10-Q 1 air-20220322x10q.htm FORM 10-Q
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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 28, 2022

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 No. 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 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 28, 2022 there were 35,196,677 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 28, 2022

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

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

29

Part II — OTHER INFORMATION

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 6.

Exhibits

31

Exhibit Index

31

Signatures

32

2

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of February 28, 2022 and May 31, 2021

(In millions, except share data)

ASSETS

February 28, 

May 31, 

2022

2021

    

(Unaudited)  

    

Current assets:

Cash and cash equivalents

$

40.6

$

51.8

Restricted cash

2.4

8.4

Accounts receivable, less allowances of $17.5 and $16.4, respectively

209.3

166.7

Contract assets

68.8

71.9

Inventories

 

535.2

 

540.6

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

 

53.6

 

50.4

Assets of discontinued operations

17.0

19.5

Other current assets

50.3

27.7

Total current assets

 

977.2

 

937.0

Property, plant and equipment, net of accumulated depreciation of $258.4 and $260.2 respectively

106.9

120.0

Other assets:

Goodwill and intangible assets, net

 

121.0

 

123.8

Operating lease right-of-use assets, net

73.2

75.8

Rotable assets supporting long-term programs

171.1

184.3

Other non-current assets

 

102.6

 

98.8

 

467.9

 

482.7

$

1,552.0

$

1,539.7

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

3

AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of February 28, 2022 and May 31, 2021

(In millions, except share data)

LIABILITIES AND EQUITY

February 28, 

May 31, 

2022

2021

    

(Unaudited)  

    

Current liabilities:

Accounts payable

$

140.8

$

127.2

Accrued liabilities

 

157.4

 

148.3

Deferred revenue

26.8

25.9

Liabilities of discontinued operations

18.1

35.4

Total current liabilities

 

343.1

 

336.8

Long-term debt

 

103.3

 

133.7

Operating lease liabilities

57.9

59.9

Other liabilities

 

30.0

 

34.9

 

191.2

 

228.5

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

 

481.4

 

479.8

Retained earnings

 

796.5

 

741.7

Treasury stock, 10,104,109 and 9,925,551 shares at cost, respectively

 

(285.4)

 

(274.1)

Accumulated other comprehensive loss

 

(20.1)

 

(18.3)

Total equity

 

1,017.7

 

974.4

$

1,552.0

$

1,539.7

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

4

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Income

For the Three and Nine Months Ended February 28, 2022 and 2021

(Unaudited)

(In millions, except share data)

Three Months Ended

Nine Months Ended

February 28, 

February 28, 

    

2022

    

2021

    

2022

    

2021

Sales:

Sales from products

$

275.1

$

227.1

$

789.2

$

696.5

Sales from services

 

177.1

 

183.2

554.7

518.2

 

452.2

 

410.3

1,343.9

1,214.7

Cost and operating expenses:

Cost of products

 

217.8

 

179.8

637.5

578.6

Cost of services

 

154.0

 

144.5

483.0

432.0

Provision for doubtful accounts

0.1

1.4

0.9

5.8

Selling, general and administrative

 

48.9

 

44.9

145.3

133.6

 

420.8

 

370.6

1,266.7

1,150.0

Loss from joint ventures

(1.1)

(1.7)

(0.2)

Operating income

 

30.3

 

39.7

75.5

64.5

Loss on sale of business

(1.3)

(19.5)

Other income, net

1.1

4.4

2.1

3.9

Interest expense

 

(0.6)

 

(1.1)

(1.8)

(4.1)

Interest income

 

 

0.1

0.1

0.2

Income from continuing operations before provision for income taxes

30.8

43.1

74.6

45.0

Provision for income taxes

8.2

12.0

20.0

13.4

Income from continuing operations

22.6

31.1

54.6

31.6

Income (Loss) from discontinued operations, net of tax

(0.1)

(3.0)

0.2

(9.8)

Net income

$

22.5

$

28.1

$

54.8

$

21.8

Earnings per share – basic:

Earnings from continuing operations

$

0.64

$

0.88

$

1.54

$

0.90

Income (Loss) from discontinued operations

(0.09)

0.01

(0.28)

Earnings per share – basic

$

0.64

$

0.79

$

1.55

$

0.62

Earnings per share – diluted:

Earnings from continuing operations

$

0.63

$

0.87

$

1.52

$

0.89

Income (Loss) from discontinued operations

(0.08)

0.01

(0.28)

Earnings per share – diluted

$

0.63

$

0.79

$

1.53

$

0.61

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

5

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

For the Three and Nine Months Ended February 28, 2022 and 2021

(Unaudited)

