# AAR Corp: Form 10-Q for the period ended Feb 29, 2024

- Company: [AAR Corp](/companies/air.md) (CIK 1750)
- Form: 10-Q
- Filed: 2024-03-21
- Accepted by EDGAR: Mar 21, 2024, 17:26 ET
- Period: 2024-02-29
- Accession: 0001104659-24-037408
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1750/000110465924037408/air-20240229x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1750/000110465924037408/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-02-29.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-12-01 to 2024-02-29 | $567.3m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2023-06-01 to 2024-02-29 | $1.66bn | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2023-12-01 to 2024-02-29 | $457.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-06-01 to 2024-02-29 | $1.35bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-12-01 to 2024-02-29 | $110.3m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-06-01 to 2024-02-29 | $315.0m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-12-01 to 2024-02-29 | $77.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-06-01 to 2024-02-29 | $217.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Interest expense | 3 months, 2023-12-01 to 2024-02-29 | $11.9m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-06-01 to 2024-02-29 | $23.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-12-01 to 2024-02-29 | $6.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-06-01 to 2024-02-29 | $7.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-12-01 to 2024-02-29 | $14.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-06-01 to 2024-02-29 | $37.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-12-01 to 2024-02-29 | $0.39 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-06-01 to 2024-02-29 | $1.04 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-12-01 to 2024-02-29 | $0.40 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-06-01 to 2024-02-29 | $1.05 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-12-01 to 2024-02-29 | 35,200,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-06-01 to 2024-02-29 | 35,300,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-06-01 to 2024-02-29 | $19.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-06-01 to 2024-02-29 | $22.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2023-06-01 to 2024-02-29 | $5.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-02-29 | $69.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-02-29 | $1.24bn | us-gaap:AssetsCurrent |
| Total assets | at 2024-02-29 | $2.02bn | us-gaap:Assets |
| Current liabilities | at 2024-02-29 | $428.2m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2024-02-29 | $274.7m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2024-02-29 | $1.17bn | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |
| Shares outstanding | at 2024-02-29 | 35,427,056 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 39,034 characters.

### General Overview and Outlook

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

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

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

Our operating segments are comprised of:

- Parts Supply, primarily consisting of our sales of used serviceable engine and airframe parts and components and distribution of new parts;
- Repair & Engineering, primarily consisting of our maintenance, repair, and overhaul services across airframes and components, including landing gear;
- Integrated Solutions, primarily consisting of our fleet management and operations of customer-owned aircraft, customized performance-based supply chain logistics programs in support of the U.S. Department of Defense, U.S. Department of State, and foreign governments, flight hour component inventory and repair programs for commercial airlines, and integrated software solutions, including Trax; and
- Expeditionary Services, primarily consisting of products and services supporting the movement of equipment and personnel by the U.S. and foreign governments and non-governmental organizations with sales derived from the engineering, design, integration, and manufacture of pallets, shelters, and containers.

The accounting policies for the segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended May 31, 2023. Cost of sales consists principally of the cost of products, including material used in manufacturing operations, direct labor, and overhead.

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

On March 1, 2024, we completed the acquisition of Triumph Group, Inc.’s Product Support Business (the “Product Support Business”) for a purchase price of $725.0 million subject to customary post-closing adjustments for cash, working capital and indebtedness. The Product Support Business is a leading global provider of specialized maintenance, repair, and overhaul (“MRO”) capabilities for critical aircraft components in the commercial and defense markets, providing MRO services for structural components, engine and airframe accessories, interior refurbishment and wheels and brakes. The Product Support Business also designs proprietary designated engineering representative repairs and parts manufacturer approval parts. The Product Support Business will be reported within our Repair & Engineering segment. The purchase price was paid at closing and was funded with proceeds from the issuance of $550 million of aggregate principal amount of 6.75% Senior Notes due 2029 and borrowings from our Amended Revolving Credit Facility (as defined below).

