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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the Quarterly Period Ended
or
For the transition period from to
Commission File No.
(Exact name of registrant as specified in its charter)
| ||
(State or other jurisdiction of incorporation | (I.R.S. Employer Identification No.) |
| ||
(Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
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.
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth 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.
Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | Emerging growth company |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of February 28, 2022 there were
AAR CORP. and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended February 28, 2022
Table of Contents
Page | ||
3 | ||
5 | ||
6 | ||
7 | ||
8 | ||
9 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | |
29 | ||
29 | ||
30 | ||
30 | ||
30 | ||
31 | ||
31 | ||
32 | ||
2
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of February 28, 2022 and May 31, 2021
(In millions, except share data)
ASSETS | ||||||
February 28, | May 31, | |||||
2022 | 2021 | |||||
| (Unaudited) |
| ||||
Current assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash | | | ||||
Accounts receivable, less allowances of $ | | | ||||
Contract assets | | | ||||
Inventories |
| |
| | ||
Rotable assets and equipment on or available for short-term lease |
| |
| | ||
Assets of discontinued operations | | | ||||
Other current assets | | | ||||
Total current assets |
| |
| | ||
Property, plant and equipment, net of accumulated depreciation of $ | | | ||||
Other assets: | ||||||
Goodwill and intangible assets, net |
| |
| | ||
Operating lease right-of-use assets, net | | | ||||
Rotable assets supporting long-term programs | | | ||||
Other non-current assets |
| |
| | ||
| |
| | |||
$ | | $ | | |||
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
3
AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of February 28, 2022 and May 31, 2021
(In millions, except share data)
LIABILITIES AND EQUITY | ||||||
February 28, | May 31, | |||||
2022 | 2021 | |||||
| (Unaudited) |
| ||||
Current liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Accrued liabilities |
| |
| | ||
Deferred revenue | | | ||||
Liabilities of discontinued operations | | | ||||
Total current liabilities |
| |
| | ||
Long-term debt |
| |
| | ||
Operating lease liabilities | | | ||||
Other liabilities |
| |
| | ||
| |
| | |||
Equity: | ||||||
Preferred stock, $ |
| |
| — | ||
Common stock, $ |
| |
| | ||
Capital surplus |
| |
| | ||
Retained earnings |
| |
| | ||
Treasury stock, |
| ( |
| ( | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Total equity |
| |
| | ||
$ | | $ | | |||
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
4
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Income
For the Three and Nine Months Ended February 28, 2022 and 2021
(Unaudited)
(In millions, except share data)
Three Months Ended | Nine Months Ended | |||||||||||
February 28, | February 28, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Sales: | ||||||||||||
Sales from products | $ | | $ | | $ | | $ | | ||||
Sales from services |
| |
| | | | ||||||
| |
| | | | |||||||
Cost and operating expenses: | ||||||||||||
Cost of products |
| |
| | | | ||||||
Cost of services |
| |
| | | | ||||||
Provision for doubtful accounts | | | | | ||||||||
Selling, general and administrative |
| |
| | | | ||||||
| |
| | | | |||||||
Loss from joint ventures | ( | — | ( | ( | ||||||||
Operating income |
| |
| | | | ||||||
Loss on sale of business | — | — | ( | ( | ||||||||
Other income, net | | | | | ||||||||
Interest expense |
| ( |
| ( | ( | ( | ||||||
Interest income |
| — |
| | | | ||||||
Income from continuing operations before provision for income taxes | | | | | ||||||||
Provision for income taxes | | | | | ||||||||
Income from continuing operations | | | | | ||||||||
Income (Loss) from discontinued operations, net of tax | ( | ( | | ( | ||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Earnings per share – basic: | ||||||||||||
Earnings from continuing operations | $ | | $ | | $ | | $ | | ||||
Income (Loss) from discontinued operations | — | ( | | ( | ||||||||
Earnings per share – basic | $ | | $ | | $ | | $ | | ||||
Earnings per share – diluted: | ||||||||||||
Earnings from continuing operations | $ | | $ | | $ | | $ | | ||||
Income (Loss) from discontinued operations | — | ( | | ( | ||||||||
Earnings per share – diluted | $ | | $ | | $ | | $ | | ||||
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
5
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended February 28, 2022 and 2021
(Unaudited)
(In millions)
Three Months Ended | Nine Months Ended | |||||||||||
February 28, |
| February 28, | ||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net income | $ | | $ | | $ | | $ | | ||||
Other comprehensive income (loss), net of tax: | ||||||||||||
Currency translation adjustments | ( | |
| ( |
| | ||||||
Pension and other post-retirement plans, net of tax of $ | | |
| |
| ( | ||||||
Other comprehensive income (loss), net of tax | | |
| ( |
| | ||||||
Comprehensive income | $ | | $ | | $ | | $ | | ||||
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
6
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended February 28, 2022 and 2021
(Unaudited)
(In millions)
Nine Months Ended | ||||||
February 28, | ||||||
| 2022 |
| 2021 | |||
Cash flows provided from operating activities: | ||||||
Net income | $ | | $ | | ||
Less: (Income) Loss from discontinued operations | ( | | ||||
Income from continuing operations | | | ||||
Adjustments to reconcile income from continuing operations to net cash provided from operating activities: | ||||||
Depreciation and intangible amortization |
| |
| | ||
Stock-based compensation |
| |
| | ||
Provision for doubtful accounts | | | ||||
Deferred tax provision | ( | ( | ||||
Loss from joint ventures | | | ||||
Loss on sale of business | | | ||||
Customer contract termination costs | — | | ||||
Impairment charges |
| |
| | ||
Changes in certain assets and liabilities: | ||||||
Accounts receivable |
| ( |
| ( | ||
Contract assets | | ( | ||||
Inventories |
| |
| | ||
Prepaid expenses and other current assets | ( | | ||||
Rotable assets supporting long-term programs |
| |
| | ||
Accounts payable |
| |
| ( | ||
Accrued and other liabilities |
| | | |||
Deferred revenue on long-term programs | | ( | ||||
Other | ( |
| ( | |||
Net cash provided from operating activities - continuing operations |
| |
| | ||
Net cash used in operating activities - discontinued operations |
| ( |
| ( | ||
Net cash provided from operating activities | | | ||||
Cash flows provided from (used in) investing activities: | ||||||
Property, plant and equipment expenditures | ( | ( | ||||
Proceeds from termination of life insurance policies |
| — |
| | ||
Proceeds from asset disposals | | | ||||
Investments in joint ventures | ( | | ||||
Other | — | | ||||
Net cash provided from (used in) investing activities | ( | | ||||
Cash flows used in financing activities: | ||||||
Short-term borrowings, net | ( | ( | ||||
Repayment of long-term borrowings |
| ( |
| | ||
Purchase of treasury stock | ( | |||||
Proceeds from Payroll Support Program note |
| — | | |||
Cash dividends | — | ( | ||||
Stock compensation activity |
| |
| ( | ||
Net cash used in financing activities |
| ( |
| ( | ||
Effect of exchange rate changes on cash |
| ( | | |||
Decrease in cash and cash equivalents | ( | ( | ||||
Cash, cash equivalents, and restricted cash at beginning of period |
| | | |||
Cash, cash equivalents, and restricted cash at end of period | $ | | $ | | ||
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
7
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
For the Three and Nine Months Ended February 28, 2022 and 2021
(Unaudited)
