Summary of Significant Accounting Policies (Policies)

12 Months Ended

May. 31, 2015

Summary of Significant Accounting Policies

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 10 for a discussion of aircraft joint ventures).

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 large airframe maintenance contracts and performance-based logistics programs are recognized by the percentage of completion method, based on the relationship of costs incurred to date to the estimated total costs. 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 to 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, 2015 and 2014, are $21.1 million and $19.7 million, respectively, of unbilled accounts receivable related to our KC10 supply 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 non-current assets on the consolidated balance sheet as of May 31, 2015 and 2014, are $7.5 million and $9.9 million, respectively, of costs in excess of amounts billed for the flight-hour portion of the same KC10 supply agreement. These amounts represent the difference between the amounts of revenue recognized by us driven by costs incurred under the flight hour portion of the program, compared to what was billed.

Pursuant to U.S. generally accepted accounting principles, we have to assess the recoverability of the costs in excess of amounts billed by projecting future performance of the flight hour portion of the contract, including an estimate of future flight hours and costs over the life of the program. In fiscal 2013, we established cost savings targets to reduce program spend over the life of the program and we had been successful in achieving these targets. However, beginning in the second half of fiscal 2013 we experienced a decrease in flight hour revenue. This decrease was caused by a 28% decline in flight hours flown primarily due to lower operations tempo. As a result of this unexpected and significant decline in flight hour revenue and a revised forecast indicating lower usage in the future for the fleet, we lowered the revenue and profitability forecast for the flight hour portion of the contract during the fourth quarter of fiscal 2013 resulting in a $29.8 million pre-tax charge. This revised forecast results in a 0% margin over the remaining life of the flight-hour program.

No additional adjustments have been recorded in fiscal 2015 or 2014 based on the flight hours and costs incurred to date as well as future expectations for the program. We recorded 0% margin in fiscal 2015 and 2014 on the flight-hour portion of the contract, which resulted in revenue of $46.5 million and $42.4 million in fiscal 2015 and 2014, respectively. We expect to recover the May 31, 2015 balance of the costs in excess of amounts billed of $7.5 million through projected future billings in excess of forecasted costs over the life of the program.

Notwithstanding the foregoing, we reserve all our rights under the KC10 supply agreement, at law and in equity, including our rights to recover past and future revenues and expenses associated with the program.

Allowance for Doubtful Accounts

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

Goodwill and Other Intangible Assets

In accordance with Accounting Standards Codification ("ASC") 350, Intangibles—Goodwill and Other, 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. 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. The second step of the test requires the allocation of the reporting unit's fair value to its assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the carrying value, the difference is recorded as an impairment loss.

We estimate the fair value of each reporting unit using both an income approach based on discounted cash flows and a market approach based on a multiple of earnings. 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. We use a discount rate based on our consolidated weighted average cost of capital which is adjusted for each of our reporting units based on their specific risk and size characteristics. 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, 2015, we have five reporting units as defined by ASC 350. Step one of the impairment test was completed for the reporting units with assigned goodwill and the estimated fair value for each reporting unit exceeded its net asset carrying value. Accordingly, there was no indication of impairment and the second step was not performed.

In connection with the change in reportable segments discussed in Note 13—Business Segment Information and the divestitures discussed in Note 2—Discontinued Operations, we reallocated goodwill across our new segments based on a relative fair value basis. Changes in the carrying amount of goodwill by segment for fiscal 2015 and 2014 are as follows:

	Aviation Services			Expeditionary Services		Discontinued Operations			Total
Balance as of May 31, 2013	$	73.7		$	45.0	$	136.9		$	255.6
Acquisition		—			—		0.3			0.3
Foreign currency translation adjustments		2.0			—		3.8			5.8

Balance as of May 31, 2014		75.7			45.0		141.0			261.7
Reallocation of goodwill		—			4.7		(4.7	)		—
Businesses sold or assets held for sale		—			—		(136.3	)		(136.3	)
Foreign currency translation adjustments		(1.9	)		—		—			(1.9	)

Balance as of May 31, 2015	$	73.8		$	49.7	$	—		$	123.5

Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives. Intangible assets, other than goodwill, are comprised of the following:

