AAR CORP. and Subsidiaries

Quarterly Report on Form 10-Q

For the Quarter Ended ~~February 28,~~November 30, 2018

Table of Contents

					Page
Part I — FINANCIAL INFORMATION
	Item 1.		Financial Statements
			Condensed Consolidated Balance Sheets	3
			Condensed Consolidated Statements of Operations	5
			Condensed Consolidated Statements of Comprehensive Income ~~(Loss)~~	6
			Condensed Consolidated Statements of Cash Flows	7
			Condensed Consolidated ~~Statement~~Statements of Changes in Equity	8
			Notes to Condensed Consolidated Financial Statements	9
	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	2123
	Item 3.		Quantitative and Qualitative Disclosures About Market Risk	2830
	Item 4.		Controls and Procedures	2830

Part II — OTHER INFORMATION
	Item 1.		~~Legal Proceedings~~	29
		~~Item~~ 1A.	Risk Factors	29
		~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	3031
	Item 6.		Exhibits	3031

	Exhibit Index			31
	Signature Page			32

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of ~~February 28,~~November 30, 2018 and May 31, ~~2017~~2018

(In millions, except share data)

February 28,

May 31,

2018

2017

(Unaudited)

ASSETS
Current assets:

Cash and cash equivalents

$
23.9

$
10.3

Restricted cash

10.7

—

Accounts receivable, less allowances of $7.4 and $4.9, respectively

203.4

234.5

Inventories

472.1

433.4

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

68.4

70.7

Assets of discontinued operations — current

122.7

120.4

Other current assets

32.4

19.1

Total current assets

933.6

888.4

Property, plant and equipment, net of accumulated depreciation of $212.4 and $207.5, respectively

135.3

117.2

Other assets:

Goodwill

119.6

105.6

Intangible assets, net of accumulated amortization of $32.7 and $27.6, respectively

28.2

29.4

Rotable assets supporting long-term programs

183.6

159.6

Assets of discontinued operations — non-current

—

99.0

Other non-current assets

111.9

104.9

443.3

498.5

$
1,512.2

$
1,504.1

ASSETS

	November 30,		May 31,
	2018		2018
	(Unaudited)
Current assets:
Cash and cash equivalents	$	25.7	$	31.1
Restricted cash	15.0		10.5
Accounts receivable, less allowances of $14.5 and $7.5, respectively	218.6		202.0
Contract assets	63.0		—
Inventories	495.0		460.7
Rotable assets and equipment on or available for short-term lease	80.5		87.2
Assets of discontinued operations	109.9		125.0
Other current assets	33.0		26.2
Total current assets	1,040.7		942.7

Property, plant and equipment, net of accumulated depreciation of $221.9 and $214.4, respectively	133.4		133.2

Other assets:
Goodwill	116.6		118.7
Intangible assets, net of accumulated amortization of $29.5 and $33.3, respectively	25.2		27.8
Rotable assets supporting long-term programs	202.5		183.4
Other non-current assets	85.8		118.9
	430.1		448.8
	$	1,604.2	$	1,524.7

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of ~~February 28,~~November 30, 2018 and May 31, ~~2017~~2018

(In millions, except share data)

February 28,

May 31,

2018

2017

(Unaudited)

LIABILITIES AND EQUITY
Current liabilities:

Current maturities of long-term debt

$
0.1

$
0.1

Accounts and trade notes payable

176.8

164.2

Accrued liabilities

123.2

139.9

Liabilities of discontinued operations

26.5

30.8

Total current liabilities

326.6

335.0

Long-term debt, less current maturities

194.3

154.1

Deferred tax liabilities

13.7

37.2

Other liabilities and deferred income

62.4

63.6

270.4

254.9

Equity:

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

—

—

Common stock, $1.00 par value, authorized 100,000,000 shares; issued 45,300,786 and 45,175,302 shares at cost, respectively

45.3

45.2

Capital surplus

464.1

460.8

Retained earnings

723.8

727.9

Treasury stock, 10,662,048 and 10,820,844 shares at cost, respectively

(282.4
)
(279.8
)
Accumulated other comprehensive loss

(35.6
)
(39.9
)
Total equity

915.2

914.2

$
1,512.2

$
1,504.1

LIABILITIES AND EQUITY

	November 30,			May 31,
	2018			2018
	(Unaudited)
Current liabilities:
Accounts and trade notes payable	$	205.2		$	170.0
Accrued liabilities	114.4			138.3
Liabilities of discontinued operations	24.6			25.0
Total current liabilities	344.2			333.3

Long-term debt, less current maturities	218.9			177.2
Deferred tax liabilities	10.5			15.7
Other liabilities and deferred income	95.0			62.2
	324.4			255.1

Equity:
Preferred stock, $1.00 par value, authorized 250,000 shares; none issued	—			—
Common stock, $1.00 par value, authorized 100,000,000 shares; issued 45,300,786 shares at cost	45.3			45.3
Capital surplus	470.8			470.5
Retained earnings	729.6			733.2
Treasury stock, 10,205,647 and 10,585,165 shares at cost, respectively	(277.5		)	(280.7		)
Accumulated other comprehensive loss	(32.6		)	(32.0		)
Total equity	935.6			936.3
	$	1,604.2		$	1,524.7

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three and ~~Nine~~Six Months Ended ~~February 28,~~November 30, 2018 and 2017

(Unaudited)

(In millions, except share data)

	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	February 28,						February 28,						November 30,						November 30,
	2018			2017			2018			2017			2018			2017			2018			2017
Sales:
Sales from products	$	275.1		$	242.7		$	764.8		$	679.1		$	264.8		$	248.6		$	522.1		$	489.6
Sales from services	181.2			164.5			510.0			461.2			228.5			172.0			437.5			328.9
	456.3			407.2			1,274.8			1,140.3			493.3			420.6			959.6			818.5
Cost and operating expenses:
Cost of products	224.0			202.3			620.3			570.6			217.0			200.1			426.5			396.3
Cost of services	154.7			138.4			444.6			384.2			198.0			149.8			383.6			289.9
Provision for doubtful accounts													12.4			0.1			13.0			0.3
Selling, general and administrative	53.4			43.1			146.7			126.6			49.1			48.8			97.3			93.1
	432.1			383.8			1,211.6			1,081.4			476.5			398.8			920.4			779.6
Operating income	24.2			23.4			63.2			58.9			16.8			21.8			39.2			38.9
Other income (expense), net													(0.2		)	—			0.2			—
Interest expense	(2.2		)	(1.4		)	(5.8		)	(3.8		)	(2.5		)	(1.9		)	(4.6		)	(3.6		)
Interest income	—			0.1			0.1			0.1			0.1			0.1			0.6			0.1
Other expense	(0.5		)	—			(0.5		)	—
Income from continuing operations before provision for income taxes (benefit)	21.5			22.1			57.0			55.2
Provision for income taxes (benefit)	(9.8		)	7.7			1.4			19.5
Income from continuing operations before provision for income taxes													14.2			20.0			35.4			35.4
Provision for income taxes													3.0			6.8			5.3			11.2
Income from continuing operations	31.3			14.4			55.6			35.7			11.2			13.2			30.1			24.2
Loss from discontinued operations, net of tax	(15.8		)	(0.7		)	(52.0		)	(0.4		)
Net income	$	15.5		$	13.7		$	3.6		$	35.3
Loss from discontinued operations													(4.2		)	(35.8		)	(8.0		)	(36.2		)
Net income (loss)													$	7.0		$	(22.6	)	$	22.1		$	(12.0	)

Earnings per share — basic:
Earnings (Loss) per share — basic:
Earnings from continuing operations	$	0.91		$	0.43		$	1.62		$	1.05		$	0.32		$	0.39		$	0.87		$	0.71
Loss from discontinued operations	(0.46		)	(0.02		)	(1.52		)	(0.01		)	(0.12		)	(1.05		)	(0.23		)	(1.06		)
Earnings per share — basic	$	0.45		$	0.41		$	0.10		$	1.04
Earnings (Loss) per share — basic													$	0.20		$	(0.66	)	$	0.64		$	(0.35	)

Earnings per share — diluted:
Earnings (Loss) per share — diluted:
Earnings from continuing operations	$	0.90		$	0.42		$	1.60		$	1.04		$	0.32		$	0.38		$	0.85		$	0.70
Loss from discontinued operations	(0.46		)	(0.02		)	(1.52		)	(0.01		)	(0.12		)	(1.04		)	(0.23		)	(1.05		)
Earnings per share — diluted	$	0.44		$	0.40		$	0.08		$	1.03
Earnings (Loss) per share — diluted													$	0.20		$	(0.66	)	$	0.62		$	(0.35	)

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income ~~(Loss)~~

For the Three and ~~Nine~~Six Months Ended ~~February 28,~~November 30, 2018 and 2017

(Unaudited)

(In millions)

	Three Months Ended					Nine Months Ended					Three Months Ended						Six Months Ended
	February 28,					February 28,					November 30,						November 30,
	2018		2017			2018		2017			2018			2017			2018			2017
Net income	$	15.5	$	13.7		$	3.6	$	35.3
Net income (loss)											$	7.0		$	(22.6	)	$	22.1		$	(12.0	)
Other comprehensive income (loss), net of tax expense (benefit):
Currency translation adjustments	0.9		(0.2		)	3.4		(2.8		)	(0.6		)	1.9			(1.1		)	2.5
Pension and other post-retirement plans:
Amortization of actuarial loss and prior service cost included in net income, net of tax of $0.1 and $0.2 for the three months ended February 28, 2018 and 2017, respectively, and $0.4 and $0.5 for the nine months ended February 28, 2018 and 2017, respectively	0.3		0.3			0.9		0.8
Amortization of actuarial loss and prior service cost included in net income, net of tax of $0.0 and $0.2 for the three months ended November 30, 2018 and 2017, respectively, and $0.1 and $0.3 for the six months ended November 30, 2018 and 2017, respectively											0.2			0.3			0.5			0.6
Other comprehensive income (loss), net of tax	1.2		0.1			4.3		(2.0		)	(0.4		)	2.2			(0.6		)	3.1
Comprehensive income	$	16.7	$	13.8		$	7.9	$	33.3
Comprehensive income (loss)											$	6.6		$	(20.4	)	$	21.5		$	(8.9	)

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the ~~Nine~~Six Months Ended ~~February 28,~~November 30, 2018 and 2017

(Unaudited)

(In millions)

	Nine Months Ended						Six Months Ended
	February 28,						November 30,
	2018			2017			2018			2017
Cash flows provided from (used in) operating activities:
Net income	$	3.6		$	35.3
Loss from discontinued operations	52.0			0.4
Cash flows used in operating activities:
Net income (loss)							$	22.1		$	(12.0	)
Less: Loss from discontinued operations							8.0			36.2
Income from continuing operations	55.6			35.7			30.1			24.2
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
Adjustments to reconcile income from continuing operations to net cash used in operating activities:
Depreciation and intangible amortization	31.4			26.2			20.5			20.8
Stock-based compensation	8.7			7.6
Deferred tax benefit	(24.1		)	(1.7		)
Gain on asset disposal	—			(2.6		)
Amortization of stock-based compensation							5.2			5.3
Provision for doubtful accounts							13.0			0.3
Deferred tax provision							1.4			(22.1		)
Changes in certain assets and liabilities:
Accounts receivable	35.2			(26.7		)	(52.1		)	(13.9		)
Contract assets							(13.4		)	—
Inventories	(36.7		)	(15.6		)	(52.1		)	(22.1		)
Rotable spares and equipment on or available for short-term lease	2.5			(8.3		)
Rotable assets and equipment on or available for short-term lease							6.6			(0.3		)
Rotable assets supporting long-term programs	(35.7		)	(75.7		)	(26.7		)	(28.4		)
Accounts and trade notes payable	8.5			38.2			35.4			15.9
Accrued and other liabilities	(12.0		)	(10.3		)	(29.7		)	(6.4		)
Other	(17.8		)	(4.6		)	20.6			(8.1		)
Net cash provided from (used in) operating activities — continuing operations	15.6			(37.8		)
Net cash used in operating activities — continuing operations							(41.2		)	(34.8		)
Net cash provided from operating activities — discontinued operations	17.3			26.6			5.7			24.9
Net cash provided from (used in) operating activities	32.9			(11.2		)
Net cash used in operating activities							(35.5		)	(9.9		)
Cash flows used in investing activities:
Property, plant and equipment expenditures	(18.4		)	(20.1		)	(8.0		)	(13.6		)
Payments for acquisitions	(22.9		)	—			(2.3		)	(22.9		)
Proceeds from aircraft joint ventures	7.3			—			—			7.3
Proceeds from asset disposals	1.3			5.9
Other	0.4			(2.8		)	1.3			0.7
Net cash used in investing activities — continuing operations	(32.3		)	(17.0		)	(9.0		)	(28.5		)
Net cash provided from (used in) investing activities — discontinued operations	(4.7		)	4.2
Net cash used in investing activities — discontinued operations							(0.4		)	(4.3		)
Net cash used in investing activities	(37.0		)	(12.8		)	(9.4		)	(32.8		)
Cash flows provided from financing activities:
Short-term borrowings, net	16.0			34.0			67.0			37.0
Reduction in long-term borrowings	—			(10.0		)
Repayments on long-term borrowings							(25.0		)	—
Proceeds from long-term borrowings	24.8			—			—			24.8
Cash dividends	(7.7		)	(7.7		)	(5.3		)	(5.2		)
Purchase of treasury stock	(13.1		)	(16.6		)	—			(5.2		)
Stock option exercises	10.0			5.3			8.2			9.1
Other	(0.3		)	(0.4		)	—			(0.2		)
Net cash provided from financing activities — continuing operations	29.7			4.6			44.9			60.3
Net cash used in financing activities — discontinued operations	(1.3		)	(1.2		)	(0.7		)	(0.8		)
Net cash provided from financing activities	28.4			3.4			44.2			59.5
Effect of exchange rate changes on cash	—			(0.5		)	(0.2		)	—
Increase (Decrease) in cash, cash equivalents, and restricted cash	24.3			(21.1		)
Increase (Decrease) in cash and cash equivalents							(0.9		)	16.8
Cash, cash equivalents, and restricted cash at beginning of period	10.3			31.2			41.6			10.3
Cash, cash equivalents, and restricted cash at end of period	$	34.6		$	10.1		$	40.7		$	27.1

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity

For the ~~Nine~~Six Months Ended ~~February 28,~~November 30, 2018

(Unaudited)

(In millions)

												Accumulated																	Accumulated
												Other																	Other
	Common		Capital			Retained			Treasury			Comprehensive						Common		Capital			Retained			Treasury			Comprehensive
	Stock		Surplus			Earnings			Stock			Income (Loss)			Total Equity			Stock		Surplus			Earnings			Stock			Income (Loss)			Total Equity
Balance, May 31, 2017	$	45.2	$	460.8		$	727.9		$	(279.8	)	$	(39.9	)	$	914.2
Balance, May 31, 2018																		$	45.3	$	470.5		$	733.2		$	(280.7	)	$	(32.0	)	$	936.3
Cumulative effect adjustment upon adoption of ASC 606 on June 1, 2018																		—		—			(20.4		)	—			—			(20.4		)
Net income	—		—			3.6			—			—			3.6			—		—			22.1			—			—			22.1
Cash dividends	—		—			(7.7		)	—			—			(7.7		)	—		—			(5.3		)	—			—			(5.3		)
Stock option activity	—		(0.1		)	—			9.5			—			9.4			—		1.6			—			3.8			—			5.4
Restricted stock activity	0.1		3.4			—			1.0			—			4.5			—		(1.3		)	—			(0.6		)	—			(1.9		)
Repurchase of shares	—		—			—			(13.1		)	—			(13.1		)
Other comprehensive income (loss), net of tax	—		—			—			—			4.3			4.3
Balance, February 28, 2018	$	45.3	$	464.1		$	723.8		$	(282.4	)	$	(35.6	)	$	915.2
Other comprehensive loss, net of tax																		—		—			—			—			(0.6		)	(0.6		)
Balance, November 30, 2018																		$	45.3	$	470.8		$	729.6		$	(277.5	)	$	(32.6	)	$	935.6

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

~~February 28,~~November 30, 2018

(Unaudited)

(Dollars in millions, except per share amounts)

Note 1 — Basis of Presentation

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

We have prepared these statements without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The Condensed Consolidated Balance Sheet as of May 31, ~~2017~~2018 has been derived from audited financial statements. To prepare the financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”), management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain information and note disclosures, normally included in comprehensive financial statements prepared in accordance with GAAP, have been condensed or omitted pursuant to such rules and regulations of the SEC. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our latest annual report on Form 10-K.