(In millions)
Accumulated | ||||||||||||||||||
Other | ||||||||||||||||||
Common | Capital | Retained | Treasury | Comprehensive | ||||||||||||||
| Stock |
| Surplus |
| Earnings |
| Stock |
| Income (Loss) |
| Total Equity | |||||||
Balance, May 31, 2021 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net income |
| |
| |
| | | | | |||||||||
Stock option activity |
| |
| |
| | | | | |||||||||
Restricted stock activity |
| |
| ( |
| | | | | |||||||||
Other comprehensive loss, net of tax |
| |
| |
| | | ( | ( | |||||||||
Balance, August 31, 2021 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net income | | | | | | | ||||||||||||
Stock option activity | |
| |
| |
| |
| |
| | |||||||
Restricted stock activity | |
| |
| |
| |
| |
| | |||||||
Other comprehensive loss, net of tax | |
| |
| |
| |
| ( |
| ( | |||||||
Balance, November 30, 2021 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net income | | | | | | | ||||||||||||
Stock option activity | | ( | | | | | ||||||||||||
Restricted stock activity | | | | | | | ||||||||||||
Repurchase of shares | | | | ( | | ( | ||||||||||||
Other comprehensive income, net of tax | | | | | | | ||||||||||||
Balance, February 28, 2022 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Accumulated | ||||||||||||||||||
Other | ||||||||||||||||||
Common | Capital | Retained | Treasury | Comprehensive | ||||||||||||||
| Stock |
| Surplus |
| Earnings |
| Stock |
| Income (Loss) |
| Total Equity | |||||||
Balance, May 31, 2020 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net loss |
| |
| |
| ( |
| |
| |
| ( | ||||||
Cash dividends |
| |
| |
| ( |
| |
| |
| ( | ||||||
Stock option activity |
| |
| |
| |
| |
| |
| | ||||||
Restricted stock activity |
| |
| ( |
| |
| |
| |
| | ||||||
Other comprehensive income, net of tax |
| |
| |
| |
| |
| |
| | ||||||
Balance, August 31, 2020 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net income | | | | | | | ||||||||||||
Stock option activity | | | | | | | ||||||||||||
Restricted stock activity | | | | ( | | | ||||||||||||
Other comprehensive income, net of tax | | | | | | | ||||||||||||
Balance, November 30, 2020 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net income | | | | | | |||||||||||||
Stock option activity | | | | | | | ||||||||||||
Restricted stock activity | | | | ( | | | ||||||||||||
Other comprehensive income, net of tax | | | | | | | ||||||||||||
Balance, February 28, 2021 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
8
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
February 28, 2022
(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,” or “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, 2021 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 Annual Report on Form 10-K for the fiscal year ended May 31, 2021.
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 Balance Sheet of AAR CORP. and its subsidiaries as of February 28, 2022, the Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income for the three- and nine-month periods ended February 28, 2022 and 2021, the Condensed Consolidated Statements of Cash Flows for the nine-month periods ended February 28, 2022 and 2021, and the Condensed Consolidated Statements of Changes in Equity for the three- and nine-month periods ended February 28, 2022 and 2021. The results of operations for such interim periods are not necessarily indicative of the results for the full year.
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. Unless otherwise noted, amounts and disclosures throughout these Notes to Condensed Consolidated Financial Statements relate to our continuing operations.
In the fourth quarter of fiscal 2020, we completed the sale of the last operating contract of the COCO business shortly after government approval. Our continuing involvement in the COCO business is limited to the lease of certain aircraft which is an obligation of the acquirer of this contract. The assets and liabilities of our discontinued operations are primarily comprised of right-of-use assets and lease-related liabilities.
Note 3 – Sale of Composites Business
On August 31, 2020, we completed the sale of our aerostructures and aerospace products operations located in Clearwater, Florida and Sacramento, California (“Composites”). The Composites business was formerly included in our Expeditionary Services segment.
We recognized a loss on the sale of the Composites business of $
9
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
February 28, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
Note 4 – Revenue Recognition
Revenue is measured based on the 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 the good or service being provided is significantly integrated with other promises in the contract, the service provided significantly modifies or customizes another good or service or the good or service is highly interdependent or interrelated. If the contract has more than one performance obligation, we determine the standalone price of each distinct good or service underlying each performance obligation and allocate the transaction price based on their relative standalone selling prices.
The transaction price of a contract, which can include both fixed and variable amounts, is allocated to each performance obligation identified. Some contracts contain variable consideration, which could include incremental fees or penalty provisions related to performance. Variable consideration that can be reasonably estimated based on current assumptions and historical information is included in the transaction price at the inception of the contract but limited to the amount that is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Variable consideration that cannot be reasonably estimated is recorded when known.
Our performance obligations are satisfied over time as work progresses or at a point in time based on transfer of control of products and services to our customers. The majority of our sales from products are recognized at a point in time upon transfer of control to the customer, which generally occurs upon shipment. In connection with certain sales of products, we also provide logistics services, which include inventory management, replenishment, and other related services. The price of such services is generally included in the price of the products delivered to the customer, and revenues are recognized upon delivery of the product, at which point the customer has obtained control of the product. We do not account for these services separate from the related product sales as the services are inputs required to fulfill part orders received from customers.
For our performance obligations that are satisfied over time, we measure progress in a manner that depicts the performance of transferring control to the customer. As such, we utilize the input method of cost-to-cost to recognize revenue over time as this depicts when control of the promised goods or services is 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. For contracts that are deemed to be loss contracts, we establish forward loss reserves for total estimated costs that are in excess of total estimated consideration in the period in which they become known.
When contracts are modified, we consider whether the modification either creates new or changes the existing enforceable rights and obligations. Contract modifications that are for goods or services that are not distinct from the existing contract, due to the significant integration with the original goods or services provided, are accounted for as if they were part of that existing contract with the effect of the contract modification recognized as an adjustment to revenue on a cumulative catch-up basis. When the modifications include additional performance obligations that are distinct, they are accounted for as a new contract and performance obligation, which are recognized prospectively.
