Quarterly Report (10-q)

Date : 03/20/2019 @ 7:58PM
Source : Edgar (US Regulatory)
Stock : AAR Corp (AIR)
Quote : 40.32  0.0 (0.00%) @ 1:00AM
AAR share price Chart

Quarterly Report (10-q)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended February 28, 2019

 

or

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                         to                 

 

Commission File No. 1-6263

 

AAR CORP.

(Exact name of registrant as specified in its charter)

 

Delaware

 

36-2334820

(State or other jurisdiction of incorporation
or organization)

 

(I.R.S. Employer Identification No.)

 

One AAR Place, 1100 N. Wood Dale Road
Wood Dale, Illinois

 

60191

(Address of principal executive offices)

 

(Zip Code)

 

(630) 227-2000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x   No  o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  x    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No  x

 

As of February 28, 2019 there were 35,066,569 shares of the registrant’s Common Stock, $1.00 par value per share, outstanding.

 

 

 


Table of Contents

 

AAR CORP. and Subsidiaries

Quarterly Report on Form 10-Q

For the Quarter Ended February 28, 2019

Table of Cont ents

 

 

 

Page

Part I — FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

5

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

6

 

Condensed Consolidated Statements of Cash Flows

7

 

Condensed Consolidated Statements of Changes in Equity

8

 

Notes to Condensed Consolidated Financial Statements

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

31

 

 

 

Part II — OTHER INFORMATION

 

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 6.

Exhibits

32

 

 

 

Exhibit Index

32

Signature Page

34

 

2


Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1 — Financial Statements

 

AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of February 28, 2019 and May 31, 2018

(In millions, except share data)

 

ASSETS

 

 

 

February 28,

 

May 31,

 

 

 

2019

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

28.9

 

$

31.1

 

Restricted cash

 

21.5

 

10.5

 

Accounts receivable, less allowances of $15.0 and $7.5, respectively

 

237.6

 

202.0

 

Contract assets

 

54.9

 

 

Inventories

 

514.7

 

460.7

 

Rotable assets and equipment on or available for short-term lease

 

68.3

 

87.2

 

Assets of discontinued operations

 

28.2

 

125.0

 

Other current assets

 

39.3

 

26.2

 

Total current assets

 

993.4

 

942.7

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation of $226.4 and $214.4, respectively

 

134.4

 

133.2

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Goodwill

 

117.4

 

118.7

 

Intangible assets, net of accumulated amortization of $30.7 and $33.3, respectively

 

24.4

 

27.8

 

Rotable assets supporting long-term programs

 

209.4

 

183.4

 

Other non-current assets

 

67.5

 

118.9

 

 

 

418.7

 

448.8

 

 

 

$

1,546.5

 

$

1,524.7

 

 

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

 

3


Table of Contents

 

AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of February 28, 2019 and May 31, 2018

(In millions, except share data)

 

LIABILITIES AND EQUITY

 

 

 

February 28,

 

May 31,

 

 

 

2019

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts and trade notes payable

 

$

218.6

 

$

170.0

 

Accrued liabilities

 

115.0

 

138.3

 

Liabilities of discontinued operations

 

26.0

 

25.0

 

Total current liabilities

 

359.6

 

333.3

 

 

 

 

 

 

 

Long-term debt

 

177.2

 

177.2

 

Deferred revenue on long-term contracts

 

89.0

 

35.8

 

Deferred tax liabilities

 

 

15.7

 

Other liabilities

 

21.3

 

26.4

 

 

 

287.5

 

255.1

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Preferred stock, $1.00 par value, authorized 250,000 shares; none issued

 

 

 

Common stock, $1.00 par value, authorized 100,000,000 shares; issued 45,300,786 shares at cost

 

45.3

 

45.3

 

Capital surplus

 

474.8

 

470.5

 

Retained earnings

 

689.6

 

733.2

 

Treasury stock, 10,234,217 and 10,585,165 shares at cost, respectively

 

(278.5

)

(280.7

)

Accumulated other comprehensive loss

 

(31.8

)

(32.0

)

Total equity

 

899.4

 

936.3

 

 

 

$

1,546.5

 

$

1,524.7

 

 

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

 

4


Table of Contents

 

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three and Nine Months Ended February 28, 2019 and 2018

(Unaudited)

(In millions, except share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

February 28,

 

February 28,

 

 

 

2019

 

2018

 

2019

 

2018

 

Sales:

 

 

 

 

 

 

 

 

 

Sales from products

 

$

292.4

 

$

275.1

 

$

814.5

 

$

764.8

 

Sales from services

 

237.1

 

181.2

 

674.6

 

510.0

 

 

 

529.5

 

456.3

 

1,489.1

 

1,274.8

 

Cost and operating expenses:

 

 

 

 

 

 

 

 

 

Cost of products

 

239.0

 

224.0

 

665.5

 

620.3

 

Cost of services

 

205.2

 

154.7

 

588.8

 

444.6

 

Provision for doubtful accounts

 

0.7

 

0.1

 

13.7

 

0.4

 

Selling, general and administrative

 

54.8

 

53.3

 

152.1

 

146.3

 

 

 

499.7

 

432.1

 

1,420.1

 

1,211.6

 

Operating income

 

29.8

 

24.2

 

69.0

 

63.2

 

Other expense, net

 

(0.6

)

(0.5

)

(0.4

)

(0.5

)

Interest expense

 

(2.6

)

(2.2

)

(7.2

)

(5.8

)

Interest income

 

0.2

 

 

0.8

 

0.1

 

Income from continuing operations before provision for income taxes

 

26.8

 

21.5

 

62.2

 

57.0

 

Provision for income taxes (benefit)

 

(0.6

)

(9.8

)

4.7

 

1.4

 

Income from continuing operations

 

27.4

 

31.3

 

57.5

 

55.6

 

Loss from discontinued operations, net of tax

 

(64.8

)

(15.8

)

(72.8

)

(52.0

)

Net income (loss)

 

$

(37.4

)

$

15.5

 

$

(15.3

)

$

3.6

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) per share — basic:

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

0.79

 

$

0.91

 

$

1.66

 

$

1.62

 

Loss from discontinued operations

 

(1.87

)

(0.46

)

(2.11

)

(1.52

)

Earnings (Loss) per share — basic

 

$

(1.08

)

$

0.45

 

$

(0.45

)

$

0.10

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) per share — diluted:

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

0.78

 

$

0.90

 

$

1.63

 

$

1.60

 

Loss from discontinued operations

 

(1.86

)

(0.46

)

(2.08

)

(1.52

)

Earnings (Loss) per share — diluted

 

$

(1.08

)

$

0.44

 

$

(0.45

)

$

0.08

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.075

 

$

0.075

 

$

0.225

 

$

0.225

 

