UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the fiscal year ended May 31, | |||||
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o | 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)
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Delaware | 36-2334820 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
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One AAR Place, 1100 N. Wood Dale Road, Wood Dale, Illinois 60191
(Address of principal executive offices, including zip code)
Registrant’sRegistrant's telephone number, including area code:(630) 227-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, $1.00 par value | New York Stock Exchange | |
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Common Stock Purchase Rights | New York Stock Exchange | |
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Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yesýx Noo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yeso No No ýx
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. Yesý Noxo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yeso Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’sregistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitiondefinitions of “accelerated"large accelerated filer," "accelerated filer" and large accelerated filer”"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check(Check one):
Large accelerated filero | Accelerated filerý | Non-Accelerated filero | Smaller reporting companyo |
Large accelerated filer x Accelerated filer o Non-Accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso No No ýx
At November 30, 2006,2008, the aggregate market value of the registrant’sregistrant's voting stock held by nonaffiliates was approximately $955,063,050$633,384,669 (based upon the closing price of the Common Stock at November 30, 20062008 as reported on the New York Stock Exchange).
On June 30, 2007,2009, there were 37,795,63038,850,913 shares of Common Stock outstanding.
Documents Incorporated by Reference
Portions of the definitive proxy statement relating to the registrant’s 2007registrant's 2009 Annual Meeting of Stockholders, to be held October 17, 200714, 2009 are incorporated by reference in Part III.
PART I ITEM 1. BUSINESS AAR CORP. and its subsidiaries are referred to herein collectively as We report our activities in four business segments: (i) Aviation Supply Chain, comprised primarily of business activities conducted through AAR Parts Trading, Inc., AAR Services, Inc., AAR Allen Services, Inc., Activities in our Aviation Supply Chain segment include the purchase and sale of a wide variety of new, overhauled and repaired engine and airframe parts and components for our airline and defense customers. We also repair and overhaul a wide variety of avionics, electrical, electronic, fuel, hydraulic and pneumatic components and instruments and a broad range of internal airframe components for the same customer categories. We provide customized inventory supply and management programs and performance-based logistics programs for engine and airframe parts and components in support of airline and defense On June 15, 2009, we announced the formation of AAR Global Solutions, LLC, a joint venture to expand our participation in domestic and international government and defense markets. The new business is designed to allow the Company to compete more effectively as a prime contractor in the domestic and international government and defense markets. Maintenance, Repair and Overhaul Activities in our Maintenance, Repair and Overhaul segment include major airframe maintenance inspection and overhaul, painting services, line maintenance, airframe modifications, structural repairs, avionic service and for many types of commercial and military aircraft. We also repair and overhaul We have a long-term lease to occupy a portion of an In this segment, we purchase replacement parts from original equipment manufacturers ("OEMs") and suppliers that are used in our maintenance, repair and overhaul operations. We have ongoing arrangements with Activities in our Structures and Systems segment include the design, manufacture and repair of airdrop and other transportation pallets, and a wide variety of containers and shelters in support of military and humanitarian tactical deployment activities. Activities in our Aircraft Sales and Leasing segment include the sale airlines and aircraft leasing companies for our own account or in partnership with strategic or financial partners The following table summarizes our aircraft portfolio by aircraft type and by ownership status as of May 31, 2009: MD80 series 737-300 series 737-400 series 737-500 series 757-200 series 767-300 series 747-400 series A320 CRJ200 Total At May 31, 2009, 31 of the 32 aircraft were on lease, with 23 of the aircraft on lease outside of North America. The one aircraft not under lease at May 31, 2009 was subsequently leased to an international carrier in July, 2009. During fiscal 2010, six 737-400's in the joint We historically have been able to obtain raw materials and other items for our inventories for each of our segments at competitive prices, terms and conditions from numerous sources, and we expect to be able to continue to do so. In the Aviation Supply Chain, Maintenance, Repair and Overhaul, and Structures and Systems segments, we generally sell our products under standard 30-day terms. On occasion, certain customers (principally foreign customers) will negotiate extended payment terms (60-90 days). Except for customary warranty provisions, customers do not have the right to return products nor do they have the right to extended financing. In the Aircraft Sales and Leasing segment, we sell our products on a cash due at delivery basis, standard 30-day terms or on an extended term basis, and aircraft purchasers do not have the right to return the aircraft. Our contracts with the U.S. Department of Defense and its contractors are typically firm agreements to provide products and services at a fixed price and have a term of one year or less, frequently subject to extension for one or more additional periods of one year at the option of the U.S. Department of Defense. Customers For each of our reportable segments, we market and sell products and services primarily through our own employees. In certain markets outside of the United States, we rely on foreign sales representatives to assist in the sale of our products and services. The principal customers for our products and services in the Aviation Supply Chain and Maintenance, Repair and Overhaul segments are domestic and foreign commercial airlines, regional and commuter airlines, business and general aviation operators, original equipment manufacturers, aircraft leasing companies, domestic and foreign military organizations and independent aviation support companies. In the Structures and Systems segment, our principal customers include domestic and foreign We have Competition in each of our markets is based on quality, ability to provide a broad range of products and services, speed of delivery and price. Competitors in both the Aviation Supply Chain and the Maintenance, Repair and Overhaul segments include original equipment manufacturers, the service divisions of large commercial airlines and other independent suppliers of parts and repair and overhaul services. Our of divisions of large corporations and other large and small companies. In our Aircraft Sales and Leasing segment, we face competition from financial institutions, syndicators, hedge funds, commercial and specialized leasing companies and other entities that provide financing. Although certain of our competitors have substantially greater financial and other resources than we do, in each of our four reportable segments we believe that we have maintained a satisfactory competitive position through our responsiveness to customer needs, our attention to quality and our unique combination of market expertise and technical and financial capabilities. At May 31, At May 31, Sales to Sales to global defense customers were $605,583 (42.5% of total sales) in fiscal 2009. Sales to the U.S. Department of Defense and its contractors were For additional information concerning our business segments, see Item 7, Our internet address is The following is a description of some of the principal risks inherent in our business. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could adversely impact our results of operations or financial condition in the future. We As a provider of products and services to the commercial aviation industry, we are greatly affected by More recently, over the past nine to twelve months, the U.S. economy and the economies of other industrialized nations have deteriorated. In the first quarter of calendar year 2009, U.S. gross domestic product declined 5.5%, and the U.S. unemployment rate reached approximately 9.5%, its highest level since 1983. As a result of weak economic conditions, both business and leisure travelers have reduced air travel, causing many carriers to announce further capacity reductions. Capacity in North America was down approximately 8% during the first calendar quarter of 2009 compared to last year, and passenger traffic declined approximately 10%. There has also been tightening in the credit markets over the last year. This has reduced the amount of liquidity available to our customers which has limited their ability to buy parts, services, engines and aircraft. A further reduction in the operating fleet of aircraft both in the U.S. and abroad will result in reduced demand for parts support and maintenance activities for the type of aircraft affected. Further, tight credit conditions may impact the amount of liquidity available to buy parts, services, engines and aircraft. Reduced demand from customers caused by weak economic conditions, including Our business, financial condition, and results of operations and our growth rates may be adversely the ongoing war on terrorism; and Our customers may not be able to meet their financial obligations to us or we may experience less business as a result of the current airline environment, which would adversely affect our financial condition and results of operations. In addition to Mesa, a number of our existing and prospective worldwide airline customers continue to suffer from the problems affecting the aviation industry, and some have filed for bankruptcy The market value for our aviation products fluctuates. We have used a number of assumptions when determining the recoverability of inventories and aircraft and engines which are on lease or available for lease. These assumptions include historical sales trends, current and expected usage trends, replacement values, current and expected lease rates, residual values, future demand, and future cash flows. future periods. We can give no assurance that future impairment charges for our inventories, aircraft and engines will not occur. Acquisitions expose us to risks, including the risk that we may be unable to effectively integrate acquired businesses. During fiscal 2008 and 2007, we completed four acquisitions. Further, we explore and have discussions with third parties regarding additional acquisitions on a regular basis. Acquisitions involve risks, including difficulties in integrating the operations and personnel, the effects of amortization of any acquired intangible assets and the potential impairment of goodwill, and the potential loss of key employees of the acquired business. For the acquisitions we made during fiscal 2008 and fiscal 2007, and for any additional businesses we may acquire in the future, we may not be able to execute our operational, financial or integration plan of the acquired businesses, which could adversely affect our results of operations and financial condition. Our government contracts may not continue at present sales levels, which may have a material adverse effect on our financial condition and results of operations. Our sales to the U.S. Department of Defense and its contractors were approximately We face risks of cost overruns and losses on fixed-price contracts. We sell certain of our products and services under firm We may be unable to re-lease or sell We purchase and lease aircraft and engines to our customers on an operating lease basis. Our ability to re-lease or sell these assets on acceptable terms is subject to a number of factors which drive industry capacity, including new aircraft deliveries, availability of used aircraft and engines in the marketplace, competition, financial condition of our customers, overall health of the airline industry and general economic conditions. During fiscal 2010, six 737-400's in the joint venture portfolio will be up for lease renewal and one MD80 in the wholly-owned portfolio will be up for lease renewal. Our inability to re-lease these aircraft, or Significant cost issues may develop associated with the A400M Cargo system. In June 2005, we announced that our Cargo Systems business in our Structures and Systems segment was selected to provide cargo handling systems for the new A400M Military Transport Aircraft at We operate in a highly competitive industry, and competitive pressures may adversely affect us. The aviation industry and the markets for our products and services are highly competitive, and we face competition from a number of We are dependent upon continued availability of financing to manage our business and to execute our business strategy, and additional financing may not be available on terms acceptable to us. Our ability to manage our business and to execute our business strategy is dependent, in part, on the continuing availability of debt and equity capital. Access to the debt and equity capital markets may be limited by various factors, including the condition of overall credit markets, general economic Our existing debt includes restrictive and financial covenants. Certain of our loan agreements require us to comply with various restrictive covenants and some contain financial covenants that require us to comply with specified financial ratios and tests. Our failure to meet these covenants could result in default under these loan agreements and would result in a cross-default under other loan agreements. In the event of a default and our inability to obtain a waiver of the default, all amounts outstanding under loan agreements could be declared immediately due and payable. Our failure to comply with these covenants could adversely affect our results of operations and financial condition. We are subject to significant government regulation and may need to incur significant expenses to comply with new or more stringent governmental regulation. The aviation industry is highly regulated by the FAA in the United States and the equivalent regulatory agencies in other countries. Before we sell any of our products that are to be installed in an aircraft, such as engines, engine parts and components, and airframe and accessory parts and components, they must meet certain standards of airworthiness established by the FAA or the equivalent regulatory agencies in other countries. We also operate repair stations that are licensed by the FAA and If any of the Company's material licenses, authorizations or approvals were revoked or suspended by the FAA and in some cases the equivalent regulatory agencies in other countries, our results of operations and financial condition may be adversely affected. Our industry is susceptible to product liability claims, and claims not adequately covered by insurance may adversely affect our financial condition. Our business exposes us to possible claims for property damage and personal injury or death which may result if an engine, engine part or component, airframe part or accessory or any other aviation product which we have sold, manufactured or repaired fails, or if an aircraft we serviced or in which our products are installed crashes and the cause cannot be determined. We carry substantial liability insurance in amounts that we believe are adequate for our risk exposure and commensurate with industry norms. However, claims may arise in the future, and our insurance coverage may not be adequate to protect us in all circumstances. Additionally, we can give no assurance that we will be able to maintain adequate insurance coverage in the future at an acceptable cost. Any product liability claim not covered by adequate insurance could adversely affect our results of operations and financial condition. We must comply with extensive environmental requirements, and any exposure to environmental liabilities may adversely affect us. Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes, and other activities affecting the environment have had and may continue to have an impact on our operations. We may need to make significant capital expenditures to keep pace with technological developments in our industry. The aviation industry is constantly undergoing development and change, and it is likely that new products, equipment and methods of repair and overhaul services will be introduced in the future. We may need to make significant Our operations would be adversely affected by a shortage of skilled personnel or work stoppages. Because of the complex nature of many of our products and services, we are ITEM 1B. UNRESOLVED STAFF COMMENTS Our principal activities in the Aircraft Sales and Leasing segment and parts distribution activities in the Aviation Supply Chain segment are conducted from a building in Wood Dale, Illinois, which Our principal activities in the Maintenance, Repair and Overhaul segment are conducted at facilities leased by us located in Indianapolis, Indiana; Oklahoma City, Oklahoma; Miami, Our principal activities in the Structures and Systems segment are conducted at facilities owned by us in Clearwater, Florida (subject to an industrial revenue bond); Cadillac and Livonia, We also operate sales offices which support all our activities and are leased in London, England; Melbourne, Australia; Paris, France; Rio de Janeiro, Brazil; Shanghai, China; Singapore, Republic of Singapore and Tokyo, Japan. We believe that our owned and leased facilities are suitable and adequate for our operational requirements. ITEM 3. LEGAL PROCEEDINGS Except as described below, we are not a party to any material, pending legal proceeding (including any governmental or environmental proceedings) other than routine litigation incidental to our business. AAR Manufacturing, Inc., a subsidiary of the Company The subsidiary advised the MDEQ that it would perform the requirements of the Order to the extent those requirements apply to the allegation by the MDEQ that a release of hazardous substances occurred after the execution of the 1985 Consent Decree. The subsidiary declined to perform certain work required by the Order that the subsidiary believes is based on claims resolved in the 1985 Consent Decree. On March 31, 2005, a complaint was filed by the MDEQ in Cadillac, Michigan with the Wexford County Circuit Court. The case isMichigan Department of Environmental Quality The Company and the subsidiary filed their Answer, including Trial took place during the months of December 2008 through February 2009. During the trial, the court granted a motion by the subsidiary to dismiss MDEQ's claims for enforcement of the Order and for civil fines and exemplary damages for the Company's alleged failure to comply with the Order. As a result of this ruling, the only issues remaining in the case are whether the subsidiary is liable for a post-Consent Decree release of contamination and, if so, what costs MDEQ is entitled to recover. The court also In a related matter, in December 2008, the Company and the subsidiary were sued by Liberty Mutual Insurance Co., the insurer who had been paying the Company's defense costs in the ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. Supplemental Item: EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning each of our executive officers is set forth below: David P. Storch Timothy J. Romenesko Richard J. Poulton James J. Clark Michael J. Sharp Terry D. Stinson Donald J. Wetekam Mr. Storchwas elected Chairman of the Board and Chief Executive Officer in October 2005. Previously, he served as President and Chief Executive Officer from 1996 to 2005 and Chief Operating Officer from 1989 to 1996. Prior to that, he served as a Vice President of the Company from 1988 to 1989. Mr. Storch joined the Company in 1979 and also served as president of a major subsidiary from 1984 to 1988. Mr. Storch has been a director of the Company since 1989. Mr. Romeneskowas appointed President and Chief Operating Officer effective June 1, 2007. Previously, he served as Vice President and Chief Financial Officer since 1994. He also served as Controller of the Company from 1991 to 1995, and in various other positions since joining the Company in 1981. Mr. Romenesko was appointed a director of the Company in July 2007. Mr. Poultonwas appointed Vice President, Chief Financial Officer and Treasurer effective June 1, 2007. Previously he served as Vice President of Acquisitions and Strategic Investments since joining the Company in September 2006. Prior to joining the Company, he spent ten years in the aviation industry and held senior executive leadership positions with UAL Corporation, including Senior Vice President of Business Development and Senior Vice President and Chief Procurement Officer for United Airlines, Inc. Mr. Mr. Clarkhas served as Group Vice President, Aviation Supply Chain since 2005. Previously, he served in various Group Vice President roles from 2000 to 2005, and previous to that he served as General Manager of AAR Aircraft Component Services—Amsterdam from 1995 to 2000, and in various other positions since joining the Company in 1982. Mr. Sharphas served as Vice President, Controller and Chief Accounting Officer since 1999. Previously, he served as Controller of the Company from 1996 to 1999. Prior to joining the Company, he was with Kraft Foods from 1994 to 1996, and with KPMG LLP from 1984 to 1994. Mr. Stinson has served as Group Vice President of Structures and Systems since joining the Company in the first quarter of fiscal 2008. Previously, he was President of Commercial Operations for Thomas Group, an operational consulting firm, and Chairman and Chief Executive Officer of Xelus Inc. Prior to that he served as Chairman and Chief Executive Officer of Bell Helicopter Textron, Inc. from 1991 to 2001 and before that held leadership positions with United Technologies Corporation ("UTC"), including President and Chief Executive Officer of Hamilton Standard, a UTC division from 1986 to 1991. Mr. Wetekam has served as Group Vice President, Maintenance, Repair and Overhaul since January 2008. Previously, he served as President and General Manager of the Company's aircraft maintenance facility in Oklahoma City since joining the Company in September 2007. Prior to joining the Company, he served as Deputy Chief of Staff for Installations and Logistics in the U.S. Air Force. Each executive officer is elected annually by the Board of Directors at the first meeting of the Board held after the annual meeting of stockholders. Executive officers continue to hold office until their successors are duly elected or until their death, resignation, termination or reassignment. PART II ITEM 5. MARKET FOR Our Common Stock is traded on the New York Stock Exchange and the Chicago Stock Exchange. On July 1, The table below sets forth for each quarter of the past two fiscal years the reported high and low closing market prices of our Common Stock on the New York Stock Exchange. Fiscal 2007 Fiscal 2006 Per Common Share Market Prices Market Prices Quarter High Low High Low First $ 25.17 $ 19.50 $ 17.97 $ 14.94 Second 27.69 22.24 20.94 15.10 Third 31.52 26.32 26.42 20.50 Fourth 33.55 27.40 29.00 24.05 ITEM 6. SELECTED FINANCIAL DATA For the Year Ended May 31, 2007 2006 2005 2004 2003 RESULTS OF OPERATIONS Sales from continuing operations3 $ 1,061,169 $ 885,518 $ 740,427 $ 632,223 $ 589,085 Gross profit 184,147 1 163,221 120,575 100,389 77,581 1 Operating income 95,366 1 65,172 34,917 21,612 2,431 1 Gain (loss) on extinguishment of debt 2,927 (3,893 ) 3,562 — — Interest expense 16,701 18,004 16,917 18,691 19,416 Income (loss) from continuing operations3 59,447 35,823 19,498 5,430 (9,589 ) Loss from discontinued operations3 (787 ) (660 ) (4,045 ) (1,926 ) (2,821 ) Net income (loss) 58,660 35,163 15,453 3,504 (12,410 ) Share data: Earnings (loss) per share-basic: Earnings (loss) from continuing operations $ 1.63 $ 1.07 $ 0.60 $ 0.17 $ (0.30 ) Loss from discontinued operations (0.02 ) (0.02 ) (0.12 ) (0.06 ) (0.09 ) Earnings (loss) per share-basic $ 1.61 $ 1.05 $ 0.48 $ 0.11 $ (0.39 ) Earnings (loss) per share-diluted: Earnings (loss) from continuing operations $ 1.42 $ 0.96 $ 0.57 $ 0.17 $ (0.30 ) Loss from discontinued operations (0.02 ) (0.02 ) (0.11 ) (0.06 ) (0.09 ) Earnings (loss) per share-diluted $ 1.40 $ 0.94 $ 0.46 $ 0.11 $ (0.39 ) Cash dividends per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.03 Weighted average common shares outstanding—basic 36,389 33,530 32,297 32,111 31,852 Weighted average common shares outstanding—diluted 43,309 38,852 36,205 32,392 31,852 FINANCIAL POSITION Total cash and cash equivalents $ 83,317 $ 121,738 $ 50,338 $ 41,010 $ 29,154 Working capital 389,215 436,666 314,517 300,943 192,837 Total assets 1,067,633 978,819 732,230 709,292 686,621 Short-term recourse debt 51,366 361 2,123 2,656 59,729 Short-term non-recourse debt 22,879 1,928 1,622 736 32,527 Long-term recourse debt 232,863 293,263 4,5 199,919 217,434 2 164,658 Long-term non-recourse debt 20,748 25,313 27,240 31,232 — Total recourse debt 284,229 293,624 202,042 220,090 224,387 Stockholders’ equity 494,243 422,717 5 314,744 301,684 294,988 Number of shares outstanding at end of year 37,729 36,654 32,586 32,245 31,850 Book value per share of common stock $ 13.10 $ 11.53 $ 9.66 $ 9.36 $ 9.26 RESULTS OF OPERATIONS Sales from continuing operations1 Gross profit Operating income Gain (loss) on extinguishment of debt Interest expense Income from continuing operations1 Loss from discontinued operations1 Net income Share data: Earnings (loss) per share—basic: Earnings from continuing operations Loss from discontinued operations Earnings per share—basic Earnings (loss) per share—diluted: Earnings from continuing operations Loss from discontinued operations Earnings per share—diluted Weighted average common shares outstanding—basic Weighted average common shares outstanding—diluted FINANCIAL POSITION Total cash and cash equivalents Working capital Total assets Short-term recourse debt Short-term non-recourse debt Long-term recourse debt Long-term non-recourse debt Total recourse debt Stockholders' equity Number of shares outstanding at end of year Book value per share of common stock Notes: Table of ITEM 7. We report our activities in four business segments: Aviation Supply Chain; Maintenance, Repair and Overhaul; Structures and Systems; and Aircraft Sales and Leasing. Sales in the Aviation Supply Chain segment are derived from the sale and lease of a wide variety of new, overhauled and repaired engine and airframe parts and components to the commercial aviation and defense markets, as well as the repair and overhaul of a wide range of commercial and military aircraft Sales in the Maintenance, Repair and Overhaul segment are principally derived from aircraft maintenance, Sales in the Structures and Systems segment are derived from the Sales in the Aircraft Sales and Leasing segment are derived from the sale and lease of commercial aircraft and technical and advisory services. Cost of sales consists principally of the cost of product (aircraft), labor and the cost of lease revenue (primarily depreciation Our chief operating decision making officer (Chief Executive Officer) evaluates performance based on the reportable segments and utilizes gross profit (loss) as a primary profitability measure. The tables below set forth consolidated sales and gross profit (loss) for our four business segments for each of the last three fiscal years ended May 31. For the Year Ended May 31, 2007 2006 2005 Sales: Aviation Supply Chain $ 543,674 $ 461,166 $ 390,060 Maintenance, Repair and Overhaul 211,516 182,258 111,932 Structures and Systems 264,083 228,747 193,296 Aircraft Sales and Leasing 41,896 13,347 45,139 $ 1,061,169 $ 885,518 $ 740,427 Sales: Aviation Supply Chain Maintenance, Repair and Overhaul Structures and Systems Aircraft Sales and Leasing For the Year Ended May 31, 2007 2006 2005 Gross Profit: Aviation Supply Chain $ 114,383 $ 99,255 $ 67,672 Maintenance, Repair and Overhaul 29,915 25,914 14,414 Structures and Systems 36,021 33,711 35,184 Aircraft Sales and Leasing 3,828 4,341 3,305 $ 184,147 $ 163,221 $ 120,575 Gross Profit (Loss): Aviation Supply Chain Maintenance, Repair and Overhaul Structures and Systems Aircraft Sales and Leasing Business Trends and Highlights Disruptions in the financial We expect During fiscal 2009, sales to global defense customers increased 16.8% and at May 31, 2009 represented 42.5% of consolidated sales. We continue to are well positioned with our current portfolio of products and services and growth plans to benefit from longer-term U.S. military deployment and program management strategies. Fiscal Consolidated sales for fiscal In the Aviation Supply Chain segment, sales decreased $22,525 or 3.7% compared to the prior year. The sales decrease is primarily attributable to reduced demand for parts support from commercial customers as a result of airline capacity reductions, lower sales to a regional airline customer and the unfavorable impact of foreign currency translation. Gross profit in the Aviation Supply Chain segment decreased $14,680 or 10.1% and the gross profit margin percentage decreased to 22.3% from 23.9% in the prior year primarily due to the impairment charge of $10,100 recorded in the fourth quarter of fiscal 2009 (see Note 13 of Notes to Consolidated Financial Statements). In the Maintenance, Repair and Overhaul segment, sales increased $46,125 or 15.3% over the prior year. In the Structures and Systems segment, sales increased $88,203 or 22.6% over the prior year. The increase in sales is attributable to the inclusion of revenue from Summa, which was acquired in December 2007, as well as continued strong demand for specialized mobility products and new product offerings. Gross profit in the Structures and Systems segment increased $19,485 or 35.6%, and the gross profit percentage increased to 15.5% from 14.0% in the prior year due to increased volume and increased shipments of higher margin products. In the Aircraft Sales and Leasing segment, sales decreased $72,746 or 82.5% compared with the prior year. During the fiscal year ended May 31, 2009, we sold two aircraft from our wholly-owned aircraft portfolio whereas during fiscal 2008, we sold five aircraft from our wholly-owned portfolio. Gross profit (loss) in the Aircraft Sales and Leasing segment decreased $35,062 from the prior year as a result of the reduction in aircraft sales and the impairment charge of $21,033 recorded in the second quarter of fiscal 2009 (see Note 13 of Notes to Consolidated Financial Statements). Earnings from joint ventures increased $2,548 compared to the prior year due to gains on the sale of two aircraft owned in joint ventures. Operating income decreased $31,626 or 23.5% compared with the prior year due to the impairment charges and an increase in selling, general and administrative expenses. Selling, general and administrative expenses increased $11,717 primarily as a result of the impact of acquisitions. Net interest expense decreased $1,851 or 9.9% versus the prior year principally due to a reduction in outstanding borrowings and lower interest rates on our revolving credit agreement. Our effective income tax rate decreased to 32.8% compared to 34.8% in the prior year. The decrease in the effective tax rate was due to research and development tax credits recorded during fiscal 2009. During fiscal 2009, we retired $110,510 of convertible notes. The notes were retired for $72,916 cash and the gain after consideration of unamortized debt issuance costs was $35,316 and is reported in gain (loss) on extinguishment of debt on the consolidated statement of operations for fiscal 2009 (see Note 2 of Notes to Consolidated Financial Statements). During the second quarter of fiscal 2009, we sold our non-core industrial turbine business, which was classified as a discontinued operation. Loss on the sale of business, net of tax, was $1,403 (see Note 11 of Notes to Consolidated Financial Statements). Net income was $78,651 compared to $75,144 in the prior year due to the factors discussed above. Fiscal 2008 Compared with Fiscal 2007 Consolidated sales for fiscal 2008 increased $323,750 or 30.5% over fiscal 2007 as all four of our reportable segments experienced an increase in sales. Overall sales growth reflects In the Maintenance, Repair and Overhaul segment, sales increased $89,355 or 42.2% over the prior year. The increase in sales is primarily attributable to increased revenue at the Indianapolis heavy maintenance facility, greater volume of landing gear overhauls and the inclusion of revenue from Avborne which was acquired in March 2008 and contributed approximately $16,000 of revenues during fiscal 2008 (see Note 7 of Notes to Consolidated Financial Statements). Gross profit in the Maintenance, Repair and Overhaul segment increased $14,052 or 47.0%, and the gross profit percentage increased to 14.6% from 14.1% in the prior year due to increased volume and operational improvement initiatives. In the Structures and Systems segment, sales increased $125,345 or 47.5% over the prior year. The sales increase is attributable to sustained high levels of demand and new business wins for specialized mobility products, and the inclusion of revenue from Brown (acquired in April 2007) and Summa (acquired in December 2007) which together contributed approximately $88,800 of revenues during fiscal 2008 (see Note 7 of Notes to Consolidated Financial Statements). Gross profit in the Structures and Systems segment increased $18,652 or 51.8% compared to the prior year primarily due to increased sales, while the gross profit margin percentage increased slightly to 14.0% from 13.6%. In the Aircraft Sales and Leasing segment, sales increased $46,234 or 110.4% compared with the same period last year driven by the sale of five aircraft from our wholly-owned portfolio. Gross profit in the Aircraft Sales and Leasing segment increased $16,513 as a result of increased aircraft sales and the $2,902 impairment charge recorded during the first quarter of fiscal 2007 2008, we Operating income increased During the third quarter of fiscal 2007, we decided to exit our non-core industrial turbine business, which was part of the Structures and Systems segment, and classified the results as a discontinued operation. Net income AAR Manufacturing, Inc., a subsidiary of the Company The subsidiary advised the MDEQ that it would perform the requirements of the Order to the extent those requirements apply to the allegation by the MDEQ that a release of hazardous substances occurred after the execution of the 1985 Consent Decree. The subsidiary declined to perform certain work required by the Order that the subsidiary believes is based on claims resolved in the 1985 Consent Decree. On March 31, 2005, a complaint was filed by the MDEQ in Cadillac, Michigan with the Wexford County Circuit Court. The case isMichigan Department of Environmental Quality Delaware corporation, File No. The Company and the subsidiary filed their Answer, including Trial took place during the months of December 2008 through February 2009. During the trial, the court granted a motion by the subsidiary to dismiss MDEQ's claims for enforcement of the Order and for civil fines and exemplary damages for the Company's alleged failure to comply with the Order. As a result of this ruling, the only issues remaining in the case are whether the subsidiary is liable for a post-Consent Decree release of contamination and, if so, what costs MDEQ is entitled to recover. The court also In a related matter, in December 2008, the Company and the subsidiary were sued by Liberty Mutual Insurance Co., the insurer who had been paying the Company's defense costs in the In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial condition or results of operations. Liquidity and Capital Resources Historically, we have funded our operating activities and met our commitments through the generation of cash from operations, augmented by the periodic issuance of common stock and debt in the public and private markets. In addition to these cash sources, our current capital resources include our unsecured credit facility. 