Aar Corp 10-Q for FY2024 Q2
Aar Corp (AIR)
About this 10-Q
Aar Corp filed this 10-Q on December 21, 2023, covering the quarter ended November 30, 2023 (FY2024 Q2).
Headline figures
Quarter ended November 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $545.4M
- up 16.1% from $469.8M a year earlier
- Net income
- $23.8M
- up 5.8% from net income of $22.5M a year earlier
- Diluted EPS
- $0.67
- up 4.7% from $0.64 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 Number:
(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:
Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
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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 November 30, 2023 there were
AAR CORP. and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended November 30, 2023
Table of Contents
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PART I – FINANCIAL INFORMATION
Item 1 – Financial Statements
AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of November 30, 2023 and May 31, 2023
(In millions, except share data)
ASSETS | ||||||
| | | | | | |
| | November 30, | | May 31, | ||
| | 2023 | | 2023 | ||
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| (Unaudited) |
| | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | | | $ | |
Restricted cash | | | | | | |
Accounts receivable, less allowances of $ | | | | | | |
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 | | | | | | |
Prepaid expenses and other current assets | | | | | | |
Total current assets | |
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Property, plant, and equipment, net of accumulated depreciation of $ | | | | | | |
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Other assets: | | | | | | |
Goodwill | |
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Intangible assets, net of accumulated amortization of $ | |
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Operating lease right-of-use assets, net | | | | | | |
Rotable assets supporting long-term programs | | | | | | |
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 November 30, 2023 and May 31, 2023
(In millions, except share data)
LIABILITIES AND EQUITY | ||||||
| | | | | | |
| | November 30, | | May 31, | ||
| | 2023 | | 2023 | ||
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| (Unaudited) |
| | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | | | $ | |
Accrued liabilities | |
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Liabilities of discontinued operations | | | | | | |
Total current liabilities | |
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Long-term debt | |
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Operating lease liabilities | | | | | | |
Deferred tax liabilities | |
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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 Income
For the Three and Six Months Ended November 30, 2023 and 2022
(Unaudited)
(In millions, except share data)
| | Three Months Ended | | Six Months Ended | ||||||||
|
| November 30, | | November 30, | ||||||||
| | 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
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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Gross profit | | | | | | | | | | | | |
Provision for (Recovery of) credit losses | | | — | | | ( | | | | | | ( |
Selling, general and administrative | | | | | | | | | | | | |
Earnings (Loss) from joint ventures | | | | | | ( | | | ( | | | ( |
Operating income | |
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Pension settlement charge | | | — | | | — | | | ( | | | — |
Losses related to sale and exit of business | | | ( | | | ( | | | ( | | | ( |
Other income (expense), net | | | ( | | | | | | ( | | | |
Interest expense | |
| ( | |
| ( | |
| ( | |
| ( |
Interest income | |
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Income from continuing operations before income taxes | | | | | | | | | | | | |
Income tax expense | | | | | | | | | | | | |
Income from continuing operations | | | | | | | | | | | | |
Income from discontinued operations, net of tax | | | — | | | — | | | — | | | |
Net income | | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | | |
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 accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
5
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended November 30, 2023 and 2022
(Unaudited)
(In millions)
| | Three Months Ended | | Six Months Ended | ||||||||
|
| November 30, | | November 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Net income | | $ | | | $ | | | $ | | | $ | |
Other comprehensive loss, net of tax: | | | | | | | | | | | | |
Currency translation adjustments | |
| ( | |
| ( | | | | | | ( |
Pension and other post-retirement plans, net of tax | |
| — | |
| | | | | | | |
Other comprehensive income (loss), net of tax | |
| ( | |
| ( | | | | | | ( |
Comprehensive income | | $ | | | $ | | | $ | | | $ | |
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
6
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended November 30, 2023 and 2022
(Unaudited)
(In millions)
| | Six Months Ended | ||||
| | November 30, | ||||
|
| 2023 |
| 2022 | ||
Cash flows used in operating activities: | | | | | | |
Net income | | $ | | | $ | |
Less: Income from discontinued operations | | | — | | | ( |
Income from continuing operations | | | | | | |
Adjustments to reconcile income from continuing operations to net cash used in operating activities: | | | | | | |
Depreciation and intangible amortization | |
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Stock-based compensation | |
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Pension settlement charge | | | | | | — |
Loss from joint ventures | | | | | | |
Provision for (Recovery of) credit losses | | | | | | ( |
Deferred taxes | |
| ( | |
| — |
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 used in operating activities – continuing operations | |
| ( | |
| ( |
Net cash used in operating activities – discontinued operations | |
| ( | |
| ( |
Net cash used in operating activities | | | ( | | | ( |
Cash flows used in investing activities: | | | | | | |
Property, plant, and equipment expenditures | | | ( | | | ( |
Other | | | ( | | | ( |
Net cash used in investing activities – continuing operations | | | ( | | | ( |
Cash flows provided by financing activities: | | | | | | |
Short-term borrowings on Revolving Credit Facility, net | | | | | | |
Purchase of treasury stock | | | — | | | ( |
Stock compensation activity | | | | | | |
Net cash provided by financing activities – continuing operations | |
| | |
| |
Effect of exchange rate changes on cash | |
| — | | | ( |
Decrease in cash, cash equivalents, and restricted cash | | | ( | | | ( |
Cash, cash equivalents, and restricted cash at beginning of period | |
| | | | |
Cash, cash equivalents, and restricted cash at end of period | | $ | | | $ | |
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
7
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
For the Three and Six Months Ended November 30, 2023 and 2022
(Unaudited)
(In millions)
| | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | | | | Other | | | | |
| | Common | | Capital | | Retained | | Treasury | | Comprehensive | | | | |||||
|
| Stock |
| Surplus |
| Earnings |
| Stock |
| Loss |
| Total Equity | ||||||
Balance, May 31, 2023 | | $ | | | $ | | | $ | | | $ | ( | | $ | ( | | $ | |
Net loss | |
| — | |
| — | |
| ( | | | — | | | — | | | ( |
Stock option activity | |
| — | |
| ( | |
| — | | | | | | — | | | |
Restricted stock activity | |
| — | |
| ( | |
| — | | | | | | — | | | |
Other comprehensive income, net of tax | |
| — | |
| — | |
| — | | | — | | | | | | |
Balance, August 31, 2023 | | $ | | | $ | | | $ | | | $ | ( | | $ | ( | | $ | |
Net income | | | — | |
| — | |
| | |
| — | |
| — | |
| |
Stock option activity | | | — | |
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| — | |
| | |
| — | |
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Restricted stock activity | | | — | |
| | |
| — | |
| — | |
| — | |
| |
Other comprehensive loss, net of tax | | | — | | | — | | | — | | | — | | | ( | | | ( |
Balance, November 30, 2023 | | $ | | | $ | | | $ | | | $ | ( | | $ | ( | | $ | |
| | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | | | | Other | | | | |
| | Common | | Capital | | Retained | | Treasury | | Comprehensive | | | | |||||
|
| Stock |
| Surplus |
| Earnings |
| Stock |
| Loss |
| Total Equity | ||||||
Balance, May 31, 2022 | | $ | | | $ | | | $ | | | $ | ( | | $ | ( | | $ | |
Net income | |
| — | |
| — | |
| | |
| — | |
| — | |
| |
Stock option activity | |
| — | |
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| — | |
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| — | |
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Restricted stock activity | |
| — | |
| ( | |
| — | |
| | |
| — | |
| |
Repurchase of shares | | | — | | | — | | | — | | | ( | | | — | | | ( |
Other comprehensive loss, net of tax | | | — | | | — | | | — | | | — | | | ( | | | ( |
Balance, August 31, 2022 | | $ | | | $ | | | $ | | | $ | ( | | $ | ( | | $ | |
Net income | | | — | | | — | | | | | | — | | | — | | | |
Stock option activity | | | — | | | | | | — | | | | | | — | | | |
Restricted stock activity | | | — | | | | | | — | | | — | | | — | | | |
Repurchase of shares | | | — | | | — | | | — | | | ( | | | — | | | ( |
Other comprehensive loss, net of tax | | | — | | | — | | | — | | | — | | | ( | | | ( |
Balance, November 30, 2022 | | $ | | | $ | | | $ | | | $ | ( | | $ | ( | | $ | |
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
8
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, 2023 has been derived from audited financial statements. To prepare the financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”), management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain information and note disclosures, normally included in comprehensive financial statements prepared in accordance with GAAP, have been condensed or omitted pursuant to such rules and regulations of the SEC. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023.
