ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
AAR CORP.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of AAR CORP. and subsidiaries (the Company) as of May 31, 2018 and 2017, and
the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended May 31, 2018, and the related notes
(collectively, the Consolidated Financial Statements). In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company as of
May 31, 2018 and 2017, and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 2018, in conformity with U.S. generally
accepted accounting principles.
We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting
as of May 31, 2018, based on criteria established in
Internal ControlIntegrated Framework (2013)
issued by the Committee of
Sponsoring Organizations of the Treadway Commission, and our report dated July 11, 2018, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial
reporting.
Basis for Opinion
These Consolidated Financial Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these
Consolidated Financial Statements
based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
Consolidated Financial Statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
Consolidated Financial Statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the Consolidated Financial Statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the Consolidated Financial Statements. We believe that our audits provide a reasonable basis for our opinion.
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/s/ KPMG LLP
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We have served as the Company's auditor since 1985.
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Chicago, Illinois
July 11, 2018
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34
Table of Contents
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
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|
|
|
|
|
|
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For the Year Ended May 31,
|
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|
|
2018
|
|
2017
|
|
2016
|
|
|
|
(In millions, except per share data)
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
Sales from products
|
|
$
|
1,040.7
|
|
$
|
944.8
|
|
$
|
930.1
|
|
Sales from services
|
|
|
707.6
|
|
|
646.0
|
|
|
595.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,748.3
|
|
|
1,590.8
|
|
|
1,525.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost of products
|
|
|
840.5
|
|
|
787.5
|
|
|
785.3
|
|
Cost of services
|
|
|
613.2
|
|
|
539.9
|
|
|
507.0
|
|
Selling, general and administrative
|
|
|
208.6
|
|
|
181.1
|
|
|
157.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,662.3
|
|
|
1,508.5
|
|
|
1,449.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
86.0
|
|
|
82.3
|
|
|
75.5
|
|
Other expenses
|
|
|
(0.9
|
)
|
|
|
|
|
(0.4
|
)
|
Interest expense
|
|
|
(8.0
|
)
|
|
(5.3
|
)
|
|
(6.4
|
)
|
Interest income
|
|
|
0.1
|
|
|
0.1
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income taxes
|
|
|
77.2
|
|
|
77.1
|
|
|
68.9
|
|
Provision for income taxes
|
|
|
3.5
|
|
|
25.1
|
|
|
23.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
73.7
|
|
|
52.0
|
|
|
45.5
|
|
Income (Loss) from discontinued operations, net of tax
|
|
|
(58.1
|
)
|
|
4.5
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15.6
|
|
$
|
56.5
|
|
$
|
47.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Earnings per sharebasic:
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
2.14
|
|
$
|
1.53
|
|
$
|
1.30
|
|
Earnings (Loss) from discontinued operations
|
|
|
(1.70
|
)
|
|
0.13
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharebasic
|
|
$
|
0.44
|
|
$
|
1.66
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Earnings per sharediluted:
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
2.11
|
|
$
|
1.51
|
|
$
|
1.30
|
|
Earnings (Loss) from discontinued operations
|
|
|
(1.70
|
)
|
|
0.13
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharediluted
|
|
$
|
0.41
|
|
$
|
1.64
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements
are an integral part of these statements.
35
Table of Contents
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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|
|
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|
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|
For the Year Ended May 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
(In millions)
|
|
Net income
|
|
$
|
15.6
|
|
$
|
56.5
|
|
$
|
47.7
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments, net of tax
|
|
|
2.0
|
|
|
(0.6
|
)
|
|
|
|
Unrecognized pension and post retirement costs, net of tax expense (benefit) of $2.4 in 2018, $2.8 in 2017, and ($2.1) in 2016
|
|
|
5.9
|
|
|
5.1
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of tax
|
|
|
7.9
|
|
|
4.5
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
23.5
|
|
$
|
61.0
|
|
$
|
43.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements
are an integral part of these statements.
36
Table of Contents
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
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|
|
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|
May 31,
|
|
|
|
2018
|
|
2017
|
|
|
|
(In millions, except share data)
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
31.1
|
|
$
|
10.3
|
|
Restricted cash
|
|
|
10.5
|
|
|
|
|
Accounts receivable, net
|
|
|
202.0
|
|
|
234.5
|
|
Inventories
|
|
|
460.7
|
|
|
433.4
|
|
Rotable assets and equipment on or available for short-term lease
|
|
|
87.2
|
|
|
70.7
|
|
Assets of discontinued operationscurrent
|
|
|
125.0
|
|
|
120.4
|
|
Other current assets
|
|
|
26.2
|
|
|
19.1
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
942.7
|
|
|
888.4
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost:
|
|
|
|
|
|
|
|
Land
|
|
|
4.5
|
|
|
4.3
|
|
Buildings and improvements
|
|
|
107.4
|
|
|
97.5
|
|
Equipment and furniture and fixtures
|
|
|
235.7
|
|
|
222.9
|
|
|
|
|
|
|
|
|
|
|
|
|
347.6
|
|
|
324.7
|
|
Accumulated depreciation
|
|
|
(214.4
|
)
|
|
(207.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
133.2
|
|
|
117.2
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
118.7
|
|
|
105.6
|
|
Intangible assets, net
|
|
|
27.8
|
|
|
30.6
|
|
Rotable assets supporting long-term programs
|
|
|
183.4
|
|
|
159.6
|
|
Assets of discontinued operationsnon-current
|
|
|
|
|
|
97.8
|
|
Other non-current assets
|
|
|
118.9
|
|
|
104.9
|
|
|
|
|
|
|
|
|
|
|
|
|
448.8
|
|
|
498.5
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,524.7
|
|
$
|
1,504.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements
are an integral part of these statements.
37
Table of Contents
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2018
|
|
2017
|
|
|
|
(In millions, except share data)
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
|
|
$
|
0.1
|
|
Accounts and trade notes payable
|
|
|
170.0
|
|
|
164.2
|
|
Accrued liabilities
|
|
|
138.3
|
|
|
139.9
|
|
Liabilities of discontinued operations
|
|
|
25.0
|
|
|
30.8
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
333.3
|
|
|
335.0
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
|
177.2
|
|
|
154.1
|
|
Deferred tax liabilities
|
|
|
15.7
|
|
|
37.2
|
|
Other liabilities and deferred income
|
|
|
62.2
|
|
|
63.6
|
|
|
|
|
|
|
|
|
|
|
|
|
255.1
|
|
|
254.9
|
|
|
|
|
|
|
|
|
|
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 and 45,175,302 shares at cost, respectively
|
|
|
45.3
|
|
|
45.2
|
|
Capital surplus
|
|
|
470.5
|
|
|
460.8
|
|
Retained earnings
|
|
|
733.2
|
|
|
727.9
|
|
Treasury stock, 10,585,165 and 10,820,844 shares at cost, respectively
|
|
|
(280.7
|
)
|
|
(279.8
|
)
|
Accumulated other comprehensive loss
|
|
|
(32.0
|
)
|
|
(39.9
|
)
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
936.3
|
|
|
914.2
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,524.7
|
|
$
|
1,504.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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, 2015
|
|
$
|
44.9
|
|
$
|
442.6
|
|
$
|
644.3
|
|
$
|
(246.3
|
)
|
$
|
(40.4
|
)
|
$
|
845.1
|
|
Net income
|
|
|
|
|
|
|
|
|
47.7
|
|
|
|
|
|
|
|
|
47.7
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
(10.4
|
)
|
|
|
|
|
|
|
|
(10.4
|
)
|
Stock option activity
|
|
|
|
|
|
4.4
|
|
|
|
|
|
2.3
|
|
|
|
|
|
6.7
|
|
Restricted stock activity
|
|
|
|
|
|
4.5
|
|
|
|
|
|
(4.8
|
)
|
|
|
|
|
(0.3
|
)
|
Repurchase of shares
|
|
|
|
|
|
|
|
|
|
|
|
(18.8
|
)
|
|
|
|
|
(18.8
|
)
|
Other
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.0
|
)
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements
are an integral part of these statements.
