<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 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 (I.R.S. Employer
Incorporation or Organization) Identification 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
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ----------------------------------- -----------------------------------
COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
COMMON STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
None
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
At July 31, 1998, the aggregate market value of the Registrant's voting
stock held by nonaffiliates was approximately $655,793,339. The calculation of
such market value has been made for the purposes of this report only and should
not be considered as an admission or conclusion by the Registrant that any
person is in fact an affiliate of the Registrant.
On July 31, 1998, there were 27,707,256 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the Registrant's Annual Meeting
of Stockholders, to be held October 14,1998, is incorporated by reference in
Part III to the extent described therein.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
PART I
Item 1. Business.............................................................................. 2
Item 2. Properties............................................................................ 4
Item 3. Legal Proceedings..................................................................... 4
Item 4. Submission of Matters to a Vote of Security Holders................................... 4
Executive Officers of the Registrant.................................................. 5
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............. 6
Item 6. Selected Financial Data............................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 8
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 12
Item 8. Financial Statements and Supplementary Data........................................... 13
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................... 37
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 38
Item 11. Executive Compensation................................................................ 38
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 38
Item 13. Certain Relationships and Related Transactions........................................ 38
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K..................... 39
SIGNATURES................................................................................................ 40
</TABLE>
1
<PAGE>
PART I
ITEM 1. BUSINESS (IN THOUSANDS, EXCEPT PERCENTAGE AND EMPLOYEE DATA)
AAR CORP. and its subsidiaries are referred to herein collectively as "AAR"
or the "Company," unless the context indicates otherwise. The Company was
organized in 1955 as the successor to a business founded in 1951 and was
reincorporated in Delaware in 1966. The Company is a worldwide leader in
supplying aftermarket products and services to the global aviation/aerospace
industry.
Certain of the Company's aviation-related activities and products are
subject to licensing, certification and other requirements imposed by the
Federal Aviation Administration (FAA) and other regulatory agencies, both
domestic and foreign. The Company believes that it has all licenses and
certifications that are material to the conduct of its business.
The Company reports its activities in one business segment: Aviation
Services. It reports three classes of similar products and services within this
segment: (i) Aircraft and Engines, (ii) Airframe and Accessories and (iii)
Manufacturing.
The Company's Aircraft and Engines activities include (i) the purchase,
sale, and lease of new and used commercial jet aircraft, (ii) the purchase, sale
and lease of a wide variety of new, overhauled and repaired engines and engine
products for the aviation aftermarket, including a broad range of spare engines
and engine parts and other engine components and accessories, and (iii) the
overhaul, repair and exchange of a wide range of engine parts and components and
other engine support services for its commercial and military customers. The
Company also provides customized inventory supply and management programs for
engine parts and components in support of customer maintenance activities. The
Company has two FAA licensed repair stations in the U.S. to perform engine
component overhaul services which cover a broad range of internal engine parts
and components. The Company also provides turbine engine overhaul and parts
supply services to industrial gas and steam turbine operators. The Company's
primary sources of aviation products for its Aircraft and Engine activities are
domestic and foreign airlines, independent aviation service companies, aircraft
leasing companies and original equipment manufacturers.
The Company's Airframe and Accessories activities consist of (i) the
purchase, sale and lease of new, overhauled and repaired airframe parts and
accessories for the aviation aftermarket, and (ii) a wide variety of airframe
and accessory parts and components overhaul, as well as repair and exchange
services for its commercial, military and general aviation customers. The
Company also provides customized inventory supply and management programs for
certain airframe parts and components in support of customer maintenance
activities. The Company's primary sources of airframe parts for its Airframe and
Accessories activities are domestic and foreign airlines, independent aviation
service companies and aircraft leasing companies. The Company is also an
authorized distributor for more than 200 leading aviation/aerospace product
manufacturers.
The Company's Airframe and Accessories overhaul and repair capabilities
include most commercial aircraft landing gear, a wide variety of avionics,
instruments, electrical, electronic, fuel, hydraulic and pneumatic components
and a broad range of internal airframe components. AAR also operates an aircraft
maintenance facility providing maintenance, modification, special equipment
installation, painting services and aircraft terminal services for various
models of commercial, military, regional, business and general aviation
aircraft. AAR's overhaul and repair of parts and components also support the
sale, lease and inventory management activities of the Company. AAR has seven
FAA-licensed repair stations in the U.S., two in Europe and one in the Far East
to perform airframe component overhaul services.