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 November 30, 2023, the Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income for the three- and six-month periods ended November 30, 2023 and 2022, the Condensed Consolidated Statements of Cash Flows for the six-month periods ended November 30, 2023 and 2022, and the Condensed Consolidated Statement of Changes in Equity for the three- and six-month periods ended November 30, 2023 and 2022. 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.
Following the sale of the last operating contract of the COCO business in 2020, our continuing involvement in the COCO business is limited to the lease of certain aircraft which is an obligation of the acquirer of the COCO business. The assets and liabilities of our discontinued operations are primarily comprised of right-of-use (“ROU”) 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.
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.
9
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.
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.
10
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 November 30, 2023, we recognized favorable and (unfavorable) cumulative catch-up adjustments of $
For the six-month period ended November 30, 2023, we recognized cumulative catch-up adjustments 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.
Net contract assets and liabilities are as follows:
| | November 30, | | May 31, | | | | ||
|
| 2023 |
| 2023 |
| 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.
11
To support our power-by-the-hour 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 includes certain minimum repair volume guarantees, which, subject to the amendment noted below, we have historically not met. To date, we have recognized charges of $
Changes in our deferred revenue were as follows for the three- and six-month periods ended November 30, 2023 and 2022:
|
| Three Months Ended |
| Six Months Ended | ||||||||
| | November 30, | | November 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Deferred revenue at beginning of period | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
Revenue deferred | | | ( | | | ( | |
| ( | |
| ( |
Revenue recognized | | | | | | | |
| | |
| |
Other (1) | | | ( | | | | |
| ( | |
| |
Deferred revenue at end of period | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
(1) | Other includes cumulative catch-up adjustments, foreign currency translation, and other adjustments. |
Remaining Performance Obligations
As of November 30, 2023, we had approximately $
Disaggregation of Revenue
Third-party sales across the major customer markets for each of our operating segments for the three- and six-month periods ended November 30, 2023 and 2022 were as follows:
| | Three Months Ended | | Six Months Ended | ||||||||
|
| November 30, | | November 30, | ||||||||
| | 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Parts Supply: |
| | | | | | | | | | | |
Commercial | | $ | | | $ | | | $ | | | $ | |
Government and defense | |
| | |
| | | | | | | |
| | $ | | | $ | | | $ | | | $ | |
Repair & Engineering: | | | | | | | | | | | | |
Commercial | | $ | | | $ | | | $ | | | $ | |
Government and defense | |
| | |
| | | | | | | |
| | $ | | | $ | | | $ | | | $ | |
Integrated Solutions: | | | | | | | | | | | | |
Commercial | | $ | | | $ | | | $ | | | $ | |
Government and defense | |
| | |
| | | | | | | |
| | $ | | | $ | | | $ | | | $ | |
Expeditionary Services: | | | | | | | | | | | | |
Commercial | | $ | | | $ | | | $ | | | $ | |
Government and defense | |
| | |
| | | | | | | |
| | $ | | | $ | | | $ | | | $ | |
12
Consolidated sales by geographic region for the three- and six-month periods ended November 30, 2023 and 2022 were as follows:
| | Three Months Ended | | Six Months Ended | ||||||||
| | November 30, | | November, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
U.S./Canada |
| $ | | | $ | | | $ | | | $ | |
Europe/Africa | | | | | | | | | | | | |
Asia/South Pacific | | | | | | | | | | | | |
Other | | | | | | | | | | | | |
| | $ | | | $ | | | $ | | | $ | |
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:
| | November 30, | | May 31, | ||
|
| 2023 |
| 2023 | ||
U.S. Government contracts: |
| |
|
| |
|
Trade receivables | | $ | | | $ | |
Unbilled receivables | |
| | |
| |
| |
| | |
| |
All other customers: | |
| | |
| |
Trade receivables | |
| | |
| |
Unbilled receivables | |
| | |
| |
| |
| | |
| |
| | $ | | | $ | |
Note 5 – Accounting for Stock-Based Compensation
Restricted Stock
In the three-month period ended August 31, 2023, as part of our annual long-term stock incentive compensation, we granted
Expenses charged to operations for restricted stock during the three-month periods ended November 30, 2023 and 2022 was $
Stock Options
In July 2023, 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 six-month periods ended November 30, 2023 and 2022 was $
13
30, 2023 and 2022 was $
Note 6 – Inventories
The summary of inventories is as follows:
| | November 30, |
| May 31, | ||
|
| 2023 |
| 2023 | ||
Aircraft and engine parts, components and finished goods | | $ | | | $ | |
Raw materials and parts | |
| | |
| |
Work-in-process | | | | | | |
| | $ | | | $ | |
Note 7 – Supplemental Cash Flow Information
| | Six Months Ended | ||||
| | November 30, | ||||
|
| 2023 |
| 2022 | ||
Interest paid | | $ | | | $ | |
Income taxes paid | |
| | |
| |
Income tax refunds received | | | | | | |
Operating lease liabilities arising from obtaining or re-measuring ROU assets | | | | | | |
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 six-month periods ended November 30, 2023 and 2022, we sold $
Note 9 – Financing Arrangements
A summary of the carrying amount of our debt is as follows:
| | November 30, | | May 31, | ||
|
| 2023 |
| 2023 | ||
Revolving Credit Facility with interest payable monthly | | $ | | | $ | |
Debt issuance costs, net | |
| ( | |
| ( |
Long-term debt | | $ | | | $ | |
At November 30, 2023, our debt had a fair value that approximates its carrying value and is classified as Level 2 in the fair value hierarchy.
14
On December 14, 2022, we entered into a credit agreement with various financial institutions as lenders and Wells Fargo Bank, N.A. as administrative agent for the lenders (the “Credit Agreement”). The Credit Agreement provides for a $
On December 14, 2022, and in connection with our entry into the Credit Agreement, we terminated our revolving credit facility under the credit agreement dated April 12, 2011, as amended, (the “2011 Credit Agreement”) with the outstanding borrowings under the 2011 Credit Agreement at the date of its termination rolled over to the Credit Agreement.