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

### Discussion of Results of Operations

### Three- and Nine- Month Periods Ended February 29, 2024

| ​ ​ ​ Sales: | ​ ​ ​ | ​ ​ ​ Three Months Ended February 29/28, 2024 ​ ​ | ​ ​ ​ 2023 ​ ​ | ​ ​ ​ % Change ​ | ​ ​ ​ Nine Months Ended February 29/28, 2024 ​ ​ | ​ ​ ​ 2023 ​ | ​ ​ % Change ​ |
| --- | --- | ---: | ---: | --- | ---: | ---: | --- |
| Commercial | ​ | $399.2 ​ | $339.5 ​ | 17.6% | $1,176.9 ​ | $944.9 | 24.6% |
| Government and defense | ​ | 168.1 ​ | 181.6 ​ | (7.4)% | 485.5 ​ | 492.3 | (1.4)% |
| ​ | ​ | $567.3 ​ | $521.1 | 8.9% | $1,662.4 ​ | $1,437.2 | 15.7% |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ |
| Gross Profit: | ​ | ​ |  | ​ ​ | ​ |  | ​ ​ |
| Commercial | ​ | $79.1 ​ | $61.6 | 28.4% | $233.4 ​ | $172.4 | 35.4% |
| Government and defense | ​ | 31.2 ​ | 32.7 | (4.6)% | 81.6 ​ | 89.6 | (8.9)% |
| ​ | ​ | $110.3 ​ | $94.3 | 17.0% | $315.0 ​ | $262.0 | 20.2% |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ |
| Gross Profit Margin: | ​ | ​ |  | ​ ​ | ​ |  | ​ |
| Commercial | ​ | 19.8% | 18.1% | ​ ​ | 19.8% | 18.2% | ​ |
| Government and defense | ​ | 18.6% | 18.0% | ​ ​ | 16.8% | 18.2% | ​ |
| Consolidated | ​ | 19.4% | 18.1% | ​ ​ | 18.9% | 18.2% | ​ |

### Three-Month Period Ended February 29, 2024

Consolidated sales for the third quarter of fiscal 2024 increased $46.2 million, or 8.9%, over the prior year quarter primarily due to an increase in sales to commercial customers. Consolidated sales to commercial customers increased $59.7 million, or 17.6%, over the prior year quarter primarily due to strong demand and volume growth in our new parts distribution activities and increased sales in our airframe maintenance facilities. Our consolidated sales to government customers decreased $13.5 million, or 7.4%, primarily due to lower sales volumes in both our new parts distribution activities and for our mobility products.

Consolidated cost of sales increased $30.2 million, or 7.1%, over the prior year quarter primarily due to the overall higher sales volumes over the prior year period.

Consolidated gross profit for the third quarter of fiscal 2024 increased $16.0 million, or 17.0%, over the prior year quarter. Gross profit on sales to commercial customers increased $17.5 million, or 28.4%, over the prior year quarter due to volume growth and favorable product mix for both new parts and used serviceable material. Gross profit margin on sales to commercial customers increased to 19.8% from 18.1% in the prior year quarter primarily due to the acquisition of Trax in the fourth quarter of fiscal 2023 and its higher margin digital services.

Gross profit on sales to government customers decreased $1.5 million, or 4.6%, from the prior year quarter due to the completion of certain government programs in our Integrated Solutions segment. Gross profit margin on sales to government customers increased to 18.6% from 18.0% primarily due to changes in the mix of products sold in our Parts Supply segment.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $20.3 million, or 35.8%, over the prior year quarter primarily due to $9.4 million of costs incurred related to our acquisition of the Product Support Business and investments to support the sales growth across our commercial activities. These investments include $2.6 million of amortization and acquisition-related expenses for Trax. As a percent of sales, selling, general and administrative expenses increased to 13.6% from 10.9% in the prior year quarter primarily due to these costs.

#### Operating Income

Operating income decreased $1.0 million, or 2.9%, from the prior year quarter primarily due to increased selling, general and administrative expenses discussed above.

#### Interest Expense

Interest expense increased $8.1 million in the third quarter of fiscal 2024 which included $6.1 million of bridge financing facility expenses related to our acquisition of the Product Support Business. In addition, interest expense in the third quarter of fiscal 2024 reflects the impact of both higher interest rates and higher average borrowings used to fund investments in the business, including our acquisition of Trax. Our average borrowing rate was 6.82% in the third quarter of fiscal 2024 compared to 5.65% in the prior year quarter.

#### Income Taxes

Our effective income tax rate for continuing operations was 31.7% for the third quarter of fiscal 2024 compared to 26.8% in the prior year quarter. The increase in the effective tax rate was primarily attributable to higher non-deductible acquisition expenses in the third quarter of fiscal 2024 which increased the effective income tax rate. In addition, the prior year quarter included higher tax benefits from stock option exercises which decreased the effective income tax rate.

### Nine-Month Period Ended February 29, 2024

Consolidated sales for the nine-month period ended February 29, 2024 increased $225.2 million, or 15.7%, over the prior year period primarily due to an increase in sales to commercial customers. Consolidated sales to commercial customers increased $232.0 million, or 24.6%, over the prior year period primarily due to strong demand and volume growth in our Parts Supply segment across both new parts distribution and used serviceable material. Our consolidated sales to government customers decreased $6.8 million, or 1.4%, primarily due to lower sales volume for both our mobility products and for new parts to government customers in our Parts Supply segment.

