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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 Number:
(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)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 (§232.405 of this chapter) 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
As of August 31, 2022 there were
AAR CORP. and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended August 31, 2022
Table of Contents
Page | ||
3 | ||
5 | ||
6 | ||
7 | ||
8 | ||
9 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | |
25 | ||
26 | ||
27 | ||
27 | ||
27 | ||
28 | ||
28 | ||
29 | ||
2
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of August 31, 2022 and May 31, 2022
(In millions, except share data)
ASSETS | ||||||
August 31, | May 31, | |||||
2022 | 2022 | |||||
| (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 | | | ||||
Prepaid expenses and 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 August 31, 2022 and May 31, 2022
(In millions, except share data)
LIABILITIES AND EQUITY | ||||||
August 31, | May 31, | |||||
2022 | 2022 | |||||
| (Unaudited) |
| ||||
Current liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Accrued liabilities |
| |
| | ||
Liabilities of discontinued operations | | | ||||
Total current liabilities |
| |
| | ||
Long-term debt |
| |
| | ||
Operating lease liabilities | | | ||||
Deferred tax 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 Months Ended August 31, 2022 and 2021
(Unaudited)
(In millions, except share data)
Three Months Ended | ||||||
August 31, | ||||||
| 2022 |
| 2021 | |||
Sales: | ||||||
Sales from products | $ | | $ | | ||
Sales from services |
| |
| | ||
| |
| | |||
Cost and operating expenses: | ||||||
Cost of products |
| |
| | ||
Cost of services |
| |
| | ||
Selling, general, and administrative |
| |
| | ||
| |
| | |||
Loss from joint ventures | ( | ( | ||||
Operating income |
| |
| | ||
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 from discontinued operations, net of tax | | | ||||
Net income | $ | | $ | | ||
Earnings per share – basic: | ||||||
Earnings from continuing operations | $ | | $ | | ||
Earnings from discontinued operations | | | ||||
Earnings per share – basic | $ | | $ | | ||
Earnings per share – diluted: | ||||||
Earnings from continuing operations | $ | | $ | | ||
Earnings 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 Months Ended August 31, 2022 and 2021
(Unaudited)
(In millions)
Three Months Ended | ||||||
August 31, | ||||||
| 2022 |
| 2021 | |||
Net income | $ | | $ | | ||
Other comprehensive income (loss), net of tax: | ||||||
Currency translation adjustments | ( | ( | ||||
Pension and other post-retirement plans, net of tax | | | ||||
Other comprehensive 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 Three Months Ended August 31, 2022 and 2021
(Unaudited)
(In millions)
Three Months Ended | ||||||
August 31, | ||||||
| 2022 |
| 2021 | |||
Cash flows provided from operating activities: | ||||||
Net income | $ | | $ | | ||
Less: Income 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 |
| |
| | ||
Loss from joint ventures | | | ||||
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 used in investing activities: | ||||||
Property, plant, and equipment expenditures | ( | ( | ||||
Other | ( | ( | ||||
Net cash used in investing activities – continuing operations | ( | ( | ||||
Cash flows used in financing activities: | ||||||
Short-term borrowings (repayments) on Revolving Credit Facility, net | | ( | ||||
Purchase of treasury stock | ( | | ||||
Stock compensation activity |
| |
| ( | ||
Net cash used in financing activities – continuing operations |
| ( |
| ( | ||
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 Months Ended August 31, 2022 and 2021
(Unaudited)
(In millions)
Accumulated | ||||||||||||||||||
Other | ||||||||||||||||||
Common | Capital | Retained | Treasury | Comprehensive | ||||||||||||||
| Stock |
| Surplus |
| Earnings |
| Stock |
| Loss |
| Total Equity | |||||||
Balance, May 31, 2022 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net income |
| — |
| — |
| | — | — | | |||||||||
Stock option activity |
| — |
| |
| — | | — | | |||||||||
Restricted stock activity |
| — |
| ( |
| — | | — | | |||||||||
Repurchase of shares | — | — | — | ( | — | ( | ||||||||||||
Other comprehensive loss, net of tax |
| — |
| — |
| — | — | ( | ( | |||||||||
Balance,August 31, 2022 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Accumulated | ||||||||||||||||||
Other | ||||||||||||||||||
Common | Capital | Retained | Treasury | Comprehensive | ||||||||||||||
| Stock |
| Surplus |
| Earnings |
| Stock |
| 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 | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
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
