ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
AAR CORP.:
We
have audited the accompanying consolidated balance sheets of AAR CORP. and subsidiaries as of May 31, 2017 and 2016, and the related consolidated statements of income,
comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period ended May 31, 2017. 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
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AAR CORP. and subsidiaries as of
May 31, 2017 and 2016, and the results of their operations, and their cash flows for each of the years in the three-year period ended May 31, 2017, 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), AAR CORP.'s internal control over financial reporting as of
May 31, 2017, based on criteria established in
Internal ControlIntegrated Framework (2013)
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated July 12, 2017 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial
reporting.
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/s/ KPMG LLP
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Chicago, Illinois
July 12, 2017
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34
Table of Contents
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
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|
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|
|
|
|
|
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|
For the Year Ended May 31,
|
|
|
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2017
|
|
2016
|
|
2015
|
|
|
|
(In millions, except per share data)
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
Sales from products
|
|
$
|
956.6
|
|
$
|
934.4
|
|
$
|
916.7
|
|
Sales from services
|
|
|
811.0
|
|
|
764.5
|
|
|
704.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,767.6
|
|
|
1,698.9
|
|
|
1,621.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost of products
|
|
|
800.7
|
|
|
787.4
|
|
|
891.0
|
|
Cost of services
|
|
|
690.4
|
|
|
673.6
|
|
|
599.6
|
|
Selling, general and administrative
|
|
|
196.7
|
|
|
173.2
|
|
|
172.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,687.8
|
|
|
1,634.2
|
|
|
1,663.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) from joint ventures
|
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
79.6
|
|
|
64.4
|
|
|
(41.4
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
(0.4
|
)
|
|
(44.9
|
)
|
Interest expense
|
|
|
(5.5
|
)
|
|
(6.4
|
)
|
|
(27.2
|
)
|
Interest income
|
|
|
0.2
|
|
|
0.3
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations before provision for income taxes
|
|
|
74.3
|
|
|
57.9
|
|
|
(113.2
|
)
|
Provision for income tax (benefit)
|
|
|
24.1
|
|
|
19.6
|
|
|
(39.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations
|
|
|
50.2
|
|
|
38.3
|
|
|
(73.9
|
)
|
Income from discontinued operations attributable to AAR
|
|
|
6.3
|
|
|
9.4
|
|
|
84.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to AAR
|
|
$
|
56.5
|
|
$
|
47.7
|
|
$
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Earnings per sharebasic:
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) from continuing operations
|
|
$
|
1.47
|
|
$
|
1.10
|
|
$
|
(1.90
|
)
|
Earnings from discontinued operations
|
|
|
0.19
|
|
|
0.27
|
|
|
2.16
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharebasic
|
|
$
|
1.66
|
|
$
|
1.37
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Earnings per sharediluted:
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) from continuing operations
|
|
$
|
1.45
|
|
$
|
1.10
|
|
$
|
(1.90
|
)
|
Earnings from discontinued operations
|
|
|
0.19
|
|
|
0.27
|
|
|
2.14
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharediluted
|
|
$
|
1.64
|
|
$
|
1.37
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (LOSS)
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|
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|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(In millions)
|
|
Net income
|
|
$
|
56.5
|
|
$
|
47.7
|
|
$
|
10.4
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments, net of tax
|
|
|
(0.6
|
)
|
|
|
|
|
(7.8
|
)
|
Derivative instruments, net of tax expense of $1.4 in 2015
|
|
|
|
|
|
|
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|
2.6
|
|
Unrecognized pension and post retirement costs, net of tax expense (benefit) of $2.8 in 2017, ($2.1) in 2016, and ($3.2) in 2015
|
|
|
5.1
|
|
|
(4.0
|
)
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of tax
|
|
|
4.5
|
|
|
(4.0
|
)
|
|
(11.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
61.0
|
|
|
43.7
|
|
|
(0.7
|
)
|
Less: Comprehensive income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to AAR
|
|
$
|
61.0
|
|
$
|
43.7
|
|
$
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(In millions)
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10.3
|
|
$
|
31.2
|
|
Accounts receivable
|
|
|
251.4
|
|
|
248.3
|
|
Inventories
|
|
|
483.1
|
|
|
452.0
|
|
Rotable spares and equipment on or available for short-term lease
|
|
|
118.0
|
|
|
118.3
|
|
Deposits, prepaids and other
|
|
|
25.7
|
|
|
31.9
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
888.5
|
|
|
881.7
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost:
|
|
|
|
|
|
|
|
Land
|
|
|
4.3
|
|
|
4.5
|
|
Buildings and improvements
|
|
|
100.1
|
|
|
99.5
|
|
Aircraft, equipment, furniture and fixtures
|
|
|
511.4
|
|
|
571.8
|
|
|
|
|
|
|
|
|
|
|
|
|
615.8
|
|
|
675.8
|
|
Accumulated depreciation
|
|
|
(413.9
|
)
|
|
(437.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
201.9
|
|
|
238.1
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
115.4
|
|
|
117.3
|
|
Intangible assets, net
|
|
|
32.8
|
|
|
35.8
|
|
Equipment on or available for long-term lease
|
|
|
159.6
|
|
|
81.1
|
|
Other
|
|
|
105.9
|
|
|
102.0
|
|
|
|
|
|
|
|
|
|
|
|
|
413.7
|
|
|
336.2
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,504.1
|
|
$
|
1,456.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2017
|
|
2016
|
|
|
|
(In millions)
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
2.0
|
|
$
|
12.0
|
|
Accounts and trade notes payable
|
|
|
177.4
|
|
|
166.3
|
|
Accrued liabilities
|
|
|
155.7
|
|
|
163.1
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
335.1
|
|
|
341.4
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
|
155.3
|
|
|
136.1
|
|
Deferred tax liabilities
|
|
|
37.2
|
|
|
34.3
|
|
Other liabilities and deferred income
|
|
|
62.3
|
|
|
78.4
|
|
|
|
|
|
|
|
|
|
|
|
|
254.8
|
|
|
248.8
|
|
|
|
|
|
|
|
|
|
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 45,175,302 and 44,867,703 shares at cost, respectively
|
|
|
45.2
|
|
|
44.9
|
|
Capital surplus
|
|
|
460.8
|
|
|
451.3
|
|
Retained earnings
|
|
|
727.9
|
|
|
681.6
|
|
Treasury stock, 10,820,844 and 10,353,153 shares at cost, respectively
|
|
|
(279.8
|
)
|
|
(267.6
|
)
|
Accumulated other comprehensive loss
|
|
|
(39.9
|
)
|
|
(44.4
|
)
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
914.2
|
|
|
865.8
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,504.1
|
|
$
|
1,456.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2017
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Capital
Surplus
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total AAR
Stockholders'
Equity
|
|
Noncontrolling
Interest
|
|
Total
Equity
|
|
Balance, May 31, 2014
|
|
$
|
44.7
|
|
$
|
436.4
|
|
$
|
646.0
|
|
$
|
(98.3
|
)
|
$
|
(29.3
|
)
|
$
|
999.5
|
|
$
|
1.2
|
|
$
|
1,000.7
|
|
Net income
|
|
|
|
|
|
|
|
|
10.2
|
|
|
|
|
|
|
|
|
10.2
|
|
|
0.2
|
|
|
10.4
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
(11.9
|
)
|
|
|
|
|
|
|
|
(11.9
|
)
|
|
(0.6
|
)
|
|
(12.5
|
)
|
Stock option activity
|
|
|
|
|
|
2.1
|
|
|
|
|
|
4.2
|
|
|
|
|
|
6.3
|
|
|
|
|
|
6.3
|
|
Restricted stock activity
|
|
|
0.2
|
|
|
4.7
|
|
|
|
|
|
(0.7
|
)
|
|
|
|
|
4.2
|
|
|
|
|
|
4.2
|
|
Repurchase of shares
|
|
|
|
|
|
|
|
|
|
|
|
(151.5
|
)
|
|
|
|
|
(151.5
|
)
|
|
|
|
|
(151.5
|
)
|
Other
|
|
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.6
|
)
|
|
(0.8
|
)
|
|
(1.4
|
)
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.1
|
)
|
|
(11.1
|
)
|
|
|
|
|
