UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒~~FORM 10-Q~~

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

For the Quarterly Period Ended ~~February 28, 2018~~November 30, 2021

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

For the transition period from to

Commission File No.1-6263

AAR ~~CORP.~~CORP.

(Exact name of registrant as specified in its charter)

Delaware
36-2334820
(State or other jurisdiction of incorporation

or organization)

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

One AAR Place, 1100 N. Wood Dale Road

Wood Dale, Illinois
60191
(Address of principal executive offices)

(Zip Code)

~~(630)~~ (630) 227-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered
Common Stock, $1.00 par value

AIR

New York Stock Exchange
Chicago Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).     Yes x☒ No o☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐

~~Large accelerated filer~~ x ~~Accelerated filer~~ o ~~Non-accelerated filer~~ o ~~Smaller reporting company~~ o ~~Emerging growth company~~ o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐

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

As of ~~February 28, 2018,~~November 30, 2021 there were ~~34,638,738~~35,468,871 shares of the registrant’s Common Stock, $1.00 par value per share, outstanding.

Table of Contents
AAR CORP. and Subsidiaries
Quarterly Report on Form 10-Q
For the Quarter Ended ~~February 28, 2018~~November 30, 2021
Table of Contents

Page
Part I — FINANCIAL INFORMATION

Item 1.
~~Item 1.~~Financial Statements
~~Financial Statements~~

Condensed Consolidated Balance Sheets
3

Condensed Consolidated Statements of Operations
5

Condensed Consolidated Statements of Comprehensive ~~Income~~Incom (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.
~~Item 2.~~
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2123
Item 3.
~~Item 3.~~
Quantitative and Qualitative Disclosures About Market Risk
28
~~Item 4.~~
~~Controls and Procedures~~
28
~~Part II — OTHER INFORMATION~~
~~Item 1.~~
~~Legal Proceedings~~
29
Item 4.
~~Item 1A.~~Controls and Procedures
~~Risk Factors~~
29

~~Item 2.~~

~~Unregistered Sales of Equity Securities and Use of Proceeds~~Part II — OTHER INFORMATION

Item 1.
Legal Proceedings
30
Item 1A.
~~Item 6.~~Risk Factors
~~Exhibits~~
30
Item 6.
~~Exhibit Index~~Exhibits
31

~~Signature Page~~Exhibit Index
31
Signatures
32

2
Table of Contents
PART I —– FINANCIAL INFORMATION

Item 1 —– Financial Statements
AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of ~~February 28, 2018~~November 30, 2021 and May 31, ~~2017~~2021
(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,

2021

2021


(Unaudited)


Current assets:

Cash and cash equivalents

$
42.7

$
51.8
Restricted cash

3.7

8.4
Accounts receivable, less allowances of $17.8 and $16.4, respectively

192.1

166.7
Contract assets

68.5

71.9
Inventories

531.7

540.6
Rotable assets and equipment on or available for short-term lease

53.9

50.4
Assets of discontinued operations

17.9

19.5
Other current assets

36.2

27.7
Total current assets

946.7

937.0

Property, plant and equipment, net of accumulated depreciation of $254.8 and $260.2 respectively

106.2

120.0

Other assets:

Goodwill and intangible assets, net

120.9

123.8
Operating lease right-of-use assets, net

76.3

75.8
Rotable assets supporting long-term programs

173.6

184.3
Other non-current assets

105.9

98.8

476.7

482.7

$
1,529.6

$
1,539.7

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

3
Table of Contents
AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of ~~February 28, 2018~~November 30, 2021 and May 31, ~~2017~~2021
(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,

2021

2021


(Unaudited)


Current liabilities:

Accounts payable

$
124.3

$
127.2
Accrued liabilities

143.1

148.3
Deferred revenue

33.6

25.9
Liabilities of discontinued operations

19.2

35.4
Total current liabilities

320.2

336.8

Long-term debt

103.2

133.7
Operating lease liabilities

60.5

59.9
Other liabilities

38.7

34.9

202.4

228.5
Equity:

Preferred stock, $1.00 par value, authorized 250,000 shares; NaN issued

0

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

45.3

45.3
Capital surplus

481.5

479.8
Retained earnings

774.0

741.7
Treasury stock, 9,831,915 and 9,925,551 shares at cost, respectively

(271.6)

(274.1)
Accumulated other comprehensive loss

(22.2)

(18.3)
Total equity

1,007.0

974.4

$
1,529.6

$
1,539.7

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

4
Table of Contents
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three and ~~Nine~~Six Months Ended ~~February 28, 2018~~November 30, 2021 and ~~2017~~2020
(Unaudited)
(In millions, except share data)

Three Months Ended

Nine Months Ended

February 28,

February 28,

2018

2017

2018

2017

Sales:

Sales from products

$
275.1

$
242.7

$
764.8

$
679.1

Sales from services

181.2

164.5

510.0

461.2

456.3

407.2

1,274.8

1,140.3

Cost and operating expenses:

Cost of products

224.0

202.3

620.3

570.6

Cost of services

154.7

138.4

444.6

384.2

Selling, general and administrative

53.4

43.1

146.7

126.6

432.1

383.8

1,211.6

1,081.4

Operating income

24.2

23.4

63.2

58.9

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

Provision for income taxes (benefit)

(9.8
)
7.7

1.4

19.5

Income from continuing operations

31.3

14.4

55.6

35.7

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

Earnings per share — basic:

Earnings from continuing operations

$
0.91

$
0.43

$
1.62

$
1.05

Loss from discontinued operations

(0.46
)
(0.02
)
(1.52
)
(0.01
)
Earnings per share — basic

$
0.45

$
0.41

$
0.10

$
1.04

Earnings per share — diluted:

Earnings from continuing operations

$
0.90

$
0.42

$
1.60

$
1.04

Loss from discontinued operations

(0.46
)
(0.02
)
(1.52
)
(0.01
)
Earnings per share — diluted

$
0.44

$
0.40

$
0.08

$
1.03

Three Months Ended

Six Months Ended

November 30,

November 30,


2021

2020

2021

2020
Sales:

Sales from products

$
252.0

$
233.1

$
514.1

$
469.4
Sales from services

184.6

170.5

377.6

335.0

436.6

403.6

891.7

804.4
Cost and operating expenses:

Cost of products

202.1

194.3

419.7

398.8
Cost of services

156.1

139.8

329.0

287.5
Provision for doubtful accounts

0.8

4.4

0.8

4.4
Selling, general and administrative

47.1

43.4

96.4

88.7

406.1

381.9

845.9

779.4
Loss from joint ventures

(0.4)

(0.1)

(0.6)

(0.2)
Operating income

30.1

21.6

45.2

24.8
Loss on sale of business

(1.3)

—

(1.3)

(19.5)
Other income (expense), net

0.3

(0.7)

1.0

(0.5)
Interest expense

(0.5)

(1.3)

(1.2)

(3.0)
Interest income

0.1

—

0.1

0.1
Income from continuing operations before provision for income taxes

28.7

19.6

43.8

1.9
Provision for income taxes

7.9

5.2

11.8

1.4
Income from continuing operations

20.8

14.4

32.0

0.5
Income (Loss) from discontinued operations, net of tax

—

(6.2)

0.3

(6.8)
Net income (loss)

$
20.8

$
8.2

$
32.3

$
(6.3)

Earnings (Loss) per share – basic:

Earnings from continuing operations

$
0.59

$
0.41

$
0.90

$
0.01
Income (Loss) from discontinued operations

—

(0.18)

0.01

(0.20)
Earnings (Loss) per share – basic

$
0.59

$
0.23

$
0.91

$
(0.19)

Earnings (Loss) per share – diluted:

Earnings from continuing operations

$
0.58

$
0.41

$
0.89

$
0.01
Income (Loss) from discontinued operations

—

(0.18)

0.01

(0.19)
Earnings (Loss) per share – diluted

$
0.58

$
0.23

$
0.90

$
(0.18)

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

5
Table of Contents
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income ~~(Loss)~~
For the Three and ~~Nine~~Six Months Ended ~~February 28, 2018~~November 30, 2021 and ~~2017~~2020
(Unaudited)
(In millions)

Three Months Ended

Nine Months Ended

February 28,

February 28,

2018

2017

2018

2017

Net income

$
15.5

$
13.7

$
3.6

$
35.3

Other comprehensive income (loss), net of tax expense (benefit):

Currency translation adjustments

0.9

(0.2
)
3.4

(2.8
)
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

Other comprehensive income (loss), net of tax

1.2

0.1

4.3

(2.0
)
Comprehensive income

$
16.7

$
13.8

$
7.9

$
33.3

Three Months Ended

Six Months Ended

November 30,

November 30,


2021

2020

2021

2020
Net income (loss)

$
20.8

$
8.2

$
32.3

$
(6.3)
Other comprehensive income (loss), net of tax:

Currency translation adjustments

(3.9)

1.1

(4.5)

2.3
Pension and other post-retirement plans, net of tax of $0 and ($0.5) for the three months ended November 30, 2021 and 2020, respectively, and $0.1 and ($0.4) for the six months ended November 30, 2021 and 2020, respectively

0.3

(1.0)

0.6

(0.7)
Other comprehensive income (loss), net of tax

(3.6)

0.1

(3.9)

1.6
Comprehensive income (loss)

$
17.2

$
8.3

$
28.4

$
(4.7)

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

6
Table of Contents
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the ~~Nine~~Six Months Ended ~~February 28, 2018~~November 30, 2021 and ~~2017~~2020
(Unaudited)
(In millions)

Nine Months Ended

February 28,

2018

2017

Cash flows provided from (used in) operating activities:

Net income

$
3.6

$
35.3

Loss from discontinued operations

52.0

0.4

Income from continuing operations

55.6

35.7

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

Depreciation and intangible amortization

31.4

26.2

Stock-based compensation

8.7

7.6

Deferred tax benefit

(24.1
)
(1.7
)
Gain on asset disposal

—

(2.6
)
Changes in certain assets and liabilities:

Accounts receivable

35.2

(26.7
)
Inventories

(36.7
)
(15.6
)
Rotable spares and equipment on or available for short-term lease

2.5

(8.3
)
Rotable assets supporting long-term programs

(35.7
)
(75.7
)
Accounts and trade notes payable

8.5

38.2

Accrued and other liabilities

(12.0
)
(10.3
)
Other

(17.8
)
(4.6
)
Net cash provided from (used in) operating activities — continuing operations

15.6

(37.8
)
Net cash provided from operating activities — discontinued operations

17.3

26.6

Net cash provided from (used in) operating activities

32.9

(11.2
)
Cash flows used in investing activities:

