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 2022 began withIn fiscal 2023, we established new partnerships, expanded our focus centered on continuingservice offerings, and enhanced our approach to navigatesafety to best serve our customers across the unprecedented declineworld. The global recovery in commercial passenger flight hours. We maintainedair travel drove an increased demand for our strategy of leveragingservices, enabling us to achieve strong results across our portfolio, particularly in used serviceable material and new parts distribution. Our actions to reduce costs and improve operating efficiency gains, optimized portfolio and strong balance sheet to drive growth and margin expansion through the recoverywere reflected in our commercial markets from the impact of COVID-19. improved profitability during fiscal 2023.

Our sales to commercial customers in fiscal 20222023 increased by $277.4$245.0 million, or 34.4%22.6%, over the prior year reflecting the recovery in commercial air travel following the height of the impact of COVID-19 as well as growth from recently awarded new parts distribution contracts. Our sales to government customers in fiscal 2023 decreased by $74.5 million, or 10.1%, from the prior year as we were successful in driving sales growth through the uneven recovery from COVID-19.completed certain government programs, including our Afghanistan contracts.

We were also successful in winning new long-term agreements in both our commercial and government markets. We were awarded ana significant expansion of our exclusive distribution agreement with Collins Aerospace’s Goodrich De-Icing & Specialty Heating Systems business. Under the agreement, we provide airlines, business jetUnison Industries which broadens our distribution of select Unison ignitor plugs, ignition leads, harnesses, and other aircraft operators as well as maintenance, repair and overhaul (“MRO”) facilities globally with de-icers and supporting products.related spare parts. We also were awarded a five-year renewal ofextended our power-by-the-hour component pooldistribution relationship with Leach International Corp to supply electromechanical and repair support program for flydubai’s fleet of 33 Boeing 737NG aircraft.

Our salessolid-state switch gears to government customers in fiscal 2022 decreased by $109.7 million, or 13.0%, from the prior year as we were impacted by the U.S. exit from Afghanistan in fiscal 2022 and certainelectronics end-market. In our commercial programs coming to a natural completion. The operations related to our activities, in Afghanistan contributed revenue of $67 million and $43 million in fiscal 2021 and fiscal 2022, respectively. During fiscal 2022, we were awarded a firm fixedmulti-year, flight-hour component support contract with flydubai for their growing Boeing 737 MAX fleet.

In our government market, we were awarded a firm-fixed price indefinite delivery/indefinite quantity contract from the U.S. Air Force to produce Next Generation All Aluminum Cargo Pallets with a total contract value, including option periods, of $173.5 million. We were also awarded a contract from the Norwegian Defence Logistics Organisation to provide commercial common parts for the Royal Norwegian Air Force P-8A fleet.

During the fourth quarter of fiscal 2023, we acquired Trax USA Corp. (“Trax”), a leading independent provider of aircraft MRO and fleet management software which was founded in 1999. The acquisition price was $120 million in cash, plus up to a $20 million earn-out payment based on adjusted revenue in calendar year 2023 and 2024. Trax offers critical software applications to a diverse global customer base of airlines and MROs supporting approximately 5,000 aircraft. Trax’s comprehensive solutions support United States Air Forces in Europe (“USAFE”) F-16 aircraft. This $365 million, ten-year contractthe entire spectrum of maintenance activities and create the system of record required by airlines and MROs. The Trax acquisition adds established, higher-margin aviation aftermarket software offerings with recurring revenue to our portfolio and provides for F-16 depot work as well as Service Life Extension Program modificationsopportunities to cross-sell products and maintenance.services.

During fiscal 2022,2023, we continued our strong focus on working capital management with cash flows from operating activities from continuing operations of $89.8 million.$23.8 million which included significant investments in inventory, rotable assets, and licensing arrangements to support further growth. Borrowings outstanding under the Revolving Credit Facility were $100.0$272.0 million at May 31, 20222023 with an availability on the facility of $488.6$336.9 million.

Our long-term strategy also emphasizes the return of capital to shareholders. In December 2021, our Board of Directors authorized a renewal of our stock repurchase program. The authorization has no expiration date and permits the Company to repurchase up to $150 million of our common stock. We were able to return capital to shareholders through common stock repurchases of $42.4 million during fiscal 2022 and expect to fully utilize the authorization by the end of calendar 2023.

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

Business Segments

Aviation Services

The Aviation Services segment provides aftermarket support and services for the commercial aviation and government and defense markets and accounted for approximately 95% of our sales in fiscal 2023, 2022, 2021, and 2020.2021. In this segment, we also provide inventory management and distribution services, MROmaintenance, repair, and overhaul (“MRO”) services, and engineering services. Business activities in this segment are primarily conducted through AAR Supply Chain, Inc.; AAR Government Services, Inc.; AAR Aircraft & Engine Sales & Leasing, Inc.; AAR Aircraft Services, Inc.; AAR Allen Services, Inc.; AAR Landing Gear LLC; AAR Airlift Group,International, Inc.; Trax USA CORP.; and AAR International,Airlift Group, Inc.

We sell and lease a wide variety of new, overhauled and repaired engine and airframe parts and components and aircraft to our commercial aviation and government/defense customers.

To support activities within the Aviation Services segment, we acquire aviation parts and components from domestic and foreign airlines, independent aviation service companies, aircraft leasing companies, and OEMs. We have ongoing arrangements with OEMs that provide us access to parts, repair manuals, and service bulletins in support of parts manufactured by them. Although the terms of each arrangement vary, they typically are made on standard OEM terms as to duration, price, and delivery. From time to time, we purchase airframes and engines for resale or disassembly into individual parts and components. Airframes and engines may also be leased to airlines by us or through joint ventures on a short-term basis prior to disassembly or sale.