 

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

 

5


Table of Contents

 

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

For the Three and Nine Months Ended February 28, 2019 and 2018

(Unaudited)

(In millions)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

February 28,

 

February 28,

 

 

 

2019

 

2018

 

2019

 

2018

 

Net income (loss)

 

$

(37.4

)

$

15.5

 

$

(15.3

)

$

3.6

 

Other comprehensive income, net of tax expense (benefit):

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

0.5

 

0.9

 

(0.6

)

3.4

 

Pension and other post-retirement plans:

 

 

 

 

 

 

 

 

 

Amortization of actuarial loss and prior service cost included in net income, net of tax of $0.1 and $0.1 for the three months ended February 28, 2019 and 2018, respectively, and $0.2 and $0.4 for the nine months ended February 28, 2019 and 2018, respectively

 

0.3

 

0.3

 

0.8

 

0.9

 

Other comprehensive income, net of tax

 

0.8

 

1.2

 

0.2

 

4.3

 

Comprehensive income (loss)

 

$

(36.6

)

$

16.7

 

$

(15.1

)

$

7.9

 

 

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

 

6


Table of Contents

 

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended February 28, 2019 and 2018

(Unaudited)

(In millions)

 

 

 

Nine Months Ended

 

 

 

February 28,

 

 

 

2019

 

2018

 

Cash flows provided from operating activities:

 

 

 

 

 

Net income (loss)

 

$

(15.3

)

$

3.6

 

Less: Loss from discontinued operations

 

72.8

 

52.0

 

Income from continuing operations

 

57.5

 

55.6

 

Adjustments to reconcile income from continuing operations to net cash provided from operating activities:

 

 

 

 

 

Depreciation and intangible amortization

 

31.3

 

31.4

 

Amortization of stock-based compensation

 

8.8

 

8.7

 

Provision for doubtful accounts

 

13.7

 

0.4

 

Deferred tax provision

 

(10.2

)

(24.1

)

Changes in certain assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(73.3

)

34.8

 

Contract assets

 

(5.2

)

 

Inventories

 

(71.8

)

(36.7

)

Rotable assets and equipment on or available for short-term lease

 

18.6

 

2.5

 

Rotable assets supporting long-term programs

 

(38.2

)

(35.7

)

Accounts and trade notes payable

 

47.7

 

8.5

 

Accrued and other liabilities

 

2.8

 

(12.0

)

Other

 

34.7

 

(17.8

)

Net cash provided from operating activities — continuing operations

 

16.4

 

15.6

 

Net cash provided from operating activities — discontinued operations

 

8.1

 

17.3

 

Net cash provided from operating activities

 

24.5

 

32.9

 

Cash flows used in investing activities:

 

 

 

 

 

Property, plant and equipment expenditures

 

(12.3

)

(18.4

)

Payments for acquisitions

 

(2.3

)

(22.9

)

Proceeds from aircraft joint ventures

 

 

7.3

 

Other

 

1.3

 

1.7

 

Net cash used in investing activities — continuing operations

 

(13.3

)

(32.3

)

Net cash used in investing activities — discontinued operations

 

(0.5

)

(4.7

)

Net cash used in investing activities

 

(13.8

)

(37.0

)

Cash flows provided from financing activities:

 

 

 

 

 

Short-term borrowings, net

 

25.0

 

16.0

 

Repayments on long-term borrowings

 

(25.0

)

 

Proceeds from long-term borrowings

 

 

24.8

 

Cash dividends

 

(7.9

)

(7.7

)

Purchase of treasury stock

 

(0.8

)

(13.1

)

Stock option exercises

 

8.3

 

10.0

 

Other

 

 

(0.3

)

Net cash provided from (used in) financing activities — continuing operations

 

(0.4

)

29.7

 

Net cash used in financing activities — discontinued operations

 

(1.4

)

(1.3

)

Net cash provided from (used in) financing activities

 

(1.8

)

28.4

 

Effect of exchange rate changes on cash

 

(0.1

)

 

Increase in cash and cash equivalents

 

8.8

 

24.3

 

Cash, cash equivalents, and restricted cash at beginning of period

 

41.6

 

10.3

 

Cash, cash equivalents, and restricted cash at end of period

 

$

50.4

 

$

34.6

 

 

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

 

7


Table of Contents

 

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity

For the Nine Months Ended February 28, 2019 and 2018

(Unaudited)

(In millions)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common

 

Capital

 

Retained

 

Treasury

 

Comprehensive

 

 

 

 

 

Stock

 

Surplus

 

Earnings

 

Stock

 

Income (Loss)

 

Total Equity

 

Balance, May 31, 2018

 

$

45.3

 

$

470.5

 

$

733.2

 

$

(280.7

)

$

(32.0

)

$

936.3

 

Cumulative effect adjustment upon adoption of ASC 606 on June 1, 2018

 

 

 

(20.4

)

 

 

(20.4

)

Net income

 

 

 

15.1

 

 

 

15.1

 

Cash dividends

 

 

 

(2.7

)

 

 

(2.7

)

Stock option activity

 

 

0.7

 

 

2.2

 

 

2.9

 

Restricted stock activity

 

 

(1.4

)

 

(0.5

)

 

(1.9

)

Other comprehensive loss, net of tax

 

 

 

 

 

(0.2

)

(0.2

)

Balance, August 31, 2018

 

45.3

 

469.8

 

725.2

 

(279.0

)

(32.2

)

929.1

 

Net income

 

 

 

7.0

 

 

 

7.0

 

Cash dividends

 

 

 

(2.6

)

 

 

(2.6

)

Stock option activity

 

 

0.9

 

 

1.6

 

 

2.5

 

Restricted stock activity

 

 

0.1

 

 

(0.1

)

 

 

Other comprehensive loss, net of tax

 

 

 

 

 

(0.4

)

(0.4

)

Balance, November 30, 2018

 

45.3

 

470.8

 

729.6

 

(277.5

)

(32.6

)

935.6

 

Net loss

 

 

 

(37.4

)

 

 

(37.4

)

Cash dividends

 

 

 

(2.6

)

 

 

(2.6

)

Stock option activity

 

 

1.0

 

 

 

 

1.0

 

Restricted stock activity

 

 

3.0

 

 

(0.2

)

 

2.8

 

Repurchase of shares

 

 

 

 

(0.8

)

 

(0.8

)

Other comprehensive income, net of tax

 

 

 

 

 

0.8

 

0.8

 

Balance, February 28, 2019

 

$

45.3

 

$

474.8

 

$

689.6

 

$

(278.5

)

$

(31.8

)

$

899.4

 

 

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

 

8


Table of Contents

 

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity

For the Nine Months Ended February 28, 2019 and 2018

(Unaudited)

(In millions)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common

 