Property, plant and equipment expenditures

(18.4
)
(20.1
)
Payments for acquisitions

(22.9
)
—

Proceeds from aircraft joint ventures

7.3

—

Proceeds from asset disposals

1.3

5.9

Other

0.4

(2.8
)
Net cash used in investing activities — continuing operations

(32.3
)
(17.0
)
Net cash provided from (used in) investing activities — discontinued operations

(4.7
)
4.2

Net cash used in investing activities

(37.0
)
(12.8
)
Cash flows provided from financing activities:

Short-term borrowings, net

16.0

34.0

Reduction in long-term borrowings

—

(10.0
)
Proceeds from long-term borrowings

24.8

—

Cash dividends

(7.7
)
(7.7
)
Purchase of treasury stock

(13.1
)
(16.6
)
Stock option exercises

10.0

5.3

Other

(0.3
)
(0.4
)
Net cash provided from financing activities — continuing operations

29.7

4.6

Net cash used in financing activities — discontinued operations

(1.3
)
(1.2
)
Net cash provided from financing activities

28.4

3.4

Effect of exchange rate changes on cash

—

(0.5
)
Increase (Decrease) in cash, cash equivalents, and restricted cash

24.3

(21.1
)
Cash, cash equivalents, and restricted cash at beginning of period

10.3

31.2

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

$
34.6

$
10.1

Six Months Ended

November 30,


2021

2020
Cash flows provided from operating activities:

Net income (loss)

$
32.3

$
(6.3)
Less: (Income) Loss from discontinued operations

(0.3)

6.8
Income from continuing operations

32.0

0.5
Adjustments to reconcile income from continuing operations to net cash provided from operating activities:

Depreciation and intangible amortization

17.8

18.2
Stock-based compensation

4.7

4.5
Provision for doubtful accounts

0.8

4.4
Deferred tax provision

(0.1)

1.0
Loss from joint ventures

0.6

0.2
Loss on sale of business

1.3

19.5
Customer contract termination costs

—

2.2
Impairment charges

2.9

7.0
Changes in certain assets and liabilities:

Accounts receivable

(26.2)

(4.8)
Contract assets

3.2

(7.5)
Inventories

8.0

30.2
Prepaid expenses and other current assets

(8.7)

36.8
Rotable assets supporting long-term programs

1.8

(0.9)
Accounts payable

(2.3)

8.8
Accrued and other liabilities

0.9

0.2
Payroll Support Program deferred credit

—

23.6
Deferred revenue on long-term programs

0.7

(60.4)
Other

(4.0)

(16.1)
Net cash provided from operating activities - continuing operations

33.4

67.4
Net cash used in operating activities - discontinued operations

(14.2)

(1.9)
Net cash provided from operating activities

19.2

65.5
Cash flows provided from (used in) investing activities:

Property, plant and equipment expenditures

(6.0)

(6.0)
Proceeds from termination of life insurance policies

—

10.0
Proceeds from asset disposals

7.3

0
Investments in joint ventures

(4.0)

0
Proceeds from sale of business

—

1.6
Net cash provided from (used in) investing activities

(2.7)

5.6
Cash flows used in financing activities:

Short-term borrowings, net

(5.0)

(390.0)
Repayment of long-term borrowings

(24.7)

0
Proceeds from Payroll Support Program note

—

8.7
Cash dividends

—

(0.1)
Stock compensation activity

(0.4)

(1.5)
Net cash used in financing activities

(30.1)

(382.9)
Effect of exchange rate changes on cash

(0.2)

0.1
Decrease in cash and cash equivalents

(13.8)

(311.7)
Cash, cash equivalents, and restricted cash at beginning of period

60.2

424.7
Cash, cash equivalents, and restricted cash at end of period

$
46.4

$
113.0

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

7
Table of Contents
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
For the ~~Nine~~Three and Six Months Ended ~~February 28, 2018~~November 30, 2021 and 2020
(Unaudited)
(In millions)

Accumulated

Other

Common

Capital

Retained

Treasury

Comprehensive

Stock

Surplus

Earnings

Stock

Income (Loss)

Total Equity

Balance, May 31, 2017

$
45.2

$
460.8

$
727.9

$
(279.8
)
$
(39.9
)
$
914.2

Net income

—

—

3.6

—

—

3.6

Cash dividends

—

—

(7.7
)
—

—

(7.7
)
Stock option activity

—

(0.1
)
—

9.5

—

9.4

Restricted stock activity

0.1

3.4

—

1.0

—

4.5

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

Accumulated

Other

Common

Capital

Retained

Treasury

Comprehensive


Stock

Surplus

Earnings

Stock

Income (Loss)

Total Equity
Balance, May 31, 2021

$
45.3

$
479.8

$
741.7

$
(274.1)

$
(18.3)

$
974.4
Net income

0

0

11.5

0

0

11.5
Stock option activity

0

1.1

0

0.2

0

1.3
Restricted stock activity

0

(1.0)

0

2.3

0

1.3
Other comprehensive income, net of tax

0

0

0

0

(0.3)

(0.3)
Balance, August 31, 2021

$
45.3

$
479.9

$
753.2

$
(271.6)

$
(18.6)

$
988.2
Net income

0

0

20.8

0

0

20.8
Stock option activity

0

0.9

0

0

0

0.9
Restricted stock activity

0

0.7

0

0

0

0.7
Other comprehensive income, net of tax

0

0

0

0

(3.6)

(3.6)
Balance, November 30, 2021

$
45.3

$
481.5

$
774.0

$
(271.6)

$
(22.2)

$
1,007.0

Accumulated

Other

Common

Capital

Retained

Treasury

Comprehensive


Stock

Surplus

Earnings

Stock

Income (Loss)

Total Equity
Balance, May 31, 2020

$
45.3

$
478.6

$
706.0

$
(282.7)

$
(44.6)

$
902.6
Net loss

0

0

(14.5)

0

0

(14.5)
Cash dividends

0

0

(0.1)

0

0

(0.1)
Stock option activity

0

0.5

0

0.5

0

1.0
Restricted stock activity

0

(6.0)

0

6.1

0

0.1
Other comprehensive income, net of tax

0

0

0

0

1.5

1.5
Balance, August 31, 2020

$
45.3

$
473.1

$
691.4

$
(276.1)

$
(43.1)

$
890.6
Net income

0

0

8.2

0

0

8.2
Stock option activity

0

1.1

0

0.1

0

1.2
Restricted stock activity

0

0.9

0

(0.3)

0

0.6
Other comprehensive income, net of tax

0

0

0

0

0.1

0.1
Balance, November 30, 2020

$
45.3

$
475.1

$
699.6

$
(276.3)

$
(43.0)

$
900.7

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

8
Table of Contents
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
~~February 28, 2018~~November 30, 2021
(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~~or “our,” unless the context indicates otherwise. The accompanying Condensed Consolidated Financial Statements include the accounts of AAR and its subsidiaries after elimination of intercompany accounts and transactions.

We have prepared these statements without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The Condensed Consolidated Balance Sheet as of May 31, ~~2017~~2021 has been derived from audited financial statements. To prepare the financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”), management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain information and note disclosures, normally included in comprehensive financial statements prepared in accordance with GAAP, have been condensed or omitted pursuant to such rules and regulations of the SEC. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our ~~latest annual report~~Annual Report on Form ~~10-K.~~10-K for the fiscal year ended May 31, 2021.

In the opinion of management, the ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements reflect all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the Condensed Consolidated Balance ~~Sheets~~Sheet of AAR CORP. and its subsidiaries as of ~~February 28, 2018,~~November 30, 2021, 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, 2018~~November 30, 2021 and ~~2017,~~2020, the Condensed Consolidated Statements of Cash Flows for the ~~nine-month~~six-month periods ended ~~February 28, 2018~~November 30, 2021 and ~~2017,~~2020, and the Condensed Consolidated Statement of Changes in Equity for the ~~nine-month period~~three- and six-month periods ended ~~February 28, 2018.~~November 30, 2021 and 2020. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Note 2 ~~— New Accounting Pronouncements~~– Discontinued Operations
~~Revenue from Contracts with Customers~~
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, 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 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 June 1, 2018, using the modified retrospective transition method. Under this method, we will be required to recognize the cumulative effect of adopting this ASU as of June 1, 2018 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.~~
~~AAR CORP. and Subsidiaries~~
~~Notes to Condensed Consolidated Financial Statements~~
~~February 28, 2018~~
~~(Unaudited)~~
~~(Dollars in millions, except per share amounts)~~
To date, we have preliminarily identified three significant areas where the new ASU will impact revenue recognition. First, we have certain contracts under which we manufacture products with no alternative use and the Company has an enforceable right to payment from the customer. As a result, the Company will be required to record revenue for these contracts over time as opposed to at the time of shipment which is our current policy today. Second, we also perform repair services on customer-owned assets which will also transition to an over time approach compared to our current policy of recognizing revenue at time of shipment. Third, we have certain contracts in which revenue is recognized using percentage of completion over the expected term of the contract. The new ASU will likely result in the reduction of the contract term used for percentage of completion as certain contracts include unexercised customer option years or include customer rights to terminate the contract without significant penalty.
~~Other New Accounting Pronouncements~~
In February 2016, the FASB issued ASU 2016-02, 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 a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are in the preliminary phases of assessing the effect of this ASU on our portfolio of leases. 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. 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”). 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 3 — Discontinued Operations~~

During the third quarter of fiscal 2018, we decided to pursue the sale of our Contractor-Owned, Contractor-Operated (“COCO”) business previously included in our Expeditionary Services segment. Due to this strategic shift, the assets, liabilities, and results of operations of our COCO business have been reported as discontinued operations for all periods presented. 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 was below its carrying value, a goodwill impairment charge of $9.8 million 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, 2018.
~~No amounts of 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.

~~Operating results for discontinued operations were comprised~~In the fourth quarter of fiscal 2020, we completed the sale of the ~~following:~~

Three Months Ended

Nine Months Ended

February 28,

February 28,

2018

2017

2018

2017

Sales

$
8.8

$
39.5

$
79.2

$
135.1

Cost of sales

(15.8
)
(37.3
)
(81.6
)
(125.1
)
Asset impairments

(11.0
)
—

(65.2
)
—

Selling, general and administrative expenses

(2.6
)
(4.3
)
(9.6
)
(11.7
)
Loss from discontinued operations before provision for income tax benefit

(20.6
)
(2.1
)
(77.2
)
(1.7
)
Provision for income tax benefit

(4.8
)
(1.4
)
(25.2
)
(1.3
)
Loss from discontinued operations

$
(15.8
)
$
(0.7
)
$
(52.0
)
$
(0.4
)
~~The carrying amounts~~last operating contract of the ~~major classes~~COCO business shortly after government approval. Our continuing involvement in the COCO business is limited to the lease of certain aircraft which is an obligation of the acquirer of this contract. The assets and liabilities ~~for~~of our discontinued operations are ~~as follows:~~primarily comprised of right-of-use assets and lease-related liabilities.