(11.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2015
|
|
$
|
44.9
|
|
$
|
442.6
|
|
$
|
644.3
|
|
$
|
(246.3
|
)
|
$
|
(40.4
|
)
|
$
|
845.1
|
|
$
|
|
|
$
|
845.1
|
|
Net income
|
|
|
|
|
|
|
|
|
47.7
|
|
|
|
|
|
|
|
|
47.7
|
|
|
|
|
|
47.7
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
(10.4
|
)
|
|
|
|
|
|
|
|
(10.4
|
)
|
|
|
|
|
(10.4
|
)
|
Stock option activity
|
|
|
|
|
|
4.4
|
|
|
|
|
|
2.3
|
|
|
|
|
|
6.7
|
|
|
|
|
|
6.7
|
|
Restricted stock activity
|
|
|
|
|
|
4.5
|
|
|
|
|
|
(4.8
|
)
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
(0.3
|
)
|
Repurchase of shares
|
|
|
|
|
|
|
|
|
|
|
|
(18.8
|
)
|
|
|
|
|
(18.8
|
)
|
|
|
|
|
(18.8
|
)
|
Other
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
(0.2
|
)
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.0
|
)
|
|
(4.0
|
)
|
|
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2016
|
|
$
|
44.9
|
|
$
|
451.3
|
|
$
|
681.6
|
|
$
|
(267.6
|
)
|
$
|
(44.4
|
)
|
$
|
865.8
|
|
$
|
|
|
$
|
865.8
|
|
Net income
|
|
|
|
|
|
|
|
|
56.5
|
|
|
|
|
|
|
|
|
56.5
|
|
|
|
|
|
56.5
|
|
Cash dividends
|
|
|
|
|
|
|
|
|
(10.2
|
)
|
|
|
|
|
|
|
|
(10.2
|
)
|
|
|
|
|
(10.2
|
)
|
Stock option activity
|
|
|
|
|
|
3.1
|
|
|
|
|
|
8.9
|
|
|
|
|
|
12.0
|
|
|
|
|
|
12.0
|
|
Restricted stock activity
|
|
|
0.3
|
|
|
6.4
|
|
|
|
|
|
(1.3
|
)
|
|
|
|
|
5.4
|
|
|
|
|
|
5.4
|
|
Repurchase of shares
|
|
|
|
|
|
|
|
|
|
|
|
(19.8
|
)
|
|
|
|
|
(19.8
|
)
|
|
|
|
|
(19.8
|
)
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.5
|
|
|
4.5
|
|
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2017
|
|
$
|
45.2
|
|
$
|
460.8
|
|
$
|
727.9
|
|
$
|
(279.8
|
)
|
$
|
(39.9
|
)
|
$
|
914.2
|
|
$
|
|
|
$
|
914.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Cash flows provided from (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
56.5
|
|
$
|
47.7
|
|
$
|
10.4
|
|
Less: Income from discontinued operations
|
|
|
(6.3
|
)
|
|
(9.4
|
)
|
|
(84.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations
|
|
|
50.2
|
|
|
38.3
|
|
|
(73.9
|
)
|
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and intangible amortization
|
|
|
52.9
|
|
|
51.1
|
|
|
58.0
|
|
Impairment charges
|
|
|
|
|
|
|
|
|
53.0
|
|
Amortization of stock-based compensation
|
|
|
11.0
|
|
|
6.7
|
|
|
7.4
|
|
Amortization of overhaul costs
|
|
|
18.1
|
|
|
20.8
|
|
|
23.2
|
|
Deferred tax provision (benefit)
|
|
|
0.6
|
|
|
4.8
|
|
|
(52.6
|
)
|
Gain on sale of product line
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
0.4
|
|
|
44.9
|
|
Changes in certain assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4.0
|
)
|
|
(14.1
|
)
|
|
(6.5
|
)
|
Inventories
|
|
|
(18.8
|
)
|
|
(24.6
|
)
|
|
(29.2
|
)
|
Rotable spares and equipment on or available for short-term lease
|
|
|
2.3
|
|
|
(7.4
|
)
|
|
6.6
|
|
Equipment on or available for long-term lease
|
|
|
(82.5
|
)
|
|
(10.2
|
)
|
|
6.2
|
|
Accounts and trade notes payable
|
|
|
14.1
|
|
|
19.9
|
|
|
3.0
|
|
Accrued and other liabilities
|
|
|
3.3
|
|
|
(30.2
|
)
|
|
46.4
|
|
Other, primarily program and overhaul costs
|
|
|
(20.4
|
)
|
|
(22.9
|
)
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from operating activitiescontinuing operations
|
|
|
24.2
|
|
|
32.6
|
|
|
86.4
|
|
Net cash used in operating activitiesdiscontinued operations
|
|
|
(2.4
|
)
|
|
(0.5
|
)
|
|
(129.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) operating activities
|
|
|
21.8
|
|
|
32.1
|
|
|
(43.0
|
)
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment expenditures
|
|
|
(33.6
|
)
|
|
(88.9
|
)
|
|
(42.1
|
)
|
Proceeds from asset disposals
|
|
|
18.7
|
|
|
45.1
|
|
|
46.8
|
|
Payments for acquisitions
|
|
|
(12.5
|
)
|
|
(4.8
|
)
|
|
(1.0
|
)
|
Other
|
|
|
(2.7
|
)
|
|
1.0
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activitiescontinuing operations
|
|
|
(30.1
|
)
|
|
(47.6
|
)
|
|
7.2
|
|
Net cash provided from investing activitiesdiscontinued operations
|
|
|
|
|
|
30.7
|
|
|
682.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) investing activities
|
|
|
(30.1
|
)
|
|
(16.9
|
)
|
|
689.2
|
|
Cash flows used in financing activities:
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (repayments), net
|
|
|
21.0
|
|
|
60.0
|
|
|
(80.0
|
)
|
Reduction in long-term borrowings
|
|
|
(10.0
|
)
|
|
(70.6
|
)
|
|
(394.8
|
)
|
Cash dividends
|
|
|
(10.2
|
)
|
|
(10.4
|
)
|
|
(11.9
|
)
|
Premium paid on early retirement of debt
|
|
|
|
|
|
|
|
|
(45.6
|
)
|
Purchase of treasury stock
|
|
|
(19.8
|
)
|
|
(18.8
|
)
|
|
(151.5
|
)
|
Other
|
|
|
6.9
|
|
|
1.4
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activitiescontinuing operations
|
|
|
(12.1
|
)
|
|
(38.4
|
)
|
|
(677.5
|
)
|
Net cash used in financing activitiesdiscontinued operations
|
|
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(12.1
|
)
|
|
(38.4
|
)
|
|
(678.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(0.5
|
)
|
|
(0.3
|
)
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(20.9
|
)
|
|
(23.5
|
)
|
|
(34.5
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
31.2
|
|
|
54.7
|
|
|
89.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
10.3
|
|
$
|
31.2
|
|
$
|
54.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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; expeditionary 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% (see Note 10 for a discussion of aircraft joint ventures).
Revenue Recognition
Sales and related cost of sales for product sales are 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.
Under the majority of our expeditionary airlift services contracts, we are paid and record as revenue a fixed daily amount per aircraft for each day an aircraft is available to perform airlift
services. In addition, we are paid and record as revenue an amount which is based on number of hours flown. 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. When our experience and projections indicate adjustments to the estimated margin are required,
changes are recognized using the cumulative catch-up method with the impact of the change from inception to date recorded in the current period. Net favorable cumulative catch-up adjustments
recognized during fiscal 2017, 2016, and 2015 were $8.5 million, $3.7 million, and $2.5 million, respectively.
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.
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)
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.
Included
in accounts receivable as of May 31, 2017 and 2016, are $14.5 million and $29.8 million, respectively, of unbilled accounts receivable related to our KC-10
supply agreement. These unbilled accounts receivable relate to costs we have incurred on parts that were requested and accepted by our customer to support the program. These costs have not been billed
by us because the customer has not issued the final paperwork necessary to allow for billing.
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 expect limited services will continue for an unspecified period of time. Sales for the KC-10 Program during fiscal
2017, 2016 and 2015 were $110.6 million, $148.1 million, and $111.4 million, respectively. Gross profit for the KC-10 Program during fiscal 2017, 2016 and 2015 was
$3.7 million, $12.0 million, and $4.5 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.
We
utilize both the qualitative approach and the two-step quantitative approach to evaluate goodwill for impairment. In the first step of the quantitative approach, we compare the fair
value of the reporting unit with its carrying value, including goodwill. If the estimated fair value of the reporting unit is less than its carrying value, we would be required to complete a second
step to determine the amount of goodwill impairment. The second step of the test requires the allocation of the reporting
unit's fair value to its assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill as if the reporting unit
was being acquired in a business combination. If the implied fair value of goodwill is less than the carrying value, the difference is recorded as an impairment loss.
