Aar Corp 10-Q for FY2021 Q1
Aar Corp (AIR)
About this 10-Q
Aar Corp filed this 10-Q on September 24, 2020, covering the quarter ended August 31, 2020 (FY2021 Q1).
Headline figures
Quarter ended August 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $400.8M
- down 26.0% from $541.5M a year earlier
- Net loss
- $14.5M
- compared with net income of $4.4M a year earlier
- Diluted EPS
- -$0.42
- compared with $0.13 a year earlier
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)
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(State or other jurisdiction of incorporation | | (I.R.S. Employer Identification No.) |
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(Address of principal executive offices) | | (Zip Code) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
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Securities registered pursuant to Section 12(g) of the Act: None
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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, 2020 there were
AAR CORP. and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended August 31, 2020
Table of Contents
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| Condensed Consolidated Statements of Comprehensive Income (Loss) | 6 |
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| 8 | |
| 9 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 | |
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30 | ||
2
PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of August 31, 2020 and May 31, 2020
(In millions, except share data)
ASSETS
|
| August 31, |
| May 31, | ||
| | 2020 | | 2020 | ||
| | (Unaudited) | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | | | $ | |
Restricted cash | | | | | | |
Accounts receivable, less allowances of $ | |
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Contract assets | | | | | | |
Inventories | |
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Rotable assets and equipment on or available for short-term lease | |
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Assets of discontinued operations | | | | | | |
Other current assets | |
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Total current assets | |
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Property, plant and equipment, net of accumulated depreciation of $ | |
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Other assets: | | | | | | |
Goodwill and intangible assets, net | |
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Operating lease right-of-use assets, net | | | | | | |
Rotable assets supporting long-term programs | |
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Other non-current assets | |
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| | $ | | | $ | |
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, 2020 and May 31, 2020
(In millions, except share data)
LIABILITIES AND EQUITY
|
| August 31, |
| May 31, | ||
| | 2020 | | 2020 | ||
| | (Unaudited) | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | | | $ | |
Accrued liabilities | | | | | | |
Payroll Support Program deferred credit | | | | | | –– |
Liabilities of discontinued operations | |
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Total current liabilities | |
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Long-term debt | |
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Operating lease liabilities | | | | | | |
Deferred revenue on long-term programs | | | | | | |
Other liabilities | |
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Equity: | | | | | | |
Preferred stock, $ | | | |
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Common stock, $ | |
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Capital surplus | |
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Retained earnings | |
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Treasury stock, | |
| ( | |
| ( |
Accumulated other comprehensive loss | |
| ( | |
| ( |
Total equity | |
| | |
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| | $ | | | $ | |
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
4
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three Months Ended August 31, 2020 and 2019
(Unaudited)
(In millions, except share data)
| | Three Months Ended | ||||
| | August 31, | ||||
|
| 2020 |
| 2019 | ||
Sales: | | | | | | |
Sales from products | | $ | | | $ | |
Sales from services | |
| | |
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Cost and operating expenses: | | | | | | |
Cost of products | |
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Cost of services | |
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Provision for doubtful accounts | | | — | | | |
Selling, general and administrative | | | | | | |
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| | | | |
Loss from joint ventures | | | ( | | | — |
Operating income | |
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Loss on sale of business | | | ( | | | — |
Other income (expense), net | | | | | | ( |
Interest expense | |
| ( | | | ( |
Interest income | | | | |
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Income (Loss) from continuing operations before provision for income taxes | |
| ( | | | |
Provision for income taxes (benefit) | |
| ( | |
