1,000 aircraft moving through our facilities each year, and that generates individual component repairs that we can perform. But mostly, it's going to be by doing deals with our customers where we sign up long-term commitments on the heavy maintenance side that are coupled with long-term commitments on the component repair side.

And I just want to highlight, we've invested a lot in proprietary systems and processes inside our hangars, and we have now achieved industry-leading turnaround time and quality. Our turnaround times are particularly important to the customers because let's just say a heavy maintenance visit is going to take 30 days, a typical is going to take 30 days. If we can deliver that aircraft back to our customer in 28 days or 27 days, they love that because that's extra days that they have to put that aircraft back in revenue service.

And that's worth a lot. And that operational performance inside our hangars is driving the demand that we're seeing. And as I mentioned, when all this is said and done, we will have added 40% capacity and that's sold out through the end of the decade. So that's a lot of demand, and we plan to leverage that leadership position again to drive volume through the component shops.

As it relates to Trax, in particular, Trax has synergy predominantly with our parts supply business. We intend to develop proprietary channels to market to sell new and used parts through Trax and then also through component repair. The Aerostrat acquisition that we made last quarter does have direct synergy with heavy maintenance because that software allows customers to plan long-range heavy maintenance visits. And of course, that feeds directly into the heavy maintenance offering that we provide.

Excellent. And also, you announced of win yesterday with Thai Airways. And I was wondering, has the -- like the landmark win with Delta Airlines that you announced over the summer, has that stimulated the pipeline as many airlines, they often follow Delta's lead given Delta's role as one of the largest like MROs in addition to one of the largest airlines.

Yes. The answer is absolutely. And that's one of the reasons we were so focused on securing Delta as a win early on in our journey with Trax because Delta is not only the largest, but it's an extremely well-respected airline amongst all airlines. And so the fact that they have selected Trax and endorsed that as a solution that can scale up to their size is hugely beneficial.

And absolutely, that has opened doors for Trax. We -- the other thing I would just mention is that it's approximately a 3-year implementation at Delta, so we're about 7 months into that. It is going very well, and Delta has been willing to serve as a reference for us with other customers, which we -- which we're grateful for.

[Operator Instructions] Our next question comes from the line of Michael Leshock with KeyBanc Capital Markets.

I wanted to ask on M&A. You've been highly acquisitive as of late, and you mentioned capital allocation priorities are unchanged. Do you see opportunities for further M&A over the next maybe 6 to 12 months? Or is there more of a shift to integration? Just any thoughts you can provide on the M&A pipeline and what you're seeing there and then maybe what segments you might target going forward?

Sure. The short answer is yes. We continue to believe that -- and continue to see M&A as a key part of our growth. And one of the things I'm particularly proud of is out of the last several deals that we've done, these have all been self-sourced. We have gone to these companies. We have developed relationships with the owners. And we -- so all the deals that we've closed in the last 3 years, they've been sourced by us.

So we've got very specific criteria that acquisitions need to meet. There are several other companies out there that we believe can meet those -- meet that criteria, and we are actively pursuing them. We feel that we have the integration muscle, if you will, moving inside the company. We're definitely cognizant of our own bandwidth. So we want to make sure that we're successful with the integrations that are underway right now. But we also want to be in a position to curate attractive M&A opportunities and close on them.

Great. And then one more question on Trax. If you could provide any color on Trax and the customer upgrade cycle, whether that be the percent of customers that have already upgraded or the timing of when you expect more upgrades to occur. I know it's a multiyear event, but any more color on Trax would be great.

Thanks, Michael, and a great question there. We're approximately, I'd say, 30% -- 30% to 35% of the way through the customer upgrades. You have -- and that's customer upgrades that have been agreed to but potentially not yet implemented. So we have a lot of current upgrades going on that are in various stages of implementation. Our goal is to have all of that completed by the end of 2028. Like any software upgrade cycle, it may take longer, but our goal is to have the bulk of this done by 2028.

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

Yes, can you hear me? John, I wanted to ask on the ART acquisition. We're seeing a lot of airlines announce interior refreshes as they try to better segment their cabins and increase the premium offerings. So I'm just kind of wondering if you could provide what's the revenue now? What kind of growth CAGR do you see there, say, over the next 3, 4 years? And what's the margin potential for that business?