	May 31, 2015
	Gross		Accumulated Amortization			Net
Amortizable intangible assets:
Customer relationships	$	23.4	$	(9.0	)	$	14.4
Developed technology		8.0		(3.5	)		4.5
Lease agreements		21.5		(8.7	)		12.8
FAA certificates		5.0		(1.3	)		3.7

		57.9		(22.5	)		35.4
Unamortized intangible assets:
Trademarks		1.3		—			1.3

	$	59.2	$	(22.5	)	$	36.7

	May 31, 2014
	Gross		Accumulated Amortization			Net
Amortizable intangible assets:
Customer relationships	$	124.0	$	(22.9	)	$	101.1
Developed technology		32.8		(4.8	)		28.0
Lease agreements		21.5		(7.5	)		14.0
FAA certificates		5.0		(1.0	)		4.0

		183.3		(36.2	)		147.1
Unamortized intangible assets:
Trademarks		18.3		—			18.3

	$	201.6	$	(36.2	)	$	165.4

Customer relationships are being amortized over 10-20 years, developed technology is being amortized over 7-10 years, the lease agreements are being amortized over 18 years, and the FAA certificates are being amortized over 20 years. Amortization expense recorded during fiscal 2015, 2014 and 2013 was $4.6 million, $4.7 million, and $7.7 million, respectively. The estimated aggregate amount of amortization expense for intangible assets in each of the next five fiscal years is $4.4 million in 2016, $4.4 million in 2017, $4.4 million in 2018, $3.8 million in 2019 and $3.5 million in 2020.

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 until such subsidiaries are liquidated.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid instruments which have original maturities of three months or less when purchased.

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 $39.2 million and $50.5 million at May 31, 2015 and 2014, respectively. Additionally, included in accounts receivable as of May 31, 2015 and 2014, are $41.1 million and $48.7 million, respectively, of accounts receivable from a large defense contractor. 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, 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

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,
	2015		2014
Raw materials and parts	$	43.1	$	114.1
Work-in-process		18.1		57.5
Aircraft and engine parts, components and finished goods		337.0		297.3
Aircraft held for sale and related support parts		57.8		26.4

	$	456.0	$	495.3

We classify certain aircraft from our expeditionary airlift business as assets held for sale at the time management commits to a plan to sell the aircraft, changes to the planned sale are not likely, the aircraft are actively marketed and available for immediate sale, and the sale is expected to be completed within one year. Upon designation of an aircraft as held for sale, we record the aircraft's value at the lower of its carrying value or its estimated fair value, less estimated costs to sell. Assets held for sale are not depreciated.

Aircraft may be classified as assets held for sale for more than one year as we continue to actively market the aircraft at reasonable prices. Certain aircraft types we currently have available for sale are specifically designed for particular functions which limits the marketability of those assets. We had eleven aircraft held for sale comprised of five fixed-wing and six rotary-wing aircraft at May 31, 2015 and nine aircraft held for sale comprised of five fixed-wing and four rotary-wing aircraft at May 31, 2014. During fiscal 2015, we recognized impairment charges of $8.9 million reflecting the decrease in fair value for certain aircraft held for sale and related rotable assets.

During the fourth quarter of fiscal 2015, we entered into a sale-leaseback transaction for our two S-92 rotary-wing aircraft. We received proceeds of $40.3 million in fiscal 2015 which have been deferred as a sale-leaseback advance pending completion of the sale transaction, which is expected to occur in fiscal 2016.

Equipment under Leases

Lease revenue is recognized as earned. The cost of the asset under lease is the 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. In conjunction with our decision to exit certain product lines in our landing gear business, we recognized an impairment charge of $17.7 million related to rotable assets in fiscal 2015.

Equipment on long-term lease consists of engines on lease with commercial airlines generally for more than twelve months and rotable parts used to support long-term supply chain programs. The rotable parts included in equipment on long-term lease are being depreciated on a straight-line basis over their estimated useful lives. During the fourth quarter of fiscal 2015, we sold our two remaining wholly-owned aircraft which were on long-term leases for $11.0 million which resulted in a loss on sale of $14.8 million.