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Income (Loss) from continuing operations | | | ( | | | |
Loss from discontinued operations, net of tax | |
| ( | |
| ( |
Net income (loss) | | $ | ( | | $ | |
| | | | | | |
Earnings (Loss) per share - basic: | | | | | | |
Earnings (Loss) from continuing operations | | $ | ( | | $ | |
Loss from discontinued operations | | | ( | | | ( |
Earnings (Loss) per share – basic | | $ | ( | | $ | |
| | | | | | |
Earnings (Loss) per share - diluted: | | | | | | |
Earnings (Loss) from continuing operations | | $ | ( | | $ | |
Loss from discontinued operations | | | ( | | | ( |
Earnings (Loss) 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 (Loss)
For the Three Months Ended August 31, 2020 and 2019
(Unaudited)
(In millions)
| | Three Months Ended | ||||
| | August 31, | ||||
|
| 2020 |
| 2019 | ||
Net income (loss) | | $ | ( | | $ | |
Other comprehensive income (loss), net of tax expense (benefit): | | | | | | |
Currency translation adjustments | | | | | | ( |
Pension and other post-retirement plans: | | | | | | |
Amortization of actuarial loss and prior service cost included in net income, net of tax of $ | |
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Other comprehensive income (loss), net of tax | |
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Comprehensive income (loss) | | $ | ( | | $ | |
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, 2020 and 2019
(Unaudited)
(In millions)
| | Three Months Ended | ||||
| | August 31, | ||||
|
| 2020 |
| 2019 | ||
Cash flows provided from (used in) operating activities: | | | | | | |
Net income (loss) | | $ | ( | | $ | |
Less: Loss from discontinued operations | | | | | | |
Income (Loss) from continuing operations | | | ( | | | |
Adjustments to reconcile income (loss) from continuing operations to net cash provided from (used in) operating activities: | | | | | | |
Depreciation and intangible amortization | |
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Stock-based compensation | |
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Provision for doubtful accounts | | | — | | | |
Deferred tax provision | |
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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 | |
| | |
| ( |
Rotable assets supporting long-term programs | |
| | |
| ( |
Accounts payable | |
| ( | |
| |
Accrued and other liabilities | | | ( | | | ( |
Payroll Support Program deferred credit | | | | | | — |
Deferred revenue on long-term programs | |
| ( | |
| ( |
Other | |
| ( | |
| ( |
Net cash provided from (used in) operating activities – continuing operations | | | | | | ( |
Net cash used in operating activities – discontinued operations | | | ( | | | ( |
Net cash provided from (used in) operating activities | | | | | | ( |
Cash flows used in investing activities: | | | | | | |
Property, plant and equipment expenditures | |
| ( | |
| ( |
Other | |
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Net cash used in investing activities – continuing operations | |
| ( | |
| ( |
Net cash used in investing activities – discontinued operations | | | — | | | — |
Net cash used in investing activities | | | ( | | | ( |
Cash flows provided from (used in) financing activities: | | | | | | |
Short-term borrowings, net | |
| ( | |
| |
Proceeds from Payroll Support Program note | | | | | | — |
Cash dividends | |
| ( | |
| ( |
Stock compensation activity | | | ( | | | ( |
Net cash provided from (used in) financing activities – continuing operations | |
| ( | |
| |
Net cash used in financing activities – discontinued operations | | | — | | | — |
Net cash provided from (used in) financing activities | | | ( | | | |
Effect of exchange rate changes on cash | |
| | |
| — |
Increase (Decrease) in cash and cash equivalents | |
| ( | |
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Cash, cash equivalents, and restricted cash at beginning of period | |
| | |
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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, 2020 and 2019
(Unaudited)
(In millions)
| | | | | | | | | | | | | | 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 | | $ | | | $ | | | $ | | | $ | ( | | $ | ( | | $ | |
| | | | | | | | | | | | | | | | | | |
Balance, May 31, 2019 | | $ | | | $ | | | $ | | | $ | ( | | $ | ( | | $ | |
Cumulative effect adjustment upon adoption of ASC 842 on June 1, 2019 | | | — | | | — | | | | | | — | | | — | | | |
Net income | | | — | | | — | | | | | | — | | | — | | | |
Cash dividends | | | — | | | — | | | ( | | | — | | | — | | | ( |
Stock option activity | | | — | | | | | | — | | | | | | — | | | |
Restricted stock activity | | | — | | | ( | | | — | | | | | | — | | | ( |
Other comprehensive income, net of tax | | | — | | | — | | | — | | | — | | | | | | |
Balance, August 31, 2019 | | $ | | | $ | | | $ | | | $ | ( | | $ | ( | | $ | |
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, 2020
(Unaudited)
(Dollars in millions, except per share amounts)
Note 1 – Basis of Presentation
AAR CORP. and its subsidiaries are referred to herein collectively as “AAR,” “Company,” “we,” “us,” and “our,” unless the context indicates otherwise. The accompanying Condensed Consolidated Financial Statements include the accounts of AAR and its subsidiaries after elimination of intercompany accounts and transactions.