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 At May 31, National Association ("Bank of America"), as administrative agent for the lenders, total. The During During fiscal During Contractual Obligations and Off-Balance Sheet Arrangements A summary of contractual obligations and off-balance sheet arrangements as of May 31, Payments Due by Period Due in Due in Due in Due in Due in After Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Total 2008 2009 2010 2011 2012 2012 On Balance Sheet: Debt $ 284,229 $ 51,366 $ 200 $ 200 $ 55,108 $ — $ 177,355 Non-recourse Debt 43,627 22,879 640 696 757 823 17,832 Interest 87,679 13,562 9,243 9,008 8,492 3,916 43,458 Off Balance Sheet: Aviation Equipment Operating Leases 8,960 3,840 3,840 1,280 — — — Facilities and Equipment Operating Leases 32,506 7,971 6,893 5,581 4,122 3,740 4,199 Garden City Operating Lease 29,092 1,455 1,492 1,529 1,567 1,606 21,443 Purchase Obligations 106,783 103,535 3,248 — — — — Pension Contribution 4,000 4,000 — — — — — On Balance Sheet: Debt Non-recourse Debt Capital Leases Bank Borrowings Interest Off Balance Sheet: Aviation Equipment Operating Leases Facilities and Equipment Operating Leases Garden City, New York Operating Lease Purchase Obligations Pension Contribution Notes: Purchase obligations arise in the ordinary course of business and represent a binding commitment to acquire inventory, including raw materials, parts and components, as well as equipment to support the operations of our business. We routinely issue letters of credit and performance bonds in the ordinary course of business. These instruments are typically issued in conjunction with insurance contracts or other business requirements. The total of these instruments outstanding at May 31, Critical Accounting Policies and Significant Estimates Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Management has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare the consolidated financial statements. The most significant estimates made by management include those related to the allowance for doubtful accounts, assumptions used in assessing goodwill impairment, adjustments to reduce the value of inventories and aviation equipment on or available for lease, Allowance for Doubtful Accounts Our allowance for doubtful accounts is intended to reduce the value of customer accounts receivable to amounts expected to be collected. In determining the required allowance, we consider factors such as general and industry-specific economic conditions, customer credit history, and Under Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," goodwill and other intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. The Company reviews and evaluates its goodwill and indefinite life intangible assets for potential impairment at a minimum annually, on May 31, or more frequently if circumstances indicate that impairment is possible. We use a two step process to evaluate goodwill for impairment. In the first step, we compare the fair value of each reporting unit with the carrying value of the reporting unit, including goodwill. We estimate the fair value of each reporting unit using a valuation technique based on a multiple of earnings or discounted cash flows. If the estimated fair value of the reporting unit is less than the carrying value of the reporting unit, we would be required to complete a second step to determine the amount of goodwill impairment. In the second step, we would determine an implied fair value of the reporting unit's goodwill by allocating the reporting unit's fair value to all of the assets and liabilities other than goodwill. We then would compare the implied fair value of goodwill to the carrying amount and recognize the difference as an impairment charge. The assumptions we used to estimate fair value of the reporting unit are based on historical performance as well as forecasts used in our current business plan. The amount reported under the caption "Goodwill and other intangible assets, net" is comprised of goodwill and intangible assets associated with acquisitions we made, principally since the beginning of fiscal 1998. Inventories Inventories are valued at the lower of cost or market. Cost is determined by the specific identification, average cost or first-in, first-out methods. Provisions are made for excess and obsolete inventories and inventories that have been impaired as a result of industry conditions. We have utilized certain assumptions when determining the market value of inventories, such as historical sales of inventory, current and expected future aviation usage trends, replacement values and expected future demand. During the fourth quarter of fiscal 2009, we recorded a $10,100 pre-tax impairment charge on inventory and engines which had been acquired prior to September 11, 2001. This inventory was also subject to impairment charges recorded in previous fiscal years. The fiscal 2009 impairment charge was triggered by declining conditions in the commercial aviation industry and a slowdown in the sales volume of these assets during the fiscal year (see Note 13 of Notes to Consolidated Financial Statements). Revenue Recognition Certain supply chain management programs that we provide to our customers contain multiple elements or deliverables, such as program and warehouse management, parts distribution and maintenance and repair services. We recognize revenue for each element or deliverable that can be identified as a separate unit of accounting at the time of delivery based upon the relative fair value of the products and services. In connection with these programs, we are required to make certain judgments and estimates concerning the overall profitability of the program and the relative fair value of each element of the arrangement. Differences may occur between the judgments and estimates made by management and actual program results. Equipment on or Available for Lease The cost of assets under lease is original purchase price plus overhaul costs. Depreciation is computed using the straight-line method over the estimated service life of the equipment, and maintenance costs are expensed as incurred. In accordance with SFAS No. 144, During the second quarter of fiscal 2009, we performed a comprehensive review of our aircraft portfolio. The primary objective of this review was to assess the impact of the economic slowdown and credit crisis on market conditions. Based upon that review, and taking into consideration the desire to improve liquidity and generate cash, we made the decision to sell one of the four aircraft acquired before September 11, 2001, and offer two of the remaining three for sale. As a result of this review and taking into consideration our assessment of current market conditions, the Company recorded a $21,033 pre-tax impairment charge to reduce the carrying value of the three aircraft to their estimated net realizable value during the second quarter of fiscal 2009. Program Development Costs In June 2005, we announced that our Cargo Systems business was selected to provide cargo handling systems for the new Airbus A400M Military Transport Aircraft ("A400M"). We are a subcontractor to Pfalz Flugzeugwerke GmbH ("PFW") on this Airbus program. Our portion of the revenue from this program is expected to exceed $300,000 through fiscal 2020, based on sales projections of the A400M. During fiscal 2009, Airbus agreed to reimburse AAR and PFW 20.0 million euros for costs incurred to develop the A400M system. AAR's share of this reimbursement was $18,700 and reduced the amount of capitalized program development costs. As of May 31, 2009, we have capitalized, net of the $18,700 reimbursement, approximately $38,000 of costs associated with the engineering and development of the cargo system in accordance with SOP 81-1 "Accounting for Performance of Construction—Type and Certain Production—Type Contracts." Sales and related cost of sales will be recognized on the units of delivery method. In determining the recoverability of the capitalized program development costs, we have utilized certain judgments and estimates concerning expected revenues and the cost to manufacture the A400M cargo system. Differences between actual results and the assumptions utilized by us may result in us not fully recovering the value of the program development costs, which would unfavorably impact our financial condition and results of operations. Pension Plans The liabilities and net periodic cost of our pension plans are determined utilizing several actuarial assumptions, the most significant of which are the discount rate and the expected long-term rate of return on plan assets. Our discount rate is determined based on a review of long-term, high quality corporate bonds as of May 31, plan assets may impact the amount of net periodic pension expense recognized in our consolidated statement of operations. New Accounting Standards In September 2006, the In December 2007, the FASB issued SFAS No. 160 ("SFAS 160"), "Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB 51." This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon adoption of SFAS 160, effective for us as of June 1, 2009, noncontrolling interests will be classified as equity in the Company's financial statements and income and comprehensive income attributed to the noncontrolling interest will be included in the Company's income and comprehensive income. The presentation and disclosure provisions of this standard must be applied retrospectively upon adoption and is not expected to have a material impact on our results of operations In In May 2008, the FASB issued Staff Position FSP APB 14-1 ("FSP APB 14-1"), "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)." FSP APB 14-1 requires companies that have issued convertible debt that may be settled wholly or partly in cash when converted, to account for the debt and equity components separately. The value Table of ITEM 7A. 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 Part II, Item 8 for a discussion on accounts receivable exposure. During fiscal At May 31, Revenues and expenses of our foreign operations are translated at average exchange rates during the year, and balance sheet accounts are translated at year-end exchange rates. Balance sheet translation adjustments are excluded from the results of operations and are recorded in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF AAR CORP.: We have audited the accompanying consolidated balance sheets of AAR CORP. and subsidiaries (the Company) as of May 31, We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AAR CORP. and subsidiaries as of May 31, We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the /s/ KPMG LLP Chicago, Illinois AAR CORP. AND SUBSIDIARIES For the Year Ended May 31, 2007 2006 2005 (In thousands except per share data) Sales: Sales from products. $ 882,509 $ 732,908 $ 629,054 Sales from services. 150,400 128,182 90,021 Sales from leasing 28,260 24,428 21,352 1,061,169 885,518 740,427 Cost and operating expenses: Cost of products 724,419 603,643 533,271 Cost of services 126,372 102,709 67,523 Cost of leasing 18,579 15,945 19,058 Cost of sales-impairment charges 7,652 — — Selling, general and administrative and other 105,091 99,551 86,226 982,113 821,848 706,078 Gain on sale of product line 5,358 — — Earnings from aircraft joint ventures 10,952 1,502 568 Operating income 95,366 65,172 34,917 Gain (loss) on extinguishment of debt 2,927 (3,893 ) 3,562 Interest expense (16,701 ) (18,004 ) (16,917 ) Interest income and other 5,829 3,236 1,502 Income before provision for income taxes 87,421 46,511 23,064 Provision for income taxes 27,974 10,688 3,566 Income from continuing operations 59,447 35,823 19,498 Discontinued operations, net of tax: Operating loss (787 ) (660 ) (1,724 ) Loss on disposal — — (2,321 ) Loss from discontinued operations (787 ) (660 ) (4,045 ) Net income $ 58,660 $ 35,163 $ 15,453 Earnings per share—basic: Earnings from continuing operations $ 1.63 $ 1.07 $ 0.60 Loss from discontinued operations (0.02 ) (0.02 ) (0.12 ) Earnings per share—basic. $ 1.61 $ 1.05 $ 0.48 Earnings per share—diluted: Earnings from continuing operations $ 1.42 $ 0.96 $ 0.57 Loss from discontinued operations (0.02 ) (0.02 ) (0.11 ) Earnings per share—diluted. $ 1.40 $ 0.94 $ 0.46 Sales: Sales from products Sales from services Sales from leasing Costs and operating expenses: Cost of products Cost of services Cost of leasing Cost of sales—impairment charges Selling, general and administrative and other Gain on sale of product line Earnings from joint ventures Operating income Gain (loss) on extinguishment of debt Interest expense Interest income Gain (loss) on sale of investments Income from continuing operations before provision for income taxes Provision for income taxes Income from continuing operations Discontinued operations, net of tax: Operating loss Loss on disposal Loss from discontinued operations Net income Earnings per share—basic: Earnings from continuing operations Loss from discontinued operations Earnings per share—basic Earnings per share—diluted: Earnings from continuing operations Loss from discontinued operations Earnings per share—diluted The accompanying notes to consolidated financial statements AAR CORP. AND SUBSIDIARIES May 31, 2007 2006 (In thousands) Current assets: Cash and cash equivalents $ 83,317 $ 121,738 Accounts receivable 181,691 136,272 Inventories 244,661 245,690 Equipment on or available for short-term lease 97,932 77,902 Deposits, prepaids and other 12,607 12,986 Deferred tax assets 25,513 29,866 Total current assets. 645,721 624,454 Property, plant and equipment, at cost: Land 4,828 4,828 Buildings and improvements 69,564 57,842 Equipment, furniture and fixtures. 159,313 139,863 233,705 202,533 Accumulated depreciation (145,518 ) (129,896 ) 88,187 72,637 Other assets: Goodwill and other intangible assets, net 74,267 44,432 Equipment on long-term lease. 171,980 140,743 Investment in joint ventures. 17,824 28,498 Other. 69,654 68,055 333,725 281,728 $ 1,067,633 $ 978,819 Current assets: Cash and cash equivalents Accounts receivable Inventories Equipment on or available for short-term lease Deposits, prepaids and other Deferred tax assets Total current assets Property, plant and equipment, at cost: Land Buildings and improvements Equipment, furniture and fixtures Accumulated depreciation Other assets: Goodwill and other intangible assets, net Equipment on long-term lease Investment in joint ventures Other The accompanying notes to consolidated financial statements AAR CORP. AND SUBSIDIARIES May 31, 2007 2006 (In thousands) Current liabilities: Short-term debt $ — $ 161 Current maturities of long-term debt 51,366 200 Current maturities of non-recourse long-term debt 22,879 1,928 Accounts payable 110,239 97,002 Accrued liabilities 72,022 88,497 Total current liabilities 256,506 187,788 Long-term debt, less current maturities 232,863 293,263 Non-recourse debt 20,748 25,313 Deferred tax liabilities 40,121 25,357 Other liabilities and deferred income 23,152 24,381 316,884 368,314 Stockholders’ equity: Preferred stock, $1.00 par value, authorized 250 shares; none issued — — Common stock, $1.00 par value, authorized 100,000 shares; issued 42,230 and 40,789 shares, respectively. 42,230 40,789 Capital surplus 289,673 274,211 Retained earnings 256,052 197,392 Treasury stock, 4,501 and 4,135 shares at cost, respectively (79,813 ) (69,664 ) Unearned restricted stock awards — (6,169 ) Accumulated other comprehensive loss. (13,899 ) (13,842 ) 494,243 422,717 $ 1,067,633 $ 978,819 Current liabilities: Short-term debt Current maturities of long-term debt Current maturities of non-recourse long-term debt Current maturities of long-term capital lease obligations Accounts payable Accrued liabilities Total current liabilities Long-term debt, less current maturities Non-recourse debt Capital lease obligations Deferred tax liabilities Other liabilities and deferred income Stockholders' equity: Preferred stock, $1.00 par value, authorized 250 shares; none issued Common stock, $1.00 par value, authorized 100,000 shares; issued Capital surplus Retained earnings Treasury stock, 5,317 and 5,159 shares at cost, respectively Accumulated other comprehensive loss The accompanying notes to consolidated financial statements AAR CORP. AND SUBSIDIARIES Unearned Accumulated Restricted Other Common Stock Treasury Stock Capital Retained Stock Comprehensive Comprehensive Shares Amount Shares Amount Surplus Earnings Awards Income (Loss) Income (In thousands) Balance, May 31, 2004 34,525 $ 34,525 2,280 $ (36,030 ) $ 172,681 $ 146,776 $ (1,376 ) $ (14,892 ) Net income — — — — — 15,453 — — $ 15,453 Exercise of stock options and stock awards 1,328 1,328 987 (14,467 ) 16,936 — — — — Restricted stock activity — — — — — — (1,303 ) — — Adjustment for net translation loss — — — — — — — (150 ) (150 ) Minimum pension liability, net of tax — — — — — — — (4,737 ) (4,737 ) Comprehensive income $ 10,566 Balance, May 31, 2005 35,853 $ 35,853 3,267 $ (50,497 ) $ 189,617 $ 162,229 $ (2,679 ) $ (19,779 ) Net income — — — — — 35,163 — — $ 35,163 Exercise of stock options and stock awards 2,212 2,212 868 (19,167 ) 37,876 — — — — Restricted stock activity — — — — — — (3,490 ) — — Common stock issued in debt for equity transaction 2,724 2,724 — — 46,718 — — — — Adjustment for net translation gain — — — — — — — 1,058 1,058 Minimum pension liability, net of tax — — — — — — — 4,879 4,879 Comprehensive income $ 41,100 Balance, May 31, 2006 40,789 $ 40,789 4,135 $ (69,664 ) $ 274,211 $ 197,392 $ (6,169 ) $ (13,842 ) Net income — — — — — 58,660 — — $ 58,660 Exercise of stock options and stock awards 1,441 1,441 366 (10,149 ) 14,230 — — — — Tax benefit related to share- based plans — — — — 4,345 — — — — Restricted stock activity — — — — (3,113 ) — 6,169 — — Adjustment for net translation gain — — — — — — — 1,559 1,559 Minimum pension liability, net of tax — — — — — — — 1,921 1,921 Adoption of SFAS No. 158, net of tax — — — — — — — (3,537 ) — Comprehensive income $ 62,140 Balance, May 31, 2007 42,230 $ 42,230 4,501 $ (79,813 ) $ 289,673 $ 256,052 $ — $ (13,899 ) Net income Exercise of stock options and stock awards Repurchase of shares Tax benefit related to share- based plans Restricted stock activity Common stock issued in debt for equity transaction Purchase of hedge on convertible debt, net of tax Issuance of warrants Adjustment for net translation gain Unrealized gains on securities, net of tax Change in unrecognized pension and post retirement costs, net of tax Comprehensive income Balance, May 31, 2008 Net income Exercise of stock options and stock awards Tax benefit related to share- based plans Restricted stock activity Bond hedge and warrant activity Adjustment for net translation loss Change in unrealized gains (losses) on investments, net of tax Change in unrecognized pension and post retirement costs, net of tax Comprehensive income Balance, May 31, 2009 The accompanying notes to consolidated financial statements AAR CORP. AND SUBSIDIARIES For the Year Ended May 31, 2007 2006 2005 (In thousands) Cash flows provided from (used in) operating activities: Net income $ 58,660 $ 35,163 $ 15,453 Adjustments to reconcile net income to net cash provided from (used in) operating activities: Depreciation and amortization 32,199 29,222 29,178 Deferred tax provision - continuing operations 20,411 8,433 2,112 Excess tax benefits from exercise of stock options (4,345 ) — — Gain on sale of product line (5,358 ) — — Impairment charges 7,652 — — Loss (gain) on extinguishment of debt (2,927 ) 3,893 3,562 Earnings from aircraft joint ventures (10,952 ) — — Gain on sale of investment (915 ) — — Loss on disposal of business, net of tax — — 2,321 Changes in certain assets and liabilities: Accounts and trade notes receivable. (25,160 ) (9,324 ) (17,596 ) Inventories (8,567 ) (58,297 ) (12,013 ) Equipment on or available for short-term lease (5,259 ) (12,892 ) (3,154 ) Equipment on long-term lease (62,491 ) (76,156 ) 18,728 Accounts payable. 6,473 19,735 19,244 Accrued liabilities and taxes on income 1,903 12,282 5,907 Other liabilities. (4,696 ) 10,493 — Other. (17,867 ) (3,034 ) (12,804 ) Net cash provided from (used in) operating activities. (21,239 ) (40,482 ) 50,938 Cash flows used in investing activities: Property, plant and equipment expenditures (29,891 ) (16,296 ) (13,033 ) Proceeds from disposal of assets 51 205 7 Proceeds from sale of product line 6,567 — — Proceeds from disposal of business — — 7,700 Proceeds from sale of available for sale securities 11,612 — — Investment in available for sale securities. (10,697 ) — — Companies acquired (38,478 ) — — Proceeds from aircraft joint ventures 32,108 6,439 — Investment in aircraft joint ventures (9,556 ) (23,245 ) (11,223 ) Investment in leveraged leases. 139 183 122 Other (984 ) 89 (1,157 ) Net cash used in investing activities (39,129 ) (32,625 ) (17,584 ) Cash flows provided from (used in) financing activities: Proceeds from borrowings 30,355 161,000 — Reduction in borrowings. (20,439 ) (20,376 ) (24,005 ) Financing costs (864 ) (5,371 ) (34 ) Excess tax benefits from exercise of stock options 4,345 — — Other, primarily stock option exercises 8,576 9,402 2 Net cash provided from (used in) financing activities 21,973 144,655 (24,037 ) Effect of exchange rate changes on cash (26 ) (148 ) 11 Increase (decrease) in cash and cash equivalents. (38,421 ) 71,400 9,328 Cash and cash equivalents, beginning of year 121,738 50,338 41,010 Cash and cash equivalents, end of year $ 83,317 $ 121,738 $ 50,338 Cash flows provided from (used in) operating activities: Net income Adjustments to reconcile net income to net cash provided from (used in) operating activities: Depreciation and amortization Deferred tax provision—continuing operations Tax benefits from exercise of stock options Gain on sale of product line Impairment charges (Gain) loss on extinguishment of debt Earnings from joint ventures (Gain) loss on sale of investment Loss on disposal of business, net of tax Changes in certain assets and liabilities, net of acquisitions: Accounts and trade notes receivable Inventories Equipment on or available for short-term lease Equipment on long-term lease Accounts payable Accrued liabilities and taxes on income Other liabilities Other, deposits and program costs Net cash provided from (used in) operating activities Cash flows used in investing activities: Property, plant and equipment expenditures Proceeds from disposal of assets Proceeds from sale of product line Proceeds from disposal of business Proceeds from sale of available for sale securities Investment in available for sale securities Companies acquired, net of cash Proceeds from aircraft joint ventures Investment in aircraft joint ventures Other Net cash used in investing activities Cash flows provided from (used in) financing activities: Proceeds from borrowings, net Reduction in borrowings Proceeds from capital lease obligations Reduction in capital lease obligations Proceeds from sale of warrants Purchase of convertible note hedges Purchase of treasury stock Stock option exercises Tax benefits from exercise of stock options Net cash provided from (used in) financing activities Effect of exchange rate changes on cash Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year The accompanying notes to consolidated financial statements AAR CORP. AND SUBSIDIARIES 1. Summary of Significant Accounting Policies Description of Business AAR CORP. is a diversified provider of products and services to the worldwide aviation and defense industries. Products and services include: aviation supply chain and parts support programs; maintenance, repair and overhaul of aircraft and landing gear; design and manufacture of specialized mobility and cargo systems and composite and other high-end precision machined structures; and aircraft sales and leasing. We serve commercial and governmental aircraft fleet operators, original equipment manufacturers, and independent service providers around the Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after elimination of intercompany accounts and transactions. The equity method of accounting is used for investments in other companies in which we have significant influence; generally this represents common stock ownership of at least 20% and not more than 50% (see Note Revenue Recognition Sales and related cost of sales for product sales are recognized upon shipment of the product to the customer. Our standard terms and conditions provide that title passes to the customer when the product is shipped to the customer. Sales of certain defense products are recognized upon customer acceptance, which includes transfer of Certain supply chain management programs we provide our customers contain multiple elements or deliverables, such as program and warehouse management, parts distribution and maintenance and repair services. We recognize revenue for each element or deliverable that can be identified as a separate unit of accounting at the time of delivery based upon the relative fair value of the products and services. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 1. Summary of Significant Accounting Policies (Continued) Goodwill and Intangible Assets Under The amount reported under the caption Goodwill by reportable segment is as follows: May 31, 2007 2006 Aviation Supply Chain $ 20,136 $ 20,110 Maintenance, Repair and Overhaul 14,940 5,838 Structures and Systems 37,611 18,484 $ 72,687 $ 44,432 Customer relationships Lease agreements Covenants not to compete Accumulated amortization Customer relationships are being amortized over five- to twenty-year periods, the lease agreements are being amortized over an eighteen-year period and the covenants not to compete are being amortized over a Cash and Cash Equivalents At May 31, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 1. Summary of Significant Accounting Policies (Continued) Marketable Securities Occasionally we will invest in equity securities and classify these equity securities as available for sale in the Consolidated Balance Sheet. As of May 31, 2009 and 2008, $0 and $3,044, respectively, was invested in available for sale securities. During Foreign Currency Our foreign subsidiaries generally utilize the local currency as their functional currency. All balance sheet accounts of foreign subsidiaries transacting business in currencies other than the U.S. dollar are translated at year-end exchange rates. Revenues and expenses are translated at average exchange rates during the year. Translation adjustments are excluded from the results of operations and are recorded in Financial Instruments and Concentrations of Market or Credit Risk 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. Department of Defense and its contractors and entities in the aviation industry. Accounts receivable due from the U.S. Department of Defense were Mesa is a customer of the Company and in May 2008, warned it may have to file for bankruptcy protection if it could not resolve a contract dispute with one of its customers. In addition to the ongoing dispute with their customer, Mesa has reported substantial operating losses in the three- and six-month periods ended March 31, 2009. During fiscal 2009, our consolidated sales to Mesa were $70,700, of which $45,500 was in the Aviation Supply Chain segment and $25,200 was in the Maintenance, Repair and Overhaul segment. At May 31, 2009, we have other long-term assets recorded in equipment on long-term lease of $46,000 supporting the Mesa supply chain programs and also have trade receivables and other assets associated with Mesa of approximately $12,500. Mesa is current on its obligations to us and we continue to monitor their situation. SFAS No. 107, Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 1. Summary of Significant Accounting Policies (Continued) significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Inventories Inventories are valued at the lower of cost or The following is a summary of inventories: May 31, 2007 2006 Raw materials and parts $ 55,702 $ 58,421 Work-in-process 36,580 30,651 Purchased aircraft, parts, engines and components held for sale 152,379 156,618 $ 244,661 $ 245,690 Equipment under Lease revenue is recognized as earned. The cost of the asset under lease is original purchase price plus overhaul costs. Depreciation for aircraft is computed Equipment on short-term lease consists of aircraft engines and parts on or available for lease to satisfy Our aircraft and engine portfolio recorded on our consolidated balance sheet includes NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 1. Summary of Significant Accounting Policies (Continued) Property, Plant and Equipment Depreciation is computed on the straight-line method over useful lives of 10-40 years for buildings and improvements and 3-10 years for equipment, furniture and fixtures and capitalized software. Leasehold improvements are amortized over the shorter of the estimated useful life or the term of the applicable lease. Repair and maintenance expenditures are expensed as incurred. Upon sale or disposal, cost and accumulated depreciation are removed from the accounts, and related gains and losses are included in results of operations. Leveraged Lease We are an equity participant in a leveraged lease transaction. The equipment cost in excess of equity contribution is financed by a third party in the form of secured debt. Under the lease agreement, the third party has no recourse against us for nonpayment of the obligation. The third-party debt is collateralized by the We have ownership rights to the leased asset and are entitled to the tax deduction for depreciation on the leased asset and for interest on the secured debt financing. Income taxes Income taxes are determined in accordance with SFAS No. 109, Supplemental Information on Cash Flows Supplemental information on cash flows follows: For the Year Ended May 31, 2007 2006 2005 Interest paid $ 13,650 $ 13,588 $ 13,764 Income taxes paid 1,948 1,303 591 Income tax refunds and interest received 1,221 1,137 1,138 During fiscal 2009, 2008 and 2007 we capitalized $0, $1,372 and $977, respectively, of interest primarily related to capital projects in our Structures and Systems segment. During the third quarter of fiscal In connection with the acquisition of Avborne, we assumed a $25,000 industrial revenue bond secured by During fiscal 2009, treasury stock increased NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share 1. Summary of Significant Accounting Policies (Continued) options of $879. During fiscal 2008, treasury stock increased $21,122 reflecting the $11,595. During fiscal 2007, Use of Estimates We have made estimates and utilized certain assumptions relating to the reporting of assets and liabilities and the disclosures of contingent liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ from those estimates. New Accounting Standards In September 2006, the In December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB 51." This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon adoption of SFAS 160, effective for us as of June 1, 2009, noncontrolling interests will be classified as equity in the Company's financial statements and income and comprehensive income attributed to the noncontrolling interest will be included in the Company's income and comprehensive income. The presentation and disclosure provisions of this standard must be applied retrospectively upon adoption and is not expected to have a material impact on our results of operations In NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 1. Summary of Significant Accounting Policies (Continued) In May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)." FSP APB 14-1 requires companies that have issued convertible debt that may be settled wholly or partly in cash when converted, to account for the debt and equity components separately. The value Reclassification Certain amounts in the prior Revolving Credit Facility Short-term borrowing activity under our revolving credit facilities during fiscal For the Year Ended May 31, 2006 2005 Maximum amount borrowed $ 25,000 $ 21,000 Average daily borrowings 7,216 5,248 Average interest rate during the year 6.76 % 5.47 % AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 2. Financing Arrangements (Continued) A summary of our recourse and non-recourse long-term debt is as follows: May 31, 2007 2006 Recourse debt Notes payable due December 15, 2007 with interest at 6.875% payable semi-annually on June 15 and December 15 $ 31,166 $ 40,200 Notes payable due May 15, 2008 with interest at 7.98% payable semi-annually on June 1 and December 1 20,000 20,000 Notes payable due May 15, 2011 with interest at 8.39% payable semi-annually on June 1 and December 1 55,000 55,000 Mortgage loan (secured by Wood Dale, Illinois facility) due August 1, 2015 with interest at 5.01% 11,000 11,000 Convertible notes payable due February 1, 2024 with interest at 2.875% payable semi-annually on February 1 and August 1 16,355 16,355 Convertible notes payable due March 1, 2014 with interest at 1.625% payable semi-annually on March 1 and September 1 Convertible notes payable due March 1, 2016 with interest at 2.25% payable semi-annually on March 1 and September 1 Convertible notes payable due February 1, 2026 with interest at 1.75% payable semi-annually on February 1 and August 1 150,000 150,000 Industrial revenue bond, (secured by trust indenture on property, plant and equipment) due December 1, 2010 with floating interest rate, payable quarterly—interest 3.93% at May 31, 2007 708 908 Industrial revenue bonds (secured by trust indenture on property, plant and equipment) due December 1, 2010 and August 1, 2018 with floating interest rate, payable monthly Total recourse debt 284,229 293,463 Current maturities of recourse debt (51,366 ) (200 ) Long-term recourse debt $ 232,863 $ 293,263 Non-recourse debt Non-recourse note payable due December 1, 2007 with interest at 6.00% $ 22,252 $ 27,241 Non-recourse note payable due September 23, 2007 with interest at 8.11% 15,000 — Non-recourse note payable due October 31, 2008 with interest at 5.66% Non-recourse note payable due June 30, 2009 with interest at 3.85% Non-recourse note payable due July 19, 2012 with interest at 7.22% Non-recourse note payable due April 3, 2015 with interest at 8.38% 6,375 — Total non-recourse debt 43,627 27,241 Current maturities of non-recourse debt (22,879 ) (1,928 ) Long-term non-recourse debt $ 20,748 $ 25,313 Recourse debt During Holders may convert their Notes based on a conversion rate of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 2. Financing Arrangements (Continued) price of our common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of such preceding calendar quarter is more than 130% of the applicable conversion price per share of common stock on the last day of such preceding calendar quarter; (ii) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes of the applicable series for each day of that period was less than 98% of the product of the closing price of our common stock and the then applicable conversion rate; (iii) if a designated event or similar change of control transaction occurs; (iv) upon specified corporate transactions; or (v) beginning on February 1, 2014, in the case of the 2014 notes, or February 1, 2016, in the case of the 2016 notes, and ending at the close of business on the business day immediately preceding the applicable maturity date. Upon conversion, a holder of the Notes will receive for each $1,000 principal amount, in lieu of common stock, an amount in cash equal to the lesser of (i) $1,000 and (ii) the conversion value of a number of shares of our common stock equal to the conversion rate. If the conversion value exceeds the principal amount, we will also deliver at our election, cash or common stock or a combination thereof having a value equal to such excess amount. The Notes are senior, unsecured obligations and rank equal in right of payment with all of our existing and future unsecured and unsubordinated indebtedness. Costs associated with the issuance and sale of the Notes of approximately $6,028 are being amortized using the effective interest method over a six- and eight-year period. In connection with the issuance of the Notes, we entered into convertible note hedge transactions ("Note Hedges") with respect to our common stock with Merrill Lynch Financial Markets, Inc. ("Hedge Provider"). The Note Hedges are exercisable solely in connection with any conversion of the Notes and provide for us to receive shares of our common stock from the Hedge Provider equal to the number of shares issuable to the holders of the Notes upon conversion. We paid $69,676 for the Note Hedges. In addition, we entered into separate warrant transactions with Merrill Lynch Financial Markets, Inc. whereby we issued warrants to purchase 7,028,000 shares of our common stock at an exercise price of $48.83 per share. We received $40,114 from the sale of these warrants. The Note Hedges and warrant transactions are intended to reduce potential dilution to our common stock upon future conversion of the Notes and generally have the effect of increasing the conversion price of the Notes to approximately $48.83 per share. Net proceeds from the Notes transaction after paying expenses were approximately $214,410 and were used to repay the balance outstanding under our unsecured revolving credit facility, to pay for the net cost of the Note Hedges and warrant transactions and for general corporate purposes. On February 1, 2006, we completed the sale of $150,000 principal amount of convertible senior notes. The notes are due on February 1, 2026 unless earlier redeemed, repurchased or converted, and bear interest at 1.75% payable semiannually on February 1 and August 1. A holder may convert the notes into shares of common stock based on a conversion rate of 33.9789 shares per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $29.43 per share, under the following circumstances: (i) during any calendar quarter beginning after March 31, 2006 (and only during such calendar quarter), if, as of the last day of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 2. Financing Arrangements (Continued) preceding calendar quarter, the closing price of our common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of such preceding calendar quarter is more than 120% of the applicable conversion price per share of common stock on the last day of such preceding calendar quarter; (ii) during the five business day period after any five consecutive trading day period in which the We may redeem for cash all or a portion of the notes at any time on or after February 6, 2013 at specified redemption prices. Holders of the notes have the right to require us to purchase for cash all or any portion of the notes on February 1, 2013, 2016 and 2021 at a price equal to 100% of the principal amount of the notes plus accrued interest and unpaid interest, if any, to the purchase date. The notes are senior, unsecured obligations and rank equal in right of payment with all other unsecured and unsubordinated indebtedness. The mortgage loan due August 1, 2015 is secured by our Wood Dale, Illinois facility. At May 31, In connection with the acquisition of Avborne, we assumed a $25,000 industrial revenue bond secured by maintenance hangars located at Miami International Airport. The industrial revenue bond matures on August 1, 2018 and has a During fiscal 2009, we retired $30,279 of our 1.75% convertible notes due February 1, 2026, $40,156 of our 1.625% convertible notes due March 1, 2014 and $40,075 of our 2.25% convertible notes due March 1, 2016. Collectively, the We are subject to a number of covenants under our financing arrangements, including restrictions which relate to the payment of cash dividends, maintenance of minimum net working capital and tangible net worth levels, fixed charge coverage ratio, sales of assets, additional financing, purchase of our shares and other matters. We are in compliance with all financial covenants under our financing arrangements. The aggregate amount of long-term recourse debt maturing during each of the next five fiscal years is Non-recourse debt On May 31, 2009, our total non-recourse debt balance is $28,450 and is secured by three aircraft with a net book value of $41,240. The aggregate amount of long-term non-recourse debt maturing during each of the next five fiscal years is $11,722 in 2010, $2,656 in 2011, $2,860 in 2012, $9,274 in 2013 and $972 in 2014. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 3. Stock-Based Compensation We provide stock-based awards under the AAR CORP. Stock Benefit Plan Restricted stock grants are designed, among other things, to align employee interests with the interests of stockholders and to encourage the recipient to build a career with the Company. Restricted stock typically vests over periods of three to ten years from date of grant. Restricted stock grants may be performance-based with vesting to occur over periods of one to ten years after the grant is earned. All restricted stock Typically, stock options and restricted stock are subject to forfeiture prior to vesting if the employee terminates employment for any reason other than death, retirement or disability, or if we terminate employment for cause. A total of The weighted average fair value of stock options granted during fiscal 2009, 2008 and 2007 Stock Options Granted 2007 2006 2005 Risk-free interest rate 5.0 % 4.3 % 3.3 % Expected volatility of common stock 58.7 % 34.1 % 45.6 % Dividend yield 0.0 % 0.0 % 0.0 % Expected option term in years 4.0 1.0 1.1 The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on historical volatility of our common stock and the expected option term represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The dividend yield represents our anticipated cash dividends over the expected option term. For the Year Ended 2006 2005 Net income as reported $ 35,163 $ 15,453 Add: Stock-based compensation expense included in net income as reported, net of tax 2,634 1,540 Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of tax (6,464 ) (5,170 ) Pro forma net income $ 31,333 $ 11,823 Earnings per share—basic: As reported $ 1.05 $ 0.48 Pro forma $ 0.94 $ 0.37 Earnings per share—diluted: As reported $ 0.94 $ 0.46 Pro forma $ 0.84 $ 0.36 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 3. Stock-Based Compensation (Continued) A summary of 2007 2006 2005 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Oustanding at beginning of year 3,080 $ 16.88 4,607 $ 15.17 5,154 $ 14.35 Outstanding at beginning of year Granted 100 $ 24.08 364 $ 22.28 845 $ 14.66 Exercised (1,021 ) $ 17.72 (1,818 ) $ 13.70 (1,186 ) $ 11.03 Cancelled (24 ) $ 17.47 (73 ) $ 15.19 (206 ) $ 16.37 Outstanding at end of year 2,135 $ 18.30 3,080 $ 16.88 4,607 $ 15.17 Options exercisable at end of year 2,038 $ 18.03 3,080 $ 16.88 3,414 $ 17.48 The total fair value of stock options that vested during fiscal 2009, 2008 and 2007 The following table provides additional information regarding stock options outstanding as of May 31, Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Option Number Remaining Average Number Average Exercise Outstanding as Contractual Exercise Exercisable as Exercise Price Range of 5/31/07 Life in Years Price of 5/31/07 Price $3.20—$13.00 304 5.9 $ 7.51 304 $ 7.51 $13.01—$18.50 783 4.1 $ 15.95 783 $ 15.95 $18.51—$24.50 955 5.0 $ 23.12 858 $ 23.01 $24.51—$29.00 93 3.3 $ 26.26 93 $ 26.26 2,135 4.7 $ 18.30 2,038 $ 18.03 Restricted Stock We provide executives and other key employees an opportunity to be awarded performance-based restricted NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 3. Stock-Based Compensation (Continued) In addition to the performance-based restricted stock awards, we also granted a total of The fair value of restricted shares is the market value of our common stock on the date of grant. Amortization expense related to all restricted shares during fiscal 2009, 2008 and 2007 Restricted share activity during the fiscal year ended May 31, Number Weighted Average Nonvested at May 31, 2006 785 $ 15.06 Nonvested at May 31, 2008 Granted 480 $ 32.91 Vested (195 ) $ 14.20 Forfeited (3 ) $ 15.88 Nonvested at May 31, 2007 1,067 $ 23.16 Nonvested at May 31, 2009 As of May 31, 2006, unearned compensation related to restricted shares was included in unearned restricted stock awards, a separate component of Pursuant to a shareholder rights plan adopted in In the event that an Acquiring Person acquires 15% or more of the common stock, or if we are the surviving corporation in a merger involving an Acquiring Person or if the Acquiring Person engages in certain types of self-dealing transactions, each Right entitles the holder to purchase for corporation having a market value of two times the exercise price. The Rights do not entitle the holder thereof to vote or to receive dividends. The Rights will expire on August 6, Table of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 3. Stock-Based Compensation (Continued) Stock Repurchase Authorization On June 20, 2006 our Board of Directors authorized us to purchase up to 4. Income Taxes
