AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
(In millions, except per share data)
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
Sales from products
|
|
$
|
1,124.3
|
|
$
|
1,040.7
|
|
$
|
944.8
|
|
Sales from services
|
|
|
927.5
|
|
|
707.6
|
|
|
646.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,051.8
|
|
|
1,748.3
|
|
|
1,590.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost of products
|
|
|
915.0
|
|
|
840.5
|
|
|
787.5
|
|
Cost of services
|
|
|
807.3
|
|
|
613.2
|
|
|
539.9
|
|
Provision for doubtful accounts
|
|
|
15.8
|
|
|
0.5
|
|
|
2.1
|
|
Selling, general and administrative
|
|
|
215.4
|
|
|
208.1
|
|
|
179.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,953.5
|
|
|
1,662.3
|
|
|
1,508.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
98.3
|
|
|
86.0
|
|
|
82.3
|
|
Other expense, net
|
|
|
(0.8
|
)
|
|
(0.9
|
)
|
|
|
|
Interest expense
|
|
|
(9.5
|
)
|
|
(8.0
|
)
|
|
(5.3
|
)
|
Interest income
|
|
|
1.0
|
|
|
0.1
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income taxes
|
|
|
89.0
|
|
|
77.2
|
|
|
77.1
|
|
Provision for income taxes
|
|
|
4.9
|
|
|
3.5
|
|
|
25.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
84.1
|
|
|
73.7
|
|
|
52.0
|
|
Income (Loss) from discontinued operations, net of tax
|
|
|
(76.6
|
)
|
|
(58.1
|
)
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7.5
|
|
$
|
15.6
|
|
$
|
56.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharebasic:
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
2.42
|
|
$
|
2.14
|
|
$
|
1.53
|
|
Earnings (Loss) from discontinued operations
|
|
|
(2.22
|
)
|
|
(1.70
|
)
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharebasic
|
|
$
|
0.20
|
|
$
|
0.44
|
|
$
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharediluted:
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
2.40
|
|
$
|
2.11
|
|
$
|
1.51
|
|
Earnings (Loss) from discontinued operations
|
|
|
(2.19
|
)
|
|
(1.70
|
)
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharediluted
|
|
$
|
0.21
|
|
$
|
0.41
|
|
$
|
1.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
0.30
|
|
$
|
0.30
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements
are an integral part of these statements.
38
Table of Contents
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
(In millions)
|
|
Net income
|
|
$
|
7.5
|
|
$
|
15.6
|
|
$
|
56.5
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments, net of tax
|
|
|
(2.4
|
)
|
|
2.0
|
|
|
(0.6
|
)
|
Unrecognized pension and post retirement costs, net of tax expense (benefit) of $(1.7) in 2019, $2.4 in 2018, and $2.8 in 2017
|
|
|
(6.5
|
)
|
|
5.9
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of tax
|
|
|
(8.9
|
)
|
|
7.9
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(1.4
|
)
|
$
|
23.5
|
|
$
|
61.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements
are an integral part of these statements.
39
Table of Contents
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(In millions, except
share data)
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21.3
|
|
$
|
31.1
|
|
Restricted cash
|
|
|
19.8
|
|
|
10.5
|
|
Accounts receivable, net
|
|
|
197.8
|
|
|
202.0
|
|
Contract assets
|
|
|
59.2
|
|
|
|
|
Inventories
|
|
|
523.7
|
|
|
460.7
|
|
Rotable assets and equipment on or available for short-term lease
|
|
|
65.3
|
|
|
87.2
|
|
Assets of discontinued operations
|
|
|
29.2
|
|
|
125.0
|
|
Other current assets
|
|
|
36.2
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
952.5
|
|
|
942.7
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost:
|
|
|
|
|
|
|
|
Land
|
|
|
4.5
|
|
|
4.5
|
|
Buildings and improvements
|
|
|
111.9
|
|
|
107.4
|
|
Equipment and furniture and fixtures
|
|
|
248.2
|
|
|
235.7
|
|
|
|
|
|
|
|
|
|
|
|
|
364.6
|
|
|
347.6
|
|
Accumulated depreciation
|
|
|
(231.8
|
)
|
|
(214.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
132.8
|
|
|
133.2
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
116.2
|
|
|
118.7
|
|
Intangible assets, net
|
|
|
22.2
|
|
|
27.8
|
|
Rotable assets supporting long-term programs
|
|
|
216.0
|
|
|
183.4
|
|
Other non-current assets
|
|
|
77.5
|
|
|
118.9
|
|
|
|
|
|
|
|
|
|
|
|
|
431.9
|
|
|
448.8
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,517.2
|
|
$
|
1,524.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements
are an integral part of these statements.
40
Table of Contents
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(In millions, except
share data)
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
187.8
|
|
|
170.0
|
|
Accrued liabilities
|
|
|
140.5
|
|
|
138.3
|
|
Liabilities of discontinued operations
|
|
|
29.2
|
|
|
25.0
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
357.5
|
|
|
333.3
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
141.7
|
|
|
177.2
|
|
Deferred revenue on long-term contracts
|
|
|
83.8
|
|
|
35.8
|
|
Deferred tax liabilities
|
|
|
|
|
|
15.7
|
|
Other liabilities
|
|
|
28.3
|
|
|
26.4
|
|
|
|
|
|
|
|
|
|
|
|
|
253.8
|
|
|
255.1
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value, authorized 250,000 shares; none issued
|
|
|
|
|
|
|
|
Common stock, $1.00 par value, authorized 100,000,000 shares; issued 45,300,786 shares at cost
|
|
|
45.3
|
|
|
45.3
|
|
Capital surplus
|
|
|
479.4
|
|
|
470.5
|
|
Retained earnings
|
|
|
709.8
|
|
|
733.2
|
|
Treasury stock, 10,512,974 and 10,585,165 shares at cost, respectively
|
|
|
(287.7
|
)
|
|
(280.7
|
)
|
Accumulated other comprehensive loss
|
|
|
(40.9
|
)
|
|
(32.0
|
)
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
905.9
|
|
|
936.3
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,517.2
|
|
$
|
1,524.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements
are an integral part of these statements.
41
Table of Contents
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE YEARS ENDED MAY 31, 2018
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Capital
Surplus
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
Equity
|
|
Balance, May 31, 2016
|
|
$
|
44.9
|
|
$
|
451.3
|
|
$
|
681.6
|
|
$
|
(267.6
|
)
|
$
|
(44.4
|
)
|
$
|
865.8
|
|
Net income
|
|
|
|
|
|
|
|
|
56.5
|
|
|
|
|
|
|
|
|
56.5
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
(10.2
|
)
|
|
|
|
|
|
|
|
(10.2
|
)
|
Stock option activity
|
|
|
|
|
|
3.1
|
|
|
|
|
|
8.9
|
|
|
|
|
|
12.0
|
|
Restricted stock activity
|
|
|
0.3
|
|
|
6.4
|
|
|
|
|
|
(1.3
|
)
|
|
|
|
|
5.4
|
|
Repurchase of shares
|
|
|
|
|
|
|
|
|
|
|
|
(19.8
|
)
|
|
|
|
|
(19.8
|
)
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.5
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2017
|
|
$
|
45.2
|
|
$
|
460.8
|
|
$
|
727.9
|
|
$
|
(279.8
|
)
|
$
|
(39.9
|
)
|
$
|
914.2
|
|
Net income
|
|
|
|
|
|
|
|
|
15.6
|
|
|
|
|
|
|
|
|
15.6
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
(10.3
|
)
|
|
|
|
|
|
|
|
(10.3
|
)
|
Stock option activity
|
|
|
|
|
|
0.9
|
|
|
|
|
|
11.2
|
|
|
|
|
|
12.1
|
|
Restricted stock activity
|
|
|
0.1
|
|
|
8.8
|
|
|
|
|
|
1.0
|
|
|
|
|
|
9.9
|
|
Repurchase of shares
|
|
|
|
|
|
|
|
|
|
|
|
(13.1
|
)
|
|
|
|
|
(13.1
|
)
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.9
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2018
|
|
$
|
45.3
|
|
$
|
470.5
|
|
$
|
733.2
|
|
$
|
(280.7
|
)
|
$
|
(32.0
|
)
|
$
|
936.3
|
|
Cumulative effect adjustment upon adoption of ASC 606 on June 1, 2018
|
|
|
|
|
|
|
|
|
(20.4
|
)
|
|
|
|
|
|
|
|
(20.4
|
)
|
Net income
|
|
|
|
|
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
7.5
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
(10.5
|
)
|
|
|
|
|
|
|
|
(10.5
|
)
|
Stock option activity
|
|
|
|
|
|
3.5
|
|
|
|
|
|
4.1
|
|
|
|
|
|
7.6
|
|
Restricted stock activity
|
|
|
|
|
|
5.4
|
|
|
|
|
|
(0.8
|
)
|
|
|
|
|
4.6
|
|
Repurchase of shares
|
|
|
|
|
|
|
|
|
|
|
|
(10.3
|
)
|
|
|
|
|
(10.3
|
)
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.9
|
)
|
|
(8.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2019
|
|
$
|
45.3
|
|
$
|
479.4
|
|
$
|
709.8
|
|
$
|
(287.7
|
)
|
$
|
(40.9
|
)
|
$
|
905.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements
are an integral part of these statements.
42
Table of Contents
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Cash flows provided from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7.5
|
|
$
|
15.6
|
|
$
|
56.5
|
|
Less: Income (Loss) from discontinued operations
|
|
|
(76.6
|
)
|
|
(58.1
|
)
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
84.1
|
|
|
73.7
|
|
|
52.0
|
|
Adjustments to reconcile income to net cash provided from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and intangible amortization
|
|
|
42.8
|
|
|
40.5
|
|
|
35.7
|
|
Amortization of stock-based compensation
|
|
|
13.5
|
|
|
15.3
|
|
|
11.0
|
|
Provision for doubtful accounts
|
|
|
15.8
|
|
|
0.5
|
|
|
2.1
|
|
Deferred tax provision (benefit)
|
|
|
(5.0
|
)
|
|
(12.9
|
)
|
|
12.5
|
|
Gain on sale of product line
|
|
|
|
|
|
|
|
|
(2.6
|
)
|
Changes in certain assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(34.4
|
)
|
|
35.4
|
|
|
(16.8
|
)
|
Contract assets
|
|
|
(9.7
|
)
|
|
|
|
|
|
|
Inventories
|
|
|
(80.9
|
)
|
|
(25.8
|
)
|
|
(23.3
|
)
|
Rotable spares and equipment on or available for short-term lease
|
|
|
21.5
|
|
|
(16.6
|
)
|
|
(3.1
|
)
|
Rotable assets supporting long-term programs
|
|
|
(49.2
|
)
|
|
(38.5
|
)
|
|
(82.5
|
)
|
Accounts payable
|
|
|
17.5
|
|
|
1.8
|
|
|
19.6
|
|
Accrued and other liabilities
|
|
|
22.9
|
|
|
8.0
|
|
|
6.5
|
|
Other
|
|
|
21.6
|
|
|
(25.6
|
)
|
|
(24.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) operating activitiescontinuing
operations
|
|
|
60.5
|
|
|
55.8
|
|
|
(13.5
|
)
|
Net cash provided from operating activitiesdiscontinued operations
|
|
|
6.9
|
|
|
8.5
|
|
|
35.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from operating activities
|
|
|
67.4
|
|
|
64.3
|
|
|
21.8
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment expenditures
|
|
|
(17.4
|
)
|
|
(22.0
|
)
|
|
(25.2
|
)
|
Proceeds from asset disposals
|
|
|
1.8
|
|
|
8.6
|
|
|
6.5
|
|
Payments for acquisitions
|
|
|
(2.3
|
)
|
|
(22.9
|
)
|
|
(12.5
|
)
|
Other
|
|
|
(0.6
|
)
|
|
(2.3
|
)
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activitiescontinuing operations
|
|
|
(18.5
|
)
|
|
(38.6
|
)
|
|
(33.9
|
)
|
Net cash provided from (used in) investing activitiesdiscontinued operations
|
|
|
(0.5
|
)
|
|
(4.3
|
)
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(19.0
|
)
|
|
(42.9
|
)
|
|
(30.1
|
)
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (repayments), net
|
|
|
(10.0
|
)
|
|
(1.0
|
)
|
|
21.0
|
|
Proceeds (Repayments) on long-term borrowings
|
|
|
(25.0
|
)
|
|
24.8
|
|
|
(10.0
|
)
|
Cash dividends
|
|
|
(10.5
|
)
|
|
(10.3
|
)
|
|
(10.2
|
)
|
Purchase of treasury stock
|
|
|
(10.3
|
)
|
|
(13.1
|
)
|
|
(19.8
|
)
|
Stock option exercises
|
|
|
8.5
|
|
|
11.6
|
|
|
8.5
|
|
Other
|
|
|
|
|
|
(0.3
|
)
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) financing activitiescontinuing operations
|
|
|
(47.3
|
)
|
|
11.7
|
|
|
(10.4
|
)
|
Net cash used in financing activitiesdiscontinued operations
|
|
|
(1.4
|
)
|
|
(1.7
|
)
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) financing activities
|
|
|
(48.7
|
)
|
|
10.0
|
|
|
(12.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(0.2
|
)
|
|
(0.1
|
)
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in cash and cash equivalents
|
|
|
(0.5
|
)
|
|
31.3
|
|
|
(20.9
|
)
|
Cash, cash equivalents, and restricted cash at beginning of year
|
|
|
41.6
|
|
|
10.3
|
|
|
31.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash at end of year
|
|
$
|
41.1
|
|
$
|
41.6
|
|
$
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements
are an integral part of these statements.