In the opinion of management, the condensed consolidated financial statements reflect all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the ~~Condensed Consolidated Balance Sheets~~condensed consolidated financial position of AAR CORP. and its subsidiaries as of ~~February 28,~~November 30, 2018, the Condensed Consolidated Statements of Operations and ~~the~~ Condensed Consolidated Statements of Comprehensive Income (Loss) for the three- and ~~nine-month~~six-month periods ended ~~February 28,~~November 30, 2018 and 2017, the Condensed Consolidated Statements of Cash Flows for the ~~nine-month~~six-month periods ended ~~February 28,~~November 30, 2018 and 2017, and the Condensed Consolidated Statement of Changes in Equity for the ~~nine-month~~six-month period ended ~~February 28,~~November 30, 2018. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

~~Note 2 —~~ New Accounting Pronouncements

~~Revenue from Contracts with Customers~~ Adopted

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires an employer to report the service cost component of net periodic pension benefit cost in the same line item as other compensation costs for those related employees. Other components of net pension cost, including interest, expected return on plan assets, and actuarial gains and losses are to be presented outside of operating income. We adopted this ASU on June 1, 2018, which resulted in $0.3 million and $0.6 million of pension income included in Other income (expense), net in the Condensed Consolidated Statement of Operations for the three- and six-month periods ended November 30, 2018, respectively. The Condensed Consolidated Statement of Operations for the three- and six month periods ended November 30, 2017 were not restated as the non-service cost components of pension expense were not material to fiscal 2018.

In May 2014, the FASB issued ~~Accounting Standards Update (“ASU”)~~ASU No. 2014-09, Revenue from Contracts with Customers (“ASC 606”), which provides guidance for revenue recognition. ~~This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. This ASU will supersede~~ASC 606 superseded the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition, and most industry-specific guidance. This ASU will also supersede certain cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. In August 2015, the FASB issued ASU No. 2015-14 which deferred the effective date of the new standard by one year so that it will be effective for us beginning June 1, 2018.

We ~~will adopt this ASU as of~~adopted ASC 606 on June 1, 2018 using the modified retrospective ~~transition~~ method. Under ~~this method, we will~~that approach, prior periods have not been restated and continue to be ~~required to recognize~~reported under the ~~cumulative~~accounting standards in effect for those periods. A discussion of ~~adopting this ASU as of June 1, 2018~~our revised accounting policy for revenue recognition is included in our first quarter ending August 31, 2018. We expect to estimate the cumulative effect upon adoption of the new ASU in the fourth quarter of fiscal 2018 based on expected contracts in process at May 31, 2018. Our implementation effort continues to progress as we assess the anticipated impact of the new ASU on our consolidated financial statements.

~~The accompanying Notes to Condensed Consolidated Financial~~

~~Statements are an integral part of these statements.~~Note 3.

AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
~~February 28,~~November 30, 2018
(Unaudited)
(Dollars in millions, except per share amounts)

~~To date,~~We elected to use the practical expedient allowing for the application of ASC 606 only to contracts that were not completed as of June 1, 2018. We recognized the cumulative effect of initially applying ASC 606 as a decrease of $20.4 million to the opening balance of retained earnings as of June 1, 2018. The impact of the adoption of ASC 606 on our Condensed Consolidated Balance Sheet was as follows:

As of
May 31, 2018

ASC 606
Adjustments

As of
June 1, 2018

Accounts receivable, net

$
202.0

$
(31.4
)
$
170.6

Inventories

460.7

(17.3
)
443.4

Contract assets—current

—

49.6

49.6

Other current assets

26.2

(0.9
)
25.3

Other non-current assets

118.9

(19.0
)
99.9

Accrued liabilities

138.3

9.1

147.4

Deferred tax liabilities

15.7

(6.6
)
9.1

Other liabilities and deferred income

62.2

(1.1
)
61.1

Retained earnings

733.2

(20.4
)
712.8

The adoption of ASC 606 impacted us in three primary areas. First, we have ~~preliminarily identified three~~certain contracts in which revenue is recognized using the percentage of completion method over the expected term of the contract. Under ASC 606, the contract term used for revenue recognition purposes was shortened to exclude any unexercised customer option years or incorporate customer rights to terminate the contract without significant ~~areas where~~penalty as we do not have any enforceable rights or obligations prior to the ~~new ASU will~~exercise of the underlying option. The impact of this change as of June 1, 2018 resulted in the elimination of certain deferred costs and the establishment of accrued liabilities reflecting our estimated obligations under the contracts. For this change, we recognized a decrease of $22.1 million to the opening balance of retained earnings as of June 1, 2018.
Second, we have contracts under which we perform repair services on customer-owned assets whereby the customer simultaneously receives the benefits of the repair. These contracts also transitioned to an over time revenue ~~recognition. First,~~recognition model as of June 1, 2018 compared to our prior policy of recognizing revenue at the time of shipment. The impact of this change as of June 1, 2018 resulted in the elimination of certain inventory and accounts receivable amounts and the establishment of a contract asset reflecting the over time revenue recognition treatment. For this change, we recognized an increase of $1.3 million to the opening balance of retained earnings as of June 1, 2018.
Third, we have certain contracts under which we manufacture products with no alternative use as the customer owns the underlying intellectual property and ~~the Company has~~we have an enforceable right to payment from the customer. As a result, ~~the Company will be required to record~~we now recognize revenue for these contracts over time as opposed to at the time of shipment, which iswas our ~~current~~ policy ~~today. Second, we also perform repair services on customer-owned assets which will also transition~~prior to anJune 1, 2018. The impact of this change as of June 1, 2018 resulted in the elimination of certain inventory amounts and the establishment of a contract asset reflecting the over time ~~approach compared~~revenue recognition treatment. For this change, we recognized an increase of $0.4 million to ~~our current policy~~the opening balance of ~~recognizing revenue at time~~retained earnings as of ~~shipment. Third, we have certain contracts~~June 1, 2018.
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2018
(Unaudited)
(Dollars in ~~which revenue is recognized using percentage of completion over the expected term~~millions, except per share amounts)
The impact of the ~~contract. The new ASU will likely result~~ASC 606 adoption on our Condensed Consolidated Balance Sheet as of November 30, 2018 and our Condensed Consolidated Statement of Operations for the three- and six-month periods ended November 30, 2018 was as follows:

As Reported

ASC 606
Adjustments

Balances
Excluding
ASC 606

Accounts receivable, net

$
218.6

$
46.8

$
265.4

Contract assets

63.0

(63.0
)
—

Inventories

495.0

20.1

515.1

Other current assets

33.0

0.6

33.6

Other non-current assets

85.8

21.5

107.3

Accrued liabilities

114.4

(5.0
)
109.4

Deferred tax liabilities

10.5

6.6

17.1

Other liabilities and deferred income

95.0

5.6

100.6

Retained earnings

729.6

18.8

748.4

Three Months Ended November 30, 2018

As Reported

ASC 606
Adjustments

Balances
Excluding
ASC 606

Sales

$
493.3

$
(0.4
)
$
492.9

Cost of sales

415.0

(1.5
)
413.5

Gross profit

78.3

1.1

79.4

Provision for income taxes

3.0

0.3

3.3

Income from continuing operations

11.2

0.8

12.0

Six Months Ended November 30, 2018

As Reported

ASC 606
Adjustments

Balances
Excluding
ASC 606

Sales

$
959.6

$
(5.2
)
$
954.4

Cost of sales

810.1

(3.1
)
807.0

Gross profit

149.5

(2.1
)
147.4

Provision for income taxes

5.3

(0.5
)
4.8

Income from continuing operations

30.1

(1.6
)
28.5

Excluding the ASC 606 adjustments from our reported results for the six-month period ended November 30, 2018, our Condensed Consolidated Statement of Cash Flows would include the changes of asset and liability accounts described above, with no impact on our net cash used in ~~the reduction of the contract term used for percentage of completion as certain contracts include unexercised customer option years or include customer rights~~operating activities.
AAR CORP. and Subsidiaries
Notes to ~~terminate the contract without significant penalty.~~Condensed Consolidated Financial Statements
November 30, 2018
(Unaudited)
(Dollars in millions, except per share amounts)

~~Other~~ New Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, ~~Leases.~~Leases. This ASU amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets, including those classified as operating leases under the current accounting guidance. In addition, this ASU will require new qualitative and quantitative disclosures about the Company’s leasing activities. This new standard will be effective for us beginning June 1, 2019 ~~with early adoption permitted. This ASU requires~~and is required to be adopted using a modified retrospective ~~transition approach for all leases existing at, or entered into after, the date of initial application, with~~approach.   The new standard provides us an option to ~~use certain transition relief.~~recognize the cumulative effect adjustment on retained earnings as of June 1, 2019 or as of the beginning of the earliest period presented. We are in the preliminary phases of ~~assessing the effect~~our assessment of this ASU and continue to gather information on our ~~portfolio~~lease population and portfolio. We are also considering the terms and conditions of ~~leases.~~our other arrangements that could meet the definition of a lease and designing and implementing new processes and controls, including information technology tools. While this assessment continues, we have not yet selected a transition date nor have we determined the effect of this ASU on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation — Stock Compensation. This ASU requires excess tax benefits or deficiencies for share-based payments to be recorded in the period shares vest as income tax expense or benefit, rather than within equity. Cash flows related to excess tax benefits are now included in operating activities and are no longer classified as a financing activity. We adopted this ASU on June 1, 2017 and recognized excess tax benefits of $0.8 and $2.4 million as an income tax benefit during the three- and nine-month periods ended February 28, 2018, respectively. We have also presented the excess tax benefits within operating activities in the condensed consolidated statement of cash flows for the nine-month period ended February 28, 2018. As permitted, we adopted the statement of cash flow presentation guidance on a prospective basis with no adjustments to the previously reported amounts.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires restricted cash to be included within beginning and ending total cash amounts reported in the consolidated statements of cash flows as well as increased disclosure requirements. As permitted, we have early adopted this ASU in fiscal 2018. The ASU is required to be adopted on a retroactive basis; however, we did not have restricted cash in our prior periods reported.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive ~~Income.~~Income. This ASU permits the reclassification of tax effects stranded in accumulated other comprehensive income to retained earnings as a result of the Tax ~~Cuts and Jobs Act (the “Tax~~ Reform ~~Act”).~~Act. This new standard will be effective for us beginning June 1, 2019 with early adoption permitted. We are currently evaluating the impact of this new standard on our consolidated financial statements.
~~The accompanying Notes to Condensed Consolidated Financial~~
~~Statements are an integral part of these statements.~~
~~AAR CORP. and Subsidiaries~~
~~Notes to Condensed Consolidated Financial Statements~~
~~February 28, 2018~~
~~(Unaudited)~~
~~(Dollars in millions, except per share amounts)~~

Note 32 — Discontinued Operations

During the third quarter of fiscal 2018, we decided to pursue the sale of our Contractor-Owned, Contractor-Operated (“COCO”) business previously included in our Expeditionary Services segment. Due to this strategic shift, the assets, liabilities, and results of operations of our COCO business have been reported as discontinued operations for all periods presented. Goodwill was allocated to this business based on its relative fair value to the reporting unit. The fair value of the reporting unit was determined based on a combination of the expected net proceeds upon sale and a discounted cash flow analysis. As the fair value of the ~~reporting unit~~COCO business was below its carrying value, a goodwill impairment charge of $9.8 million, representing the estimated loss on disposal, was recorded in the third quarter of fiscal 2018.

Our COCO business completed certain contracts in the second quarter of fiscal 2018. As the aircraft supporting these contracts were not placed on new contracts combined with the continued decline in operational tempo within the U.S. Department of Defense ~~(“DoD”)~~ and an excess supply of aircraft assets in the market, we determined there was an impairment triggering event and tested the recoverability of our COCO assets. As a result, we recognized impairment and other charges of $54.2 million in the ~~three-month period ended February 28,~~second quarter of fiscal 2018. The fair value of the aircraft and related assets was based on available market data for similar assets.
The COCO business is available for immediate sale and we continue to actively market the COCO business at a reasonable price in relation to its fair value. We expect a sale of the COCO business to be completed before the end of fiscal 2019.

No amounts offor general corporate overhead or interest expense were allocated to discontinued operations during the periods presented. Unless otherwise noted, amounts and disclosures throughout these Notes to ~~Condensed~~ Consolidated Financial Statements relate to our continuing operations.
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2018
(Unaudited)
(Dollars in millions, except per share amounts)

Operating results for discontinued operations were comprised of the following:

Three Months Ended

Nine Months Ended

Three Months Ended

Six Months Ended

February 28,

February 28,

November 30,

November 30,

2018

2017

2018

2017

2018

2017

2018

2017

Sales

$
8.8

$
39.5

$
79.2

$
135.1

$
22.2

$
29.1

$
42.2

$
70.4

Cost of sales

(15.8
)
(37.3
)
(81.6
)
(125.1
)

(25.4
)
(27.4
)
(47.7
)
(65.8
)
Asset impairments

(11.0
)
—

(65.2
)
—

—

(54.2
)
—

(54.2
)
Selling, general and administrative expenses

(2.6
)
(4.3
)
(9.6
)
(11.7
)

(2.3
)
(3.4
)
(4.8
)
(7.0
)
Loss from discontinued operations before provision for income tax benefit

(20.6
)
(2.1
)
(77.2
)
(1.7
)

(5.5
)
(55.9
)
(10.3
)
(56.6
)
Provision for income tax benefit

(4.8
)
(1.4
)
(25.2
)
(1.3
)

(1.3
)
(20.1
)
(2.3
)
(20.4
)
Loss from discontinued operations

$
(15.8
)
$
(0.7
)
$
(52.0
)
$
(0.4
)

$
(4.2
)
$
(35.8
)
$
(8.0
)
$
(36.2
)

The carrying amounts of the major classes of assets and liabilities for our discontinued operations are as follows:

February 28,

May 31,

November 30,

May 31,

2018

2017

2018

2018

Inventory, rotable assets, and equipment

$
110.4

$
183.7

$
93.5

$
106.1

Goodwill

—

9.8

Accounts receivable, net

13.1

14.7

Other assets

12.3

25.9

3.3

4.2

Assets of discontinued operations

$
122.7

$
219.4

$
109.9

$
125.0

Liabilities — current

$
26.5

$
30.8

Liabilities — non-current

—

2.6

Liabilities of discontinued operations

$
26.5

$
33.4

$
24.6

$
25.0

Note 3 — Revenue Recognition
Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.
Our unit of accounting for revenue recognition is a performance obligation included in our customer contracts. A performance obligation reflects the distinct good or service that we must transfer to a customer. At contract inception, we evaluate if the contract should be accounted for as a single performance obligation or if the contract contains multiple performance obligations. In some cases, our contract with the customer is considered one performance obligation as it includes factors such as whether the good or service being provided is significantly integrated with other promises in the contract, whether the service provided significantly modifies or customizes another good or service or whether the good or service is highly interdependent or interrelated. If the contract has more than one performance obligation, the Company determines the standalone price of each distinct good or service underlying each performance obligation and allocates the transaction price based on their relative standalone selling prices.