We have prepared these statements without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The Condensed Consolidated Balance Sheet as of May 31, 2020 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, 2020, the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income (Loss) for the three-month periods ended August 31, 2020 and 2019, the Condensed Consolidated Statements of Cash Flows for the three-month periods ended August 31, 2020 and 2019, and the Condensed Consolidated Statement of Changes in Equity for the three-month periods ended August 31, 2020 and 2019. The results of operations for such interim periods are not necessarily indicative of the results for the full year.
New Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This ASU requires a change in the measurement approach for credit losses on financial assets measured on an amortized cost basis from an incurred loss method to an expected loss method, thereby eliminating the requirement that a credit loss be considered probable to impact the valuation of a financial asset measured on an amortized cost basis. This ASU also requires the measurement of expected credit losses to be based on relevant information about past events, including historical experience, current conditions, and a reasonable and supportable forecast of the collectability of the related financial asset.
Our adoption of this ASU on June 1, 2020 did not have a material impact on our Condensed Consolidated Financial Statements.
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.
9
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2020
(Unaudited)
(Dollars in millions, except per share amounts)
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. The sale of Composites is consistent with our multi-year strategy to focus our portfolio on our core services offerings and the transaction will allow us to further prioritize our efforts in our principal businesses.
We recognized a loss on the sale of the Composites business of $
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, the Company determines the standalone price of each distinct good or service underlying each performance obligation and allocates the transaction price based on their relative standalone selling prices.
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
10
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2020
(Unaudited)
(Dollars in millions, except per share amounts)
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. For the three-month period ended August 31, 2020, we recognized favorable 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:
|
| August 31, |
| May 31, |
| | | ||
| | 2020 | | 2020 | | Change | |||
Contract assets – current | | $ | | | $ | | | $ | ( |
Contract assets – non-current | | | | | | | | | ( |
Contract liabilities: | | | | | | | | | |
Deferred revenue – current | | | ( | | | ( | | | ( |
Deferred revenue on long-term contracts | |
| ( | |
| ( | |
| |
Net contract liabilities | | $ | ( | | $ | ( | | $ | |
11
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2020
(Unaudited)
(Dollars in millions, except per share amounts)
Contract assets – non-current is reported within Other non-current assets, and Contract liabilities – current is reported within Accrued liabilities on our Condensed Consolidated Balance Sheet. Changes in contract assets and contract liabilities primarily result from the timing difference between our performance of services and payments from customers.
