TABLE OF CONTENTS

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PART I

ITEM 1.BUSINESS

General

AAR CORP. and its subsidiaries are referred to herein collectively as “AAR,” “Company,” “we,” “us,” and “our” unless the context indicates otherwise.  AAR was founded in 1951, organized in 1955 and reincorporated in Delaware in 1966.  We are a diversified provider of products and services to the worldwide aviation and government and defense markets.

Fiscal 20202021 began with strategic initiatives focusedour focus centered on growthmanaging through the COVID-19 pandemic to ensure the safety of our team and execution acrossnavigating the unprecedented decline in commercial passenger flight hours.  Our sales to commercial customers in fiscal 2021 decreased by $486.8 million or 37.6% from the prior year as the impact from COVID-19 affected all of our activitiescommercial businesses.

To mitigate the impact of COVID-19, we implemented a number of actions since the onset of the COVID-19 pandemic to align our costs with the anticipated lower levels of demand.  These actions included facility consolidations, exiting or restructuring several underperforming contracts, and eliminating discretionary spending.  We also implemented actions to reduce our fixed and variable cost base which will support improved operating efficiencies and margins as commercial demand recovers.

In addition to these actions, we have also taken steps to focus on our core aviation services offering by continuing the divestiture of non-core businesses.  Following the fiscal 2020 exit from our Contractor-Owned, Contractor-Operated (“COCO”) business, we completed the sale of our composites manufacturing business in the commercialearly fiscal 2021.  All of these actions have simplified our portfolio and government markets.  Our momentum from a successful fiscal 2019 carried into the new year as we saw continued strengthimproved efficiency in our parts supply activities,operations to position us to drive higher returns on capital.

As we continued to successfully execute on our recent government contract awards over the last few years, we achieved strong sales growth in fiscal 2021 with our government customers as wellsales increased $67.1 million or 8.6% over the prior year.  This growth was driven from recent contract awards such as in government programs.  We also realized the positive impact our efforts to attract and retain talent had in our maintenance, repair and overhaul (“MRO”) activities.

We succeeded in enhancing customer relationships with multiple commercial and government customers.  In fiscal 2020, we were awarded a new $118 million contract from the Naval Air Systems Command in support of the U.S. Marine Corps for the procurement, modification and delivery of two C-40 aircraft.  This award demonstrates the power of our integrated services model by combining the strengths of our parts supply, government programs, MRO, and engineering teams to deliver a creative solution to the U.S. Marine Corps.

We were also awarded new long-term contracts across our parts supply activities including multiple distribution agreements for new parts and our largest commercial agreement in Japan to date covering aftermarket engine components.  Our strategy to exit the capital-intensive Contractor-Owned, Contractor-Operated (“COCO”) business was also completed inDuring fiscal 2020 as all of its assets and contracts were sold.

As we continued to successfully execute on our recent contract awards over the last few years, we achieved strong sales growth through the first nine months of fiscal 2020 and were on track for a record year.  Sales had increased $166.4 million or 11.2% over the prior year period primarily due to an increase in sales of $175.5 million or 12.5% in our Aviation Services segment reflecting the growth from new contract awards and successful execution across our Aviation Services activities.

Upon entering the fourth quarter in March, we began to see the impact of the COVID-19 pandemic on the commercial aviation industry.  In response to the impact from COVID-19, we implemented significant actions to reduce fixed costs and overhead which included a freeze on new hiring, reducing or eliminating all non-essential spend, reducing compensation and benefits, furloughs, a reduction in force, and closure of an airframe maintenance facility.  During the fourth quarter,2021, we also exited underperforming contracts and assets across ourmaintained a strong focus on working capital management with cash flows from operating activities from continuing operations and decided to exit our joint venture investment in a Malaysian landing gear wheel and brake facility.  Additionally, in June 2020, we decided to sell our composites manufacturing business which is consistent with our multi-year strategy to focus our portfolio on our core services offerings.

We have also taken actions to preserve flexibility in our liquidity.  Inof $108.5 million.  Borrowings outstanding under the fourth quarter, we elected to draw down our remaining available borrowings under our Revolving Credit Facility were $109.5 million at May 31, 2021 with an availability on the majorityfacility of that additional funding remaining in our cash accounts.  We elected to borrow these additional amounts as a precautionary measure in light of economic and market uncertainty presented by COVID-19.$471.3 million.

Over the long-term, we expect to see continued strength in our Aviation Services segment given its offerings of value-added services to both commercial and government and defense customers.  We believe long-term commercial aftermarket growth trends are favorable although there is uncertaintyfavorable.  As we continue to experience growth in certain fleet types asour government businesses and recovery in some commercial operators re-evaluate their structure.  Our results of operations are affected bymarkets, our long-term strategy continues to emphasize investing in the amount of commercial aircraft flyingbusiness and flight hours. The current COVID-19 pandemic has decreased the amount of commercial aircraft flying and flight hours and has created significant economic disruption.capitalizing on opportunities in those markets.

We provide customized flight hour component inventory and repair programs, warranty claim management, and outsourcing programs for engine and airframe parts and components in support of our airline and government customers’ maintenance activities.  The types of services provided under these programs include some or all of the following functions: material planning, sourcing, logistics, information and program management, and parts and component repair and overhaul.  We are also an authorized distributor for more than 30 product lines which include parts from over 300 Federal Supply Class codes, which we source from over 25 leading aviation original equipment manufacturers (“OEM”s).

We provide fleet management and operations of customer-owned aircraft for the U.S. Department of State (“DoS”) under the INL/A WASS contract.  We are the prime contractor on this ten-year performance-based contract which began in fiscal 2018.  Our services under the contract include operating and maintaining the global DoS fleet of fixed- and rotary-wing aircraft.

We also provide customized performance-based supply chain logistics programs in support of the U.S. Department of Defense (“DoD”) and foreign governments.  The types of services provided under these programs include some or all of the following functions: material planning, sourcing, logistics, information and program management, airframe maintenance and maintenance planning, and component repair and overhaul.

We provide major airframe inspection, maintenance, repair and overhaul, painting services, line maintenance, airframe modifications, structural repairs, avionics service and installation, exterior and interior refurbishment, and engineering services and support for many types of commercial and military aircraft.  We also repair and overhaul various components, landing gears, wheels, and brakes for commercial and military aircraft.

We operate six airframe maintenance facilities and one landing gear overhaul facility.  Our landing gear overhaul facility is in Miami, Florida, where we repair and overhaul landing gear, wheels, brakes, and actuators for different types of commercial and military aircraft.  Our U.S. airframe maintenance facilities are in Indianapolis, Indiana; Oklahoma City, Oklahoma; Miami, Florida; and Rockford, Illinois and our Canadian airframe maintenance facilities are in Trois Rivieres, Quebec and Windsor, Ontario.  In the fourth quarter of fiscal 2020, we announced our decision to close our airframe maintenance hangar in Duluth, Minnesota as the facility was only supporting a single customer and its location was not convenient for many of our customers' route networks. We recognized pretax closure costs of $4.3 million in the fourth quarter primarily related to severance costs  and asset impairment charges.  

In addition to our North American facilities, we also have an interest in a joint venture to develop and operate an airframe maintenance facility in India. The facility construction is expected to be completedreceive regulatory certification in the first half of fiscal 2021.2022 and would commence airframe maintenance operations shortly thereafter.

The majority of our product sales are made pursuant to standard commercial purchase orders.  Government sales are generally made under standard types of government contracts, which can include firm fixed-price contracts, cost plus fixed fee contracts, and time-and-materials contracts.  For cost plus fixed fee contracts, we typically receive reimbursement of our costs, to the extent the costs are allowable under contractual and regulatory provisions, in addition to receiving a fixed fee.  Some of our contracts call for the performance of specified services or the delivery of specified products under indefinite delivery/indefinite quantity (“ID/IQ”) arrangements.  Certain inventory supply and management and performance-based logistics program agreements reflect negotiated terms and conditions.

We design, manufacture, and repair transportation pallets and a wide variety of containers and shelters used in support of military and humanitarian tactical deployment activities.  The containers and shelters are used in numerous mission requirements, including armories, supply and parts storage, refrigeration systems, tactical operation centers, briefing rooms, laundry and kitchen facilities, water treatment, and sleeping quarters. Shelters include both stationary and vehicle-mounted applications.We also provide engineering, design, and system integration services for specialized command and control systems.

We also design and manufacture advanced composite materials for commercial,During the first quarter of fiscal 2021, we sold our composites manufacturing business and military aircraft (“Composites”).  On June 23, 2020, we entered intowhich resulted in a definitive agreement to sell ourcharge of $20.2 million.  The sale of the Composites business as this divestiture is consistent with our multi-year strategy to focus our portfolio on our core services offerings.  We expectofferings, and the saletransaction has allowed us to closefurther prioritize our efforts in the third quarter of calendar 2020 and will recognize a charge in the first quarter of fiscal 2021 of approximately $20 million in conjunction with the transaction.our principal operations.