Capital

 

Retained

 

Treasury

 

Comprehensive

 

 

 

 

 

Stock

 

Surplus

 

Earnings

 

Stock

 

Income (Loss)

 

Total Equity

 

Balance, May 31, 2017

 

$

45.2

 

$

460.8

 

$

727.9

 

$

(279.8

)

$

(39.9

)

$

914.2

 

Net income

 

 

 

10.6

 

 

 

10.6

 

Cash dividends

 

 

 

(2.6

)

 

 

(2.6

)

Stock option activity

 

 

(0.6

)

 

6.6

 

 

6.0

 

Restricted stock activity

 

0.1

 

0.1

 

 

0.6

 

 

0.8

 

Repurchase of shares

 

 

 

 

(5.2

)

 

(5.2

)

Other comprehensive income, net of tax

 

 

 

 

 

0.9

 

0.9

 

Balance, August 31, 2017

 

45.3

 

460.3

 

735.9

 

(277.8

)

(39.0

)

924.7

 

Net loss

 

 

 

(22.5

)

 

 

(22.5

)

Cash dividends

 

 

 

(2.6

)

 

 

(2.6

)

Stock option activity

 

 

0.7

 

 

2.6

 

 

3.3

 

Restricted stock activity

 

 

1.3

 

 

0.2

 

 

1.5

 

Other comprehensive income, net of tax

 

 

 

 

 

2.2

 

2.2

 

Balance, November 30, 2017

 

45.3

 

462.3

 

710.8

 

(275.0

)

(36.8

)

906.6

 

Net income

 

 

 

15.5

 

 

 

15.5

 

Cash dividends

 

 

 

(2.5

)

 

 

(2.5

)

Stock option activity

 

 

(0.2

)

 

0.3

 

 

0.1

 

Restricted stock activity

 

 

2.0

 

 

0.2

 

 

2.2

 

Repurchase of shares

 

 

 

 

(7.9

)

 

(7.9

)

Other comprehensive income, net of tax

 

 

 

 

 

1.2

 

1.2

 

Balance, February 28, 2018

 

$

45.3

 

$

464.1

 

$

723.8

 

$

(282.4

)

$

(35.6

)

$

915.2

 

 

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

 

9


Table of Contents

 

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2019

(Unaudited)

(Dollars in millions, except per share amounts)

 

Note 1 — Basis of Presentation

 

AAR CORP. and its subsidiaries are referred to herein collectively as “AAR,” “Company,” “we,” “us,” and “our,” unless the context indicates otherwise.  The accompanying Condensed Consolidated Financial Statements include the accounts of AAR and its subsidiaries after elimination of intercompany accounts and transactions.

 

We have prepared these statements without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”).  The Condensed Consolidated Balance Sheet as of May 31, 2018 has been derived from audited financial statements.  To prepare the financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”), management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities.  Actual results could differ from those estimates.  Certain information and note disclosures, normally included in comprehensive financial statements prepared in accordance with GAAP, have been condensed or omitted pursuant to such rules and regulations of the SEC.  These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our latest annual report on Form 10-K.

 

In the opinion of management, the condensed consolidated financial statements reflect all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the condensed consolidated financial position of AAR CORP. and its subsidiaries as of February 28, 2019, the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income (Loss) for the three- and nine-month periods ended February 28, 2019 and 2018, the Condensed Consolidated Statements of Cash Flows for the nine-month periods ended February 28, 2019 and 2018, and the Condensed Consolidated Statement of Changes in Equity for the three- and nine-month periods ended February 28, 2019 and 2018.  The results of operations for such interim periods are not necessarily indicative of the results for the full year.

 

New Accounting Pronouncements Adopted

 

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost .  This ASU requires an employer to report the service cost component of net periodic pension benefit cost in the same line item as other compensation costs for those related employees.  Other components of net pension cost, including interest, expected return on plan assets, and actuarial gains and losses are to be presented outside of operating income.  We adopted this ASU on June 1, 2018, which resulted in $0.1 million and $0.7 million of pension income included in Other expense, net in the Condensed Consolidated Statement of Operations for the three- and nine-month periods ended February 28, 2019, respectively.  The Condensed Consolidated Statement of Operations for the three- and nine month periods ended February 28, 2018 were not restated as the non-service cost components of pension expense were not material to fiscal 2018.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASC 606”), which provides guidance for revenue recognition.  ASC 606 superseded the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition , and most industry-specific guidance.

 

We adopted ASC 606 on June 1, 2018 using the modified retrospective method.  Under that approach, prior periods have not been restated and continue to be reported under the accounting standards in effect for those periods.  A discussion of our revised accounting policy for revenue recognition is included in Note 3.

 

10


Table of Contents

 

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2019

(Unaudited)

(Dollars in millions, except per share amounts)

 

We elected to use the practical expedient allowing for the application of ASC 606 only to contracts that were not completed as of June 1, 2018.  We recognized the cumulative effect of initially applying ASC 606 as a decrease of $20.4 million to the opening balance of retained earnings as of June 1, 2018.  The impact of the adoption of ASC 606 on our Condensed Consolidated Balance Sheet was as follows:

 

 

 

As of
May 31, 2018

 

ASC 606
Adjustments

 

As of
June 1, 2018

 

Accounts receivable, net

 

$

202.0

 

$

(31.4

)

$

170.6

 

Inventories

 

460.7

 

(17.3

)

443.4

 

Contract assets—current

 

 

49.6

 

49.6

 

Other current assets

 

26.2

 

(0.9

)

25.3

 

Other non-current assets

 

118.9

 

(19.0

)

99.9

 

Accrued liabilities

 

138.3

 

9.1

 

147.4

 

Deferred tax liabilities

 

15.7

 

(6.6

)

9.1

 

Other liabilities and deferred income

 

62.2

 

(1.1

)

61.1

 

Retained earnings

 

733.2

 

(20.4

)

712.8

 

 

The adoption of ASC 606 impacted us in three primary areas.  First, we have certain contracts in which revenue is recognized using the percentage of completion method over the expected term of the contract.  Under ASC 606, the contract term used for revenue recognition purposes was shortened to exclude any unexercised customer option years or incorporate customer rights to terminate the contract without significant penalty as we do not have any enforceable rights or obligations prior to the exercise of the underlying option.  The impact of this change as of June 1, 2018 resulted in the elimination of certain deferred costs and the establishment of accrued liabilities reflecting our estimated obligations under the contracts.  For this change, we recognized a decrease of $22.1 million to the opening balance of retained earnings as of June 1, 2018.

