AAR's Q1 2026: Contradictions Emerge on Revenue Growth, Parts Supply Margins, Inventory Strategy, USM Recovery, and Trax Expansion

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 23, 2025

Financials Results

• Revenue: $740M adjusted sales, up 13% YOY; organic growth 17% excluding prior-year Landing Gear sales of $19M
• EPS: Adjusted diluted EPS $1.08, up 27% YOY (from $0.85)
• Operating Margin: Adjusted operating margin 9.7%, up from 9.1% in the prior-year quarter

Guidance:

• Q2 sales growth expected 7–10% YoY, excluding Landing Gear; prior-year Q2 included $20.4M Landing Gear sales.
• Q2 adjusted operating margin expected 6–10%.
• FY26 organic sales growth now expected to approach 10% (raised from ~9% in July).
• Expect to be cash positive in Q2 and for the fiscal year.

Business Commentary:

• Strong Financial Performance and Sales Growth:
• AAR Corp reported total adjusted sales of $740 million for Q1 FY 2026, a 13% year-over-year increase, excluding the sale of Landing Gear.

• The company achieved 17% organic adjusted sales growth, driven by significant top-line growth and higher profitability in all segments.

• Parts Supply Segment Success:

• Part Supply sales grew by 27% to $318 million from the same quarter last year, with 13.8% adjusted EBITDA margin and 12.9% adjusted operating margin.

• This growth was supported by over 20% organic growth in new parts distribution, particularly in both commercial and government end markets.

• New Distribution and Market Share Gains:

• AAR's new parts distribution activities saw over 20% organic growth, marking significant marketshare gains.

• The success is attributed to the company's exclusive distribution model, with key wins such as the multiyear exclusive distribution agreement with AmSafe Bridport.

• Software and IP Investments and Acquisitions:

• AAR's Trax software solution continued its momentum, with a major win from Delta Airlines and the acquisition of Aerostrat.

• These investments are aimed at increasing intellectual property and expanding software capabilities, enhancing market position and customer offerings.

• Margin Expansion and Cost Discipline:

• Adjusted operating margin increased to 9.7% from 9.1%, and adjusted EBITDA margins improved to 11.7% from 11.3%.
• Cost discipline, paperless hangar solution implementation, and product support integrations contributed to margin expansion and efficiency improvements.

Sentiment Analysis:

• Management called it “a very strong start,” with adjusted sales up 13% to $740M (organic +17% ex-Landing Gear), adjusted EBITDA +18% with margin up to 11.7% from 11.3%, adjusted operating margin up to 9.7% from 9.1%, and adjusted diluted EPS +27% to $1.08. They also raised FY26 organic sales growth outlook to “approaching 10%.”

Q&A:

• Question from Kenneth Herbert (RBC Capital Markets): You raised the full-year expectation to approaching 10% versus ~9% previously. Is that all driven by Part Supply? What’s behind the uptick?
  Response: Part Supply strength—especially new parts distribution—is driving the improved full-year outlook.

• Question from Kenneth Herbert (RBC Capital Markets): Comment on the pipeline for new distribution agreements—are you taking share or are these first-time opportunities?
  Response: Mostly share gains via an exclusive OEM distribution model; momentum is opening more opportunities, with some net-new wins like AmSafe.

• Question from Michael Leshock (KeyBanc Capital Markets Inc.): Do you still expect to outgrow the market within distribution at a mid-teens rate?
  Response: Yes; maintaining an above-market, mid-teens growth outlook for distribution.

• Question from Michael Leshock (KeyBanc Capital Markets Inc.): Update on cross-selling Component Services through Repair & Engineering and success so far?
  Response: Integration is complete; early innings of cross-sell with a robust pipeline and longer sales cycles; expect more material results ahead.

• Question from Scott Mikus (Melius Research LLC): Has the meaningful uptick in USM sales continued, and is visibility on whole assets improving?
  Response: Supply loosened in Q4 and continued in Q1, boosting USM; more qualifying assets are coming to market, and AAR is investing accordingly.

• Question from Scott Mikus (Melius Research LLC): What is the margin opportunity in Part Supply if USM availability increases—could operating margins reach 14–15%?
  Response: Distribution margins are strong; USM margins are currently compressed by tight supply but should expand as supply improves.

• Question from Scott Mikus (Melius Research LLC): For Aerostrat, are there retention agreements for key employees?
  Response: Yes—a 3-year earn-out for key team members; integration with Trax aims to drive two-way revenue synergies.

• Question from Samuel Struhsaker (Truist Securities, Inc.): You invested in inventory to support Part Supply; are you satisfied with current levels?
  Response: Q1 saw significant inventory investments across distribution and USM to support growth, balanced with a goal to be cash positive for the rest of the year.

• Question from Noah Levitz (William Blair & Company L.L.C.): Discuss your engine aftermarket exposure across Part Supply and Repair & Engineering.
  Response: Exposure is significant: ~80% of USM parts are engine; largest distribution line (Unison/GE) is engine-related; expanding engine repair capabilities.

• Question from Noah Levitz (William Blair & Company L.L.C.): Progress on making Trax an e-commerce marketplace to cross-sell parts?
  Response: Actively investing to leverage Trax data and customer base for parts/repair solutions; expect updates in H1 2026.