February 28,

May 31,

2018

2017

Inventory, rotable assets, and equipment

$
110.4

$
183.7

Goodwill

—

9.8

Other assets

12.3

25.9

Assets of discontinued operations

$
122.7

$
219.4

Liabilities — current

$
26.5

$
30.8

Liabilities — non-current

—

2.6

Liabilities of discontinued operations

$
26.5

$
33.4

Note 3 – Sale of Composites Business

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

We recognized a loss on the sale of the Composites business of $19.5 million in the first quarter of fiscal 2021. In the fourth quarter of fiscal 2021, the post-closing working capital adjustment was finalized resulting in an additional loss of $0.7 million. The sale also included contingent consideration of up to ~~Condensed Consolidated Financial~~$6.5 million based on the achievement of sales targets over a three-year period subsequent to the sale. Sales forecasts for the Composites business now indicate that it is unlikely that the sales targets will be achieved. We recognized a charge of $1.3 million in the three-month period ended November 30, 2021 to reflect the fair value of the contingent consideration at zero.
~~Statements are an integral part~~
9
Table of ~~these statements.~~Contents
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
~~February 28, 2018~~November 30, 2021
(Unaudited)
(Dollars in millions, except per share amounts)
Note 4 —– Revenue Recognition

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

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

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

Our performance obligations are satisfied over time as work progresses or at a point in time based on transfer of control of products and services to our customers. The majority of our sales ~~for product~~from products are recognized at a point in time upon transfer of control to the customer, which generally occurs upon shipment. In connection with certain sales of products, we also provide logistics services, which include inventory management, replenishment, and other related services. The price of such services is generally included in the price of the products delivered to the customer, and revenues are recognized upon ~~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~~promised goods or services is ~~shipped~~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 ~~recognized net favorable cumulative catch-up adjustments of $1.8 million~~are required to make certain judgments and ~~$3.2 million during~~estimates, including estimated revenues and costs, as well as inflation and the three-month periods ended February 28, 2018 and 2017, respectively, and $2.2 million and $7.8 million during the nine-month periods ended February 28, 2018 and 2017, respectively, resulting from changes to the estimatedoverall profitability of ~~these contracts.~~
~~Lease revenues~~the arrangement. Key assumptions involved include future labor costs and efficiencies, overhead costs, and ultimate timing of product delivery. Differences may occur between the judgments and estimates made by management and actual program results. For contracts that are ~~recognized as earned. Income from monthly or quarterly rental payments is recorded~~deemed to be loss contracts, we establish forward loss reserves for total estimated costs that are 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 numberexcess of ~~hours the engine is used in a particular month. Lease income associated with these contingent rentals is recorded~~total estimated consideration in the period in which ~~actual usage is reported~~they become known.

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

Changes in estimates and assumptions related to our arrangements accounted for using the ~~month following~~cost-to-cost method are recorded using the ~~actual usage.~~
~~Certain supply chain management~~cumulative catch-up method of accounting. These changes are primarily adjustments to the estimated profitability for our long-term programs where we provide ~~to our customers contain multiple elements or deliverables, such as program and warehouse~~component inventory management ~~parts distribution, and maintenance and~~and/or repair services. ~~We recognize revenue for each element or deliverable that can be identified as a separate unit~~

10
Table of ~~accounting at the time of delivery based upon the relative fair value of the products and services.~~Contents
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 in accounts receivable as of February 28, 2018 and May 31, 2017, were $5.4 million and $14.5 million, respectively, of unbilled accounts receivable related 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.~~
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
~~February 28, 2018~~November 30, 2021
(Unaudited)
(Dollars in millions, except per share amounts)
~~Note 5 — Income Taxes~~
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 and limited deductions for executive compensation. The income tax rate reduction in the Tax Reform Act is effective January 1, 2018 which results in a blended federal statutory tax rate for the Company of 29.2% in fiscal 2018. Our income tax expense forFor the three-month period ended ~~February 28, 2018 included~~November 30, 2021, we recognized favorable and (unfavorable) cumulative catch-up adjustments of $8.2 million and $(2.3) million, respectively. For the three-month period ended November 30, 2020, we recognized favorable cumulative catch-up adjustments of $2.5 million. When considering these adjustments on a ~~benefit~~net basis, we recognized net favorable adjustments of ~~$1.8~~$5.9 million ~~related to~~and $2.5 million in the ~~impact of our revised, lower estimated fiscal 2018 tax rate applied to our pre-tax income for~~three-month periods ended November 30, 2021 and 2020, respectively.

For the six-month period ended November 30, ~~2017 which was previously expected~~2021, we recognized favorable and (unfavorable) cumulative catch-up adjustments of $8.2 million and $(3.3) million, respectively. For the six-month period ended November 30, 2020, we recognized favorable cumulative catch-up adjustments of $2.8 million. When considering these adjustments on a net basis, we recognized net favorable adjustments of $4.9 million and $2.8 million in the six-month periods ended November 30, 2021 and 2020, respectively.

Under most of our U.S. government contracts, if the contract is terminated for convenience, we are entitled to ~~be taxed at 35%.~~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 ~~re-measured~~have elected to use certain practical expedients permitted under ASU No. 2014-09, Revenue from Contracts with Customers. Shipping and handling fees and costs incurred associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in Cost of sales on our ~~deferred tax~~Condensed Consolidated Statements of Operations, and are not considered a performance obligation to our customers. Our reported sales on our Condensed Consolidated Statements 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 the invoiced amount corresponds directly with the value we are providing to the customer.

Contract Assets and Liabilities

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

Net contract assets and liabilities ~~based~~are as follows:

November 30,

May 31,


2021

2021

Change
Contract assets – current

$
68.5

$
71.9

$
(3.4)
Contract assets – non-current

24.0

21.6

2.4
Contract liabilities:

Deferred revenue – current

(33.6)

(25.9)

(7.7)
Deferred revenue on long-term contracts

(9.1)

(5.4)

(3.7)
Net contract assets

$
49.8

$
62.2

$
(12.4)

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

During the three-month period ended August 31, 2020, we terminated a commercial power-by-the-hour (“PBH”) customer contract which ~~they are expected to reverse~~resulted in a charge of $2.2 million.
One of our PBH customers notified us in June 2021 that the ~~future, which is either at~~customer would terminate its contract with us earlier than we originally anticipated. In conjunction with the early termination, we recognized a ~~federal rate~~charge 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~~$5.2 million in the three-month period ended ~~February 28, 2018~~
11
Table of Contents
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2021
(Unaudited)
(Dollars in millions, except per share amounts)
August 31, 2021, which included a reduction in contract assets and revenue of $1.0 million and the establishment of loss reserves of $4.2 million. As of November 30, 2021, our Condensed Consolidated Balance Sheet included remaining forward loss reserves of $2.2 million classified in Accrued liabilities.

During fiscal 2020, we established forward loss reserves for a certain PBH contract where total estimated costs are in excess of the total estimated consideration over the remainder of the contract. As of November 30, 2021, our Condensed Consolidated Balance Sheet included remaining forward loss reserves of $1.7 million classified in Accrued liabilities.

To support our PBH customer contracts, we previously entered into an agreement with a component repair facility to outsource a portion of the component repair and overhaul services. The agreement included certain minimum repair volume guarantees, which we have not met due to the impact of COVID-19 on commercial passenger aircraft flight hours. During fiscal 2021, we recognized a $4.5 million charge to reflect our estimated obligation over the remainder of the agreement for not achieving the minimum volume guarantees. During the three-month period ended August 31, 2021, we recognized a $1.7 million charge to increase the obligation reflecting the revised estimated shortfall on the minimum volume guarantee. As of November 30, 2021, our Condensed Consolidated Balance Sheet included remaining loss reserves of $4.6 million with $1.5 million classified as current in Accrued liabilities and $3.1 million classified as long-term in Other liabilities.

Changes in our deferred revenue were as follows for the ~~re-measurement impact on a provisional basis.~~three- and six-month periods ended November 30, 2021 and 2020:

Three Months Ended

Six Months Ended

November 30,

November 30,


2021

2020

2021

2020
Deferred revenue at beginning of period

$
(33.0)

$
(85.4)

$
(31.3)

$
(99.2)
Revenue deferred

(72.0)

(50.8)

(122.1)

(123.0)
Revenue recognized

58.6

87.6

105.0

176.1
Other

3.7

0.2

5.7

(2.3)
Deferred revenue at end of period

$
(42.7)

$
(48.4)

$
(42.7)

$
(48.4)

~~On December 22, 2017,~~Remaining Performance Obligations

As of November 30, 2021, we had approximately $780 million of remaining performance obligations, also referred to as firm backlog, which excludes unexercised contract options and potential orders under our indefinite-delivery, indefinite-quantity (IDIQ) contracts. We expect that approximately 50% of this backlog will be recognized as revenue over the ~~Securities~~next 12 months with approximately 40% of the remainder recognized over the next three years. The amount of remaining performance obligations that are expected to be recognized as revenue beyond 12 months, primarily relates to our long-term programs where we provide component inventory management and/or repair services.

