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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended February 29, 2024

or

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

For the transition period from                    to                   

Commission File Number: 1-6263

AAR CORP.

(Exact name of registrant as specified in its charter)

Delaware

    

36-2334820

(State or other jurisdiction of incorporation
or organization)

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

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

    

60191

(Address of principal executive offices)

(Zip Code)

(630) 227-2000

(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

Common Stock, $1.00 par value

AIR

New York Stock Exchange

Chicago Stock Exchange

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

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

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.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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

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

As of February 29, 2024 there were 35,427,056 shares of the registrant’s Common Stock, $1.00 par value per share, outstanding.

AAR CORP. and Subsidiaries

Quarterly Report on Form 10-Q

For the Quarter Ended February 29, 2024

Table of Contents

Page

Part I — FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Income

5

Condensed Consolidated Statements of Comprehensive Income

6

Condensed Consolidated Statements of Cash Flows

7

Condensed Consolidated Statements of Changes in Equity

8

Notes to Condensed Consolidated Financial Statements

9

Item 2.

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

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

Controls and Procedures

35

Part II — OTHER INFORMATION

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 5.

Other Information

37

Item 6.

Exhibits

38

Exhibit Index

38

Signatures

40

2

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of February 29, 2024 and May 31, 2023

(In millions, except share data)

ASSETS

February 29, 

May 31, 

2024

2023

    

(Unaudited)  

    

Current assets:

Cash and cash equivalents

$

69.2

$

68.4

Restricted cash

14.4

13.4

Accounts receivable, less allowances of $13.9 and $13.4, respectively

257.1

241.3

Contract assets

86.5

86.9

Inventories

 

671.5

 

574.1

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

 

74.5

 

50.6

Assets of discontinued operations

10.8

13.5

Prepaid expenses and other current assets

56.7

49.7

Total current assets

 

1,240.7

 

1,097.9

Property, plant, and equipment, net of accumulated depreciation of $278.2 and $268.8, respectively

134.1

126.1

Other assets:

Goodwill

 

179.4

 

175.8

Intangible assets, net of accumulated amortization of $9.3 and $6.0, respectively

 

60.4

 

63.7

Operating lease right-of-use assets, net

89.5

63.7

Rotable assets supporting long-term programs

177.9

178.1

Other non-current assets

 

139.8

 

127.8

 

647.0

 

609.1

$

2,021.8

$

1,833.1

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

3

AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of February 29, 2024 and May 31, 2023

(In millions, except share data)

LIABILITIES AND EQUITY

February 29, 

May 31, 

2024

2023

    

(Unaudited)  

    

Current liabilities:

Accounts payable

$

230.3

$

158.5

Accrued liabilities

 

187.4

 

179.6

Liabilities of discontinued operations

10.5

13.4

Total current liabilities

 

428.2

 

351.5

Long-term debt

 

274.7

 

269.7

Operating lease liabilities

73.0

48.2

Deferred tax liabilities

 

37.0

 

33.6

Other liabilities

 

40.9

 

31.0

 

425.6

 

382.5

Equity:

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

 

 

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

 

45.3

 

45.3

Capital surplus

 

489.3

 

484.5

Retained earnings

 

947.8

 

910.6

Treasury stock, 9,873,730 and 10,385,237 shares at cost, respectively

 

(305.7)

 

(317.8)

Accumulated other comprehensive loss

 

(8.7)

 

(23.5)

Total equity

 

1,168.0

 

1,099.1

$

2,021.8

$

1,833.1

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

4

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Income

For the Three and Nine Months Ended February 29/28, 2024 and 2023

(Unaudited)

(In millions, except share data)

Three Months Ended

Nine Months Ended

February 29/28,

February 29/28,

    

2024

    

2023

    

2024

    

2023

Sales:

Sales from products

$

329.9

$

327.6

$

987.6

$

891.4

Sales from services

 

237.4

 

193.5

674.8

545.8

 

567.3

 

521.1

1,662.4

1,437.2

Cost and operating expenses:

Cost of products

 

257.5

 

260.5

788.8

709.3

Cost of services

 

199.5

 

166.3

558.6

465.9

457.0

426.8

1,347.4

1,175.2

Gross profit

110.3

94.3

315.0

262.0

Provision for credit losses

0.1

1.9

0.5

1.8

Selling, general and administrative

 

77.0

 

56.7

217.4

159.6

Loss from joint ventures

 

(0.2)

 

(1.7)

(0.5)

(3.0)

Operating income

33.0

34.0

96.6

97.6

Pension settlement charge

 

 

(26.7)

Losses related to sale and exit of business

(1.0)

(0.4)

(2.6)

(0.5)

Other income (expense), net

(0.2)

