Executive Summary / Key Takeaways

• Record Performance & Strategic Momentum: AAR Corp. delivered record fiscal year 2025 results, with consolidated sales up 19.9% to $2.78 billion and adjusted diluted EPS reaching $3.91, reflecting strong organic growth and successful integration of strategic acquisitions.
• Portfolio Optimization & Margin Expansion: The company's disciplined portfolio management, including the divestiture of the Landing Gear Overhaul business and substantial completion of the Product Support acquisition integration, is driving significant margin expansion, with $10 million in annual cost synergies expected to be fully realized by Q1 FY26.
• Technological Differentiator (Trax): AAR's Trax software solution, a high-margin, high-growth cloud-based MRO ERP, has doubled its revenue to $50 million since acquisition and secured major wins like Delta Airlines (DAL), positioning it as a key driver for future profitability and a potential sales channel for parts.
• Robust Demand & Capacity Growth: Strong underlying demand in both commercial and government aviation aftermarket, coupled with strategic hangar expansions in Miami and Oklahoma City (adding 15% capacity, already sold), ensures continued top-line growth and operational leverage.
• Deleveraging & Capital Allocation: AAR is rapidly deleveraging, reducing net debt leverage from 3.58x post-acquisition to 2.72x by Q4 FY25, with a target of 2.0-2.5x in FY26, providing increased flexibility for organic investments and opportunistic share repurchases.

A Global Aftermarket Powerhouse in a Dynamic Industry

AAR Corp., established in 1955, has cultivated a deep-rooted presence as a leading independent provider of solutions to the global aviation aftermarket. The company's enduring success is built upon a strategic foundation of optimizing its product and service portfolio, investing in differentiated capabilities, and capitalizing on favorable industry dynamics. Operating across more than 20 countries, AAR serves a diverse customer base spanning commercial airlines, government agencies, and defense organizations. This broad reach and independent status are critical to its competitive positioning.

The aviation aftermarket is currently experiencing robust tailwinds, driven by elevated levels of consumer air travel and an aging global fleet. Delays in new aircraft deliveries and ongoing challenges with new engine platforms further intensify the utilization of existing aircraft, creating sustained, high demand for maintenance, repair, and overhaul (MRO) services and spare parts. This environment plays directly into AAR's strengths, particularly its comprehensive offerings in parts supply, repair engineering, and integrated solutions.

In a competitive landscape dominated by large Original Equipment Manufacturers (OEMs) like Boeing (BA) and Airbus (EADSY), and defense contractors such as Lockheed Martin (LMT) and Honeywell International (HON), AAR carves out a unique and compelling niche. Its independent provider status is a significant competitive advantage, allowing it to offer unbiased solutions without the inherent conflicts of interest faced by OEM service divisions. This independence fosters stronger customer loyalty and enables AAR to secure exclusive distribution contracts with OEM partners, serving all aircraft types. While OEMs like Boeing and Airbus boast superior manufacturing scale and R&D investment (e.g., Boeing's $2-3 billion annual R&D vs. AAR's more modest investment), AAR differentiates through operational flexibility, cost efficiency, and faster turnaround times in MRO services. For instance, AAR's integrated approach can offer 10-15% greater efficiency in inventory management compared to OEM-tied services.

Technological Edge and Strategic Innovation

A core pillar of AAR's strategy and a significant technological differentiator is Trax, its integrated software solution. Acquired in fiscal 2023, Trax is the first fully cloud-based electronic Enterprise Resource Platform (ERP) for the MRO industry, offering a full suite of paperless mobility apps that automate MRO workflows with artificial intelligence. This technology provides tangible benefits: it increases efficiency, improves asset utilization, and streamlines information flow during the maintenance process, while also creating the required regulatory system of record for airline and lessor customers.

Since its acquisition, Trax's revenue has doubled from $25 million to approximately $50 million, demonstrating its high-growth capability. A major validation of Trax's scalability and differentiation came with Delta Airlines' selection of Trax to modernize Delta TechOps' maintenance and engineering systems. This multi-year implementation is poised to be the largest of its kind in the maintenance ERP space. Furthermore, AAR anticipates that upgrading existing Trax users to the new eMRO and eMobility solutions could increase annual license fees by 4 to 5 times, offering substantial revenue upside from the established customer base. This technological leadership not only enhances AAR's service delivery but also contributes to its competitive moat by offering advanced, efficiency-driving solutions that rivals may struggle to match. The company also designs proprietary Designated Engineering Representative (DER) repairs and Parts Manufacturer Approval (PMA) parts, broadening its intellectual property in aftermarket applications.

Strategic Execution and Operational Excellence

AAR's recent performance underscores its effective strategic execution across its core segments:

Parts Supply: Driving Market Share Gains

The Parts Supply segment, contributing approximately 40% of consolidated sales, is a significant growth engine. In fiscal 2025, sales increased 13.7% to $1.1 billion, with operating income surging 42.8% to $156.8 million, yielding a 14.3% operating margin. This robust performance was primarily driven by the new parts distribution activities, which saw over 20% organic growth in Q4 FY25 and has consistently delivered double-digit organic growth for the past 13 quarters. This business now accounts for roughly 60% of the Parts Supply segment. AAR's independent distributor status enables it to secure exclusive agreements with OEMs like Unison, Chromalloy (for PW4000 and CF6-80C2 PMA parts), and Ontic, expanding its product offerings and market reach.

