<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1997 Commission file number 1-6263
AAR CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 36-2334820
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or organization) No.)
ONE AAR PLACE
1100 N. WOOD DALE ROAD
WOOD DALE, ILLINOIS
(Address of principal 60191
executive offices) (Zip Code)
</TABLE>
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, 18,344,157
shares outstanding as of August 31, 1997.
- --------------------------------------------------------------------------------
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<PAGE>
AAR CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
AUGUST 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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............................. 9-10
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits........................................................ 11
Reports on Form 8-K............................................... 11
Signature Page.......................................................... 12
</TABLE>
2
<PAGE>
PART I, ITEM 1 -- FINANCIAL STATEMENTS
AAR CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF AUGUST 31, 1997 AND MAY 31, 1997
(000S OMITTED)
<TABLE>
<CAPTION>
MAY 31,
1997
---------------
AUGUST 31, (DERIVED FROM
1997 AUDITED
----------- FINANCIAL
(UNAUDITED) STATEMENTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 30,406 $ 51,705
Accounts receivable, less allowances of $2,561 and $1,965 respectively........... 124,349 122,944
Inventories...................................................................... 194,560 176,921
Equipment on or available for short-term lease................................... 36,115 40,318
Deferred tax assets, deposits and other.......................................... 27,959 22,212
----------- ---------------
Total current assets....................................................... 413,389 414,100
----------- ---------------
Property, plant and equipment, net................................................. 70,944 71,108
----------- ---------------
Other assets:
Investments in leveraged leases.................................................. 36,107 27,606
Cost in excess of underlying net assets of acquired companies.................... 9,742 5,653
Retirement benefits, notes receivable and other.................................. 12,637 11,117
----------- ---------------
58,486 44,376
----------- ---------------
$ 542,819 $ 529,584
----------- ---------------
----------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............................................. $ 1,492 $ 1,474
Accounts payable................................................................. 80,505 77,567
Accrued liabilities.............................................................. 18,627 17,647
Accrued taxes on income.......................................................... 4,635 3,293
----------- ---------------
Total current liabilities.................................................. 105,259 99,981
----------- ---------------
Long-term debt, less current maturities............................................ 116,438 116,818
Deferred tax liabilities........................................................... 33,552 32,560
Other liabilities.................................................................. 6,382 6,294
Retirement benefit obligation and deferred credits................................. 5,523 4,672
----------- ---------------
161,895 160,344
----------- ---------------
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 250 shares, none issued............. -- --
Common stock, $1.00 par value, authorized 80,000 shares; issued 19,017 and 18,932
shares, respectively........................................................... 19,017 18,932
Capital surplus.................................................................. 143,587 141,016
Retained earnings................................................................ 130,802 125,694
Treasury stock, 673 and 728 shares at cost, respectively......................... (13,063) (13,365)
Cumulative translation adjustments............................................... (4,678) (3,018)
----------- ---------------
275,665 269,259
----------- ---------------
$ 542,819 $ 529,584
----------- ---------------
----------- ---------------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements
3
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED AUGUST 31, 1997 AND 1996
(UNAUDITED)
(000S OMITTED EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Net sales................................................................................. $ 170,906 $ 136,037
---------- ----------
Costs and operating expenses:
Cost of sales........................................................................... 138,978 111,449
Selling, general and administrative..................................................... 19,034 15,375
---------- ----------
Operating income.......................................................................... 12,894 9,213
Interest expense.......................................................................... (2,759) (2,625)
Interest income........................................................................... 319 310
---------- ----------
Income before provision for income taxes.................................................. 10,454 6,898
Provision for income taxes................................................................ 3,144 2,050
---------- ----------
Net income................................................................................ $ 7,310 $ 4,848
---------- ----------
---------- ----------
Net income per share of common stock...................................................... $ .40 $ .30
Dividends paid and declared per share of common stock..................................... $ .12 $ .12
Average common shares outstanding......................................................... 18,326 15,965
</TABLE>
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements
4
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 1997 AND 1996
(UNAUDITED)
(000S OMITTED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................. $ 7,310 $ 4,848
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization......................................................... 3,463 2,679
Change in certain assets and liabilities:
Accounts receivable................................................................. 5,001 (6,826)
Inventories......................................................................... (12,378) (13,481)
Equipment on or available for short-term lease...................................... 4,030 10,027
