Component: (Network and Table)
2010 - Disclosure - Summary of Significant Accounting Policies (Policies)
Slicers (applies to each fact value in each table cell)
Summary of Significant Accounting PoliciesPeriod [Axis]
2011-06-01 - 2012-05-31
Summary of Significant Accounting Policies
Principles of Consolidation

Principles of Consolidation

        The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after elimination of intercompany accounts and transactions. The equity method of accounting is used for investments in other companies in which we have significant influence; generally this represents common stock ownership of at least 20% and not more than 50% (see Note 9 for a discussion of aircraft joint ventures).

        As of the third quarter of fiscal 2012, we no longer reported the operating results of our Amsterdam component repair business as a discontinued operation. We made the decision to retain the operation after considering the results of our sales process and reviewing strategic alternatives for the business. As a result of this change in strategy, the operating results for the Amsterdam business have been reclassified from discontinued operations and are reported in continuing operations for all periods presented and are not material to our financial position or results of operations.

Revenue Recognition

Revenue Recognition

        Sales and related cost of sales for product sales are recognized upon shipment of the product to the customer. Our standard terms and conditions provide that title passes to the customer when the product is shipped to the customer. Sales of certain defense products are recognized upon customer acceptance, which includes transfer of title. Under the majority of our expeditionary airlift services contracts, we are paid and record as revenue a fixed daily amount per aircraft for each day an aircraft is available to perform airlift services. In addition, we are paid and record as revenue an amount which is based on number of hours flown. Sales from services and the related cost of services are generally recognized when customer-owned material is shipped back to the customer. We have adopted this accounting policy because at the time the customer-owned material is shipped back to the customer, all services related to that material are complete as our service agreements generally do not require us to provide services at customer sites. Furthermore, serviced units are typically shipped to the customer immediately upon completion of the related services. Sales and related cost of sales for certain long-term manufacturing contracts and certain large airframe maintenance contracts and performance-based logistics programs are recognized by the percentage of completion method, either based on the relationship of costs incurred to date to estimated total costs or the units of delivery method. Lease revenues are recognized as earned. Income from monthly or quarterly rental payments is recorded in the pertinent period according to the lease agreement. However, for leases that provide variable rents, we recognize lease income on a straight-line basis. In addition to a monthly lease rate, some engine leases require an additional rental amount based on the number of hours the engine is used in a particular month. Lease income associated with these contingent rentals is recorded in the period in which actual usage is reported to us by the lessee, which is normally the month following the actual usage.

        Certain supply chain management programs we provide our customers contain multiple elements or deliverables, such as program and warehouse management, parts distribution and maintenance and repair services. We recognize revenue for each element or deliverable that can be identified as a separate unit of accounting at the time of delivery based upon the relative fair value of the products and services.

        Included in accounts receivable as of May 31, 2012 and 2011, are $36,218 and $28,867, respectively, of unbilled accounts receivable related to a defense supply chain support agreement. These unbilled accounts receivable relate to costs we have incurred on parts that were requested and accepted by our customer to support the program. These costs have not been billed by us because the customer has not issued the final paperwork necessary to allow for billing.

        In addition to the unbilled accounts receivable, included in Other on the consolidated balance sheet as of May 31, 2012 and 2011, are $27,872 and $19,404, respectively, of costs in excess of amounts billed for the same defense supply chain support agreement. We expect to recover costs in excess of amounts billed through future billings over the life of the program.

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

        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. We use a two-step process to evaluate goodwill for impairment. In the first step, we compare the fair value of each reporting unit with the carrying value of the reporting unit, including goodwill. We estimate the fair value of each reporting unit using a valuation technique based on a multiple of earnings or discounted cash flows. If the estimated fair value of the reporting unit is less than the carrying value of the reporting unit, we would be required to complete a second step to determine the amount of goodwill impairment. In the second step, we would determine an implied fair value of the reporting unit's goodwill by allocating the reporting unit's fair value to all of the assets and liabilities other than goodwill. We then would compare the implied fair value of goodwill to the carrying amount and recognize the difference as an impairment charge.

        The assumptions we used to estimate the fair value of our reporting units are based on historical performance as well as forecasts used in our current business plan and require considerable management judgment. The fair value measurements used for our goodwill impairment testing use significant unobservable inputs which reflect 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.