During the fourth quarter of fiscal 1997, the Company sold its hardware
distribution unit. During fiscal 1998, the Company purchased substantially all
of the assets of Cooper Aviation Industries, Inc.,
2
<PAGE>
(Cooper), and AVSCO Aviation Service Corporation (AVSCO), each of whom is a
distributor of factory-new parts and accessories to the commercial,
regional/commuter and general aviation markets.
The Company's Manufacturing activities include (i) the design, manufacture
and installation of in-plane cargo loading and handling systems for commercial
and military aircraft and helicopters, (ii) the design and manufacture of
advanced composite materials for commercial, business and military aircraft,
(iii) the manufacture and repair of a wide array of containers, pallets and
shelters in support of military and humanitarian rapid deployment activities,
(iv) the design and manufacture of a complete line of self-propelled floor
sweepers and scrubbers for a variety of industrial and commercial uses,
including both ride-on and walk-behind lines, powered by gasoline, diesel fuel
or battery, and (v) the design and manufacture of a line of specialized
protective transport cases that are used to transport sensitive and calibrated
tools and instruments, and a variety of vacuum storage containers that protect
machinery and equipment during long-term storage. During fiscal 1998, the
Company purchased the stock of ATR International, Inc. (ATR), a company which
engineers and manufactures composites and structures for the aviation/aerospace
industry.
The Company furnishes aviation products and services primarily through its
own employees. Domestic and foreign commercial airlines, regional/commuter
airlines, business aircraft operators, aviation original equipment
manufacturers, aircraft leasing companies, domestic and foreign military
organizations and independent aviation support companies are the principal
customers for the Company's products and services. Sales of aviation products
and services to commercial airlines are generally affected by such factors as
the number, type and average age of aircraft in service, the levels of aircraft
utilization (E.G., frequency of schedules), the number of airline operators and
the level of sales of new and used aircraft.
The Company is a leading independent supplier of aviation products and
services to the highly competitive worldwide aviation/aerospace aftermarket.
Competition is based on quality, ability to provide a broad range of products
and services, speed of delivery and price. Competitors in the parts supply
business include the original equipment manufacturers, commercial airlines, and
other independent suppliers of parts and services. In certain of its leasing and
commercial jet aircraft trading activities, the Company faces competition from
financial institutions, syndicators, commercial and specialized leasing
companies and other entities that provide financing. AAR also competes with
various repair and overhaul organizations, which include the service arms of
original equipment manufacturers, the maintenance departments or divisions of
large commercial airlines (some of which also offer maintenance services to
third parties) and independent organizations. AAR's pallet, container and
shelter manufacturing activities compete with several modest-sized private
companies, and its cargo systems competitors include a number of divisions of
large corporations. Although certain of the Company's competitors have
substantially greater financial and other resources than the Company, the
Company believes that it has maintained a satisfactory competitive position
through its responsiveness to customer needs, its attention to quality and its
unique combination of trading expertise, technical capabilities and financial
strength.
At May 31, 1998, backlog believed to be firm was approximately $107,400
compared to $84,795 at May 31, 1997. An additional $7,743 of unfunded government
options on awarded contracts also existed at May 31, 1998. It is expected that
approximately $102,500 of the backlog will be shipped in fiscal 1999.
Sales to the U.S. Government, its agencies and its contractors were
approximately $83,114 (10.6% of total net sales), $82,125 (13.9% of total net
sales), and $92,362 (18.3% of total net sales) in fiscal years 1998, 1997 and
1996, respectively. Because such sales are subject to competitive bidding and
government funding, no assurance can be given that such sales will continue at
levels previously experienced. The majority of the Company's government
contracts are for aviation products and services used for ongoing routine
military logistic support activities; unlike weapons systems and
3
<PAGE>
other high-technology military requirements, these products and services are
less likely to be affected by reductions in defense spending. The Company's
contracts with the U.S. Government and its agencies are typically firm
agreements to provide aviation products and services at a fixed price and have a
term of one year or less, frequently subject to extension for one or more
additional periods of one year at the option of the government agency. Although
the Company's government contracts are subject to termination at the election of
the government, in the event of such a termination the Company would be entitled
to recover from the government all allowable costs incurred by the Company
through the date of termination.