Consolidated cost of sales increased $172.2 million, or 14.7%, over the prior year period which was largely in line with the consolidated sales increase of 15.7% discussed above.

Consolidated gross profit for the nine-month period ended February 29, 2024 increased $53.0 million, or 20.2%, over the prior year period. Gross profit on sales to commercial customers increased $61.0 million, or 35.4%, over the prior year period due to strong demand and volume growth for both new parts and used serviceable material. Gross profit margin on sales to commercial customers increased to 19.8% from 18.2% in the prior year period primarily due to the acquisition of Trax and its higher margin services.

Gross profit on sales to government customers decreased $8.0 million, or 8.9%, from the prior year period with the gross profit margin on sales to government customers decreasing to 16.8% from 18.2%. These decreases are primarily due to the completion of certain government programs in our Integrated Solutions segment.

#### Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $57.8 million, or 36.2%, over the prior year period primarily due to the recognition of a charge for $11.2 million in the first quarter of fiscal 2024 related to an unfavorable Russian court judgment. In addition, we recognized expenses of $9.4 million related to our acquisition of the Product Support Business. The remaining increase in selling, general and administrative expenses was largely attributable to investments to support the sales growth as our commercial activities continue to recover from the impact of COVID-19. These investments include $7.9 million of amortization and acquisition-related expenses for Trax. As a percent of sales, selling, general and administrative expenses increased to 13.1% from 11.1% in the prior year quarter primarily due to these costs.

#### Operating Income

Operating income for the nine-month period ended February 29, 2024 decreased $1.0 million, or 1.0%, from the prior year quarter primarily due to increased selling, general and administrative expenses discussed above.

#### Pension Settlement Charge

During the first quarter of fiscal 2024, we settled all future obligations under our frozen U.S. defined benefit retirement plan. The settlement included a combination of lump-sum payments to participants who elected to receive them and the transfer of the remaining benefit obligations to a third-party insurance company under a group annuity contract. As a result of the settlement, in the nine-month period ended February 29, 2024, we recognized a non-cash, pre-tax pension settlement charge of $26.7 million ($16.1 million after-tax) related to the accelerated recognition of all unamortized net actuarial losses in Accumulated other comprehensive loss.

#### Interest Expense

Interest expense for the nine-month period ended February 29, 2024 increased $16.9 million which included $6.1 million of bridge financing facility expenses related to our acquisition of the Product Support Business. In addition, interest expense for the nine-month period ended February 29, 2024 reflects the impact of both higher interest rates and higher average borrowings used to fund investments in the business, including our acquisition of Trax. Our average borrowing rate was 6.67% for the nine-month period ended February 29, 2024 compared to 4.14% in the prior year period.

#### Income Taxes

Our effective income tax rate for continuing operations for the nine-month period ended February 29, 2024 was 16.8% compared to 26.8% in the prior year period. The decrease in the effective tax rate was primarily attributable to the deferred tax benefit recognized in conjunction with the pension settlement in the first quarter of fiscal 2024.

### Operating Segment Results of Operations

### Three-Month Period Ended February 29, 2024

#### Parts Supply Segment

| ​ ​ ​ | ​ ​ | ​ ​ ​ Three Months Ended February 29/28, 2024 | ​ ​ ​ 2023 | ​ ​ % Change |
| --- | --- | ---: | ---: | ---: |
| Third-party sales | ​ | $242.3 ​ | $227.6 ​ | 6.5% |
| Operating income | ​ | 31.1 ​ | 25.1 | 23.9% |
| Operating margin | ​ | 12.8% | 11.0% | ​ |

Sales in the Parts Supply segment increased $14.7 million, or 6.5%, over the prior year quarter primarily due to a $14.0 million increase in demand and sales volume for our new parts distribution activities.

Operating income in the Parts Supply segment increased $6.0 million, or 23.9%, over the prior year period, primarily due to sales volume growth and the mix of products sold across both our new parts distribution and aftermarket parts trading activities. Operating margin increased to 12.8% from 11.0% in the prior year quarter, primarily due to the mix of products sold.

#### Repair & Engineering Segment

| ​ ​ ​ | ​ ​ | ​ ​ ​ Three Months Ended February 29/28, 2024 | ​ ​ ​ 2023 | ​ ​ % Change |
| --- | --- | ---: | ---: | ---: |
| Third-party sales | ​ | $140.8 ​ | $128.0 ​ | 10.0% |
| Operating income | ​ | 11.5 ​ | 9.8 | 17.3% |
| Operating margin | ​ | 8.2% | 7.7% | ​ |

Sales in the Repair & Engineering segment increased $12.8 million, or 10.0%, over the prior year quarter primarily due to a $16.4 million sales increase at our airframe maintenance facilities. This increase was partially offset by lower sales volume of $3.0 million at our landing gear facility.

