Earnings call transcript: AAR Corp beats Q1 2026 forecasts, stock rises

AAR Corp (NYSE:AIR) reported its first-quarter fiscal 2026 earnings, significantly surpassing market expectations with an adjusted EPS of $1.08 compared to a forecasted $1.00. The company reported a revenue of $740 million, exceeding the expected $691.5 million. According to InvestingPro data, the company maintains a FAIR financial health score of 2.3, with particularly strong momentum metrics. Following the earnings announcement, AAR Corp’s stock rose by 1.89% in regular trading hours and an additional 2.43% in after-hours trading, reflecting investor optimism. The stock currently trades near its InvestingPro Fair Value, suggesting balanced market pricing.

Key Takeaways

• AAR Corp’s EPS exceeded forecasts by 8%, showcasing strong financial performance.
• Revenue increased by 13% year-over-year, driven by a 17% rise in organic sales.
• The stock price increased by 1.89% during regular hours and 2.43% after-hours.
• The company is expanding its software solutions and maintenance facilities.
• Future guidance indicates continued growth with a focus on acquisitions.

Company Performance

AAR Corp demonstrated robust performance in the first quarter of fiscal 2026, with significant growth in both revenue and EPS. The company benefited from a strong increase in commercial sales, which constituted 71% of total sales, and a strategic focus on expanding its aviation aftermarket capabilities. The acquisition of Aerostrat and expansion of Trax software solutions indicate a commitment to enhancing service offerings and operational efficiency.

Financial Highlights

• Revenue: $740 million, up 13% year-over-year
• Earnings per share: $1.08, up 27% from $0.85
• Adjusted EBITDA: $86.7 million, an 18% increase
• Commercial sales: 71% of total sales
• Government sales: 29% of total sales

Earnings vs. Forecast

AAR Corp’s actual EPS of $1.08 surpassed the forecasted $1.00, resulting in an 8% positive earnings surprise. Revenue also exceeded expectations by 7.01%, marking a strong start to fiscal 2026. This performance is consistent with the company’s historical trend of exceeding market expectations, particularly in the growing aviation aftermarket sector.

Market Reaction

Following the earnings release, AAR Corp’s stock price increased by 1.89% during regular trading hours and an additional 2.43% in after-hours trading, reaching $78.77. This positive movement reflects investor confidence in the company’s ability to deliver strong financial results and maintain growth momentum. The stock remains within its 52-week range, with a high of $86.43 and a low of $46.51.

Outlook & Guidance

AAR Corp projects Q2 sales growth between 7-10% and an adjusted operating margin of 9.6-10%. The company anticipates full fiscal year organic sales growth approaching 10%, driven by targeted acquisitions and increased market share in parts distribution. AAR also expects to be cash positive in the upcoming quarter and throughout the full fiscal year.

Executive Commentary

CEO John Holmes emphasized the company’s strong position in the aviation aftermarket, stating, "We are well positioned in the most attractive segments of the growing aviation aftermarket." Holmes also highlighted the progress in new parts distribution, saying, "We continue to be very, very pleased with our progress in the new parts distribution market."

Risks and Challenges

• Supply chain disruptions could impact the availability of aircraft parts.
• Market competition may intensify, affecting market share.
• Macroeconomic pressures could influence demand in the aviation sector.
• Integration challenges with new acquisitions could arise.
• Regulatory changes in the aviation industry could impact operations.

Q&A

During the earnings call, analysts inquired about the company’s strategy to improve parts supply and capitalize on distribution wins. AAR Corp’s management highlighted their focus on cross-selling component repair services and increasing exposure to the engine aftermarket. The development of Trax as a digital marketplace was also discussed as a key growth area.

Full transcript - AAR Corp (AIR) Q1 2026:

Conference Call Operator: Hello, and thank you for standing by. Welcome to AAR Fourth Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press STAR-1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press STAR-1-1 again. I would now like to hand the conference over to management. You may begin.

John Holmes, Chairman, President, and Chief Executive Officer, AAR Corporation: 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 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 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 three, there are three key takeaways from our Q1 FY26 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 than 20% organic growth in each of the last four years. Our exclusive distribution model resonates with OEMs and is helping to drive continued market share gains. Third, our Trax software solution has continued its momentum on the back of the major win we announced with Delta Air Lines in June.