The ~~accompanying Notes~~transaction price of a contract, which can include both fixed and variable amounts, is allocated to ~~Condensed Consolidated Financial~~
~~Statements are an integral part~~each performance obligation identified. Some contracts contain variable consideration, which could include incremental fees or penalty provisions related to performance. Variable consideration that can be reasonably estimated based on current assumptions and historical information is included in the transaction price at the inception of ~~these statements.~~the contract but limited to the amount that is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Variable consideration that cannot be reasonably estimated is recorded when known.
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
~~February 28,~~November 30, 2018
(Unaudited)
(Dollars in millions, except per share amounts)

~~Note 4 — Revenue Recognition~~
~~Sales~~Our performance obligations are satisfied over time as work progresses or at a point in time based on transfer of control of products and services to our customers. The majority of our sales from products are recognized at a point in time upon transfer of control to the customer, which generally occurs upon shipment. In connection with certain sales of products, we also provide logistics services, which include inventory management, replenishment, and other related ~~cost~~services. The price of ~~sales for product sales~~such services is generally included in the price of the products delivered to the customer, and revenues are recognized upon ~~shipment~~delivery of the product, at which point, the customer has obtained control of the product. We do not account for these services separate from the related product sales as the services are inputs required to fulfill part orders received from customers.
For our performance obligations that are satisfied over time, we measure progress in a manner that depicts the performance of transferring control to the customer. ~~Our standard terms and conditions provide that title passes~~As such, we utilize the input method of cost-to-cost to recognize revenue over time as this depicts when control of the ~~customer when the product is shipped~~promised goods or services are transferred to the customer. ~~Sales of certain defense products are~~Revenue is recognized upon customer acceptance, which includes transfer of 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 large airframe maintenance contracts and performance-based logistics programs are recognized by the percentage of completion method, based on the relationship of actual costs incurred to date to the estimated total ~~costs.~~cost at completion of the performance obligation. We are required to make certain judgments and estimates, including estimated revenues and costs, as well as inflation and the overall profitability of the arrangement. Key assumptions involved include future labor costs and efficiencies, overhead costs, and ultimate timing of product delivery. Differences may occur between the judgments and estimates made by management and actual program results.
Changes in estimates and assumptions related to our arrangements accounted for using the cost-to-cost method are recorded using the cumulative catch-up method of accounting. These changes are primarily adjustments to the estimated profitability for our long-term, power-by-the-hour programs where we provide component inventory management and repair services.
For the three-month period ended November 30, 2018, we recognized ~~net~~ favorable cumulative catch-up adjustments of ~~$1.8~~$3.1 million. For the three-month period ended November 30, 2017, we recognized favorable and unfavorable adjustments of $1.0 million and ~~$3.2~~$0.6 million, ~~during~~respectively. When considering these adjustments on a net basis, we recognized net favorable adjustments of $3.1 million and $0.4 million in the three-month periods ended ~~February 28,~~November 30, 2018 and 2017, ~~respectively,~~respectively.
For the six-month period ended November 30, 2018, we recognized favorable and ~~$2.2~~unfavorable cumulative catch-up adjustments of $3.8 million and ~~$7.8~~$0.5 million, ~~during~~respectively. For the ~~nine-month~~six-month period ended November 30, 2017, we recognized favorable and unfavorable adjustments of $1.0 million and $0.6 million, respectively. When considering these adjustments on a net basis, we recognized net favorable adjustments of $3.3 million and $0.4 million in the six-month periods ended ~~February 28,~~November 30, 2018 and 2017, ~~respectively, resulting from changes to the estimated profitability of these contracts.~~
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.
Certain supply chain management programs 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 June 2016, the U.S. Air Force awarded the new contract for the KC-10 Extender Contractor Logistics Support Program (“KC-10 Program”) to a competitor. Our principal services under the prior contract for the KC-10 Program were completed in January 2017; however, we have provided limited services since that date and will continue to do so for an unspecified period of time. Sales for the KC-10 Program during the three-month periods ended February 28, 2018 and 2017 were $3.6 million and $24.3 million, respectively, and sales during the nine-month periods ended February 28, 2018 and 2017 were $24.6 million and $92.3 million, respectively. Gross profit for the KC-10 Program during the three-month periods ended February 28, 2018 and 2017 were $0.2 million and $1.6 million, respectively, and gross profit during the nine-month periods ended February 28, 2018 and 2017 were $2.4 million and $6.1 million, respectively.

~~Included~~Under most of our U.S. government contracts, if the contract is terminated for convenience, we are entitled to payment for items delivered and fair compensation for work performed, the costs of settling and paying other claims, and a reasonable profit on the costs incurred or committed.
We have elected to use certain practical expedients permitted under ASC 606. Shipping and handling fees and costs incurred associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in ~~accounts receivable as~~cost of ~~February 28, 2018~~sales in our Condensed Consolidated Statement of Operations, and ~~May 31, 2017, were $5.4 million~~are not considered a performance obligation to our customers. Our reported sales on our Condensed Consolidated Statement of Operations are net of any sales or related non-income taxes. We also utilize the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and ~~$14.5 million, respectively, of unbilled accounts receivable related~~the invoiced amount corresponds directly with the value we are providing to the KC-10 Program. These unbilled accounts receivable related to costs we have incurred on parts that were requested and accepted by our customer to support the KC-10 Program. These costs have not been billed by us because the customer has not yet issued the final paperwork necessary to allow for billing.
~~The accompanying Notes to Condensed Consolidated Financial~~
~~Statements are an integral part of these statements.~~customer.
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
~~February 28,~~November 30, 2018
(Unaudited)
(Dollars in millions, except per share amounts)

~~Note 5 — Income Taxes~~Contract Assets and Liabilities

~~On December 22, 2017, the Tax Reform Act was enacted which significantly revised the U.S. corporate income tax system.~~ The ~~Tax Reform Act, among other things, reduced the current corporate federal income tax rate to 21% from 35%, changed bonus depreciation regulations~~timing of revenue recognition, customer billings, and ~~limited deductions for executive compensation. The income tax rate reduction in the Tax Reform Act is effective January 1, 2018 which~~cash collections results in a ~~blended federal statutory tax rate for~~contract asset or contract liability at the ~~Company~~end of ~~29.2%~~each reporting period. Contract assets consist of unbilled receivables or costs incurred where revenue recognized over time using the cost-to-cost model exceeds the amounts billed to customers. Contract liabilities include advance payments and billings in ~~fiscal 2018. Our~~excess of revenue recognized. Certain customers make advance payments prior to the satisfaction of our performance obligations on the contract. These amounts are recorded as contract liabilities until such performance obligations are satisfied, either over time as costs are incurred or at a point in time when deliveries are made. Contract assets and contract liabilities are determined on a contract-by-contract basis.
Net contract assets and liabilities are as follows:

November 30,
2018

June 1,
2018

Change

Contract assets — current

$
63.0

$
49.6

$
13.4

Contract assets — non-current

21.3

12.9

8.4

Contract liabilities — current

(9.3
)
(9.4
)
0.1

Contract liabilities — non-current

(68.3
)
(33.0
)
(35.3
)
Net contract assets

$
6.7

$
20.1

$
(13.4
)
Contract assets — non-current is reported within Other non-current assets, Contract liabilities — current is reported within Accrued Liabilities, and Contract liabilities — non-current is reported within Other liabilities and deferred income ~~tax expense for~~on our Condensed Consolidated Balance Sheet. Changes in contract assets and contract liabilities primarily result from the timing difference between our performance of services and payments from customers. For the three- and six-month periods ended November 30, 2018, we recognized revenue of $76.4 million and $156.5 million that was previously included in the beginning balance of contract liabilities.
In the three-month period ended ~~February 28,~~November 30, 2018, ~~included~~we recognized a ~~benefit~~provision for doubtful accounts of ~~$1.8~~$12.4 million related to the ~~impact~~bankruptcy of a European airline customer. The provision included impairment of non-current contract assets of $7.6 million, allowance for doubtful accounts of $3.3 million, and other liabilities of $1.5 million.
Remaining Performance Obligations
As of November 30, 2018, we had approximately $1.3 billion of remaining performance obligations, also referred to as firm backlog, which excludes unexercised contract options and potential orders under our indefinite-delivery, indefinite-quantity (IDIQ) contracts. We expect that approximately 40% of this backlog will be recognized as revenue over the next 12 months with the majority of the remainder recognized over the next three years. The amount of remaining performance obligations that is expected to be recognized as revenue beyond 12 months primarily relates to our long-term, power-by-the-hour programs where we provide component inventory management and repair services.
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2018
(Unaudited)
(Dollars in millions, except per share amounts)
Disaggregation of Revenue
Sales across the major customer markets for each of our ~~revised, lower estimated fiscal 2018 tax rate applied to our pre-tax income~~operating segments for the three- and six-month ~~period~~periods ended November 30, 2018 and 2017 ~~which was previously expected to be taxed at 35%.~~were as follows:

Three Months Ended

Six Months Ended

November 30,

November 30,

2018

2017

2018

2017

Aviation Services:

Commercial

$
325.5

$
303.4

$
632.2

$
600.2

Government and defense

137.4

88.3

269.1

162.8

$
462.9

$
391.7

$
901.3

$
763.0

Expeditionary Services:

Commercial

$
8.0

$
9.2

$
16.5

$
17.5

Government and defense

22.4

19.7

41.8

38.0

$
30.4

$
28.9

$
58.3

$
55.5

We re-measured our deferred tax assets and liabilities based on the tax rate at which they are expected to reverse in the future, which is either at a federal rate of 29.2% for reversals in fiscal 2018 or 21% for reversals in fiscal 2019 and subsequent years. We recognized an income tax benefit of $13.0 million in the three-month period ended February 28, 2018
Sales by geographic region for the ~~re-measurement impact on a provisional basis.~~three- and six month periods ended November 30, 2018 and 2017 were as follows:

On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, which allows the use of a measurement period, similar to that used in business combinations, to account for the impacts of the Tax Reform Act. We have accounted for the impacts of the Tax Reform Act to the extent a reasonable estimate could be made, however, we will continue to refine our estimates on the timing of the deferred tax reversals throughout the measurement period as additional information becomes available or until the accounting is complete.

Three Months Ended

Six Months Ended

November 30,

November 30,

2018

2017

2018

2017

Aviation Services:

North America

$
331.7

$
268.0

$
651.2

$
525.5

Europe/Africa

83.5

86.6

164.5

155.2

Other

47.7

37.1

85.6

82.3

$
462.9

$
391.7

$
901.3

$
763.0

Expeditionary Services:

North America

$
29.2

$
27.0

$
54.9

$
51.7

Europe/Africa

1.0

1.9

2.7

3.7

Other

0.2

—

0.7

0.1

$
30.4

$
28.9

$
58.3

$
55.5

Note 64 — Accounting for Stock-Based Compensation

Restricted Stock

In the three-month period ended August 31, ~~2017,~~2018, as part of our annual long-term stock incentive compensation, we granted ~~98,750~~43,680 shares of performance-based restricted stock and ~~24,425~~38,760 shares of time-based restricted stock to eligible employees. The grant date fair value per share for these shares was ~~$35.26~~$48.09 (the closing price on the grant date). In June ~~2017,~~2018, we also granted ~~55,000~~29,128 shares of time-based restricted stock to members of the Board of Directors with a grant date fair value per share of ~~$34.95.~~$45.32.

Expense charged to operations for restricted stock during the three-month periods ended ~~February 28,~~November 30, 2018 and 2017 was ~~$2.0~~$0.2 million and ~~$1.6~~$1.5 million, respectively, and ~~$4.9~~$3.0 million and ~~$4.2~~$2.9 million during the ~~nine-month~~six-month periods ended ~~February 28,~~November 30, 2018 and 2017, respectively.
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2018
(Unaudited)
(Dollars in millions, except per share amounts)

Stock Options

In the three-month period ended August 31, ~~2017,~~2018, as part of our annual long-term stock incentive compensation, we granted ~~453,450~~290,340 stock options to eligible employees at an exercise price per share of ~~$35.26~~$48.09 and weighted average fair value of ~~$9.27.~~$13.67.

The total intrinsic value of stock options exercised during the ~~nine-month~~six-month periods ended ~~February 28,~~November 30, 2018 and 2017 was ~~$12.0~~$11.9 million and ~~$3.3~~$6.5 million, respectively.   Expense charged to operations for stock options during the three-month periods ended ~~February 28,~~November 30, 2018 and 2017 was ~~$1.4~~$1.0 million and ~~$1.1~~$1.3 million, respectively, and ~~$3.8 and $3.4 million~~ during the ~~nine-month~~six-month periods ended ~~February 28,~~November 30, 2018 and 2017 ~~respectively.~~
~~The accompanying Notes to Condensed Consolidated Financial~~
~~Statements are an integral part of these statements.~~
~~AAR CORP.~~was $2.2 million and ~~Subsidiaries~~
~~Notes to Condensed Consolidated Financial Statements~~
~~February 28, 2018~~
~~(Unaudited)~~
~~(Dollars in millions, except per share amounts)~~$2.4 million, respectively.