August 31, 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, 2022 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 Balance Sheet of AAR CORP. and its subsidiaries as of August 31, 2022, the Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income for the three-month periods ended August 31, 2022 and 2021, the Condensed Consolidated Statements of Cash Flows for the three-month periods ended August 31, 2022 and 2021, and the Condensed Consolidated Statement of Changes in Equity for the three-month periods ended August 31, 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 – 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 whether the good or service being provided is significantly integrated with other promises in the contract, whether the service provided significantly modifies or customizes another good or service or whether the good or service is highly interdependent or interrelated. If the contract has more than one performance obligation, we determine the standalone price of each distinct good or service underlying each performance obligation and allocate the transaction price based on their relative standalone selling prices.
9
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2022
(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 typically represent distinct performance obligations and 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 can include customer volume, future labor costs and efficiencies, repair or overhaul costs, 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.
We utilize the portfolio approach to estimate the amount of revenue to recognize for certain contracts which require over-time revenue recognition. Such contracts are grouped together either by revenue stream, customer or product line with each portfolio of contracts grouped together based on having similar characteristics. The portfolio approach is utilized only when the result of the accounting is not expected to be materially different than if applied to individual contracts.
We also may enter into offset agreements or conditions as part of obtaining orders for our products and services from certain government customers in foreign countries. These agreements are designed to enhance the social and economic environment of the foreign country by requiring the contractor to promote investment in the country. These agreements also may be satisfied through our use of cash or other means of providing financial support for in-country projects with local companies. The amounts ultimately applied against our offset agreements are based on negotiations with the customer and satisfaction of our offset obligations are included in the estimates of our total costs to complete the contract.
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.
Certain contracts with customers have options for the customer to acquire additional goods or services. In most cases, the pricing of these options are reflective of the standalone selling price of the good or service. These options do not provide the customer with a material right and are accounted for only when the customer exercises the option to purchase the additional goods or services. If the option on the customer contract was not indicative of the standalone selling price of the good or service, the material right would be accounted for as a separate performance obligation.
10
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
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.
In the ordinary course of business, agencies of the U.S. and other governments audit our claimed indirect costs and conduct inquiries and investigations of our business practices with respect to government contracts to determine whether our operations are conducted in accordance with these requirements and the terms of the relevant contracts. U.S. government agencies, including the Defense Contract Audit Agency (“DCAA”), routinely audit our claimed indirect costs, for compliance with the Cost Accounting Standards and the Federal Acquisition Regulations. These agencies also conduct reviews and investigations and make inquiries regarding our accounting and other systems in connection with our performance and business practices with respect to our government contracts and subcontracts. As of August 31, 2022, our Condensed Consolidated Balance Sheet included $
Costs to fulfill and obtain a contract are considered for capitalization based on contract specific facts and circumstances. The incremental costs to fulfill a contract, including setup and implementation costs prior to beginning the period of performance, may be capitalized when expenses are incurred prior to the start of satisfying a performance obligation. The capitalized costs are subsequently expensed over the contract’s period of performance.
We have elected to use certain
Cumulative Catch-up Adjustments
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, supply chain logistics programs, and/or repair services.