Borrowings outstanding under the Revolving Credit Facility at November 30, 2023 were $
Our financing arrangements require us to comply with leverage and interest coverage ratios and comply with certain affirmative and negative covenants, including those relating to financial reporting and notification, compliance with applicable laws, and limitations on additional liens, indebtedness, acquisitions, investments and disposition of assets. Our Credit Agreement also requires our significant domestic subsidiaries to provide a guarantee of payment under the Credit Agreement. At November 30, 2023, we were in compliance with the financial and other covenants in our financing agreements.
Note 10 – Other Non-current Assets
Investment in Indian Joint Venture
Our investments in joint ventures include $
We guarantee
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 timely basis that is sufficient for us to apply the equity method on a current basis. Our share of the Indian joint venture’s income (losses) for the three-month periods ended November 30, 2023 and 2022 were $
Note 11 – 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,
15
A reconciliation of the computations of basic and diluted earnings per share information for the three- and six-month periods ended November 30, 2023 and 2022 is as follows:
| | Three Months Ended | | Six Months Ended | ||||||||
| | November 30, | | November 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Basic and Diluted Earnings Per Share: | | | | | | | | | | | | |
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 the 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 | | $ | | | $ | | | $ | | | $ | |
No stock options were determined to be anti-dilutive for the three- and six-month periods ended November 30, 2023. The potential dilutive effect of
Note 12 - Defined Benefit Pension Settlement
During the three-month period ended August 31, 2023, we settled all future obligations under our frozen U.S. defined benefit retirement plan (the “U.S. Retirement Plan”). The settlement included a combination of lump-sum payments to participants who elected to receive them and the transfer of the remaining benefit obligations to a third-party insurance company under group annuity contracts. The purchase of the group annuity contracts was funded directly by assets of the U.S. Retirement Plan and required no additional cash or asset contributions from us. As a result of the settlements, we recognized a non-cash, pre-tax pension settlement charge of $
The remaining surplus plan assets are expected to be utilized to fund remaining U.S. Retirement Plan expenses as well as certain contributions associated with one of our qualified 401(k) plans. Surplus plan assets not used for these expenses or 401(k) contributions would be subject to a
16
Note 13 – Accumulated Other Comprehensive Loss
Changes in our accumulated other comprehensive loss (“AOCL”) by component for the three- and six-month periods ended November 30, 2023 and 2022 were as follows:
|
| Currency | | | |
| | | |
| | Translation | | Pension | | | |||
|
| Adjustments |
| Plans |
| Total | |||
Balance at September 1, 2023 | | $ | ( | | $ | ( | | $ | ( |
Other comprehensive income before reclassifications | |
| ( | |
| — | |
| ( |
Amounts reclassified from AOCL | |
| — | |
| — | |
| — |
Total other comprehensive loss | |
| ( | |
| — | |
| ( |
Balance at November 30, 2023 | | $ | ( | | $ | ( | | $ | ( |
| | | | | | | | | |
Balance at September 1, 2022 | | $ | ( | | $ | ( | | $ | ( |
Other comprehensive loss before reclassifications | |
| ( | |
| — | |
| ( |
Amounts reclassified from AOCL | |
| — | |
| | |
| |
Total other comprehensive income (loss) | |
| ( | |
| | |
| ( |
Balance at November 30, 2022 | | $ | ( | | $ | ( | | $ | ( |
| | Currency | | | | | | | |
| | Translation | | Pension | | | | ||
|
| Adjustments |
| Plans |
| Total | |||
Balance at June 1, 2023 | | $ | ( | | $ | ( | | $ | ( |
Other comprehensive income before reclassifications | |
| | |
| — | |
| |
Amounts reclassified from AOCL | |
| — | |
| | |
| |
Total other comprehensive income | |
| | |
| | |
| |
Balance at November 30, 2023 | | $ | ( | $ | ( | | $ | ( | |
| | | | | | | | | |
Balance at June 1, 2022 | | $ | ( | | $ | ( | | $ | ( |
Other comprehensive loss before reclassifications | |
| ( | |
| — | |
| ( |
Amounts reclassified from AOCL | |
| — | |
| | |
| |
Total other comprehensive income (loss) | |
| ( | |
| | |
| ( |
Balance at November 30, 2022 | | $ | ( | | $ | ( | | $ | ( |
Note 14 – Acquisition
On March 20, 2023, we acquired the outstanding shares of Trax USA Corp. (“Trax”) for a purchase price of $
The purchase price was paid at closing except for $
The contingent consideration is based on an adjusted revenue target and requires certain of the former owners’ continued employment through December 31, 2024, and is treated as compensation expense within Selling, general and administrative expenses. The adjusted revenue target is based on revenue recognized under U.S. GAAP adjusted for certain events related to deferred revenue, customer commitments, and other adjustments. We recognized compensation expense of $
We accounted for the acquisition using the acquisition method and included the results of Trax’s operations in our consolidated financial statements from the effective date of the acquisition. Trax’s results are reported within our Integrated Solutions segment. The acquisition was funded using a combination of proceeds from our Revolving Credit Facility and cash on hand. Transaction costs associated with the acquisition of $
17
The amounts recorded for certain assets and liabilities are preliminary in nature and are subject to adjustment as additional information is obtained about their acquisition date fair values. The allocation of the purchase price is preliminary and will potentially change in future periods as fair value estimates of the assets acquired and liabilities assumed are finalized, including those related to working capital and income taxes. The final determination of the fair values will be completed within the one-year measurement period. The preliminary fair value of assets acquired and liabilities assumed is as follows:
Accounts receivable |
| $ | |
Other assets | |
| |
Intangible assets | |
| |
Deferred revenue | |
| ( |
Deferred tax liabilities | |
| ( |
Other liabilities | |
| ( |
Net assets acquired | |
| |
Goodwill | |
| |
Purchase price, net of cash acquired | | $ | |
Acquired amortizable intangible assets include customer relationships of $
Note 15 – Business Segment Information
During the first quarter of fiscal 2024, our chief operating decision maker (“CODM”) implemented changes in how he organizes the business, allocates resources, and assesses performance. Specifically, this new structure resulted in the separation of our former Aviation Services segment into
In conjunction with the re-alignment, our CODM now evaluates each segment’s performance based on operating income instead of gross profit as our CODM believes operating income is a more comprehensive profitability measure for each operating segment.
Our previously reported segment financial information has been recast to conform to our new segment structure. The change in our operating segments had no impact on our previously reported consolidated results of operations, financial condition, or cash flows.
Our operating segments are comprised of:
| ● | Parts Supply, primarily consisting of our sales of used serviceable engine and airframe parts and components and distribution of new parts; |
| ● | Repair & Engineering, primarily consisting of our maintenance, repair, and overhaul services across airframes and components, including landing gear; |
| ● | Integrated Solutions, primarily consisting of our fleet management and operations of customer-owned aircraft, customized performance-based supply chain logistics programs in support of the U.S. Department of Defense, U.S. Department of State, and foreign governments, flight hour component inventory and repair programs for commercial airlines, and integrated software solutions, including Trax; and |
| ● | Expeditionary Services, primarily consisting of products and services supporting the movement of equipment and personnel by the U.S. and foreign governments and non-governmental organizations with sales derived from the engineering, design, integration, and manufacture of pallets, shelters, and containers. |
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, 2023. Cost of sales consists principally of the cost of products, including material used in manufacturing operations, direct labor, and overhead.