Expeditionary Services

The Expeditionary Services segment primarily consists of products and services supporting the movement of equipment and personnel by the U.S. and foreign governments and non-governmental organizations. The Expeditionary Services segment accounted for approximately 5% of our sales in fiscal 2023, 2022, 2021, and 2020.2021. Business activities in this segment are primarily conducted through AAR Manufacturing, Inc. and Brown International Corporation.

Raw Materials and Procurement of Repair and Other Services

Although we generated approximately 60% of our fiscal 20222023 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.

Historically, we have not been significantly impacted by inflation. Increases in raw material costs, freight, or other costs have generally been offset through efficiencies or price increases. A portion of our contracts contain terms and conditions that enable us to pass inflationary price increases to our customers. In those cases whereby inflationary increases are not contractually stipulated, we attempt to actively negotiate price increases. We have consistently implemented actions to deliver efficiencies and cost savings. While the historical benefits of these efforts have generally offset the margin impact of competitive pricing conditions in the markets that we serve, there are no assurances that higher prices can effectively be passed through to our customers or that we will be able to fully offset the effects of higher costs through price increases on a timely basis.

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 of aviation products and services to our commercial airline customers are generally affected by such factors as the number, type and average age of aircraft in service, the levels of aircraft utilization (e.g., frequency of schedules, flying hours, and take-off and landing cycles), the number of airline operators, the general economy, and the level of sales of new and used aircraft. Sales to the DoD and other government agencies are subject to a number of factors, including the level of troop deployment worldwide, government funding, competitive bidding, and requirements generated by worldwide geopolitical events.

For example, the U.S. Government decided to withdraw its U.S. Department of State personnel presence in Afghanistan during calendar year 2021. In conjunction with the U.S. exit from Afghanistan, we concluded our activities in country under our INL/A WASS and U.S. Department of Defense contracts.contracts in fiscal 2022. The operations related to our activities in Afghanistan contributed revenue of $67 million in fiscal 2021.

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 nine FAA certificated repair stations in the United States, Canada, and Europe. Of the nine 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. All of the certificated repair stations are in the Aviation Services segment. We believe that we possess all licenses and certifications that are material to the conduct of our business.

We also have a 40% ownership interest in a joint venture in Nagpur, India which operates an airframe maintenance facility as a Directorate General of Civil Aviation (“DGCA”) certificated repair station for heavy maintenance on Airbus A320 aircraft.

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.

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 setprovide the foundation for our ability to achieve our strategic objectives. In particular, the employees in our MRO facilities, sales, and quality assurance departmentsThey 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 depends 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 vision to be the place of choice for people to build an inspiring career. Our people are at the center of our business. We care about the experience they have with us and the impact we collectively have in our community.

Our human capital management strategy is centered on a purposeful culture, proactive career development and an inspiring employee experience. We believe this strategy is important because it helps us ensure workforce engagement, retention and productivity, which sets a foundation for strong business growth. Our human capital strategy includes the components below:noted below.

We are excited that Tracey Patterson has joined AAR as our Chief HR Officer leading our people strategy globally. Tom Hoferer has also joined as our Senior Vice President and General Manager to lead our Repair & Engineering segment where a large percentage of our workforce resides.

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. Our Board of Directors maintains an Aviation Safety and Training Committee which oversees safety and training matters as well as our culture of safety compliance. 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.

We launched a corporatewide Safety and Management System (“SMS”), making us the first independent third-party MRO organization to implement this FAA recognized program. Our corporate SMS provides a single platform for all employees to proactively identify and report hazards, perform risk analysis, mitigate risks and share best practices.

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 stockholders. 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/dental 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.

We are continually seeking out new ways to broaden our exposure to underrepresented groups in the aviation industry and to do our part to develop talent globally. AAR’s Fellowship Program provides recipients tuition assistance and the opportunity to work at one of our MRO facilities while completing their Airframe and Powerplant program at a diversepartner college. After graduation, fellows in good standing are guaranteed employment with us. Due to the success of this program, we have expanded our Fellowship program in calendar 2023 to include two Indianapolis, Indiana colleges.

Talent Development

Our continued success depends on a workforce of skilled talent. Attracting people to join us and retaining that workforce requires collaboration across industry, education, and government to develop pathways for future talent. We are proud to lead the way. Our custom-built Eagle Career Pathway program is helping us build the next generation labor force, hire from untapped talent pipeline.  Our ERGspools and enable easy transition from military service. We are also proud to partner with Choose Aerospace, a 501(c)(3) nonprofit, to create a general aviation curriculum based on FAA standards. Following a successful pilot program, the curriculum officially launched across six states.

Internally, our global talent development model aligns with our desire to support thea talented and high performing workforce throughout our organization. Annual talent reviews are conducted to provide meaningful and timely feedback, identify career aspirations and opportunities to grow future focused skills. The development of diverseour talent internallyis ongoing through Individual Development Plans, assessments, learning and promote the acquisitiondevelopment classes, mentorship programs, and cohort style leadership development programs. We seek to foster a spirit of talent externally.continuous learning and our workforce has responded with a total of 19,000 hours of professional development since 2019 including 5,000 hours in fiscal 2023.

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 1516 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 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.

Information about our Executive Officers

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

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Mr. Holmes is Chairman, President and Chief Executive Officer, and President, having served in that capacity since January 2023. Prior to that he served as President and Chief Executive Officer 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 Senior 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.

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 ableour inability to fully collect outstanding accounts receivable, which was recently seen over the past two yearswe experienced during the height of the COVID-19 pandemic.pandemic in 2020 and 2021. 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.