(In millions)

Three Months Ended

Nine Months Ended

February 28,

    

February 28,

    

2022

    

2021

    

2022

    

2021

Net income

$

22.5

$

28.1

$

54.8

$

21.8

Other comprehensive income (loss), net of tax:

Currency translation adjustments

(0.5)

0.2

 

(5.0)

 

2.5

Pension and other post-retirement plans, net of tax of $0.7 and $0.1 for the three months ended February 28, 2022 and 2021, respectively, and $0.8 and $(0.3) for the nine months ended February 28, 2022 and 2021, respectively

2.6

0.4

 

3.2

 

(0.3)

Other comprehensive income (loss), net of tax

2.1

0.6

 

(1.8)

 

2.2

Comprehensive income

$

24.6

$

28.7

$

53.0

$

24.0

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

6

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended February 28, 2022 and 2021

(Unaudited)

(In millions)

Nine Months Ended

February 28, 

    

2022

    

2021

Cash flows provided from operating activities:

Net income

$

54.8

$

21.8

Less: (Income) Loss from discontinued operations

(0.2)

9.8

Income from continuing operations

54.6

31.6

Adjustments to reconcile income from continuing operations to net cash provided from operating activities:

Depreciation and intangible amortization

 

25.5

 

27.1

Stock-based compensation

 

5.8

 

6.8

Provision for doubtful accounts

0.9

5.8

Deferred tax provision

(1.5)

(2.7)

Loss from joint ventures

1.7

0.2

Loss on sale of business

1.3

19.5

Customer contract termination costs

2.2

Impairment charges

 

2.9

 

7.0

Changes in certain assets and liabilities:

Accounts receivable

 

(44.1)

 

(22.5)

Contract assets

2.9

(16.8)

Inventories

 

4.6

 

51.2

Prepaid expenses and other current assets

(22.7)

46.7

Rotable assets supporting long-term programs

 

1.4

 

4.2

Accounts payable

 

14.1

 

(7.1)

Accrued and other liabilities

 

3.1

12.4

Deferred revenue on long-term programs

2.5

(72.6)

Other

(3.4)

 

(8.0)

Net cash provided from operating activities - continuing operations

 

49.6

 

85.0

Net cash used in operating activities - discontinued operations

 

(14.5)

 

(2.4)

Net cash provided from operating activities

35.1

82.6

Cash flows provided from (used in) investing activities:

Property, plant and equipment expenditures

(10.2)

(8.6)

Proceeds from termination of life insurance policies

 

 

10.0

Proceeds from asset disposals

7.3

Investments in joint ventures

(4.0)

Other

0.9

Net cash provided from (used in) investing activities

(6.9)

2.3

Cash flows used in financing activities:

Short-term borrowings, net

(5.0)

(405.0)

Repayment of long-term borrowings

 

(24.7)

 

Purchase of treasury stock

(20.2)

Proceeds from Payroll Support Program note

 

8.7

Cash dividends

(0.1)

Stock compensation activity

 

4.6

 

(0.8)

Net cash used in financing activities

 

(45.3)

 

(397.2)

Effect of exchange rate changes on cash

 

(0.1)

0.2

Decrease in cash and cash equivalents

(17.2)

(312.1)

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

 

60.2

424.7

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

$

43.0

$

112.6

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

7

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity

For the Three and Nine Months Ended February 28, 2022 and 2021

(Unaudited)

(In millions)

Accumulated

Other

Common

Capital

Retained

Treasury

Comprehensive

    

Stock

    

Surplus

    

Earnings

    

Stock

    

Income (Loss)

    

Total Equity

Balance, May 31, 2021

$

45.3

$

479.8

$

741.7

$

(274.1)

$

(18.3)

$

974.4

Net income

 

 

 

11.5

11.5

Stock option activity

 

 

1.1

 

0.2

1.3

Restricted stock activity

 

 

(1.0)

 

2.3

1.3

Other comprehensive loss, net of tax

 

 

 

(0.3)

(0.3)

Balance, August 31, 2021

$

45.3

$

479.9

$

753.2

$

(271.6)

$

(18.6)

$

988.2

Net income

20.8

20.8

Stock option activity

 

0.9

 

 

 

 

0.9

Restricted stock activity

 

0.7

 

 

 

 

0.7

Other comprehensive loss, net of tax

 

 

 

 

(3.6)

 

(3.6)

Balance, November 30, 2021

$

45.3

$

481.5

$

774.0

$

(271.6)

$

(22.2)

$

1,007.0

Net income

22.5

22.5

Stock option activity

(0.4)