Note 75 — Inventory

The summary of inventories is as follows:

February 28,

May 31,

November 30,

May 31,

2018

2017

2018

2018

Aircraft and engine parts, components and finished goods

$
437.5

$
383.5
��
Raw materials and parts

$
47.6

$
45.0

43.4

45.1

Work-in-process

35.3

25.8

14.1

32.1

Aircraft and engine parts, components and finished goods

389.2

362.6

$
472.1

$
433.4

$
495.0

$
460.7

Note 86 — Supplemental Cash Flow Information

Nine Months Ended

Six Months Ended

February 28,

November 30,

2018

2017

2018

2017

Interest paid

$
4.9

$
3.2

$
4.3

$
3.0

Income taxes paid

16.6

8.3

3.0

14.8

Income tax refunds received

0.1

1.2

—

0.1

Note 97 — Sale of Receivables

On February 23, 2018, we entered into a Purchase Agreement with Citibank N.A. (“Purchaser”) for the sale, from time to time, of certain accounts receivable due from certain customers (the “Purchase Agreement”). Under the Purchase Agreement, the maximum amount of receivables sold is limited to $150 million. The term of the Purchase Agreement runs through February 22, ~~2019,~~2019; however, the Purchase Agreement may also be terminated earlier under certain circumstances. The term of the Purchase Agreement shall be automatically extended for annual terms unless either party provides advance notice that they do not intend to extend the term.

We have no retained interests in the sold receivables, other than limited recourse obligations in certain circumstances, and only perform collection and administrative functions for the Purchaser. We account for these receivable transfers as sales under ASC 860, Transfers and Servicing, and de-recognize the sold receivables from our ~~Condensed~~ Consolidated Balance Sheet.

During the ~~three-month~~six-month period ended ~~February 28,~~November 30, 2018, we sold ~~$63.0~~$351.0 million of receivables under the Purchase Agreement and remitted $327.5 million to the Purchaser on their behalf. During fiscal 2018, we sold $239.6 million of receivables under the Purchase Agreement and remitted $167.9 million to the Purchaser on their behalf. As of November 30, 2018 and May 31, 2018, we had collected ~~$10.7~~cash of $15.0 million ~~on behalf of the Purchaser. The cash collected has~~and $10.5 million, respectively, which was not yet ~~been~~ remitted to the Purchaser and ~~has been~~was classified as Restricted cash on our Condensed Consolidated Balance Sheet. WeDuring the three- and six-month periods ended November 30, 2018, we incurred ~~purchase discount~~discounts on the sale of our receivables of $0.6 million and ~~other fees of $0.5~~$1.0 million, respectively, which ~~are~~were recognized as an expense in Other ~~expenses~~income, net on our Condensed Consolidated Statements of Operations.
~~The accompanying Notes to Condensed Consolidated Financial~~
~~Statements are an integral part of these statements.~~
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
~~February 28,~~November 30, 2018
(Unaudited)
(Dollars in millions, except per share amounts)

Note 108 — Financing Arrangements

A summary of the carrying amount of our debt is as follows:

February 28,

May 31,

November 30,

May 31,

2018

2017

2018

2018

Revolving Credit Facility expiring November 1, 2021 with interest payable monthly

$
147.0

$
131.0

$
197.0

$
130.0

Term loan due November 1, 2021 with interest payable monthly

24.1

—

23.3

23.9

Industrial revenue bond (secured by property, plant and equipment) due August 1, 2018 with interest payable monthly

25.0

25.0

Capital lease obligations

0.1

0.2

Industrial revenue bond due August 1, 2018

—

25.0

Total debt

196.2

156.2

220.3

178.9

Current maturities

(0.1
)
(0.1
)
Debt issuance costs, net

(1.8
)
(2.0
)

(1.4
)
(1.7
)
Long-term debt

$
194.3

$
154.1

$
218.9

$
177.2

At ~~February 28,~~November 30, 2018, our variable ~~rate and fixed~~ rate debt had a fair value that approximates its carrying value and ~~are~~is classified as Level 2 in the fair value hierarchy.
The industrial revenue bond was paid on August 1, 2018 using our Revolving Credit Facility.

On October 18, 2017, we entered into a Credit Agreement with the Canadian Imperial Bank of Commerce, as lender (the “Credit Agreement”). The Credit Agreement provided a Canadian $31 million term loan with the proceeds used to fund the acquisition of two maintenance, repair, and overhaul (“MRO”) facilities in Canada from Premier Aviation. The term loan is due in full at the expiration of the Credit Agreement on November 1, 2021 unless terminated earlier pursuant to the terms of the Credit Agreement. Interest is payable monthly on the term loan at the offered fluctuating Canadian Dollar Offer Rate plus 125 to 225 basis points based on certain financial measurements if a Bankers’ Acceptances loan, or at the offered ~~fluctuation~~fluctuating Prime Rate plus 25 to 125 basis points based on certain financial measurements, if a Prime Rate loan.

~~The industrial revenue bond that matures on August 1, 2018 has been classified~~ ~~as a long-term liability due to our intent and ability to refinance this bond on a long-term basis using our Revolving Credit Facility.~~
Our financing arrangements also require us to comply with leverage and interest coverage ratios, maintain a minimum net working capital level, and comply with certain affirmative and negative covenants, including those relating to financial reporting and notification, payment of indebtedness, cash dividends, taxes and other obligations, compliance with applicable laws, and limitations on additional liens, indebtedness, acquisitions, investments and disposition of assets. The Revolving Credit Facility ~~and Credit Agreement~~ also ~~require~~requires our significant domestic subsidiaries, and any subsidiaries that guarantee our other indebtedness, to provide a guarantee of ~~payment.~~payment under the Revolving Credit Facility. At ~~February 28,~~November 30, 2018, we were in compliance with the financial and other covenants in our financing agreements.

~~The accompanying Notes to Condensed Consolidated Financial~~
~~Statements are an integral part of these statements.~~
~~AAR CORP. and Subsidiaries~~
~~Notes to Condensed Consolidated Financial Statements~~
~~February 28, 2018~~
~~(Unaudited)~~
~~(Dollars in millions, except per share amounts)~~
Note 119 — 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.~~options and shares issuable upon vesting of restricted stock awards.

In accordance with ASC 260-10-45, Share-Based Payment Arrangements and Participating Securities and the Two-Class Method, our unvested restricted stock awards are deemed participating securities since these shares are entitled to participate in dividends declared on common shares. During periods of net income, the calculation of earnings per share for common stock excludes income attributable to unvested restricted stock awards from the numerator and excludes the dilutive impact of those shares from the denominator. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2018
(Unaudited)
(Dollars in millions, except per share amounts)

A reconciliation of the computations of basic and diluted earnings per share information for the three- and ~~nine-month~~six-month periods ended ~~February 28,~~November 30, 2018 and 2017 is as follows:

Three Months Ended

Nine Months Ended

Three Months Ended

Six Months Ended

February 28,

February 28,

November 30,

November 30,

2018

2017

2018

2017

2018

2017

2018

2017

Basic and Diluted EPS:

Income from continuing operations

$
31.3

$
14.4

$
55.6

$
35.7

$
11.2

$
13.2

$
30.1

$
24.2

Less income attributable to participating shares

(0.2
)
(0.1
)
(0.5
)
(0.3
)

(0.1
)
(0.1
)
(0.1
)
(0.1
)
Income from continuing operations attributable to common shareholders

31.1

14.3

55.1

35.4

11.1

13.1

30.0

24.1

Loss from discontinued operations attributable to common shareholders

(15.8
)
(0.7
)
(52.0
)
(0.4
)

(4.2
)
(35.8
)
(8.0
)
(36.2
)
Net income (loss) attributable to common shareholders for earnings per share

$
15.3

$
13.6

$
3.1

$
35.0

$
6.9

$
(22.7
)
$
22.0

$
(12.1
)

Weighted Average Shares:

Weighted average common shares outstanding — basic

34.0

33.7

34.1

33.9

34.6

34.0

34.6

34.1

Additional shares from the assumed exercise of stock options

0.5

0.5

0.4

0.4

0.4

0.5

0.5

0.4

Weighted average common shares outstanding — diluted

34.5

34.2

34.5

34.3

35.0

34.5

35.1

34.5

Earnings (Loss) per share — basic:

Earnings from continuing operations

$
0.91

$
0.43

$
1.62

$
1.05

$
0.32

$
0.39

$
0.87

$
0.71

Loss from discontinued operations

(0.46
)
(0.02
)
(1.52
)
(0.01
)

(0.12
)
(1.05
)
(0.23
)
(1.06
)
Earnings (Loss) per share — basic

$
0.45

$
0.41

$
0.10

$
1.04

Earnings (Loss) per share — basic and diluted

$
0.20

$
(0.66
)
$
0.64

$
(0.35
)

Earnings (Loss) per share — diluted:

Earnings from continuing operations

$
0.90

$
0.42

$
1.60

$
1.04

$
0.32

$
0.38

$
0.85

$
0.70

Loss from discontinued operations

(0.46
)
(0.02
)
(1.52
)
(0.01
)

(0.12
)
(1.04
)
(0.23
)
(1.05
)
Earnings (Loss) per share — diluted

$
0.44

$
0.40

$
0.08

$
1.03

Earnings (Loss) per share — basic and diluted

$
0.20

$
(0.66
)
$
0.62

$
(0.35
)

The potential dilutive effect of 290,000 shares relating to stock options was excluded from the computation of weighted average common shares outstanding — diluted for both the three- and six-month periods ended November 30, 2018 as the shares would have been anti-dilutive. At ~~February 28, 2018 and~~November 30, 2017, the average market price of our common shares was in excess of the exercise prices of all of our outstanding options.
~~The accompanying Notes to Condensed Consolidated Financial~~
~~Statements are an integral part of these statements.~~
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
~~February 28,~~November 30, 2018
(Unaudited)
(Dollars in millions, except per share amounts)

Note 1210 — Accumulated Other Comprehensive Loss

Changes in our accumulated other comprehensive loss (“AOCL”) by component for the three- and ~~nine-month~~six-month periods ended ~~February 28,~~November 30, 2018 and 2017 were as follows:

Currency
Translation
Adjustments

Pension
Plans

Total

Currency
Translation
Adjustments

Pension
Plans

Total

Balance at December 1, 2017

$
0.8

$
(37.6
)
$
(36.8
)
Balance at September 1, 2018

$
(0.2
)
$
(32.0
)
$
(32.2
)
Other comprehensive loss before reclassifications

(0.6
)
—

(0.6
)
Amounts reclassified from AOCL

—

0.2

0.2

Total other comprehensive income (loss)

(0.6
)
0.2

(0.4
)
Balance at November 30, 2018

$
(0.8
)
$
(31.8
)
$
(32.6
)

Balance at September 1, 2017

$
(1.1
)
$
(37.9
)
$
(39.0
)
Other comprehensive income before reclassifications

0.9

—

0.9

1.9

—

1.9

Amounts reclassified from AOCL

—

0.3

0.3

—

0.3

0.3

Total other comprehensive income

0.9

0.3

1.2

1.9

0.3

2.2

Balance at February 28, 2018

$
1.7

$
(37.3
)
$
(35.6
)

Balance at December 1, 2016

$
(3.7
)
$
(42.8
)
$
(46.5
)
Other comprehensive loss before reclassifications

(0.2
)
—

(0.2
)
Amounts reclassified from AOCL

—

0.3

0.3

Total other comprehensive income (loss)

(0.2
)
0.3

0.1

Balance at February 28, 2017

$
(3.9
)
$
(42.5
)
$
(46.4
)
Balance at November 30, 2017

$
0.8

$
(37.6
)
$
(36.8
)

Currency
Translation
Adjustments

Pension
Plans

Total

Balance at June 1, 2018

$
0.3

$
(32.3
)
$
(32.0
)
Other comprehensive loss before reclassifications

(1.1
)
—

(1.1
)
Amounts reclassified from AOCL

—

0.5

0.5

Total other comprehensive income (loss)

(1.1
)
0.5

(0.6
)
Balance at November 30, 2018

$
(0.8
)
$
(31.8
)
$
(32.6
)

Currency
Translation
Adjustments

Pension
Plans

Total

Balance at June 1, 2017

$
(1.7
)
$
(38.2
)
$
(39.9
)

$
(1.7
)
$
(38.2
)
$
(39.9
)
Other comprehensive income before reclassifications

3.4

—

3.4

2.5

—

2.5

Amounts reclassified from AOCL

—

0.9

0.9

—

0.6

0.6

Total other comprehensive income

3.4

0.9

4.3

2.5

0.6

3.1

Balance at February 28, 2018

$
1.7

$
(37.3
)
$
(35.6
)

Balance at June 1, 2016

$
(1.1
)
$
(43.3
)
$
(44.4
)
Other comprehensive loss before reclassifications

(2.8
)
—

(2.8
)
Amounts reclassified from AOCL

—

0.8

0.8

Total other comprehensive income (loss)

(2.8
)
0.8

(2.0
)
Balance at February 28, 2017

$
(3.9
)
$
(42.5
)
$
(46.4
)
Balance at November 30, 2018

$
0.8

$
(37.6
)
$
(36.8
)

Note ~~13 — Sale of Product Line~~
During the three-month period ended August 31, 2016, we sold certain assets related to our temperature-controlled container product line to Sonoco Protective Solutions, Inc. (“Sonoco”) for $5 million. The sale price included $3 million paid at closing and $2 million in non-contingent, deferred consideration due over the following two years. We recognized a gain of $2.6 million on the sale. In conjunction with the sale, we also entered into a long-term manufacturing agreement to supply temperature-controlled containers to Sonoco over the following three years.
~~The accompanying Notes to Condensed Consolidated Financial~~
~~Statements are an integral part of these statements.~~
~~AAR CORP. and Subsidiaries~~
~~Notes to Condensed Consolidated Financial Statements~~
~~February 28, 2018~~
~~(Unaudited)~~
~~(Dollars in millions, except per share amounts)~~
~~Note 14~~11 — Acquisitions

On September 19, 2017, we acquired the outstanding shares of two MRO facilities in ~~Quebec and Ontario,~~ Canada owned by Premier Aviation for approximately $24.8 million. The purchase price includes $22.9 million paid at closing ~~and~~with the remaining deferred consideration ~~of $1.9 million payable~~paid in September 2018. This business is included in our Aviation Services segment. The amounts recorded for certain assets are preliminary in nature and are subject to adjustment as additional information is obtained about their acquisition date fair value. The final determination of the fair values will be completed within the one year measurement period. The preliminary fair value of assets acquired and liabilities assumed is as follows:

Current assets

$
4.1

$
4.4

Property and equipment

13.1

15.1

Intangible assets, including goodwill

16.0

14.6

Accounts payable and accrued liabilities

(8.4
)

(9.3
)

$
24.8

$
24.8

AAR CORP. and Subsidiaries
On April 10, 2017, we acquired the trading business of ACLAS Global Limited (“ACLAS”). In conjunction with the acquisition, we entered into a multi-year component support and repair contract covering approximately 100 of ACLAS’ aircraft. The purchase price of the acquisition was $12.0 million paid at closing with $3.0 millionNotes to Condensed Consolidated Financial Statements
November 30, 2018
(Unaudited)
(Dollars in deferred consideration payable over the next three years. This business operates as part of our Aviation Services segment. The amounts recorded for certain assets are preliminary in nature and are subject to adjustment as additional information is obtained about their acquisition date fair value. The final determination of the fair values will be completed within the one year measurement period. The preliminary fair value of assets acquired is as follows:millions, except per share amounts)
Inventory

$
5.0

Equipment on or available for long-term lease

7.0

Intangible assets

3.0

$
15.0

Note 1512 — Business Segment Information

Consistent with how our chief operating decision making officer (Chief Executive Officer) evaluates performance and the way we are organized internally, we report our activities in two ~~business~~operating segments: Aviation Services comprised of supply chain and MRO activities and Expeditionary Services comprised of manufacturing activities.
In the first quarter of fiscal 2019, we re-aligned the composition of our operating segments to leverage the full breadth of our operational expertise in Aviation Services. Our government-owned, contractor-operated ~~(“GOCO”) airlift services~~business, which includes the INL/A WASS program, was previously included in our Expeditionary Services segment and ~~mobility operations.~~is now reported within our Aviation Services segment for all periods presented.