Operating income in the Repair & Engineering segment increased $1.7 million, or 17.3%, over the prior year quarter primarily due to the sales volume increase in our airframe maintenance facilities. Operating margin increased to 8.2% from 7.7% in the prior year quarter, primarily due to improved profitability in our airframe maintenance facilities.

#### Integrated Solutions Segment

| ​ ​ ​ | ​ ​ | ​ ​ ​ Three Months Ended February 29/28, 2024 | ​ ​ ​ 2023 | ​ ​ % Change |
| --- | --- | ---: | ---: | ---: |
| Third-party sales | ​ | $165.5 ​ | $143.5 ​ | 15.3% |
| Operating income | ​ | 8.6 ​ | 7.0 | 22.9% |
| Operating margin | ​ | 5.2% | 4.9% | ​ |

Sales in the Integrated Solutions segment increased $22.0 million, or 15.3%, over the prior year quarter primarily due to higher commercial program activity and the Trax acquisition in the fourth quarter of fiscal 2023 which contributed sales of $9.9 million in the current year quarter.

Changes in estimates and assumptions related to our arrangements accounted for using the cost-to-cost method are recorded using the cumulative catch-up method of accounting. In the third quarter of fiscal 2024, we recognized favorable cumulative catch-up adjustments of $2.5 million. These adjustments primarily relate to our long-term, power-by-the-hour programs where we provide component inventory management and repair services as well as certain long-term government programs. For the three-month period ended February 28, 2023, we recognized no cumulative catch-up adjustments.

Operating income in the Integrated Solutions segment increased $1.6 million, or 22.9%, over the prior year quarter with operating margin increasing to 5.2% from 4.9%. These increases are primarily attributable to the favorable cumulative catch-up adjustments discussed above.

#### Expeditionary Services Segment

| ​ ​ ​ | ​ ​ | ​ ​ ​ Three Months Ended February 29/28, 2024 | ​ ​ ​ 2023 | ​ ​ % Change |
| --- | --- | ---: | ---: | ---: |
| Third-party sales | ​ | $18.7 | $22.0 | (15.0)% |
| Operating income | ​ | 0.9 ​ | 1.9 | (52.6)% |
| Operating margin | ​ | 4.8% | 8.6% | ​ |

Sales in the Expeditionary Services segment decreased $3.3 million, or 15.0%, from the prior year period primarily due to lower sales volumes for pallets partially offset by higher sales volumes for shelters.

Operating income in the Expeditionary Services segment decreased $1.0 million, or 52.6%, from the prior year quarter primarily due to the lower sales volumes. Operating margin decreased to 4.8% from 8.6% in the prior year quarter, primarily due to increased selling, general and administrative expenses over the prior year quarter.

### Nine-Month Period Ended February 29, 2024

#### Parts Supply Segment

| ​ ​ ​ | ​ ​ | ​ ​ ​ Nine Months Ended February 29/28, 2024 | ​ ​ ​ 2023 | ​ ​ % Change |
| --- | --- | ---: | ---: | ---: |
| Third-party sales |  | $706.7 | $579.8 | 21.9% |
| Operating income | ​ | 74.6 ​ | 64.7 | 15.3% |
| Operating margin | ​ | 10.6% | 11.2% | ​ |

Sales in the Parts Supply segment for the nine-month period ended February 29, 2024 increased $126.9 million, or 21.9%, over the prior year period primarily due to a $69.0 million increase in sales in our aftermarket parts trading activities as a result of increased demand for used serviceable material. Whole asset sales in our aftermarket parts trading activities increased $20.8 million over the prior year period.

Operating income in the Parts Supply segment increased $9.9 million, or 15.3%, over the prior year period, primarily due to increased sales volumes across both new parts distribution and used serviceable material partially offset by the recognition of the $11.2 million charge in the first quarter of fiscal 2024 related to the unfavorable Russian court judgment.

#### Repair & Engineering Segment

| ​ ​ ​ | ​ ​ | ​ ​ ​ Nine Months Ended February 29/28, 2024 | ​ ​ ​ 2023 | ​ ​ % Change |
| --- | --- | ---: | ---: | ---: |
| Third-party sales |  | $423.7 | $390.4 | 8.5% |
| Operating income | ​ | 31.9 ​ | 25.8 | 23.6% |
| Operating margin | ​ | 7.5% | 6.6% | ​ |

Sales in the Repair & Engineering segment for the nine-month period ended February 29, 2024 increased $33.3 million, or 8.5%, over the prior year period primarily due to a $46.4 million sales increase at our airframe maintenance facilities. This increase was partially offset by lower sales volume of $18.7 million at our landing gear facility.

