# AAR Corp. (AIR) — Financial Analysis

**Exchange:** NYSE  
**Coverage as of:** 2026-Q2  
**Updated:** 2026-05-27  
**Tier:** Free primer (step 2 of 19)  
**Sibling pages:** /stocks/AIR/thesis · /stocks/AIR/memo

## Financial Snapshot

---
source: coverage-next-full
ticker: AIR
company: AAR Corp.
step: 04
title: Financial Quality & Adversarial Sweep
created: 2026-05-27
---

### Step 04 — Financial Quality & Adversarial Research Sweep: AAR Corp. (AIR)

#### 1. Statement Quality Assessment

##### Income Statement Quality
**Revenue recognition:** AAR adopted ASC 606 (Revenue from Contracts with Customers); performance obligations are straightforward — parts delivered or services performed. Revenue recognition risk is LOW for a physical parts/services business. [S4]

**Key quality concern — GAAP vs. Adjusted EPS divergence:**
- FY2025 GAAP EPS: $0.35 vs. Adjusted EPS: $3.91 — a $3.56/share divergence
- Primary driver: $55.6M FCPA settlement (confirmed one-time; Non-Prosecution Agreement signed; [S9])
- Secondary driver: Amortization of acquisition intangibles ($235M+ intangibles from Triumph, step-up amortization) inflates D&A and suppresses GAAP net income
- **Judgment:** The GAAP/adj. divergence is legitimate here — FCPA is disclosed, one-time, and legally resolved. Intangible amortization from acquisitions is a GAAP requirement that overstates economic cost. Adjusted EBITDA ($240M) and Adjusted EPS ($3.91) are more representative of economic performance in FY2025. [S1][S4]

**SBC as a quality indicator:**
- FY2025: $19.9M SBC (0.7% of revenue); FY2024: $15.3M; FY2023: $13.5M
- Growing but proportional to revenue growth; not excessive for a company this size
- Management heavily equity-compensated (CEO: 86.7% variable, 60% PBRS) — aligns incentives [S2]

##### Cash Flow Quality
**Operating Cash Flow vs. Net Income:**
- FY2025: OCF $36.1M vs. Net Income $12.5M → OCF > NI (good conversion)
- However, OCF is depressed by working capital build from rapid revenue growth (inventory investment for USM + AR from larger contracts)
- FY2022: OCF $75M vs. NI $79M — historically good conversion before acquisition-related dilution
- FY2023: OCF $23M vs. NI $90M — working capital absorbed heavily during scale-up

**Free Cash Flow trajectory:**
- FY2021-FY2022: Strong ($94M/$58M) when revenue was smaller and WC managed
- FY2023-FY2025: FCF compressed as company invested in growth (inventory build, CapEx increase) and absorbed Triumph integration costs
- Q3 FY2026: FCF $66M in a single quarter — signals working capital normalization post-integration [S6]
- **Judgment:** FCF will recover significantly in FY2026-FY2028 as integration completes and WC normalizes. Near-term weakness was growth-investment-related, not structural.

##### Balance Sheet Quality
- **Goodwill jump:** FY2023 $176M → FY2024 $555M → FY2025 $531M (small decline indicates Triumph integration not generating material impairment yet)
- **Intangibles:** $235M (FY2024) → $220M (FY2025) — amortizing as expected; no impairment signals
- **Leverage:** Net debt ~$950M; net leverage ~2.4-2.5x Adj. EBITDA — elevated but within management's stated 2.0-2.5x target range. Term loan and revolver structure (not disclosed in full detail from available data) [S1][S6]

#### 2. Adversarial Research Sweep

##### Adversarial Item 1: FCPA Violation (PRIMARY HISTORICAL CONCERN — RESOLVED)
**Finding:** AAR Corp. paid bribes to government officials in Nepal and South Africa during 2016-2017 through its subsidiary's CEO, Deepak Sharma. AAR self-reported to DOJ and SEC in 2019 after discovering the violations through an internal investigation. [S9]

**Settlement (January 2025):**
- DOJ: Non-Prosecution Agreement (NPA); $26.4M penalty + $18.6M forfeiture
- SEC: Cease-and-desist order; $23.5M disgorgement + $5.8M prejudgment interest
- **Total: $55.6M** (recorded as one-time charge in Q2 FY2025)

**AAR's response:** Full cooperation with investigations; enhanced compliance program; CEO of the relevant subsidiary separately charged. The NPA requires AAR to maintain enhanced FCPA compliance policies for the NPA term.

**Assessment for investors:** The violation is concerning as a historical governance failure, but: (1) company self-reported (uncommon in FCPA cases, suggests genuine compliance culture now); (2) violations occurred under prior management practices in a subsidiary; (3) settlement fully resolved with no ongoing DOJ oversight requirements beyond NPA compliance; (4) one-time financial impact is contained and recorded. **RISK: REDUCED (from HIGH to MEDIUM-LOW post-settlement)** [S9]

##### Adversarial Item 2: Debt Load Post-Acquisition
**Finding:** Total debt jumped from $318M (FY2023) to $1,066M (FY2024) following the $725M Triumph acquisition — a 3x increase in one year. Interest expense rose from ~$12M (FY2023) to ~$43M (FY2024).

