AAR Corp.

Good afternoon, everyone, and welcome to AAR's fiscal 2023 third quarter earnings call. We are joined today by John Holmes, Chairman, President, and Chief Executive Officer, and Sean Gillen, Chief Financial Officer. Before we begin, I would like to remind you that 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 factor section of the company's Form 10-K for the fiscal year ended May 31, 2022, and Form 10-Q for the fiscal quarter ended November 30, 2022. 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 in 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. At this time, I'd like to turn the call over to AAR's Chairman, President, and CEO, John Holmes.

Great. Thank you, and good afternoon, everyone. I appreciate you joining us today to discuss our third quarter fiscal year 2023 results. Before I comment on the results, I would like to highlight the acquisition of TRACS that we announced yesterday. This is a combination that we have been thinking about together with TRACS for almost 10 years, and we have worked carefully with the founders on the strategic vision for the combined organization. TRAX is one of the leading third-party providers of MRO and fleet management software globally. It supports over 100 customers and approximately 5,000 aircraft, providing software for managing the entire spectrum of maintenance activities. These activities include many things, such as inventory planning and purchasing, maintenance scheduling, engineering, work order processing, mobile task cards, electronic logbooks, and personnel management. Additionally, TRAX is a critical piece of software as it serves as a system of record required for airlines and MROs by the FAA and other global regulators. For over 20 years, TRAX has competed successfully against much larger players and has established itself as the leading independent provider of maintenance ERP software. The success in the market, given their size, speaks to the strength of the product and And we believe that with AAR's backing, we'll help them compete even more effectively. For AAR, this acquisition accelerates our digital strategy, adding a platform for bringing additional software tools and analytical solutions to our customers, and creating a unique channel to offer AAR products and services. In addition, it squarely furthers our stated objective to add differentiated, IP-based, higher margin solutions to our aviation aftermarket offerings. The Trach leadership team will remain with the business, and we will retain the Trach's brand and identity in the marketplace. Turning the quarter, sales were up 15% from $452 million in the prior year quarter to $521 million, and adjusted diluted earnings per share from continuing operations were up 19% from $0.63 per share to $0.75 per share. Our sales to commercial customers increased 28%, and our sales to government customers decreased 3%, reflecting the prior wind down of certain programs last fiscal year. Sequentially, sales to customers increased 9%, and sales to government customers increased 15%. Our commercial parts activities continued the momentum that we described last quarter. New parts distribution benefited from the continued recovery in commercial flying, as well as the recent contract wins, which were also contributing to the results. And as expected, the investments that we made in our USM activities last quarter have already generated early returns. We remain focused on additional opportunities to deploy capital to support our parts activities. In MRO, we continue the strong performance that we have seen for the past several quarters, remaining nearly at capacity. And I'm pleased to report that on our government business, we were able to identify short-term opportunities that drove sequential growth in the quarter. We also delivered another strong quarter with respect to profitability as our operating margin was 7.6% on an adjusted basis up from 6.7% last year and consistent with the strong performance in Q2. This was driven by our revenue growth and our ability to continue to leverage the lower cost structure that we established during the pandemic. With respect to cash, we generated cash flow from operating activities from continuing operations of 17.4 million during the quarter. Our net leverage at the end of Q3 was 0.8 times EBITDA. Proforma for the TRAX acquisition, our net leverage was 1.35 times EBITDA. At this level, we continue to have significant balance sheet flexibility to further fund our growth. With that, I'll turn it over to our CFO, Sean Gillen, to discuss the results in more detail.

Thanks, John. Our sales in the quarter of $521.1 million were up 15.2% year over year. Our commercial sales were up 28.1%, driven by growth across our commercial activities. Our government sales were down 3% due to the completion of certain government programs in our previous fiscal year. Sequentially, our commercial sales were up 8.9%, and our government sales were up 14.9%. Gross profit margin in the quarter was 18.1% versus 17.8% in the prior year quarter. Gross profit margin in our commercial business was 18.1%. and gross profit margin in our government business was 18%. The margins in the quarter reflect continued strong performance in our part supply and MRO activities, as well as favorable adjustments on a government contract related to improved recovery on overhead costs and contract performance. SG&A expenses in the quarter were $56.7 million. This figure includes a net $4 million related to certain items that are excluded from our adjusted financial results. These items are detailed in the earnings press release. Excluding these items, our SG&A decreased to 10.1% of sales in the quarter, which drove our adjusted operating margin performance to 7.6%. Net interest expense for the quarter was $3.5 million compared to $0.6 million last year, driven by higher interest rates and borrowings. Our effective tax rate in the quarter was 26.8%. We would expect our Q4 effective income tax rate to be approximately 28%. Cash flow from operating activities from continuing operations was $17.4 million, including a $25 million reduction in inventory in the quarter. We ended the quarter with net debt of $135.3 million and net leverage of 0.75 times EBITDA, which is down from 0.88 times EBITDA at the end of our fiscal Q2 in November. With respect to the trash acquisition, we announced and closed the transaction yesterday. The consideration was 120 million in cash upfront, plus up to a 20 million earn out based on calendar year 2023 and 2024 adjusted revenue performance. This represents a purchase multiple of 14 times LTM EBITDA on the 120 million. Trash generated calendar year 2022 revenue of 25 million with approximately 35% EBITDA margins. We expect the acquisition to be immediately accretive to adjusted EPS, which will exclude the non-cash amortization resulting from purchase accounting. Note that the $20 million earn-out consideration will be reflected in our SG&A over the two-year period as there are retention conditions, but we will exclude it from our adjusted results. Based on the closing date, TRACS will contribute a little more than two months to our fiscal Q4. We would expect it to contribute $3 to $4 million in sales, with EBITDA margins around 35%. Interest expense in the quarter will be impacted by the upfront $120 million at an interest rate of approximately 6%. As mentioned, we expect tracks to be accretive to adjusted EPS and FY24. On a pro forma basis, our net leverage at the end of Q3 was 1.35 times EBITDA, and our liquidity from remaining cash on hand and availability under our revolver was over $340 million. As we have indicated previously, our priorities for capital deployment are in order. organic growth investments in our business, value accretive inorganic investments to add complementary capabilities, and capital return to shareholders. Over the last couple of quarters, we have had attractive opportunities to deploy capital in the first two categories. As a result, we elected not to repurchase stock during Q3. We currently have $58 million remaining on the $150 million stock repurchase program that we announced in December of 2021. We will evaluate usage of the remaining authorization over the balance of this calendar year based upon alternative capital deployment opportunities. Thank you for your attention, and I'll now turn the call back over to John.