Sales in this segment are generally made to customers pursuant to standard commercial purchase orders and contracts.  Government sales are generally made under standard types of government contracts, which can include firm fixed-price contracts, cost plus fixed fee contracts, and time-and-materials contracts.  Some of our contracts call for the performance of specified services or the delivery of specified products under ID/IQ arrangements, however, the majority of our products and services are procured via definite contracts.

Raw Materials

Although we generated approximately 55% of our fiscal 20202021 sales from the sale of products, we are generally engaged in only limited manufacturing activities and have minimal exposure to fluctuations in both the availability and pricing of raw materials.  We purchase raw materials for our manufacturing operations, including steel, aluminum, extrusions, balsa, and other necessary supplies from several vendors. Where necessary, we have been able to obtain raw materials and other inventory items from numerous sources for each segment at competitive prices, terms, and conditions, and we expect to be able to continue to do so.

Terms of Sale

We generally sell our products and services under standard 30-day payment terms.  On occasion, certain customers will negotiate extended payment terms of 60-90 days.  Except for customary warranty provisions, customers neither have the right to return products nor do they have the right to extended financing. Our government contracts may extend several years and include one or more base years and one or more option years. The government generally has the right not to exercise options to extend or expand our contracts and may otherwise terminate, cancel, or modify some contracts at its convenience.

Customers

The principal customers for our products and services in the Aviation Services segment are domestic and foreign passenger airlines, domestic and foreign cargo airlines, regional and commuter airlines, business and general aviation operators, OEMs, aircraft leasing companies, aftermarket aviation support companies, the DoD and its contractors, the DoS, and foreign military organizations or governments.  In the Expeditionary Services segment, our principal customers include the DoD and its contractors, foreign military organizations or governments, defense organizations, and OEMs.

Sales to Government and Defense Customers

Sales to global government and defense customers (including sales to branches, agencies, and departments of the U.S. government) were $845.9 million (51.2% of consolidated sales), $778.8 million (37.6% of consolidated sales), and $677.9 million (33.0% of consolidated sales) and $428.9 million (24.5% of consolidated sales) in fiscal 2021, 2020 2019 and 2018,2019, respectively.  Sales to branches, agencies, and departments of the U.S. government and their contractors were $738.8 million (44.7% of consolidated sales), $668.2 million (32.2% of consolidated sales), and $546.2 million (26.6% of consolidated sales) and $304.3 million (17.4% of consolidated sales) in fiscal 2021, 2020, and 2019, and 2018, respectively.

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Sales to government and defense customers are reported in each of our reportable segments (See Note 14 of Notes to Consolidated Financial Statements).  Since such sales are subject to competitive bidding and government funding, no assurance can be given that such sales will continue at levels previously experienced.  The majority of our U.S. government sales are for products and services supporting the DoD logistics and mobility strategy and supporting DoS flight operations.  Thus, our government contracts have changed, and may continue to change, with fluctuations in defense and other governmental agency spending and requirements.  Our government contracts are also often subject to termination for convenience by the customer; in the event of such a termination, we are contractually entitled to recover all allowable costs incurred by us through the date of termination.

Government Regulation and Certificates

The Federal Aviation Administration (“FAA”) regulates the manufacture, repair, and operation of all aircraft and aircraft parts operated in the United States.  Similar rules and regulatory authorities exist in other countries.  The inspection, maintenance and repair procedures for the various types of aircraft and equipment are prescribed by these regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians.  The FAA requires that various maintenance routines be performed on aircraft engines, certain engine parts, and airframes at regular intervals based on take off and landing cycles or flight time.  Our businesses, which sell defense products and services directly to the U.S. government or through its contractors, can be subject to various laws and regulations governing pricing and other factors.

We have 12nine FAA certificated repair stations in the United States, Canada, and Europe.  Of the 12nine certificated FAA repair stations, seven are also European Aviation Safety Agency (“EASA”) and three are also Transport Canada Civil Aviation (“TCCA”) certificated repair stations.  Such certificates, which are ongoing in duration, are required for us to perform authorized maintenance, repair, and overhaul services for our customers and are subject to revocation by the government for non-compliance with applicable regulations.  OfAll of the 12 FAA certificated repair stations, 11 are in the Aviation Services segment and one is held by Composites included in our Expeditionary Services segment, which is expected to be sold in third quarter of calendar 2020.  The EASA and TCCA certificated repair stations are in the Aviation Services segment.  We also have a FAR Part 135 certificate to operate aircraft, although the certificate is not active.  We believe that we possess all licenses and certifications that are material to the conduct of our business.

Competition

Competition in each of our markets is based on quality, ability to provide a broad range of products and services, speed of delivery, and price.  Competitors in our Aviation Services segment include OEMs, the service divisions of large commercial airlines, and other independent suppliers of parts, repair, and overhaul services to the commercial and defense markets.  Our Expeditionary Services segment competes with a number of divisions of large corporations and other large and small companies.  Although certain of our competitors have substantially greater financial and other resources than we do, we believe that we have maintained a satisfactory competitive position through our responsiveness to customer needs, our attention to quality, and our unique combination of market expertise and technical and financial capabilities.

EmployeesHuman Capital Resources

AtAs of May 31, 2020,2021, we employedhad approximately 5,4004,700 employees worldwide, with approximately 1,2003,300 employees in the United States and approximately 1,400 employees outside of these employees on furlough as of that date due to our actions to mitigate the impact from COVID-19.  Approximately 200 of our employees are subject to a collective bargaining agreement.United States. We also retained approximately 170220 contract workers as of May 31, 2020,2021, the majority of whom are located at our airframe maintenance facilities.  We retain these contract workers as they provide unique skill sets which are necessary at certain facilities as well as mitigate the impact of demand variability with our customers.

Our employees set the foundation for our ability to achieve our strategic objectives. In particular, the employees in our MRO facilities, sales, and quality assurance departments are instrumental in driving operational execution and strong financial performance, and maintaining a strong quality and compliance program.

The success and growth of our business depend in large part on our ability to attract, retain and develop a population of talented and high-performing employees at all levels of our organization.  To achieve this objective we have formulated a human capital management strategy, which includes the components below:

Commitment to Safety

One of our primary objectives is the health and safety of our employees. The commitment to safety starts at the top levels of our organization.  In December 2020, our Board of Directors formed an Aviation Safety and Training Committee that oversees safety and training matters on the Board’s behalf. We believe a safe and secure workplace is fundamental and important to our success and we are committed to providing a safe and healthy workplace, and complying with applicable safety and health laws, regulations and internal requirements. We are also committed to engaging our employees to continually improve health and safety by acting upon opportunities to reduce risk and improve our safety and health performance. We maintain comprehensive safety programs focused on identifying hazards and eliminating risks that can lead to severe injuries.

Competitive Pay and Benefits

We focus on paying our employees competitively. We strive to provide competitive pay opportunities which reward our employees for achieving and exceeding objectives that create long-term value for shareholders. Providing competitive pay enhances our ability to attract and retain strong, innovative talent.

Providing comprehensive, competitive and affordable benefits is important to our attraction and retention strategy. We offer health benefits which include various medical/pharmacy plan options as well as a cost comparison tool to assist employees with their decisions.  Health savings accounts for those in a high deductible health plan and flexible spending accounts for both health care and dependent care are also available to employees.  The retirement, investment, and tax savings/deferral opportunities offered to employees include competitive 401k benefits and an Employee Stock Purchase Plan.

Employees are eligible for paid and unpaid leaves and, in addition, we offer a variety of other benefits to meet the needs of employees including an employee assistance program which provides some free counseling sessions, educational assistance and adoption assistance. Some of our facilities have fitness centers on site for employees to use.

Diversity, Inclusion and Engagement

We are an equal opportunity employer and recognize the value of a diverse workforce. We have established company-wide Employee Resource Groups (“ERGs”) where employees can foster connections and develop in a supportive environment.  

We are continually seeking out new ways to broaden our exposure to underrepresented groups in the aviation industry and to develop a diverse talent pipeline.  Our ERGs support the development of diverse talent internally and promote the acquisition of talent externally.

Business Ethics

Our Code of Conduct ("Code") is a statement of the principles and standards that we expect our employees to follow. Each officer, director and employee is required to use good ethical judgement when conducting business and comply with applicable laws, rules and regulations. The Code describes what is appropriate behavior and guides ethical business decisions that maintain a commitment to integrity. Failure to comply with the Code and applicable laws can have severe consequences for both us and individuals involved, including disciplinary action, civil penalties or criminal prosecution under certain circumstances.