For the three-month period ended August 31, 2022, we recognized a favorable cumulative catch-up adjustment of $
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. For instances where we recognize revenue prior to having an unconditional right to payment, we record a contract asset or liability. When an unconditional right to consideration exists, we reduce our contract asset or liability and recognize an unbilled or trade receivable. When amounts are dependent on factors other than the passage of time in order for payment from a customer to be due, we record a contract asset which consists 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.
11
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
Net contract assets and liabilities are as follows:
August 31, | May 31, | ||||||||
| 2022 |
| 2022 |
| 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, contract liabilities – current is reported within Accrued liabilities, 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.
One of our power-by-the-hour (“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 $
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-month periods ended August 31, 2022 and 2021:
| Three Months Ended | |||||
August 31, | ||||||
2022 |
| 2021 | ||||
Deferred revenue at beginning of period | $ | ( | $ | ( | ||
Revenue deferred | ( | ( | ||||
Revenue recognized | | | ||||
Other | | | ||||
Deferred revenue at end of period | $ | ( | $ | ( | ||
Remaining Performance Obligations
As of August 31, 2022, we had approximately $
12
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 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-month periods ended August 31, 2022 and 2021 were as follows:
Three Months Ended | ||||||
| August 31, | |||||
2022 |
| 2021 | ||||
Aviation Services: |
| |||||
Commercial | $ | | $ | | ||
Government and defense | | | ||||
$ | | $ | | |||
Expeditionary Services: | ||||||
Commercial | $ | | $ | | ||
Government and defense | | | ||||
$ | | $ | | |||
Sales by geographic region for the three-month periods ended August 31, 2022 and 2021 were as follows:
Three Months Ended | ||||||
August 31, | ||||||
| 2022 |
| 2021 | |||
Aviation Services: |
| |||||
North America | $ | | $ | | ||
Europe/Africa | | | ||||
Other | | | ||||
$ | | $ | | |||
Expeditionary Services: | ||||||
North America | $ | | $ | | ||
Europe/Africa | | | ||||
$ | | $ | | |||
Note 4 – 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:
August 31, | May 31, | |||||
| 2022 |
| 2022 | |||
U.S. Government contracts: |
|
|
|
| ||
Trade receivables | $ | | $ | | ||
Unbilled receivables |
| |
| | ||
| |
| | |||
All other customers: |
|
|
| |||
Trade receivables |
| |
| | ||
Unbilled receivables |
| |
| | ||
| |
| | |||
$ | | $ | | |||
13
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
Note 5 – Accounting for Stock-Based Compensation
Restricted Stock
In the three-month period ended August 31, 2022, 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 August 31, 2022 and 2021 was $
Stock Options
In July 2022, 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 three-month periods ended August 31, 2022 and 2021 was $
Note 6 – Inventories
The summary of inventories is as follows:
August 31, |
| May 31, | ||||
| 2022 |
| 2022 | |||
Aircraft and engine parts, components and finished goods | $ | | $ | | ||
Raw materials and parts |
| |
| | ||
Work-in-process | | | ||||
$ | | $ | | |||
Note 7 – Supplemental Cash Flow Information
Three Months Ended | ||||||
August 31, | ||||||
| 2022 |
| 2021 | |||
Interest paid | $ | | $ | | ||
Income taxes paid |
| |
| | ||
Income tax refunds received | | | ||||
14
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
Note 8 – 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 $
We have
During the three-month periods ended August 31, 2022 and 2021, we sold $
We recognize discounts on the sale of our receivables and other fees related to the Purchase Agreement in Other income, net on our Condensed Consolidated Statements of Income. We incurred discounts on the sale of our receivables of $
Note 9 – 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
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. During the three-month periods ended August 31, 2022 and 2021, respectively, our foreign subsidiaries recognized employment subsidies of $
Note 10 – Financing Arrangements
A summary of the carrying amount of our debt is as follows:
August 31, | May 31, | |||||
| 2022 |
| 2022 | |||
Revolving Credit Facility expiring September 25, 2024 with interest payable monthly | $ | | $ | | ||
Debt issuance costs, net |
| ( |
| ( | ||
Long-term debt | $ | | $ | | ||
At August 31, 2022, our debt had a fair value that approximates its carrying value and is classified as Level 2 in the fair value hierarchy.