As
of May 31, 2017, 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
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)
Supply
Chain and Maintenance, Repair, and Overhaul) and two in our Expeditionary Services segment (Airlift and Mobility). We utilized the qualitative assessment approach for the two Aviation Services
reporting units and the two-step quantitative approach for the two Expeditionary Services reporting units.
We
performed the annual qualitative analysis for the two Aviation Services reporting units and concluded it was more likely than not that the fair value of each reporting unit exceeded
their carrying values, and thus no impairment charge was recorded. Step one of the quantitative goodwill impairment test was completed for the two Expeditionary Services reporting units and the
estimated fair value for each reporting unit exceeded its carrying value. Accordingly, there was no indication of impairment and the second step was not performed.
We
estimate the fair value of each Expeditionary Services reporting unit using an income approach based on discounted cash flows. The assumptions we used to estimate the fair value of
these reporting units are based on historical performance, as well as forecasts used in our current business plan, and require considerable management judgment. We use a discount rate based on our
consolidated weighted average cost of capital which is adjusted for each of our reporting units based on their specific risk and size characteristics. The fair value measurements used for our goodwill
impairment testing use significant unobservable inputs, which reflect our own assumptions about the inputs that market participants would use in measuring fair value. The fair value of our reporting
units is also impacted by our overall market capitalization and may be impacted by volatility in our stock price and assumed control premium, among other items.
Changes
in the carrying amount of goodwill by segment for fiscal 2017 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation
Services
|
|
Expeditionary
Services
|
|
Total
|
|
Balance as of May 31, 2015
|
|
$
|
73.8
|
|
$
|
49.7
|
|
$
|
123.5
|
|
Acquisition
|
|
|
|
|
|
1.3
|
|
|
1.3
|
|
Deferred tax adjustments
|
|
|
(6.5
|
)
|
|
|
|
|
(6.5
|
)
|
Foreign currency translation adjustments
|
|
|
(1.0
|
)
|
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2016
|
|
|
66.3
|
|
|
51.0
|
|
|
117.3
|
|
Foreign currency translation adjustments
|
|
|
(1.9
|
)
|
|
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2017
|
|
$
|
64.4
|
|
$
|
51.0
|
|
$
|
115.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
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, 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 certificates
|
|
|
5.6
|
|
|
(2.3
|
)
|
|
3.3
|
|
Trademarks
|
|
|
0.2
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61.5
|
|
|
(29.8
|
)
|
|
31.7
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
1.1
|
|
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62.6
|
|
$
|
(29.8
|
)
|
$
|
32.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2016
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
22.7
|
|
$
|
(10.5
|
)
|
$
|
12.2
|
|
Developed technology
|
|
|
11.4
|
|
|
(4.6
|
)
|
|
6.8
|
|
Lease agreements
|
|
|
21.5
|
|
|
(9.9
|
)
|
|
11.6
|
|
FAA certificates
|
|
|
5.2
|
|
|
(1.5
|
)
|
|
3.7
|
|
Trademarks
|
|
|
0.2
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61.0
|
|
|
(26.5
|
)
|
|
34.5
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
1.3
|
|
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62.3
|
|
$
|
(26.5
|
)
|
$
|
35.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 certificates are being amortized over 20 years. Amortization expense recorded during fiscal 2017, 2016 and 2015 was $4.3 million, $4.4 million, and
$4.6 million, respectively. The estimated aggregate amount of amortization expense for intangible assets in each of the next five fiscal years is $4.5 million in 2018,
$3.8 million in 2019, $3.5 million in 2020, $3.5 million in 2021 and $2.7 million in 2022.
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
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)
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 and Cash Equivalents
Cash and cash equivalents consist of highly liquid instruments which have original maturities of three months or less when purchased.
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. Department of Defense and its contractors and entities in the aviation industry.
Accounts receivable due from the U.S. Department of Defense were $43.0 million and $43.7 million at May 31, 2017 and 2016, respectively. Additionally, included in accounts
receivable as of May 31, 2017 and 2016, are $25.5 million and $42.4 million, respectively, of accounts receivable from a large defense contractor. 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.
45
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
The
following is a summary of inventories:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2017
|
|
2016
|
|
Raw materials and parts
|
|
$
|
45.0
|
|
$
|
46.3
|
|
Work-in-process
|
|
|
25.8
|
|
|
23.4
|
|
Aircraft and engine parts, components and finished goods
|
|
|
393.1
|
|
|
366.6
|
|
Aircraft held for sale and related support parts
|
|
|
19.2
|
|
|
15.7
|
|
|
|
|
|
|
|
|
|
|
|
$
|
483.1
|
|
$
|
452.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
classify certain aircraft from our expeditionary airlift business as assets held for sale at the time management commits to a plan to sell the aircraft, changes to the planned sale
are not likely, the aircraft are actively marketed and available for immediate sale, and the sale is expected to be completed within one year. Upon designation of an aircraft as held for sale, we
record the aircraft's value at the lower of its carrying value or its estimated fair value, less estimated costs to sell. Assets held for sale are not depreciated.
Aircraft
may be classified as assets held for sale for more than one year as we continue to actively market the aircraft at reasonable prices. Certain aircraft types we currently have
available for sale are specifically designed for particular functions which limits the marketability of those assets. During fiscal 2015, we recognized impairment charges of $8.9 million
reflecting the decrease in fair value for certain aircraft held for sale and related rotable assets.
During
the fourth quarter of fiscal 2015, we entered into a sale-leaseback transaction for our two S-92 rotary-wing aircraft resulting in the recognition of a loss of
$1.1 million. We received sales proceeds of $40.3 million in fiscal 2015 which were deferred as a sale-leaseback advance pending completion of the sale transactions. Both of the S-92
aircraft sales were completed in fiscal 2016 and the related leases ended in fiscal 2017.
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 for
aircraft 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. In conjunction with our decision to exit certain product lines in our landing gear business, we recognized an impairment charge of
$17.7 million related to rotable assets in fiscal 2015.
Equipment
on long-term lease consists of engines on lease with commercial airlines generally for more than twelve months and rotable parts used to support long-term supply chain
programs. The rotable parts included in equipment on long-term lease are being depreciated on a straight-line basis over their estimated useful lives. During the fourth quarter of fiscal 2015, we sold
our two remaining wholly-owned aircraft which were on long-term leases for $11.0 million which resulted in a loss on sale of $14.8 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)
Future rent due to us under non-cancelable leases during each of the next five fiscal years is $31.6 million in 2018, $31.3 million in 2019, $31.2 million in 2020,
$30.6 million in 2021, and $30.6 million in 2022.
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. Aircraft, major components in service, and associated rotable assets to support
our expeditionary airlift services are depreciated over their estimated useful lives, which is generally 7-30 years. Leasehold improvements are amortized over the shorter of the estimated
useful life or the term of the applicable lease.
Repair
and maintenance expenditures are expensed as incurred. Upon sale or disposal, cost and accumulated depreciation are removed from the accounts, and related gains and losses are
included in results of operations.
In
accordance with ASC 360,
Property, Plant and Equipment
, we are required to test for impairment of long-lived assets whenever events or
changes in circumstances indicate the carrying value of an asset may not be recoverable from its undiscounted cash flows. We utilize certain assumptions to estimate future undiscounted cash flows,
including demand for our services, future market conditions and trends, business development pipeline of opportunities, current and future lease rates, lease terms, and residual values.
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.
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)
Supplemental Information on Cash Flows
Supplemental information on cash flows is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Interest paid
|
|
$
|
4.4
|
|
$
|
4.7
|
|
$
|
42.7
|
|
Income taxes paid
|
|
|
12.7
|
|
|
35.7
|
|
|
105.6
|
|
Income tax refunds and interest received
|
|
|
1.3
|
|
|
1.3
|
|
|
12.1
|
|
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.
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.
On
May 29, 2015, we repurchased 4,185,960 shares of our common stock at a price of $31.90 per share pursuant to a tender offer utilizing $133.5 million cash on hand. Fees
and expenses of $1.2 million were incurred related to the tender offer and were recorded in treasury stock. In addition to the tender offer, we also repurchased common shares of
$16.8 million and re-issued shares upon exercise of stock options, net of shares withheld to satisfy statutory tax obligations, of $3.6 million during fiscal 2015.