Available Information

For additional information concerning our business segments, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business Segment Information” in Note 14 of Notes to Consolidated Financial Statements under Item 8, “Financial Statements and Supplementary Data.”

Our internet address is www.aarcorp.com.  We make available free of charge through our web site our annual reportAnnual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission.  Information contained on our web site is not a part of this report.

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ITEM 1A.RISK FACTORS

The following is a description of the principal risks inherent in our business. Any of the risks and uncertainties described below could materially and adversely affect our business, financial condition, and results of operations and should be considered in evaluating us. Although the risks are organized by heading, and each risk is described separately, many of the risks are interrelated. While we believe we have identified and discussed below the material risks affecting our business, there may be additional risks and uncertainties that we do not presently know or that we do not currently believe to be material that may adversely affect our business, financial condition, or results of operations in the future.

Risks Related to Our Business and Industry

We are affected by factors that adversely impact the commercial aviation industry.

As a provider of products and services to the commercial aviation industry, we are greatly affected by overall economic conditions of that industry. The commercial aviation industry is historically cyclical and has been negatively affected in the past by geopolitical events and conflicts, weather related events, natural disasters, disruption to fuel and oil production and supply shortages, high fuel and oil prices, environmental concerns (including climate change), lack of capital, and weak economic conditions. As a result of these and other events, from time to time certain of our customers have filed for bankruptcy protection or ceased operation. The impact of instability in the global financial markets may lead airlines to reduce domestic or international capacity. In addition, certain of our airline customers have in the past been impacted by tight credit markets, which limited their ability to buy parts, services, engines, and aircraft.

A reduction in the operating fleet of aircraft both in the U.S. and abroad will result in reduced demand for parts support and maintenance activities for the type of aircraft affected. A deteriorating airline environment may also result in additional airline bankruptcies, and in such circumstances we may not be able to fully collect outstanding accounts receivable.receivable, which was recently seen over the past year during the COVID-19 pandemic. Reduced demand from customers caused by weak economic conditions, including tight credit conditions and customer bankruptcies, may adversely impact our financial condition or results of operations. As an example, over the past year, as a result of the COVID-19 pandemic, which reduced demand, our revenue decreased by 20% largely due to reduced demand attributable to the COVID-19 pandemic.  

Our business, financial condition, results of operations, and growth rates have been and may continue to be adversely affected by these and other events that impact the aviation industry, including the following:

The coronavirus pandemic has had a material adverse impact on the Company’s business, operating results, financial condition, and liquidity, and the duration and extent of the pandemic could prolong or increase the adverse impact.

In December 2019, an outbreak of COVID-19 originated in Wuhan, China, and in March 2020, the World Health Organization characterized COVID-19 as a pandemic.  Many countries, including the United States, have declared states of emergency and taken steps to restrict air travel, and many companies have adopted policies prohibiting non-essential business travel by their employees.  Even in the absence of formal restrictions and prohibitions, contagious illness and fear of contagion has adversely affected travel demand and travel behavior.  Passenger airline traffic has declined significantly since March 2020, and the decrease had a material negative impact on the financial results for the fourth quarter of fiscal 2020.  We expect to continue to see reduced demand in our non-cargo commercial businesses.  Moreover, if the COVID-19 pandemic continues to result in decreased worldwide commercial activity, it could also adversely affect the demand for airline cargo services.  Reduced numbers of aircraft flying or flight hours negatively impacts the demand for our services, and any prolonged reduction could materially and adversely affect our business, operating results, financial condition, and liquidity.

In addition, we source parts and components for our business from various suppliers around the world. Disruptions to our supply chain and business operations, or to our suppliers’ or customers’ supply chains and business operations, could have adverse effects on our ability to provide aftermarket support and services. Moreover, a prolonged epidemic or pandemic, or the threat thereof, could result in worker absences, lower productivity, voluntary closure of our offices and facilities, travel restrictions for our employees and other disruptions to our business. Any of these could have a material adverse effect on our business, financial condition or results of operations.

The Company has taken a number of actions in response to decreased demand. In addition to reducing operating expenditures for fiscal 2021 (including by implementing furloughs, eliminating certain employee and contractor positions, temporarily reducing senior employee and director compensation, consolidating facilities and eliminating non-essential spending), we have taken steps to improve our liquidity, including drawing down our Revolving Credit Facility and seeking financial assistance under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).  Certain subsidiaries of the Company have been approved to receive $57.2 million from the U.S. Treasury Department (“Treasury”) through the Payroll Support Program under the CARES Act. In connection with the financial assistance these subsidiaries expect to receive under the Payroll Support Program, they will be required to comply with certain provisions of the CARES Act, including the requirement that funds provided pursuant to the Payroll Support Program be used exclusively for the continuation of payment of employee wages, salaries and benefits; the requirement against involuntary terminations and furloughs and reductions in employee pay rates and benefits  from the signing date of the Payroll Support Program agreement through September 30, 2020. In addition, those subsidiaries and the Company would be subject to provisions prohibiting the repurchase of common stock and the payment of common stock dividends through September 30, 2021; and limitations on the payment of certain employee compensation through March 24, 2022. These restrictions will materially affect the Company’s operations, and the Company may not be successful in managing these impacts for the duration of the restrictions. In particular, limitations on compensation may adversely impact the Company's ability to attract and retain senior management or attract other key employees during this critical time.  Although the Company has submitted what it believes to be final CARES Act documents to Treasury for counter signature, we can provide no assurance as to the final timing, terms or receipt of any funds.

In addition, we cannot predict the impact that COVID-19 will have on our customers, suppliers, vendors, and other business partners, and each of their financial conditions; however, any material effect on these parties could adversely impact us.  The impact of COVID-19 may also exacerbate other risks discussed in this “Risk Factors” section, any of which could have a material effect on us.

Our U.S. government contracts may not continue at present sales levels, which may have a material adverse effect on our financial condition and results of operations.

Our sales to branches, agencies and departments of the U.S. government and their contractors were $668.2$738.8 million (32.2%(44.7% of consolidated sales) in fiscal 20202021 (See Note 14 of Notes to Consolidated Financial Statements). The majority of our U.S. government sales is for products and services supporting DoD logistics and mobility strategy and DoS flight operations and are, therefore, subject to changes in defense and other governmental agency funding and spending. Our contracts with the U.S. government and their contractors are typically agreements to provide products and services at a fixed price and have a term of one year or less, frequently subject to extension for one or more additional periods of one year at the option of the government customer. Sales to agencies of the U.S. government and their contractors are subject to a number of factors, including the level of troop deployment worldwide, competitive bidding, U.S. government funding, requirements generated by world events, and budgetary constraints.

U.S. government programs are subject to annual congressional budget authorization and appropriation processes.  In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation, including the statutory limit on the amount of permissible federal debt. These issues could negatively affect the timely collection of our U.S. government invoices.

Future congressional appropriation and authorization of defense spending and the application of sequestration remain marked by significant debate and an uncertain schedule. The federal debt limit continues to be actively debated as plans for long-term national fiscal policy are discussed. The outcome of these debates could have a significant impact on defense spending broadly and programs we support in particular.

If our subcontractors or suppliers fail to perform their contractual obligations, our contract profitability and our ability to win new contracts may be adversely affected.

We rely on subcontractors to perform a portion of the services we agree to provide our customers, and our suppliers provide necessary inventory and component parts. A failure by one or more of our subcontractors or suppliers to satisfactorily provide on a timely basis the agreed-upon services or supplies may affect our ability to perform our contractual obligations.  Deficiencies in the performance of our subcontractors and/or suppliers could result in liquidated damages or our customer terminating our contract for default. A termination for default could expose us to liability and adversely affect our financial performance and our ability to win new contract awards.

We are subject to significant government regulation and may need to incur significant expenses to comply with new or more stringent governmental regulation.

The aviation industry is highly regulated by the FAA in the United States and equivalent regulatory agencies in other countries. Before we sell any of our products that are to be installed in an aircraft, such as engines, engine parts and components, and airframe and accessory parts and components, they must meet certain standards of airworthiness established by the FAA or the equivalent regulatory agencies in certain other countries. We operate repair stations that are licensed by the FAA and the equivalent regulatory agencies in certain other countries, and hold certificates to operate aircraft. Specific regulations vary from country to country; although regulatory requirements in other countries are generally satisfied by compliance with FAA requirements. New and more stringent governmental regulations may be adopted in the future that, if enacted, may have an adverse impact on us.