The Aviation Services segment consists of aftermarket support and services ~~businesses~~offerings that provide spare parts and maintenance support for aircraft operated by our commercial and government/defense customers. Sales in the Aviation Services segment are derived from the sale and lease of a wide variety of new, overhauled and repaired engine and airframe parts and components to the commercial aviation and government and defense markets. We provide customized inventory supply chain management, performance based logistics programs, customer fleet management and operations, and aircraft component repair management ~~services, and aircraft modifications.~~services. The segment also includes repair, maintenance and overhaul of aircraft, landing gear and components. Cost of sales consists principally of the cost of product, direct labor, and overhead.

The ~~accompanying Notes to Condensed Consolidated Financial~~
~~Statements are an integral part of these statements.~~
~~AAR CORP. and Subsidiaries~~
~~Notes to Condensed Consolidated Financial Statements~~
~~February 28, 2018~~
~~(Unaudited)~~
~~(Dollars in millions, except per share amounts)~~
~~The~~ Expeditionary Services segment consists of businesses that provide products and services supporting the movement of equipment and personnel by the U.S. and foreign governments and other non-governmental organizations. Sales in the Expeditionary Services segment areprimarily manufacturing operations with sales derived from ~~fleet management and operations of customer-owned aircraft and~~ the design and manufacture of pallets, shelters, and containers used to support the U.S. military’s requirements for a mobile and agile ~~force. We also~~force including engineering, design, and ~~manufacture~~system integration services for specialized command and control systems. This segment also designs and manufactures advanced composite materials for commercial, business and military aircraft. Cost of sales consists principally of the cost of material to manufacture products, direct labor and overhead.

The accounting policies for the segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements included in our annual report on Form 10-K for the year ended May 31, ~~2017.~~ 2018 except for our revised accounting policy for revenue recognition. We adopted ASC 606 on June 1, 2018 and our revised accounting policy is further described in Note 3.
Our chief operating decision making officer (Chief Executive Officer) evaluates performance based on the ~~reportable~~operating segments and utilizes gross profit as a primary profitability measure. Gross profit is calculated by subtracting cost of sales from sales. The assets and certain expenses related to corporate activities are not allocated to the segments. ~~Our reportable segments are aligned principally around differences~~
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2018
(Unaudited)
(Dollars in ~~products and services.~~millions, except per share amounts)

Selected financial information for each segment is as follows:

Three Months Ended

Nine Months Ended

Three Months Ended

Six Months Ended

February 28,

February 28,

November 30,

November 30,

2018

2017

2018

2017

2018

2017

2018

2017

Sales:

Aviation Services

$
426.4

$
382.8

$
1,189.3

$
1,064.1

$
462.9

$
391.7

$
901.3

$
763.0

Expeditionary Services

29.9

24.4

85.5

76.2

30.4

28.9

58.3

55.5

$
456.3

$
407.2

$
1,274.8

$
1,140.3

$
493.3

$
420.6

$
959.6

$
818.5

Three Months Ended

Nine Months Ended

Three Months Ended

Six Months Ended

February 28,

February 28,

November 30,

November 30,

2018

2017

2018

2017

2018

2017

2018

2017

Gross profit:

Aviation Services

$
71.7

$
63.2

$
195.5

$
172.6

$
74.9

$
66.0

$
142.0

$
123.8

Expeditionary Services

5.9

3.3

14.4

12.9

3.4

4.7

7.5

8.5

$
77.6

$
66.5

$
209.9

$
185.5

$
78.3

$
70.7

$
149.5

$
132.3

The following table reconciles segment gross profit to income from continuing operations before provision for income ~~taxes (benefit).~~taxes:

Three Months Ended

Nine Months Ended

February 28,

February 28,

2018

2017

2018

2017

Segment gross profit

$
77.6

$
66.5

$
209.9

$
185.5

Selling, general and administrative

(53.4
)
(43.1
)
(146.7
)
(126.6
)
Interest expense

(2.2
)
(1.4
)
(5.8
)
(3.8
)
Interest income

—

0.1

0.1

0.1

Other expense

(0.5
)
—

(0.5
)
—

Income from continuing operations before provision for income taxes (benefit)

$
21.5

$
22.1

$
57.0

$
55.2

~~The accompanying Notes to Condensed Consolidated Financial~~
~~Statements are an integral part of these statements.~~
~~AAR CORP. and Subsidiaries~~
~~Notes to Condensed Consolidated Financial Statements~~
~~February 28, 2018~~
~~(Unaudited)~~
~~(Dollars in millions, except per share amounts)~~

Three Months Ended

Six Months Ended

November 30,

November 30,

2018

2017

2018

2017

Segment gross profit

$
78.3

$
70.7

$
149.5

$
132.3

Selling, general and administrative

(49.1
)
(48.8
)
(97.3
)
(93.1
)
Provision for doubtful accounts

(12.4
)
(0.1
)
(13.0
)
(0.3
)
Other income (expense), net

(0.2
)
—

0.2

—

Interest expense

(2.5
)
(1.9
)
(4.6
)
(3.6
)
Interest income

0.1

0.1

0.6

0.1

Income from continuing operations before provision for income taxes

$
14.2

$
20.0

$
35.4

$
35.4

Note 1613 — Legal Proceedings

We are not a party to any material pending legal proceeding (including any governmental or environmental proceeding) other than routine litigation incidental to our business except for the following:

~~DynCorp International LLC v. AAR Airlift Group, Inc.~~Department of Justice Investigation

~~On September 5, 2015, DynCorp International LLC~~The U.S. Department of Justice (“~~DynCorp”~~DoJ”) ~~filed a complaint in~~, acting through the ~~United States District Court~~U.S. Attorney’s Office for the ~~Middle~~Southern District of ~~Florida, Orlando Division (the “District Court”), accusing~~Illinois, is conducting an investigation of AAR Airlift Group, Inc. (“~~AAR~~ Airlift”)~~, a wholly-owned subsidiary~~ under the federal civil False Claims Act (“FCA”). The investigation relates to Airlift’s performance of AAR CORP., of misappropriation of DynCorp information, including trade secrets, and other related allegations. DynCorp’s complaint, which sought damages in an unspecified amount and a preliminary injunction, alleged that AAR Airlift engaged in this conduct in connection with the submission of proposals in response to the solicitation issuedseveral contracts awarded by the U.S. ~~Department~~Transportation Command concerning the operations and maintenance of ~~State (“DOS”) Bureau of International Narcotics~~rotary-wing and ~~Law Enforcement Affairs, Office of Aviation (“INL/A”)~~fixed-wing aircraft in ~~support~~Afghanistan and Africa, as well as several U.S. Navy contracts. In June 2018, the DoJ informed Airlift that part of the ~~Worldwide Aviation Support Services program (“INL/A WASS”). The INL/A WASS contract~~investigation was ~~subsequently awarded to AAR~~precipitated by a lawsuit filed under the qui tam provisions of the FCA by a former employee of Airlift. That lawsuit remains under seal.   Airlift ~~on September 1, 2016.~~
~~The District Court denied DynCorp’s preliminary injunction motion, and on October 19, 2015, DynCorp filed an amended complaint~~is cooperating with the District Court. On January 14, 2016, the District Court granted AAR Airlift’s motion to dismiss DynCorp’s amended complaint. On February 2, 2016, DynCorp appealed the District Court’s order to the United States Court of Appeals for the Eleventh Circuit (the “Eleventh Circuit”).
On November 21, 2016, the Eleventh Circuit reversed in part the District Court’s dismissal of the amended complaint and remanded the case to the District Court for further proceedings. The District Court set a discovery schedule that was to end on September 1, 2017 and a trial date of April 2, 2018.
On June 16, 2017, the District Court granted AAR Airlift’s motion to stay the legal proceeding against AAR Airlift. The stay was to remain in effect until the earlier of (a) October 31, 2017 or (b) the entry of a decision of the United States Court of Federal Claims (“COFC”), on DynCorp’s protest of the contract award to AAR Airlift. The District Court’s stay immediately halted all discovery and other activity in the DynCorp lawsuit.
On October 31, 2017, the COFC denied DynCorp’s protest of the DOS award to AAR Airlift. Following the COFC decision, the Department of State lifted the voluntary stay that had been in place on the INL/A WASS contract, and since that time it has issued several task orders to AAR Airlift in order to transition the INL/A WASS program to AAR Airlift.
On November 29, 2017, the District Court granted AAR Airlift’s motion to stay discovery in this lawsuit pending the District Court’s resolution of AAR Airlift’s motion for summary judgment. The District Court’s decision effectively extended the stay that was previously in effect.
On December 1, 2017, AAR Airlift filed its motion for summary judgment with the District Court. This motion maintains that DynCorp’s claims fail as a matter of law because DynCorp suffered no damages attributable to any alleged conduct of AAR Airlift; rather, as determined by the COFC, DynCorp was deemed ineligible for the INL/A WASS contract on account of its own actions.
On January 31, 2018, AAR Airlift and DynCorp filed a joint notice of settlement, advising the District Court that they had reached an agreement in principle to resolve DynCorp’s lawsuit and that they expected to file a stipulation of dismissal ~~with~~ ~~prejudice within 14 days (meaning that DynCorp may not file its claims again).~~
~~On February 1, 2018, the District Court entered an order dismissing the DynCorp lawsuit~~ ~~without~~ prejudice subject to the right of any party within 60 days to move the court for the purpose of entering a stipulated form of a final order or judgment or, on good cause shown, to reopen the case for further proceedings.
On March 16, 2018, however, DynCorp moved to reopen the case for further proceedings, stating that the parties did not have a meeting of the minds on a potential settlement. On March 19, 2018, AAR filed a response to DynCorp’s motion, clarifying that the parties did reach an agreement to settle the case and requesting that the court reopen the case for the limited purpose of allowing AAR Airlift to file a motion to enforce the settlement agreement reached between the parties and to dismiss the DynCorp lawsuit ~~with~~ ~~prejudice.~~
~~The accompanying Notes to Condensed Consolidated Financial~~
~~Statements are an integral part of these statements.~~DoJ investigation.
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
~~(Dollars~~  (Dollars in millions)

General Overview

We report our activities in two ~~business~~operating segments: Aviation Services comprised of supply chain and maintenance, repair, and overhaul (“MRO”) activities and Expeditionary Services comprised of manufacturing activities.
In the first quarter of fiscal 2019, we re-aligned the composition of our operating segments to leverage the full breadth of our operational expertise in Aviation Services. Our government-owned, contractor-operated ~~(“GOCO”) airlift services~~business, which includes the INL/A WASS program and ~~mobility operations.~~was previously included in our Expeditionary Services segment, is now reported within our Aviation Services segment for all periods presented.

The Aviation Services segment consists of aftermarket support and services ~~businesses~~offerings that provide spare parts and maintenance support for aircraft operated by our commercial and government/defense customers. Sales in the Aviation Services segment are derived from the sale and lease of a wide variety of new, overhauled and repaired engine and airframe parts and components to the commercial aviation and government and defense markets. We provide customized inventory supply chain management, performance based logistics programs, customer fleet management and operations, and aircraft component repair management ~~services, and aircraft modifications.~~services. The segment also includes repair, maintenance and overhaul of aircraft, landing gear and components. Cost of sales consists principally of the cost of product, direct labor, and overhead.

The Expeditionary Services segment consists of businesses that provide products and services supporting the movement of equipment and personnel by the U.S. and foreign governments and other non-governmental organizations. Sales in the Expeditionary Services segment areprimarily manufacturing operations with sales derived from ~~fleet management and operations of customer-owned aircraft and~~ the design and manufacture of pallets, shelters, and containers used to support the U.S. military’s requirements for a mobile and agile ~~force. We also~~force including engineering, design, and ~~manufacture~~system integration services for specialized command and control systems. This segment also designs and manufactures advanced composite materials for commercial, business and military aircraft. Cost of sales consists principally of the cost of material to manufacture products, direct labor and overhead.

The accounting policies for the segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements included in our annual report on Form 10-K for the year ended May 31, ~~2017.~~ 2018 except for our revised accounting policy for revenue recognition. We adopted ASC 606 on June 1, 2018 and our revised accounting policy is further described in Note 3.
Our chief operating decision making officer (Chief Executive Officer) evaluates performance based on the ~~reportable~~operating segments and utilizes gross profit as a primary profitability measure. Gross profit is calculated by subtracting cost of sales from sales. The assets and certain expenses related to corporate activities are not allocated to the segments. ~~Our reportable segments are aligned principally around differences in products and services.~~

InBeginning in fiscal ~~2017,~~2015, we ~~increased~~implemented a comprehensive strategic plan to narrow our strategy to focus on our best-in-class aviation and expeditionary services through our two business segments: Aviation Services ~~segment revenues by~~and Expeditionary Services. We sold our Telair Cargo Group for cash of $714 million, resulting in pre-tax gains of $198.6 million in the fourth quarter of fiscal 2015 (and $27.7 million in the first quarter of fiscal 2016 from the receipt of contingent consideration). We used the proceeds from the sale in fiscal 2015 to reduce our total debt and return capital to stockholders through common stock repurchases and dividends.
Through execution of our strategic plan over the last three years, we have succeeded in expanding customer relationships and securing ~~additional~~new flight hour component inventory management and repair programs ~~from our~~with multiple international commercial ~~airline~~ customers and ~~investing~~government customers. We also invested in our capacity and business development resources. During fiscal 2017, our investment in business development resulted in the award of new contracts from commercial operators along with investment of over $80 million in rotable assets to support these ~~commercial aviation programs.~~
~~We started~~programs and continued our focus on expanding our business development resources. These investments in our supply chain activities have allowed us to ~~recognize revenue~~increase market share, expand our customer base, and ~~income in~~enlarge our geographic footprint.
In fiscal ~~2017 on most of these contract awards and are continuing~~2018, we began the ramp-up ~~in fiscal 2018. We believe there continues to be a favorable trend by both commercial and government and defense customers~~ for ~~comprehensive~~the 15-year, U.S. Air Force Landing Gear Performance-Based Logistics One program. Under this program, we are providing total supply chain management including purchasing, distribution and ~~maintenance programs, as these customers continue~~inventory control to ~~seek ways to reduce their operating cost structure.~~support all landing gear components for the U.S. Air Force’s fleet of C-130, KC-135 and E-3 aircraft.