The Company has not aggregated operating segments for purposes of identifying reportable segments. Inter-segment sales are recorded at fair value, which results in intercompany profit on inter-segment sales that is eliminated in consolidation. Corporate selling,
18
general and administrative expenses include centralized functions such as legal, finance, treasury and human resources with a portion of the costs allocated to our operating segments.
Selected financial information for each segment is as follows:
|
| Three Months Ended November 30, 2023 | |||||||
| | Third-Party |
| Inter-segment |
| Total | |||
| | Sales | | Sales | | Sales | |||
Parts Supply |
| $ | |
| $ | |
| $ | |
Repair & Engineering | |
| | | | | | | |
Integrated Solutions | |
| | |
| ( | |
| |
Expeditionary Services | |
| | |
| — | |
| |
| | $ | | | $ | | | $ | |
| | Three Months Ended November 30, 2022 | |||||||
|
| Third-Party |
| Inter-segment |
| Total | |||
| | Sales | | Sales | | Sales | |||
Parts Supply |
| $ | |
| $ | |
| $ | |
Repair & Engineering | | | | | | | | | |
Integrated Solutions | |
| | |
| — | |
| |
Expeditionary Services | |
| | |
| — | |
| |
| | $ | | | $ | | | $ | |
| | Six Months Ended November 30, 2023 | |||||||
|
| Third-Party |
| Inter-segment |
| Total | |||
| | Sales | | Sales | | Sales | |||
Parts Supply | | $ | | | $ | | | $ | |
Repair & Engineering | |
| | |
| | |
| |
Integrated Solutions | |
| | |
| | |
| |
Expeditionary Services | |
| | |
| — | |
| |
| | $ | | | $ | | | $ | |
| | Six Months Ended November 30, 2022 | |||||||
|
| Third-Party |
| Inter-segment |
| Total | |||
| | Sales | | Sales | | Sales | |||
Parts Supply | | $ | | | $ | | | $ | |
Repair & Engineering | |
| | |
| | |
| |
Integrated Solutions | |
| | |
| — | |
| |
Expeditionary Services | |
| | |
| — | |
| |
| | $ | | | $ | | | $ | |
19
The following table reconciles segment operating income to income from continuing operations before income taxes:
| | Three Months Ended | | Six Months Ended | ||||||||
|
| November, |
| November, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Segment operating income: | | | | | | | | | | | | |
Parts Supply | | $ | | | $ | | | $ | | | $ | |
Repair & Engineering | |
| | |
| | | | | | | |
Integrated Solutions | |
| | |
| | | | | | | |
Expeditionary Services | |
| | |
| | | | | | | |
| |
| | |
| | | | | | | |
Corporate and other | |
| ( | |
| ( | | | ( | | | ( |
Operating income | |
| | |
| | | | | | | |
Pension settlement charge | |
| — | |
| — | | | ( | | | — |
Losses related to sale and exit of business | | | ( | | | ( | | | ( | | | ( |
Other income (expense), net | |
| ( | |
| | | | ( | | | |
Interest expense | |
| ( | |
| ( | | | ( | | | ( |
Interest income | |
| | |
| | | | | | | |
Income from continuing operations before income taxes | | $ | | | $ | | | $ | | | $ | |
Note 16 – 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:
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 U.S. Department of Justice, the SEC 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 subsidiaries of AAR CORP. (the “Company”) purchased
On September 26, 2023, the Russian Eleventh Arbitration Court of Appeal (the “Russian Appellate Court”) issued an order (i) affirming the Russian Trial Court's adverse judgment against the Company relating to one of the four engines; (ii) reversing the Russian Trial Court's dismissal of the claims relating to the remaining three engines; and (iii) awarding a judgment against the Company in the total amount of $
20
The Company strongly disputes the validity of the judgment announced by the Russian Appellate Court and continues to strongly dispute all claims asserted in the clawback action. On October 25, 2023, the Company petitioned the Russian Court of Cassation for leave to obtain the Russian Court of Cassation's appellate review of the Russian Appellate Court's order of September 26, 2023. On November 13, 2023, the Russian Court of Cassation granted the Company's petition. The Company's appeal to the Russian Court of Cassation is pending.
The Company believes that the judgment announced on September 26, 2023 by the Russian Appellate Court is a result of, among other things, a hostile business and legal environment for foreign companies in Russia, which has been caused by developments in the Russia/Ukraine conflict, including the imposition of a range of sanctions and export controls on Russian entities and individuals by the U.S. and its North Atlantic Treaty Organization allies. Given the Company's obligation to comply with U.S. trade restrictions likely applicable to undisclosed creditors of the VIM-AVIA bankruptcy estate, the Company's ability to satisfy any portion of the Russian judgment or to otherwise settle the receiver's claims may be restricted and is unknown. Although there can be no assurances, the Company believes it will have strong defenses to any attempt that may be made to recognize and enforce the adverse judgment announced by the Russian Appellate Court outside of Russia. As of November 30, 2023, our Condensed Consolidated Balance Sheet included a total liability for the matter of $
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 (the “Customer”) 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 (the “Buyer”) filed for bankruptcy and moved to have the bankruptcy court reject the A220 Contract. The Customer also notified us that it believes the Buyer has failed to timely deliver products in accordance with the terms of the A220 Contract and that the Customer has incurred losses related to the asserted non-compliance that the Customer believes is covered by our performance guarantee. To date, the Customer has provided us with limited details in support of the extent of the Customer’s claimed losses with respect to the A220 Contract and its contention that we may be responsible under our performance guarantee to reimburse the Customer for any portion of its claimed losses. The Customer filed suit against us during the fourth quarter of fiscal 2023 claiming damages of at least $
In this regard, while we are continuing to seek additional detail around the facts and legal basis underlying the claim for losses the Customer attributed to the A220 Contract and the Customer’s corresponding claim under the performance guarantee, we strongly disagree with the premise of the Customer’s claim based on the information available and known to us at this time, and we believe that we have numerous defenses available against this claim that we will vigorously pursue. While it is reasonably possible that we will incur a loss from the claim under the performance guarantee, we are unable to estimate the range of loss on this claim. There can be no assurance that the Customer’s claim under the performance guarantee will not have a material adverse effect on our operations, financial position and cash flows.
Note 17 – Subsequent Event
Pending Acquisition of Triumph Group’s Product Support Business
On December 21, 2023, we entered into a definitive agreement with Triumph Group (“Seller”) to acquire Seller’s Product Support business (the “Product Support Business”). The Product Support Business is a leading global provider of specialized MRO capabilities for critical aircraft components in the commercial and defense markets, providing MRO services for structural components, engine and airframe accessories, interior refurbishment and wheels and brakes. The Product Support Business also designs proprietary designated engineering representative repairs and parts manufacturer approval parts.