During the first quarter of fiscal 2021, we terminated a commercial power-by-the-hour ("PBH") customer contract which resulted in a charge of $
Changes in our deferred revenue were as follows for the three-month periods ended August 31, 2020 and 2019:
| | | | | | |
| | Three Months Ended | ||||
| | August 31, | ||||
|
| 2020 |
| 2019 | ||
Deferred revenue at beginning of period |
| $ | ( | | $ | ( |
Revenue deferred |
|
| ( | |
| ( |
Revenue recognized |
|
| | |
| |
Other |
|
| ( | |
| ( |
Deferred revenue at end of period |
| $ | ( | | $ | ( |
Remaining Performance Obligations
As of August 31, 2020, we had approximately $
Disaggregation of Revenue
Sales across the major customer markets for each of our reportable segments for the three-month periods ended August 31, 2020 and 2019 were as follows:
| | Three Months Ended | ||||
| | August 31, | ||||
|
| 2020 |
| 2019 | ||
Aviation Services | | | | | | |
Commercial | | $ | | | $ | |
Government and defense | |
| | |
| |
| | $ | | | $ | |
Expeditionary Services | |
|
| |
|
|
Commercial | | $ | | | $ | |
Government and defense | |
| | |
| |
| | $ | | | $ | |
12
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2020
(Unaudited)
(Dollars in millions, except per share amounts)
Sales by geographic region for the three- month periods ended August 31, 2020 and 2019 were as follows:
| | Three Months Ended | ||||
| | August 31, | ||||
|
| 2020 |
| 2019 | ||
Aviation Services | | | | | | |
North America | | $ | | | $ | |
Europe/Africa | | | | | | |
Other | | | | | | |
| | $ | | | $ | |
Expeditionary Services | | | | | | |
North America | | $ | | | $ | |
Europe/Africa | |
| | |
| |
Other | |
| | |
| |
| | $ | | | $ | |
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:
| | August 31, | | May 31, | ||
|
| 2020 |
| 2020 | ||
U.S. Government contracts: | | | | | | |
Trade receivables | | $ | | | $ | |
Unbilled receivables | |
| | |
| |
| |
| | |
| |
All other customers: | | | | | | |
Trade receivables | |
| | |
| |
Unbilled receivables | |
| | |
| |
| |
| | |
| |
| | $ | | | $ | |
We currently have past due accounts receivable owed by former commercial program customers primarily related to our exit from customer contracts in certain geographies, including Colombia, Peru, and Poland. Our past due accounts receivable owed by these customers was $
Note 6 – Restructuring and Impairment Costs
During the three-month period ended August 31, 2020, 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
13
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2020
(Unaudited)
(Dollars in millions, except per share amounts)
values. In light of recent declines in commercial airline volumes and commercial program contract terminations, we evaluated future cash flows related to certain rotable assets supporting long-term programs and recognized asset impairment charges of $
Note 7 – Accounting for Stock-Based Compensation
Restricted Stock
In the three-month period ended August 31, 2020, as part of our annual long-term stock incentive compensation, we granted
Expense charged to operations for restricted stock during the three-month periods ended August, 2020 and 2019 was $
Stock Options
In July 2020, as part of our annual long-term stock incentive compensation, we issued
The total intrinsic value of stock options exercised during the three-month periods ended August 31, 2020 and 2019 was $
Note 8 – Inventories
The summary of inventories is as follows:
|
| August 31, |
| May 31, | ||
| | 2020 | | 2020 | ||
Aircraft and engine parts, components and finished goods | | $ | | | $ | |
Raw materials and parts | |
| | |
| |
Work-in-process | | | | | | |
| | $ | | | $ | |
Note 9 – Supplemental Cash Flow Information
| | Three Months Ended | ||||
| | August 31, | ||||
|
| 2020 |
| 2019 | ||
Interest paid | | $ | | | $ | |
Income taxes paid | |
| | |
| |
Income tax refunds received | | | | | | — |
14
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2020
(Unaudited)
(Dollars in millions, except per share amounts)
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 (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, 2020 and 2019, 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 Operations. 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 similar legislation 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 period ended August 31, 2020, our foreign
15
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2020
(Unaudited)
(Dollars in millions, except per share amounts)
subsidiaries recognized employment subsidies of $
Note 12 – Financing Arrangements
A summary of the carrying amount of our debt is as follows:
|
| August 31, |
| May 31, | ||
| | 2020 | | 2020 | ||
Revolving Credit Facility expiring September 25, 2024 with interest payable monthly | | $ | | | $ | |
Term loan due November 1, 2021 with interest payable monthly | | | | | | |
Payroll Support Program Promissory Note | | | | | | — |
Total debt | |
