SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant To Section 13 or 15(d)of the Securities Exchange Act of 1934
For Quarterly Period Ended August 31, 2001
Commission file number 1-6263
AAR CORP. (Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code (630) 227-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /.
(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each on the issuer's classes of common stock, as of the latest practicable date.
$1.00 par value, 26,957,745 shares outstanding as of August 31, 2001.
AAR CORP. and SubsidiariesQuarterly Report on Form 10-QAugust 31, 2001
Table of Contents
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PART I, ITEM 1—FINANCIAL STATEMENTS
AAR CORP. and SubsidiariesCondensed Consolidated Balance SheetsAs of August 31, 2001 and May 31, 2001(In thousands)
The accompanying Notes to Condensed Consolidated FinancialStatements are an integral part of these statements.
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AAR CORP. and SubsidiariesCondensed Consolidated Statements of IncomeFor the Three Months Ended August 31, 2001 and 2000(Unaudited)(In thousands except per share data)
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AAR CORP. and SubsidiariesCondensed Consolidated Statements of Cash FlowsFor the Three Months Ended August 31, 2001 and 2000(Unaudited)(In thousands)
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AAR CORP. and SubsidiariesCondensed Consolidated Statements of Comprehensive IncomeFor the Three Months Ended August 31, 2001 and 2000(Unaudited)(In thousands)
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AAR CORP. and SubsidiariesNotes to Condensed Consolidated Financial StatementsAugust 31, 2001(In thousands)
Note A—Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of AAR CORP. (the Company) and its subsidiaries after elimination of intercompany accounts and transactions.
These statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The condensed consolidated balance sheet as of May 31, 2001 has been derived from audited financial statements. To prepare the financial statements in conformity with accounting principles generally accepted in the United States of America, management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain information and footnote disclosures, normally included in comprehensive financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to such rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest annual report on Form 10-K.
In the opinion of management of the Company, the condensed consolidated financial statements reflect all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the condensed consolidated financial position of AAR CORP. and its subsidiaries as of August 31, 2001 and the condensed consolidated results of operations, cash flows and comprehensive income for the three-month periods ended August 31, 2001 and 2000. The results of operations for such interim periods are not necessarily indicative of the results for the full years.
Note B—New Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141 "Business Combinations" effective for business combinations after June 30, 2001 and SFAS No. 142 "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. SFAS No. 141 requires all business combinations to be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized, but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. Early adoption of SFAS No. 142 is permitted for companies with a fiscal year beginning after March 2001, provided that the first quarter financial statements have not previously been issued. The Company adopted these statements in the first quarter of fiscal 2002. As a result of adoption of SFAS No. 142, the Company did not record goodwill amortization in the first quarter of fiscal 2002. Goodwill amortization in the first quarter of fiscal 2001 was $278. Had such amortization not been recorded, net income would have been $3,407 in the first quarter of fiscal 2001.
Note C—Revenue Recognition
Sales and related cost of sales are recognized primarily upon shipment of products and performance of services. Lease revenue is recognized as earned.
In connection with certain long-term inventory management programs, the Company purchases factory new products on behalf of its customers from original equipment manufacturers. These products are purchased from the manufacturer and "passed through" to the Company's customers at the Company's cost.
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Note D—Inventory
The following is a summary of inventories:
Note E—Supplemental Cash Flows Information
Supplemental information on cash flows:
Note F—Common Stock and Earnings Per Share of Common Stock
The computation of basic earnings per share is based on the weighted average number of common shares outstanding during each period. The computation of diluted earnings per share is based on the weighted average number of common shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options. The following table provides a reconciliation of the computations of basic and diluted earnings per share information for the three-month periods ended August 31, 2001 and 2000.
Note G—Long Term Debt
On June 7, 2001, the Company completed a $75,000 private placement of long-term debt, including $55,000 of ten-year notes at 8.39% due May 15, 2011 and $20,000 of seven-year notes at 7.98% due
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May 15, 2008. The Company's $65,000 of 9.5% notes are due November 1, 2001 and have been classified as current maturities of long-term debt.
Note H—Segment Reporting
The Company is a leading provider of value-added products and services to the global aviation/aerospace industry. In the first quarter of fiscal 2002, the Company changed its reporting segments to reflect changes in the chief decision making officer's approach to evaluating performance. Previously, the Company reported in three segments, Aircraft and Engines, Airframe and Accessories, and Manufacturing. The Company now reports its activities in four segments: Inventory and Logistic Services; Maintenance Repair and Overhaul; Manufacturing and Aircraft and Engine Sales and Leasing.