Yes. I appreciate the question. We didn't disclose the revenue, but what we can say is that, that is one of the main reasons we decided to make this acquisition. This is a market we do participate in, in a limited way today, but ART brings much needed engineering, IP and self-certification expertise to allow us to become a much bigger player in that market.

And you hit the nail on the head. This is an area that is very strong now and expected to grow as airlines are constantly looking to refine their offering and reposition the resources inside of their cabin to meet the demand. And this acquisition puts us in a really strong position to participate in that market, coupled with our heavy maintenance offering.

Okay. And then one more quick question. I mean just -- I think last quarter, you mentioned there was a meaningful pickup in USM sales. Just wondering if that trend continued this quarter. And are airlines maybe reconsidering retiring aircraft and parting them out just given that demand looks like it's improved in recent months and now fuel prices are pretty low.

Yes. I would -- so we saw about the same level of activity in USM this quarter as we did last quarter. And I would say there's been no material change in the market in terms of availability since what we discussed last quarter. So it's pretty much status quo. But we're really focused, as you could tell, on the new parts distribution business, which has exceptional momentum in the market right now, and it continues to gain wide acceptance.

Okay. And then a quick one for Sarah. I just wanted to clarify. I think you said new parts distribution sales were up 32% organically. I was wondering if you could parse that out maybe between commercial and government.

Yes. I would say in the quarter, roughly 50% of that growth came from commercial and the other 50% came from defense. So we had a really strong quarter on both fronts.

[Operator Instructions] Our next question comes from the line of Ken Herbert with RBC.

John, on the USM front, one of your major partners, FTAI, has announced an aeroderivative IGT offering for the CFM56. It sounds like overall activity for you on that engine with FTAI may have been trending down. But do you see this potentially as a risk longer term to engine volumes perhaps for your USM business as we maybe see more traction of aeroderivative engines in the non-aerospace markets?

No, I appreciate you asking the question. I really don't see it as a risk. In the immediate term, as you just indicated, FTAI -- and they're a great partner. They've had such demand for these assets that we have seen our activity with them decline significantly over the last year plus, yet our team in the USM business has been able to continue to source CFM material out in the market to basically make up for the lack of volume with FTAI. So our skill in the USM business is finding material in the market where others cannot. And I'm very confident that despite potentially this new demand vector for that engine, we'll continue to be able to find material.

[Operator Instructions] I'm showing no further questions in the queue. I would now like to turn the call back over to John for closing remarks.

It looks like we have some more questions.

Yes, they just popped up [Operator Instructions] Our next question comes from the line of Michael Ciarmoli with Truist Securities.

Not sure what was going on, but real nice results. John, just how should we think -- you've given sort of the annual guidance in terms of revenues. We've got some dilution on the margins. Any thoughts on how we should think about that adjusted operating margin, maybe, call it, a 10% ceiling when you can kind of firmly punch through that.

It does seem like, I guess, with more of a full quarter, you kind of talked about it, you get a little bit of that dilution from HAECO. It's going to take a little bit. But anything in terms of how we should think about those adjusted margins going forward, taking into account the synergies, the cost out and some of the other benefits?

Yes. I would say, first of all, we're really pleased with the trajectory we've been on, right? This is only the second time we've been above 10% in the quarter. We're up a full point from last year. And I think as we've said in various settings, we see the ability to achieve a couple of points above where we are now. The HAECO integration is going to be a near-term dilutionary, as you said, for the next couple of quarters. But as a result of the integration, as a result of exiting our higher cost location in Indianapolis, we feel very good about punching above that 10% level over time.

Okay. Okay. And then just on the revenue outlook for the year, do you have any contributions from the new capacity coming online in this current fiscal '26 guidance? Or is it going to be a more pronounced positive impact next year?

It will be a more pronounced positive impact next year. Yes, it will be a more pronounced positive impact in our FY '27. We will see a slight contribution from the Oklahoma City site that will come online likely in February time frame. But the Miami site will come online fully in, call it, July time frame. So both of those will be a full run rate for our FY '27.

