Earnings Call Transcript - AIR Q4 2024

Operator, Operator

Good afternoon, everyone, and welcome to AAR's Fiscal 2024 Fourth Quarter Earnings Call. We're 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 risk factor section of the company's annual report on Form 10-K for the fiscal year ended May 31, 2024, which we expect to be on file with the SEC shortly. 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. A replay of this conference call will be available for on-demand listening shortly after the completion of the call on AAR’s website. At this time, I would like to turn the call over to AAR’s Chairman, President and CEO, John Holmes.

John Holmes, CEO

Thank you, and thank you to everyone for joining us this afternoon. We are very proud of the record performance we delivered during our FY 2024. I want to thank our team for their tireless efforts. AAR advanced strategic initiatives, sharpened focus, completed our largest ever acquisition, and we executed well across the company. We are benefiting from structural tailwinds from high levels of air travel and an aging fleet, which drives demand for our aftermarket services. Our company is more focused than ever before within our three main segments: Parts Supply, Repair & Engineering, and Integrated Solutions. We are making investments in each of these three segments to drive growth, improve our efficiency, and deliver higher margins. We saw the benefits from these investments in our FY 2024 and expect them to continue in our FY 2025. With that, I will turn to the FY 2024 results more specifically. We delivered record full year sales of $2.3 billion, up 17% over the prior year. Our adjusted operating margins increased from 7.5% to 8.3% in fiscal 2024, which only reflects one quarter of ownership of the higher margin Triumph Product Support business. And we generated record adjusted diluted earnings per share from continuing operations of $3.33 compared to $2.86 last year. Our fourth quarter was a record ending to a record year. Sales increased 19% year-over-year, driven by the impact of the product support acquisition and strong performance in our distribution and government integrated solutions activities. Adjusted operating margin improved by 150 basis points year-over-year from 7.8% to 9.3% due to the contribution from product support and our solid execution in both Parts Supply and airframe maintenance. Given some of the changes that we have made to the portfolio, I'm now going to go into the results in a little more detail for each of our three segments. Parts Supply. Parts Supply is our largest and most profitable segment and where we have very significant opportunities for organic growth. This segment contains two activities, new parts distribution and new serviceable material or USM. Distribution represents about 55% of Parts Supply sales. Distribution executed extremely well in the fourth quarter, posting the 10th straight quarter of double-digit organic growth. Revenue grew 16%, driven by additional government volumes, market share gains, and continued commercial demand strength. We're the largest independent distributor of OEM parts, and our independent status is a key strategic advantage that eliminates conflicts and allows our OEM partners to serve all aircraft types. We have deep relationships with a few key OEMs, and these are all on an exclusive basis. We continue to sign new exclusive agreements, and we had several meaningful wins in the quarter including our multi-year contract extension and expansion with Sumitomo Precision Products to distribute its V2500 starter and valve components, our new multi-year agreement with Triumph to support its actuation product line, and the expansion of our agreement with auto engineering to distribute electromechanical components. We are optimistic about continuing to gain market share and add new distribution lines at a similar pace going forward, particularly as we move into electronic components and business in general aviation end markets. USM. USM represents about 45% of total Parts Supply sales. It has also performed well in the quarter, with sales up 1% year-over-year and up 7% sequentially, despite extremely tight supply conditions. As a reminder, in this business, we acquire used aircraft engines, design a disassembly and repair plan, have individual parts refurbished, and then sell them to our customers at significant savings versus new products. We also acquire and resell whole aircraft and engines, which is an important activity and can create lumpiness in our results. Excluding these whole asset sales, USM sales parts growth