**Assessment:** Leverage is real but management is actively deleveraging: net debt declined from ~$980M (FY2024) to ~$970M (FY2025) to ~$900M (Q3 FY2026). Strong operating cash flow recovery should accelerate deleveraging. At 2.5x net leverage and ~$375M adj. EBITDA (LTM), the ratio is manageable. **RISK: MEDIUM** [S1][S6]

##### Adversarial Item 3: Legacy Program Wind-Down Execution Risk
**Finding:** AAR announced it will wind down "Legacy Commercial Programs" as part of its 4-segment restructure. These appear to be low-margin airframe maintenance programs that have been margin-dilutive. Exiting these programs will temporarily reduce revenue.

**Assessment:** The exit strategy is margin-positive in the medium term but may cause revenue-growth optics to disappoint in the near term if consensus doesn't model the trade-off correctly. Not a material adverse finding. **RISK: LOW-MEDIUM** [S7]

##### Adversarial Item 4: Triumph Integration Risk
**Finding:** The Triumph Product Support acquisition ($725M) is the largest deal in AAR's history. Integration involves consolidating 15-20 facilities, managing 2,000+ acquired employees, and realizing ~$10M synergies. Garden City, NY facility consolidation is ongoing (expected FY2026 completion).

**Assessment:** No material integration failure signals in filings or press releases as of Q3 FY2026. Adjusted EBITDA margins are improving, suggesting integration is proceeding on track. However, this remains a key operational risk. **RISK: MEDIUM** [S11]

##### Adversarial Item 5: Short-Seller Activity / Fraud Allegations
**Finding:** No short-seller reports, fraud allegations, or securities class action lawsuits identified in available sources as of May 2026. Short interest is not elevated based on available data.

**Assessment:** No material adversarial concern from this angle. **RISK: LOW** [JUDGMENT]

##### Adversarial Item 6: Q3 FY2025 Net Income Anomaly
**Finding:** Q3 FY2025 showed a net loss of $8.9M despite $71M operating income. This appears to be driven by interest expense (~$15M/quarter on $1B debt) plus elevated tax provisions or timing items.

**Assessment:** The pattern of positive operating income but negative/low GAAP net income in FY2025 is consistent with the FCPA charge (Q2) and high interest burden. Not a quality concern per se; just financial leverage effects. [S6]

#### 3. Key Financial Ratios (FY2025, annualized)

| Ratio | Value | Benchmark |
|-------|-------|-----------|
| Gross Margin | 19.0% | HEICO ~38%, StandardAero ~14% |
| EBITDA Margin (adj.) | 8.6% FY25 / 12.1% LTM | StandardAero ~14% target |
| Net Debt/EBITDA | ~2.4x | Target 2.0-2.5x |
| Interest Coverage (EBIT/Int.) | ~3.1x | Adequate; needs to improve |
| FCF Conversion (FCF/NI adj.) | Low currently | Improving rapidly |
| SBC/Revenue | 0.7% | Acceptable |
| Capex/Revenue | 1.2% | Asset-light ✓ |

#### Source Index
[S1] AAR Corp. FY2025 10-K — balance sheet, intangibles, debt structure
[S2] DEF 14A FY2025 — CEO compensation structure
[S4] AAR Corp. FY2025 10-K — revenue recognition policy, risk factors
[S6] StockAnalysis.com — quarterly data, cash flows
[S7] AAR 2026 Investor Day — three-year framework, segment strategy
[S9] DOJ/SEC FCPA settlement — $55.6M settlement details, NPA terms
[S11] AAR Corp. press release March 2024 — Triumph acquisition details

## Deeper Financial Analysis

The fundamental tier ($1.00) adds 8 dimensions not included here:

- Revenue Breakdown — segment revenue, geographic mix, product-line margins
- Financial Trends — QoQ momentum, leading indicators, inflection points
- Balance Sheet — debt structure, dilution risk, working capital dynamics
- Capital Allocation — ROIC, buyback cadence, reinvestment efficiency
- Earnings Analysis — beats/misses, guidance vs actuals, transcript highlights
- Competitive Positioning — market share, pricing power, peer benchmarks
- Industry Context — TAM, sector tailwinds/headwinds, regulatory backdrop

**API endpoint:** GET /api/v1/research/AIR/fundamental

## Navigation

- Overview: /stocks/AIR
- Financials (this page): /stocks/AIR/financials
- Thesis: /stocks/AIR/thesis
- Investment Memo: /stocks/AIR/memo
- Coverage universe: /stocks