 

Second, we have contracts under which we perform repair services on customer-owned assets whereby the customer simultaneously receives the benefits of the repair.  These contracts also transitioned to an over time revenue recognition model as of June 1, 2018 compared to our prior policy of recognizing revenue at the time of shipment.  The impact of this change as of June 1, 2018 resulted in the elimination of certain inventory and accounts receivable amounts and the establishment of a contract asset reflecting the over time revenue recognition treatment.  For this change, we recognized an increase of $1.3 million to the opening balance of retained earnings as of June 1, 2018.

 

Third, we have certain contracts under which we manufacture products with no alternative use as the customer owns the underlying intellectual property and we have an enforceable right to payment from the customer.  As a result, we now recognize revenue for these contracts over time as opposed to at the time of shipment, which was our policy prior to June 1, 2018.  The impact of this change as of June 1, 2018 resulted in the elimination of certain inventory amounts and the establishment of a contract asset reflecting the over time revenue recognition treatment.  For this change, we recognized an increase of $0.4 million to the opening balance of retained earnings as of June 1, 2018.

 

11


Table of Contents

 

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2019

(Unaudited)

(Dollars in millions, except per share amounts)

 

The impact of the ASC 606 adoption on our Condensed Consolidated Financial Statements as of February 28, 2019 and for the three- and nine-month periods ended February 28, 2019 were as follows:

 

 

 

As of February 28, 2019

 

 

 

As Reported

 

ASC 606
Adjustments

 

Balances
Excluding
ASC 606

 

Accounts receivable, net

 

$

237.6

 

$

39.5

 

$

277.1

 

Contract assets

 

54.9

 

(54.9

)

 

Inventories

 

514.7

 

21.4

 

536.1

 

Other current assets

 

39.3

 

0.2

 

39.5

 

Other non-current assets

 

67.5

 

24.1

 

91.6

 

Accrued liabilities

 

115.0

 

(3.1

)

111.9

 

Deferred tax liabilities

 

 

6.6

 

6.6

 

Deferred revenue on long-term contracts

 

89.0

 

7.4

 

96.4

 

Retained earnings

 

689.6

 

19.4

 

709.0

 

 

 

 

Three Months Ended February 28, 2019

 

 

 

As Reported

 

ASC 606
Adjustments

 

Balances
Excluding
ASC 606

 

Sales

 

$

529.5

 

$

0.1

 

$

529.6

 

Cost of sales

 

444.2

 

(1.0

)

443.2

 

Gross profit

 

85.3

 

1.1

 

86.4

 

Provision for income taxes (benefit)

 

(0.6

)

0.2

 

(0.4

)

Income from continuing operations

 

27.4

 

0.9

 

28.3

 

 

 

 

Nine Months Ended February 28, 2019

 

 

 

As Reported

 

ASC 606
Adjustments

 

Balances
Excluding
ASC 606

 

Sales

 

$

1,489.1

 

$

(5.3

)

$

1,483.8

 

Cost of sales

 

1,254.3

 

(4.1

)

1,250.2

 

Gross profit

 

234.8

 

(1.2

)

233.6

 

Provision for income taxes

 

4.7

 

(0.3

)

4.4

 

Income from continuing operations

 

57.5

 

(0.9

)

56.6

 

 

 

 

Nine Months Ended February 28, 2019

 

 

 

As Reported

 

ASC 606
Adjustments

 

Balances
Excluding
ASC 606

 

Cash flows provided from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(15.3

)

$

(0.9

)

$

(16.2

)

Income from continuing operations

 

57.5

 

(0.9

)

56.6

 

Accounts receivable

 

(73.3

)

(8.1

)

(81.4

)

Contract assets

 

(5.2

)

5.2

 

 

Inventories

 

(71.8

)

(4.1

)

(75.9

)

Accrued and other liabilities

 

2.8

 

6.0

 

8.8

 

Other

 

34.7

 

1.9

 

36.6

 

 

12


Table of Contents

 

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2019

(Unaudited)

(Dollars in millions, except per share amounts)

 

New Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU 2016-02, Leases .  This ASU amends the existing accounting standards for lease accounting, including requiring lessees to recognize a right-of-use asset and lease liability on the balance sheet for most lease arrangements, including those classified as operating leases under the current accounting guidance.  In addition, this ASU will require new qualitative and quantitative disclosures about our leasing activities.  This new standard will be effective for us beginning June 1, 2019 and is required to be adopted using a modified retrospective approach.   The new standard provides us an option to recognize the cumulative effect adjustment on retained earnings as of June 1, 2019 or as of the beginning of the earliest period presented.

 

We continue to evaluate this ASU and gather information on our lease population and portfolio.  We are also considering the terms and conditions of our other arrangements that could meet the definition of a lease and designing and implementing new processes and controls, including information technology tools.  We will adopt this ASU effective June 1, 2019 and apply it prospectively.  We have made substantial progress on our implementation plan and expect to have an estimate of the impact of the ASU on our financial position during the fourth quarter of fiscal 2019.  We do not anticipate that adoption of the ASU will have a significant impact on our results of operations or cash flows.

 

In February 2018, the FASB issued ASU 2018-02,  Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income .  This ASU permits the reclassification of tax effects stranded in accumulated other comprehensive income to retained earnings as a result of the Tax Cuts and Jobs Act (the “Tax Reform Act”).  We continue to evaluate the impact of this ASU on our consolidated financial statements and expect to adopt this ASU on June 1, 2019.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments .  This ASU requires a change in the measurement approach for credit losses on financial assets measured on an amortized cost basis from an incurred loss method to an expected loss method, thereby eliminating the requirement that a credit loss be considered probable to impact the valuation of a financial asset measured on an amortized cost basis. This ASU also requires the measurement of expected credit losses to be based on relevant information about past events, including historical experience, current conditions, and a reasonable and supportable forecast of the collectability of the related financial asset.  We continue to evaluate the impact of this ASU on our consolidated financial statements and expect to adopt this ASU on June 1, 2020.

 

Note 2 — Discontinued Operations

 

During the third quarter of fiscal 2018, we decided to pursue the sale of our Contractor-Owned, Contractor-Operated (“COCO”) business previously included in our Expeditionary Services segment.  Due to this strategic shift, the assets, liabilities, and results of operations of our COCO business have been reported as discontinued operations for all periods presented.  Goodwill was allocated to this business based on its relative fair value to the reporting unit.  The fair value of the reporting unit was determined based on a combination of the expected net proceeds upon sale and a discounted cash flow analysis.  As the fair value of the COCO business was below its carrying value, a goodwill impairment charge of $9.8 million, representing the estimated loss on disposal, was recorded in the third quarter of fiscal 2018.

 

Our COCO business completed certain contracts in the second quarter of fiscal 2018.  As the aircraft supporting these contracts were not placed on new contracts, combined with the continued decline in operational tempo within the U.S. Department of Defense and an excess supply of aircraft assets in the market, we determined there was an impairment triggering event and tested the recoverability of our COCO assets.  As a result, we recognized impairment and other charges of $54.2 million in the second quarter of fiscal 2018. The fair value of the aircraft and related assets was based on available market data for similar assets.