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
In May 2014, the FASB issued 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 RecognitionConstruction-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 which will make the new standard effective for us beginning June 1, 2018. The ASU may be applied retrospectively to each prior period presented or retrospectively with the cumulative
effect recognized as of the date of initial application. We continue to gain an understanding of the standard's revenue recognition model and are in the process of analyzing and documenting our
significant customer contracts to evaluate the potential impact of the adoption of this new ASU. We have not yet selected a transition method for
48
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
adoption
nor determined the potential effect on our accounting policies and consolidated financial statements.
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 be recorded in the period shares vest as income tax expense or benefit, rather than within
Capital
surplus
. Cash flows related to excess tax benefits will be included in operating activities and will no longer be classified as a financing activity. This ASU will be effective
for us beginning June 1, 2017 and no material impact on our financial statements is expected.
2. Discontinued Operations
On March 26, 2015, we completed the sale of our Telair Cargo Group to TransDigm, Inc. The Telair Cargo Group was comprised of Telair International, Telair US, and Nordisk
Aviation Products. Cash received at closing in the fourth quarter of fiscal 2015 before fees and expenses was $705 million. The sale also allowed for contingent consideration of up to
$35 million based on the occurrence of certain post-closing events related to the A400M cargo system. We recognized a pre-tax gain on the sale (net of transaction expenses and fees) of
$198.6 million in the fourth quarter of fiscal 2015.
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 A400M cargo
system.
During
fiscal 2015, we also announced our intention to sell our Precision Systems Manufacturing ("PSM") businesses comprised of our metal and composite machined and fabricated parts
manufacturing operations. We recognized impairment charges of $57.5 million during fiscal 2015 to reduce the carrying value of the PSM business's net assets to their expected value at the time
of sale.
During
the first quarter of fiscal 2017, we decided to retain our composite manufacturing operations within our Expeditionary Services segment as a product line within our mobility
products business. As a result, we reclassified our composite manufacturing operations into continuing operations for all periods presented which included $25.6 million of impairment charges
previously classified in discontinued operations which are now classified as
Cost of products
in our fiscal 2015 Consolidated Statement of Income. Also
during the first quarter of fiscal 2017, we decided to shut down our metal machining operation which had been available for sale. The shutdown of the metal machining operation was completed prior to
the end of the first quarter of fiscal 2017.
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)
Telair
Cargo Group and PSM's metal machining operation are reported as discontinued operations in the Consolidated Statements of Income for all periods presented. No amounts for general
corporate overhead were allocated to discontinued operations during the periods presented. Interest expense allocated to discontinued operations was $8.5 million for fiscal 2015. No interest
expense was allocated to discontinued operations in fiscal 2017 and fiscal 2016.
Liabilities
of discontinued operations of $6.9 million and $12.5 million at May 31, 2017 and 2016, respectively, were classified as Accrued liabilities on the
Consolidated Balance Sheet. Income from discontinued operations was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Sales
|
|
$
|
0.6
|
|
$
|
11.5
|
|
$
|
259.2
|
|
Cost of sales
|
|
|
1.0
|
|
|
15.3
|
|
|
219.7
|
|
Selling, general and administrative expenses
|
|
|
1.2
|
|
|
3.0
|
|
|
26.9
|
|
Interest expense, net.
|
|
|
|
|
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from discontinued operations
|
|
|
(1.6
|
)
|
|
(6.8
|
)
|
|
3.2
|
|
Gain on sale of Telair Cargo Group
|
|
|
|
|
|
27.7
|
|
|
198.6
|
|
PSM Impairment charges
|
|
|
|
|
|
|
|
|
(31.9
|
)
|
Provision for income taxes (benefit)
|
|
|
(7.9
|
)
|
|
11.5
|
|
|
85.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
6.3
|
|
|
9.4
|
|
|
84.3
|
|
Income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations attributable to AAR
|
|
$
|
6.3
|
|
$
|
9.4
|
|
$
|
84.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Unless
otherwise noted, amounts and disclosures throughout these Notes to Consolidated Financial Statements relate to our continuing operations.
50
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
3. Financing Arrangements
Debt Outstanding
A summary of the carrying amount of our debt is as follows:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2017
|
|
2016
|
|
Revolving Credit Facility expiring November 1, 2021 with interest payable monthly
|
|
$
|
131.0
|
|
$
|
110.0
|
|
Industrial revenue bond (secured by property, plant and equipment) due August 1, 2018 with interest payable monthly
|
|
|
25.0
|
|
|
25.0
|
|
Note payable due March 9, 2017 with floating interest rate, payable semi-annually on June 1 and December 1
|
|
|
|
|
|
10.0
|
|
Capital lease obligations
|
|
|
3.3
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
159.3
|
|
|
150.1
|
|
Current maturities of debt
|
|
|
(2.0
|
)
|
|
(12.0
|
)
|
Debt issuance costs, net
|
|
|
(2.0
|
)
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
155.3
|
|
$
|
136.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
May 31, 2017, our variable rate and fixed rate debt had a fair value that approximates the carrying value of $156.0 million and are classified as Level 2 in the
fair value hierarchy.
During
fiscal 2016, the Company entered into capital leases in the amount of $5.1 million related to new aircraft and IT equipment. We have omitted substantially all of the
required disclosures as the capital leases are not material to our consolidated financial position or results of operations.
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.
Our
financing arrangements also requires us to comply with leverage and interest coverage ratios 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
51
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
3. Financing Arrangements (Continued)
Credit
Facility. At May 31, 2017, we were in compliance with the financial and other covenants in our financing agreements.
Borrowing
activity under the Revolving Credit Facility during fiscal 2017, 2016 and 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Maximum amount borrowed
|
|
$
|
217.0
|
|
$
|
200.0
|
|
$
|
215.0
|
|
Average daily borrowings
|
|
|
175.5
|
|
|
134.2
|
|
|
140.7
|
|
Average interest rate during the year
|
|
|
1.77
|
%
|
|
1.41
|
%
|
|
1.69
|
%
|
We
also have $9.6 million available under foreign lines of credit.
7.25% Senior Notes due 2022
On April 30, 2015, we redeemed our $325 million 7.25% Senior Notes due 2022 for $370.6 million. We recognized a loss on
extinguishment of debt of $44.9 million comprised of a make-whole premium of $45.6 million and unamortized deferred financing costs of $6.2 million, partially offset by an
unamortized net premium of $6.9 million.
Convertible Notes
The interest expense associated with the convertible notes, which were paid in full in the fourth quarter of fiscal 2016, was as follows:
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
May 31,
|
|
|
|
2016
|
|
2015
|
|
Coupon interest
|
|
$
|
0.6
|
|
$
|
1.5
|
|
Amortization of deferred financing fees
|
|
|
0.1
|
|
|
0.1
|
|
Amortization of discount
|
|
|
1.3
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
Interest expense related to convertible notes
|
|
$
|
2.0
|
|
$
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Derivative Instruments and Hedging Activities
We are exposed to interest rate risk associated with fluctuations in interest rates on our variable rate debt. Prior to the fourth quarter of fiscal 2015, we utilized two derivative
financial instruments to manage our variable interest rate exposure. We utilized a floating-to-fixed interest rate swap and an interest rate cap agreement with each hedging $50.0 million of
notional principal interest under our Revolving Credit Facility. In connection with the Amendment of our Revolving Credit Facility, we settled our floating-to-fixed interest rate swap and interest
rate cap agreements in the fourth quarter of fiscal 2015 for approximately $2.6 million.
Prior
to the settlement, the derivatives instruments were classified as cash flow hedges with gains and losses on the derivative instruments included in other comprehensive loss. We
recognized gains and losses
52
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
4. Derivative Instruments and Hedging Activities (Continued)
on
our derivative instruments as an adjustment to interest expense in the period the hedged interest payment affected earnings. We recognized a loss of $2.0 million in fiscal 2015 related to
the reclassification of previously unrealized losses in accumulated other comprehensive loss.
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 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 are designed, among other things, to align employee interests with the interests of stockholders and to encourage the recipient to build a career with us.
Restricted stock typically vests
over periods of one to five years from date of grant. Restricted stock grants may be performance-based with vesting to occur over periods of three to five years. All restricted stock that has been
granted and, if performance-based, earned according to performance criteria carries full dividend and voting rights, regardless of whether it has vested.
Substantially
all stock options and restricted stock are subject to forfeiture prior to vesting if the employee's employment terminates for any reason other than death, disability or
retirement. Since inception, a total of 11,149,000 shares have been granted under the Stock Benefit Plan. Subsequent to stockholder approval of the 2013 Stock Plan, we have granted a total of
2,018,000 shares under the 2013 Stock Plan. All future stock awards will be made under the 2013 Stock Plan. There were 2,689,733 shares available for grant under the 2013 Stock Plan as of
May 31, 2017.