In addition, an increase in energy costs and the price of fuel to the airlines could result in additional pressure on the operating costs of airlines, who comprise our largest customers. The market for jet fuel is inherently volatile and is subject to, among other things, changes in government policy on jet fuel production, fluctuations in the global supply of crude oil and disruptions in oil production or delivery caused by hostility in oil-producing areas. Airlines are sometimes unable to pass on increases in fuel prices to customers by increasing fares due to the competitive nature of the airline industry, and this compounds the pressure on operating costs, and in turn, airlines’ ability to do business with us. In addition, our business depends on maintaining a sufficient supply of various products to meet our customers’ demands. If we were to lose a key supplier, or were unable to obtain the same levels of deliveries from these suppliers and were unable to supplement those purchases with products obtained from other suppliers, it could have a material adverse effect on our business. Additionally, our key suppliers could also increase the pricing of their products, which would negatively affect our operating results if we were not able to pass these price increases through to our customers.

Reduced numbers of aircraft flying or flight hours negatively impacts the demand for our aftermarket parts support and maintenance services, and any prolonged reduction in the future could materially and adversely affect our business, operating results, financial condition, and liquidity.

From the COVID-19 pandemic, some businesses have expanded remote working opportunities and continued to restrict non-essential travel for their employees, which has kept demand for business air travel below pre-pandemic levels. Consumer behavior related to traveling may continue to be negatively impacted by adverse changes in business travel patterns or adverse changes in the perceived or actual economic climate, including declines in income levels and/or loss of wealth resulting from the impact from economic conditions.

We are unable to predict the extent to which disease outbreaks or other public health threats that may arise in the future may change air travel, which could have a material impact on our business. The degree to which any future disease outbreaks or public health threats may impact our business, results of operations, financial condition, and liquidity is uncertain and will depend on future developments.

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 $620.0$577.0 million (34.1%(29.0% of consolidated sales) in fiscal 20222023 (See Note 1516 of Notes to Consolidated Financial Statements). The majority of our U.S. government sales is for products and services supporting DoD aircraft sustainment 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 and personnel deployment worldwide, competitive bidding, U.S. government funding, requirements generated by world events, and budgetary constraints. For example, in conjunction with the U.S. exit from Afghanistan in fiscal 2022, we concluded our activities in country under our WASSDoS and U.S. Department of DefenseDoD contracts.

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.

inefficiencies and differences between assumptions used by us to price a contract and actual results. Increased costs may result in cost overruns and losses on such contracts, which could adversely affect our results of operations and financial condition.

We recognize revenue on our long-term contracts primarily over time as there is continuous transfer of control to the customer over the duration of the contract as the services are delivered, which generally requires estimates of total costs at completion, fees earned on the contract, or both. This estimation process is complex and involves significant judgment related to assumptions on flight hours, component repair costs, labor hours and rates, and contract penalties and incentives. Adjustments to estimates are often required as work progresses, experience is gained and additional information becomes known, even though the scope of the work required under the contract may not change. Any adjustment as a result of a change in estimateestimates is recognized as events become known. Changes in the underlying assumptions, circumstances or estimates could result in adjustments that may adversely affect our future financial results.

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.

Success at our airframe maintenance facilities is dependent upon continued outsourcing by the airlines.airlines and our ability to maintain our operational footprint.

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 our inability to extend our leases on commercial reasonable terms, 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.

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.

Our government customers, including the DoD and DoS, may turn to commercial contractors, rather than traditional defense contractors, for certain work, or may utilize set asides such as small business, women-owned, or minority-owned contractors or determine to source work internally rather than use us. We are also impacted by bid protests from unsuccessful bidders on new program awards and task orders. Bid protests could result in significant expense for us, contract modifications, or the award decision being overturned and loss of the contract award. Even where a bid protest does not result in the loss of an award, the resolution can extend the time until the contract activity can begin, and delay earnings. These competitive pressures, with potential impacts on both our commercial and government business, could adversely affect our results of operations and financial condition.

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:

Acquisitions expose us to risks, including the risk that we may be unable to effectively integrate acquired businesses.

We have completed acquisitions in the past and we have discussions with third parties regarding acquisitions on a regular basis. Acquisitions involve risks, including difficulties in integrating the operations and personnel, the effects of amortization of any acquired intangible assets and the potential impairment of goodwill, and the potential loss of key employees of the acquired business. In addition, acquisitions often require substantial management resources and have the potential to divert our attention from our existing business. For any businesses we may acquire in the future, we may not be able to execute our operational, financial, or integration plans for the acquired businesses, which could adversely affect our results of operations and financial condition.

We may not realize the anticipated benefits of the Trax acquisition, and may face difficulties integrating Trax’s operations.

We expect the acquisition of Trax, as a provider of comprehensive MRO and airline fleet management software, to expand our proprietary technology and digital portfolio and accelerate our strategy to offer digital solutions to our customers. However, we may not realize the anticipated benefits of the Trax acquisition or our digital solutions strategy, including any synergies, cross-selling opportunities, cost savings or growth opportunities. These benefits may not be achieved within the anticipated time frame, or at all. Further, we may not be able to execute our integration plans for Trax and may face diversion of management attention from our existing business, unanticipated costs and risks associated with expanding further into the digital solutions market. Failing to realize the anticipated benefits and difficulties integrating Trax could have a material adverse effect on business, operating results and financial condition.

Market values for our aviation products fluctuate and we may be unable to recover our costs incurred on engines, rotable components and other aircraft parts.

We make a number of assumptions when determining the recoverability of rotable components, engines, and other assets which are on lease, available for lease, or supporting our long-term programs. These assumptions include historical sales trends, current and expected usage trends, replacement values, current and expected lease rates, residual values, future demand, and future cash flows. Reductions in demand for these assets or declining market values, as well as differences between actual results and the assumptions utilized by us when determining the recoverability of our aircraft, engines, and other assets, could result in impairment charges in future periods, which would adversely affect our results of operations and financial condition.

