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 NOVEMBER 30, 1995 Commission file number 1-6263 AAR CORP. (Exact name of registrant as specified in its charter) DELAWARE 36-2334820 (State or other jurisdiction of incorporation (I.R.S. Employer or or organization) Identification No.) 1111 NICHOLAS BOULEVARD, ELK GROVE VILLAGE, ILLINOIS 60007 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (708) 439-3939 ________________________________________________________________________________ Former name, former address and former fiscal year, if changed since last report. 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, 15,954,995 shares outstanding as of NOVEMBER 30, 1995. ------------------
AAR CORP. and Subsidiaries Quarterly Report on Form 10Q November 30, 1995 Table of Contents Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-1 PART II - OTHER INFORMATION Item 1. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 6. Exhibits and Reports on Form 8-K Exhibits 11 Reports on Form 8-K 11 Signature Page 12 2
PART I, ITEM 1 - FINANCIAL STATEMENTS AAR CORP. and Subsidiaries Condensed Consolidated Balance Sheets As of November 30, 1995 and May 31, 1995 (000s omitted) <TABLE> <CAPTION> November 30, May 31, 1995 1995 ------------ -------- (Unaudited) (Derived from audited financial ASSETS statements) - ------ <S> <C> <C> Current assets: Cash and cash equivalents $ 22,960 $ 22,487 Accounts receivable, less allowances of $3,000 and $2,400 at each date 107,488 110,420 Inventories (Note B) 152,543 151,827 Equipment on or available for short-term lease 21,402 18,501 Deferred tax assets, deposits and other 18,391 18,397 ------- ------- Total current assets 322,784 321,632 ------- ------- Property, plant and equipment, net 55,324 56,596 Other assets: Investment in leveraged leases 31,278 31,952 Cost in excess of underlying net assets of acquired companies 5,961 6,101 Retirement benefits, notes receivable and other 6,103 9,533 ------- ------- 43,342 47,586 ------- ------- $421,450 $425,814 ------- ------- ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Current maturities of long-term debt $ 1,489 $ 1,632 Accounts payable 47,189 51,393 Accrued liabilities 14,137 15,977 Accrued taxes on income 5,013 4,138 ------- ------- Total current liabilities 67,828 73,140 ------- ------- Long-term debt, less current maturities 119,013 119,766 Deferred tax liabilities 30,660 30,660 Retirement benefit obligation and deferred credits (Note D) 3,883 5,129 ------- ------- 153,556 155,555 ------- ------- Stockholders' equity: Preferred stock, $1.00 par value, authorized 250 shares; none issued - - Common stock, $1.00 par value, authorized 80,000 shares; issued 16,313 and 16,284 shares at each date 16,313 16,284 Capital surplus 82,544 82,132 Retained earnings 105,396 102,309 Treasury stock, 358 and 323 shares at each date, at cost (4,320) (3,733) Cumulative translation adjustments (Note D) 493 1,497 Minimum pension liability adjustment (Note D) (360) (1,370) ------- ------- 200,066 197,119 ------- ------- $421,450 $425,814 ------- ------- ------- ------- </TABLE> The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 3
AAR CORP. and Subsidiaries Condensed Consolidated Statements of Income For the Three and Six Months Ended November 30, 1995 and 1994 (Unaudited) (000s omitted except per share data) <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, ------------------ ------------------ 1995 1994 1995 1994 ------ ------ ------ ------- <S> <C> <C> <C> <C> Net sales $121,261 $99,384 $230,854 $196,575 ------- ------- ------- ------- Costs and operating expenses: Cost of sales 99,298 81,387 188,395 161,765 Selling, general and administrative 14,292 12,615 27,897 24,177 ------- ------- ------- ------- 113,590 94,002 216,292 185,942 ------- ------- ------- ------- Operating income 7,671 5,382 14,562 10,633 Interest expense (2,621) (2,681) (5,285) (5,278) Interest income 221 246 585 417 ------- ------- ------- ------- Income before provision for income taxes 5,271 2,947 9,862 5,772 Provision for income taxes 1,580 880 2,945 1,700 ------- ------- ------- ------- Net income $ 3,691 $ 2,067 $ 6,917 $ 4,072 ------- ------- ------- ------- ------- ------- ------- ------- Net income per share of common stock (Note E): $ .23 $ .13 $ .43 $ .26 Dividends paid and declared per share of common stock $ .12 $ .12 $ .24 $ .24 Average shares outstanding 15,957 15,913 15,957 15,910 </TABLE> The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 4