Additionally, we further enhanced our software capabilities with the acquisition of Aerostrat, which we completed in the quarter. Turning now to slide four, 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, improve margins 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 multi-year 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 progress 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 hangar solution, which drove increased throughput, leading to another quarter of sales growth out of the same hangar 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 the acquired 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 IT 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 the world’s largest airlines. We don’t announce all of Trax’s wins, but this quarter we’re proud to say that JetBlue, a longtime 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 the 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, and with that, I’ll turn it over to Sean to discuss the results in more detail.

Sean Gillen, Chief Financial Officer, AAR Corporation: Thanks, John. Looking now to slide five, 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 is 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 parts 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 six. Parts 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 parts 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 margins also increased from 12.1% to 12.9%. Turning now to slide seven for repair and engineering. Sales decreased 1% to $215 million year over year. However, excluding the impact of the landing gear divestiture, organic sales growth in repair and engineering was 8%, as demand remained strong for our MRO activities, and we continued 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 increasing to 13.1% from 12.8%. First quarter adjusted operating income of $24.9 million was 2% higher from the same period last year, and adjusted operating margin 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 hangar initiatives, and the capacity expansions that are in process. Looking now to slide eight. Integrated solution 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 nine of the presentation. During the quarter, our net debt leverage increased slightly from 2.72 times in the fourth quarter to 2.82 times. 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 parts 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 12th. While these investments drove a cash use in the quarter, we expect to be cash positive in Q2 and for the full fiscal year. With that, I will turn the call back over to John.

John Holmes, Chairman, President, and Chief Executive Officer, AAR Corporation: 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 of 9.6% 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 strengths 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. With that, we’ll turn it over to the operator for questions.

Conference Call Operator: Thank you. Ladies and gentlemen, as a reminder to ask a question, please press STAR-1-1 on your telephone, then wait for your name to be announced. To withdraw your question, please press STAR-1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Ken Herbert with RBC. Your line is open.

Yeah, hi. Good afternoon, John and Sean. Maybe just first question. You raised sort of the full-year expectation and now approaching 10% versus up 9% coming out of the fourth quarter. Is that all just better results in the parts supply, or maybe you can just parse out sort of what’s behind the slight uptick in the full-year expectations?

John Holmes, Chairman, President, and Chief Executive Officer, AAR Corporation: Yeah, I would say parts supply definitely is leading the way. We had a very strong quarter with 27% organic growth in parts supply. We continue to be very, very pleased with our progress in the new parts distribution market. The wins that we’ve got there continue to gain traction. Really, as you mentioned, parts supply is driving the improved outlook for the year.

Can you just comment on the pipeline for new distribution agreements? 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?

Yeah, I would say the majority of the wins over the last several years have been our taking share. There definitely are net new contracts that come on the market. The one we announced this past quarter with AmSafe Bridport was an example of that. The majority have been our taking share. We’ve got a different model in distribution, that exclusive relationship only, where we have an exclusive relationship with the OEM, where we don’t represent competing products, and they have an exclusive relationship with us where they don’t work with competing distributors for a given product or a given market. That model is resonating. As we continue to win more business, more doors are open to us. Whereas we might not have been thought of as a leading new parts distributor two or three years ago, we’re invited to participate in a lot more conversations now, which is encouraging.

Great. Thanks, John. Nice quarter. I’ll pass it back there.

Great. Thank you, Ken.

Conference Call Operator: Please stand by for our next question. Our next question comes from the line of Michael Leshock with KeyBanc Capital Markets. Your line is open.

Hey, good afternoon. 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?

John Holmes, Chairman, President, and Chief Executive Officer, AAR Corporation: No, I think you’ve got it. We would maintain that outlook for distribution and would expect to continue to grow above market there.

Okay. 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 any way to frame also how much more there are to come. Thank you.

Yeah, great, great question. 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. 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 two sites, one in Dallas and one in Wellington, Kansas. That work is now complete. We’re still ramping up efficiency in the two sites that received the work. The focus now has shifted to executing on that cross-selling strategy. We’ve got a long pipeline of opportunities. I was just with a major carrier yesterday making a pitch myself as part of that strategy.

To date, we’re having a lot of encouraging conversations, but the results are going to be more meaningful in the future. 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 sell 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. 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. Appreciate it. Thank you.

Conference Call Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Scott Michus with Nilius Research. Your line is open.

John, Sean, nice results. I wanted to just circle back on the USM sales. In the opening remarks, you mentioned meaningful uptick. I’m just curious, has that trend continued into the current quarter? Is the visibility on whole assets coming to market improving, given that next year the fleet’s going to need to absorb probably 1,500 narrowbody aircraft through new aircraft deliveries and also the return to service of GTF grounded aircraft?

