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AAR beat its guidance, then agreed a deal that roughly doubles its leverage

AAR beat its own guidance, then used the same day to move net leverage from 1.81x to about 3.6x by buying 65% of a business that, by our arithmetic, would supply about two-fifths of the combined adjusted EBITDA.

Published · Inve Research Desk

AAR stock page → More news from Oct 2, 2026

3.6x

expected net leverage at close, counting unearned savings

It was 1.81x at the end of August; by our arithmetic the figure is about 4.0x before the targeted savings, well above the 2.0x to 2.5x range the company aims for.

How they did last quarter

Ahead of what AAR had guided on growth and margin, with cash flow lifted by a $27.5 million rotable-assets line, then a deal that takes leverage far past its target range.

  • Sales growth ex-legacy programs
    +25.5% on a year ago, by our arithmetic
    vs Guidance given 21 July: "we are expecting total sales growth, excluding the legacy commercial Programs segment to be 21% to 23%"
    Total growth was 24.1%, of which organic was 10.8%: less than half was organic, and acquisitions of the last twelve months supplied 13.3 points.
  • Adjusted EBITDA margin ex-legacy
    13.3% (12.7% on all segments)
    vs Guidance given 21 July: "We expect Q1 adjusted EBITDA margin of 12.25% to 12.75%, also excluding legacy commercial programs"; total adjusted EBITDA margin 11.7% a year earlier
    Margin rose a point on a year ago on all segments, and was higher still without the winding-down programs.
  • Net leverage
    1.81x at 31 August 2026
    vs 2.03x at 31 May 2026 and 2.17x at 28 February 2026
    Leverage had come down from 2.17x in February to 2.03x in May and 1.81x in August, before the deal takes it to about 3.6x.
  • Cash from operations
    $55.8 million, against minus $44.9 million a year ago
    vs The rotable-assets line of the cash-flow statement was +$27.5 million, 49% of the quarter's operating cash flow by our arithmetic; management said it liquidated $24 million of rotable assets
    Half of this quarter's cash came from running down parts the company is exiting, which does not repeat indefinitely.

AAR beat its own guidance, then changed the subject

AAR Corp. beat its own guidance in the August 2026 quarter. Sales excluding the legacy commercial programs it is winding down grew 25.5% by our arithmetic against the 21% to 23% the company guided in July. The margin on the same basis was 13.3% against 12.25% to 12.75%. On an ordinary morning that would be the story.

It was not the story. With the results, AAR said it would buy 65% of MRO Holdings, an airframe maintenance business, at an implied enterprise value of about $4 billion.

AAR Corp.: Sales growth, last eight quarters, Nov '24 to Aug '26. Growth was above 20% in each of the last three quarters shown, helped by acquisitions.
Chart: Inve Research Desk

In July the balance sheet was room to grow into

In July the chief executive, John Holmes, said AAR sat at the low end of its target range for leverage, with capacity to invest and then reduce debt again. At the end of August its net debt was 1.81x its adjusted EBITDA for the last year (the company's adjusted earnings before interest, tax, depreciation and amortization).

Later the chief financial officer, Dylan Wolin, gave the new figure: "We expect net leverage to be approximately 3.6x at closing, including the full amount of the run rate synergies."

The leverage figure counts savings not yet made

By our arithmetic, existing net debt plus the new borrowing, set against AAR's trailing earnings and MRO's expected earnings, comes to a leverage ratio of about 4.0x. The lower figure appears only when a run-rate of cost savings, which the company expects to take years to reach, is counted as if it were already earned.

By our arithmetic the share count also rises by roughly a fifth. The owner who held AAR in July is now holding a more indebted company with more owners.

Debt and equity, last four quarter-ends

Before the deal debt was drifting lower while equity rose; the new borrowing for MRO Holdings reverses the first of those trends.

$ million

DebtEquity
Nov 20259531,561
Feb 20268881,643
May 20268941,704
Aug 20268801,742

Two-fifths of combined EBITDA from a business AAR never ran

By our arithmetic MRO Holdings would supply about two-fifths of the combined adjusted EBITDA on under a quarter of the combined sales. Its margin, about 27% on the company's own figures, is more than double that of AAR's own repair segment. Holmes calls a significant labor cost advantage a key contributor to MRO's margin.

The company now expects a combined adjusted EBITDA margin of 19% to 20% in the years after close. On today's sales and earnings, the named savings take the combined margin to about 18% by our arithmetic; the rest would have to come from growth and margin gains over those years, which the company's earlier standalone target (set in May) partly covers.

Its last integration is now dated to the fourth quarter

AAR is also still working through its last large deal, HAECO Americas. In March the company put the return of repair margins to pre-acquisition levels in the third quarter of fiscal 2027. By July it was saying the airframe facilities would run at consistent margins in the fourth quarter, and on this call it repeated that integration completes in the fourth quarter, with the Indianapolis exit by the end of this calendar year. That is the far end of the window the company set in January.

Last quarter the segment's sales rose by nearly a third while its operating income fell by a fifth.

What we do not know yet

We do not know yet whether MRO Holdings holds its margin once AAR runs it, or whether the repair recovery arrives on the new date. The company expects the purchase to close in early 2027, subject to regulatory approvals, and says it expects the purchase to be accretive in the first full fiscal year after close.

In July AAR described its balance sheet as room to invest and then pay debt down again. By late September it had agreed to spend that room, and some more, on a single purchase.