Okay. Perfect. And then I'm going to ask you this one anyway. I get this question a lot from clients and have gotten it. Just on the rationale to expand that lower-margin MRO heavy maintenance. It often gets perceived as the wrench-turning aspect of the business. I mean, to me, it makes a lot of sense, but you're kind of adding to the lowest margin portion of your business. I know you talked about the synergies -- just the thoughts on maybe skewing more towards that higher-margin parts business? Or how should we think about it? How should investors really think about that when they see deploying capital there?

Yes. So I'm really happy that you were able to get the question in because that's one that I'm happy to answer. It is not a low-margin business. We have made more margin gains in the heavy maintenance area since -- over the last -- since coming out of COVID than anywhere else. So now that business is a low double-digit margin business with potential to expand as a result of this acquisition as we improve the fixed cost base. Not only that, we now have circa 45%, 50% market share and the customers are coming to us.

And so the investments that we've made in our processes that improve the turnaround, as I described, I mean, they're allowing us to sell out through the end of the decade and in certain cases, achieve a premium in the market. So that business, I think, is misunderstood. If you look at the margins in our Repair and Engineering segment and look at them compared to other publicly traded MROs they're actual -- they trade differently than we do.

They're actually pretty similar, and we're telling you that we can expand margins from here. So I think the historical view that airframe is a tough business, it's low margin, et cetera. It is a tough business, but we've developed a model that is succeeding significantly, and that's thanks to our execution and the systems that we've put in place. So I'm really excited about the HAECO acquisition and the potential for further margin expansion across all the heavy maintenance.

[Operator Instructions] Our next question comes from the line of Sheila with Jefferies.

Congrats on a great quarter. John, maybe on the last line of questioning, if that's okay, sticking to Repair and Engineering. Maybe, I guess, just bigger picture, how do you think about margin expansion within the segment? And then second, as we think about HAECO and I know you already talked about it with Mike a little bit, how do you think about going from 3% margins or low single digits to double-digit margins? How much of that comes from the contract realignment versus the cost rationalization?

I think it's -- okay. So I would say, in general, in the segment, we would see going back to the levels that we were a year ago in terms of margins, so low double digit and then expanding from there. So I would view the moment that we're in right now in repair and engineering as a low point. We got a couple of quarters to get through as we get through the bulk of the -- or the real heavy lifting as it comes to the -- as it relates to the HAECO acquisition, but then we'll go up from there and then ultimately exceed where we were prior to this.

And again, as I mentioned, we've got the customer support and the customer commitments over a multiyear period to achieve all of that. So I feel good about the overall margin profitability in repair and engineering. And one other thing I should mention is that I'm talking about heavy maintenance. The component repair business is a mid- to high teen operating margin business. And as I talked about earlier, we intend to leverage the leadership position that we have in heavy maintenance to drive more volume to component repair, which will further enhance those margins of the overall segment.

As it relates to the HAECO integration -- as it relates to the HAECO integration in particular, it would be a mix between the revenue realignment and the cost takeout. And I should mention that we are taking the revenues down from what HAECO was doing before pretty significantly. And so we're bringing the volume of that -- across the facilities down to a level where we can establish our processes, establish the rigor that we want to see that we've been able to achieve elsewhere on the floor in the hangars and then ultimately build up from there.

So we're utilizing -- we're not utilizing the full footprint. We're rightsizing the labor force to match the volume to get the operations performing the way we want. But then over time, we would intend to build up from here. And I should mention that we've done that successfully in several of our other existing facilities, and we're obviously doing that in Miami and Oklahoma City because we're expanding those 2 sites.

Yes. Great. And then maybe just switching gears a little bit. Lots of questions already on your success in parts distribution accelerating over 30% in the quarter. Can you talk about what you're expecting? You -- Sarah mentioned 50% of that came from government customers. What you're thinking about the second half of the year?

Yes. I would say, again, we've been kind of on an annual run rates of circa 20% organic growth. And I would think that we would be slightly above that in the second half of the year.

I'm showing no further questions at this time. I would now like to turn the call back over to John for closing remarks.

Great. Really want to thank everybody for the time and the interest. As you can tell, we've got a strategy that's working. We're encouraged by the momentum that we have, and we expect it to continue and look forward to getting back together next quarter. Thanks, everybody.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

Hello, and thank you for standing by. Welcome to AAR Fourth Quarter Fiscal Year 2026 Earnings Conference Call.