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.

RiskRisks 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, we recognized impairment charges of $11.8 million related to our COCO business which is classified as a discontinued operation. In addition, we recognized impairment charges over the last three years of $2.6 million related to our Malaysian joint venture. 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 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.acquisitions, including $122.3 million associated with our acquisition of Trax in fiscal 2023. 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. 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 make any further repurchases will depend on many factors, including but not limited to our business and financial performance, the business and market conditions at the time, including the price of our shares, and other factors that management considers relevant. Additionally, we expect to fund repurchases under our stock repurchase program through cash on hand, which may impact our ability to pursue potential strategic opportunities. Although our stock repurchase program is intended to enhance long-term stockholder value, short-term stock price fluctuations could reduce the program’s effectiveness and there can be no assurance that any stock repurchases will enhance stockholder value.

Our credit agreement prohibits payment of a dividend or repurchase of our stock if a default exists under the agreement. In addition, we have not declared a dividend on our common stock since 2020, and there can be no assurance that we will do so in the foreseeable future. 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 strategy and any future government restrictions. If we do not pay dividends or continue to execute on our stock repurchase program, investors will have to rely on the possibility of stock appreciation and sell their shares to realize a return on their investment.

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, interest rates, 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.

LIBOR, the London interbank offered rate, is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. Interest rates under our Revolving Credit Facility (as defined below) are based partly on LIBOR. On March 5, 2021, the UK Financial Conduct Authority, which regulates LIBOR, announced that it would cease publication of all tenors of LIBOR immediately after June 30, 2023. Additionally, the Federal Reserve Board has advised banks to stop entering into new U.S. dollar LIBOR based contracts.  The U.S. Federal Reserve has begun publishing a Secured Overnight Funding Rate which is currently intended to serve as an alternative reference rate to LIBOR. If lenders have increased costs due to changes in LIBOR, we may suffer from potential increases in interest rates on our borrowings. We may in the future pursue amendments to our LIBOR-based debt transactions to provide for a transaction mechanism or other reference rate in anticipation of LIBOR’s discontinuation, but we may not be able to reach agreement with our lenders on any such amendments.

Our existing debt includes restrictive and/or financial covenants.

Certain financing arrangements, including our Revolving Credit Facility and our accounts receivable financing program, require us to comply with various restrictive covenants and some contain financial covenants that require us to comply with specified financial ratios and tests. Our failure to meet these covenants could result in default under these loan and debt agreements and may result in a cross-default under other debt agreements. In the event of a default and our inability to obtain a waiver of the default, all amounts outstanding under our debt agreements could be declared immediately due and payable. Our failure to comply with these covenants could adversely affect our results of operations and financial condition.

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 16 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 StatesU.S. 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. Claims 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.

We could be negatively impacted by stakeholder and market focus on Environmental, Social and Governance (“ESG”) matters.

There has been an increasing focus on corporate ESG practices and disclosures over the past few years, and expectations in this area are rapidly evolving. The criteria used to evaluate ESG practices may continue to evolve, which could result in greater expectations and may cause us to undertake costly initiatives to satisfy new criteria.criteria and abide by any new disclosure requirements. The increasing attention to sustainability could also result in reduced demand for certain of our products and/or reduced profits. If we are unable to respond effectively, investors may conclude that our ESG policies and/or actions are inadequate.inadequate and decide not to invest in our stock. If we are perceived to have failed to achieve our ESG initiatives or accurately disclose our progress on such matters, our reputation, business, financial condition and results of operations could be adversely impacted.

We must comply with extensive environmental requirements, and any exposure to environmental liabilities may adversely affect us.

Federal, state, and local requirements relating to the discharge and emission of substances into the environment, the disposal of hazardous wastes, the remediation and abatement of contaminants, and other activities affecting the environment have had and may continue to have an impact on our operations. Management cannot assess the possible effect of compliance with future environmental requirements or of future environmental claims for which we may not have adequate indemnification or insurance coverage. If we were required to pay the expenses related to any future environmental claims for which neither indemnification nor insurance coverage were available, these expenses could have an adverse impact on our results of operations and financial condition.

Future environmental regulatory developments in the United States and abroad concerning environmental issues, such as climate change, could adversely affect our operations and increase operating costs and, through their impact on our customers, reduce demand for our products and services. Actions may be taken in the future by the U.S. government, state governments within the United States, foreign governments, or the International Civil Aviation Organization to regulate the emission of greenhouse gases by the aviation industry. The precise nature of any such requirements and their applicability to us and our customers are difficult to predict, but the impact to us and the aviation industry would likely be adverse and could be significant, including the potential for increased fuel costs, carbon taxes or fees, or a requirement to purchase carbon credits.

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ITEM 1B.UNRESOLVED STAFF COMMENTS

Not Applicable.

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ITEM 2.PROPERTIES

In the Aviation Services segment, we conduct parts supply activities from our headquarters in Wood Dale, Illinois, which we own. In addition to warehouse space, this facility includes executive, sales and administrative offices. Our principal maintenance, repair, overhaul, engineering and other service activities for this segment are conducted at U.S. facilities leased by us in Indianapolis, Indiana; Oklahoma City, Oklahoma; Miami, Florida; Medley, Florida; and Rockford, Illinois and at Canadian facilities leased by us in Trois Rivieres, Quebec and Windsor, Ontario.

We also lease facilities in Garden City, New York; Jacksonville, Florida; Rockledge, Florida; Ogden, Utah; Windsor, Connecticut; Brussels, Belgium; London, England; and Crawley, England, and own a building near Schiphol International Airport in the Netherlands to support activities in the Aviation Services segment.

