AAR(AIR) - 2025 Q4 - Annual Report

Part I This section provides an overview of AAR CORP.'s business, segments, government sales, and human capital resources Item 1. Business AAR CORP. provides aviation aftermarket solutions, achieving 19.9% consolidated sales growth in fiscal 2025 through strategic acquisitions and portfolio optimization Fiscal 2025 Sales Performance | Category | Sales (in millions) | Year-over-Year Change | Key Drivers | | :--- | :--- | :--- | :--- | | Consolidated Sales | $2,780.5 | +19.9% | Strong demand in commercial and government markets. | | Commercial Sales | $1,976.1 | +20.6% | Product Support acquisition and growth in new parts distribution. | | Government Sales | $804.4 | +18.1% | Increased volume in new parts distribution and pallet demand. | - Strategic initiatives in fiscal 2025 included divesting the Landing Gear Overhaul (LGO) business to focus on core, higher-margin offerings and investing in digital technologies to improve service delivery and profitability[13] - The company is expanding its Airframe MRO capacity with new facilities in Miami, FL (114,000 sq ft) and Oklahoma City, OK (80,000 sq ft), expected to be operational in the next 12-18 months[13][28] - New long-term agreements were secured, including distribution contracts with Unison, Chromalloy, and Ontic, an extension of the USM agreement with FTAI Aviation, and two multi-year contracts with the U.S. Navy for P-8A aircraft support[15] Business Segments The company operates through four segments: Parts Supply, Repair & Engineering, Integrated Solutions, and Expeditionary Services, each contributing to fiscal 2025 sales Fiscal 2025 Sales by Business Segment | Segment | % of Consolidated Sales (FY2025) | | :--- | :--- | | Parts Supply | ~40% | | Repair & Engineering | ~32% | | Integrated Solutions | ~25% | | Expeditionary Services | ~3% | - In fiscal 2025, the company divested its Landing Gear Overhaul (LGO) business for net proceeds of $48 million, recognizing a loss of $71.1 million, as part of its portfolio optimization strategy[24] - The Integrated Solutions segment's capabilities were enhanced by the fiscal 2023 acquisition of Trax, a leading provider of cloud-based MRO software solutions for airlines and MROs[34] Sales to Government and Defense Customers Sales to global government and defense customers represented 28.9% of consolidated sales in fiscal 2025, primarily supporting U.S. government operations Sales to Government and Defense Customers (in millions) | Customer Group | FY 2025 | FY 2024 | FY 2023 | | :--- | :--- | :--- | :--- | | Global Govt. & Defense | $804.3 (28.9%) | $681.0 (29.4%) | $661.7 (33.2%) | | U.S. Govt. & Contractors | $687.6 (24.7%) | $576.1 (24.8%) | $577.0 (29.0%) | Human Capital Resources AAR employs approximately 5,600 people globally, focusing on talent development and a positive work environment - The company employs approximately 5,600 people globally as of May 31, 2025[55] - AAR focuses on talent development through its EAGLE Career Pathway program and partnerships like Choose Aerospace and Embry-Riddle Aeronautical University to train and place military veterans and students in aviation maintenance careers[66] Item 1A. Risk Factors The company faces significant risks including industry cyclicality, government contract dependency, operational challenges, cybersecurity threats, and regulatory compliance - Business & Industry Risks: The company is highly affected by factors impacting the commercial aviation industry, which accounted for 71.1% of sales in FY2025 - Government Contract Risks: U.S. government sales (24.7% of FY2025 sales) are subject to funding changes, budgetary constraints, and termination for convenience[92][98] - Technology & Cybersecurity Risks: The business faces evolving cyber threats like ransomware and unauthorized access to sensitive data[128][129][131] - Financial & Debt Risks: As of May 31, 2025, the company had $977.0 million in total debt[137][139] - Legal & Regulatory Risks: The company must comply with extensive regulations, including the FCPA, ITAR, and FAA rules[146][152][157] Item 1B. Unresolved Staff Comments There are no unresolved comments from the SEC staff regarding the company's filings - Not Applicable[163] Item 1C. Cybersecurity AAR implements a comprehensive cybersecurity risk management program based on the NIST framework, overseen by