[Operator Instructions]

I would now like to hand the conference over to management. You may begin.

Good afternoon, everyone, and welcome to AAR's Fiscal Year 2026 First Quarter Earnings Call. We're joined today by John Holmes, Chairman, President and Chief Executive Officer; and Sean Gillen, Chief Financial Officer. The presentation material we are sharing today as part of this webcast can also be found under the Investor Relations section on our corporate website.

Before we begin, I'd like to remind you the comments made during the call may 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, 2025.

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. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is set forth in the company's earnings release and slides. A transcript of this conference call will be available shortly after the webcast on AAR's website. At this time, I would like to turn the call over to AAR's Chairman, President and CEO, John Holmes.

Thank you, and welcome, everyone, to our first quarter fiscal year 2026 earnings call. This quarter was a very strong start to the year, and we are proud of the results we delivered as we continue to advance the execution of our strategic objectives. We have accompanying information on the slides that will be referenced as I talk through the details of this release.

Turning to Slide 3. There are 3 key takeaways from our Q1 FY '26 that I would like to highlight today. First, we delivered significant top line growth with higher profitability. We are particularly proud of the 17% organic adjusted sales growth that we drove in the quarter. Second, we continue to win and grow in new parts distribution. This has been our fastest-growing activity, averaging more active than 20% organic growth in each of the last 4 years. Our exclusive distribution model resonates with OEMs and is helping to drive continued market share gains. Third, our track software solution has continued its momentum on the back of the major win we announced with Delta Airlines in June.

Additionally, we further enhanced our software capabilities with the acquisition of Aerostrat, which we completed in the quarter. Turning now to Slide 4. I will discuss our strategy execution in more detail. We are executing across our strategic objectives to drive growth through market share capture and new business, improved margin through cost efficiency and synergy realization, increase the intellectual property in our offerings through software and IP investments and to continue our disciplined portfolio management.

Starting with share gains and new business wins in the quarter. In our Parts Supply segment, we expanded our new parts distribution capabilities through our multiyear exclusive distribution agreement with AmSafe Bridport, a TransDigm company, becoming the exclusive KC-46 and C-40 platform distributor to the global defense and military aftermarket. This win once again demonstrates the strength of our new parts distribution capabilities across both the commercial and government markets. Also in repair and engineering, we continue to make press on our Oklahoma City and Miami Airframe MRO expansions. Both expansions are progressing well and will come online in calendar 2026, adding 15% capacity to our network.

Moving to cost efficiency. We are continuing the rollout of our paperless hanger solution, which drove increased throughput leading to another quarter of sales growth out of the same hanger footprint. We have completed approximately 60% of the paperless rollout to date. In Component Services, now that we have substantially completed the product support integration, our focus is to drive incremental volume through wire sites which will lead to additional margin expansion. In the quarter, we also maintained consistent cost discipline, reducing SG&A year-over-year. In our software and IP-enabled offerings, we continue to have success in the market with our Trax software solutions particularly after Trax's selection by Delta validated its ability to scale and support of the world's largest airlines.

We don't announce all of Trax's win, but this quarter, we're proud to say that JetBlue, a long-time Trax customer, upgraded to e-mobility and our cloud hosting solution. Also during the quarter, we acquired Aerostrat, a maintenance planning software provider, which immediately expands the reach of our software offerings and the enterprise resource planning system capabilities of our Trax software solution. Aerostrat brings exciting opportunities for growth with a potential for further integration and scope expansion among existing Trax customers. We are proud that this was another quarter of both strong execution and new business capture.

With that, I'll turn it over to Sean to discuss the results in more details.

Thanks, John. Looking now to Slide 5. Total adjusted sales in the quarter grew 13% to $740 million year-over-year. However, excluding the sale of Landing Gear, which contributed sales of $19 million in last year's quarter, Q1 organic sales growth was 17%, we drove growth in each of our segments with particular strength in parts supply. Adjusted sales growth to government customers increased 21%, and adjusted organic sales to commercial customers increased 15% over the same period last year.