was 38% in the quarter. This underlying growth in the current used parts reflects our strong market position underpinned by deep supply relationships to source parts, significant expertise to evaluate assets, and a world-class global sales force. We continue to benefit from the increasing adoption of USM as airlines and MROs unlock the benefits of buying used, and we believe this will continue to be a tailwind to our business for years to come. Whole assets, such as engines in particular are in high demand due to the issues with the GTF and other new engine variants. This coupled with relatively few aircraft retirements is driving constrained whole-asset availability. However, we expect supply pressures to alleviate over the next few years based on the recovery of new aircraft production and improved new engine variant performance. This will lead to more aircraft and engine retirements, which will drive greater availability of individual parts and whole assets and allow us to continue our overall growth in USM. Repair and engineering. Turning to repair and engineering, this segment consists of airframe heavy maintenance and component repair, including Triumph product support, as well as our PMA parts initiatives. Revenue growth was 51% in the quarter. Excluding the product support acquisition, revenue was relatively flat as our hangars are nearly at capacity. That said, our hanger capacity expansions in Miami and Oklahoma City remain on track for operation beginning in the second half of calendar 2025. These expansions will add approximately $60 million of annual sales. At the beginning of the fourth quarter on March 1st, we closed on the acquisition of Triumph Product Support, which brings increased scale and differentiated repair capability. The acquisition exceeded our expectations in Q4, and we are in the early stages of unlocking significant additional value. In terms of cost synergy, we are beginning to consolidate our existing Long Island facility and the product supports Grand Prairie, Texas and Wellington, Kansas facilities. We are on track to achieve the previously announced associated cost synergy target of $10 million by Q1 FY 2026. The business also brings capability in-house that we can now use for repair work to support our commercial programs and USM refurbishment activities. In addition, we are leveraging our talented commercial aftermarket sales force and our government business development resources to further accelerate product support growth. We also continue to make progress on our PMA initiative. We received FAA approval for several parts and have a significant additional pipeline that we are actively working to develop. We are in the process of integrating this initiative with the existing PMA business that came with the Product Support acquisition and remain committed to growing this combined PMA effort into a meaningful business over the next several years. Integrated Solutions. Turning to Integrated Solutions, in this segment we support government and commercial aircraft operators with the management of logistics and supply chains, as well as the Trax software offering. The majority of what we do in this segment is supporting government customers. Our programs are long term with an average tenure of five years, meaning this is an annuity business. In general, we are managing the aftermarket needs of aircraft operators across parts, maintenance, sourcing, and logistics in a programmatic fashion. Revenue in this segment was up 10% from a year ago and we saw greater volume in our State Department and F-16 programs. As you know, we acquired the Trax software business a year ago, and the integration has gone well. Trax is a best-in-class maintenance ERP offering, which supports nearly 150 airlines and MRO customers globally. We are growing the core Trax business by introducing it to customers it may not have been able to reach previously and laying the groundwork for Trax to be a new sales channel for our core parts and services offerings. Trax is a high-margin business and has a long runway for growth. That concludes the update for our three core segments. Our fourth segment, Expeditionary Services, is non-core for AAR. Sales in this segment were down 30% due to continued depressed volumes in both pallets and shelters as the government prioritized spending on products that are supporting Ukrainian forces. However, we now have visibility on funding going forward and we expect volumes to normalize during FY 2025. Overall, I am incredibly proud of the quarter and the year that we delivered and with that I'll turn it over to Sean.