 

13


Table of Contents

 

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2019

(Unaudited)

(Dollars in millions, except per share amounts)

 

On March 15, 2019, we signed a definitive agreement to sell certain contracts and assets of our COCO business.  We expect the sale to close before the end of calendar 2019.  In conjunction with this definitive agreement and other expected asset sales, we recognized an impairment charge in discontinued operations of $74.1 million during the third quarter of fiscal 2019 reflecting the expected net proceeds to be received upon the completion of the sale transactions.

 

No amounts for general corporate overhead or interest expense were allocated to discontinued operations during the periods presented.  Unless otherwise noted, amounts and disclosures throughout these Notes to Condensed Consolidated Financial Statements relate to our continuing operations.

 

Operating results for discontinued operations were comprised of the following:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

February 28,

 

February 28,

 

 

 

2019

 

2018

 

2019

 

2018

 

Sales

 

$

26.6

 

$

8.8

 

$

68.8

 

$

79.2

 

Cost of sales

 

(31.3

)

(15.8

)

(79.0

)

(81.6

)

Asset impairments

 

(74.1

)

(11.0

)

(74.1

)

(65.2

)

Selling, general and administrative expenses

 

(2.7

)

(2.6

)

(7.5

)

(9.6

)

Loss from discontinued operations before provision for income tax benefit

 

(81.5

)

(20.6

)

(91.8

)

(77.2

)

Provision for income tax benefit

 

(16.7

)

(4.8

)

(19.0

)

(25.2

)

Loss from discontinued operations

 

$

(64.8

)

$

(15.8

)

$

(72.8

)

$

(52.0

)

 

The carrying amounts of the major classes of assets and liabilities for our discontinued operations are as follows:

 

 

 

February 28,

 

May 31,

 

 

 

2019

 

2018

 

Inventory, rotable assets, and equipment

 

$

13.7

 

$

106.1

 

Accounts receivable, net

 

11.8

 

14.7

 

Other assets

 

2.7

 

4.2

 

Assets of discontinued operations

 

$

28.2

 

$

125.0

 

 

 

 

 

 

 

Liabilities of discontinued operations

 

$

26.0

 

$

25.0

 

 

Note 3 — Revenue Recognition

 

Revenue is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer.

 

Our unit of accounting for revenue recognition is a performance obligation included in our customer contracts.  A performance obligation reflects the distinct good or service that we must transfer to a customer.  At contract inception, we evaluate if the contract should be accounted for as a single performance obligation or if the contract contains multiple performance obligations.  In some cases, our contract with the customer is considered one performance obligation as it includes factors such as whether the good or service being provided is significantly integrated with other promises in the contract, whether the service provided significantly modifies or customizes another good or service or whether the good or service is highly interdependent or interrelated.  If the contract has more than one performance obligation, we determine the standalone price of each distinct good or service underlying each performance obligation and allocates the transaction price based on their relative standalone selling prices.

 

14


Table of Contents

 

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2019

(Unaudited)

(Dollars in millions, except per share amounts)

 

The transaction price of a contract, which can include both fixed and variable amounts, is allocated to each performance obligation identified.  Some contracts contain variable consideration, which could include incremental fees or penalty provisions related to performance.  Variable consideration that can be reasonably estimated based on current assumptions and historical information is included in the transaction price at the inception of the contract but limited to the amount that is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.  Variable consideration that cannot be reasonably estimated is recorded when known.

 

Our performance obligations are satisfied over time as work progresses or at a point in time based on transfer of control of products and services to our customers.  The majority of our sales from products are recognized at a point in time upon transfer of control to the customer, which generally occurs upon shipment.  In connection with certain sales of products, we also provide logistics services, which include inventory management, replenishment, and other related services.  The price of such services is generally included in the price of the products delivered to the customer, and revenues are recognized upon delivery of the product, at which point, the customer has obtained control of the product.  We do not account for these services separate from the related product sales as the services are inputs required to fulfill part orders received from customers.

 

For our performance obligations that are satisfied over time, we measure progress in a manner that depicts the performance of transferring control to the customer. As such, we utilize the input method of cost-to-cost to recognize revenue over time as this depicts when control of the promised goods or services are transferred to the customer.  Revenue is recognized based on the relationship of actual costs incurred to date to the estimated total cost at completion of the performance obligation.  We are required to make certain judgments and estimates, including estimated revenues and costs, as well as inflation and the overall profitability of the arrangement.  Key assumptions involved include future labor costs and efficiencies, overhead costs, and ultimate timing of product delivery.  Differences may occur between the judgments and estimates made by management and actual program results.

 

Changes in estimates and assumptions related to our arrangements accounted for using the cost-to-cost method are recorded using the cumulative catch-up method of accounting.  These changes are primarily adjustments to the estimated profitability for our long-term, power-by-the-hour programs where we provide component inventory management and repair services.

 

For the three-month period ended February 28, 2019, we recognized favorable adjustments of $0.8 million.  For the three-month period ended February 28, 2018, we recognized favorable and unfavorable adjustments of $8.3 million and $6.5 million, respectively.  When considering these adjustments on a net basis, we recognized net favorable adjustments of $0.8 million and $1.8 million in the three-month periods ended February 28, 2019 and 2018, respectively.

 

For the nine-month period ended February 28, 2019, we recognized favorable and unfavorable cumulative catch-up adjustments of $4.6 million and $0.5 million, respectively.  For the nine-month period ended February 28, 2018, we recognized favorable and unfavorable adjustments of $9.3 million and $7.1 million, respectively.  When considering these adjustments on a net basis, we recognized net favorable adjustments of $4.1 million and $2.2 million in the nine-month periods ended February 28, 2019 and 2018, respectively.

 

Under most of our U.S. government contracts, if the contract is terminated for convenience, we are entitled to payment for items delivered and fair compensation for work performed, the costs of settling and paying other claims, and a reasonable profit on the costs incurred or committed.

 

15


Table of Contents

 

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2019

(Unaudited)

(Dollars in millions, except per share amounts)

 

We have elected to use certain practical expedients permitted under ASC 606.  Shipping and handling fees and costs incurred associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales in our Condensed Consolidated Statement of Operations, and are not considered a performance obligation to our customers.  Our reported sales on our Condensed Consolidated Statement of Operations are net of any sales or related non-income taxes.  We also utilize the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value we are providing to the customer.

