| Summary of Significant Accounting Policies | 1. Summary of Significant Accounting Policies Description of Business AAR CORP. (the “Company”) is a diversified provider of services and products to the worldwide commercial aviation and government and defense markets. Services and products include: aviation supply chain and parts support programs; customer fleet management and operations; maintenance, repair and overhaul of airframes, landing gear, and certain other airframe components; design and manufacture of specialized pallets, shelters, and containers; aircraft modifications and aircraft and engine sales and leasing. We serve commercial, government and defense aircraft fleet operators, original equipment manufacturers, and independent service providers around the world, and various other domestic and foreign military customers. Principles of Consolidation The accompanying Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries after elimination of intercompany accounts and transactions. Certain reclassifications have been made to the 2020 presentation to conform to the 2021 presentation. New Accounting Pronouncements Adopted In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASC 842”), which amended the existing accounting standards for lease accounting. ASC 842 requires lessees to recognize a right-of-use (“ROU”) asset and lease liability on the balance sheet for most lease arrangements, including those classified as operating leases. In addition, ASC 842 requires new qualitative and quantitative disclosures about our leasing activities. We adopted ASC 842 on June 1, 2019 using the modified retrospective transition approach. Under that approach, prior periods have not been restated and continue to be reported under the accounting standards in effect for those periods. We elected the package of practical expedients, which must be elected as a package and applied consistently to all leases. This package permitted us to not reassess our prior conclusions about lease identification, lease classification and initial direct costs. In addition, we elected the practical expedients to not separate lease and non-lease components for both lessee and lessor relationships and to not apply the recognition requirements to leases with terms of less than twelve months. Upon adoption of ASC 842 on June 1, 2019, we recognized operating lease ROU assets of $123.2 million and operating lease liabilities of $116.8 million on our Consolidated Balance Sheet. These amounts included operating lease ROU assets of $26.6 million and operating lease liabilities of $25.3 million related to our discontinued operations. In addition, we recognized the remaining unamortized deferred gains of $2.5 million, net of tax, associated with sale-leaseback transactions as a cumulative effect adjustment to the opening balance of retained earnings as of June 1, 2019. The adoption of ASC 842 did not have a material impact on the Consolidated Statements of Operations or Cash Flows. 1. Summary of Significant Accounting Policies (Continued) In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers Revenue Recognition We adopted ASC 606 on June 1, 2018 using the modified retrospective method. Under that approach, prior periods were not restated and continue to be reported under the accounting standards in effect for those periods. We elected to use the practical expedient Revenue Recognition Revenue is measured based on 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 whether the good or service being provided is significantly integrated with other promises in the contract, whether the service provided significantly modifies or customizes another good or service or whether the good or service is highly interdependent or interrelated. If the contract has more than one performance obligation, we determine the standalone price of each distinct good or service underlying each performance obligation and allocate the transaction price based on their relative standalone selling prices. The transaction price of a contract, which can include both fixed and variable amounts, is allocated to each performance obligation identified. Some contracts contain variable consideration, which could include incremental fees or penalty provisions related to performance. Variable consideration that can be reasonably estimated based on current assumptions and historical information is included in the transaction price at the inception of the contract but limited to the amount that is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Variable consideration that cannot be reasonably estimated is recorded when known. Our performance obligations are satisfied over time as work progresses or at a point in time based on transfer of control of products and services to our customers. The majority of our sales from products typically represent distinct performance obligations and are recognized at a point in time upon transfer of control to the customer, which generally occurs upon shipment. In connection with certain sales of products, we also provide logistics services, which include inventory management, replenishment, and other related services. The price of such services is generally included in the price of the products delivered to the customer, and revenues are recognized upon delivery of the product, at which point the customer has obtained control of the product. We do not account for these services separate from the related product sales as the services are inputs required to fulfill part orders received from customers. For our performance obligations that are satisfied over time, we measure progress in a manner that depicts the performance of transferring control to the customer. As such, we utilize the input method of cost-to-cost to recognize revenue over time as this depicts when