6.4

6.0

Restricted stock activity

0.3

0.3

Repurchase of shares

(20.2)

(20.2)

Other comprehensive income, net of tax

2.1

2.1

Balance, February 28, 2022

$

45.3

$

481.4

$

796.5

$

(285.4)

$

(20.1)

$

1,017.7

Accumulated

Other

Common

Capital

Retained

Treasury

Comprehensive

    

Stock

    

Surplus

    

Earnings

    

Stock

    

Income (Loss)

    

Total Equity

Balance, May 31, 2020

$

45.3

$

478.6

$

706.0

$

(282.7)

$

(44.6)

$

902.6

Net loss

 

 

 

(14.5)

 

 

 

(14.5)

Cash dividends

 

 

 

(0.1)

 

 

 

(0.1)

Stock option activity

 

 

0.5

 

 

0.5

 

 

1.0

Restricted stock activity

 

 

(6.0)

 

 

6.1

 

 

0.1

Other comprehensive income, net of tax

 

 

 

 

 

1.5

 

1.5

Balance, August 31, 2020

$

45.3

$

473.1

$

691.4

$

(276.1)

$

(43.1)

$

890.6

Net income

8.2

8.2

Stock option activity

1.1

0.1

1.2

Restricted stock activity

0.9

(0.3)

0.6

Other comprehensive income, net of tax

0.1

0.1

Balance, November 30, 2020

$

45.3

$

475.1

$

699.6

$

(276.3)

$

(43.0)

$

900.7

Net income

28.1

28.1

Stock option activity

1.0

0.9

1.9

Restricted stock activity

1.3

(0.2)

1.1

Other comprehensive income, net of tax

0.6

0.6

Balance, February 28, 2021

$

45.3

$

477.4

$

727.7

$

(275.6)

$

(42.4)

$

932.4

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 28, 2022

(Unaudited)

(Dollars in millions, except per share amounts)

Note 1 – Basis of Presentation

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

We have prepared these statements without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The Condensed Consolidated Balance Sheet as of May 31, 2021 has been derived from audited financial statements. To prepare the financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”), management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain information and note disclosures, normally included in comprehensive financial statements prepared in accordance with GAAP, have been condensed or omitted pursuant to such rules and regulations of the SEC. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2021.

In the opinion of management, the Condensed Consolidated Financial Statements reflect all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the Condensed Consolidated Balance Sheet of AAR CORP. and its subsidiaries as of February 28, 2022, the Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income for the three- and nine-month periods ended February 28, 2022 and 2021, the Condensed Consolidated Statements of Cash Flows for the nine-month periods ended February 28, 2022 and 2021, and the Condensed Consolidated Statements of Changes in Equity for the three- and nine-month periods ended February 28, 2022 and 2021. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Note 2 – Discontinued Operations

During the third quarter of fiscal 2018, we decided to pursue the sale of our Contractor-Owned, Contractor-Operated (“COCO”) business previously included in our Expeditionary Services segment. Due to this strategic shift, the assets, liabilities, and results of operations of our COCO business have been reported as discontinued operations for all periods presented. Unless otherwise noted, amounts and disclosures throughout these Notes to Condensed Consolidated Financial Statements relate to our continuing operations.

In the fourth quarter of fiscal 2020, we completed the sale of the last operating contract of the COCO business shortly after government approval. Our continuing involvement in the COCO business is limited to the lease of certain aircraft which is an obligation of the acquirer of this contract. The assets and liabilities of our discontinued operations are primarily comprised of right-of-use assets and lease-related liabilities.

Note 3 – Sale of Composites Business

On August 31, 2020, we completed the sale of our aerostructures and aerospace products operations located in Clearwater, Florida and Sacramento, California (“Composites”). The Composites business was formerly included in our Expeditionary Services segment.

We recognized a loss on the sale of the Composites business of $19.5 million in the first quarter of fiscal 2021. In the fourth quarter of fiscal 2021, the post-closing working capital adjustment was finalized resulting in an additional loss of $0.7 million. The sale also included contingent consideration of up to $6.5 million based on the achievement of sales targets over a three-year period subsequent to the sale. We recognized a charge of $1.3 million in the three-month period ended November 30, 2021 to reflect the fair value of the contingent consideration at zero as it is unlikely the sales targets will be achieved.