43
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies
Description of Business
AAR CORP. is a diversified provider of services and products to the worldwide commercial aviation and government and defense markets. Services
and products include: aviation supply chain and parts support programs; customer fleet management and operations; maintenance, repair and overhaul of airframes, landing gear, and certain other
airframe components; design and manufacture of specialized pallets, shelters, and containers; aircraft modifications and aircraft and engine sales and leasing. We serve commercial, government and
defense aircraft fleet operators, original equipment manufacturers, and independent service providers around the world, and various other domestic and foreign military customers.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries after elimination of
intercompany accounts and transactions.
New Accounting Pronouncements Adopted
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09,
Improvements to Employee Share-Based Payment
Accounting
, which amends ASC Topic 718,
CompensationStock Compensation
. This ASU requires excess tax benefits or deficiencies for share-based payments to be
recorded in the period
shares vest as income tax expense or benefit, rather than within equity. Effective with the adoption of this ASU, cash flows related to excess tax benefits are now included in operating activities and
are no longer classified as a financing activity. We adopted this ASU on June 1, 2017 and recognized excess tax benefits of $2.7 million and $2.9 million as an income tax benefit
in fiscal 2019 and 2018, respectively. We have also presented the excess tax benefits within operating activities in the Consolidated Statements of Cash Flows for fiscal 2019 and 2018. As permitted,
we adopted the statement of cash flow presentation guidance on a prospective basis with no adjustments to fiscal 2017.
In
March 2017, the FASB issued ASU 2017-07,
CompensationRetirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and
Net Periodic Postretirement Benefit Cost
. This ASU requires an employer to report the service cost component of net periodic pension benefit cost in the same line item as other
compensation costs for those related employees. Other components of net pension cost, including interest, expected return on plan assets, and actuarial gains and losses and settlement charges are to
be presented outside of operating income. We adopted this ASU on June 1, 2018, which resulted in $1.0 million of pension income included in Other expense, net in the Consolidated
Statement of Income for fiscal 2019. The Consolidated Statements of Income for fiscal years 2018 and 2017 were not restated as the non-service cost components of pension expense were not material to
those fiscal years.
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
("ASC 606"), which provides guidance for
revenue recognition. ASC 606 superseded the revenue recognition requirements in Accounting Standards Codification ("ASC") 605,
Revenue Recognition
, and
most industry-specific guidance.
We
adopted ASC 606 on June 1, 2018 using the modified retrospective method. Under that approach, prior periods were not restated and continue to be reported under the accounting
standards in effect for
44
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
those
periods. We elected to use the practical expedient allowing for the application of ASC 606 only to contracts that were not completed as of June 1, 2018. We recognized the cumulative
effect of initially applying ASC 606 as a decrease of $20.4 million to the opening balance of retained earnings as of June 1, 2018.
The
impact of the adoption of ASC 606 on our Consolidated Balance Sheet was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
May 31, 2018
|
|
ASC 606
Adjustments
|
|
As of
June 1, 2018
|
|
Accounts receivable, net
|
|
$
|
202.0
|
|
$
|
(31.4
|
)
|
$
|
170.6
|
|
Inventories
|
|
|
460.7
|
|
|
(17.3
|
)
|
|
443.4
|
|
Contract assetscurrent
|
|
|
|
|
|
49.6
|
|
|
49.6
|
|
Other current assets
|
|
|
26.2
|
|
|
(0.9
|
)
|
|
25.3
|
|
Other non-current assets
|
|
|
118.9
|
|
|
(19.0
|
)
|
|
99.9
|
|
Accrued liabilities
|
|
|
138.3
|
|
|
9.1
|
|
|
147.4
|
|
Deferred tax liabilities
|
|
|
15.7
|
|
|
(6.6
|
)
|
|
9.1
|
|
Deferred revenue on long-term contracts
|
|
|
35.8
|
|
|
(1.1
|
)
|
|
34.7
|
|
Retained earnings
|
|
|
733.2
|
|
|
(20.4
|
)
|
|
712.8
|
|
The
adoption of ASC 606 impacted us in three primary areas. First, we have certain contracts in which revenue is recognized using the percentage of completion method over the expected
term of the contract. Under ASC 606, the contract term used for revenue recognition purposes was shortened to exclude any unexercised customer option years or incorporate customer rights to terminate
the contract without significant penalty as we do not have any enforceable rights or obligations prior to the exercise of the underlying option. The impact of this change as of June 1, 2018
resulted in the elimination of certain deferred costs and the establishment of accrued liabilities reflecting our estimated obligations under the contracts. For this change, we recognized a decrease
of $22.1 million to the opening balance of retained earnings as of June 1, 2018.
Second,
we have contracts under which we perform repair services on customer-owned assets whereby the customer simultaneously receives the benefits of the repair. These contracts also
transitioned to an over time revenue recognition model as of June 1, 2018 compared to our prior policy of recognizing revenue at the time of shipment. The impact of this change as of
June 1, 2018 resulted in the elimination of certain inventory and accounts receivable amounts and the establishment of a contract asset reflecting the over time revenue recognition treatment.
For this change, we recognized an increase of $1.3 million to the opening balance of retained earnings as of June 1, 2018.
Third,
we have certain contracts under which we manufacture products with no alternative use as the customer owns the underlying intellectual property and we have an enforceable right to
payment from the customer. As a result, we now recognize revenue for these contracts over time as opposed to at the time of shipment, which was our policy prior to June 1, 2018. The impact of
this change as of June 1, 2018 resulted in the elimination of certain inventory amounts and the establishment of a contract asset reflecting the over time revenue recognition treatment. For
this change, we recognized an increase of $0.4 million to the opening balance of retained earnings as of June 1, 2018.
45
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
The
impact of the ASC 606 adoption on our Consolidated Financial Statements as of May 31, 2019 and for the fiscal year ended May 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2019
|
|
|
|
As Reported
|
|
ASC 606
Adjustments
|
|
Balances
Excluding
ASC 606
|
|
Accounts receivable, net
|
|
$
|
197.8
|
|
$
|
38.5
|
|
$
|
236.3
|
|
Contract assetscurrent
|
|
|
59.2
|
|
|
(59.2
|
)
|
|
|
|
Inventories
|
|
|
523.7
|
|
|
22.2
|
|
|
545.9
|
|
Other current assets
|
|
|
36.2
|
|
|
(0.4
|
)
|
|
35.8
|
|
Other non-current assets
|
|
|
77.5
|
|
|
25.3
|
|
|
102.8
|
|
Accrued liabilities
|
|
|
140.5
|
|
|
(5.9
|
)
|
|
134.5
|
|
Deferred tax liabilities
|
|
|
|
|
|
6.6
|
|
|
6.6
|
|
Deferred revenue on long-term contracts
|
|
|
83.8
|
|
|
5.2
|
|
|
89.0
|
|
Retained earnings
|
|
|
709.8
|
|
|
20.5
|
|
|
730.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended May 31, 2019
|
|
|
|
As Reported
|
|
ASC 606
Adjustments
|
|
Balances
Excluding
ASC 606
|
|
Sales
|
|
$
|
2,051.8
|
|
$
|
(5.0
|
)
|
$
|
2,046.8
|
|
Cost of sales
|
|
|
1,722.3
|
|
|
(5.1
|
)
|
|
1,717.2
|
|
Operating income
|
|
|
98.3
|
|
|
0.1
|
|
|
98.4
|
|
Provision for income taxes
|
|
|
4.9
|
|
|
|
|
|
4.9
|
|
Income from continuing operations
|
|
|
84.1
|
|
|
0.1
|
|
|
84.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended May 31, 2019
|
|
|
|
As Reported
|
|
ASC 606
Adjustments
|
|
Balances
Excluding
ASC 606
|
|
Cash flows provided from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7.5
|
|
$
|
0.1
|
|
$
|
7.6
|
|
Income from continuing operations
|
|
|
84.1
|
|
|
0.1
|
|
|
84.2
|
|
Accounts receivable
|
|
|
(34.4
|
)
|
|
(7.1
|
)
|
|
(41.5
|
)
|
Contract assets
|
|
|
(9.7
|
)
|
|
9.7
|
|
|
|
|
Inventories
|
|
|
(80.9
|
)
|
|
(4.9
|
)
|
|
(85.8
|
)
|
Accrued and other liabilities
|
|
|
22.9
|
|
|
3.2
|
|
|
26.1
|
|
Other
|
|
|
21.6
|
|
|
(1.0
|
)
|
|
20.6
|
|
Revenue Recognition for Fiscal 2019
Revenue is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on
behalf of third parties. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer.
46
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
Our
unit of accounting for revenue recognition is a performance obligation included in our customer contracts. A performance obligation reflects the distinct good or service that we must
transfer to a customer. At contract inception, we evaluate if the contract should be accounted for as a single performance obligation or if the contract contains multiple performance obligations. In
some cases, our contract with the customer is considered one performance obligation as it includes factors such as whether the good or service being provided is significantly integrated with other
promises in the contract, whether the service provided significantly modifies or customizes another good or service or whether the good or service is highly interdependent or interrelated. If the
contract has more than one performance obligation, we determine the standalone price of each distinct good or service underlying each performance obligation and allocate the transaction price based on
their relative standalone selling prices.
The
transaction price of a contract, which can include both fixed and variable amounts, is allocated to each performance obligation identified. Some contracts contain variable
consideration, which could include incremental fees or penalty provisions related to performance. Variable consideration that can be reasonably estimated based on current assumptions and historical
information is included in the transaction price at the inception of the contract but limited to the amount that is probable that a significant reversal in the amount of cumulative revenue recognized
will not occur. Variable consideration that cannot be reasonably estimated is recorded when known.
Our
performance obligations are satisfied over time as work progresses or at a point in time based on transfer of control of products and services to our customers. The majority of our
sales from products are recognized at a point in time upon transfer of control to the customer, which generally occurs upon shipment. In connection with certain sales of products, we also provide
logistics services, which include
inventory management, replenishment, and other related services. The price of such services is generally included in the price of the products delivered to the customer, and revenues are recognized
upon delivery of the product, at which point, the customer has obtained control of the product. We do not account for these services separate from the related product sales as the services are inputs
required to fulfill part orders received from customers.
For
our performance obligations that are satisfied over time, we measure progress in a manner that depicts the performance of transferring control to the customer. As such, we utilize
the input method of cost-to-cost to recognize revenue over time as this depicts when control of the promised goods or services are transferred to the customer. Revenue is recognized based on the
relationship of actual costs incurred to date to the estimated total cost at completion of the performance obligation. We are required to make certain judgments and estimates, including estimated
revenues and costs, as well as inflation and the overall profitability of the arrangement. Key assumptions involved include future labor costs and efficiencies, overhead costs, and ultimate timing of
product delivery. Differences may occur between the judgments and estimates made by management and actual program results.
Changes
in estimates and assumptions related to our arrangements accounted for using the cost-to-cost method are recorded using the cumulative catch-up method of accounting. These
changes are primarily adjustments to the estimated profitability for our long-term programs where we provide component inventory management and/or repair services. For the fiscal year ended
May 31, 2019, we recognized favorable and unfavorable cumulative catch-up adjustments of $8.0 million and $2.1 million, respectively.
47
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
Under
most of our U.S. government contracts, if the contract is terminated for convenience, we are entitled to payment for items delivered and fair compensation for work performed, the
costs of settling and paying other claims, and a reasonable profit on the costs incurred or committed.
Lease
revenues are recognized as earned. Income from monthly or quarterly rental payments is recorded in the pertinent period according to the lease agreement. However, for leases that
provide variable rents, we recognize lease income on a straight-line basis. In addition to a monthly lease rate, some engine leases require an additional rental amount based on the number of hours the
engine is used in a particular month. Lease income associated with these contingent rentals is recorded in the period in which actual usage is reported to us by the lessee, which is normally the month
following the actual usage.
We
have elected to use certain practical expedients permitted under ASC 606. Shipping and handling fees and costs incurred associated with outbound freight after control over a product
has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales in our Consolidated
Statement of Income, and are not considered a performance obligation to our customers. Our reported sales on our Consolidated Statement of Income are net of any sales or related non-income taxes. We
also utilize the "as invoiced" practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value we are providing
to the customer.