Sean Gillen, CFO

Thanks, John. Total sales in the quarter grew 19% to $657 million. Excluding the impacts from the recently acquired product support business, organic revenue growth for the quarter was 5.5%. Our consolidated sales to commercial customers increased 20% or 4% on an organic basis, with growth in all three of our core segments. Our commercial distribution sales were a particular standout as we continued to drive sales growth on existing product lines and expanded newly won product lines as well. Our government sales increased 15% or 10% on an organic basis and improvement from a 7% decline in the prior quarter. The organic sales increase was driven by an ongoing recovery across our government program activities and increased order volume for our new parts distribution activities. Adjusted operating profit margin improved 150 basis points from 7.8% to 9.3%. On an organic basis, adjusted operating margins also increased by 60 basis points driven by part supply and airframe maintenance. Adjusted EBITDA margin increased 200 basis points from 9.6% to 11.6%. We have a clear roadmap for continued margin improvements over the medium term as our mix shifts towards our higher margin segments, and we will realize the product support synergies. We continue to roll out our airframe maintenance efficiency improvement initiatives, and the new airframe maintenance capacity expansion projects come online. Net interest expense for the quarter was $18.7 million reflecting the financing of the product support acquisition, and we expect Q1 interest expense to be approximately the same as Q4. The average diluted share count in the quarter was 35.4 million shares. Our effective adjusted tax rate increased from 23.6% to 26.4%. For FY 2025, we expect our effective adjusted tax rate to be approximately 28%. Adjusted diluted EPS increased from $0.83 to a record $0.88, reflecting the benefit of our growth and margin expansion. The product support acquisition was slightly dilutive to the quarter, but we expect it to be accretive to earnings in FY 2025. With that, I'll turn to the detailed results by segment. Parts Supply sales grew 9% to $260 million driven by 16% growth in distribution and 1% growth in USM. The growth in distribution was consistent with the double-digit growth we've experienced over the last several quarters as we continue to gain market share. Growth in the quarter was positively impacted by the continued ramp-up of our new product support lines, as well as greater purchases by both the U.S. and foreign governments. Our USM activities had a strong quarter as sales of USM parts were up significantly. However, this growth was largely offset by a decline in USM whole asset sales as supply remains constrained for these types of larger transactions. Parts supply adjusted operating margins increased by 130 basis points to 13.5% in the quarter, driven by distribution which benefited from scale and mix. The improvement of distribution sales to government customers also contributed to the increase in margins. Repair and Engineering sales increased 51% to $216 million. On an organic basis, sales were flat as growth in the hangars was offset by the roll-off of certain landing gear repair work. The product support integration is progressing well and its acquisition contributed $73 million to revenue in the fourth quarter. Demand remains strong for our heavy maintenance and component repair capabilities, and we look to continue to drive growth in these activities. Repair and engineering adjusted operating margins increased by 490 basis points to 11.5% in the quarter, driven by the inorganic impact of product support and continued efficiency gains in the hangars. Going forward, we expect to drive further margin expansion in this segment from the realization of product support synergies, rollout of our paperless hanger initiative, and the capacity expansions once they come online in FY 2026. Integrated Solution sales increased 10% to $163 million driven by growth in our State Department program, F-16 program, and from Trax. Integrated solutions adjusted operating margin decreased by 120 basis points to 5.6% in the quarter based on the mix within government programs. Turning to consolidated cash, cash flow provided by operating activities from continuing operations was $25 million in the quarter as we reduced non-product support inventory by $7 million. This cash flow generation and the EBITDA growth allowed us to de-lever from 3.6 times net debt to adjusted pro forma EBITDA at the closing of the product support acquisition to 3.3 times at the end of Q4. We are pleased with this reduction in leverage and will continue to balance opportunities to invest in the business and continued debt reduction. Our balance sheet and capital structure afford us sufficient flexibility to manage our business and make decisions that maximize shareholder value. With that, I will turn the call back over to John.

John Holmes, CEO

Great, thank you, Sean. Considering that this will be our first full year of results, including the margin-accretive product support acquisition, we are updating our three to five-year adjusted operating margin target that we communicated at last year's Investor Day to include the accretive impact of the product support acquisition. We previously expected 9% to 10% plus adjusted operating margins. We are increasing that to 10.5% to 11.5% plus as a result of the product support acquisition and our increased confidence in hitting the targets that we laid out a year ago. This translates to 12.5% to 13.5% plus adjusted EBITDA margins. We're confident in our ability to deliver 5% to 10% average annual organic sales growth and an average annual growth of 10% to 15% on organic adjusted EPS over the next three to five years. With respect to FY 2025, we anticipate continued growth and margin expansion. In Parts Supply, we expect new parts distribution will continue to benefit from the ramp-up of new distribution lines and the growth in commercial aftermarket demand. In USM, demand should continue to be very strong, although tight supply will likely limit revenue growth until more aircraft are retired over the next few years. In Repair and Engineering, our airframe maintenance hangars will continue to be largely full until our expansions in Miami and Oklahoma City come online in FY 2026, but we expect to continue to drive greater efficiency and higher profitability out of our existing footprint in the meantime. With respect to component repair, we expect to drive additional volume and margin expansion as we integrate and realize the synergies from the product support acquisition. In integrated solutions, although new government awards during FY 2025 would likely not commence until FY 2026, our pipeline of opportunity remains full and we continue to be well positioned to support the DOD's interests in applying commercial best practices in support of the government's lease. Looking to Q1 of FY 2025 specifically, we expect revenue growth of 15% to 19% and adjusted operating margin of approximately 9%. Last year at our Investor Day, we outlined a strategy and a vision, and we made tremendous progress in FY 2024, executing on those objectives. We continue to expand our leadership position in Parts Supply, broke ground on airframe maintenance expansions, integrated Trax, completed our largest ever acquisition, and drove higher margins through our investments in efficiency and differentiated capability. We are exceptionally well positioned to capitalize on the strength that we are seeing in our markets and I'm very excited about our future. With that, I'll turn it over to the operator for questions.

Operator, Operator

Thank you. Our first question comes from Michael Ciarmoli with Truist Securities. Your line is open.

Michael Ciarmoli, Analyst

Hey, good evening, guys. Thanks for taking the questions.

John Holmes, CEO

Hey, Michael. How are you?