Changes in estimates and assumptions related to our arrangements accounted for using the cost-to-cost method are recorded using the cumulative catch-up method of accounting. These changes are primarily adjustments to the estimated profitability for our long-term programs where we provide component inventory management and/or repair services.
10
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
February 28, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
For the three-month period ended February 28, 2022, we recognized a favorable cumulative catch-up adjustment of $
For the nine-month period ended February 28, 2022, we recognized favorable and (unfavorable) cumulative catch-up adjustments of $
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.
We have elected to use certain
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 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, | May 31, | ||||||||
| 2022 |
| 2021 |
| Change | ||||
Contract assets – current | $ | | $ | | $ | ( | |||
Contract assets – non-current | | | | ||||||
Contract liabilities: | |||||||||
Deferred revenue – current | ( | ( | ( | ||||||
Deferred revenue on long-term contracts | ( |
| ( |
| ( | ||||
Net contract assets | $ | | $ | | $ | ( | |||
Contract assets – non-current is reported within Other non-current assets and Deferred revenue on long-term contracts is reported within Other liabilities on our Condensed Consolidated Balance Sheets. Changes in contract assets and contract liabilities primarily result from the timing difference between our performance of services and payments from customers.
During the three-month period ended August 31, 2020, we terminated a commercial power-by-the-hour (“PBH”) customer contract which resulted in a charge of $
11
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
February 28, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
One of our PBH customers notified us in June 2021 that the customer would terminate its contract with us earlier than we originally anticipated. In conjunction with the early termination, we recognized a charge of $
During fiscal 2020, we established forward loss reserves for a certain PBH contract where total estimated costs are in excess of the total estimated consideration over the remainder of the contract. As of February 28, 2022, our Condensed Consolidated Balance Sheet included remaining forward loss reserves of $
To support our PBH customer contracts, we previously entered into an agreement with a component repair facility to outsource a portion of the component repair and overhaul services. The agreement included certain minimum repair volume guarantees, which we have not met due to the impact of COVID-19 on commercial passenger aircraft flight hours. During fiscal 2021, we recognized a $
Changes in our deferred revenue were as follows for the three- and nine-month periods ended February 28, 2022 and 2021:
Three Months Ended |
| Nine Months Ended | ||||||||||
February 28, | February 28, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Deferred revenue at beginning of period | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Revenue deferred | ( | ( |
| ( |
| ( | ||||||
Revenue recognized | | |
| |
| | ||||||
Other | | ( |
| |
| ( | ||||||
Deferred revenue at end of period | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Remaining Performance Obligations
As of February 28, 2022, we had approximately $
12
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
February 28, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
Disaggregation of Revenue
Sales across the major customer markets for each of our reportable segments for the three- and nine-month periods ended February 28, 2022 and 2021 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||
February 28, |
| February 28, | ||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Aviation Services: |
| |||||||||||
Commercial | $ | | $ | | $ | | $ | | ||||
Government and defense | | |
| |
| | ||||||
$ | | $ | | $ | | $ | | |||||
Expeditionary Services: | ||||||||||||
Commercial | $ | | $ | | $ | | $ | | ||||
Government and defense | | |
| |
| | ||||||
$ | | $ | | $ | | $ | | |||||
Sales by geographic region for the three- and nine-month periods ended February 28, 2022 and 2021 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||
February 28, | February 28, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Aviation Services: |
| |||||||||||
North America | $ | | $ | | $ | | $ | | ||||
Europe/Africa | | | | | ||||||||
Other | | | | | ||||||||
$ | | $ | | $ | | $ | | |||||
Expeditionary Services: | ||||||||||||
North America | $ | | $ | | $ | | $ | | ||||
Europe/Africa | | |
| |
| | ||||||
Other | | |
| |
| | ||||||
$ | | $ | | $ | | $ | | |||||
13
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
February 28, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
Note 5 – Accounts Receivable
Financial instruments that potentially subject us to concentrations of market or credit risk consist principally of trade receivables. While our trade receivables are diverse and represent a number of entities and geographic regions, the majority are with the U.S. government and its contractors and entities in the aviation industry. The composition of our accounts receivable is as follows:
February 28, | May 31, | |||||
| 2022 |
| 2021 | |||
U.S. Government contracts: |
|
|
|
| ||
Trade receivables | $ | | $ | | ||
Unbilled receivables |
| |
| | ||
| |
| | |||
All other customers: |
|
|
| |||
Trade receivables |
| |
| | ||
Unbilled receivables |
| |
| | ||
| |
| | |||
$ | | $ | | |||
Note 6 – Restructuring and Impairment Costs
During the nine-month period ended February 28, 2021, we incurred severance and furlough-related costs of $
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.
In light of declines in commercial airline volumes and commercial program contract terminations in fiscal 2020 and 2021, we evaluated future cash flows related to certain rotable assets supporting long-term programs and recognized asset impairment charges of $
In conjunction with the early termination notice we received in June 2021 from one of our PBH customers, we evaluated future cash flows related to the rotable assets supporting that fleet type and recognized asset impairment charges of $
Note 7 – Accounting for Stock-Based Compensation
Restricted Stock
In the three-month period ended August 31, 2021, as part of our annual long-term stock incentive compensation, we granted
Expense charged to operations for restricted stock during each of the three-month periods ended February 28, 2022 and 2021 was $
14
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
February 28, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
Stock Options
In July 2021, as part of our annual long-term stock incentive compensation, we granted
Risk-free interest rate |
| | % |
Expected volatility of common stock |
| | % |
Dividend yield |
| | % |
Expected option term in years |
|
The total intrinsic value of stock options exercised during the nine-month periods ended February 28, 2022 and 2021 was $
Note 8 – Inventories
The summary of inventories is as follows:
February 28, |
| May 31, | ||||
| 2022 |
| 2021 | |||
Aircraft and engine parts, components and finished goods | $ | | $ | | ||
Raw materials and parts |
| |
| | ||
Work-in-process | | | ||||
$ | | $ | | |||
During the three-month period ended November 30, 2020, we decided to exit a product line in our engineering operations and recognized a $
Note 9 – Supplemental Cash Flow Information
Nine Months Ended | ||||||
February 28, | ||||||
| 2022 |
| 2021 | |||
Interest paid | $ | | $ | | ||
Income taxes paid |
| |
| | ||
Income tax refunds received | | | ||||
Note 10 – 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 (as amended to the date hereof, the “Purchase Agreement”). Under the Purchase Agreement, the maximum amount of receivables sold is limited to $
15
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
February 28, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
We have
During the nine-month periods ended February 28, 2022 and 2021, we sold $
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 Income. We incurred discounts on the sale of our receivables of $
Note 11 – Government Subsidies
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in the U.S. in response to the COVID-19 pandemic. The CARES Act includes provisions relating to refundable payroll tax credits, deferral of the employer portion of certain payroll taxes, net operating loss carrybacks, and other areas. The payroll tax deferral requires that the deferred payroll taxes be paid over
During the three-month period ended August 31, 2020, we received $
The remaining funding of $
Other countries have enacted legislation similar to the CARES Act to provide relief and stimulus measures to assist companies in mitigating the financial impact from COVID-19 and supporting their employees. Our foreign subsidiaries recognized subsidies of $
16
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
February 28, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
Note 12 – Financing Arrangements
A summary of the carrying amount of our debt is as follows:
February 28, | May 31, | |||||
| 2022 |
| 2021 | |||
Revolving Credit Facility expiring September 25, 2024 with interest payable monthly | $ | | $ | | ||
Term loan due November 1, 2021 with interest payable monthly | | | ||||
Total debt | | | ||||
Debt issuance costs, net |
| ( |
| ( | ||
Long-term debt | $ | | $ | | ||
At February 28, 2022, our debt had a fair value that approximates its carrying value and is classified as Level 2 in the fair value hierarchy.