(0.3)

(0.3)

0.4

Interest expense

 

(11.9)

 

(3.8)

(23.9)

(7.0)

Interest income

 

0.6

 

0.3

1.6

0.5

Income from continuing operations before income taxes

20.5

29.8

44.7

91.0

Income tax expense

6.5

8.0

7.5

24.4

Income from continuing operations

14.0

21.8

37.2

66.6

Income from discontinued operations, net of tax

0.4

Net income

$

14.0

$

21.8

$

37.2

$

67.0

Earnings per share – basic:

Earnings from continuing operations

$

0.40

$

0.63

$

1.05

$

1.90

Earnings from discontinued operations

0.01

Earnings per share – basic

$

0.40

$

0.63

$

1.05

$

1.91

Earnings per share – diluted:

Earnings from continuing operations

$

0.39

$

0.62

$

1.04

$

1.87

Earnings from discontinued operations

0.01

Earnings per share – diluted

$

0.39

$

0.62

$

1.04

$

1.88

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

5

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

For the Three and Nine Months Ended February 29/28, 2024 and 2023

(Unaudited)

(In millions)

Three Months Ended

Nine Months Ended

    

February 29/28,

February 29/28,

2024

    

2023

    

2024

    

2023

Net income

$

14.0

$

21.8

$

37.2

$

67.0

Other comprehensive loss, net of tax:

Currency translation adjustments

 

(0.2)

 

0.7

(0.1)

(2.9)

Pension and other post-retirement plans, net of tax

 

 

0.1

14.9

0.5

Other comprehensive income (loss), net of tax

 

(0.2)

 

0.8

14.8

(2.4)

Comprehensive income

$

13.8

$

22.6

$

52.0

$

64.6

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

6

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended February 29/28, 2024 and 2023

(Unaudited)

(In millions)

Nine Months Ended

February 29/28,

    

2024

    

2023

Cash flows provided by (used in) operating activities:

Net income

$

37.2

$

67.0

Less: Income from discontinued operations

(0.4)

Income from continuing operations

37.2

66.6

Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:

Depreciation and amortization

 

25.9

 

20.2

Stock-based compensation

 

11.5

 

10.4

Pension settlement charge

26.7

Loss from joint ventures

0.5

3.0

Provision for credit losses

0.5

1.8

Deferred taxes

(4.8)

(5.8)

Changes in certain assets and liabilities:

Accounts receivable

 

(17.3)

 

(26.4)

Contract assets

0.5

(18.5)

Inventories

(97.3)

(20.2)

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

 

(23.8)

 

1.9

Prepaid expenses and other current assets

(11.3)

(8.8)

Rotable assets supporting long-term programs

 

(6.9)

 

(13.2)

Accounts payable

 

73.7

 

2.8

Accrued and other liabilities

 

19.8

(15.9)

Deferred revenue on long-term programs

(13.6)

2.2

Other

(2.0)

 

(21.6)

Net cash provided by (used in) operating activities - continuing operations

 

19.3

 

(21.5)

Net cash used in operating activities - discontinued operations

 

(0.2)

 

(0.4)

Net cash provided by (used in) operating activities

19.1

(21.9)

Cash flows used in investing activities:

Property, plant, and equipment expenditures

(22.2)

(22.5)

Other

(4.6)

(4.8)

Net cash used in investing activities – continuing operations

(26.8)

(27.3)

Cash flows provided by financing activities:

Short-term borrowings on Revolving Credit Facility, net

5.0

88.0

Purchase of treasury stock

(5.1)

(50.1)

Financing costs

 

(0.8)

 

(1.9)

Stock compensation activity

10.4

8.5

Net cash provided by financing activities – continuing operations

 

9.5

 

44.5

Effect of exchange rate changes on cash

 

(0.1)

Increase (Decrease) in cash, cash equivalents, and restricted cash

1.8

(4.8)

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

 

81.8

58.9

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

$

83.6

$

54.1

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

7

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity

For the Three and Nine Months Ended February 29/28, 2024 and 2023

(Unaudited)

(In millions)

Accumulated

Other

Common

Capital

Retained

Treasury

Comprehensive

    

Stock

    

Surplus

    

Earnings

    

Stock

    

Loss

    

Total Equity

Balance, May 31, 2023

$

45.3

$

484.5

$

910.6

$

(317.8)

$

(23.5)

$

1,099.1

Net loss

 

 

 

(0.6)

(0.6)

Stock option activity

 

 

(0.3)

 

7.0

6.7

Restricted stock activity

 

 

(2.4)

 

3.7

1.3

Other comprehensive income, net of tax

 

 

 

15.4

15.4

Balance, August 31, 2023

$

45.3

$

481.8

$

910.0

$

(307.1)