Revenue Recognition for Fiscal 2018 and 2017
Sales and related cost of sales for product sales are generally recognized upon shipment of the product to the customer. Our standard terms and
conditions provide that title passes to the customer when the product is shipped to the customer. Sales of certain defense products are recognized upon customer acceptance, which includes transfer of
title. Sales from services and the related cost of services are generally recognized when customer-owned material is shipped back to the customer. We have adopted this accounting policy because at the
time the customer-owned material is shipped back to the customer, all services related to that material are complete as our service agreements generally do not require us to provide services at
customer sites. Furthermore, serviced units are typically shipped to the customer immediately upon completion of the related services. Sales and related cost of sales for certain large airframe
maintenance contracts and performance-based logistics programs are recognized by the percentage of completion method, based on the relationship of costs incurred to date to the estimated total costs.
Net favorable cumulative catch-up adjustments recognized during fiscal 2018 and 2017 were $3.6 million and $8.5 million, respectively, resulting from changes to the estimated
profitability of these contracts.
Lease
revenues are recognized as earned. Income from monthly or quarterly rental payments is recorded in the pertinent period according to the lease agreement. However, for leases that
provide variable rents, we recognize lease income on a straight-line basis. In addition to a monthly lease rate, some engine leases require an additional rental amount based on the number of hours the
engine is used in a particular month. Lease income associated with these contingent rentals is recorded in the period in which actual usage is reported to us by the lessee, which is normally the month
following the actual usage.
Certain
supply chain management programs we provide to our customers contain multiple elements or deliverables, such as program and warehouse management, parts distribution, and
maintenance and
48
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
repair
services. We recognize revenue for each element or deliverable that can be identified as a separate unit of accounting at the time of delivery based upon the relative fair value of the products
and services.
Contract Assets and Liabilities
The timing of revenue recognition, customer billings, and cash collections results in a contract asset or contract liability at the end of each
reporting period. Contract assets consist of unbilled receivables or costs incurred where revenue recognized over time using the cost-to-cost model exceeds the amounts billed to customers. Contract
liabilities include advance payments and billings in excess of revenue recognized. Certain customers make advance payments prior to the satisfaction of our performance obligations on the contract.
These amounts are recorded as contract liabilities until such performance obligations are satisfied, either over time as costs are incurred or at a point in time when deliveries are made. Contract
assets and contract liabilities are determined on a contract-by-contract basis.
Net
contract assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2019
|
|
June 1, 2018
|
|
Change
|
|
Contract assetscurrent
|
|
$
|
59.2
|
|
$
|
49.6
|
|
$
|
9.6
|
|
Contract assetsnon-current
|
|
|
17.0
|
|
|
12.9
|
|
|
4.1
|
|
Deferred revenuecurrent
|
|
|
(12.6
|
)
|
|
(9.4
|
)
|
|
(3.2
|
)
|
Deferred revenue on long-term contracts
|
|
|
(83.8
|
)
|
|
(34.7
|
)
|
|
(49.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net contract assets (liabilities)
|
|
$
|
(20.2
|
)
|
$
|
18.4
|
|
$
|
(38.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
assetsnon-current is reported within Other non-current assets, and Contract liabilitiescurrent is reported within Accrued Liabilities on our
Consolidated Balance Sheet. Changes in contract assets and contract liabilities primarily result from the timing difference between our performance of services and payments from customers. For the
fiscal year ended May 31, 2019, we recognized as revenue the entire opening balance of our contract liabilities as the timing between customer payment and our performance of the services is a
short period of time and generally no longer than three months.
Remaining Performance Obligations
As of May 31, 2019, we had approximately $1.5 billion of remaining performance obligations, also referred to as firm backlog,
which excludes unexercised contract options and potential orders under our indefinite-delivery, indefinite-quantity contracts. We expect that approximately 40% of this backlog will be recognized as
revenue over the next 12 months, with the majority of the remaining balance recognized over the next three years. The amount of remaining performance obligations that is expected to be
recognized as revenue beyond 12 months primarily relates to our long-term programs where we provide component inventory management and/or repair services.
49
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts to reflect the expected uncollectibility of accounts receivable based on past collection history
and specific risks identified among uncollected accounts. In determining the required allowance, we consider factors such as general and industry-specific economic conditions, customer credit history,
and our customers' current and expected future financial performance. The majority of our customers are recurring customers with an established payment history. Certain customers are required to
undergo an extensive credit check prior to delivery of products or services.
We
perform regular evaluations of customer payment experience, current financial condition, and risk analysis. We may require collateral in the form of security interests in assets,
letters of credit, and/or obligation guarantees from financial institutions for transactions executed on other than normal trade terms. We also maintain trade credit insurance for certain customers to
provide coverage, up to a certain limit, in the event of insolvency of some customers.
In
fiscal 2019, we recognized a provision for doubtful accounts of $12.4 million related to the bankruptcy of a European airline customer. The provision consisted of impairment of
non-current contract assets of $7.6 million, allowance for doubtful accounts of $3.3 million, and other liabilities of $1.5 million.
The
change in our allowance for doubtful accounts was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Balance, beginning of year
|
|
$
|
7.5
|
|
$
|
4.9
|
|
$
|
3.3
|
|
Provision charged to operations
|
|
|
15.8
|
|
|
0.5
|
|
|
2.1
|
|
Recoveries, deductions for accounts written off and other reclassifications
|
|
|
(7.3
|
)
|
|
2.1
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
16.0
|
|
$
|
7.5
|
|
$
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and Other Intangible Assets
In accordance with ASC 350,
IntangiblesGoodwill and Other
, goodwill and other
intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. We review and evaluate our goodwill and indefinite life intangible assets for potential
impairment at a minimum annually, on May 31, or more frequently if circumstances indicate that impairment is possible.
As
of May 31, 2019, we had three reporting units, which included two in our Aviation Services segment (Aviation Supply Chain and Maintenance, Repair, and Overhaul) and one
comprised of our Expeditionary Services segment. We utilized the qualitative assessment approach for all reporting units and concluded it was more likely than not that the fair value of each reporting
unit exceeded its carrying value at May 31, 2019, and thus no impairment charge was recorded.
50
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
Changes
in the carrying amount of goodwill by segment for fiscal 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation
Services
|
|
Expeditionary
Services
|
|
Total
|
|
Balance as of May 31, 2017
|
|
$
|
86.3
|
|
$
|
19.3
|
|
$
|
105.6
|
|
Acquisition
|
|
|
12.5
|
|
|
|
|
|
12.5
|
|
Foreign currency translation adjustments
|
|
|
0.6
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2018
|
|
|
99.4
|
|
|
19.3
|
|
|
118.7
|
|
Finalization of purchase price allocation
|
|
|
(1.0
|
)
|
|
|
|
|
(1.0
|
)
|
Foreign currency translation adjustments
|
|
|
(1.5
|
)
|
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2019
|
|
$
|
96.9
|
|
$
|
19.3
|
|
$
|
116.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives. Intangible assets, other than goodwill, are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2019
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
25.5
|
|
$
|
(15.6
|
)
|
$
|
9.9
|
|
Lease agreements
|
|
|
22.5
|
|
|
(14.0
|
)
|
|
8.5
|
|
Other
|
|
|
3.4
|
|
|
(0.7
|
)
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51.4
|
|
|
(30.3
|
)
|
|
21.1
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
1.1
|
|
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52.5
|
|
$
|
(30.3
|
)
|
$
|
22.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2018
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
26.3
|
|
$
|
(13.9
|
)
|
$
|
12.4
|
|
Lease agreements
|
|
|
22.5
|
|
|
(12.6
|
)
|
|
9.9
|
|
Other
|
|
|
11.2
|
|
|
(6.8
|
)
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60.0
|
|
|
(33.3
|
)
|
|
26.7
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
1.1
|
|
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
61.1
|
|
$
|
(33.3
|
)
|
$
|
27.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships are being amortized over 5-20 years and lease agreements are being amortized over 5-18 years. Amortization expense recorded during fiscal 2019, 2018
and 2017 was $3.9 million, $4.7 million, and $4.2 million, respectively. The estimated aggregate amount of amortization expense for
51
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
intangible
assets in each of the next five fiscal years is $3.7 million in 2020, $3.7 million in 2021, $2.8 million in 2022, $2.3 million in 2023 and $2.1 million in
2024.
Foreign Currency
Our foreign subsidiaries utilize the local currency as their functional currency. All balance sheet accounts of foreign subsidiaries transacting
business in currencies other than the U.S. dollar are translated at year-end exchange rates. Revenues and expenses are translated at average exchange rates during the year. Translation adjustments are
excluded from the results of operations and are recorded in stockholders' equity as a component of accumulated other comprehensive loss until such subsidiaries are liquidated.
Cash
Cash and cash equivalents consist of highly liquid instruments which have original maturities of three months or less when purchased. Restricted
cash represents cash on hand required to be set aside by a contractual agreement related to receivable securitization arrangements. Generally, the restrictions related to the receivable securitization
arrangements lapse at the time we remit the customer payments collected by us as servicer of previously sold customer receivables to the purchaser.
Financial Instruments and Concentrations of Market or Credit Risk
Financial instruments that potentially subject us to concentrations of market or credit risk consist principally of trade receivables. While our
trade receivables are diverse and represent a number of entities and geographic regions, the majority are with the U.S. government and its contractors and entities in the aviation industry. The
composition of our accounts receivable is as follows:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2019
|
|
2018
|
|
U.S. Government contracts:
|
|
|
|
|
|
|
|
Trade receivables
|
|
$
|
28.7
|
|
$
|
31.9
|
|
Unbilled receivables
|
|
|
31.7
|
|
|
13.4
|
|
|
|
|
|
|
|
|
|
|
|
|
60.4
|
|
|
45.3
|
|
All other customers:
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
92.5
|
|
|
96.2
|
|
Unbilled receivables
|
|
|
44.9
|
|
|
60.5
|
|
|
|
|
|
|
|
|
|
|
|
|
137.4
|
|
|
156.7
|
|
|
|
|
|
|
|
|
|
|
|
$
|
197.8
|
|
$
|
202.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
addition, we currently have past due accounts receivable owed by former commercial program customers primarily related to our exit from customer contracts in certain geographies,
including Colombia, Peru, and Poland. Our past due accounts receivable owed by these customers was $12.4 million as of May 31, 2019 which was net of allowance for doubtful accounts of
$8.2 million.
52
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
The
carrying amounts of cash and cash equivalents, accounts receivable, and accounts and trade notes payable approximate fair value because of the short-term maturity of these
instruments. The carrying value of long-term debt bearing a variable interest rate approximates fair value.
Fair
value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Inventories
Inventories are valued at the lower of cost or market (estimated net realizable value). Cost is determined by the specific identification,
average cost, or first-in, first-out methods. From time-to-time, we purchase aircraft and engines for disassembly to individual parts and components. Costs are assigned to these individual parts and
components utilizing list prices from original equipment manufacturers and recent sales history.
The
following is a summary of inventories:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2019
|
|
2018
|
|
Aircraft and engine parts, components and finished goods
|
|
$
|
467.9
|
|
$
|
383.5
|
|
Raw materials and parts
|
|
|
41.8
|
|
|
45.1
|
|
Work-in-process
|
|
|
14.0
|
|
|
32.1
|
|
|
|
|
|
|
|
|
|
|
|
$
|
523.7
|
|
$
|
460.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rotable Assets and Equipment under Leases
The cost of the asset under lease is the original purchase price plus overhaul costs. Depreciation is computed using the straight-line method
over the estimated service life of the equipment. The balance sheet classification of equipment under lease is generally based on lease term, with fixed-term leases less than twelve months generally
classified as short-term and all others generally classified as long-term.
Equipment
on short-term lease includes aircraft engines and parts on or available for lease to satisfy customers' immediate short-term requirements. The leases are renewable with fixed
terms, which generally vary from one to twelve months.
Future
rent due to us under non-cancelable leases during each of the next five fiscal years is $29.4 million in 2020, $28.7 million in 2021, $28.2 million in 2022,
$28.0 million in 2023, and $28.0 million in 2024.
Rotable Assets Supporting Long-Term Programs
Rotable assets supporting long-term programs consist of rotable component parts used to support long-term supply chain programs. The assets are
being depreciated on a straight-line basis over their estimated useful lives.
53
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
Property, Plant and Equipment
We record property, plant and equipment at cost. Depreciation is computed on the straight-line method over useful lives of 10-40 years
for buildings and improvements and 3-10 years for equipment, furniture and fixtures, and capitalized software. Leasehold improvements are amortized over the shorter of the estimated useful life
or the term of the applicable lease.
Repair
and maintenance expenditures are expensed as incurred. Upon sale or disposal, cost and accumulated depreciation are removed from the accounts, and related gains and losses are
included in results of operations.
In
accordance with ASC 360,
Property, Plant and Equipment
, we are required to test for impairment of long-lived assets whenever events or
changes in circumstances indicate the carrying value of an asset may not be recoverable from its undiscounted cash flows. We utilize certain assumptions to estimate future undiscounted cash flows,
including demand for our services, future market conditions and trends, business development pipeline of opportunities, current and future lease rates, lease terms, and residual values.