At May 31, 1998, the Company employed approximately 2,700 persons worldwide.
For additional information concerning the Company's business segment
activities, including classes of similar products and services, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." For information concerning export sales, see "Business Segment
Information" in Note 10 of Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES
The Company's principal aircraft and engine sales and leasing activities as
well as engine and airframe components and parts distribution activities are
conducted from one building in Wood Dale, Illinois which is owned by the
Company. In addition to warehouse space, the facility includes executive and
sales offices. The Company also owns and operates one building in Elk Grove
Village, Illinois for the purpose of the distribution of new aviation parts.
Warehouse facilities are leased in Windsor Locks, Connecticut; Hamburg and
Hannover, Germany; Nantgarw, Wales; and Brussels, Belgium for the purpose of
aviation parts distribution.
Aviation overhaul facilities are located in The Netherlands near Schiphol
International Airport in a building owned by the Company; Garden City, New York
in a building owned by the Company; Frankfort, New York (subject to an
industrial revenue bond lease to the Company until 2001, at which time the
Company expects to purchase the facility for a nominal consideration); Windsor,
Connecticut in a building owned by the Company; Miami, Florida in leased
facilities near the airport; Singapore in leased facilities near the airport;
London, England in leased facilities and Oklahoma City, Oklahoma in facilities
leased from airport authorities. The Company's experience indicates that lease
renewal is available on reasonable terms consistent with its business needs.
The Company's principal Manufacturing activities are conducted at owned
facilities in Clearwater, Florida (subject to an industrial revenue bond); Port
Jervis, New York; Cadillac and Livonia, Michigan; and a plant located in
Aberdeen, North Carolina (subject to an expired industrial revenue bond lease to
the Company which provided for the Company to purchase the facility for a
nominal consideration).
The Company believes that its owned and lease facilities are suitable and
adequate for its existing business.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material, pending legal proceedings
(including any governmental or environmental proceedings) other than routine
litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
4
<PAGE>
SUPPLEMENTAL INFORMATION:
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning each executive officer of the Company is set forth
below:
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION WITH THE COMPANY
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Ira A. Eichner............................... 67 Chairman of the Board; Director
David P. Storch.............................. 45 President and Chief Executive Officer; Director
Howard A. Pulsifer........................... 55 Vice President; General Counsel; Secretary
Timothy J. Romenesko......................... 41 Vice President and Chief Financial Officer
Philip C. Slapke............................. 45 Vice President-Engine Group
</TABLE>
Mr. Eichner, the founder of the Company, has been Chairman of the Board of
the Company since 1973, and a director since it was founded in 1955. Mr. Eichner
was the Company's Chief Executive Officer from 1955 until 1996, when he
relinquished that position. Mr. Eichner is Mr. Storch's father-in-law.
Mr. Storch has been President of the Company since 1989 and Chief Executive
Officer since 1996. Previously, he was Chief Operating Officer from 1989 to 1996
and a Vice President of the Company from 1988 to 1989. Mr. Storch joined the
Company in 1979 and was President of a major subsidiary from 1984 to 1988. Mr.
Storch has been a director of the Company since 1989. Mr. Storch is Mr.
Eichner's son-in-law.
Mr. Pulsifer joined the Company as General Counsel in 1987 and has been a
Vice President since 1989 and Secretary since 1990. He was previously with
United Airlines, Inc. for 14 years, most recently as Senior Counsel.
Mr. Romenesko has been Vice President and Chief Financial Officer since
1994. Previously he served as Controller of the Company from 1991 to 1995 and in
various other positions since joining the Company in 1981.
Mr. Slapke has been a Vice President of the Company since July, 1994. He is
also President of a major subsidiary, a position he has held since 1989. He has
been with the Company in various positions since 1982.
5
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS (IN THOUSANDS, EXCEPT PER SHARE INFORMATION, PERCENTAGE DATA
AND NUMBER OF STOCKHOLDERS)
The Company's Common Stock is traded on the New York Stock Exchange and the
Chicago Stock Exchange. On June 30, 1998, there were approximately 12,000
holders of the Common Stock of the Company, including participants in security
position listings.
