AAR Corp (AIR) FY2026 10-K: Net Income Up 15x on 19% Revenue Growth
Listen to this report
The Hook
AAR Corp $AIR just reported net income of $187.7 million for fiscal 2026 against $12.5 million the year before. That is a 15-fold increase. Revenue over the same stretch grew 19.0%, from $2,780.5 million to $3,308.0 million. Nineteen percent more revenue does not produce fifteen times the profit, so something else did the work.
The 10-K, filed July 22, 2026 for the year ended May 31, 2026, says exactly what. Pretax income rose $207.0 million, from $38.9 million to $245.9 million. Of that increase, $43.0 million came from the four operating segments actually earning more. The rest came from a corporate expense line that fell by half, and from a swing of $113.1 million in one-off gains and losses. Strip the noise out of both years and pretax income grew about 23%, on 19% revenue growth. That is a good year. It is not a fifteen-bagger.
Company Snapshot
AAR is an aviation aftermarket company: it distributes new and used aircraft parts, performs heavy airframe and component maintenance, sells maintenance-planning software, and runs fleet and logistics programs for the U.S. Department of War, the Department of State and foreign governments. Commercial customers were $2,384.1 million of fiscal 2026 sales, or 72.1%; the U.S. government and its contractors were $787.8 million, or 23.8%. Roughly 34.3% of sales went to foreign customers.
In the fourth quarter of fiscal 2026 AAR re-cut its segments into four: Parts Supply; Repair, Engineering, and Software; Government Solutions; and Legacy Commercial Programs. It also announced it will wind Legacy Commercial Programs down over three to four years because that business "requires significant asset pools and no longer meets our capital return thresholds." Fiscal 2026 was AAR's most acquisitive year on record, with four deals closed: ADI for $137.1 million, HAECO Americas for $78.0 million, ART for $36.0 million and Aerostrat for $19.0 million. This is initiating coverage.
The Financial Story
Start with the bridge, because everything else follows from it. Here is the entire move from fiscal 2025 pretax income to fiscal 2026 pretax income, taken from the segment reconciliation in the 10-K.
| Bridge from FY2025 to FY2026 pretax income | $ millions |
|---|---|
| FY2025 income before income taxes | 38.9 |
| Segment operating income ($284.5M to $327.5M) | +43.0 |
| Corporate and other costs ($99.3M to $49.7M) | +49.6 |
| One-off gains and losses (-$72.4M to +$40.7M) | +113.1 |
| Interest and other, net | +1.3 |
| FY2026 income before income taxes | 245.9 |
Two of those four lines are not the operating business getting better. The corporate line halved because fiscal 2025 carried the company's Foreign Corrupt Practices Act resolution. AAR self-reported transactions in Nepal and South Africa in 2019, and on December 19, 2024 settled with the Department of Justice under a Non-Prosecution Agreement and with the SEC under a Cease-and-Desist Order. It booked a $55.6 million charge in the second quarter of fiscal 2025. Management's own words in the MD&A: selling, general and administrative expense rose only $1.6 million year over year "primarily due to the fiscal 2026 acquisitions, including ADI and HAECO Americas," an increase "largely offset by FCPA investigation and settlement costs of $54.8 in the prior year."
The $113.1 million line is a flip in direction, not a gain in operations. Fiscal 2025 absorbed a $72.4 million loss on the sale and exit of businesses, of which $71.1 million was the divestiture of the Landing Gear Overhaul business to GA Telesis for $48 million of net proceeds, including $14.6 million of written-off goodwill. Fiscal 2026 posted $40.7 million of gains going the other way: a $29.5 million bargain purchase gain on HAECO Americas, a $9.8 million gain on the sale of the Wood Dale headquarters building for $26.0 million, and $1.4 million from a business exit. The bargain purchase gain is worth pausing on. It is non-cash, and AAR's own explanation is that "the seller was highly motivated to divest the business as part of its long-term strategies." Fair value of the net assets acquired came to $107.5 million against a $78.0 million price. That is $29.5 million of reported earnings that no customer paid for.
Then the tax rate did the rest. AAR's effective rate was 67.9% in fiscal 2025 and 23.7% in fiscal 2026. The MD&A attributes the drop "primarily" to the fact that the $55.6 million FCPA settlement charge "was nondeductible for income tax purposes resulting in no income tax benefit." So the same event that crushed fiscal 2025 pretax income also stopped the tax line from cushioning it. Fiscal 2025 paid $26.4 million of tax on $38.9 million of pretax income and was left with $12.5 million. That $12.5 million denominator is what makes the multiple look like 15x.