Investments
Investments where we have the ability to exercise significant influence, but do not control the entity, are accounted for under the equity
method of accounting. Significant influence generally exists if we have a 20% to 50% ownership interest in the investee. Our share of the net earnings or loss of our investees is included in operating
income in our Consolidated Statements of Income since the activities of the investees are closely aligned with our operations. Equity investments in entities over which we do not have the ability to
exercise significant influence and whose securities do not have a readily determinable fair value are carried at cost.
We
evaluate our investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired. If a decline in the value
of an investment is determined to be other than temporary, a loss is recorded in earnings in the current period.
Our
investments are classified in Other non-current assets on our Consolidated Balance Sheets. Distributions from joint ventures are classified as operating or investing activities in
the Consolidated
Statements of Cash Flows based upon an evaluation of the specific facts and circumstances of each distribution.
Income Taxes
We are subject to income taxes in the U.S., state, and several foreign jurisdictions. In the ordinary course of business, there can be
transactions and calculations where the ultimate tax determination is uncertain. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns in accordance with applicable accounting guidance for accounting for income taxes, using currently enacted tax rates in effect for the year in which
the differences are expected to reverse.
We
record a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. Deferred tax assets are reduced by a valuation allowance if, based on
the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
54
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
Both
positive and negative evidence are considered in forming our judgment as to whether a valuation allowance is appropriate, and more weight is given to evidence that can be objectively verified.
Valuation allowances are reassessed whenever there are changes in circumstances that may cause a change in judgment.
The
accounting for uncertainty in income taxes requires a more-likely-than-not threshold for financial statement recognition of tax positions taken or expected to be taken in a tax
return. Where necessary, we record a liability for the difference between the benefit recognized for financial statement purposes and the tax position taken or expected to be taken on our tax return.
To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made.
Supplemental Information on Cash Flows
Supplemental information on cash flows is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Interest paid
|
|
$
|
8.8
|
|
$
|
7.2
|
|
$
|
4.4
|
|
Income taxes paid
|
|
|
7.0
|
|
|
17.0
|
|
|
12.7
|
|
Income tax refunds and interest received
|
|
|
6.4
|
|
|
0.1
|
|
|
1.3
|
|
During
fiscal 2019, treasury stock increased $7.0 million reflecting the repurchase of common shares of $10.3 million, restricted stock activity of $0.8 million
partially offset by the re-issuance of shares upon exercise of stock options, net of shares withheld to satisfy statutory tax obligations, of $4.1 million.
During
fiscal 2018, treasury stock increased $0.9 million reflecting the repurchase of common shares of $13.1 million, restricted stock activity of $1.0 million and
the re-issuance of shares upon exercise of stock options, net of shares withheld to satisfy statutory tax obligations, of $11.2 million.
During
fiscal 2017, treasury stock increased $12.2 million reflecting the repurchase of common shares of $19.8 million, restricted stock grants of $1.3 million and
the re-issuance of shares upon exercise of stock options, net of shares withheld to satisfy statutory tax obligations, of $8.9 million.
Use of Estimates
We have made estimates and utilized certain assumptions relating to the reporting of assets and liabilities and the disclosures of contingent
liabilities to prepare these Consolidated
Financial Statements in conformity with accounting principles generally accepted in the United States. Actual results could differ from those estimates.
New Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02,
Leases
. This ASU amends the existing
accounting standards for lease accounting, including requiring lessees to recognize a right-of-use asset and lease liability on the balance sheet for most lease arrangements, including those
classified as operating leases under the current accounting guidance. In addition, this ASU will require new qualitative and quantitative
55
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
disclosures
about our leasing activities. This new standard will be effective for us beginning June 1, 2019 and is required to be adopted using a modified retrospective approach. The new
standard provides us an option to recognize the cumulative effect adjustment on retained earnings as of June 1, 2019 or as of the beginning of the earliest period presented.
We
have reviewed our lease portfolio and are finalizing implementation of the necessary processes and systems to comply with the requirements of this new ASU. This included the selection
and implementation of a third-party software solution to facilitate the accounting and reporting requirements of the new ASU.
We
will adopt this ASU in the first quarter of fiscal 2020 and apply it prospectively. We expect to elect the package of practical expedients, which permits us not to reassess under the
new ASU our prior conclusions about lease identification, lease classification and initial direct costs. In addition, we will implement accounting policy elections to not separate lease and non-lease
components for both lessee and lessor relationships and not capitalize any leases with terms of less than twelve months on our Consolidated Balance Sheet.
We
expect to recognize operating lease liabilities with corresponding right-of-use assets of approximately the same amount based on the present value of the remaining lease payments over
the lease term. We do not anticipate that adoption of the ASU will have a significant impact on our results of operations or cash flows.
In
February 2018, the FASB issued ASU 2018-02,
Income StatementReporting Comprehensive Income (Topic 220): Reclassification of Certain
Tax Effects from Accumulated Other Comprehensive Income
. This ASU permits the reclassification of tax effects stranded in accumulated other comprehensive income to retained
earnings as a result of the Tax Cuts and Jobs Act (the "Tax Reform Act"). We continue to evaluate the impact of this ASU on our consolidated financial statements and expect to adopt this ASU in the
first quarter of fiscal 2020.
In
June 2016, the FASB issued ASU 2016-13,
Financial InstrumentsCredit Losses (Topic 326), Measurement of Credit Losses on Financial
Instruments
. This ASU requires a change in the measurement approach for credit losses on financial assets measured on an amortized cost basis from an incurred loss method to an
expected loss method, thereby eliminating the requirement that a credit loss be considered probable to impact the valuation of a financial asset measured on an amortized cost basis. This ASU also
requires the measurement of expected credit losses to be based on relevant information about past events, including historical experience, current conditions, and a reasonable and supportable forecast
of the collectability of the related financial asset. We continue to evaluate the impact of this ASU on our consolidated financial statements and expect to adopt this ASU on June 1, 2020.
56
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AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
2. Discontinued Operations
Our Contractor-Owned, Contractor-Operated ("COCO") business completed certain contracts in the second quarter of fiscal 2018. As the aircraft supporting these contracts were not placed
on new contracts, combined with the continued decline in operational tempo within the U.S. Department of Defense ("DoD") and an excess supply of aircraft assets in the market, we determined there was
an impairment triggering event and tested the recoverability of our COCO assets. As a result, we recognized impairment and other charges of $54.2 million in the second quarter of fiscal 2018.
The fair value of the aircraft and related assets was based on available market data for similar assets.
During
the third quarter of fiscal 2018, we decided to pursue the sale of our COCO business previously included in our Expeditionary Services segment. Due to this strategic shift, the
assets, liabilities, and results of operations of our COCO business have been reported as discontinued operations for all periods presented. Goodwill was allocated to this business based on its
relative fair value to the reporting unit. The fair value of the reporting unit was determined based on a combination of the expected net proceeds upon sale and a discounted cash flow analysis. As the
fair value of the COCO business was below its carrying value, a goodwill impairment charge of $9.8 million, representing the estimated loss on disposal, was recorded in the third quarter of
fiscal 2018.
On
March 15, 2019, we signed an agreement to sell certain contracts and assets of our COCO business. We expect the sale to close before the end of calendar 2019. In conjunction
with this agreement and other expected asset sales, we recognized an impairment charge in discontinued operations of $74.1 million during the third quarter of fiscal 2019 reflecting the
expected net proceeds to be received upon the completion of the sale transactions.
Discontinued
operations also includes the results of our former metal machining operation, which was shutdown in the first quarter of fiscal 2017.
No
amounts for general corporate overhead or interest expense were allocated to discontinued operations during the periods presented. Unless otherwise noted, amounts and disclosures
throughout these Notes to Consolidated Financial Statements relate to our continuing operations.
Operating
results for discontinued operations were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Sales
|
|
$
|
95.8
|
|
$
|
96.3
|
|
$
|
176.9
|
|
Cost of sales
|
|
|
(106.1
|
)
|
|
(101.4
|
)
|
|
(165.1
|
)
|
Asset impairments
|
|
|
(74.1
|
)
|
|
(65.2
|
)
|
|
|
|
Selling, general and administrative expenses
|
|
|
(12.1
|
)
|
|
(11.8
|
)
|
|
(16.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from discontinued operations
|
|
|
(96.5
|
)
|
|
(82.1
|
)
|
|
(4.3
|
)
|
Provision for income taxes (benefit)
|
|
|
(19.9
|
)
|
|
(24.0
|
)
|
|
(8.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from discontinued operations
|
|
$
|
(76.6
|
)
|
$
|
(58.1
|
)
|
$
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the fourth quarter of fiscal 2017, we recognized an income tax benefit in discontinued operations of $6.7 million for an effective settlement of a previously reserved tax
position.
57
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AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
2. Discontinued Operations (Continued)
The
carrying amounts of the major classes of assets and liabilities for our discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
May 31,
2019
|
|
May 31,
2018
|
|
Accounts receivable, net
|
|
$
|
16.2
|
|
$
|
14.7
|
|
Inventory, rotable assets, and equipment
|
|
|
7.5
|
|
|
106.1
|
|
Other assets
|
|
|
5.5
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
29.2
|
|
$
|
125.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
$
|
29.2
|
|
$
|
25.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Sale of Receivables
On February 23, 2018, we entered into a Purchase Agreement with Citibank N.A. ("Purchaser") for the sale, from time to time, of certain accounts receivable due from certain
customers (the "Purchase Agreement"). Under the Purchase Agreement, the maximum amount of receivables sold is limited to $150 million. The term of the Purchase Agreement runs through
February 22, 2020; however, the Purchase Agreement may also be terminated earlier under certain circumstances. The term of the Purchase Agreement shall be automatically extended for annual
terms unless either party provides advance notice that they do not intend to extend the term.
We
have no retained interests in the sold receivables, other than limited recourse obligations in certain circumstances, and only perform collection and administrative functions for the
Purchaser. We account for these receivable transfers as sales under ASC 860,
Transfers and Servicing
, and de-recognize the sold receivables from our
Consolidated Balance Sheet.
During
fiscal 2019 and 2018, we sold $744.2 million and $239.6 million, respectively, of receivables under the Purchase Agreement and remitted $729.7 million and
$167.9 million, respectively, to the Purchaser on their behalf. As of May 31, 2019 and May 31, 2018, we had collected cash of $19.8 million and $10.5 million,
respectively, which was not yet remitted to the Purchaser as of those dates and was classified as Restricted cash on our Consolidated Balance Sheets.
We
recognize discounts on the sale of our receivables and other fees related to the Purchase Agreement in Other expense, net on our Consolidated Statements of Income. During fiscal 2019
and 2018, we incurred discounts on the sale of our receivables and other fees of $2.2 million and $0.9 million, respectively.
58
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AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
4. Financing Arrangements
Debt Outstanding
A summary of the carrying amount of our debt is as follows:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2019
|
|
2018
|
|
Revolving Credit Facility expiring November 1, 2021 with interest payable monthly
|
|
$
|
120.0
|
|
$
|
130.0
|
|
Term loan due November 1, 2021 with interest payable monthly
|
|
|
22.9
|
|
|
23.9
|
|
Industrial revenue bond (secured by property, plant and equipment) due August 1, 2018 with interest payable monthly
|
|
|
|
|
|
25.0
|
|
Capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
142.9
|
|
|
178.9
|
|
Current maturities of debt
|
|
|
|
|
|
|
|
Debt issuance costs, net
|
|
|
(1.2
|
)
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
141.7
|
|
$
|
177.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
May 31, 2019, our variable rate and fixed rate debt had a fair value that approximates its carrying value and is classified as Level 2 in the fair value hierarchy.
The
industrial revenue bond was paid on August 1, 2018 using our Revolving Credit Facility.
On
October 18, 2017, we entered into a Credit Agreement with the Canadian Imperial Bank of Commerce, as lender (the "Credit Agreement"). The Credit Agreement provided a Canadian
$31 million term loan with the proceeds used to fund the acquisition of two maintenance, repair, and overhaul ("MRO") facilities in Canada from Premier Aviation. The term loan is due in full at
the expiration of the Credit Agreement on November 1, 2021 unless terminated earlier pursuant to the terms of the Credit Agreement. Interest is payable monthly on the term loan at the offered
fluctuating Canadian Dollar Offer Rate plus 125 to 225 basis points based on certain financial measurements if a Bankers' Acceptances loan, or at the offered fluctuating Prime Rate plus 25 to 125
basis points based on certain financial measurements, if a Prime Rate loan.
We
maintain a Revolving Credit Facility with various financial institutions, as lenders, and Bank of America, N.A., as administrative agent for the lenders, which provides the Company an
aggregate revolving credit commitment amount of $500 million. The Company, under certain circumstances, has the ability to request an increase to the revolving credit commitment by an aggregate
amount of up to $250 million, not to exceed $750 million in total.
On
November 1, 2016, we entered into an amendment to our Revolving Credit Facility which extended the maturity of the Revolving Credit Facility to November 1, 2021,
eliminated the condition of no material adverse change for credit extensions and modified certain other provisions.
Borrowings
under the Revolving Credit Facility bear interest at the offered Eurodollar Rate plus 100 to 200 basis points based on certain financial measurements if a Eurodollar Rate
loan, or at the offered fluctuating Base Rate plus 0 to 100 basis points based on certain financial measurements if a Base Rate loan.