If any of our material licenses, certificates, authorizations, or approvals were revoked or suspended by the FAA or equivalent regulatory agencies in other countries, our results of operations and financial condition may be adversely affected.

Success at our airframe maintenance facilities is dependent upon continued outsourcing by the airlines.

We currently perform airframe maintenance, repair, and overhaul activities at six leased locations. If our maintenance facilities become unavailable either temporarily or permanently due to labor disruptions or circumstances beyond our control, such as geopolitical developments or logistical complications arising from acts of war, cyber-attacks, weather, global climate change, earthquakes or other natural disasters including public health crises, we may be unable to shift such work to other facilities or to make up for lost work.  Revenues at these facilities fluctuate based on demand for maintenance which, in turn, is driven by the number of aircraft operating and the extent of outsourcing of maintenance activities by airlines. In addition, certain airlines operate certain new fleet types and/or newer generation aircraft and we may not have contractual arrangements to service these aircraft nor technicians trained and certified to perform the required airframe maintenance, repair, and overhaul activities. If either the number of aircraft operating or the level of outsourcing of maintenance activities declines, we may not be able to execute our operational and financial plans at our maintenance, repair, and overhaul facilities, which could adversely affect our results of operations and financial condition.

Our operations would be adversely affected by a shortage of skilled personnel or work stoppages.

Our business has historically been dependent on educated and skilled aviation mechanics because of the complex nature of many of our products and services. We face competition for management and qualified technical personnel from other companies and organizations. Furthermore, we have a collective bargaining agreement covering approximately 200 employees.employees (4% of employees).  Beginning in April 2020, we furloughed a significant portion of our skilled workforce as a result of the negative impact the COVID-19 pandemic has had on the demand for our services.services, with those employees being either terminated or brought back to work by November 16, 2020.  Although we are takingtook measures to maintain good relationships with our workforce, including by paying the employer and employee portion of the furloughed employees’ health insurance costs, there can be no assurance that the act of furloughing our employees willdid not damage employee relations or cause employeesnegatively impact our ability to seek work elsewhere. Shouldbe an employer of choice in our field. As the demand for skilled personnel begins to return to pre-COVID-19 levels, and if we are unable to quickly reassemble our skilled workforce and subsequently retain a sufficient number of skilled personnel, or we experience a significant or prolonged work stoppage in such an environment, our ability to secure new work and our results of operations and financial condition could be adversely affected.

We operate in highly competitive markets, and competitive pressures may adversely affect us.

The markets for our products and services to our commercial, government, and defense customers are highly competitive, and we face competition from a number of sources, both domestic and international.  Our competitors include aircraft manufacturers, aircraft component and parts manufacturers, airline and aircraft service companies, other companies providing maintenance, repair and overhaul services, other aircraft spare parts distributors and redistributors.  Some of our competitors have substantially greater financial and other resources than we have and others may price their products and services below our selling prices.  These competitive markets also create pressure on our ability to hire and retain qualified technicians and other skilled labor needs.  We believe that our ability to compete depends on superior customer service and support, on-time delivery, sufficient inventory availability, competitive pricing, and effective quality assurance programs.

We are exposed to risks associated with operating internationally.

We conduct our business in a number of foreign countries, some of which are politically unstable or subject to military or civil conflicts.  Consequently, we are subject to a variety of risks that are specific to international operations, including the following:

On January 31, 2020, the UK officially exited the European Union (“EU”) and entered a transition period during which it remains bound by EU rules and trade policy. There is significant uncertainty regarding the terms and the future relationship between the UK and the EU following the transition period. Potential adverse consequences of the UK’s exit include global market uncertainty, volatility in currency exchange rates, greater restrictions on imports and exports between the UK and other countries and increased regulatory complexities.

While we haveAny measures adopted and will continue to adopt measures to reduce the potential impact of losses resulting from the risks of doing business internationally, such measures may not be adequate, and the regions in which we operate might not continue to be stable enough to allow us to operate profitably or at all.

Our business could be negatively affected by cyber or other security threats or other disruptions.

Our business depends heavily on information technology and computerized systems to communicate and operate effectively. We store sensitive data including proprietary business information, intellectual property and confidential employee or other personal data on our servers and databases. Our systems and technologies, or those of third parties on which we rely, could fail or become unreliable due to equipment failures, software viruses, cyber threats, ransomware attacks, terrorist acts, natural disasters, power failures, political or social unrest, pandemics or other public health issues or other causes. These threats arise in some cases as a result of our role as a defense contractor.

Cyber security threats are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to our sensitive information, business e-mail compromises, ransomware attacks, and other electronic security breaches, including at our customers, suppliers, subcontractors, and joint venture partners, that could lead to disruptions in mission critical systems, unauthorized release of confidential or otherwise protected information, and corruption of data.

A theft, loss, fraudulent use or misuse of customer, stockholder, employee or our proprietary data by cybercrime or otherwise, noncompliance with our contractual or other legal obligations regarding such data or a violation of our privacy and security policies with respect to such data could adversely impact our reputation and could result in costs, fines, litigation or regulatory action against us. Security breaches can create system disruptions and shutdowns that could result in disruptions to our operations. We cannot be certain that advances in criminal capabilities, new vulnerabilities or other developments will not compromise or breach the security solutions protecting our information technology, networks and systems. A failure of or cyber‐attack on our information systems technology or those of our partners, customers, vendors, or suppliers could adversely affect our ability to process orders, maintain proper levels of inventory, collect accounts receivable and pay expenses; all of which could have an adverse effect on our results of operations, financial condition and cash flows. Such serious harm can involve, among other things, misuse of our assets, business disruptions, loss of data, unauthorized access to trade secrets and confidential business information, unauthorized access to personal information, legal claims or proceedings, reporting errors, processing inefficiencies, negative media attention, reputational harm, loss of sales, remediation and increased insurance costs, and interference with regulatory compliance. We have experienced and expect to continue to experience some of these types of cybersecurity threats and incidents, which could be material in the future.

The procedures and controls we utilize to monitor and mitigate these threats may not be sufficient to prevent security threats from materializing. If any of these events were to materialize, the costs related to cyber or other security threats or disruptions may not be fully insured or indemnified and could have a material adverse effect on our reputation, operating results, and financial condition.

Moreover, expenditures incurred in implementing and maintaining cyber security and other procedures and controls could adversely affect our results of operations and financial condition.

We may need to make significant capital expenditures to keep pace with technological developments in our industry.

The industries in which we participate are constantly undergoing development and change, and it is likely that new products, equipment, and methods of repair and overhaul services will be introduced in the future. We may need to make significant expenditures to purchase new equipment and to train our employees to keep pace with any new technological developments. These expenditures could adversely affect our results of operations and financial condition.

Risk Related to Financial Matters

We may need to reduce the carrying value of our assets.

We own and distribute a significant amount of engines, aircraft parts and components, as well as own manufacturing facilities and joint venture investments. Recurring losses in certain operations could require us to evaluate the recoverability of the carrying value of the related assets and recognize an impairment charge through earnings to reduce the carrying value. During fiscal 2020, 2019, and 2018,2019, we recognized impairment charges of $11.8 million $74.1 million, and $54.2$74.1 million, respectively, related to our COCO business which is classified as a discontinued operation. In addition, if aircraft or engines for which we offer replacement parts or supply repair and overhaul services are retired and there are fewer aircraft that require these parts or services, our revenues may decline. We recognized impairment charges of $11.0 million in fiscal 2020 related to the exit of certain product lines across our operations.

We make a number of assumptions when determining the recoverability of our assets, including historical sales trends, current and expected usage trends, replacement values, current and expected lease rates, residual values, future demand, and future cash flows.  Differences between actual results and the assumptions utilized by us when determining the recoverability of our assets could result in impairment charges in future periods, which would adversely affect our results of operations and financial condition.

We have recorded goodwill and other intangible assets related to acquisitions. If we are unable to achieve the projected levels of operating results, it may be necessary to record an impairment charge to reduce the carrying value of goodwill and related intangible assets. During the third quarter of fiscal 2018, we recognized a goodwill impairment charge of $9.8 million related to our COCO business. Similarly, if we were to lose a key customer or if a regulator were to terminate any of our repair certificates at our airframe maintenance or landing gear facilities, we might be required to record an impairment charge if we were unable to operate.

We are dependent upon continued availability of financing to manage our business and to execute our business strategy, and additional financing may not be available on terms acceptable to us.

Our ability to manage our business and to execute our business strategy is dependent, in part, on the continued availability of debt and equity capital. Access to the debt and equity capital markets may be limited by various factors, including the condition of overall credit markets, general economic factors, state of the aviation industry, our financial performance, and credit ratings. Debt and equity capital may not continue to be available to us on favorable terms, or at all. Our inability to obtain financing on favorable terms could adversely affect our results of operations and financial condition.