Our principal activities in the Expeditionary Services segment are conducted at a facility we own in Cadillac, Michigan.

We also operate sales offices that support all our activities and are leased in London, England; Crawley, England; Paris, France; Rio de Janeiro, Brazil; Tokyo, Japan; Shanghai, China; Singapore, Republic of Singapore; and Dubai, UAE.

We believe that our owned and leased facilities are suitable and adequate for our operational requirements.

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ITEM 3.LEGAL PROCEEDINGS

Notes 14 and 16Note 17 of the Notes to our Consolidated Financial Statements for the year ended May 31, 20222023 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 Notes 14 and 16 areNote 17 is incorporated by reference in this Item 3.

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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 Notes 14 and 16Note 17 to our Consolidated Financial Statements for the year ended May 31, 20222023 contained in this Annual Report on Form 10-K.

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ITEM 4.MINE SAFETY DISCLOSURES

Not Applicable.

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Three companies were removed from the prior year’s peer group: Cubic Corporation was acquired, and Teledyne Technologies Incorporated and CACI International Inc were judged to no longer be suitable comparator companies due to their size.

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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-sizedcomparably 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.

The Expeditionary Services segment consists of primarily manufacturing operations with sales derived from the design and manufacture of pallets, shelters, and containers used to support the U.S. military’s requirements for a mobile and agile force including engineering, design, and system integration services for specialized command and control systems. Cost of sales consists principally of the cost of material to manufacture products, direct labor and overhead.

Our chief operating decision making officer (Chief(“CODM”) is our Chief Executive Officer)Officer and he evaluates performance based on the reportableour operating segments and utilizesusing gross profit as athe primary profitability measure. Gross profit is calculated by subtracting cost of sales from sales. The assets and certain expenses related to corporate activities are not allocated to the segments. Our reportableoperating segments are aligned principally around differences in products and services.

Change in Operating Segments

During the first quarter of fiscal 2024, our CODM implemented changes in how he evaluates the business, allocates resources, and assesses performance. Specifically, this new structure results in the separation of our Aviation Services segment into three new operating segments: Parts Supply, Repair & Engineering and Integrated Solutions. Beginning with the first quarter of fiscal 2024, we will report under this new structure using the following four operating segments:

In conjunction with the re-alignment, our CODM will evaluate each segment’s performance based on operating income instead of gross profit as the CODM believes operating income is a more comprehensive profitability measure for each operating segment. These changes will be initially reflected in our condensed consolidated financial statements for the quarterly period ended August 31, 2023 and are not reflected herein.

Business Trends and Outlook

Fiscal 2022 began withIn fiscal 2023, we established new partnerships, expanded our focus centered on continuingservice offerings, and enhanced our approach to navigatesafety to best serve our customers across the unprecedented decline in commercial passenger flight hours.  We maintained our strategy of leveraging our efficiency gains, optimized portfolio and strong balance sheet to drive growth and margin expansion through theworld. The global recovery in air travel drove an increased demand for our commercial markets from the impact of COVID-19.  services, enabling us to achieve strong results across our portfolio, particularly in used serviceable material and new parts distribution. Our actions to reduce costs and improve operating efficiency were reflected in our improved profitability during fiscal 2023.

Our sales to commercial customers in fiscal 20222023 increased by $277.4$245.0 million, or 34.4%22.6%, over the prior year reflecting the recovery in commercial air travel following the height of the impact of COVID-19 as well as growth from recently awarded new parts distribution contracts. Our sales to government customers in fiscal 2023 decreased by $74.5 million, or 10.1%, from the prior year as we were successful in driving sales growth through the uneven recovery from COVID-19.completed certain government programs, including our Afghanistan contracts.

In our government market, we were awarded a firm-fixed price indefinite delivery/indefinite quantity contract from the U.S. Air Force to produce Next Generation All Aluminum Cargo Pallets with a total contract value, including option periods, of $173.5 million. We were also awarded a contract from the Norwegian Defence Logistics Organisation to provide commercial common parts for the Royal Norwegian Air Force P-8A fleet.

During the fourth quarter of fiscal 2023, we acquired Trax USA Corp. (“Trax”), a leading independent provider of aircraft MRO and fleet management software which was founded in 1999. The acquisition price was $120 million in cash, plus up to a $20 million earn-out payment based on adjusted revenue in calendar year 2023 and 2024. Trax offers critical software applications to a diverse global customer base of airlines and MROs supporting approximately 5,000 aircraft. Trax’s comprehensive solutions support United States Air Forces in Europe (“USAFE”) F-16 aircraft. This $365 million, ten-year contractthe entire spectrum of maintenance activities and create the system of record required by airlines and MROs. The Trax acquisition adds established, higher-margin aviation aftermarket software offerings with recurring revenue to our portfolio and provides for F-16 depot work as well as Service Life Extension Program modificationsopportunities to cross-sell products and maintenance.services.

During fiscal 2022,2023, we continued our strong focus on working capital management with cash flows from operating activities from continuing operations of $89.8 million.$23.8 million which included significant investments in inventory, rotable assets, and licensing arrangements to support further growth. Borrowings outstanding under the Revolving Credit Facility were $100.0$272.0 million at May 31, 20222023 with an availability on the facility of $488.6$336.9 million.

Our long-term strategy also emphasizes the return of capital to shareholders.  In December 2021, our Board of Directors authorized a renewal of our stock repurchase program.  The authorization has no expiration date and permits the Company to repurchase up to $150 million of our common stock. We were able to return capital to shareholders through common stock repurchases of $42.4 million during fiscal 2022 and expect to fully utilize the authorization by the end of calendar 2023.