59
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
4. Financing Arrangements (Continued)
The
industrial revenue bond that matured on August 1, 2018 was classified as a long-term liability due to our intent and ability to refinance this bond on a long-term basis using
our Revolving Credit Facility.
Our
financing arrangements also require us to comply with leverage and interest coverage ratios, maintain a minimum net working capital level, and comply with certain affirmative and
negative covenants, including those relating to financial reporting and notification, payment of indebtedness, cash dividends, taxes and other obligations, compliance with applicable laws, and
limitations on additional liens, indebtedness, acquisitions, investments and disposition of assets. The Revolving Credit Facility also requires our significant domestic subsidiaries, and any
subsidiaries that guarantee our other indebtedness, to provide a guarantee of payment under the Revolving Credit Facility. At May 31, 2019, we were in compliance with the financial and other
covenants in our financing agreements.
Borrowing
activity under the Revolving Credit Facility during fiscal 2019, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Maximum amount borrowed
|
|
$
|
287.0
|
|
$
|
275.0
|
|
$
|
217.0
|
|
Average daily borrowings
|
|
|
207.8
|
|
|
214.1
|
|
|
175.5
|
|
Average interest rate during the year
|
|
|
3.41
|
%
|
|
2.52
|
%
|
|
1.77
|
%
|
We
also have $9.5 million available under foreign lines of credit.
5. Stock-Based Compensation
We have granted stock-based awards under the AAR CORP. 2013 Stock Plan (the "2013 Stock Plan") and the AAR CORP. Stock Benefit Plan ("Stock Benefit Plan") each of which has been approved
by our stockholders. No further awards will be made under the Stock Benefit Plan. Under the 2013 Stock Plan, we are authorized to issue stock options to employees and non-employee directors that allow
the
grant recipients to purchase shares of common stock at a price not less than the fair market value of the common stock on the date of grant. Generally, stock options awarded expire ten years from the
date of grant and are exercisable in three annual increments commencing one year after the date of grant. In addition to stock options, the 2013 Stock Plan also provides for the grant of time-based
restricted stock awards and performance-based restricted stock awards. The number of performance-based awards earned, subject to vesting, is based on achievement of certain Company-wide or segment
financial goals or stock price targets. The 2013 Stock Plan also provides for the grant of stock appreciation units and restricted stock units; however, to date, no such awards have been granted.
Restricted
stock grants (whether time-based or performance-based) are designed, among other things, to align employee interests with the interests of stockholders and to encourage the
recipient to build a career with us. Restricted stock typically vests over periods of one to five years from date of grant. Restricted stock grants may be performance-based with vesting to occur over
periods of three to five years. All restricted stock that has been granted and, if performance-based, earned according to performance criteria carries full dividend and voting rights, regardless of
whether it has vested.
Substantially
all stock options and restricted stock are subject to forfeiture prior to vesting if the employee's employment terminates for any reason other than death, disability or
retirement. Since inception, a total of 11,149,000 shares have been granted under the Stock Benefit Plan. We have granted a
60
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
5. Stock-Based Compensation (Continued)
total
of 3,089,000 shares under the 2013 Stock Plan. All future stock awards will be made under the 2013 Stock Plan. There were 1,556,114 shares available for grant under the 2013 Stock Plan as of
May 31, 2019.
Stock Options
During fiscal 2019, 2018, and 2017, we granted stock options with respect to 300,240 shares, 463,140 shares and 687,000 shares, respectively.
The weighted average fair value per share of stock options granted during fiscal 2019, 2018 and 2017 was $13.60, $9.29 and $6.50, respectively. The fair value of each stock option grant was estimated
on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
Granted In
Fiscal Year
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Risk-free interest rate
|
|
|
2.7
|
%
|
|
1.8
|
%
|
|
1.0
|
%
|
Expected volatility of common stock
|
|
|
30.8
|
%
|
|
31.7
|
%
|
|
36.8
|
%
|
Dividend yield
|
|
|
0.6
|
%
|
|
0.9
|
%
|
|
1.3
|
%
|
Expected option term in years
|
|
|
4.5
|
|
|
4.3
|
|
|
4.0
|
|
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on historical volatility of our common stock, and
the expected option term represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The dividend yield represents our anticipated
cash dividends at the grant date over the expected option term.
A
summary of stock option activity for the three years ended May 31, 2019 consisted of the following (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at beginning of year
|
|
|
2,082
|
|
$
|
26.72
|
|
|
2,334
|
|
$
|
23.02
|
|
|
2,096
|
|
$
|
22.17
|
|
Granted
|
|
|
300
|
|
$
|
47.84
|
|
|
463
|
|
$
|
35.33
|
|
|
687
|
|
$
|
24.10
|
|
Exercised
|
|
|
(571
|
)
|
$
|
25.56
|
|
|
(704
|
)
|
$
|
20.04
|
|
|
(396
|
)
|
$
|
20.07
|
|
Cancelled
|
|
|
(34
|
)
|
$
|
42.02
|
|
|
(11
|
)
|
$
|
29.50
|
|
|
(53
|
)
|
$
|
25.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,777
|
|
$
|
30.37
|
|
|
2,082
|
|
$
|
26.72
|
|
|
2,334
|
|
$
|
23.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
981
|
|
$
|
25.28
|
|
|
883
|
|
$
|
23.81
|
|
|
910
|
|
$
|
21.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
total fair value of stock options that vested during fiscal 2019, 2018, and 2017 was $5.6 million, $4.9 million, and $3.5 million, respectively. The total
intrinsic value of stock options exercised during fiscal 2019, 2018, and 2017 was $12.2 million, $14.2 million, and $4.7 million, respectively. The aggregate intrinsic value of
options outstanding was $6.7 million and $37.4 million as of May 31, 2019 and 2018, respectively. The tax benefit realized from stock options exercised during fiscal 2019, 2018,
and 2017 was $2.7 million,
61
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
5. Stock-Based Compensation (Continued)
$2.9 million,
and $1.2 million, respectively. Expense recognized in selling, general and administrative expenses for stock options during fiscal 2019, 2018, and 2017 was
$4.1 million, $5.1 million, and $4.6 million, respectively. As of May 31, 2019, we had $4.2 million of unrecognized compensation expense related to stock options
that will be amortized over an average period of 1.3 years.
Restricted Stock
We provide executives and other key employees an opportunity to be awarded performance-based and time-based restricted stock. The
performance-based awards are contingent upon the achievement of certain objectives, which generally include cumulative net income, average return on capital, and relative total shareholder return over
a three-year performance period. During fiscal 2019, 2018, and 2017, we granted 43,680, 108,440, and 212,583 of performance-based restricted shares, respectively. Time-based restricted shares of
46,470, 24,425, and 39,100 were granted to executives and key employees during fiscal 2019, 2018, and 2017, respectively. We also award time-based restricted stock to our non-employee directors as
part of their annual compensation. Time-based restricted shares of 29,128, 55,000, and 50,625 were granted to members of the Board of Directors during fiscal 2019, 2018, and 2017, respectively.
The
fair value of restricted shares is the market value of our common stock on the date of grant. Expense recognized in selling, general and administrative expenses for all restricted
share programs during fiscal 2019, 2018, and 2017 was $9.4 million, $10.2 million, and $6.4 million, respectively.
Restricted
share activity during the fiscal 2019 was as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Fair Value
on Grant Date
|
|
Nonvested at May 31, 2018
|
|
|
684
|
|
$
|
27.89
|
|
Granted
|
|
|
168
|
|
$
|
40.83
|
|
Vested
|
|
|
(303
|
)
|
$
|
28.08
|
|
Forfeited
|
|
|
(17
|
)
|
$
|
40.67
|
|
|
|
|
|
|
|
|
|
Nonvested at May 31, 2019
|
|
|
532
|
|
$
|
31.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of May 31, 2019 we had $7.1 million of unearned compensation related to restricted shares that will be amortized to expense over a weighted average period of
1.1 years.
6. Income Taxes
On December 22, 2017, the Tax Reform Act was enacted which significantly revised the U.S. corporate income tax system. The Tax Reform Act, among other things, reduced the
corporate federal income tax rate to 21% from 35%, changed bonus depreciation regulations and limited deductions for executive compensation. The income tax rate reduction in the Tax Reform Act was
effective January 1, 2018 which resulted in a blended federal statutory tax rate of 29.2% in fiscal 2018.
In
fiscal 2018, we re-measured our deferred tax assets and liabilities based on the tax rate at which they are expected to reverse in the future, which was either at a federal rate of
29.2% for reversals expected in fiscal 2018 or 21% for reversals in fiscal 2019 and subsequent years. During fiscal 2018, we
62
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
6. Income Taxes (Continued)
recognized
an income tax benefit of $14.1 million for the re-measurement impact from applying the provisions of the Tax Reform Act.
The
provision for income tax on income from continuing operations includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4.8
|
|
$
|
14.6
|
|
$
|
9.3
|
|
State
|
|
|
0.1
|
|
|
0.1
|
|
|
0.2
|
|
Foreign
|
|
|
5.0
|
|
|
1.7
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.9
|
|
|
16.4
|
|
|
12.6
|
|
Deferred
|
|
|
(5.0
|
)
|
|
(12.9
|
)
|
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4.9
|
|
$
|
3.5
|
|
$
|
25.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
provision for income taxes on pre-tax income differs from the amount computed by applying the U.S. federal statutory income tax rate of 21.0% for fiscal 2019, 29.2% for fiscal 2018
and 35.0% for fiscal 2017 to income from continuing operations before provision for income taxes due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Provision for income tax at the federal statutory rate
|
|
$
|
18.7
|
|
$
|
22.5
|
|
$
|
27.0
|
|
Deferred tax re-measurement from the Tax Reform Act
|
|
|
|
|
|
(14.1
|
)
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
(2.7
|
)
|
|
(2.9
|
)
|
|
|
|
State net operating losses
|
|
|
(0.3
|
)
|
|
1.3
|
|
|
5.7
|
|
Change in valuation allowance for state deferred tax assets
|
|
|
(6.9
|
)
|
|
(3.4
|
)
|
|
(5.7
|
)
|
Effective settlement of prior tax positions
|
|
|
(4.7
|
)
|
|
|
|
|
(2.2
|
)
|
Other
|
|
|
0.8
|
|
|
0.1
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax
|
|
$
|
4.9
|
|
$
|
3.5
|
|
$
|
25.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Domestic
|
|
$
|
68.9
|
|
$
|
58.7
|
|
$
|
57.7
|
|
Foreign
|
|
|
20.1
|
|
|
18.5
|
|
|
19.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
89.0
|
|
$
|
77.2
|
|
$
|
77.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
6. Income Taxes (Continued)
Deferred tax liabilities and assets result primarily from the differences in the timing of the recognition of transactions for financial reporting and income tax purposes. Our deferred
tax liabilities and assets consist of the following components:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2019
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
9.4
|
|
$
|
9.7
|
|
State net operating losses
|
|
|
9.0
|
|
|
8.6
|
|
Deferred revenue
|
|
|
7.7
|
|
|
1.1
|
|
Inventory costs
|
|
|
4.9
|
|
|
15.9
|
|
Postretirement benefits
|
|
|
3.7
|
|
|
2.2
|
|
Other
|
|
|
4.8
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
39.5
|
|
|
41.7
|
|
Valuation allowance
|
|
|
(0.1
|
)
|
|
(7.0
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax assets net of valuation allowance
|
|
|
39.4
|
|
|
34.7
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Tangible and intangible assets
|
|
|
(36.1
|
)
|
|
(50.2
|
)
|
Other
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(36.3
|
)
|
|
(50.4
|
)
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
3.1
|
|
$
|
(15.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of May 31, 2019, we have determined that the realization of our deferred tax assets is more likely than not and that a valuation allowance is not required except for certain
state deferred tax assets, including net operating losses. The change in the valuation allowance was primarily the result of the expected utilization of a portion of these state net operating losses.
Our net operating losses have carry forward periods that range from 5 to 20 years. Our history of operating earnings, our expectations for continued future earnings, the nature of certain of
our deferred tax assets and the scheduled reversal of deferred tax liabilities, primarily related to depreciation, support the recoverability of the majority of the deferred tax assets. Our net
deferred tax assets are included in Other non-current assets on our Consolidated Balance Sheet at May 31, 2019.
Income
tax receivable was $1.1 million and $1.0 million at May 31, 2019 and 2018, respectively, and was included in Other current assets on the Consolidated Balance
Sheet.
64
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
6. Income Taxes (Continued)
A
reconciliation of the beginning and ending amounts of unrecognized tax benefits was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Balance, beginning of year
|
|
$
|
4.4
|
|
$
|
4.4
|
|
$
|
12.9
|
|
Additions for tax positions of prior years
|
|
|
|
|
|
|
|
|
0.4
|
|
Effective settlement of prior tax position
|
|
|
(4.4
|
)
|
|
|
|
|
(8.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
|
|
$
|
4.4
|
|
$
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
reserve for unrecognized tax benefits decreased primarily as a result of effective settlement of tax positions for prior tax years, which occurred upon the settlement of IRS
examinations. Income tax expense in fiscal 2019 included a benefit of $4.4 million for these effective settlements. Income tax expense in fiscal 2017 included a benefit of $2.2 million
and discontinued operations included a benefit of $6.7 million for these effective settlements.