(Dollars in thousands)“AAR,” “Company,” “we,” “us,”"AAR," "Company," "we," "us," and “our”"our" unless the context indicates otherwise. AAR was founded in 1951, organized in 1955 and reincorporated in Delaware in 1966. We are a diversified provider of products and services to the worldwide aviation and defense industries. We conduct our business activities primarily through six principal operating subsidiaries: AAR Parts Trading, Inc., AAR Aircraft & Engine Sales & Leasing, Inc., AAR Services, Inc., AAR Aircraft Services, Inc., AAR Manufacturing, Inc., and AAR International, Inc. Our international business activities are conducted primarily through AAR International, Inc.a(a wholly-owned subsidiary of AAR Parts Trading, Inc. and AAR Services, Inc.), respectively, and AAR International, Inc., (ii) Maintenance, Repair and Overhaul, comprised primarily of business activities conducted through AAR Services, Inc., AAR Allen Services, Inc. and AAR Aircraft Services, Inc. (iii) Structures and Systems, comprised primarily of business activities conducted through AAR Manufacturing, Inc., and (iv) Aircraft Sales and Leasing, comprised of business activities primarily conducted through AAR Aircraft & Engine Sales & Leasing, Inc.customer’scustomer's maintenance activities. The types of services provided under these programs include program and warehouse management, parts replenishment and parts and component repair and overhaul. We are an authorized distributor for more than 125 leading aviation product manufacturers. In addition, we sell and lease commercial jet engines. We acquire aviation parts and components for the Aviation Supply Chain segment from domestic and foreign airlines, original equipment manufacturers, independent aviation service companies and aircraft leasing companies. From time to time, we also purchase aircraft and engines for disassembly to individual parts and components. These assets may be leased to airlines on a short-term basis prior to disassembly. In the Aviation Supply Chain segment, the majority of our sales are made pursuant to standard commercial purchase orders. In certain inventory supply and management programs and performance-based logistics programs, we supply products and services under agreements reflecting negotiated terms and conditions.theinstallation, exterior and interior refurbishment and engineering service and supportof most types oflanding gears and wheels and brakes for different commercial and military aircraft. We currently operate four airframe maintenance facilities and one landing gear for our airline and defense customers.overhaul facility.airframeaircraft maintenance facility in Indianapolis, Indiana (the Indianapolis"Indianapolis Maintenance CenterCenter" or IMC)"IMC"), which is owned by the Indianapolis Airport Authority (IAA)("IAA"). We believe the IMC is one of the most efficient and state-of-the-art airframe maintenance facilities in the world and our occupancy of the IMC significantly expands our maintenance and repair capacity and capabilities.United States. The IMC is comprised of 12 airframe maintenance bays, backshop space to support airframe maintenance activities,and warehouse and office space. At May 31, 2007, we occupied and were performingOur lease with the IAA allows us to occupy up to ten of the maintenance activities in seven bays and occupied certain office space within the IMC. We have options forthree additional bays and additional office space under a lease which expires in December 2014, with a ten-year renewal option. The lease agreement contains early termination rights for AAR and the IAA, which may be exercised in specified circumstances. In addition to the IMC, weWe also operate an aircraft maintenance facility located in Oklahoma City, Oklahoma providing airframe maintenance, modification, special equipment installation, painting services and aircraft terminal services for various models of commercial, defense, regional, business and general aviation aircraft. On January 12, 2007, we acquired substantially all the assets of Reebaire Aircraft, Inc. (“Reebaire”), a regional airframeaircraft maintenance and repair overhaul facility located in Hot Springs, Arkansas. This acquisition increasesOn March 5, 2008, we acquired Avborne Heavy Maintenance, Inc. ("Avborne") an independent provider of airframe maintenance, modifications, installations and painting services to commercial airlines, international cargo carriers and major aircraft leasing companies. Avborne performs heavy maintenance on Boeing and Airbus aircraft at a leased facility located at Miami International Airport. In addition to our regional MRO capacityaircraft maintenance facilities, we operate a landing gear repair center in North America. The purchase price was approximately $11,800Miami, Florida where we repair and was paid in cash. We also operate an aircraft storage facility in Roswell, New Mexico.overhaul landing gear, wheels, brakes and actuators for different types of commercial and military aircraft.original equipment manufacturers (OEMs)OEMs that provide us access to parts, repair manuals and service bulletins in support of parts manufactured by the OEM. Although the terms of each arrangement vary, they typically are made on standard OEM terms as to duration, price and delivery. When possible, we obtain replacement parts used in repair and overhaul activities from operating units in our Aviation Supply Chain segment.On April 2, 2007, we acquired 100%The containers and shelters are used in a variety of the shares of common stock of Brown International Corporation (“Brown”), a privately held defense contractor that provides engineering, design, manufacturingmission requirements, including armories, supply and parts storage, refrigeration systems, integration services. The purchase price was approximately $26,700tactical operation centers, briefing rooms, laundry and was paid in cash.kitchen facilities, water treatment and sleeping quarters. We also design, manufacture and install in-plane cargo loading and handling systems for commercial and military aircraft and helicopters. We also design and manufacture advanced composite materials for commercial, business and military aircraft as well as advanced composite structures for the transportation industry. On December 3, 2007, we acquired Summa Technology, Inc. ("Summa"), a leading provider of high-end sub-systems and precision machining, fabrication, welding and engineering services. On April 2, 2007, we acquired Brown International Corporation ("Brown"), a privately held defense contractor that provides engineering, design, manufacturing and systems integration services. During the fiscal year ended May 31, 2007 ("fiscal 2007"), we decided to exit our non-core industrial turbine business located in Frankfort, New York, and have treatedtreat it as a discontinued operation. We sold the assets of the business to local management in November 2008. In this segment, sales are made to customers pursuant to standard commercial purchase orders and contracts. We purchase the raw materials for this business, including steel, titanium, aluminum, sheets, extrusions and castings and other necessary supplies, from a number of vendors.orand lease of used commercial jet aircraft. Each sale or lease is negotiated as a separate agreement which includes term, price, representations, warranties and lease return provisions. Leases have fixed terms; early termination by either party is not permitted except in the event of a breach. In this segment, we purchase aircraft fromtypically under joint venture agreements. As a result of weak economic conditions and tight credit markets, we have been focused on reducing our investment in our joint venture and wholly-owned aircraft portfolio, and consequently, we have not purchased any aircraft in this segment since November 2007. We are considering combining the activities of this segment with the Aviation Supply Chain segment during the fiscal year ending May 31, 2010 ("fiscal 2010"). At May 31, 2007,2009, the total number of aircraft held in these joint ventures was 12. We also directly own nine26 and six were wholly-owned. Joint Venture
Portfolio Wholly-Owned
Portfolio — 1 4 — 18 — — 1 1 — 2 — 1 — — 3 — 1 26 6 ventures.venture portfolio will be up for lease renewal and the MD80 in the wholly-owned portfolio will be up for lease renewal. The oldest aircraft in the portfolio of 32 aircraft is 22 years old, the newest aircraft is 10 years old and the average age of our fleet is 17 years (see Note 8 of Notes to Consolidated Financial Statements). Within thisthe Aircraft Sales and Leasing segment, we also provide advisory services which consist of assistance in remarketing aircraft, records management and storage maintenance.militarygovernment and defense organizations, domestic and foreign commercialpassenger and freight airlines, original equipment manufacturers, large system providers and other industrial entities. The principal customers in the Aircraft Sales and Leasing segment include domestic and foreign commercial airlines and aircraft finance and leasing companies. Sales of aviation products and services to our airline customers are generally affected by such factors as the number, type and average age of aircraft in service, the levels of aircraft utilization (e.g., frequency of schedules), the number of airline operators and the level of sales of new and used aircraft. Sales to the U.S. Department of Defense are subject to a number of factors, including the level of troop deployment worldwide, government funding, competitive bidding government funding and requirements generated by world events.1210 Federal Aviation Administration (FAA)("FAA") licensed repair stations in the United States and Europe. Of the 1210 licensed FAA repair stations, six are also European Aviation Safety Agency (EASA)("EASA") licensed repair stations. Such licenses, which are ongoing in duration, are required in order for us to perform authorized maintenance, repair and overhaul services for our customers and are subject to revocation by the government for non-compliance with applicable regulations. Of the 1210 FAA licensed repair stations, four are in the Aviation Supply Chain segment, five are in the Maintenance, Repair and Overhaul segment, and three areone is in the Structures and Systems segment. Of the six EASA licensed repair stations, two are in the Aviation Supply Chain segment threeand four are in the Maintenance, Repair and Overhaul segment and one is in the Structures and Systems segment. We believe that we possess all licenses and certifications that are material to the conduct of our business.pallet, containerengineering, manufacturing, machining and shelter manufacturingintegration activities in our Structures and Systems segment compete with several large and small companies, and our cargo systems and composite structures competitors include a number2007,2009, backlog believed to be firm was approximately $319,700$492,500 compared to $243,200$466,700 at May 31, 2006.2008. These amounts do not include expected sales from the A400M cargo system (see Item 1A—Risk Factors). Approximately $268,300$440,700 of thisour May 31, 2009 backlog is expected to be filled within the next 12 months.2007,2009, we employed approximately 3,9005,300 persons worldwide. We also retain approximately 600630 contract workers, the majority of which are located at our airframe maintenance facilities.U.S. DepartmentDefense CustomersDefense$325,280 (30.7%$533,050 (37.4% of total sales), $293,778 (33.2%$438,501 (31.7% of total sales), and $249,216 (33.7%$325,280 (30.7% of total sales) in fiscal years 2007, 20062009, 2008 and 2005,2007, respectively. Because such sales are subject to competitive bidding and U.S. government funding, no assurance can be given that such sales will continue at levels previously experienced. The majority of our U.S. government contracts are for products and services used for ongoing military logisticlogistics support activities and for products which support the U.S. military's deployment strategy, and are, therefore, subject to changes in defense spending. Our U.S. government contracts are subject to termination at the election of the U.S. government; in the event of such a termination we would be entitled to recover from the U.S. government all allowable costs incurred by us through the date of termination.“Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" and “Business"Business Segment Information”Information" in Note 15 of Notes to Consolidated Financial Statements under Item 8, “Financial"Financial Statements and Supplementary Data”, below.Data."www.aarcorp.com.www.aarcorp.com. We make available free of charge through our web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC.Securities and Exchange Commission. Information contained on our web site is not a part of this report.may be affectedare impacted by factors that adversely affect the commercial aviation industry.the overall economic conditionconditions of that industry. The commercial aviation industry is historically cyclical. Early in calendar year 2001,cyclical and has been negatively affected during the commercial aviation industry began to experiencepast decade by the negative effects of a worldwide economic downturn. The eventsterrorist attacks of September 11, 2001, exacerbated that condition, resulting in a significantthe subsequent decline in air travel, and reduced capacity by most of the major U.S.-based airlines. Since September 11, 2001, the aviation industry has also been negatively affected by historically high fuel prices, the war on terrorism, and the outbreak of Severe Acute Respiratory Syndrome, or SARS.SARS, and historically high oil prices. As a result of these and other events, certain customers filed for bankruptcy protection over the past several years, and others may be forced to do so in the future.Air Canada, Aloha Airlines, Delta Air Lines, Mesaba Airlines, Northwest Airlines, U.S. Airways, United Airlines and Varig.tight credit conditions, may adversely impact our financial condition or results of operations.impactedaffected by these and other events that impact the aviation industry, including the following:· continued historically high fuel costs;· future terrorist attacks and the ongoing war on terrorism;·deterioration in the financial condition of our existing and potential customers;····The economic and other factors affecting the aviation industry may have an adverse impact on our resultsTable of operations and financial condition.ContentsA Mesa Airlines and subsidiaries ("Mesa") is a customer of the Company and in May 2008, warned it may have to file for bankruptcy protection if it could not resolve a contract dispute with one of its customers. In addition to the ongoing dispute with their customer, Mesa has reported substantial operating losses in the three- and six-month periods ended March 31, 2009. During fiscal 2009, our consolidated sales to Mesa were $70,700, of which $45,500 was in the Aviation Supply Chain segment and $25,200 was in the Maintenance, Repair and Overhaul segment. At May 31, 2009, we have long-term assets recorded in equipment on long-term lease of $46,000 supporting the Mesa supply chain programs and also have trade receivables and other assets associated with Mesa of approximately $12,500.protection or are only recently emerging from bankruptcy.protection. As a result, we may sell fewer parts and services to these customers and certain of these customers continue to pose credit risks to us. Our inability to collect receivables from one or more important customers, couldincluding Mesa, would adversely affect our results of operations and financial condition.Principally as a result of the events of September 11, 2001 and its impact on the global airline industry’s financial condition, fleet size and aircraft utilization, we recorded a significant charge for impaired inventories and engines duringDuring the second quarter of fiscal 2002 utilizing those assumptions.2009, we performed a comprehensive review of our aircraft portfolio. The primary objective of this review was to assess the impact of the economic slowdown and credit crisis on market conditions. Based upon that review, and taking into consideration the desire to improve liquidity and generate cash, we made the decision to sell one of the four aircraft acquired before September 11, 2001, and offer two of the remaining three for sale. As a result of this review and taking into consideration our assessment of current market conditions, the Company recorded a $21,033 pre-tax impairment charge in the second quarter of fiscal 2009 to reduce the carrying value of the three aircraft to their net realizable value. During the fourth quarter of fiscal 2003 and the first quarter of fiscal 2007,2009, we recorded additionala $10,100 pre-tax impairment charge on inventory and engines which had been acquired prior to September 11, 2001. This inventory was also subject to impairment charges asrecorded in previous fiscal years. The fiscal 2009 inventory and engine impairment charge was triggered by declining conditions in the commercial aviation industry and a result of a further declineslowdown in market value for certainthe sales volume of these inventories, aircraft and engines.assets during the fiscal year. Further reductions in demand for our inventories or declining market values, as well as differences between actual results and the assumptions utilized by us when determining the recoverability of our inventories, aircraft and engines, could result in additional impairment charges in$325,280 (30.7%$533,050 (37.4% of consolidated sales) in fiscal year 2007.2009. The majority of our U.S. government contracts are for aviation products and services used for ongoing military logisticlogistics support activities and for products which support the U.S. military’smilitary's deployment strategy. Our contracts with the U.S. Department of Defense and its contractors are typically firm agreements to provide products and services at a fixed price and have a term of one year or less, frequently subject to extension for one or more additional periods of one year at the option of the U.S. Department of Defense. Sales to the U.S. Department of Defense are subject to a number of factors, including the level of troop deployment worldwide, competitive bidding, U.S. government funding and requirements generated by world events, and therefore may not continue at levels previously experienced, which could have an adverse effect on our results of operations and financial condition. fixed-price contracts providing for fixed prices for the products and services, regardless of costs incurred by us. The cost of producing products or providing services may be adversely affected by increases in the cost of labor, materials, fuel, overhead and other unknown variants, including manufacturing and other operational inefficiencies and differences between assumptions used by us to price a contract and actual results. Increased costs may result in cost overruns and losses on such contracts which could adversely affect our results of operations and financial condition.currently leased aircraft and engines.engines when their current leases expire.sellother aircraft and engines that are currently on lease, could adversely affect our results of operations and financial condition.(A400M)("A400M"). We are teaming witha subcontractor to Pfalz Flugzeugwerke GmbH (PFW)("PFW") of Speyer, Germany on thethis Airbus program. We have incurred, and are expected to continue to incur, significant development costs in connection with this program.program (see Note 14 in Notes to Consolidated Financial Statements). Our portion of revenue to be generated from this program is expected to exceed $300,000 through fiscal 2015,2020, based on current sales projections offor the A400M. We expectA400M as provided to beginus by Airbus. Based on program delays and information provided by Airbus, planned first shipments under this program during the second half ofhave slipped to fiscal 2008.2013. If the A400M experiences significant additional delivery delays or order cancellations, or if we fail to develop the system according to contract specifications, then we may not be able to recover our development costs, and our operating results and financial condition could be adversely affected.The IndianapolisSuccess within our Maintenance, Center successRepair and Overhaul segment is dependent upon fleet utilization and continued outsourcing by the hiring and retention of a large pool of skilled aircraft mechanics.airlines.The Indianapolis Maintenance Center is comprised of 12 We currently conduct airframe maintenance, bays (10repair and overhaul activities at leased facilities in Indianapolis, Indiana; Oklahoma City, Oklahoma; Miami, Florida; and Hot Springs, Arkansas. Revenuesthe IMCthese facilities fluctuate based on the demand for maintenance which, in turn, is driven by the number of aircraft operating and potentialthe extent of outsourcing of maintenance activities by airlines. Furthermore, we may not be able to hire and retainIf therequired amount number of qualified licensed aircraft mechanics. As a result,operating decline or outsourcing of maintenance activities decline, we may not be able to execute our operational and financial plan at the IMC,our MRO facilities, which could adversely affect our results of operations and financial condition.sources.sources, both domestic and international. Our competitors include aircraft manufacturers, aircraft parts manufacturers, airline and aircraft service companies, other companies providing maintenance, repair and overhaul services, and other aircraft spare parts distributors and redistributors. Some of our competitors have substantially greater financial and other resources than we have. We can give no assurance thathave and others may price their products and services below our selling prices. These competitive pressures will notcould adversely affect our results of operations and financial condition.conditions,factors, the state of the aviation industry, our financial performance and current credit ratings. Debt and equity capital may not continue to be available to us on favorable terms, or at all. Our inability to obtain financing on favorable terms could adversely affect our results of operations and financial condition.in some cases the equivalent regulatory agencies in other countries. Specific regulations vary from country to country, although regulatory requirements in other countries are generally satisfied by compliance with FAA requirements. Although we believe we comply with all applicable regulatory standards, these standards may change in the future, requiring our inventory to be modified or scrapped. New and more stringent governmental regulations may be adopted in the future that, if enacted, may have an adverse impact on us.Acquisitions expose us to risks, including the risk that we may be unable to effectively integrate acquired businesses.During fiscal 2007, we completed two acquisitions. Further, we explore and have discussions with third parties regarding additional acquisitions on a regular basis. Acquisitions involve risks including Compliance with environmental requirements and resolution of environmental claims have, in the past, been accomplished without material effect on our liquidity and capital resources, competitive position or financial condition. Management cannot assess the possible effect of compliance with future environmental requirements or of future environmental claims for which we may not have adequate indemnification or insurance coverage. If we were required to pay the expenses related to any future environmental claims for which neither indemnification nor insurance coverage were available, these expenses could have an adverse impact on our results of operations and financial condition. Additional informationInformation on environmental matters, including an administrativea legal proceeding byinvolving the Michigan Department of Environmental Quality is contained under Item 3 of this Annual Report on Form 10-K for the fiscal year ended May 31, 2007.10-K.capital expenditures to purchase new equipment and to train our employees to keep pace with any new technological developments. These capital expenditures could adversely affect our results of operations and financial condition.generally dependent on an educated and highly skilled workforce. Furthermore, we have a collective bargaining agreementsagreement covering approximately 600 employees at three of our facilities.630 employees. Our ability to operate successfully and meet our customers’customers' demands could be jeopardized if we are unable to attract and retain a sufficient number of skilled personnel, including qualified licensed mechanics, to conduct our business, or if we experience a significant or prolonged work stoppage, and may adversely affect our results of operations and profitability.financial condition.None. Not Applicable.is owned by uswe own subject to a mortgage. In addition to warehouse space, this facility includes executive, sales and administrative offices. We also lease facilities in Atlanta and Macon, Georgia; Jacksonville, Florida;Florida and Garden City, New York, and London, England, and we own a building near Schiphol International Airport in the Netherlands to support activities in the Aviation Supply Chain segment.Florida; Roswell, New MexicoFlorida and Hot Springs, Arkansas.Michigan;Michigan and Goldsboro, North Carolina and Frankfort, New York.Carolina. We also lease facilities in Huntsville, Alabama.Alabama; Cullman, Alabama; Lebanon, Kentucky and Sacramento, California.(Dollars(“subsidiary”("subsidiary") received an Administrative Order for Response Activity (“Order”("Order") dated August 7, 2003, from the Michigan Department of Environmental Quality (“MDEQ”("MDEQ") relating to environmental conditions at and in the vicinity of the subsidiary’ssubsidiary's Cadillac, Michigan plant. The Order requiresrequired the subsidiary to perform environmental investigatory work, prepare a feasibility study and a remedial action plan, and perform interim response actions. The interim response actions include continuation of the response activities the subsidiary is performing under a 1985 Consent Decree, operation of a soil vapor extraction system the subsidiary had previously installed and operated, determination of the need to provide alternate water supplies to off-site properties (and if it is so determined then to actually provide them), removal of any free phase liquids encountered in the ground, providing notices of groundwater contamination migration to off-site property owners, and other actions determined by the MDEQ or the subsidiary to be appropriate. The MDEQ further demands payment of environmental response costs already incurred by the MDEQ in the approximate amount of $2,500 plus interest, and reimbursement of unspecified costs to be incurred in the future by the MDEQ. The Order and the letter accompanying it threaten the imposition of civil fines up to $25 for each day of violation of the Order, plus exemplary damages up to three times the costs incurred by the MDEQ if the subsidiary does not comply with the Order. The Order may require the implementation of the remedial action plan, although it is not clear on that point. The Order requires the implementation of emergency response action if a release of hazardous substances, threat of a release, or exacerbation of existing contamination occurs during the pendency of the Order. The MDEQ responded to the subsidiary by saying that the MDEQ “will be taking appropriate action to protect public health, safety and welfare and the environment, and gain AAR’s compliance with Part 201” (the Michigan “cleanup law”).The subsidiary has received funds from an insurance carrier to reimburse it for a portion of the subsidiary’s costs. The subsidiary sought coverage from another insurance company and that carrier is paying a portion of defense costs, but has reserved its rights on coverage for the litigation noted below. The subsidiary has filed suit against one of the insurance carriers for breach of contract and other relief and recently reached a settlement.Prior to the issuance of the Order, the subsidiary sought a Court order to enforce the 1985 Consent Decree, but that relief was denied by the Court, primarily on the basis that the action was premature since the State was not pursuing an enforcement action at the time. The subsidiary sought leave to appeal that decision to the Michigan Court of Appeals, but leave was denied.The work performed and data gathered by the subsidiary since the issuance of the Order appears to support the positions previously taken by the subsidiary regarding the movement of groundwater for treatment by the subsidiary. There is disagreement with the MDEQ regarding the conclusions to be drawn from the data developed from that work. The MDEQ has retained contractors to perform environmental investigations in the vicinity of the plant.vvs AAR Cadillac Manufacturing, a division of AAR Manufacturing Group, Inc., an Illinois corporation, and AAR Corp., a Delaware corporation, File No. 05-18853-CE.05-18853-CE. In its complaint, the MDEQ seeks to enforce the Order against the subsidiary and to have the Court impose civil fines and exemplary damages upon the subsidiary for the alleged failure to comply with the Order. The MDEQ seeks to recover its costs incurred in performing response activities from both the subsidiary and the Company and seeks a declaratory judgment that both are liable for all future costs incurred by the State at the facility. The MDEQ also seeks civil fines from the subsidiary for alleged violations of a particular section of a Michigan environmental law.Affirmative Defenses, and intend on vigorously defendingaffirmative defenses. Prior to trial, the complaint filedcourt granted a motion by the MDEQ. On June 17, 2005,Company to dismiss the Company as a defendant, leaving the subsidiary as the only remaining defendant in the lawsuit.filedruled that it would bifurcate the trial between liability and cost recovery. The first stage of trial was devoted to liability. If the court finds the subsidiary liable, it will move to the second stage of determining what costs are owed by the subsidiary. At the close of trial in February 2009, the court asked the parties to submit post-trial briefs, which have now been completed. The court currently has the case under consideration and will issue a Petition for Reimbursement of itsruling on liability.amountMDEQ matter. The suit, entitledLiberty Mutual Insurance Company vs AAR Corporation, AAR Manufacturing Inc. and AAR Cadillac Manufacturing (No. 08 CH 46851) was filed in the Circuit Court of approximately $200 incurred in complying withCook County, Chancery Division. Plaintiff Liberty Mutual seeks a declaratory judgment stating that it has no duty to defend or indemnify the Order from the State of Michigan cleanup and redevelopment fund established under Michigan law, plus costs and attorney fees. As of May 31, 2007,Company or the subsidiary has chargedwith respect to operations $1,309 related to thisthe MDEQ matter. The MDEQcase remains pending and discovery has filed a motion for summary disposition which is scheduled for an August 20, 2007 hearing.not yet begun.NameAge 5456 Chairman and Chief Executive Officer, Director 5052 President and Chief Operating Officer, Director 4244 Vice President, Chief Financial Officer and Treasurer Howard A. PulsiferRobert J. Regan6451 Vice President, General Counsel and Secretary 4749 Group Vice President, Aviation Supply Chain 4547 Vice President, Controller and Chief Accounting Officer 67 Group Vice President, Structures and Systems 57 Group Vice President, Maintenance, Repair and Overhaul Pulsifer Reganhas served as was appointed Vice President, General Counsel and Secretary of the Company since 1990.effective June 1, 2009. Previously he served as Vice President (since 1990) and General Counsel (since 1987).and prior to that as Associate General Counsel after joining the Company on February 28, 2008. Prior to joining AAR,the Company, he was with United Airlines, Inc. for 14 years.a partner at the law firm of Schiff Hardin LLP since 1989.REGISTRANT’SREGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES(Dollars in thousands, except per share amounts)20072009, there were approximately 7,0008,700 holders of Common Stock, including participants in security position listings. Fiscal 2009 Fiscal 2008 Market Prices Market Prices High Low High Low $ 18.87 $ 13.10 $ 34.86 $ 28.50 18.23 10.37 33.25 28.88 19.71 13.22 38.54 25.89 15.30 10.61 28.10 18.94
(In thousands, except per share amounts) For the Year Ended May 31, 2009 2008 2007 2006 2005
$ 1,423,976 $ 1,384,919 $ 1,061,169 $ 885,518 $ 740,427 241,615 2 264,072 184,147 2 163,221 120,575 102,892 2 134,518 95,366 2 65,172 34,917 35,316 3 (205 ) 2,927 (3,893 ) 3,562 18,371 20,578 16,701 18,004 16,917 80,600 75,745 59,447 35,823 19,498 (1,949 ) (601 ) (787 ) (660 ) (4,045 ) 78,651 75,144 58,660 35,163 15,453
$ 2.12 $ 2.04 $ 1.63 $ 1.07 $ 0.60 (0.05 ) (0.02 ) (0.02 ) (0.02 ) (0.12 ) $ 2.07 $ 2.02 $ 1.61 $ 1.05 $ 0.48
$ 1.92 $ 1.77 $ 1.42 $ 0.96 $ 0.57 (0.05 ) (0.01 ) (0.02 ) (0.02 ) (0.11 ) $ 1.87 $ 1.76 $ 1.40 $ 0.94 $ 0.46
38,059 37,194 36,389 33,530 32,297 42,809 43,745 43,309 38,852 36,205
$ 112,505 $ 109,391 $ 83,317 $ 121,738 $ 50,338 596,894 564,932 389,215 436,666 314,517 1,377,511 1,362,010 1,067,633 978,819 732,230 50,205 1,236 51,366 361 2,123 11,722 20,212 22,879 1,928 1,622 367,598 478,308 4 232,863 293,263 5,6 199,919 16,728 19,190 20,748 25,313 27,240 417,803 479,544 284,229 293,624 202,042 656,895 585,255 494,243 422,717 6 314,744