On October 18, 2017, we entered into a Credit Agreement with the Canadian Imperial Bank of Commerce, as lender (the “Credit Agreement”). The Credit Agreement provided a Canadian $
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 of $
Borrowings outstanding under the Revolving Credit Facility at February 28, 2022 were $
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, 2022, we were in compliance with the financial and other covenants in our financing agreements.
Note 13 – Other Non-current Assets
Investments in Joint Ventures
Our investments in joint ventures include $
The investment balance as of February 28, 2022 includes $
17
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
February 28, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
method. In addition, each of the partners in the Indian joint venture has a loan to the joint venture proportionate to its equity ownership. Our loan to the Indian joint venture under this arrangement was $
In the fourth quarter of fiscal 2020, we made the decision to exit our joint venture which operates a landing gear wheel and brake repair and overhaul facility in Malaysia. In conjunction with the decision to exit the joint venture, we recognized an impairment charge of $
License Fees
In June 2011, we entered into a
Split-Dollar Life Insurance Arrangements
We previously entered into split-dollar life insurance agreements to benefit certain former executives and officers. Under the terms of the arrangements, we made premium payments on the individuals’ behalf, and we retained a collateral interest in the policies generally to the extent of the premiums we previously paid.
During the second quarter of fiscal 2021, certain split-dollar life insurance agreements were terminated and we received $
Note 14 – 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.
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,
18
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
February 28, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
A reconciliation of the computations of basic and diluted earnings per share information for the three- and nine-month periods ended February 28, 2022 and 2021 is as follows:
Three Months Ended | Nine Months Ended | |||||||||||
February 28, | February 28, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Basic and Diluted EPS: | ||||||||||||
Income from continuing operations | $ | | $ | | $ | | $ | | ||||
Less income attributable to participating shares | ( | ( |
| ( |
| ( | ||||||
Income from continuing operations attributable to common shareholders | | | | | ||||||||
Income (Loss) from discontinued operations attributable to common shareholders | ( | ( | | ( | ||||||||
Net income attributable to common shareholders for earnings per share | $ | | $ | | $ | | $ | | ||||
Weighted Average Shares: | ||||||||||||
Weighted average common shares outstanding – basic | | |
| |
| | ||||||
Additional shares from the assumed exercise of stock options | | | | | ||||||||
Weighted average common shares outstanding – diluted | | | | | ||||||||
Earnings per share – basic: | ||||||||||||
Earnings from continuing operations | $ | | $ | | $ | | $ | | ||||
Income (Loss) from discontinued operations | | ( |
| |
| ( | ||||||
Earnings per share - basic | $ | | $ | | $ | | $ | | ||||
Earnings per share – diluted: | ||||||||||||
Earnings from continuing operations | $ | | $ | | $ | | $ | | ||||
Income (Loss) from discontinued operations | | ( |
| |
| ( | ||||||
Earnings per share - diluted | $ | | $ | | $ | | $ | | ||||
The potential dilutive effect of
19
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
February 28, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
Note 15 – Accumulated Other Comprehensive Loss
Changes in our accumulated other comprehensive loss (“AOCL”) by component for the three- and nine-month periods ended February 28, 2022 and 2021 were as follows:
| Currency |
|
| ||||||
Translation | Pension | ||||||||
| Adjustments |
| Plans |
| Total | ||||
Balance at December 1, 2021 | $ | ( | $ | ( | $ | ( | |||
Other comprehensive income before reclassifications |
| ( |
| |
| | |||
Amounts reclassified from AOCL |
| — |
| |
| | |||
Total other comprehensive income (loss) |
| ( |
| |
| | |||
Balance at February 28, 2022 | $ | ( | $ | ( | $ | ( | |||
Balance at December 1, 2020 | $ | | $ | ( | $ | ( | |||
Other comprehensive loss before reclassifications |
| |
| |
| | |||
Amounts reclassified from AOCL |
| — |
| |
| | |||
Total other comprehensive income |
| |
| |
| | |||
Balance at February 28, 2021 | $ | | $ | ( | $ | ( | |||
Currency | |||||||||
Translation | Pension | ||||||||
| Adjustments |
| Plans |
| Total | ||||
Balance at June 1, 2021 | $ | | $ | ( | $ | ( | |||
Other comprehensive income before reclassifications | ( | | ( | ||||||
Amounts reclassified from AOCL | — | | | ||||||
Total other comprehensive income (loss) | ( | | ( | ||||||
Balance at February 28, 2022 | $ | ( | $ | ( | $ | ( | |||
Balance at June 1, 2020 | $ | ( | $ | ( | $ | ( | |||
Other comprehensive loss before reclassifications | | ( | | ||||||
Amounts reclassified from AOCL | — | | | ||||||
Total other comprehensive income (loss) | | ( | | ||||||
Balance at February 28, 2021 | $ | | $ | ( | $ | ( | |||
Note 16 – Business Segment Information
Consistent with how our chief operating decision making officer (our Chief Executive Officer) evaluates performance and the way we are organized internally, we report our activities in
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.
20
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
February 28, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
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. 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 fiscal year ended May 31, 2021.
Our chief operating decision making officer (our Chief Executive Officer) evaluates performance based on our 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.