9

Table of Contents

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2022

(Unaudited)

(Dollars in millions, except per share amounts)

Note 4 – Revenue Recognition

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

Our unit of accounting for revenue recognition is a performance obligation included in our customer contracts. A performance obligation reflects the distinct good or service that we must transfer to a customer. At contract inception, we evaluate if the contract should be accounted for as a single performance obligation or if the contract contains multiple performance obligations. In some cases, our contract with the customer is considered one performance obligation as it includes factors such as the good or service being provided is significantly integrated with other promises in the contract, the service provided significantly modifies or customizes another good or service or the good or service is highly interdependent or interrelated. If the contract has more than one performance obligation, we determine the standalone price of each distinct good or service underlying each performance obligation and allocate the transaction price based on their relative standalone selling prices.

The transaction price of a contract, which can include both fixed and variable amounts, is allocated to each performance obligation identified. Some contracts contain variable consideration, which could include incremental fees or penalty provisions related to performance. Variable consideration that can be reasonably estimated based on current assumptions and historical information is included in the transaction price at the inception of the contract but limited to the amount that is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Variable consideration that cannot be reasonably estimated is recorded when known.

Our performance obligations are satisfied over time as work progresses or at a point in time based on transfer of control of products and services to our customers. The majority of our sales from products are recognized at a point in time upon transfer of control to the customer, which generally occurs upon shipment. In connection with certain sales of products, we also provide logistics services, which include inventory management, replenishment, and other related services. The price of such services is generally included in the price of the products delivered to the customer, and revenues are recognized upon delivery of the product, at which point the customer has obtained control of the product. We do not account for these services separate from the related product sales as the services are inputs required to fulfill part orders received from customers.

For our performance obligations that are satisfied over time, we measure progress in a manner that depicts the performance of transferring control to the customer. As such, we utilize the input method of cost-to-cost to recognize revenue over time as this depicts when control of the promised goods or services is transferred to the customer. Revenue is recognized based on the relationship of actual costs incurred to date to the estimated total cost at completion of the performance obligation. We are required to make certain judgments and estimates, including estimated revenues and costs, as well as inflation and the overall profitability of the arrangement. Key assumptions involved include future labor costs and efficiencies, overhead costs, and ultimate timing of product delivery. Differences may occur between the judgments and estimates made by management and actual program results. For contracts that are deemed to be loss contracts, we establish forward loss reserves for total estimated costs that are in excess of total estimated consideration in the period in which they become known.

When contracts are modified, we consider whether the modification either creates new or changes the existing enforceable rights and obligations. Contract modifications that are for goods or services that are not distinct from the existing contract, due to the significant integration with the original goods or services provided, are accounted for as if they were part of that existing contract with the effect of the contract modification recognized as an adjustment to revenue on a cumulative catch-up basis. When the modifications include additional performance obligations that are distinct, they are accounted for as a new contract and performance obligation, which are recognized prospectively.

Changes in estimates and assumptions related to our arrangements accounted for using the cost-to-cost method are recorded using the cumulative catch-up method of accounting. These changes are primarily adjustments to the estimated profitability for our long-term programs where we provide component inventory management and/or repair services.

10

Table of Contents

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2022

(Unaudited)

(Dollars in millions, except per share amounts)

For the three-month period ended February 28, 2022, we recognized a favorable cumulative catch-up adjustment of $2.5 million. For the three-month period ended February 28, 2021, we recognized favorable and (unfavorable) cumulative catch-up adjustments of $4.1 million and $(2.1) million, respectively, or $2.0 million on a net basis.

For the nine-month period ended February 28, 2022, we recognized favorable and (unfavorable) cumulative catch-up adjustments of $10.7 million and $(3.3) million, respectively. For the nine-month period ended February 28, 2021, we recognized favorable and (unfavorable) cumulative catch-up adjustments of $6.9 million and $(2.1) million, respectively. When considering these adjustments on a net basis, we recognized net favorable adjustments of $7.4 million and $4.8 million in the nine-month periods ended February 28, 2022 and 2021, respectively.

Under most of our U.S. government contracts, if the contract is terminated for convenience, we are entitled to payment for items delivered and fair compensation for work performed, the costs of settling and paying other claims, and a reasonable profit on the costs incurred or committed.

We have elected to use certain practical expedients permitted under ASU No. 2014-09, 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.

Contract Assets and Liabilities

The timing of revenue recognition, customer billings, and cash collections results in a contract asset or contract liability at the end of each reporting period. Contract assets consist of costs incurred where revenue recognized over time using the cost-to-cost model exceeds the amounts billed to customers. Contract liabilities include advance payments and billings in excess of revenue recognized. Certain customers make advance payments prior to the satisfaction of our performance obligations on the contract. These amounts are recorded as contract liabilities until such performance obligations are satisfied, either over time as costs are incurred or at a point in time when deliveries are made. Contract assets and contract liabilities are determined on a contract-by-contract basis.

