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, 1996 Commission file number 1-6263 ------------------- -------- AAR CORP. ---------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 36-2334820 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1111 NICHOLAS BOULEVARD, ELK GROVE VILLAGE, ILLINOIS 60007 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (847) 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, 16,130,836 shares outstanding as of NOVEMBER 30, 1996 . - --------- ------------ -------------------
AAR CORP. and Subsidiaries Quarterly Report on Form 10-Q November 30, 1996 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 8-10 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 11 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K Exhibits 12 Reports on Form 8-K 12 Signature Page 13 2
PART I, ITEM 1 - FINANCIAL STATEMENTS AAR CORP. and Subsidiaries Condensed Consolidated Balance Sheets As of November 30, 1996 and May 31, 1996 (000s omitted) <TABLE> <CAPTION> November 30, May 31, 1996 1996 ----------- -------------- (Unaudited) (Derived from audited financial statements) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 19,574 $ 33,606 Accounts receivable, less allowances of $2,185 and $2,490 respectively 120,033 107,138 Inventories 162,360 138,200 Equipment on or available for short-term lease 28,952 36,884 Deferred tax assets, deposits and other 22,645 22,184 -------- -------- Total current assets 353,564 338,012 -------- -------- Property, plant and equipment, net 69,051 54,831 -------- -------- Other assets: Investments in leveraged leases 29,495 30,905 Cost in excess of underlying net assets of acquired companies 5,774 5,842 Retirement benefits, notes receivable and other 10,666 8,256 -------- -------- 45,935 45,003 -------- -------- $468,550 $437,846 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 1,507 $ 1,474 Accounts payable 75,464 59,005 Accrued liabilities 10,226 14,356 Accrued taxes on income 6,624 4,550 -------- -------- Total current liabilities 93,821 79,385 -------- -------- Long-term debt, less current maturities 117,506 118,292 Deferred tax liabilities 30,158 30,680 Other liabilities, less discount of $1,102 9,898 - Retirement benefit obligation and deferred credits 4,854 4,854 -------- -------- 162,416 153,826 -------- -------- Stockholders' equity: Preferred stock, $1.00 par value, authorized 250 shares, none issued - - Common stock, $1.00 par value, authorized 80,000 shares; issued 16,770 and 16,404 shares, respectively 16,770 16,404 Capital surplus 90,552 83,975 Retained earnings 116,783 110,645 Treasury stock, 639 and 406 shares at cost, respectively (10,846) (5,285) Cumulative translation adjustments (946) (1,104) -------- -------- 212,313 204,635 -------- -------- $468,550 $437,846 -------- -------- -------- -------- </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, 1996 and 1995 (Unaudited) (000s omitted except per share data) <TABLE> <CAPTION> Three Months Ended Six Months Ended November 30, November 30, ----------------------- ----------------------- 1996 1995 1996 1995 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net sales $135,675 $121,261 $271,712 $230,854 -------- -------- -------- -------- Costs and operating expenses: Cost of sales 110,851 99,298 222,300 188,395 Selling, general and administrative 15,031 14,292 30,406 27,897 -------- -------- -------- -------- 125,882 113,590 252,706 216,292 Operating income 9,793 7,671 19,006 14,562 Interest expense (2,569) (2,621) (5,194) (5,285) Interest income 199 221 509 585 -------- -------- -------- -------- Income before provision for income taxes 7,423 5,271 14,321 9,862 Provision for income taxes 2,279 1,580 4,329 2,945 -------- -------- -------- -------- Net income $ 5,144 $ 3,691 $ 9,992 $ 6,917 -------- -------- -------- -------- -------- -------- -------- -------- Net income per share of common stock $ .32 $ .23 $ .62 $ .43 Average common shares outstanding 16,078 15,957 16,027 15,957 Dividends paid and declared per share of common stock $ .12 $ .12 $ .24 $ .24 </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, 1996 and 1995 (Unaudited) (000s omitted) <TABLE> <CAPTION> Six Months Ended November 30, --------------------- 1996 1995 ------- ------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,992 $ 6,917 Adjustments to reconcile net income to net cash provided from (used in) operating activities: Depreciation and amortization 5,634 5,067 Change in certain assets and liabilities: Accounts receivable, net (12,878) 2,433 Inventories, net (24,150) (2,285) Equipment on or available for short-term lease 7,943 (2,125) Deferred tax assets, deposits and other (526) (787) Accounts payable 16,433 (4,137) Accrued liabilities and taxes on income (1,233) (631) Other liabilities 9,898 - ------- ------- Net cash provided from operating activities 11,113 4,452 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment expenditures, net (18,993) (3,241) Investment in leveraged leases 1,410 674 Notes receivable and other (3,105) 3,232 ------- ------- Net cash provided from (used in) investing activities (20,688) 665 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in borrowings (753) (896) Cash dividends (3,854) (3,830) Purchase of treasury stock (5,561) (587) Proceeds from exercise of stock options and other 5,629 441 ------- ------- Net cash (used in) financing activities (4,539) (4,872) ------- ------- Effect of exchange rate changes on cash 82 228 ------- ------- Increase (decrease) in cash and cash equivalents (14,032) 473 Cash and cash equivalents, beginning of period 33,606 22,487 ------- ------- Cash and cash equivalents, end of period $19,574 $22,960 ------- ------- ------- ------- </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, 1996 (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, 1996 has been derived from audited financial statements. To prepare the financial statements in conformity with generally accepted accounting principles, 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 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, 1996 and the condensed consolidated results of operations for the three and six months ended November 30, 1996 and 1995, and the condensed consolidated cash flows for the six months ended November 30, 1996 and 1995. 