John Holmes, Chairman, President, and Chief Executive Officer, AAR Corporation: Great questions, and you’re citing all the right industry dynamics. We did start to see a loosening of supply in the fourth quarter, and that continued through the first quarter. That did drive 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. Also, just thinking about the opportunity there, if correct me if I’m wrong here, but I think USM has been margin accretive to parts supply’s overall margins. I’m just wondering, what’s kind of the opportunity for this year from a margin perspective at parts supply if more USM does come available to market? Could this be a business that’s running 14%, 15% operating margin business or operating margins this year?

Yeah. A good question on parts supply. Distribution from a margin standpoint has been performing extremely, extremely well. In the recent quarters, if you look back through 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. The supply, even though it’s loosening up, is still actually quite tight. The spread that we’re able to make on assets in USM is narrower than it would be historically. We believe we’re in the very early innings of this. As you see more supply come onto 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.

Okay. Got it. 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 there?

Yeah, great, great question. You’re hitting on the right theme in as much as the team that came with Aerostrat are extremely talented. We’re really excited about the team that came with it. We noted this publicly, there is an earnout associated with the transaction that applies to the key team members. That’s a three-year earnout. We feel pretty good about their financial incentive to stay around. Even more than the financial incentive, our goal is to fully integrate them into AAR, the Trax team, and really help them grow. We’re encouraged, it’s early days, obviously, but we’re encouraged by kind of the two-way revenue synergy there. In as much as Aerostrat already is in customers where Trax is not, 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 provides services to dozens and dozens of customers where Aerostrat is not yet providing services. Our goal is to add the Aerostrat functionality to the Trax offering and sell that as an additional service to the Trax customers. A lot of exciting conversations amongst our software team.

All right. Thank you.

Conference Call Operator: Thank you. Our next question comes from the line of Sam Strassaker with Choice Security. Your line is open.

Hi guys. Thanks for taking the question. On from Mike from Moly 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 parts 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?

John Holmes, Chairman, President, and Chief Executive Officer, AAR Corporation: Yeah. This was a big investment quarter. We saw a lot of opportunities across the full parts supply side in the VOC and distribution as well as in USM. As we mentioned, we are encouraged by the opportunity to make investments in that business to support its continued rapid growth. At the same time, we’ve got to focus on being cash positive for the rest of the year. We want to balance those priorities.

Great. I’ll keep it at one for now. Thank you.

Great. Thank you.

Conference Call Operator: Thank you. As a reminder, ladies and gentlemen, that’s STAR-1-1 to ask a question. Our next question comes from the line of Noah Levitz with Wembley. Your line is open.

Thanks, John and Sean. Good afternoon. Thanks for taking my questions. To start off, this is more a strategic or high-level question, but a lot of your peers have commented on the notable strength specific to the engine aftermarket. Can you talk about your exposure, whether across parts supply or repair and engineering, to engine-related aftermarket services, any key themes, or just put some takes there? Thanks.

John Holmes, Chairman, President, and Chief Executive Officer, AAR Corporation: Yeah, absolutely. I mean, we have significant engine market exposure. For example, in the USM business, 80% of our parts business in USM are engine, I mean, are engine parts. In our distribution business, we distribute engine-related accessories. Our largest line at Unison, for example, which is a unit of GE, are all engine-related parts, and that’s our largest single product line within distribution. The majority of the parts activity in the parts supply segment is related to engines. Also, in the component services business, we have significant engine-related capability, particularly in our Grand Prairie operation in Texas. 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. I would say across the company’s broad engine exposure, which is helping to drive the significant growth that we’ve been demonstrating.

Awesome. Just another quick one, drilling in on Trax. Can you talk about how far along you are making Trax into more of a digital marketplace, which can hopefully lead to more cross-sell opportunities with your parts distribution business? Kind of what trends are you seeing there? Thanks.

Yeah, thanks for asking about that. You know, again, really encouraged with the continued market uptake on Trax. I mean, the challenge Trax 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. 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.

Great, thank you.

All right. Thank you.

Conference Call Operator: Thank you. Ladies and gentlemen, I am showing no further questions in the queue. I will now like to turn the call back over to management for closing remarks.

John Holmes, Chairman, President, and Chief Executive Officer, AAR Corporation: Great. Thank you. I really appreciate everybody’s time today and look forward to discussing our Q2 results in a few months. Thank you.

Conference Call Operator: Ladies and gentlemen, that concludes today’s conference call. Thank you for your participation. You may now disconnect.

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