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

Results of Operations – Fiscal 2023 Compared with Fiscal 2022

Sales and gross profit for our two operating segments for the years ended May 31, 2023 and 2022 were as follows:

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Results of Operations – Fiscal 2022 Compared with Fiscal 2021

Sales and gross profit for our two business segments for the years ended May 31, 2022 and 2021 were as follows:

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nm – Percentage change is not meaningful.

Aviation Services Segment

Sales in the Aviation Services segment increased $192.1$152.9 million, or 12.4%8.8%, over the prior year due to a $287.7$238.9 million, or 36.2%22.1%, increase in sales to commercial customers. The increase in sales to commercial customers was primarily attributable to increased sales of $99.4 million in our MRO activities and $81.5$91.1 million related to new parts distribution activities and $71.4 million in our MRO activities as commercial passenger air traffic continues to recover from the impact of COVID-19. In addition, sales increased $74.0$43.2 million in our aftermarket trading activities which included whole asset sales of $66.6$74.0 million in fiscal 20222023 compared to $20.3$66.6 million in the prior year.

During fiscal 2022,2023, sales in this segment to government and defense customers decreased $95.6$86.0 million, or 12.6%12.9%, from the prior year. The decrease in sales to government and defense customers was primarily attributable to the timing of activities for the C-40 aircraft we are delivering to the Naval Air Systems Command in support of the U.S. Marine Corps. The prior year included sales of $39.5 million related to the installation of engines on the aircraft while no engine installation activities occurred in fiscal 2022. The remainder of the decrease in sales from the prior year relates to the natural completion of certain government programs, including Afghanistan contracts, partially offset by growth from new programs.contracts.

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 2022,2023, we recognized net favorable and unfavorable cumulative catch-up adjustments of $15.0$8.3 million and $5.0 million, respectively, compared to favorable and unfavorable cumulative catch-up adjustments of $16.1 million and $4.1 million, respectively, in fiscal 2021.  When considering these adjustments on a net basis, we recognized favorable cumulative catch-up adjustments of $10.0 million and $12.0 million forin fiscal 2022 and 2021, respectively.2022. These adjustments primarily relate to our long-term, power-by-the-hour programs where we provide component inventory management supply chain logistics programs and/orand repair services.services to commercial customers as well as certain long-term government programs.

Cost of sales in Aviation Services increased $157.8$95.3 million, or 12.2%6.6%, over the prior year which was largely in line with the sales increase of 12.4%8.8% discussed above.

Income Taxes

Our fiscal 2022 effective income tax rate for continuing operations was 25.3% compared to 28.2% in the prior year.  In fiscal 2022, we recognized favorable excess tax benefits of $2.1 million related to stock compensation while we recognized additional tax expense of $0.7 million for stock compensation fiscal 2021.

Discontinued Operations

Income from discontinued operations was $0.2 million in fiscal 2022 compared to a loss of $10.5 million in the prior year. The fiscal 2021 loss was primarily attributable to an $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.

Liquidity, Capital Resources and Financial Position

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

At May 31, 2022,2023, our liquidity and capital resources included working capital of $659.0$746.4 million inclusive of cash of $53.5$68.4 million.

We maintainOn December 14, 2022, we entered into a Revolving Credit Facilitynew credit agreement with various financial institutions as lenders and Wells Fargo Bank, of America, N.A., as administrative agent for the lenders which(the “Credit Agreement”). The Credit Agreement provides the Company an aggregatefor a $620 million unsecured revolving credit commitment of $600 millionfacility (the “Revolving Credit Facility”) that matures September 25, 2024.we can draw upon for working capital and general corporate purposes. Under certain circumstances, we have the ability tomay request but our lenders are not required to grant, an increase to the revolving credit commitmentlending commitments under the Credit Agreement by an aggregate amount of up to $300 million, not to exceed $900$920 million in total. The Credit Agreement expires on December 14, 2027.

BorrowingsOn December 14, 2022, and in connection with our entry into the Credit Agreement, we terminated our revolving credit facility under the Revolvingcredit agreement dated April 12, 2011, as amended, (the “2011 Credit Facility bear interestAgreement”) with the outstanding borrowings under the 2011 Credit Agreement at the offered Eurodollar Rate plus 87.5date of its termination rolled over to 175 basis points based on certain financial measurements if a Eurodollar Rate loan, or at the offered fluctuating Base Rate plus 0 to 75 basis points based on certain financial measurements if a Base Rate loan.Credit Agreement.

Borrowings outstanding under the Revolving Credit Facility under the Credit Agreement at May 31, 20222023 were $100.0$272.0 million and there were approximately $11.4$11.1 million of outstanding letters of credit, which reduced the availability ofunder this facility to $488.6 million.$336.9 million as of May 31, 2023. There are no other terms or covenants limiting the availability of this facility.the Revolving Credit Facility.

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

As of May 31, 2022,2023, we also had other financing arrangements that did not limit availability on our Revolving Credit Facility including outstanding letters of credit of $11.6 million and foreign lines of credit of $9.3$9.2 million.

On October 18, 2017, we entered into a Credit Agreement with the Canadian Imperial Bank of Commerce, as lender (the “Credit Agreement”). The Credit Agreement provided a Canadian $31 million term loan with the proceeds used to fund the acquisition of two MRO facilities in Canada from Premier Aviation. The term loan was paid in full at the expiration of the Credit Agreement on November 1, 2021.

We routinely issue letters of credit and performance bonds in the ordinary course of business. These instruments are typically issued in conjunction with insurance contracts or other business requirements. The total of these instruments outstanding at May 31, 20222023 was $23.0$22.7 million.