 

Contract Assets and Liabilities

 

The timing of revenue recognition, customer billings, and cash collections results in a contract asset or contract liability at the end of each reporting period.  Contract assets consist of unbilled receivables or costs incurred where revenue recognized over time using the cost-to-cost model exceeds the amounts billed to customers.  Contract liabilities include advance payments and billings in excess of revenue recognized. Certain customers make advance payments prior to the satisfaction of our performance obligations on the contract.  These amounts are recorded as contract liabilities until such performance obligations are satisfied, either over time as costs are incurred or at a point in time when deliveries are made.  Contract assets and contract liabilities are determined on a contract-by-contract basis.

 

Net contract assets and liabilities are as follows:

 

 

 

February 28,
2019

 

June 1,
2018

 

Change

 

Contract assets — current

 

$

54.9

 

$

49.6

 

$

5.3

 

Contract assets — non-current

 

15.7

 

12.9

 

2.8

 

Contract liabilities — current

 

(8.3

)

(9.4

)

1.1

 

Contract liabilities — non-current

 

(89.0

)

(35.8

)

(53.2

)

Net contract assets (liabilities)

 

$

(26.7

)

$

17.3

 

$

(44.0

)

 

Contract assets — non-current is reported within Other non-current assets, and Contract liabilities — current is reported within Accrued Liabilities on our Condensed Consolidated Balance Sheet.  Changes in contract assets and contract liabilities primarily result from the timing difference between our performance of services and payments from customers.  For the nine-month period ended February 28, 2019, we recognized as revenue the entire opening balance of our contract liabilities as the timing between customer payment and our performance of the services is a short period of time and generally no longer than three months.

 

In the three-month period ended November 30, 2018, we recognized a provision for doubtful accounts of $12.4 million related to the bankruptcy of a European airline customer.  The provision consisted of impairment of non-current contract assets of $7.6 million, allowance for doubtful accounts of $3.3 million, and other liabilities of $1.5 million.

 

Remaining Performance Obligations

 

As of February 28, 2019, we had approximately $1.2 billion of remaining performance obligations, also referred to as firm backlog, which excludes unexercised contract options and potential orders under our indefinite-delivery, indefinite-quantity (IDIQ) contracts.  We expect that approximately 40% of this backlog will be recognized as revenue over the next 12 months, with the majority of the remaining balance recognized over the next three years.  The amount of remaining performance obligations that is expected to be recognized as revenue beyond 12 months primarily relates to our long-term, power-by-the-hour programs where we provide component inventory management and repair services.

 

16


Table of Contents

 

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2019

(Unaudited)

(Dollars in millions, except per share amounts)

 

Disaggregation of Revenue

 

Sales across the major customer markets for each of our operating segments for the three- and nine-month periods ended February 28, 2019 and 2018 were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

February 28,

 

February 28,

 

 

 

2019

 

2018

 

2019

 

2018

 

Aviation Services:

 

 

 

 

 

 

 

 

 

Commercial

 

$

350.8

 

$

340.2

 

$

983.0

 

$

940.4

 

Government and defense

 

146.5

 

88.8

 

415.6

 

251.6

 

 

 

$

497.3

 

$

429.0

 

$

1,398.6

 

$

1,192.0

 

 

 

 

 

 

 

 

 

 

 

Expeditionary Services:

 

 

 

 

 

 

 

 

 

Commercial

 

$

6.8

 

$

11.0

 

$

23.3

 

$

28.5

 

Government and defense

 

25.4

 

16.3

 

67.2

 

54.3

 

 

 

$

32.2

 

$

27.3

 

$

90.5

 

$

82.8

 

 

Sales by geographic region for the three- and nine-month periods ended February 28, 2019 and 2018 were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

February 28,

 

February 28,

 

 

 

2019

 

2018

 

2019

 

2018

 

Aviation Services:

 

 

 

 

 

 

 

 

 

North America

 

$

373.7

 

$

285.8

 

$

1,024.9

 

$

811.3

 

Europe/Africa

 

80.9

 

87.1

 

245.4

 

242.3

 

Other

 

42.7

 

56.1

 

128.3

 

138.4

 

 

 

$

497.3

 

$

429.0

 

$

1,398.6

 

$

1,192.0

 

 

 

 

 

 

 

 

 

 

 

Expeditionary Services:

 

 

 

 

 

 

 

 

 

North America

 

$

30.2

 

$

19.7

 

$

85.1

 

$

71.4

 

Europe/Africa

 

1.5

 

7.4

 

4.2

 

11.1

 

Other

 

0.5

 

0.2

 

1.2

 

0.3

 

 

 

$

32.2

 

$

27.3

 

$

90.5

 

$

82.8

 

 

Note 4 — Accounting for Stock-Based Compensation

 

Restricted Stock

 

In the three-month period ended August 31, 2018, as part of our annual long-term stock incentive compensation, we granted 43,680 shares of performance-based restricted stock and 38,760 shares of time-based restricted stock to eligible employees.  The grant date fair value per share for these shares was $48.09 (the closing price on the grant date).  In June 2018, we also granted 29,128 shares of time-based restricted stock to members of the Board of Directors with a grant date fair value per share of $45.32.

 

Expense charged to operations for restricted stock was $2.7 million and $2.0 million during the three-month periods ended February 28, 2019 and 2018, respectively, and $5.7 million and $4.9 million during the nine-month periods ended February 28, 2019 and 2018, respectively.

 

17


Table of Contents

 

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2019

(Unaudited)

(Dollars in millions, except per share amounts)

 

Stock Options

 

In the three-month period ended August 31, 2018, as part of our annual long-term stock incentive compensation, we granted 290,340 stock options to eligible employees at an exercise price per share of $48.09 and weighted average fair value of $13.67.

 

The total intrinsic value of stock options exercised during the nine-month periods ended February 28, 2019 and 2018 was $12.0 million and $12.0 million, respectively.   Expense charged to operations for stock options was $1.0 million and $1.4 million during the three-month periods ended February 28, 2019 and 2018, respectively, and $3.2 million and $3.8 million during the nine-month periods ended February 28, 2019 and 2018, respectively.

 

Note 5 — Inventory

 

The summary of inventories is as follows:

 

 

 

February 28,

 

May 31,

 

 

 

2019

 

2018

 

Aircraft and engine parts, components and finished goods

 

$

456.1

 

$

383.5

 

Raw materials and parts

 

41.9

 

45.1

 

Work-in-process

 

16.7

 

32.1

 

 

 

$

514.7

 

$

460.7

 

 

Note 6 — Supplemental Cash Flow Information

 

 

 

Nine Months Ended

 

 

 

February 28,

 

 

 

2019

 

2018

 

Interest paid

 

$

6.7

 

$

4.9

 

Income taxes paid

 

5.3

 

16.6

 

Income tax refunds received

 

 

0.1

 

 

Note 7 — Sale of Receivables

 

On February 23, 2018, we entered into a Purchase Agreement with Citibank N.A. (“Purchaser”) for the sale, from time to time, of certain accounts receivable due from certain customers (the “Purchase Agreement”).  Under the Purchase Agreement, the maximum amount of receivables sold is limited to $150 million.  The term of the Purchase Agreement runs through February 22, 2020; however, the Purchase Agreement may also be terminated earlier under certain circumstances.  The term of the Purchase Agreement shall be automatically extended for annual terms unless either party provides advance notice that they do not intend to extend the term.