| | |
| |
Debt issuance costs, net | |
| ( | |
| ( |
Long-term debt | | $ | | | $ | |
At August 31, 2020, 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 $
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, 2020, 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 $
16
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2020
(Unaudited)
(Dollars in millions, except per share amounts)
The investment balance as of August 31, 2020 includes $
License Fees
In June 2011, we entered into a
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,
17
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2020
(Unaudited)
(Dollars in millions, except per share amounts)
A reconciliation of the computations of basic and diluted earnings per share information for the three- month periods ended August 31, 2020 and 2019 is as follows:
| | Three Months Ended | ||||
| | August 31, | ||||
|
| 2020 |
| 2019 | ||
Basic and Diluted EPS: | | | | | | |
Income (Loss) from continuing operations | | $ | ( | | $ | |
Less income attributable to participating shares | |
| — | |
| ( |
Income (Loss) from continuing operations attributable to common shareholders | | | ( | | | |
Loss from discontinued operations attributable to common shareholders | | | ( | | | ( |
Net income (loss) 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 (Loss) per share – basic: | | | | | | |
Earnings (Loss) from continuing operations | | $ | ( | | $ | |
Loss from discontinued operations | | | ( | | | ( |
Earnings (Loss) per share – basic | | $ | ( | | $ | |
| | | | | | |
Earnings (Loss) per share – diluted: | | | | | | |
Earnings (Loss) from continuing operations | | $ | ( | | $ | |
Loss from discontinued operations | | | ( | | | ( |
Earnings (Loss) per share – diluted | | $ | ( | | $ | |
The potential dilutive effect of
18
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2020
(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--month periods ended August 31, 2020 and 2019 were as follows:
| | Currency | | | | | | | |
| | Translation | | Pension | | | | ||
|
| Adjustments |
| Plans |
| Total | |||
Balance at June 1, 2020 | | $ | ( | | $ | ( | | $ | ( |
Other comprehensive income before reclassifications | | | | | | — | | | |
Amounts reclassified from AOCL | | | — | | | | | | |
Total other comprehensive income | | | | | | | | | |
Balance at August 31, 2020 | | $ | ( | | $ | ( | | $ | ( |
| | | | | | | | | |
Balance at June 1, 2019 | | $ | ( | | $ | ( | | $ | ( |
Other comprehensive loss before reclassifications | | | ( | | | — | | | ( |
Amounts reclassified from AOCL | | | — | | | | | | |
Total other comprehensive income (loss) | | | ( | | | | | | |
Balance at August 31, 2019 | | $ | ( | | $ | ( | | $ | ( |
Note 16 – Business Segment Information
Consistent with how our chief operating decision making officer (Chief Executive Officer) evaluates performance and the way we are organized internally, we report our activities in
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, 2020.
Our chief operating decision making officer (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.
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AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2020
(Unaudited)
(Dollars in millions, except per share amounts)
Selected financial information for each segment is as follows:
| | Three Months Ended | ||||
| | August 31, | ||||
|
| 2020 |
| 2019 | ||
Net sales: | | | | | | |
Aviation Services | | $ | | | $ | |
Expeditionary Services | |
| | |
| |
| | $ | | | $ | |
| | Three Months Ended | ||||
| | August 31, | ||||
|
| 2020 |
| 2019 | ||
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, | ||||
|
| 2020 |
| 2019 | ||
Segment gross profit | | $ | | | $ | |
Selling, general and administrative | | | ( | |
| ( |
Loss from joint ventures | | | ( | | | — |
Provision for doubtful accounts | | | — | | | ( |
Loss on sale of business | | | ( | | | — |
Other income (expenses), net | | | | | | ( |
Interest expense | | | ( | | | ( |
Interest income | | | | | | |
Income (Loss) from continuing operations before provision for income taxes | | $ | ( | | $ | |
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
The U.S. Department of Justice (“DoJ”), acting through the U.S. Attorney’s Office for the Southern District of Illinois, is conducting an investigation of AAR Airlift Group, Inc. (“Airlift”), a wholly-owned subsidiary of AAR CORP., under the federal civil False Claims Act (“FCA”). The investigation relates to Airlift’s performance of several contracts awarded by the U.S. Transportation Command concerning the operations and maintenance of rotary-wing and fixed-wing aircraft in Afghanistan and Africa, as well as several U.S. Navy contracts. In June 2018, the DoJ informed Airlift that part of the investigation was precipitated by a lawsuit filed under the qui tam provisions of the FCA by a former employee of Airlift. That lawsuit remains under seal.