AAR CORP. and Subsidiaries Condensed Consolidated Statements of Cash Flows For the Six Months Ended November 30, 1995 and 1994 (Unaudited) (000s omitted) <TABLE> <CAPTION> Six Months Ended November 30, ------------------ 1995 1994 -------- ------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,917 $ 4,072 Adjustments to reconcile net income to net cash provided from (used in) operating activities: Depreciation and amortization 5,067 4,980 Change in certain assets and liabilities: Accounts receivable, net 2,433 (1,085) Inventories, net (1,509) (20,620) Equipment on or available for short-term lease (2,901) 3,628 Deferred tax assets, deposits and other (787) (665) Accounts payable (4,137) (5,072) Accrued liabilities and taxes on income (631) 636 Retirement benefit obligations, deferred tax liabilities and deferred credits - (560) -------- -------- Net cash provided from (used in) operating activities 4,452 (14,686) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment expenditures, net (3,241) (3,890) Investment in leveraged leases 674 295 Notes receivable and other 3,232 (303) -------- -------- Net cash provided from (used in) investing activities 665 (3,898) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in other borrowings, net (896) 5,808 Cash dividends (3,830) (3,819) Purchase of treasury stock (587) (87) Proceeds from exercise of stock options and other 441 89 -------- -------- Net cash provided from (used in) financing activities (4,872) 1,991 -------- -------- Effect of exchange rate changes on cash 228 166 -------- -------- Increase (decrease) in cash and cash equivalents 473 (16,427) Cash and cash equivalents, beginning of period 22,487 18,074 -------- -------- Cash and cash equivalents, end of period $ 22,960 $ 1,647 -------- -------- -------- -------- </TABLE> The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 5
AAR CORP. and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS November 30, 1995 (000s omitted) 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, 1995 has been derived from audited financial statements. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, 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 November 30, 1995 and the condensed consolidated results of operations and cash flows for the three and six months ended November 30, 1995 and 1994. The results of operations for such interim periods are not necessarily indicative of the results for the full year. Certain prior period amounts have been reclassified to conform to the November 30, 1995 presentation. NOTE B - INVENTORY <TABLE> <CAPTION> The summary of inventories is as follows: November 30, May 31, 1995 1995 ------------ --------- <S> <C> <C> Raw materials and parts $ 34,232 $ 29,316 Work-in-process 11,940 11,891 Purchased aircraft, parts, engines and components held for sale or exchange 104,758 110,948 Finished goods 1,613 1,734 ------- ------- 152,543 153,889 Progress billings on long-term contracts and programs - (2,062) ------- ------- $152,543 $151,827 ------- ------- ------- ------- </TABLE> 6
AAR CORP.and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS November 30, 1995 (Continued) (000s omitted) NOTE C - SUPPLEMENTAL CASH FLOWS INFORMATION Supplemental information on cash flows: <TABLE> <CAPTION> Six Months Ended November 30, ----------------- 1995 1994 ------ ------ <S> <C> <C> Interest paid $5,200 $ 5,320 Income taxes paid 2,600 2,130 Income tax refunds received 70 340 </TABLE> NOTE D - CUMULATIVE TRANSLATION ADJUSTMENTS The Cumulative translation adjustments account decreased due to a net translation loss of $1,004 for the six-month period ended November 30, 1995. The loss resulted from a decrease in the value of the Company's net investment in foreign subsidiaries primarily resulting from an increase in the value of the U.S. dollar against most European currencies. The noncash adjustment did not affect the Company's results of operations. NOTE E - EARNINGS PER SHARE The per share data was calculated using the weighted average shares outstanding for the periods presented. Common stock equivalents consisting of employee stock options have not been included in the per share calculation as their dilutive effect is not material. 7