 

We have no retained interests in the sold receivables, other than limited recourse obligations in certain circumstances, and only perform collection and administrative functions for the Purchaser.  We account for these receivable transfers as sales under ASC 860, Transfers and Servicing , and de-recognize the sold receivables from our Condensed Consolidated Balance Sheet.

 

During the nine-month period ended February 28, 2019, we sold $547.6 million of receivables under the Purchase Agreement and remitted $519.8 million to the Purchaser on their behalf.  During fiscal 2018, we sold $239.6 million of receivables under the Purchase Agreement and remitted $167.9 million to the Purchaser on their behalf.  As of February 28, 2019 and May 31, 2018, we had collected cash of $21.5 million and $10.5 million, respectively, which was not yet remitted to the Purchaser and was classified as Restricted cash on our Condensed Consolidated Balance Sheet.

 

18


Table of Contents

 

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2019

(Unaudited)

(Dollars in millions, except per share amounts)

 

We recognize discounts on the sale of our receivables and other fees related to the Purchase Agreement in Other expense, net on our Condensed Consolidated Statements of Operations.  During the three- and nine-month periods ended February 28, 2019, we incurred discounts on the sale of our receivables of $0.6 million and $1.6 million, respectively.  During the three-month period ended February 28, 2018, we incurred discounts on the sale of our receivables and other fees of $0.5 million.

 

Note 8 — Financing Arrangements

 

A summary of the carrying amount of our debt is as follows:

 

 

 

February 28,

 

May 31,

 

 

 

2019

 

2018

 

Revolving Credit Facility expiring November 1, 2021 with interest payable monthly

 

$

155.0

 

$

130.0

 

Term loan due November 1, 2021 with interest payable monthly

 

23.5

 

23.9

 

Industrial revenue bond due August 1, 2018

 

 

25.0

 

Total debt

 

178.5

 

178.9

 

Debt issuance costs, net

 

(1.3

)

(1.7

)

Long-term debt

 

$

177.2

 

$

177.2

 

 

At February 28, 2019, our variable rate debt had a fair value that approximates its carrying value and is classified as Level 2 in the fair value hierarchy.

 

The industrial revenue bond was paid on August 1, 2018 using our Revolving Credit Facility.

 

On October 18, 2017, we entered into a Credit Agreement with the Canadian Imperial Bank of Commerce, as lender (the “Credit Agreement”).  The Credit Agreement provided a Canadian $31 million term loan with the proceeds used to fund the acquisition of two maintenance, repair, and overhaul (“MRO”) facilities in Canada from Premier Aviation.  The term loan is due in full at the expiration of the Credit Agreement on November 1, 2021 unless terminated earlier pursuant to the terms of the Credit Agreement.  Interest is payable monthly on the term loan at the offered fluctuating Canadian Dollar Offer Rate plus 125 to 225 basis points based on certain financial measurements if a Bankers’ Acceptances loan, or at the offered fluctuating Prime Rate plus 25 to 125 basis points based on certain financial measurements, if a Prime Rate loan.

 

Our financing arrangements also require us to comply with leverage and interest coverage ratios, maintain a minimum net working capital level, and comply with certain affirmative and negative covenants, including those relating to financial reporting and notification, payment of indebtedness, cash dividends, taxes and other obligations, compliance with applicable laws, and limitations on additional liens, indebtedness, acquisitions, investments and disposition of assets.  The Revolving Credit Facility also requires our significant domestic subsidiaries, and any subsidiaries that guarantee our other indebtedness, to provide a guarantee of payment under the Revolving Credit Facility.  At February 28, 2019, we were in compliance with the financial and other covenants in our financing agreements.

 

Note 9 — 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 and shares issuable upon vesting of restricted stock awards.

 

19


Table of Contents

 

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2019

(Unaudited)

(Dollars in millions, except per share amounts)

 

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.

 

A reconciliation of the computations of basic and diluted earnings per share information for the three- and nine-month periods ended February 28, 2019 and 2018 is as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

February 28,

 

February 28,

 

 

 

2019

 

2018

 

2019

 

2018

 

Basic and Diluted EPS :

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

27.4

 

$

31.3

 

$

57.5

 

$

55.6

 

Less income attributable to participating shares

 

(0.1

)

(0.2

)

(0.2

)

(0.5

)

Income from continuing operations attributable to common shareholders

 

27.3

 

31.1

 

57.3

 

55.1

 

Loss from discontinued operations attributable to common shareholders

 

(64.8

)

(15.8

)

(72.8

)

(52.0

)

Net income (loss) attributable to common shareholders for earnings per share

 

$

(37.5

)

$

15.3

 

$

(15.5

)

$

3.1

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — basic

 

34.5

 

34.0

 

34.6

 

34.1

 

Additional shares from the assumed exercise of stock options

 

0.4

 

0.5

 

0.4

 

0.4

 

Weighted average common shares outstanding — diluted

 

34.9

 

34.5

 

35.0

 

34.5

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) per share — basic:

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

0.79

 

$

0.91

 

$

1.66

 

$

1.62

 

Loss from discontinued operations

 

(1.87

)

(0.46

)

(2.11

)

(1.52

)

Earnings (Loss) per share — basic and diluted

 

$

(1.08

)

$

0.45

 

$

(0.45

)

$

0.10

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) per share — diluted:

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

0.78

 

$

0.90

 

$

1.63

 

$

1.60

 

Loss from discontinued operations

 

(1.86

)

(0.46

)

(2.08

)

(1.52

)

Earnings (Loss) per share — basic and diluted

 

$

(1.08

)

$

0.44

 

$

(0.45

)

$

0.08

 

 

The potential dilutive effect of 277,000 shares and 273,000 shares relating to stock options was excluded from the computation of weighted average common shares outstanding — diluted for both the three- and nine-month periods ended February 28, 2019, respectively, as the shares would have been anti-dilutive.  At February 28, 2018, the average market price of our common shares was in excess of the exercise price of all of our outstanding options.