Under the terms of the agreement and subject to closing conditions, we will acquire the Product Support Business for $
21
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions)
General Overview and Outlook
During the first quarter of fiscal 2024, our chief operating decision maker (“CODM”) implemented changes in how he organizes the business, allocates resources, and assesses performance. Specifically, this new structure resulted in the separation of our former Aviation Services segment into three new operating segments: Parts Supply, Repair & Engineering, and Integrated Solutions.
In conjunction with the re-alignment, our CODM now evaluates each segment’s performance based on operating income instead of gross profit as our CODM believes operating income is a more comprehensive profitability measure for each operating segment.
All of our previously reported segment financial information has been recast to conform to our new segment structure. The change in our operating segments had no impact on our previously reported consolidated results of operations, financial condition, or cash flows.
Our operating segments are comprised of:
| ● | Parts Supply, primarily consisting of our sales of used serviceable engine and airframe parts and components and distribution of new parts; |
| ● | Repair & Engineering, primarily consisting of our maintenance, repair, and overhaul services across airframes and components, including landing gear; |
| ● | Integrated Solutions, primarily consisting of our fleet management and operations of customer-owned aircraft, customized performance-based supply chain logistics programs in support of the U.S. Department of Defense, U.S. Department of State, and foreign governments, flight hour component inventory and repair programs for commercial airlines, and integrated software solutions, including Trax; and |
| ● | Expeditionary Services, primarily consisting of products and services supporting the movement of equipment and personnel by the U.S. and foreign governments and non-governmental organizations with sales derived from the engineering, design, integration, and manufacture of pallets, shelters, and containers. |
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, 2023. Cost of sales consists principally of the cost of products, including material used in manufacturing operations, direct labor, and overhead.
The Company has not aggregated operating segments for purposes of identifying reportable segments. Inter-segment sales are recorded at fair value which results in intercompany profit on inter-segment sales that is eliminated in consolidation. Corporate selling, general and administrative expenses include centralized functions such as legal, finance, treasury and human resources with a portion of the costs allocated to our operating segments.
Over the long-term, we expect to see strength in our aviation products and services given our offerings of value-added solutions to both commercial and government and defense customers. We believe long-term commercial aftermarket growth trends are favorable. As we continue to invest in the pipeline of opportunities in the government market, our long-term strategy continues to emphasize investing in the business and capitalizing on opportunities in both the commercial and government markets.
22
Discussion of Results of Operations
Three- and Six- Month Periods Ended November 30, 2023
| | Three Months Ended November 30, | | Six Months Ended November 30, |
| ||||||||||||
|
| 2023 |
| 2022 |
| % Change |
| 2023 |
| 2022 |
| % Change |
| ||||
Sales: | | | | | | | | |
| |
|
| |
|
|
| |
Commercial | | $ | 385.2 | | $ | 311.8 | | 23.5 | % | $ | 777.7 | | $ | 605.4 |
| 28.5 | % |
Government and defense | | | 160.2 | | | 158.0 | | 1.4 | % |
| 317.4 | |
| 310.7 | | 2.2 | % |
| | $ | 545.4 | | $ | 469.8 | | 16.1 | % | $ | 1,095.1 | | $ | 916.1 |
| 19.5 | % |
Gross Profit: | | | | | | | | | |
| | |
|
|
| | |
Commercial | | $ | 78.7 | | $ | 57.3 | | 37.3 | % | $ | 154.3 | | $ | 110.8 |
| 39.3 | % |
Government and defense | | | 24.7 | | | 28.5 | | (13.3) | % |
| 50.4 | |
| 56.9 |
| (11.4) | % |
| | $ | 103.4 | | $ | 85.8 | | 20.5 | % | $ | 204.7 | | $ | 167.7 |
| 22.1 | % |
| | | | | | | | | | | | | | | | | |
Gross Profit Margin: | | | | | | | | | | | | | | | | | |
Commercial | | | 20.4 | % | | 18.4 | % | | | | 19.8 | % | | 18.3 | % | | |
Government and defense | | | 15.4 | % | | 18.0 | % | | | | 15.9 | % | | 18.3 | % | | |
Consolidated | | | 19.0 | % | | 18.3 | % | | | | 18.7 | % | | 18.3 | % | | |
Three Month Period Ended November 30, 2023
Consolidated sales for the second quarter of fiscal 2024 increased $75.6 million, or 16.1%, over the prior year quarter primarily due to an increase in sales to commercial customers. Consolidated sales to commercial customers increased $73.4 million, or 23.5%, over the prior year quarter primarily due to strong demand and volume growth in our Parts Supply segment across both new parts distribution and used serviceable material. Our consolidated sales to government customers increased $2.2 million, or 1.4%, primarily due to the growth across government programs in our Integrated Solutions segment partially offset by lower sales volume for pallets, containers, and shelters in our Expeditionary Services segment.
Consolidated cost of sales increased $58.0 million, or 15.1%, over the prior year quarter primarily due to the overall higher sales volumes over the prior year period.
Consolidated gross profit for the second quarter of fiscal 2024 increased $17.6 million, or 20.5%, over the prior year quarter. Gross profit on sales to commercial customers increased $21.4 million, or 37.3%, over the prior year quarter due to strong demand and volume growth for both new parts and used serviceable material. Gross profit margin on sales to commercial customers increased to 20.4% from 18.4% in the prior year quarter primarily due to the acquisition of Trax in the fourth quarter of fiscal 2023 and its higher margin digital services.
Gross profit on sales to government customers decreased $3.8 million, or 13.3%, from the prior year quarter with the gross profit margin on sales to government customers decreasing to 15.4% from 18.0%. These decreases are primarily attributable to changes in the mix of products and services sold in our Integrated Solutions segment.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses increased $12.9 million, or 24.4%, over the prior year quarter primarily due to investments to support the sales growth across our commercial activities. These investments include $2.7 million of amortization and acquisition-related expenses for Trax. As a percent of sales, selling, general and administrative expenses increased to 12.0% from 11.2% in the prior year quarter primarily due to these incremental investments.
Operating Income
Operating income increased $5.9 million, or 18.2%, over the prior year quarter primarily due to the increased sales volumes and margin improvement discussed above.
23
Interest Expense
Interest expense increased $4.1 million in the second quarter of fiscal 2024 reflecting the impact of both higher interest rates and higher average borrowings used to fund investments in the business, including our acquisition of Trax. Our average borrowing rate was 6.7% in the second quarter of fiscal 2024 compared to 4.1% in the prior year quarter.
Income Taxes
Our effective income tax rate for continuing operations was 24.9% for the second quarter of fiscal 2024 compared to 26.9% in the prior year quarter. The decrease in the effective tax rate was primarily attributable to higher tax benefits from stock option exercises in the current quarter which reduced the effective income tax rate.
Six Month Period Ended November 30, 2023
Consolidated sales for the six-month period ended November 30, 2023 increased $179.0 million, or 19.5%, over the prior year period primarily due to an increase in sales to commercial customers. Consolidated sales to commercial customers increased $172.3 million, or 28.5%, over the prior year period primarily due to strong demand and volume growth in our Parts Supply segment across both new parts distribution and used serviceable material. Our consolidated sales to government customers increased $6.7 million, or 2.2%, primarily due to the growth across government programs in our Integrated Solutions segment partially offset by lower sales volume for new parts to government customers in our Parts Supply segment.