In addition, our expected receipt of funding underfrom the Payroll Support Program under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act would requireAct”) requires us to comply with certain covenants. If we do not comply with these covenants, or if the government issues new guidance regarding existing covenants, the government may require us to repay the support given to us.

We currently are prohibited from paying dividends under the Payroll Support Program under the CARES Act and, in the future, may not be able to pay or maintain dividends, or we may choose not to pay dividends, and the failure to pay or maintain dividends may adversely affect our share price.price.

On March 17, 2020, our Board of Directors declared a regular quarterly dividend of $0.075 per share, or an aggregate of $2.6 million, which was paid on April 9, 2020 to holders of record on March 30, 2020.  This dividend may not be indicative of the amount of any future quarterly dividends.  Specifically, theThe Payroll Support Program under the CARES Act prohibits the Company from paying stock dividends to our stockholders through September 30, 2021, accordingly no dividend has been paid since April 2020 or will be paid by the Company prior to that time assuming the receiptSeptember 30 of funding.this year.

After the restrictions on paying the dividenddividends under the CARES Act lapse, our ability to pay, maintain or increase cash dividends to our stockholders is subject to the discretion of our Board of Directors and will depend on many factors, including: our ability to comply with financial covenants, the economic condition of the commercial aviation industry, the level and timing of capital expenditures, principal repayments and other capital needs, maintaining our credit ratings, our results of operations, financial condition and liquidity, and legal restrictions on the payment of dividends, including government imposed restrictions. In the future, we may choose to not pay dividends or may not be able to pay dividends, maintain our currenthistorical level of dividends, or increase them over time. The failure to maintain or pay dividends may adversely affect our share price.

Risks Related to COVID-19

The COVID-19 pandemic has had a material adverse impact on our business, results of operations, financial condition, and liquidity, and the duration and extent of the pandemic could prolong or increase the adverse impact.

In December 2019, an outbreak of COVID-19 originated in Wuhan, China, and in March 2020, the World Health Organization characterized COVID-19 as a pandemic. Many countries, including the United States, declared states of emergency and took steps to restrict air travel, and many companies adopted policies prohibiting non-essential business travel by their employees. Even in the absence of formal restrictions and prohibitions, contagious illness and fear of contagion has adversely affected travel demand and travel behavior. Passenger airline traffic declined significantly since March 2020, and the decrease has since had a material negative impact on our financial results.

With the roll-out of the COVID-19 vaccines, many countries have started to lift their states of emergency and restrictions on air travel.  With the easing of these restrictions, passenger airline traffic has started to pick-up in the United States, but business travel in particular remains well below pre-pandemic levels. In addition, we have seen and expect to continue to see reduced demand in our non-cargo commercial businesses in certain markets. In some cases, airlines have reduced their operating fleet of aircraft both in the U.S. and abroad which results in reduced demand for parts support and maintenance activities for the type of aircraft affected. Moreover, if the COVID-19 pandemic continues to result in decreased worldwide commercial activity, it could also adversely affect the demand for airline cargo services. Reduced numbers of aircraft flying or flight hours has and will continue to negatively impact the demand for our services, and any prolonged reduction could materially and adversely affect our business, operating results, financial condition, and liquidity.

While some of our employees were able to work remotely during spikes in COVID-19 cases, a significant number can only perform their job functions on site.  We have promulgated policies designed to provide for appropriate protections for employees in light of relevant government guidance. We evaluate and modify these policies as needed on an ongoing basis, but there remains the risk of disruption or reduced efficiency caused by social distancing and other protective measures as well as elevated employee absence because of illness or required quarantines.

In addition, we source parts and components for our business from various suppliers around the world. Disruptions to our supply chain and business operations, or to our suppliers’ or customers’ supply chains and business operations, could have adverse effects on our ability to provide aftermarket support and services. Moreover, a prolonged epidemic or pandemic, or the threat thereof, could result in worker absences, lower productivity, voluntary closure of our offices and facilities, travel restrictions for our employees and other disruptions to our business. These impacts have had and could continue to have a material adverse effect on our business, financial condition or results of operations.

We have taken a number of actions in response to decreased demand. In addition to reducing operating expenditures for fiscal 2021, we received financial assistance under the CARES Act. Certain of our subsidiaries received $57.2 million from the U.S. Treasury Department (“Treasury”) through the Payroll Support Program under the CARES Act. In connection with the financial assistance these subsidiaries received under the Payroll Support Program, we are required to comply with certain provisions of the CARES Act, including provisions prohibiting the repurchase of common stock and the payment of common stock dividends through September 30, 2021; and limitations on the payment of certain employee compensation through March 24, 2022. These restrictions have and may continue to materially affect our operations, and we may not be successful in managing these impacts for the duration of the restrictions. In particular, limitations on compensation may adversely impact our ability to attract and retain senior management or attract other key employees during this critical time.

Risks Related to Legal and Regulatory Matters

If we fail to comply with government procurement laws and regulations, we could lose business and be liable for various penalties or sanctions.

We must comply with laws and regulations relating to the formation, administration, and performance of government contracts. In the U.S., these laws and regulations include the Federal Acquisition Regulations, Defense Federal Acquisition Regulations, the Truth in Negotiations Act, Cost Accounting Standards, and laws, regulations, and orders restricting the use and dissemination of classified information under the U.S. export control laws and the export of certain products and technical information and safeguarding of contractor information systems.

In addition, we are subject to U.S. government inquiries and investigations, including periodic audits of costs that we determine are reimbursable under government contracts. U.S. government agencies routinely audit government contractors, including the Company, to review performance under contracts, cost structure and compliance with applicable laws, regulations, and standards, as well as the adequacy of and compliance with internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be misclassified or inaccurately allocated to a specific contract are not reimbursable, and to the extent already reimbursed, must be refunded. Also, any inadequacies in our systems and policies could result in payments being withheld, penalties and reduced future business.

U.S. government rules allow contracting officers to impose contractual withholdings at no less than certain minimum levels if a contracting officer determines that one or more of a contractor’s business systems have one or more significant deficiencies. If a contracting officer were to impose such a withholding on us or even one of our prime contractors, it would increase the risk that we would not be paid in full or paid timely. If future audit adjustments exceed our estimates, our profitability could be adversely affected.

If a government inquiry or investigation uncovers improper or illegal activities, we could be subject to civil or criminal penalties or administrative sanctions, including contract termination, fines, forfeiture of fees, suspension of payment and suspension or debarment from doing business with government agencies, any of which could materially adversely affect our reputation, business, financial condition and results of operations. See Note 15 of Notes to Consolidated Financial Statements for information about certain pending proceedings.

We are subject to significant government regulation and may need to incur significant expenses to comply with new or more stringent governmental regulation.

The aviation industry is highly regulated by the FAA in the United States and equivalent regulatory agencies in other countries. Before we sell any of our products that are to be installed in an aircraft, such as engines, engine parts and components, and airframe and accessory parts and components, they must meet certain standards of airworthiness established by the FAA or the equivalent regulatory agencies in certain other countries. We operate repair stations that are licensed by the FAA and the equivalent regulatory agencies in certain other countries, and hold certificates to operate aircraft. Specific regulations vary from country to country; although regulatory requirements in other countries are generally satisfied by compliance with FAA requirements. New and more stringent governmental regulations may be adopted in the future that, if enacted, may have an adverse impact on us.

If any of our material licenses, certificates, authorizations, or approvals were revoked or suspended by the FAA or equivalent regulatory agencies in other countries, our results of operations and financial condition may be adversely affected.

Our industry is susceptible to product and other liability claims, and claims not adequately covered by insurance may adversely affect our financial condition.

Our business exposes us to possible claims for property damage and bodily injury or death, which may result if an engine, engine part or component, airframe part or accessory, or any other aviation product that we have sold, manufactured, or repaired fails, or if an aircraft we operated, serviced, or in which our products are installed, has an accident. We carry substantial liability insurance in amounts that we believe are adequate for our risk exposure and commensurate with industry norms. However, claimsClaims may arise in the future, and our insurance coverage may not be adequate to protect us in all circumstances. Additionally, we might not be able to maintain adequate insurance coverage in the future at an acceptable cost. Any liability claim not covered by adequate insurance could adversely affect our results of operations and financial condition.

ITEM 3.LEGAL PROCEEDINGS

Note 15 of the Notes to our Consolidated Financial Statements for the year ended May 31, 20202021 contained in Item 8 of this Annual Report on Form 10-K includes information on legal proceedings that constitute material contingencies for financial reporting purposes that could have a material adverse effect on our consolidated financial position or liquidity if they were resolved in a manner that is adverse to us.  The information in Note 15 is incorporated by reference in this Item 3.