Now the part that actually is the business, and it is more mixed than the headline. Segment operating income rose 15.1%, from $284.5 million to $327.5 million, which is slower than the 19.0% revenue growth. Segment operating margin fell from 10.2% to 9.9%. Three of the four segments saw margins go down.
| Segment | FY26 sales | FY26 op income | FY26 margin | FY25 margin |
|---|---|---|---|---|
| Parts Supply | $1,487.7M | $186.2M | 12.5% | 14.3% |
| Repair, Engineering, and Software | $1,080.8M | $84.6M | 7.8% | 9.0% |
| Government Solutions | $502.3M | $56.7M | 11.3% | 7.1% |
| Legacy Commercial Programs | $237.2M | $0.0M | 0.0% | 3.4% |
| Total segments | $3,308.0M | $327.5M | 9.9% | 10.2% |
Parts Supply grew sales 35.3% and operating income only 18.8%, though the margin comparison is unfair to fiscal 2026: the prior year included an $11.2 million reversal of a Russian legal liability and a $6.5 million insurance recovery on an aircraft destroyed in Haiti. Repair, Engineering, and Software grew sales 16.1% and operating income 0.7%, because HAECO Americas came in at lower margins pre-integration. Government Solutions is the genuine bright spot: sales up just 1.4% but operating income up 61.5% and margin from 7.1% to 11.3%. Legacy Commercial Programs earned nothing at all, hit by a $4.9 million inventory reserve taken alongside the decision to exit the consumables line.
Cash tells a colder version of the story. Operating cash flow was $98.7 million against $187.7 million of reported net income. Subtract $36.6 million of property and equipment spending and $28.8 million of hangar expansion and roughly $33 million of free cash flow is left. The gap is working capital: inventories consumed $69.0 million, accounts payable ran down $49.9 million, and rotable assets supporting long-term programs took another $22.3 million. That is structural, not a one-quarter blip. Inventory alone is $979.0 million against $3,308.0 million of revenue, and net working capital runs near 31% of sales, so every incremental dollar of revenue at this company costs about thirty cents of cash before it earns anything.
The balance sheet is stronger than a year ago because AAR sold stock into it. In the second quarter of fiscal 2026 the company issued 3,450,000 shares at $83.00 for $273.9 million of net proceeds, and issued another $150.0 million of its 6.75% senior notes. That funded $259.4 million of acquisitions and paid down $227.0 million of short-term borrowings. Equity rose from $1,211.6 million to $1,703.8 million; long-term debt fell from $968.0 million to $893.9 million, with $700.0 million of 6.75% notes due March 2029 and $200.0 million drawn on a revolver that expires December 14, 2027. Interest expense fell $3.3 million to $72.1 million. The cost of the raise shows up in the share count: weighted average diluted shares went from 35.8 million to 38.4 million, which is why net income grew 15.0x and diluted EPS grew 13.9x, from $0.35 to $4.86.
Valuation
AAR trades around $136.57 with a market capitalization near $5.37 billion, per Investing.com in July 2026. Against $700.0 million of senior notes plus $200.0 million of revolver borrowings and $84.0 million of cash, enterprise value is roughly $6.2 billion. On fiscal 2026 numbers that is about 1.6 times sales, 28.1 times reported diluted EPS of $4.86, and roughly 17.7 times EBITDA of $349.9 million, taking operating income of $277.8 million plus $72.1 million of depreciation and amortization. Free cash flow of about $33 million against a $5.37 billion market capitalization is a yield of roughly 0.6%.
Strip the $40.7 million of one-off gains out of pretax income and $205.2 million is left. Taxed at the reported 23.7% rate, that is about $157 million, or roughly $4.08 a share on 38.4 million diluted shares. The stock is therefore closer to 33 times core earnings than 28. For context on expectations, analysts polled by stockanalysis.com put fiscal 2027 EPS at $5.56, in a range of $5.13 to $6.16, and the seven analysts polled by S&P Global carry an average target of $131.67 with a range of $125 to $150 - a consensus target that sits below where the stock trades.