Operating income in the Repair & Engineering segment increased $6.1 million, or 23.6%, over the prior year period primarily due to the sales volume increase in our airframe maintenance facilities. Operating margin increased to 7.5% from 6.6% in the prior year period, primarily due to improved profitability in our airframe maintenance facilities.

#### Integrated Solutions Segment

| ​ ​ ​ | ​ ​ | ​ ​ ​ Nine Months Ended February 29/28, 2024 | ​ ​ ​ 2023 | ​ ​ % Change |
| --- | --- | ---: | ---: | ---: |
| Third-party sales |  | $478.4 | $398.6 | 20.0% |
| Operating income | ​ | 22.7 ​ | 22.4 | 1.3% |
| Operating margin | ​ | 4.7% | 5.6% | ​ |

Sales in the Integrated Solutions segment for the nine-month period ended February 29, 2024 increased $79.8 million, or 20.0%, over the prior year period primarily due to higher commercial program activity and the Trax acquisition in the fourth quarter of fiscal 2023 which contributed sales of $26.9 million in the current year period.

In the nine-month period ended February 29, 2024, we recognized net favorable cumulative catch-up adjustments of $2.7 million compared to net favorable cumulative catch-up adjustments of $5.8 million in the prior year period. These adjustments primarily relate to our long-term, power-by-the-hour programs where we provide component inventory management and repair services as well as certain long-term government programs.

Operating income in the Integrated Solutions segment increased $0.3 million, or 1.3%, over the prior year period primarily due to the higher commercial government program activity largely offset by $7.9 million of amortization and acquisition-related expenses for Trax. Operating margin decreased to 4.7% from 5.6% primarily due to the completion of certain government programs.

#### Expeditionary Services Segment

| ​ ​ ​ | ​ ​ ​ | ​ ​ ​ Nine Months Ended February 29/28, 2024 ​ | ​ ​ ​ 2023 ​ | ​ ​ % Change |
| --- | --- | ---: | ---: | ---: |
| Third-party sales | ​ | $53.6 ​ | $68.4 | (21.6)% |
| Operating income |  | 3.1 | 6.2 | (50.0)% |
| Operating margin | ​ | 5.8% | 9.1% | ​ |

Sales in the Expeditionary Services segment for the nine-month period ended February 29, 2024 decreased $14.8 million, or 21.6%, from the prior year period primarily due to lower sales volumes for pallets partially offset by higher sales volumes for shelters.

Operating income in the Expeditionary Services segment decreased $3.1 million, or 50.0%, from the prior year period primarily due to lower sales volumes. Operating margin decreased to 5.8% from 9.1% in the prior year period, primarily due to increased selling, general and administrative expenses over the prior year period.

### Liquidity, Capital Resources and Financial Position

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

At February 29, 2024, our liquidity and capital resources included working capital of $812.5 million inclusive of cash of $69.2 million.

On December 14, 2022, we entered into a new credit agreement with various financial institutions as lenders and Wells Fargo Bank, N.A. as administrative agent for the lenders (the “Credit Agreement”) that included an unsecured revolving credit facility (the “Revolving Credit Facility”) that we can draw upon for working capital and general corporate purposes. In conjunction with the Credit Agreement, we terminated our revolving credit facility under the credit agreement dated April 12, 2011, as amended, (the “2011 Credit Agreement”) with the outstanding borrowings under the 2011 Credit Agreement at the date of its termination rolled over to the Credit Agreement.

On March 1, 2024, we entered into an amendment (the “Revolver Amendment”) to our Credit Agreement, which governs the Company’s existing revolving credit facility (the revolving credit facility as amended by the Revolver Amendment, the “Amended Revolving Credit Facility”). Among other things, the Revolver Amendment (i) increased the aggregate commitments under the Amended Revolving Credit Facility to $825.0 million from $620 million under the Revolving Credit Facility, (ii) increased the maximum leverage ratio permitted under the financial covenants applicable to the Amended Revolving Credit Facility and (iii) included an additional pricing level that will increase the interest rate margins on the Amended Revolving Credit Facility to 250 basis points (in the case of SOFR loans) and 150 basis points (in the case of Base Rate loans) if our adjusted total debt to EBITDA ratio exceeds 3.75:1.00.

In connection with the Revolver Amendment, we borrowed $186.2 million under the Amended Revolving Credit Facility to fund a portion of the purchase price for the acquisition of the Product Support Business.