39
Table of Contents
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Cash flows provided from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15.6
|
|
$
|
56.5
|
|
$
|
47.7
|
|
Less: Income (Loss) from discontinued operations
|
|
|
(58.1
|
)
|
|
4.5
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
73.7
|
|
|
52.0
|
|
|
45.5
|
|
Adjustments to reconcile income to net cash provided from (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and intangible amortization
|
|
|
40.5
|
|
|
35.7
|
|
|
33.2
|
|
Amortization of stock-based compensation
|
|
|
15.3
|
|
|
11.0
|
|
|
6.5
|
|
Deferred tax provision (benefit)
|
|
|
(12.9
|
)
|
|
12.5
|
|
|
5.5
|
|
Gain on sale of product line
|
|
|
|
|
|
(2.6
|
)
|
|
|
|
Changes in certain assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
35.9
|
|
|
(14.7
|
)
|
|
(2.2
|
)
|
Inventories
|
|
|
(25.8
|
)
|
|
(23.3
|
)
|
|
(19.5
|
)
|
Rotable spares and equipment on or available for short-term lease
|
|
|
(16.6
|
)
|
|
(3.1
|
)
|
|
2.8
|
|
Rotable assets supporting long-term programs
|
|
|
(38.5
|
)
|
|
(82.5
|
)
|
|
(10.2
|
)
|
Accounts and trade notes payable
|
|
|
1.8
|
|
|
19.6
|
|
|
13.8
|
|
Accrued and other liabilities
|
|
|
8.0
|
|
|
6.5
|
|
|
(31.1
|
)
|
Other
|
|
|
(25.6
|
)
|
|
(24.6
|
)
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) operating activitiescontinuing
operations
|
|
|
55.8
|
|
|
(13.5
|
)
|
|
46.0
|
|
Net cash provided from (used in) operating activitiesdiscontinued
operations
|
|
|
8.5
|
|
|
35.3
|
|
|
(13.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from operating activities
|
|
|
64.3
|
|
|
21.8
|
|
|
32.1
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment expenditures
|
|
|
(22.0
|
)
|
|
(25.2
|
)
|
|
(40.1
|
)
|
Proceeds from asset disposals
|
|
|
8.6
|
|
|
6.5
|
|
|
0.1
|
|
Payments for acquisitions
|
|
|
(22.9
|
)
|
|
(12.5
|
)
|
|
(4.8
|
)
|
Other
|
|
|
(2.3
|
)
|
|
(2.7
|
)
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activitiescontinuing operations
|
|
|
(38.6
|
)
|
|
(33.9
|
)
|
|
(43.8
|
)
|
Net cash provided from (used in) investing activitiesdiscontinued
operations
|
|
|
(4.3
|
)
|
|
3.8
|
|
|
26.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(42.9
|
)
|
|
(30.1
|
)
|
|
(16.9
|
)
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (repayments), net
|
|
|
(1.0
|
)
|
|
21.0
|
|
|
60.0
|
|
Proceeds (Repayments) on long-term borrowings
|
|
|
24.8
|
|
|
(10.0
|
)
|
|
(70.6
|
)
|
Cash dividends
|
|
|
(10.3
|
)
|
|
(10.2
|
)
|
|
(10.4
|
)
|
Purchase of treasury stock
|
|
|
(13.1
|
)
|
|
(19.8
|
)
|
|
(18.8
|
)
|
Stock option exercises
|
|
|
11.6
|
|
|
8.5
|
|
|
1.8
|
|
Other
|
|
|
(0.3
|
)
|
|
0.1
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) financing activitiescontinuing
operations
|
|
|
11.7
|
|
|
(10.4
|
)
|
|
(38.4
|
)
|
Net cash used in financing activitiesdiscontinued operations
|
|
|
(1.7
|
)
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) financing activities
|
|
|
10.0
|
|
|
(12.1
|
)
|
|
(38.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(0.1
|
)
|
|
(0.5
|
)
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in cash and cash equivalents
|
|
|
31.3
|
|
|
(20.9
|
)
|
|
(23.5
|
)
|
Cash, cash equivalents, and restricted cash at beginning of year
|
|
|
10.3
|
|
|
31.2
|
|
|
54.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash at end of year
|
|
$
|
41.6
|
|
$
|
10.3
|
|
$
|
31.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
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; maintenance, repair and overhaul of airframes, landing gear, and certain other airframe components; design and manufacture of
specialized pallets, shelters, and containers; airlift services; aircraft modifications and aircraft and engine sales and leasing. We serve commercial, defense and governmental 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. The equity method of accounting is used for investments in other companies in which we have significant influence; generally this represents common stock
ownership of at least 20% and not more than 50%.
Revenue Recognition
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, 2017, and 2016 were $3.6 million, $8.5 million, and $3.7 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 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.
41
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)
In
June 2016, the U.S. Air Force awarded the new contract for the KC-10 Extender Contractor Logistics Support Program ("KC-10 Program") to a competitor. Our principal services under the
prior contract for the KC-10 Program were completed in January 2017; however, we have provided limited services since that date. Sales for the KC-10 Program during fiscal 2018, 2017 and 2016 were
$29.1 million, $110.6 million, and $148.1 million, respectively. Gross profit for the KC-10 Program during fiscal 2018, 2017 and 2016 was $4.8 million, $8.7 million,
and $16.0 million, respectively.
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.
Goodwill and Other Intangible Assets
In accordance with Accounting Standards Codification ("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. Our annual goodwill
impairment test over the last three years has used a combination of the qualitative approach and the two-step quantitative approach to evaluate goodwill for impairment.
As
of May 31, 2018, we have five reporting units with only four of the reporting units assigned goodwill. Our four reporting units with goodwill include two in our Aviation
Services segment (Aviation Supply Chain and Maintenance, Repair, and Overhaul) and two in our Expeditionary Services segment (Airlift and Mobility). We utilized the qualitative assessment approach for
all reporting units.
We
performed the annual qualitative analysis as of May 31, 2018 for the four reporting units with assigned goodwill and concluded it was more likely than not that the fair value
of each reporting unit exceeded its carrying value, and thus no impairment charge was recorded.