While the Used Serviceable Material (USM) business experienced a temporary decline in Q1 FY25 due to a lack of whole asset availability, piece-part sales remained strong. Management anticipates a loosening of the USM market, with more whole assets expected to come to market, which, combined with the extension of the exclusive CFM56 engine material distribution agreement with FTAI Aviation through 2030, positions AAR to capitalize on future supply.

Repair & Engineering: Capacity Expansion and Synergy Realization

The Repair & Engineering segment, accounting for approximately 32% of sales, saw a remarkable 38.2% sales increase to $884.9 million in fiscal 2025, with operating income jumping 54.7% to $81.2 million and operating margin improving to 9.2%. This growth was significantly bolstered by the acquisition of the Product Support business in Q4 FY24, which contributed $232.7 million in incremental sales. The integration of this acquisition is substantially complete, with the full $10 million in annual cost synergies expected to be realized by Q1 FY26 as the Long Island, New York facility consolidates operations into Dallas and Wellington, Kansas.

Operational efficiencies from digital advancements in Airframe MRO activities have driven significant profitability improvements. To meet growing customer demand, AAR is expanding its airframe MRO facilities in Miami, Florida, and Oklahoma City, Oklahoma, adding 15% to its network capacity. These expansions, expected to be operational in calendar 2026, are already fully booked, ensuring immediate revenue generation upon completion. The company's Amsterdam Component Services facility was also recognized as the #1 "Best Source of Repair" by NATO Support and Procurement Agency, highlighting its quality and competitive edge.

Integrated Solutions: Government Programs and Trax Growth

The Integrated Solutions segment, representing about 25% of sales, grew 8.3% to $695.3 million in fiscal 2025, with operating income increasing 52.3% to $36.4 million. This segment benefits from customized supply chain logistics programs for the U.S. Department of Defense (DoD) and foreign governments, as well as commercial flight hour programs. Recent wins include two multi-year contracts from the U.S. Navy to support its P-8A aircraft fleet, covering both airframe maintenance (a continuation of existing work) and new engine maintenance support.

Trax, housed within this segment, is a high-margin, high-growth asset. Its recent selection by Delta Airlines to modernize their maintenance and engineering systems is a testament to its differentiated offering and AAR's ability to leverage its customer relationships to scale Trax to support the world's largest airlines. AAR also sees Trax evolving into a viable sales channel for its parts business, a strategic initiative currently under development.

Expeditionary Services: Niche Support

The smallest segment, Expeditionary Services, saw sales increase 44.1% to $100.7 million in fiscal 2025, with operating income rising 188.6% to $10.1 million. This growth was driven by higher pallet sales volumes and an estimated recovery on the terminated Next Generation Pallet contract. The company remains an incumbent for current generation pallets, ensuring continued support for government demand.

Financial Health and Deleveraging

AAR's financial performance in fiscal 2025 demonstrates strong operational leverage. Consolidated sales grew 19.9% to $2.78 billion, with adjusted EBITDA margin expanding 140 basis points to 11.8%. Adjusted diluted EPS reached a record $3.91.

The company's liquidity position is robust, with $955.90 million in working capital and $96.50 million in cash as of May 31, 2025.

The Product Support acquisition in fiscal 2024 significantly increased AAR's debt, but the company has made rapid progress in deleveraging. Net debt leverage decreased from 3.58x post-acquisition to 2.72x by Q4 FY25, driven by strong Q4 cash flow from operations ($51 million) and $48 million in net proceeds from the Landing Gear Overhaul divestiture. AAR is on track to achieve its target net leverage of 2.0x to 2.5x in fiscal year 2026, absent any major M&A.

This disciplined approach to capital allocation provides flexibility for future organic investments and opportunistic share repurchases, as demonstrated by the $10 million stock repurchase in Q4 FY25.

Outlook and Key Risks

For fiscal year 2026, AAR expects organic sales growth to approach the 9% level achieved in fiscal 2025, with adjusted operating margins continuing to improve from the 9.6% delivered in fiscal 2025. Q1 FY26 guidance projects sales growth of 6% to 11% (excluding the LGO impact) and adjusted operating margins of 9.6% to 10%. This positive outlook is underpinned by continued strong demand signals from major commercial and government customers, the realization of Product Support synergies, and the ramp-up of new hangar capacity.

However, investors should consider several risks. Sales to U.S. government customers, which constituted 28.9% of consolidated sales in FY25, are subject to changes in funding and budgetary constraints. For example, the White House's proposed 50% reduction in the Department of State's budget in April 2025 negatively impacted AAR's DoS contracts by $70 million in annual revenue. International operations expose the company to geopolitical volatility and export regulations. Cybersecurity threats remain a persistent concern, with potential for financial loss and reputational damage. While the USM market is expected to improve, its inherent dynamism can lead to variability in sales. The company also resolved a previously disclosed FCPA investigation with a $55.6 million settlement in Q2 FY25, highlighting the ongoing compliance challenges in global operations.

Conclusion

AAR Corp. stands as a compelling investment in the robust aviation aftermarket, propelled by a clear strategic vision and consistent operational execution. The company's focus on portfolio optimization, significant investments in digital technologies like Trax, and strategic capacity expansions are translating directly into strong organic growth and expanding margins. Its unique position as a leading independent provider, coupled with its ability to deliver cost-effective and efficient solutions to both commercial and government clients, provides a durable competitive advantage against larger, more integrated OEMs.

With a disciplined approach to deleveraging and a clear roadmap for continued profitability improvement, AAR is well-positioned to capitalize on enduring industry tailwinds. The company's ability to secure new long-term contracts, integrate acquisitions effectively, and leverage technological differentiators like Trax underscores its potential for sustained value creation for shareholders.