12
Table of Contents
AAR CORP. and ~~Exchange Commission issued Staff Accounting Bulletin No. 118, which allows~~Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2021
(Unaudited)
(Dollars in millions, except per share amounts)
Disaggregation of Revenue

Sales across the ~~use~~major customer markets for each of ~~a measurement period, similar to that used in business combinations, to account~~our reportable segments for the ~~impacts of the Tax Reform Act. We have accounted~~three- and six-month periods ended November 30, 2021 and 2020 were as follows:

Three Months Ended

Six Months Ended

November 30,

November 30,


2021

2020

2021

2020
Aviation Services:

Commercial

$
257.0

$
192.2

$
524.2

$
361.8
Government and defense

162.3

192.8

330.7

386.8

$
419.3

$
385.0

$
854.9

$
748.6
Expeditionary Services:

Commercial

$
0.7

$
2.0

$
0.8

$
7.7
Government and defense

16.6

16.6

36.0

48.1

$
17.3

$
18.6

$
36.8

$
55.8

Sales by geographic region for the ~~impacts~~three- and six-month periods ended November 30, 2021 and 2020 were as follows:

Three Months Ended

Six Months Ended

November 30,

November 30,


2021

2020

2021

2020
Aviation Services:

North America

$
341.2

$
314.1

$
688.8

$
608.9
Europe/Africa

50.4

45.7

112.4

96.7
Other

27.7

25.2

53.7

43.0

$
419.3

$
385.0

$
854.9

$
748.6
Expeditionary Services:

North America

$
17.3

$
18.4

$
36.6

$
53.3
Europe/Africa

0

0.2

0.2

2.4
Other

0

0

0

0.1

$
17.3

$
18.6

$
36.8

$
55.8

Note 5 – Accounts Receivable

Financial instruments that potentially subject us to concentrations of market or credit risk consist principally of trade receivables. While our trade receivables are diverse and represent a number of entities and geographic regions, the ~~Tax Reform Act~~majority are with the U.S. government and its contractors and entities in the aviation industry. The composition of our accounts receivable is as follows:

November 30,

May 31,


2021

2021
U.S. Government contracts:




Trade receivables

$
22.8

$
24.1
Unbilled receivables

21.1

25.2

43.9

49.3
All other customers:


Trade receivables

131.6

104.9
Unbilled receivables

16.6

12.5

148.2

117.4

$
192.1

$
166.7

13
Table of Contents
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2021
(Unaudited)
(Dollars in millions, except per share amounts)
Note 6 – Restructuring and Impairment Costs

During the six-month period ended November 30, 2020, we incurred severance and furlough-related costs of $8.2 million, which were included as a component of Cost of sales and Selling, general and administrative on our Condensed Consolidated Statements of Operations.

In accordance with ASC 360, Property, Plant and Equipment, we are required to test for impairment of long-lived assets whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable from its undiscounted cash flows. We utilize certain assumptions to estimate future undiscounted cash flows, including demand for our services, future market conditions and trends, business development pipeline of opportunities, current and future lease rates, lease terms, and residual values.

In light of declines in commercial airline volumes and commercial program contract terminations in fiscal 2020 and 2021, we evaluated future cash flows related to certain rotable assets supporting long-term programs and recognized asset impairment charges of $5.8 million in the three-month period ended August 31, 2020.

In conjunction with the early termination notice we received in June 2021 from one of our PBH customers, we evaluated future cash flows related to the ~~extent a reasonable estimate could be made, however, we will continue to refine our estimates on~~rotable assets supporting that fleet type and recognized asset impairment charges of $2.3 million in the ~~timing of the deferred tax reversals throughout the measurement~~three-month period ~~as additional information becomes available or until the accounting is complete.~~ended August 31, 2021.

Note ~~6 —~~7 – Accounting for Stock-Based Compensation

Restricted Stock

In the three-month period ended August 31, ~~2017,~~2021, as part of our annual long-term stock incentive compensation, we granted ~~98,750~~43,010 shares of performance-based restricted stock and ~~24,425~~50,845 shares of time-based restricted stock to eligible employees. The grant date fair value per share for these shares was ~~$35.26~~$37.74 (the closing price on the grant date). ~~In June 2017, we~~We also granted ~~55,000~~32,307 shares of time-based restricted stock to members of the Board of Directors with a grant date fair value per share of ~~$34.95.~~$42.56 (the closing price on the grant date).

Expense charged to operations for restricted stock during each of the three-month periods ended ~~February 28, 2018~~November 30, 2021 and ~~2017~~2020 was ~~$2.0~~$0.8 million and ~~$1.6~~$0.8 million, respectively, and ~~$4.9~~$2.7 million and ~~$4.2~~$2.7 million during the ~~nine-month~~six-month periods ended ~~February 28, 2018~~November 30, 2021 and ~~2017,~~2020, respectively.
Stock Options

In ~~the three-month period ended August 31, 2017,~~July 2021, as part of our annual long-term stock incentive compensation, we granted ~~453,450~~143,745 stock options to eligible employees at an exercise price ~~per share~~ of ~~$35.26~~$37.74 and ~~weighted average~~grant date fair value of ~~$9.27.~~$13.36. The fair value of stock options was estimated using the Black-Scholes option pricing model with the following assumptions:

Risk-free interest rate
0.8
%
Expected volatility of common stock
41.6
%
Dividend yield
0.8
%
Expected option term in years
5.3

The total intrinsic value of stock options exercised during the ~~nine-month~~six-month periods ended ~~February 28, 2018~~November 30, 2021 and ~~2017~~2020 was ~~$12.0~~$0.1 million and ~~$3.3~~$0.1 million, respectively. Expense charged to operations for stock options during the three-month periods ended ~~February 28, 2018~~November 30, 2021 and ~~2017~~2020 was ~~$1.4~~$0.9 million and ~~$1.1~~$1.0 million, respectively, and ~~$3.8 and $3.4 million~~ during the ~~nine-month~~six-month periods ended ~~February 28, 2018~~November 30, 2021 and ~~2017,~~2020 was $2.1 million and $1.8 million, respectively.

~~The accompanying Notes to Condensed Consolidated Financial~~14
~~Statements are an integral part~~Table of ~~these statements.~~Contents
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
~~February 28, 2018~~November 30, 2021
(Unaudited)
(Dollars in millions, except per share amounts)
Note ~~7 — Inventory~~8 – Inventories

The summary of inventories is as follows:

February 28,

May 31,

2018

2017

November 30,

May 31,


2021

2021
Aircraft and engine parts, components and finished goods

$
453.1

$
468.4
Raw materials and parts

$
47.6

$
45.0

58.7

53.0
Work-in-process

35.3

25.8

19.9

19.2
Aircraft and engine parts, components and finished goods

389.2

362.6

$
472.1

$
433.4

$
531.7

$
540.6

During the three-month period ended November 30, 2020, we decided to exit a product line in our engineering operations and recognized a $1.2 million charge to reserve against the remaining inventory.

Note ~~8 —~~9 – Supplemental Cash Flow Information

Nine Months Ended

February 28,

2018

2017

Six Months Ended

November 30,


2021

2020
Interest paid

$
4.9

$
3.2

$
0.7

$
2.6
Income taxes paid

16.6

8.3

10.9

2.2
Income tax refunds received

0.1

1.2

0.5

0.1

Note ~~9 —~~10 – 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.~~million and Purchaser may, but is not required to, purchase the eligible receivables we offer to sell. The term of the Purchase Agreement runs through February 22, ~~2019,~~2022, 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 no0 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 period~~six-month periods ended ~~February 28, 2018,~~November 30, 2021 and 2020, we sold ~~$63.0~~$158.4 million and $243.1 million, respectively, of receivables under the Purchase Agreement and remitted $176.8 million and $268.5 million, respectively, to the Purchaser on their behalf. As of November 30, 2021 and May 31, 2021, we had collected ~~$10.7~~cash of $3.7 million ~~on behalf of the Purchaser. The cash collected has~~and $8.4 million, respectively, which was not yet ~~been~~ remitted to the Purchaser as of those dates and ~~has been~~was classified as Restricted cash on our Condensed Consolidated Balance ~~Sheet.~~ Sheets.

We ~~incurred purchase discount~~recognize discounts on the sale of our receivables and other fees ~~of $0.5 million which are recognized as~~related to the Purchase Agreement in Other ~~expenses~~expense, net on our Condensed Consolidated Statements of Operations. We incurred discounts on the sale of our receivables of $0 million and $0.1 million during the three-month periods ended November 30, 2021 and 2020, respectively, and $0.1 million and $0.2 million during the six-month periods ended November 30, 2021 and 2020, respectively.

~~The accompanying Notes to Condensed Consolidated Financial~~15
~~Statements are an integral part~~Table of ~~these statements.~~Contents
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
~~February 28, 2018~~November 30, 2021
(Unaudited)
(Dollars in millions, except per share amounts)
Note 11 – Government Subsidies

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in the U.S. in response to the COVID-19 pandemic. The CARES Act includes provisions relating to refundable payroll tax credits, deferral of the employer portion of certain payroll taxes, net operating loss carrybacks, and other areas. The payroll tax deferral requires that the deferred payroll taxes be paid over two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. As of November 30, 2021, we have deferred payroll taxes of $12.4 million of which $6.2 million are included in Accrued liabilities and $6.2 million in Other liabilities on our Condensed Consolidated Balance Sheet.

During the three-month period ended August 31, 2020, we received $57.2 million from the U.S. Treasury Department through the Payroll Support Program under the CARES Act. This funding included a $48.5 million cash grant which is to be used exclusively for the continuation of payment of employee wages, salaries and benefits for employees of certain maintenance, repair, and overhaul (“MRO”) facilities. The grant was recognized as contra-expense on our Condensed Consolidated Statement of Operations as the eligible wages, salaries and benefits were incurred. In fiscal 2021, we recognized the full amount of the grant as contra-expense within Cost of sales and Selling, general and administrative expenses of $47.5 million and $1.0 million, respectively.

The remaining funding of $8.7 million was a low interest 10-year senior unsecured promissory note (“Promissory Note”) which included interest at a rate per annum equal to the sum of (i) 1.0% for the first five years, and the applicable secured overnight financing rate plus 2.0% in years six through ten plus (ii) in kind interest of 3.0% for the first five years and increasing by 1.0% each year over the remaining term. The Promissory Note ~~10 —~~was pre-payable at par at any time and we re-paid the Promissory Note in full during the fourth quarter of fiscal 2021. Certain corporate restrictions continue to apply to us which include restrictions on employee compensation. The restrictions previously applicable to us relating to dividends, stock repurchases, and certain workforce actions have lapsed.

Other countries have enacted legislation similar to the CARES Act to provide relief and stimulus measures to assist companies in mitigating the financial impact from COVID-19 and supporting their employees. Our foreign subsidiaries recognized subsidies of $2.5 million and $1.6 million during the three-months ended November 30, 2021 and 2020, respectively, and $2.8 million and $4.9 million during the six-months ended November 30, 2021 and 2020, respectively, from foreign governments which have been deducted from the related expenses on our Condensed Consolidated Statements of Operations.

Note 12 – Financing Arrangements

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

February 28,

May 31,

2018

2017

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

$
147.0

$
131.0

November 30,

May 31,


2021

2021
Revolving Credit Facility expiring September 25, 2024 with interest payable monthly

$
104.5

$
109.5
Term loan due November 1, 2021 with interest payable monthly

24.1

—

0

25.7
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

Total debt

196.2

156.2

104.5

135.2
Current maturities

(0.1
)
(0.1
)
Debt issuance costs, net

(1.8
)
(2.0
)

(1.3)

(1.5)
Long-term debt

$
194.3

$
154.1

$
103.2

$
133.7

At ~~February 28, 2018,~~November 30, 2021, 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.