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 15 to our Consolidated Financial Statements for the year ended May 31, 20202021 contained in this Annual Report on Form 10-K.

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ITEM 4.MINE SAFETY DISCLOSURES

Not Applicable.

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Supplemental Item:

INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT

Information concerning each of our executive officers is set forth below:

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Mr. Holmes is Chief Executive Officer and President, having served in that capacity since June 2018.   From June 2017 to May 2018, Mr. Holmes served as President and Chief Operating Officer.  From February 2015 to June 2017, Mr. Holmes served as Chief Operating Officer – Aviation Services.  Prior to that, Mr. Holmes served as Group Vice President, Aviation Services – Inventory Management and Distribution from 2012 to 2015, General Manager and Division President of our Allen Asset Management business from 2003 to 2012, and in various other positions since joining the Company in September 2001.  Mr. Holmes has been a director of the Company since 2017.

Mr. Gillen is Vice President and Chief Financial Officer, having served in that capacity since January 2019.  Prior to joining AAR, Mr. Gillen was Vice President and Treasurer of USG Corporation since 2017.  Prior to USG, Mr. Gillen spent nine years in investment banking with Goldman Sachs, most recently as a Vice President in their Global Industrials Group.

Ms. Garascia is Vice President, General Counsel, Chief Compliance Officer and Secretary, having served in thatthe capacity of General Counsel and Secretary since February 2020.2020 and Chief Compliance Officer since May 2021.  Prior to joining the Company, from September 2013 through February 2020, Ms. Garascia served in positions of increasing responsibility for USG Corporation, most recently as Deputy General Counsel.  Prior to USG, Ms. Garascia was an attorney for the Museum of Science and Industry and the law firm of Jenner & Block.

Mr. Jessup is Vice President, Chief Commercial Officer, having served in that capacity since June 2017.  Mr. Jessup previously served as Chief Commercial Officer for the Company’s Aviation Services segment since February 2015, and prior to that, he served in various capacities within the Company’s Maintenance, Repair and Overhaul business. Prior to joining the Company in 2008, Mr. Jessup was Vice President, Sales and Marketing at Avborne Heavy Maintenance, Inc. in Miami, Florida.

Mr. Pachapa is Vice President, Controller and Chief Accounting Officer, having served in that capacity since July 2016.  Mr. Pachapa previously served as Controller since October 2015 and Senior Director of Accounting and Reporting since April 2014.  Prior to joining the Company, Mr. Pachapa was with Glanbia plc from 2011 to 2014, and with Ernst & Young LLP from 1996 to 2011.

Each executive officer is elected annually by the Board of Directors.  Executive officers continue to hold office until their successors are duly elected or until their death, resignation, termination or reassignment.

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The Company annually revisits the composition of the peer group to ensure that the Company's performance is measured against those of comparably-sized and situated companies. The mix of the Company's commercial and government/defense markets presents a challenge in constructing a peer group, given that many government/defense contractors have substantially greater resources than the Company.

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Dividends

The declaration and payment of cash dividends is at the discretion of our Board of Directors and will be dependent upon our future earnings, cash flows, financial condition, capital requirements and any government restrictions.  Specifically, the Payroll Support Program under the CARES Act would prohibitprohibits the Company from paying stock dividends through September 30, 2021, accordingly no dividend will be paid by the Company prior to that time assuming receipt of the funds.time.

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Notes:

We recognized pre-tax asset impairment charges related to our Contractor-Owned, Contractor-Operated (“COCO”) business of $11.8 million, $74.1 million, and $64.0 million in fiscal 2020, 2019, and 2018, respectively.

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To mitigate the impact of COVID-19, we implemented a number of actions since the onset of the COVID-19 pandemic to align our costs with the anticipated lower levels of demand.  These actions included facility consolidations, exiting or restructuring several underperforming contracts, and eliminating discretionary spending.  We succeeded in enhancing customer relationships with multiplealso implemented actions to reduce our fixed and variable cost base which will support improved operating efficiencies and margins as commercial and government customers.  demand recovers.

In addition to these actions, we have also taken steps to focus on our core aviation services offering by continuing the divestiture of non-core businesses.  Following the fiscal 2020 exit from our Contractor-Owned, Contractor-Operated (“COCO”) business, we were awarded a newcompleted the sale of our composites manufacturing business in early fiscal 2021.  All of these actions have simplified our portfolio and improved efficiency in our operations to position us to drive higher returns on capital.

As we continued to successfully execute on our recent government contract awards over the last few years, we achieved strong sales growth in fiscal 2021 with our government customers as sales increased $67.1 million or 8.6% over the prior year.  This growth was driven from recent contract awards such as the $118 million contract from the Naval Air Systems Command in support of the U.S. Marine Corps for the procurement, modification and delivery of two C-40 aircraft.  This award demonstrates the power of our integrated services model by combining the strengths of our parts supply, government programs, MRO, and engineering teams to deliver a creative solution to the U.S. Marine Corps.

We were also awarded new long-term contracts across our parts supply activities including multiple distribution agreements for new parts and our largest commercial agreement in Japan to date covering aftermarket engine components.  Our strategy to exit the capital-intensive Contractor-Owned, Contractor-Operated (“COCO”) business was also completed inDuring fiscal 2020 as all of its assets and contracts were sold.  

As we continued to successfully execute on our recent contract awards over the last few years, we achieved strong sales growth through the first nine months of fiscal 2020 and were on track for a record year.  Sales had increased $166.4 million or 11.2% over the prior year period primarily due to an increase in sales of $175.5 million or 12.5% in our Aviation Services segment reflecting the growth from new contract awards and successful execution across our Aviation Services activities.

Upon entering the fourth quarter in March, we began to see the impact of the COVID-19 pandemic on the commercial aviation industry.  In response to the impact from COVID-19, we implemented significant actions to reduce fixed costs and overhead which included a freeze on new hiring, reducing or eliminating all non-essential spend, reducing compensation and benefits, furloughs, a reduction in force, and closure of an airframe maintenance facility.  During the fourth quarter,2021, we also exited underperforming contracts and assets across ourmaintained a strong focus on working capital management with cash flows from operating activities from continuing operations and decided to exit our joint venture investment in a Malaysian landing gear wheel and brake facility.  Additionally, in June 2020, we decided to sell our composites manufacturing business which is consistent with our multi-year strategy to focus our portfolio on our core services offerings.

We have also taken actions to preserve flexibility in our liquidity.  Inof $108.5 million.  Borrowings outstanding under the fourth quarter, we elected to draw down our remaining available borrowings under our Revolving Credit Facility were $109.5 million at May 31, 2021 with an availability on the majorityfacility of that additional funding remaining in our cash accounts.  We elected to borrow these additional amounts as a precautionary measure in light of economic and market uncertainty presented by COVID-19.$471.3 million.

Over the long-term, we expect to see continued strength in our Aviation Services segment given its offerings of value-added services to both commercial and government and defense customers.  We believe long-term commercial aftermarket growth trends are favorable although there is uncertaintyfavorable.  As we continue to experience growth in certain fleet types asour government businesses and recovery in some commercial operators re-evaluate their structure.  Our results of operations are affected bymarkets, our long-term strategy continues to emphasize investing in the amount of commercial aircraft flyingbusiness and flight hours. The current COVID-19 pandemic has decreased the amount of commercial aircraft flying and flight hours and has created significant economic disruption.capitalizing on opportunities in those markets.

Results of Operations – Fiscal 20202021 Compared with Fiscal 20192020

Sales and gross profit for our two business segments for the two years ended May 31, 20202021 and 20192020 were as follows:

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Aviation Services Segment

Sales in the Aviation Services segment increased $43.6decreased $410.5 million or 2.3% over20.9% from the prior year.  Sales to government and defense customers increased $117.0$64.5 million or 20.2%9.3% primarily attributable to new contracts awarded recently including the $118 million contract for the procurement, modification and delivery of two C-40 aircraft we received in early fiscal 2020.

awarded.  During fiscal 2020,2021, sales in this segment to commercial customers decreased $73.4$475.0 million or 5.5%37.4% from the prior year.  We experienced an increaseThe decrease in sales to commercial customers was primarily attributable to the impact of 7.2% overCOVID-19 and the first nine months of the year primarily due to higherresultant decrease in commercial passenger air traffic which significantly reduced our volumes in our supply chain and MRO activities as our actions to attract and retain the necessary skilled labor allowed us to capture the customer demand for these services.  During the fourth quarter of fiscal 2020, the impact from COVID-19 significantly decreased our commercial sales across the majority of our operations.activities.