20
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2020
(Unaudited)
(Dollars in millions, except per share amounts)
Airlift is cooperating with the DoJ investigation. In order to explore whether a negotiated resolution of the matter is possible, and in an effort to minimize continuing legal defense costs, Airlift has entered into settlement discussions with the DoJ. Airlift believes it has meritorious defenses and counter-arguments to the concerns raised by the DoJ; however, there is no assurance that any settlement will be achieved. If no settlement is reached, the DoJ and the qui tam plaintiff could pursue civil litigation under the FCA, which provides for the recovery of, among other amounts, treble damages and penalties.
While we believe that it is probable that we will incur a loss from this matter, we cannot yet reasonably estimate the maximum amount of potential loss, nor can we provide any assurance that the ultimate resolution of the remaining exposure for this matter will not be material.
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.
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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 (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 year ended May 31, 2020.
Business Trends and Outlook
In late fiscal 2020, we began to see the impact of the COVID-19 pandemic on the commercial aviation industry. In response to the impact from COVID-19, we implemented significant actions to reduce fixed costs and overhead which included a freeze on new hiring, reducing or eliminating all non-essential spend, reducing compensation and benefits, furloughs, a reduction in force, and closure of an airframe maintenance facility. We have also exited underperforming contracts and assets across our operations and decided to exit our joint venture investment in a Malaysian landing gear wheel and brake facility.
Additionally, we sold our composites manufacturing business in the first quarter of fiscal 2021 which resulted in a charge of $19.5 million. The sale of Composites is consistent with our multi-year strategy to focus our portfolio on our core services offerings and the transaction will allow us to further prioritize our efforts in our principal operations.
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. 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 is 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. The grant is being recognized as contra-expense on our Condensed Consolidated Statement of Operations as the eligible wages, salaries and benefits are incurred, with $7.7 million recognized in the first quarter of fiscal 2021.
Consolidated sales for the first quarter of fiscal 2020 decreased $140.7 million or 26.0% from the prior year quarter primarily due to a decrease in sales of $148.2 million or 29.0% in our Aviation Services segment. Consolidated sales to commercial customers decreased $160.9 million or 47.9% from the prior year quarter due to the continued impact of COVID-19 and the slow recovery in commercial passenger air traffic. Our consolidated sales to government customers increased $20.2 million or 9.8% driven by execution on recent government contract awards including the U.S. Air Force pallet contract award in our Mobility business.
22
Over the long-term, we expect to see continued 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 aftermarket growth trends are favorable although there is uncertainty in certain fleet types as commercial operators re-evaluate their structure. Our results of operations are affected by the amount of commercial aircraft flying and flight hours. The current COVID-19 pandemic has decreased the amount of commercial aircraft flying and flight hours and has created significant economic disruption.