Retirement benefit obligation, deferred taxes, deposits and other................... (4,083) 3,753
Accounts payable and other liabilities.............................................. (4,134) 8,912
Accrued liabilities and taxes on income............................................. (66) (2,140)
Accrued interest.................................................................... 2,346 2,470
---------- ----------
Net cash provided from operating activities............................................. 1,489 10,242
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment expenditures, net......................................... (2,678) (14,056)
Investment in leveraged leases.......................................................... (8,501) 304
Notes receivable and other.............................................................. (2,193) 376
---------- ----------
Net cash used in investing activities................................................... (13,372) (13,376)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in borrowings.................................................................... (7,293) (375)
Cash dividends.......................................................................... (2,202) (1,919)
Purchases of treasury stock............................................................. -- (1,601)
Proceeds from exercise of stock options and other....................................... 100 588
---------- ----------
Net cash used in financing activities................................................... (9,395) (3,307)
---------- ----------
Effect of exchange rate changes on cash................................................... (21) 151
---------- ----------
Decrease in cash and cash equivalents..................................................... (21,299) (6,290)
Cash and cash equivalents, beginning of period............................................ 51,705 33,606
---------- ----------
Cash and cash equivalents, end of period.................................................. $ 30,406 $ 27,316
---------- ----------
---------- ----------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
5
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
(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 August 31, 1997 and
the condensed consolidated results of operations and cash flows for the
three-month periods ended August 31, 1997 and 1996. The results of operations
for such interim periods are not necessarily indicative of the results for the
full year.
NOTE B -- INVENTORY
The following is a summary of inventories:
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1997 1997
---------- ----------
<S> <C> <C>
Raw materials and parts............................................... $ 37,235 $ 36,067
Work-in-process....................................................... 17,841 15,477
Purchased aircraft, parts, engines and components held for sale....... 138,091 124,212
Finished goods........................................................ 1,393 1,165
---------- ----------
$ 194,560 $ 176,921
---------- ----------
---------- ----------
</TABLE>
6
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1997
(000S OMITTED)
NOTE C -- SUPPLEMENTAL CASH FLOWS INFORMATION
Supplemental information on cash flows follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Interest paid..................................... $ 280 $ 120
Income taxes paid................................. 1,070 1,340
Income tax refunds received....................... 50 120
</TABLE>
Non-Cash Investing Activities:
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 93 thousand common shares and 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 $1,660 for the three-month period ended August 31, 1997. 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
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Common
stock equivalents consisting of employee stock options have not been included in
the per share calculations as their dilutive effect is not material.
NOTE F -- NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per
Share" in February, 1997. 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. The standard replaces the presentation of
primary EPS with a presentation of basic EPS, and fully diluted EPS with diluted
EPS. The Company is required to adopt the provisions of SFAS No. 128 in its
third quarter of fiscal 1998.
7
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 1997
(000S OMITTED)
NOTE F -- NEW ACCOUNTING STANDARDS (CONTINUED)
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 financial statements for periods 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 fourth quarter
of fiscal 1998.
8
<PAGE>
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-MONTH PERIOD ENDED AUGUST 31, 1997
(as compared with the same period of the prior year)
The Company reports its activities in one business segment: Aviation
Services. The table below sets forth consolidated net sales for the Company's
classes of similar products and services within this segment for the three month
periods ended August 31, 1997 and 1996. Prior period amounts have been
reclassified to conform to the current year presentation.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Net Sales:
Aircraft and Engines........................................... $ 79,781 $ 59,520
Airframe and Accessories....................................... 70,066 48,208
Manufacturing.................................................. 21,059 28,309
---------- ----------
$ 170,906 $ 136,037
---------- ----------
---------- ----------
</TABLE>
THREE-MONTH PERIOD ENDED AUGUST 31, 1997
(as compared with the same period of the prior year)
Consolidated net sales for the first quarter of the Company's fiscal year
ending May 31, 1998 (fiscal 1998) increased $34,869 or 25.6% over the same
period in the prior year reflecting continued strong demand for the Company's
broad range of products and services. Aircraft and Engines sales increased
$20,261 or 34.0% over the prior year period primarily reflecting growth in its
engine parts trading and engine component repair businesses as well as increased
sales in its engine trading and leasing business. A majority of the sales
increase in the engine parts business was in conjunction with long-term
inventory management programs. Airframe and Accessories sales increased $21,858
or 45.3%, reflecting the inclusion of results of Cooper for the entire quarter
and higher demand for certain aircraft maintenance and aircraft component repair
services, as well as higher sales in the Company's airframe parts trading
business. Manufacturing sales were $7,250 or 25.6% below the prior year period
reflecting lower demand for its products supporting the United States
Government's rapid deployment program.