Consolidated cost of sales increased $142.0 million, or 19.0%, over the prior year period which was largely in line with the consolidated sales increase of 19.5% discussed above.
Consolidated gross profit for the six-month period ended November 30, 2023 increased $37.0 million, or 22.1%, over the prior year period. Gross profit on sales to commercial customers increased $43.5 million, or 39.3%, over the prior year period due to strong demand and volume growth for both new parts and used serviceable material. Gross profit margin on sales to commercial customers increased to 19.8% from 18.3% in the prior year period primarily due to the acquisition of Trax and its higher margin services.
Gross profit on sales to government customers decreased $6.5 million, or 11.4%, from the prior year period. Gross profit on sales to government customers decreased primarily due to lower sales to government customers in our Parts Supply segment. Gross profit margin on sales to government customers decreased to 15.9% from 18.3% primarily due to changes in the mix of products and services sold.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses increased $37.5 million, or 36.4%, over the prior year period primarily due to the recognition of a charge for $11.2 million in the first quarter of fiscal 2024 related to an unfavorable Russian court judgment. The remaining increase in selling, general and administrative expenses was largely attributable to investments to support the sales growth as our commercial activities continue to recover from the impact of COVID-19. These investments include $5.5 million of amortization and acquisition-related expenses for Trax.
Operating Income
Operating income for the six-month period ended November 30, 2023 was unchanged from the prior year period as the increased sales volumes and margin improvement were offset by the recognition of the $11.2 million charge related to the unfavorable Russian court judgment and investments in the business to support further growth.
Pension Settlement Charge
During the first quarter of fiscal 2024, we settled all future obligations under our frozen U.S. defined benefit retirement plan. The settlement included a combination of lump-sum payments to participants who elected to receive them and the transfer of the remaining benefit obligations to a third-party insurance company under a group annuity contract. As a result of the settlement, in the six-month period ended November 30, 2023, we recognized a non-cash, pre-tax pension settlement charge of $26.7 million ($16.1 million after-tax) related to the accelerated recognition of all unamortized net actuarial losses in Accumulated other comprehensive loss.
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Interest Expense
Interest expense for the six-month period ended November 30, 2023 increased $8.8 million over the prior year period reflecting the impact of both higher interest rates and higher average borrowings used to fund investments in the business, including our acquisition of Trax. Our average borrowing rate was 6.6% for the six-month period ended November 30, 2023 compared to 3.4% in the prior year period.
Income Taxes
Our effective income tax rate for continuing operations for the six-month period ended November 30, 2023 was 4.1% compared to 26.8% in the prior year period. The decrease in the effective tax rate was primarily attributable to the deferred tax benefit recognized in conjunction with the pension settlement in the first quarter of fiscal 2024.
Operating Segment Results of Operations
Three-Month Periods Ended November 30, 2023 and 2022
Parts Supply Segment
| | Three Months Ended November 30, |
| ||||||
|
| 2023 |
| 2022 |
| % Change |
| ||
Third-party sales | | $ | 227.6 | | $ | 183.6 |
| 24.0 | % |
Operating income | |
| 28.4 | |
| 21.3 |
| 33.3 | % |
Operating margin | |
| 12.5 | % |
| 11.6 | % | | |
Sales in the Parts Supply segment increased $44.0 million, or 24.0%, over the prior year quarter primarily due to a $22.2 million increase in sales in our aftermarket parts trading activities as a result of increased demand for used serviceable material. Whole asset sales in our aftermarket parts trading activities increased $14.6 million in the second quarter of fiscal 2024 over the prior year quarter.
Operating income in the Parts Supply segment increased $7.1 million, or 33.3%, over the prior year period, primarily due to growth in sales volumes across both new parts distribution and used serviceable material. Operating margin increased to 12.5% from 11.6% in the prior year quarter, primarily due to the mix of products sold in our new parts distribution activities.
Repair & Engineering Segment
| | Three Months Ended November 30, |
| ||||||
|
| 2023 |
| 2022 |
| % Change |
| ||
Third-party sales | | $ | 145.4 | | $ | 134.8 |
| 7.9 | % |
Operating income | |
| 11.3 | |
| 8.6 |
| 31.4 | % |
Operating margin | |
| 7.8 | % |
| 6.4 | % | | |
Sales in the Repair & Engineering segment increased $10.6 million, or 7.9%, over the prior year quarter primarily due to a $16.5 million sales increase at our airframe maintenance facilities. This increase was partially offset by lower sales volume of $5.9 million in our landing gear and component repair facilities.
Operating income in the Repair & Engineering segment increased $2.7 million, or 31.4%, over the prior year quarter primarily due to the sales volume increase in our airframe maintenance facilities. Operating margin increased to 7.8% from 6.4% in the prior year quarter, primarily due to our actions to reduce both our fixed and variable cost structure.
Integrated Solutions Segment
| | Three Months Ended November 30, |
| ||||||
|
| 2023 |
| 2022 |
| % Change |
| ||
Third-party sales | | $ | 156.6 | | $ | 127.3 |
| 23.0 | % |
Operating income | |
| 6.4 | |
| 7.1 |
| (9.9) | % |
Operating margin | |
| 4.1 | % |
| 5.6 | % | | |
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Sales in the Integrated Solutions segment increased $29.3 million, or 23.0%, over the prior year quarter primarily due to higher commercial and government program activity and the Trax acquisition in the fourth quarter of fiscal 2023 which contributed sales of $9.5 million in the current year quarter.
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 second quarter of fiscal 2024, we recognized net unfavorable cumulative catch-up adjustments of $0.3 million compared to favorable cumulative catch-up adjustments of $2.9 million in the prior year quarter. These adjustments primarily relate to our long-term, power-by-the-hour programs where we provide component inventory management and repair services as well as certain long-term government programs.
Operating income in the Integrated Solutions segment decreased $0.7 million, or 9.9%, from the prior year quarter with operating margin decreasing to 4.1% from 5.6%. These decreases are primarily attributable to decrease in favorability from the cumulative catch-up adjustments discussed above.
Expeditionary Services Segment
| | Three Months Ended November 30, |
| ||||||
|
| 2023 |
| 2022 |
| % Change |
| ||
Third-party sales | | $ | 15.8 | | $ | 24.1 |
| (34.4) | % |
Operating income | |
| 0.9 | |
| 2.0 |
| (55.0) | % |
Operating margin | |
| 5.7 | % |
| 8.3 | % | | |
Sales in the Expeditionary Services segment decreased $8.3 million, or 34.4%, from the prior year period primarily due to lower sales volumes for pallets, containers, and shelters.
Operating income in the Expeditionary Services segment decreased $1.1 million, or 55.0%, from the prior year quarter primarily due to the lower sales volumes. Operating margin decreased to 5.7% from 8.3% in the prior year quarter, primarily due to increased selling, general, and administrative expenses over the prior year quarter.
