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 FEBRUARY 28, 1998 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 Identification or organization) No.) ONE AAR PLACE, 1100 N. WOOD DALE ROAD, WOOD DALE, ILLINOIS 60191 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 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 of the issuer's classes of common stock, as of the latest practicable date. $1.00 par value, 27,690,412 shares outstanding as of FEBRUARY 28, 1998 . - ---------- -------------- ---------------------
AAR CORP. and Subsidiaries Quarterly Report on Form 10-Q February 28, 1998 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 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 PART II - OTHER INFORMATION 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 February 28, 1998 and May 31, 1997 (000s omitted) <TABLE> <CAPTION> February 28, May 31, 1998 1997 ------------ ------------- (Derived from (Unaudited) audited financial statements) ASSETS <S> <C> <C> Current assets: Cash and cash equivalents $ 30,052 $ 51,705 Accounts receivable, less allowances of $3,760 and $1,965 respectively 153,047 122,944 Inventories 231,471 176,921 Equipment on or available for short-term lease 45,343 40,318 Deferred tax assets, deposits and other 33,381 22,212 --------- --------- Total current assets 493,294 414,100 --------- --------- Property, plant and equipment, net 78,083 71,108 Other assets: Investments in leveraged leases 36,355 27,606 Cost in excess of underlying net assets of acquired companies 24,923 5,653 Retirement benefits, notes receivable and other 29,690 11,117 --------- --------- 90,968 44,376 --------- --------- $ 662,345 $ 529,584 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 16,728 $ - Current maturities of long-term debt 237 1,474 Accounts payable 102,999 77,567 Accrued liabilities 25,553 17,647 Accrued taxes on income 5,442 3,293 --------- --------- Total current liabilities 150,959 99,981 --------- --------- Long-term debt, less current maturities 177,568 116,818 Deferred tax liabilities 34,959 32,560 Other liabilities 1,589 6,294 Retirement benefit obligation and deferred credits 5,033 4,672 --------- --------- 219,149 160,344 --------- --------- Stockholders' equity: Preferred stock, $1.00 par value, authorized 250 shares, none issued - - Common stock, $1.00 par value, authorized 80,000 shares; issued 28,805 and 28,398 shares, respectively 28,805 28,398 Capital surplus 140,251 131,550 Retained earnings 143,969 125,694 Treasury stock, 1,115 and 1,092 shares at cost, respectively (15,858) (13,365) Cumulative translation adjustments (4,930) (3,018) --------- --------- 292,237 269,259 --------- --------- $ 662,345 $ 529,584 --------- --------- --------- --------- </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 Nine Months Ended February 28, 1998 and 1997 (Unaudited) (000s omitted except per share data) <TABLE> <CAPTION> Three Months Ended Nine Months Ended February 28, February 28, ----------------------- ----------------------- 1998 1997 1998 1997 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net sales $208,492 $154,135 $559,554 $425,847 -------- -------- -------- -------- Costs and operating expenses: Cost of sales 169,577 125,995 454,656 348,295 Selling, general and administrative 21,836 16,829 60,009 47,235 -------- -------- -------- -------- 191,413 142,824 514,665 395,530 Operating income 17,079 11,311 44,889 30,317 Interest expense (4,045) (2,952) (9,861) (8,146) Interest income 365 127 841 636 -------- -------- -------- -------- Income before provision for income taxes 13,399 8,486 35,869 22,807 Provision for income taxes 4,085 2,546 10,834 6,875 -------- -------- -------- -------- Net income $ 9,314 $ 5,940 $ 25,035 $ 15,932 -------- -------- -------- -------- -------- -------- -------- -------- Earnings Per Share - Basic $ .34 $ .24 $ .91 $ .66 Earnings Per Share - Diluted $ .33 $ .24 $ .89 $ .65 Weighted average common shares outstanding - Basic 27,632 24,753 27,550 24,273 Weighted average common shares outstanding - Diluted 28,510 25,211 28,141 24,637 Dividends paid and declared per share of common stock $ .085 $ .08 $ .245 $ .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 Nine Months Ended February 28, 1998 and 1997 (Unaudited) (000s omitted) <TABLE> <CAPTION> Nine Months Ended February 28 ----------------------- 1998 1997 ------- ------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $25,035 $15,932 Adjustments to reconcile net income to net cash (used in) provided from operating activities: Depreciation and amortization 11,021 8,838 Change in certain assets and liabilities: Accounts receivable (4,358) (24,491) Inventories (35,182) (27,507) Equipment on or available for short-term lease (5,221) 3,626 Retirement benefit obligation, deferred tax assets deposits and other (7,580) (1,293) Accounts and notes payable and other liabilities 233 28,631 Accrued liabilities and taxes on income 2,580 (2,189) Accrued interest 3,309 2,435 ------- ------- Net cash (used in) provided from operating activities (10,163) 3,982 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment expenditures, net (11,098) (26,243) Acquisitions, less cash acquired (28,148) - Investment in leveraged leases (8,749) 2,244 Notes receivable and other (19,144) (3,125) ------- ------- Net cash (used in) investing activities (67,139) (27,124) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in borrowings (948) (1,116) Proceeds from debt issuance, net of costs 59,347 - Cash dividends (6,760) (5,792) Purchase of treasury stock - (6,228) Proceeds from exercise of stock options and other 3,899 6,300 Proceeds from stock offering - 50,450 ------- ------- Net cash provided from financing activities 55,538 43,614 ------- ------- Effect of exchange rate changes on cash 111 (95) ------- ------- (Decrease) increase in cash and cash equivalents (21,653) 20,377 Cash and cash equivalents, beginning of period 51,705 33,606 ------- ------- Cash and cash equivalents, end of period $ 30,052 $53,983 ------- ------- ------- ------- </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 February 28, 1998 (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, 1997 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 February 28, 1998 and the condensed consolidated results of operations for the three and nine-month periods ended February 28, 1998 and 1997, and the condensed consolidated cash flows for the nine-month periods ended February 28, 1998 and 1997. 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 February 28, 1998 presentation. NOTE B - INVENTORY The summary of inventories is as follows: <TABLE> <CAPTION> February 28, May 31, 1998 1997 ------------ --------- <S> <C> <C> Raw materials and parts $ 44,495 $ 36,067 Work-in-process 17,857 15,477 Purchased aircraft, parts, engines and components held for sale including inventory from acquisitions 167,534 124,212 Finished goods 1,585 1,165 ------------ --------- $ 231,471 $ 176,921 ------------ --------- ------------ --------- </TABLE> 6
AAR CORP. and Subsidiaries Notes to Condensed Consolidated Financial Statements February 28, 1998 (Continued) (000s omitted) NOTE C - SUPPLEMENTAL CASH FLOWS INFORMATION Supplemental information on cash flows: <TABLE> <CAPTION> Nine Months Ended February 28, --------------------- 1998 1997 ------ ------ <S> <C> <C> Interest paid $6,178 $5,430 Income taxes paid 3,881 7,532 Income tax refunds received 232 147 </TABLE> On June 2, 1997, the Company acquired substantially all of the assets and assumed certain liabilities of Cooper Aviation Industries, Inc. (Cooper), a distributor of factory-new aviation parts and accessories to the commercial, regional/commuter and general aviation markets. The purchase price was paid by issuing approximately 139 thousand common shares (adjusted for the three-for-two stock split as described in Note E) and the transaction was recorded under the purchase method of accounting. On October 24, 1997, the Company purchased the stock of ATR International, Inc. (ATR), a company which engineers and manufactures composite parts and structures for the aerospace/aviation industry. The Company acquired ATR for approximately $19 million cash and the transaction was recorded under the purchase method of accounting. On December 31, 1997, the Company acquired substantially all of the assets and assumed certain liabilities of AVSCO Aviation Service Corporation (AVSCO), a distributor of factory new parts and accessories to the commercial, regional/commuter and general aviation markets. The purchase price of approximately $18.4 million was paid for with a combination of cash and a note and the transaction was recorded under the purchase method of accounting. NOTE D - CUMULATIVE TRANSLATION ADJUSTMENTS The cumulative translation adjustments account changed due to a net translation loss of $1,912 for the nine-month period ended February 28, 1998. The change 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 certain European currencies. The noncash adjustment did not affect the Company's results of operations. NOTE E - COMMON STOCK AND NET INCOME PER SHARE OF COMMON STOCK Effective the third quarter of fiscal 1998, the Company adopted the provision of Statement of Financial Accounting Standards No. 128 "Earnings Per Share". SFAS No. 128 was issued to simplify the computation of earnings per share (EPS) calculations and to make U. S. standards more compatible with the EPS standards of other countries and that of the International Accounting Standards Committee. All earnings per share information has been restated to conform to the provisions of SFAS No. 128. The following table provides a reconciliation of the computations of basic and diluted earnings per share information for the three and nine month periods ended February 28, 1998. 7