$

(8.1)

$

1,121.9

Net income

 

 

23.8

 

 

 

23.8

Stock option activity

 

0.9

 

 

6.3

 

 

7.2

Restricted stock activity

 

3.0

 

 

 

 

3.0

Other comprehensive loss, net of tax

(0.4)

(0.4)

Balance, November 30, 2023

$

45.3

$

485.7

$

933.8

$

(300.8)

$

(8.5)

$

1,155.5

Net income

14.0

14.0

Stock option activity

0.7

0.2

0.9

Restricted stock activity

2.9

2.9

Repurchase of shares

(5.1)

(5.1)

Other comprehensive loss, net of tax

(0.2)

(0.2)

Balance, February 29, 2024

$

45.3

$

489.3

$

947.8

$

(305.7)

$

(8.7)

$

1,168.0

Accumulated

Other

Common

Capital

Retained

Treasury

Comprehensive

    

Stock

    

Surplus

    

Earnings

    

Stock

    

Income (Loss)

    

Total Equity

Balance, May 31, 2022

$

45.3

$

477.5

$

820.4

$

(289.1)

$

(19.6)

$

1,034.5

Net income

 

 

 

22.7

 

 

 

22.7

Stock option activity

 

 

1.0

 

 

1.5

 

 

2.5

Restricted stock activity

 

 

(1.7)

 

 

3.5

 

 

1.8

Repurchase of shares

(21.9)

(21.9)

Other comprehensive loss, net of tax

 

 

 

 

 

(3.1)

 

(3.1)

Balance, August 31, 2022

$

45.3

$

476.8

$

843.1

$

(306.0)

$

(22.7)

$

1,036.5

Net income

22.5

22.5

Stock option activity

0.2

2.4

2.6

Restricted stock activity

2.0

2.0

Repurchase of shares

(28.2)

(28.2)

Other comprehensive loss, net of tax

(0.1)

(0.1)

Balance, November 30, 2022

$

45.3

$

479.0

$

865.6

$

(331.8)

$

(22.8)

$

1,035.3

Net income

21.8

21.8

Stock option activity

(0.5)

7.7

7.2

Restricted stock activity

2.7

(0.1)

2.6

Other comprehensive loss, net of tax

0.8

0.8

Balance, February 28, 2023

$

45.3

$

481.2

$

887.4

$

(324.2)

$

(22.0)

$

1,067.7

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

8

Table of Contents

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2024

(Unaudited)

(Dollars in millions, except per share amounts)

Note 1 – Basis of Presentation

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

We have prepared these statements without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The Condensed Consolidated Balance Sheet as of May 31, 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 February 29, 2024, the Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income for the three- and nine-month periods ended February 29/28, 2024 and 2023, the Condensed Consolidated Statements of Cash Flows for the nine-month periods ended February 29/28, 2024 and 2023, and the Condensed Consolidated Statement of Changes in Equity for the three- and nine-month periods ended February 29/28, 2024 and 2023. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Note 2 – Acquisitions

Acquisition of Triumph Group’s Product Support Business

On March 1, 2024, we completed the acquisition of Triumph Group, Inc.’s Product Support Business (the “Product Support Business”) for a purchase price of $725.0 million subject to customary post-closing adjustments for cash, working capital and indebtedness. The Product Support Business is a leading global provider of specialized maintenance, repair, and overhaul (“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.

The Product Support Business will be reported within our Repair & Engineering segment. The purchase price was paid at closing and was funded with debt financing. In connection with the acquisition, we secured commitments for a bridge financing facility (the “Bridge Facility”). No amounts were drawn under the Bridge Facility, which was terminated on March 1, 2024 upon securing permanent debt financing and closing the acquisition. We expensed $6.1 million within Interest expense for the fees associated with the Bridge Facility. Transaction costs associated with the acquisition of $9.4 million were expensed as incurred within Selling, general and administrative expenses in the three-month period ended February 29, 2024.

Acquisition of Trax USA Corp.

On March 20, 2023, we acquired the outstanding shares of Trax USA Corp. (“Trax”) for a purchase price of $120.0 million plus contingent consideration of up to $20.0 million based on Trax’s adjusted revenue in calendar years 2023 and 2024. Trax is a leading provider of aircraft MRO and fleet management software supporting a broad spectrum of maintenance activities for a diverse global customer base of airlines and MROs.

9

Table of Contents

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2024

(Unaudited)

(Dollars in millions, except per share amounts)

The purchase price was paid at closing except for $12.0 million which was placed on deposit with an escrow agent to secure potential indemnification obligations and fund post-closing adjustments for working capital and indebtedness. The post-closing adjustments for working capital and indebtedness were finalized in the three-month period ended November 30, 2023 resulting in a purchase price reduction of $1.8 million.