 

20


Table of Contents

 

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2019

(Unaudited)

(Dollars in millions, except per share amounts)

 

Note 10 — Accumulated Other Comprehensive Loss

 

Changes in our accumulated other comprehensive loss (“AOCL”) by component for the three- and nine-month periods ended February 28, 2019 and 2018 were as follows:

 

 

 

Currency
Translation
Adjustments

 

Pension
Plans

 

Total

 

Balance at December 1, 2018

 

$

(0.8

)

$

(31.8

)

$

(32.6

)

Other comprehensive loss before reclassifications

 

0.5

 

 

0.5

 

Amounts reclassified from AOCL

 

 

0.3

 

0.3

 

Total other comprehensive income

 

0.5

 

0.3

 

0.8

 

Balance at February 28, 2019

 

$

(0.3

)

$

(31.5

)

$

(31.8

)

 

 

 

 

 

 

 

 

Balance at December 1, 2017

 

$

0.8

 

$

(37.6

)

$

(36.8

)

Other comprehensive income before reclassifications

 

0.9

 

 

0.9

 

Amounts reclassified from AOCL

 

 

0.3

 

0.3

 

Total other comprehensive income

 

0.9

 

0.3

 

1.2

 

Balance at February 28, 2018

 

$

1.7

 

$

(37.3

)

$

(35.6

)

 

 

 

Currency
Translation
Adjustments

 

Pension
Plans

 

Total

 

Balance at June 1, 2018

 

$

0.3

 

$

(32.3

)

$

(32.0

)

Other comprehensive loss before reclassifications

 

(0.6

)

 

(0.6

)

Amounts reclassified from AOCL

 

 

0.8

 

0.8

 

Total other comprehensive income (loss)

 

(0.6

)

0.8

 

0.2

 

Balance at February 28, 2019

 

$

(0.3

)

$

(31.5

)

$

(31.8

)

 

 

 

 

 

 

 

 

Balance at June 1, 2017

 

$

(1.7

)

$

(38.2

)

$

(39.9

)

Other comprehensive income before reclassifications

 

3.4

 

 

3.4

 

Amounts reclassified from AOCL

 

 

0.9

 

0.9

 

Total other comprehensive income

 

3.4

 

0.9

 

4.3

 

Balance at February 28, 2018

 

$

1.7

 

$

(37.3

)

$

(35.6

)

 

Note 11 — Income Taxes

 

Our income tax expense for the three- and nine-month periods ended February 28, 2019 included a tax benefit of $4.7 million related to the recognition of previously unrecognized uncertain tax positions and a tax benefit of $1.8 million related to tax provision to federal income tax return filing differences.

 

On December 22, 2017, the President of the United States signed into law the Tax Reform Act which significantly reduced the corporate federal income tax rate to 21% from 35%.  The income tax rate reduction in the Tax Reform Act results in federal statutory tax rates for the Company of 21% and 29.2% in fiscal 2019 and 2018, respectively.

 

Our income tax benefit for the three-month period ended February 28, 2018 included tax benefits of $14.8 million related to the impact of the Tax Reform Act.  These tax benefits included a $13.0 million benefit for the impact of the re-measurement of our deferred tax assets and liabilities to the new, lower statutory rate and a $1.8 million benefit related to the application of the lower tax rate applied to our pre-tax income for the six-month period ended November 30, 2017 which was previously expected to be taxed at 35%.

 

21


Table of Contents

 

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2019

(Unaudited)

(Dollars in millions, except per share amounts)

 

Note 12 — Acquisitions

 

On September 19, 2017, we acquired the outstanding shares of two MRO facilities in Canada owned by Premier Aviation for approximately $24.8 million.  The purchase price includes $22.9 million paid at closing with the remaining deferred consideration paid in September 2018.  This business is included in our Aviation Services segment.  The fair value of assets acquired and liabilities assumed is as follows:

 

Current assets

 

$

4.4

 

Property and equipment

 

15.1

 

Intangible assets, including goodwill

 

14.6

 

Accounts payable and accrued liabilities

 

(9.3

)

 

 

$

24.8

 

 

Note 13 — Business Segment Information

 

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 operating segments:  Aviation Services comprised of supply chain and MRO activities and Expeditionary Services comprised of manufacturing activities.

 

In the first quarter of fiscal 2019, we re-aligned the composition of our operating segments to leverage the full breadth of our operational expertise in Aviation Services.  Our government-owned, contractor-operated operations, which include the INL/A Worldwide Aviation Support Services (“INL/A WASS”) program, were previously included in our Expeditionary Services segment and are now reported within our Aviation Services segment for all periods presented.

 

The Aviation Services segment consists of aftermarket support and services offerings that provide spare parts and maintenance support for aircraft operated by our commercial and government/defense customers.  Sales in the Aviation Services segment are derived from the sale and lease of a wide variety of new, overhauled and repaired engine and airframe parts and components to the commercial aviation and government and defense markets.  We provide customized inventory supply chain management, performance based logistics programs, customer fleet management and operations, and aircraft component repair management services.  The segment also includes repair, maintenance and overhaul of aircraft, landing gear and components.  Cost of sales consists principally of the cost of product, direct labor, and overhead.

 

The Expeditionary Services segment consists of primarily manufacturing operations with sales derived from the design and manufacture of pallets, shelters, and containers used to support the U.S. military’s requirements for a mobile and agile force including engineering, design, and system integration services for specialized command and control systems.  This segment also designs and manufactures advanced composite materials for commercial, business and military aircraft.  Cost of sales consists principally of the cost of material to manufacture products, direct labor and overhead.

 

The accounting policies for the segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements included in our annual report on Form 10-K for the year ended May 31, 2018 except for our revised accounting policy for revenue recognition.  We adopted ASC 606 on June 1, 2018 and our revised accounting policy is further described in Note 3.

 

Our chief operating decision making officer (Chief Executive Officer) evaluates performance based on the operating 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.

 

22


Table of Contents

 

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2019

(Unaudited)

(Dollars in millions, except per share amounts)

 

Selected financial information for each segment is as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

February 28,

 

February 28,

 

 

 

2019

 

2018

 

2019

 

2018

 

Sales:

 

 

 

 

 

 

 

 

 

Aviation Services

 

$

497.3

 

$

429.0

 

$

1,398.6

 

$

1,192.0

 

Expeditionary Services

 

32.2

 

27.3

 

90.5

 

82.8

 

 

 

$

529.5

 

$

456.3

 

$

1,489.1

 

$

1,274.8

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

February 28,

 

February 28,

 

 

 

2019

 

2018

 

2019

 

2018

 

Gross profit:

 

 

 

 

 

 

 

 

 

Aviation Services

 

$

81.7

 

$

72.1

 

$

223.7

 

$

195.9

 

Expeditionary Services

 

3.6

 

5.5

 

11.1

 

14.0

 

 

 

$

85.3

 

$

77.6

 

$

234.8

 

$

209.9

 

 

The following table reconciles segment gross profit to income from continuing operations before provision for income taxes:

 

 

 

Three Months Ended

 

Nine Months Ended