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, 1996 presentation. NOTE B - INVENTORY The summary of inventories is as follows: November 30, May 31, 1996 1996 ------------ -------- Raw materials and parts $ 34,063 $ 33,978 Work-in-process 14,495 12,179 Purchased aircraft, parts, engines and components held for sale 112,461 90,438 Finished goods 1,341 1,605 -------- -------- $162,360 $138,200 -------- -------- -------- -------- During the first quarter of fiscal 1997, the Company made certain inventory purchases in which the vendors provided extended terms at no interest. Other liabilities reflect the long-term obligation under these arrangements payable through December 31, 1998 and have been discounted at 6.5%. 6
AAR CORP. and Subsidiaries Notes to Condensed Consolidated Financial Statements November 30, 1996 (Continued) (000s omitted) NOTE C - SUPPLEMENTAL CASH FLOWS INFORMATION Supplemental information on cash flows: Six Months Ended November 30, ----------------- 1996 1995 ------ ------ Interest paid $5,150 $5,200 Income taxes paid 2,525 2,600 Income tax refunds received 125 70 NOTE D - CUMULATIVE TRANSLATION ADJUSTMENTS The cumulative translation adjustments account changed due to a net translation gain of $158 for the six-month period ended November 30, 1996. The change resulted from an increase in the value of the Company's net investment in foreign subsidiaries primarily resulting from a decrease 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. NOTE F - NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock-Based Compensation" in October 1995. Under SFAS No. 123, entities may elect to adopt the provisions of SFAS No. 123, or continue to apply the provisions of APB No. 25 "Accounting for Stock Issued to Employees" with additional disclosures. The Company has elected to continue to apply the provisions of APB No. 25 "Accounting for Stock Issued to Employees", which will result in expanded disclosures in the notes to consolidated financial statements in the fiscal 1997 annual report to stockholders. 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, 1996 (as compared with the same period of the prior year) 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, --------------------- --------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Net Sales: Trading $ 78,361 $ 56,735 $156,030 $110,365 Overhaul 35,781 35,324 68,091 66,978 Manufacturing 21,533 29,202 47,591 53,511 -------- -------- -------- -------- $135,675 $121,261 $271,712 $230,854 -------- -------- -------- -------- -------- -------- -------- -------- THREE-MONTH PERIOD ENDED NOVEMBER 30, 1996 (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, 1997 (fiscal 1997) increased $14,414 or 11.9% over the same period in the prior year. Trading sales increased $21,626 or 38.1% over the prior year period reflecting strong sales of engine and airframe parts and components, particularly in conjunction with long-term inventory management programs. Overhaul sales increased $457 or 1.3% reflecting higher demand for certain airframe component overhaul services. Manufacturing sales were $7,669 or 26.3% below the prior year period reflecting lower sales of its products supporting the United States Government's rapid deployment program and lower sales of its cargo loading and handling systems. Consolidated gross profit increased $2,861 or 13.0% over the prior year period due to increased consolidated net sales and an increase in the consolidated gross profit margin to 18.3% from 18.1%. Consolidated operating income increased $2,122 or 27.7% and the Company's operating income margin increased to 7.2% compared to the prior year period's margin of 6.3% as a result of increased net sales, partially offset by higher selling, general and administrative expenses from increased personnel costs. Consolidated net income increased $1,453 or 39.4% over the prior year period due primarily to the factors discussed 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, 1996 (as compared with the same period of the prior year) Consolidated net sales for the first half of fiscal 1997 increased $40,858 or 17.7% over the prior year period reflecting overall increased demand for the Company's Trading and Overhaul products and services. Trading sales increased $45,665 or 41.4% over the prior year period due to increased aircraft, airframe and large component part sales, as well as sales under both existing and recently implemented inventory management programs. Overhaul sales increased $1,113 or 1.7%, reflecting increased airframe component overhaul services. Manufacturing sales were $5,920 or 11.1% below the prior year period, reflecting lower sales of its products supporting the United States Government's rapid deployment program and lower sales of its cargo loading and handling systems. Consolidated gross profit increased $6,953 or 16.4% over the prior year period due to increased consolidated net sales, partially offset by a decline in the consolidated gross profit margin to 18.2% from 18.4% in the prior year period. The lower consolidated gross profit margin was due primarily to the mix of inventories sold during the first quarter of fiscal 1997. Consolidated operating income increased $4,444 or 30.5% over the same six-month period in the prior year, and the Company's