Michael Ciarmoli, Analyst

Good. How are you doing? Just on that last item you just said, 9% margins, is that just more seasonality driving that down sequentially? What are the puts and takes for the margins dipping sequentially off the last quarter?

John Holmes, CEO

Yeah, that's exactly it. It's the seasonality. Even though seasonality in the business is much less severe than it was in years past, we still do experience a bit of it as the aircraft that we're working on and component volumes are a bit less during the summer because the airlines have the aircraft flying, although it's a nice increase year-over-year. I mean, Q1 last year was 7.3%. And obviously, we're forecasting 9% this year.

Michael Ciarmoli, Analyst

Got it. Regarding the organic targets, I’m a bit confused. You mentioned merchant expansion, but the EPS CAGR remains the same. It seems like there’s some higher interest expense in the short term, and you plan to reduce debt. I’m trying to understand these organic targets. What is my actual starting point? You had one quarter of Triumph, but if I adjust that for 2024, I can project a $6 number at your midpoint in three years, or I could take the $3.33 and arrive at a lower number. How should we interpret these targets?

John Holmes, CEO

I would interpret that the entire curve has increased, which means we are applying the same organic growth assumptions to a higher base that includes Triumph. We do expect that.

Michael Ciarmoli, Analyst

So like I could take an annualized $280 million that hits close for 2024, give or take, at those margins and make my assumptions off of that base?

John Holmes, CEO

That's right. That's right.

Michael Ciarmoli, Analyst

Okay. Okay. That helps. And then just last one that I had. Just any other color on USM. I mean I get it parts are tight. What are you seeing out there in the marketplace? I mean it seems like this aftermarket with the Boeing and Airbus struggles continues to benefit. Obviously, parts are hard to get any material out there. But any behavioral changes? Any color you can give from airline customers, or just kind of the lay of the land out there?

John Holmes, CEO

Sure. I'll address that in a few ways. Firstly, demand remains very strong across all areas, including maintenance, component repair, and parts. We are seeing significant strength from larger carriers like United, and while lower-cost carriers are slightly less robust, they still show strong demand. Overall, our large customers exhibit very strong demand. Regarding USM, it’s currently very tight for all the reasons mentioned. Last quarter, we started to differentiate between parts sales and whole asset sales. Despite the tightness, we are successfully acquiring high-demand individual parts, contributing to the 38% growth in individual parts sales that we reported for the first quarter. However, whole assets, particularly engines, are becoming increasingly hard to find, especially as the market has tightened over the past few quarters. These whole engines are being quickly utilized as soon as they become available because they hold more value for operators due to new engine issues and ETF, among others. While we expect these issues to resolve eventually, predicting the exact timing remains challenging.

Michael Ciarmoli, Analyst

Okay. Got it. Perfect. I’ll jump back in the queue. Thanks, guys.

John Holmes, CEO

Thanks, Mike.

Operator, Operator

Please stand by for our next question. Our next question comes from the line of Bert Subin with Stifel. Your line is open.

Bert Subin, Analyst

Hey, good afternoon. Thank you for the questions.

John Holmes, CEO

Thank you.

Bert Subin, Analyst

John, maybe just to pick up on that last note on the 1Q commentary for 15% to 19% growth, I guess that would imply something a little below probably around 4.5% organic relative to that 5% to 10% longer-term target. So how do we think about growth this quarter being sort of a lower end of that, next quarter maybe being below it? What changes as we go through time to get you to sort of 7.5% plus?

John Holmes, CEO

Yes. A few things. Again, you've got a bit of seasonality in this quarter, so that's driving some of it. But as we integrate Triumph Support, as we continue to see supply loosening in the U.S. end market. As we ramp up the new distribution deals that we continue to sign, all of those we expect will continue to drive increasing organic growth.

Bert Subin, Analyst

Okay. Regarding the distribution side, growth has been strong. Last quarter we saw 27% growth, and this quarter it's 16%. While the Triumph deal is on the horizon, it won't start impacting us for a few more quarters. In the meantime, we anticipate maintaining double-digit growth in distribution. Is there a path to sustain that growth over time?

John Holmes, CEO

Yes. And we see that continuing through this fiscal year.

Bert Subin, Analyst

Got it. And then...

John Holmes, CEO

And again, that's layering on some of the new deals that you just mentioned, but if you consider it in terms of same-store sales, contracts that we've had in place for years due to the overall strong demand, we continue to see healthy growth from our mature agreements as well.