For the quarter, total commercial sales made up 71% of total sales, while government sales made up the remaining 29%. Compared to the same quarter last year, adjusted EBITDA increased 18% to $86.7 million, and adjusted EBITDA margins increased to 11.7% from 11.3%. Adjusted operating income increased 21% to $71.6 million, with adjusted operating margins improving to 9.7% from 9.1%. Our focus on improving operating efficiencies and strong performance in our part supply segment was a key driver of the improved margins. The combination of sales growth and margin expansion resulted in a year-over-year adjusted diluted EPS increase of 27% to $1.08 from $0.85 in the same quarter last year.

With that, I'll turn to the detailed results by segment, starting with parts supply on Slide 6. Part Supply sales grew 27% to $318 million from the same quarter last year. We once again saw above-market growth of over 20% in our new parts distribution activities with strong growth across both the commercial and government end markets. In the quarter, we also saw a meaningful pickup in USM sales. First quarter part supply adjusted EBITDA of $43.8 million was higher by 34% and adjusted EBITDA margin increased to 13.8% from 13.1% in the same quarter last year. Adjusted operating income rose 36% to $40.9 million, and adjusted operating margin also increased from 12.1% to 12.9%.

Turning now to Slide 7 for repair and engineering. Sales decreased 1% to $215 million year-over-year. However, excluding the impact of the land and year divestiture, organic sales growth in repair and engineering was 8% as demand remains strong for our MRO activities, and we continue to drive efficiency to increase throughput. Adjusted EBITDA of $28.1 million was 1% higher than in the same period last year, with adjusted EBITDA margins in 13.1% from 12.8%. First quarter adjusted operating income of $24.9 million was 2% higher than the same period last year and adjusted operating margins increased to 11.6% from 11.2%. These increases were primarily driven by continued strong efficiencies in our operations.

Going forward, we expect to continue to drive margin expansion in this segment from the realization of product support synergies, continued rollout of our paperless hanger initiatives and the capacity expansions that are in process.

Looking now to Slide 8. Integrated Solutions sales increased by 10% year-over-year to $185 million. We saw strong growth in our government end markets as recent new wins ramped up in the quarter. Integrated Solutions adjusted EBITDA of $14.2 million was 5% higher than the same period last year. Adjusted operating income of $11 million was 5% higher, with the adjusted operating margin decreasing from 6.2% to 5.9%.

Turning to Slide 9 of the presentation. During the quarter, net debt leverage increased slightly from 2.72x in the fourth quarter to 2.82x. This increase was driven by both organic and inorganic investments we made in the quarter. We invested over $50 million in inventory in the quarter to support future growth, particularly in our Part Supply segment as we saw opportunities in both new parts distribution and USM. Additionally, we invested $15 million in the acquisition of Aerostrat, which was signed and closed on August 12. While these investments drove a cash use in the quarter, we expect to be cash positive in Q2 and for the fiscal year.

With that, I will turn the call back over to John.

Great. Thank you, Sean. Turning to Slide 10, we have an update on our outlook for Q2. For Q2, we expect sales growth of 7% to 10% which excludes the impact of Landing Gear, which generated $20.4 million in sales in Q2 of last year. We expect adjusted operating margin 6% to 10%. For the full fiscal year, given our strong start, we expect organic sales growth approaching 10% as compared to the 9% we cited back in July. In closing, I would like to highlight the strength of AAR as a business and as an investment. We are well positioned in the most attractive segments of the growing aviation aftermarket. We have broad, unique distribution and repair capabilities, including our Trax software solutions that are unmatched in our industry. We have also continued to optimize our portfolio to deliver stronger growth at higher margins.

Finally, we expect to continue to strengthen our offering with targeted acquisitions to accelerate our strategy. I would like to thank our global team of employees for their dedication and hard work as well as our customers and our shareholders for your continued interest and support of AAR. And with that, we'll turn it over to the operator for questions.

[Operator Instructions]

Our first question comes from the line of Ken Herbert with RBC.

Maybe just first question. You raised sort of the full year expectation are now approaching 10% versus up 9% coming out of the fourth quarter. Is that all just better results in the part supply? Or maybe you can just parse out sort of what's behind the site uptick in the full year expectations?

