Executive Summary / Key Takeaways

• AAR Corp. is strategically transforming into a more focused, higher-margin aerospace aftermarket leader, driven by robust demand in commercial and government sectors.
• The company delivered a strong Q1 FY26 with 17% organic adjusted sales growth and a 27% increase in adjusted diluted EPS, propelled by its Parts Supply segment and operational efficiencies.
• AAR's differentiated software solutions, particularly Trax and the newly acquired Aerostrat, are expanding its technological moat and driving significant, high-margin growth opportunities.
• Strategic portfolio optimization, including the divestiture of the Landing Gear Overhaul business and recent acquisitions like ADI, is enhancing profitability and market share in key areas.
• AAR is committed to deleveraging, aiming for a net leverage target of 2.0 to 2.5 times in fiscal year 2026, while continuing to invest in organic growth and accretive acquisitions.

A Focused Flight Path in the Aerospace Aftermarket

AAR Corp., founded in 1951, has evolved into a global aerospace and defense aftermarket solutions company, strategically refining its portfolio to capitalize on high-growth, high-margin opportunities. Headquartered in Wood Dale, Illinois, AAR's core business revolves around providing essential products and services to commercial aviation, government, and defense markets worldwide. This strategic evolution, marked by targeted acquisitions and divestitures, has positioned AAR as a formidable player in a dynamic industry. The company's overarching strategy emphasizes driving growth through market share capture and new business, improving margins through cost efficiency and synergy realization, and increasing the intellectual property in its offerings through digital and other investments.

The aerospace aftermarket is currently experiencing robust demand, fueled by elevated consumer air travel, an aging global fleet, and increasing requirements from government sectors. These broad industry trends are expected to persist through calendar year 2025, providing a strong tailwind for AAR's specialized services. The company's foundational strengths lie in its comprehensive distribution network, extensive MRO capabilities, and increasingly, its differentiated digital solutions.

AAR's technological differentiation is a critical component of its competitive strategy. At its core is the Trax software solution, a cloud-based electronic enterprise resource platform for the MRO industry. Trax offers a full suite of paperless mobility apps that are automating MRO workflows with artificial intelligence. This technology provides tangible benefits by streamlining maintenance processes, enhancing data accuracy, and improving operational performance for airlines and MROs. For instance, Trax has successfully doubled its revenue from $25 million two years ago to approximately $50 million today, demonstrating its market traction and scalability. The company aims to double Trax's revenue again, with significant upside from upgrading existing users to the new eMRO and eMobility solutions, which can increase license fees by four to five times.

Further enhancing its digital capabilities, AAR acquired Aerostrat Corp. in August 2025 for $15 million plus contingent consideration. Aerostrat is a leading long-range maintenance planning software provider, and its flagship tool, Aerros, supports over 5,000 aircraft by automating complex scheduling and simplifying aircraft allocation. The integration of Aerostrat immediately expands the reach of AAR's software offerings and the enterprise resource planning (ERP) capabilities of Trax. This strategic pairing creates opportunities for further integration and scope expansion for both existing Trax and Aerostrat customers. AAR is also investing in a Trax e-commerce marketplace initiative, with announcements expected in calendar year 2026, aiming to create significant synergy by leveraging the Trax operator base to offer parts and repair solutions. These technological advancements are central to AAR's competitive moat, contributing to higher-margin revenue streams, strengthening its market positioning, and supporting its long-term growth strategy.

Strategic Evolution and Competitive Positioning

AAR's history is one of continuous adaptation and strategic refinement. Significant shifts began in fiscal year 2018 with the divestiture of its Contractor-Owned, Contractor-Operated (COCO) business. More recently, the company completed the sale of its Landing Gear Overhaul (LGO) business in Q4 FY25, a move that generated $48 million in cash and was immediately accretive to margins. This divestiture allows AAR to focus on higher-growth, higher-margin aftermarket activities and foster an integrated approach between product support, heavy maintenance, and parts supply.

In September 2025, AAR further bolstered its Parts Supply segment with the acquisition of American Distributors Holding Co., LLC (ADI) for $146 million. ADI, a leading distributor of components and assemblies, generated $149 million in revenue and $15.2 million in EBITDA for the trailing twelve months ended June 30, 2025. This acquisition immediately expands AAR's new parts distribution activity with additional product lines and extensive OEM relationships, leveraging AAR's broad market reach to increase ADI's market share and product offering.

In the competitive landscape, AAR operates alongside major players like HEICO Corporation (HEI), TransDigm Group (TDG), and RTX Corporation (RTX). AAR's Parts Supply segment, particularly its new parts distribution activities, has been its fastest-growing area, averaging over 20% organic growth in each of the last four years. This growth is driven by an exclusive distribution model that resonates with OEMs, allowing AAR to gain market share. While competitors like HEICO are known for their focus on high-margin proprietary parts and innovation, AAR's model emphasizes global scale, independence, and highly technical sales capabilities across both commercial and government end-markets. AAR's multi-year exclusive distribution agreement with AmSafe Bridport for KC-46 and C-40 platforms, and its supply chain alliance with the U.S. Defense Logistics Agency, exemplify its strength in securing long-term, high-value contracts.