Bert Subin, Analyst

Okay. That's mainly on the commercial side. You mentioned potentially going into BG&A. Obviously, you have a government business here. Is there a way to break down where the growth in distribution has been?

John Holmes, CEO

Yes. Great question. We did see a nice return to growth in government distribution this quarter. That had been on a decline for several quarters, and we did see an inflection point in the last couple of quarters of bookings, and now that’s translated into sales. So we would expect growth out of government distribution to continue through FY 2025 based on the value that we have. The focus on BG&A as well as electric, those are relatively new efforts for us. We're encouraged by some of the early wins that we've had on distribution product lines. And as we build out the sales force and build out our presence in the market, we would expect those to be contributors. But I would view that as more significant kind of 2026 and beyond and the growth in 2025 will be more commercial and a return to growth in government.

Bert Subin, Analyst

Got it. Okay. And then just last one for me for you, Sean. Pretty encouraging to see the net leverage tick down at the pace it did. I think you've talked about getting down sort of closer to 2 times over the next two years. Is that still the target? And what should we expect from future deleveraging?

Sean Gillen, CFO

Yes, that's correct. The goal is to achieve a net leverage of 2 times following the acquisition, with a long-term range of 1 to 2 times. As I've previously mentioned, the expected timeline to reach this target is around two years. I'm very pleased that in the first quarter, we were able to reduce leverage by 0.3 turns right from the start.

Bert Subin, Analyst

Great. Thanks so much.

Operator, Operator

Thank you. Please stand by for our next questioner. Our next question comes from the line of Scott Mikus with Melius Research. Your line is open.

Scott Mikus, Analyst

Good evening.

John Holmes, CEO

Hey, Scott.

Scott Mikus, Analyst

John, Sean, I wanted to ask on margins at Parts Supply. They were strong in the quarter at 13.5%, and slides mentioned favorable mix in distribution. So I'm just wondering, should we be using that as a jumping-off point for FY 2025? Or is there a more normalized margin that we should be using?

Sean Gillen, CFO

Yes. It had a mixed benefit, and part of that mix benefit was on the distribution side as the government sales improved. The margin associated with those tend to be a little bit higher than the commercial side. So that was part of it. So I think that 13.5% is a bit higher than the past few quarters, which were more in that kind of high 12%. So I think somewhere right in that zip code is a good jumping-off point. And we look to continue to drive margin as we get incremental sales volume as some of these new product lines ramp up. But somewhere in that zip code to the right starting point.

Scott Mikus, Analyst

Okay. And then recently, we've seen airlines talking about overcapacity, especially in the U.S. domestic market. So I'm just wondering, are you seeing any sort of a slowdown, whether it be in bookings for your hangers from more U.S. domestic-focused carriers or low-cost carriers? And then are they also ordering less parts as well?

John Holmes, CEO

Yes, we have noticed a change. We continue to experience strong demand from larger carriers like United and Delta, which are among our biggest customers. There has been a slight decline in demand from lower-cost carriers such as Southwest. However, the larger airlines have quickly addressed any demand reduction from these smaller carriers. Overall, the market remains robust. Based on our visibility in the hangars throughout the remainder of the fiscal year, we anticipate full capacity. The parts market remains strong overall, which is contributing to a constrained supply. If we do encounter a softening in the market and see aircraft being retired, it would be beneficial for us as we could acquire the assets needed to meet demand.

Scott Mikus, Analyst

Yes, I’ll stop there. Thank you.

John Holmes, CEO

Great. Thank you.

Operator, Operator

Please stand by for our next question. Our next question comes from the line of Louie DiPalma with William Blair. Your line is open.

Louie DiPalma, Analyst

John, Sean and good afternoon.

John Holmes, CEO

Hey, Louie. How are you doing?

Louie DiPalma, Analyst

Great. You announced the distribution expansion with auto engineering. Related to that, how large is your APAC business? And do you have opportunities to add APAC distribution to many of your other OEM partners?

John Holmes, CEO

Yes. Regarding APAC distribution, I don’t have the specific figures at the moment, but it is a significant and expanding market for us. Additionally, we have announced an expansion of our agreement with Sumitomo. They have been an excellent joint venture partner in Japan, and we anticipate ongoing growth in that market specifically. Our physical presence at the Triumph facility in Thailand is also beneficial as it aligns well with our distribution business. Several OEM partners we engage with are interested in having repair capabilities in the region for the parts we distribute, so these elements complement each other. While it’s still early, we are having positive discussions about potential further expansion in Asia due to the presence of the Triumph facility there.