38,884 38,773 37,729 36,654 32,586 $ 16.89 $ 15.09 $ 13.10 $ 11.53 $ 9.66 In fiscal 2007 and 2003, we recorded $7,652 and $5,360, respectively, of impairment charges related to engines and engine and airframe parts. A portion of the fiscal 2007 charge related to an aircraft. See Note 13 of Notes to Consolidated Financial Statements.2In February 2004, we sold $75,000 of 2.875% convertible notes due February 1, 2024.31011 of Notes to Consolidated Financial Statements.5 See Note 1Notes to Consolidated Financial Statements.Contents14 MANAGEMENT’S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands)Management’s Management's Discussion and Analysis of Financial Condition and Results of Operations contain certain statements relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the beliefs of 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 discussed under Item 1A, “Risk Factors”."Risk Factors." 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 publicly release the result of any revisions that may be made toupdate 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.airframe parts.parts and components. We also provideoffer customized programs for inventory supply and management programs and performance-based logistics programs for engine and airframe parts and components.logistics. Sales also include the sale and lease of commercial jet engines. Cost of sales consists principally of the cost of product (primarily aircraft and engine parts), direct labor and overhead (primarily indirect labor, facility cost and insurance).and storageincluding painting services, and the repair and overhaul of most commercial landing gear types.gear. Cost of sales consists principally of the cost of product (primarily replacement aircraft parts), direct labor and overhead.manufactureengineering, design and salemanufacture of containers, pallets and shelters used to support the U.S. military’smilitary's tactical deployment requirements, complex machined and fabricated parts, components and sub-systems for various aerospace and defense programs and other applications, in-plane cargo loading and handling systems for commercial and military applications and composite products for aviation and industrial use. Cost of sales consists principally of the cost of product, direct labor and overhead.lease expense and insurance). For the Year Ended May 31, 2009 2008 2007 $ 583,965 $ 606,490 $ 543,674 346,996 300,871 211,516 477,631 389,428 264,083 15,384 88,130 41,896 $ 1,423,976 $ 1,384,919 $ 1,061,169 For the Year Ended May 31, 2009 2008 2007 $ 130,411 $ 145,091 $ 114,383 51,767 43,967 29,915 74,158 54,673 36,021 (14,721 ) 20,341 3,828 $ 241,615 $ 264,072 $ 184,147 During In early calendar year 20062008, many U.S. air carriers announced a series of cost reduction initiatives, including staffing reductions, route consolidations and intocapacity reductions. The fleet reductions announced in early 2008 were principally in response to high oil prices. More recent capacity reductions have been in response to the deteriorating U.S. economic environment, including significant declines in fourth quarter 2008 and first quarter 2009 U.S. gross domestic product, and the highest unemployment rate in the U.S. since 1983. Capacity in North America was down approximately 8% during the first calendar quarter of 2007, many2009 compared to last year, and passenger traffic was down approximately 10%. Certain air carriers in the U.S. and abroad have filed for bankruptcy protection, and some have ceased operations. Certain foreign carriers have also reduced capacity in response to weak world-wide economic conditions. A reduction in the global operating fleet of passenger and cargo aircraft has resulted in reduced demand for parts support and maintenance activities for the domestic commercial airlines reported improvedtypes of aircraft affected.results, reflectingmarkets, including tightened credit markets, have reduced the amount of liquidity available to certain of our customers which, in turn, affects their ability to implement fare increasesbuy parts, services, engines and aircraft. We continue to partially offset the continued high cost of fuelmonitor economic conditions for their impact on our customers and intense competition. The improvement has also been driven by the airlines’ continued focus on controlling non-fuel related expenses, the implementation of operational efficienciesmarkets, assessing both risks and relatively high load factors.opportunities that may affect our business.certainmany carriers will continue to aggressively seek ways to reduce their cost structure, including outsourcing more of their maintenance and support functions to third parties. Further, low-costparties, while we believe other carriers who have historically outsourced their maintenance requirements will continue to expand their presence around the world. Many of these low-cost carriers are flying newer aircraft which will result in increasing demand for maintenance and parts support in future years. Wedo so. Although we believe we remain well positioned to respond to the market with our broad range of products and services, as these trends continuethe factors above may have an adverse impact on our growth rates and our results of operations and financial condition.develop.experience strong demand forsee opportunities to provide performance-based logisticlogistics services and mobilitymanufactured products supporting our defense customers’ deployment activities. We are monitoring the debate between the current Administration and the U.S. Congress regarding the troop withdrawal from Iraq and its impact on demand for our products and services.customers' requirements. Although it remains difficult for us to predict long-term demand for these types of products and services, we believe we20072009 Compared with Fiscal 20062008(as compared with the same period of the prior year)20072009 increased $175,651$39,057 or 19.8%2.8% over the prior year period. Sales to commercial customers decreased 5.5% compared to the prior year reflecting reduced demand for parts support and maintenance activities as a result of declining airline capacity. Sales to commercial customers also declined due to lower sales in our Aircraft Sales and Leasing segment reflecting lower aircraft sales as a result of tight credit markets and reduced demand for big ticket items. Sales to global defense customers increased 16.8% reflecting the favorable impact of acquisitions and strong demand for specialized mobility products and performance-based logistics programs.Each reportingThe increase in sales is attributable to the inclusion of revenue from Avborne, which was acquired in March 2008 and contributed approximately $44,000 of revenue during the first nine months of fiscal 2009, as well as increased revenues at our landing gear overhaul business. Sales were lower at our Indianapolis-based MRO facility reflecting reduced demand as a result of airline capacity reductions. Gross profit in the Maintenance, Repair and Overhaul segment increased $7,800 or 17.7%, and the gross profit margin percentage increased slightly to 14.9% from 14.6% in the prior year due primarily to operational improvement initiatives.with saleswas driven by market share gains through solid execution across our business and broad market acceptance of the Company's value proposition of innovative cost savings solutions. Sales to commercial customers increasing 24.3%increased 27.8% and sales to defense customers up 14.4%increased 36.7% compared to the prior year. The sales increase to commercial customersthe improved commercial airline environment, our expanded presence in global markets, growth in supply chain programs, andmarket share gains, increased demand for airframe maintenance and landing gear overhaul, services.strength in supply chain programs, successful marketing efforts in international markets, increased aircraft sales and the impact from acquisitions. Sales to defense customers increased as we continue to experiencereflecting the favorable impact of acquisitions and continued strong demand for performance-based logistics programs and specialized mobility products and the impact from acquisitions.products.Sales in In the Aviation Supply Chain segment, sales increased $82,508$62,816 or 17.9%11.6% over the prior year. The sales increase reflects strong demand for engine and airframe parts from commercial customers dueis attributable to improved sourcing and program execution as well as the implementation of new supply chain programs. The increase in sales to defense customers was driven by continued strong demand for parts support from defense-related performance-based logistics programs.programs and aftermarket parts sales to commercial customers. Gross profit in the Aviation Supply Chain segment increased $15,128$30,708 or 15.2%26.8% over the prior year primarily due to increased sales volume, partially offset by an impairment charge of $4,750 recorded in this segment duringand the first quarter of fiscal 2007 (see Note 13 of Notes to Consolidated Financial Statements). The gross profit margin percentage decreased slightlyincreased to 21.0%23.9% from 21.5%21.0% in the prior year due to the unfavorablefavorable mix of products sold and the impairment charge.In the Maintenance, Repair and Overhaul segment, sales increased $29,258 or 16.1% over the prior year. The increase in sales is primarily attributable to increased demand for landing gear overhaul services as well as airframe maintenance at our Oklahoma and Indianapolis airframe maintenance facilities. Gross profit in the Maintenance, Repair and Overhaul segment increased $4,001 or 15.4% over the prior year due to the increase in sales and the gross profit margin percentage decreased slightly to 14.1% from 14.2%. The gross profit margin improved at our landing gear and Oklahoma airframe maintenance businesses due to increased sales and operational efficiencies. The gross profit margin declined at our Indianapolis airframe maintenance facility due to start-up inefficiencies associated with new customers.In the Structures and Systems segment, sales increased $35,336 or 15.4% over the prior year. The increase in sales was primarily due to the development and delivery of increasingly complex and specialized shelter products and higher volume of pallets at our Mobility Systems business. Sales also increased due to the inclusion of $12,368 of revenue from Brown which was acquired during the fourth quarter of fiscal 2007 (see Note 11 of Notes to Consolidated Financial Statements). Sales of our cargo systems were lower as we relocated production to a new manufacturing facility in North Carolina. Gross profit in the Structures and Systems segment increased $2,310 or 6.9% compared to the prior year due to the increase in sales. The gross profit margin percentage decreased from 14.7% to 13.6% due to the unfavorable mix of products sold, primarily at our Mobility Systems business.In the Aircraft Sales and Leasing segment, sales increased $28,549 due to more aircraft sales compared to the prior year. During fiscal 2007, our joint ventures purchased six aircraft and sold ten. The increase in earnings from aircraft joint ventures compared to the prior year is primarily due to the sale of the ten aircraft. At May 31, 2007, the total number of aircraft held in joint ventures was 12 (see Note 7 of Notes to Consolidated Financial Statements). Our strategy in the Aircraft Sales and Leasing segment is to build an aircraft portfolio through participation in joint ventures and for our own account. We also own nine aircraft outside of the joint ventures. Of the nine aircraft owned by us outside the aircraft joint ventures, five were acquired prior to September 11, 2001. Gross profit in the Aircraft Sales and Leasing segment decreased $513 compared to the prior year principally due to the$4,750 impairment charge of $2,902 recorded during the first quarter of fiscal 2007 (see Note 13 of Notes to Consolidated Financial Statements). we recorded an impairment charge of $4,750 in the Aviation Supply Chain segment for engine parts that were acquired prior to September 11, 2001, and were subject to impairment charges recorded in prior years. This impairment charge was triggered by our decision to aggressively pursue the liquidation of this inventory. We made this decision to recognize the impairment due to the impact of persistently high fuel costs and fewer operators on demand for these parts, as well asto better align human and physical resources with higher potential opportunities in the rapidly growing Aviation Supply Chain segment (see Note 13 of Notes to Consolidated Financial Statements). InUp until mid fiscal 2008, our strategy in the Aircraft Sales and Leasing segment was to invest in aircraft mostly through participation in joint ventures and for our own account. During fiscalrecorded an impairment chargepurchased 20 aircraft with joint venture partners, all of $2,902 duringwhich are currently on lease. At May 31, 2008, the first quartertotal number of 2007 on a wide-body aircraft originally purchasedheld in joint ventures was 29 (see Note 8 of Notes to Consolidated Financial Statements). Earnings from joint ventures declined $5,004 as aircraft joint ventures had less sales activity in fiscal 2008 compared to fiscal 2007. We also owned eight aircraft outside of the joint ventures. Of the eight aircraft owned by us outside the aircraft joint ventures, four were acquired prior to September 11, 2001. The lease and non-recourse debt on the aircraft were restructured during the quarter, and we made the decision to offer the aircraft for sale and recorded the impairment charge to reduce the carrying value of the aircraft to estimated net realizable value. As part of the restructuring, the lender of the non-recourse debt reduced the outstanding principal balance by $2,927 which resulted in a gain on extinguishment of the same amount.During the first quarter of fiscal 2007, we sold substantially all assets, subject to certain liabilities, of a product line within our Structures and Systems segment. Proceeds from the sale of the product line were $6,567 and the net carrying value of the assets sold was $1,209, resulting in a gain on sale of product line of $5,358. The gain on this transaction has been classified as a component of operating income in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.$30,194$39,152 or 46.3%41.1% compared withto the prior year’ssame period last year due to increased sales increased earnings from aircraft joint ventures and the gain on the sale of a product line,gross profit, partially offset by impairment charges and an increase in selling, general and administrative expenses. In fiscal 2007, our selling,Selling, general and administrative expenses increased $5,540 or 5.6% over$30,411 reflecting the prior year primarily due toimpact of acquisitions, increased resourcesspending to support our growth. Selling, generalgrowth and administrative expensesinvestments in operational improvement initiatives. Interest expense increased $3,877 as a percentageresult of sales decreased to 9.9% compared to 11.2%an increase in the prior year. Interest expense decreased $1,303 or 7.2% primarily due to a reduction in average outstanding borrowings onunder our unsecured revolving credit agreements during fiscal 2007,facility to support growth, as well as capitalized interest of $977.an increase in non-recourse borrowings to acquire aircraft. Interest income and other increased $2,593 or 80.1% due to higher averagedecreased $3,093 principally as a result of lower yields on invested cash, during the current fiscal year, as well as a $915 gain on sale of an equity security.decline in average invested cash balances. Our effective income tax rate for fiscal 2007 was 32.0%increased to 34.8% compared to 23.0%32.0% in the prior year due to lowerthe expiration of certain income tax benefits on export activities. We expect our effective income tax rate to be approximately 35% in fiscal 2008.Sales for thisDuring the second quarter of fiscal 2009, we sold our non-core industrial turbine business. Loss on the sale of business, were $7,778 in fiscal 2007.net of tax, was $1,403 (see Note 11 of Notes to Consolidated Financial Statements).increasedwas $75,144 compared to $58,660 for fiscal 2007 compared to $35,163 in the prior year due to the factors discussed above.Fiscal 2006 Compared with Fiscal 2005Consolidated sales for fiscal 2006 increased $145,091 or 19.6% over the prior year. The increase in sales over the prior year was attributable to sales increases in the Aviation Supply Chain; Maintenance, Repair and Overhaul and Structures and Systems segments due to an 18.8% increase in sales to commercial airline customers and a 21.7% increase in sales to defense customers. The increase in sales to commercial airline customers principally reflects improved demand for engine and airframe parts support due to increased passenger traffic, improved sourcing and program execution. Sales to commercial customers also increased as a result of a full year of revenue during fiscal 2006 at the Indianapolis airframe maintenance facility, compared to only four full months during fiscal 2005, as that facility commenced operations in January 2005. The increase in sales to defense customers was principally driven by continued strong demand for specialized mobility products and new performance-based logistics programs. Consolidated gross profit increased $42,646 or 35.4% over the prior year. The increase in gross profit was attributable to the consolidated sales increase, as well as an improvement in the consolidated gross margin percentage to 18.4% from 16.3% in the prior year.Sales in the Aviation Supply Chain segment increased $71,106 or 18.2% compared to the prior year. The sales increase reflects increased demand for engine and airframe parts to commercial customers as well as an increase in sales to program customers using our supply chain management programs. The increase in sales to defense customers served by this segment was driven by continued strong demand for parts support from existing and new performance-based logistics programs. Gross profit in the Aviation Supply Chain segment increased $31,583 or 46.7% over the prior year primarily due to increased sales volume as well as an improvement in the gross profit margin percentage to 21.5% from 17.3% in the prior year. The improvement in the gross profit margin percentage was attributable to effective purchasing and favorable mix of products sold.In the Maintenance, Repair and Overhaul segment, sales increased $70,326 or 62.8% over the prior year. The increase in sales was primarily attributable to a full year of revenue at our Indianapolis airframe maintenance facility during fiscal 2006, compared with only four full months of sales during fiscal 2005, as that facility commenced operations in January 2005. Sales also increased over the prior year at our Oklahoma City airframe maintenance facility and landing gear overhaul center reflecting stronger demand. Gross profit in the Maintenance, Repair and Overhaul segment increased $11,500 or 79.8% over the prior year and the gross profit margin percentage improved from 12.9% to 14.2%, primarily due to improvements at our Oklahoma City-based airframe maintenance facility and the favorable impact of a full year of operations at the Indianapolis airframe maintenance facility.In the Structures and Systems segment, sales increased $35,451 or 18.3% over the prior year as we experienced increased sales at all of our business units within the segment. The increase was primarily attributable to increased sales of products supporting our defense customers’ deployment activities due to continued strong demand and new product development, and increased demand for cargo systems and composite structure products primarily due to successful sales and marketing efforts. Gross profit in the Structures and Systems segment declined $1,473 or 4.2% compared to the prior year as the gross profit margin percentage decreased from 18.2% to 14.7% primarily due to the unfavorable mix of products sold.In the Aircraft Sales and Leasing segment, sales decreased $31,792 or 70.4% compared with the prior year. The decrease in sales is principally due to the fact that the majority of current year aircraft activity is conducted through unconsolidated joint ventures, which excludes revenues from consolidated net sales. Since September 11, 2001, most of the aircraft transactions we have entered into have been with joint venture partners who provide equity capital equal to our equity capital contribution. Debt is provided on a limited recourse basis by various financial institutions. Gross profit in the Aircraft Sales and Leasing segment increased $1,036 or 31.3% compared to the prior year.Operating income increased $30,255 or 86.6% compared with the prior year due to increased gross profit, partially offset by an increase in selling, general and administrative expenses. During fiscal 2006, selling, general and administrative expenses increased $13,325 or 15.5% primarily due to increased resources to support our growth. Net interest expense declined $647 compared to the prior year primarily due to increased interest income as a result of higher average invested cash balances during fiscal 2006 compared with the prior year.During the third quarter of fiscal 2006, we acquired $50,645 aggregate principal amount of our 2.875% Convertible Senior Notes due 2024, or approximately 76% of the previously outstanding principal amount, in exchange for an aggregate 2,724 newly issued shares of common stock plus $3,893 in cash, in privately negotiated transactions exempt from the registration requirements under the Securities Act of 1933, as amended. The number of shares issued was equivalent to the number into which the notes were convertible under the original terms of the notes. We recorded $3,893 of pre-tax expense on the exchange of the notes into stock in advance of the call date which was comprised of interest that the note holders would otherwise have been entitled to receive as well as an incentive payment made as part of the exchange.Also during the third quarter of fiscal 2006, upon completion of our fiscal 2005 Federal income tax return, we determined that the Company qualified for additional tax benefits of $1,606 related to higher than estimated margin on fiscal 2005 export activities. We recorded a benefit of $496 related to fiscal 2004 export activity in the third quarter of 2005. Our effective income tax rate for fiscal 2006 was 23.0% compared to 15.5% in the prior year.Income from continuing operations increased to $35,823 compared to $19,498 in the prior year due to the factors discussed above.During the third quarter of fiscal 2005, we sold our engine component repair business located in Windsor, Connecticut, and during the third quarter of fiscal 2007, we decided to exit our non-core industrial turbine business. As a result, we have classified the results of these businesses as discontinued operations for all periods presented.Net income increased to $35,163 for fiscal 2006 compared to $15,453 in the prior year due to the factors discussed above.(“subsidiary”("subsidiary") received an Administrative Order for Response Activity (“Order”("Order") dated August 7, 2003, from the Michigan Department of Environmental Quality (“MDEQ”("MDEQ") relating to environmental conditions at and in the vicinity of the subsidiary’ssubsidiary's Cadillac, Michigan plant. The Order requiresrequired the subsidiary to perform environmental investigatory work, prepare a feasibility study and a remedial action plan, and perform interim response actions. The interim response actions include continuation of the response activities the subsidiary is performing under a 1985 Consent Decree, operation of a soil vapor extraction system the subsidiary had previously installed and operated, determination of the need to provide alternate water supplies to off-site properties (and if it is so determined then to actually provide them), removal of any free phase liquids encountered in the ground, providing notices of groundwater contamination migration to off-site property owners, and other actions determined by the MDEQ or the subsidiary to be appropriate. The MDEQ further demands payment of environmental response costs already incurred by the MDEQ in the approximate amount of $2,500 plus interest, and reimbursement of unspecified costs to be incurred in the future by the MDEQ. The Order and the letter accompanying it threaten the imposition of civil fines up to $25 for each day of violation of the Order, plus exemplary damages up to three times the costs incurred by the MDEQ if the subsidiary does not comply with the Order. The Order may require the implementation of the remedial action plan, although it is not clear on that point. The Order requires the implementation of emergency response action if a release of hazardous substances, threat of a release, or exacerbation of existing contamination occurs during the pendency of the Order. The MDEQ responded to the subsidiary by saying that the MDEQ “will be taking appropriate action to protect public health, safety and welfare and the environment, and gain AAR’s compliance with Part 201” (the Michigan “cleanup law”).The subsidiary has received funds from an insurance carrier to reimburse it for a portion of the subsidiary’s costs. The subsidiary sought coverage from another insurance company and that carrier is paying a portion of defense costs, but has reserved its rights on coverage for the litigation noted below. The subsidiary has filed suit against one of the insurance carriers for breach of contract and other relief and recently reached a settlement.Prior to the issuance of the Order, the subsidiary sought a Court order to enforce the 1985 Consent Decree, but that relief was denied by the Court, primarily on the basis that the action was premature since the State was not pursuing an enforcement action at the time. The subsidiary sought leave to appeal that decision to the Michigan Court of Appeals, but leave was denied.The work performed and data gathered by the subsidiary since the issuance of the Order appears to support the positions previously taken by the subsidiary regarding the movement of groundwater for treatment by the subsidiary. There is disagreement with the MDEQ regarding the conclusions to be drawn from the data developed from that work. The MDEQ has retained contractors to perform environmental investigations in the vicinity of the plant.vvs AAR Cadillac Manufacturing, a division of AAR Manufacturing Group, Inc., an Illinois corporation, and AAR Corp., a05-18853-CE.05-18853-CE. In its complaint, the MDEQ seeks to enforce the Order against the subsidiary and to have the Court impose civil fines and exemplary damages upon the subsidiary for the alleged failure to comply with the Order. The MDEQ seeks to recover its costs incurred in performing response activities from both the subsidiary and the Company and seeks a declaratory judgment that both are liable for all future costs incurred by the State at the facility. The MDEQ also seeks civil fines from the subsidiary for alleged violations of a particular section of a Michigan environmental law.Affirmative Defenses, and intend on vigorously defendingaffirmative defenses. Prior to trial, the complaint filedcourt granted a motion by the MDEQ. On June 17, 2005,Company to dismiss the Company as a defendant, leaving the subsidiary as the only remaining defendant in the lawsuit.filedruled that it would bifurcate the trial between liability and cost recovery. The first stage of trial was devoted to liability. If the court finds the subsidiary liable, it will move to the second stage of determining what costs are owed by the subsidiary. At the close of trial in February 2009, the court asked the parties to submit post-trial briefs, which have now been completed. The court currently has the case under consideration and will issue a Petition for Reimbursement of itsruling on liability.amountMDEQ matter. The suit, entitledLiberty Mutual Insurance Company vs AAR Corporation, AAR Manufacturing Inc. and AAR Cadillac Manufacturing (No. 08 CH 46851) was filed in the Circuit Court of approximately $200 incurred in complying withCook County, Chancery Division. Plaintiff Liberty Mutual seeks a declaratory judgment stating that it has no duty to defend or indemnify the Order from the State of Michigan cleanup and redevelopment fund established under Michigan law, plus costs and attorney fees. As of May 31, 2007,Company or the subsidiary has chargedwith respect to operations $1,309 related to thisthe MDEQ matter. The MDEQcase remains pending and discovery has filed a motion for summary disposition which is scheduled for an August 20, 2007 hearing.not yet begun. and aviation industry conditions, geo-political events, including the war on terrorism, and our operating performance. Our ability to generate cash from operations is influenced primarily by our operating performance and changes in working capital. We haveUnder a universal shelf registration on filestatement filed with the Securities and Exchange Commission under which, subject to market conditions,that became effective on December 12, 2008, we may offer and sell up to $163,675$300,000 of various types of securities, including common stock, preferred stock or medium-and medium-term or long-term debt securities, may be issued or sold.subject to market conditions.2007,2009, our liquidity and capital resources included cash of $83,317$112,505 and working capital of $389,215. On August 31, 2006, we entered into a$596,894. Our revolving credit agreement, as amended (the "Credit Agreement") with various financial institutions, as lenders, and Bank of America National Association as successor by merger to LaSalle Bank(the “LaSalle Credit Agreement”). The LaSalle Credit Agreement created a $140,000provides us with unsecured revolving credit facility that we can draw upon for general corporate purposes.borrowing capacity of up to $250,000. Under certain circumstances, we may request an increase to the revolving commitment by an aggregate amount of up to $35,000,$75,000, not to exceed $175,000$325,000 inLaSalleterm of our Credit Agreement expires onextends to August 31, 2010.2011. Borrowings under the LaSalle Credit Agreement bear interest at the London Interbank Offered Rate (“LIBOR”("LIBOR") plus 125100 to 200237.5 basis points based on certain financial measurements. There were no borrowingsBorrowings outstanding under this facility at May 31, 2007. On August 31, 2006, we terminated our secured revolving2009 were $50,000, and there were approximately $12,910 of outstanding letters of credit agreement with Merrill Lynch Capital and duringwhich reduced the second quarteravailability of fiscal 2007, we terminated our accounts receivable securitization program. No borrowings were outstanding and no accounts receivable were sold at the date of these terminations. No material penalties or fees resulted from the terminations.this facility. In addition to our domestic facility,Credit Agreement, we also have $3,041$3,169 available under a foreign line of credit.We continually evaluate various financing arrangements, including the issuance of common stock or debt, that would allow us to improve our liquidity position and finance future growth on commercially reasonable terms. Our ability to obtain additional financing is dependent upon a number of factors, including the geo-political environment, general economic conditions, airline industry conditions, our operating performance and market conditions in the public and private debt and equity markets.the year ended May 31, 2007, we used $21,239 offiscal 2009, cash flow from operations was $64,451 primarily dueas a result of net income and depreciation of $119,202, partially offset by an increase in inventories of $45,414 principally reflecting investments to investments of $67,750 made in aircraftsupport our Aviation Supply Chain customers, and engines on both short- and long-term lease, a $25,160an increase in accounts receivable reflecting higher sales, payment of capitalized program development costs of $17,023 related to the A400M program which is reported in other on the consolidated statements of cash flows, and investment in inventories of $8,567.$26,388.2007, cash flow from operations benefited from an increase in accounts payable of $6,473 as well as net income and depreciation and amortization of $90,859.During the year ended May 31, 2007,2009, our investing activities used $39,129$24,227 of cash principally as a result of capital expenditures of $29,891, acquisitions of $38,478 (see Note 11 of Notes to Consolidated Financial Statements)$27,535, which mainly represents capacity expansion and investmentcapability improvements in our Structures and Systems and Maintenance, Repair and Overhaul segments, partially offset by proceeds from aircraft joint ventures of $9,556, partially offset by cash generated from the sales of$4,230. We expect fiscal 2010 capital expenditures to be $25,000 to $30,000, principally reflecting increased investments across our interests in aircraft joint ventures of $32,108Maintenance, Repair and proceeds from the sale of a product line of $6,567 (see Note 12 of Notes to Consolidated Financial Statements).Overhaul and Structures and Systems segments.the year ended May 31, 2007, cash generated fromfiscal 2009, our financing activities was $21,973, comprised principallyused $36,167 of proceeds from borrowings relatedcash primarily due to aircraft financings of $30,355, cash proceeds from stock option exercises of $8,576 and excess tax benefits from the exercise of stock options of $4,345, partially offset by a reduction in borrowings of $20,439,$110,625, which includes $9,034 for the early retirement of 6.875% Notes due December 15, 2007.convertible notes for $72,916 cash and the paydown of our revolving credit facility of $25,000. Proceeds from borrowings of $75,323 during fiscal 2009 principally reflects proceeds from our revolving credit facility.20072009 is as follows: Payments Due by Period Total Due in
Fiscal
2010 Due in
Fiscal
2011 Due in
Fiscal
2012 Due in
Fiscal
2013 Due in
Fiscal
2014 After
Fiscal
2015 $ 367,798 1 $ 200 $ 42,108 $ — $ — $ 97,344 $ 228,146 28,450 11,722 2,656 2,860 9,274 972 966 10,331 1,673 1,797 1,929 4,932 — — 50,005 2 50,005 — — — — — 76,386 3 12,327 11,365 7,636 7,227 7,150 30,681 1,280 1,280 — — — — — 59,584 11,913 10,011 8,965 8,365 7,811 12,519 26,145 1,529 1,567 1,606 1,647 1,688 18,108 148,949 138,222 7,815 2,912 — — — 4,000 4,000 — — — — — 20072009 was approximately $11,891.$12,910. allowance for doubtful accounts, revenue recognition, loss accruals for aviation equipment operating leases, program development costs and assumptions used in determining pension plan obligations. Accordingly, actual results could differ materially from those estimates. The following is a summary of the accounting policies considered critical by management.the customer’sour customer's current and expected future financial performance.InventoriesGoodwill During the first quarter of fiscal 2007, we recorded an impairment charge related to certain engine parts in the amount of $4,750. These parts were acquired prior to September 11, 2001, and were subject to impairment charges recorded in fiscal 2002 and 2003. The fiscal 2007 impairment charge was triggered by the Company’s decision to aggressively pursue the liquidation of this inventory. The Company made this decision to recognize the impairment due to the impact of persistently high fuel costs and fewer operators on demand for these parts, as well as to better align human and physical resources with higher potential opportunities in the rapidly growing Aviation Supply Chain segment. Reductions in demand for certain of our inventories or declining market values, as well as differences between actual results and the assumptions utilized by us when determining the market value of our inventories, could result in additionalthe recognition of impairment charges in future periods.“Accounting"Accounting for the Impairment or Disposal of Long-Lived Assets”,Assets," we are required to test for impairment of long-lived assets whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable from its undiscounted cash flows. When applying the provisions of SFAS No. 144 to equipment on or available for lease, we have utilized certain assumptions to estimate future undiscounted cash flows, including current and future lease rates, lease terms, residual values and market conditions and trends impacting future demand. Differences between actual results and the assumptions utilized by us when determining undiscounted cash flows could result in future impairments of aircraft and engines which are currently being leased or are available for lease.20072009, and models that match projected benefit payments to coupons and maturities from the high quality bonds. The assumption for the expected long-term return on plan assets is developed through analysis of historical asset returns by investment category, our fund’sfund's actual return experience and current market conditions. Changes in the discount rate and differences between expected and actual return onSecuritiesFinancial Accounting Standards Board ("FASB") issued SFAS No. 157 ("SFAS 157") "Fair Value Measurements." SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles, and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 provides guidance regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. SAB 108 isexpands disclosures about fair value measurements. SFAS 157 was effective for fiscal years endingbeginning after November 15, 2006,2007 for financial assets and early application is encouraged.liabilities, as well as for any other assets that are carried at fair value on a recurring basis in financial statements. In November 2007, the FASB provided a one year deferral of the implementation of SFAS 157 for other non-financial assets and liabilities. We adopted the provisions of SFAS 157 as it relates to financial assets and liabilities effective June 1, 2008. We will adopt the provisions of SFAS 157 as it relates to non-financial assets and liabilities in fiscal 2010. The adoption of SAB 108SFAS 157 for financial assets and liabilities as well as for other assets that are reported at fair value on a recurring basis did not have an impact on our results of operations and financial position. We do not expect that the adoption of SFAS 157 for non-financial assets and liabilities on June 1, 2009 will have a significant impact on our financial statements.orand financial position.July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the recognition threshold and measurement requirements for tax positions taken or expected to be taken in tax returns and provides guidance on the related classification and disclosure. The provisions of FIN No. 48 are effective for fiscal years beginning after December 15, 2006. Accordingly, we will adopt FIN No. 48 no later than the beginning of fiscal year 2008. FIN No. 48 will not have a material impact on our results from operations or financial position.In September 2006,2007, the FASB issued SFAS No. 157, “Fair Value Measurements”. 141 (revised 2007) ("SFAS No. 157141(R)"), "Business Combinations." SFAS 141(R) establishes principles and requirements for how an acquirer in a frameworkbusiness combination recognizes and measures the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree. The provisions of SFAS 141(R) are effective for measuring fairbusiness combinations occurring on or after June 1, 2009.in GAAP,assigned to the bond liability is the estimated value of a similar bond without the conversion feature as of the issuance date. The difference between the proceeds for the convertible debt and expands disclosures about fair value measurements. SFAS No. 157the amount reflected as a bond liability is recorded as additional paid-in-capital. Interest expense is recorded using the issuer's comparable debt rate. FSP APB 14-1 is effective for us beginning June 1, 2009 (fiscal 2010) and will require retrospective application. We expect the implementation of FSP APB 14-1 will reduce our diluted earnings per share by $0.09 per share in fiscal years beginning after November 15, 2007. We have not yet determined the impact2010.the adoption of this new accounting standard.Contents
(Dollars in thousands)2007, 20062009, 2008 and 2005,2007, we did not utilize derivative financial instruments to offset these risks.2007, $140,0002009, $187,090 was available under our LaSalle Credit Agreement. Interest on amounts borrowed under this credit facility is LIBOR based. As of May 31, 2007,2009, the outstanding balance under this agreement was $0.$50,000. A hypothetical 10 percent increase to the average interest rate under the credit facilities applied to the average outstanding balance during fiscal 20072009 would not have had an impact onreduced our results of operations as we had no borrowings outstanding under this agreementpre-tax income by approximately $108 during fiscal 2007.2009.stockholders’stockholders' equity as a component of accumulated other comprehensive income (loss). A hypothetical 10 percent devaluation of foreign currencies against the U.S. dollar would not have had a material impact on our financial position or results of operations.20072009 and 20062008 and the related consolidated statements of operations, stockholders’stockholders' equity and cash flows for each of the years in the three-year period ended May 31, 2007.2009. These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.20072009 and 20062008 and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 2007,2009, in conformity with U.S. generally accepted accounting principles.Company’sCompany's internal control over financial reporting as of May 31, 2007,2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated July 19, 200715, 2009 expressed an unqualified opinion on management’s assessment of, and the effective operation of internal control over financial reporting.