Revenues in the Inventory and Logistic Services segment are derived from the sale of a wide variety of new, overhauled and repaired engine and airframe parts and accessories to the commercial, military, general and business aviation markets.
Revenues in the Maintenance, Repair and Overhaul segment are derived from the repair and overhaul of a wide range of commercial and military aircraft engine and airframe parts and accessories; repair and overhaul of a wide variety of airframes and the repair and overhaul of parts to industrial gas and steam turbine operators.
Revenues in the Manufacturing segment are derived from the manufacture and sale of in-plane cargo loading and handling systems, advanced composite materials and a wide array of containers, pallets and shelters.
Revenues in the Aircraft and Engine Sales and Leasing segment are derived from the sale and lease of used commercial aircraft and new, overhauled and repaired commercial aircraft engines.
The accounting policies for the segments are the same as those for the Company. The chief decision making officer of the Company evaluates performance based on the segments. The expenses and assets related to corporate activities are not allocated to the segments.
Selected financial information for each segment is as follows:
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PART I, ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AAR CORP. and SubsidiariesResults of Operations(In thousands except percent data)
Three-Month Period Ended August 31, 2001(as compared with the same period of the prior year)
The Company reports its activities in four business segments: Inventory and Logistic Services, Maintenance, Repair and Overhaul, Manufacturing and Aircraft and Engine Sales and Leasing. The table below sets forth consolidated sales for the Company's four business segments for the three month periods ended August 31, 2001 and 2000.
Consolidated sales for the first quarter of the Company's fiscal year ending May 31, 2002, excluding pass through sales, decreased $21,895 or 9.7% over the same period in the prior year. The decline in first quarter sales was due primarily to the extremely difficult environment in the commercial aviation industry which, prior to the events of September 11, 2001, was plagued by a weakened global economy, high fuel and labor costs and a steep drop in business travel.
In the Inventory and Logistic Services segment, sales decreased $17,696 or 17.9% as a result of lower engine and airframe parts demand. The decline in engine parts sales was also due to lower sales to a major customer for certain engine parts due principally to the impact of converting the Company's exclusive engine parts support agreement with this major customer to preferred status, which occurred in December 2000. The elimination of pass through sales was also attributable to this factor.
In the Maintenance, Repair and Overhaul segment, sales decreased $4,105 or 6.8% during the first quarter of fiscal 2002 reflecting reduced demand for certain aircraft component overhaul services. Partially offsetting the reduction in sales was the favorable impact of the acquisition of Hermetic, which the Company acquired on September 29, 2000.
In the Manufacturing segment, sales decreased $1,051 or 4.6% compared to the same period last year primarily as a result of lower sales of the Company's cargo handling systems.
Consolidated gross profit decreased $5,275 or 15.3% over the prior year period as a result of lower sales and a reduction in the gross profit margin, which declined due to lower demand for engine parts support and margin pressure experienced primarily as a result of the competitive environment in which the Company operates to support its customers. Interest expense decreased $444 as a result of lower average short-term borrowings outstanding during the first quarter this year compared to last year, offset by interest on the $75,000 private placement of long-term debt, which was completed on June 7, 2001. Interest income was $241 higher than the first quarter of last year primarily as a result of an increase in cash invested during the first quarter.
Operating income decreased $4,426 or 44.8% and net income decreased $2,673 or 84.6% over the prior year due primarily to the factors discussed above.
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AAR CORP. and SubsidiariesFinancial Condition(In thousands except ratios)
At August 31, 2001
At August 31, 2001, the Company's liquidity and capital resources included cash of $42,810 and working capital of $367,707. At August 31, 2001, the Company's ratio of long-term debt to capitalization was 35.8%, up from 34.6% at May 31, 2001, and the Company's ratio of total debt to capitalization was 42.9% compared to 36.3% at May 31, 2001. The increase in the debt to capitalization ratios are attributable to the first quarter fiscal 2002 issuance of $75,000 long-term notes. The Company's $65,000 of 9.5% notes, which mature on November 1, 2001, will be paid off from a combination of available cash and short-term borrowings from the Company's unused and available bank lines. The Company continues to maintain its external sources of financing including $110,000 of unused available committed bank lines, and a universal shelf registration on file with the Securities and Exchange Commission under which up to $200,000 of common stock, preferred stock or medium-or long-term debt securities may be issued or sold subject to market conditions, and an accounts receivable securitization program under which the Company may sell an interest in defined pool of accounts receivable. At August 31, 2001, accounts receivable, net of retained interest, sold under this arrangement were $24,000 compared to $18,984 at May 31, 2001.