Critical Accounting Policies and Significant Estimates

Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States. Management has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare the Consolidated Financial Statements. The most significant estimates made by management include those related to assumptions used in accounting for business combinations, assessing goodwill impairment, adjustments to reduce the value of inventories and certain rotable assets, revenue recognition, allowance for credit losses, and assumptions used in determining pension plan obligations. Accordingly, actual results could differ materially from those estimates. The following is a summary of the accounting policies considered critical by management.

Business Combinations

When we acquire a business, we allocate the purchase price by recognizing assets acquired and liabilities assumed based on their estimated fair values at acquisition date with any excess of the purchase consideration when compared to the fair value of the net tangible and intangible assets acquired recognized as goodwill. A preliminary fair value is determined once a business is acquired, with the final determination of fair value completed no later than one year from the date of acquisition.

The determination of the estimated fair value of assets acquired and liabilities assumed requires significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenues, costs and cash flows, discount rates, and selection of comparable companies. We engage the assistance of valuation specialists in concluding on fair value measurements in determining the fair value of assets acquired and liabilities assumed in business combinations.

The fair value of the intangible assets is estimated using several valuation methodologies, including the income-based or market-based approaches, which represent Level 3 fair value measurements. The value for customer relationships is typically estimated based on a multi-period excess earnings approach. The more significant inputs used in the customer relationships intangible asset valuation include (i) future revenue growth rates, (ii) projected gross margins, (iii) the customer attrition rate, and (iv) the discount rate. The value for developed technology is estimated based on a relief from royalty approach. The more significant inputs used in the developed technology intangible asset valuation include (i) future revenue growth rates, (ii) profitability, (iii) technology obsolescence, (iv) market royalty rates, and (v) the discount rate. The useful lives are estimated based on the future economic benefit expected to be received from the assets.

Transaction costs are not included as components of consideration transferred but instead, expensed as incurred.

Goodwill

Under accounting standards for goodwill and other intangible assets, goodwill and other intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. We review and evaluate our goodwill and indefinite life intangible assets for potential impairment at a minimum annually, on May 31, or more frequently if circumstances indicate that impairment is possible.

The accounting standards for goodwill allow for either a qualitative or quantitative approach for the annual impairment test. Under the qualitative approach, factors such as macroeconomic conditions, industry and market conditions and company-specific events or circumstances are assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. When the quantitative approach is utilized, we compare the fair value of each reporting unit with the carrying value of the reporting unit, including goodwill. If the estimated fair value of the reporting unit is less than the carrying value of the reporting unit, we would be required to recognize an impairment loss for the excess carrying value of the reporting unit’s assets.

As of May 31, 2022,2023, we had three reporting units, which included two in our Aviation Services segment (Aviation Supply Chain and MRO) and one comprised of our Expeditionary Services segment. In fiscal 2023, 2022, and 2021, 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. The fair value of our reporting units is also impacted by our overall market capitalization and may be impacted by volatility in our stock price and assumed control premium, among other items. We concluded 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 forego 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 business plan, and required considerable management judgment in light of the impact of COVID-19.  Our Aviation Services reporting units were impacted by the reduced numbers of commercial aircraft flying and the overall decline in flight hours.  We incorporated the decline in demand from commercial airline customers 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 was 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 used significant unobservable inputs, which reflected our own assumptions about the inputs that market participants would use in measuring fair value.  The fair value of our reporting units is also impacted by our overall market capitalization and may be impacted by volatility in our stock price and assumed control premium, among other items.

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.

Inventories

Inventories are valued at the lower of cost or net realizable value. Cost is determined by the specific identification, average cost or first-in, first-out methods. Write-downs are made for excess and obsolete inventories and inventories that have been impaired as a result of industry conditions. We have utilized certain assumptions when determining the market value of inventories, such as inventory quantities and aging, historical sales of inventory, current and expected future aviation usage trends, replacement values, expected future demand, and historical scrap recovery rates. Reductions in demand for certain of our inventories or declining market values, as well as differences between actual results and the assumptions utilized by us when determining the market value of our inventories, could result in the recognition of impairment charges in future periods.

In conjunction with the decision to exit certain product lines and facilities, we recognized inventory impairment charges of $3.9 million in fiscal 2020.  We also recognized rotable asset impairment charges of $1.9 million in fiscal 2020 in conjunction with reclassifying the rotable assets as inventory held for sale.  In fiscal 2022 and 2021,sale, we recognized additionalrotable asset impairment charges of $1.0 million and $1.4 million respectively, on these assets.in fiscal 2022 and 2021, respectively.

Revenue Recognition

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

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.

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

Under most of our U.S. government contracts, if the contract is terminated for convenience, we are entitled to payment for items delivered and fair compensation for work performed, the costs of settling and paying other claims, and a reasonable profit on the costs incurred or committed.

Shipping and handling fees and costs incurred associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in Cost of sales on our Consolidated Statements of Income, and are not considered a performance obligation to our customers. Our reported sales on our Consolidated Statements of Income are net of anyinclude sales orand related non-income taxes. We also utilize the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value we are providing to the customer.

in future impairments of long-lived assets. We recognized a pre-tax asset impairment charge of $11.8 million in fiscal 2020 related to assets included in our COCO business, which is classified as a discontinued operation. In our Expeditionary Services segment, we consolidated manufacturing facilities and recognized impairment and related charges of $2.6 million during fiscal 2021.

We maintain a significant inventory of rotable parts and equipment to service customer aircraft and components. Portions of that inventory are used parts that are often exchanged with parts removed from aircraft or components, and are reworked to a useable condition. We may have to recognize an impairment of our rotable parts and equipment if we discontinue using or servicing certain aircraft models or if an older aircraft model is phased-out in the industry. In light of declines in commercial airline volumes and commercial program contract terminations driven by the impact of COVID, we evaluated future cash flows related to certain rotable assets supporting long-term programs and recognized asset impairment charges of $2.3 million $5.8 million, and $1.9$5.8 million in fiscal 2022 2021, and 2020,2021, respectively.