Changes in estimates and assumptions related to our programs accounted for using the cost-to-cost method are recorded using the cumulative catch-up method of accounting.  In fiscal 2020,2021, we recognized favorable and unfavorable cumulative catch-up adjustments of $16.1 million and $4.1 million, respectively, compared to favorable and unfavorable cumulative catch-up adjustments of $6.1 million and $2.2 million, respectively, compared to favorable and unfavorable cumulative catch-up adjustments of $8.0 million and $2.1 million, respectively, in fiscal 2019.2020.  When considering these adjustments on a net basis, we recognized favorable cumulative catch-up adjustments of $3.9$12.0 million and $5.9$3.9 million for fiscal 20202021 and 2019,2020, respectively.  These adjustments primarily relate to our long-term programs where we provide component inventory management and/or repair services.

Cost of sales in Aviation Services increased $89.9decreased $406.4 million or 5.6%23.9% from the prior year which was largely in line with the sales increasedecrease of 2.3%20.9% discussed above.  Gross profit in the Aviation Services segment decreased $46.3$4.1 million or 14.8%1.5% from the prior year.  Gross profit in this segment on sales to commercial customers decreased $47.7$11.8 million or 24.4%8.0% from the prior year primarily drivendue to the COVID-19 impact discussed above.  The impact of COVID-19 on our gross profit on sales to commercial customers was partially mitigated by a net benefit of $53.8 million in government workforce subsidies from the Payroll Support Program in the CARES Act and other subsidies provided by foreign governments.

Gross profit on sales to commercial customers was also impacted in fiscal 2021 from asset impairment charges of $8.4 million.  In fiscal 2020, gross profit on sales to commercial customers was impacted by contract termination and restructuring charges of $31.3 million across certain power-by-the-hour contracts, in fiscal 2020.  The charges included a reduction in revenue of $17.3 million, the establishment of forward loss reserves of $5.4 million, and other related charges of $8.6 million.  During fiscal 2020, we also recognized impairment charges of $6.9 million related to the exit of certain product lines across our operations and $4.3 million related to the closure of our Duluth airframe maintenance facility.

The gross profit margin on sales to commercial customers wasincreased to 17.2% from 11.7% compared to 14.6% in the prior year with the decreasedincreased margin largely attributable to contract termination, restructuring, and impairment charges discussed above.the net benefit from the government workforce subsidies.

Gross profit on sales to government and defense customers increased $1.4$7.7 million or 1.2%6.5% over the prior year. Gross profit margin on sales to government and defense customers decreased to 17.2%16.7% from 20.4%17.2% as the gross profit margin on our recent contract awards is lower than our existing government and defense activity.

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Expeditionary Services Segment

Sales in the Expeditionary Services segment decreased $23.4$9.2 million or 17.8%8.5% from the prior year primarily due to delays in contract awards forthe divestiture of our mobility products.  composites manufacturing business.

Gross profit in the Expeditionary Services segment decreased $14.3increased $10.8 million or 88.3% from568.4% over the prior year and grossdue to the divestiture of our composites manufacturing business as it was not profitable in the prior year period.  Gross profit margin decreasedincreased to 12.9% from 1.8% from 12.3% bothin the prior year primarily as a result of restructuringsuch divestiture.

Provision for Doubtful Accounts

Provision for doubtful accounts increased $3.1 million from the prior year primarily related to increased customer credit charges in fiscal 2021.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $38.2 million from the prior year due to our actions to reduce both our fixed and lower sales volumes.  During fiscal 2020, we consolidated our mobility products operations into one core facility and exited certain product lines as partvariable cost structure in light of the consolidation.  We recognized chargesreduced commercial volumes resulting from the COVID-19 pandemic.  As a percent of $2.8 million relatedsales, selling, general and administrative expenses increased to facility closure costs and impairment charges.11.0% in fiscal 2021 from 10.6% in fiscal 2020.  This increase is

Provision for Doubtful Accounts

Provision for doubtful accounts decreased $10.4 millionprimarily attributable to the significant decrease in commercial sales more than offsetting the favorable impact from the prior year primarily related to fewer bankruptcy charges in fiscal 2020.  In the second quarter of fiscal 2019, we recognized a provision for doubtful accounts of $12.4 million related to the bankruptcy of a European airline customer.  The provision included impairment of non-current contract assets of $7.6 million, allowance for doubtful accounts of $3.3 million, and other liabilities of $1.5 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $5.2 million over the prior year.  As a percent of sales, selling, general and administrative expenses remained relatively flat at 10.6% in fiscal 2020 compared to 10.5% in the prior year.cost reduction actions.

Interest Expense

Interest expense decreased $0.2$4.3 million in fiscal 2020 as2021 reflecting the impact of higher average borrowings was more than offset byboth lower average borrowing rates and average borrowings on our Revolving Credit Facility.Facility during fiscal 2021.  

Income Taxes

Our fiscal 20202021 effective income tax rate for continuing operations was 18.4%28.2% compared to 5.5%18.4% in the prior year.  In fiscal 2019,2021, we recognized additional tax expense of $0.7 million for stock compensation while we recognized favorable excess tax benefits of $5.1$2.1 million related to the reversal of certain state valuation allowances based on the recoverability of the net operating losses and other state deferred tax assets.  The effective income tax rate forstock compensation in fiscal 2019 also includes a benefit of $4.7 million related to the recognition of previously unrecognized uncertain tax positions and a tax benefit of $1.8 million related to tax provision to federal income tax return filing differences.2020.

Discontinued Operations

During the third quarter of fiscal 2018, we decided to pursue the sale of our COCO business previously included in our Expeditionary Services segment.  Due to this strategic shift, the assets, liabilities, and results of operations of our COCO business were reported as discontinued operations for all periods presented.  

Loss from discontinued operations was $20.4$10.5 million in fiscal 20202021 compared to $76.6$20.4 million in the prior year.  The reducedfiscal 2021 loss of $56.2 million was primarily dueattributable to lower pre-taxan $11.0 million increase in our legal reserve to reflect the agreement with the U.S. Department of Justice to settle their investigation of our COCO business under the federal civil False Claims Act.  The prior period loss includes both operating losses incurred by our COCO business prior to the sale of its last operating contract in the fourth quarter of fiscal 2020 and impairment charges of $11.8 million in fiscal 2020 as compared to $74.1 million in fiscal 2019.million.

Liquidity, Capital Resources and Financial Position

Our operating activities are funded and commitments met through the generation of cash from operations.  In addition to operations, our current capital resources include an unsecured Revolving Credit Facility 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.  Our ability to generate cash from operations is influenced primarily by our operating performance and changes in working capital.

We maintain a Revolving Credit Facility with various financial institutions, as lenders, and Bank of America, N.A., as administrative agent for the lenders.  On September 25, 2019, we entered intolenders, which provides the Company an amendment to our Revolving Credit Facility which extended the maturity of the Revolving Credit Facility to September 25, 2024, increased theaggregate revolving credit commitment by $100 million toof $600 million and modified certain other provisions.that matures September 25, 2024.  Under certain circumstances, we have the ability to request, but our lenders are not required to grant, an increase to the revolving credit commitment by an aggregate amount of up to $300 million.  million, not to exceed $900 million in total.

Dollar Offer Rate plus 125 to 225 basis points based on certain financial measurements if a Bankers’ Acceptances loan, or at the offered fluctuating Prime Rate plus 25 to 125 basis points based on certain financial measurements, if a Prime Rate loan.

On February 23, 2018, we entered intoThe term loan under the Credit Agreement is due in full at the expiration of the Credit Agreement on November 1, 2021. We intend to retire this loan at maturity using proceeds from our Revolving Credit Facility.

We maintain a Purchase Agreement with Citibank N.A. (“Purchaser”) for the sale, from time to time, of certain accounts receivable due from certain customers (the “Purchase Agreement”).  Under the Purchase Agreement, the maximum amount of receivables sold is limited to $150 million and Purchaser may, but is not required to, purchase the eligible receivables we offer to sell.  The term of the Purchase Agreement runs through February 22, 2021,2022, however, the Purchase Agreement may also be terminated earlier under certain circumstances.  The term of the Purchase Agreement shall be automatically extended for annual terms unless either party provides advance notice that they do not intend to extend the term.

We have 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.

Receivables sold under the Purchase Agreement during fiscal 2021, 2020, and 2019 and 2018 were $440.6 million, $746.4 million, and $744.2 million, and $239.6, respectively.  Amounts remitted to the Purchaser on their behalf during fiscal 2021, 2020, and 2019 and 2018 were $476.3 million, $758.3 million, and $729.7 million, and $167.9, respectively.  As of May 31, 20202021 and May 31, 2019,2020, we had collected cash of $20.0$8.4 million and $19.8$20.0 million, respectively, which was not yet remitted to the Purchaser as of those dates and was classified as Restricted cash on our Consolidated Balance Sheets.