During the three-month period ended August 31, 2001, the Company's operations used $26,131 of cash, principally reflecting investments in inventories, equipment on or available for lease and deposits, offset by a reduction in accounts receivable.
During the three-month period ended August 31, 2001, the Company's investing activities used $17,424 of cash, principally reflecting the investment in property, plant and equipment of $3,000, and the final cash payment for the Hermetic acquisition of $13,251.
During the three-month period ended August 31, 2001, the Company's financing activities generated $72,515 of cash, principally reflecting the issuance of $75,000 of long-term notes offset by the payment of cash dividends of $2,290.
On September 11, 2001, four aircraft operated by United Airlines and American Airlines were hijacked and destroyed in terrorist attacks on the World Trade Center in New York, the Pentagon in Washington D.C. and in a crash near Johnstown, Pennsylvania. Immediately after the attacks, the Federal Aviation Administration closed U.S. airspace to civilian aircraft for several days.
In the weeks that have followed the attacks, most of the major U.S.-based air carriers have announced significant reductions in worldwide capacity, some in excess of 20 percent. Many of the U.S.-based air carriers have announced plans to accelerate the retirement of certain types of aircraft, and are beginning to defer the delivery of new aircraft. Announced layoffs by the U.S.-based air carriers and some manufacturers of aircraft and related components have exceeded 100,000 people since the September 11 terrorist attacks.
On September 22, the President of the United States signed the Air Transportation Safety and System Stabilization Act (the Act), which is intended to compensate victims of terrorist attacks and the U.S.-based air carriers for losses incurred as a result of the attacks. Among other things, the Act includes the payment of $5 billion to U.S.-based air carriers for incurred losses, and for the issuance of loan guarantees up to $10 billion in debt of U.S.-based air carriers.
The impact of the events of September 11 on the Company depends on a number of factors, including (1) the demand level from the world's air carriers for the Company's products and services, (2) the adverse effect of the September 11 events on the economy, (3) whether air travel demand remains at current reduced levels or declines further, (4) the ability of the Company's customers to
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meet their obligations to the Company, and (5) the affect, if any, on the value of the Company's inventories and equipment on or available for lease, which support the air carriers.
Since September 11, the Company has taken a number of steps to reduce costs, preserve cash and maintain a strong balance sheet, including workforce and salary reductions, facility consolidations and a reduction in the quarterly cash dividend from 8.5 cents per share to 2.5 cents per share. At this point, however, the Company is unable to estimate the effect of the events of September 11, 2001 on its financial position or its future results of operations.*
The Company believes that its cash and cash equivalents and available sources of financing will continue to provide the Company the ability to meet its ongoing working capital requirements, make anticipated capital expenditures, meet contractual commitments and pay dividends.*
A summary of key indicators of financial condition and lines of credit follows:
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain statements relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995 and are identified by an asterisk(*). These forward-looking statements are based on beliefs of Company management, as well as assumptions and estimates based on information currently available to the Company, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors, including: general economic conditions; ability to acquire inventory at favorable prices; integration of acquisitions; marketplace competition; economic and aviation/aerospace market stability; Company profitability and the impact of the events of September 11, 2001 on the economy, the aviation/aerospace industry and the Company. Should one or more of these risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. These events and uncertainties are difficult or impossible to predict accurately and many are beyond the Company's control. The Company assumes no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company's exposure to market risk includes fluctuating interest rates under its unsecured bank credit agreements, foreign exchange rates and accounts receivable. See Part I, Item 2 for a
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discussion on accounts receivable exposure. During the first quarter of fiscal 2002 and 2001, the Company did not utilize derivative financial instruments to offset these risks.
At August 31, 2001, $110,000 was available under credit lines with domestic banks under revolving credit and term loan agreements, and $2,899 was available under credit agreements with foreign banks (credit facilities). Interest on amounts borrowed under the credit facilities is LIBOR based. As of August 31, 2001, the outstanding balance under these agreements was $0. A hypothetical 10 percent increase to the average interest rate under the credit facilities applied to the average outstanding balance during the first quarter of fiscal 2002 would not have had a material impact on the financial position or results of operations of the Company.
Revenues and expenses of the Company's foreign operations in The Netherlands 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 income (loss). A hypothetical 10 percent devaluation of foreign currencies against the U.S. dollar would not have a material impact on the financial position or results of operations of the Company.
PART II—OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The Company filed no reports on Form 8-K during the three months ended August 31, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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