15
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
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 August 31, 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 August 31, 2022, we were in compliance with the financial and other covenants in our financing agreements.
Note 11 – Other Non-current Assets
Investment in Indian Joint Venture
As of August 31, 2022, our investments in joint ventures include $
The investment balance as of August 31, 2022 includes $
We account for our share of the earnings or losses of the Indian joint venture using the equity method with a reporting lag of two months, as the financial statements of the Indian joint venture are not completed on a basis that is sufficient for us to apply the equity method on a current basis. Our share of the Indian joint venture’s losses for the three-month periods ended August 31, 2022 and 2021 were $
Note 12 – 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.
16
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2022
(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,
A reconciliation of the computations of basic and diluted earnings per share information for the three-month periods ended August 31, 2022 and 2021 is as follows:
Three Months Ended | ||||||
August 31, | ||||||
| 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 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 assumed exercise of stock options | | | ||||
Weighted average common shares outstanding–diluted | | | ||||
Earnings per share – basic: | ||||||
Earnings from continuing operations | $ | | $ | | ||
Income from discontinued operations | | | ||||
Earnings per share – basic | $ | | $ | | ||
Earnings per share – diluted: | ||||||
Earnings from continuing operations | $ | | $ | | ||
Income from discontinued operations | | | ||||
Earnings per share – diluted | $ | | $ | | ||
The potential dilutive effect of
17
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
Note 13 – Accumulated Other Comprehensive Loss
Changes in our accumulated other comprehensive loss (“AOCL”) by component for the three-month periods ended August 31, 2022 and 2021 were as follows:
Currency | |||||||||
Translation | Pension | ||||||||
| Adjustments |
| Plans |
| Total | ||||
Balance at June 1, 2022 | $ | ( | $ | ( | $ | ( | |||
Other comprehensive income before reclassifications | ( | — | ( | ||||||
Amounts reclassified from AOCL | — | | | ||||||
Total other comprehensive income (loss) | ( | | ( | ||||||
Balance at August 31, 2022 | $ | ( | $ | ( | $ | ( | |||
Balance at June 1, 2021 | $ | | $ | ( | $ | ( | |||
Other comprehensive loss before reclassifications | ( | — | ( | ||||||
Amounts reclassified from AOCL | — | | | ||||||
Total other comprehensive income (loss) | ( | | ( | ||||||
Balance at August 31, 2021 | $ | | $ | ( | $ | ( | |||
Note 14 – 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.
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 year ended May 31, 2022.
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.
18
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
Selected financial information for each segment is as follows:
Three Months Ended | ||||||
| August 31, | |||||
2022 |
| 2021 | ||||
Net sales: | ||||||
Aviation Services | $ | | $ | | ||
Expeditionary Services | | | ||||
$ | | $ | | |||
Three Months Ended | ||||||
| August 31, | |||||
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 | ||||||
| August 31, | |||||
2022 |
| 2021 | ||||
Segment gross profit | $ | | $ | | ||
Selling, general, and administrative | ( | ( | ||||
Loss from joint ventures | ( | ( | ||||
Other income, net | | | ||||
Interest expense | ( | ( | ||||
Interest income | | — | ||||
Income from continuing operations before provision for income taxes | $ | | $ | | ||
Note 15 – Legal Proceedings
We are involved in various claims and legal actions, including environmental matters, arising in the ordinary course of business. 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 $
19
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2022
(Unaudited)
(Dollars in millions, except per share amounts)
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 clawback action, believes it has meritorious defenses, and is vigorously defending itself in the Russian court system. However, 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 in February 2022 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 of the range of possible losses at this time.