dedicated leadership and the Board's Audit Committee - The company's cybersecurity strategy is based on the National Institute of Standards and Technology (NIST) framework to identify, assess, and manage risks[166] - Cybersecurity governance is managed by a dedicated CISO who reports to the CDTO[172][174] Item 2. Properties AAR operates globally from owned and leased facilities, including its headquarters and key MRO sites, which are deemed adequate for current needs - The company owns its headquarters in Wood Dale, IL, and several component repair and manufacturing facilities[175][176][177] - Major airframe maintenance operations are conducted at leased facilities in the U.S. and Canada[176] Item 3. Legal Proceedings The company is involved in various legal proceedings, including a $55.6 million FCPA settlement, Russian bankruptcy litigation, and a performance guarantee claim - Information on material legal proceedings is incorporated by reference from Note 18 of the Notes to Consolidated Financial Statements[180] Item 4. Mine Safety Disclosures This section is not applicable to the company's operations - Not Applicable[182] Part II This section details the company's market for common equity, financial condition, results of operations, and market risk disclosures Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities AAR's common stock trades on the NYSE, with no dividends declared in recent fiscal years, and the company repurchased shares under its program - The company has not declared any dividends in fiscal 2023, 2024, or 2025[192] Share Repurchases (Quarter Ended May 31, 2025) | Period | Total Shares Purchased | Average Price Paid per Share | Value of Shares Remaining for Purchase | | :--- | :--- | :--- | :--- | | Mar 2025 | — | $ — | $52,544,833 | | Apr 2025 | 192,532 | $52.37 | $42,462,495 | | May 2025 | — | $ — | $42,462,495 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2025 saw consolidated sales grow 19.9% to $2.78 billion, though net income declined due to a divestiture loss and FCPA settlement, while liquidity remained strong Consolidated Results of Operations (Fiscal Year Ended May 31) | Metric (in millions) | 2025 | 2024 | % Change | | :--- | :--- | :--- | :--- | | Total Sales | $2,780.5 | $2,318.9 | 19.9% | | Gross Profit | $527.7 | $442.3 | 19.3% | | Operating Income | $185.2 | $129.2 | 43.3% | | Net Income | $12.5 | $46.3 | -73.0% | - The effective income tax rate was 67.9% in fiscal 2025, significantly higher than 20.6% in fiscal 2024, primarily because the majority of the FCPA settlement charge was non-deductible for tax purposes[224] - Net cash from operating activities was $36.1 million in FY2025, a decrease from $43.6 million in FY2024, mainly due to working capital changes, including the timing of customer collections[254] Operating Segment Results of Operations All four operating segments reported sales growth in fiscal 2025, with significant increases in operating income across the board FY2025 Segment Performance vs. FY2024 | Segment | Sales (in millions) | Sales % Change | Operating Income (in millions) | Op. Income % Change | | :--- | :--- | :--- | :--- | :--- | | Parts Supply | $1,099.6 | 13.7% | $156.8 | 42.8% | | Repair & Engineering | $884.9 | 38.2% | $81.2 | 54.7% | | Integrated Solutions | $695.3 | 8.3% | $36.4 | 52.3% | | Expeditionary Services | $100.7 | 44.1% | $10.1 | 188.6% | Liquidity, Capital Resources and Financial Position As of May 31, 2025, AAR maintained strong liquidity with $955.9 million in working capital and access to significant credit facilities and senior notes - At May 31, 2025, the company had working capital of $955.9 million and cash of $96.5 million[239] Key Financing Arrangements as of May 31, 2025 | Facility | Total Size (in millions) | Outstanding (in millions) | Availability (in millions) | | :--- | :--- | :--- | :--- | | Amended Revolving Credit Facility | $825.0 | $427.0 | $390.1 | | 6.75% Senior Notes due 2029 | $550.0 | $550.0 | N/A | | Accounts Receivable Purchase Agreement | $150.0 | $13.9 (utilized) | $136.1 | - During fiscal 2025, the company repurchased 0.2 million shares for $10.1 million under its stock repurchase program, leaving $107.5 million repurchased since the program's renewal[253] Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are interest rate fluctuations on variable-rate debt and foreign exchange rate