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AAR Corp. (AIR -3.5%) is losing a bit of altitude today after reporting Q1 (Aug) earnings last night. This provider of aviation services for commercial and defense aircraft buys/sells airplane parts and provides airframe inspection, maintenance, and repair services.

• AIR reported its largest EPS beat since Q1 of last fiscal year. Revenue rose a healthy 20.4% yr/yr to $661.7 mln, which was well above analyst expectations and was driven by growth in each of its segments. Sales to commercial customers and to government customers both increased 20% yr/yr, primarily due to the acquisition of the Product Support business but there was organic growth as well. Sales to commercial customers were 71% of sales.
• Parts Supply is its largest and most profitable segment and where it sees very significant opportunity for organic growth. Segment sales rose 5.4% yr/yr to $249.7 mln. This segment contains two activities: new parts distribution and used serviceable material (USM). In new parts distribution, sales grew a robust 26% organically, driven by continued market share gains. AIR benefited from commercial demand strength and a recovery in government volumes.
• AIR also made the point that it's the largest independent distributor of OEM parts, and this independent status is a key advantage which eliminates conflicts of interest. This is a key driver behind its consistent market share gains. For USM activity within Parts Supply, AIR saw a decline in yr/yr sales driven entirely by the lack of whole assets, predominantly engine available in the market. The continued delay of new aircraft deliveries has resulted in lower retirements and thus fewer used parts.
• Turning to its Repair & Engineering segment, sales jumped 58% yr/yr to $217.6 mln. Excluding the Product Support acquisition, sales growth was 6% as AIR continues to see strong underlying demand for its MRO services. Even though its hangars are largely at capacity, AIR says it continues to grow inside of its existing footprint with both increased efficiency and improved throughput. Nevertheless, its hanger capacity expansions in Miami and Oklahoma City remain on track for operation beginning in 2HCY25.
• A key part of the AIR story is its expanding adjusted operating margins, which increased to 9.1% from 7.3% a year ago. This was the result of continued organic margin expansion as well as contribution from recent acquisitions. AIR has been expanding its adjusted operating margin each quarter over the past three years and expects continued margin expansion.

Overall, there was a lot to like in this report with nice upside to EPS and revenue as well as margin expansion. AIR is benefiting from structural tailwinds, elevated levels of air travel, and an aging fleet which drives demand for its aftermarket services. Also, its new parts segment is sporting impressive growth and demand for its MRO services sounds robust with additional capacity on the way. In terms of why shares are lower, it may be that most of the top line growth came from acquisitions. Also, its used parts business is struggling a bit because airlines are not retiring old planes, so there are not as many used parts to buy/sell. However, we are a bit surprised to see the stock lower as there seemed to be more good than bad.