control of the promised goods or services are transferred to the customer. Revenue is recognized based on the relationship of actual costs incurred to date to the estimated total cost at completion of the performance obligation. We are required to make certain judgments and estimates, including estimated revenues and costs, as well as inflation and the overall profitability of the arrangement. Key assumptions involved can include customer volume, future labor costs and efficiencies, repair or overhaul costs, overhead costs, and ultimate timing of product delivery. Differences may occur between the judgments and estimates made by management and actual program results. For contracts that are deemed to be loss contracts, we establish forward loss reserves for total estimated costs that are in excess of total estimated consideration in the period in which they become known. 1. Summary of Significant Accounting Policies (Continued) When contracts are modified, we consider whether the modification either creates new or changes the existing enforceable rights and obligations. Contract modifications that are for goods or services that are not distinct from the existing contract, due to the significant integration with the original goods or services provided, are accounted for as if they were part of that existing contract with the effect of the contract modification recognized as an adjustment to revenue on a cumulative catch-up basis. When the modifications include additional performance obligations that are distinct, they are accounted for as a new contract and performance obligation, which are recognized prospectively. Under most of our U.S. government contracts, if the contract is terminated for convenience, we are entitled to payment for items delivered and fair compensation for work performed, the costs of settling and paying other claims, and a reasonable profit on the costs incurred or committed. We have elected to use certain practical expedients permitted under ASC 606. Shipping and handling fees and costs incurred associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in Cost of sales on our Consolidated Statements of Income, and are not considered a performance obligation to our customers. Our reported sales on our Consolidated Statements of Income are net of any sales or related non-income taxes. We also utilize the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value we are providing to the customer. Cumulative Catch-up Adjustments Changes in estimates and assumptions related to our arrangements accounted for using the cost-to-cost method are recorded using the cumulative catch-up method of accounting. These changes are primarily adjustments to the estimated profitability for our long-term programs where we provide component inventory management and/or repair services. Favorable and unfavorable cumulative catch-up adjustments were as follows: May 31, 2021 2020 2019 Favorable cumulative catch-up adjustments $ 16.1 $ 6.1 $ 8.0 Unfavorable cumulative catch-up adjustments (4.1) (2.2) (2.1) Net cumulative catch-up adjustments $ 12.0 $ 3.9 $ 5.9 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. When an unconditional right to consideration exists, we record an unbilled receivable. When amounts are dependent on factors other than the passage of time in order for payment from a customer to be due, we record a contract asset which consists of costs incurred where revenue recognized over time using the cost-to-cost model exceeds the amounts billed to customers. Contract liabilities include advance payments and billings in excess of revenue recognized. Certain customers make advance payments prior to the satisfaction of our performance obligations on the contract. These amounts are recorded as contract liabilities until such performance obligations are satisfied, either over time as costs are incurred or at a point in time when deliveries are made. Contract assets and contract liabilities are determined on a contract-by-contract basis. 1. Summary of Significant Accounting Policies (Continued) Net contract assets and liabilities are as follows: May 31, 2021 2020 Change Contract assets – current $ 71.9 $ 49.3 $ 22.6 Contract assets – non-current 21.6 22.4 (0.8) Contract liabilities – current (25.9) (11.2) (14.7) Deferred revenue on long-term contracts (5.4) (88.0) 82.6 Net contract assets (liabilities) $ 62.2 $ (27.5) $ 89.7 Contract assets – non-current is reported within Other non-current assets, and Contract liabilities – current is reported within Accrued Liabilities on our Consolidated Balance Sheet. Changes in contract assets and contract liabilities primarily result from the timing difference between our performance of services and payments from customers. During the fiscal 2021 and 2020, we terminated or restructured certain commercial power-by-the-hour (“PBH”) customer contracts resulting in charges of $5.7 million and $31.3 million, respectively. Some of these contracts were deemed loss contracts requiring the establishment of forward loss reserves for the total estimated costs that are in excess of the total estimated consideration over the remainder of the contracts. As of May 31, 2021, our Consolidated Balance Sheet included remaining forward loss reserves of $3.0 million with $2.8 million classified as current in Accrued liabilities and $0.2 million classified as long-term in Other liabilities. One of our PBH customers notified us in June 2021 that the contract would be terminating earlier than originally anticipated. In conjunction with the early termination, we expect to recognize contract asset and rotable asset impairment charges of $5.0 to $10.0 million in the first quarter of fiscal 2022. 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. As of May 31, 2021, our Consolidated Balance Sheet included remaining loss reserves of $2.9 million with $1.5 million classified as current in Accrued liabilities and $1.4 million classified as long-term in Other liabilities. Changes in our deferred revenue were as follows: Year ended May 31, 2021 2020 Deferred revenue at beginning of period $ (99.2) $ (96.4) Revenue deferred (251.4) (417.2) Revenue recognized 318.2 410.5 Other 1.1 3.9 Deferred revenue at end of period $ (31.3) $ (99.2) 1. Summary of Significant Accounting Policies (Continued) Remaining Performance Obligations As of May 31, 2021, we had approximately $750 million of remaining performance obligations, also referred to as firm backlog, which excludes unexercised contract options and potential orders under our indefinite-delivery, indefinite-quantity contracts. We expect that approximately 40% of this backlog will be recognized as revenue over the next 12 months, with approximately 45% of the remaining balance recognized over the next three years. The amount of remaining performance obligations, which is expected to be recognized as revenue beyond 12 months, primarily relates to our long-term, PBH programs where we provide component inventory management and/or repair services. Financial Instruments and Concentrations of Market or Credit Risk Financial instruments that potentially subject us to concentrations of market or credit risk consist principally of trade receivables. While our trade receivables are diverse and represent a number of entities and geographic regions, the majority are with the U.S. government and its contractors and entities in the aviation industry. The composition of our accounts receivable is as follows: May 31, 2021 2020 U.S. Government contracts: Trade receivables $ 24.1 $ 33.9 Unbilled receivables 25.2 27.4 49.3 61.3 All other customers: Trade receivables 104.9 81.7 Unbilled receivables 12.5 28.9 117.4 110.6 $ 166.7 $ 171.9 In addition, we currently have past due accounts receivable owed by former commercial program customers primarily related to our exit from customer contracts in certain geographies, including Colombia, Peru, and Spain. Our past due accounts receivable owed by these customers was $4.7 million as of May 31, 2021 which was net of allowance for doubtful accounts of $8.8 million. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts and trade notes payable approximate fair value because of the short-term maturity of these instruments. The carrying value of long-term debt bearing a variable interest rate approximates fair value. Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts to reflect the expected uncollectibility of accounts receivable based on past collection history and specific risks identified among uncollected accounts. In determining the required allowance, we consider factors such as general and industry-specific economic conditions, customer credit history, and our customers’ current and expected future financial performance. The majority of our customers are recurring customers with an established payment history. Certain customers are required to undergo an extensive credit check prior to delivery of products or services. 1. Summary of Significant Accounting Policies (Continued) Our allowance for doubtful accounts also includes reserves for estimated product returns based on historical return rates. The reserve for estimated product returns is recognized as a reduction to sales with a corresponding reduction to cost of sales for the estimated cost of inventory that is expected to be returned. We perform regular evaluations of customer payment experience, current financial condition, and risk analysis. We may require collateral in the form of security interests in assets, letters of credit, and/or obligation guarantees from financial institutions for transactions executed on other than normal trade terms. We also maintain trade credit insurance for certain customers to provide coverage, up to a certain limit, in the event of insolvency of some customers. In fiscal 2019, we recognized a provision for doubtful accounts of $12.4 million related to the bankruptcy of a European airline customer. The provision consisted of impairment of non-current contract assets of $7.6 million, allowance for doubtful accounts of $3.3 million, and other liabilities of $1.5 million. The change in our allowance for doubtful accounts was as follows: May 31, 2021 2020 2019 Balance, beginning of year $ 22.1 $ 16.0 $ 7.5 Provision charged to operations 8.5 5.4 15.8 Recoveries, deductions for accounts written off and other reclassifications (14.2) 0.7 (7.3) Balance, end of year $ 16.4 $ 22.1 $ 16.0 Goodwill and Other Intangible Assets In accordance with ASC 350, Intangibles–Goodwill and Other As of May 31, 2021, we had three reporting units, which included two in our Aviation Services segment (Aviation Supply Chain and Maintenance, Repair, and Overhaul) and one comprised of our Expeditionary Services segment. We utilized the qualitative assessment approach for all reporting units which considers general economic conditions, industry specific performance, changes in reporting unit carrying values, and assumptions used in the most recent fair value calculation. We concluded it was more likely than not that the fair value of each reporting unit exceeded its carrying value at May 31, 2021, and thus no impairment charges were recorded. In fiscal 2020, we elected to forego the qualitative assessment due to the unprecedented impact of the COVID-19 pandemic and utilized a quantitative assessment approach for all reporting units. We estimated the fair value of each reporting unit using primarily an income approach based on discounted cash flows. The assumptions we used to estimate the fair value of our reporting units were based on historical performance, as well as forecasts used in our business plan and required considerable management judgment in light of the impact of COVID-19. We used discount rates based on our consolidated weighted average cost of capital which is adjusted for each of our reporting units based on their specific risk, size, and industry characteristics. The fair value measurements used for our goodwill impairment testing use significant unobservable inputs, which reflected our own assumptions about the inputs that market participants would use in measuring fair value. The fair value of our reporting units is also impacted by our overall market capitalization and may be impacted by volatility in our stock price and assumed control premium, among other items. We concluded the fair value of each reporting unit exceeded its carrying values as of May 31, 2020, and thus no impairment charges were recorded. 