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”)~~2 MRO facilities in Canada from Premier Aviation. The term loan ~~is due~~was paid in full at the expiration of the Credit Agreement on November 1, 2021.

16
Table of Contents
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2021 ~~unless terminated earlier pursuant~~
(Unaudited)
(Dollars in millions, except per share amounts)
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 of $600 million and matures September 25, 2024. Under certain circumstances, we have the ability to request, but our lenders are not required to grant, an increase to the ~~terms~~revolving credit commitment by an aggregate amount of up to $300 million, not to exceed $900 million in total. Borrowings under the Revolving Credit ~~Agreement. Interest is payable monthly on the term loan~~Facility bear interest at the offered ~~fluctuating Canadian Dollar Offer~~Eurodollar Rate plus ~~125~~87.5 to ~~225~~175 basis points based on certain financial measurements if a ~~Bankers’ Acceptances~~Eurodollar Rate loan, or at the offered ~~fluctuation Prime~~fluctuating Base Rate plus 250 to ~~125~~75 basis points based on certain financial measurements if a ~~Prime~~Base 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~~Borrowings outstanding under the Revolving Credit ~~Facility.~~Facility at November 30, 2021 were $104.5 million and there were approximately $12.1 million of outstanding letters of credit, which reduced the availability of this facility to $483.4 million.

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, 2018,~~November 30, 2021, we were in compliance with the financial and other covenants in our financing agreements.

Note 13 – Other Non-current Assets

Investments in Joint Ventures

Our investments in joint ventures include $10.7 million for our 40% ownership interest in a joint venture in India to develop and operate an airframe maintenance facility. The facility received certain regulatory approvals and commenced airframe maintenance operations in the second quarter of fiscal 2022.

The ~~accompanying Notes~~investment balance as of November 30, 2021 includes $9.4 million related to ~~Condensed Consolidated Financial~~the guarantee liability recognized in conjunction with our guarantee of 40% of the Indian joint venture’s debt. The Indian joint venture is accounted for using the equity method. In addition, each of the partners in the Indian joint venture has a loan to the joint venture proportionate to its equity ownership. Our loan to the Indian joint venture under this arrangement was $3.1 million as of November 30, 2021.
~~Statements are~~
License Fees

In June 2011, we entered into a ten-year agreement with Unison Industries (“Unison”) to be the exclusive worldwide aftermarket distributor for Unison’s electrical components, sensors, switches and other systems for aircraft and industrial uses. In June 2020, we entered into an ~~integral part~~extension and expansion of ~~these statements.~~our agreement with Unison including a new termination date of December 31, 2031, an initial $25.0 million license fee paid in June 2020 to Unison, and annual license fees at a fixed percentage of our net sales of Unison products. The June 2020 payment of $25.0 million was capitalized and is being amortized on a straight-line basis over the term of the new agreement.

Split-Dollar Life Insurance Arrangements

We previously entered into split-dollar life insurance agreements to benefit certain former executives and officers. Under the terms of the arrangements, we made premium payments on the individuals’ behalf, and we retained a collateral interest in the policies generally to the extent of the premiums we previously paid.

17
Table of Contents
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
~~February 28, 2018~~November 30, 2021
(Unaudited)
(Dollars in millions, except per share amounts)
During the second quarter of fiscal 2021, certain split-dollar life insurance agreements were terminated and we received $12.0 million for reimbursement of both the life insurance premiums we previously paid and a portion of our prior tax payments made on the individuals’ behalf related to their imputed income on the policies. The reimbursement of the premiums paid of $10.0 million has been classified as cash flow from investing activities with the remainder included in cash flow from operating activities as it represents the reimbursement of a portion of the taxes previously paid and expensed. In the second quarter of fiscal 2021, we recognized a benefit of $1.3 million in Selling, general and administrative expenses on the Condensed Consolidated Statement of Operations for the net recovery of the taxes previously paid on behalf of the individuals.

Note ~~11 —~~14 – 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, no0 effect is given to the participating securities because they do not share in the losses of the Company.

18
Table of Contents
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2021
(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, 2018~~November 30, 2021 and ~~2017~~2020 is as follows:

Three Months Ended

Nine Months Ended

February 28,

February 28,

2018

2017

2018

2017

Three Months Ended

Six Months Ended

November 30,

November 30,


2021

2020

2021

2020
Basic and Diluted EPS:

Income from continuing operations

$
31.3

$
14.4

$
55.6

$
35.7

$
20.8

$
14.4

$
32.0

$
0.5
Less income attributable to participating shares

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

(0.1)

(0.1)

(0.2)

0
Income from continuing operations attributable to common shareholders

31.1

14.3

55.1

35.4

20.7

14.3

31.8

0.5
Loss from discontinued operations attributable to common shareholders

(15.8
)
(0.7
)
(52.0
)
(0.4
)
Income (Loss) from discontinued operations attributable to common shareholders

0

(6.2)

0.3

(6.8)
Net income (loss) attributable to common shareholders for earnings per share

$
15.3

$
13.6

$
3.1

$
35.0

$
20.7

$
8.1

$
32.1

$
(6.3)

Weighted Average Shares:

Weighted average common shares outstanding — basic

34.0

33.7

34.1

33.9

Weighted average common shares outstanding – basic

35.1

34.9

35.1

34.9
Additional shares from the assumed exercise of stock options

0.5

0.5

0.4

0.4

0.5

0.1

0.5

0.1
Weighted average common shares outstanding — diluted

34.5

34.2

34.5

34.3

Earnings (Loss) per share — basic:

Weighted average common shares outstanding – diluted

35.6

35.0

35.6

35.0

Earnings (Loss) per share – basic:

Earnings from continuing operations

$
0.91

$
0.43

$
1.62

$
1.05

$
0.59

$
0.41

$
0.90

$
0.01
Loss from discontinued operations

(0.46
)
(0.02
)
(1.52
)
(0.01
)
Earnings (Loss) per share — basic

$
0.45

$
0.41

$
0.10

$
1.04

Earnings (Loss) per share — diluted:

Income (Loss) from discontinued operations

0

(0.18)

0.01

(0.20)
Earnings (Loss) per share - basic

$
0.59

$
0.23

$
0.91

$
(0.19)

Earnings (Loss) per share – diluted:

Earnings from continuing operations

$
0.90

$
0.42

$
1.60

$
1.04

$
0.58

$
0.41

$
0.89

$
0.01
Loss from discontinued operations

(0.46
)
(0.02
)
(1.52
)
(0.01
)
Earnings (Loss) per share — diluted

$
0.44

$
0.40

$
0.08

$
1.03

Income (Loss) from discontinued operations

0

(0.18)

0.01

(0.19)
Earnings (Loss) per share - diluted

$
0.58

$
0.23

$
0.90

$
(0.18)

~~At February 28, 2018~~The potential dilutive effect of 1,195,000 and ~~2017,~~1,743,000 shares relating to stock options was excluded from the ~~average market price~~computation of ~~our~~weighted average common shares outstanding – diluted for the three-month periods ended November 30, 2021 and 2020, respectively, as the shares would have been anti-dilutive. The potential dilutive effect of 790,000 and 1,743,000 shares relating to stock options was ~~in excess~~excluded from the computation of ~~all~~weighted average common shares outstanding - diluted for the six-month periods ended November 30, 2021 and 2020, respectively.

19
Table of ~~our outstanding options.~~Contents
~~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~~November 30, 2021
(Unaudited)
(Dollars in millions, except per share amounts)
Note ~~12 —~~15 – 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, 2018~~November 30, 2021 and ~~2017~~2020 were as follows:

Currency
Translation
Adjustments

Pension
Plans

Total

Balance at December 1, 2017

$
0.8

$
(37.6
)
$
(36.8
)


Currency




Translation

Pension


Adjustments

Plans

Total
Balance at September 1, 2021

$
3.3

$
(21.9)

$
(18.6)
Other comprehensive income before reclassifications

0.9

—

0.9

(3.7)

—

(3.7)
Amounts reclassified from AOCL

—

0.3

0.3

(0.2)

0.3

0.1
Total other comprehensive income

0.9

0.3

1.2

Balance at February 28, 2018

$
1.7

$
(37.3
)
$
(35.6
)

Balance at December 1, 2016

$
(3.7
)
$
(42.8
)
$
(46.5
)
Total other comprehensive income (loss)

(3.9)

0.3

(3.6)
Balance at November 30, 2021

$
(0.6)

$
(21.6)

$
(22.2)

Balance at September 1, 2020

$
(0.8)

$
(42.3)

$
(43.1)
Other comprehensive loss before reclassifications

(0.2
)
—

(0.2
)

1.1

(1.2)

(0.1)
Amounts reclassified from AOCL

—

0.3

0.3

—

0.2

0.2
Total other comprehensive income (loss)

(0.2
)
0.3

0.1

1.1

(1.0)

0.1
Balance at February 28, 2017

$
(3.9
)
$
(42.5
)
$
(46.4
)
Balance at November 30, 2020

$
0.3

$
(43.3)

$
(43.0)

Currency
Translation
Adjustments

Pension
Plans

Total

Balance at June 1, 2017

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

Currency

Translation

Pension


Adjustments

Plans

Total
Balance at June 1, 2021

$
3.9

$
(22.2)

$
(18.3)
Other comprehensive income before reclassifications

3.4

—

3.4

(4.3)

—

(4.3)
Amounts reclassified from AOCL

—

0.9

0.9

(0.2)

0.6

0.4
Total other comprehensive income

3.4

0.9

4.3

Balance at February 28, 2018

$
1.7

$
(37.3
)
$
(35.6
)

Balance at June 1, 2016

$
(1.1
)
$
(43.3
)
$
(44.4
)
Total other comprehensive income (loss)

(4.5)

0.6

(3.9)
Balance at November 30, 2021

$
(0.6)

$
(21.6)

$
(22.2)

Balance at June 1, 2020

$
(2.0)

$
(42.6)

$
(44.6)
Other comprehensive loss before reclassifications

(2.8
)
—

(2.8
)

2.3

(1.2)

1.1
Amounts reclassified from AOCL

—

0.8

0.8

—

0.5

0.5
Total other comprehensive income (loss)

(2.8
)
0.8

(2.0
)

2.3

(0.7)

1.6
Balance at February 28, 2017

$
(3.9
)
$
(42.5
)
$
(46.4
)
Balance at November 30, 2020

$
0.3

$
(43.3)

$
(43.0)

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 — 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 deferred consideration of $1.9 million payable 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

Property and equipment

13.1

Intangible assets, including goodwill

16.0

Accounts payable and accrued liabilities

(8.4
)

$
24.8

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 million 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:
Inventory

$
5.0

Equipment on or available for long-term lease

7.0

Intangible assets

3.0

$
15.0

~~Note 15 —~~16 – Business Segment Information

Consistent with how our chief operating decision making officer ~~(Chief~~(our Chief Executive Officer) evaluates performance and the way we are organized internally, we report our activities in ~~two business~~2 reportable segments: Aviation Services comprised of supply chain and MRO activities and Expeditionary Services comprised of ~~our government-owned, contractor-operated (“GOCO”) airlift services and mobility operations.~~manufacturing activities.