July 19, 200715, 2009
CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended May 31, 2009 2008 2007 (In thousands except per share data) $ 1,159,971 $ 1,145,625 $ 882,509 231,535 202,627 150,400 32,470 36,667 28,260 1,423,976 1,384,919 1,061,169 944,405 930,649 724,419 191,047 168,888 126,372 15,776 21,310 18,579 31,133 — 7,652 147,219 135,502 105,091 1,329,580 1,256,349 982,113 — — 5,358 8,496 5,948 10,952 102,892 134,518 95,366 35,316 (205 ) 2,927 (18,371 ) (20,578 ) (16,701 ) 1,465 1,821 4,914 (1,393 ) 532 915 119,909 116,088 87,421 39,309 40,343 27,974 80,600 75,745 59,447 (546 ) (601 ) (787 ) (1,403 ) — — (1,949 ) (601 ) (787 ) $ 78,651 $ 75,144 $ 58,660 $ 2.12 $ 2.04 $ 1.63 (0.05 ) (0.02 ) (0.02 ) $ 2.07 $ 2.02 $ 1.61 $ 1.92 $ 1.77 $ 1.42 (0.05 ) (0.01 ) (0.02 ) $ 1.87 $ 1.76 $ 1.40
are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS
ASSETS May 31, 2009 2008 (In thousands) $ 112,505 $ 109,391 227,300 202,472 347,495 296,610 129,929 138,998 15,856 17,657 18,227 18,303 851,312 783,431 4,842 4,842 83,068 110,202 212,011 197,461 299,921 312,505 (174,873 ) (166,070 ) 125,048 146,435 150,227 129,719 120,538 163,958 45,433 42,734 84,953 95,733 401,151 432,144 $ 1,377,511 $ 1,362,010
are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’STOCKHOLDERS' EQUITY May 31, 2009 2008 (In thousands) $ 50,005 $ 1,036 200 200 11,722 20,212 1,673 1,546 100,651 99,073 90,167 96,432 254,418 218,499
367,598
478,308 16,728 19,190 8,658 10,420 40,263 28,011 32,951 22,327 466,198 558,256 — —
44,201 and 43,932 shares, respectively 44,201 43,932 330,002 324,074 409,847 331,196 (103,159 ) (100,935 ) (23,996 ) (13,012 ) 656,895 585,255 $ 1,377,511 $ 1,362,010
are an integral part of these statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED MAY 31, 20072009 Accumulated
Other
Comprehensive
Income
(Loss) Common Stock Treasury Stock Unearned
Restricted
Stock
Awards Capital
Surplus Retained
Earnings Accumulated
Other
Comprehensive
Income
(Loss) Shares Amount Shares Amount Accumulated
Other
Comprehensive
Income
(Loss) (In thousands) 40,789 $ 40,789 4,135 $ (69,664 ) $ 274,211 $ 197,392 $ (6,169 ) $ (13,842 ) — — — — — 58,660 — — $ 58,660 1,441 1,441 366 (10,149 ) 14,230 — — — — — — — — 4,345 — — — — — — — — (3,113 ) — 6,169 — — — — — — — — — 1,559 1,559 — — — — — — — 1,921 1,921 — — — — — — — (3,537 ) — $ 62,140 42,230 $ 42,230 4,501 $ (79,813 ) $ 289,673 $ 256,052 $ — $ (13,899 ) — — — — — 75,144 — — $ 75,144 773 773 336 (11,595 ) 13,817 — — — — — — 322 (9,527 ) — — — — — — — — — 4,657 — — — — 49 49 — — 5,818 — — — — 880 880 — — 15,284 — — — — — — — — (45,289 ) — — — — — — — — 40,114 — — — — — — — — — — — 5,284 5,284 — — — — — — — 65 65 — — — — — — — (4,462 ) (4,462 ) $ 76,031 43,932 $ 43,932 5,159 $ (100,935 ) $ 324,074 $ 331,196 $ — $ (13,012 ) — — — — — 78,651 — — $ 78,651 67 67 63 (879 ) 1,365 — — — — — — — — 171 — — — — 202 202 — — 4,857 — — — — — — 95 (1,345 ) (465 ) — — — — — — — — — — — (2,759 ) (2,759 ) — — — — — — — (65 ) (65 ) — — — — — — — (8,160 ) (8,160 ) $ 67,667 44,201 $ 44,201 5,317 $ (103,159 ) $ 330,002 $ 409,847 $ — $ (23,996 )
are an integral part of these statementsstatements.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended May 31, 2009 2008 2007 (In thousands) $ 78,651 $ 75,144 $ 58,660 40,551 39,952 32,199 16,009 13,243 20,411 (171 ) (4,657 ) (4,345 ) — — (5,358 ) 31,133 — 7,652 (35,316 ) 205 (2,927 ) (8,496 ) (5,948 ) (10,952 ) 1,393 (532 ) (915 ) 1,403 — — (26,388 ) 12,428 (25,160 ) (45,414 ) (42,339 ) (8,567 ) 4,270 (44,689 ) (5,259 ) (1,265 ) 4,413 (62,491 ) 2,651 (26,078 ) 6,473 (5,461 ) 19,131 1,903 (1,962 ) (6,152 ) (4,696 ) 12,863 (17,195 ) (17,867 ) 64,451 16,926 (21,239 ) (27,535 ) (30,334 ) (29,891 ) 67 10 51 767 — 6,567 100 — — 1,551 23,767 11,612 — (26,179 ) (10,697 ) — (85,210 ) (38,478 ) 4,230 877 32,108 (828 ) (23,609 ) (9,556 ) (2,579 ) (1,287 ) (845 ) (24,227 ) (141,965 ) (39,129 ) 75,323 267,003 29,491 (110,625 ) (99,541 ) (20,439 ) — 12,880 — (1,635 ) (1,058 ) — — 40,114 — — (69,676 ) — — (9,527 ) — 599 6,169 8,576 171 4,657 4,345 (36,167 ) 151,021 21,973 (943 ) 92 (26 ) 3,114 26,074 (38,421 ) 109,391 83,317 121,738 $ 112,505 $ 109,391 $ 83,317
are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)world.world, and various domestic and foreign military customers.78 for a discussion of aircraft joint ventures).title and transfer of risk of loss.title. Sales from services and the related cost of services are generally recognized when customer-owned material is shipped back to the customer. We have adopted this accounting policy because at the time the customer-owned material is shipped back to the customer, all services related to that material are complete as our service agreements generally do not require us to provide services at customer sites. Furthermore, serviced units are typically shipped to the customer immediately upon completion of the related services. Sales and related cost of sales for certain long-term manufacturing contracts, and for certain large airframe maintenance contracts and certain long-term aircraft component maintenance agreements are recognized by the percentage of completion method, either based on the relationship of costs incurred to date to estimated total costs or the units of delivery method. Lease revenues are recognized as earned. Income from monthly or quarterly rental payments is recorded in the pertinent period according to the lease agreement. However, for leases that provide variable rents, we recognize lease income on a straight-line basis. In addition to a monthly lease rate, some engine leases require an additional rental amount based on the number of hours the engine is used in a particular month. Lease income associated with these contingent rentals is recorded in the period in which actual usage is reported to us by the lessee, which is normally the month following the actual usage.GoodwillTable of Contents
AAR CORP. AND SUBSIDIARIESStatement of Financial Accounting Standards (SFAS)SFAS No. 142, “Goodwill"Goodwill and Other Intangible Assets”,Assets," goodwill and other intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests.AAR CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands, except per share amounts)tests at least annually, or more frequently if indicators of impairment are present.1. Summary of Significant Accounting Policies (Continued)“Goodwill"Goodwill and other intangible assets, net”net" is comprised of goodwill and intangible assets associated with acquisitions we made, principally since the beginning of fiscal 1998. Each of the acquisitions involved a single business that now comprises or is included in a single operating segment. We were not required to allocate goodwill related to specific acquisitions across two or more segments. For the annual goodwill impairment test, we compare an estimate of the fair value of each of our reportable segments to its carrying amount. The estimated fair value of each reportable segment was determined utilizing a valuation technique based on a multiple of earnings. May 31, 2009 2008 $ 20,040 $ 20,133 28,108 18,234 61,603 63,153 $ 109,751 $ 101,520 The increase in goodwill during fiscal 2007 was attributable to the acquisitions discussed in Note 11. At May 31, 2007,2009 and 2008, intangible assets, other than goodwill, are comprised of customer relationships, of $1,000lease agreements and a covenantcovenants not to compete agreement of $580. The customer relationship isas follows: May 31, 2009 2008 $ 24,949 $ 28,730 21,500 — 1,170 1,760 (7,143 ) (2,291 ) $ 40,476 $ 28,199 three year periodthree-year period. Amortization expense recorded during fiscal 2009, 2008 and 2007 was $4,852, $2,241 and $50, respectively. The aggregate amount of amortization expense for intangible assets in each of the covenant not to competenext five fiscal years is being amortized over a five year period.$3,723 in 2010, $3,030 in 2011, $2,902 in 2012, $2,773 in 2013 and $2,554 in 2014.20072009 and 2006,2008, cash equivalents of approximately $0$2,000 and $40,535,$5,005, respectively, consist of investments in funds holding high-quality commercial paper.certificates of deposit which mature within 90 days. The carrying amount of cash equivalents approximates fair value at May 31, 20072009 and 2006, respectively.2008.
AAR CORP. AND SUBSIDIARIESthe fourth quarter of fiscal 2009, 2008 and 2007, we sold an investmentinvestments in equity securities that waswere classified as available for sale. These securities were acquiredThe loss on sale of these investments was $1,393 in fiscal 2007, and had a cost basis of $10,697. Proceeds on the sale were $11,6122009 and the gaingains on sale of these investments were $532 and $915 is reported in interest incomefiscal 2008 and other on the consolidated statements of operations.2007, respectively.stockholders’stockholders' equity as a component of accumulated other comprehensive loss.AAR CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands, except per share amounts)1. Summary of Significant Accounting Policies (Continued)$22,098 $16,730 and $16,347$24,112 at May 31, 20072009 and 2006,2008, respectively. We perform regular evaluations of customer payment experience, current financial condition and risk analysis. We may require collateral in the form of security interests in assets, letters of credit, and/or obligation guarantees from financial institutions for transactions executed on other than normal trade terms.“Disclosures"Disclosures about Fair Value of Financial Instruments”,Instruments," requires disclosure of the fair value of certain financial instruments. Cash and cash equivalents, accounts receivable, short-term borrowings and accounts payable are reflected in the consolidated financial statements at fair value because of the short-term maturity of these instruments. The carrying value of long-term debt bearing a variable interest rate approximates fair market value.
AAR CORP. AND SUBSIDIARIESmarket.market (estimated net realizable value). Cost is determined by the specific identification, average cost or first-in, first-out methods. We also purchase aircraft and engines for disassembly to individual parts and components. Costs are assigned to these individual parts and components based onutilizing list prices from original equipment manufacturers and recent sales history. May 31, 2009 2008 $ 62,565 $ 55,183 52,584 47,576 232,346 193,851 $ 347,495 $ 296,610 Government GrantsIn connection with our occupancy of the Indianapolis Maintenance Center (IMC), the State of Indiana and the City of Indianapolis committed $7,000 of government grants to assist with the initial mobilization and start-up of the facility, as well as to assist us with the purchase of certain capital equipment. During fiscal 2007, 2006 and 2005, we received $0, $300 and $3,700, respectively, of grants for mobilization, training and other start-up related costs, and have offset the receipt of these grants against applicable mobilization and other start-up related costs incurred by us.Operating Leaseson ausing the straight-line method over the estimated service life of the equipment. The balance sheet classification of equipment under lease is generally based on lease term, with fixed-term leases less than twelve months generally classified as short-term and all others generally classified as long-term.AAR CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands, except per share amounts)1. Summary of Significant Accounting Policies (Continued)customers’customers' immediate short-term requirements. The leases are renewable with fixed terms, which generally vary from one to twelve months. Equipment on long-term lease consists of aircraft and engines on lease with commercial airlines generally for more than twelve months (see Note 8).months.sevensix narrow-body and two wide-body aircraft and several types of engines. Of the nine aircraft owned by us outside of aircraft joint ventures, five were acquired prior to September 11, 2001. Several engines also were acquired prior to September 11, 2001. Demand and lease rates for certain of these assets have not returned to pre-September 11, 2001 levels. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we are required to test for impairment of these assets and previously adjusted the carrying value forwhenever certain of these assets (see Note 13). During the first quarter of fiscal 2007, we recorded an impairment charge of $2,902 on a wide-body aircraft originally purchased prior to September 11, 2001. The lease and non-recourse debt on the aircraft were restructured during the quarter, and we made the decision to offer the aircraft for sale and recorded the impairment charge to reduce the carrying value of the aircraft to estimated net realizable value. During the fourth quarter of fiscal 2005, we recorded a $900 charge related to the write-down of an aircraft as a result of a renegotiated lease with an airline customer operating under bankruptcy protection.conditions exist. When applying the provisions of SFAS No. 144 to our aircraft and engine portfolio, we utilizedutilize certain assumptions to estimate future undiscounted cash flows, including current and future lease rates, lease terms, residual values and market conditions and trends impacting future demand.demand (see Note 13—Impairment Charges). Unfavorable differences between actual results and expected results could result in future impairments in our aircraft and engine lease portfolio.All of the aircraft in our aircraft portfolio are currently on lease. Future rent due to us under non-cancelable leases during each of the next five fiscal years is $29,025 in 2008, $26,492 in 2009, $23,357$32,734 in 2010, $17,059$31,001 in 2011, $29,083 in 2012, $23,428 in 2013 and $16,948$22,733 in 2012.2014.
AAR CORP. AND SUBSIDIARIESlessees’lessees' rental obligation and the leased equipment.AAR CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands, except per share amounts)1. Summary of Significant Accounting Policies (Continued)“Accounting"Accounting for Income Taxes”.Taxes." For the Year Ended May 31, 2009 2008 2007 $ 17,014 $ 20,024 $ 13,650 29,106 11,412 1,948 432 506 1,221 2006, we acquired $50,645 aggregate principal amount2008, the holders of $16,355 of 2.875% convertible notes redeemed their notes for 880,000 shares of our 2.875% Convertible Senior Notes due 2024, or approximately 76% of the previously outstanding principal amount, in exchange for an aggregate 2,724 newly issued shares of common stock plus $3,893 in cash, in privately negotiated transactions exempt from the registration requirements under the Securities Act of 1933, as amended. The number of shares issued was equivalent to the number into which the notes were convertible under the original terms of the notes. We recorded a $3,893 pre-tax loss on the exchange of the notes into stock in advance of the call date of the notes; this loss was comprised of interest that the note holders would otherwise have been entitled to receive as well as an incentive payment for the exchange.stock. As a result of these transactions, our long-term debt decreasedthe redemption, common stock increased $880 and capital surplus increased $15,284.$50,645maintenance hangars located at Miami International Airport. The industrial revenue bond matures on August 1, 2018 and stockholders’ equityhas a variable interest rate. The interest rate at May 31, 2009 was 0.45%.by $46,600. The 2,724 newly issued$2,224 reflecting the impact of net share settlements of $1,345 of bond hedge and warrants associated with convertible bond repurchases during fiscal 2009, and the impact from shares did not impact diluted earningswithheld to satisfy statutory tax obligations associated with the exercise of stock
AAR CORP. AND SUBSIDIARIESbecauseamounts)equivalent shares were already included in the diluted earnings per share calculation.Aspurchase of May 31, 2007, the outstanding balance of the 2.875% Convertible Senior Notes due 2024 was $16,355 and as of March 15, 2006, these notes can be converted intotreasury shares of common$9,527 and the impact from shares withheld to satisfy statutory tax obligations associated with the exercise of stock at the optionoptions of the note holder. 2006 and 2005, treasury stock increased $10,149 $19,167 and $14,467, respectively, principally reflecting the impact from shares withheld to satisfy statutory tax obligations associated with the exercise of stock options.SecuritiesFASB issued SFAS 157 "Fair Value Measurements." SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles, and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 provides guidance regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement isAAR CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands, except per share amounts)1. Summary of Significant Accounting Policies (Continued)necessary. SAB 108 isexpands disclosures about fair value measurements. SFAS 157 was effective for fiscal years endingbeginning after November 15, 2006,2007 for financial assets and early application is encouraged.liabilities, as well as for any other assets that are carried at fair value on a recurring basis in financial statements. In November 2007, the FASB provided a one year deferral of the implementation of SFAS 157 for other non-financial assets and liabilities. We adopted the provisions of SFAS 157 as it relates to financial assets and liabilities effective June 1, 2008. We will adopt the provisions of SFAS 157 as it relates to non-financial assets and liabilities in fiscal 2010. The adoption of SAB 108SFAS 157 for financial assets and liabilities as well as for other assets that are reported at fair value on a recurring basis did not have an impact on our results of operations and financial position. We do not expect that the adoption of SFAS 157 for non-financial assets and liabilities on June 1, 2009 will have a significant impact on our financial statements.orand financial position.July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN No. 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the recognition threshold and measurement requirements for tax positions taken or expected to be taken in tax returns and provides guidance on the related classification and disclosure. The provisions of FIN No. 48 are effective for fiscal years beginning after December 15, 2006. Accordingly, we will adopt FIN No. 48 no later than the beginning of fiscal year 2008. FIN No. 48 will not have a material impact on our results from operations or financial position.In September 2006,2007, the FASB issued SFAS No. 157, “Fair Value Measurements”.141(R), "Business Combinations." SFAS No. 157141(R) establishes principles and requirements for how an acquirer in a frameworkbusiness combination recognizes and measures the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree. The provisions of SFAS 141(R) are effective for measuring fairus for business combinations occurring on or after June 1, 2009.
AAR CORP. AND SUBSIDIARIESin GAAP,assigned to the bond liability is the estimated value of a similar bond without the conversion feature as of the issuance date. The difference between the proceeds for the convertible debt and expands disclosures about fair value measurements. SFAS No. 157the amount reflected as a bond liability is recorded as additional paid-in-capital. Interest expense is recorded using the issuer's comparable debt rate. FSP APB 14-1 is effective for us beginning June 1, 2009 (fiscal 2010) and will require retrospective application. We expect the implementation of FSP APB 14-1 will reduce our diluted earnings per share by $0.09 per share in fiscal years beginning after November 15, 2007. We have not yet determined the impact of the adoption of this new accounting standard.2010.years’years' consolidated financial statements have been reclassified to conform to the current year’syear's presentation.On August 31, 2006, we entered into a $140,000 Our revolving credit agreement, as amended (the "Credit Agreement") with various financial institutions, as lenders, and Bank of America, as administrative agent for the lenders, provides us with unsecured revolving credit facility with LaSalle Bank National Association and various other lenders.borrowing capacity of up to $250,000. Under certain circumstances, we may request an increase to the revolving commitment inby an aggregate amount of up to $35,000,$75,000, not to exceed $175,000$325,000 in total. The credit facility expires onterm of our Credit Agreement extends to August 31, 2010 and borrowings2011. Borrowings under the facilityCredit Agreement bear interest at LIBORthe London Interbank Offered Rate ("LIBOR") plus 125100 to 200237.5 basis points based on certain financial measurements. The credit facility also includes a non-use fee which is currently equal to 30 basis points on the unused portion of the facility.There were no borrowingsBorrowings outstanding under either this facility orat May 31, 2009 were $50,000, and there were approximately $12,910 of outstanding letters of credit which reduced the availability of this facility. In addition to our previous revolving credit facilities during fiscal 2007.Credit Agreement, we also have $3,169 available under a foreign line of credit.20062009, 2008 and 20052007 was as follows: For the Year Ended May 31, 2009 2008 2007 $ 75,000 $ 173,000 $ 0 45,397 35,077 0 2.38 % 6.12 % — 37In conjunction with entering into the new credit facility, we terminated our secured revolving credit agreement with Merrill Lynch Capital during the first quarter of fiscal 2007, and our accounts receivable securitization program during the second quarter of fiscal 2007. No borrowings were outstanding and no accounts receivable were sold at the date of termination. No material penalties or fees resulted from the termination of these arrangements. May 31, 2009 2008
$
42,000
$
42,000 11,000 11,000 97,344 137,500 72,425 112,500 119,721 150,000 25,308 25,508 367,798 478,508 (200 ) (200 ) $ 367,598 $ 478,308
$
—
$
7,881 9,261 10,048 14,082 15,725 5,107 5,748 28,450 39,402 (11,722 ) (20,212 ) $ 16,728 $ 19,190 fiscal 2007February 2008, we completed the sale of $250,000 of convertible notes, consisting of $137,500 aggregate principal amount of 1.625% convertible senior notes due 2014 and 2006, we retired $9,034$112,500 aggregate principal amount of 2.25% convertible senior notes due 2016 (together, the "Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. Interest under the Notes is payable semiannually on March 1 and $7,180, respectively,September 1.6.875% notes payable due in December 2007. During28.1116 shares of our common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of $35.57 per share, only under the firstfollowing circumstances: (i) during any calendar quarter of fiscal 2007, we restructured the lease and non-recourse debt associated with a 767-300 aircraft. As partbeginning after March 31, 2008 (and only during such calendar quarter) if, as of the restructuring, the lenderlast day of the non-recourse debt reducedpreceding calendar quarter, the outstanding principal balance by $2,927 which resulted in a gain on extinguishment of the same amount (see Note 13).closing
AAR CORP. AND SUBSIDIARIES Costs associated with this transaction of approximately $4,875 are being amortized over a seven-year period. Net proceeds from this transaction were $145,125 and were used in part to repurchase $25,000 of accounts receivable which had been sold under our accounts receivable securitization facility, to repay $25,000 outstanding under our secured revolving credit facility and to purchase aviation equipment for $11,232 which was subject to an operating lease.
AAR CORP. AND SUBSIDIARIES“trading price”"trading price" per $1,000 principal amount of notes for each day of that period was less than 98% of the product of the closing price of our common stock and the then applicable conversion rate; (iii) upon a redemption notice; (iv) if a designated event or similar change of control transaction occurs; (v) upon specified corporate transactions; or (vi) during the ten trading day period ending at the close of business on the business day immediately preceding the stated maturity date on the notes. Upon conversion, we will have the right to deliver, in lieu of shares of our common stock, cash or a combination of cash and shares of common stock, at our option, in an amount per note equal to the applicable conversion rate multiplied by the applicable stock price.On May 23, 2007, we financed a narrow-body aircraft purchase with a $15,000 note payable. The note matures September 23, 2007 and bears interest at LIBOR plus 275 basis points. On July 19, 2007, we refinanced this note payable. Proceeds of the new loan were $17,000 and the term of the financing is five years with interest at 7.22%. Accordingly, we have classified the $15,000 note payable outstanding at May 31, 2007 as long-term on the consolidated balance sheet.2007,2009, the net book value of our Wood Dale, Illinois facility is $14,593. The non-recourse note payable due December 2007 is$14,518.wide-body aircraft. Atvariable interest rate. The interest rate at May 31, 2007,2009 was 0.45%.net book valueconvertible notes were retired for $72,916 cash, and the gain after consideration of this aircraftunamortized debt issuance costs of $35,316 is $26,430.recorded in gain (loss) on extinguishment of debt on the consolidated statements of operations.AAR CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands, except per share amounts)2. Financing Arrangements (Continued)$51,366 in 2008, $200 in 2009, $200 in 2010, $55,108$42,108 in 2011, and $0 in 2012.2012, $0 in 2013 and $97,344 in 2014. Our long-term recourse debt was estimated to have a fair value of approximately $300,000$290,000 at May 31, 2007.2009. The fair value was determinedestimated using available market information.
AAR CORP. AND SUBSIDIARIES(“("Stock Benefit Plan”Plan") which has been approved by our stockholders. Under this plan, we are authorized to issuegrant stock options to employees and non-employee directors that allow the grant recipients to purchase shares of common stock at a price not less than the fair market value of the common stock on the date of grant. Generally, stock options awarded under the plan expire ten years from the date of grant and arebecome exercisable in either four or five equal annual increments commencing one year after the date of grant. We issue new common stock upon the exercise of stock options. In addition to stock options, the Stock Benefit Plan also provides for the issuancegrant of restricted stock awards and performance based restricted stock awards, as well as for the grantinggrant of stock appreciation units; however, to date, no stock appreciation units have been granted.which has not vested carries full dividend and voting rights.rights, regardless of whether it has vested.5,0945,658,000 shares have been granted under the Stock Benefit Plan since its inception, and as of May 31, 2007,2009, awards representing 3,3683,347,000 shares were available for future grant under the Stock Benefit Plan.Effective June 1, 2006, we adopted SFAS No. 123(R), using the modified prospective method of transition. Under SFAS No. 123(R), compensation expense is recognized for stock option grants made after May 31, 2006 and for the unvested portion of outstanding stock options that were granted prior to the adoption of SFAS No. 123(R). Compensation cost is measured based on the grant date fair value of the award and recognized on a straight line basis over the vesting period.Stock OptionsPrior to the adoption of SFAS No. 123(R), we accounted for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” and SFAS No. 123, “Accounting for Stock-Based Compensation”. Under APB 25, no compensation expense was recognized for stock option grants, and accordingly share-based compensation related to stock options granted prior to June 1, 2006 was included as pro forma disclosure in the consolidated financial statements.On April 11, 2006, our Board of Directors approved the acceleration of the vesting of all unvested stock options. As a result of this action, stock options representing approximately 679 shares that were scheduled to vest in During fiscal 2007,2009, 2008 and 2009 became fully exercisable effective May 1, 2006. TheAAR CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands, except per share amounts)3. Stock-Based Compensation (Continued)accelerated vesting enabled us to reduce the amount of compensation expense that would otherwise be required to be recognized in our consolidated statements of operations with respect to these options upon the adoption of SFAS No. 123(R). The aggregate expense that was eliminated as a result of the acceleration was approximately $1,800. The acceleration resulted in a non-cash, one-time pre-tax stock compensation expense of $362 in the fourth quarter of fiscal 2006.On June 1, 2006,2007, we granted stock options representing 100184,750 shares, to a select group of key leadership track employees. No executive officers were included in the group that received stock option grants. No stock options were granted during fiscal 200688,000 shares and 2005 other than reload options, which resulted from the exercise of original stock options granted in prior years. Effective May 1, 2006, the reload provision was eliminated from substantially all outstanding stock option arrangements.100,000 shares, respectively.2006was $8.27, $13.46 and 2005 was $11.93, $3.71 and $2.87, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
In Fiscal Year Stock Options Granted
In Fiscal Year 2009 2008 2007 3.3 % 4.9 % 5.0 % 38.9 % 43.1 % 58.7 % 0.0 % 0.0 % 0.0 % 6.0 4.0 4.0 The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisionsTable of SFAS No. 123 to our stock option plan for the years ended May 31, 2006 and 2005.Contents
May 31,The adoption of SFAS No. 123(R) on June 1, 2006 reduced our operating income from continuing operations by $240 for the year ended May 31, 2007. changes in stock option activity for the three years ended May 31, 20072009 follows (shares in thousands): 2009 2008 2007 Shares Weighted
Average
Exercise
Price Shares Weighted
Average
Exercise
Price Shares Weighted
Average
Exercise
Price 1,425 $ 21.53 2,135 $ 18.30 3,080 $ 16.88 185 $ 19.26 88 $ 33.63 100 $ 24.08 (68 ) $ 9.66 (773 ) $ 18.28 (1,021 ) $ 17.72 (317 ) $ 22.11 (25 ) $ 26.55 (24 ) $ 17.47 1,225 $ 21.18 1,425 $ 21.53 2,135 $ 18.30 945 $ 19.89 1,271 $ 19.94 2,038 $ 18.03 2006was $434, $227 and 2005 was $0, $1,628 and $818, respectively. The total intrinsic value of stock options exercised during fiscal 2009, 2008 and 2007 2006was $493, $12,627 and 2005 was $13,582, $17,148 and $4,315, respectively. The aggregate intrinsic value of options outstanding as of May 31, 20072009 was $30,255.$1,305. The tax benefit realized from stock options exercised during fiscal 2009, 2008 and 2007 was $171, $4,657 and 2006$4,345, respectively. Expense charged to operations for stock options during fiscal 2009, 2008 and 2007 was $4,345$781, $465 and $7,553,$240, respectively. As of May 31, 2007,2009, we had $953$2,420 of unrecognized compensation expense related to stock options that will be amortized over an average period of five3.3 years.20072009 (shares in thousands): Options Outstanding Options Exercisable Weighted-
Average
Remaining
Contractual
Life in Years Option
Exercise
Price Range Number
Outstanding
as of 5/31/09 Weighted-
Average
Exercise
Price Number
Exercisable
as of 5/31/09 Weighted-
Average
Exercise
Price $3.20—$13.00 173 3.9 $ 7.74 173 $ 7.74 $13.01—$18.50 369 2.3 $ 16.01 364 $ 15.98 $18.51—$24.50 539 6.4 $ 21.85 322 $ 22.60 $24.51—$34.50 144 6.2 $ 30.38 86 $ 27.71 1,225 4.9 $ 21.18 945 $ 19.89 42AAR CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands, except per share amounts)3. Stock-Based Compensation (Continued)shares.stock. The award is contingent upon the achievement of certain performance objectives, including net income, and return on capital, and leverage ratios, or the Company’sCompany's stock price achieving a certain level over a period of time. After the shares are granted, the restrictions are released over a fivethree to seven year period. During fiscal 2007, 20062009, 2008 and 2005,2007, we granted 459, 438213,000, 35,000 and 150459,000 restricted shares, respectively, under this program.