Performance Guarantee
In conjunction with the fiscal 2021 sale of our Composites business, we retained a performance guarantee to a customer of the Composites business under an existing contract providing flap track fairings on the A220 aircraft (“A220 Contract”). The term of the A220 Contract and our performance guarantee extend for the duration that A220 aircraft are in service and the customer continues to maintain support for the A220 aircraft. The performance guarantee does not contain a financial cap.
In March 2022, the buyer of the Composites business filed for bankruptcy and moved to have the bankruptcy court reject the A220 Contract. The buyer’s customer also notified us that they believe the buyer has failed to timely deliver products in accordance with the terms of the A220 Contract and that they have incurred losses, and will incur additional losses, related to the non-compliance that are covered by our performance guarantee. The losses claimed include delay damages, incremental labor costs, legal expenses, and other related costs.
While we believe that we have numerous defenses available against this claim that we will vigorously pursue, it is reasonably possible that we will incur a loss from the performance guarantee. Due to the preliminary nature of the claim we are unable, however, to estimate a range of loss on the performance guarantee. There can be no assurance that the performance guarantee will not have a material adverse effect on our operations, financial position and cash flows.
20
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 materials, 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. Our reportable segments are aligned principally around differences in products and services.
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, 2022.
Business Trends and Outlook
Consolidated sales for the first quarter of fiscal 2023 decreased $8.8 million or 1.9% from the prior year quarter primarily due to a decrease in sales of $11.6 million or 2.7% in our Aviation Services segment. Consolidated sales to commercial customers increased $26.3 million or 9.8% over the prior year quarter due to the continuing recovery in commercial passenger air traffic from the impact of COVID-19. Our consolidated sales to government customers decreased $35.1 million or 18.7% primarily due to the completion of certain government programs, including Afghanistan 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. Both our commercial and government businesses are subject to the economic environment, impact of COVID-19, public policy decisions or other factors that could adversely impact our business, financial condition or results of operations in the future.
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. Our long-term strategy also emphasizes the return of capital to shareholders. In December 2021, our Board of Directors authorized a renewal of our stock repurchase program. The authorization has no expiration date and permits the Company to repurchase up to $150 million of our common stock. We were able to return capital to shareholders through common stock repurchases under this program of $64.3 million to date and expect to fully utilize the authorization by the end of calendar 2023.
21
Results of Operations
Three-Month Periods Ended August 31, 2022 and 2021
Sales and gross profit for our two business segments for the three-months ended August 31, 2022 and 2021 were as follows:
Three Months Ended August 31, |
| ||||||||
| 2022 |
| 2021 |
| % Change |
| |||
Sales: | |||||||||
Aviation Services: | |||||||||
Commercial | $ | 292.1 | $ | 267.2 | 9.3 | % | |||
Government and defense | 131.9 | 168.4 | (21.7) | % | |||||
$ | 424.0 | $ | 435.6 | (2.7) | % | ||||
Expeditionary Services: | |||||||||
Commercial | $ | 1.5 | $ | 0.1 | nm | ||||
Government and defense | 20.8 | 19.4 | 7.2 | % | |||||
$ | 22.3 | $ | 19.5 | 14.4 | % | ||||
Three Months Ended August 31, |
| ||||||||
| 2022 |
| 2021 |
| % Change |
| |||
Gross Profit: | |||||||||
Aviation Services: | |||||||||
Commercial | $ | 53.5 | $ | 30.5 | 75.4 | % | |||
Government and defense | 24.5 | 30.4 | (19.4) | % | |||||
$ | 78.0 | $ | 60.9 | 28.1 | % | ||||
Expeditionary Services: | |||||||||
Commercial | $ | — | $ | — | n/a | ||||
Government and defense | 3.9 | 3.7 | 5.4 | % | |||||
$ | 3.9 | $ | 3.7 | 5.4 | % | ||||
nm – Percentage change is not meaningful.