Yes. I would say part supply is definitely is leading the way. We had a very strong quarter of 27% organic growth in part supply. We continue to be very, very pleased with our progress in the new parts distribution market. And the wins that we've got there continue to gain traction. And really, as you mentioned, the part supply is driving the improved outlook for the year.

And can you just comment on the pipeline for new distribution agreements. I mean it sounds like OEMs continue to look to maybe find additional partners. Are you taking share to drive that growth? Or is it really sort of first-time opportunities where parts are coming to the market through distribution.

Yes. I would say the majority of the wins over the last several years have been our taking share. I mean there definitely are net new contracts that come on the market. The one we announced this past quarter with AmSafe was an example of that, but the majority have been our taking share. And again, we've got a different model in distribution that exclusive relationship only where we have an exclusive relationship with the O&M, where we don't represent competing product, and they have an exclusive relationship with us where they don't work with competing distributors for a given product or a given market. And that model is resonating, and as we continue to win more business, more doors are open to us. And so whereas we might not have been thought of as a leading new parts distributor 2 or 3 years ago, we're invited to participate in a lot more conversations now, which is encouraging.

Our next question comes from the line of Michael Leshock with KeyBanc Capital Markets.

Just wanted to ask on the updated guidance framework for 2026. You had called out strong growth in distribution across both commercial and government. Do you still expect to outgrow the market within distribution maybe at a mid-teens rate? Or is there any change either way relative to your outlook for distribution?

No. I think you've got it. We would maintain that outlook for distribution and would expect to continue to grow above market there.

And then maybe if you could talk a bit about the cross-selling opportunities you see within repair and engineering for component services, specifically. Any way to frame how much you've had in terms of success to date with cross-selling opportunities. And yes, and any way to frame also how much more there are to come.

Yes. Great question. So again, a big part of our strategy is to leverage our leadership position in the heavy maintenance world and use that to drive volume into our component repair shops that we acquired with the Product Support acquisition. And I would say that we are in the early innings of that strategy. Our focus over the last year has really been on the integration and exiting our facility, our large facility in Long Island and transferring that volume to the 2 sites, one in Dallas and one in Wellington, Kansas. That work is now complete. We're still ramping up efficiency in the 2 sites that receive the work. But the focus now has shifted to executing on that cross-selling strategy.

So we've got a long pipeline of opportunities. I was just with a major carrier yesterday, making a pitch myself for -- as part of that strategy. And to date, the -- we're having a lot of encouraging conversations, but the results are going to be more meaningful in the future. So a big pipeline. And like I said, we're in the early innings. The only thing I would just say on that is the parts business, it's a much shorter sales cycle. Obviously, it's highly transactional. You're able to sell parts very quickly. The component repair business, these are longer-term agreements, and it takes a while to get the customers to move the volume that they've been sending to other providers and reallocate it to us.

But given the confidence and relationships that we have with our large airline customers, particularly around heavy maintenance, we're confident we can secure that volume over time.

Our next question comes from the line of Scott Mikus, Melius Research.

John, Sean, nice results. I want to just circle back on the USM sales. In the opening remarks, you mentioned a meaningful uptick. So I'm just curious, has that trend continued into the current quarter? And then is the visibility on whole assets coming to market, improving given that next year, the fleet is going to need to absorb probably 1,500 narrow-body aircraft through new aircraft deliveries and then also the return to service of GTF grounded aircraft.

Yes. Great questions, and you're citing all the right industry dynamics. So we did start to see a loosening of supply in the fourth quarter, and that continued through the first quarter, that did drive a meaningful growth in our USM business for the first quarter. I would say it still remains a dynamic environment, but we definitely are encouraged by the additional assets that we see coming to market that match our criteria, which is one of the reasons we made the investments that we did during Q1.

Okay. And then also just thinking about the opportunity there. If -- correct me if I'm wrong here, but I think USM has been margin accretive to part supplies overall margins. So I'm just wondering what's kind of the opportunity for this year from a margin perspective at part supply if more USM does become available to market. Could this be a business that's running 14%, 15% operating margin business or operating margins this year?