AAR CORP. and Subsidiaries Notes to Condensed Consolidated Financial Statements February 28, 1998 (Continued) (000s omitted) NOTE E - COMMON STOCK AND NET INCOME PER SHARE OF COMMON STOCK (CONTINUED) In January, 1998 the Board of Directors declared a three-for-two stock split which was paid February 23, 1998 to stockholders of record February 2, 1998 and a quarterly cash dividend of 8.5 cents per share on the increased shares, which effectively increased the cash dividend payment by 6.25%. All prior year common shares outstanding and earnings per share amounts have been restated to reflect the three-for-two stock split. <TABLE> <CAPTION> Three Months Ended Nine Months Ended February 28, February 28, ---------------------- ---------------------- 1998 1997 1998 1997 ------- ------- ------- ------- <S> <C> <C> <C> <C> BASIC EPS Net income $ 9,314 $ 5,940 $25,035 $15,932 Common shares outstanding 27,632 24,753 27,550 24,273 ------- ------- ------- ------- Basic earnings per share $ 0.34 $ 0.24 $ 0.91 $ 0.66 ------- ------- ------- ------- ------- ------- ------- ------- DILUTED EPS Net income $ 9,314 $ 5,940 $25,035 $15,932 Common shares outstanding 27,632 24,753 27,550 24,273 Additional shares due to hypothetical exercise of stock options 878 458 591 364 ------- ------- ------- ------- 28,510 25,211 28,141 24,637 ------- ------- ------- ------- Diluted earnings per share $ 0.33 $ 0.24 $ 0.89 $ 0.65 ------- ------- ------- ------- ------- ------- ------- ------- </TABLE> NOTE F - NEW ACCOUNTING STANDARDS SFAS No. 130, "Reporting Comprehensive Income" is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company is evaluating the Statement's provisions to determine how it will present comprehensive income in its financial statements. The Company will adopt SFAS No. 130 in fiscal 1999. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for the way public companies report financial and descriptive information about reportable operating segments in annual financial statements and interim financial reports issued to stockholders. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", but retains the requirement to report information about major customers. The Company is evaluating the new Statement's provisions to determine the additional disclosures required in its financial statements, if any, and will adopt SFAS No. 131 in its fiscal 1999. 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 percent data) THREE AND NINE-MONTH PERIOD ENDED FEBRUARY 28, 1998 (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. Prior period amounts have been reclassified to conform to the current year presentation. <TABLE> <CAPTION> Three Months Ended Nine Months Ended February 28, February 28, ------------------------ ----------------------- 1998 1997 1998 1997 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net Sales: Aircraft and Engines $ 85,992 $ 74,128 $242,717 $190,020 Airframe and Accessories 91,632 56,451 236,231 160,221 Manufacturing 30,868 23,556 80,606 75,606 -------- -------- -------- -------- $208,492 $154,135 $559,554 $425,847 -------- -------- -------- -------- -------- -------- -------- -------- </TABLE> THREE-MONTH PERIOD ENDED FEBRUARY 28, 1998 (as compared with the same period of the prior year) Consolidated net sales for the third quarter of the Company's fiscal year ending May 31, 1998 (fiscal 1998), increased $54.4 million or 35.3% over the same period in the prior year. The Company experienced increased sales in all three classes of products and services as it continues to benefit from the successful implementation of its long-term strategies and programs, acquisitions and a friendly industry environment. Aircraft and Engine sales increased $11.9 million or 16.0% over the prior year period. Airframe and accessories sales increased $35.2 million or 62.3% reflecting the inclusion of sales resulting from the Cooper Aviation and AVSCO acquisitions, and increased demand for the Company's aircraft maintenance and aircraft component repair services. Manufacturing sales increased $7.3 million or 31% reflecting increased cargo loading and handling system sales and the inclusion of ATR for the quarter. Consolidated gross profit increased $10.8 million or 38.3% over the prior year reflecting higher consolidated net sales and an increase in the consolidated gross profit margin to 18.7% from 18.3%. The increase in the consolidated gross profit margin was primarily attributable to improved margins in certain of the Company's Manufacturing products. Consolidated operating income increased $5,768 or 51.0% and the consolidated operating income margin increased to 8.2% from 7.3% as a result of increased net sales and gross profit, partially offset by higher selling, general and administrative expenses. Selling, general and administrative expenses were lower as a percentage of consolidated net sales; however, total expenses increased principally due to the inclusion of recently acquired companies. Consolidated net income increased $3.4 million or 56.8% over the prior year period due principally to 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 RESULTS OF OPERATIONS (000s omitted except ratios) NINE MONTH PERIOD ENDED FEBRUARY 28, 1998 (as compared with the same period of the prior year) Consolidated net sales for the nine-month period ended February 28, 1998 increased $133.7 million or 31.4%. Net sales increased across all three classes of products and services with the consolidated sales increase driven by increased demand in the Company's engine and engine parts business; higher sales in the aircraft business; higher sales in the Company's aircraft maintenance and component