Selected financial information for each segment is as follows:
Three Months Ended | Nine Months Ended | |||||||||||
February 28, |
| February 28, | ||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Sales: | ||||||||||||
Aviation Services | $ | | $ | | $ | | $ | | ||||
Expeditionary Services | | |
| |
| | ||||||
$ | | $ | | $ | | $ | | |||||
Three Months Ended | Nine Months Ended | |||||||||||
February 28, |
| February 28, | ||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Gross profit: | ||||||||||||
Aviation Services | $ | | $ | | $ | | $ | | ||||
Expeditionary Services | | |
| |
| | ||||||
$ | | $ | | $ | | $ | | |||||
The following table reconciles segment gross profit to income from continuing operations before provision for income taxes:
Three Months Ended | Nine Months Ended | |||||||||||
February 28, |
| February 28, | ||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Segment gross profit | $ | | $ | | $ | | $ | | ||||
Selling, general and administrative | ( | ( | ( |
| ( | |||||||
Loss from joint ventures | ( | — | ( | ( | ||||||||
Provision for doubtful accounts | ( | ( | ( | ( | ||||||||
Loss on sale of business | — | — | ( | ( | ||||||||
Other income, net | | | | | ||||||||
Interest expense | ( | ( | ( | ( | ||||||||
Interest income | — | | | | ||||||||
Income from continuing operations before provision for income taxes | $ | | $ | | $ | | $ | | ||||
21
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
February 28, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
Note 17 – Legal Proceedings
We are not a party to any material pending legal proceeding (including any governmental or environmental proceeding) other than routine litigation incidental to our business, except for the following:
Department of Justice Investigation
As previously reported, the U.S. Department of Justice (“DoJ”), acting through the U.S. Attorney’s Office for the Southern District of Illinois, conducted an investigation of AAR Airlift Group, Inc. (“Airlift”), a wholly-owned subsidiary of AAR CORP., under the federal civil False Claims Act (“FCA”). The investigation related to Airlift’s performance of several contracts awarded by the U.S. Transportation Command (“TRANSCOM”) concerning the operations and maintenance of rotary-wing and fixed-wing aircraft in Afghanistan and Africa, as well as several U.S. Navy contracts. In June 2018, the DoJ informed Airlift that part of the investigation was precipitated by a lawsuit filed under the qui tam provisions of the FCA by a former employee of Airlift.
In June 2021, Airlift and the DoJ reached an agreement to settle the FCA investigation and related matters for approximately $
We recognized charges of $
Self-Reporting of Potential Foreign Corrupt Practices Act Violations
The Company retained outside counsel to investigate possible violations of the Company’s Code of Conduct, the U.S. Foreign Corrupt Practices Act, and other applicable laws, relating to the Company’s activities in Nepal and South Africa. Based on these investigations, in fiscal 2019, we self-reported these matters to the DoJ, the U.S. Securities and Exchange Commission and the UK Serious Fraud Office. The Company is fully cooperating with the reviews by these agencies, although we are unable at this time to predict what action, if any, they may take.
Russian Bankruptcy Litigation
During calendar years 2016 and 2017, certain of the Company's subsidiaries purchased
The Company strongly disputes all claims asserted in the claw-back action, believes it has meritorious defenses, and is vigorously defending itself in the Russian court system. However, in late February 2022, with the developments in the Russia/Ukraine conflict, the U.S. and its North Atlantic Treaty Organization allies imposed a range of sanctions and export controls on Russian entities and individuals. These sanctions and export controls have resulted in heightened tensions between the United States and Russia and a hostile business and legal environment for foreign companies in Russia. As a result, we now believe that a loss related to this matter is reasonably possible, rather than remote, although we are not able to estimate the range of possible losses at this time.
22
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions)
General Overview
We report our activities in two reportable segments: Aviation Services comprised of supply chain and maintenance, repair, and overhaul (“MRO”) activities and Expeditionary Services comprised of manufacturing activities.
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. Cost of sales consists principally of the cost of material to manufacture products, direct labor and overhead.
Our chief operating decision making officer (our Chief Executive Officer) evaluates performance based on our 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.
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 fiscal year ended May 31, 2021.
Business Trends and Outlook
Consolidated sales for the third quarter of fiscal 2022 increased $41.9 million or 10.2% over the prior year quarter primarily due to an increase in sales of $48.3 million or 12.4% in our Aviation Services segment. Consolidated sales to commercial customers increased $57.2 million or 27.5% over the prior year quarter due to the continued recovery in commercial passenger air traffic. Our consolidated sales to government customers decreased $15.3 million or 7.6% primarily due to less volume across certain U.S. Government contracts.
Over the long-term, we expect to see strength in our Aviation Services segment given its offerings of value-added services to both commercial and government and defense customers. We believe long-term commercial and government growth trends are favorable. As we continue to experience recovery and growth in our operations, our long-term strategy continues to emphasize investing in the business and capitalizing on opportunities in those markets.
Both our commercial and government businesses are subject to the economic environment, impact of COVID-19 and related variants, public policy decisions or other factors that could adversely impact our business, financial condition or results of operations in the future. A recent example of this was the U.S. Government’s decision to withdraw all U.S. Department of State personnel presence in Afghanistan. In conjunction with the U.S. exit from Afghanistan, we concluded our activities in country under our WASS and U.S. Department of Defense contracts. The operations related to our activities in Afghanistan contributed revenue of $67 million in fiscal 2021.
We are also monitoring developments in Ukraine and Russia as well as the related export controls and financial and economic sanctions imposed on certain industry sectors, including the aviation sector, and parties in Russia by the U.S., the U.K., the European Union and others. Although we do not presently foresee direct material adverse effects upon our business, the short- and long-term worldwide implications of the Russian/Ukraine conflict are difficult to predict at this time. Factors such as increased energy costs, embargos on flights from Russian airlines, and sanctions on Russian companies could impact the global economy and aviation sector in particular. Our sales to customers in Russia and Ukraine were $3.8 million in fiscal 2021 or 0.2% of consolidated sales.