AAR CORP. AND SUBSIDIARIES2122,500 restricted shares to members of the Board of Directors and one non-executive employee during fiscal 2007.2009. These shares vest over a three-year period.2006was $5,435, $5,943 and 2005 was $3,458, $3,690 and $1,263 respectively.20072009 is as follows:follows (shares in thousands):
of Shares
Fair Value
on Grant Date Number of
Shares Weighted Average
Fair Value
on Grant Date 940 $ 24.44 235 $ 14.64 (271 ) $ 16.03 (26 ) $ 28.43 878 $ 24.29 stockholders’stockholders' equity. Upon the adoption of SFAS No. 123(R), the balance was reclassified to capital surplus. As of May 31, 2007,2009, we had $16,538$9,402 of unearned compensation related to restricted shares that will be amortized to expense over a weighted average period of 2.92.5 years.Shareholders’Shareholders' Rights Plan1997,2007, each outstanding share of our common stock carries with it a Right to purchase one and one half additional sharesshare at a price of $83.33$140 per share. The Rights become exercisable (and separate from the shares) when certain specified events occur, including the acquisition of 15% or more of the common stock by a person or group (an “Acquiring Person”"Acquiring Person") or the commencement of a tender or exchange offer for 15% or more of the common stock.$83.33$140 per share (or the then-current exercise price), shares of our common stock having a market value of $166.66$280 (or two times the exercise price), subject to certain exceptions. Similarly, if we are acquired in a merger or other business combination or 50% or more of our assets or earning power is sold, each Right entitles the holder to purchase at the then-current exercise price that number of shares of common stock of the survivingAAR CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands, except per share amounts)3. Stock-Based Compensation (Continued)2007,2017, and may be redeemed by us for $.01 per Right under certain circumstances. On July 10,The 2007 our Boardrights plan replaced a shareholder rights plan that expired on August 6, 2007.Directors adopted a new Shareholders’ Rights plan effective August 7, 2007.Contents
AAR CORP. AND SUBSIDIARIES1,5001,500,000 shares of our common stock on the market. This action superseded our previous stock repurchase plan which had remaining authorization to purchase 1,2551,255,000 shares. During fiscal 2008, we purchased 321,700 shares of our common stock on the open market at an average price of $29.61, leaving 1,178,300 shares still available for repurchase.
Our Substantially all of our pre-tax income was substantially from domestic activities. The provision for income taxes on continuing operations includes the following components:
|
| For the Year Ended May 31, |
| | For the Year Ended May 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| 2007 |
| 2006 |
| 2005 |
| | 2009 | 2008 | 2007 | ||||||||||
Current: |
|
|
|
|
|
|
| Current: | |||||||||||||
Federal |
| $ | 6,863 |
| $ | 1,355 |
| $ | 1,034 |
| |||||||||||
State |
| 700 |
| 900 |
| 420 |
| ||||||||||||||
Federal | $ | 21,400 | $ | 25,900 | $ | 6,863 | |||||||||||||||
State | 1,900 | 1,200 | 700 | ||||||||||||||||||
|
| 7,563 |
| 2,255 |
| 1,454 |
| 23,300 | 27,100 | 7,563 | |||||||||||
Deferred |
| 20,411 |
| 8,433 |
| 2,112 |
| Deferred | 16,009 | 13,243 | 20,411 | ||||||||||
|
| $ | 27,974 |
| $ | 10,688 |
| $ | 3,566 |
| |||||||||||
$ | 39,309 | $ | 40,343 | $ | 27,974 | ||||||||||||||||
The deferred tax provision results primarily from differences between financial reporting and taxable income arising from depreciationinventory and leveraged leases.depreciation.
Income tax payable at May 31, 2009 and 2008 was $6,482 and $14,523, respectively, and is included in accrued liabilities on the consolidated balance sheet.
The provision for income taxes on continuing operations differs from the amount computed by applying the U.S. federal statutory income tax rate of 35% for fiscal 2007, 20062009, 2008 and 20052007 to income before taxes, for the following reasons:
|
| For the Year Ended May 31, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Provision for income taxes at the federal statutory rate |
| $ | 30,597 |
| $ | 16,279 |
| $ | 8,073 |
|
Tax benefits on exempt earnings from export sales |
| (3,257 | ) | (5,806 | ) | (3,430 | ) | |||
State income taxes, net of federal benefit and refunds |
| 455 |
| 585 |
| 270 |
| |||
Changes in valuation allowance |
| — |
| — |
| (1,575 | ) | |||
Reduction in income tax accrued liabilities and other |
| 179 |
| (370 | ) | 228 |
| |||
Provision for income taxes on continuing operations |
| $ | 27,974 |
| $ | 10,688 |
| $ | 3,566 |
|
| For the Year Ended May 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | ||||||||
Provision for income taxes at the federal statutory rate | $ | 41,968 | $ | 40,631 | $ | 30,597 | |||||
Tax benefit on exempt earnings from export sales | — | — | (2,916 | ) | |||||||
Tax benefits on domestic production activities | (1,487 | ) | (1,558 | ) | (167 | ) | |||||
State income taxes, net of federal benefit and refunds | 1,248 | 770 | 455 | ||||||||
Research and development credit | (2,702 | ) | — | — | |||||||
Other | 282 | 500 | 5 | ||||||||
Provision for income taxes on continuing operations | $ | 39,309 | $ | 40,343 | $ | 27,974 | |||||
In October of 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law and included a number of Federal income tax reforms, including the phase-out of tax benefits on earnings from export sales. This benefit was eliminated effective December 31, 2006 resulting in a lower benefit on exempt earnings from export sales during fiscal 2007.
During the third quarter of fiscal 2006, upon completion of our fiscal 2005 Federal income tax return, we determined that the Company qualified for additional tax benefits of $1,606 related to higher than
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
4. Income Taxes (Continued)
estimated margin on fiscal 2005 export activities. Similarly, we recorded a $496 benefit during the third quarter of fiscal 2005 which primarily related to additional tax benefits from fiscal 2004 export activities.
Deferred tax liabilities and assets result primarily from the differences in the timing of the recognition of transactions for financial reporting and income tax purposes and consist of the following components:
|
| May 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
Deferred tax assets-current attributable to: |
|
|
|
|
| ||
Inventory costs |
| $ | 24,162 |
| $ | 26,099 |
|
Employee benefits (accruals) |
| (878 | ) | (175 | ) | ||
Allowance for doubtful accounts |
| 1,293 |
| 1,473 |
| ||
Advanced billings and other |
| 936 |
| 2,469 |
| ||
Total deferred tax assets-current |
| $ | 25,513 |
| $ | 29,866 |
|
Deferred tax assets-noncurrent attributable to: |
|
|
|
|
| ||
Postretirement benefits (liabilities) |
| $ | 8,366 |
| $ | 7,495 |
|
Alternative minimum tax carryforwards, NOL carryforwards and foreign tax credit carryforwards |
| 1,063 |
| 16,545 |
| ||
Total deferred tax assets-noncurrent |
| $ | 9,429 |
| $ | 24,040 |
|
Total deferred tax assets |
| $ | 34,942 |
| $ | 53,906 |
|
Deferred tax liabilities attributable to: |
|
|
|
|
| ||
Depreciation |
| $ | (43,031 | ) | $ | (42,345 | ) |
Leveraged leases |
| (6,518 | ) | (7,052 | ) | ||
Total deferred tax liabilities |
| $ | (49,549 | ) | $ | (49,397 | ) |
Net deferred tax assets (liabilities) |
| $ | (14,607 | ) | $ | 4,509 |
|
| May 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | ||||||
Deferred tax assets-current attributable to: | ||||||||
Inventory costs | $ | 16,088 | $ | 15,973 | ||||
Employee benefits | 206 | (1,051 | ) | |||||
Allowance for doubtful accounts | 1,776 | 2,043 | ||||||
Advanced billings and other | 157 | 1,338 | ||||||
Total deferred tax assets-current | $ | 18,227 | $ | 18,303 | ||||
Deferred tax assets-noncurrent attributable to: | ||||||||
Postretirement benefits | $ | 15,162 | $ | 10,768 | ||||
Bond hedge | 11,924 | 24,311 | ||||||
Total deferred tax assets-noncurrent | $ | 27,086 | $ | 35,079 | ||||
Total deferred tax assets | $ | 45,313 | $ | 53,382 | ||||
Deferred tax liabilities attributable to: | ||||||||
Depreciation | $ | (55,011 | ) | $ | (49,609 | ) | ||
Leveraged leases | (5,186 | ) | (5,813 | ) | ||||
Intangible assets | (7,152 | ) | (7,633 | ) | ||||
Unrealized gain on available for sale securities | — | (35 | ) | |||||
Total deferred tax liabilities | $ | (67,349 | ) | $ | (63,090 | ) | ||
Net deferred tax liabilities | $ | (22,036 | ) | $ | (9,708 | ) | ||
As of May 31, 2007,2009, we have determined that the realization of our deferred tax assets is more likely than not, and that a valuation allowance is not required based upon our history of operating earnings, our expectations for continued future earnings, the nature of certain of our deferred tax assets our expectations for continued future earnings and the scheduled reversal of deferred tax liabilities, primarily related to depreciation. Fiscal years 2006 through 2009 remain open to examination by the Internal Revenue Service. Various states and foreign jurisdictions also remain open subject to their applicable statute of limitations.
5. 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, shares issuable upon vesting of restricted stock awards and shares issuableto be issued upon conversion of convertible debt.
In the third quarter of fiscal 2005, we adopted Under the provisions of Emerging Issues Task Force Issue No. 04-08, “The"The Effect of Contingently Convertible Instruments on Diluted Earnings per Share” (“Share" ("EITF No. 04-08”04-08"), which requires companieswe are required to use the “if converted”"if converted" method set forth in SFAS No. 128, “Earnings"Earnings Per Share,” for" in calculating the diluted earnings per share when contingently convertible debt is
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
5. Earnings Per Share (Continued)
outstanding.per share effect of the assumed conversion of our contingently convertible debt issued in fiscal 2006 because the principal for that issuance can be settled in stock, cash or a combination thereof. Under the “if converted”"if converted" method, the after-tax effect of interest expense related to the convertible securities is added back to net income, and the convertible debt is assumed to have been converted into common shares at the beginning of the period. For comparative purposes, diluted earnings per share information for all periods since the convertible debt securities were issued in February 2004 have been restated as required by EITF No. 04-08.
The following table provides a reconciliation of the computations of basic and diluted earnings per share information for each of the years in the three-year period ended May 31, 20072009 (shares in thousands).
|
| For the Year Ended May 31, |
| | For the Year Ended May 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| 2007 |
| 2006 |
| 2005 |
| | 2009 | 2008 | 2007 | ||||||||||
Income from continuing operations |
| $ | 59,447 |
| $ | 35,823 |
| $ | 19,498 |
| Income from continuing operations | $ | 80,600 | $ | 75,745 | $ | 59,447 | ||||
Loss from discontinued operations, net of tax |
| (787 | ) | (660 | ) | (4,045 | ) | Loss from discontinued operations, net of tax | (1,949 | ) | (601 | ) | (787 | ) | |||||||
Net income |
| $ | 58,660 |
| $ | 35,163 |
| $ | 15,453 |
| Net income | $ | 78,651 | $ | 75,144 | $ | 58,660 | ||||
Basic shares: |
|
|
|
|
|
|
| Basic shares: | |||||||||||||
Weighted average common shares outstanding |
| 36,389 |
| 33,530 |
| 32,297 |
| ||||||||||||||
Weighted average common shares outstanding | 38,059 | 37,194 | 36,389 | ||||||||||||||||||
Earnings per share—basic: |
|
|
|
|
|
|
| Earnings per share—basic: | |||||||||||||
Earnings from continuing operations |
| $ | 1.63 |
| $ | 1.07 |
| $ | 0.60 |
| |||||||||||
Loss from discontinued operations, net of tax |
| (0.02 | ) | (0.02 | ) | (0.12 | ) | ||||||||||||||
Earnings per share—basic |
| $ | 1.61 |
| $ | 1.05 |
| $ | 0.48 |
| |||||||||||
Earnings from continuing operations | $ | 2.12 | $ | 2.04 | $ | 1.63 | |||||||||||||||
Loss from discontinued operations, net of tax | (0.05 | ) | (0.02 | ) | (0.02 | ) | |||||||||||||||
Earnings per share—basic | $ | 2.07 | $ | 2.02 | $ | 1.61 | |||||||||||||||
Net income |
| $ | 58,660 |
| $ | 35,163 |
| $ | 15,453 |
| Net income | $ | 78,651 | $ | 75,144 | $ | 58,660 | ||||
Add: After-tax interest on convertible debt |
| 1,965 |
| 1,461 |
| 1,230 |
| Add: After-tax interest on convertible debt | 1,454 | 1,866 | 1,965 | ||||||||||
Net income for diluted EPS calculation |
| $ | 60,625 |
| $ | 36,624 |
| $ | 16,683 |
| Net income for diluted EPS calculation | $ | 80,105 | $ | 77,010 | $ | 60,625 | ||||
Diluted shares: |
|
|
|
|
|
|
| Diluted shares: | |||||||||||||
Weighted average common shares outstanding |
| 36,389 |
| 33,530 |
| 32,297 |
| ||||||||||||||
Additional shares from the assumed exercise of stock options |
| 445 |
| 487 |
| 304 |
| ||||||||||||||
Additional shares from the assumed vesting of restricted stock |
| 499 |
| 473 |
| — |
| ||||||||||||||
Additional shares from the assumed conversion of convertible debt |
| 5,976 |
| 4,362 |
| 3,604 |
| ||||||||||||||
Weighted average common shares outstanding—diluted |
| 43,309 |
| 38,852 |
| 36,205 |
| ||||||||||||||
Weighted average common shares outstanding | 38,059 | 37,194 | 36,389 | ||||||||||||||||||
Additional shares from the assumed exercise of stock options | 61 | 332 | 445 | ||||||||||||||||||
Additional shares from the assumed vesting of restricted stock | 244 | 523 | 499 | ||||||||||||||||||
Additional shares from the assumed conversion of convertible debt | 4,445 | 5,696 | 5,976 | ||||||||||||||||||
Weighted average common shares outstanding—diluted | 42,809 | 43,745 | 43,309 | ||||||||||||||||||
Earnings per share—diluted: |
|
|
|
|
|
|
| Earnings per share—diluted: | |||||||||||||
Earnings from continuing operations |
| $ | 1.42 |
| $ | 0.96 |
| $ | 0.57 |
| |||||||||||
Loss from discontinued operations, net of tax |
| (0.02 | ) | (0.02 | ) | (0.11 | ) | ||||||||||||||
Earnings per share—diluted |
| $ | 1.40 |
| $ | 0.94 |
| $ | 0.46 |
| |||||||||||
Earnings from continuing operations | $ | 1.92 | $ | 1.77 | $ | 1.42 | |||||||||||||||
Loss from discontinued operations, net of tax | (0.05 | ) | (0.01 | ) | (0.02 | ) | |||||||||||||||
Earnings per share—diluted | $ | 1.87 | $ | 1.76 | $ | 1.40 | |||||||||||||||
At May 31, 2007, 20062009, 2008 and 2005,2007, respectively, options to purchase 31 thousand, 1.2 million958,000, 78,000 and 3.4 million31,000 shares of common stock were outstanding, but were not included in the computation of diluted earnings per share, because the exercise price of these options was greater than the average market price of the common shares.
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 6. Employee Benefit Plans We have defined contribution and defined benefit plans covering substantially all full-time domestic employees and certain employees in The Netherlands. Defined Benefit Plans Prior to January 1, 2000, the pension plan for domestic salaried and non-union hourly employees had a benefit formula based primarily on years of service and compensation. Effective January 1, 2000, we converted our defined benefit plan for substantially all domestic salaried and certain hourly employees to a cash balance pension plan. Under the cash balance pension plan, the retirement benefit is expressed as a dollar amount in an account that grows with annual pay-based credits and interest on the account balance. The interest crediting rate under our cash balance plan is determined quarterly and is equal to 100% of the average 30-year treasury rate for the second month preceding the applicable quarter published by the Internal Revenue Service. The average interest crediting rate under our cash balance plan for the fiscal year ended May 31, Certain foreign operations of domestic subsidiaries also have a We provide eligible outside directors with benefits upon retirement on or after age 65 provided they have completed at least five years of service as a director. Benefits are paid quarterly in cash equal to 25% of the annual retainer fee payable to active outside directors. Payment of benefits commence upon retirement and �� We also provide supplemental NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 6. Employee Benefit Plans (Continued) Obligations and Funded Status The following table sets forth the changes in projected benefit obligations and plan assets for all of our pension plans: May 31, 2007 2006 Change in benefit obligation: Benefit obligation at beginning of year $ 84,427 $ 90,829 Service cost 1,322 1,567 Interest cost 5,058 4,717 Plan participants’ contributions 271 252 Amendments — 104 Net actuarial loss (gain) (436 ) (7,141 ) Benefits paid (5,835 ) (5,901 ) Translation 4,640 — Benefit obligation at end of year $ 89,447 $ 84,427 Change in plan assets: Fair value of plan assets at beginning of year $ 75,121 $ 69,859 Actual return on plan assets 8,471 6,731 Employer contributions 2,947 4,180 Plan participants’ contributions 271 252 Benefits paid (5,835 ) (5,901 ) Translation 5,070 — Fair value of plan assets at end of year $ 86,045 $ 75,121 Funded status at end of year $ (3,402 ) $ (9,306 ) Unrecognized actuarial losses 24,416 Unrecognized prior service cost 1,021 Accumulated other comprehensive loss—minimum pension liability (20,159 ) Net amount recognized $ (4,028 ) Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Plan participants' contributions Amendments Net actuarial gain Benefits paid Translation Benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Plan participants' contributions Benefits paid Translation Fair value of plan assets at end of year Funded status at end of year Amounts recognized in the consolidated balance sheets consisted of the following: May 31, 2007 2006 Deposits, prepaids and other $ — $ 2,633 Other assets 3,456 16,820 Accrued liabilities (2,450 ) (3,322 ) Other liabilities and deferred income (4,408 ) — $ (3,402 ) $ 16,131 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 6. Employee Benefit Plans (Continued)20072009 was 4.93%5.25%. Effective June 1, 2005, the existing cash balance plan was frozen and the annual pay-based credits were discontinued. During the fourth quarter of fiscal 2005, we recorded a $667 curtailment loss associated with this change to the cash balance plan. Also effective June 1, 2005, the defined contribution plan was modified to include increased employer contributions and an enhanced profit sharing formula. Defined pension benefits for certain union hourly employees are based primarily on a fixed amount per year of service.pension plan which is a defined benefitpension plan. Benefit formulas are based generally on years of service and compensation. It is the policy of these subsidiaries to fund at least the minimum amounts required by local laws and regulations.continuescontinue for a period equal to the total number of years of the retired director’sdirector's service up to a maximum of ten years, or death, whichever occurs first. In the fourth quarter of fiscal 2001, we terminated the plan for any new members of the Board of Directors first elected after May 31, 2001.retirement and profit sharingpension benefits for current and formercertain executives and key employees to supplement benefits provided by our other benefit plans.Effective May 31, 2007, we adopted the provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”. SFAS No. 158 requires employers to recognize the overfunded or underfunded status of a defined benefit pension or other postretirement plan as an asset or liability in its statement of financial position, recognize changes in that funded status in the year in which the changes occur through comprehensive income and measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year. We have historically measured the plan assets and liabilities as of ourcash balance sheet date.plan.
AAR CORP. AND SUBSIDIARIES May 31, 2009 2008 $ 92,140 $ 89,447 1,461 1,546 5,347 5,066 387 380 730 273 (4,379 ) (2,991 ) (4,316 ) (5,292 ) (2,622 ) 3,711 $ 88,748 $ 92,140 $ 85,193 $ 86,045 (11,509 ) (3,617 ) 2,872 3,628 387 380 (4,316 ) (5,292 ) (2,774 ) 4,049 $ 69,853 $ 85,193 $ (18,895 ) $ (6,947 ) May 31, 2009 2008 $ — $ 1,262 (1,475 ) (1,311 ) (17,420 ) (6,898 ) $ (18,895 ) $ (6,947 )
AAR CORP. AND SUBSIDIARIES
Amounts recognized in accumulated other comprehensive loss, net of tax consisted of the following:
|
| May 31, |
| May 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| 2007 |
| 2006 |
| 2009 | 2008 | |||||||
Actuarial loss |
| $ | 13,683 |
| $ | — |
| $ | 26,314 | $ | 18,159 | |||
Prior service cost |
| 571 |
| — |
| 625 | 520 | |||||||
Minimum pension liability |
| — |
| 13,103 |
| |||||||||
Total |
| $ | 14,254 |
| $ | 13,103 |
| $ | 26,939 | $ | 18,679 | |||
Prior to the adoption of SFAS No. 158, a minimum pension liability adjustment was required when the actuarial present value of accumulated plan benefits exceeded plan assets and accrued pension liabilities. During fiscal 2007, we reduced the minimum pension liability by $3,104, and $1,921, net of tax, was reported as a component of comprehensive income.
Information for pension plans with an accumulated benefit obligation in excess of plan assets was as follows:
|
| May 31, |
| May 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| 2007 |
| 2006 |
| 2009 | 2008 | |||||||
Projected benefit obligation |
| $ | 65,027 |
| $ | 63,963 |
| $ | 60,314 | $ | 63,838 | |||
Accumulated benefit obligation |
| 64,381 |
| 63,077 |
| 59,904 | 63,109 | |||||||
Fair value of plan assets |
| 58,170 |
| 53,307 |
| 41,673 | 55,629 |
The accumulated benefit obligation for all pension plans was $82,820$83,867 and $82,077$86,776 as of May 31, 20072009 and 2006,2008, respectively.
Net Periodic BeneficBenefit Cost
Pension expense charged to results of operations includes the following components:
|
| For the Year Ended May 31, |
| For the Year Ended May 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| 2007 |
| 2006 |
| 2005 |
| 2009 | 2008 | 2007 | ||||||||||
Service cost |
| $ | 1,322 |
| $ | 1,567 |
| $ | 2,841 |
| $ | 1,461 | $ | 1,546 | $ | 1,322 | ||||
Interest cost |
| 5,058 |
| 4,717 |
| 4,899 |
| 5,347 | 5,066 | 5,058 | ||||||||||
Expected return on plan assets |
| (6,029 | ) | (5,764 | ) | (5,701 | ) | (6,514 | ) | (6,338 | ) | (6,029 | ) | |||||||
Amortization of prior service cost |
| 109 |
| 112 |
| 295 |
| 134 | 116 | 109 | ||||||||||
Recognized net actuarial loss |
| 633 |
| 1,052 |
| 1,155 |
| 500 | 684 | 633 | ||||||||||
Transitional obligation |
| — |
| — |
| 68 |
| |||||||||||||
Curtailment |
| — |
| — |
| 667 |
| — | 184 | — | ||||||||||
Settlement charge |
| 201 |
| 156 |
| — |
| — | 181 | 201 | ||||||||||
|
| $ | 1,294 |
| $ | 1,840 |
| $ | 4,224 |
| ||||||||||
$ | 928 | $ | 1,439 | $ | 1,294 | |||||||||||||||
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
6. Employee Benefit Plans (Continued)
Adoption of SFAS No. 158Assumptions
Effective May 31, 2007, we adopted the provisions of SFAS No. 158. The incremental effect of applying SFAS No. 158 for all of our plans on individual line items in the consolidated balance sheet as of May 31, 2007 was as follows:
|
| Before Application |
| Adjustments |
| After Application |
| |||||||||
Deposits, prepaids and other |
|
| $ | 17,096 |
|
|
| $ | (4,489 | ) |
|
| $ | 12,607 |
|
|
Other assets |
|
| 84,268 |
|
|
| (14,614 | ) |
|
| 69,654 |
|
| |||
Total assets |
|
| 1,086,736 |
|
|
| (19,103 | ) |
|
| 1,067,633 |
|
| |||
Accrued liabilities |
|
| 90,640 |
|
|
| (18,618 | ) |
|
| 72,022 |
|
| |||
Deferred tax liabilities |
|
| 42,026 |
|
|
| (1,905 | ) |
|
| 40,121 |
|
| |||
Other liabilities and deferred income |
|
| 18,194 |
|
|
| 4,958 |
|
|
| 23,152 |
|
| |||
Accumulated other comprehensive loss |
|
| (10,362 | ) |
|
| (3,537 | ) |
|
| (13,899 | ) |
| |||
Stockholders’ equity |
|
| 497,780 |
|
|
| (3,537 | ) |
|
| 494,243 |
|
|
Assumptions
The assumptions used in accounting for the Company’sCompany's plans are estimates of factors including, among other things, the amount and timing of future benefit payments. The following table presents the key assumptions used in the measurement of the Company’sCompany's benefit obligations:
|
| May 31, |
| ||
|
| 2007 |
| 2006 |
|
Domestic plans: |
|
|
|
|
|
Discount rate |
| 6.05 | % | 6.40 | % |
Rate of compensation increase |
| 3.50 |
| 3.50 |
|
| May 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | ||||||
Domestic plans: | ||||||||
Discount rate | 6.82 | % | 6.45 | % | ||||
Rate of compensation increase | 3.50 | 3.50 |
|
| May 31, |
| ||
|
| 2007 |
| 2006 |
|
Non-domestic plans: |
|
|
|
|
|
Discount rate |
| 5.10 | % | 4.75 | % |
Rate of compensation increase |
| 3.00 |
| 3.00 |
|
| May 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | ||||||
Non-domestic plans: | ||||||||
Discount rate | 5.90 | % | 6.10 | % | ||||
Rate of compensation increase | 3.00 | 3.00 |
AAR CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands, except per share amounts)
6. Employee Benefit Plans (Continued)
A summary of the weighted average assumptions used to determine net periodic pension expense is as follows:
|
| For the Year Ended May 31, |
| ||||
|
| 2007 |
| 2006 |
| 2005 |
|
Domestic plans: |
|
|
|
|
|
|
|
Discount rate |
| 6.40 | % | 5.40 | % | 6.50 | % |
Rate of compensation increase |
| 3.50 |
| 3.00 |
| 3.00 |
|
Expected long-term return on plan assets |
| 8.50 |
| 8.50 |
| 8.50 |
|
Non-domestic plans: |
|
|
|
|
|
|
|
Discount rate |
| 4.75 | % | 4.25 | % | 5.50 | % |
Rate of compensation increase |
| 3.00 |
| 3.00 |
| 3.25 |
|
Expected long-term return on plan assets |
| 6.50 |
| 6.50 |
| 6.50 |
|
| For the Year Ended May 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | ||||||||
Domestic plans: | |||||||||||
Discount rate | 6.45 | % | 6.05 | % | 6.40 | % | |||||
Rate of compensation increase | 3.50 | 3.50 | 3.50 | ||||||||
Expected long-term return on plan assets | 8.50 | 8.50 | 8.50 | ||||||||
Non-domestic plans: | |||||||||||
Discount rate | 6.10 | % | 5.10 | % | 4.75 | % | |||||
Rate of compensation increase | 3.00 | 3.00 | 3.00 | ||||||||
Expected long-term return on plan assets | 6.50 | 6.50 | 6.50 |
The discount rate was determined by projecting the plan’splan's expected future benefit payments as defined for the projected benefit obligation, discounting those expected payments using a theoretical zero-coupon spot yield curve derived from a universe of high-quality bonds as of the measurement date, and solving for the single equivalent discount rate that resulted in the same projected benefit obligation. Constraints were applied with respect to callability and credit quality. In addition, 3% of the bonds were deemed outliers due to questionable pricing information and consequently were excluded from consideration.
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
6. Employee Benefit Plans (Continued)
Plan Assets
The following table sets forth the actual asset allocation and target allocations for our U.S. pension plans:
| May 31, | | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| May 31, |
| Target Asset |
| Target Asset Allocation | |||||||||||||||||
|
| 2007 |
| 2006 |
| Allocation |
| 2009 | 2008 | ||||||||||||||
Equity securities |
|
| 67 | % |
|
| 65 | % |
|
| 45–75 | % |
| 57 | % | 59 | % | 45 – 75 | % | ||||
Fixed income securities |
|
| 21 |
|
|
| 27 |
|
|
| 25–55 | % |
| 23 | 22 | 25 – 55 | % | ||||||
Other (fund-of funds hedge fund) |
|
| 12 |
|
|
| 8 |
|
|
| 0–20 | % |
| 20 | 19 | 0 – 20 | % | ||||||
|
|
| 100 | % |
|
| 100 | % |
|
|
|
|
| ||||||||||
100 | % | 100 | % | ||||||||||||||||||||
The assets of U.S pension plans are invested in compliance with the Employee Retirement Income Security Act of 1974 (ERISA). The investment goals are to provide a total return that, over the long term, optimizes the long-term return on plan assets at an acceptable risk, and to maintain a broad diversification across asset classes and among investment managers. Direct investments in our securities and the use of derivatives for the purpose of speculation are not permitted. The assets of the U.S. pension plans are invested primarily in equity and fixed income mutual funds, individual common stocks and investments in fund-of funds hedge funds.
The assets of the non-domestic plan are invested in compliance with local laws and regulations and are comprised of insurance contracts and equity and fixed income mutual funds.
51
AAR CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands, except per share amounts)
6. Employee Benefit Plans (Continued)
To develop our expected long-term rate of return assumption on domestic plans, we use long-term historical return information for our targeted asset mix and current market conditions.
Cash Flow
The following table summarizes our estimated future pension benefits by fiscal year:
|
| Fiscal Year |
| ||||||||||||||||||
|
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 to 2017 |
| ||||||||
Estimated pension benefits |
| $ | 7,022 |
| $ | 5,535 |
| $ | 5,523 |
| $ | 5,504 |
| $ | 5,668 |
|
| $ | 29,217 |
|
|
| Fiscal Year | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 to 2019 | |||||||||||||
Estimated pension benefits | $ | 6,211 | $ | 4,147 | $ | 4,708 | $ | 4,613 | $ | 5,180 | $ | 29,533 |
Our contribution policy for the domestic plans is to contribute annually, at a minimum, an amount which is deductible for federal income tax purposes and that is sufficient to meet actuarially computed pension benefits. We anticipate contributing $2,000$3,000 to $4,000$5,000 during fiscal 2008.2010.
Additional Information
The estimated amounts for our plans that will be amortized from accumulated other comprehensive incomeloss into expense over the next fiscal year are as follows:
Amortization of net actuarial loss |
| $ | 727 |
| $ | 1,132 | ||
Amortization of prior service cost |
| $ | 148 |
| $ | 134 | ||
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
6. Employee Benefit Plans (Continued)
Postretirement Benefits Other Than Pensions
We provide health and life insurance benefits for certain eligible retirees. The postretirement plans are unfunded and we have the right to modify or terminate any of these plans in the future, in certain cases, subject to union bargaining agreements. In fiscal 1995, we completed termination of postretirement health and life insurance benefits attributable to future services of collective bargaining and other domestic employees. The unfunded projected benefit obligation for this plan was $1,370$1,272 and $1,363$1,427 as of May 31, 20072009 and 2006,2008, respectively. We have omitted substantially all of the required disclosures related to this plan because the plan is not material to our consolidated financial position or results of operations. Effective May 31, 2007, we adopted the provisions of SFAS No. 158 for this plan resulting in an increase to comprehensive loss of $465, net of tax.
Defined Contribution Plan
The defined contribution plan is a profit sharing plan which is intended to qualify as a 401(k) plan under the Internal Revenue Code. Under the plan, employees may contribute up to 75% of their pretax compensation, subject to applicable regulatory limits. We may make matching contributions up to 5% of compensation as well as discretionary profit sharing contributions. Company contributions vest on a pro-rata basis during the first three years of employment. We also provide profit sharing benefits for certain executives and key employees to supplement the benefits provided by the defined contribution plan. Expense charged to results of operations for Company matching contributions, including profit sharing contributions, was $7,964 in fiscal 2009, $8,666 in fiscal 2008 and $5,501 in fiscal 2007 $4,216for these plans.
7. Acquisitions
On April 2, 2007, we acquired Brown International Corporation ("Brown"), a privately held defense contractor that provides engineering, design, manufacturing and systems integration services. Brown operates as part of our Structures and Systems segment. The purchase price was approximately $26,700 and was paid in fiscal 2006cash.
On December 3, 2007, we acquired Summa Technology, Inc. ("Summa"), a leading provider of high-end sub-systems and $897precision machining, fabrication, welding and engineering services. Summa operates as part of our Structures and Systems segment. The purchase price was approximately $71,000 and was paid in fiscal 2005.cash.