repair business, and higher sales reflecting the inclusion of recently acquired companies. Consolidated gross profit increased $27.3 million or 35.3% over the prior year due to increased consolidated net sales and an increase in the consolidated gross profit margin to 18.7% from 18.2% in the prior year. The increase in the consolidated gross profit margin is primarily due to a favorable mix of inventories sold. Consolidated operating income increased $14.6 million or 48.1% over the prior year, and the consolidated operating income margin increased to 8.0% from 7.1% as a result of increased net sales and gross profit, partially offset by higher selling, general and administrative expenses. Selling, general and administrative expenses were lower as a percentage of consolidated net sales; however, total expenses increased principally due to the inclusion of recently acquired companies. Consolidated net income increased $9.1 million or 57.1% principally as a result of the factors discussed above. 10
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 FEBRUARY 28, 1998 (as compared with May 31, 1997) At February 28, 1998, the Company's liquidity and capital reserves included cash of $30.1 million and working capital of $342.3. At February 28, 1998, the Company's ratio of long-term debt to capitalization was 37.8%, up from 30.3% at May 31, 1997 reflecting the Company's December, 1997 sale of $60 million notes at 6.875% due December 15, 2007. The notes were priced at 99.80 to yield 6.903%. During the nine-month period ended February 28, 1998, the Company's operations used $10.2 million of cash, compared to $4.0 million of cash provided by operations in the prior year period. The reduction in cash generated from operations was principally due to increases in inventory and accounts receivable. During the nine-month period ended February 28, 1998, the Company's investing activities used $67.1 million of cash, compared to $27.1 million in the prior year period. The increase in cash used in investing activities was attributable to the purchases of ATR and AVSCO, an investment in a new leveraged lease and an investment in a joint venture, partially offset by a reduction in capital expenditures. Cash from financing activities during the nine-month period was $55.5 million, which primarily reflects the sale of the $60 million notes in December 1997. The Company believes that its cash and cash equivalents and available sources of financing will continue to provide the Company with 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: <TABLE> <CAPTION> Description February 28, May 31, ----------- 1998 1997 ----------- ---------- <S> <C> <C> Working capital $342,335 $314,119 Current ratio 3.3:1 4.1:1 Bank credit lines: Borrowings outstanding -- -- Available but unused lines $180,882 136,283 ----------- ---------- Total credit lines $180,882 $136,283 ----------- ---------- ----------- ---------- Long-term debt less current maturities $177,568 $116,818 Ratio of long-term debt to capitalization 37.8% 30.3% </TABLE> The Company believes that currently all of the Company's major financial systems and the significant business application in the Company's engine and airframe parts trading operations are Year 2000 compliant. Recently, the Company has undertaken a systems enhancement program for other business applications which will substantially enhance the capabilities of the Company's information technology systems, including a significant upgrade to the information systems in the Company's recently acquired new parts distribution businesses. The Company believes that all of the Company's business applications will be Year 2000 compliant after the aforementioned enhancements have been made. The capital outlay associated with the upgrade of the Company's information systems is not expected to have a material impact on the Company's financial position or results of operations. 11
PART II - OTHER INFORMATION AAR CORP. and Subsidiaries February 28, 1998 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS <TABLE> <CAPTION> ITEM <S> <C> 4. Instruments 4.7 Second Amendment and Restated Credit Agreement defining the dated February 10, 1998 between the Registrant rights of and the First National Bank of Chicago. security holders 10. Material 10.1 Fourth Amendment to AAR CORP.'s Stock Benefit Contracts Plan. 10.2 Fifth Amendment to AAR CORP.'s Stock Benefit Plan. 27. Financial Data 27.1 Financial Data Schedule for the Registrant's nine- Schedule month interim period ended February 28, 1998 </TABLE> (b) REPORTS ON FORM 8-K FOR QUARTER ENDED FEBRUARY 28, 1998: The Company filed three reports on Form 8-K during the three months ended February 28, 1998. Each Form 8-K was filed under Item 5, Other Events and Item 7, Financial Statements and Exhibits. The respective dates of the reports were December 4, 10 and 11, 1997. 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: April 13, 1998 /s/ Timothy J. Romenesko ---------------------------------------- Timothy J. Romenesko Vice President and Chief Financial Officer (Principal accounting officer and officer duly authorized to sign on behalf of registrant) 13