        As of May 31, 2012, we have four operating segments which are also considered to be our reporting units as defined by the accounting standard for goodwill: Aviation Supply Chain; Government and Defense Services; Maintenance, Repair and Overhaul and Structures and Systems. During the fourth quarter of 2012, our stock price declined steeply and at the end of the year traded below our book value. Based on the results of the step one impairment test performed as of May 31, 2012, we determined that the estimated fair value of each reporting unit substantially exceeded its net asset carrying value. Accordingly, there was no indication of impairment and the second step was not performed.

        The amount reported under the caption "Goodwill and other intangible assets, net" is comprised of goodwill and intangible assets associated with acquisitions we made, principally since the beginning of fiscal 1998. During 2012, we acquired Telair® International GmbH ("Telair"), Nordisk Aviation Products, AS ("Nordisk") and Airinmar Holdings Limited ("Airinmar"), which increased goodwill by $135,975.

        Goodwill by segment is as follows:

  May 31,  
  2012   2011  

Aviation Supply Chain

  $ 40,596   $ 20,040  

Government and Defense Services

    38,304     38,304  

Maintenance, Repair and Overhaul

    28,108     28,108  

Structures and Systems

    162,968     47,549  


  $ 269,976   $ 134,001  

        At May 31, 2012 and 2011, intangible assets, other than goodwill, are comprised of the following:

  May 31,  
  2012   2011  

Amortizable intangible assets:


Customer relationships

  $ 113,384   $ 39,449  

Developed technology


Lease agreements

    21,500     21,500  

FAA certificates

    5,000     5,000  

Covenants not to compete

    1,570     1,570  


    600     600  


    300     300  


    172,362     68,419  

Accumulated amortization

    (34,094 )   (21,323 )


    138,268     47,096  

Unamortized intangible assets:





  $ 154,962   $ 47,096  

        Customer relationships are being amortized over one- to twenty-year periods, developed technology is being amortized over a seven- to thirty-year period, the lease agreements are being amortized over an eighteen-year period, the FAA certificates are being amortized over a twenty-year period and the covenants not to compete are being amortized over a three-year period. Amortization expense recorded during fiscal 2012, 2011 and 2010 was $12,971, $9,613 and $4,567, respectively. The estimated aggregate amount of amortization expense for intangible assets in each of the next five fiscal years is $12,943 in 2013, $9,030 in 2014, $8,981 in 2015, $8,820 in 2016 and $8,820 in 2017.

Cash and Cash Equivalents

Cash and Cash Equivalents

        At May 31, 2012 and 2011, there were no cash equivalents.

Marketable Securities

Marketable Securities

        Occasionally we will invest in equity securities and classify these equity securities as available for sale in the Consolidated Balance Sheet. As of May 31, 2012 and 2011, we had no amounts invested in available for sale securities.

        During fiscal 2010, we sold investments in securities that were classified as available for sale. The loss on sale of these investments was $1,150.

Foreign Currency

Foreign Currency

        Our foreign subsidiaries utilize the local currency as their functional currency. All balance sheet accounts of foreign subsidiaries transacting business in currencies other than the U.S. dollar are translated at year-end exchange rates. Revenues and expenses are translated at average exchange rates during the year. Translation adjustments are excluded from the results of operations and are recorded in stockholders' equity as a component of accumulated other comprehensive loss.

Financial Instruments and Concentrations of Market or Credit Risk

Financial Instruments and Concentrations of Market or Credit Risk

        Financial instruments that potentially subject us to concentrations of market or credit risk consist principally of trade receivables. While our trade receivables are diverse and represent a number of entities and geographic regions, the majority are with the U.S. Department of Defense and its contractors and entities in the aviation industry. Accounts receivable due from the U.S. Department of Defense were $50,598 and $70,652 at May 31, 2012 and 2011, respectively. We perform regular evaluations of customer payment experience, current financial condition and risk analysis. We may require collateral in the form of security interests in assets, letters of credit, and/or obligation guarantees from financial institutions for transactions executed on other than normal trade terms.

        The carrying amounts of cash and cash equivalents, accounts receivable, short-term borrowings and accounts and trade notes payable approximate fair value because of the short-term maturity of these instruments. The carrying value of long-term debt bearing a variable interest rate approximates fair value.

        Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.



        Inventories are valued at the lower of cost or market (estimated net realizable value). Cost is determined by the specific identification, average cost or first-in, first-out methods. From time-to-time, we purchase aircraft and engines for disassembly to individual parts and components. Costs are assigned to these individual parts and components utilizing list prices from original equipment manufacturers and recent sales history.