Under certain circumstances, we may request an increase to the lending commitments under the Credit Agreement by an aggregate amount of up to $300 million, not to exceed $1,125 million in total. The Credit Agreement expires on December 14, 2027. Borrowings under the Credit Agreement bear interest at a variable rate based on the secured overnight financing rate (“SOFR”) plus 112.5 to 250 basis points based on certain financial measurements if a SOFR loan, or at the offered fluctuating Base Rate plus 12.5 to 150 basis points based on certain financial measurements if a Base Rate loan.

At February 29, 2024, borrowings outstanding under the Revolving Credit Facility were $277.0 million and there were approximately $11.0 million of outstanding letters of credit, which reduced the availability under this facility to $332.0 million. There are no other terms or covenants limiting the availability of the Revolving Credit Facility.As of February 29, 2024, 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 $9.4 million.

On March 1, 2024, we issued $550.0 million aggregate principal amount of 6.75% Senior Notes due 2029 (the “Notes”) to fund a portion of the purchase price for the acquisition of the Product Support Business. The Notes bear interest at a rate of 6.75% per year, payable semiannually in cash in arrears on March 15 and September 15 of each year, commencing September 15, 2024. The Notes will mature on March 15, 2029.

At any time prior to March 15, 2026, the Company may redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date plus an applicable “make-whole” premium. At any time prior to March 15, 2026, the Company may also redeem up to 40% of the Notes with net cash proceeds of certain equity offerings at a redemption price equal to 106.75% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. On or after March 15, 2026, the Company may redeem the Notes, in whole or in part, at specified redemption prices ranging from 100.000% to 103.375% depending on the date of redemption.

We maintain a Purchase Agreement with Citibank N.A. (“Purchaser”) for the sale, from time to time, of certain accounts receivable due from certain customers (the “Purchase Agreement”). Under the Purchase Agreement, the maximum amount of receivables sold is limited to $150 million and Purchaser may, but is not required to, purchase the eligible receivables we offer to sell. The term of the Purchase Agreement expires after February 22, 2025, but, the Purchase Agreement may be terminated earlier under certain circumstances. The term of the Purchase Agreement is automatically extended for annual terms unless either party provides advance notice that they do not intend to extend the term.

We have no retained interests in the sold receivables, other than limited recourse obligations in certain circumstances, and only perform collection and administrative functions for the Purchaser. We account for these receivable transfers as sales under ASC 860, *Transfers and Servicing*, and de-recognize the sold receivables from our Consolidated Balance Sheet. At February 29, 2024, we have utilized $8.7 million which reduced the availability under the Purchase Agreement to $141.3 million.

Our financing arrangements require us to comply with leverage and interest coverage ratios and comply with certain affirmative and negative covenants, including those relating to financial reporting and notification, compliance with applicable laws, and limitations on additional liens, indebtedness, acquisitions, investments and disposition of assets. Our financing arrangements also generally require our significant domestic subsidiaries to provide a guarantee of payment. At February 29, 2024, we were in compliance with the financial and other covenants under each of our financing arrangements.

During fiscal 2024, we continued to experience delayed collections from one of our significant regional airline customers and issued the customer a Notice of Payment and Other Defaults during the second quarter of fiscal 2024 to request payment and reserve our rights under our agreements. Though we currently expect full payment from the customer of all amounts due and do not believe a reserve for credit loss is warranted, the customer’s financial condition may continue to deteriorate and we may in the future experience loss due to a default by the customer and the related nonpayment of account receivable balances. Our Condensed Consolidated Balance Sheet as of February 29, 2024 included accounts receivable of $8.5 million, including $2.2 million past due, and contract assets of $9.7 million related to this customer.

On December 16, 2021, our Board of Directors authorized a renewal of our stock repurchase program, under which we may repurchase up to $150 million of our common stock with no expiration date. During the third quarter of fiscal 2024, we repurchased 0.1 million shares for an aggregate purchase price of $5.1 million. During fiscal 2023, we repurchased 1.2 million shares for an aggregate purchase price of $50.1 million. Since inception of the renewal authorization, we have repurchased 2.2 million shares for an aggregate purchase price of $97.5 million. The timing and amount of repurchases are subject to prevailing market conditions and other considerations, including our liquidity and acquisition and other investment opportunities.

#### Cash Flows from Operating Activities

Net cash provided by operating activities–continuing operations was $19.3 million in the nine-month period ended February 29, 2024 compared to cash used of $21.5 million in the prior year period. The increase in cash provided over the prior year of $40.8 million was primarily attributable to working capital changes, including the timing of payments for inventory and rotable asset investments in both aircraft, new parts and used serviceable material in the current year period.