Consolidated gross profit increased $7,340 or 29.9% over the prior year
period due to increased consolidated net sales and an increase in the
consolidated gross profit margin to 18.7% from 18.1%. The improvement in the
consolidated gross profit margin was attributable to the mix of inventories
sold. Consolidated operating income increased $3,681 or 40.0% and the Company's
operating income margin increased to 7.5% compared to the prior year period's
margin of 6.8% as a result of increased consolidated net sales and an increase
in consolidated 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 Cooper and higher marketing support and
personnel costs.
Consolidated net income increased $2,462 or 50.8% over the prior year period
due primarily to the factors discussed above.
9
<PAGE>
AAR CORP. AND SUBSIDIARIES
FINANCIAL CONDITION
(000S OMITTED EXCEPT RATIOS)
AT AUGUST 31, 1997
- ----------------
At August 31, 1997, the Company's liquidity and capital resources included
cash of $30,406 and working capital of $308,130. At August 31, 1997, the
Company's ratio of long-term debt to capitalization was 29.7%, down from 30.3%
at May 31, 1997. The Company continues to maintain its available external
sources of financing from $135,941 of unused bank lines and a shelf registration
on file with the Securities and Exchange Commission under which up to an
additional $85,000 of medium- or long-term debt securities may be sold subject
to market conditions.
During the three month period ended August 31, 1997, the Company generated
$1,489 of cash from operations compared to $10,242 in the three month period
ended August 31, 1996. The reduction in cash generated from operations was due
principally to working capital investments made as a result of continued growth
in the Company's Aircraft and Engines and Airframe and Accessories businesses.
During the three month period ended August 31,1997, the Company's investing
activities used $13,372 of cash principally due to an investment in a new
leveraged lease for $8,320 and capital expenditures of $2,678. Cash used in
financing activities during the three month period ended August 31, 1997 was
$9,395, compared to $3,307 for the three month period ended August 31, 1996. The
increase in cash used in financing activities was primarily the result of the
repayment of $6,942 of debt assumed in the Cooper acquisition during the first
quarter of fiscal 1998.
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:
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
DESCRIPTION 1997 1997
- ------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Working capital.................................................... $ 308,130 $ 314,119
Current ratio...................................................... 3.9:1 4.1:1
Bank credit lines:
Borrowings outstanding........................................... $ -- $ --
Available but unused lines....................................... 135,941 136,283
---------- ----------
Total credit lines................................................. $ 135,941 $ 136,283
---------- ----------
---------- ----------
Long-term debt, less current maturities............................ $ 116,438 $ 116,818
Ratio of long-term debt to capitalization.......................... 29.7% 30.3%
</TABLE>
10
<PAGE>
PART II -- OTHER INFORMATION
AAR CORP. AND SUBSIDIARIES
AUGUST 31, 1997
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
ITEM
- ---------
<S> <C>
27. Financial Data Schedule
27.1 Financial Data Schedule for the Registrant's three-month interim period ended August 31, 1997.
</TABLE>
(b) REPORTS ON FORM 8-K FOR QUARTER ENDED AUGUST 31, 1997:
A report on Form 8-K under Item 5. -- Other Events was filed on August
4, 1997.
11
<PAGE>
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: October 8, 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)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S REPORT ON FORM 10-Q FOR THE THREE MONTH INTERIM PERIOD ENDED
AUGUST 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 30,406
<SECURITIES> 0
<RECEIVABLES> 126,910
<ALLOWANCES> 2,561
<INVENTORY> 194,560
<CURRENT-ASSETS> 413,389
<PP&E> 134,249
<DEPRECIATION> 63,305
<TOTAL-ASSETS> 542,819
<CURRENT-LIABILITIES> 105,259
<BONDS> 116,438
0
0
<COMMON> 19,017
<OTHER-SE> 256,648
<TOTAL-LIABILITY-AND-EQUITY> 542,819
<SALES> 170,906
<TOTAL-REVENUES> 170,906
<CGS> 138,978
<TOTAL-COSTS> 158,012
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 234<F1>
<INTEREST-EXPENSE> 2,440<F2>
<INCOME-PRETAX> 10,454
<INCOME-TAX> 3,144
<INCOME-CONTINUING> 7,310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,310
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
<FN>
<F1>Provision for doubtful accounts is included in Total Costs and Expenses.
<F2>Interest expense is presented net of $319 of interest income.
</FN>
</TABLE>