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~~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~~20
~~Statements are an integral part~~Table of ~~these statements.~~Contents
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
~~February 28, 2018~~November 30, 2021
(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 advanced composite materials~~system integration services for ~~commercial, business~~specialized command and ~~military aircraft.~~control systems. 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~~annual Report on Form 10-K for the fiscal year ended May 31, ~~2017.~~ 2021.

Our chief operating decision making officer ~~(Chief~~(our Chief Executive Officer) evaluates performance based on ~~the reportable~~our 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.~~

Selected financial information for each segment is as follows:

Three Months Ended

Nine Months Ended

February 28,

February 28,

2018

2017

2018

2017

Three Months Ended

Six Months Ended

November 30,

November 30,


2021

2020

2021

2020
Sales:

Aviation Services

$
426.4

$
382.8

$
1,189.3

$
1,064.1

$
419.3

$
385.0

$
854.9

$
748.6
Expeditionary Services

29.9

24.4

85.5

76.2

17.3

18.6

36.8

55.8

$
456.3

$
407.2

$
1,274.8

$
1,140.3

$
436.6

$
403.6

$
891.7

$
804.4

Three Months Ended

Nine Months Ended

February 28,

February 28,

2018

2017

2018

2017

Three Months Ended

Six Months Ended

November 30,

November 30,


2021

2020

2021

2020
Gross profit:

Aviation Services

$
71.7

$
63.2

$
195.5

$
172.6

$
74.0

$
66.8

$
134.9

$
111.4
Expeditionary Services

5.9

3.3

14.4

12.9

4.4

2.7

8.1

6.7

$
77.6

$
66.5

$
209.9

$
185.5

$
78.4

$
69.5

$
143.0

$
118.1

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

Three Months Ended

Six Months Ended

November 30,

November 30,


2021

2020

2021

2020
Segment gross profit

$
77.6

$
66.5

$
209.9

$
185.5

$
78.4

$
69.5

$
143.0

$
118.1
Selling, general and administrative

(53.4
)
(43.1
)
(146.7
)
(126.6
)

(47.1)

(43.4)

(96.4)

(88.7)
Loss from joint ventures

(0.4)

(0.1)

(0.6)

(0.2)
Provision for doubtful accounts

(0.8)

(4.4)

(0.8)

(4.4)
Loss on sale of business

(1.3)

—

(1.3)

(19.5)
Other income(expenses), net

0.3

(0.7)

1.0

(0.5)
Interest expense

(2.2
)
(1.4
)
(5.8
)
(3.8
)

(0.5)

(1.3)

(1.2)

(3.0)
Interest income

—

0.1

0.1

0.1

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

Income from continuing operations before provision for income taxes

$
28.7

$
19.6

$
43.8

$
1.9

~~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 ~~16 —~~17 – 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:

21
Table of Contents
~~DynCorp International LLC v.~~ AAR ~~Airlift Group, Inc.~~CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2021
(Unaudited)
(Dollars in millions, except per share amounts)
Department of Justice Investigation

~~On September 5, 2015, DynCorp International LLC~~As previously reported, 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, conducted an investigation of AAR Airlift Group, Inc. (“~~AAR~~ Airlift”), a wholly-owned subsidiary of AAR CORP., under the federal civil False Claims Act (“FCA”). The investigation related to Airlift’s performance 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 (“TRANSCOM”) 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 Airlift on September 1, 2016.~~
~~The District Court denied DynCorp’s preliminary injunction motion, and on October 19, 2015, DynCorp~~precipitated by a lawsuit filed ~~an amended complaint with~~under 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~~qui tam provisions of the ~~amended complaint and remanded the case to the District Court for further proceedings. The District Court set~~FCA by a ~~discovery schedule that was to end on September 1, 2017 and a trial date~~former employee 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~~In June 2021, Airlift and ~~DynCorp filed a joint notice of settlement, advising~~ the ~~District Court that they had~~DoJ 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~~FCA investigation and ~~requesting that~~related matters for approximately $11.5 million which concluded the ~~court reopen~~DoJ investigation into Airlift’s contracts with TRANSCOM and the ~~case~~U.S. Navy. As part of the settlement, Airlift and AAR did not admit any wrongdoing.

We recognized charges of $11.0 million in discontinued operations in fiscal 2021 related to this agreement and related matters. As of May 31, 2021, our reserve was $12.7 million and payment for the ~~limited purpose~~entire matter was made in the first quarter 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.~~fiscal 2022.

Self-Reporting of Potential Foreign Corrupt Practices Act Violations

The ~~accompanying Notes~~Company retained outside counsel to ~~Condensed Consolidated Financial~~investigate possible violations of the Company’s Code of Conduct, the U.S. Foreign Corrupt Practices Act, and other applicable laws, relating to the Company’s activities in Nepal and South Africa. Based on these investigations, in fiscal 2019, we self-reported these matters to the DoJ, the U.S. Securities and Exchange Commission and the UK Serious Fraud Office. The Company is fully cooperating with the reviews by these agencies, although we are unable at this time to predict what action, if any, they may take.
~~Statements are an integral part~~

22
Table of ~~these statements.~~Contents
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions)

~~(Dollars in millions)~~General Overview

~~General Overview~~
We report our activities in two ~~business~~reportable segments: Aviation Services comprised of supply chain and maintenance, repair, and overhaul (“MRO”) activities and Expeditionary Services comprised of ~~our government-owned, contractor-operated (“GOCO”) airlift services and mobility operations.~~manufacturing activities.

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~~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 advanced composite materials~~system integration services for ~~commercial, business~~specialized command and ~~military aircraft.~~control systems. 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. Our chief operating decision making officer ~~(Chief~~(our Chief Executive Officer) evaluates performance based on ~~the reportable~~our 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~~

The accounting policies for the segments are ~~aligned principally around differences~~the same as those described in ~~products~~Note 1 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2021.

Business Trends and ~~services.~~Outlook

InConsolidated sales for the second quarter of fiscal ~~2017,~~2022 increased $33.0 million or 8.2% over the prior year quarter primarily due to an increase in sales of $34.3 million or 8.9% in our Aviation Services segment. Consolidated sales to commercial customers increased $63.5 million or 32.7% over the prior year quarter due to the partial recovery in commercial passenger air traffic. Our consolidated sales to government customers decreased $30.5 million or 14.6% primarily due to less volume across certain U.S. Government contracts.

Over the long-term, we ~~increased~~expect to see strength in our Aviation Services segment revenues by securing additional flight hour component inventory management and repair programs from our commercial airline customers and investing in our capacity and business development resources. During fiscal 2017, our investment in business development resulted in the awardgiven its offerings of ~~new contracts from commercial operators along with investment of over $80 million in rotable assets~~value-added services to ~~support these commercial aviation programs.~~
~~We started to recognize revenue and income in fiscal 2017 on most of these contract awards and are continuing 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 supply chain~~customers. We believe long-term commercial and ~~maintenance programs, as these customers~~government growth trends are favorable. As we continue to ~~seek ways~~experience recovery and growth in our operations, our long-term strategy continues to ~~reduce their operating cost structure.~~emphasize investing in the business and capitalizing on opportunities in those markets.

~~In November 2017, we began transition services on~~Both our commercial and government businesses are subject to the ~~INL/~~economic environment, impact of COVID-19, public policy decisions or other factors that could adversely impact our business, financial condition or results of operations in the future. A ~~Worldwide Aviation Support Services (“INL/A WASS”) contract from~~recent example of this was the U.S. Government’s decision to withdraw all U.S. Department of State ~~(“DOS”). This contract leverages~~personnel presence in Afghanistan. In conjunction with the U.S. exit from Afghanistan, we concluded our ~~capabilities~~activities in ~~aviation services, including flight~~country under our WASS and U.S. Department of Defense contracts. The operations supply chain logistics, and other services. We are the prime contractor on this ten-year performance-based contract to globally operate and maintain the DOS fleet of fixed and rotary-wing aircraft. We expect to be fully operational by the end of the fourth quarter of fiscal 2018 at which point the INL/A WASS program will be a contributorrelated to our ~~earnings.~~
We have been repositioning our Expeditionary Services segment resources to focus on a GOCO model rather than a Contractor-Owned, Contractor-Operated (“COCO”) model as we transition to a capital light operating structureactivities in ~~this segment. During the third quarter~~Afghanistan contributed revenue of $67 million in fiscal ~~2018, we decided to pursue the sale~~2021.
23
Table 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.~~Contents
~~Fiscal Year 2019 Outlook~~
We remain in a strong financial position to further execute on our strategy as a best in class aviation services and expeditionary services company. Our cash on hand plus unused capacities on our Revolving Credit Facility and our new accounts receivable financing program was $458 million at February 28, 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

Three- and Six-Month Periods Ended November 30, 2021

Sales and gross profit for our two business segments for the three- and ~~nine-months~~six-months ended ~~February 28, 2018~~November 30, 2021 and ~~2017~~2020 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 November 30,

Six Months Ended November 30,


2021

2020

% Change

2021

2020

% Change

Sales:







Aviation Services







Commercial

$
257.0

$
192.2

33.7
%
$
524.2

$
361.8

44.9
%
Government and defense

162.3

192.8

(15.8)
%

330.7

386.8

(14.5)
%

$
419.3

$
385.0

8.9
%
$
854.9

$
748.6

14.2
%
Expeditionary Services



Commercial

$
0.7

$
2.0

(65.0)
%
$
0.8

$
7.7

(89.6)
%
Government and defense

16.6

16.6

—

36.0

48.1

(25.2)
%

$
17.3

$
18.6

(7.0)
%
$
36.8

$
55.8

(34.1)
%

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,


2021

2020

% Change

2021

2020

% Change

Gross Profit (Loss):







Aviation Services







Commercial

$
44.6

$
37.9

17.7
%
$
75.1

$
54.2

38.6
%
Government and defense

29.4

28.9

1.7
%

59.8

57.2

4.5
%

$
74.0

$
66.8

10.8
%
$
134.9

$
111.4

21.1
%
Expeditionary Services



Commercial

$
—

$
0.1

nm

$
—

$
(1.2)

nm

Government and defense

4.4

2.6

69.2
%

8.1

7.9

2.5
%

$
4.4

$
2.7

63.0
%
$
8.1

$
6.7

20.9
%
nm – Percentage change is not meaningful.