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 $1.4 million and $4.2 million in the three- and nine-month periods ended February 29, 2024, respectively.

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 $5.1 million were expensed as incurred.

The final fair value of assets acquired and liabilities assumed is as follows:

Accounts receivable

    

$

8.8

Other assets

 

3.0

Intangible assets

 

61.7

Deferred revenue

 

(4.1)

Deferred tax liabilities

 

(15.1)

Other liabilities

 

(4.6)

Net assets acquired

 

49.7

Goodwill

 

63.8

Purchase price, net of cash acquired

$

113.5

Acquired amortizable intangible assets include customer relationships of $33.6 million and developed technology of $22.0 million which are being amortized over 12 years and 20 years, respectively. Intangible assets also include tradenames of $6.1 million which are indefinite-lived. The goodwill associated with the Trax acquisition is not deductible for tax purposes and is primarily attributable to the benefits we expect to derive from expected synergies including complimentary products and services, cross-selling opportunities and intangible assets that do not qualify for separate recognition, such as their assembled workforce.

Note 3 – 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 4 – Revenue Recognition

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

10

Table of Contents

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2024

(Unaudited)

(Dollars in millions, except per share amounts)

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.

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.

11

Table of Contents

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2024

(Unaudited)

(Dollars in millions, except per share amounts)

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.

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

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 February 29, 2024, we recognized favorable cumulative catch-up adjustments of $2.5 million. For the three-month period ended February 28, 2023, we recognized no cumulative catch-up adjustments.

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AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2024

(Unaudited)

(Dollars in millions, except per share amounts)

For the nine-month period ended February 29, 2024, we recognized favorable and (unfavorable) cumulative catch-up adjustments of $9.5 million and $(6.8) million, respectively. For the nine-month period ended February 28, 2023, we recognized cumulative catch-up adjustments of $7.6 million and $(1.8) million, respectively. When considering these adjustments on a net basis, we recognized adjustments of $2.7 million and $5.8 million for the nine-month periods ended February 29/28, 2024 and 2023, respectively.

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:

February 29, 

May 31, 

    

2024

    

2023

    

Change 

Contract assets – current

$

86.5

$

86.9

$

(0.4)

Contract assets – non-current

33.5

27.5

6.0

Contract liabilities:

Deferred revenue – current

(16.2)

(19.7)

3.5

Deferred revenue on long-term contracts

(6.1)

 

(12.7)

 

6.6

Net contract assets

$

97.7

$

82.0

$

15.7

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 our invoicing to customers.

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. During the three-month period ended November 30, 2023, we amended the agreement to eliminate certain minimum repair volume guarantees, including all future guarantees, resulting in the de-recognition of $2.0 million from our remaining loss reserves.

Changes in our deferred revenue were as follows for the three- and nine-month periods ended February 29/28, 2024 and 2023:

    

Three Months Ended

    

Nine Months Ended

February 29/28,

February 29/28,

    

2024

    

2023

    

2024

    

2023

Deferred revenue at beginning of period

$

(26.4)

$

(28.8)

$

(32.4)

$

(30.6)

Revenue deferred

(86.4)

(81.0)

 

(222.6)

 

(208.1)

Revenue recognized

85.6

73.9

 

228.0

 

194.0

Other(1)

4.9

1.7

 

4.7

 

10.5

Deferred revenue at end of period

$

(22.3)

$

(34.2)

$

(22.3)

$

(34.2)

(1)Other includes cumulative catch-up adjustments, foreign currency translation, and other adjustments.

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AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 29, 2024

(Unaudited)

(Dollars in millions, except per share amounts)

Remaining Performance Obligations

As of February 29, 2024, we had approximately $825 million of remaining performance obligations, also referred to as firm backlog, which excludes unexercised contract options and potential orders under our indefinite-delivery, indefinite-quantity contracts. We expect that approximately 45% of this backlog will be recognized as revenue over the next 12 months with approximately 55% of the remainder recognized over the next three years. The amount of remaining performance obligations that are expected to be recognized as revenue beyond 12 months, primarily relates to our long-term programs where we provide component inventory management, supply chain logistics programs and/or repair services.

Disaggregation of Revenue

Third - party sales across the major customer markets for each of our operating segments for the three- and nine-month periods ended February 29/28, 2024 and 2023 were as follows:

Three Months Ended

Nine Months Ended

    

February 29/28,

    

February 29/28,

2024

    

2023

    

2024

    

2023

Parts Supply:

 

 

Commercial

$

200.2

$

179.7

$

595.6

$

451.0

Government and defense

42.1

47.9

 

111.1

 

128.8