AAR Corp's Q1 2026: Contradictions Emerge on USM Growth, Trax Potential, Parts Supply, and Engine Market Exposure

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

Date of Call: None provided

Financials Results

• Revenue: $740M adjusted sales, up 13% YOY (17% organic excluding prior-year landing gear sale)
• EPS: $1.08 adjusted diluted EPS, up 27% YOY (vs $0.85 prior year)
• Operating Margin: 9.7% adjusted operating margin, up from 9.1% in the prior year

Guidance:

• Q2 sales growth expected 7%–10%, excluding last year’s $20.4M landing gear sale in Q2.
• Q2 adjusted operating margin expected at 9.6%–10.0%.
• FY26 organic sales growth now expected to approach ~10% (vs 9% prior outlook).
• Expect to be cash positive in Q2 and for the full fiscal year.

Business Commentary:

* Strong Financial Performance: - AAR Corporation reported total adjusted sales of $740 million for Q1 FY2026, up 13% year-on-year, excluding a $19 million sale of landing gear from the previous year. - The growth was driven by significant top-line growth with higher profitability, particularly in the parts supply segment with 27% organic growth.

• Parts Supply Expansion:
• Parts supply sales grew 27% to $318 million, driven by over 20% growth in new parts distribution activities in both commercial and government end markets.

• This expansion was supported by exclusive distribution agreements, such as the one with AmSafe Bridport, and a pickup in USM sales.

• Software and IT Investments:

• AAR acquired Aerostrat, a maintenance planning software provider, for $15 million, expanding the reach of its Trax software solutions.

• The acquisition is expected to provide growth opportunities through further integration and scope expansion among existing Trax customers.

• Profitability Improvement:

• Adjusted EBITDA increased 18% to $86.7 million, with adjusted operating income rising 21% to $71.6 million.
• Margin expansion was driven by strong performance in the parts supply segment, cost discipline, and continued rollout of paperless hangar solutions.

Sentiment Analysis:

• Management called it a “very strong start,” with adjusted sales up 13% to $740M, adjusted operating margin improving to 9.7% (from 9.1%), and adjusted diluted EPS up 27% to $1.08. Parts supply grew 27%. They raised FY26 organic growth outlook to approaching 10% and expect to be cash positive in Q2 and for the full year.

Q&A:

• Question from Ken Herbert (RBC): You raised the full-year outlook to approaching 10% (vs 9% prior). Is this mainly parts supply, and what’s behind the uptick?
  Response: Parts supply is the primary driver, led by strong new parts distribution wins gaining traction.

• Question from Ken Herbert (RBC): What’s the pipeline for new distribution agreements—share gains or net-new contracts?
  Response: Mostly share gains; the exclusive distribution model is resonating and opening more OEM opportunities.

• Question from Michael Leshock (KeyBanc Capital Markets): Do you still expect to outgrow the market in distribution, potentially mid-teens?
  Response: Yes—distribution outlook unchanged; they expect to continue above-market growth.

• Question from Michael Leshock (KeyBanc Capital Markets): Update on cross-selling component services via repair and engineering; progress and potential?
  Response: Early innings; integration complete and pipeline is large, but sales cycles are longer, so benefits ramp over time.

• Question from Scott Michus (Nilius Research): Has the USM sales uptick continued into the current quarter, and is asset supply visibility improving?
  Response: Supply loosened in Q4 and Q1, driving USM growth; asset availability matching criteria is improving, prompting Q1 investments.

• Question from Scott Michus (Nilius Research): Could parts supply reach 14%–15% operating margins if more USM comes to market?
  Response: Distribution margins are very strong; USM margins are currently compressed but should expand as supply improves.

• Question from Scott Michus (Nilius Research): With Aerostrat, are key employees retained via agreements?
  Response: Yes—there’s a three-year earnout for key team members, and they plan full integration with Trax to drive two-way synergies.

• Question from Sam Strassaker (Choice Security): How should we view inventory investment needs from here given parts supply demand?
  Response: They invested heavily this quarter to support growth but will balance further opportunities with the goal to be cash positive for the rest of the year.

• Question from Noah Levitz (Wembley): What is your exposure to the engine aftermarket across segments?
  Response: Broad engine exposure: ~80% of USM parts are engine, major distribution lines are engine-related (e.g., Unison), and component services have engine capabilities with plans to expand.

• Question from Noah Levitz (Wembley): Progress on making Trax a digital marketplace to cross-sell parts/repairs?
  Response: Actively investing; expect first-half 2026 updates, leveraging Trax data and customer base to offer parts and repair solutions.