Three Month Period Ended ~~February 28, 2018~~November 30, 2021

Aviation Services Segment

Sales in the Aviation Services segment increased ~~$43.6~~$34.3 million or ~~11.4%~~8.9% over the prior year period due to a ~~$48.7~~$64.8 million or ~~16.7%~~33.7% increase in sales to commercial customers. The increase in sales to commercial customers was attributable to ~~higher volumes 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~~increased sales of $21.7 million in our MRO activities as commercial passenger air traffic continues to recover from the impact of COVID-19. In addition, sales ~~to commercial customers.~~
~~During~~increased $15.8 million in our aftermarket parts trading activities which included whole asset sales of $12.0 million during the ~~third~~second quarter of fiscal ~~2018,~~2022 compared to none in the prior year.

During the second quarter of fiscal 2022, sales in this segment to government and defense customers decreased ~~$5.1~~$30.5 million or ~~5.6%~~15.8%, from the prior year period. The ~~decrease was primarily due~~prior year quarter included sales of $19.7 million related to the ~~wind-down~~installation of ~~our KC-10 Program partially offset by increased volume~~engines on the C-40 aircraft we are delivering to the Naval Air Systems Command in ~~parts supply activities. Our principal services under~~support of the ~~KC-10 Program were completed~~U.S. Marine Corps. No engine installation activities occurred in ~~January 2017 with~~ the ~~wind-down expected to be complete in~~second quarter of 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.~~2022.

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. In the ~~third~~second quarter of fiscal ~~2018,~~2022, we recognized favorable and unfavorable cumulative catch-up adjustments of $8.3 million and $6.5 million, respectively, compared to only favorable adjustments of $3.2 million in the prior year period. When considering these adjustments on ahad net ~~basis, we recognized~~ favorable cumulative catch-up adjustments of ~~$1.8~~$5.9 million ~~and $3.2~~compared to net favorable cumulative catch-up adjustments of $2.5 million ~~for the current and~~in prior year ~~periods, respectively.~~quarter. These adjustments primarily relate to our long-term, power-by-the-hour programs where we provide component inventory management and repair ~~services.~~services as well as certain long-term government programs.

24
Table of Contents
Cost of sales in Aviation Services increased ~~$35.1~~$27.1 million, or ~~11.0%~~8.5%, 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~~$7.2 million, or ~~13.4%~~10.8%, over the prior year period. Gross profit on sales to commercial customers increased ~~$5.7~~$6.7 million, or ~~12.1%~~17.7%, over the prior year period primarily ~~driven by~~due to the ~~higher volumes in aviation supply chain activities. Gross~~COVID-19 recovery discussed above. The gross profit margin on sales to commercial customers decreased to 17.4% from ~~16.1%~~19.7% in the prior year period, primarily from the benefit of government workforce subsidies including the Payroll Support Program in the CARES Act and other subsidies provided by foreign governments. We recognized a benefit of $2.4 million in cost of sales during the second quarter of fiscal 2022 related to ~~15.5% primarily as a result of~~ the ~~mix of products and services sold.~~government subsidies compared to $18.1 million in the prior year quarter.

Gross profit on sales to government and defense customers increased ~~$2.8~~$0.5 million, or ~~17.3%~~1.7%, over the prior year ~~period primarily due to the increased volume in parts supply activities. The gross~~period. Gross profit margin on sales to government and defense customers increased to 18.1% from ~~17.7% to 22.0% reflecting~~15.0% in the ~~wind-down of the lower profitability KC-10 Program.~~prior year period, primarily driven by cumulative catch-up adjustments on long-term government programs.

Expeditionary Services Segment

Sales in the Expeditionary Services segment ~~increased $5.5~~decreased $1.3 million, or ~~22.5%~~7.0%, from the prior year period primarily due to reduced volume for our mobility products. Gross profit in the Expeditionary Services segment increased $1.7 million, or 63.0%, over the prior period primarily due to lower raw material costs. Gross profit margin increased to 25.4% from 14.5% in the prior year period primarily as a result of these lower raw material costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $3.7 million, or 8.5%, over the prior year period primarily due to the ~~continued recovery in sales volumes for our mobility products business. Gross profit in the Expeditionary Services segment increased $2.6 million or 78.8% over~~reinstatement of full salary and benefits which were temporarily reduced during the prior year ~~period primarily due~~quarter as part of our actions to mitigate the ~~increased~~financial impact to our business from COVID-19. As a percent of sales, ~~volumes discussed above. Gross profit margin for Expeditionary Services increased from 13.5% to 19.7% primarily as a result of the mix of products and services sold.~~
~~Selling, General and Administrative Expenses~~
~~Selling,~~selling, general and administrative expenses ~~increased $10.3 million over~~remained consistent at 10.8% as the ~~prior year period primarily due to increased personnel related costs. During~~reinstatement of compensation was offset by the ~~three months ended February 28, 2018, we incurred $1.1 million of severance costs in connection with a voluntary early retirement program.~~favorable impact from our cost reduction actions.

~~Interest Expense~~Income Taxes

Interest expense increased $0.8 million in fiscal 2018 from 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, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted which significantly reduced the corporate federal~~Our effective 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 continuing operations was 27.5% 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~~second 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~~2022 compared to ~~$0.7 million~~26.5% in the prior year period. The increase ~~of $15.1 million~~in the effective tax rate in fiscal 2022 is primarily related to higher non-deductible expenses in fiscal 2022 compared to the prior year.

Discontinued Operations

Loss from discontinued operations was ~~primarily due to goodwill and other asset impairment pre-tax charges of $11.0~~$6.2 million in the ~~third quarter~~prior year period which was attributable to a $6.0 million increase in our reserve to reflect the tentative agreement with the U.S. Department of ~~fiscal 2018 and~~Justice to settle their investigation of our Contractor-Owned, Contractor-Operated (“COCO”) business under the ~~completion of certain long-term customer contracts in the second quarter of fiscal 2018.~~federal civil False Claims Act.

~~Nine-Month~~Six Month Period Ended ~~February 28, 2018~~November 30, 2021

Aviation Services Segment

Sales in the Aviation Services segment increased ~~$125.2~~$106.3 million, or ~~11.8%~~14.2%, over the prior year period due to a ~~$160.2~~$162.4 million, or ~~20.5%~~44.9%, increase in sales to commercial customers. The increase in sales to commercial customers was ~~primarily~~ attributable to higher volumes 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 $21.7increased sales of $53.0 million in our MRO activities as commercial passenger air traffic continues to recover from the impact of COVID-19. In addition, sales increased $46.3 million in our aftermarket parts trading activities which included whole asset sales of $34.0 million during the six-month period ended November 30, 2021 compared to ~~commercial customers.~~$14.0 million in the prior year period.

~~Sales~~During the six-month period ended November 30, 2021, sales in this segment to government and defense customers decreased ~~$35.0~~$56.1 million, or ~~12.3%~~14.5%, from the prior year period. ~~The~~This decrease was primarily ~~due~~attributable to the ~~wind-down~~timing of ~~our KC-10 Program partially offset by increased volume~~activities for the C-40 aircraft we are delivering to the Naval Air Systems Command in ~~parts supply activities. Our principal services under~~support of the ~~KC-10 Program were completed in January 2017 with~~U.S. Marine Corps. The prior year period included sales of $39.5 million related to the ~~wind-down expected to be complete~~installation of engines on the aircraft while no engine installation activities occurred 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.~~2022.

25
Table of Contents
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~~During the ~~nine-month~~six-month period ended ~~February 28, 2018,~~November 30, 2021, we recognized favorable and unfavorable cumulative catch-up adjustments of $9.3 million and $7.1 million, respectively, compared to only favorable adjustments of $7.8 million in the prior year period. When considering these adjustments on ahad net ~~basis, we recognized~~ favorable cumulative catch-up adjustments of ~~$2.2~~$4.9 million ~~and $7.8~~compared to net favorable cumulative catch-up adjustments of $2.8 million ~~for the current and~~in prior year ~~periods, respectively.~~period. These adjustments primarily relate to our long-term, power-by-the-hour programs where we provide component inventory management and repair ~~services.~~services as well as certain long-term government programs.

Cost of sales in Aviation Services increased ~~$102.3~~$82.8 million, or ~~11.5%~~13.0%, 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~~$23.5 million, or ~~13.3%~~21.1%, over the prior year period. Gross profit on sales to commercial customers increased ~~$19.4~~$20.9 million, or ~~15.3%~~38.6%, over the prior year period primarily ~~driven by~~due to the ~~higher volumes in aviation supply chain activities~~COVID-19 recovery discussed above. In addition, gross profit was unfavorably impacted in the six-month period ended November 30, 2020 due to asset impairment charges of $7.0 million and facility consolidation and repositioning costs of $2.4 million. These items were more than offset by a benefit of $28.2 million in government workforce subsidies from the Payroll Support Program in the CARES Act and other subsidies provided by foreign governments. Gross profit margin on sales to commercial customers decreased to 14.3% from ~~16.3%~~15.0% in the prior year period primarily due to ~~15.6% primarily as a result~~the impact of the ~~mix of products and services sold.~~subsidies in the prior year period more than offsetting the volume recovery in fiscal 2022.

Gross profit on sales to government and defense customers increased ~~$3.5~~$2.6 million, or ~~7.7%~~4.5%, over the prior year ~~period~~ primarily ~~due to the increased volume in parts supply activities. The gross~~driven by cumulative catch-up adjustments on long-term government programs. Gross profit margin on sales to government and defense customers increased to 18.1% from ~~16.1% to 19.8% reflecting~~14.8% in the ~~wind-down~~prior year period primarily as a result of ~~the lower profitability KC-10 Program.~~these adjustments.