Yes. So again, a question on parts supply. So distribution from a margin standpoint has been performing extremely extremely well. In recent quarters, if you look back to last fiscal year and even in this quarter, margin in USM has actually been depressed. Historically, you're absolutely right. It's one of our higher-margin activities, but the supply, even though it's loosening up, is still actually quite tight. And so the spread that we're able to make on assets and USM is narrow, then it would be historically. And again, we're in the very early innings of this. As you see more supply come on to the market and for the reasons you cited, we do expect that to occur over time. We would expect margins to expand from where they are today on USM.

And then if I could squeeze a quick one on Aerostrat. It looks like another nice bolt-on acquisition for the software solutions of your business. Just curious, is there any sort of agreement with the employees that they stay on for an X amount of time just making sure that you're retaining the key men.

Yes, great question. And you're hitting on the right theme. And as much as the team that came with Aerostrat are extremely talented. We're really excited about the team that came with it. And we noted this publicly, there is an earn-out associated with the transaction that applies to the key team members. And so that's a 3-year earn-out, and we feel pretty good about their financial incentive to stay around.

But even more than the financial incentive, I mean our goal is to fully integrate them into the AAR, the Trax team and really help them grow. And we're encouraged. It's early days, obviously, but we're encouraged by kind of the 2-way revenue synergies there. And as much as Aerostrat already is in customers where Trax is not, and we are going to leverage the software position that Aerostrat has with some large airlines that aren't yet on Trax to make an entry for Trax. Conversely, Trax provide services to dozens and dozens of customers where Aerostrat is not yet providing services. And so our goal is to add the Aerostrat functionality to the Trax offering and sell that as an additional service to the Trax customers. So a lot of exciting conversations amongst our software team.

Our next question comes from the line of Sam Struhsaker with Truist Securities.

On for Mike Ciarmoli and nice results as well. I think in the results, you guys mentioned that you've been investing a little bit in inventory to support the strong demand in part supply. I was just curious how we should think about -- I mean, are you guys kind of satisfied with where you are with inventory or maybe where you might be going with that as growth continues?

Yes. This was -- it was a big investment quarter. We saw a lot of opportunities across the full part supply segment, both in distribution as well as in USM. As we mentioned, we are encouraged by opportunity to make investments in that business to support its continued rapid growth, but at the same time, we've got a focus on being cash positive for the rest of the year. So we want to balance those priorities.

[Operator Instructions]

Our next question comes from the line of Noah Levitz with William Blair.

John and Sean, to start off, this is a more strategic or high-level question, but a lot of your peers have commented on the notable strength specific to the engine aftermarket. So can you talk about your exposure, whether across part supply or repair and engineering to engine-related aftermarket services, any key themes or just puts and takes there?

Yes, absolutely. I mean we have significant engine market exposure. The -- for example, in the USM business, 80% of our parts business in USM are engine -- I mean our engine parts. In our distribution business, we distribute engine-related accessories, our largest line of Unison, for example, which is a unit of GE, are all engine-related parts, and that's our largest single product line within distribution.

So the majority of the parts activity in the part supply segment is related to engines, also related in the component services business. We have significant engine-related capability, particularly in our Grand Prairie operation in Texas. And that's an area where we continue to or we expect to continue to develop repair capability, either independently or in conjunction with OEMs like GE. So I would say across the company, broad engine exposure, which is helping to drive the significant growth that we've been demonstrating.

Awesome. And then just another quick one, drilling in on Trax. Can you talk about how far along you are making Trax into more of an e-commerce marketplace, this can hopefully lead to more cross-sell opportunities with your parts distribution business, kind of what trends are you seeing there?

Yes. Thanks for asking about that. Again, really encouraged with the continued market uptake on Trax. I mean the challenge track has right now is just managing and prioritizing all the opportunities that they have in front of them, which is a great challenge to have. As it relates to the marketplace initiative in general, we are investing in that initiative. It is very important to us. We see significant synergy between the Trax operator base, the data that they traffic in and ultimately, leveraging their position to offer parts and repair solutions through the Trax interface to their customer base and even beyond the Trax customer base. Those are investments that we're making right now. It's a very active project inside of AAR. And I would expect that in the first half of 2026, we'll have announcements to make in terms of the progress that we've made there.

Ladies and gentlemen, I am showing no further questions in the queue. I would now like to turn the call back over to management for closing remarks.

Great. Thank you. And I really appreciate everybody's time today and look forward to discussing our Q2 results in a few months. Thank you.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.