23
Results of Operations
Three- and Nine-Month Periods Ended February 28, 2022
Sales and gross profit for our two business segments for the three- and nine-months ended February 28, 2022 and 2021 were as follows:
Three Months Ended February 28, | Nine Months Ended February 28, |
| |||||||||||||||
| 2022 |
| 2021 |
| % Change |
| 2022 |
| 2021 |
| % Change |
| |||||
Sales: |
|
|
|
|
|
| |||||||||||
Aviation Services |
|
|
|
|
|
| |||||||||||
Commercial | $ | 264.0 | $ | 204.7 | 29.0 | % | $ | 788.2 | $ | 566.5 |
| 39.1 | % | ||||
Government and defense | 174.0 | 185.0 | (5.9) | % |
| 504.7 |
| 571.8 | (11.7) | % | |||||||
$ | 438.0 | $ | 389.7 | 12.4 | % | $ | 1,292.9 | $ | 1,138.3 |
| 13.6 | % | |||||
Expeditionary Services |
|
|
|
| |||||||||||||
Commercial | $ | 1.0 | $ | 3.1 | (67.7) | % | $ | 1.8 | $ | 10.8 |
| (83.3) | % | ||||
Government and defense | 13.2 | 17.5 | (24.6) | % |
| 49.2 |
| 65.6 |
| (25.0) | % | ||||||
$ | 14.2 | $ | 20.6 | (31.1) | % | $ | 51.0 | $ | 76.4 |
| (33.2) | % | |||||
Three Months Ended February 28, | Nine Months Ended February 28, | ||||||||||||||||
| 2022 |
| 2021 |
| % Change |
| 2022 |
| 2021 |
| % Change |
| |||||
Gross Profit (Loss): |
|
|
|
|
|
|
| ||||||||||
Aviation Services |
|
|
|
|
|
|
| ||||||||||
Commercial | $ | 53.3 | $ | 51.2 | 4.1 | % | $ | 128.4 | $ | 105.4 |
| 21.8 | % | ||||
Government and defense | 24.6 | 31.3 | (21.4) | % |
| 84.4 |
| 88.5 |
| (4.6) | % | ||||||
$ | 77.9 | $ | 82.5 | (5.6) | % | $ | 212.8 | $ | 193.9 |
| 9.7 | % | |||||
Expeditionary Services |
|
|
|
| |||||||||||||
Commercial | $ | — | $ | 0.1 | nm | $ | — | $ | (1.1) |
| nm | ||||||
Government and defense | 2.5 | 3.4 | (26.5) | % |
| 10.6 |
| 11.3 |
| (6.2) | % | ||||||
$ | 2.5 | $ | 3.5 | (28.6) | % | $ | 10.6 | $ | 10.2 |
| 3.9 | % | |||||
nm – Percentage change is not meaningful.
Three Month Period Ended February 28, 2022
Aviation Services Segment
Sales in the Aviation Services segment increased $48.3 million or 12.4% over the prior year period due to a $59.3 million or 29.0% increase in sales to commercial customers. The increase in sales to commercial customers was primarily attributable to increased sales of $22.0 million in our new parts distribution activities and $19.6 million in our MRO activities as commercial passenger air traffic continues to recover from the impact of COVID-19.
During the third quarter of fiscal 2022, sales in this segment to government and defense customers decreased $11.0 million or 5.9%, from the prior year period. The decrease in sales to government customers was primarily attributable to reduced volume on program activity including the wind-down of Afghanistan activities which decreased $9.9 million from the prior year period.
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. In the third quarter of fiscal 2022, we had a favorable cumulative catch-up adjustment of $2.5 million compared to net favorable cumulative catch-up adjustments of $2.0 million in the prior year quarter. These adjustments primarily relate to our long-term, power-by-the-hour programs where we provide component inventory management and repair services as well as certain long-term government programs.
24
Cost of sales in Aviation Services increased $52.9 million, or 17.2%, over the prior year period. The prior year period included higher benefits from government workforce subsidies such as the Payroll Support Program in the CARES Act and other subsidies provided by foreign governments. We recognized a benefit of $0.9 million in cost of sales during the third quarter of fiscal 2022 related to the government subsidies compared to $24.1 million in the prior year quarter.
Gross profit in the Aviation Services segment decreased $4.6 million, or 5.6%, from the prior year period. Gross profit on sales to commercial customers increased $2.1 million, or 4.1%, over the prior year period primarily due to the COVID-19 recovery discussed above. The gross profit margin on sales to commercial customers decreased to 20.2% from 25.0% in the prior year period, primarily from the benefit of government workforce subsidies.
Gross profit on sales to government and defense customers decreased $6.7 million, or 21.4%, from the prior year period. Gross profit margin on sales to government and defense customers decreased to 14.1% from 16.9% in the prior year period, primarily driven by the mix of products and services provided on long-term government programs.
Expeditionary Services Segment
Sales in the Expeditionary Services segment decreased $6.4 million, or 31.1%, from the prior year period primarily due to reduced volume for our mobility products. Gross profit in the Expeditionary Services segment decreased $1.0 million, or 28.6%, from the prior period primarily due to mix of sales across mobility product lines including pallets, containers, and shelters. Gross profit margin increased to 17.6% from 17.0% in the prior year period primarily as a result of the mix of sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $4.0 million, or 8.9%, over the prior year period primarily due to investments to support the sales growth as our commercial activities continue the recovery from the impact of COVID-19. As a percent of sales, selling, general and administrative expenses decreased to 10.8% from 10.9% in the prior year period as the benefit from our actions to reduce both our fixed and variable cost structure in light of the reduced volumes from COVID-19 more than offset the investments to support sales growth.
Income Taxes
Our effective income tax rate for continuing operations was 26.6% for the third quarter of fiscal 2022 compared to 27.8% in the prior year period. The prior year period included tax expense of $0.5 million related to tax provision to federal income tax return filing differences.
Discontinued Operations
Loss from discontinued operations was $0.1 million in the third quarter of fiscal 2022 compared to a loss of $3.0 million in the prior year period. The loss in the prior year period was attributable to a $4.2 million increase in our reserve to reflect the tentative agreement with the U.S. Department of Justice to settle their investigation of our Contractor-Owned, Contractor-Operated (“COCO”) business under the federal civil False Claims Act.
Nine Month Period Ended February 28, 2022
Aviation Services Segment
Sales in the Aviation Services segment increased $154.6 million, or 13.6%, over the prior year period due to a $221.7 million, or 39.1%, increase in sales to commercial customers. The increase in sales to commercial customers was primarily attributable to increased sales of $67.2 million in our MRO activities and $64.9 million related to new parts distribution activities as commercial passenger air traffic continues to recover from the impact of COVID-19. In addition, sales increased $56.5 million in our aftermarket parts trading activities which included whole asset sales of $34.0 million during the nine-month period ended February 28, 2022 compared to $14.0 million in the prior year period.
25
During the nine-month period ended February 28, 2022, sales in this segment to government and defense customers decreased $67.1 million, or 11.7%, from the prior year period. This decrease was primarily attributable to the timing of activities for the C-40 aircraft we are delivering to the Naval Air Systems Command in support of the U.S. Marine Corps. The prior year period included sales of $39.5 million related to the installation of engines on the aircraft while no engine installation activities occurred in fiscal 2022.