Expeditionary Services Segment

Sales in the Expeditionary Services segment ~~increased $9.3~~decreased $19.0 million, or ~~12.2%~~34.1%, from the prior year period primarily due to reduced volume for our mobility products. Gross profit in the Expeditionary Services segment increased $1.4 million, or 20.9%, over the prior period primarily due to the divestiture of our composites manufacturing business which was not profitable prior to its divestiture on August 31, 2020. Gross profit margin increased to 22.0% from 12.0% in the prior year period primarily as a result of the divestiture.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $7.7 million, or 8.7%, over the prior year period primarily due to the ~~continued recovery in sales volumes for our mobility products business. Gross profit in the Expeditionary Services segment increased $1.5 million from the prior period~~reinstatement of full salary and benefits which ~~was primarily in line with the sales increase discussed above as the gross profit margin was 16.8% in the current period compared to 16.9% in~~were temporarily reduced during the prior year ~~period.~~
~~Selling, General and Administrative Expenses~~
~~Selling,~~period as part of our actions to mitigate the financial impact of COVID-19. As a percent of sales, selling, general and administrative expenses ~~increased $20.1 million~~decreased to 10.8% from 11.0% in fiscal 2018 primarily due to higher legal costs related to our defense of 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.
~~Interest Expense~~
~~Interest expense increased $2.0 million in fiscal 2018 from~~ the prior year period primarily ~~as a result~~due to the benefit from our actions to reduce both our fixed and variable cost structure in light of ~~higher borrowings and higher interest rates on our Revolving Credit Facility and our new Canadian Credit Agreement.~~the reduced volumes from COVID-19.

Income Taxes

Our effective income tax rate for continuing operations was ~~2.5%~~26.9% for the ~~nine-month~~six-month period ended ~~February 28, 2017~~November 30, 2021 compared to ~~35.3%~~73.7% in the prior year period. The prior year period included unfavorable stock compensation items of $0.9 million.
The Tax Reform Act significantly reduced the corporate federal income tax rate to 21% from 35% which resulted in a blended federal statutory tax rate for the Company of 29.2% in fiscal 2018. 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 million of excess tax benefits as an increase to our income tax benefit during the nine-month period ended February 28, 2018 related to the adoption of ASU 2016-09.~~

Discontinued Operations

~~Loss~~Income from discontinued operations was ~~$52.0~~$0.3 million in the ~~nine-month~~six-month period ended ~~February 28, 2018~~November 30, 2021 compared to ~~$0.4~~a loss of $6.8 million in the prior year period. The ~~increase of $51.6 million~~loss in the prior year period was ~~primarily~~ attributable to ~~pre-tax asset impairment charges~~a $6.0 million increase in our legal reserve discussed above.

26
Table of ~~$65.2 million and the completion of certain long-term customer contracts in the second quarter of fiscal 2018.~~Contents
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, 2021, our liquidity and capital resources included working capital of $626.5 million inclusive of cash of $42.7 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 of $600 million and matures September 25, 2024. Under certain circumstances, we have the ability to request, but our lenders are not required to grant, an increase to the revolving credit commitment by an aggregate amount of up to $300 million, not to exceed $900 million in total.

Borrowings under the Revolving Credit Facility bear interest at the offered Eurodollar Rate plus 87.5 to 175 basis points based on certain financial measurements if a Eurodollar Rate loan, or at the offered fluctuating Base Rate plus 0 to 75 basis points based on certain financial measurements if a Base Rate loan.

Borrowings outstanding under the Revolving Credit Facility at November 30, 2021 were $104.5 million and there were approximately $12.1 million of outstanding letters of credit, which reduced the availability of this facility to $483.4 million. There are no other terms or covenants limiting the availability of this facility.

In the first quarter of fiscal 2021, we received $57.2 million from the U.S. Treasury Department through the Payroll Support Program under the CARES Act. This funding included a $48.5 million cash grant, which was to be used exclusively for the continuation of payment of employee wages, salaries and benefits for employees of certain MRO facilities, and a low interest 10-year senior unsecured promissory note of $8.7 million. In fiscal 2021, we recognized the full amount of the grant as contra-expense within Cost of sales and Selling, general and administrative expenses. The Promissory Note was re-paid in full during the fourth quarter of fiscal 2021.

As of November 30, 2021, we also had other financing arrangements that did not limit our availability on the Revolving Credit Facility, including outstanding letters of credit of $11.6 million and foreign lines of credit of $9.7 million.

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 MRO facilities in Canada from Premier Aviation. The term loan was paid in full at the expiration of the Credit Agreement on November 1, 2021.

We maintain a Purchase Agreement with Citibank N.A. (“Purchaser”) for the sale, from time to time, of certain accounts receivable due from certain customers (the “Purchase Agreement”). Under the Purchase Agreement, the maximum amount of receivables sold is limited to $150 million and Purchaser may, but is not required to, purchase the eligible receivables we offer to sell. The term of the Purchase Agreement runs through February 22, 2022, 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 ~~retire current maturities due~~extend the term.

We have no retained interests in the ~~next twelve months through borrowings~~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 ~~Revolving Credit Facility.~~Condensed Consolidated Balance Sheets.

27
Table of Contents
During the six-month periods ended November 30, 2021 and 2020, we sold $158.4 million and $243.1 million, respectively, of receivables under the Purchase Agreement and remitted $176.8 million and $268.5 million, respectively, to the Purchaser on their behalf. As of November 30, 2021 and May 31, 2021, we had collected cash of $3.7 million and $8.4 million, respectively, which was not yet remitted to the Purchaser as of those dates and was classified as Restricted cash on our Condensed Consolidated Balance Sheets.

At ~~February 28, 2018,~~November 30, 2021, we ~~complied~~were in compliance with all financial and other covenants under ~~each of~~ our financing arrangements.

On December 16, 2021, our Board of Directors approved a stock repurchase program in which we may repurchase up to $150 million of our common stock with no expiration date. The timing and amount of repurchases are subject to prevailing market conditions and other considerations, including our liquidity and other investment opportunities. We plan to fully utilize the authorization over approximately the next two years.

Cash Flows from Operating Activities

Net cash provided ~~from~~by operating ~~activities—~~activities–continuing operations was ~~$15.6~~$33.4 million in the ~~nine-month~~six-month period ended ~~February 28, 2018~~November 30, 2021 compared to cash ~~used~~provided of ~~$37.8~~$67.4 million in the prior year period. The ~~increase~~decrease from the prior period of ~~$53.4~~$34.0 million was primarily attributable to a higher reduction in inventory levels in the ~~new Purchase Agreement entered into during~~prior year period and the ~~third quarter~~proceeds of ~~fiscal 2018 for~~a $48.5 million grant from the ~~sale of certain accounts receivable. As of February 28, 2018, we had sold accounts receivable of $63.0 million and collected, but not yet remitted to the buyer, $10.7 million as the servicer~~Payroll Support Program of the ~~receivables.~~CARES Act. These items were partially offset by a $25 million license fee paid to Unison Industries in the prior year period for our expanded and extended exclusive distribution agreement.

Cash Flows from Investing Activities

Net cash used in investing ~~activities—continuing operations~~activities was ~~$32.3~~$2.7 million during the ~~nine-month~~six-month period ended ~~February 28, 2018~~November 30, 2021 compared to cash used of $17.0 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 million during the nine-month period ended February 28, 2018 compared to~~a cash provided of ~~$4.6~~$5.6 million in the prior year period. The ~~additional cash provided of $25.1 million~~decrease over the prior period was primarily ~~attributable~~related to proceeds of $10.0 million from the termination of split-dollar life insurance policies in the prior year period.

Cash Flows from Financing Activities

Net cash used in financing activities was $30.1 million during the six-month period ended November 30, 2021 compared to cash used of $382.9 million in the prior year period. The prior year period included the repayment of our additional draw down on our Revolving Credit Facility. These funds were originally drawn in late fiscal 2020 as a ~~new term loan of $24.8 million to finance the acquisition~~precautionary measure in light of the ~~two Canadian MRO facilities previously discussed.~~economic and market uncertainty presented by COVID-19.

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 Operationsin our ~~annual report~~Annual Report on Form 10-K for the fiscal year ended May 31, ~~2017~~2021 for a discussion of our critical accounting policies. There have been no significant changes to the application of our critical accounting policies during fiscal ~~2018.~~2022.

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.~~2021. 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.

28
Table of Contents
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 fiscal year ended May 31, ~~2017~~2021 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, 2021.

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 fiscal year ended May 31, ~~2017.~~2021. There were no significant changes during the quarter ended ~~February 28, 2018.~~November 30, 2021.

Item 4 — Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~February 28, 2018.~~November 30, 2021. 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, 2018,~~November 30, 2021, 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.

There were no changes in our internal control over financial reporting during the ~~third~~ quarter ended ~~February 28, 2018~~November 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

29
Table of Contents
PART II — OTHER INFORMATION

Item 1 —– Legal Proceedings

The information in Note 17 to the Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference. There are no matters which constitute material pending legal proceedings to which we are a party other than those incorporated into this item by reference from Note 17 to our Condensed Consolidated Financial Statements for the quarter ended November 30, 2021 contained in this Quarterly Report on Form 10-Q.

Item 1A — Risk Factors

There ~~have been several recent developments~~is no material change 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~~information reported under Part I-Item 1A “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended May 31, ~~2017. AAR Airlift is a wholly-owned subsidiary~~2021.

30
Table of ~~AAR CORP.~~Contents
~~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 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.~~
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

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).

31.2

Section 302 Certification dated March 21, 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).

32.2

Section 906 Certification dated March 21, 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.**
Exhibit
No.

Description


Exhibits

31.

Rule 13a-14(a)/15(d)-14(a) Certifications
31.1

Section 302 Certification dated December 21, 2021 of John M. Holmes, President and Chief Executive Officer of Registrant (filed herewith).

31.2

Section 302 Certification dated December 21, 2021 of Sean M. Gillen, Vice President and Chief Financial Officer of Registrant (filed herewith).

32.

Section 1350 Certifications
32.1

Section 906 Certification dated December 21, 2021 of John M. Holmes, President and Chief Executive Officer of Registrant (filed herewith).

32.2

Section 906 Certification dated December 21, 2021 of Sean M. Gillen, 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 November 30, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at November 30, 2021 and May 31, 2021, (ii) Condensed Consolidated Statements of Operations for the three- and six-months ended November 30, 2021 and 2020, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three- and six-months ended November 30, 2021 and 2020, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended November 30, 2021 and 2020, (v) Condensed Consolidated Statement of Changes in Equity for the three- and six-months ended November 30, 2021 and 2020 (vi) Notes to Condensed Consolidated Financial Statements.**

104.

Cover Page Interactive Data File
104

Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)
**   Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

31
Table of Contents
~~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~~December 21, ~~2018~~2021

/s/ ~~MICHAEL D. MILLIGAN~~SEAN M. GILLEN

~~Michael D. Milligan~~

Sean M. Gillen

Vice President and Chief Financial Officer

(Principal Financial ~~Officer and officer duly~~Officer)

~~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