In ~~November 2017,~~fiscal 2018, we also began ~~transition~~providing services onto the U.S. Department of State (“DoS”) under the INL/A Worldwide Aviation Support Services (“INL/A WASS”) ~~contract from the U.S. Department of State (“DOS”).~~contract. This contract leverages our capabilities in aviation services, including flight operations, supply chain logistics, and other services. We are the prime contractor on this ~~ten-year~~10-year performance-based contract to globally operate and maintain the ~~DOS~~DoS fleet of fixed and rotary-wing aircraft. We ~~expect to be fully operational by~~successfully completed the ~~end~~transition and phase-in of the ~~fourth quarter of fiscal 2018 at which point the INL/A~~ WASS program ~~will be a contributor to our earnings.~~in June 2018. We have full operational capability at all contract sites, which include Afghanistan, Iraq, Panama, Peru, and Patrick Air Force Base as well as support locations in Brevard County, Florida.

~~We have been repositioning~~Fiscal 2019
For fiscal 2019, we continue to see strength in our ~~Expeditionary~~Aviation Services segment ~~resources~~given its leadership positions in value-added services to ~~focus on a GOCO model rather than a Contractor-Owned, Contractor-Operated (“COCO”) model as we transition~~both commercial and government and defense customers. Long-term aftermarket growth trends are favorable and our comprehensive suite of integrated services will continue to ~~a capital light operating structure in this segment. During the third quarter~~drive growth across our diverse base of fiscal 2018, we decided to pursue the sale of our COCO business. Due to this strategic shift, the assets, liabilities, and results of operations of our COCO business have been reported as discontinued operations for all periods presented.
~~Fiscal Year 2019 Outlook~~customers.

We remain in a strong financial position to further execute on our strategy ~~as a best~~ in ~~class aviation services~~fiscal 2019. Both our commercial and ~~expeditionary services company.~~government businesses are executing on our many contract wins and are delivering growth in fiscal 2019. Our cash on hand plus unused capacities on our Revolving Credit Facility and ~~our new~~ accounts receivable financing program was ~~$458~~$380 million at ~~February 28,~~November 30, 2018. We expect to invest opportunistically in expanding our comprehensive suite of services to the global commercial aviation and government and defense markets. We continue to have the flexibility in our balance sheet to invest in our growth. ~~As we generate positive cash flow, we will continue our strategy of returning capital to our shareholders without hampering our future operating flexibility and our growth plans.~~
For fiscal 2019, we expect the Company’s consolidated sales in the range of $2.1 to $2.2 billion. This sales range includes $200 to $225 million for our INL/A WASS contract. Diluted earnings per share from continuing operations for fiscal 2019 is expected to be in the range of $2.50 to $2.80.

Results of Operations

Sales and gross profit for our two business segments for the three- and ~~nine-months~~six-months ended ~~February 28,~~November 30, 2018 and 2017 were as follows:

Three Months Ended February 28,

Nine Months Ended February 28,

2018

2017

% Change

2018

2017

% Change

Sales:

Aviation Services Commercial

$
340.1

$
291.4

16.7
%
$
940.3

$
780.1

20.5
%
Government and Defense

86.3

91.4

(5.6
)%
249.0

284.0

(12.3
)%

$
426.4

$
382.8

11.4
%
$
1,189.3

$
1,064.1

11.8
%
Expeditionary Services Commercial

$
10.9

$
10.9

—

$
28.4

$
28.6

(0.7
)%
Government and Defense

19.0

13.5

40.7
%
57.1

47.6

20.0
%

$
29.9

$
24.4

22.5
%
$
85.5

$
76.2

12.2
%

Three Months Ended February 28,

Nine Months Ended February 28,

2018

2017

% Change

2018

2017

% Change

Gross Profit:

Aviation Services Commercial

$
52.7

$
47.0

12.1
%
$
146.3

$
126.9

15.3
%
Government and Defense

19.0

16.2

17.3
%
49.2

45.7

7.7
%

$
71.7

$
63.2

13.4
%
$
195.5

$
172.6

13.3
%
Expeditionary Services Commercial

$
2.3

$
1.7

35.3
%
$
6.8

$
5.9

15.3
%
Government and Defense

3.6

1.6

125.0
%
7.6

7.0

8.6
%

$
5.9

$
3.3

78.8
%
$
14.4

$
12.9

11.6
%

Three Months Ended November 30,

Six Months Ended November 30,

2018

2017

% Change

2018

2017

% Change

Sales:

Aviation Services Commercial

$
325.5

$
303.4

7.3
%
$
632.2

$
600.2

5.3
%
Government and defense

137.4

88.3

55.6
%
269.1

162.8

65.3
%

$
462.9

$
391.7

18.2
%
$
901.3

$
763.0

18.1
%

Expeditionary ServicesCommercial

$
8.0

$
9.2

(13.0
)%
$
16.5

$
17.5

(5.7
)%
Government and defense

22.4

19.7

13.7
%
41.8

38.0

10.0
%

$
30.4

$
28.9

5.2
%
$
58.3

$
55.5

5.0
%

Three Months Ended November 30,

Six Months Ended November 30,

2018

2017

% Change

2018

2017

% Change

Gross Profit:

Aviation Services Commercial

$
46.5

$
49.4

(5.9
)%
$
89.3

$
93.6

(4.6
)%
Government and defense

28.4

16.6

71.1
%
52.7

30.2

74.5
%

$
74.9

$
66.0

13.5
%
$
142.0

$
123.8

14.7
%
Expeditionary Services Commercial

$
0.5

$
2.0

(75.0
)%
$
1.5

$
4.5

(66.7
)%
Government and defense

2.9

2.7

7.4
%
6.0

4.0

50.0
%

$
3.4

$
4.7

(27.7
)%
$
7.5

$
8.5

(11.8
)%

Three Month Period Ended ~~February 28,~~November 30, 2018

Aviation Services Segment

Sales in the Aviation Services segment increased ~~$43.6~~$71.2 million or ~~11.4%~~18.2% over the prior year period due to a ~~$48.7~~$49.1 million or ~~16.7%~~55.6% increase in sales to ~~commercial~~government and defense customers. The increase in sales to ~~commercial~~government and defense customers was primarily attributable to ~~higher volumes~~the INL/A WASS program, which achieved full operational capability in aviation supply chain activities. We also acquired two MRO facilities in Canada in conjunction with the Premier Aviation acquisition in September 2017 which contributed $11.7 million in sales to commercial customers.June 2018.
During the ~~third~~second quarter of fiscal ~~2018,~~2019, sales in this segment to ~~government and defense~~commercial customers ~~decreased $5.1~~increased $22.1 million or ~~5.6% from~~7.3% over the prior year period. The ~~decrease~~increase was primarily due to ~~the wind-down of~~increased demand in our ~~KC-10 Program partially offset by increased volume in parts~~ supply chain activities. Our principal services under the KC-10 Program were completed in January 2017 with the wind-down expected to be complete in fiscal 2018. Sales for the KC-10 Program during the three-month periods ended February 28, 2018 and 2017 were $3.6 million and $24.3 million, respectively.

Changes in estimates and assumptions related to our ~~programs~~arrangements accounted for using the ~~percentage-of-completion~~cost-to-cost method are recorded using the cumulative catch-up method of accounting. InFor the ~~third~~second quarter of fiscal ~~2018,~~2019, we recognized favorable ~~and unfavorable~~ cumulative catch-up adjustments of ~~$8.3~~$3.1 million compared to favorable and unfavorable adjustments of $1.0 million and ~~$6.5~~$0.6 million, respectively, ~~compared to only favorable adjustments of $3.2 million~~ in the prior year period. When considering these adjustments on a net basis, we recognized favorable ~~cumulative catch-up~~ adjustments of ~~$1.8~~$3.1 million and ~~$3.2~~$0.4 million for the ~~current~~second quarter of fiscal 2019 and ~~prior year periods,~~2018, respectively. These adjustments ~~primarily~~ relate to our long-term, power-by-the-hour programs where we provide component inventory management and repair services.

Cost of sales in Aviation Services increased ~~$35.1~~$62.3 million or ~~11.0%~~19.1% over the prior year period, which was largely in line with the sales increase discussed above. Gross profit in the Aviation Services segment increased ~~$8.5~~$8.9 million or ~~13.4%~~13.5% over the prior year period. Gross profit on sales to ~~commercial~~government and defense customers increased ~~$5.7~~$11.8 million or ~~12.1%~~71.1% over the prior year primarily driven by the ~~higher volumes in aviation supply chain activities.~~start of the INL/A WASS program. Gross profit margin on sales to ~~commercial~~government and defense customers ~~decreased~~increased to 20.7% from ~~16.1% to 15.5%~~18.8% primarily as a result of the mix of products and services sold.

Gross profit on sales to ~~government and defense~~commercial customers ~~increased $2.8~~decreased $2.9 million or ~~17.3% over~~5.9% from the prior year period primarily due to the ~~increased~~lower volume in ~~parts supply~~our MRO activities. The gross profit margin on sales to ~~government and defense~~commercial customers ~~increased~~decreased from ~~17.7%~~16.3% to ~~22.0%~~14.3% reflecting the ~~wind-down~~impact of ~~the~~these lower ~~profitability KC-10 Program.~~volumes.

Expeditionary Services Segment

Sales in the Expeditionary Services segment increased ~~$5.5~~$1.5 million or ~~22.5%~~5.2% over the prior year period primarily due to ~~the continued recovery in sales volumes~~stronger demand for our mobility ~~products business.~~ products.
Gross profit in the Expeditionary Services segment ~~increased $2.6~~decreased $1.3 million or ~~78.8% over~~27.7% from the prior ~~year~~ period ~~primarily due to the increased sales volumes discussed above. Gross~~and gross profit margin ~~for Expeditionary Services increased~~decreased to 11.2% from ~~13.5% to 19.7%~~16.3% primarily as a result of the mix of products sold.
Provision for Doubtful Accounts
In the three-month period ended November 30, 2018, we recognized a provision for doubtful accounts of $12.4 million related to the bankruptcy of a European airline customer. The provision included impairment of non-current contract assets of $7.6 million, allowance for doubtful accounts of $3.3 million, and ~~services sold.~~other liabilities of $1.5 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased ~~$10.3~~$0.3 million over the prior year period. As a percent of sales, selling, general and administrative expenses decreased to 10.0% from 11.6% in the prior year period ~~primarily due~~reflecting improved leverage of our existing cost structure to ~~increased personnel related costs. During~~support the ~~three months ended February 28, 2018, we incurred $1.1 million of severance costs in connection with a voluntary early retirement program.~~sales growth.

Interest Expense

Interest expense increased ~~$0.8~~$0.6 million ~~in fiscal 2018 from~~over the prior year period primarily as a result of higher borrowings and higher interest rates on our Revolving Credit Facility. We also entered into a Credit Agreement with the Canadian Imperial Bank of Commerce, as lender (the “Credit Agreement”) on October 18, 2017. The Credit Agreement provided a Canadian $31 million term loan with the proceeds used to fund the acquisition of two MRO facilities in Canada from Premier Aviation.

Income Taxes

~~On December 22, 2017,~~Our effective income tax rate for continuing operations was 21.1% in the second quarter of fiscal 2019 compared to 34.0% in the prior year period primarily due to the Tax Cuts and Jobs Act (the “Tax Reform Act”) ~~was enacted~~, which significantly reduced the corporate federal income tax rate to 21% from 35%. The income tax rate reduction in the Tax Reform Act results in a blended federal statutory tax rate for the Company of 29.2% in fiscal 2018. Our income tax expense for the three-month period ended February 28, 2018 included a benefit of $1.8 million related to the impact of our revised, lower estimated fiscal 2018 tax rate applied to our pre-tax income for the six-month period ended November 30, 2017 which was previously expected to be taxed at 35%.
We also re-measured our deferred tax assets and liabilities based on the tax rate at which they are expected to reverse in the future, which is either at a federal rate of 29.2% for reversals in fiscal 2018 or 21% for reversals in fiscal 2019 and subsequent years. We recognized an income tax benefit of $13.0 million in the three-month period ended February 28, 2018 for the impact of the re-measurement of our deferred tax assets and liabilities at these new rates.
Effective June 1, 2017, we adopted Accounting Standards Update (“ASU”) 2016-09 which requires excess tax benefits or deficiencies for restricted shares and stock options be recognized as income tax expense or benefit in the period shares vest or options are exercised rather than within equity. We recognized $0.8 million of excess tax benefits as an income tax benefit during the three-month period ended February 28, 2018.
~~Discontinued Operations~~
During the third quarter of fiscal 2018, we decided to pursue the sale of our COCO business previously included in our Expeditionary Services segment. Due to this strategic shift, the assets, liabilities, and results of operations of our COCO business have been reported as discontinued operations for all periods presented.
Loss from discontinued operations was $15.8 million in the three-month period ended February 28, 2018 compared to $0.7 million in the prior year period. The increase of $15.1 million was primarily due to goodwill and other asset impairment pre-tax charges of $11.0 million in the third quarter of fiscal 2018 and the completion of certain long-term customer contracts in the second quarter of fiscal 2018.

~~Nine-Month~~Six Month Period Ended ~~February 28,~~November 30, 2018

Aviation Services Segment

Sales in the Aviation Services segment increased ~~$125.2~~$138.3 million or ~~11.8%~~18.1% over the prior year period due to a ~~$160.2~~$106.3 million or ~~20.5%~~65.3% increase in sales to ~~commercial~~government and defense customers. The increase in sales to ~~commercial~~government and defense customers was primarily attributable to ~~higher volumes~~the INL/A WASS program, which achieved full operational capability in aviation supply chain activities driven primarily by new contract awards. We also acquired two MRO facilities in Canada in conjunction with the Premier Aviation acquisition in September 2017 which contributed $21.7 million in sales to commercial customers.
June 2018. Sales in this segment to ~~government and defense~~commercial customers ~~decreased $35.0~~increased $32.0 million or ~~12.3% from~~5.3% over the prior year ~~period. The decrease was~~period primarily due to ~~the wind-down of~~increased demand in our ~~KC-10 Program partially offset by increased volume in parts~~ supply chain activities. Our principal services under the KC-10 Program were completed in January 2017 with the wind-down expected to be complete in fiscal 2018. Sales for the KC-10 Program during the nine-month periods ended February 28, 2018 and 2017 were $24.6 million and $92.3 million, respectively.

Changes in estimates and assumptions related to our ~~programs~~arrangements accounted for using the ~~percentage-of-completion~~cost-to-cost method are recorded using the cumulative catch-up method of accounting. For the ~~nine-month~~six-month period ended ~~February 28,~~November 30, 2018, we recognized favorable and unfavorable cumulative catch-up adjustments of ~~$9.3~~$3.8 million and ~~$7.1~~$0.5 million, respectively, compared to ~~only~~ favorable and unfavorable adjustments of ~~$7.8~~$1.0 million and $0.6 million, respectively, in the prior year period. When considering these adjustments on a net basis, we recognized favorable cumulative catch-up adjustments of ~~$2.2~~$3.3 million and ~~$7.8~~$0.4 million for the ~~current~~six-month periods ended November 30, 2018 and ~~prior year periods,~~2017, respectively. These adjustments ~~primarily~~ relate to our long-term, power-by-the-hour programs where we provide component inventory management and repair services.