During the nine-month period ended February 28, 2022, we had net favorable cumulative catch-up adjustments of $7.4 million compared to $4.8 million in the prior year period. These adjustments primarily relate to our long-term, power-by-the-hour programs where we provide component inventory management and repair services as well as certain long-term government programs.
Cost of sales in Aviation Services increased $135.7 million, or 14.4%, over the prior year period which was in line with the sales increase discussed above.
Gross profit in the Aviation Services segment increased $18.9 million, or 9.7%, over the prior year period. Gross profit on sales to commercial customers increased $23.0 million, or 21.8%, over the prior year period primarily due to the COVID-19 recovery discussed above. In addition, gross profit was unfavorably impacted in the nine-month period ended February 28, 2021 due to asset impairment charges of $7.0 million and facility consolidation and repositioning costs of $2.4 million. These items were more than offset by a benefit of $52.3 million in government workforce subsidies from the Payroll Support Program in the CARES Act and other subsidies provided by foreign governments. Gross profit margin on sales to commercial customers decreased to 16.3% from 18.6% in the prior year period primarily due to the impact of the subsidies in the prior year period more than offsetting the volume recovery in fiscal 2022.
Gross profit on sales to government and defense customers decreased $4.1 million, or 4.6%, from the prior year primarily driven by primarily driven by the mix of products and services provided on long-term government programs. Gross profit margin on sales to government and defense customers increased to 16.7% from 15.5% in the prior year period primarily as a result of the mix of sales.
Expeditionary Services Segment
Sales in the Expeditionary Services segment decreased $25.4 million, or 33.2%, from the prior year period primarily due to reduced volume for our mobility products. Gross profit in the Expeditionary Services segment increased $0.4 million, or 3.9%, over the prior period primarily due to the divestiture of our composites manufacturing business which was not profitable prior to its divestiture on August 31, 2020. Gross profit margin increased to 20.8% from 13.4% in the prior year period primarily as a result of the divestiture.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $11.7 million, or 8.8%, over the prior year period primarily due to investments to support the sales growth as our commercial activities continue the recovery from the impact of COVID-19. As a percent of sales, selling, general and administrative expenses decreased to 10.8% from 11.0% in the prior year period as the benefit from our actions to reduce both our fixed and variable cost structure in light of the reduced volumes from COVID-19 more than offset the investments to support sales growth.
Income Taxes
Our effective income tax rate for continuing operations was 26.8% for the nine-month period ended February 28, 2022 compared to 29.8% in the prior year period. The prior year period included unfavorable stock compensation items of $0.8 million compared to favorable stock compensation benefits of $0.7 million in the current year period.
Discontinued Operations
Income from discontinued operations was $0.2 million in the nine-month period ended February 28, 2022 compared to a loss of $9.8 million in the prior year period. The loss in the prior year period was attributable to a $11.0 million increase in our legal reserve discussed above.
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Liquidity, Capital Resources and Financial Position
Our operating activities are funded and commitments met through the generation of cash from operations. In addition to operations, our current capital resources include an unsecured Revolving Credit Facility and an accounts receivable financing program. Periodically, we may also raise capital through common stock and debt financings in the public or private markets. We continually evaluate various financing arrangements, including the issuance of common stock or debt, which would allow us to improve our liquidity position and finance future growth on commercially reasonable terms. Our continuing ability to borrow from our lenders and issue debt and equity securities to the public and private markets in the future may be negatively affected by a number of factors, including the overall health of the credit markets, general economic conditions, airline industry conditions, geo-political events, and our operating performance. Our ability to generate cash from operations is influenced primarily by our operating performance and changes in working capital.
At February 28, 2022, our liquidity and capital resources included working capital of $634.1 million inclusive of cash of $43.0 million.
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 of $600 million and matures September 25, 2024. Under certain circumstances, we have the ability to request, but our lenders are not required to grant, an increase to the revolving credit commitment by an aggregate amount of up to $300 million, not to exceed $900 million in total.
Borrowings under the Revolving Credit Facility bear interest at the offered Eurodollar Rate plus 87.5 to 175 basis points based on certain financial measurements if a Eurodollar Rate loan, or at the offered fluctuating Base Rate plus 0 to 75 basis points based on certain financial measurements if a Base Rate loan.
Borrowings outstanding under the Revolving Credit Facility at February 28, 2022 were $104.5 million and there were approximately $11.4 million of outstanding letters of credit, which reduced the availability of this facility to $484.1 million. There are no other terms or covenants limiting the availability of this facility.
In the first quarter of fiscal 2021, we received $57.2 million from the U.S. Treasury Department through the Payroll Support Program under the CARES Act. This funding included a $48.5 million cash grant, which was to be used exclusively for the continuation of payment of employee wages, salaries and benefits for employees of certain MRO facilities, and a low interest 10-year senior unsecured promissory note of $8.7 million. In fiscal 2021, we recognized the full amount of the grant as contra-expense within Cost of sales and Selling, general and administrative expenses. The Promissory Note was re-paid in full during the fourth quarter of fiscal 2021.
As of February 28, 2022, we also had other financing arrangements that did not limit our availability on the Revolving Credit Facility, including outstanding letters of credit of $11.6 million and foreign lines of credit of $10.1 million.
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 MRO facilities in Canada from Premier Aviation. The term loan was paid in full at the expiration of the Credit Agreement on November 1, 2021.
We maintain a Purchase Agreement with Citibank N.A. (“Purchaser”) for the sale, from time to time, of certain accounts receivable due from certain customers (as amended to the date hereof, the “Purchase Agreement”). Under the Purchase Agreement, the maximum amount of receivables sold is limited to $150 million and Purchaser may, but is not required to, purchase the eligible receivables we offer to sell. The current term of the Purchase Agreement runs through February 22, 2022, however, the Purchase Agreement may also be terminated earlier under certain circumstances. The term of the Purchase Agreement shall be automatically extended for one-year 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 Sheets.
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During the nine-month periods ended February 28, 2022 and 2021, we sold $225.5 million and $346.0 million, respectively, of receivables under the Purchase Agreement and remitted $246.1 million and $371.9 million, respectively, to the Purchaser on their behalf. As of February 28, 2022 and May 31, 2021, we had collected cash of $2.4 million and $8.4 million, respectively, which was not yet remitted to the Purchaser as of those dates and was classified as Restricted cash on our Condensed Consolidated Balance Sheets.
At February 28, 2022, we were in compliance with all financial and other covenants under our financing arrangements.