Aviation Services Segment
Sales in the Aviation Services segment decreased $11.6 million or 2.7%, from the prior year period primarily due to a $36.5 million, or 21.7% decrease in sales to government and defense customers. The decrease in sales to government and defense customers was primarily due to the natural completion of certain government programs.
During the first quarter of fiscal 2023, sales in this segment to commercial customers increased $24.9 million or 9.3%, over the prior year period. The increase in sales to commercial customers was primarily attributable to increased sales of $19.1 million in our new parts distribution activities and $16.1 million in our MRO activities as commercial passenger air traffic continues to recover from the impact of COVID-19. These increases were partially offset by a decrease of $13.9 million in whole asset sales in our aftermarket parts trading activities.
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 first quarter of fiscal 2023, we had a favorable cumulative catch-up adjustment of $2.9 million. In the first quarter of fiscal 2022, we had an unfavorable cumulative catch-up adjustment of $1.0 million. These adjustments primarily relate to our long-term, power-by-the-hour (“PBH”) programs where we provide component inventory management and repair services as well as certain long-term government programs.
Cost of sales in Aviation Services decreased $28.7 million, or 7.7%, from the prior year period. Cost of sales in the first quarter of fiscal 2022 included contract termination and asset impairment charges of $6.5 million related to an early termination of one of our PBH customer contracts.
22
Gross profit in the Aviation Services segment increased $17.1 million, or 28.1%, over the prior year period. Gross profit on sales to commercial customers increased $23.0 million, or 75.4%, over the prior year period primarily due to the continuing recovery in commercial passenger air traffic from the COVID-19 impact discussed above. The gross profit margin on sales to commercial customers increased to 18.3% from 11.4% in the prior year period, primarily from our actions to reduce both our fixed and variable cost structure. In addition, gross profit in the prior year period included $7.5 million of expense related to the early customer contract termination discussed above.
Gross profit on sales to government and defense customers decreased $5.9 million from the prior year period. Gross profit margin on sales to government and defense customers increased to 18.6% from 18.1% in the prior year period, primarily as a result of the favorable cumulative catch-up adjustment of $2.9 million discussed above.
Expeditionary Services Segment
Sales in the Expeditionary Services segment increased $2.8 million, or 14.4%, over the prior year period. The increase was primarily due to strong sales volumes for containers within our Mobility business.
Gross profit in the Expeditionary Services segment increased $0.2 million, or 5.4%, over the prior period, primarily due to the higher sales volumes in our Mobility business. Gross profit margin decreased to 17.5% from 19.0% 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 $0.8 million, or 1.6%, over the prior year period. As a percent of sales, selling, general, and administrative expenses increased to 11.2% from 10.8% in the prior year period reflecting investments to support future sales growth.
Interest Expense
Interest expense increased $0.4 million in the first quarter of fiscal 2023 reflecting the impact of higher average borrowing rates on our outstanding debt.
Income Taxes
Our effective income tax rate for continuing operations was 26.6% for the first quarter of fiscal 2023 compared to 25.8% in the prior year period primarily due to increased non-deductible expenses in fiscal 2023.
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 August 31, 2022, our liquidity and capital resources included working capital of $677.3 million inclusive of cash of $44.3 million.
23
We maintain an unsecured 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 on September 25, 2024 (the “Revolving Credit Facility”). Under certain circumstances, we have the ability to request, but our lenders are not required to grant, an increase to the revolving credit commitment under this facility 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 August 31, 2022 were $115.0 million and there were approximately $11.3 million of outstanding letters of credit, which reduced the availability under this facility to $473.7 million as of August 31, 2022. There are no other terms or covenants limiting the availability of this facility.