Certain of the Company's debt agreements contain provisions restricting the
payment of dividends or repurchase of its shares. See Note 2 of Notes to
Consolidated Financial Statements included herein. Under the most restrictive of
these provisions, the Company may not pay dividends (other than stock dividends)
or acquire its capital stock if after giving effect to the aggregate amounts
paid on or after June 1, 1996 exceed the sum of (i) $25,000 plus (ii) 50% of
Consolidated Net Income of the Company after June 1, 1996. At May 31, 1998,
unrestricted consolidated retained earnings available for payment of dividends
and purchase of the Company's shares totaled approximately $17,590. At June 1,
1998 unrestricted consolidated retained earnings increased to $35,419 due to
inclusion of 50% of Consolidated Net Income of the Company for fiscal 1998.
The table below sets forth for each quarter of the fiscal year indicated the
reported high and low market prices of the Company's Common Stock on the New
York Stock Exchange and the quarterly dividends declared. Fiscal 1997 market
prices and quarterly dividends have been restated to reflect the Company's
three-for-two stock split on February 23, 1998.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
------------------------------------ ---------------------------------------
PER COMMON SHARE: MARKET PRICES MARKET PRICES
- ------------------------ ----------------------- QUARTERLY -------------------------- QUARTERLY
QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
- ------------------------ -------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
First................. 25 5/8 20 1/2 $ .08 14 1/2 12 1/4 $ .08
Second................ 26 1/4 21 13/16 .08 20 1/4 14 .08
Third................. 32 7/16 24 11/16 .085 20 3/16 16 7/16 .08
Fourth................ 30 3/8 25 7/8 .085 21 1/4 17 .08
--------- ---
$ .33 $ .32
--------- ---
--------- ---
</TABLE>
6
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
- -------------------------------------------------
Net sales...................................... $782,123 $589,328 $504,990 $451,395 $407,754
Gross profit................................... 148,406 108,541 90,765 77,871 71,910
Operating income............................... 64,716 42,890 32,442 24,438 21,824
Interest expense............................... 14,494 10,786 10,616 10,900 9,564
Income before provision for income taxes....... 51,157 32,975 22,782 14,713 13,684
Net income..................................... 35,657 23,025 16,012 10,463 9,494
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Share data:(1)
Earnings per share -- basic.................. $ 1.29 $ .92 $ .67 $ .44 $ .40
Earnings per share -- diluted................ $ 1.27 $ .91 $ .66 $ .44 $ .40
Cash dividends per share..................... $ .33 $ .32 $ .32 $ .32 $ .32
Average common shares outstanding -- basic... 27,588 25,026(3) 23,967 23,898 23,856
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Average common shares outstanding --
diluted.................................... 28,174 25,399 24,248 23,966 23,962
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
FINANCIAL POSITION AT YEAR END
- ------------------------------------------------------------
Working capital................................ $319,252(2) $314,119(3) $258,627 $248,492 $240,009(5)
Total assets................................... 670,559 529,584(3) 437,846 425,814 411,016(4)
Short-term debt................................ 237(2) 1,474 1,474 1,632 568(5)
Long-term debt................................. 177,509(2) 116,818 118,292 119,766 115,729(5)
Total debt..................................... 177,746(2) 118,292 119,766 121,398 116,297(5)
Stockholders' equity........................... 300,850 269,259(3) 204,635 197,119 189,488
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Number of shares outstanding at end of
year(1)...................................... 27,717 27,306(3) 23,997 23,942 23,859
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Book value per share of common stock(1)........ $ 10.85 $ 9.86 $ 8.53 $ 8.23 $ 7.94
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
Notes:
(1) All share and per share information reflects the three-for-two stock split
on February 23, 1998.
(2) In December 1997, the Company sold $60,000 of unsecured 6.875% Notes due
December 15, 2007.
(3) In February 1997, the Company sold two million shares of its common stock
for $50,075, which is net of expenses.
(4) Reflects reclassification of $6,610 of noncurrent deferred tax assets
against noncurrent deferred tax liabilities to conform to the fiscal 1995
presentation.
(5) In October 1993, the Company sold $50,000 of unsecured 7.25% Notes due
October 15, 2003.