Net contract assets and liabilities are as follows:

February 28, 

May 31, 

    

2022

    

2021

    

Change 

Contract assets – current

$

68.8

$

71.9

$

(3.1)

Contract assets – non-current

22.4

21.6

0.8

Contract liabilities:

Deferred revenue – current

(26.8)

(25.9)

(0.9)

Deferred revenue on long-term contracts

(8.7)

 

(5.4)

 

(3.3)

Net contract assets

$

55.7

$

62.2

$

(6.5)

Contract assets – non-current is reported within Other non-current assets and Deferred revenue on long-term contracts is reported within Other liabilities on our Condensed Consolidated Balance Sheets. Changes in contract assets and contract liabilities primarily result from the timing difference between our performance of services and payments from customers.

During the three-month period ended August 31, 2020, we terminated a commercial power-by-the-hour (“PBH”) customer contract which resulted in a charge of $2.2 million. During the three-month period ended February 28, 2021, we recognized a loss contract charge of $3.5 million related to a certain PBH contract accounted for as a long-term contract using the cost-to-cost input method for revenue recognition.

11

Table of Contents

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2022

(Unaudited)

(Dollars in millions, except per share amounts)

One of our PBH customers notified us in June 2021 that the customer would terminate its contract with us earlier than we originally anticipated. In conjunction with the early termination, we recognized a charge of $5.2 million in the three-month period ended August 31, 2021, which included a reduction in contract assets and revenue of $1.0 million and the establishment of loss reserves of $4.2 million. As of February 28, 2022, our Condensed Consolidated Balance Sheet included remaining loss reserves of $0.9 million classified in Accrued liabilities.

During fiscal 2020, we established forward loss reserves for a certain PBH contract where total estimated costs are in excess of the total estimated consideration over the remainder of the contract. As of February 28, 2022, our Condensed Consolidated Balance Sheet included remaining forward loss reserves of $1.5 million classified in Accrued liabilities.

To support our PBH customer contracts, we previously entered into an agreement with a component repair facility to outsource a portion of the component repair and overhaul services. The agreement included certain minimum repair volume guarantees, which we have not met due to the impact of COVID-19 on commercial passenger aircraft flight hours. During fiscal 2021, we recognized a $4.5 million charge to reflect our estimated obligation over the remainder of the agreement for not achieving the minimum volume guarantees. During the three-month period ended August 31, 2021, we recognized a $1.7 million charge to increase the obligation reflecting the revised estimated shortfall on the minimum volume guarantee. As of February 28, 2022, our Condensed Consolidated Balance Sheet included remaining loss reserves of $4.6 million with $1.5 million classified as current in Accrued liabilities and $3.1 million classified as long-term in Other liabilities.

Changes in our deferred revenue were as follows for the three- and nine-month periods ended February 28, 2022 and 2021:

Three Months Ended

    

Nine Months Ended

February 28, 

February 28, 

    

2022

    

2021

    

2022

    

2021

Deferred revenue at beginning of period

$

(42.7)

$

(48.4)

$

(31.3)

$

(99.2)

Revenue deferred

(81.9)

(61.7)

 

(204.0)

 

(184.7)

Revenue recognized

82.4

72.4

 

187.4

 

248.5

Other

6.7

(0.6)

 

12.4

 

(2.9)

Deferred revenue at end of period

$

(35.5)

$

(38.3)

$

(35.5)

$

(38.3)

Remaining Performance Obligations

As of February 28, 2022, 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 (IDIQ) contracts. We expect that approximately 40% of this backlog will be recognized as revenue over the next 12 months with approximately 35% 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 and/or repair services.

12

Table of Contents

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

February 28, 2022

(Unaudited)

(Dollars in millions, except per share amounts)

Disaggregation of Revenue

Sales across the major customer markets for each of our reportable segments for the three- and nine-month periods ended February 28, 2022 and 2021 were as follows:

Three Months Ended

Nine Months Ended

February 28, 

    

February 28, 

    

2022

    

2021

    

2022

    

2021

Aviation Services:

 

Commercial

$

264.0

$

204.7

$

788.2

$

566.5

Government and defense

174.0

185.0

 

504.7

 

571.8

$

438.0

$

389.7

$

1,292.9

$

1,138.3

Expeditionary Services:

Commercial

$

1.0

$

3.1

$

1.8

$

10.8

Government and defense

13.2

17.5

 

49.2

 

65.6

$

14.2

$

20.6

$

51.0

$

76.4

Sales by geographic region for the three- and nine-month periods ended February 28, 2022 and 2021 were as follows: