AAR 10Q 2024 Q2 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended November 30, 2023

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

For the transition period from �� to

Commission File Number: 1-6263

AAR CORP.

(Exact name of registrant as specified in its charter)


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) 227-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $1.00 par value

AIR

New York Stock Exchange

Chicago Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of November 30, 2023 there were 35,502,614 shares of the registrant’s Common Stock, $1.00 par value per share, outstanding.

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AAR CORP. and Subsidiaries
Quarterly Report on Form 10-Q

For the Quarter Ended November 30, 2023

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of November 30, 2023 and May 31, 2023

(In millions, except share data)


ASSETS

	November 30,		May 31,
	2023		2023
	(Unaudited)
Current assets:
Cash and cash equivalents	$	65.1	$	68.4
Restricted cash		10.4		13.4
Accounts receivable, less allowances of $13.9 and $13.4, respectively		246.4		241.3
Contract assets		99.3		86.9
Inventories		645.9		574.1
Rotable assets and equipment on or available for short-term lease		55.1		50.6
Assets of discontinued operations		11.7		13.5
Prepaid expenses and other current assets		60.5		49.7
Total current assets		1,194.4		1,097.9

Property, plant, and equipment, net of accumulated depreciation of $276.7 and $268.8, respectively		132.6		126.1

Other assets:
Goodwill		176.0		175.8
Intangible assets, net of accumulated amortization of $8.2 and $6.0, respectively		61.5		63.7
Operating lease right-of-use assets, net		90.4		63.7
Rotable assets supporting long-term programs		177.4		178.1
Other non-current assets		133.3		127.8
		638.6		609.1
	$	1,965.6	$	1,833.1

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

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AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of November 30, 2023 and May 31, 2023

(In millions, except share data)


LIABILITIES AND EQUITY

	November 30,		May 31,
	2023		2023
	(Unaudited)
Current liabilities:
Accounts payable	$	209.7	$	158.5
Accrued liabilities		159.0		179.6
Liabilities of discontinued operations		11.4		13.4
Total current liabilities		380.1		351.5

Long-term debt		275.0		269.7
Operating lease liabilities		73.2		48.2
Deferred tax liabilities		39.8		33.6
Other liabilities		42.0		31.0
		430.0		382.5

Equity:
Preferred stock, $1.00 par value, authorized 250,000 shares; none issued		—		—
Common stock, $1.00 par value, authorized 100,000,000 shares; issued 45,300,786 shares at cost		45.3		45.3
Capital surplus		485.7		484.5
Retained earnings		933.8		910.6
Treasury stock, 9,798,172 and 10,385,237 shares at cost, respectively		(300.8)		(317.8)
Accumulated other comprehensive loss		(8.5)		(23.5)
Total equity		1,155.5		1,099.1
	$	1,965.6	$	1,833.1

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

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AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Income

For the Three and Six Months Ended November 30, 2023 and 2022

(Unaudited)

(In millions, except share data)


	Three Months Ended				Six Months Ended
	November 30,				November 30,
	2023		2022		2023		2022
Sales:
Sales from products	$	320.2	$	298.6	$	657.7	$	563.8
Sales from services		225.2		171.2		437.4		352.3
		545.4		469.8		1,095.1		916.1
Cost and operating expenses:
Cost of products		257.5		234.8		531.3		448.8
Cost of services		184.5		149.2		359.1		299.6
		442.0		384.0		890.4		748.4
Gross profit		103.4		85.8		204.7		167.7
Provision for (Recovery of) credit losses		—		(0.1)		0.4		(0.1)
Selling, general and administrative		65.7		52.8		140.4		102.9
Earnings (Loss) from joint ventures		0.6		(0.7)		(0.3)		(1.3)
Operating income		38.3		32.4		63.6		63.6
Pension settlement charge		—		—		(26.7)		—
Losses related to sale and exit of business		(0.9)		(0.1)		(1.6)		(0.1)
Other income (expense), net		(0.1)		0.5		(0.1)		0.7
Interest expense		(6.2)		(2.1)		(12.0)		(3.2)
Interest income		0.6		0.1		1.0		0.2
Income from continuing operations before income taxes		31.7		30.8		24.2		61.2
Income tax expense		7.9		8.3		1.0		16.4
Income from continuing operations	��	23.8		22.5		23.2		44.8
Income from discontinued operations, net of tax		—		—		—		0.4
Net income	$	23.8	$	22.5	$	23.2	$	45.2

Earnings per share – basic:
Earnings from continuing operations	$	0.67	$	0.65	$	0.66	$	1.28
Income from discontinued operations		—		—		—		0.01
Earnings per share – basic	$	0.67	$	0.65	$	0.66	$	1.29

Earnings per share – diluted:
Earnings from continuing operations	$	0.67	$	0.64	$	0.65	$	1.26
Income from discontinued operations		—		—		—		0.01
Earnings per share – diluted	$	0.67	$	0.64	$	0.65	$	1.27

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

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AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

For the Three and Six Months Ended November 30, 2023 and 2022

(Unaudited)

(In millions)


	Three Months Ended				Six Months Ended
	November 30,				November 30,
	2023		2022		2023		2022
Net income	$	23.8	$	22.5	$	23.2	$	45.2
Other comprehensive loss, net of tax:
Currency translation adjustments		(0.4)		(0.3)		0.1		(3.6)
Pension and other post-retirement plans, net of tax		—		0.2		14.9		0.4
Other comprehensive income (loss), net of tax		(0.4)		(0.1)		15.0		(3.2)
Comprehensive income	$	23.4	$	22.4	$	38.2	$	42.0

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

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AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Six Months Ended November 30, 2023 and 2022

(Unaudited)

(In millions)


	Six Months Ended
	November 30,
	2023		2022
Cash flows used in operating activities:
Net income	$	23.2	$	45.2
Less: Income from discontinued operations		—		(0.4)
Income from continuing operations		23.2		44.8
Adjustments to reconcile income from continuing operations to net cash used in operating activities:
Depreciation and intangible amortization		17.1		13.3
Stock-based compensation		7.9		6.9
Pension settlement charge		26.7		—
Loss from joint ventures		0.3		1.3
Provision for (Recovery of) credit losses		0.4		(0.1)
Deferred taxes		(4.6)		—
Changes in certain assets and liabilities:
Accounts receivable		(6.3)		(12.0)
Contract assets		(12.4)		(9.3)
Inventories		(71.5)		(44.8)
Prepaid expenses and other current assets		(10.2)		(0.1)
Rotable assets supporting long-term programs		(4.0)		(8.1)
Accounts payable		52.8		—
Accrued and other liabilities		(5.6)		(21.2)
Deferred revenue on long-term programs		(9.5)		8.2
Other		(5.4)		(17.8)
Net cash used in operating activities – continuing operations		(1.1)		(38.9)
Net cash used in operating activities – discontinued operations		(0.2)		(0.4)
Net cash used in operating activities		(1.3)		(39.3)
Cash flows used in investing activities:
Property, plant, and equipment expenditures		(16.4)		(12.8)
Other		(3.9)		(5.5)
Net cash used in investing activities – continuing operations		(20.3)		(18.3)
Cash flows provided by financing activities:
Short-term borrowings on Revolving Credit Facility, net		5.0		98.0
Purchase of treasury stock		—		(50.1)
Stock compensation activity		10.3		2.1
Net cash provided by financing activities – continuing operations		15.3		50.0
Effect of exchange rate changes on cash		—		(0.1)
Decrease in cash, cash equivalents, and restricted cash		(6.3)		(7.7)
Cash, cash equivalents, and restricted cash at beginning of period		81.8		58.9
Cash, cash equivalents, and restricted cash at end of period	$	75.5	$	51.2

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

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AAR CORP. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity

For the Three and Six Months Ended November 30, 2023 and 2022

(Unaudited)

(In millions)


									Accumulated
									Other
	Common		Capital		Retained		Treasury		Comprehensive
	Stock		Surplus		Earnings		Stock		Loss		Total Equity
Balance, May 31, 2023	$	45.3	$	484.5	$	910.6	$	(317.8)	$	(23.5)	$	1,099.1
Net loss		—		—		(0.6)		—		—		(0.6)
Stock option activity		—		(0.3)		—		7.0		—		6.7
Restricted stock activity		—		(2.4)		—		3.7		—		1.3
Other comprehensive income, net of tax		—		—		—		—		15.4		15.4
Balance, August 31, 2023	$	45.3	$	481.8	$	910.0	$	(307.1)	$	(8.1)	$	1,121.9
Net income		—		—		23.8		—		—		23.8
Stock option activity		—		0.9		—		6.3		—		7.2
Restricted stock activity		—		3.0		—		—		—		3.0
Other comprehensive loss, net of tax		—		—		—		—		(0.4)		(0.4)
Balance, November 30, 2023	$	45.3	$	485.7	$	933.8	$	(300.8)	$	(8.5)	$	1,155.5


									Accumulated
									Other
	Common		Capital		Retained		Treasury		Comprehensive
	Stock		Surplus		Earnings		Stock		Loss		Total Equity
Balance, May 31, 2022	$	45.3	$	477.5	$	820.4	$	(289.1)	$	(19.6)	$	1,034.5
Net income		—		—		22.7		—		—		22.7
Stock option activity		—		1.0		—		1.5		—		2.5
Restricted stock activity		—		(1.7)		—		3.5		—		1.8
Repurchase of shares		—		—		—		(21.9)		—		(21.9)
Other comprehensive loss, net of tax		—		—		—		—		(3.1)		(3.1)
Balance, August 31, 2022	$	45.3	$	476.8	$	843.1	$	(306.0)	$	(22.7)	$	1,036.5
Net income		—		—		22.5		—		—		22.5
Stock option activity		—		0.2		—		2.4		—		2.6
Restricted stock activity		—		2.0		—		—		—		2.0
Repurchase of shares		—		—		—		(28.2)		—		(28.2)
Other comprehensive loss, net of tax		—		—		—		—		(0.1)		(0.1)
Balance, November 30, 2022	$	45.3	$	479.0	$	865.6	$	(331.8)	$	(22.8)	$	1,035.3

The accompanying Notes to Condensed Consolidated Financial

Statements are an integral part of these statements.

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Note 1 – Basis of Presentation

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

We have prepared these statements without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The Condensed Consolidated Balance Sheet as of May 31, 2023 has been derived from audited financial statements. To prepare the financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”), management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain information and note disclosures, normally included in comprehensive financial statements prepared in accordance with GAAP, have been condensed or omitted pursuant to such rules and regulations of the SEC. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023.

In the opinion of management, the Condensed Consolidated Financial Statements reflect all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the Condensed Consolidated Balance Sheet of AAR CORP. and its subsidiaries as of November 30, 2023, the Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income for the three- and six-month periods ended November 30, 2023 and 2022, the Condensed Consolidated Statements of Cash Flows for the six-month periods ended November 30, 2023 and 2022, and the Condensed Consolidated Statement of Changes in Equity for the three- and six-month periods ended November 30, 2023 and 2022. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Note 2 – Discontinued Operations

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

Following the sale of the last operating contract of the COCO business in 2020, our continuing involvement in the COCO business is limited to the lease of certain aircraft which is an obligation of the acquirer of the COCO business. The assets and liabilities of our discontinued operations are primarily comprised of right-of-use (“ROU”) assets and lease-related liabilities.

Note 3 – Revenue Recognition

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

Our unit of accounting for revenue recognition is a performance obligation included in our customer contracts. A performance obligation reflects the distinct good or service that we must transfer to a customer. At contract inception, we evaluate if the contract should be accounted for as a single performance obligation or if the contract contains multiple performance obligations. In some cases, our contract with the customer is considered one performance obligation as it includes factors such as 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.

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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.

We utilize the portfolio approach to estimate the amount of revenue to recognize for certain contracts which require over-time revenue recognition. Such contracts are grouped together either by revenue stream, customer or product line with each portfolio of contracts grouped together based on having similar characteristics. The portfolio approach is utilized only when the result of the accounting is not expected to be materially different than if applied to individual contracts.

We also may enter into offset agreements or conditions as part of obtaining orders for our products and services from certain government customers in foreign countries. These agreements are designed to enhance the social and economic environment of the foreign country by requiring the contractor to promote investment in the country. These agreements also may be satisfied through our use of cash or other means of providing financial support for in-country projects with local companies. The amounts ultimately applied against our offset agreements are based on negotiations with the customer and satisfaction of our offset obligations are included in the estimates of our total costs to complete the contract.

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.

Certain contracts with customers have options for the customer to acquire additional goods or services. In most cases, the pricing of these options are reflective of the standalone selling price of the good or service. These options do not provide the customer with a material right and are accounted for only when the customer exercises the option to purchase the additional goods or services. If the option on the customer contract was not indicative of the standalone selling price of the good or service, the material right would be accounted for as a separate performance obligation.

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.

In the ordinary course of business, agencies of the U.S. and other governments audit our claimed indirect costs and conduct inquiries and investigations of our business practices with respect to government contracts to determine whether our operations are conducted in accordance with these requirements and the terms of the relevant contracts. U.S. government agencies, including the Defense Contract Audit Agency (“DCAA”), routinely audit our claimed indirect costs, for compliance with the Cost Accounting Standards and the Federal Acquisition Regulations. These agencies also conduct reviews and investigations and make inquiries regarding our accounting and other systems in connection with our performance and business practices with respect to our government contracts and subcontracts.

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Costs to fulfill and obtain a contract are considered for capitalization based on contract specific facts and circumstances. The incremental costs to fulfill a contract, including setup and implementation costs prior to beginning the period of performance, may be capitalized when expenses are incurred prior to the start of satisfying a performance obligation. The capitalized costs are subsequently expensed over the contract’s period of performance.

We have elected to use certain practical expedients permitted under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Shipping and handling fees and costs incurred associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in Cost of sales on our Condensed Consolidated Statements of Income and are not considered a performance obligation to our customers. Our reported sales on our Condensed Consolidated Statements of Income are net of any sales or related non-income taxes. We also utilize the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value we are providing to the customer.

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, supply chain logistics programs, and/or repair services.

For the three-month period ended November 30, 2023, we recognized favorable and (unfavorable) cumulative catch-up adjustments of $4.0 million and $(4.3) million, respectively. For the three-month period ended November 30, 2022, we recognized cumulative catch-up adjustments of $4.7 million and $(1.8) million, respectively. When considering these adjustments on a net basis, we recognized adjustments of ($0.3) million and $2.9 million for the three-month periods ended November 30, 2023 and 2022, respectively.

For the six-month period ended November 30, 2023, we recognized cumulative catch-up adjustments of $7.0 million and $(6.8) million, respectively. For the six-month period ended November 30, 2022, we recognized cumulative catch-up adjustments of $7.6 million and $(1.8) million, respectively. When considering these adjustments on a net basis, we recognized adjustments of $0.2 million and $5.8 million for the six-month periods ended November 30, 2023 and 2022, respectively.

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. For instances where we recognize revenue prior to having an unconditional right to payment, we record a contract asset or liability. When an unconditional right to consideration exists, we reduce our contract asset or liability and recognize an unbilled or trade 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.

Net contract assets and liabilities are as follows:


	November 30,		May 31,
	2023		2023		Change
Contract assets – current	$	99.3	$	86.9	$	12.4
Contract assets – non-current		33.1		27.5		5.6
Contract liabilities:
Deferred revenue – current		(16.6)		(19.7)		3.1
Deferred revenue on long-term contracts		(9.8)		(12.7)		2.9
Net contract assets	$	106.0	$	82.0	$	24.0

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

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To support our power-by-the-hour 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 includes certain minimum repair volume guarantees, which, subject to the amendment noted below, we have historically not met. To date, we have recognized charges of $8.1 million to reflect our obligations for not achieving the minimum volume guarantees. During the three-month period ended November 30, 2023, we amended the agreement to eliminate certain minimum repair volume guarantees resulting in the de-recognition of $2.0 million from our remaining loss reserves. As of November 30, 2023, our Condensed Consolidated Balance Sheet included remaining loss reserves of $3.1 million classified in Accrued liabilities.

Changes in our deferred revenue were as follows for the three- and six-month periods ended November 30, 2023 and 2022:


	Three Months Ended				Six Months Ended
	November 30,				November 30,
	2023		2022		2023		2022
Deferred revenue at beginning of period	$	(37.1)	$	(33.5)	$	(32.4)	$	(30.6)
Revenue deferred		(69.4)		(69.6)		(136.2)		(127.1)
Revenue recognized		81.3		66.6		142.4		120.1
Other ⁽¹⁾		(1.2)		7.7		(0.2)		8.8
Deferred revenue at end of period	$	(26.4)	$	(28.8)	$	(26.4)	$	(28.8)

⁽¹⁾

Other includes cumulative catch-up adjustments, foreign currency translation, and other adjustments.

Remaining Performance Obligations

As of November 30, 2023, we had approximately $720 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 55% of this backlog will be recognized as revenue over the next 12 months with approximately 50% 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, supply chain logistics programs and/or repair services.

Disaggregation of Revenue

Third-party sales across the major customer markets for each of our operating segments for the three- and six-month periods ended November 30, 2023 and 2022 were as follows:


	Three Months Ended				Six Months Ended
	November 30,				November 30,
	2023		2022		2023		2022
Parts Supply:
Commercial	$	189.4	$	141.5	$	395.4	$	271.3
Government and defense		38.2		42.1		69.0		80.9
	$	227.6	$	183.6	$	464.4	$	352.2
Repair & Engineering:
Commercial	$	130.9	$	122.1	$	252.5	$	234.8
Government and defense		14.5		12.7		30.4		27.6
	$	145.4	$	134.8	$	282.9	$	262.4
Integrated Solutions:
Commercial	$	63.4	$	46.3	$	126.2	$	95.9
Government and defense		93.2		81.0		186.7		159.2
	$	156.6	$	127.3	$	312.9	$	255.1
Expeditionary Services:
Commercial	$	1.5	$	1.9	$	3.6	$	3.4
Government and defense		14.3		22.2		31.3		43.0
	$	15.8	$	24.1	$	34.9	$	46.4

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Consolidated sales by geographic region for the three- and six-month periods ended November 30, 2023 and 2022 were as follows:


	Three Months Ended				Six Months Ended
	November 30,				November,
	2023		2022		2023		2022
U.S./Canada	$	405.4	$	377.2	$	814.3	$	722.4
Europe/Africa		81.8		52.5		173.2		115.3
Asia/South Pacific		44.9		32.4		86.1		63.4
Other		13.3		7.7		21.5		15.0
	$	545.4	$	469.8	$	1,095.1	$	916.1

Note 4 – 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 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,
	2023		2023
U.S. Government contracts:
Trade receivables	$	16.6	$	13.1
Unbilled receivables		18.2		18.9
		34.8		32.0
All other customers:
Trade receivables		185.0		179.7
Unbilled receivables		26.6		29.6
		211.6		209.3
	$	246.4	$	241.3

Note 5 – Accounting for Stock-Based Compensation

Restricted Stock

In the three-month period ended August 31, 2023, as part of our annual long-term stock incentive compensation, we granted 81,100 shares of performance-based restricted stock and 87,130 shares of time-based restricted stock to eligible employees. The grant date fair value per share for these shares was $58.27 (the closing price per share of our common stock on the grant date). We also granted 21,834 shares of time-based restricted stock to members of the Board of Directors with a grant date fair value per share of $51.51 (the closing price per share of our common stock on the grant date).

Expenses charged to operations for restricted stock during the three-month periods ended November 30, 2023 and 2022 was $2.9 million and $1.9 million, respectively, and during the six-month periods ended November 30, 2023 and 2022 was $6.3 million and $4.9 million, respectively.

Stock Options

In July 2023, as part of our annual long-term stock incentive compensation, we granted 141,545 stock options to eligible employees at an exercise price per share of $58.27 and grant date fair value per share of $25.31. The fair value of stock options was estimated using the Black-Scholes option pricing model with the following assumptions:


Risk-free interest rate	4.1	%
Expected volatility of common stock	42.3	%
Dividend yield	0.0	%
Expected option term in years	5.1

The total intrinsic value of stock options exercised during the six-month periods ended November 30, 2023 and 2022 was $13.7 million and $2.7 million, respectively. Expenses charged to operations for stock options during the three-month periods ended November

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30, 2023 and 2022 was $0.7 million and $0.9 million, respectively, and during the six-month periods ended November 30, 2023 and 2022 was $1.6 million and $2.0 million, respectively.

Note 6 – Inventories

The summary of inventories is as follows:


	November 30,		May 31,
	2023		2023
Aircraft and engine parts, components and finished goods	$	563.8	$	488.9
Raw materials and parts		52.3		59.6
Work-in-process		29.8		25.6
	$	645.9	$	574.1

Note 7 – Supplemental Cash Flow Information


	Six Months Ended
	November 30,
	2023		2022
Interest paid	$	11.5	$	2.6
Income taxes paid		24.8		17.9
Income tax refunds received		0.1		0.2
Operating lease liabilities arising from obtaining or re-measuring ROU assets		31.1		0.7

Note 8 – 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 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, 2024, but, the Purchase Agreement may also be terminated earlier under certain circumstances. The term of the Purchase Agreement shall be automatically extended for annual terms unless either party provides advance notice that they do not intend to extend the term.

We have no retained interests in the sold receivables, other than limited recourse obligations in certain circumstances, and only perform collection and administrative functions for the Purchaser. We account for these receivable transfers as sales under ASC 860, Transfers and Servicing, and de-recognize the sold receivables from our Condensed Consolidated Balance Sheets. At November 30, 2023, we have utilized $12.6 million which reduced the availability under the Purchase Agreement to $137.4 million.

During the six-month periods ended November 30, 2023 and 2022, we sold $72.6 million and $87.2 million, respectively, of receivables under the Purchase Agreement and remitted $71.7 million and $86.1 million, respectively, to the Purchaser on their behalf. As of November 30, 2023 and May 31, 2023, we had collected cash of $1.2 million and $1.3 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.

Note 9 – Financing Arrangements

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


	November 30,		May 31,
	2023		2023
Revolving Credit Facility with interest payable monthly	$	277.0	$	272.0
Debt issuance costs, net		(2.0)		(2.3)
Long-term debt	$	275.0	$	269.7

At November 30, 2023, our debt had a fair value that approximates its carrying value and is classified as Level 2 in the fair value hierarchy.

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On December 14, 2022, we entered into a credit agreement with various financial institutions as lenders and Wells Fargo Bank, N.A. as administrative agent for the lenders (the “Credit Agreement”). The Credit Agreement provides for a $620 million unsecured revolving credit facility (the “Revolving Credit Facility”) that we can draw upon for working capital and general corporate purposes. Under certain circumstances, we may request an increase to the lending commitments under the Credit Agreement by an aggregate amount of up to $300 million, not to exceed $920 million in total. The Credit Agreement expires on December 14, 2027. Borrowings under the Credit Agreement bear interest at a variable rate based on the secured overnight financing rate (“SOFR”) plus 112.5 to 200 basis points based on certain financial measurements if a SOFR loan, or at the offered fluctuating Base Rate plus 12.5 to 100 basis points based on certain financial measurements if a Base Rate loan.

On December 14, 2022, and in connection with our entry into the Credit Agreement, we terminated our revolving credit facility under the credit agreement dated April 12, 2011, as amended, (the “2011 Credit Agreement”) with the outstanding borrowings under the 2011 Credit Agreement at the date of its termination rolled over to the Credit Agreement.

Borrowings outstanding under the Revolving Credit Facility at November 30, 2023 were $277.0 million and there were approximately $11.0 million of outstanding letters of credit, which reduced the availability of this facility to $332.0 million.

Our financing arrangements require us to comply with leverage and interest coverage ratios and comply with certain affirmative and negative covenants, including those relating to financial reporting and notification, compliance with applicable laws, and limitations on additional liens, indebtedness, acquisitions, investments and disposition of assets. Our Credit Agreement also requires our significant domestic subsidiaries to provide a guarantee of payment under the Credit Agreement. At November 30, 2023, we were in compliance with the financial and other covenants in our financing agreements.

Note 10 – Other Non-current Assets

Investment in Indian Joint Venture

Our investments in joint ventures include $10.0 million for our 40% ownership interest in a joint venture in India to operate an airframe maintenance facility. The facility received certain regulatory approvals and commenced airframe maintenance operations in the second quarter of fiscal 2022.

We guarantee 40% of the Indian joint venture’s debt and have recognized a guarantee liability of $9.5 million as of November 30, 2023. Each of the partners in the Indian joint venture also has a loan to the joint venture proportionate to its equity ownership. In addition to the net equity investment of $6.5 million, our investment in the Indian joint venture includes $3.5 million for our loan to the joint venture as of November 30, 2023.

We account for our share of the earnings or losses of the Indian joint venture using the equity method with a reporting lag of two months, as the financial statements of the Indian joint venture are not completed on a timely basis that is sufficient for us to apply the equity method on a current basis. Our share of the Indian joint venture’s income (losses) for the three-month periods ended November 30, 2023 and 2022 were $0.7 million and $(0.6) million, respectively. Our share of the income (losses) for the six-month periods ended November 30, 2023 and 2022 were $0.1 million and $(0.8) million, respectively. We are currently evaluating a potential exit from our investment in the Indian joint venture.

Note 11 – 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 and shares issuable upon vesting of restricted stock awards.

In accordance with ASC 260-10-45, Share-Based Payment Arrangements and Participating Securities and the Two-Class Method, our unvested restricted stock awards are deemed participating securities since these shares are entitled to participate in dividends declared on common shares. During periods of net income, the calculation of earnings per share for common stock excludes income attributable to unvested restricted stock awards from the numerator and excludes the dilutive impact of those shares from the denominator. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.

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A reconciliation of the computations of basic and diluted earnings per share information for the three- and six-month periods ended November 30, 2023 and 2022 is as follows:


	Three Months Ended				Six Months Ended
	November 30,				November 30,
	2023		2022		2023		2022
Basic and Diluted Earnings Per Share:
Income from continuing operations	$	23.8	$	22.5	$	23.2	$	44.8
Less income attributable to participating shares		(0.3)		(0.3)		(0.3)		(0.6)
Income from continuing operations attributable to common shareholders		23.5		22.2		22.9		44.2
Income from discontinued operations attributable to common shareholders		—		—		—		0.4
Net income attributable to common shareholders for earnings per share	$	23.5	$	22.2	$	22.9	$	44.6

Weighted Average Shares:
Weighted average common shares outstanding - basic		34.9		34.2		34.9		34.6
Additional shares from the assumed exercise of stock options		0.4		0.5		0.4		0.4
Weighted average common shares outstanding - diluted		35.3		34.7		35.3		35.0

Earnings per share – basic:
Earnings from continuing operations	$	0.67	$	0.65	$	0.66	$	1.28
Income from discontinued operations		—		—		—		0.01
Earnings per share – basic	$	0.67	$	0.65	$	0.66	$	1.29

Earnings per share – diluted:
Earnings from continuing operations	$	0.67	$	0.64	$	0.65	$	1.26
Income from discontinued operations		—		—		—		0.01
Earnings per share – diluted	$	0.67	$	0.64	$	0.65	$	1.27

No stock options were determined to be anti-dilutive for the three- and six-month periods ended November 30, 2023. The potential dilutive effect of 447,000 and 229,000 shares relating to stock options was excluded from the computation of weighted average common shares outstanding – diluted for the three- and six-month periods ended November 30, 2022, respectively, as the shares would have been anti-dilutive.

Note 12 - Defined Benefit Pension Settlement

During the three-month period ended August 31, 2023, we settled all future obligations under our frozen U.S. defined benefit retirement plan (the “U.S. Retirement Plan”). The settlement included a combination of lump-sum payments to participants who elected to receive them and the transfer of the remaining benefit obligations to a third-party insurance company under group annuity contracts. The purchase of the group annuity contracts was funded directly by assets of the U.S. Retirement Plan and required no additional cash or asset contributions from us. As a result of the settlements, we recognized a non-cash, pre-tax pension settlement charge of $26.7 million ($16.1 million after-tax) related to the accelerated recognition of all unamortized net actuarial losses in Accumulated other comprehensive loss.

The remaining surplus plan assets are expected to be utilized to fund remaining U.S. Retirement Plan expenses as well as certain contributions associated with one of our qualified 401(k) plans. Surplus plan assets not used for these expenses or 401(k) contributions would be subject to a 20% excise tax upon withdrawal from the plan. As of November 30, 2023, our Condensed Consolidated Balance Sheet included $6.9 million of surplus plan assets reported in Other non-current assets.

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Note 13 – Accumulated Other Comprehensive Loss

Changes in our accumulated other comprehensive loss (“AOCL”) by component for the three- and six-month periods ended November 30, 2023 and 2022 were as follows:


	Currency
	Translation		Pension
	Adjustments		Plans		Total
Balance at September 1, 2023	$	(5.2)	$	(2.9)	$	(8.1)
Other comprehensive income before reclassifications		(0.4)		—		(0.4)
Amounts reclassified from AOCL		—		—		—
Total other comprehensive loss		(0.4)		—		(0.4)
Balance at November 30, 2023	$	(5.6)	$	(2.9)	$	(8.5)

Balance at September 1, 2022	$	(6.1)	$	(16.6)	$	(22.7)
Other comprehensive loss before reclassifications		(0.3)		—		(0.3)
Amounts reclassified from AOCL		—		0.2		0.2
Total other comprehensive income (loss)		(0.3)		0.2		(0.1)
Balance at November 30, 2022	$	(6.4)	$	(16.4)	$	(22.8)


	Currency
	Translation		Pension
	Adjustments		Plans		Total
Balance at June 1, 2023	$	(5.7)	$	(17.8)	$	(23.5)
Other comprehensive income before reclassifications		0.1		—		0.1
Amounts reclassified from AOCL		—		14.9		14.9
Total other comprehensive income		0.1		14.9		15.0
Balance at November 30, 2023	$	(5.6)	$	(2.9)	$	(8.5)

Balance at June 1, 2022	$	(2.8)	$	(16.8)	$	(19.6)
Other comprehensive loss before reclassifications		(3.6)		—		(3.6)
Amounts reclassified from AOCL		—		0.4		0.4
Total other comprehensive income (loss)		(3.6)		0.4		(3.2)
Balance at November 30, 2022	$	(6.4)	$	(16.4)	$	(22.8)

Note 14 – Acquisition

On March 20, 2023, we acquired the outstanding shares of Trax USA Corp. (“Trax”) for a purchase price of $120.0 million plus contingent consideration of up to $20.0 million based on Trax’s adjusted revenue in calendar years 2023 and 2024. Trax is a leading provider of aircraft maintenance, repair, and overhaul (“MRO”) and fleet management software supporting a broad spectrum of maintenance activities for a diverse global customer base of airlines and MROs.

The purchase price was paid at closing except for $12.0 million which was placed on deposit with an escrow agent to secure potential indemnification obligations and fund post-closing adjustments for working capital and indebtedness. The post-closing adjustments for working capital and indebtedness were finalized in the three-month period ended November 30, 2023 resulting in a purchase price reduction of $1.8 million.

The contingent consideration is based on an adjusted revenue target and requires certain of the former owners’ continued employment through December 31, 2024, and is treated as compensation expense within Selling, general and administrative expenses. The adjusted revenue target is based on revenue recognized under U.S. GAAP adjusted for certain events related to deferred revenue, customer commitments, and other adjustments. We recognized compensation expense of $1.4 million and $2.8 million in the three- and six-month periods ended November 30, 2023, respectively.

We accounted for the acquisition using the acquisition method and included the results of Trax’s operations in our consolidated financial statements from the effective date of the acquisition. Trax’s results are reported within our Integrated Solutions segment. The acquisition was funded using a combination of proceeds from our Revolving Credit Facility and cash on hand. Transaction costs associated with the acquisition of $5.1 million were expensed as incurred.

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The amounts recorded for certain assets and liabilities are preliminary in nature and are subject to adjustment as additional information is obtained about their acquisition date fair values. The allocation of the purchase price is preliminary and will potentially change in future periods as fair value estimates of the assets acquired and liabilities assumed are finalized, including those related to working capital and income taxes. 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:


Accounts receivable	$	8.8
Other assets		5.7
Intangible assets		61.7
Deferred revenue		(4.1)
Deferred tax liabilities		(15.8)
Other liabilities		(3.1)
Net assets acquired		53.2
Goodwill		60.3
Purchase price, net of cash acquired	$	113.5

Acquired amortizable intangible assets include customer relationships of $33.6 million and developed technology of $22.0 million which are being amortized over 12 years and 20 years, respectively. Intangible assets also include tradenames of $6.1 million which are indefinite-lived. The goodwill associated with the Trax acquisition is not deductible for tax purposes and is primarily attributable to the benefits we expect to derive from expected synergies including complimentary products and services, cross-selling opportunities and intangible assets that do not qualify for separate recognition, such as their assembled workforce.

Note 15 – Business Segment Information

During the first quarter of fiscal 2024, our chief operating decision maker (“CODM”) implemented changes in how he organizes the business, allocates resources, and assesses performance. Specifically, this new structure resulted in the separation of our former Aviation Services segment into three new operating segments: Parts Supply, Repair & Engineering, and Integrated Solutions.

In conjunction with the re-alignment, our CODM now evaluates each segment’s performance based on operating income instead of gross profit as our CODM believes operating income is a more comprehensive profitability measure for each operating segment.

Our previously reported segment financial information has been recast to conform to our new segment structure. The change in our operating segments had no impact on our previously reported consolidated results of operations, financial condition, or cash flows.

Our operating segments are comprised of:

●

Parts Supply, primarily consisting of our sales of used serviceable engine and airframe parts and components and distribution of new parts;

●

Repair & Engineering, primarily consisting of our maintenance, repair, and overhaul services across airframes and components, including landing gear;

●

Integrated Solutions, primarily consisting of our fleet management and operations of customer-owned aircraft, customized performance-based supply chain logistics programs in support of the U.S. Department of Defense, U.S. Department of State, and foreign governments, flight hour component inventory and repair programs for commercial airlines, and integrated software solutions, including Trax; and

●

Expeditionary Services, primarily consisting of products and services supporting the movement of equipment and personnel by the U.S. and foreign governments and non-governmental organizations with sales derived from the engineering, design, integration, and manufacture of pallets, shelters, and containers.

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, 2023. Cost of sales consists principally of the cost of products, including material used in manufacturing operations, direct labor, and overhead.

The Company has not aggregated operating segments for purposes of identifying reportable segments. Inter-segment sales are recorded at fair value, which results in intercompany profit on inter-segment sales that is eliminated in consolidation. Corporate selling,

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general and administrative expenses include centralized functions such as legal, finance, treasury and human resources with a portion of the costs allocated to our operating segments.

Selected financial information for each segment is as follows:


	Three Months Ended November 30, 2023
	Third-Party		Inter-segment		Total
	Sales		Sales		Sales
Parts Supply	$	227.6	$	1.8	$	229.4
Repair & Engineering		145.4		22.1		167.5
Integrated Solutions		156.6		(0.7)		155.9
Expeditionary Services		15.8		—		15.8
	$	545.4	$	23.2	$	568.6


	Three Months Ended November 30, 2022
	Third-Party		Inter-segment		Total
	Sales		Sales		Sales
Parts Supply	$	183.6	$	2.0	$	185.6
Repair & Engineering		134.8		18.3		153.1
Integrated Solutions		127.3		—		127.3
Expeditionary Services		24.1		—		24.1
	$	469.8	$	20.3	$	490.1


	Six Months Ended November 30, 2023
	Third-Party		Inter-segment		Total
	Sales		Sales		Sales
Parts Supply	$	464.4	$	2.6	$	467.0
Repair & Engineering		282.9		41.6		324.5
Integrated Solutions		312.9		0.4		313.3
Expeditionary Services		34.9		—		34.9
	$	1,095.1	$	44.6	$	1,139.7


	Six Months Ended November 30, 2022
	Third-Party		Inter-segment		Total
	Sales		Sales		Sales
Parts Supply	$	352.2	$	3.8	$	356.0
Repair & Engineering		262.4		38.6		301.0
Integrated Solutions		255.1		—		255.1
Expeditionary Services		46.4		—		46.4
	$	916.1	$	42.4	$	958.5

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The following table reconciles segment operating income to income from continuing operations before income taxes:


	Three Months Ended				Six Months Ended
	November,				November,
	2023		2022		2023		2022
Segment operating income:
Parts Supply	$	28.4	$	21.3	$	43.5	$	39.6
Repair & Engineering		11.3		8.6		20.4		16.0
Integrated Solutions		6.4		7.1		14.1		15.4
Expeditionary Services		0.9		2.0		2.2		4.3
		47.0		39.0		80.2		75.3
Corporate and other		(8.7)		(6.6)		(16.6)		(11.7)
Operating income		38.3		32.4		63.6		63.6
Pension settlement charge		—		—		(26.7)		—
Losses related to sale and exit of business		(0.9)		(0.1)		(1.6)		(0.1)
Other income (expense), net		(0.1)		0.5		(0.1)		0.7
Interest expense		(6.2)		(2.1)		(12.0)		(3.2)
Interest income		0.6		0.1		1.0		0.2
Income from continuing operations before income taxes	$	31.7	$	30.8	$	24.2	$	61.2

Note 16 – Legal Proceedings

We are involved in various claims and legal actions, including environmental matters, arising in the ordinary course of business. 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:

Self-Reporting of Potential Foreign Corrupt Practices Act Violations

The Company retained outside counsel to 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 U.S. Department of Justice, the SEC 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.

Russian Bankruptcy Litigation

During calendar years 2016 and 2017, certain of the subsidiaries of AAR CORP. (the “Company”) purchased four engines from VIM-AVIA Airlines, LLC (“VIM-AVIA”), a company organized in Russia. Subsequent to the purchase of the engines, VIM-AVIA declared bankruptcy in Russian courts, and shortly thereafter the receiver of the VIM-AVIA bankruptcy estate and one of the major creditors of VIM-AVIA filed a claw-back action in the Arbitration Court of the Russian Republic of Tartarstan (the “Russian Trial Court”) against our subsidiaries alleging that the contracts entered into with VIM-AVIA in the 2016-2017 timeframe are invalid. The clawback action alleged that our subsidiaries owe the VIM-AVIA bankruptcy estate approximately $13 million, the alleged fair market value of the four engines at the time of sale. In March 2023, the Russian Trial Court awarded a $1.8 million judgment against the Company relating to one engine, and dismissed all the other claims against the Company relating to the three remaining engines. The Company recognized a corresponding charge of $1.8 million in the third quarter of fiscal 2023. The Company thereafter appealed the $1.8 million judgment entered against it by the Russian Trial Court. The receiver and the creditor thereafter appealed to the Russian Trial Court’s judgment dismissing their claims relating to the remaining three engines.

On September 26, 2023, the Russian Eleventh Arbitration Court of Appeal (the “Russian Appellate Court”) issued an order (i) affirming the Russian Trial Court's adverse judgment against the Company relating to one of the four engines; (ii) reversing the Russian Trial Court's dismissal of the claims relating to the remaining three engines; and (iii) awarding a judgment against the Company in the total amount of $13.0 million. During the first quarter of fiscal 2024, the Company recognized a charge for $11.2 million representing the judgment against the Company for the remaining three engines.

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The Company strongly disputes the validity of the judgment announced by the Russian Appellate Court and continues to strongly dispute all claims asserted in the clawback action. On October 25, 2023, the Company petitioned the Russian Court of Cassation for leave to obtain the Russian Court of Cassation's appellate review of the Russian Appellate Court's order of September 26, 2023. On November 13, 2023, the Russian Court of Cassation granted the Company's petition. The Company's appeal to the Russian Court of Cassation is pending.

The Company believes that the judgment announced on September 26, 2023 by the Russian Appellate Court is a result of, among other things, a hostile business and legal environment for foreign companies in Russia, which has been caused by developments in the Russia/Ukraine conflict, including the imposition of a range of sanctions and export controls on Russian entities and individuals by the U.S. and its North Atlantic Treaty Organization allies. Given the Company's obligation to comply with U.S. trade restrictions likely applicable to undisclosed creditors of the VIM-AVIA bankruptcy estate, the Company's ability to satisfy any portion of the Russian judgment or to otherwise settle the receiver's claims may be restricted and is unknown. Although there can be no assurances, the Company believes it will have strong defenses to any attempt that may be made to recognize and enforce the adverse judgment announced by the Russian Appellate Court outside of Russia. As of November 30, 2023, our Condensed Consolidated Balance Sheet included a total liability for the matter of $13.0 million classified as long-term in Other liabilities.

Performance Guarantee

In conjunction with the fiscal 2021 sale of our Composites business, we retained a performance guarantee to a customer of the Composites business (the “Customer”) under an existing contract providing flap track fairings on the A220 aircraft (“A220 Contract”). The term of the A220 Contract and our performance guarantee extend for the duration that A220 aircraft are in service and the customer continues to maintain support for the A220 aircraft. The performance guarantee does not contain a financial cap.

In March 2022, the buyer of the Composites business (the “Buyer”) filed for bankruptcy and moved to have the bankruptcy court reject the A220 Contract. The Customer also notified us that it believes the Buyer has failed to timely deliver products in accordance with the terms of the A220 Contract and that the Customer has incurred losses related to the asserted non-compliance that the Customer believes is covered by our performance guarantee. To date, the Customer has provided us with limited details in support of the extent of the Customer’s claimed losses with respect to the A220 Contract and its contention that we may be responsible under our performance guarantee to reimburse the Customer for any portion of its claimed losses. The Customer filed suit against us during the fourth quarter of fiscal 2023 claiming damages of at least $32 million.

In this regard, while we are continuing to seek additional detail around the facts and legal basis underlying the claim for losses the Customer attributed to the A220 Contract and the Customer’s corresponding claim under the performance guarantee, we strongly disagree with the premise of the Customer’s claim based on the information available and known to us at this time, and we believe that we have numerous defenses available against this claim that we will vigorously pursue. While it is reasonably possible that we will incur a loss from the claim under the performance guarantee, we are unable to estimate the range of loss on this claim. There can be no assurance that the Customer’s claim under the performance guarantee will not have a material adverse effect on our operations, financial position and cash flows.

Note 17 – Subsequent Event

Pending Acquisition of Triumph Group’s Product Support Business

On December 21, 2023, we entered into a definitive agreement with Triumph Group (“Seller”) to acquire Seller’s Product Support business (the “Product Support Business”). The Product Support Business is a leading global provider of specialized MRO capabilities for critical aircraft components in the commercial and defense markets, providing MRO services for structural components, engine and airframe accessories, interior refurbishment and wheels and brakes. The Product Support Business also designs proprietary designated engineering representative repairs and parts manufacturer approval parts.

Under the terms of the agreement and subject to closing conditions, we will acquire the Product Support Business for $725 million in cash, which we expect to fund with a combination of new equity and debt financings. We have also secured a debt financing commitment to backstop the contemplated new financings. The acquisition is expected to close in the first quarter of the 2024 calendar year, subject to customary closing conditions, including regulatory approvals.

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions)

General Overview and Outlook

All of our previously reported segment financial information has been recast to conform to our new segment structure. The change in our operating segments had no impact on our previously reported consolidated results of operations, financial condition, or cash flows.

Our operating segments are comprised of:

●

Parts Supply, primarily consisting of our sales of used serviceable engine and airframe parts and components and distribution of new parts;

●

Repair & Engineering, primarily consisting of our maintenance, repair, and overhaul services across airframes and components, including landing gear;

●

The Company has not aggregated operating segments for purposes of identifying reportable segments. Inter-segment sales are recorded at fair value which results in intercompany profit on inter-segment sales that is eliminated in consolidation. Corporate selling, general and administrative expenses include centralized functions such as legal, finance, treasury and human resources with a portion of the costs allocated to our operating segments.

Over the long-term, we expect to see strength in our aviation products and services given our offerings of value-added solutions to both commercial and government and defense customers. We believe long-term commercial aftermarket growth trends are favorable. As we continue to invest in the pipeline of opportunities in the government market, our long-term strategy continues to emphasize investing in the business and capitalizing on opportunities in both the commercial and government markets.

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Discussion of Results of Operations

Three- and Six- Month Periods Ended November 30, 2023


	Three Months Ended November 30,								Six Months Ended November 30,
	2023			2022			% Change		2023			2022			% Change
Sales:
Commercial	$	385.2		$	311.8		23.5	%	$	777.7		$	605.4		28.5	%
Government and defense		160.2			158.0		1.4	%		317.4			310.7		2.2	%
	$	545.4		$	469.8		16.1	%	$	1,095.1		$	916.1		19.5	%
Gross Profit:
Commercial	$	78.7		$	57.3		37.3	%	$	154.3		$	110.8		39.3	%
Government and defense		24.7			28.5		(13.3)	%		50.4			56.9		(11.4)	%
	$	103.4		$	85.8		20.5	%	$	204.7		$	167.7		22.1	%

Gross Profit Margin:
Commercial		20.4	%		18.4	%				19.8	%		18.3	%
Government and defense		15.4	%		18.0	%				15.9	%		18.3	%
Consolidated		19.0	%		18.3	%				18.7	%		18.3	%

Three Month Period Ended November 30, 2023

Consolidated sales for the second quarter of fiscal 2024 increased $75.6 million, or 16.1%, over the prior year quarter primarily due to an increase in sales to commercial customers. Consolidated sales to commercial customers increased $73.4 million, or 23.5%, over the prior year quarter primarily due to strong demand and volume growth in our Parts Supply segment across both new parts distribution and used serviceable material. Our consolidated sales to government customers increased $2.2 million, or 1.4%, primarily due to the growth across government programs in our Integrated Solutions segment partially offset by lower sales volume for pallets, containers, and shelters in our Expeditionary Services segment.

Consolidated cost of sales increased $58.0 million, or 15.1%, over the prior year quarter primarily due to the overall higher sales volumes over the prior year period.

Consolidated gross profit for the second quarter of fiscal 2024 increased $17.6 million, or 20.5%, over the prior year quarter. Gross profit on sales to commercial customers increased $21.4 million, or 37.3%, over the prior year quarter due to strong demand and volume growth for both new parts and used serviceable material. Gross profit margin on sales to commercial customers increased to 20.4% from 18.4% in the prior year quarter primarily due to the acquisition of Trax in the fourth quarter of fiscal 2023 and its higher margin digital services.

Gross profit on sales to government customers decreased $3.8 million, or 13.3%, from the prior year quarter with the gross profit margin on sales to government customers decreasing to 15.4% from 18.0%. These decreases are primarily attributable to changes in the mix of products and services sold in our Integrated Solutions segment.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses increased $12.9 million, or 24.4%, over the prior year quarter primarily due to investments to support the sales growth across our commercial activities. These investments include $2.7 million of amortization and acquisition-related expenses for Trax. As a percent of sales, selling, general and administrative expenses increased to 12.0% from 11.2% in the prior year quarter primarily due to these incremental investments.

Operating Income

Operating income increased $5.9 million, or 18.2%, over the prior year quarter primarily due to the increased sales volumes and margin improvement discussed above.

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Interest Expense

Interest expense increased $4.1 million in the second quarter of fiscal 2024 reflecting the impact of both higher interest rates and higher average borrowings used to fund investments in the business, including our acquisition of Trax. Our average borrowing rate was 6.7% in the second quarter of fiscal 2024 compared to 4.1% in the prior year quarter.

Income Taxes

Our effective income tax rate for continuing operations was 24.9% for the second quarter of fiscal 2024 compared to 26.9% in the prior year quarter. The decrease in the effective tax rate was primarily attributable to higher tax benefits from stock option exercises in the current quarter which reduced the effective income tax rate.

Six Month Period Ended November 30, 2023

Consolidated sales for the six-month period ended November 30, 2023 increased $179.0 million, or 19.5%, over the prior year period primarily due to an increase in sales to commercial customers. Consolidated sales to commercial customers increased $172.3 million, or 28.5%, over the prior year period primarily due to strong demand and volume growth in our Parts Supply segment across both new parts distribution and used serviceable material. Our consolidated sales to government customers increased $6.7 million, or 2.2%, primarily due to the growth across government programs in our Integrated Solutions segment partially offset by lower sales volume for new parts to government customers in our Parts Supply segment.

Consolidated cost of sales increased $142.0 million, or 19.0%, over the prior year period which was largely in line with the consolidated sales increase of 19.5% discussed above.

Consolidated gross profit for the six-month period ended November 30, 2023 increased $37.0 million, or 22.1%, over the prior year period. Gross profit on sales to commercial customers increased $43.5 million, or 39.3%, over the prior year period due to strong demand and volume growth for both new parts and used serviceable material. Gross profit margin on sales to commercial customers increased to 19.8% from 18.3% in the prior year period primarily due to the acquisition of Trax and its higher margin services.

Gross profit on sales to government customers decreased $6.5 million, or 11.4%, from the prior year period. Gross profit on sales to government customers decreased primarily due to lower sales to government customers in our Parts Supply segment. Gross profit margin on sales to government customers decreased to 15.9% from 18.3% primarily due to changes in the mix of products and services sold.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses increased $37.5 million, or 36.4%, over the prior year period primarily due to the recognition of a charge for $11.2 million in the first quarter of fiscal 2024 related to an unfavorable Russian court judgment. The remaining increase in selling, general and administrative expenses was largely attributable to investments to support the sales growth as our commercial activities continue to recover from the impact of COVID-19. These investments include $5.5 million of amortization and acquisition-related expenses for Trax.

Operating Income

Operating income for the six-month period ended November 30, 2023 was unchanged from the prior year period as the increased sales volumes and margin improvement were offset by the recognition of the $11.2 million charge related to the unfavorable Russian court judgment and investments in the business to support further growth.

Pension Settlement Charge

During the first quarter of fiscal 2024, we settled all future obligations under our frozen U.S. defined benefit retirement plan. The settlement included a combination of lump-sum payments to participants who elected to receive them and the transfer of the remaining benefit obligations to a third-party insurance company under a group annuity contract. As a result of the settlement, in the six-month period ended November 30, 2023, we recognized a non-cash, pre-tax pension settlement charge of $26.7 million ($16.1 million after-tax) related to the accelerated recognition of all unamortized net actuarial losses in Accumulated other comprehensive loss.

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Interest Expense

Interest expense for the six-month period ended November 30, 2023 increased $8.8 million over the prior year period reflecting the impact of both higher interest rates and higher average borrowings used to fund investments in the business, including our acquisition of Trax. Our average borrowing rate was 6.6% for the six-month period ended November 30, 2023 compared to 3.4% in the prior year period.

Income Taxes

Our effective income tax rate for continuing operations for the six-month period ended November 30, 2023 was 4.1% compared to 26.8% in the prior year period. The decrease in the effective tax rate was primarily attributable to the deferred tax benefit recognized in conjunction with the pension settlement in the first quarter of fiscal 2024.

Operating Segment Results of Operations

Three-Month Periods Ended November 30, 2023 and 2022

Parts Supply Segment


	Three Months Ended November 30,
	2023			2022			% Change
Third-party sales	$	227.6		$	183.6		24.0	%
Operating income		28.4			21.3		33.3	%
Operating margin		12.5	%		11.6	%

Sales in the Parts Supply segment increased $44.0 million, or 24.0%, over the prior year quarter primarily due to a $22.2 million increase in sales in our aftermarket parts trading activities as a result of increased demand for used serviceable material. Whole asset sales in our aftermarket parts trading activities increased $14.6 million in the second quarter of fiscal 2024 over the prior year quarter.

Operating income in the Parts Supply segment increased $7.1 million, or 33.3%, over the prior year period, primarily due to growth in sales volumes across both new parts distribution and used serviceable material. Operating margin increased to 12.5% from 11.6% in the prior year quarter, primarily due to the mix of products sold in our new parts distribution activities.

Repair & Engineering Segment


	Three Months Ended November 30,
	2023			2022			% Change
Third-party sales	$	145.4		$	134.8		7.9	%
Operating income		11.3			8.6		31.4	%
Operating margin		7.8	%		6.4	%

Sales in the Repair & Engineering segment increased $10.6 million, or 7.9%, over the prior year quarter primarily due to a $16.5 million sales increase at our airframe maintenance facilities. This increase was partially offset by lower sales volume of $5.9 million in our landing gear and component repair facilities.

Operating income in the Repair & Engineering segment increased $2.7 million, or 31.4%, over the prior year quarter primarily due to the sales volume increase in our airframe maintenance facilities. Operating margin increased to 7.8% from 6.4% in the prior year quarter, primarily due to our actions to reduce both our fixed and variable cost structure.

Integrated Solutions Segment


	Three Months Ended November 30,
	2023			2022			% Change
Third-party sales	$	156.6		$	127.3		23.0	%
Operating income		6.4			7.1		(9.9)	%
Operating margin		4.1	%		5.6	%

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Sales in the Integrated Solutions segment increased $29.3 million, or 23.0%, over the prior year quarter primarily due to higher commercial and government program activity and the Trax acquisition in the fourth quarter of fiscal 2023 which contributed sales of $9.5 million in the current year quarter.

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. In the second quarter of fiscal 2024, we recognized net unfavorable cumulative catch-up adjustments of $0.3 million compared to favorable cumulative catch-up adjustments of $2.9 million in the prior year quarter. These adjustments primarily relate to our long-term, power-by-the-hour programs where we provide component inventory management and repair services as well as certain long-term government programs.

Operating income in the Integrated Solutions segment decreased $0.7 million, or 9.9%, from the prior year quarter with operating margin decreasing to 4.1% from 5.6%. These decreases are primarily attributable to decrease in favorability from the cumulative catch-up adjustments discussed above.

Expeditionary Services Segment


	Three Months Ended November 30,
	2023			2022			% Change
Third-party sales	$	15.8		$	24.1		(34.4)	%
Operating income		0.9			2.0		(55.0)	%
Operating margin		5.7	%		8.3	%

Sales in the Expeditionary Services segment decreased $8.3 million, or 34.4%, from the prior year period primarily due to lower sales volumes for pallets, containers, and shelters.

Operating income in the Expeditionary Services segment decreased $1.1 million, or 55.0%, from the prior year quarter primarily due to the lower sales volumes. Operating margin decreased to 5.7% from 8.3% in the prior year quarter, primarily due to increased selling, general, and administrative expenses over the prior year quarter.

Six-Month Periods Ended November 30, 2023 and 2022

Parts Supply Segment


	Six Months Ended November 30,
	2023			2022			% Change
Third-party sales	$	464.4		$	352.2		31.9	%
Operating income		43.5			39.6		9.8	%
Operating margin		9.4	%		11.2	%

Sales in the Parts Supply segment for the six-month period ended November 30, 2023 increased $112.2 million, or 31.9%, over the prior year period primarily due to a $68.4 million increase in sales in our aftermarket parts trading activities as a result of increased demand for used serviceable material. Whole asset sales in our aftermarket parts trading activities increased $35.6 million over the prior year period.

Operating income in the Parts Supply segment increased $3.9 million, or 9.8%, over the prior year period, primarily due to increased sales volumes across both new parts distribution and used serviceable material partially offset by the recognition of the $11.2 million charge in the first quarter of fiscal 2024 related to the unfavorable Russian court judgment.

Repair & Engineering Segment


	Six Months Ended November 30,
	2023			2022			% Change
Third-party sales	$	282.9		$	262.4		7.8	%
Operating income		20.4			16.0		27.5	%
Operating margin		7.2	%		6.1	%

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Sales in the Repair & Engineering segment for the six-month period ended November 30, 2023 increased $20.5 million, or 7.8%, over the prior year period primarily due to a $29.9 million sales increase at our airframe maintenance facilities. This increase was partially offset by lower sales volume of $10.5 million in our landing gear and component repair facilities.

Operating income in the Repair & Engineering segment increased $4.4 million, or 27.5%, over the prior year period primarily due to the sales volume increase in our airframe maintenance facilities. Operating margin increased to 7.2% from 6.1% in the prior year period, primarily due to our actions to reduce both our fixed and variable cost structure.

Integrated Solutions Segment


	Six Months Ended November 30,
	2023			2022			% Change
Third-party sales	$	312.9		$	255.1		22.7	%
Operating income		14.1			15.4		(8.4)	%
Operating margin		4.5	%		6.0	%

Sales in the Integrated Solutions segment for the six-month period ended November 30, 2023 increased $57.8 million, or 22.7%, over the prior year period primarily due to higher commercial and government program activity and the Trax acquisition in the fourth quarter of fiscal 2023 which contributed sales of $17.1 million in the current year period.

In the six-month period ended November 30, 2023, we recognized net favorable cumulative catch-up adjustments of $0.2 million compared to a favorable cumulative catch-up adjustments of $5.8 million in the prior year period. These adjustments primarily relate to our long-term, power-by-the-hour programs where we provide component inventory management and repair services as well as certain long-term government programs.

Operating income in the Integrated Solutions segment decreased $1.3 million, or 8.4%, from the prior year period with the operating margin decreasing to 4.5% from 6.0%. These decreases are primarily attributable to the changes in the amount of net favorable cumulative catch-up adjustments in each period.

Expeditionary Services Segment


	Six Months Ended November 30,
	2023			2022			% Change
Third-party sales	$	34.9		$	46.4		(24.8)	%
Operating income		2.2			4.3		(48.8)	%
Operating margin		6.3	%		9.3	%

Sales in the Expeditionary Services segment for the six-month period ended November 30, 2023 decreased $11.5 million, or 24.8%, from the prior year period primarily due to lower sales volumes for pallets, containers, and shelters.

Operating income in the Expeditionary Services segment decreased $2.1 million, or 48.8%, from the prior year period primarily due to lower sales volumes. Operating margin decreased to 6.3% from 9.3% in the prior year period, primarily due to increased selling, general, and administrative expenses over the prior year period.

Liquidity, Capital Resources and Financial Position

Our operating activities are funded and commitments met through the generation of cash from operations. Our ability to generate cash from operations is influenced primarily by our operating performance and changes in working capital. In addition to operations, our current capital resources include an unsecured revolving credit facility under the Credit Agreement referred to below and an accounts receivable 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.