Six-Month Periods Ended November 30, 2023 and 2022
Parts Supply Segment
| | Six Months Ended November 30, |
| ||||||
|
| 2023 |
| 2022 |
| % Change |
| ||
Third-party sales | | $ | 464.4 | | $ | 352.2 |
| 31.9 | % |
Operating income | |
| 43.5 | |
| 39.6 |
| 9.8 | % |
Operating margin | |
| 9.4 | % |
| 11.2 | % | | |
Sales in the Parts Supply segment for the six-month period ended November 30, 2023 increased $112.2 million, or 31.9%, over the prior year period primarily due to a $68.4 million increase in sales in our aftermarket parts trading activities as a result of increased demand for used serviceable material. Whole asset sales in our aftermarket parts trading activities increased $35.6 million over the prior year period.
Operating income in the Parts Supply segment increased $3.9 million, or 9.8%, over the prior year period, primarily due to increased sales volumes across both new parts distribution and used serviceable material partially offset by the recognition of the $11.2 million charge in the first quarter of fiscal 2024 related to the unfavorable Russian court judgment.
Repair & Engineering Segment
| | Six Months Ended November 30, |
| ||||||
|
| 2023 |
| 2022 |
| % Change |
| ||
Third-party sales | | $ | 282.9 | | $ | 262.4 |
| 7.8 | % |
Operating income | |
| 20.4 | |
| 16.0 |
| 27.5 | % |
Operating margin | |
| 7.2 | % |
| 6.1 | % | | |
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Sales in the Repair & Engineering segment for the six-month period ended November 30, 2023 increased $20.5 million, or 7.8%, over the prior year period primarily due to a $29.9 million sales increase at our airframe maintenance facilities. This increase was partially offset by lower sales volume of $10.5 million in our landing gear and component repair facilities.
Operating income in the Repair & Engineering segment increased $4.4 million, or 27.5%, over the prior year period primarily due to the sales volume increase in our airframe maintenance facilities. Operating margin increased to 7.2% from 6.1% in the prior year period, primarily due to our actions to reduce both our fixed and variable cost structure.
Integrated Solutions Segment
| | Six Months Ended November 30, |
| ||||||
|
| 2023 |
| 2022 |
| % Change |
| ||
Third-party sales | | $ | 312.9 | | $ | 255.1 |
| 22.7 | % |
Operating income | |
| 14.1 | |
| 15.4 |
| (8.4) | % |
Operating margin | |
| 4.5 | % |
| 6.0 | % | | |
Sales in the Integrated Solutions segment for the six-month period ended November 30, 2023 increased $57.8 million, or 22.7%, over the prior year period primarily due to higher commercial and government program activity and the Trax acquisition in the fourth quarter of fiscal 2023 which contributed sales of $17.1 million in the current year period.
In the six-month period ended November 30, 2023, we recognized net favorable cumulative catch-up adjustments of $0.2 million compared to a favorable cumulative catch-up adjustments of $5.8 million in the prior year period. These adjustments primarily relate to our long-term, power-by-the-hour programs where we provide component inventory management and repair services as well as certain long-term government programs.
Operating income in the Integrated Solutions segment decreased $1.3 million, or 8.4%, from the prior year period with the operating margin decreasing to 4.5% from 6.0%. These decreases are primarily attributable to the changes in the amount of net favorable cumulative catch-up adjustments in each period.
Expeditionary Services Segment
| | Six Months Ended November 30, |
| ||||||
|
| 2023 |
| 2022 |
| % Change |
| ||
Third-party sales | | $ | 34.9 | | $ | 46.4 |
| (24.8) | % |
Operating income | |
| 2.2 | |
| 4.3 |
| (48.8) | % |
Operating margin | |
| 6.3 | % |
| 9.3 | % | | |
Sales in the Expeditionary Services segment for the six-month period ended November 30, 2023 decreased $11.5 million, or 24.8%, from the prior year period primarily due to lower sales volumes for pallets, containers, and shelters.
Operating income in the Expeditionary Services segment decreased $2.1 million, or 48.8%, from the prior year period primarily due to lower sales volumes. Operating margin decreased to 6.3% from 9.3% in the prior year period, primarily due to increased selling, general, and administrative expenses over the prior year period.
Liquidity, Capital Resources and Financial Position
Our operating activities are funded and commitments met through the generation of cash from operations. Our ability to generate cash from operations is influenced primarily by our operating performance and changes in working capital. In addition to operations, our current capital resources include an unsecured revolving credit facility under the Credit Agreement referred to below 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.
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At November 30, 2023, our liquidity and capital resources included working capital of $814.3 million inclusive of cash of $65.1 million.
On December 14, 2022, we entered into a new credit agreement with various financial institutions as lenders and Wells Fargo Bank, N.A. as administrative agent for the lenders (the “Credit Agreement”). The Credit Agreement provides for a $620 million unsecured revolving credit facility (the “Revolving Credit Facility”) that we can draw upon for working capital and general corporate purposes. Under certain circumstances, we may request an increase to the lending commitments under the Credit Agreement by an aggregate amount of up to $300 million, not to exceed $920 million in total. The Credit Agreement expires on December 14, 2027.
At November 30, 2023, borrowings outstanding under the Revolving Credit Facility were $277.0 million and there were approximately $11.0 million of outstanding letters of credit, which reduced the availability under this facility to $332.0 million. There are no other terms or covenants limiting the availability of the Revolving Credit Facility.
As of November 30, 2023, we also had other financing arrangements that did not limit availability on our Revolving Credit Facility, including outstanding letters of credit of $11.7 million and foreign lines of credit of $9.4 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 expires after February 22, 2024, but, the Purchase Agreement may be terminated earlier under certain circumstances. The term of the Purchase Agreement is 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 Consolidated Balance Sheet. At November 30, 2023, we have utilized $12.6 million which reduced the availability under the Purchase Agreement to $137.4 million.
At November 30, 2023, we were in compliance with all financial and other covenants under each of our financing arrangements.
During the second quarter of fiscal 2024, we continued to experience delayed collections from one of our significant regional airline customers and issued the customer a Notice of Payment and Other Defaults to request payment and reserve our rights under our agreements. Though we currently expect full payment from the customer of all amounts due and do not believe a reserve for credit loss is warranted, the customer’s financial condition may continue to deteriorate and we may in the future experience loss due to a default by the customer and the related nonpayment of account receivable balances. Our Condensed Consolidated Balance Sheet as of November 30, 2023 included accounts receivable of $11.9 million, including $5.4 million past due, and contract assets of $9.4 million related to this customer.
On December 16, 2021, our Board of Directors authorized a renewal of our stock repurchase program, under which we may repurchase up to $150 million of our common stock with no expiration date. During fiscal 2023, we repurchased 1.2 million shares for an aggregate purchase price of $50.1 million. No repurchases were made during the six-month period ended November 30, 2023. Since inception of the renewal authorization, we have repurchased 2.2 million shares for an aggregate purchase price of $92.4 million. The timing and amount of repurchases are subject to prevailing market conditions and other considerations, including our liquidity and acquisition and other investment opportunities.
Cash Flows from Operating Activities
Net cash used in operating activities–continuing operations was $1.1 million in the six-month period ended November 30, 2023 compared to cash used of $38.9 million in the prior year period. The decrease in cash used from the prior year of $37.8 million was primarily attributable to working capital changes, including the timing of payments for inventory investments in both new parts and used serviceable material in the current year period.