1. Summary of Significant Accounting Policies (Continued) Changes in the carrying amount of goodwill by segment for fiscal 2021 and 2020 are as follows: Aviation Expeditionary Services Services Total Balance as of May 31, 2019 $ 96.9 $ 19.3 $ 116.2 Foreign currency translation adjustments (0.5) — (0.5) Balance as of May 31, 2020 96.4 19.3 115.7 Sale of Composites — (0.5) (0.5) Foreign currency translation adjustments 4.1 — 4.1 Balance as of May 31, 2021 $ 100.5 $ 18.8 $ 119.3 Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives. Intangible assets, other than goodwill, are comprised of the following: May 31, 2021 Accumulated Amortizable Gross Amortization Net Customer relationships $ 23.0 $ (19.7) $ 3.3 Unamortized intangible assets: Trademarks 1.2 — 1.2 $ 24.2 $ (19.7) $ 4.5 May 31, 2020 Accumulated Amortizable Gross Amortization Net Customer relationships $ 21.4 $ (16.5) $ 4.9 Unamortized intangible assets: Trademarks 1.1 — 1.1 $ 22.5 $ (16.5) $ 6.0 In conjunction with the adoption of ASC 842 on June 1, 2019, our net intangible asset for lease agreements of $8.5 million was re-classified to the ROU asset. During fiscal 2020, we recognized an impairment charge of $5.4 million related to the exit of certain product lines across both our Aviation Services and Expeditionary Services segments. Customer relationships are being amortized over 5-20 years. Amortization expense recorded during fiscal 2021, 2020 and 2019 was $1.8 million, $2.3 million, and $3.9 million, respectively. The estimated aggregate amount of amortization expense for intangible assets in each of the next five fiscal years is $1.1 million in 2022, $0.5 million in 2023, $0.3 million in 2024, $0.3 million in 2025 and $0.3 million in 2026. Foreign Currency Our foreign subsidiaries utilize the local currency as their functional currency. All balance sheet accounts of foreign subsidiaries transacting business in currencies other than the U.S. dollar are translated at year-end exchange rates. Revenues and expenses are translated at average exchange rates during the year. Translation adjustments are excluded from the results of operations and are recorded in stockholders’ equity as a component of accumulated other comprehensive loss until such subsidiaries are liquidated. 1. Summary of Significant Accounting Policies (Continued) Cash Cash and cash equivalents consist of highly liquid instruments which have original maturities of three months or less when purchased. Restricted cash represents cash on hand required to be set aside by a contractual agreement related to receivable securitization arrangements. Generally, the restrictions related to the receivable securitization arrangements lapse at the time we remit the customer payments collected by us as servicer of previously sold customer receivables to the purchaser. Inventories Inventories are valued at the lower of cost or market (estimated net realizable value). Cost is determined by the specific identification, average cost, or first-in, first-out methods. From time-to-time, we purchase aircraft and engines for disassembly to individual parts and components. Costs are assigned to these individual parts and components utilizing list prices from original equipment manufacturers and recent sales history. Expenditures for the repair of parts and components are capitalized as inventory. The following is a summary of inventories: May 31, 2021 2020 Aircraft and engine parts, components and finished goods $ 468.4 $ 556.6 Raw materials and parts 53.0 45.9 Work-in-process 19.2 20.6 $ 540.6 $ 623.1 Rotable Assets and Equipment under Leases The cost of the asset under lease is the original purchase price plus overhaul costs. Depreciation is computed using the straight-line method over the estimated service life of the equipment. The balance sheet classification of equipment under lease is generally based on lease term, with fixed-term leases less than twelve months generally classified as short-term and all others generally classified as long-term. Equipment on short-term lease includes aircraft engines and parts on or available for lease to satisfy customers’ immediate short-term requirements. The leases are renewable with fixed terms, which generally vary from one Property, Plant and Equipment and Other Non-Current Assets We record property, plant and equipment at cost. Depreciation is computed on the straight-line method over useful lives of 10-40 years for buildings and improvements and 3-10 years for equipment, furniture fixtures capitalized software Repair and maintenance expenditures are expensed as incurred. Upon sale or disposal, cost and accumulated depreciation are removed from the accounts, and related gains and losses are included in results of operations. Rotable assets supporting long-term programs consist of rotable component parts used to support long-term supply chain programs. The assets are being depreciated on a straight-line basis over their estimated useful lives. 