Louie DiPalma, Analyst

Great. Thanks, John. And for, Sean, should the operating margin in the second half of the year be higher than the first half? And will the exit rate when taking into account some initial synergies approach that 10% threshold?

Sean Gillen, CFO

Yes. So one, the operating margin as we move through this year, we expect will increase, which is similar to the past year as well. But with this year, we'll have the benefit, we'll see in some of the synergies as we move through the fiscal year. Our goal is, we've got to revise medium targets in terms of operating margin, but as we think about this year, by the end of it, getting towards that 10% is the target.

Louie DiPalma, Analyst

Great. And one last one. The government distribution improved. The return to growth, is that sustainable in this fiscal year? Or should we expect that to be lumpy?

John Holmes, CEO

I would break that down into two parts. First, the overall growth in government is coming from two different areas. One is the sales of new parts to the government, which we expect to maintain a consistent growth rate throughout the year based on our current backlog. The second source of growth we experienced this quarter is due to the increased operational tempo at several larger programs, particularly with the WASS contract we have with the State Department. This aspect is harder to predict because we are working at the pace of the government, and we often do not know the missions we are undertaking until they are actually executed. We are confident about the growth rate from new parts distribution sales to the government, and we hope that the increase in operational tempo we saw in the fourth quarter will persist throughout this fiscal year on the program side.

Louie DiPalma, Analyst

Sounds good. Thanks, John and Sean.

John Holmes, CEO

Thanks, Louie.

Operator, Operator

Please stand by for our next question. Our next question comes from the line of Ken Herbert with RBC. Your line is open.

John Holmes, CEO

Hi, Ken.

Kenneth Herbert, Analyst

Yes, hey, John. How are you?

John Holmes, CEO

Great. How are you doing?

Kenneth Herbert, Analyst

Good. Can you just break out within Parts Supply distribution in particular, what was the growth of commercial versus government if you can provide that in the quarter?

John Holmes, CEO

Let’s see if we have that handy. We may need to get back to you on that specific detail. They were both great.

Kenneth Herbert, Analyst

Okay. We'll follow up on that. But I guess, have you seen any incremental pushback on pricing from customers, specifically on the commercial side as it relates to some of your distribution agreements?

John Holmes, CEO

We have not. We have not. And as you're well aware, we obviously buy to the extent that there's OEM price increases, we pass that along. Certainly, there are reactions to certain of those price increases depending on the severity. But it has not impacted the order flow.

Sean Gillen, CFO

In terms of distribution growth, the commercial sector experienced growth in the low teens, while the government sector saw a strong recovery with nearly 20% growth year-over-year.

Kenneth Herbert, Analyst

Okay. I mean it looks like the commercial growth was sequentially lower in the fourth quarter than the third quarter. I remember you called out as part of the third quarter results. Was there anything in particular for that slower growth, maybe tougher comps on the commercial side or anything in particular we should keep in mind?

John Holmes, CEO

No. I won't point anything in particular. I mean you do see ebbs and flows in order volume and that largely depends on when we receive material from our OEM partners. And as you know, the supply chains are still quite dynamic right now. But I wouldn't point to anything in particular.

Kenneth Herbert, Analyst

Okay, great. In Integrated Solutions, was there any one-time factor this quarter? It seems there were some issues with the State Department contract that affected margins. Should we view this as a one-time occurrence, or how should we consider the starting point for margins in that business as we move into fiscal 2025?

Sean Gillen, CFO

Yes. There were no significant onetime items as it relates to margin in the quarter in Integrated Solutions. The mix within government was some of the sales mix towards some of the slightly lower-margin programs, but there wasn't anything kind of onetime associated with that.

Kenneth Herbert, Analyst

So low single digits maybe the right way to think about segment margins for that business?

Sean Gillen, CFO

Well, I think in the near term, yes, but as Trax ramps, that will be accretive to the margins and will move into this fiscal year. That will be accretive to the margin portfolio. And then in the programs piece, kind of that zip code that you mentioned is about the right place for margin expectations.

Kenneth Herbert, Analyst

Okay. Perfect. I’ll stop there. Thanks, John. I’ll pass it back.

John Holmes, CEO

Great. Thanks, Ken.

Operator, Operator

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

John Holmes, CEO

Great. Well, thank you, everybody, for your time and attention. Again, we're extremely proud of the results. We're excited about FY 2025, and we look forward to speaking with you again in September. Thank you.

Operator, Operator

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