PART I, ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AAR CORP. AND SUBSIDIARIES RESULTS OF OPERATIONS (000s omitted except percent data) THREE AND SIX MONTH PERIOD ENDED NOVEMBER 30, 1995 (as compared with the same period of the prior year) <TABLE> <CAPTION> The following table sets forth net sales for the Company's classes of similar products and services within the Company's Aviation Services business segment: Three Months Ended Six Months Ended November 30 November 30, -------------------- ------------------- 1995 1994 1995 1994 -------- -------- -------- ------- <S> <C> <C> <C> <C> Net Sales: Trading $ 56,735 $ 46,755 $110,365 $ 94,426 Overhaul 35,324 26,437 66,978 50,558 Manufacturing 29,202 26,192 53,511 51,591 ------- ------- ------- ------- $121,261 $ 99,384 $230,854 $196,575 ------- ------- ------- ------- ------- ------- ------- ------- </TABLE> THREE MONTH PERIOD ENDED NOVEMER 30, 1995 (as compared with the same period of the prior year) Consolidated net sales for the second quarter of the Company's Fiscal year ending May 31, 1996 (fiscal 1996) increased $21,877 or 22% over the same period in the prior year. Net sales increases were experienced across all core products and services. Consolidated net sales continued to improve as airline customers continued to experience increased traffic demands, aircraft utilization and the need to convert aircraft for alternative uses. Net Sales of certain operations continue to benefit from airline customers continuing to outsource certain support activities, the continued government outsourcing of certain activities previously performed within the military and increased demand for manufactured products to support rapid deployment requirements. Consolidated gross profit increased $3,966 or 22% over the prior year on increased consolidated net sales and a stable consolidated gross profit margin of 18.1%. Consolidated operating profit increased over the prior year by $2,289 or 42.5% on increased consolidated net sales and a stable gross profit margin partially offset by certain increases in selling, general and administrative expenses. While selling, general and administrative expenses were lower as a percentage of consolidated net sales, total expenditures increased due to higher personnel costs and increased marketing support programs. The prior year included recognition of a $250 after tax curtailment gain on the termination of certain postretirement health care benefits. Consolidated net income increased $1,624 or 78.6% during the current year due to the factors described above. 8
PART I, ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AAR CORP. AND SUBSIDIARIES RESULTS OF OPERATIONS (000s omitted except ratios) SIX MONTH PERIOD ENDED NOVEMBER 30, 1995 (as compared with the same period of the prior year) Consolidated net sales for the first half of fiscal 1996 increased $34,279 or 17.4% over the prior year. Consolidated net sales increases were experienced on all core products and services partially offset by a small decline in certain small manufactured product lines disposed of since the prior year period. Consolidated net sales improvements resulted from the Company's ability to capture increased business opportunities in a resurging aerospace/aviation marketplace more fully described above in the results of operations for the three month period ended November 30, 1995. Consolidated gross profit increased $7,649 or 22% over the prior year due to increased consolidated net sales and an increase in the consolidated gross profit margin. The gross profit margin increased from 17.7% in the prior year to an 18.4% margin primarily due to favorable product mix and improved pricing of certain products and services. Consolidated operating profit increased $3,929 or 37% over the prior year due to increased consolidated net sales and a higher gross profit margin partially offset by increased selling, general and administrative expenses. Selling, general and administrative expenses were lower as a percentage of consolidated net sales, however, total expenses increased as a result of higher personnel costs and increased marketing support costs. The prior year included recognition of a $250 after tax curtailment gain on the termination of certain postretirement health care benefits. Consolidated net income increased $2,845 or 69.9% during the current year as a result of the factors described above. 9