Fiscal
years 2016 and subsequent are open for examination. Various states and foreign jurisdictions also remain open subject to their applicable statute of limitations.
7. Earnings Per Share
The computation of basic earnings per share is based on the weighted average number of common shares outstanding during each period. The computation of diluted earnings per share is
based on the weighted average number of common shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options, shares
issuable upon vesting of restricted stock awards and shares to be issued upon conversion of convertible debt.
In
accordance with ASC 260-10-45,
Share-Based Payment Arrangements and Participating Securities and the Two-Class Method
, our unvested
restricted stock awards are deemed participating securities since these shares are entitled to participate in dividends declared on common shares. During periods of net income, the calculation of
earnings per share for common stock excludes income attributable to unvested restricted stock awards from the numerator and excludes the dilutive impact of those shares from the denominator. During
periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.
65
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
7. Earnings Per Share (Continued)
The
following tables provide a reconciliation of the computations of basic and diluted earnings per share information for each of the years in the three-year period ended May 31,
2019 (shares in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Basic and Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
84.1
|
|
$
|
73.7
|
|
$
|
52.0
|
|
Less income attributable to participating shares
|
|
|
(0.4
|
)
|
|
(0.6
|
)
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common shareholders
|
|
|
83.7
|
|
|
73.1
|
|
|
51.5
|
|
Income (Loss) from discontinued operations attributable to common shareholders
|
|
|
(76.6
|
)
|
|
(58.1
|
)
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders for earnings per share
|
|
$
|
7.1
|
|
$
|
15.0
|
|
$
|
56.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingbasic
|
|
|
34.5
|
|
|
34.2
|
|
|
33.9
|
|
Additional shares from assumed exercise of stock options
|
|
|
0.4
|
|
|
0.4
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingdiluted
|
|
|
34.9
|
|
|
34.6
|
|
|
34.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharebasic:
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
2.42
|
|
$
|
2.14
|
|
$
|
1.53
|
|
Earnings (Loss) from discontinued operations
|
|
|
(2.22
|
)
|
|
(1.70
|
)
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharebasic
|
|
$
|
0.20
|
|
$
|
0.44
|
|
$
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharediluted:
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
2.40
|
|
$
|
2.11
|
|
$
|
1.51
|
|
Earnings (Loss) from discontinued operations
|
|
|
(2.19
|
)
|
|
(1.70
|
)
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharediluted
|
|
$
|
0.21
|
|
$
|
0.41
|
|
$
|
1.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
May 31, 2019 and 2017, respectively, outstanding options to purchase 273,400 and 11,200 shares of common stock were not included in the computation of diluted earnings per
share, because the exercise price of these options was greater than the average market price of the common shares for the year then ended. At May 31, 2018, the average market price of our
common shares was in excess of the exercise prices of all of our outstanding options.
8. Employee Benefit Plans
Defined Benefit Plans
Prior to January 1, 2000, the pension plan for domestic salaried and non-union hourly employees had a benefit formula based primarily on
years of service and compensation. Effective January 1, 2000, we converted our defined benefit plan for substantially all domestic salaried and certain hourly employees to a cash balance
pension plan. Under the cash balance pension plan, the retirement benefit is expressed as a dollar amount in an account that grows with annual pay-based credits and interest on the account balance.
The interest crediting rate under our cash balance plan is determined quarterly and is equal to 100% of the average 30-year treasury rate for the second month preceding the applicable quarter
published by the
66
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
8. Employee Benefit Plans (Continued)
Internal
Revenue Service. The average interest crediting rate under our cash balance plan for the fiscal year ended May 31, 2019 was 4.46%. Effective June 1, 2005, the existing cash
balance plan was frozen and the annual pay-based credits were discontinued. Also effective June 1, 2005, the defined contribution plan was modified to include increased employer contributions
and an enhanced profit sharing formula. Defined pension benefits for certain union hourly employees are based primarily on a fixed amount per year of service and the plan was frozen in fiscal 2018.
We
also have a defined benefit pension plan covering certain employees in the Netherlands. Benefit formulas are based generally on years of service and compensation.
We
also have a benefit plan which provides benefits to certain retired outside directors. In fiscal 2001, we froze the plan for any new members of the Board of Directors and no current
directors participate in this plan.
The
change to our projected benefit obligation and the fair value of our plan assets for our pension plans was as follows:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2019
|
|
2018
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
146.5
|
|
$
|
145.4
|
|
Service cost
|
|
|
2.3
|
|
|
2.4
|
|
Interest cost
|
|
|
4.3
|
|
|
4.3
|
|
Participant contributions
|
|
|
0.4
|
|
|
0.4
|
|
Net actuarial loss (gain)
|
|
|
6.5
|
|
|
(2.3
|
)
|
Benefits and administrative payments
|
|
|
(6.9
|
)
|
|
(6.5
|
)
|
Settlements
|
|
|
(0.6
|
)
|
|
|
|
Plan change
|
|
|
|
|
|
0.7
|
|
Foreign currency translation adjustment
|
|
|
(3.3
|
)
|
|
2.1
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
149.2
|
|
$
|
146.5
|
|
|
|
|
|
|
|
|
|
Change in the fair value of plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
134.5
|
|
$
|
118.8
|
|
Actual return on plan assets
|
|
|
2.8
|
|
|
11.6
|
|
Employer contributions
|
|
|
2.6
|
|
|
8.4
|
|
Participant contributions
|
|
|
0.4
|
|
|
0.4
|
|
Benefits and administrative payments, including settlements
|
|
|
(7.5
|
)
|
|
(6.5
|
)
|
Foreign currency translation adjustment
|
|
|
(2.9
|
)
|
|
1.8
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
129.9
|
|
$
|
134.5
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(19.3
|
)
|
$
|
(12.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
8. Employee Benefit Plans (Continued)
Amounts
recognized in the Consolidated Balance Sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2019
|
|
2018
|
|
Other non-current assets
|
|
$
|
|
|
$
|
0.5
|
|
Accrued liabilities
|
|
|
(0.4
|
)
|
|
(1.2
|
)
|
Other liabilities
|
|
|
(18.9
|
)
|
|
(11.3
|
)
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(19.3
|
)
|
$
|
(12.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in accumulated other comprehensive loss at May 31, 2019 and 2018, respectively, consisted of the following:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2019
|
|
2018
|
|
Actuarial loss
|
|
$
|
58.7
|
|
$
|
50.5
|
|
Prior service credit
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58.7
|
|
$
|
50.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
all of our pension plans, both the projected benefit obligation and the accumulated benefit obligation are in excess of the individual plans' assets. The accumulated benefit
obligation for all pension plans was $142.4 million and $140.2 million at May 31, 2019 and 2018, respectively.
Net Periodic Benefit Cost
Pension expense charged to the Consolidated Statements of Income includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Service cost
|
|
$
|
2.3
|
|
$
|
2.4
|
|
$
|
2.5
|
|
Interest cost
|
|
|
4.3
|
|
|
4.3
|
|
|
4.2
|
|
Expected return on plan assets
|
|
|
(7.1
|
)
|
|
(7.3
|
)
|
|
(6.5
|
)
|
Curtailment
|
|
|
|
|
|
0.3
|
|
|
|
|
Settlements
|
|
|
0.1
|
|
|
|
|
|
|
|
Amortization of prior service credit
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
Recognized net actuarial loss
|
|
|
1.8
|
|
|
2.3
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.3
|
|
$
|
2.0
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
estimated amount of net actuarial loss to be amortized from accumulated other comprehensive loss into expense during fiscal 2020 is $2.0 million.
68
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
8. Employee Benefit Plans (Continued)
Assumptions
The assumptions used in accounting for our plans are estimates of factors including, among other things, the amount and timing of future benefit
payments. The following table presents the key weighted-average assumptions used in the measurement of our projected benefit obligations:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2019
|
|
2018
|
|
Discount rate:
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
3.67
|
%
|
|
4.05
|
%
|
International plan
|
|
|
1.50
|
|
|
1.90
|
|
Rate of compensation increase:
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
n/a
|
|
|
n/a
|
|
International plans
|
|
|
3.00
|
%
|
|
3.00
|
%
|
A
summary of the weighted-average assumptions used to determine net periodic pension expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Discount rate:
|
|
|
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
4.05
|
%
|
|
3.82
|
%
|
|
3.83
|
%
|
International plan
|
|
|
1.90
|
|
|
2.00
|
|
|
1.90
|
|
Expected long-term rate on plan assets:
|
|
|
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
7.25
|
%
|
|
7.25
|
%
|
|
7.25
|
%
|
International plan
|
|
|
3.60
|
|
|
4.00
|
|
|
4.00
|
|
The
discount rate was determined by projecting the expected future benefit payments as defined for the projected benefit obligation, discounting those expected payments using a
theoretical zero-coupon spot yield curve derived from a universe of high-quality bonds as of the measurement date, and solving for the single equivalent discount rate that resulted in the same
projected benefit obligation.
Plan Assets
The following table sets forth the actual asset allocation and target allocations for our U.S. pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
|
|
Target Asset
Allocation
|
|
|
|
2019
|
|
2018
|
|
Equity securities
|
|
|
59
|
%
|
|
59
|
%
|
|
45 - 75
|
%
|
Fixed income securities
|
|
|
22
|
|
|
22
|
|
|
15 - 45
|
%
|
Other
|
|
|
19
|
|
|
19
|
|
|
0 - 25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
8. Employee Benefit Plans (Continued)
The
assets of U.S pension plans are invested in compliance with the Employee Retirement Income Security Act of 1974. The investment goals are to provide a total return that, over the
long term, optimizes the long-term return on plan assets at an acceptable risk, and to maintain a broad diversification across asset classes and among investment managers. We believe that there are no
significant concentrations of risk within our plan assets as of May 31, 2019. The use of derivatives for the purpose of speculation are not permitted. The assets of the U.S. pension plans are
invested primarily in equity and fixed income mutual funds, individual common stocks, and fund-of-funds hedge funds. The assets of the non-domestic plan are invested in funds-of-funds where each fund
holds a portfolio of equity and fixed income mutual funds.
To
develop our expected long-term rate of return assumption on domestic plans, we use long-term historical return information for our targeted asset mix and current market conditions.
The expected return for each asset class is weighted based on the target asset allocation to develop the expected long-term rate of return on plan assets assumption. While consideration is given to
recent performance, the assumption represents a long-term, prospective rate of return.
The
following table sets forth by level, within the fair value hierarchy, pension plan assets at their fair value as of May 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
1
|
|
Level 2
2
|
|
Level 3
3
|
|
Total
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. mutual funds
|
|
$
|
31.1
|
|
$
|
|
|
$
|
|
|
$
|
31.1
|
|
International mutual funds
|
|
|
8.4
|
|
|
|
|
|
|
|
|
8.4
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities and corporate bond mutual funds
|
|
|
9.0
|
|
|
5.9
|
|
|
|
|
|
14.9
|
|
Funds-of-funds
|
|
|
|
|
|
53.0
|
|
|
7.9
|
|
|
60.9
|
|
Hedge funds
|
|
|
|
|
|
|
|
|
4.2
|
|
|
4.2
|
|
Insurance annuities
|
|
|
|
|
|
|
|
|
9.9
|
|
|
9.9
|
|
Cash and cash equivalents
|
|
|
0.5
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
49.0
|
|
$
|
58.9
|
|
$
|
22.0
|
|
$
|
129.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
8. Employee Benefit Plans (Continued)
The following table sets forth by level, within the fair value hierarchy, pension plan assets at their fair value as of May 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
1
|
|
Level 2
2
|
|
Level 3
3
|
|
Total
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. mutual funds
|
|
$
|
32.8
|
|
$
|
|
|
$
|
|
|
$
|
32.8
|
|
International mutual funds
|
|
|
10.4
|
|
|
|
|
|
|
|
|
10.4
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities and corporate bond mutual funds
|
|
|
15.7
|
|
|
|
|
|
|
|
|
15.7
|
|
Funds-of-funds
|
|
|
|
|
|
53.6
|
|
|
7.7
|
|
|
61.3
|
|
Hedge funds
|
|
|
|
|
|
|
|
|
4.4
|
|
|
4.4
|
|
Insurance annuities
|
|
|
|
|
|
|
|
|
7.8
|
|
|
7.8
|
|
Cash and cash equivalents
|
|
|
2.1
|
|
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
61.0
|
|
$
|
53.6
|
|
$
|
19.9
|
|
$
|
134.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
1
-
Quoted
prices in active markets for identical assets that we have the ability to access as of the reporting date.
-
2
-
Inputs
other than quoted prices included within Level 1 that are directly observable for the asset or indirectly observable through corroboration
with observable market data.
-
3
-
Unobservable
inputs, such as internally developed pricing models or third party valuations for the asset due to little or no market activity for the
asset.
The
following table presents the reconciliation of Level 3 pension assets measured at fair value for the fiscal years ended May 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge
Funds
|
|
Fund-of-
funds
|
|
Insurance
Annuities
|
|
Total
|
|
Balance as of May 31, 2017
|
|
$
|
6.8
|
|
$
|
7.3
|
|
$
|
|
|
$
|
14.1
|
|
Purchases
|
|
|
|
|
|
|
|
|
7.8
|
|
|
7.8
|
|
Sales
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
(3.0
|
)
|
Return on plan assets related to assets still held at May 31, 2018
|
|
|
0.6
|
|
|
0.4
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2018
|
|
|
4.4
|
|
|
7.7
|
|
|
7.8
|
|
|
19.9
|
|
Purchases
|
|
|
|
|
|
|
|
|
2.1
|
|
|
2.1
|
|
Return on plan assets related to assets still held at May 31, 2019
|
|
|
(0.2
|
)
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2019
|
|
$
|
4.2
|
|
$
|
7.9
|
|
$
|
9.9
|
|
$
|
22.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Techniques Used to Determine Fair Value
Cash equivalents are investments with maturities of three months or less when purchased. The fair values are based on observable market prices
and categorized as Level 1.
71
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
8. Employee Benefit Plans (Continued)
With
respect to individually held equity securities, including investments in U.S. and international securities, the trustees obtain prices from pricing services, whose prices are
obtained from direct feeds from market exchanges, which we are able to independently corroborate. Equity securities held individually are primarily traded on exchanges that contain only actively
traded securities, due to the volume trading requirements imposed by these exchanges. Equity securities are valued based on quoted prices in active markets and categorized as Level 1.
Equity
and fixed income mutual funds are maintained by investment companies that hold certain investments in accordance with a stated set of fund objectives, which are consistent with
our overall investment strategy. The values of some of these funds are publicly quoted. For equity and fixed income mutual funds which are publicly quoted, the funds are valued based on quoted prices
in active markets and have been categorized as Level 1. As certain of our funds-of-funds investments are also derived from quoted prices in active markets, we have categorized certain
funds-of-funds investments as Level 2.
Hedge
fund investments include those seeking to maximize absolute returns using a broad range of strategies to enhance returns and provide additional diversification. The fair value of
hedge funds is determined using net asset value or its equivalent subject to certain restrictions, such as a lock-up period. As we may be limited in our ability to redeem the investments at the
measurement date or within a reasonable period of time, the hedge fund investments are categorized as Level 3. Our other Level 3 investments require the utilization of unobservable
inputs resulting in Level 3 treatment in the fair value hierarchy.
Future Benefit Payments and Funding
The following table summarizes our estimated future pension payments by fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025 to
2029
|
|
Estimated future pension payments
|
|
$
|
6.8
|
|
$
|
5.5
|
|
$
|
6.0
|
|
$
|
6.3
|
|
$
|
5.9
|
|
$
|
35.7
|
|
Our
contribution policy for the domestic plans is to contribute annually, at a minimum, an amount which is deductible for federal income tax purposes and that is sufficient to meet
actuarially computed pension benefits. For our Netherlands pension plan, our policy is to fund at least the minimum amount required by the local laws and regulations. We anticipate contributing
approximately $1.6 million to our pension plans during fiscal 2020.
Postretirement Benefits Other Than Pensions
We provide health and life insurance benefits for certain eligible retirees. The postretirement plan is unfunded and in fiscal 1995, we
completed termination of postretirement health and life insurance benefits attributable to future services of collective bargaining and other domestic employees. The unfunded projected benefit
obligation for this plan was $0.4 million and $0.4 million as of May 31, 2019 and 2018, respectively. We have omitted substantially all of the required disclosures
related to this plan because the plan is not material to our consolidated financial position or results of operations.
72
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
8. Employee Benefit Plans (Continued)
Defined Contribution Plan
The defined contribution plan is a profit sharing plan that is intended to qualify as a 401(k) plan under the Internal Revenue Code. Under the
plan, employees may contribute up to 75% of their pretax compensation, subject to applicable regulatory limits. We may make matching contributions up to 5% of compensation as well as discretionary
profit sharing contributions. Our contributions vest on a pro-rata basis during the first three years of employment. We also provide profit sharing benefits for certain executives and key employees to
supplement the benefits provided by the defined contribution plan. Expense charged to the Consolidated Statements of Income for our matching contributions, including profit sharing contributions, was
$11.4 million in fiscal 2019, $9.2 million in fiscal 2018 and $11.6 million in fiscal 2017 for these plans.
9. Accumulated Other Comprehensive Loss
Changes in our accumulated other comprehensive loss ("AOCL") by component for each of the years in the three-year period ended May 31, 2019 were as follows (all
amounts are net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
Translation
Adjustments
|
|
Pension Plans
|
|
Total
|
|
Balance as of June 1, 2016
|
|
$
|
(1.1
|
)
|
$
|
(43.3
|
)
|
$
|
(44.4
|
)
|
Other comprehensive loss before reclassifications
|
|
|
(0.6
|
)
|
|
3.5
|
|
|
2.9
|
|
Amounts reclassified from AOCL
|
|
|
|
|
|
1.6
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
|
(0.6
|
)
|
|
5.1
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2017
|
|
|
(1.7
|
)
|
|
(38.2
|
)
|
|
(39.9
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
2.0
|
|
|
4.2
|
|
|
6.2
|
|
Amounts reclassified from AOCL
|
|
|
|
|
|
1.7
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
2.0
|
|
|
5.9
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2018
|
|
|
0.3
|
|
|
(32.3
|
)
|
|
(32.0
|
)
|
Other comprehensive income before reclassifications
|
|
|
(2.4
|
)
|
|
(8.0
|
)
|
|
(10.4
|
)
|
Amounts reclassified from AOCL
|
|
|
|
|
|
1.5
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
(2.4
|
)
|
|
(6.5
|
)
|
|
(8.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2019
|
|
$
|
(2.1
|
)
|
$
|
(38.8
|
)
|
$
|
(40.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Commitments and Contingencies
On October 3, 2003, we entered into a sale-leaseback transaction whereby we sold and leased back a facility located in Garden City, New York. The lease is classified as an
operating lease. Net proceeds from the sale of the facility were $14.0 million and the cost and related accumulated depreciation of the facility of $9.5 million and $4.6 million,
respectively, were removed from the Consolidated Balance Sheet at the time of sale. The gain realized on the sale of $9.1 million has been deferred and is being amortized over the 20-year lease
term. As of May 31, 2019 and 2018, the unamortized balance of the deferred gain was
73
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
10. Commitments and Contingencies (Continued)
approximately
$2.0 million and $2.5 million, respectively, and is included in Other liabilities on the Consolidated Balance Sheets.
In
addition to the leases described above, we lease other facilities and equipment under agreements that are classified as operating leases. With the exception of a land lease for one of
our airframe maintenance facilities which expires in 2108, our operating leases expire at various dates through 2034. Future minimum payments under all operating leases at May 31, 2019 are as
follows:
|
|
|
|
|
2020
|
|
$
|
21.6
|
|
2021
|
|
|
19.3
|
|
2022
|
|
|
16.5
|
|
2023
|
|
|
13.2
|
|
2024
|
|
|
11.0
|
|
2025 and thereafter
|
|
|
39.9
|
|
Rental
expense for facilities and equipment during fiscal years 2019, 2018, and 2017 was $25.9 million, $23.5 million, and $22.9 million, respectively.
We
enter into purchase obligations, which arise in the ordinary course of business and represent a binding commitment to acquire inventory, including raw materials, parts and components,
as well as equipment to support the operations of our business. The aggregate amount of purchase obligations due in each of the next five fiscal years is $322.3 million in 2020,
$53.8 million in 2021, $7.8 million in 2022, $0.6 in 2023 and $0.1 million in 2024.
We
routinely issue letters of credit and performance bonds in the ordinary course of our business. These instruments are typically issued in conjunction with insurance contracts or other
business requirements. The total of these instruments outstanding at May 31, 2019 was approximately $31.7 million which includes $11.6 million related to a guarantee of 40% of the
outstanding debt of our Indian joint venture. We have recognized a current liability of $4.8 million based on the fair value of our guarantee obligation.
We
are involved in various claims and legal actions, including environmental matters, arising in the ordinary course of business. In the opinion of management, the ultimate disposition
of these matters will not have a material adverse effect on our consolidated financial condition or results of operations.
74
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
11. Other Non-current Assets
At May 31, 2019 and 2018, other non-current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2019
|
|
2018
|
|
Contract assets
|
|
$
|
17.0
|
|
$
|
39.0
|
|
Cash surrender value of life insurance
|
|
|
15.6
|
|
|
16.8
|
|
Assets under deferred compensation plan
|
|
|
10.4
|
|
|
35.7
|
|
Investments in joint ventures
|
|
|
12.3
|
|
|
7.6
|
|
License fees
|
|
|
7.2
|
|
|
10.6
|
|
Other
|
|
|
15.0
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
$
|
77.5
|
|
$
|
118.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in Joint Ventures
During fiscal 2018, we sold interests in two aircraft joint ventures, which were accounted for under the equity method of accounting. We
received cash proceeds of $7.3 million and recognized a gain on the sale of $0.4 million.
Under
the terms of servicing agreements with certain of our aircraft joint ventures, we provide administrative services and technical advisory services, including aircraft evaluations,
oversight and logistical support of the maintenance process and records management. We also provide evaluation and inspection services prior to the purchase of an aircraft and remarketing services
with respect to the divestiture of aircraft by the joint ventures. During fiscal 2019, 2018, and 2017, we were paid $0.4 million, $0.4 million, and $1.2 million, respectively, for
such services.
Our
investments in joint ventures includes $6.3 million for our 40% ownership interest in our Indian joint venture with Indamer Aviation to develop and operate an airframe
maintenance facility in India. The investment balance includes $4.8 million related to the guarantee liability recognized in conjunction with our guarantee of 40% of the Indian joint venture's
debt. The Indian joint venture is accounted for using the equity method. In addition, each of the partners in the Indian joint venture have a loan to the joint venture proportionate to their equity
ownership. We have a loan to the joint venture of $2.8 million as of May 31, 2019.
12. Acquisitions
On September 19, 2017, we acquired the outstanding shares of two MRO facilities in Canada owned by Premier Aviation for approximately $24.8 million. The purchase price
includes $22.9 million paid at
75
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
12. Acquisitions (Continued)
closing
with the remaining deferred consideration paid in September 2018. This business is included in our Aviation Services segment. The fair value of assets acquired and liabilities assumed is as
follows:
|
|
|
|
|
Current assets
|
|
$
|
4.4
|
|
Property and equipment
|
|
|
15.1
|
|
Intangible assets, including goodwill
|
|
|
14.6
|
|
Accounts payable and accrued liabilities
|
|
|
(9.3
|
)
|
|
|
|
|
|
|
|
$
|
24.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
April 10, 2017, we acquired the trading business of ACLAS Global Limited ("ACLAS"). In conjunction with the acquisition, we entered into a multi-year component support and
repair contract covering approximately 100 of ACLAS' aircraft. The purchase price of the acquisition was $12.0 million paid at closing with $3.0 million in deferred consideration payable
over the next three years. This business operates as part of our Aviation Services segment. The fair value of assets acquired is as follows:
|
|
|
|
|
Inventory
|
|
$
|
5.0
|
|
Equipment on or available for long-term lease
|
|
|
6.2
|
|
Intangible assets
|
|
|
3.8
|
|
|
|
|
|
|
Assets acquired
|
|
$
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Business Segment Information
Segment Reporting
Consistent with how our chief operating decision making officer (Chief Executive Officer) evaluates performance and the way we are organized
internally, we report our activities in two segments:
Aviation Services
comprised of supply chain and MRO activities and
Expeditionary Services
comprised
of manufacturing activities.
In
the first quarter of fiscal 2019, we re-aligned the composition of our operating segments to leverage the full breadth of our operational expertise in Aviation Services. Our
government-owned, contractor-operated operations (which include the INL/A Worldwide Aviation Support Services ("INL/A WASS") program) were previously included in our Expeditionary Services segment and
are now reported within our Aviation Services segment for all periods presented.
The
Aviation Services segment consists of aftermarket support and services offerings that provide spare parts and maintenance support for aircraft operated by our commercial and
government/defense customers. Sales in the Aviation Services segment are derived from the sale and lease of a wide variety of new, overhauled and repaired engine and airframe parts and components to
the commercial aviation and government and defense markets. We provide customized inventory supply chain management, performance based logistics programs, customer fleet management and operations, and
aircraft component repair management services. The segment also includes repair, maintenance and overhaul of aircraft, landing gear and components. Cost of sales consists principally of the cost of
product, direct labor, and overhead.
76
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AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
13. Business Segment Information (Continued)
The
Expeditionary Services segment consists of primarily manufacturing operations with sales derived from the design and manufacture of pallets, shelters, and containers used to support
the U.S. military's requirements for a mobile and agile force including engineering, design, and system integration services for specialized command and control systems. This segment also designs and
manufactures advanced composite materials for commercial, business and military aircraft. Cost of sales consists principally of the cost of material to manufacture products, direct labor and overhead.
The
accounting policies for the segments are the same as those described in Note 1. Our chief operating decision making officer (Chief Executive Officer) evaluates performance
based on the reportable segments and utilizes gross profit as a primary profitability measure. Gross profit is calculated by subtracting cost of sales from sales. The assets and certain expenses
related to corporate activities are
not allocated to the segments. Our reportable segments are aligned principally around differences in products and services.
Selected
financial information for each segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
Aviation Services
|
|
$
|
1,920.6
|
|
$
|
1,635.8
|
|
$
|
1,485.4
|
|
Expeditionary Services
|
|
|
131.2
|
|
|
112.5
|
|
|
105.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,051.8
|
|
$
|
1,748.3
|
|
$
|
1,590.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
Aviation Services
|
|
$
|
313.3
|
|
$
|
275.3
|
|
$
|
246.0
|
|
Expeditionary Services
|
|
|
16.2
|
|
|
19.3
|
|
|
17.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
329.5
|
|
$
|
294.6
|
|
$
|
263.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2019
|
|
2018
|
|
Total assets:
|
|
|
|
|
|
|
|
Aviation Services
|
|
$
|
1,346.8
|
|
$
|
1,241.2
|
|
Expeditionary Services
|
|
|
94.7
|
|
|
94.8
|
|
Corporate and discontinued operations
|
|
|
75.7
|
|
|
188.7
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,517.2
|
|
$
|
1,524.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
13. Business Segment Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
Aviation Services
|
|
$
|
15.1
|
|
$
|
18.9
|
|
$
|
15.0
|
|
Expeditionary Services
|
|
|
1.4
|
|
|
1.8
|
|
|
2.0
|
|
Corporate
|
|
|
0.9
|
|
|
1.3
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Total continuing operations
|
|
|
17.4
|
|
|
22.0
|
|
|
25.2
|
|
Discontinued operations
|
|
|
0.5
|
|
|
5.0
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17.9
|
|
$
|
27.0
|
|
$
|
33.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Depreciation and amortization:
1
|
|
|
|
|
|
|
|
|
|
|
Aviation Services
|
|
$
|
37.5
|
|
$
|
34.6
|
|
$
|
30.8
|
|
Expeditionary Services
|
|
|
4.1
|
|
|
4.6
|
|
|
5.0
|
|
Corporate
|
|
|
14.7
|
|
|
16.6
|
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Total continuing operations
|
|
|
56.3
|
|
|
55.8
|
|
|
46.7
|
|
Discontinued operations
|
|
|
|
|
|
7.3
|
|
|
17.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
56.3
|
|
$
|
63.1
|
|
$
|
63.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
1
-
Includes
amortization of stock-based compensation.
The
following table reconciles segment gross profit to income from continuing operations before provision for income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Segment gross profit
|
|
$
|
329.5
|
|
$
|
294.6
|
|
$
|
263.4
|
|
Provision for doubtful accounts
|
|
|
(15.8
|
)
|
|
(0.5
|
)
|
|
(2.1
|
)
|
Selling, general and administrative
|
|
|
(215.4
|
)
|
|
(208.1
|
)
|
|
(179.0
|
)
|
Other expenses
|
|
|
(0.8
|
)
|
|
(0.9
|
)
|
|
|
|
Interest expense
|
|
|
(9.5
|
)
|
|
(8.0
|
)
|
|
(5.3
|
)
|
Interest income
|
|
|
1.0
|
|
|
0.1
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income taxes
|
|
$
|
89.0
|
|
$
|
77.2
|
|
$
|
77.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
13. Business Segment Information (Continued)
The
U.S. Department of Defense, U.S. Department of State, other U.S. government agencies and their contractors are our only customers representing 10% or more of total sales in any of
the last three fiscal years. Sales by segment for these customers are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Aviation Services
|
|
$
|
455.9
|
|
$
|
241.3
|
|
$
|
260.2
|
|
Expeditionary Services
|
|
|
90.3
|
|
|
63.0
|
|
|
61.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
546.2
|
|
$
|
304.3
|
|
$
|
321.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total sales
|
|
|
26.6
|
%
|
|
17.4
|
%
|
|
20.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
across the major customer markets for each of our operating segments for the fiscal years ended May 31, 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Aviation Services:
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,342.3
|
|
$
|
1,281.9
|
|
$
|
1,114.9
|
|
Government and defense
|
|
|
578.3
|
|
|
353.9
|
|
|
370.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,920.6
|
|
$
|
1,635.8
|
|
$
|
1,485.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expeditionary Services:
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
31.6
|
|
$
|
37.5
|
|
$
|
37.1
|
|
Government and defense
|
|
|
99.6
|
|
|
75.0
|
|
|
68.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
131.2
|
|
$
|
112.5
|
|
$
|
105.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
by type of product/service was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Aviation supply chain
|
|
$
|
1,395.2
|
|
$
|
1,082.9
|
|
$
|
998.7
|
|
Maintenance, repair and overhaul services
|
|
|
525.4
|
|
|
552.9
|
|
|
486.7
|
|
Mobility products
|
|
|
131.2
|
|
|
112.5
|
|
|
105.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,051.8
|
|
$
|
1,748.3
|
|
$
|
1,590.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
13. Business Segment Information (Continued)
Sales by geographic region for the fiscal years ended May 31, 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Aviation Services:
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,426.8
|
|
$
|
1,131.4
|
|
$
|
1,077.4
|
|
Europe/Africa
|
|
|
323.4
|
|
|
325.9
|
|
|
272.4
|
|
Other
|
|
|
170.4
|
|
|
178.5
|
|
|
135.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,920.6
|
|
$
|
1,635.8
|
|
$
|
1,485.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expeditionary Services:
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
124.1
|
|
$
|
105.3
|
|
$
|
101.0
|
|
Europe/Africa
|
|
|
5.8
|
|
|
6.9
|
|
|
4.3
|
|
Other
|
|
|
1.3
|
|
|
0.3
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
131.2
|
|
$
|
112.5
|
|
$
|
105.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2019
|
|
2018
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
United States
|
|
$
|
345.4
|
|
$
|
393.1
|
|
Europe
|
|
|
108.7
|
|
|
103.3
|
|
Other
|
|
|
110.6
|
|
|
85.6
|
|
|
|
|
|
|
|
|
|
|
|
$
|
564.7
|
|
$
|
582.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
to unaffiliated customers in foreign countries (including sales through foreign sales offices of domestic subsidiaries) were approximately $661.8 million (32.3% of total
sales), $694.0 million (39.7% of total sales) and $595.4 million (37.4% of total sales) in fiscal 2019, 2018 and 2017, respectively.
14. Legal Proceedings
We are not a party to any material pending legal proceeding (including any governmental or environmental proceeding) other than routine litigation incidental to our business except for
the following:
Department of Justice Investigation
The U.S. Department of Justice ("DoJ"), acting through the U.S. Attorney's Office for the Southern District of Illinois, is conducting an
investigation of AAR Airlift Group, Inc. ("Airlift"), a wholly-owned subsidiary of AAR CORP., under the federal civil False Claims Act ("FCA"). The investigation relates to Airlift's
performance of several contracts awarded by the U.S. Transportation Command concerning the operations and maintenance of rotary-wing and fixed-wing aircraft in Afghanistan and Africa, as well as
several U.S. Navy contracts. In June 2018, the DoJ informed Airlift that part of the investigation was
80
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
14. Legal Proceedings (Continued)
precipitated
by a lawsuit filed under the qui tam provisions of the FCA by a former employee of Airlift. That lawsuit remains under seal. Airlift is cooperating with the DoJ investigation.
Self-Reporting of Potential Foreign Corrupt Practices Act Violations
The Company retained outside counsel to investigate possible violations of the Company's Code of Conduct, the U.S. Foreign Corrupt Practices
Act, and other applicable laws, relating to the Company's activities in Nepal and South Africa. Based on these investigations, we self-reported these matters to the DoJ, the U.S. Securities and
Exchange Commission and the UK Serious Fraud Office. The Company will fully cooperate in any review by these agencies, although we are unable at this time to predict what action, if any, they may
take.
15. Selected Quarterly Data (Unaudited)
The unaudited selected quarterly data for fiscal years ended May 31, 2019 and 2018 is as follows:
Fiscal 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Full
Year
|
|
Sales
1
|
|
$
|
466.3
|
|
$
|
493.3
|
|
$
|
529.5
|
|
$
|
562.7
|
|
$
|
2,051.8
|
|
Operating income
|
|
|
22.4
|
|
|
16.8
|
|
|
29.8
|
|
|
29.3
|
|
|
98.3
|
|
Income from continuing operations
|
|
|
18.9
|
|
|
11.2
|
|
|
27.4
|
|
|
26.6
|
|
|
84.1
|
|
Loss from discontinued operations
2
|
|
|
(3.8
|
)
|
|
(4.2
|
)
|
|
(64.8
|
)
|
|
(3.8
|
)
|
|
(76.6
|
)
|
Net income (loss)
|
|
|
15.1
|
|
|
7.0
|
|
|
(37.4
|
)
|
|
22.8
|
|
|
7.5
|
|
Earnings (Loss) per sharebasic:
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
0.54
|
|
|
0.32
|
|
|
0.79
|
|
|
0.77
|
|
|
2.42
|
|
Discontinued operations
|
|
|
(0.11
|
)
|
|
(0.12
|
)
|
|
(1.87
|
)
|
|
(0.11
|
)
|
|
(2.22
|
)
|
Earnings per sharebasic
|
|
|
0.43
|
|
|
0.20
|
|
|
(1.08
|
)
|
|
0.66
|
|
|
0.20
|
|
Earnings (Loss) per sharediluted:
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
0.54
|
|
|
0.32
|
|
|
0.78
|
|
|
0.76
|
|
|
2.40
|
|
Discontinued operations
|
|
|
(0.11
|
)
|
|
(0.12
|
)
|
|
(1.86
|
)
|
|
(0.11
|
)
|
|
(2.19
|
)
|
Earnings per sharediluted
|
|
|
0.43
|
|
|
0.20
|
|
|
(1.08
|
)
|
|
0.65
|
|
|
0.21
|
|
81
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
15. Selected Quarterly Data (Unaudited) (Continued)
Fiscal 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Full
Year
|
|
Sales
1
|
|
$
|
397.9
|
|
$
|
420.6
|
|
$
|
456.3
|
|
$
|
473.5
|
|
$
|
1,748.3
|
|
Operating income
|
|
|
17.1
|
|
|
21.8
|
|
|
24.3
|
|
|
22.8
|
|
|
86.0
|
|
Income from continuing operations
|
|
|
11.0
|
|
|
13.3
|
|
|
31.3
|
|
|
18.1
|
|
|
73.7
|
|
Loss from discontinued operations
4
|
|
|
(0.4
|
)
|
|
(35.8
|
)
|
|
(15.8
|
)
|
|
(6.1
|
)
|
|
(58.1
|
)
|
Net income
|
|
|
10.6
|
|
|
(22.5
|
)
|
|
15.5
|
|
|
12.0
|
|
|
15.6
|
|
Earnings (Loss) per sharebasic:
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
0.32
|
|
|
0.39
|
|
|
0.91
|
|
|
0.53
|
|
|
2.14
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
(1.05
|
)
|
|
(0.46
|
)
|
|
(0.18
|
)
|
|
(1.70
|
)
|
Earnings per sharebasic
|
|
|
0.31
|
|
|
(0.66
|
)
|
|
0.45
|
|
|
0.35
|
|
|
0.44
|
|
Earnings (Loss) per sharediluted:
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
0.32
|
|
|
0.38
|
|
|
0.90
|
|
|
0.52
|
|
|
2.11
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
(1.05
|
)
|
|
(0.46
|
)
|
|
(0.18
|
)
|
|
(1.70
|
)
|
Earnings per sharediluted
|
|
|
0.31
|
|
|
(0.67
|
)
|
|
0.44
|
|
|
0.34
|
|
|
0.41
|
|
-
1
-
At
the beginning of fiscal 2019, we adopted ASC 606 using a modified retrospective method and as a result, the comparative information has not been
restated and is reported under accounting standards in effect for those years. See Note 1 for additional information.
-
2
-
On
March 15, 2019, we signed an agreement to sell certain contracts and assets of our COCO business. In conjunction with this agreement and other
expected asset sales, we recognized an impairment charge in discontinued operations of $74.1 million during the third quarter of fiscal 2019 reflecting the expected net proceeds to be received
upon the completion of the sale transactions.
-
3
-
The
earnings-per-share computation for the year is a separate, annual calculation. Accordingly, the sum of the quarterly earnings-per-share amounts does
not necessarily equal the earnings per share for the year.
-
4
-
Loss
from discontinued operations in fiscal 2018 includes pre-tax aircraft and other asset impairment charges of $54.2 million in the second
quarter and a goodwill impairment charge of $9.8 million in the third quarter.
82
Table of Contents