Changes
in the carrying amount of goodwill by segment for fiscal 2018 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation
Services
|
|
Expeditionary
Services
|
|
Total
|
|
Balance as of May 31, 2016
|
|
$
|
66.3
|
|
$
|
41.2
|
|
$
|
107.5
|
|
Foreign currency translation adjustments
|
|
|
(1.9
|
)
|
|
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2017
|
|
|
64.4
|
|
|
41.2
|
|
|
105.6
|
|
Acquisition
|
|
|
12.5
|
|
|
|
|
|
12.5
|
|
Foreign currency translation adjustments
|
|
|
0.6
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2018
|
|
$
|
77.5
|
|
$
|
41.2
|
|
$
|
118.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
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 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, 2018
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
26.3
|
|
$
|
(13.9
|
)
|
$
|
12.4
|
|
Developed technology
|
|
|
9.1
|
|
|
(5.9
|
)
|
|
3.2
|
|
Lease agreements
|
|
|
22.5
|
|
|
(12.6
|
)
|
|
9.9
|
|
FAA certificate
|
|
|
1.9
|
|
|
(0.9
|
)
|
|
1.0
|
|
Trademarks
|
|
|
0.2
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60.0
|
|
|
(33.3
|
)
|
|
26.7
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
1.1
|
|
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
61.1
|
|
$
|
(33.3
|
)
|
$
|
27.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
24.4
|
|
$
|
(11.6
|
)
|
$
|
12.8
|
|
Developed technology
|
|
|
8.8
|
|
|
(4.7
|
)
|
|
4.1
|
|
Lease agreements
|
|
|
22.5
|
|
|
(11.2
|
)
|
|
11.3
|
|
FAA certificate
|
|
|
1.9
|
|
|
(0.8
|
)
|
|
1.1
|
|
Trademarks
|
|
|
0.2
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57.8
|
|
|
(28.3
|
)
|
|
29.5
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
1.1
|
|
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58.9
|
|
$
|
(28.3
|
)
|
$
|
30.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships are being amortized over 10-20 years, developed technology is being amortized over 7-15 years, lease agreements are being amortized over
5-18 years, and the FAA certificate is being amortized over 20 years. Amortization expense recorded during fiscal 2018, 2017 and 2016 was $4.7 million, $4.2 million, and
$4.4 million, respectively. The estimated aggregate amount of amortization expense for intangible assets in each of the next five fiscal years is $4.1 million in 2019,
$3.7 million in 2020, $3.7 million in 2021, $2.9 million in 2022 and $2.3 million in 2023.
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
43
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)
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. Accounts
receivable due from the U.S. government were $33.0 million and $29.4 million at May 31, 2018 and 2017, respectively. 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.
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.
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)
The
following is a summary of inventories:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2018
|
|
2017
|
|
Aircraft and engine parts, components and finished goods
|
|
$
|
383.5
|
|
$
|
362.6
|
|
Raw materials and parts
|
|
|
45.1
|
|
|
45.0
|
|
Work-in-process
|
|
|
32.1
|
|
|
25.8
|
|
|
|
|
|
|
|
|
|
|
|
$
|
460.7
|
|
$
|
433.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rotable Assets and Equipment under Leases
Lease revenue is recognized as earned. 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 $26.2 million in 2019, $25.7 million in 2020, $25.0 million in 2021,
$24.5 million in 2022, and $24.5 million in 2023.
Rotable Assets Supporting Long-Term Programs
Rotable assets supporting long-term programs consists 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.
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
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)
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.
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. 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,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Interest paid
|
|
$
|
7.2
|
|
$
|
4.4
|
|
$
|
4.7
|
|
Income taxes paid
|
|
|
17.0
|
|
|
12.7
|
|
|
35.7
|
|
Income tax refunds and interest received
|
|
|
0.1
|
|
|
1.3
|
|
|
1.3
|
|
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.
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)
During fiscal 2016, treasury stock increased $21.3 million reflecting the repurchase of common shares of $18.8 million, restricted stock grants of $4.8 million and
the re-issuance of shares upon exercise of stock options, net of shares withheld to satisfy statutory tax obligations, of $2.3 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
Revenue from Contracts with Customers
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with
Customers
, which provides guidance for revenue recognition. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters
into contracts for the transfer of non-financial assets. This ASU will supersede the revenue recognition requirements in ASC 605,
Revenue
Recognition
, and most industry-specific guidance. This ASU will also supersede certain cost guidance included in Subtopic 605-35,
Revenue
Recognition-Construction-Type and Production-Type Contracts
. In August 2015, the FASB issued ASU No. 2015-14 which deferred the effective date of the new standard by one
year so that it will be effective for us beginning June 1, 2018.
We
will adopt this ASU using the modified retrospective transition method in the first quarter of fiscal 2019. Under this method, we will be required to recognize the cumulative effect
of adopting this ASU as of June 1, 2018. We have substantially completed our assessment of the new ASU and are finalizing the quantification of our adoption adjustments as well as preparing the
new required disclosures for the first quarter of fiscal 2019.
We
have identified three areas where the new ASU will impact our revenue recognition. First, we have certain contracts under which we manufacture products with no alternative use and the
Company has an enforceable right to payment from the customer. As a result, the Company will be required to record revenue for these contracts over time as opposed to at the time of shipment which is
our current policy today. Second, we have contracts under which we perform repair services on customer-owned assets which will also transition to an over time approach compared to our current policy
of recognizing revenue at the time of shipment.
Third,
we have certain contracts in which revenue is recognized using the percentage of completion method over the expected term of the contract. The new ASU will result in the reduction
of the contract term used for revenue recognition as certain contracts include unexercised customer option years or include customer rights to terminate the contract without significant penalty.
We
expect the cumulative effect for the adoption of the new ASU will result in a decrease to retained earnings of approximately $20 million as of June 1, 2018. We will
establish new Contract asset and Contract liability balance sheet accounts and will reclassify certain amounts from Accounts receivable, Inventories, Other non-current assets, and Other liabilities
and deferred income into these new accounts.
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)
Other New Accounting Pronouncements
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 most leases on their balance sheets, including those classified as operating leases under the current accounting guidance. In
addition, this ASU will require new qualitative and quantitative disclosures about the Company's leasing activities. This new standard will be effective for us beginning June 1, 2019, with
early adoption permitted. This ASU requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use
certain transition relief. We are in the preliminary phases of assessing the effect of this ASU on our portfolio of leases. While this assessment continues, we have not yet selected a transition date
nor have we determined the effect of this ASU on our consolidated financial statements.
In
March 2016, the FASB issued 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. 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 $2.9 million as an income tax benefit in fiscal 2018. We have also
presented the excess tax benefits within operating activities in the consolidated statement of cash flows for fiscal 2018. As permitted, we adopted the statement of cash flow presentation guidance on
a prospective basis with no adjustments to the previously reported amounts.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. This ASU requires restricted cash to
be included within beginning and ending total cash amounts reported in the consolidated statements of cash flows as well as increased disclosure requirements. As permitted, we have early adopted this
ASU in fiscal 2018. The ASU is required to be adopted on a retroactive basis; however, we did not have restricted cash in our prior periods reported.
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"). This new standard will be effective for us beginning June 1, 2019 with early adoption
permitted. We are currently evaluating the impact of this new standard on our consolidated financial statements.
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 are to be presented outside of
operating income. This new standard requires retrospective treatment for the classification of pension costs and will be effective for us beginning June 1, 2018. With the majority of our
pension plans frozen and total service cost, including administrative expenses, of $2.4 million and $2.5 million in fiscal 2018 and 2017, respectively, this ASU is not expected to have a
material impact on our consolidated financial statements.
48
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
2. Discontinued Operations
During the third quarter of fiscal 2018, we decided to pursue the sale of our Contractor-Owned, Contractor-Operated ("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.
Our
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.
In
the first quarter of fiscal 2016, we recognized a gain of $27.7 million net of expenses representing the receipt of the contingent consideration related to the sale of our
Telair Cargo Group.