        The following is a summary of inventories:

  May 31,  
  2012   2011  

Raw materials and parts

  $ 101,257   $ 61,314  


    64,682     51,725  

Aircraft and engine parts, components and finished goods

    295,227     250,360  


  $ 461,166   $ 363,399  
Equipment under Leases

Equipment under Leases

        Lease revenue is recognized as earned. The cost of the asset under lease is original purchase price plus overhaul costs. Depreciation for aircraft is computed using the straight-line method over the estimated service life of the equipment. The balance sheet classification of equipment under lease is generally based on lease term, with fixed-term leases less than twelve months generally classified as short-term and all others generally classified as long-term.

        Equipment on short-term lease includes aircraft engines and parts on or available for lease to satisfy customers' immediate short-term requirements. The leases are renewable with fixed terms, which generally vary from one to twelve months. Equipment on long-term lease consists of aircraft and engines on lease with commercial airlines generally for more than twelve months.

        We are required to test for impairment of long-lived assets whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable from its undiscounted cash flows. When applying accounting standards addressing impairment to our aircraft and engine portfolio, we utilize certain assumptions to estimate future undiscounted cash flows, including current and future lease rates, lease terms, residual values and market conditions and trends impacting future demand (see Note 12—Restructuring and Impairment Charges). Unfavorable differences between actual and expected results could result in future impairments in our aircraft and engine lease portfolio.

        Future rent due to us under non-cancelable leases during each of the next five fiscal years is $16,675 in 2013, $16,031 in 2014, $14,414 in 2015, $8,354 in 2016 and $6,916 in 2017.

Property, Plant and Equipment

Property, Plant and Equipment

        Depreciation is computed on the straight-line method over useful lives of 10-40 years for buildings and improvements and 3-10 years for equipment, furniture and fixtures and capitalized software. Aircraft and major components in service to support our Airlift business are depreciated over their estimated useful lives which is generally 7-20 years. Leasehold improvements are amortized over the shorter of the estimated useful life or the term of the applicable lease.

        Repair and maintenance expenditures are expensed as incurred. Upon sale or disposal, cost and accumulated depreciation are removed from the accounts, and related gains and losses are included in results of operations.

Comprehensive Income

Comprehensive Income

        A summary of the components of comprehensive income is as follows:

  For the Year Ended May 31,  
  2012   2011   2010  

Net income attributable to AAR and noncontrolling interest

  $ 68,029   $ 69,826   $ 43,202  

Other comprehensive income—


Cumulative translation adjustments, net of tax

    (11,098 )   3,290     (2,238 )

Unrealized loss on derivative instruments, net of tax

    (3,887 )        

Unrecognized pension and post retirement costs, net of tax

    (14,184 )   7,711     (3,412 )

Total comprehensive income

  $ 38,860   $ 80,827   $ 37,552  
Supplemental Information on Cash Flows

Supplemental Information on Cash Flows

        Supplemental information on cash flows follows:

  For the Year Ended May 31,  
  2012   2011   2010  

Interest paid

  $ 16,566   $ 17,167   $ 13,629  

Income taxes paid

    11,418     9,812     30,149  

Income tax refunds and interest received

    7,205     4,541     709  

        During fiscal 2012 Treasury stock decreased $10,027 reflecting the re-issuance of shares upon exercise of stock options, net of shares withheld to satisfy statutory tax obligations, and restricted stock award grants of $13,730, partially offset by the purchase of treasury shares of $3,659 and the impact of net share settlements of $44 of bond hedge and warrants associated with convertible bond repurchases during fiscal 2012. During fiscal 2011 Treasury stock decreased $4,016 reflecting the re-issuance of shares upon exercise of stock options, net of shares withheld to satisfy statutory tax obligations, and restricted stock award grants of $6,692, partially offset by the purchase of treasury shares of $2,539 and the impact of net share settlements of $137 of bond hedge and warrants associated with convertible bond repurchases during fiscal 2011. During fiscal 2010, Treasury stock increased $1,288 reflecting the impact of net share settlements of $338 of bond hedge and warrants associated with convertible bond repurchases during fiscal 2010, and the impact from shares withheld to satisfy statutory tax obligations associated with the exercise of stock options of $950.

Use of Estimates

Use of Estimates

        We have made estimates and utilized certain assumptions relating to the reporting of assets and liabilities and the disclosures of contingent liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ from those estimates.