operating income margin increased to 7.0% compared to the prior year period's margin of 6.3% as a result of increased net sales, partially offset by higher selling, general and administrative expenses from higher personnel and marketing support costs. Consolidated net income increased $3,075 or 44.5% primarily as a result of the factors discussed 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, 1996 (as compared with May 31, 1996) In the six-month period ended November 30, 1996, the Company generated $11,113 of cash from operations through increased earnings and working capital management. The company's cash and cash equivalent position decreased $14,032 at the end of the six-month period after making capital expenditures of $18,993, and paying dividends of $3,854. The increase over the prior year in capital expenditures during the six-month period reflects the Company's acquisition and refurbishment of an operating facility for approximately $13,700. This facility will accommodate the growth of the Company's principal trading operating units and at the same time permit the Company to consolidate and replace certain facilities currently operated by the Company. Upon the sale of the facilities owned by the Company vacated as a result of the relocation to the new building, the proceeds will be added to cash and cash equivalents. In the six-month period ended November 30, 1996, the Company acquired 233 shares of its stock for $5,561, of which 175 shares were acquired in connection with the exercise of stock options. The Company further strengthened its financial position during the second quarter of fiscal 1997 by reducing its long-term debt to capitalization ratio to 35.6%. The Company continues to maintain its available external sources of financing from $136,977 of unused available bank lines and a shelf registration on file with the Securities and Exchange Commission under which up to $85,000 of additional medium or long-term debt securities may be sold subject to market conditions. During the second quarter of fiscal 1997, the Company entered into amended and restated credit agreements for $60 million of committed facilities with two financial institutions. The new agreements are effective through August 31, 1999, with annual evergreen extension options. The Company believes that its cash and cash equivalents and available sources of capital 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 financial conditions, ratios, and lines of credit follows: Description November 30, May 31, --------------------- 1996 1996 ------------ -------- Working capital $259,743 $258,627 Current ratio 3.8:1 4.3:1 Bank Credit Lines: Borrowings outstanding $ - $ - Available but unused lines 136,977 132,977 -------- -------- Total credit lines $136,977 $132,977 -------- -------- -------- -------- Long-term debt less current maturities $117,506 $118,292 Ratio of long-term debt to capitalization 35.6% 36.6% 10
PART II - OTHER INFORMATION AAR CORP. and Subsidiaries November 30, 1996 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of the Company was held on October 9, 1996. The following two items were acted upon at the meeting: 1) Election of four Class III directors to serve until the 1999 Annual Meeting of Stockholders. 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 ---------- -------- A. Robert Abboud 14,475,930 - Howard B. Bernick 14,653,423 - Ira A. Eichner 14,637,432 - Robert B. Judson 14,653,902 - 2) Amendment to the Company's Stock Benefit Plan to increase the total number of additional shares of common stock that become available for award under the Plan each year. The results of the vote were as follows: For 8,667,434 Against 4,137,718 Abstain 43,568 Broker non-vote 1,824,186 No other matters were presented to the Company's shareholders for action at the Annual Meeting of Shareholders. Item 5. OTHER INFORMATION. In 1981, a subsidiary of the Company acquired property at which, from 1957 to 1971, the former owner manufactured products containing a thorium alloy under a license from the predecessor of the Nuclear Regulatory Commission (the "NRC"). As a result of an investigation of terminated licenses, in 1994 the NRC requested that the Company's subsidiary perform an investigation of the property. That investigation revealed certain areas of low level residual thorium contamination that will require remediation. In April 1996, the subsidiary submitted a proposal to the NRC for remediating the site, which is currently pending before the NRC. The Company believes that the ultimate resolution of this matter will not have a material adverse effect on the Company. 11
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Item 4. Instruments 4.3 Credit Agreement dated September 9, 1996, between defining the rights the Registrant and Bank of America, Illinois. of security holders 4.7 Credit Agreement dated October 7, 1996, between the Registrant and the First National Bank of Chicago. 10. Material Contracts 10.1 Amendments to AAR CORP. Stock Benefit Plan. First amendment dated July 29, 1996 and second amendment dated January 2, 1997. 10.7 Amendment dated October 9, 1996 to Employment Agreement dated June 1, 1994 between the Registrant and David P. Storch. 27. Financial 27.1 Financial Data Schedule for the Registrant's six- Data Schedule month interim period ended November 30, 1996. (b) REPORTS ON FORM 8-K FOR QUARTER ENDED NOVEMBER 30, 1996: The Company filed no reports on Form 8-K during the three months ended November 30, 1996. 12
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 13, 1997 /s/ Timothy J. Romenesko --------------------------------------- Timothy J. Romenesko Vice President, Chief Financial Officer and Treasurer. (Principal accounting officer and officer duly authorized to sign on behalf of registrant) 13