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,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Sales
|
|
$
|
96.3
|
|
$
|
176.9
|
|
$
|
184.9
|
|
Cost of sales
|
|
|
(101.4
|
)
|
|
(165.1
|
)
|
|
(184.2
|
)
|
Asset impairments
|
|
|
(65.2
|
)
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
(11.8
|
)
|
|
(16.1
|
)
|
|
(18.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from discontinued operations
|
|
|
(82.1
|
)
|
|
(4.3
|
)
|
|
(17.8
|
)
|
Gain on sale of Telair Cargo Group
|
|
|
|
|
|
|
|
|
27.7
|
|
Provision for income taxes (benefit)
|
|
|
(24.0
|
)
|
|
(8.8
|
)
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from discontinued operations
|
|
$
|
(58.1
|
)
|
$
|
4.5
|
|
$
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the third quarter of fiscal 2016, we recognized $2.8 million of income tax expense in discontinued operations related to changes in estimates associated with tax provision
to federal income tax return filing differences. 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.
49
Table of Contents
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,
|
|
|
|
2018
|
|
2017
|
|
Inventory, rotable assets, and equipment
|
|
$
|
106.1
|
|
$
|
183.7
|
|
Accounts receivable, net
|
|
|
14.7
|
|
|
17.0
|
|
Goodwill
|
|
|
|
|
|
9.8
|
|
Other assets
|
|
|
4.2
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
125.0
|
|
$
|
218.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilitiescurrent
|
|
$
|
25.0
|
|
$
|
30.8
|
|
Liabilitiesnon-current
|
|
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
$
|
25.0
|
|
$
|
33.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019, 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 2018, we sold $239.6 million of receivables under the Purchase Agreement and remitted $167.9 million to the Purchaser on their behalf. As of May 31,
2018, we have collected cash of $10.5 million which has not yet been remitted to the Purchaser and has been classified as Restricted cash on our Consolidated Balance Sheet. During fiscal 2018,
we incurred purchase discount and other fees of $0.9 million which are recognized as Other expenses on our Consolidated Statements of Income.
50
Table of Contents
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,
|
|
|
|
2018
|
|
2017
|
|
Revolving Credit Facility expiring November 1, 2021 with interest payable monthly
|
|
$
|
130.0
|
|
$
|
131.0
|
|
Term loan due November 1, 2021 with interest payable monthly
|
|
|
23.9
|
|
|
|
|
Industrial revenue bond (secured by property, plant and equipment) due August 1, 2018 with interest payable monthly
|
|
|
25.0
|
|
|
25.0
|
|
Capital lease obligations
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
178.9
|
|
|
156.2
|
|
Current maturities of debt
|
|
|
|
|
|
(0.1
|
)
|
Debt issuance costs, net
|
|
|
(1.7
|
)
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
177.2
|
|
$
|
154.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
May 31, 2018, our variable rate and fixed rate debt had a fair value that approximates its carrying value and are classified as Level 2 in the fair value hierarchy.
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.
51
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 matures on August 1, 2018 has been 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, 2018, we were in compliance with the financial and other
covenants in our financing agreements.
Borrowing
activity under the Revolving Credit Facility during fiscal 2018, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Maximum amount borrowed
|
|
$
|
275.0
|
|
$
|
217.0
|
|
$
|
200.0
|
|
Average daily borrowings
|
|
|
214.1
|
|
|
175.5
|
|
|
134.2
|
|
Average interest rate during the year
|
|
|
2.52
|
%
|
|
1.77
|
%
|
|
1.41
|
%
|
We
also have $9.9 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, four or five equal 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
52
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)
inception,
a total of 11,149,000 shares have been granted under the Stock Benefit Plan. We have granted a total of 2,669,000 shares under the 2013 Stock Plan. All future stock awards will be made
under the 2013 Stock Plan. There were 2,128,238 shares available for grant under the 2013 Stock Plan as of May 31, 2018.
Stock Options
During fiscal 2018, 2017, and 2016, we granted stock options with respect to 463,140 shares, 687,000 shares and 488,767 shares, respectively.
The weighted average fair value per share of stock options granted during fiscal 2018, 2017 and 2016 was $9.29, $6.50 and $7.48, 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
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Risk-free interest rate
|
|
|
1.8
|
%
|
|
1.0
|
%
|
|
1.6
|
%
|
Expected volatility of common stock
|
|
|
31.7
|
%
|
|
36.8
|
%
|
|
36.1
|
%
|
Dividend yield
|
|
|
0.9
|
%
|
|
1.3
|
%
|
|
1.1
|
%
|
Expected option term in years
|
|
|
4.3
|
|
|
4.0
|
|
|
4.2
|
|
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, 2018 consisted of the following (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at beginning of year
|
|
|
2,334
|
|
$
|
23.02
|
|
|
2,096
|
|
$
|
22.17
|
|
|
1,857
|
|
$
|
21.05
|
|
Granted
|
|
|
463
|
|
$
|
35.33
|
|
|
687
|
|
$
|
24.10
|
|
|
489
|
|
$
|
26.62
|
|
Exercised
|
|
|
(704
|
)
|
$
|
20.04
|
|
|
(396
|
)
|
$
|
20.07
|
|
|
(122
|
)
|
$
|
20.61
|
|
Cancelled
|
|
|
(11
|
)
|
$
|
29.50
|
|
|
(53
|
)
|
$
|
25.42
|
|
|
(128
|
)
|
$
|
24.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
2,082
|
|
$
|
26.72
|
|
|
2,334
|
|
$
|
23.02
|
|
|
2,096
|
|
$
|
22.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
883
|
|
$
|
23.81
|
|
|
910
|
|
$
|
21.97
|
|
|
837
|
|
$
|
21.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
total fair value of stock options that vested during fiscal 2018, 2017, and 2016 was $4.9 million, $3.5 million, and $2.7 million, respectively. The total
intrinsic value of stock options exercised during fiscal 2018, 2017, and 2016 was $14.2 million, $4.7 million, and $1.0 million, respectively. The aggregate intrinsic value of
options outstanding was $37.4 million and $27.8 million as of May 31, 2018 and 2017, respectively. The tax benefit realized from stock options exercised during fiscal 2018, 2017,
and 2016 was $2.9 million,
53
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)
$1.2 million,
and $0.2 million, respectively. Expense recognized in selling, general and administrative expenses for stock options during fiscal 2018, 2017, and 2016 was
$5.1 million, $4.6 million, and $3.5 million, respectively. As of May 31, 2018, we had $4.6 million of unrecognized compensation expense related to stock options
that will be amortized over an average period of 0.7 years.
The
following table provides additional information regarding stock options outstanding as of May 31, 2018 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Option
Exercise
Price Range
|
|
Number
Outstanding as
of 5/31/18
|
|
Weighted-Average
Remaining Contractual
Life in Years
|
|
Weighted-
Average Exercise
Price
|
|
Number
Exercisable as
of 5/31/18
|
|
Weighted-
Average Exercise
Price
|
|
$12.00 - $20.00
|
|
|
160
|
|
|
3.2
|
|
$
|
14.51
|
|
|
160
|
|
$
|
14.51
|
|
$20.01 - $26.00
|
|
|
1,041
|
|
|
6.8
|
|
$
|
24.63
|
|
|
447
|
|
$
|
24.93
|
|
$26.01 - $38.70
|
|
|
881
|
|
|
7.9
|
|
$
|
31.41
|
|
|
276
|
|
$
|
27.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,082
|
|
|
7.0
|
|
$
|
26.72
|
|
|
883
|
|
$
|
23.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 performance objectives, including cumulative net income and average return on capital over a three-year performance period.