A scenario DCF, on unlevered free cash flow, charging thirty cents of working capital for every incremental dollar of revenue because that is what the cash flow statement shows, and holding capital expenditure equal to depreciation at about 2.2% of sales:
| Scenario | Revenue growth | EBIT margin by year 5 | WACC | Terminal growth | Implied value per share |
|---|---|---|---|---|---|
| Bear | 2% | 8.4% | 10.5% | 2.0% | about $37 |
| Base | 6% | 9.5% | 9.5% | 2.5% | about $66 |
| Bull | 10% | 11.0% | 9.0% | 3.0% | about $112 |
All three sit below the current price, and the honest reading of that is not "the stock is worth $66." It is that a 9.5% discount rate applied to an 8.4% operating margin cannot get to $136, and so the market must be underwriting something the trailing numbers do not contain. Back-solving makes it concrete: to justify $136.57 on 6% revenue growth you need the consolidated EBIT margin to reach about 16.9%, which is higher than any segment earns today. Hold the margin at 9.5% and you need roughly 25% annual revenue growth. Or you accept a discount rate near 6.5%.
The multiples lens disagrees, and the disagreement is the analysis. AAR at roughly 17.7 times EBITDA is cheaper than HEICO at 31.69 times as of May 5, 2026 per valueinvesting.io, and cheaper than TransDigm at 21.12 times as of May 6, 2026 per GuruFocus. But those are proprietary-content businesses with EBITDA margins several times AAR's 10.6%, and a parts distributor and airframe MRO with thirty cents of working capital per incremental revenue dollar should not clear the same multiple. On AAR's own $349.9 million of EBITDA, 12 times implies about $85 a share, 16 times about $120, and 18 times about $137 - which is roughly where it trades. The market is already paying a full aftermarket multiple for a business whose segment margins went down this year. This is implied value under stated assumptions, not a price target and not investment advice.
Risks
The largest disclosed risk is the one AAR has already told you is coming: the 10-K states the company "expects to impair the goodwill included in our Legacy Commercial Programs segment as its operations are wound down over the next three to four years." Goodwill is $580.3 million and other intangibles are $281.6 million against $1,703.8 million of equity, so half of book value is acquisition accounting. Contract concentration is real too: the INL/A WASS contract with the State Department contributed $92.0 million of fiscal 2026 sales, is up for renewal in June 2028, and the filing notes "this program's sales have decreased significantly since the original award, and there are no assurances that we will win the re-compete." Most U.S. government contracts carry one-year base terms with option-year extensions.
Legal exposure has not fully closed with the FCPA settlement. Nepal's Commission for Investigation of Abuse of Authority pursued a criminal proceeding over the same transactions, and per the filing AAR International was convicted, carrying a roughly $0.9 million fine and a 1.5-year prison sentence assigned under Nepalese law to the company's principal business executive; AAR does not intend to pay or participate, believing the proceedings lack due process. Separately, a customer of the divested Composites business is suing under a retained A220 performance guarantee for at least $32 million, a guarantee with no financial cap and which AAR says it cannot estimate a loss range for. On the macro side, the Commerce Department opened a Section 232 national security investigation into imports of commercial aircraft, jet engines and parts in May 2025, and the filing flags two instances of export license applications being placed on hold - a direct threat to a distribution business. Finally, $1,161.1 million of off-balance-sheet purchase obligations are outstanding, $772.0 million of it due in fiscal 2027, against $84.0 million of cash.
The Bottom Line
Fiscal 2026 was a legitimately good year for AAR: record revenue, a cleaner portfolio, four acquisitions, a decision to exit the worst business it owns, and a Government Solutions segment that lifted margin from 7.1% to 11.3% on almost no sales growth. But the 15x earnings headline is mostly a story about fiscal 2025, a year gutted by a $55.6 million nondeductible FCPA settlement and a $72.4 million divestiture loss. Clean-to-clean, pretax income grew about 23% on 19% revenue growth - modest operating leverage, not an inflection.
What to watch next: whether HAECO Americas margins converge on the rest of Repair, Engineering, and Software once the Indianapolis facility closes and the Greensboro consolidation completes; whether Parts Supply holds a 12.5% margin now that the fiscal 2025 legal reversal and insurance recovery are out of the comparison; and above all whether operating cash flow starts tracking net income. A company earning $187.7 million and converting $33 million of it into free cash flow is telling you where the next surprise comes from.
All figures are from AAR Corp's Form 10-K for the fiscal year ended May 31, 2026, filed July 22, 2026, unless attributed otherwise. Price, market capitalization, consensus estimates and peer multiples are from the web sources named inline.
Every number above was pulled from the original SEC XBRL filing through RoboSystems. Run your own queries on any public company at robosystems.ai. New customers get 50% off your first month with code ROBO50.