In Repair & Engineering, AAR has positioned itself as a top choice in North America for heavy maintenance. The company is expanding its Oklahoma City and Miami airframe MRO facilities, adding 15% capacity to its network, with these expansions already sold out and expected to come online in calendar year 2026. This contrasts with some competitors who might face declines due to airline capacity cuts, as AAR's core customers have indicated they would prioritize AAR's services. While TransDigm excels in cost efficiency and proprietary components, AAR differentiates through comprehensive MRO services, including structural components, engine and airframe accessories, and interior refurbishment, as well as developing Parts Manufacturer Approval (PMA) parts. AAR's recent multi-year exclusive agreement with Chromalloy to distribute PMA parts for PW4000 and CF6-80C2 engine platforms further expands its offerings.

The Integrated Solutions segment, with its Trax software, provides a distinct competitive advantage. The selection of Trax by Delta Airlines (DAL) to modernize its maintenance and engineering systems, a multi-year implementation, is a testament to Trax's scalability and advanced capabilities. This positions AAR ahead of competitors relying solely on traditional MRO services, as it offers a digital solution that streamlines operations and enhances efficiency. AAR's government programs, including a joint venture with KIRA (KALS LLC) for U.S. Navy E-6B pilot training, highlight its expertise in customized performance-based supply chain logistics for the DoD and DoS, an area where its integrated solutions offer significant cost savings through commercial best practices.

Financial Performance and Outlook

AAR delivered a very strong start to fiscal year 2026. For the three months ended August 31, 2025, the company reported consolidated sales of $739.6 million, an 11.8% increase over the prior year quarter. Excluding the divested Landing Gear Overhaul business, organic adjusted sales growth was a robust 17%. This growth was broad-based, with commercial sales increasing 10.7% and government sales rising 14.6%.
Profitability saw significant improvement, with adjusted EBITDA increasing 18% to $86.7 million, and adjusted EBITDA margins expanding to 11.7% from 11.3% in the prior year quarter. Adjusted operating income grew 21% to $71.6 million, pushing the adjusted operating margin to 9.7% from 9.1%. This margin expansion was primarily driven by improved operating efficiencies and exceptional performance in the Parts Supply segment. The strong top-line growth and margin expansion translated into a 27% year-over-year increase in adjusted diluted EPS, reaching $1.08.

The Parts Supply segment was a standout performer, with sales growing 27.3% to $317.8 million and operating income increasing 35.9% to $40.9 million. This was fueled by double-digit increases in both new parts distribution (23.9%) and used serviceable material (USM) activities (32.1%). While USM margins have been somewhat depressed due to tight supply, management expects them to expand as more supply becomes available. The Repair & Engineering segment, despite a slight sales decrease due to the LGO divestiture, showed 8% organic sales growth, reflecting strong MRO demand and efficiency gains. Integrated Solutions sales increased 9.5% to $185 million, driven by higher government program activity, leading to a 26% increase in operating income.

From a liquidity perspective, AAR's net debt leverage increased slightly from 2.72 times in Q4 FY25 to 2.82 times in Q1 FY26. This was a result of strategic investments, including over $50 million in inventory for Parts Supply and $15 million for the Aerostrat acquisition. However, the company expects to be cash positive in Q2 FY26 and for the full fiscal year. As of August 31, 2025, AAR had $80 million in cash and cash equivalents and $1028.40 million in working capital. The recent public offering of 3 million shares of common stock, with an option for an additional 450,000 shares, is intended to repay outstanding borrowings under its revolving credit facility and fund general corporate purposes, including future acquisitions. This move further strengthens its financial flexibility.

Looking ahead, AAR's management has provided an optimistic outlook for fiscal year 2026. For Q2 FY26, the company expects sales growth of 7% to 10%, excluding the impact of the divested Landing Gear business, and an adjusted operating margin of 9.6% to 10%. For the full fiscal year, organic sales growth is projected to approach 10%, an increase from the 9% previously cited. Adjusted operating margins are also expected to continue improving from the 9.6% delivered in fiscal year 2025. This margin expansion will be driven by the full realization of $10 million in Product Support acquisition synergies, continued rollout of paperless hangar initiatives, and increased throughput from the already sold-out MRO hangar expansions.

Risks and Challenges

Despite the positive outlook, AAR faces several risks. The dynamic nature of the USM market, characterized by tight supply, can lead to narrower profit spreads, although management anticipates improvement as more assets become available. International operations expose the company to legal and geopolitical risks, as evidenced by the Russian bankruptcy litigation and the Nepalese enforcement proceeding. While AAR believes it has strong defenses and does not expect a material adverse effect, these situations highlight the complexities of global business. The company also carries a performance guarantee with no financial cap related to a divested Composites business, which has resulted in a customer claim of at least $32 million. Furthermore, potential tariffs could impact OEM pricing, requiring AAR to effectively pass these costs on to end-users to maintain margins.

Conclusion

AAR Corp. is executing a clear and compelling strategy to solidify its position as a leader in the aerospace and defense aftermarket. By focusing on high-growth areas like new parts distribution, optimizing its MRO footprint through strategic acquisitions and capacity expansions, and leveraging its innovative digital solutions, AAR is building a resilient and profitable business. The company's strong Q1 FY26 results, characterized by robust organic sales growth and significant margin expansion, underscore the effectiveness of its strategic initiatives. With a disciplined approach to capital allocation, a clear roadmap for deleveraging, and a commitment to technological differentiation through platforms like Trax and Aerostrat, AAR is well-positioned to capitalize on the enduring demand in the aviation aftermarket. Investors should recognize AAR's transformation into a more focused, technologically advanced, and higher-margin enterprise, poised for sustained growth and enhanced shareholder value.