Cash Flows from Investing Activities
Net cash used in investing activities was $20.3 million in the six-month period ended November 30, 2023 compared to $18.3 million in the prior year period. The increase in cash used in investing activities over the prior year of $2.0 million was primarily related to increased expenditures for capital equipment in the current year period.
28
Cash Flows from Financing Activities
Net cash provided by financing activities was $15.3 million in the six-month period ended November 30, 2023 compared to cash provided of $50.0 million in the prior year period. The decrease in cash provided by financing activities from the prior year of $34.7 million was primarily related to stock repurchases of $50.1 million in the prior year period compared to no repurchases in fiscal 2024.
Pending Acquisition of Triumph Group’s Product Support Business
On December 21, 2023, we entered into a definitive agreement with Triumph Group (“Seller”) to acquire Seller’s Product Support business (the “Product Support Business”). The Product Support Business is a leading global provider of specialized MRO capabilities for critical aircraft components in the commercial and defense markets, providing MRO services for structural components, engine and airframe accessories, interior refurbishment and wheels and brakes. The Product Support Business also designs proprietary designated engineering representative repairs and parts manufacturer approval parts.
Under the terms of the agreement and subject to closing conditions, we will acquire the Product Support Business for $725 million in cash, which we expect to fund with a combination of new equity and debt financings. We have also secured a debt financing commitment to backstop the contemplated new financings. The acquisition is expected to close in the first quarter of the 2024 calendar year, subject to customary closing conditions, including regulatory approvals.
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, 2023 for a discussion of our critical accounting policies. There have been no significant changes to the application of our critical accounting policies during fiscal 2024.
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, 2023. 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, 2023 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 November 30, 2023.
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, 2023. There were no significant changes during the quarter ended November 30, 2023.
29
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 November 30, 2023. 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 November 30, 2023 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 November 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
The information in Note 16 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 16 to our Condensed Consolidated Financial Statements for the quarter ended November 30, 2023 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, 2023 with the exception of the addition of the following risk factor:
We may not complete the pending acquisition of the Product Support business of Triumph Group, and if we do, we may not realize the anticipated benefits and may face difficulties integrating the operations, which could have a material adverse impact on the Company’s business, operating results and financial condition.
On December 21, 2023, we entered into a definitive agreement with Triumph Group (“Seller”) to acquire Seller’s Product Support business (the “Product Support Business”). The Product Support business is a leading global provider of specialized MRO capabilities for critical aircraft components in the commercial and defense markets, providing MRO services for structural components, engine and airframe accessories, interior refurbishment and wheels and brakes. The Product Support Business also designs proprietary designated engineering representative repairs and parts manufacturer approval parts. We expect the pending acquisition to deepen and broaden our customer relationships globally, expand our footprint, and expand our product offerings.
We face risks in completing the acquisition. Under the terms of the agreement and subject to closing conditions, we will acquire the Product Support Business for $725 million in cash, which we expect to fund with a combination of new equity and debt financings. We have also secured a debt financing commitment to backstop the contemplated new financings. We are subject to risks related to our ability to obtain any contemplated financing on favorable terms or at all. The acquisition is expected to close in the first quarter of the 2024 calendar year, subject to customary closing conditions, including regulatory approvals. We may not be able to meet the closing conditions or obtain the approvals we need to complete the acquisition within the contemplated timeframe or at all.
In addition, if we complete the acquisition, we may not realize the anticipated benefits, including any synergies, cross-selling opportunities, cost savings, financial or business growth opportunities. The benefits related to the acquisition may not be achieved within the anticipated timeframe, or at all. Further, we may not be able to execute our integration plans for the Product Support Business and may face diversion of management attention from our existing business, unanticipated costs and risks associated with the acquisition and expanding further into the global MRO market. Failing to realize the anticipated benefits and difficulties integrating the Product Support Business could have a material adverse effect on our business, operating results and financial condition.
30
Item 5 – Other Information
During the three months ended November 30, 2023, none of our directors or “officers” (as defined in Rule 16a-1(f) promulgated under the Exchange Act)
Item 6 – Exhibits
The exhibits to this report are listed on the following index:
Exhibit |
| Description |
| |
| Exhibits |
|---|---|---|---|---|---|---|
| | | | | | |
| | | | | | |
31. | | Rule 13a-14(a)/15(d)-14(a) Certifications | | 31.1 | | Section 302 Certification of Chief Executive Officer of Registrant (filed herewith). |
| | | | | | |
| | | | 31.2 | | Section 302 Certification of Chief Financial Officer of Registrant (filed herewith). |
| | | | | | |
32. | | Section 1350 Certifications | | 32.1 | | Section 906 Certification of Chief Executive Officer of Registrant (filed herewith). |
| | | | | | |
| | | | 32.2 | | Section 906 Certification of Chief Financial Officer of Registrant (filed herewith). |
| | | | | | |
101. | | Interactive Data File | | 101 | | The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at November 30, 2023 and May 31, 2023, (ii) Condensed Consolidated Statements of Income for the three- and six-months ended November 30, 2023 and 2022, (iii) Condensed Consolidated Statements of Comprehensive Income for the three- and six-months ended November 30, 2023 and 2022, (iv) Condensed Consolidated Statements of Cash Flows for the six- months ended November 30, 2023 and 2022, (v) Condensed Consolidated Statement of Changes in Equity for the three- and six-months ended November 30, 2023 and 2022, and (vi) Notes to Condensed Consolidated Financial Statements.** |
| | | | | | |
104. | | Cover Page Interactive Data File | | 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101). |
** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
31
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: | December 21, 2023 | | /s/ SEAN M. GILLEN |
| | | Sean M. Gillen |
| | | Senior Vice President and Chief Financial Officer |
| | | (Principal Financial Officer) |
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Exhibit 31.1
SECTION 302
CERTIFICATION
I, John M. Holmes, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of AAR CORP. (the “Registrant”) for the quarterly period ended November 30, 2023; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. | The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
DATE: December 21, 2023
| /s/ JOHN M. HOLMES |
| John M. Holmes |
| Chairman, President, and Chief Executive Officer |
| (Principal Executive Officer) |
Exhibit 31.2
SECTION 302
CERTIFICATION
I, Sean M. Gillen, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of AAR CORP. (the “Registrant”) for the quarterly period ended November 30, 2023; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
5. | The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
DATE: December 21, 2023
| /s/ SEAN M. GILLEN |
| Sean M. Gillen |
| Senior Vice President and Chief Financial Officer |
| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the AAR CORP. (the “Company") quarterly report on Form 10-Q for the period ended November 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report"), I, John M. Holmes, Chairman, President, and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: December 21, 2023
| /s/ JOHN M. HOLMES |
| John M. Holmes |
| Chairman, President, and Chief Executive Officer |
| (Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the AAR CORP. (the "Company") quarterly report on Form 10-Q for the period ended November 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Sean M. Gillen, Senior Vice President and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: December 21, 2023
| /s/ SEAN M. GILLEN |
| Sean M. Gillen |
| Senior Vice President and Chief Financial Officer |
| (Principal Financial Officer) |