During fiscal 2018, 2017, and 2016, we granted 108,440, 212,583, and 119,929 of performance-based restricted shares, respectively. Time-based
restricted shares of 24,425, 39,100, and 42,557 were granted to executives and key employees during fiscal 2018, 2017, and 2016, respectively. We also award time-based restricted stock to our
non-employee directors as part of their annual compensation. Time-based restricted shares of 55,000, 50,625, and 47,083 were granted to members of the Board of Directors during fiscal 2018, 2017, and
2016, 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 2018, 2017, and 2016 was $10.2 million, $6.4 million, and $3.2 million, respectively.
Restricted
share activity during the fiscal year ended May 31, 2018 was as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Fair Value
on Grant Date
|
|
Nonvested at May 31, 2017
|
|
|
595
|
|
$
|
25.93
|
|
Granted
|
|
|
188
|
|
$
|
35.35
|
|
Vested
|
|
|
(91
|
)
|
$
|
25.08
|
|
Forfeited
|
|
|
(8
|
)
|
$
|
26.43
|
|
|
|
|
|
|
|
|
|
Nonvested at May 31, 2018
|
|
|
684
|
|
$
|
27.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
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)
As of May 31, 2018 we had $4.1 million of unearned compensation related to restricted shares that will be amortized to expense over a weighted average period of
2.5 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 current
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 is
effective January 1, 2018 which results in a blended federal statutory tax rate of 29.2% 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 is either at a federal rate of 29.2% for reversals
in fiscal 2018 or 21% for reversals in fiscal 2019 and subsequent years. During the third quarter of fiscal 2018, we recognized
an income tax benefit of $13.0 million for the re-measurement impact on a provisional basis as permitted under Staff Accounting Bulletin No. 118, which allows the use of a measurement
period, similar to that used in business combinations, to account for the impacts of the Tax Reform Act. In the fourth quarter of fiscal 2018, we completed our assessment and recognized an additional
income tax benefit of $1.1 million resulting in a total income tax benefit of $14.1 million in fiscal 2018 for the re-measurement impact.
The
provision for income tax on income from continuing operations includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
14.6
|
|
$
|
9.3
|
|
$
|
13.7
|
|
State
|
|
|
0.1
|
|
|
0.2
|
|
|
0.4
|
|
Foreign
|
|
|
1.7
|
|
|
3.1
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.4
|
|
|
12.6
|
|
|
17.9
|
|
Deferred
|
|
|
(12.9
|
)
|
|
12.5
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.5
|
|
$
|
25.1
|
|
$
|
23.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
6. Income Taxes (Continued)
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 29.2% for fiscal 2018 and 35.0% for fiscal
2017 and 2016 to income from continuing operations before provision for income taxes due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Provision for income tax (benefit) at the federal statutory rate
|
|
$
|
22.5
|
|
$
|
27.0
|
|
$
|
24.1
|
|
Deferred tax re-measurement from the Tax Reform Act
|
|
|
(14.1
|
)
|
|
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
State net operating losses
|
|
|
1.3
|
|
|
5.7
|
|
|
1.1
|
|
Change in valuation allowance for state deferred tax assets
|
|
|
(3.4
|
)
|
|
(5.7
|
)
|
|
(1.1
|
)
|
Prior period adjustments
|
|
|
|
|
|
|
|
|
(1.3
|
)
|
Effective settlement of prior tax position
|
|
|
|
|
|
(2.2
|
)
|
|
|
|
Other
|
|
|
0.1
|
|
|
0.3
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax
|
|
$
|
3.5
|
|
$
|
25.1
|
|
$
|
23.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the third quarter of fiscal 2016, we completed a reconciliation of our tax basis assets and liabilities and an analysis of our income tax payable which identified prior year
immaterial errors netting to $0.2 million with $1.5 million recognized as income tax expense in discontinued operations and $1.3 million recognized as income tax benefit within
income from continuing operations.
Income
before provision for income taxes includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Domestic
|
|
$
|
58.7
|
|
$
|
57.7
|
|
$
|
55.7
|
|
Foreign
|
|
|
18.5
|
|
|
19.4
|
|
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
77.2
|
|
$
|
77.1
|
|
$
|
68.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
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,
|
|
|
|
2018
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Inventory costs
|
|
$
|
15.9
|
|
$
|
21.3
|
|
Impairments
|
|
|
2.1
|
|
|
5.6
|
|
Postretirement benefits
|
|
|
2.2
|
|
|
6.8
|
|
Employee benefits
|
|
|
9.7
|
|
|
12.3
|
|
State net operating losses
|
|
|
8.6
|
|
|
9.4
|
|
Other
|
|
|
3.2
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
41.7
|
|
|
58.8
|
|
Valuation allowance
|
|
|
(7.0
|
)
|
|
(10.4
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax assets net of valuation allowance
|
|
|
34.7
|
|
|
48.4
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Tangible and intangible assets
|
|
|
(50.2
|
)
|
|
(85.5
|
)
|
Other
|
|
|
(0.2
|
)
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(50.4
|
)
|
|
(85.6
|
)
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(15.7
|
)
|
$
|
(37.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of May 31, 2018, 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.
Income
tax receivable at May 31, 2018 was $1.0 million and was included in Other current assets on the Consolidated Balance Sheet. Income tax payable at May 31, 2017
was $12.3 million and was included in Accrued Liabilities on the Consolidated Balance Sheet.
57
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,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Balance, beginning of year
|
|
$
|
4.4
|
|
$
|
12.9
|
|
$
|
2.2
|
|
Additions for tax positions of prior years
|
|
|
|
|
|
0.4
|
|
|
10.7
|
|
Effective settlement of prior tax position
|
|
|
|
|
|
(8.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
4.4
|
|
$
|
4.4
|
|
$
|
12.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
fiscal 2017, 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 an IRS examination. 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.
All
of our unrecognized tax benefits as of May 31, 2018 and 2017 would be recorded as a component of income tax expense or income from discontinued operations, if recognized. We
accrue interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Fiscal
years 2015 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.
58
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,
2018 (shares in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Basic and Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
73.7
|
|
$
|
52.0
|
|
$
|
45.5
|
|
Less income attributable to participating shares
|
|
|
(0.6
|
)
|
|
(0.5
|
)
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common shareholders
|
|
|
73.1
|
|
|
51.5
|
|
|
45.1
|
|
Income (Loss) from discontinued operations attributable to common shareholders
|
|
|
(58.1
|
)
|
|
4.5
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders for earnings per share
|
|
$
|
15.0
|
|
$
|
56.0
|
|
$
|
47.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingbasic
|
|
|
34.2
|
|
|
33.9
|
|
|
34.4
|
|
Additional shares from assumed exercise of stock options
|
|
|
0.4
|
|
|
0.4
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingdiluted
|
|
|
34.6
|
|
|
34.3
|
|
|
34.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharebasic:
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
2.14
|
|
$
|
1.53
|
|
$
|
1.30
|
|
Earnings (Loss) from discontinued operations
|
|
|
(1.70
|
)
|
|
0.13
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharebasic
|
|
$
|
0.44
|
|
$
|
1.66
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharediluted:
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
2.11
|
|
$
|
1.51
|
|
$
|
1.30
|
|
Earnings (Loss) from discontinued operations
|
|
|
(1.70
|
)
|
|
0.13
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharediluted
|
|
$
|
0.41
|
|
$
|
1.64
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. At May 31, 2017 and 2016,
respectively, outstanding options to purchase 11,200 shares and 1,374,200 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 period then ended.