changes, with interest rate sensitivity quantified - A 10% increase in the average interest rate on floating-rate debt would have reduced pre-tax income by $3.5 million in fiscal 2025[288] - Exposure to foreign currency exchange rate risk is not considered material[289] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for fiscal 2025, including notes detailing significant acquisitions, divestitures, financing, and legal settlements Consolidated Financial Statements The consolidated financial statements for fiscal 2025 show increased sales and assets, but a decrease in net income due to specific charges Key Financial Statement Data (in millions) | Metric | May 31, 2025 | May 31, 2024 | | :--- | :--- | :--- | | Income Statement (FY) | | | | Total Sales | $2,780.5 | $2,318.9 | | Net Income | $12.5 | $46.3 | | Balance Sheet | | | | Total Assets | $2,844.6 | $2,770.0 | | Total Liabilities | $1,633.0 | $1,580.2 | | Total Equity | $1,211.6 | $1,189.8 | Note 2. Acquisitions This note details the acquisitions of Triumph's Product Support business for $722.1 million and Trax USA Corp. for $120.0 million, enhancing company capabilities - Completed the acquisition of Triumph's Product Support business on March 1, 2024, for a net purchase price of $722.1 million ($725.0 million initial price less $2.9 million in post-closing adjustments)[399] - Acquired Trax USA Corp. on March 20, 2023, for $120.0 million plus potential contingent consideration of up to $20.0 million[406] Note 16. Divestitures In fiscal 2025, the company divested its Landing Gear Overhaul business for $48.0 million, recognizing a total loss of $69.6 million - The LGO business was sold to GA Telesis for net proceeds of $48.0 million in the fourth quarter of fiscal 2025[510] - A total loss of $69.6 million was recognized on the divestiture, including a $63.0 million impairment charge and $14.6 million of goodwill written off[509][510] Note 18. Legal Proceedings and Other Matters This note details the $55.6 million FCPA settlement, a $1.8 million Russian bankruptcy judgment, and a $32 million performance guarantee claim - Resolved FCPA investigations with the DOJ and SEC for $55.6 million, which was recognized as a charge in Q2 FY2025[539][540] - Russian litigation concerning VIM-AVIA bankruptcy concluded with a final, non-appealable judgment of $1.8 million against the company[531] - Facing a lawsuit for at least $32 million related to a performance guarantee on the divested A220 Contract[536][537] Item 9A. Controls and Procedures Management and KPMG LLP concluded that the company's disclosure controls and internal control over financial reporting were effective as of May 31, 2025 - The CEO and CFO concluded that disclosure controls and procedures were effective as of May 31, 2025[547] - Management concluded that the company maintained effective internal control over financial reporting as of May 31, 2025[550][553] Part III This section incorporates information on corporate governance, executive compensation, security ownership, and related party transactions by reference from the proxy statement Items 10-14 (Incorporated by Reference) Information for these items, including corporate governance and executive compensation, is incorporated by reference from the 2025 proxy statement - Item 10: Information on directors, executive officers, and corporate governance is incorporated by reference[564] - Item 11: Information on executive and director compensation is incorporated by reference[570] - Item 12: Information on security ownership and equity compensation plans is incorporated by reference[571][572] - Item 13 & 14: Information on related transactions, director independence, and principal accountant fees is incorporated by reference[573][574] Part IV This section lists exhibits and financial statement schedules, along with the Form 10-K summary Item 15. Exhibits, Financial Statement Schedules This section lists exhibits filed with the Form 10-K and notes the inclusion of financial statements in Item 8, with schedules omitted - The consolidated financial statements are set forth under Item 8 of the report[575] - All financial statement schedules have been omitted because they are not applicable or the required information is included elsewhere in the report[576] Item 16. Form 10-K Summary This section is not applicable to the company - Not applicable[590]