#### Cash Flows from Investing Activities

Net cash used in investing activities was $26.8 million in the nine-month period ended February 29, 2024 compared to $27.3 million in the prior year period. The decrease in cash used in investing activities from the prior year of $0.5 million was primarily related to decreased expenditures on capital projects in the current year period.

#### Cash Flows from Financing Activities

Net cash provided by financing activities was $9.5 million in the nine-month period ended February 29, 2024 compared to cash provided of $44.5 million in the prior year period. The decrease in cash provided by financing activities from the prior year period of $35.0 million was primarily related to lower borrowings on our Revolving Credit Facility in the current year period.

### Critical Accounting Policies and Significant Estimates

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

### Forward-Looking Statements

This report contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. All statements other than statements of historical fact contained in this report are forward-looking statements.

The forward-looking statements in this report are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this report and are subject to a number of known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from those projected in the forward-looking statements. These risks and uncertainties include, but are not limited to:

- the ability to realize the anticipated benefits of the Product Support Business as rapidly or to the extent anticipated;
- our ability to successfully integrate the Product Support Business into our operations;
- factors that adversely affect the commercial aviation industry;
- the impact of pandemics and other disease outbreaks, such as COVID-19, and similar public health threats on air travel, worldwide commercial activity and our and our customers’ ability to source parts and components;
- a reduction in the level of sales to the branches, agencies and departments of the U.S. government and their contractors;
- cost overruns and losses on fixed-price contracts;
- nonperformance by subcontractors or suppliers;
- changes in or non-compliance with laws and regulations that may affect certain of our aviation and government and defense related activities that are subject to licensing, certification and other regulatory requirements imposed by the Federal Aviation Administration, the U.S. State Department and other regulatory agencies, both domestic and foreign;
- a reduction in outsourcing of maintenance activity by airlines;
- a shortage of the skilled personnel on whom we depend to operate our business, or work stoppages;
- competition from other companies, including original equipment manufacturers, some of which have greater financial resources than we do;
- financial and operational risks arising as a result of operating internationally;
- inability to integrate acquisitions effectively and execute our operational and financial plan related to the acquisitions;
- inability to recover our costs due to fluctuations in market values for aviation products and equipment caused by various factors, including reductions in air travel, airline bankruptcies, consolidations and fleet reductions;
- asset impairment charges we may be required to recognize to reflect the non-recoverability of our assets or lowered expectations regarding businesses we have acquired;
- threats to our systems technology from equipment failures, cyber or other security threats or other disruptions;
- a need to make significant capital expenditures to keep pace with technological developments in our industry;
- a need to reduce the carrying value of our assets;
- inability to fully execute our stock repurchase program and return capital to our stockholders;
- restrictions on paying, or failure to maintain or pay dividends;
- limitations on our ability to access the debt and equity capital markets or to draw down funds under loan agreements;
- non-compliance with laws and regulations relating to the formation, administration and performance of our U.S. government contracts;
- exposure to product liability and property claims that may be in excess of our liability insurance coverage;
- the impact of adverse incidents involving, or adverse publicity concerning, our business or the aviation industry generally, which could harm our reputation and results of operations;
- decreased demand for our services due to mandatory groundings of aircraft;
- impacts from stakeholder and market focus on environmental, social and governance matters;
- the costs of compliance, and liability for non-compliance, with environmental regulations, including future requirements regarding climate change and environmental, social and governance matters; and
- other important risk factors that could affect the outcome of the events set forth in these statements and that could affect our operating results and financial condition, including those discussed in Part II – Item 1A, “Risk Factors,” in this report and in Part I – Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended May 31, 2023, as well as those discussed in other documents we file from time to time with the Securities and Exchange Commission.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this report, whether as a result of any new information, future events, changed circumstances or otherwise.

## Market risk

As filed, 1,188 characters.

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

*Foreign Currency Risk*. Revenues and expenses of our foreign operations are translated at average exchange rates during the period, and balance sheet accounts are translated at period-end exchange rates. Balance sheet translation adjustments are excluded from the results of operations and are recorded in stockholders’ equity as a component of accumulated other comprehensive loss. A hypothetical 10 percent devaluation of the U.S. dollar against foreign currencies would not have had a material impact on our financial position or continuing operations for the quarter ended February 29, 2024.

*Interest Rate Risk*. Refer to the section Quantitative and Qualitative Disclosures about Market Risk in our Annual Report on Form 10-K for the year ended May 31, 2023. There were no significant changes during the quarter ended February 29, 2024.

## Controls and procedures

As filed, 1,271 characters.