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
59
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, 2018 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,
|
|
|
|
2018
|
|
2017
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
145.4
|
|
$
|
145.7
|
|
Service cost
|
|
|
2.4
|
|
|
2.5
|
|
Interest cost
|
|
|
4.3
|
|
|
4.2
|
|
Participant contributions
|
|
|
0.4
|
|
|
0.3
|
|
Net actuarial gain
|
|
|
(2.3
|
)
|
|
(2.0
|
)
|
Benefits and administrative payments
|
|
|
(6.5
|
)
|
|
(6.0
|
)
|
Plan change
|
|
|
0.7
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
2.1
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
146.5
|
|
$
|
145.4
|
|
|
|
|
|
|
|
|
|
Change in the fair value of plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
118.8
|
|
$
|
111.0
|
|
Actual return on plan assets
|
|
|
11.6
|
|
|
9.9
|
|
Employer contributions
|
|
|
8.4
|
|
|
2.9
|
|
Participant contributions
|
|
|
0.4
|
|
|
0.3
|
|
Benefits and administrative payments
|
|
|
(6.5
|
)
|
|
(6.0
|
)
|
Foreign currency translation adjustment
|
|
|
1.8
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
134.5
|
|
$
|
118.8
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(12.0
|
)
|
$
|
(26.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
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,
|
|
|
|
2018
|
|
2017
|
|
Non-current assets
|
|
$
|
0.5
|
|
$
|
|
|
Accrued liabilities
|
|
|
(1.2
|
)
|
|
(2.7
|
)
|
Other liabilities and deferred income
|
|
|
(11.3
|
)
|
|
(23.9
|
)
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(12.0
|
)
|
$
|
(26.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in accumulated other comprehensive loss at May 31, 2018 and 2017, respectively, consisted of the following:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2018
|
|
2017
|
|
Actuarial loss
|
|
$
|
50.5
|
|
$
|
58.8
|
|
Prior service credit
|
|
|
(0.1
|
)
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50.4
|
|
$
|
58.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
our frozen defined benefit plan for domestic salaried and non-union hourly employees, plan assets exceeded both the projected benefit obligation and the accumulated benefit
obligation by $0.5 million. For all of our other 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 $140.2 million and $140.0 million at May 31, 2018 and 2017, respectively.
Net Periodic Benefit Cost
Pension expense charged to the Consolidated Statements of Income includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Service cost
|
|
$
|
2.4
|
|
$
|
2.5
|
|
$
|
2.5
|
|
Interest cost
|
|
|
4.3
|
|
|
4.2
|
|
|
4.5
|
|
Expected return on plan assets
|
|
|
(7.3
|
)
|
|
(6.5
|
)
|
|
(6.5
|
)
|
Curtailment
|
|
|
0.3
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
|
|
|
|
|
|
0.1
|
|
Recognized net actuarial loss
|
|
|
2.3
|
|
|
2.4
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.0
|
|
$
|
2.6
|
|
$
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
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
estimated amounts to be amortized from accumulated other comprehensive loss into expense during fiscal 2019 are as follows:
|
|
|
|
|
Net actuarial loss
|
|
$
|
1.8
|
|
Prior service cost
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2018
|
|
2017
|
|
Discount rate:
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
4.05
|
%
|
|
3.82
|
%
|
International plan
|
|
|
1.90
|
|
|
2.00
|
|
Rate of compensation increase:
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
n/a
|
|
|
2.50
|
%
|
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,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Discount rate:
|
|
|
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
3.82
|
%
|
|
3.83
|
%
|
|
4.15
|
%
|
International plan
|
|
|
2.00
|
|
|
1.90
|
|
|
1.90
|
|
Rate of compensation increase:
|
|
|
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
2.50
|
%
|
|
2.50
|
%
|
|
2.50
|
%
|
International plan
|
|
|
3.00
|
|
|
3.00
|
|
|
3.00
|
|
Expected long-term rate on plan assets:
|
|
|
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
7.25
|
%
|
|
7.25
|
%
|
|
7.25
|
%
|
International plan
|
|
|
4.00
|
|
|
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.
62
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)
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
|
|
|
|
2018
|
|
2017
|
|
Equity securities
|
|
|
59
|
%
|
|
62
|
%
|
|
45 - 75
|
%
|
Fixed income securities
|
|
|
22
|
|
|
16
|
|
|
15 - 45
|
%
|
Other
|
|
|
19
|
|
|
22
|
|
|
0 - 25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2018. 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, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
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, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
1
|
|
Level 2
2
|
|
Level 3
3
|
|
Total
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. mutual funds
|
|
$
|
30.6
|
|
$
|
|
|
$
|
|
|
$
|
30.6
|
|
International mutual funds
|
|
|
9.5
|
|
|
|
|
|
|
|
|
9.5
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities and corporate bond mutual funds
|
|
|
10.1
|
|
|
|
|
|
|
|
|
10.1
|
|
Funds-of-funds
|
|
|
|
|
|
51.6
|
|
|
7.3
|
|
|
58.9
|
|
Hedge funds
|
|
|
|
|
|
|
|
|
6.8
|
|
|
6.8
|
|
Cash and cash equivalents
|
|
|
2.9
|
|
|
|
|
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
53.1
|
|
$
|
51.6
|
|
$
|
14.1
|
|
$
|
118.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
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, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge Funds
|
|
Fund-of-funds
|
|
Insurance Annuities
|
|
Total
|
|
Balance as of May 31, 2016
|
|
$
|
6.6
|
|
$
|
7.5
|
|
$
|
|
|
$
|
14.1
|
|
Sales
|
|
|
|
|
|
(0.8
|
)
|
|
|
|
|
(0.8
|
)
|
Return on plan assets related to assets still held at May 31, 2017
|
|
|
0.2
|
|
|
0.6
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
64
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
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024 to
2028
|
|
Estimated future pension payments
|
|
$
|
8.0
|
|
$
|
6.2
|
|
$
|
6.0
|
|
$
|
6.5
|
|
$
|
6.9
|
|
$
|
34.2
|
|
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 $2.9 million to our pension plans during fiscal 2019.
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 $0.7 million as of May 31, 2018 and 2017, 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.
65
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
$9.2 million in fiscal 2018, $11.6 million in fiscal 2017 and $10.3 million in fiscal 2016 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, 2018 were as follows (all
amounts are net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
Translation
Adjustments
|
|
Pension
Plans
|
|
Total
|
|
Balance as of June 1, 2015
|
|
$
|
0.9
|
|
$
|
(41.3
|
)
|
$
|
(40.4
|
)
|
Reclassifications within AOCL
|
|
|
(2.0
|
)
|
|
2.0
|
|
|
|
|
Other comprehensive loss before reclassifications
|
|
|
|
|
|
(5.6
|
)
|
|
(5.6
|
)
|
Amounts reclassified from AOCL
|
|
|
|
|
|
1.6
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
|
|
|
|
(4.0
|
)
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2016
|
|
|
(1.1
|
)
|
|
(43.3
|
)
|
|
(44.4
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
(0.6
|
)
|
|
3.5
|
|
|
2.9
|
|
Amounts reclassified from AOCL
|
|
|
|
|
|
1.6
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
(0.6
|
)
|
|
5.1
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2017
|
|
|
(1.7
|
)
|
|
(38.2
|
)
|
|
(39.9
|
)
|
Other comprehensive income before reclassifications
|
|
|
2.0
|
|
|
4.2
|
|
|
6.2
|
|
Amounts reclassified from AOCL
|
|
|
|
|
|
1.7
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
2.0
|
|
|
5.9
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2018
|
|
$
|
0.3
|
|
$
|
(32.3
|
)
|
$
|
(32.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2018 and 2017, the unamortized balance of the deferred gain was
66
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
$2.5 million and $2.9 million, respectively, and is included in Other liabilities and deferred income on the Consolidated Balance Sheet.