Cost of sales in Aviation Services increased ~~$102.3~~$120.1 million or ~~11.5%~~18.8% over the prior year period, which was largely in line with the sales increase discussed above. Gross profit in the Aviation Services segment increased ~~$22.9~~$18.2 million or ~~13.3%~~14.7% over the prior year period. Gross profit on sales to ~~commercial~~government and defense customers increased ~~$19.4~~$22.5 million or ~~15.3%~~74.5% over the prior year primarily driven by the ~~higher volumes in aviation supply chain activities discussed above.~~start of the INL/A WASS program. Gross profit margin on sales to ~~commercial~~government and defense customers ~~decreased~~increased to 19.6% from ~~16.3% to 15.6%~~18.6% primarily as a result of the mix of products and services sold.

Gross profit on sales to ~~government and defense~~commercial customers ~~increased $3.5~~decreased $4.3 million or ~~7.7% over~~4.6% from the prior year period primarily due to the ~~increased~~lower volume in ~~parts supply~~our MRO activities. The gross profit margin on sales to ~~government and defense~~commercial customers ~~increased~~decreased from ~~16.1%~~15.6% to ~~19.8%~~14.1% reflecting the ~~wind-down~~impact of ~~the~~these lower ~~profitability KC-10 Program.~~volumes.
Expeditionary Services Segment

Sales in the Expeditionary Services segment increased ~~$9.3~~$2.8 million or ~~12.2%~~5.0% over the prior year period primarily due to ~~the continued recovery in sales volumes~~stronger demand for our mobility ~~products business.~~ products.
Gross profit in the Expeditionary Services segment ~~increased $1.5~~decreased $1.0 million or 11.8% from the prior period ~~which was primarily in line with the sales increase discussed above as the~~and gross profit margin ~~was 16.8% in~~decreased to 12.9% from 15.3% primarily as a result of the ~~current~~mix of products sold.
Provision for Doubtful Accounts
In the six-month period ~~compared~~ended November 30, 2018, we recognized a provision for doubtful accounts of $12.4 million related to ~~16.9% in~~ the ~~prior year period.~~bankruptcy of a European airline customer. The provision included impairment of non-current contract assets of $7.6 million, allowance for doubtful accounts of $3.3 million, and other liabilities of $1.5 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased ~~$20.1~~$4.2 million over the prior year period. As a percent of sales, selling, general and administrative expenses decreased to 10.1% from 11.4% in ~~fiscal 2018 primarily due~~the prior year period reflecting improved leverage of our existing cost structure to ~~higher legal costs related to our defense of~~support the ~~INL/A WASS award. During the three months ended February 28, 2018, we also incurred $1.1 million of severance costs in connection with a voluntary early retirement program.~~sales growth.

Interest Expense

Interest expense increased ~~$2.0~~$1.0 million in fiscal ~~2018 from~~2019 over the prior year period primarily as a result of higher borrowings and higher interest rates on our Revolving Credit ~~Facility and our new Canadian Credit Agreement.~~Facility.

Income Taxes

Our effective income tax rate for continuing operations was ~~2.5%~~15.0% for the ~~nine-month~~six-month period ended ~~February 28, 2017~~November 30, 2018 compared to ~~35.3%~~31.6% in the prior year period.
The effective tax rate was impacted by the Tax Cuts and Jobs Act (the “Tax Reform ~~Act~~Act”), which significantly reduced the corporate federal income tax rate to 21% from 35% ~~which resulted~~. Higher excess tax benefits from the vesting of restricted shares and stock options exercises in ~~a blended federal statutory~~fiscal 2019 compared to the prior year period also contributed to the lower effective tax rate ~~for the Company of 29.2%~~ in fiscal ~~2018.~~2019. We ~~also re-measured our deferred tax assets and liabilities based on the tax rate at which they are expected to reverse in the future and~~ recognized ~~an income tax benefit of $13.0 million in the nine-month period ended February 28, 2018 reflecting the impact of the re-measurement.~~
~~We also recognized $2.4~~$2.7 million of excess tax benefits as ~~an increase~~a reduction to ~~our~~ income tax ~~benefit~~expense during ~~the nine-month period ended February 28, 2018 related to the adoption of ASU 2016-09.~~
~~Discontinued Operations~~
~~Loss from discontinued operations was $52.0 million in the nine-month period ended February 28, 2018~~fiscal 2019 compared to ~~$0.4~~$1.6 million in the prior year period. The increase of $51.6 million was primarily attributable to pre-tax asset impairment charges of $65.2 million and the completion of certain long-term customer contracts in the second quarter of fiscal 2018.

Liquidity, Capital Resources and Financial Position
~~At February 28, 2018, our liquidity and capital resources included cash of $23.9 million and working capital of $607.0 million.~~
We maintain a Revolving Credit Facility with various financial institutions, as lenders, and Bank of America, N.A., as administrative agent for the lenders which provides the Company an aggregate revolving credit commitment amount of $500 million and matures November 1, 2021. The Company, under certain circumstances, has the ability to request an increase to the revolving credit commitment by an aggregate amount of up to $250 million, not to exceed $750 million in total.
Borrowings under the Revolving Credit Facility bear interest at the offered Eurodollar Rate plus 100 to 200 basis points based on certain financial measurements if a Eurodollar Rate loan, or at the offered fluctuating Base Rate plus 0 to 100 basis points based on certain financial measurements if a Base Rate loan.
Borrowings outstanding under the Revolving Credit Facility at February 28, 2018 were $147.0 million and there were approximately $16.6 million of outstanding letters of credit, which reduced the availability of this facility to $336.4 million. There are no other terms or covenants limiting the availability of this facility. We also had $10.2 million available under foreign lines of credit at February 28, 2018.
On October 18, 2017, we entered into a Credit Agreement with the Canadian Imperial Bank of Commerce, as lender. The Credit Agreement provided a Canadian $31 million term loan with the proceeds used to fund the acquisition of two maintenance, repair, and overhaul facilities in Canada from Premier Aviation. The term loan is due in full at the expiration of the Credit Agreement on November 1, 2021 unless terminated earlier pursuant to the terms of the Credit Agreement. Interest is payable monthly on the term loan at the offered fluctuating Canadian Dollar Offer Rate plus 125 to 225 basis points based on certain financial measurements if a Bankers’ Acceptances loan, or at the offered fluctuation Prime Rate plus 25 to 125 basis points based on certain financial measurements, if a Prime Rate loan.
On February 23, 2018, we entered into a Purchase Agreement with Citibank N.A. (“Purchaser”) for the sale, from time to time, of certain accounts receivable due from certain customers (the “Purchase Agreement”). Under the Purchase Agreement, the maximum amount of receivables sold is limited to $150 million. The term of the Purchase Agreement runs through February 22, 2019, however, the Purchase Agreement may also be terminated earlier under certain circumstances. The term of the Purchase Agreement shall be automatically extended for annual terms unless either party provides advance notice that they do not intend to extend the term. During the three-month period ended February 28, 2018, we sold $63.0 million of receivables under the Purchase Agreement and collected $10.7 million on behalf of the Purchaser.

Our operating activities are funded and commitments met through the generation of cash from operations. In addition to operations, ~~including sales of~~our current capital resources include an unsecured Revolving Credit Facility and an accounts receivable ~~in addition to borrowings from our Revolving Credit Facility.~~financing program. Periodically, we may also raise capital through common stock and debt financings in the public or private markets. We continually evaluate various financing arrangements, including the issuance of common stock or debt, which would allow us to improve our liquidity position and finance future growth on commercially reasonable terms. Our continuing ability to borrow from our lenders and issue debt and equity securities to the public and private markets in the future may be negatively affected by a number of factors, including the overall health of the credit markets, general economic conditions, airline industry conditions, geo-political events, and our operating performance. Our ability to generate cash from operations is influenced primarily by our operating performance and changes in working capital.

At November 30, 2018, our liquidity and capital resources included cash of $25.7 million and working capital of $696.5 million.
We ~~intend to retire current maturities due in the next twelve months through borrowings under our~~maintain a Revolving Credit ~~Facility.~~Facility with various financial institutions, as lenders, and Bank of America, N.A., as administrative agent for the lenders, which provides the Company an aggregate revolving credit commitment amount of $500 million and matures November 1, 2021. The Company, under certain circumstances, has the ability to request an increase to the revolving credit commitment by an aggregate amount of up to $250 million, not to exceed $750 million in total.
Borrowings under the Revolving Credit Facility bear interest at the offered Eurodollar Rate plus 100 to 200 basis points based on certain financial measurements if a Eurodollar Rate loan, or at the offered fluctuating Base Rate plus 0 to 100 basis points based on certain financial measurements if a Base Rate loan.
Borrowings outstanding under the Revolving Credit Facility at November 30, 2018 were $197.0 million and there were approximately $15.2 million of outstanding letters of credit, which reduced the availability of this facility to $287.8 million. There are no other terms or covenants limiting the availability of this facility. We also had $9.6 million available under foreign lines of credit at November 30, 2018.

At ~~February 28,~~November 30, 2018, we complied with all financial and other covenants under ~~each of~~ our financing arrangements.

Cash Flows from Operating Activities

Net cash ~~provided from~~used in operating activities—continuing operations was ~~$15.6~~$41.2 million in the ~~nine-month~~six-month period ended ~~February 28,~~November 30, 2018 compared to cash used of ~~$37.8~~$34.8 million in the prior year period. The increase from the prior period of ~~$53.4~~$6.4 million was primarily attributable to higher inventory investments in the ~~new Purchase Agreement entered into during the third quarter of fiscal 2018 for the sale of certain accounts receivable. As of February 28, 2018, we had sold~~current year and increased accounts receivable ~~of $63.0 million and collected, but not yet remitted~~primarily attributable to the ~~buyer, $10.7 million as the servicer of the receivables.~~INL/A WASS program, which achieved full operational capability in June 2018. These increases were partially offset by other working capital changes, including vendor invoice payment timing.

Cash Flows from Investing Activities

Net cash used in investing activities—continuing operations was ~~$32.3~~$9.0 million during the ~~nine-month~~six-month period ended ~~February 28,~~November 30, 2018 compared to ~~cash used of $17.0~~$28.5 million in the prior year period. In fiscal 2018, we acquired the outstanding shares of two MRO facilities in Quebec and Ontario, Canada owned by Premier Aviation for approximately $24.8 million, which included $22.9 million paid at closing. ~~In addition, we received higher cash proceeds in fiscal 2017 from asset disposals.~~
Cash Flows from Financing Activities

Net cash provided from financing activities—continuing operations was ~~$29.7~~$44.9 million during the ~~nine-month~~six-month period ended ~~February 28,~~November 30, 2018 compared to ~~cash provided of $4.6~~$60.3 million in the prior year period. The additional cash provided ~~of $25.1 million~~in the prior year was primarily attributable to proceeds from a new term loan of $24.8 million to finance the acquisition of the two Canadian MRO facilities previously discussed.

Critical Accounting Policies and Significant Estimates

We make a number of significant estimates, assumptions and judgments in the preparation of our financial statements. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in our ~~annual report on~~2018 Form 10-K ~~for the fiscal year ended May 31, 2017~~ for a discussion of our critical accounting policies. There have been no significant changes to the application of our critical accounting policies during the first quarter of fiscal ~~2018.~~2019 other than the adoption of ASC 606 on June 1, 2018, which supersedes the revenue recognition guidance in ASC 605. Under ASC 606, revenue is recognized as goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Our new accounting policies for revenue recognition are included in Notes 1 and 3 to the Condensed Consolidated Financial Statements.
Forward-Looking Statements

This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on beliefs of our management, as well as assumptions and estimates based on information available to us as of the dates such assumptions and estimates are made, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors, including those factors set forth under Part I, Item 1A in our ~~annual report~~Annual Report on Form 10-K for the ~~fiscal~~ year ended May 31, ~~2017.~~2018. Should one or more of those risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. Those events and uncertainties are difficult or impossible to predict accurately and many are beyond our control. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Item 3 — Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk includes fluctuating interest rates under our credit agreements, changes in foreign exchange rates, and credit losses on accounts receivable. See Note 1 of Notes to Consolidated Financial Statements in our ~~annual report~~Annual Report on Form 10-K for the year ended May 31, ~~2017~~2018 for a discussion of accounts receivable exposure.

Foreign Currency Risk. Revenues and expenses of our foreign operations are translated at average exchange rates during the period, and balance sheet accounts are translated at period-end exchange rates. Balance sheet translation adjustments are excluded from the results of operations and are recorded in stockholders’ equity as a component of accumulated other comprehensive loss. A hypothetical 10 percent devaluation of the U.S. dollar against foreign currencies would not have had a material impact on our financial position or continuing ~~operations.~~operations for the quarter ended November 30, 2018.

Interest Rate Risk. Refer to the section Quantitative and Qualitative Disclosures about Market Risk in our ~~annual report~~Annual Report on Form 10-K for the year ended May 31, ~~2017.~~2018. There were no significant changes during the quarter ended ~~February 28,~~November 30, 2018.

Item 4 — 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 ~~February 28,~~November 30, 2018. This evaluation was carried out under the supervision and with participation of our Chief Executive Officer and our Chief Financial Officer. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Therefore, effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of ~~February 28,~~November 30, 2018, ensuring that information required to be disclosed in the reports that are filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported in a timely manner.