On March 5, 2008, we acquired Avborne Heavy Maintenance, Inc. ("Avborne") and a related entity. Avborne, an independent provider of aircraft heavy maintenance checks, modifications, installations and painting services to commercial airlines, international cargo carriers and major aircraft leasing companies, operates as part of our Maintenance, Repair and Overhaul segment. The purchase price was approximately $40,000 and included a cash payment of $15,000 and the assumption of a $25,000 industrial revenue bond.
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
7. Acquisitions (Continued) Aircraft Joint Ventures
Our cost to acquire Brown, Summa and Avborne has been allocated to the assets and liabilities acquired based on fair values. We have investedallocated the purchase price as follows:
Cash | $ | 1,200 | ||
Accounts receivable | 41,600 | |||
Inventory | 7,900 | |||
Prepaid expenses | 2,400 | |||
Property, plant and equipment | 18,300 | |||
Identifiable intangibles | 45,900 | |||
Goodwill | 46,600 | |||
Other assets | 1,100 | |||
Accounts payable | (19,500 | ) | ||
Accrued liabilities | (7,800 | ) | ||
Industrial revenue bond | (25,000 | ) |
The following unaudited pro forma information is provided for acquisitions assuming the Brown, Summa and Avborne acquisitions occurred as of the beginning of fiscal year 2007:
| For the Year Ended May 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | ||||||
Net sales | $ | 1,483,114 | $ | 1,210,993 | ||||
Operating income | 140,493 | 100,328 | ||||||
Net income | 77,061 | 58,178 | ||||||
Earnings per share: | ||||||||
Basic | $ | 2.07 | $ | 1.60 | ||||
Diluted | $ | 1.80 | $ | 1.39 |
8. Aircraft Portfolio
Joint Venture Aircraft
The Company owns aircraft with joint venture partners as well as aircraft which are wholly-owned. As of May 31, 2009, the Company had ownership interests in 26 aircraft with joint venture partners. All of the aircraft owned with joint venture partners were acquired in fiscal years 2006, 2007 and 2008. As of May 31, 2009, our equity investment in the 26 aircraft owned with joint venture partners was approximately $42,600 and is included in investment in joint ventures on the consolidated balance sheet.
Our aircraft joint ventures represent investments in limited liability companies that are accounted for under the equity method of accounting. Our membership interest in each of these limited liability companies is 50% and the primary business of these companies is the acquisition, ownership, lease and disposition of certain narrow-body commercial aircraft. Acquired aircraftAircraft are purchased with cash contributions by the members of the companies and debt financing provided to the limited liability companies on a limited recourse basis. Twelve aircraft are held in the joint ventures at May 31, 2007. Under the terms of a servicing agreementagreements with certain of the limited liability companies, we provide administrative services and technical advisory services, including aircraft evaluations, oversight and logistical support of the maintenance process and records management. We also provide remarketing services with respect to the divestiture of aircraft by the limited liability companies. During fiscal 2007, 20062009,
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
8. Aircraft Portfolio (Continued)
2008 and 2005,2007, we were paid $1,115, $574$898, $1,059 and $229,$1,115, respectively, for such services. The income tax benefit or expense related to the operations of the ventures is recorded by the member companies.
Distributions from joint ventures are classified as operating or investing activities in the statementconsolidated statements of cash flows based upon an evaluation of the specific facts and circumstances of each distribution to determine its nature.distribution.
Summarized financial information for these limited liability companies is as follows:
|
| For the Year Ended May 31, |
| |||||||||||||||||
|
| 2007 |
| 2006 |
| 2005 |
| For the Year Ended May 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Statement of operations information: |
|
|
|
|
|
|
| |||||||||||||
| 2009 | 2008 | 2007 | |||||||||||||||||
Sales |
| $ | 81,626 |
| $ | 28,857 |
| $ | 11,249 |
| $ | 67,770 | $ | 54,424 | $ | 81,626 | ||||
Income before provision for income taxes |
| 16,877 |
| 3,314 |
| 1,136 |
| 18,059 | 14,237 | 16,877 |
|
| May 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
Balance sheet information: |
|
|
|
|
| ||
Assets |
| $ | 117,185 |
| $ | 123,177 |
|
Debt |
| 80,425 |
| 64,934 |
| ||
Members’ capital |
| 31,603 |
| 54,949 |
| ||
| May 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | ||||||
Balance sheet information: | ||||||||
Assets | $ | 282,772 | $ | 320,093 | ||||
Debt | 194,388 | 233,662 | ||||||
Members' capital | 85,268 | * | 80,299 |
Wholly-Owned Aircraft
In addition to the aircraft owned with joint venture partners, we own six aircraft for our own account which are considered wholly-owned. Of the six aircraft, one aircraft is in a leveraged lease, two aircraft were financed with non-recourse debt, one aircraft was financed with a non-recourse capital lease and the other two have no debt. A lessee of two of our wholly-owned aircraft is in arrears for amounts due under the leases. We also have anobtained a judgment against the lessee and its affiliated guarantor and expect to recover past due rental amounts. Our net investments in these two aircraft after consideration of non-recourse financing are $4,934 and $2,740, respectively. Our investment in anthe six wholly-owned aircraft joint venture company that we consolidate. We consolidate the financial position and results of operations of this joint venture because we are the primary beneficiaryis comprised of the joint venture. The equity interestfollowing components:
| May 31, | ||||||
---|---|---|---|---|---|---|---|
| 2009 | 2008 | |||||
Gross carrying value | $ | 61,202 | $ | 98,588 | |||
Non-recourse debt | (19,190 | ) | (29,354 | ) | |||
Non-recourse capital lease obligation | (10,259 | ) | (11,837 | ) | |||
Net AAR investment | $ | 31,753 | $ | 57,397 | |||
Table of the other partnerContents
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in the joint venture is recorded as a minority interest, which was included in other non-current liabilities at May 31, 2007.thousands, except per share amounts)
8.9. Equipment on Long-Term Lease
In Augustfiscal 2005, we entered into a series of ten-year agreementagreements with a customerMesa to provide supply chain services for their fleet of CRJ 700/900, and ERJ 145 and CRJ 200 regional jets. As part of the agreement,agreements, we purchased from the customer approximately $36,500$58,400 of equipment to support the program. The equipment was purchased with an initial cash payment of $22,750, with the remaining balance of approximately $13,750 due in three installments ending in August 2008. The equipment is included in equipment on long-term lease on the consolidated balance sheet and is being depreciated on a straight-line basis over 10 years to a
AAR CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands, except per share amounts)
8. Equipment on Long-Term Lease (Continued)
30% residual value. The current portion of the deferred payments is included in accounts payable and the long-term portion is included in other liabilities and deferred income on the consolidated balance sheet.
In November 2005, we signed a similar supply chain services agreement with this same customer to support their fleet of CRJ 200 regional jets. Under the terms of the agreement, we purchased from the customer approximately $21,900 of equipment to support the program. The equipment was purchased with an initial cash payment of $16,750, with the remaining balance of approximately $5,150 due in two installments ending in August 2009. The deferred payment obligation is included in other liabilities and deferred income on the consolidated balance sheet.
9.10. Commitments and Contingencies
On October 3, 2003, we entered into a sale-leaseback transaction whereby the Company sold and leased back a facility located in Garden City, New York. The lease is classified as an operating lease in accordance with SFAS No. 13 “Accounting"Accounting for Leases”.Leases." Net proceeds from the sale of the facility were $13,991 and the cost and related accumulated depreciation of the facility of $9,472 and $4,595, respectively, were removed from the consolidated balance sheet. The gain realized on the sale of $9,114 has been deferred and is being amortized over the 20-year lease term in accordance with SFAS No. 13. The unamortized balance of the deferred gain as of May 31, 20072009 is $7,533$6,610 and is included in other liabilities and deferred income on the consolidated balance sheet.
In June 2004,addition to the Garden City lease, we signed an agreement to occupy a portion of the Indianapolis Maintenance Center (IMC). In fiscal 2005, we commenced airframe maintenance operationslease other facilities and equipment as well as aviation equipment under agreements that are classified as operating leases that expire at the IMC and currently occupy seven bays and certain office space, with options to occupy up to three additional bays.various dates through 2034. Under the terms of one of the facility lease agreements, we are entitled to receive rent credits as we increase the number of baysspace we occupy. During fiscal 2007, 20062009, 2008 and 2005,2007, we received $700, $1,700$450, $1,000 and $350,$700, respectively, of such rent credits and in accordance with SFAS No. 13, we are treating the rent credits as lease incentives, which are being amortized over the term of the lease.
In addition to the Garden City and IMC leases, we lease other facilities and equipment as well as aviation equipment under agreements that are classified as operating leases that expire at various dates through 2023. Future minimum payments under all operating leases at May 31, 20072009 are as follows:
|
|
| Future Minimum Payments |
| Future Minimum Payments | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year |
|
|
| Facilities |
| Aviation |
| Facilities and Equipment | Aviation Equipment | |||||||||||
2008 |
|
| $ | 9,426 |
|
|
| $ | 3,840 |
|
| |||||||||
2009 |
|
| 8,385 |
|
|
| 3,840 |
|
| |||||||||||
2010 | 2010 |
|
| 7,110 |
|
|
| 1,280 |
|
| $ | 13,442 | $ | 1,280 | ||||||
2011 | 2011 |
|
| 5,689 |
|
|
| — |
|
| 11,578 | — | ||||||||
2012 | 2012 |
|
| 5,346 |
|
|
| — |
|
| 10,571 | — | ||||||||
2013 and thereafter |
|
| 25,642 |
|
|
| — |
|
| |||||||||||
2013 | 10,012 | — | ||||||||||||||||||
2014 | 9,499 | — | ||||||||||||||||||
2015 and thereafter | 30,627 | — |
AAR CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands, except per share amounts)
9. Commitments and Contingencies (Continued)
Rental expense during the past three fiscal years was as follows:
|
| For the Year Ended May 31, |
| For the Year Ended May 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| 2007 |
| 2006 |
| 2005 |
| 2009 | 2008 | 2007 | ||||||||||
Facilities and Equipment |
| $ | 14,412 |
| $ | 12,514 |
| $ | 9,445 |
| $ | 22,644 | $ | 18,621 | $ | 14,412 | ||||
Aviation Equipment |
| 3,471 |
| 1,538 |
| 2,629 |
| 3,204 | 3,095 | 3,471 |
During the first quarter of fiscal 2008, we completed a sale-leaseback transaction with a financial institution to finance an aircraft under a capital lease. Proceeds were approximately $12,880. The gross asset balance and accumulated depreciation of this aircraft as of May 31, 2009 is $15,954 and $1,719,
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
10. Commitments and Contingencies (Continued)
respectively, and is included in equipment on long-term lease on the consolidated balance sheet. Future minimum payments and sub-lease rentals under capitalized leases are as follows:
Year | Future Minimum Payments | Sub-lease Rentals | |||||
---|---|---|---|---|---|---|---|
2010 | $ | 1,673 | $ | 2,700 | |||
2011 | 1,797 | 2,700 | |||||
2012 | 1,929 | 2,700 | |||||
2013 | 4,932 | 548 | |||||
2014 | — | — | |||||
2015 and thereafter | — | — |
We routinely issue letters of credit and performance bonds in the ordinary course of our business. These instruments are typically issued in conjunction with insurance contracts or other business requirements. The total of these instruments outstanding at May 31, 20072009 was approximately $11,891.$12,910.
We are involved in various claims and legal actions, including environmental matters, arising in the ordinary course of business (see Item 3 Legal Proceedings). In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial condition or results of operations.
10.11. Discontinued Operations
During On November 25, 2008 we sold certain assets and liabilities of our industrial gas turbine engine business to the third quarterlocal management team. We retained ownership of fiscal 2007, we decided to exit our non-core industrial turbine business based in Frankfort, New York.the land and building and entered into a five-year lease with the buyer. As of May 31, 2009, the net book value of the land and building was $1,226. The industrial gas turbine engine business iswas a unit withinin the Structures and Systems segmentsegment. As consideration, we received cash of $100 and a $650 interest bearing note due in five equal annual installments beginning December 1, 2009. The note is expectedsecured by accounts receivable, inventory and equipment. We also have an opportunity to be sold within 12 months. Net assets ofreceive additional consideration based on the business were approximately $4,500 at May 31, 2007 and consisted of $1,800 of accounts receivable, $1,200 of inventory, $2,100 of net property, plant and equipment and $600 of accounts payable.
On February 17, 2005, we sold substantially all of the assets, subject toachieving certain liabilities, of our engine component repair business, located in Windsor, Connecticut. The engine component repair business wassales levels for a unit within the Aviation Supply Chain segment. We received as consideration cash of $7,700 and acquired inventory having a value of approximately $1,200, subject to certain adjustments.four-year period beginning January 1, 2009. As a result of thethis transaction, we recorded a pre-tax charge of $3,651$2,209 ($2,321 after-tax)1,403 after tax), in the second quarter ended November 30, 2008 representing the loss on disposal. Of the $3,651 pre-tax charge, severance charges were $287 and closing costs related to the transaction were $619. The remaining portion of the charge of $2,745loss on disposal represents the difference between thenon-contingent consideration received and the net book value of the assets sold.
Revenues, and pre-tax operating loss and pre-tax loss on disposal for fiscal years 2007, 20062009, 2008 and 20052007 for the discontinued operations are summarized as follows:
|
| For the Year Ended May 31, |
| For the Year Ended May 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| 2007 |
| 2006 |
| 2005 |
| 2009 | 2008 | 2007 | ||||||||||
Revenues |
| $ | 7,778 |
| $ | 11,766 |
| $ | 13,319 |
| $ | 852 | $ | 6,104 | $ | 7,778 | ||||
Pre-tax operating loss |
| $ | (1,212 | ) | $ | (1,015 | ) | $ | (2,800 | ) | (841 | ) | (925 | ) | (1,212 | ) | ||||
Pre-tax loss on disposal | (2,209 | ) | — | — |
11. Acquisitions
On January 12, 2007, we acquired substantially all the assets of Reebaire, a regional airframe maintenance and repair overhaul facility located in Hot Springs, Arkansas. This acquisition increases our
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
11. Acquisitions (Continued)
regional MRO capacity in North America. The purchase price was approximately $11,800 and was paid in cash.
Our cost to acquire Reebaire has been preliminarily allocated to the assets acquired based on estimated fair values. The allocation is subject to adjustment when additional information concerning asset valuations is finalized. We have preliminarily allocated the purchase price as follows:
Inventory |
| $ | 560 |
|
Equipment |
| 660 |
| |
Identifiable intangibles |
| 1,580 |
| |
Goodwill |
| 9,000 |
|
We anticipate that the asset valuation will be completed in the first quarter of fiscal 2008.
On April 2, 2007, we acquired Brown, a privately held defense contractor that provides engineering, design, manufacturing and systems integration services. Brown will operate as part of our Structures and Systems segment. The purchase price was approximately $26,700 and was paid in cash. We have not yet finalized the purchase price allocation for the Brown acquisition and are in the process of obtaining valuations for the acquired net assets.
The results of operations subsequent to the date of the acquisitions are included in the consolidated financial statements. Had the results of the acquisitions been included in the consolidated financial statements for each of the periods presented, the effect would not have been material.
12. Gain on Sale of Product Line
During the first quarter of fiscal 2007, we sold substantially all assets, subject to certain liabilities, of a product line within our Structures and Systems segment. Proceeds from the sale were $6,567 and the net carrying value of the assets sold was $1,209, resulting in a gain on sale of product line of $5,358. The gain on this transaction has been classified as a component of operating income in accordance with SFAS No. 144, “Accounting"Accounting for the Impairment or Disposal of Long-Lived Assets”.Assets."
13. Impairment Charges
Aircraft—Acquired Pre-September 11, 2001
During the second quarter of fiscal 2009, we performed a comprehensive review of our aircraft portfolio. The primary objective of this review was to assess the impact of the economic slowdown and credit crisis on market conditions. Based upon that review, and taking into consideration the desire to improve liquidity and generate cash, we made the decision to sell one of the four aircraft acquired before September 11, 2001, and offer two of the remaining three for sale. As a result of this review and taking into consideration our assessment of current market conditions, the Company recorded a $21,033 pre-tax impairment charge to reduce the carrying value of the three aircraft to their net realizable value. As of May 31, 2009, the carrying value of the two remaining aircraft subject to the impairment charge and offered for sale was approximately $5,800.
Parts and Engines—Acquired Pre-September 11, 2001
During the fourth quarter of fiscal 2009, we recorded a $10,100 pre-tax impairment charge on inventory and engines which had been acquired prior to September 11, 2001. This inventory was subject to impairment charges recorded in previous fiscal years. The fiscal 2009 impairment charge was triggered by declining conditions in the commercial aviation industry and a slowdown in the sales volume of these assets during the fiscal year. As of May 31, 2009 and 2008, the carrying value of these impaired parts and engines was $7,900 and $20,900, respectively.
During the first quarter of fiscal 2007, we recorded an impairment charge related to certain engine parts in the amount of $4,750. These parts were also acquired prior to September 11, 2001, and were subject to impairment charges recorded in fiscal 2003 and 2002.2001. The fiscal 2007 impairment charge was triggered by our decision to aggressively pursue the liquidation of this inventory. We made thisthe decision to recognize the impairment due to the impact of persistently high fuel costs and fewer operators onreduced demand for these parts, as well as to better align human and physical resources with higher potential opportunities in the rapidly growing Aviation Supply Chain segment. We had previously recorded impairment charges of $5,360 during the fourth quarter of fiscal 2003 and $75,900 during the second quarter of fiscal 2002 related to engine and airframe parts and whole engines.
AAR CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands, except per share amounts)
13. Impairment Charges (Continued)
A summary of the carrying value of impaired inventory and engines, after giving effect to all impairment charges recorded by us in fiscal 2007, 2003 and 2002 is as follows:
|
| May 31, |
| May 31, |
| May 31, |
| November 30, |
| ||||||
|
| 2007 |
| 2006 |
| 2005 |
| 2001 |
| ||||||
Net impaired inventory and engines |
| $ | 27,400 |
| $ | 36,000 |
| $ | 43,200 |
|
| $ | 89,600 |
|
|
Proceeds from sales of impaired inventory and engines for the twelve-month periods ended May 31, 2007, 2006, and 2005 were $3,800, $7,300 and $7,900, respectively.
Other Impairment and Gain on Extinguishment of Debt
During the first quarter of fiscal 2007, we restructured the lease and non-recourse debt on a wholly-owned wide-body aircraft. This aircraft was originally purchased prior to September 11, 2001. As a result of the restructuring of the lease and debt, we recorded a $2,927 gain on extinguishment of debt. Further, we decided to offer this aircraft for sale and recorded a $2,902 impairment charge to reduce the carrying value of the aircraft to its estimated net realizable value. This aircraft was sold during the third quarter of fiscal 2008.
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
14. Other Noncurrent Assets
At May 31, 2007, the carrying value of this aircraft is $26,4302009 and is reported in equipment on or available for short term lease on the consolidated balance sheets.
14. Other Noncurrent Assets
At May 31, 2007 and 2006,2008, other noncurrent assets consisted of the following:
|
| May 31, |
| May 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| 2007 |
| 2006 |
| 2009 | 2008 | |||||||
Capitalized program development costs |
| $ | 24,343 |
| $ | 7,459 |
| $ | 38,034 | $ | 43,421 | |||
Cash surrender value of life insurance |
| 9,729 |
| 8,444 |
| 12,193 | 11,299 | |||||||
Investment in leveraged lease |
| 9,096 |
| 9,236 |
| 9,006 | 8,687 | |||||||
Notes receivable |
| 6,303 |
| 11,026 |
| 7,341 | 2,236 | |||||||
Debt issuance costs |
| 5,327 |
| 5,956 |
| 6,503 | 10,294 | |||||||
Licenses and rights |
| 1,871 |
| 2,357 |
| 768 | 1,447 | |||||||
Other |
| 12,985 |
| 23,577 |
| 11,108 | 18,349 | |||||||
|
| $ | 69,654 |
| $ | 68,055 |
| |||||||
$ | 84,953 | $ | 95,733 | |||||||||||
Program Development Costs
In June 2005, we announced that our Cargo Systems business was selected to provide cargo handling systems for the new A400M cargo aircraft. We are teaming witha subcontractor to PFW on thethis Airbus program. Our portion of the revenue from this program is expected to exceed $300,000 through fiscal 2015,2020, based on sales projections of the A400M. During fiscal 2009, Airbus agreed to reimburse AAR and PFW 20.0 million euros for costs incurred to develop the A400M system. AAR's share of this reimbursement was $18,700 and reduced the amount of capitalized program development costs. As of May 31, 2007,2009, we have incurredcapitalized, net of the $18,700 reimbursement, approximately $24,000$38,000 of costs associated with the engineering and development of the cargo system and have capitalized these costs in accordance with SOP 81-1 “Accounting"Accounting for Performance of Construction—Type and Certain Production—Type Contracts”.Contracts." Sales and related cost of sales will be recognized on the units of delivery method.
57
AAR CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(Dollars in thousands, exept per share amounts)
15. Business Segment Information
Segment Reporting
We report our activities in four business segments: Aviation Supply Chain; Maintenance, Repair and Overhaul; Structures and Systems; and Aircraft Sales and Leasing.
Sales in the Aviation Supply Chain segment are derived from the sale and lease of a wide variety of new, overhauled and repaired engine and airframe parts and components to the commercial aviation and defense markets, as well as the repair and overhaul of a wide range of commercial and military aircraft airframe parts.parts and components. We also provideoffer customized programs for inventory supply and management programs and performance-based logistics programs for engine and airframe parts and components.logistics. Sales also include the sale and lease of commercial jet engines. Cost of sales consists principally of the cost of product (primarily aircraft and engine parts), direct labor and overhead (primarily indirect labor, facility cost and insurance).
Sales in the Maintenance, Repair and Overhaul segment are principally derived from aircraft maintenance, and storageincluding painting, and the repair and overhaul of most commercial landing gear types.gear. Cost of sales consists principally of the cost of product (primarily replacement aircraft parts), direct labor and overhead.
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except per share amounts)
15. Business Segment Information (Continued)
Sales in the Structures and Systems segment are derived from the manufactureengineering, design and salemanufacture of containers, pallets and shelters used to support the U.S. military’smilitary's tactical deployment requirements, complex machined and fabricated parts, components and sub-systems for various aerospace and defense programs and other applications, in-plane cargo loading and handling systems for commercial and military applications and composite products for aviation and industrial use. Cost of sales consists principally of the cost of product, direct labor and overhead.
Sales in the Aircraft Sales and Leasing segment are derived from the sale and lease of commercial aircraft and technical and advisory services. Cost of sales consists principally of the cost of product (aircraft), labor and the cost of lease revenue (primarily depreciation lease expense and insurance).
The accounting policies for the segments are the same as those described in Note 1. Our chief operating decision making officer (Chief Executive Officer) evaluates performance based on the reportable segments and utilizes gross profit (loss) as a primary profitability measure. The expenses and assets related to corporate activities are not allocated to the segments. Our reportable segments are aligned principally around differences in products and services.
Gross profit (loss) is calculated by subtracting cost of sales from sales. Selected financial information for each reportable segment is as follows:
|
| For the Year Ended May 31, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Net sales: |
|
|
|
|
|
|
| |||
Aviation Supply Chain |
| $ | 543,674 |
| $ | 461,166 |
| $ | 390,060 |
|
Maintenance, Repair and Overhaul |
| 211,516 |
| 182,258 |
| 111,932 |
| |||
Structures and Systems |
| 264,083 |
| 228,747 |
| 193,296 |
| |||
Aircraft Sales and Leasing |
| 41,896 |
| 13,347 |
| 45,139 |
| |||
|
| $ | 1,061,169 |
| $ | 885,518 |
| $ | 740,427 |
|
| For the Year Ended May 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | ||||||||
Net sales: | |||||||||||
Aviation Supply Chain | $ | 583,965 | $ | 606,490 | $ | 543,674 | |||||
Maintenance, Repair and Overhaul | 346,996 | 300,871 | 211,516 | ||||||||
Structures and Systems | 477,631 | 389,428 | 264,083 | ||||||||
Aircraft Sales and Leasing | 15,384 | 88,130 | 41,896 | ||||||||
$ | 1,423,976 | $ | 1,384,919 | $ | 1,061,169 | ||||||
| For the Year Ended May 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | ||||||||
Gross profit (loss): | |||||||||||
Aviation Supply Chain | $ | 130,411 | $ | 145,091 | $ | 114,383 | |||||
Maintenance, Repair and Overhaul | 51,767 | 43,967 | 29,915 | ||||||||
Structures and Systems | 74,158 | 54,673 | 36,021 | ||||||||
Aircraft Sales and Leasing | (14,721 | ) | 20,341 | 3,828 | |||||||
$ | 241,615 | $ | 264,072 | $ | 184,147 | ||||||
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, exeptexcept per share amounts)
15. Business Segment Information (Continued)
|
| For the Year Ended May 31, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Gross profit: |
|
|
|
|
|
|
| |||
Aviation Supply Chain |
| $ | 114,383 |
| $ | 99,255 |
| $ | 67,672 |
|
Maintenance, Repair and Overhaul |
| 29,915 |
| 25,914 |
| 14,414 |
| |||
Structures and Systems |
| 36,021 |
| 33,711 |
| 35,184 |
| |||
Aircraft Sales and Leasing |
| 3,828 |
| 4,341 |
| 3,305 |
| |||
|
| $ | 184,147 |
| $ | 163,221 |
| $ | 120,575 |
|
| May 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | ||||||||
Total assets: | |||||||||||
Aviation Supply Chain | $ | 554,472 | $ | 539,836 | $ | 449,918 | |||||
Maintenance, Repair and Overhaul | 217,540 | 182,693 | 124,482 | ||||||||
Structures and Systems | 314,711 | 319,915 | 190,386 | ||||||||
Aircraft Sales and Leasing | 117,682 | 143,781 | 156,357 | ||||||||
Corporate | 173,106 | 175,785 | 146,490 | ||||||||
$ | 1,377,511 | $ | 1,362,010 | $ | 1,067,633 | ||||||
|
| May 31, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Total assets: |
|
|
|
|
|
|
| |||
Aviation Supply Chain |
| $ | 449,918 |
| $ | 422,519 |
| $ | 298,477 |
|
Maintenance, Repair and Overhaul |
| 124,482 |
| 91,332 |
| 86,271 |
| |||
Structures and Systems |
| 190,386 |
| 113,189 |
| 97,780 |
| |||
Aircraft Sales and Leasing |
| 156,357 |
| 141,158 |
| 119,581 |
| |||
Corporate |
| 146,490 |
| 210,621 |
| 130,121 |
| |||
|
| $ | 1,067,633 |
| $ | 978,819 |
| $ | 732,230 |
|
| For the Year Ended May 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | ||||||||
Capital expenditures: | |||||||||||
Aviation Supply Chain | $ | 3,304 | $ | 3,640 | $ | 5,376 | |||||
Maintenance, Repair and Overhaul | 6,391 | 6,487 | 4,742 | ||||||||
Structures and Systems | 16,023 | 15,184 | 18,601 | ||||||||
Aircraft Sales and Leasing | 15 | 4 | 4 | ||||||||
Corporate | 1,802 | 5,019 | 1,168 | ||||||||
$ | 27,535 | $ | 30,334 | $ | 29,891 | ||||||
|
| For the��Year Ended May 31, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Capital expenditures: |
|
|
|
|
|
|
| |||
Aviation Supply Chain |
| $ | 5,376 |
| $ | 5,093 |
| $ | 3,777 |
|
Maintenance, Repair and Overhaul |
| 4,742 |
| 2,556 |
| 2,817 |
| |||
Structures and Systems |
| 18,601 |
| 6,806 |
| 5,222 |
| |||
Aircraft Sales and Leasing |
| 4 |
| — |
| 48 |
| |||
Corporate |
| 1,168 |
| 1,841 |
| 1,169 |
| |||
|
| $ | 29,891 |
| $ | 16,296 |
| $ | 13,033 |
|
| For the Year Ended May 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | ||||||||
Depreciation and amortization: | |||||||||||
Aviation Supply Chain | $ | 13,005 | $ | 15,440 | $ | 12,449 | |||||
Maintenance, Repair and Overhaul | 6,531 | 4,446 | 2,939 | ||||||||
Structures and Systems | 11,011 | 8,231 | 4,939 | ||||||||
Aircraft Sales and Leasing | 5,556 | 8,375 | 8,725 | ||||||||
Corporate | 4,448 | 3,460 | 3,147 | ||||||||
$ | 40,551 | $ | 39,952 | $ | 32,199 | ||||||
|
| For the Year Ended May 31, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Depreciation and amortization: |
|
|
|
|
|
|
| |||
Aviation Supply Chain |
| $ | 12,449 |
| $ | 11,849 |
| $ | 10,768 |
|
Maintenance, Repair and Overhaul |
| 2,939 |
| 2,834 |
| 2,534 |
| |||
Structures and Systems |
| 4,939 |
| 4,929 |
| 4,481 |
| |||
Aircraft Sales and Leasing |
| 8,725 |
| 6,553 |
| 7,315 |
| |||
Corporate |
| 3,147 |
| 3,057 |
| 4,080 |
| |||
|
| $ | 32,199 |
| $ | 29,222 |
| $ | 29,178 |
|
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, exeptexcept per share amounts)
15. Business Segment Information (Continued)
The following table reconciles segment gross profit to consolidated income before provision for income taxes.
|
| For the Year Ended May 31, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Segment gross profit |
| $ | 184,147 |
| $ | 163,221 |
| $ | 120,575 |
|
Selling, general and administrative and other |
| (105,091 | ) | (99,551 | ) | (86,226 | ) | |||
Earnings from aircraft joint ventures |
| 10,952 |
| 1,502 |
| 568 |
| |||
Gain on sale of product line |
| 5,358 |
| — |
| — |
| |||
Gain (loss) on extinguishment of debt |
| 2,927 |
| (3,893 | ) | 3,562 |
| |||
Interest expense |
| (16,701 | ) | (18,004 | ) | (16,917 | ) | |||
Interest income and other |
| 5,829 |
| 3,236 |
| 1,502 |
| |||
Income before provision for income taxes |
| $ | 87,421 |
| $ | 46,511 |
| $ | 23,064 |
|
| For the Year Ended May 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | ||||||||
Segment gross profit | $ | 241,615 | $ | 264,072 | $ | 184,147 | |||||
Selling, general and administrative and other | (147,219 | ) | (135,502 | ) | (105,091 | ) | |||||
Earnings from joint ventures | 8,496 | 5,948 | 10,952 | ||||||||
Gain on sale of product line | — | — | 5,358 | ||||||||
Gain (loss) on extinguishment of debt | 35,316 | (205 | ) | 2,927 | |||||||
Interest expense | (18,371 | ) | (20,578 | ) | (16,701 | ) | |||||
Interest income | 1,465 | 1,821 | 4,914 | ||||||||
Gain (loss) on sale of investments | (1,393 | ) | 532 | 915 | |||||||
Income before provision for income taxes | $ | 119,909 | $ | 116,088 | $ | 87,421 | |||||
No single non-government customer represents 10% or more of total sales in any of the last three fiscal years. Sales to the U.S. Department of Defense and its contractors by segment are as follows:
|
| For the Year Ended May 31, |
| For the Year Ended May 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| 2007 |
| 2006 |
| 2005 |
| 2009 | 2008 | 2007 | ||||||||||
Aviation Supply Chain |
| $ | 75,185 |
| $ | 77,340 |
| $ | 69,027 |
| $ | 114,786 | $ | 99,752 | $ | 75,185 | ||||
Maintenance, Repair and Overhaul |
| 32,184 |
| 31,089 |
| 25,976 |
| 36,453 | 33,660 | 32,184 | ||||||||||
Structures and Systems |
| 217,911 |
| 185,349 |
| 154,213 |
| 381,811 | 294,249 | 217,911 | ||||||||||
Aircraft Sales and Leasing | — | 10,840 | — | |||||||||||||||||
$ | 533,050 | $ | 438,501 | $ | 325,280 | |||||||||||||||
|
| $ | 325,280 |
| $ | 293,778 |
| $ | 249,216 |
| ||||||||||
Percentage of total sales |
| 30.7 | % | 33.2 | % | 33.7 | % | 37.4 | % | 31.7 | % | 30.7 | % | |||||||
Geographic Data
| May 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | ||||||
Long-lived assets: | ||||||||
United States | $ | 517,616 | $ | 560,181 | ||||
Europe | 8,369 | 18,113 | ||||||
Other | 214 | 285 | ||||||
$ | 526,199 | $ | 578,579 | |||||
Geographic Data
|
| May 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
Long-lived assets: |
|
|
|
|
| ||
United States |
| $ | 410,285 |
| $ | 343,121 |
|
Europe |
| 11,440 |
| 11,090 |
| ||
Other |
| 187 |
| 154 |
| ||
|
| $ | 421,912 |
| $ | 354,365 |
|
Export sales from our U.S. operationsSales to unaffiliated customers in foreign countries, the majority of which are located in Europe, the Middle East, Canada, Mexico, South America and Asia (including sales through foreign sales offices of domestic subsidiaries), were approximately $220,974 (20.8%$302,016 (21.2% of total sales), $180,752 (20.4%$330,132 (23.7% of total sales) and $178,025 (24.0%$291,892 (27.5% of total sales) in fiscal 2007, 20062009, 2008 and 2005,2007, respectively.