The following is a summary of equipment on or available for long-term lease:

	May 31,
	2015		2014
Aircraft engines and rotable parts	$	80.2	$	73.1
Aircraft		—		25.3

	$	80.2	$	98.4

Future rent due to us under non-cancelable leases during each of the next five fiscal years is $18.4 million in 2016, $17.6 million in 2017, $17.2 million in 2018, $16.7 million in 2019, and $16.1 million in 2020.

Property, Plant and Equipment

We record property, plant and equipment at cost. 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, major components in service, and associated rotable assets to support our expeditionary airlift services are depreciated over their estimated useful lives, which is generally 7-30 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.

In accordance with ASC 360, Property, Plant and Equipment, 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. We utilize certain assumptions to estimate future undiscounted cash flows, including demand for our services, future market conditions and trends, business development pipeline of opportunities, current and future lease rates, lease terms, and residual values. Where a determination has been made to exit an entire asset group, the asset group is reviewed for potential impairment with an impairment loss recognized in the period in which it is determined that the aggregate carrying amount of assets within an asset group is not recoverable.

Capitalized Program Development Costs

Our Telair Cargo Group capitalized $139.8 million, net of reimbursements, as of May 31, 2014 related to costs associated with the engineering and development of the A400M cargo system. The Telair Cargo Group was sold in March 2015 as further discussed in Note 2—Discontinued Operations. These capitalized costs are classified as current and non-current assets on the May 31, 2014 Consolidated Balance Sheet. At May 31, 2014, current assets include $27.6 million in Deposits, prepaids and other and non-current assets include $112.2 million in Capitalized program development costs. The capitalized development costs were recovered upon the sale of the Telair Cargo Group.

Income Taxes

We are subject to income taxes in the U.S., state, and several foreign jurisdictions. In the ordinary course of business, there can be transactions and calculations where the ultimate tax determination is uncertain. We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns in accordance with applicable accounting guidance for accounting for income taxes, using currently enacted tax rates in effect for the year in which the differences are expected to reverse. We record a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized.

The accounting for uncertainty in income taxes requires a more-likely-than-not threshold for financial statement recognition of tax positions taken or expected to be taken in a tax return. Where necessary, we record a liability for the difference between the benefit recognized for financial statement purposes and the tax position taken or expected to be taken on our tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made.

Supplemental Information on Cash Flows

Supplemental information on cash flows is as follows:

	For the Year Ended May 31,
	2015		2014		2013
Interest paid	$	42.7	$	33.8	$	28.3
Income taxes paid		105.6		17.3		24.1
Income tax refunds and interest received		12.1		7.5		23.2

On May 29, 2015, we repurchased 4,185,960 shares of our common stock at a price of $31.90 per share pursuant to a tender offer utilizing $133.5 million cash on hand. Fees and expenses of $1.2 million were incurred related to the tender offer and were recorded in treasury stock. In addition to the tender offer, we also repurchased common shares of $16.8 million and re-issued shares upon exercise of stock options, net of shares withheld to satisfy statutory tax obligations, of $3.6 million during fiscal 2015.

During fiscal 2014, treasury stock decreased $1.8 million 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 $2.8 million, partially offset by the purchase of treasury shares of $1.0 million. During fiscal 2013, treasury stock increased $9.7 million reflecting the purchase of treasury shares of $14.6 million, partially offset by 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 $4.9 million.

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.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. This ASU will supersede the revenue recognition requirements in ASC 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes certain cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. This new standard will be effective for us beginning June 1, 2017, however the FASB issued a proposed ASU on April 29, 2015 which would defer the effective date of the new standard for one year. We are currently evaluating the impact of the adoption of this new standard on our consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity which requires that a disposal representing a strategic shift that has or will have a major effect on an entity's financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The Company adopted this guidance on June 1, 2015 which will result in expanded disclosures related to the income statement and cash flow activities for our discontinued operations.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. This new standard will be effective for us beginning June 1, 2016 with early adoption permitted. We are currently evaluating the impact of the adoption of this new standard on our consolidated financial statements.