In
addition to the leases described above, we lease other facilities and equipment under agreements that are classified as operating leases that expire at various dates through 2034.
Future minimum payments under all operating leases at May 31, 2018 are as follows:
|
|
|
|
|
2019
|
|
$
|
17.5
|
|
2020
|
|
|
16.3
|
|
2021
|
|
|
13.0
|
|
2022
|
|
|
10.8
|
|
2023
|
|
|
10.0
|
|
2024 and thereafter
|
|
|
27.2
|
|
Rental
expense for facilities and equipment during fiscal years 2018, 2017, and 2016 was $23.5 million, $22.9 million, and $21.3 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 $203.4 million in 2019,
$43.8 million in 2020, $6.0 million in 2021, none in 2022 and none in 2023.
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, 2018 was approximately $16.7 million.
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.
11. Other Noncurrent Assets
At May 31, 2018 and 2017, other noncurrent assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2018
|
|
2017
|
|
Costs in excess of billings
|
|
$
|
39.0
|
|
$
|
19.1
|
|
Assets under deferred compensation plan
|
|
|
35.7
|
|
|
32.1
|
|
Cash surrender value of life insurance
|
|
|
16.8
|
|
|
17.8
|
|
License fees
|
|
|
10.6
|
|
|
14.4
|
|
Investments in joint ventures
|
|
|
7.6
|
|
|
15.0
|
|
Other
|
|
|
9.2
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
$
|
118.9
|
|
$
|
104.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
11. Other Noncurrent Assets (Continued)
License Fees
In June 2011, we entered into a ten-year agreement with Unison Industries to be the exclusive worldwide aftermarket distributor for Unison's
electrical components, sensors, switches and other systems for aircraft and industrial uses. In connection with the agreement, we agreed to pay Unison Industries $20.0 million for the exclusive
distribution rights with $7.0 million paid in June 2011 and $1.3 million payable by January 31 of each calendar year beginning in January 2012 through 2021.
As
of May 31, 2018 and 2017, the unamortized balance of the license is $5.6 million and $7.2 million, respectively, and is being amortized over a ten-year period.
The current portion of the deferred payments of $1.3 million is recorded in Accrued liabilities and the long-term portion of $2.2 million is included in Other liabilities and deferred
income on the Consolidated Balance Sheet.
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. As of May 31, 2018, all of our remaining investments in aircraft joint ventures are accounted for
under the cost method.
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 2018, 2017, and 2016, we were paid $0.4 million, $1.2 million, and $0.9 million, respectively, for
such services.
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.
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 closing and deferred consideration of $1.9 million payable September 2018. This business is included in our Aviation Services segment. The amounts recorded
for certain assets are preliminary in nature and are subject to adjustment as additional information is obtained about their acquisition date fair value. The final determination of the fair values
will be completed within the one year measurement period. The preliminary fair value of assets acquired and liabilities assumed is as follows:
|
|
|
|
|
Current assets
|
|
$
|
4.1
|
|
Property and equipment
|
|
|
13.1
|
|
Intangible assets, including goodwill
|
|
|
16.0
|
|
Accounts payable and accrued liabilities
|
|
|
(8.4
|
)
|
|
|
|
|
|
|
|
$
|
24.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
12. Acquisitions (Continued)
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
December 4, 2015, we acquired certain assets of Vantem Modular LLC, which designs, manufactures, and distributes modular shelters. The purchase price of the acquisition
was $4.8 million paid at closing with future royalties of up to $5.0 million. This business operates as part of our Expeditionary Services segment. The fair value of net assets acquired
is as follows:
|
|
|
|
|
Current assets
|
|
$
|
1.5
|
|
Equipment
|
|
|
0.5
|
|
Intangible assets
|
|
|
3.5
|
|
Contingent consideration
|
|
|
(2.0
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
3.5
|
|
Goodwill
|
|
|
1.3
|
|
|
|
|
|
|
Purchase price
|
|
$
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 airlift and mobility activities.
The
Aviation Services segment consists of aftermarket support and services businesses that provide spares 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 and
aircraft to the commercial aviation and government and defense markets. We provide customized inventory supply chain management, performance based logistics programs, aircraft component repair
management services, and aircraft modifications. 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.
The
Expeditionary Services segment consists of businesses that provide products and services supporting the movement of equipment and personnel by the U.S. and foreign governments and
other
69
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)
non-governmental
organizations. Sales in the Expeditionary Services segment are derived from fleet management and operations of customer-owned aircraft and the design and manufacture of pallets,
shelters, and containers used to support the U.S. military's requirements for a mobile and agile force. We also design and manufacture 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,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
Aviation Services
|
|
$
|
1,618.9
|
|
$
|
1,485.4
|
|
$
|
1,425.0
|
|
Expeditionary Services
|
|
|
129.4
|
|
|
105.4
|
|
|
100.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,748.3
|
|
$
|
1,590.8
|
|
$
|
1,525.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
Aviation Services
|
|
$
|
271.9
|
|
$
|
246.0
|
|
$
|
229.5
|
|
Expeditionary Services
|
|
|
22.7
|
|
|
17.4
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
294.6
|
|
$
|
263.4
|
|
$
|
233.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2018
|
|
2017
|
|
Total assets:
|
|
|
|
|
|
|
|
Aviation Services
|
|
$
|
1,205.8
|
|
$
|
1,057.0
|
|
Expeditionary Services
|
|
|
130.2
|
|
|
122.8
|
|
Corporate and discontinued operations
|
|
|
188.7
|
|
|
324.3
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,524.7
|
|
$
|
1,504.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
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,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
Aviation Services
|
|
$
|
18.6
|
|
$
|
15.0
|
|
$
|
16.4
|
|
Expeditionary Services
|
|
|
2.1
|
|
|
2.0
|
|
|
1.6
|
|
Corporate
|
|
|
1.3
|
|
|
8.2
|
|
|
22.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total continuing operations
|
|
|
22.0
|
|
|
25.2
|
|
|
40.1
|
|
Discontinued operations
|
|
|
5.0
|
|
|
8.4
|
|
|
48.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27.0
|
|
$
|
33.6
|
|
$
|
89.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Depreciation and amortization:
1
|
|
|
|
|
|
|
|
|
|
|
Aviation Services
|
|
$
|
34.6
|
|
$
|
30.8
|
|
$
|
26.2
|
|
Expeditionary Services
|
|
|
4.6
|
|
|
5.0
|
|
|
6.8
|
|
Corporate
|
|
|
16.6
|
|
|
10.9
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Total continuing operations
|
|
|
55.8
|
|
|
46.7
|
|
|
39.7
|
|
Discontinued operations
|
|
|
7.3
|
|
|
17.2
|
|
|
18.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
63.1
|
|
$
|
63.9
|
|
$
|
57.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
1
-
Includes
depreciation and 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,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Segment gross profit
|
|
$
|
294.6
|
|
$
|
263.4
|
|
$
|
233.1
|
|
Selling, general and administrative
|
|
|
(208.6
|
)
|
|
(181.1
|
)
|
|
(157.6
|
)
|
Other expenses
|
|
|
(0.9
|
)
|
|
|
|
|
(0.4
|
)
|
Interest expense
|
|
|
(8.0
|
)
|
|
(5.3
|
)
|
|
(6.4
|
)
|
Interest income
|
|
|
0.1
|
|
|
0.1
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income taxes
|
|
$
|
77.2
|
|
$
|
77.1
|
|
$
|
68.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
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, 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,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Aviation Services
|
|
$
|
224.4
|
|
$
|
260.2
|
|
$
|
301.1
|
|
Expeditionary Services
|
|
|
79.9
|
|
|
61.3
|
|
|
65.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
304.3
|
|
$
|
321.5
|
|
$
|
366.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total sales
|
|
|
17.4
|
%
|
|
20.2
|
%
|
|
24.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
by type of product/service was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Aviation supply chain
|
|
$
|
1,066.0
|
|
$
|
998.7
|
|
$
|
903.2
|
|
Maintenance, repair and overhaul services
|
|
|
552.9
|
|
|
486.7
|
|
|
521.8
|
|
Mobility products
|
|
|
112.5
|
|
|
105.4
|
|
|
100.4
|
|
Airlift
|
|
|
16.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,748.3
|
|
$
|
1,590.8
|
|
$
|
1,525.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2018
|
|
2017
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
United States
|
|
$
|
393.1
|
|
$
|
369.1
|
|
Europe
|
|
|
103.3
|
|
|
108.5
|
|
Other
|
|
|
85.6
|
|
|
40.3
|
|
|
|
|
|
|
|
|
|
Total continuing operations
|
|
|
582.0
|
|
|
517.9
|
|
Discontinued operations
|
|
|
|
|
|
97.8
|
|
|
|
|
|
|
|
|
|
|
|
$
|
582.0
|
|
$
|
615.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
to unaffiliated customers in foreign countries (including sales through foreign sales offices of domestic subsidiaries) were approximately $694.0 million (39.7% of total
sales), $595.4 million (37.4% of total sales) and $498.0 million (32.6% of total sales) in fiscal 2018, 2017 and 2016, respectively.