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, exeptexcept per share amounts)
16. Selected Quarterly Data (Unaudited)
The unaudited selected quarterly data for fiscal years ended May 31, 20072009 and 20062008 follows.
Fiscal 2009
Fiscal 2007 |
| |||||||||||||||||||||||||||||||||
Quarter |
|
|
| Sales |
| Gross Profit |
| Net Income |
| Diluted Earnings |
| Sales | Gross Profit | Income from Continuing Operations | Diluted Earnings Per Share— Continuing Operations | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
First | First |
| $ | 240,242 |
|
| $ | 35,371 |
|
|
| $ | 12,229 |
|
|
| $ | 0.30 |
|
| $ | 359,904 | $ | 67,138 | $ | 18,731 | $ | 0.45 | ||||||
Second | Second |
| 244,272 |
|
| 45,903 |
|
|
| 13,982 |
|
|
| 0.34 |
|
| 353,572 | 48,809 | 21,352 | 0.51 | ||||||||||||||
Third | Third |
| 270,978 |
|
| 47,275 |
|
|
| 15,519 |
|
|
| 0.37 |
|
| 338,792 | 64,625 | 20,024 | 0.48 | ||||||||||||||
Fourth | Fourth |
| 305,677 |
|
| 55,598 |
|
|
| 17,717 |
|
|
| 0.42 |
|
| 371,708 | 61,043 | 20,493 | 0.49 | ||||||||||||||
|
|
| $ | 1,061,169 |
|
| $ | 184,147 |
|
|
| $ | 59,447 |
|
|
| $ | 1.42 |
|
| ||||||||||||||
$ | 1,423,976 | $ | 241,615 | $ | 80,600 | $ | 1.92 | |||||||||||||||||||||||||||
Fiscal 2008
Fiscal 2006 |
| |||||||||||||||||||||||||||||||||
Quarter |
|
|
| Sales |
| Gross Profit |
| Net Income |
| Diluted Earnings |
| Sales | Gross Profit | Income from Continuing Operations | Diluted Earnings Per Share— Continuing Operations | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
First | First |
| $ | 197,073 |
|
| $ | 34,418 |
|
|
| $ | 5,335 |
|
|
| $ | 0.15 |
|
| $ | 305,960 | $ | 56,540 | $ | 15,255 | $ | 0.36 | ||||||
Second | Second |
| 215,394 |
|
| 37,621 |
|
|
| 7,944 |
|
|
| 0.22 |
|
| 310,647 | 60,350 | 17,888 | 0.42 | ||||||||||||||
Third | Third |
| 223,398 |
|
| 43,106 |
|
|
| 9,195 |
|
|
| 0.24 |
|
| 376,626 | 70,305 | 20,285 | 0.47 | ||||||||||||||
Fourth | Fourth |
| 249,653 |
|
| 48,076 |
|
|
| 13,349 |
|
|
| 0.32 |
|
| 391,686 | 76,877 | 22,317 | 0.52 | ||||||||||||||
|
|
| $ | 885,518 |
|
| $ | 163,221 |
|
|
| $ | 35,823 |
|
|
| $ | 0.96 |
|
| ||||||||||||||
$ | 1,384,919 | $ | 264,072 | $ | 75,745 | $ | 1.77 | |||||||||||||||||||||||||||
17. Allowance for Doubtful Accounts
| May 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2007 | ||||||||
Balance, beginning of year | $ | 5,977 | $ | 3,885 | $ | 6,466 | |||||
Provision charged to operations | 4,762 | 3,460 | 1,500 | ||||||||
Deductions for accounts written off, net of recoveries | (6,062 | ) | (1,368 | ) | (4,081 | ) | |||||
Balance, end of year | $ | 4,677 | $ | 5,977 | $ | 3,885 | |||||
|
| May 31, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Balance, beginning of year |
| $ | 6,466 |
| $ | 5,863 |
| $ | 6,310 |
|
Provision charged to operations |
| 1,500 |
| 2,580 |
| 2,391 |
| |||
Deductions for accounts written off, net of recoveries |
| (4,081 | ) | (1,977 | ) | (2,838 | ) | |||
Balance, end of year |
| $ | 3,885 |
| $ | 6,466 |
| $ | 5,863 |
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. Not Applicable.
ITEM 9A. 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 May 31, 2007.2009. This evaluation was carried out under the supervision and with participation of our Chief Executive Officer and Chief Financial Officer. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Therefore, effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of May 31, 2007,2009, ensuring that information required to be disclosed in the reports that are filed under the Act is recorded, processed, summarized and reported in a timely manner.
There were no changes in our internal control over financial reporting during the three-month period ended May 31, 20072009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company’sCompany's Common Stock is listed on the New York Stock Exchange (“NYSE”("NYSE") under the ticker symbol “AIR”"AIR". On October 27, 2006,November 3, 2008, our Chief Executive Officer certified to the NYSE pursuant to Rule 303A.12(a) that, as of the date of that certification, he was not aware of any violation by the Company of the NYSE’sNYSE's Corporate Governance listings standards.
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of AAR CORP. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Act. The Company’sCompany's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems which are determined to be effective provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of its internal control over financial reporting based on criteria for effective internal control over financial reporting described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our assessment, management concluded that the Company maintained effective internal control over financial reporting as of May 31, 2007. Our assessment of2009.
KPMG LLP, our independent registered public accounting firm, has issued a report on the effectiveness of our internal control over financial reporting as of May 31, 2007, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in itsreporting. That report which is included herein.
The scope of management’s assessment ofappears on the effectiveness of internal control over financial reporting includes all of our Company’s consolidated subsidiaries except for Brown International Corporation (“Brown”), a business acquired by our Company on April 2, 2007. Our Company’s consolidated net sales for the year-ended May 31, 2007 were $1,061,169 of which Brown represented $12,368. Our Company’s consolidated total assets as of May 31, 2007 were $1,067,633, of which Brown represented $33,043.following page.
Report of Independent Registered Public Accounting Firm
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF AAR CORP.:
We have audited management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that AAR CORP. and subsidiariessubsidiaries' (the Company) maintained effective internal control over financial reporting as of May 31, 2007,2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’sCompany's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.reporting, included in the accompanying Management Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control andbased on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’scompany's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’scompany's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of May 31, 2007, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by COSO. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2007,2009, based on criteria established in Internal Control—Integrated Framework issued by COSO.
The scope of management’s assessment of the effectiveness of internal control over financial reporting as of May 31, 2007 includes all of the Company’s consolidated subsidiaries except for Brown International Corporation (Brown), a business acquired by the Company on April 2, 2007. The Company’s consolidated net sales for the year-ended May 31, 2007 were $1,061,169, of which Brown represented $12,368. The Company’s consolidated total assets as of May 31, 2007 were $1,067,633 of which Brown represented $33,043. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over the financial reporting of Brown.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of May 31, 20072009 and 2006,2008, and the related consolidated statements of operations, stockholders’stockholders' equity and cash flows for each of the years in the three-year period ended May 31, 2007,2009, and our report dated July 19, 200715, 2009 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Chicago, Illinois
July 19, 200715, 2009
Not applicable.
64
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item regarding the Directors of the Company and nominees for election of the Board is incorporated by reference to the information contained under the caption “Board of Directors”"Information about the Nominees and Continuing Directors" in our definitive proxy statement for the 20072009 Annual Meeting of Stockholders.
The information required by this item regarding the Executive Officers of the Company appears under the caption “Executive"Executive Officers of the Registrant”Registrant" in Part I, Item 4 above.
The information required by this item regarding the compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the information contained under the caption “Section"Section 16(a) Beneficial Ownership Reporting Compliance”Compliance" in our definitive proxy statement for the 20072009 Annual Meeting of Stockholders.
The information required by this item regarding the identification of the Audit Committee as a separately-designated standing committee of the Board is incorporated by reference to the information contained under the caption “Board Committees” in our definitive proxy statement for the 2007 Annual Meeting of Stockholders, and information required by this item regarding the status of one or more members of the Audit Committee being an “audit"audit committee financial expert”expert" is incorporated by reference to the information contained under the caption “Board Committees”"Corporate Governance—Board Committees" in our definitive proxy statement for the 20072009 Annual Meeting of Stockholders.
The information required by this item regarding our Code of Business Ethics and Conduct applicable to our directors, officers and employees is incorporated by reference to the information contained under the caption “Corporate Governance Information”"Corporate Governance—Code of Business Conduct and Ethics" in our definitive proxy statement for the 20072009 Annual Meeting of Stockholders.
There have been no material changes to the procedures by which stockholders may recommend nominees to the Company’sCompany's board of directors. For a description of those procedures, see the caption “Board of Directors”"Corporate Governance—Board Committees—Nominating and Governance Committee" in our definitive proxy statement for the 20072009 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the information contained under the captions “Executive following captions: (a) "Executive Compensation—Compensation Committee's Report on Executive Compensation," (b) "Executive Compensation—Summary Compensation Table," (c) "Executive Compensation—Grants of Plan-Based Awards Table," (d) "Executive Compensation—Outstanding Equity Awards at Fiscal Year End Table," (e) "Executive Compensation—Option Exercises and Other Information”, “CompensationStock Vested Table," (f) "Executive Compensation—Pension Benefits Table," (g) "Executive Compensation—Non-Qualified Deferred Compensation Table," (h) "Executive Compensation—Potential Payments Upon Termination of Employment or Change in Control of the Company," (i) "Corporate Governance—Director Compensation," and (j) "Corporate Governance—Compensation Committee Report”, “EmploymentInterlocks and Other Agreements” and “Directors’ Compensation”Insider Participation" in our definitive proxy statement for the 20072009 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference to the information contained under the caption “Security "Security
Ownership of Management and Others”Others" in our definitive proxy statement for the 20072009 Annual Meeting of Stockholders.
The following table provides information as of May 31, 20072009 with respect to the Company’sCompany's compensation plans under which equity securities of the Company are authorized for issuance:issuance (shares in thousands):
| Equity Compensation Plan Information | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| Equity Compensation Plan Information |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||||||||||||||
|
| Number of securities to |
| Weighted-average |
| Number of securities |
| (a) | (b) | (c) | ||||||||||||||
Equity compensation plans approved by security holders |
|
| 2,135 |
|
|
| $ | 18.30 |
|
|
| 3,368 |
|
| 1,225 | $ | 21.18 | 3,347 | ||||||
Equity compensation plans not approved by security holders |
|
| — |
|
|
| — |
|
|
| — |
|
| — | — | — | ||||||||
Total |
|
| 2,135 |
|
|
| $ | 18.30 |
|
|
| 3,368 |
|
| 1,225 | $ | 21.18 | 3,347 | ||||||
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the information contained under the captions “Board of Directors—"Corporate Governance—Director Independence”“Independence" and “Corporate Governance Information—"Corporate Governance—Related Party Transactions”Person Transaction Policy" in our definitive proxy statement for the 20072009 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the information contained under the caption “Independent"Independent Registered Public Accounting Firm Fees and Services”Services" in our definitive proxy statement for the 20072009 Annual Meeting of Stockholders.
66
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) Financial Statements and Financial Statement Disclosures
The following financial statements are filed as a part of this report under “Item"Item 8—Financial Statements and Supplementary Data”Data".
Page | ||||
---|---|---|---|---|
Report of Independent Registered Public Accounting Firm |
| 29 | ||
Financial Statements—AAR CORP. and Subsidiaries: | ||||
Consolidated Statements of Operations for the three years ended May 31, |
| 30 | ||
Consolidated Balance Sheets as of May 31, |
| 31-32 | ||
Consolidated Statements of |
| 33 | ||
Consolidated Statements of Cash Flows for the three years ended May 31, |
| 34 | ||
Notes to Consolidated Financial Statements |
| 35-66 | ||
Selected quarterly data (unaudited) for the years ended May 31, |
| 66 |
The Exhibits filed as part of this report are set forth in the Exhibit Index contained elsewhere herein. Management contracts and compensatory arrangements have been marked with an asterisk (*) on the Exhibit Index.
67
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
AAR CORP. (Registrant) | ||||
Date: July | ||||
BY: | /s/ DAVID P. STORCH | |||
David P. Storch | ||||
Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| ||||||||
Signature | Title | Date | ||||||
---|---|---|---|---|---|---|---|---|
| ||||||||
/s/ David P. Storch | Chairman and Chief Executive Officer; |
| ||||||
| ||||||||
/s/ TIMOTHY J. ROMENESKO Timothy J. Romenesko |
| |||||||
| ||||||||
Richard J. Poulton |
| |||||||
| ||||||||
Michael J. Sharp |
| |||||||
/s/ NORMAN R. BOBINS Norman R. Bobins | Director | |||||||
Michael R. Boyce |
| |||||||
| ||||||||
James G. Brocksmith, Jr. |
| July 16, 2009 | ||||||
| ||||||||
Gerald F. Fitzgerald, Jr. |
| |||||||
| ||||||||
Ronald R. Fogleman |
| |||||||
| ||||||||
James E. Goodwin |
| |||||||
| ||||||||
Patrick J. Kelly |
| |||||||
| ||||||||
Marc J. Walfish |
| |||||||
| ||||||||
Ronald B. Woodard |
|
| Index | | Exhibits | |||
---|---|---|---|---|---|---|
3. | Articles of Incorporation and By-Laws | 3.1 | Restated Certificate of Incorporation.14 | |||
3.2 | By-Laws, as amended and restated through July 9, 2008.32 | |||||
4. | Instruments defining the rights of security holders | 4.1 | Restated Certificate of Incorporation (see Exhibit 3.1). | |||
4.2 | By-Laws, as amended and restated through July 9, 2008 (See Exhibit 3.2). | |||||
4.3 | Rights Agreement between the Registrant and Computershare Trust Company dated July 11, 2007.25 | |||||
4.4 | Indenture dated October 15, 1989 between the Registrant and U.S. Bank Trust National Association (formerly known as First Trust, National Association, as successor in interest to Continental Bank, National Association) as Trustee, relating to debt securities;1 First Supplemental Indenture thereto dated August 26, 1991;2 Second Supplemental Indenture thereto dated December 10, 1997.5 | |||||
4.5 | Note Purchase Agreement dated May 1, 2001 between Registrant and various purchasers, relating to the issuance of debt securities to institutional investors.7 | |||||
4.6 | Form of 2.875% Senior Convertible Note.12 | |||||
4.7 | Indenture between AAR CORP. as Issuer and U.S. Bank National Association, as Trustee dated February 3, 2004.12 | |||||
4.8 | Loan Agreement dated July 15, 2005 between Registrant's Subsidiary, AAR Wood Dale LLC and Principal Commercial Funding, LLC.16 | |||||
4.9 | Form of 1.75% Senior Convertible Note.19 | |||||
4.10 | Indenture between AAR CORP. and U.S. Bank, National Association, as trustee, dated February 1, 2006.19 | |||||
4.11 | Credit Agreement dated August 31, 2006 among AAR CORP., Bank of America National Association (as successor by merger to LaSalle Bank National Association), as administrative agent, and the various financial institutions party thereto,22 as amended August 31, 2007,26 and March 14, 2008.29 | |||||
4.12 | Form of 1.625% Convertible Senior Note due 2014.28 | |||||
4.13 | Form of 2.25% Convertible Senior Note due 2016.28 | |||||
4.14 | Indenture for 1.625% Convertible Senior Notes due 2014 between AAR CORP. and U.S. Bank National Association, as trustee, dated as of February 11, 2008.28 | |||||
4.15 | Indenture for 2.25% Convertible Senior Notes due 2016 between AAR CORP. and U.S. Bank National Association, as trustee, dated as of February 11, 2008.28 |
Index | Exhibits | |||||
---|---|---|---|---|---|---|
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant is not filing certain documents. The Registrant agrees to furnish a copy of each such document upon the request of the Commission. | ||||||
10. | Material Contracts | 10.1* | Amended and Restated AAR CORP. Stock Benefit Plan effective October 1, 2001,8 as amended June 27, 2003,10 May 5, 2005,15 July 12, 2005,20 June 23, 2006,24 January 23, 200724 and January 27, 2007.29 | |||
10.2* | AAR CORP. Directors' Retirement Plan, dated April 14, 1992,3 amended May 26, 20006 and April 10, 2001.7 | |||||
10.3* | AAR CORP. Supplemental Key Employee Retirement Plan, as Amended and Restated effective January 1, 2005,30 as amended July 11, 200733 and October 17, 2007.38 | |||||
10.4* | Amended and Restated Severance and Change in Control Agreement dated August 1, 2000 between the Registrant and Michael J. Sharp.7 | |||||
10.5* | Amended and Restated Severance and Change in Control Agreement dated April 11, 2000 between the Registrant and Timothy J. Romenesko.6 | |||||
10.6* | AAR CORP. Nonemployee Directors' Deferred Compensation Plan, as Amended and Restated effective January 1, 2005.23 | |||||
10.7* | Severance and Change in Control Agreement dated January 14, 2000 between the Registrant and James J. Clark.9 | |||||
10.8 | Indenture dated October 3, 2003 between AAR Distribution, Inc. and iStar Garden City LLC.11 | |||||
10.9 | Lease Agreement dated October 3, 2003 between AAR Allen Services, Inc., as tenant and iStar Garden City LLC, as Landlord, and related Guaranty dated October 3, 2003 from Registrant to iStar Garden City LLC.11 | |||||
10.10 | Lease Agreement by and between Indianapolis Airport Authority and AAR Aircraft Services, Inc. dated as of June 14, 2004, as amended January 21, 200515 and May 19, 2006.23 | |||||
10.11* | Form of Non-Qualified Stock Option Agreement.15 | |||||
10.12* | Form of Restricted Stock Agreement.15 | |||||
10.13* | Form of Performance Restricted Stock Agreement.30 | |||||
10.14* | Form of Non-Employee Director Non-Qualified Stock Option Agreement.18 | |||||
10.15* | Form of Director Restricted Stock Agreement.20 | |||||
10.16* | Form of Split Dollar Insurance Agreement.23 | |||||
10.17 | Confirmation of OTC Convertible Note Hedge Transaction for 2014 Notes, dated February 5, 2008, by and between AAR CORP., and Merrill Lynch Financial Markets, Inc.36 |
68
| Index | | Exhibits | |||
---|---|---|---|---|---|---|
10.18 | Confirmation of OTC Convertible Note Hedge Transaction for 2016 Notes, dated February 5, 2008, by and between AAR CORP., and Merrill Lynch Financial Markets, Inc.27 | |||||
10.19 | Confirmation of OTC Warrant Transaction for 2014 Notes, dated February 5, 2008, by and between AAR CORP., and Merrill Lynch Financial Markets, Inc.27 | |||||
10.20 | Confirmation of OTC Warrant Transaction for 2016 Notes, dated February 5, 2008, by and between AAR CORP., and Merrill Lynch Financial Markets, Inc.27 | |||||
10.21* | Amended and Restated Letter Agreement dated as of June 5, 2008 between AAR CORP. and Howard A. Pulsifer.27 | |||||
10.22 | Form of Severance and Change in Control Agreement effective from and after July 9, 2008 (entered into between the Registrant and each of Richard J. Poulton and Robert J. Regan).32 | |||||
10.23 | Form of Directors' and Officers' Indemnification Agreement.33 | |||||
10.24 | Amended and Restated Employment Agreement dated May 31, 2006 between Registrant and David P. Storch, amended December 18, 2008.34 | |||||
10.25 | Form of Amendment to the Severance and Change in Control Agreement (applicable to Messrs. Romenesko, Clark and Sharp).34 | |||||
10.26 | Form of Amendment to the Severance and Change in Control Agreement (applicable to Messrs. Poulton and Regan).34 | |||||
21. | Subsidiaries of the Registrant | 21.1 | Subsidiaries of AAR CORP. (filed herewith). | |||
23. | Consents of experts and counsel | 23.1 | Consent of Independent Registered Public Accounting Firm (filed herewith). | |||
31. | Rule 13a-14(a)/ 15(d)-14(a) Certifications | 31.1 | Section 302 Certification dated July 16, 2009 of David P. Storch, Chief Executive Officer of Registrant (filed herewith). | |||
31.2 | Section 302 Certification dated July 16, 2009 of Richard J. Poulton, Vice President and Chief Financial Officer of Registrant (filed herewith). | |||||
32. | Rule 13a-14(b)/ 15d-14(b) Certifications | 32.1 | Section 906 Certification dated July 16, 2009 of David P. Storch, Chief Executive Officer of Registrant (filed herewith). | |||
32.2 | Section 906 Certification dated July 16, 2009 of Richard J. Poulton, Vice President and Chief Financial Officer of Registrant (filed herewith). |
| Index |
|
|
| Exhibits |
| |
3. |
| Articles of Incorporation and By-Laws |
| 3 | .1 | Restated Certificate of Incorporation; Amendments thereto dated November 3, 1987, October 19, 1988, October 16, 1989 and November 3, 1999.20 |
|
|
|
|
| 3 | .2 | By-Laws as amended (filed herewith). |
|
4. |
| Instruments defining the rights of security holders |
| 4 | .1 | Restated Certificate of Incorporation and Amendments (see Exhibit 3.1). |
|
|
|
|
| 4 | .2 | By-Laws as amended (See Exhibit 3.2). |
|
|
|
|
| 4 | .3 | Rights Agreement between the Registrant and the First National Bank of Chicago dated July 8, 19979 and amended October 16, 2001.14 |
|
|
|
|
| 4 | .4 | Indenture dated October 15, 1989 between the Registrant and U.S. Bank Trust National Association (formerly known as First Trust, National Association, as successor in interest to Continental Bank, National Association) as Trustee, relating to debt securities;3 First Supplemental Indenture thereto dated August 26, 1991;4 Second Supplemental Indenture thereto dated December 10, 1997.10 |
|
|
|
|
| 4 | .5 | Officers’ certificates relating to debt securities dated October 24, 1989,6 October 12, 1993,6 December 15, 1997,16 and May 30, 2003.16 |
|
|
|
|
| 4 | .6 | Note Purchase Agreement dated May 1, 2001 between Registrant and various purchasers, relating to the issuance of debt securities to institutional investors.13 |
|
|
|
|
| 4 | .7 | Form of 2.875% Senior Convertible Note.18 |
|
|
|
|
| 4 | .8 | Indenture between AAR CORP. as Issuer and U.S. Bank National Association, as Trustee dated February 3, 2004.18 |
|
|
|
|
| 4 | .9 | Registration Rights Agreement between AAR CORP. and Goldman, Sachs & Co., as representative of the several Purchasers, dated February 3, 2004. 18 |
|
|
|
|
| 4 | .10 | Loan Agreement dated July 15, 2005 between Registrant’s Subsidiary, AAR Wood Dale LLC and Principal Commercial Funding, LLC.22 |
|
|
|
|
| 4 | .11 | Purchase Agreement between AAR CORP. and Merrill Lynch & Co., for itself and as representative of the other Initial Purchasers, dated January 26, 2006. 26 |
|
|
|
|
| 4 | .12 | Form of 1.75% Senior Convertible Note.27 |
|
|
|
|
| 4 | .13 | Indenture between AAR CORP. and U.S. Bank, National Association, as trustee, dated February 1, 2006.27 |
|
|
|
|
| 4 | .14 | Registration Rights Agreement between AAR CORP. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the initial purchasers, dated February 1, 2006.27 |
|
|
|
| 4 | .15 | Credit Agreement dated August 31, 2006 among AAR CORP., LaSalle Bank National Association, as administrative agent, and the various financial institutions party thereto.31 |
| |
|
|
|
| 4 | .16 | Rights Agreement between the Registrant and Computershare Trust Company, N.A. dated July 11, 2007.33 |
|
|
|
|
|
|
| Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant is not filing certain documents. The Registrant agrees to furnish a copy of each such document upon the request of the Commission. |
|
10. |
| Material Contracts |
| 10 | .1* | Amended and Restated AAR CORP. Stock Benefit Plan effective October 1, 2001,14 as amended June 27, 2003,16 May 5, 2005,21 July 12, 2005,28 June 23, 2006 (filed herewith) and January 23, 2007 (filed herewith). |
|
|
|
|
| 10 | .2* | Death Benefit Agreement dated August 24, 1984 between the Registrant and Ira A. Eichner.1 Amendments thereto dated August 12, 1988,2 May 25, 199011 and October 9, 1996,11 and his agreement to terminate such Death Benefit Agreement dated May 30, 1999.11 |
|
|
|
|
| 10 | .3* | Trust Agreement dated August 12, 1988 between the Registrant and Ira A. Eichner2 and amendments thereto dated May 25, 1990,8 February 4, 1994,7 October 9, 199611 and May 30, 1999.11 |
|
|
|
|
| 10 | .4* | AAR CORP. Directors’ Retirement Plan, dated April 14, 1992,5 amended May 26, 200012 and April 10, 2001.13 |
|
|
|
|
| 10 | .5* | AAR CORP. Supplemental Key Employee Retirement Plan, as Amended and Restated effective January 1, 2005,30 as amended July 11, 2007 (filed herewith). |
|
|
|
|
| 10 | .6* | Amended and Restated Employment Agreement dated May 31, 2006 between the Registrant and David P. Storch.29 |
|
|
|
|
| 10 | .7* | Amended and Restated Severance and Change in Control Agreement dated April 11, 2000 between the Registrant and Howard A. Pulsifer.12 |
|
|
|
|
| 10 | .8* | Amended and Restated Severance and Change in Control Agreement dated August 1, 2000 between the Registrant and Michael J. Sharp.13 |
|
|
|
|
| 10 | .9* | Amended and Restated Severance and Change in Control Agreement dated April 11, 2000 between the Registrant and Timothy J. Romenesko.12 |
|
|
|
|
| 10 | .10* | AAR CORP. Nonemployee Directors’ Deferred Compensation Plan, as Amended and Restated effective January 1, 2005.32 |
|
|
|
|
| 10 | .11* | Severance and Change in Control Agreement dated January 14, 2000 between the Registrant and James J. Clark.15 |
|
|
|
| 10 | .12 | Indenture dated October 3, 2003 between AAR Distribution, Inc. and iStar Garden City LLC.17 |
| |
|
|
|
| 10 | .13 | Lease Agreement dated October 3, 2003 between AAR Allen Services, Inc., as tenant and iStar Garden City LLC, as Landlord, and related Guaranty dated October 3, 2003 from Registrant to iStar Garden City LLC.17 |
|
|
|
|
| 10 | .14* | Consulting Agreement dated October 19, 2005 between the Registrant and Ira A. Eichner.24 |
|
|
|
|
| 10 | .15* | Severance and Change in Control Agreement dated April 1, 2003 between AAR Manufacturing, Inc. and Mark McDonald.19 |
|
|
|
|
| 10 | .16 | Lease Agreement by and between Indianapolis Airport Authority and AAR Aircraft Services, Inc. dated as of June 14, 2004, as amended January 21, 200521 and May 19, 2006.32 |
|
|
|
|
| 10 | .17* | Form of Non-Qualified Stock Option Agreement.21 |
|
|
|
|
| 10 | .18* | Form of Restricted Stock Agreement.21 |
|
|
|
|
| 10 | .19* | Form of Performance Restricted Stock Agreement.23 |
|
|
|
|
| 10 | .20* | Form of Non-Employee Director Non-Qualified Stock Option Agreement.25 |
|
|
|
|
| 10 | .21* | Form of Director Restricted Stock Agreement.28 |
|
|
|
|
| 10 | .22* | Form of Split Dollar Insurance Agreement.32 |
|
|
|
|
| 10 | .23* | Form of Management Incentive Plan.32 |
|
21. |
| Subsidiaries of the Registrant |
| 21 | .1 | Subsidiaries of AAR CORP. (filed herewith). |
|
23. |
| Consents of experts and counsel |
| 23 | .1 | Consent of Independent Registered Public Accounting Firm (filed herewith). |
|
31. |
| Rule 13a-14(a)/15(d)-14(a) Certifications |
| 31 | .1 | Section 302 Certification dated July 20, 2007 of David P. Storch, Chief Executive Officer of Registrant (filed herewith). |
|
|
|
|
| 31 | .2 | Section 302 Certification dated July 20, 2007 of Richard J. Poulton, Vice President and Chief Financial Officer of Registrant (filed herewith). |
|
32. |
| Rule 13a-14(b)/15d-14(b) Certifications |
| 32 | .1 | Section 906 Certification dated July 20, 2007 of David P. Storch, Chief Executive Officer of Registrant (filed herewith). |
|
|
|
|
| 32 | .2 | Section 906 Certification dated July 20, 2007 of Richard J. Poulton, Vice President and Chief Financial Officer of Registrant (filed herewith). |
|
Notes:
2000.
4 Incorporated by reference to Exhibits to the Registrant’s Registration Statement on Form S-3 filed August 27, 1991.
5 Incorporated by reference to Exhibits to the Registrant’sRegistrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1992.
2001.
10-Q for the quarter ended November 30, 2001.
2003.
2004.
10 Incorporated by reference to Exhibits to the Registrant’s Registration Statement on Form S-3 filed December 10, 1997.
11 Incorporated by reference to Exhibits to the Registrant’sRegistrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1999.
2005.
2006.
2007.
8-K dated July 12, 2007.
29, 2008.
2008.
8-K dated June 5, 2008.
July 11, 2008.
20 Incorporated by reference to Exhibits to the Registrant’s Annual Report on Form 10-K for the fiscal year ended May 31, 2004.
21 Incorporated by reference to Exhibits to the Registrant’s Annual Report on Form 10-K for the fiscal year ended May 31, 2005.
22 Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K dated July 15, 2005.
23 Incorporated by reference to Exhibits to the Registrant’sRegistrant's Quarterly Report on Form 10-Q for the quarter ended August 31, 2005.
2008.
25 Incorporated by reference to Exhibits to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2005.
26 Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K dated January 26, 2006.
27 Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K dated February 1, 2006.
28 Incorporated by reference to Exhibits to the Registrant’sRegistrant's Quarterly Report on Form 10-Q for the quarter ended February 28, 2006.2009.
29 Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K dated May 31, 2006.
30 Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K dated June 9, 2006.
31 Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K dated September 5, 2006.
32 Incorporated by reference to Exhibits to the Registrant’s Annual Report on Form 10-K for the fiscal year ended May 31, 2006.
33 Incorporated by reference to Exhibits to the Registrant’s Current Report on Form 8-K dated July 12, 2007.