Stock Options
During fiscal 2017 and 2016, we granted stock options with respect to 687,000 shares and 488,767 shares, respectively. No stock options were
granted during fiscal 2015. The weighted average fair value per share of stock options granted during fiscal 2017 and 2016 was $6.50 and $7.48, respectively. The fair value
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)
of
each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
Stock Options
Granted In
Fiscal Year
|
|
|
|
2017
|
|
2016
|
|
Risk-free interest rate
|
|
|
1.0
|
%
|
|
1.6
|
%
|
Expected volatility of common stock
|
|
|
36.8
|
%
|
|
36.1
|
%
|
Dividend yield
|
|
|
1.3
|
%
|
|
1.1
|
%
|
Expected option term in years
|
|
|
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, 2017 consisted of the following (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at beginning of year
|
|
|
2,096
|
|
$
|
22.17
|
|
|
1,857
|
|
$
|
21.05
|
|
|
2,753
|
|
$
|
19.59
|
|
Granted
|
|
|
687
|
|
$
|
24.10
|
|
|
489
|
|
$
|
26.62
|
|
|
|
|
$
|
|
|
Exercised
|
|
|
(396
|
)
|
$
|
20.07
|
|
|
(122
|
)
|
$
|
20.61
|
|
|
(793
|
)
|
$
|
15.98
|
|
Cancelled
|
|
|
(53
|
)
|
$
|
25.42
|
|
|
(128
|
)
|
$
|
24.47
|
|
|
(103
|
)
|
$
|
21.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
2,334
|
|
$
|
23.02
|
|
|
2,096
|
|
$
|
22.17
|
|
|
1,857
|
|
$
|
21.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
910
|
|
$
|
21.97
|
|
|
837
|
|
$
|
21.21
|
|
|
627
|
|
$
|
21.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
total fair value of stock options that vested during fiscal 2017, 2016, and 2015 was $3.5 million, $2.7 million, and $3.1 million, respectively. The total
intrinsic value of stock options exercised during fiscal 2017, 2016, and 2015 was $4.7 million, $1.0 million, and $11.1 million, respectively. The aggregate intrinsic value of
options outstanding was $27.8 million and $7.4 million as of May 31, 2017 and 2016, respectively. The tax benefit realized from stock options exercised during fiscal 2017, 2016,
and 2015 was $1.2 million, $0.2 million, and $2.4 million, respectively. Expense recognized in selling, general and administrative expenses for stock options during fiscal 2017,
2016, and 2015 was $4.6 million, $3.5 million, and $2.7 million, respectively. As of May 31, 2017, we had $5.5 million of unrecognized compensation expense related
to stock options that will be amortized over an average period of 0.8 years.
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)
The
following table provides additional information regarding stock options outstanding as of May 31, 2017 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Option
Exercise
Price Range
|
|
Number
Outstanding as
of 5/31/17
|
|
Weighted-Average
Remaining Contractual
Life in Years
|
|
Weighted-
Average Exercise
Price
|
|
Number
Exercisable as
of 5/31/17
|
|
Weighted-
Average Exercise
Price
|
|
$12.00 - $20.00
|
|
|
500
|
|
|
4.4
|
|
$
|
14.02
|
|
|
349
|
|
$
|
14.49
|
|
$20.01 - $26.00
|
|
|
1,305
|
|
|
7.6
|
|
$
|
24.72
|
|
|
322
|
|
$
|
25.44
|
|
$26.01 - $34.50
|
|
|
529
|
|
|
7.2
|
|
$
|
27.36
|
|
|
239
|
|
$
|
28.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,334
|
|
|
6.8
|
|
$
|
23.02
|
|
|
910
|
|
$
|
21.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2017, 2016, and 2015, we granted 212,583, 119,929, and 188,125 of performance-based restricted shares, respectively. Time-based
restricted shares of 39,100, 42,557, and 97,581 were granted to executives and key employees during fiscal 2017, 2016, and 2015, respectively. We also award time-based restricted stock to our
non-employee directors as part of their annual compensation. Time-based restricted shares of 50,625, 47,083, and 45,000 were granted to members of the Board of Directors during fiscal 2017, 2016, and
2015, 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 2017, 2016, and 2015 was $6.4 million, $3.2 million, and $4.7 million, respectively.
Restricted
share activity during the fiscal year ended May 31, 2017 was as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Fair Value
on Grant Date
|
|
Nonvested at May 31, 2016
|
|
|
400
|
|
$
|
25.61
|
|
Granted
|
|
|
302
|
|
$
|
24.24
|
|
Vested
|
|
|
(98
|
)
|
$
|
21.98
|
|
Forfeited
|
|
|
(9
|
)
|
$
|
26.32
|
|
|
|
|
|
|
|
|
|
Nonvested at May 31, 2017
|
|
|
595
|
|
$
|
25.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of May 31, 2017 we had $5.5 million of unearned compensation related to restricted shares that will be amortized to expense over a weighted average period of
2.1 years.
55
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)
Shareholders' Rights Plan
Pursuant to a shareholder rights plan adopted in 2007, each outstanding share of our common stock carries with it a Right to purchase one share
at a price of $140 per share. The Rights become exercisable (and separate from the shares) when certain specified events occur, including the acquisition of 15% or more of the common stock by a person
or group (an "Acquiring Person") or the commencement of a tender or exchange offer for 15% or more of the common stock.
In
the event that an Acquiring Person acquires 15% or more of the common stock, or if we are the surviving corporation in a merger involving an Acquiring Person or if the Acquiring
Person engages in certain types of self-dealing transactions, each Right entitles the holder to purchase for $140 per share (or the then-current exercise price), shares of our common stock having a
market value of $280 (or two times the exercise price), subject to certain exceptions. Similarly, if we are acquired in a merger or other business combination or 50% or more of our assets or earning
power is sold, each Right entitles the holder to purchase at the then-current exercise price that number of shares of common stock of the surviving corporation having a market value of two times the
exercise price. The Rights do not entitle the holder thereof to vote or to receive dividends. The Rights will expire on August 6, 2017, and may be redeemed by us for $.01 per Right under
certain circumstances.
6. Income Taxes
The provision for income tax (benefit) on income before taxes (benefit) includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
20.2
|
|
$
|
10.6
|
|
$
|
11.4
|
|
State
|
|
|
0.2
|
|
|
0.4
|
|
|
0.4
|
|
Foreign
|
|
|
3.1
|
|
|
3.8
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.5
|
|
|
14.8
|
|
|
13.3
|
|
Deferred
|
|
|
0.6
|
|
|
4.8
|
|
|
(52.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24.1
|
|
$
|
19.6
|
|
$
|
(39.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
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 35% for fiscal 2017, 2016, and 2015 to income
before taxes (benefit), due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Provision for income tax (benefit) at the federal statutory rate
|
|
$
|
26.0
|
|
$
|
20.3
|
|
$
|
(39.6
|
)
|
State income taxes, net of federal benefit and refunds
|
|
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
Federal adjustments
|
|
|
0.1
|
|
|
0.4
|
|
|
0.1
|
|
State net operating losses
|
|
|
(5.7
|
)
|
|
(1.1
|
)
|
|
(0.1
|
)
|
Valuation allowance for state deferred tax assets
|
|
|
5.7
|
|
|
1.1
|
|
|
0.1
|
|
Prior period adjustments
|
|
|
|
|
|
(1.3
|
)
|
|
|
|
Effective settlement of prior tax position
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax (benefit)
|
|
$
|
24.1
|
|
$
|
19.6
|
|
$
|
(39.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
(Loss) before provision for income tax (benefit) includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Domestic
|
|
$
|
54.9
|
|
$
|
44.7
|
|
$
|
(124.4
|
)
|
Foreign
|
|
|
19.4
|
|
|
13.2
|
|
|
11.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
74.3
|
|
$
|
57.9
|
|
$
|
(113.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
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,
|
|
|
|
2017
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Inventory costs
|
|
$
|
21.3
|
|
$
|
19.9
|
|
Impairments
|
|
|
5.6
|
|
|
9.4
|
|
Advanced billings
|
|
|
1.7
|
|
|
11.1
|
|
Postretirement benefits
|
|
|
6.8
|
|
|
12.0
|
|
Employee benefits
|
|
|
12.3
|
|
|
10.0
|
|
State NOLs, tax credits and incentives
|
|
|
9.4
|
|
|
6.5
|
|
Other
|
|
|
1.7
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
58.8
|
|
|
69.5
|
|
Valuation allowance
|
|
|
(10.4
|
)
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax assets net of valuation allowance
|
|
|
48.4
|
|
|
64.8
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Tangible and intangible assets
|
|
|
(85.5
|
)
|
|
(99.0
|
)
|
Other
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(85.6
|
)
|
|
(99.1
|
)
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(37.2
|
)
|
$
|
(34.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of May 31, 2017, 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, net operating losses and credits. The change in the valuation allowance was primarily the result of state net operating losses in subsidiaries that are not expected to be
utilized. The 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 payable at May 31, 2017 and 2016 was $12.3 million and $1.1 million, respectively and is included in
Accrued
Liabilities
on the Consolidated Balance Sheets.
58
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,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Balance, beginning of year
|
|
$
|
12.9
|
|
$
|
2.2
|
|
$
|
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
|
|
$
|
12.9
|
|
$
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2017 and 2016 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.
59
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,
2017 (shares in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Basic and Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations
|
|
$
|
50.2
|
|
$
|
38.3
|
|
$
|
(73.9
|
)
|
Less income attributable to participating shares
|
|
|
(0.5
|
)
|
|
(0.4
|
)
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations attributable to common shareholders
|
|
|
49.7
|
|
|
37.9
|
|
|
(74.2
|
)
|
Income from discontinued operations attributable to common shareholders
|
|
|
6.3
|
|
|
9.4
|
|
|
84.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders for earnings per share
|
|
$
|
56.0
|
|
$
|
47.3
|
|
$
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingbasic
|
|
|
33.9
|
|
|
34.4
|
|
|
39.1
|
|
Additional shares from assumed exercise of stock options
|
|
|
0.4
|
|
|
0.2
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingdiluted
|
|
|
34.3
|
|
|
34.6
|
|
|
39.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharebasic:
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) from continuing operations
|
|
$
|
1.47
|
|
$
|
1.10
|
|
$
|
(1.90
|
)
|
Earnings from discontinued operations
|
|
|
0.19
|
|
|
0.27
|
|
|
2.16
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharebasic
|
|
$
|
1.66
|
|
$
|
1.37
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharediluted:
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) from continuing operations
|
|
$
|
1.45
|
|
$
|
1.10
|
|
$
|
(1.90
|
)
|
Earnings from discontinued operations
|
|
|
0.19
|
|
|
0.27
|
|
|
2.14
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per sharediluted
|
|
$
|
1.64
|
|
$
|
1.37
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
May 31, 2017, 2016 and 2015, respectively, outstanding options to purchase 11,200 shares, 1,374,200 shares, and 168,200 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 Internal Revenue Service. The average interest crediting rate under our cash balance plan for the fiscal
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)
year
ended May 31, 2017 was 4.5%. 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.
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
provide eligible outside directors with benefits upon retirement on or after age 65 provided they have completed at least five years of service as a director. Benefits are paid
quarterly in cash equal to 25% of the annual retainer fee payable to active outside directors. Payment of benefits commences upon retirement and continues for a period equal to the total number of
years of the retired director's service up to a maximum of ten years, or death, whichever occurs first. In fiscal 2001, we terminated this plan for any new members of the Board of Directors first
elected after May 31, 2001. 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 in the United States and other countries was as follows:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2017
|
|
2016
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
145.7
|
|
$
|
144.9
|
|
Service cost
|
|
|
2.5
|
|
|
2.5
|
|
Interest cost
|
|
|
4.2
|
|
|
4.5
|
|
Participant contributions
|
|
|
0.3
|
|
|
0.3
|
|
Net actuarial gain
|
|
|
(2.0
|
)
|
|
(1.1
|
)
|
Benefit payments
|
|
|
(6.0
|
)
|
|
(6.0
|
)
|
Foreign currency translation adjustment
|
|
|
0.7
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
145.4
|
|
$
|
145.7
|
|
|
|
|
|
|
|
|
|
Change in the fair value of plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
111.0
|
|
$
|
115.8
|
|
Actual return on plan assets
|
|
|
9.9
|
|
|
(3.0
|
)
|
Employer contributions
|
|
|
2.9
|
|
|
3.4
|
|
Participant contributions
|
|
|
0.3
|
|
|
0.3
|
|
Benefit payments
|
|
|
(6.0
|
)
|
|
(6.0
|
)
|
Foreign currency translation adjustment
|
|
|
0.7
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
118.8
|
|
$
|
111.0
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(26.6
|
)
|
$
|
(34.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
Amounts
recognized in the Consolidated Balance Sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2017
|
|
2016
|
|
Accrued liabilities
|
|
$
|
(2.7
|
)
|
$
|
(3.8
|
)
|
Other liabilities and deferred income
|
|
|
(23.9
|
)
|
|
(30.9
|
)
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(26.6
|
)
|
$
|
(34.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in accumulated other comprehensive loss at May 31, 2017 and 2016, respectively, consisted of the following:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2017
|
|
2016
|
|
Actuarial loss
|
|
$
|
58.8
|
|
$
|
66.4
|
|
Prior service credit
|
|
|
(0.4
|
)
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58.4
|
|
$
|
66.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
all of our pension plans, both the projected benefit obligation and the accumulated benefit obligation are in excess of the individual plans' assets. The accumulated benefit
obligation for all pension plans was $140.0 million as of both May 31, 2017 and 2016.
Net Periodic Benefit Cost
Pension expense charged to the Consolidated Statements of Income includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Service cost
|
|
$
|
2.5
|
|
$
|
2.5
|
|
$
|
2.0
|
|
Interest cost
|
|
|
4.2
|
|
|
4.5
|
|
|
4.8
|
|
Expected return on plan assets
|
|
|
(6.5
|
)
|
|
(6.5
|
)
|
|
(6.0
|
)
|
Curtailment
|
|
|
|
|
|
|
|
|
0.2
|
|
Amortization of prior service cost
|
|
|
|
|
|
0.1
|
|
|
0.2
|
|
Recognized net actuarial loss
|
|
|
2.4
|
|
|
2.4
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.6
|
|
$
|
3.0
|
|
$
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
The
estimated amounts to be amortized from accumulated other comprehensive loss into expense during fiscal 2018 are as follows:
|
|
|
|
|
Net actuarial loss
|
|
$
|
2.3
|
|
Prior service cost
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2017
|
|
2016
|
|
Discount rate:
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
3.82
|
%
|
|
3.83
|
%
|
International plan
|
|
|
2.00
|
|
|
1.90
|
|
Rate of compensation increase:
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
2.50
|
%
|
|
2.50
|
%
|
International plan
|
|
|
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,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Discount rate:
|
|
|
|
|
|
|
|
|
|
|
Domestic plans
|
|
|
3.83
|
%
|
|
4.15
|
%
|
|
4.23
|
%
|
International plan
|
|
|
1.90
|
|
|
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
|
%
|
|
7.50
|
%
|
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.
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)
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
|
|
|
|
2017
|
|
2016
|
|
Equity securities
|
|
|
62
|
%
|
|
59
|
%
|
|
45 - 75
|
%
|
Fixed income securities
|
|
|
16
|
|
|
17
|
|
|
15 - 25
|
%
|
Other
|
|
|
22
|
|
|
24
|
|
|
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, 2017. 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, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
The
following table sets forth by level, within the fair value hierarchy, pension plan assets at their fair value as of May 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
1
|
|
Level 2
2
|
|
Level 3
3
|
|
Total
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. common stock
|
|
$
|
2.3
|
|
$
|
|
|
$
|
|
|
$
|
2.3
|
|
U.S. mutual funds
|
|
|
24.6
|
|
|
|
|
|
|
|
|
24.6
|
|
International common stock
|
|
|
0.1
|
|
|
|
|
|
|
|
|
0.1
|
|
International mutual funds
|
|
|
7.9
|
|
|
|
|
|
|
|
|
7.9
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government securities and corporate bond mutual funds
|
|
|
9.9
|
|
|
|
|
|
|
|
|
9.9
|
|
Funds-of-funds
|
|
|
|
|
|
50.2
|
|
|
7.5
|
|
|
57.7
|
|
Hedge funds
|
|
|
|
|
|
|
|
|
6.6
|
|
|
6.6
|
|
Cash and cash equivalents
|
|
|
1.9
|
|
|
|
|
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
46.7
|
|
$
|
50.2
|
|
$
|
14.1
|
|
$
|
111.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
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, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge Funds
|
|
Fund-of-funds
|
|
Total
|
|
Balance as of May 31, 2015
|
|
$
|
7.1
|
|
$
|
8.0
|
|
$
|
15.1
|
|
Return on plan assets related to assets still held at May 31, 2016
|
|
|
(0.5
|
)
|
|
(0.5
|
)
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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
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)
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 our funds-of-funds investments are also derived from quoted prices in active markets, we have categorized the 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.
Future Benefit Payments and Funding
The following table summarizes our estimated future pension payments by fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023 to
2027
|
|
Estimated future pension payments
|
|
$
|
8.9
|
|
$
|
5.6
|
|
$
|
6.2
|
|
$
|
5.9
|
|
$
|
5.9
|
|
$
|
35.0
|
|
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 $9.5 million to our pension plans during fiscal 2018.
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 $0.7 million and $0.9 million as of May 31, 2017 and 2016, 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.
66
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
8. Employee Benefit Plans (Continued)
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
$12.7 million in fiscal 2017, $11.2 million in fiscal 2016 and $12.1 million in fiscal 2015 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, 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
Translation
Adjustments
|
|
Pension
Plans
|
|
Derivative
Instruments
|
|
Total
|
|
Balance as of June 1, 2014
|
|
$
|
8.7
|
|
$
|
(35.4
|
)
|
$
|
(2.6
|
)
|
$
|
(29.3
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
(56.9
|
)
|
|
(7.9
|
)
|
|
0.6
|
|
|
(64.2
|
)
|
Sale of Telair Cargo Group
|
|
|
49.1
|
|
|
0.6
|
|
|
|
|
|
49.7
|
|
Amounts reclassified from AOCL
|
|
|
|
|
|
1.4
|
|
|
2.0
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
(7.8
|
)
|
|
(5.9
|
)
|
|
2.6
|
|
|
(11.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2015
|
|
|
0.9
|
|
|
(41.3
|
)
|
|
|
|
|
(40.4
|
)
|
Reclassifications within AOCL
|
|
|
(2.0
|
)
|
|
2.0
|
|
|
|
|
|
|
|
Other comprehensive income (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 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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Aircraft Portfolio
Aircraft Owned with Joint Venture Partners
We have ownership interests in two aircraft with joint venture partners at May 31, 2017 which are available for lease or sale to
commercial air carriers. Our equity investment was
approximately $10.7 million and $15.0 million as of May 31, 2017 and 2016, respectively, and is included in Other noncurrent assets on the Consolidated Balance Sheet. Our aircraft
joint ventures primarily include
67
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
10. Aircraft Portfolio (Continued)
investments
in limited liability companies that are accounted for under the equity method of accounting. For our aircraft joint ventures accounted for under the equity method of accounting, our
membership interest is 50%, and the primary business of these joint ventures is the acquisition, ownership, lease and disposition of certain commercial aircraft. Aircraft were purchased with cash
contributions by the members of the joint ventures and debt financing provided on a limited recourse basis. Under the terms of servicing agreements with certain of the 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 2017, 2016 and 2015, we were paid
$1.2 million, $0.9 million and $0.1 million, respectively, for such services. The income tax benefit or expense related to the operations of the joint ventures is recorded by the
member companies.
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.
Wholly-Owned Aircraft
In addition to the commercial aircraft owned with joint venture partners, we also previously owned 100% of two aircraft which we sold in the
fourth quarter of fiscal 2015 for $11.0 million. The carrying value of these two aircraft was $25.8 million which resulted in the recognition of a loss on sale of $14.8 million.
11. 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, 2017 and 2016, the unamortized balance of the deferred gain was approximately $2.9 million and $3.4 million, respectively, and is included in
Other liabilities and deferred
income
on the Consolidated Balance Sheet.
During
the fourth quarter of fiscal 2015, we entered into a sale-leaseback transaction for our two S-92 rotary-wing aircraft resulting in the recognition of a loss of
$1.1 million. We received sales proceeds of $40.3 million in fiscal 2015 which were deferred as a sale-leaseback advance pending completion of the sale transactions. Both of the S-92
aircraft sales were completed in fiscal 2016 and the related leases ended in fiscal 2017.
During
fiscal 2016, we received proceeds of $38.5 million from sale-leaseback transactions for two AW-189 rotary-wing aircraft which are supporting search and rescue operations in
the Falkland Islands. The $1.7 million gain realized on the sale was deferred and is being amortized over the lease term of ten years.
68
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
11. Commitments and Contingencies (Continued)
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, 2017 are as follows:
|
|
|
|
|
2018
|
|
$
|
24.0
|
|
2019
|
|
|
18.1
|
|
2020
|
|
|
16.5
|
|
2021
|
|
|
14.4
|
|
2022
|
|
|
13.5
|
|
2023 and thereafter
|
|
|
40.0
|
|
Rental
expense for facilities and equipment during fiscal years 2017, 2016, and 2015 was $31.9 million, $33.5 million, and $33.7 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 $231.2 million in 2018,
$37.7 million in 2019, $1.4 million in 2020, $2.7 million in 2021 and none in 2022.
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, 2017 was approximately $13.6 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.
12. Other Noncurrent Assets
At May 31, 2017 and 2016, other noncurrent assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2017
|
|
2016
|
|
Assets under deferred compensation plan
|
|
$
|
32.1
|
|
$
|
28.8
|
|
Costs in excess of billings
|
|
|
19.1
|
|
|
14.9
|
|
Cash surrender value of life insurance
|
|
|
17.8
|
|
|
17.7
|
|
Investments in joint ventures
|
|
|
15.0
|
|
|
17.6
|
|
License fees
|
|
|
14.4
|
|
|
15.5
|
|
Other
|
|
|
7.5
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
$
|
105.9
|
|
$
|
102.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
69
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
12. Other Noncurrent Assets (Continued)
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, 2017 and 2016, the unamortized balance of the license is $7.2 million and $8.8 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 $3.2 million
is included in
Other liabilities and deferred income
on the Consolidated Balance Sheet.
13. Acquisitions
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
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 is as follows:
|
|
|
|
|
Inventory
|
|
$
|
5.0
|
|
Equipment on or available for long-term lease
|
|
|
7.0
|
|
Intangible assets
|
|
|
3.0
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
14. 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 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. DoD, foreign governments and
non-governmental organizations. Sales in the Expeditionary Services segment are derived from the delivery of airlift services to mostly government and defense customers 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 provide engineering, design, and system integration services for specialized
command and control systems and design and manufacture advanced composite materials for
commercial, business and military aircraft. Cost of sales consists principally of aircraft maintenance costs, depreciation, 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,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
Aviation Services
|
|
$
|
1,485.4
|
|
$
|
1,425.0
|
|
$
|
1,316.1
|
|
Expeditionary Services
|
|
|
282.2
|
|
|
273.9
|
|
|
305.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,767.6
|
|
$
|
1,698.9
|
|
$
|
1,621.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
14. Business Segment Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Gross profit (loss):
|
|
|
|
|
|
|
|
|
|
|
Aviation Services
|
|
$
|
246.2
|
|
$
|
229.8
|
|
$
|
143.8
|
|
Expeditionary Services
|
|
|
30.3
|
|
|
8.1
|
|
|
(13.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
276.5
|
|
$
|
237.9
|
|
$
|
130.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
Aviation Services
|
|
$
|
1,057.0
|
|
$
|
944.8
|
|
$
|
919.0
|
|
Expeditionary Services
|
|
|
338.8
|
|
|
384.8
|
|
|
406.0
|
|
Corporate and discontinued operations
|
|
|
108.3
|
|
|
126.4
|
|
|
129.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,504.1
|
|
$
|
1,456.0
|
|
$
|
1,454.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
Aviation Services
|
|
$
|
15.0
|
|
$
|
16.4
|
|
$
|
8.7
|
|
Expeditionary Services
|
|
|
10.4
|
|
|
50.4
|
|
|
20.3
|
|
Corporate
|
|
|
8.2
|
|
|
22.1
|
|
|
13.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total continuing operations
|
|
|
33.6
|
|
|
88.9
|
|
|
42.1
|
|
Discontinued operations
|
|
|
|
|
|
0.1
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33.6
|
|
$
|
89.0
|
|
$
|
46.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Depreciation and amortization:
1
|
|
|
|
|
|
|
|
|
|
|
Aviation Services
|
|
$
|
30.8
|
|
$
|
26.2
|
|
$
|
28.9
|
|
Expeditionary Services
|
|
|
22.2
|
|
|
24.9
|
|
|
26.9
|
|
Corporate
|
|
|
10.9
|
|
|
6.7
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Total continuing operations
|
|
|
63.9
|
|
|
57.8
|
|
|
65.4
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
11.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
63.9
|
|
$
|
57.8
|
|
$
|
76.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
1
-
Includes
depreciation and amortization of stock-based compensation.
72
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
14. Business Segment Information (Continued)
The
following table reconciles segment gross profit to income (loss) from continuing operations before provision for income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Segment gross profit
|
|
$
|
276.5
|
|
$
|
237.9
|
|
$
|
130.8
|
|
Selling, general and administrative
|
|
|
(196.7
|
)
|
|
(173.2
|
)
|
|
(172.4
|
)
|
Earnings (Loss) from joint ventures
|
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
0.2
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
(0.4
|
)
|
|
(44.9
|
)
|
Interest expense
|
|
|
(5.5
|
)
|
|
(6.4
|
)
|
|
(27.2
|
)
|
Interest income
|
|
|
0.2
|
|
|
0.3
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations before provision for income taxes
|
|
$
|
74.3
|
|
$
|
57.9
|
|
$
|
(113.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Aviation Services
|
|
$
|
260.2
|
|
$
|
301.1
|
|
$
|
237.3
|
|
Expeditionary Services
|
|
|
194.6
|
|
|
222.5
|
|
|
258.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
454.8
|
|
$
|
523.6
|
|
$
|
495.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total sales
|
|
|
25.7
|
%
|
|
30.8
|
%
|
|
30.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
by type of product/service was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Aviation supply chain
|
|
$
|
998.7
|
|
$
|
903.2
|
|
$
|
847.6
|
|
Maintenance, repair and overhaul services
|
|
|
486.7
|
|
|
521.8
|
|
|
468.5
|
|
Expeditionary airlift services
|
|
|
176.8
|
|
|
173.4
|
|
|
173.3
|
|
Mobility products
|
|
|
105.4
|
|
|
100.5
|
|
|
132.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,767.6
|
|
$
|
1,698.9
|
|
$
|
1,621.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
14. Business Segment Information (Continued)
Geographic Data
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2017
|
|
2016
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
United States
|
|
$
|
452.8
|
|
$
|
489.9
|
|
Europe
|
|
|
122.5
|
|
|
73.1
|
|
Other
|
|
|
40.3
|
|
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
$
|
615.6
|
|
$
|
574.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
to unaffiliated customers in foreign countries (including sales through foreign sales offices of domestic subsidiaries) were approximately $618.8 million (35.0% of total
sales), $494.6 million (29.1% of total sales) and $538.9 million (33.2% of total sales) in fiscal 2017, 2016 and 2015, respectively.
15. 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. ("AAR Airlift"), a wholly-owned subsidiary of AAR CORP., of misappropriation of DynCorp
information, including trade secrets, and other related allegations. DynCorp's complaint, which sought damages in an unspecified amount and a preliminary injunction, alleged that AAR Airlift engaged
in this conduct 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 ("INL/A") in support of the Global Aviation Support Services program. The INL/A contract was subsequently awarded to AAR Airlift on
September 1, 2016 as described below under "Court of Federal Claims INL/A Proceeding".
The
District Court denied DynCorp's preliminary injunction motion, and on October 19, 2015, DynCorp filed an amended complaint with the District Court. On January 14, 2016,
the District Court granted AAR 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. The District Court set a discovery schedule that ends September 1, 2017 and a trial date of April 2, 2018.
On
June 16, 2017, the District Court granted AAR Airlift's motion to stay the legal proceeding against AAR Airlift. The stay will remain in effect until the earlier of
(a) November 1, 2017 or (b) the entry of a decision of the United Stated Court of Federal Claims ("COFC"), on DynCorp's protest of the award of
74
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
15. Legal Proceedings (Continued)
the
INL/A contract to AAR Airlift. The District Court's stay immediately halted all discovery and other activity in the DynCorp lawsuit.
AAR
Airlift will continue to defend itself vigorously against DynCorp's lawsuit, which it believes is entirely without merit.
16. Selected Quarterly Data (Unaudited)
The unaudited selected quarterly data for fiscal years ended May 31, 2017 and 2016 is as follows:
Fiscal 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Full
Year
|
|
Sales
|
|
$
|
404.8
|
|
$
|
423.8
|
|
$
|
446.7
|
|
$
|
492.3
|
|
$
|
1,767.6
|
|
Gross profit
|
|
|
61.5
|
|
|
66.2
|
|
|
69.0
|
|
|
79.8
|
|
|
276.5
|
|
Income from continuing operations
|
|
|
9.9
|
|
|
12.1
|
|
|
13.1
|
|
|
15.1
|
|
|
50.2
|
|
Income (Loss) from discontinued operations
|
|
|
(0.4
|
)
|
|
|
|
|
0.6
|
|
|
6.1
|
|
|
6.3
|
|
Net income
|
|
|
9.5
|
|
|
12.1
|
|
|
13.7
|
|
|
21.2
|
|
|
56.5
|
|
Earnings (Loss) per sharebasic:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
0.29
|
|
|
0.35
|
|
|
0.39
|
|
|
0.44
|
|
|
1.47
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
|
|
0.02
|
|
|
0.18
|
|
|
0.19
|
|
Earnings per sharebasic
|
|
|
0.28
|
|
|
0.35
|
|
|
0.41
|
|
|
0.62
|
|
|
1.66
|
|
Earnings (Loss) per sharediluted:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
0.29
|
|
|
0.35
|
|
|
0.38
|
|
|
0.44
|
|
|
1.45
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
|
|
0.02
|
|
|
0.18
|
|
|
0.19
|
|
Earnings per sharediluted
|
|
|
0.28
|
|
|
0.35
|
|
|
0.40
|
|
|
0.62
|
|
|
1.64
|
|
75
Table of Contents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts)
16. Selected Quarterly Data (Unaudited) (Continued)
Fiscal 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Full
Year
|
|
Sales
|
|
$
|
386.7
|
|
$
|
431.5
|
|
$
|
412.1
|
|
$
|
468.6
|
|
$
|
1,698.9
|
|
Gross profit
|
|
|
53.9
|
|
|
59.1
|
|
|
59.3
|
|
|
65.6
|
|
|
237.9
|
|
Income from continuing operations
|
|
|
7.4
|
|
|
9.2
|
|
|
9.9
|
|
|
11.8
|
|
|
38.3
|
|
Income (Loss) from discontinued operations
(2)
|
|
|
15.5
|
|
|
(1.2
|
)
|
|
(5.1
|
)
|
|
0.2
|
|
|
9.4
|
|
Net income
|
|
|
22.9
|
|
|
8.0
|
|
|
4.8
|
|
|
12.0
|
|
|
47.7
|
|
Earnings (Loss) per sharebasic:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
0.21
|
|
|
0.26
|
|
|
0.29
|
|
|
0.35
|
|
|
1.10
|
|
Discontinued operations
|
|
|
0.44
|
|
|
(0.03
|
)
|
|
(0.15
|
)
|
|
|
|
|
0.27
|
|
Earnings per sharebasic
|
|
|
0.65
|
|
|
0.23
|
|
|
0.14
|
|
|
0.35
|
|
|
1.37
|
|
Earnings (Loss) per sharediluted:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
0.21
|
|
|
0.26
|
|
|
0.29
|
|
|
0.34
|
|
|
1.10
|
|
Discontinued operations
|
|
|
0.44
|
|
|
(0.03
|
)
|
|
(0.15
|
)
|
|
|
|
|
0.27
|
|
Earnings per sharediluted
|
|
|
0.65
|
|
|
0.23
|
|
|
0.14
|
|
|
0.34
|
|
|
1.37
|
|
-
1
-
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.
-
2
-
First
quarter income from discontinued operations in fiscal 2016 reflects a pre-tax gain of $27.7 million for the receipt of contingent
consideration from the sale of Telair Cargo Group in fiscal 2015.
17. Allowance for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Balance, beginning of year
|
|
$
|
4.0
|
|
$
|
5.8
|
|
$
|
6.2
|
|
Provision charged to operations
|
|
|
2.4
|
|
|
0.3
|
|
|
1.7
|
|
Deductions for accounts written off, net of recoveries
|
|
|
(0.6
|
)
|
|
(2.1
|
)
|
|
(1.6
|
)
|
Sale of Telair Cargo Group
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
Reclassification to assets of discontinued operations
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
5.8
|
|
$
|
4.0
|
|
$
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
Table of Contents