72
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
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:
DynCorp International LLC v. AAR Airlift Group, Inc.
On September 5, 2015, DynCorp International LLC ("DynCorp") filed a complaint in the United States District Court for the Middle
District of Florida, Orlando Division (the "District Court"), accusing AAR Airlift Group, Inc. ("Airlift"), a wholly-owned subsidiary of AAR CORP., of misappropriation of DynCorp information,
including trade secrets, and other related allegations, in connection with the submission of proposals in response to the solicitation issued by the U.S. Department of State ("DoS") Bureau of
International Narcotics and Law Enforcement Affairs, Office of Aviation in support of the Worldwide Aviation Support Services program ("WASS").
On
October 19, 2015, DynCorp filed an amended complaint with the District Court. On January 14, 2016, the District Court granted Airlift's motion to dismiss DynCorp's
amended complaint. On February 2, 2016, DynCorp appealed the District Court's order to the United States Court of Appeals for the Eleventh Circuit (the "Eleventh Circuit").
On
November 21, 2016, the Eleventh Circuit reversed in part the District Court's dismissal of the amended complaint and remanded the case to the District Court for further
proceedings.
On
January 31, 2018, Airlift and DynCorp filed a joint notice of settlement, advising the District Court that they had reached an agreement in principle to resolve DynCorp's
lawsuit and that they expected to file a stipulation of dismissal with prejudice within 14 days.
On
February 1, 2018, the District Court entered an order dismissing the DynCorp lawsuit without prejudice, subject to the right of any party within 60 days to move the
court for the purpose of entering a stipulated form of a final order or judgment or, on good cause shown, to reopen the case for further proceedings.
On
June 20, 2018, the parties entered into a confidential settlement agreement to dismiss the lawsuit with prejudice without the payment of any money by either party. On
June 26, 2018, the District Court entered an order dismissing the lawsuit with prejudice.
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 Airlift 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 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.
73
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)
The unaudited selected quarterly data for fiscal years ended May 31, 2018 and 2017 is as follows:
Fiscal 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Full
Year
|
|
Sales
|
|
$
|
397.9
|
|
$
|
420.6
|
|
$
|
456.3
|
|
$
|
473.5
|
|
$
|
1,748.3
|
|
Gross profit
|
|
|
61.6
|
|
|
70.7
|
|
|
77.6
|
|
|
84.7
|
|
|
294.6
|
|
Income from continuing operations
|
|
|
11.0
|
|
|
13.3
|
|
|
31.3
|
|
|
18.1
|
|
|
73.7
|
|
Loss from discontinued operations
1
|
|
|
(0.4
|
)
|
|
(35.8
|
)
|
|
(15.8
|
)
|
|
(6.1
|
)
|
|
(58.1
|
)
|
Net income (loss)
|
|
|
10.6
|
|
|
(22.5
|
)
|
|
15.5
|
|
|
12.0
|
|
|
15.6
|
|
Earnings (Loss) per sharebasic:
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Fiscal 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Full
Year
|
|
Sales
|
|
$
|
361.8
|
|
$
|
371.3
|
|
$
|
407.2
|
|
$
|
450.5
|
|
$
|
1,590.8
|
|
Gross profit
|
|
|
59.5
|
|
|
59.5
|
|
|
66.5
|
|
|
77.9
|
|
|
263.4
|
|
Income from continuing operations
|
|
|
11.6
|
|
|
9.7
|
|
|
14.4
|
|
|
16.3
|
|
|
52.0
|
|
Income (Loss) from discontinued operations
|
|
|
(2.1
|
)
|
|
2.4
|
|
|
(0.7
|
)
|
|
4.9
|
|
|
4.5
|
|
Net income
|
|
|
9.5
|
|
|
12.1
|
|
|
13.7
|
|
|
21.2
|
|
|
56.5
|
|
Earnings (Loss) per sharebasic:
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
0.34
|
|
|
0.28
|
|
|
0.43
|
|
|
0.48
|
|
|
1.53
|
|
Discontinued operations
|
|
|
(0.06
|
)
|
|
0.07
|
|
|
(0.02
|
)
|
|
0.14
|
|
|
0.13
|
|
Earnings per sharebasic
|
|
|
0.28
|
|
|
0.35
|
|
|
0.41
|
|
|
0.62
|
|
|
1.66
|
|
Earnings (Loss) per sharediluted:
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
0.34
|
|
|
0.28
|
|
|
0.42
|
|
|
0.48
|
|
|
1.51
|
|
Discontinued operations
|
|
|
(0.06
|
)
|
|
0.07
|
|
|
(0.02
|
)
|
|
0.14
|
|
|
0.13
|
|
Earnings per sharediluted
|
|
|
0.28
|
|
|
0.35
|
|
|
0.40
|
|
|
0.62
|
|
|
1.64
|
|
-
1
-
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.
-
2
-
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.
74
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
16. Allowance for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Balance, beginning of year
|
|
$
|
4.9
|
|
$
|
3.3
|
|
$
|
4.8
|
|
Provision charged to operations
|
|
|
0.5
|
|
|
2.1
|
|
|
0.3
|
|
Recoveries, deductions for accounts written off and other reclassifications
|
|
|
2.1
|
|
|
(0.5
|
)
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
7.5
|
|
$
|
4.9
|
|
$
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Table of Contents