AAR stock page →

The record: notes, full financial tables

Notes

  1. Impact 5/5 Balance sheet Mixed

    AAR to buy 65% of MRO Holdings, taking net leverage from 1.81x to about 3.6x

    AAR agreed to buy 65% of MRO Holdings, an airframe maintenance provider, at an implied enterprise value of about $4 billion, funded with about $1 billion of new equity and about $2.1 billion of new debt. Net leverage was 1.81x at the end of August 2026 and the company expects about 3.6x at close, counting $75 million of targeted savings; by our arithmetic it is about 4.0x without them. On 21 July the company had said it was at the low end of its targeted leverage range. Close is expected in the quarter ending February 2027, subject to regulatory approvals.

    “We expect net leverage to be approximately 3.6x at closing, including the full amount of the run rate synergies.”— Dylan Wolin, Chief Financial Officer

  2. Impact 4/5 Guidance Mixed

    AAR targets 19% to 20% combined margin; on today's numbers named savings reach 18%

    After the MRO Holdings purchase closes, AAR says adjusted EBITDA margin should reach 19% to 20% within three to four years, including about $75 million of run-rate cost savings. The pro forma margin is about 16% before savings, against 12.7% for AAR alone in the August 2026 quarter. By our arithmetic, on today's combined sales and earnings, the named savings take the combined margin to about 18.0%; the rest would come from growth and margin gains over the three to four years, which the 13% to 14%-plus standalone target set in May partly covers. At the May investor day the target was 13% to 14% plus, excluding legacy commercial programs.

    “we now expect adjusted EBITDA margins to reach 19% to 20% over the next 3 to 4 years.”— John Holmes, Chairman, President and CEO

  3. Impact 3/5 Guidance Positive

    AAR beats its quarterly guide and lifts FY27 sales growth guidance to low teens, ex-MRO

    Sales excluding legacy commercial programs grew 25.5% in the August 2026 quarter by our arithmetic, above the 21% to 23% guidance of 21 July; margin on that basis was 13.3% against 12.25% to 12.75%. FY27 sales growth guidance on that basis is now low teens, from low double digits to low teens in July, excluding MRO Holdings. Next-quarter guidance is 14% to 16%, a step down from 25.5%; total growth of 24.1% included 13.3 points from acquisitions (organic 10.8%), and Holmes said the guide implies higher organic growth than the first quarter.

    “I would not think about a deceleration generally in growth or demand.”— Dylan Wolin, Chief Financial Officer

  4. Impact 3/5 Margin Negative

    HAECO repair margin recovery moved from the third to the fourth quarter since March

    AAR's Repair, Engineering and Software segment earned an adjusted EBITDA margin of 11.9% in the August 2026 quarter, down 1.2 points from a year earlier, as sales rose 31% to $297.5 million and operating income fell 20% to $16.0 million. On 24 March the company put the return to pre-acquisition margins in the third quarter of fiscal 2027; on 21 July it put consistent margins at the HAECO sites in the fourth quarter; on this call the chief executive said the company is on track to complete the integration in that quarter, with the Indianapolis exit by the end of this calendar year. Margin rose from 11.5% the quarter before.

    “We continue to expect that integration to be complete by the first -- fourth quarter of this fiscal year.”— John Holmes, Chairman, President and CEO

  5. Impact 3/5 Balance sheet Mixed

    AAR calls Q1 cash flow a record; $27.5M of $55.8M was the rotable-assets line

    AAR reported operating cash flow of $55.8 million in the August 2026 quarter against minus $44.9 million a year earlier; management called it a record first quarter for adjusted cash from operations. By our arithmetic the rotable-assets line of the cash-flow statement was $27.5 million, 49% of the total, against the $24 million of rotable assets the company said it liquidated; accounts payable and accrued liabilities rose $40.8 million. Without the rotables line, GAAP operating cash flow would be about 24% of adjusted EBITDA by our arithmetic, against a long-term target of 30% plus for adjusted cash from operations restated on 21 July.

    “we liquidated $24 million of rotable assets, which contributed approximately $5 million of margin in the quarter.”— Dylan Wolin, Chief Financial Officer

  6. Impact 3/5 One-off Mixed

    AAR adjusted EPS up 38% to $1.49, but GAAP EPS up 5.3% to $1.00 on 11% more shares

    Adjusted diluted EPS rose 38% to $1.49 in the August 2026 quarter, while GAAP diluted EPS rose to $1.00 from $0.95. Acquisition, integration and amortization expenses before tax were $24.9 million against $6.4 million a year earlier, and diluted shares were 39.9 million against 35.9 million. The gap between adjusted and GAAP EPS widened to $0.49 from $0.13.

    “Adjusted diluted EPS increased 38% year-over-year to $1.49 per share, reflecting our strong operating performance.”— John Holmes, Chairman, President and CEO

Financials

Income statement, last 8 quarters

$ million; YoY and margin in %
Quarter endSalesYoYPBTNet profit
Aug 2026918+24.1%55.440.1
May 2026928+23.0%57.750.7
Feb 2026845+24.6%93.168.0
Nov 2025795+15.9%48.134.6
Aug 2025740+11.8%47.034.4
May 2025755+14.9%47.634.0
Feb 2025678+19.5%−11.1−8.9
Nov 2024686+25.8%−22.5−30.6

Balance sheet

$ million
As ofEquityDebtCashFixed assetsTotal assets
Aug 20261,7428801051723,427
May 20261,704894841673,356
Feb 20261,643888791633,333
Nov 20251,561953762173,243

Cash flow

$ million
Year endOperatingInvestingFinancingFree cash flow
May 202698.7−30920962.1
May 202536.111−341.4
May 202443.6−75972913.9
May 202323.3−138138−6.2