Pension Plans

Our pension plan assets exceed our total projected benefit obligation by $6.0 million as of May 31, 2022. This overfunded position is driven by our U.S. plans where their plan assets exceed their obligations by $5.2 million.

Effective May 31, 2022, our Union and U.S. Retirement Plans were merged (collectively, the “Merged U.S. Plan”). We are expectingplanning to terminate the Merged U.S. Plan in the next 12-18 monthsfirst half of fiscal 2024 upon the completion of regulatory approvals and the anticipated transfer of the Merged U.S. Plan’s obligations and assets to a third-party. The Merged U.S. Plan is in an overfunded position of $8.9$8.7 million and we do not anticipate making any contributions to the Merged U.S. Plan in conjunction with the termination. We expect to recognize a non-cash pension settlement charge related to the actuarial losses in Accumulated other comprehensive loss, upon settlement of the obligations of the Merged U.S. Plan. This charge is expected to occur in fiscal 2024, with the specific timing and final amounts dependent upon several factors.

Our total pension plan assets exceed our total projected benefit obligation by $4.6 million as of May 31, 2023 with the overfunded position primarily attributable to the Merged U.S. Plan.

The liabilities and net periodic cost of our pension plans are determined utilizing several actuarial assumptions, the most significant of which are the discount rate and the expected long-term rate of return on plan assets.

Revenues and expenses of our foreign operations are translated at average exchange rates during the year, and balance sheet accounts are translated at year-end exchange rates. Balance sheet translation adjustments are excluded from the results of operations and are recorded in stockholders’ equity as a component of accumulated other comprehensive loss. A hypothetical 10 percent devaluation of the U.S. dollar against foreign currencies would not have had a material impact on our financial position or continuing operations during fiscal 2022.2023.

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ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

AAR CORP.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of AAR CORP. and subsidiaries (the Company) as of May 31, 20222023 and 2021,2022, the related consolidated statements of income, comprehensive income, (loss), changes in equity, and cash flows for each of the years in the three-year period ended May 31, 2022,2023, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 20222023 and 2021,2022, and the results of its operations and its cash flows for each of the years in the three-year period ended May 31, 2022,2023, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of May 31, 2022,2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated July 21, 202218, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Assessment of the write-down of inventories

As discussed in Note 1 to the consolidated financial statements, the inventory balance as of May 31, 20222023 was $550.5$574.1 million. The Company records inventory within the Aviation Services segment at the lower of cost or net realizable value. The write-down of slow moving inventory is recorded for excess or obsolete inventory based on certain inputs and assumptions used to determine the net realizable value. These assumptions include the number of days transpiring from the date the inventory was originally received and the historical sales of inventory to determine recovery rates. Other inputs include current and expected future aviation usage trends, replacement values, expected future demand, and historical scrap recovery rates.

We identified the assessment of the write-down of inventories for a portion of the inventory within the Aviation Services segment as a critical audit matter. The primary inputs and assumptions used in determining the write-down of slow moving inventory include the historical recovery rates, which are based on the number of days transpiring from the date the inventory was originally received, the historical sales of inventory, and the identification of specific inventories associated with aircraft with declining usage trends. The assessment of these inputs required a higher degree of subjective auditor judgment in evaluating the future customer demand for slow moving inventory.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s inventory process, including controls over the Company’s evaluation of the impact on the estimate of net realizable value based on 1) the number of days transpiring from the date the inventory was originally received, 2) historical sales of inventory, and 3) specific inventories associated with aircraft with declining usage trends. We also tested relevant information technology application controls over the determination of the number of days transpiring from the date the inventory was originally received. We evaluated the write-down to determine that it was recorded using the Company’s policy based on the number of days transpiring from the date the inventory was originally received and the recovery rates of existing inventory based on historical sales. We also assessed that the recovery rates applied to slow moving inventory were consistent with historical sales of these inventory items. We assessed the identification of specific inventory with declining usage trends by evaluating external industry information.

Evaluation of the estimate of costs at completion of certain performance obligations

As discussed in Note 1 to the consolidated financial statements, for revenue with performance obligations that are satisfied over time, the Company recognizes revenue using the cost-to-cost input method, which depicts when control of the promised goods or services are transferred to the customer. Revenue is recognized based on the relationship of costs incurred to date to the estimated total costs at completion of the performance obligation. The net favorable cumulative catch-up adjustments recognized during fiscal year 20222023 associated with revenue recognized over time totaled $10.0$8.3 million, which resulted from changes in the estimated billings and costs at completion of the performance obligations.

We identified the evaluation of the estimate of total costs at completion of the performance obligations for certain contracts within the Aviation Services segment as a critical audit matter. The key inputs and assumptions used in determining the revenue to be recognized include current and future costs to support the program, and future labor costs. The testing of the key inputs and assumptions required the application of subjective auditor judgment because of the estimation uncertainty associated with the inputs and assumptions.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s revenue process, including controls over 1) the assessment of the estimated future costs, 2) actual costs incurred for each performance obligation that are used by the Company in their assessment of the measure of progress, and 3) the approval of costs recorded for each performance obligation to assess the allowability per the contract. We obtained the Company’s forecast for the cost of a selection of Aviation Services revenue contracts and assessed that the measure of progress was determined using actual costs to date plus the estimated future costs to support the satisfaction of performance obligations. We selected a sample of contract costs where revenue is recognized over time to test actual fiscal year 20212023 program costs by comparing them to underlying documentation. We evaluated the Company’s historical estimates to assess their consistency with the Company’s historical actual costs.

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AAR CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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