1. Summary of Significant Accounting Policies (Continued) In accordance with ASC 360, Property, Plant and Equipment In our Aviation Services segment, we evaluated future cash flows related to certain rotable assets supporting long-term programs in light of declines in commercial airline volumes and commercial program contract terminations We recognized asset impairment charges of $5.8 million related to these rotable assets in fiscal 2021. In our Expeditionary Services segment, we consolidated manufacturing facilities and recognized impairment and related charges of $2.6 million during fiscal 2021. In conjunction with the decision to exit certain product lines, we recognized rotable asset impairment charges of $1.9 million in fiscal 2020 in conjunction with reclassifying the rotable assets as inventory held for sale. In fiscal 2021, we recognized additional impairment charges of $1.4 million on these assets. Future rent due to us under non-cancelable leases during each of the next five fiscal years is $21.0 million in 2022, $21.7 million in 2023, $21.1 million in 2024, $21.1 million in 2025, and $19.1 million in 2026. Investments Investments where we have the ability to exercise significant influence, but do not control the entity, are accounted for under the equity method of accounting. Significant influence generally exists if we have a 20% to 50% ownership interest in the investee. Our share of the net earnings or loss of our investees is included in operating income on our Consolidated Statements of Income since the activities of the investees are closely aligned with our operations. Equity investments in entities over which we do not have the ability to exercise significant influence and whose securities do not have a readily determinable fair value are carried at cost less impairment, if any, adjusted for changes resulting from qualifying observable price changes. We evaluate our investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an investment is determined to be other than temporary, a loss is recorded in earnings in the current period. Our investments are classified in Other non-current assets on our Consolidated Balance Sheets. Distributions from joint ventures are classified as operating or investing activities in the Consolidated Statements of Cash Flows based upon an evaluation of the specific facts and circumstances of each distribution. Restructuring and Other Exit Costs We recognize charges for restructuring and other exit costs such as product line exits and facility closures at their fair value when incurred. In cases where employees are required to render service until they are terminated in order to receive the termination benefits and will be retained beyond the minimum retention period, we record the expense ratably over the future service period. During fiscal 2021 and 2020, we incurred severance and furlough-related costs of $9.0 million and $7.1 million, respectively, which were included as a component of Cost of sales and services and Selling, general and administrative on our Consolidated Statements of Income. 1. Summary of Significant Accounting Policies (Continued) Income Taxes We are subject to income taxes in the U.S., state, and several foreign jurisdictions. In the ordinary course of business, there can be transactions and calculations where the ultimate tax determination is uncertain. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns in accordance with applicable accounting guidance for accounting for income taxes, using currently enacted tax rates in effect for the year in which the differences are expected to reverse. We record a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Both positive and negative evidence are considered in forming our judgment as to whether a valuation allowance is appropriate, and more weight is given to evidence that can be objectively verified. Valuation allowances are reassessed whenever there are changes in circumstances that may cause a change in judgment. The accounting for uncertainty in income taxes requires a more-likely-than-not threshold for financial statement recognition of tax positions taken or expected to be taken in a tax return. Where necessary, we record a liability for the difference between the benefit recognized for financial statement purposes and the tax position taken or expected to be taken on our tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. Supplemental Information on Cash Flows Supplemental information on cash flows is as follows: For the Year Ended May 31, 2021 2020 2019 Interest paid $ 4.3 $ 8.6 $ 8.8 Income taxes paid 8.2 14.3 7.0 Income tax refunds and interest received 8.3 7.0 6.4 During fiscal 2021, treasury stock decreased $8.6 million reflecting restricted stock activity of $5.6 million and the re-issuance of shares upon exercise of stock options, net of shares withheld to satisfy statutory tax obligations, of $3.0 million. During fiscal 2020, treasury stock decreased $5.0 million reflecting restricted stock activity of $0.8 million and the re-issuance of shares upon exercise of stock options, net of shares withheld to satisfy statutory tax obligations, of $8.3 million partially offset by the repurchase of common shares of $4.1 million. During fiscal 2019, treasury stock increased $7.0 million reflecting the repurchase of common shares of $10.3 million, restricted stock activity of $0.8 million partially offset by the re-issuance of shares upon exercise of stock options, net of shares withheld to satisfy statutory tax obligations, of $4.1 million. Use of Estimates We have made estimates and utilized certain assumptions relating to the reporting of assets and liabilities and the disclosures of contingent liabilities to prepare these Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States. Actual results could differ fr |