As of August 31, 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 $8.8 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 (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 term of the Purchase Agreement runs through February 22, 2023, 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 under 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 three-month periods ended August 31, 2022 and 2021, we sold $43.4 million and $87.5 million, respectively, of receivables under the Purchase Agreement and remitted $43.5 million and $95.9 million, respectively, to the Purchaser on their behalf. As of August 31, 2022 and May 31, 2022, we had collected cash of $4.1 million and $5.4 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 August 31, 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 August 31, 2022, we repurchased 0.5 million shares for $21.9 million. Through August 31, 2022, we have repurchased 1.5 million shares for $64.3 million and expect to fully utilize the authorization by December 31, 2023.
Cash Flows from Operating Activities
Net cash provided by operating activities–continuing operations was $7.0 million in the first quarter of fiscal 2023 compared to $17.5 million in the prior year quarter. The decrease from the prior year of $10.5 million was primarily attributable to working capital changes, including increased investment in inventory in the current year quarter.
24
Net cash used in operating activities–discontinued operations was $0.2 million in the first quarter of fiscal 2023 compared to $14.6 million in the prior year period. The decrease from the prior year of $14.4 million was primarily attributable to the payment of the settlement with the U.S. Department of Justice for their False Claims Act investigation.
Cash Flows from Investing Activities
Net cash used in investing activities–continuing operations was $10.7 million during the first quarter of fiscal 2023 compared to $4.9 million in the prior year period. The increase over the prior year of $5.8 million was primarily related to increased expenditures for capital equipment in the current year quarter.
Cash Flows from Financing Activities
Net cash used in financing activities–continuing operations was $6.5 million during the first quarter of fiscal 2023 compared to $5.5 million in the prior year quarter. The increase over the prior year of $1.0 million was primarily related to the repurchase of 0.5 million shares for $21.9 million in conjunction with our stock repurchase program. The repurchases were largely financed through increased borrowings under our Revolving Credit Facility of $15.0 million during the current year quarter.
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 year ended May 31, 2022 for a discussion of our critical accounting policies. There have been no significant changes to the application of our critical accounting policies during the first quarter of fiscal 2023.
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 year ended May 31, 2022. 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.
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 year ended May 31, 2022 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 August 31, 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 year ended May 31, 2022. There were no significant changes during the quarter ended August 31, 2022.
25
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 August 31, 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 were effective as of August 31, 2022 to provide reasonable assurance 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 August 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
26
PART II — OTHER INFORMATION
Item 1 – Legal Proceedings
The information in Note 15 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 15 to our Condensed Consolidated Financial Statements for the quarter ended August 31, 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, 2022.
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 August 31, 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) | ||
6/1/2022 – 6/30/2022 |
| — | $ | — |
| — |
| $ | 107,663,581 | |
7/1/2022 – 7/31/2022 |
| 206,000 | 43.39 |
| 206,000 |
| 98,725,700 | |||
8/1/2022 – 8/31/2022 |
| 286,640 |
| 45.23 |
| 286,640 |
| 85,759,547 | ||
Total | 492,640 | $ | 44.46 |
| 492,640 | |||||
| (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* | Form of AAR CORP. Fiscal 2023 Short-Term Incentive Plan (filed herewith). | ||
10.2* | |||||
10.3* | Form of AAR CORP. Fiscal 2023 Non-Qualified Stock Option Agreement (filed herewith). | ||||
10.4* | Form of AAR CORP. Fiscal 2023 Restricted Stock Agreement (filed herewith). | ||||
10.5* | Form of AAR CORP. Fiscal 2023 Performance Restricted Stock Agreement (filed herewith) | ||||
10.6* | |||||
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 August 31, 2022, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at August 31, 2022 and May 31, 2022, (ii) Condensed Consolidated Statements of Income for the three-months ended August 31, 2022 and 2021, (iii) Condensed Consolidated Statements of Comprehensive Income for the three-months ended August 31, 2022 and 2021, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended August 31, 2022 and 2021, (v) Condensed Consolidated Statement of Changes in Equity for the three-months ended August 31, 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) |
* Management contract and compensatory arrangement.
** 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: | September 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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