AAR Corp (NYSE: AIR) reported first-quarter fiscal year 2027 results that surpassed analyst expectations, with adjusted diluted earnings per share rising to $1.49. This figure beat the consensus estimate of $1.30 by 14.62%, reflecting a 37.96% increase from the prior-year period.

Consolidated sales reached $918 million, exceeding the analyst consensus of $880.347 million by 4.28%. This represents a 24.12% year-on-year increase from $739.6 million in the same quarter last year. The aviation aftermarket solutions provider attributed the revenue surge to robust demand across its Parts Supply, Repair, Engineering & Software (RE&S), and Government Solutions segments.

Segment Performance and Revenue Drivers

Sales to commercial customers grew 28%, driven by acquisition contributions and above-market Commercial Distribution sales. Government customer sales rose 14%, primarily due to increased volumes in new parts distribution. Commercial customers now account for 73% of consolidated sales, up from 71% in the prior-year quarter.

The Parts Supply segment led growth with a 31% increase in total sales, including 23% organic growth in new parts Distribution. The RE&S segment also reported 31% sales growth, fueled by Airframe MRO, Component MRO, and software activities. Government Solutions sales increased 4%, supported by strength in Mobility Systems.

Profitability and Cash Flow Metrics

Adjusted diluted earnings per share rose 38% to $1.49, compared to $1.08 in the prior-year period. GAAP net income stood at $40 million, or $1.00 per diluted share. Operating margins on an adjusted basis improved to 10.6% from 9.7% a year ago, reflecting growth in Parts Supply and increased profitability in Government Solutions.

Cash flow provided by operating activities was $55.8 million, a significant improvement from $44.9 million used in operations during the same period last year. This positive cash generation helped reduce net leverage to 1.81x as of August 31, 2026.

What the Numbers Show

A divergence between GAAP and adjusted metrics highlights the impact of recent acquisition activity. While GAAP operating income was $72.1 million, adjusted operating income reached $97.0 million. The gap is primarily due to $19.6 million in acquisition, amortization, and integration expenses recorded in the current quarter, compared to just $4.4 million in the prior year. This indicates that reported GAAP profits are currently suppressed by non-recurring integration costs associated with AAR's portfolio reshaping efforts.

The beat on adjusted EPS was operational, driven by margin expansion and volume growth, rather than non-recurring items. The 4.28% sales beat further confirms stronger-than-expected demand across core segments.

Guidance and Strategic Outlook

For the second quarter of FY27, excluding Legacy Commercial Programs, AAR guided for sales of $906.642 million to $922.548 million. This guidance range exceeds the analyst consensus estimate of $893.449 million. The company also maintained full-year FY27 sales growth guidance (ex-LCP) at low teens and projected adjusted EBITDA margins of 13.0% to 13.4% for Q2.

The company noted that current guidance does not include any impact from the pending MRO Holdings acquisition.

AAR Corp has entered into a definitive agreement to acquire a 65% controlling interest in MRO Holdings at an implied enterprise value of $4.0 billion, representing 10.7x MRO Holdings' forecasted full calendar year 2026 adjusted EBITDA.

The deal, which includes $75 million in anticipated run-rate cost synergies and net of transaction-related tax benefits with an expected present value of approximately $150 million, marks a transformational step in AAR's strategy to build an integrated Parts, Repair, and Software aviation aftermarket platform. Under the agreement, AAR will initially pay an equity value of approximately $1.8 billion for the 65% stake and will also repay approximately $1.3 billion of MRO Holdings' existing borrowings.

About MRO Holdings

MRO Holdings is a leading global provider of aircraft maintenance, repair, and overhaul (MRO) services with more than four decades of experience. The company operates through a team of approximately 10,000 professionals and 115 lines of airframe maintenance capacity across facilities in El Salvador, Mexico, Colombia, and the United States. Approximately 90% of MRO Holdings' revenue is derived from sales to U.S. customers. In calendar year 2026, MRO Holdings is expected to generate approximately $1.0 billion of sales and $285 million of adjusted EBITDA, representing an adjusted EBITDA margin of approximately 27%. The company also converts approximately 70% of adjusted EBITDA into adjusted cash flow from operating activities.

Transaction details

AAR expects to fund the transaction through approximately $2.1 billion of new debt, approximately $780 million of equity issued at $135 per share to existing MRO Holdings shareholders, and approximately $230 million of proceeds from a private investment in public equity (PIPE) offering, led by The Pritzker Organization and other institutional investors. The new debt financing is supported by a fully committed bridge facility, which AAR intends to replace with permanent debt financing prior to closing.

The following table summarises the key transaction parameters:

AAR will have the option to acquire the remaining 35% ownership interest of MRO Holdings, with 5% exercisable at any time within six years of closing, and the remaining 30% exercisable in three equal tranches of 10% on the second, third, and fourth anniversaries of closing. AAR will control the MRO Holdings Board of Managers, while selling owners are subject to customary lockups and voting-support provisions regarding their AAR shares. The transaction is expected to close in AAR's fiscal third quarter ending February 2027, subject to regulatory approvals and other customary closing conditions. AAR's Board of Directors has unanimously approved the transaction.

Financial impact and synergy targets

The acquisition is expected to be accretive to adjusted earnings per share in the first full fiscal year post closing. On a pro forma basis, AAR's consolidated adjusted EBITDA margin before synergies is approximately 16%, roughly 400 basis points accretive to AAR's standalone FY2026 results. AAR targets approximately $75 million of run-rate cost synergies from operations optimisation, procurement savings, SG&A optimisation, and sharing of operational best practices, with full run-rate benefit expected within three to four years of closing.

The table below shows AAR's adjusted EBITDA reconciliation (in millions, unaudited):

AAR is targeting an adjusted EBITDA margin of approximately 19% to 20% within three to four years following closing, including synergies. The company expects to maintain its BB-category credit rating profile at both S&P and Moody's.

Leadership commentary

"Through the acquisition of MRO Holdings, we will create the largest heavy maintenance MRO in the world, servicing a combined total of nearly 3,000 aircraft per year in our hangars," said John M. Holmes, Chairman, President and CEO of AAR. Holmes added that the transaction provides financial flexibility to continue pursuing AAR's broader strategy and described it as "truly transformational" for the company.

Roberto Kriete, Chairman of MRO Holdings, said the combination would "strengthen our value proposition and support continued investment in our people, capabilities, and facilities," noting that existing shareholders are retaining a stake because they share AAR's ambition for continued growth. Matt Evans, a Partner at Bain Capital, described MRO Holdings as having "a differentiated offering with deep customer relationships" and expressed confidence in AAR as a partner for the company's next chapter.

Advisors

Goldman Sachs & Co. LLC, William Blair & Company, LLC, and Centerview Partners LLC are serving as financial advisors to AAR, with Kirkland & Ellis LLP as legal counsel. Goldman Sachs Bank USA and Wells Fargo Securities, LLC are underwriters of the committed debt financing, and Goldman Sachs & Co. LLC is exclusive placement agent for the PIPE offering. Solomon Partners is lead financial advisor to MRO Holdings, with RBC Capital Markets, LLC also advising MRO Holdings and Greenberg Traurig, LLP serving as legal counsel.