#### Evaluation of Disclosure Controls and Procedures

As required by Rules 13a-15(e) and 15d-15(e) of the Exchange Act, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of February 29, 2024. This evaluation was carried out under the supervision and with participation of our Chief Executive Officer and our Chief Financial Officer. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Therefore, effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of February 29, 2024 to provide reasonable assurance that information required to be disclosed in the reports that are filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported in a timely manner.

There were no changes in our internal control over financial reporting during the quarter ended February 29, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 5,986 characters.

There has been no material change in the information reported under Part I-Item 1A “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023, as supplemented by the risk factors described in Exhibit 99.1 to the Current Report on Form 8-K we filed with the Securities and Exchange Commission on February 14, 2024, with the exception of the addition of the following risk factors (the risk factors included in Part II, Item 1A of our Quarterly Report for the quarter ended November 30, 2023 are deleted in their entirety):

***We may not realize the anticipated benefits from our acquisition of the Product Support Business from Triumph Group.***

Our acquisition of the Product Support Business from Triumph Group (the “Acquisition”) involves integrating the Product Support Business into our Company, both of which previously operated independent of each other. The success of the Product Support Business will depend, in part, on our ability to realize the anticipated benefits from successfully combining our business and the Product Support Business. We are devoting substantial management attention and resources to integrating our and the Product Support Business’s business practices so that we can fully realize the anticipated benefits of the Acquisition, all of which may divert attention of management from our existing business. Nonetheless, the business and assets acquired may not be successful or continue to grow at the same rate as when operated independently or may require greater resources and investments than originally anticipated. The Acquisition could also result in the assumption of unknown or contingent liabilities, and, because the Product Support Business operates in the same sector that we do, the Acquisition could also exacerbate a number of risks that currently apply to us by increasing our exposure to sector-specific trends.

Potential difficulties we may encounter include, but are not limited to, the following:

- the inability to successfully combine our business and the Product Support Business in a manner that permits us to realize the anticipated benefits, including any synergies, cross-selling opportunities, cost savings, financial or business growth opportunities, of the Acquisition in the time frame currently anticipated, or at all;
- the failure to integrate internal systems, programs and controls, or decisions by our management to apply different accounting policies, assumptions or judgments to the Product Support Business’s operational results than the Product Support Business applied in the past;
- loss of sales and other commercial relationships;
- the complexities associated with managing our company with the integration of the Triumph Group Product Support Business;
- the additional complexities of combining the Product Support Business with our company and its culture, strategies and customer base;
- the failure to retain key employees at either of the two companies that may be difficult to replace;
- the disruption of each company’s ongoing businesses or inconsistencies in services, standards, controls, procedures and policies;
- potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Acquisition;
- the increase in our indebtedness as a result of the incurrence of the Notes and borrowings under our Amended Revolving Credit Facility to finance the Acquisition; and
- performance shortfalls at one or both of the two companies as a result of the diversion of management’s attention caused by integrating our and the Product Support Business’s operations.

Based on our preliminary purchase accounting estimates, a significant portion of the purchase price for the Acquisition will be allocated to goodwill and intangible assets. We must test goodwill for possible impairment on at least an annual basis and must evaluate amortizable intangible assets for impairment if there are indicators of a possible impairment. If the Acquisition does not yield expected returns, we may be required to record impairment losses, which could materially adversely affect our reported results.

Any of these risks could adversely affect our ability to maintain relationships with customers, vendors, employees and other commercial relationships or adversely affect our or the Product Support Business’s future operational results. As a result, the anticipated benefits of the Acquisition may not be realized at all or may take longer to realize or cost more than expected, which could adversely affect our business, financial condition, results of operations and growth prospects. The indebtedness incurred to finance the Acquisition may adversely affect our ability to operate our business, remain in compliance with debt covenants, or react to changes in our business or the industry in which we operate. In addition, changes in laws and regulations affecting the Triumph Group Product Support Business could adversely impact our business, financial condition, results of operations and growth prospects.

***We expect to incur material expenses and have incurred additional indebtedness related to the Acquisition.***

We expect to incur material expenses in connection with integrating the business and operations of the Product Support Business. While we have assumed that a certain level of transaction and integration expenses will be incurred, there are a number of factors beyond our control that could affect the total amount or the timing of integration expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. We also incurred additional indebtedness in order to fund the Acquisition, which increases our debt service obligations and the risk of a downgrade of our credit ratings by credit agencies. We cannot assure you that these additional expenses and indebtedness will not have an adverse effect on us or our results of operations.

Filed Mar 21, 2024.
Source: SEC EDGAR, the filing index for accession 0001104659-24-037408. Last ingested by Listed: Nov 2, 2026, 07:59 ET. No prices; not investment advice.