PART I, ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AAR CORP. AND SUBSIDIARIES FINANCIAL CONDITION (000s omitted except ratios) AT NOVEMBER 30, 1995 (as compared with May 31, 1995) In the six month period ended November 30, 1995, the Company generated $4,452 of cash from operations through increased earnings and working capital management. The cash generated from operations was supplemented by payment on a note receivable obtained in the previous sale of a partial residual interest of an aircraft subject to a leveraged lease. The Company's cash and cash equivalents increased $473 during this six month period after making capital expenditures and paying dividends of $3,241 and $3,830, respectively. The Company further strengthened its financial position during this six month period by generating additional working capital of $6,464, eliminating short-term borrowing during this six month period and reducing its long-term debt to capitalization ratio to 37.3%. The Company's working capital increased $13,865 from the period ended November 30, 1994, primarily due to cash generated from lower inventory and inventory deposits partially offset by increased accounts receivable. The Company continues to maintain its available external sources of financing from $133,450 of unused available bank lines and a shelf registration on file with the Security and Exchange Commission for $85,000 of medium or long-term debt securities, which it may issue at its discretion, subject to market conditions. The Company believes that its cash and cash equivalents, available sources of financing and future income will continue to give the Company the ability to meet its ongoing working capital requirements, make anticipated capital expenditures, pay dividends, and pursue favorable business opportunities. A summary of key financial conditions, ratios, and lines of credit follows: <TABLE> <CAPTION> Description November 30, 1995 May 31, 1995 - ----------------------- ----------------- ------------ <S> <C> <C> Working capital $254,956 $248,492 Current ratio 4.8:1 4.4:1 Bank Credit Lines: Borrowings outstanding $ - $ - Available but unused lines 133,450 133,750 ------- ------- $133,450 $133,750 ------- ------- ------- ------- Long-term debt less current maturities $119,013 $119,766 Ratio of long-term debt to capitalization 37.3% 37.8% </TABLE> 10
PART II - OTHER INFORMATION AAR CORP. and Subsidiaries November 30, 1995 Item 1. LEGAL PROCEEDINGS In October, 1995 a subsidiary of the Company received notice of a proposed civil penalty by the United States Environmental Protection Agency in the amount of $600,000 for alleged violations of the Clean Air Act relating to exceeding volatile organic compound emission rates under a permit issued by the Michigan Department of Natural Resources. The Company is presently negotiating a resolution of the matter with representatives of the Agency. The Company believes that resolution of the matter will not have a material adverse effect on the Company's financial statements. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders of the Company held on October 11, 1995, Edgar J. Jannota, Lee B. Stern and Richard D. Tabery were elected as directors of the Company to serve until the 1998 Annual Meeting of Shareholders. There were no abstentions and no broker non-votes for any of the nominees for director. The number of votes cast for, or withheld, for each nominee for director were as follows: For Withheld ---------- -------- Edgar D. Jannota 14,709,262 - Lee B. Stern 14,708,123 - Richard D. Tabery 14,717,677 - No other matters were presented to the Company's shareholders for action at the Annual Meeting of Shareholders. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS ITEM 27. Financial 27.1 Financial Data Schedule for the Registrant's six- Data month interim period ended November 30, 1995. Schedule (b) REPORTS ON FORM 8-K FOR QUARTER ENDED NOVEMBER 30, 1995: The Company filed no reports on Form 8-K during the three (3) months ended November 30, 1995. 11
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. AAR CORP. ------------------------------------- (Registrant) Date: January 12, 1996 /S/ -------------------- --------------------------------------- Timothy J. Romenesko Vice President, Chief Financial Officer and Treasurer. (Principal accounting officer and officer duly authorized to sign on behalf of registrant) 12