On December 16, 2021, our Board of Directors authorized a renewal of our stock repurchase program in which we may repurchase up to $150 million of our common stock with no expiration date. The timing and amount of repurchases are subject to prevailing market conditions and other considerations, including our liquidity and acquisition and other investment opportunities. During the three-month period ended February 28, 2022, we repurchased 0.5 million shares for $20.2 million. We plan to fully utilize the authorization by December 31, 2023.
Cash Flows from Operating Activities
Net cash provided by operating activities–continuing operations was $49.6 million in the nine-month period ended February 28, 2022 compared to cash provided of $85.0 million in the prior year period. The decrease from the prior period of $35.4 million was primarily attributable to a greater reduction in inventory levels in the prior year period and the proceeds of a $48.5 million grant from the Payroll Support Program of the CARES Act. These items were partially offset by a $25 million license fee paid to Unison Industries in the prior year period for our expanded and extended exclusive distribution agreement.
Cash Flows from Investing Activities
Net cash used in investing activities was $6.9 million during the nine-month period ended February 28, 2022 compared to a cash provided of $2.3 million in the prior year period. The decrease over the prior period was primarily related to proceeds of $10.0 million from the termination of split-dollar life insurance policies in the prior year period.
Cash Flows from Financing Activities
Net cash used in financing activities was $45.3 million during the nine-month period ended February 28, 2022 compared to $397.2 million in the prior year period. The prior year period included the repayment of our additional draw down on our Revolving Credit Facility. These funds were originally drawn in late fiscal 2020 as a precautionary measure in light of the economic and market uncertainty presented by COVID-19. The current year period included $20.2 million for the repurchase of 0.5 million shares in conjunction with our recently announced stock repurchase program.
Critical Accounting Policies and Significant Estimates
We make a number of significant estimates, assumptions and judgments in the preparation of our financial statements. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended May 31, 2021 for a discussion of our critical accounting policies. There have been no significant changes to the application of our critical accounting policies during fiscal 2022.
Forward-Looking Statements
This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on beliefs of our management, as well as assumptions and estimates based on information available to us as of the dates such assumptions and estimates are made, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors, including those factors set forth under Part I, Item 1A in our Annual Report on Form 10-K for the fiscal year ended May 31, 2021. Should one or more of those risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. Those events and uncertainties are difficult or impossible to predict accurately and many are beyond our control. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
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Item 3 — Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk includes fluctuating interest rates under our credit agreements, changes in foreign exchange rates, and credit losses on accounts receivable. See Note 1 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended May 31, 2021 for a discussion of accounts receivable exposure.
Foreign Currency Risk. Revenues and expenses of our foreign operations are translated at average exchange rates during the period, and balance sheet accounts are translated at period-end exchange rates. Balance sheet translation adjustments are excluded from the results of operations and are recorded in stockholders’ equity as a component of accumulated other comprehensive loss. A hypothetical 10 percent devaluation of the U.S. dollar against foreign currencies would not have had a material impact on our financial position or continuing operations for the quarter ended February 28, 2022.
Interest Rate Risk. Refer to the section Quantitative and Qualitative Disclosures about Market Risk in our Annual Report on Form 10-K for the fiscal year ended May 31, 2021. There were no significant changes during the quarter ended February 28, 2022.
Item 4 — Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of February 28, 2022. This evaluation was carried out under the supervision and with participation of our Chief Executive Officer and our Chief Financial Officer. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Therefore, effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of February 28, 2022, ensuring that information required to be disclosed in the reports that are filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported in a timely manner.
There were no changes in our internal control over financial reporting during the quarter ended February 28, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1 – Legal Proceedings
The information in Note 17 to the Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference. There are no matters which constitute material pending legal proceedings to which we are a party other than those incorporated into this item by reference from Note 17 to our Condensed Consolidated Financial Statements for the quarter ended February 28, 2022 contained in this Quarterly Report on Form 10-Q.
Item 1A — Risk Factors
There is no material change in the information reported under Part I-Item 1A “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended May 31, 2021.
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds
(c) | The following table provides information about purchases we made during the quarter ended February 28, 2022 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act: |
|
|
| Total Number |
| ||||||
of Shares | Approximate | |||||||||
Purchased as | Dollar Value of | |||||||||
Part of Publicly | Shares that May Yet Be | |||||||||
Total Number | Average | Announced | Purchased | |||||||
of Shares | Price Paid per | Plans or | Under the Plans | |||||||
Period |
| Purchased |
| Share |
| Programs (1) |
| or Programs (1) | ||
12/1/2021 – 12/31/2021 |
| 114,954 | $ | 38.73 |
| 114,954 |
| $ | 145,545,523 | |
1/1/2022 – 1/31/2022 |
| 277,285 | 40.85 |
| 277,285 |
| 134,211,711 | |||
2/1/2022 – 2/28/2022 |
| 108,000 |
| 40.41 |
| 108,000 |
| 129,844,763 | ||
Total | 500,239 | $ | 40.27 |
| 500,239 | |||||
(1) On December 21, 2021, our Board of Directors announced it had authorized a renewal of our stock repurchase program providing for the repurchase of up to $150 million of our common stock, with no expiration date.
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Item 6 — Exhibits
The exhibits to this report are listed on the following index:
Exhibit |
| Description |
| Exhibits | |
|---|---|---|---|---|---|
10. | Material Contracts | 10.1 | |||
31. | Rule 13a-14(a)/15(d)-14(a) Certifications | 31.1 | |||
31.2 | |||||
32. | Section 1350 Certifications | 32.1 | |||
32.2 | |||||
101. | Interactive Data File | 101 | The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2022, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at February 28, 2022 and May 31, 2021, (ii) Condensed Consolidated Statements of Income for the three- and nine-months ended February 28, 2022 and 2021, (iii) Condensed Consolidated Statements of Comprehensive Income for the three- and nine-months ended February 28, 2022 and 2021, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended February 28, 2022 and 2021, (v) Condensed Consolidated Statements of Changes in Equity for the three- and nine-months ended February 28, 2022 and 2021 (vi) Notes to Condensed Consolidated Financial Statements.** | ||
104. | Cover Page Interactive Data File | 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) |
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AAR CORP. | ||
(Registrant) | |||
Date: | March 22, 2022 | /s/ SEAN M. GILLEN | |
Sean M. Gillen | |||
Vice President and Chief Financial Officer | |||
(Principal Financial Officer) | |||
/s/ ERIC S. PACHAPA | |||
Eric S. Pachapa | |||
Vice President, Controller and Chief Accounting Officer | |||
(Principal Accounting Officer) |
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