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At November 30, 2023, our liquidity and capital resources included working capital of $814.3 million inclusive of cash of $65.1 million.

On December 14, 2022, we entered into a new credit agreement with various financial institutions as lenders and Wells Fargo Bank, N.A. as administrative agent for the lenders (the “Credit Agreement”). The Credit Agreement provides for a $620 million unsecured revolving credit facility (the “Revolving Credit Facility”) that we can draw upon for working capital and general corporate purposes. Under certain circumstances, we may request an increase to the lending commitments under the Credit Agreement by an aggregate amount of up to $300 million, not to exceed $920 million in total. The Credit Agreement expires on December 14, 2027.

At November 30, 2023, borrowings outstanding under the Revolving Credit Facility were $277.0 million and there were approximately $11.0 million of outstanding letters of credit, which reduced the availability under this facility to $332.0 million. There are no other terms or covenants limiting the availability of the Revolving Credit Facility.

As of November 30, 2023, we also had other financing arrangements that did not limit availability on our Revolving Credit Facility, including outstanding letters of credit of $11.7 million and foreign lines of credit of $9.4 million.

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 expires after February 22, 2024, but, the Purchase Agreement may be terminated earlier under certain circumstances. The term of the Purchase Agreement is automatically extended for annual terms unless either party provides advance notice that they do not intend to extend the term.

We have no retained interests in the sold receivables, other than limited recourse obligations in certain circumstances, and only perform collection and administrative functions for the Purchaser. We account for these receivable transfers as sales under ASC 860, Transfers and Servicing, and de-recognize the sold receivables from our Consolidated Balance Sheet. At November 30, 2023, we have utilized $12.6 million which reduced the availability under the Purchase Agreement to $137.4 million.

At November 30, 2023, we were in compliance with all financial and other covenants under each of our financing arrangements.

During the second quarter of fiscal 2024, we continued to experience delayed collections from one of our significant regional airline customers and issued the customer a Notice of Payment and Other Defaults to request payment and reserve our rights under our agreements. Though we currently expect full payment from the customer of all amounts due and do not believe a reserve for credit loss is warranted, the customer’s financial condition may continue to deteriorate and we may in the future experience loss due to a default by the customer and the related nonpayment of account receivable balances. Our Condensed Consolidated Balance Sheet as of November 30, 2023 included accounts receivable of $11.9 million, including $5.4 million past due, and contract assets of $9.4 million related to this customer.

On December 16, 2021, our Board of Directors authorized a renewal of our stock repurchase program, under which we may repurchase up to $150 million of our common stock with no expiration date. During fiscal 2023, we repurchased 1.2 million shares for an aggregate purchase price of $50.1 million. No repurchases were made during the six-month period ended November 30, 2023. Since inception of the renewal authorization, we have repurchased 2.2 million shares for an aggregate purchase price of $92.4 million. The timing and amount of repurchases are subject to prevailing market conditions and other considerations, including our liquidity and acquisition and other investment opportunities.

Cash Flows from Operating Activities

Net cash used in operating activities–continuing operations was $1.1 million in the six-month period ended November 30, 2023 compared to cash used of $38.9 million in the prior year period. The decrease in cash used from the prior year of $37.8 million was primarily attributable to working capital changes, including the timing of payments for inventory investments in both new parts and used serviceable material in the current year period.

Cash Flows from Investing Activities

Net cash used in investing activities was $20.3 million in the six-month period ended November 30, 2023 compared to $18.3 million in the prior year period. The increase in cash used in investing activities over the prior year of $2.0 million was primarily related to increased expenditures for capital equipment in the current year period.

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Cash Flows from Financing Activities

Net cash provided by financing activities was $15.3 million in the six-month period ended November 30, 2023 compared to cash provided of $50.0 million in the prior year period. The decrease in cash provided by financing activities from the prior year of $34.7 million was primarily related to stock repurchases of $50.1 million in the prior year period compared to no repurchases in fiscal 2024.

Pending Acquisition of Triumph Group’s Product Support Business

Critical Accounting Policies and Significant Estimates

We make a number of significant estimates, assumptions and judgments in the preparation of our financial statements. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended May 31, 2023 for a discussion of our critical accounting policies. There have been no significant changes to the application of our critical accounting policies during fiscal 2024.

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 on Form 10-K for the year ended May 31, 2023. Should one or more of those risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. Those events and uncertainties are difficult or impossible to predict accurately and many are beyond our control. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk includes fluctuating interest rates under our credit agreements, changes in foreign exchange rates, and credit losses on accounts receivable. See Note 1 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended May 31, 2023 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 for the quarter ended November 30, 2023.

Interest Rate Risk. Refer to the section Quantitative and Qualitative Disclosures about Market Risk in our Annual Report on Form 10-K for the year ended May 31, 2023. There were no significant changes during the quarter ended November 30, 2023.

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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 November 30, 2023. 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 were effective as of November 30, 2023 to provide reasonable assurance 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 quarter ended November 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

The information in Note 16 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 16 to our Condensed Consolidated Financial Statements for the quarter ended November 30, 2023 contained in this Quarterly Report on Form 10-Q.

Item 1A – Risk Factors

There is no material change in the 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, 2023 with the exception of the addition of the following risk factor:

We may not complete the pending acquisition of the Product Support business of Triumph Group, and if we do, we may not realize the anticipated benefits and may face difficulties integrating the operations, which could have a material adverse impact on the Company’s business, operating results and financial condition.

On December 21, 2023, we entered into a definitive agreement with Triumph Group (“Seller”) to acquire Seller’s Product Support business (the “Product Support Business”). The Product Support business is a leading global provider of specialized MRO capabilities for critical aircraft components in the commercial and defense markets, providing MRO services for structural components, engine and airframe accessories, interior refurbishment and wheels and brakes. The Product Support Business also designs proprietary designated engineering representative repairs and parts manufacturer approval parts. We expect the pending acquisition to deepen and broaden our customer relationships globally, expand our footprint, and expand our product offerings.

We face risks in completing the acquisition. Under the terms of the agreement and subject to closing conditions, we will acquire the Product Support Business for $725 million in cash, which we expect to fund with a combination of new equity and debt financings. We have also secured a debt financing commitment to backstop the contemplated new financings. We are subject to risks related to our ability to obtain any contemplated financing on favorable terms or at all. The acquisition is expected to close in the first quarter of the 2024 calendar year, subject to customary closing conditions, including regulatory approvals. We may not be able to meet the closing conditions or obtain the approvals we need to complete the acquisition within the contemplated timeframe or at all.

In addition, if we complete the acquisition, we may not realize the anticipated benefits, including any synergies, cross-selling opportunities, cost savings, financial or business growth opportunities. The benefits related to the acquisition may not be achieved within the anticipated timeframe, or at all. Further, we may not be able to execute our integration plans for the Product Support Business and may face diversion of management attention from our existing business, unanticipated costs and risks associated with the acquisition and expanding further into the global MRO market. Failing to realize the anticipated benefits and difficulties integrating the Product Support Business could have a material adverse effect on our business, operating results and financial condition.

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Item 5 – Other Information

During the three months ended November 30, 2023, none of our directors or “officers” (as defined in Rule 16a-1(f) promulgated under the Exchange Act) adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement” as such terms are defined under Item 408 of Regulation S-K.

Item 6 – Exhibits

The exhibits to this report are listed on the following index:

Exhibit No.	Description		Exhibits


31.	Rule 13a-14(a)/15(d)-14(a) Certifications	31.1	Section 302 Certification of Chief Executive Officer of Registrant (filed herewith).

		31.2	Section 302 Certification of Chief Financial Officer of Registrant (filed herewith).

32.	Section 1350 Certifications	32.1	Section 906 Certification of Chief Executive Officer of Registrant (filed herewith).

		32.2	Section 906 Certification of 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, 2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at November 30, 2023 and May 31, 2023, (ii) Condensed Consolidated Statements of Income for the three- and six-months ended November 30, 2023 and 2022, (iii) Condensed Consolidated Statements of Comprehensive Income for the three- and six-months ended November 30, 2023 and 2022, (iv) Condensed Consolidated Statements of Cash Flows for the six- months ended November 30, 2023 and 2022, (v) Condensed Consolidated Statement of Changes in Equity for the three- and six-months ended November 30, 2023 and 2022, and (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.

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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:	December 21, 2023	/s/ SEAN M. GILLEN
		Sean M. Gillen
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)

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AAR (AIR) 10-Q2024 Q2 Quarterly report

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