Results of Operations
Three Month Period Ended August 31, 2020
Sales and gross profit for our two business segments for the three-months ended August 31, 2020 and 2019 were as follows:
| | Three Months Ended August 31, | | ||||||
|
| 2020 |
| 2019 |
| % Change |
| ||
Sales: |
| |
|
| |
|
|
|
|
Aviation Services |
| |
|
| |
|
|
|
|
Commercial | | $ | 169.6 | | $ | 330.5 |
| (48.7) | % |
Government and defense | |
| 194.0 | |
| 181.3 |
| 7.0 | % |
| | $ | 363.6 | | $ | 511.8 |
| (29.0) | % |
Expeditionary Services | |
|
| |
|
|
| | |
Commercial | | $ | 5.7 | | $ | 5.7 |
| n/a | |
Government and defense | |
| 31.5 | |
| 24.0 |
| 31.3 | % |
| | $ | 37.2 | | $ | 29.7 |
| 25.3 | % |
| | Three Months Ended August 31, | | ||||||
|
| 2020 |
| 2019 |
| % Change |
| ||
Gross Profit: |
| |
|
| |
|
|
|
|
Aviation Services |
| |
|
| |
|
|
|
|
Commercial | | $ | 16.3 | | $ | 53.5 |
| (69.5) | % |
Government and defense | |
| 28.3 | |
| 26.5 |
| 6.8 | % |
| | $ | 44.6 | | $ | 80.0 |
| (44.3) | % |
Expeditionary Services | |
|
| |
|
|
| | |
Commercial | | $ | (1.3) | | $ | (0.4) |
| (225.0) | % |
Government and defense | |
| 5.3 | |
| 2.0 |
| 165.0 | % |
| | $ | 4.0 | | $ | 1.6 |
| 150.0 | % |
Aviation Services Segment
Sales in the Aviation Services segment decreased $148.2 million or 29.0% from the prior year period due to a $160.9 million or 48.7% decrease in sales to commercial customers. The decrease in sales to commercial customers was attributable to the impact of COVID-19 on commercial passenger air traffic which significantly reduced our volumes in our supply chain and MRO activities.
During the first quarter of fiscal 2021, sales in this segment to government and defense customers increased $12.7 million or 7.0% over the prior year period. This increase was primarily attributable to growth from new contracts recently awarded.
Cost of sales in Aviation Services decreased $112.8 million or 26.1% from the prior year period primarily related to the impact from the COVID-19 pandemic.
Gross profit in the Aviation Services segment decreased $35.4 million or 44.3% from the prior year period. Gross profit on sales to commercial customers decreased $37.2 million or 69.5% from the prior year period primarily due to the COVID-19 impact discussed above. The gross profit margin on sales to commercial customers decreased to 9.6% from 16.2% primarily from the reduced volumes resulting from COVID-19.
23
Gross profit on sales to government and defense customers increased $1.8 million or 6.8% over the prior year primarily driven by recently awarded government contracts. Gross profit margin on sales to government and defense customers remained flat at 14.6%.
Expeditionary Services Segment
Sales in the Expeditionary Services segment increased $7.5 million or 25.3% over the prior year period primarily due to the execution on a recent contract award from the U.S. Air Force to produce and repair 463L cargo pallets within our Mobility business.
Gross profit in the Expeditionary Services segment increased $2.4 million or 150.0% over the prior period primarily due to increased volumes from the recent cargo pallet contract award. Gross profit margin increased to 10.8% from 5.4% primarily as a result of these increased volumes.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $12.8 million or 22.0% from the prior year period due to our early actions to reduce both our fixed and variable cost structure. As a percent of sales, selling, general and administrative expenses increased to 11.3% from 10.7% in the prior year period. This increase is primarily attributable to the significant decrease in commercial sales more than offsetting the favorable impact from the cost reduction actions.
Income Taxes
Our effective income tax rate for continuing operations was 21.5% for the first quarter of fiscal 2021 compared to 16.6% in the prior year period. The prior year quarter included excess tax benefits from stock compensation of $1.4 million which favorably impacted the effective tax rate.