Effective June 1, 2018, we adopted the new revenue standard under ASC 606 using the modified retrospective method of adoption. We have implemented certain changes to our internal controls over financial reporting to support the reporting and disclosure requirements of the new revenue standard. There were no other changes in our internal control over financial reporting during the ~~third~~second quarter ended ~~February 28,~~November 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION

Item ~~1 — Legal Proceedings~~
There have been several recent developments in the lawsuit entitled DynCorp International LLC v. AAR Airlift Group, Inc. and the bid protest proceeding before the Court of Federal Claims since the filing of the Company’s annual report on Form 10-K for the fiscal year ended May 31, 2017. AAR Airlift is a wholly-owned subsidiary of AAR CORP.
~~DynCorp International LLC v. AAR Airlift Group, Inc.~~
On November 29, 2017, the United States District Court for the Middle District of Florida, Orlando Division (the “District Court”) granted AAR Airlift’s motion to stay discovery in this lawsuit pending the District Court’s resolution of AAR Airlift’s motion for summary judgment.
The District Court’s decision effectively extended the stay that was previously in effect until the earlier of October 31, 2017 or the date of entry of a decision by the United States Court of Federal Claims (“COFC”) on DynCorp’s protest of the contract award made by the United States Department of State Bureau of International Narcotics and Law Enforcement, Office of Aviation (“INL/A”) to AAR Airlift.
On December 1, 2017, AAR Airlift filed its motion for summary judgment with the District Court. This motion maintains that DynCorp’s claims fail as a matter of law because DynCorp suffered no damages attributable to any alleged conduct of AAR Airlift; rather, as determined by the COFC, DynCorp was deemed ineligible for the INL/A WASS contract on account of its own actions.
On January 31, 2018, AAR Airlift and DynCorp filed a joint notice of settlement, advising the District Court that they had reached an agreement in principle to resolve DynCorp’s lawsuit and that they expected to file a stipulation of dismissal ~~with~~ ~~prejudice within 14 days (meaning that DynCorp may not file its claims again).~~
~~On February 1, 2018, the District Court entered an order dismissing the DynCorp lawsuit~~ ~~without~~ prejudice subject to the right of any party within 60 days to move the court for the purpose of entering a stipulated form of a final order or judgment or, on good cause shown, to reopen the case for further proceedings.
On March 16, 2018, however, DynCorp moved to reopen the case for further proceedings, stating that the parties did not have a meeting of the minds on a potential settlement. On March 19, 2018, AAR filed a response to DynCorp’s motion, clarifying that the parties did reach an agreement to settle the case and requesting that the court reopen the case for the limited purpose of allowing AAR Airlift to file a motion to enforce the settlement agreement reached between the parties and to dismiss the DynCorp lawsuit ~~with~~ ~~prejudice.~~
~~Court of Federal Claims Proceeding~~
On October 31, 2017, the COFC denied DynCorp’s protest of the United States Department of State’s award of the Worldwide Aviation Support Services (“INL/A WASS”) contract to AAR Airlift. Following the COFC decision, the Department of State lifted the voluntary stay that had been in place on the INL/A WASS contract, and since that time it has issued several task orders to AAR Airlift in order to transition the INL/A WASS program to AAR Airlift.
~~On November 14, 2017, DynCorp filed notice of appeal of the COFC decision to the United States Court of Appeals for the Federal Circuit (the “Court of Appeals”).~~
~~On November 20, 2017, DynCorp also filed an emergency motion for interim relief pending appeal with the COFC. On December 13, 2017, the COFC issued an order denying DynCorp’s motion.~~
On December 15, 2017, DynCorp filed a motion for injunction pending appeal with the Court of Appeals. On January 17, 2018, the Court of Appeals denied DynCorp’s motion for injunction. The case on the merits is in the briefing stage at the Court of Appeals, with no scheduled date for a decision.
~~Item~~ 1A — Risk Factors

There have been no material changes to our risk factors as set forth in our ~~annual report~~Annual Report on Form 10-K for the year ended May 31, ~~2017.~~
~~PART II — OTHER INFORMATION~~
~~Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds~~
~~(c)~~          ~~The following table provides information about purchases we made during the quarter ended February 28, 2018 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:~~
Period

Total Number
of Shares
Purchased

Average
Price Paid
per Share

Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs (1)

Approximate
Dollar Value of
Shares that May
Yet Be
Purchased
Under the Plans
or Programs (1)

12/1/2017 – 12/31/2017

—

$
—

—

1/1/2018 – 1/31/2018

201,536

38.99

201,536

2/1/2018 – 2/28/2018

—

—

—

Total

201,536

$
38.99

201,536

$
236,953,460

~~(1)~~         ~~On July 10, 2017, our Board of Directors authorized a new stock repurchase program providing for the repurchase of up to $250 million of our common stock, with no expiration date.~~2018.

Item 6 — Exhibits

The exhibits to this report are listed on the ~~Exhibit Index included elsewhere herein.~~
~~EXHIBIT INDEX~~following index:

Exhibit
No.

Description

Exhibits

Description

Exhibits

10.

Material Contracts

10.1

Purchase Agreement dated February 23, 2018 by and among AAR CORP., as seller representative and servicer, the sellers time to time party thereto, and Citibank, N.A., as buyer. (Incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K dated February 23, 2018)

10.2

Amendment No. 8 dated February 23, 2018 to Credit Agreement among AAR CORP., Bank of America, N.A., as administrative agent, and the various financial institutions party thereto. (Incorporated by reference to Exhibit 10.2 of Registrant’s Current Report on Form 8-K dated February 23, 2018)

31.

Rule 13a-14(a)/15(d)-14(a) Certifications

31.1

Section 302 Certification dated March 21, 2018 of David P. Storch, Chairman and Chief Executive Officer of Registrant (filed herewith).

Rule 13a-14(a)/15(d)-14(a) Certifications

31.1

Section 302 Certification dated December 19, 2018 of John M. Holmes, President and Chief Executive Officer of Registrant (filed herewith).

31.2

Section 302 Certification dated March 21, 2018 of Michael D. Milligan, Vice President and Chief Financial Officer of Registrant (filed herewith).

31.2

Section 302 Certification dated December 19, 2018 of Michael D. Milligan, Vice President and Chief Financial Officer of Registrant (filed herewith).

32.

Section 1350 Certifications

32.1

Section 906 Certification dated March 21, 2018 of David P. Storch, Chairman and Chief Executive Officer of Registrant (filed herewith).

Section 1350 Certifications

32.1

Section 906 Certification dated December 19, 2018 of John M. Holmes, President and Chief Executive Officer of Registrant (filed herewith).

32.2

Section 906 Certification dated March 21, 2018 of Michael D. Milligan, Vice President and Chief Financial Officer of Registrant (filed herewith).

32.2

Section 906 Certification dated December 19, 2018 of Michael D. Milligan, Vice President and Chief Financial Officer of Registrant (filed herewith).

101.

Interactive Data File

101

The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at February 28, 2018 and May 31, 2017, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended February 28, 2018 and 2017, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended February 28, 2018 and 2017, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended February 28, 2018 and 2017, (v) Condensed Consolidated Statement of Changes in Equity for the nine months ended February 28, 2018 and (vi) Notes to Condensed Consolidated Financial Statements.**

Interactive Data File

101

The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at November 30, 2018 and May 31, 2018, (ii) Condensed Consolidated Statements of Operations for the three and six months ended November 30, 2018 and 2017, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended November 30, 2018 and 2017, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended November 30, 2018 and 2017, (v) Condensed Consolidated Statement of Changes in Equity for the six months ended November 30, 2018 and (vi) Notes to Condensed Consolidated Financial Statements.**

**          Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
~~SIGNATURE~~SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AAR CORP.

(Registrant)

Date:
~~March 21,~~December 19, 2018

/s/ MICHAEL D. MILLIGAN

Michael D. Milligan

Vice President and Chief Financial Officer

(Principal Financial Officer and officer duly

authorized to sign on behalf of registrant)

/s/ ERIC S. PACHAPA

Eric S. Pachapa

Vice President, Controller and Chief Accounting Officer

(Principal Accounting Officer)

32

Delaware		36-2334820
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One AAR Place, 1100 N. Wood Dale Road Wood Dale, Illinois		60191
(Address of principal executive offices)		(Zip Code)

	As of May 31, 2018		ASC 606 Adjustments			As of June 1, 2018
Accounts receivable, net	$	202.0	$	(31.4	)	$	170.6
Inventories	460.7		(17.3		)	443.4
Contract assets—current	—		49.6			49.6
Other current assets	26.2		(0.9		)	25.3
Other non-current assets	118.9		(19.0		)	99.9
Accrued liabilities	138.3		9.1			147.4
Deferred tax liabilities	15.7		(6.6		)	9.1
Other liabilities and deferred income	62.2		(1.1		)	61.1
Retained earnings	733.2		(20.4		)	712.8

	As Reported		ASC 606 Adjustments			Balances Excluding ASC 606
Accounts receivable, net	$	218.6	$	46.8		$	265.4
Contract assets	63.0		(63.0		)	—
Inventories	495.0		20.1			515.1
Other current assets	33.0		0.6			33.6
Other non-current assets	85.8		21.5			107.3
Accrued liabilities	114.4		(5.0		)	109.4
Deferred tax liabilities	10.5		6.6			17.1
Other liabilities and deferred income	95.0		5.6			100.6
Retained earnings	729.6		18.8			748.4

	Three Months Ended November 30, 2018
	As Reported		ASC 606 Adjustments			Balances Excluding ASC 606
Sales	$	493.3	$	(0.4	)	$	492.9
Cost of sales	415.0		(1.5		)	413.5
Gross profit	78.3		1.1			79.4
Provision for income taxes	3.0		0.3			3.3
Income from continuing operations	11.2		0.8			12.0

	Six Months Ended November 30, 2018
	As Reported		ASC 606 Adjustments			Balances Excluding ASC 606
Sales	$	959.6	$	(5.2	)	$	954.4
Cost of sales	810.1		(3.1		)	807.0
Gross profit	149.5		(2.1		)	147.4
Provision for income taxes	5.3		(0.5		)	4.8
Income from continuing operations	30.1		(1.6		)	28.5

	November 30, 2018			June 1, 2018			Change
Contract assets — current	$	63.0		$	49.6		$	13.4
Contract assets — non-current	21.3			12.9			8.4
Contract liabilities — current	(9.3		)	(9.4		)	0.1
Contract liabilities — non-current	(68.3		)	(33.0		)	(35.3		)
Net contract assets	$	6.7		$	20.1		$	(13.4	)

	Currency Translation Adjustments			Pension Plans			Total			Currency Translation Adjustments			Pension Plans			Total
Balance at December 1, 2017	$	0.8		$	(37.6	)	$	(36.8	)
Balance at September 1, 2018										$	(0.2	)	$	(32.0	)	$	(32.2	)
Other comprehensive loss before reclassifications										(0.6		)	—			(0.6		)
Amounts reclassified from AOCL										—			0.2			0.2
Total other comprehensive income (loss)										(0.6		)	0.2			(0.4		)
Balance at November 30, 2018										$	(0.8	)	$	(31.8	)	$	(32.6	)

Balance at September 1, 2017										$	(1.1	)	$	(37.9	)	$	(39.0	)
Other comprehensive income before reclassifications	0.9			—			0.9			1.9			—			1.9
Amounts reclassified from AOCL	—			0.3			0.3			—			0.3			0.3
Total other comprehensive income	0.9			0.3			1.2			1.9			0.3			2.2
Balance at February 28, 2018	$	1.7		$	(37.3	)	$	(35.6	)

Balance at December 1, 2016	$	(3.7	)	$	(42.8	)	$	(46.5	)
Other comprehensive loss before reclassifications	(0.2		)	—			(0.2		)
Amounts reclassified from AOCL	—			0.3			0.3
Total other comprehensive income (loss)	(0.2		)	0.3			0.1
Balance at February 28, 2017	$	(3.9	)	$	(42.5	)	$	(46.4	)
Balance at November 30, 2017										$	0.8		$	(37.6	)	$	(36.8	)

Current assets	$	4.1		$	4.4
Property and equipment	13.1			15.1
Intangible assets, including goodwill	16.0			14.6
Accounts payable and accrued liabilities	(8.4		)	(9.3		)
	$	24.8		$	24.8

Inventory	$	5.0
Equipment on or available for long-term lease	7.0
Intangible assets	3.0
	$	15.0

	Three Months Ended February 28,						Nine Months Ended February 28,
	2018		2017		% Change		2018		2017		% Change
Sales:
Aviation Services Commercial	$	340.1	$	291.4	16.7	%	$	940.3	$	780.1	20.5	%
Government and Defense	86.3		91.4		(5.6	)%	249.0		284.0		(12.3	)%
	$	426.4	$	382.8	11.4	%	$	1,189.3	$	1,064.1	11.8	%
Expeditionary Services Commercial	$	10.9	$	10.9	—		$	28.4	$	28.6	(0.7	)%
Government and Defense	19.0		13.5		40.7	%	57.1		47.6		20.0	%
	$	29.9	$	24.4	22.5	%	$	85.5	$	76.2	12.2	%

	Three Months Ended November 30,						Six Months Ended November 30,
	2018		2017		% Change		2018		2017		% Change
Sales:
Aviation Services Commercial	$	325.5	$	303.4	7.3	%	$	632.2	$	600.2	5.3	%
Government and defense	137.4		88.3		55.6	%	269.1		162.8		65.3	%
	$	462.9	$	391.7	18.2	%	$	901.3	$	763.0	18.1	%

Expeditionary ServicesCommercial	$	8.0	$	9.2	(13.0	)%	$	16.5	$	17.5	(5.7	)%
Government and defense	22.4		19.7		13.7	%	41.8		38.0		10.0	%
	$	30.4	$	28.9	5.2	%	$	58.3	$	55.5	5.0	%

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
12/1/2017 – 12/31/2017	—	$	—	—
1/1/2018 – 1/31/2018	201,536	38.99		201,536
2/1/2018 – 2/28/2018	—	—		—
Total	201,536	$	38.99	201,536	$	236,953,460

Exhibit No.	Description		Exhibits	Description	Exhibits

10.	Material Contracts	10.1	Purchase Agreement dated February 23, 2018 by and among AAR CORP., as seller representative and servicer, the sellers time to time party thereto, and Citibank, N.A., as buyer. (Incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K dated February 23, 2018)

		10.2	Amendment No. 8 dated February 23, 2018 to Credit Agreement among AAR CORP., Bank of America, N.A., as administrative agent, and the various financial institutions party thereto. (Incorporated by reference to Exhibit 10.2 of Registrant’s Current Report on Form 8-K dated February 23, 2018)

31.	Rule 13a-14(a)/15(d)-14(a) Certifications	31.1	Section 302 Certification dated March 21, 2018 of David P. Storch, Chairman and Chief Executive Officer of Registrant (filed herewith).	Rule 13a-14(a)/15(d)-14(a) Certifications	31.1	Section 302 Certification dated December 19, 2018 of John M. Holmes, President and Chief Executive Officer of Registrant (filed herewith).

		31.2	Section 302 Certification dated March 21, 2018 of Michael D. Milligan, Vice President and Chief Financial Officer of Registrant (filed herewith).		31.2	Section 302 Certification dated December 19, 2018 of Michael D. Milligan, Vice President and Chief Financial Officer of Registrant (filed herewith).

32.	Section 1350 Certifications	32.1	Section 906 Certification dated March 21, 2018 of David P. Storch, Chairman and Chief Executive Officer of Registrant (filed herewith).	Section 1350 Certifications	32.1	Section 906 Certification dated December 19, 2018 of John M. Holmes, President and Chief Executive Officer of Registrant (filed herewith).

		32.2	Section 906 Certification dated March 21, 2018 of Michael D. Milligan, Vice President and Chief Financial Officer of Registrant (filed herewith).		32.2	Section 906 Certification dated December 19, 2018 of Michael D. Milligan, Vice President and Chief Financial Officer of Registrant (filed herewith).

101.	Interactive Data File	101	The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at February 28, 2018 and May 31, 2017, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended February 28, 2018 and 2017, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended February 28, 2018 and 2017, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended February 28, 2018 and 2017, (v) Condensed Consolidated Statement of Changes in Equity for the nine months ended February 28, 2018 and (vi) Notes to Condensed Consolidated Financial Statements.**	Interactive Data File	101	The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at November 30, 2018 and May 31, 2018, (ii) Condensed Consolidated Statements of Operations for the three and six months ended November 30, 2018 and 2017, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended November 30, 2018 and 2017, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended November 30, 2018 and 2017, (v) Condensed Consolidated Statement of Changes in Equity for the six months ended November 30, 2018 and (vi) Notes to Condensed Consolidated Financial Statements.**

Date:	~~March 21,~~December 19, 2018	/s/ MICHAEL D. MILLIGAN
		Michael D. Milligan
		Vice President and Chief Financial Officer
		(Principal Financial Officer and officer duly
		authorized to sign on behalf of registrant)


		/s/ ERIC S. PACHAPA
		Eric S. Pachapa
		Vice President, Controller and Chief Accounting Officer
		(Principal Accounting Officer)