At May 31, 2020,2021, we complied with all financial and other covenants under each of our financing arrangements.

Cash Flows – Fiscal 20202021 Compared with Fiscal 20192020

Cash Flows from Operating Activities

Net cash used inprovided from operating activities–continuing operations was $108.5 million in fiscal 2021 compared to cash used of $19.1 million in fiscal 2020 compared to cash provided2020.  The increase from the prior period of $60.5 million in fiscal 2019.  The decrease of $79.6$127.6 million was primarily attributable to a reduction in inventory levels and the proceeds of a $48.5 million grant from the Payroll Support Program of the CARES Act.  These items were partially offset by a $25 million license fee paid to Unison Industries for our expanded and extended exclusive distribution agreement and the timing of our cash receipts and disbursements on long-term programs.

As of May 31, 2020,2021, we had three reporting units, which included two in our Aviation Services segment (Aviation Supply Chain and Maintenance, Repair, and Overhaul) and one comprised of our Expeditionary Services segment.  In fiscal 20192021 and 2018,2019, we utilized the qualitative assessment approach for all reporting units.  Under this approach, we considered the overall industry and market conditions related to the aerospace and government/defense markets as well as conditions in the global capital markets.  We also considered the long-term forecasts for each reporting unit, which incorporated specific opportunities and risks, working capital requirements, and capital expenditure needs.  We concluded it was more likely than not that the fair value of each reporting unit exceeded its carrying value at the respective measurement dates, and thus no impairment charges were recorded in those fiscal years.  

In fiscal 2020, we elected to skipforego the qualitative assessment due to the unprecedented impact of COVID-19 and utilized a quantitative assessment approach for all reporting units.  We estimated the fair value of each reporting unit using primarily an income approach based on discounted cash flows.  The assumptions we used to estimate the fair value of our reporting units are based on historical performance, as well as forecasts used in our current business plan, and requirerequired considerable management judgment in light of the impact of COVID-19.  All three of ourOur Aviation Services reporting units have beenwere impacted by the reduced numbers of commercial aircraft flying and the overall decline in flight hours.  We have incorporated athe decline in demand from commercial airline customers for our next fiscal year followed by a multiple year recovery as passenger miles and flight hours progressively increase.

We used discount rates based on our consolidated weighted average cost of capital which iswas adjusted for each of our reporting units based on their specific risk, size, and industry characteristics.  The fair value measurements used for our goodwill impairment testing useused significant unobservable inputs, which reflectreflected our own assumptions about the inputs that market participants would use in measuring fair value.  The fair value of our reporting units is also impacted by our overall market capitalization and may be impacted by volatility in our stock price and assumed control premium, among other items.

Upon completion of the annual quantitative goodwill impairment analysis as of May 31, 2020 for our reporting units, we concluded the fair value of each reporting unit exceeded its carrying values, and thus no impairment charges were recorded.

We also evaluate the sensitivity of the discounted cash flow valuations by assessing the impact of changes in certain assumptions on the estimated fair value of each reporting unit by increasing the discount rates and/or adjusting our business plan assumptions including slower recovery of sales from COVID-19 and reduced profitability.  All of our reporting units would have had fair values substantially in excess of their carrying values under all our sensitivity scenarios.

our contract with the customer is considered one performance obligation as it includes factors such as whether the good or service being provided is significantly integrated with other promises in the contract, whether the service provided significantly modifies or customizes another good or service or whether the good or service is highly interdependent or interrelated.  If the contract has more than one performance obligation, we determine the standalone price of each distinct good or service underlying each performance obligation and allocate the transaction price based on their relative standalone selling prices.

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

Our performance obligations are satisfied over time as work progresses or at a point in time based on transfer of control of products and services to our customers.  The majority of our sales from products 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 include future labor costs and efficiencies, overhead costs, and ultimate timing of product delivery.  Differences may occur between the judgments and estimates made by management and actual program results.

Changes in estimates and assumptions related to our arrangements accounted for using the cost-to-cost method are recorded using the cumulative catch-up method of accounting.  These changes are primarily adjustments to the estimated profitability for our long-term programs where we provide component inventory management and/or repair services.

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.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts to reflect the expected uncollectibility of accounts receivable based on past collection history and specific risks identified among uncollected accounts.  In determining the required allowance, we consider factors such as general and industry-specific economic conditions, customer credit history, and our customers’ current and expected future financial performance.  The majority of our customers are recurring customers with an established payment history.  Certain customers are required to undergo an extensive credit check prior to delivery of products or services.

We perform regular evaluations of customer payment experience, current financial condition, and risk analysis.  We may require collateral in the form of security interests in assets, letters of credit, and/or obligation guarantees from financial institutions for transactions executed on other than normal trade terms.  We also maintain trade credit insurance for certain customers to provide coverage, up to a certain limit, in the event of insolvency of some customers.

In fiscal 2019, we recognized a provision for doubtful accounts of $12.4 million related to the bankruptcy of a European airline customer. The provision consisted of impairment of non-current contract assets of $7.6 million, allowance for doubtful accounts of $3.3 million, and other liabilities of $1.5 million.

In addition, we currently have past due accounts receivable owed by former commercial program customers primarily related to our exit from customer contracts in certain geographies, including Colombia, Peru, and Poland.Spain.  Our past due accounts receivable owed by these customers was $10.9$4.7 million as of May 31, 20202021 which was net of allowance for doubtful accounts of $9.3$8.8 million.

Impairment of Long-Lived Assets

We are required to test for impairment of long-lived assets whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable from its undiscounted cash flows.  When applying accounting standards addressing impairment of long-lived assets, we have utilized certain assumptions to estimate future undiscounted cash flows, including current and future sales volumes or lease rates, expected changes to cost structures, lease terms, residual values, market conditions, and trends impacting future demand.  Differences between actual results and the assumptions utilized by us when determining undiscounted cash flows could result in future impairments of long-lived assets.  We recognized pre-tax asset impairment charges related to our COCO business of $11.8 million $74.1 million, and $64.0$74.1 million in fiscal 2020 2019, and 2018,2019, respectively, related to assets included in our COCO business, which is classified as a discontinued operation.

500 Moody’s Aa-rated, non-callable (or callable with make-whole provisions) bonds by eliminating the top 10^th percentile and the bottom 40^th percentile to adjust for any pricing anomalies and to represent the bonds we would most likely select if we were to actually annuitize our pension plan liabilities.  This portfolio of bonds was used to generate a yield curve and associated spot rate curve to discount the projected benefit payments for the domestic plans.  The discount rate is the single level rate that produces the same result as the spot rate curve.

We establish the long-term asset return assumption based on a review of historical compound average asset returns, both company-specific and relating to the broad market, as well as analysis of current market and economic information and future expectations.  The current asset return assumption is supported by historical market experience for both our actual and target asset allocation.  In calculating the net pension cost, the expected return on assets is applied to a calculated value on plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over five years.  The difference between this expected return and the actual return on plan assets is a component of the total net unrecognized gain or loss and is subject to amortization in the future.

New Accounting Pronouncements Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASC 842”), which amended the existing accounting standards for lease accounting.  ASC 842 requires lessees to recognize a right-of-use (“ROU”) asset and lease liability on the balance sheet for most lease arrangements, including those classified as operating leases.  In addition, ASC 842 requires new qualitative and quantitative disclosures about our leasing activities.  

We adopted ASC 842 on June 1, 2019 using the modified retrospective transition approach.  Under that approach, prior periods have not been restated and continue to be reported under the accounting standards in effect for those periods.  A discussion of our revised accounting policy for leases is included in Note 11 of Notes to Consolidated Financial Statements.

We have elected the package of practical expedients, which must be elected as a package and applied consistently to all leases.  This package permits us to not reassess our prior conclusions about lease identification, lease classification and initial direct costs. In addition, we have elected the practical expedients to not separate lease and non-lease components for both lessee and lessor relationships and to not apply the recognition requirements to leases with terms of less than twelve months.

Upon adoption of ASC 842 on June 1, 2019, we recognized operating lease ROU assets of $123.2 million and operating lease liabilities of $116.8 million on our Consolidated Balance Sheet.  These amounts included operating lease ROU assets of $26.6 million and operating lease liabilities of $25.3 million related to our discontinued operations.  In addition, we recognized the remaining unamortized deferred gains of $2.5 million, net of tax, associated with sale-leaseback transactions as a cumulative effect adjustment to the opening balance of retained earnings as of June 1, 2019.  

The adoption of ASC 842 did not have a material impact on the Consolidated Statements of Operations or Cash Flows.