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, 2020, our liquidity and capital resources included cash of $107.7 million and working capital of $679.9 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 August 31, 2020 were $224.5 million and there were approximately $20.6 million of outstanding letters of credit, which reduced the availability of this facility to $354.9 million. There are no other terms or covenants limiting the availability of this facility.
In the fourth quarter of fiscal 2020, we elected to draw down our Revolving Credit Facility as a precautionary measure in light of economic and market uncertainty presented by COVID-19. We have elected to repay these additional funds in early fiscal 2021 and return to our normal level of cash on hand.
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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 is 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.
As of August 31, 2020, 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 $10.0 million.
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, 2021, however, the Purchase Agreement may also be terminated earlier under certain circumstances. The term of the Purchase Agreement shall be automatically extended for annual terms unless either party provides advance notice that they do not intend to extend the term.
We have no retained interests in the sold receivables, other than limited recourse obligations in certain circumstances, and only perform collection and administrative functions for the Purchaser. We account for these receivable transfers as sales under ASC 860, Transfers and Servicing, and de-recognize the sold receivables from our Condensed Consolidated Balance Sheet.
During the three-month periods ended August 31, 2020 and 2019, we sold $129.0 million and $199.0 million, respectively, of receivables under the Purchase Agreement and remitted $147.6 million and $199.0 million, respectively, to the Purchaser on their behalf. As of August 31, 2020 and May 31, 2020, we had collected cash of $6.4 million and $19.8 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, 2020, we complied with all financial and other covenants under our financing arrangements.
Cash Flows from Operating Activities
Net cash provided by operating activities–continuing operations was $39.8 million in the three-month period ended August 31, 2020 compared to a use of cash of $30.1 million in the prior year period. The increase from the prior period of $69.9 million was primarily attributable to a reduction in inventory levels 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 for our expanded and extended exclusive distribution agreement.
Cash Flows from Investing Activities
Net cash used in investing activities–continuing operations was $1.7 million during the three-month period ended August 31, 2020 compared to $3.5 million in the prior year period. The decrease from the prior period was primarily related to net proceeds of $1.6 million from the sale of our Composites business.
Cash Flows from Financing Activities
Net cash used in financing activities–continuing operations was $347.9 million during the three-month period ended August 31, 2020 compared to cash provided from financing activities-continuing operations of $52.8 million in the prior year period. The decrease was primarily related to the repayment of our additional draw down on our Revolving Credit Facility. These funds were was originally drawn in late fiscal 2020 as a precautionary measure in light of the economic and market uncertainty presented by COVID-19.
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 2020 Form 10-K for a discussion of
25
our critical accounting policies. There have been no significant changes to the application of our critical accounting policies during the first quarter of fiscal 2021.
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, 2020. 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, 2020 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, 2020.
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, 2020. There were no significant changes during the quarter ended August 31, 2020.
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, 2020. 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 August 31, 2020, 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 August 31, 2020 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 August 31, 2020 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, 2020.
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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 2021 Short-Term Incentive Plan (filed herewith). |
| | | | | |
| | | 10.2* | | Form of AAR CORP. Fiscal 2021 Non-Qualified Stock Option Agreement (filed herewith). |
| | | | | |
| | | 10.3* | | Form of AAR CORP. Fiscal 2021 Restricted Stock Agreement (filed herewith). |
| | | | | |
| | | 10.4* | | |
| | | | | |
| | | 10.5 | | |
| | | | | |
| | | 10.6* | | |
| | | | | |
| | | 10.7* | | |
| | | | | |
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, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at August 31, 2020 and May 31, 2020, (ii) Condensed Consolidated Statements of Operations for the three-months ended August 31, 2020 and 2019, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three-months ended August 31, 2020 and 2019, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended August 31, 2020 and 2019, (v) Condensed Consolidated Statement of Changes in Equity for the three-months ended August 31, 2020 and 2019 (vi) Notes to Condensed Consolidated Financial Statements.** |
* Management contract and compensatory arrangement.
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** 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 24, 2020 | | /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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