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
RESULTS OF OPERATIONS
The Company reports its activities in one business segment: Aviation
Services. The table below sets forth net sales for the Company's classes of
similar products and services within this segment for each of the last three
fiscal years ended May 31. Prior period amounts have been reclassified to
conform to the current year presentation.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales:
Aircraft and Engines........................................... $ 339,299 $ 263,074 $ 182,229
Airframe and Accessories....................................... 333,283 221,433 202,883
Manufacturing.................................................. 109,541 104,821 119,878
----------- ----------- -----------
$ 782,123 $ 589,328 $ 504,990
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THREE-YEAR NET SALES SUMMARY
The last three fiscal years cover a period of growth, expansion and
profitability in the worldwide aviation/aerospace market. The world's largest
airlines took advantage of increased demand resulting from generally stronger
economic conditions and lower fuel prices. Many carriers also continued to
benefit from cost structure improvements implemented in the early 1990s, and
continued to reduce costs through outsourcing of certain support operations and
consolidation of vendor lists. In addition, during the last three fiscal years,
many of the world's largest regional airlines experienced steady passenger,
revenue and net earnings growth; and the world's cargo fleet is now at an
all-time high. Increased revenue passenger miles and higher air freight volumes
resulted in increased utilization of the world's existing aircraft fleet and
higher demand for new aircraft, leading to a greater demand for parts and
services.
Over the last three fiscal years, the Company's consolidated net sales
increased as it successfully pursued opportunities in the strong
aviation/aerospace market. Net sales increased in the Company's Aircraft and
Engines and Airframe and Accessories activities during the three-year period as
the Company broadened the range of products and services provided to customers,
increased its customer base and expanded its geographical reach. Net sales also
increased as a result of growth in existing long-term programs and the addition
of new long-term programs. Fiscal 1998 net sales in Airframe and Accessories
benefited from the acquisitions of Cooper and AVSCO.
Net sales in the Company's Manufacturing activities have fluctuated the last
three fiscal years due to a reduction in demand for its manufactured pallets,
containers and shelters for the United States military, as usage of these
products declined due to lower mobilization of the rapid deployment force around
the world. The Company continues to pursue opportunities in the commercial
sector for these products. The decline in sales resulting from the reduction in
demand for the Company's products supporting rapid deployment activities was
partially offset by increased demand for the Company's aircraft cargo loading
systems and the acquisition of ATR during fiscal 1998.
The Company believes that its established market position, its ability to
respond to changes in the industry and its diverse customer base position the
Company to take advantage of future opportunities in the strong
aviation/aerospace market.*
- ------------------------------
* This section contains forward-looking statements which are identified with
an asterisk (*). Please see comments on forward-looking statement risk
factors in the "Forward-Looking Statements" section on page 12.
8
<PAGE>
FISCAL 1998 COMPARED WITH FISCAL 1997
Consolidated net sales increased $192,795 or 32.7% over the prior fiscal
year, reflecting strong demand for the Company's broad range of products and
services and the effect of acquisitions during the current fiscal year.
Acquisitions, net of prior year dispositions, contributed $77,234 to the sales
increase over the prior year. Aircraft and Engines sales increased $76,225 or
29.0% resulting from higher sales in its engine and engine parts businesses, as
well as increased aircraft sales. Airframe and Accessories sales increased
$111,850 or 50.5%, driven primarily by sales from Cooper and AVSCO, which were
acquired in June 1997 and December 1997, respectively, and increased demand for
the Company's aircraft maintenance and aircraft component overhaul and repair
capabilities. Sales in Manufacturing increased $4,720 or 4.5%, reflecting
increased cargo loading and handling system sales and the inclusion of sales
from ATR, which was acquired in October 1997, partially offset by lower sales
from products supporting the U.S. Government's rapid deployment program.
Consolidated gross profit increased $39,865 or 36.7% due to increased
consolidated net sales and an increase in the consolidated gross profit margin
to 19.0%, from 18.4% in the prior year. The increase in the consolidated gross
profit margin during fiscal 1998 reflected the favorable mix of inventories sold
and improved margins in certain manufactured products.
Consolidated operating income increased $21,826 or 50.9% over the prior
fiscal year as a result of the increase in net sales and the 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
principally due to the inclusion of recently acquired companies and increased
personnel costs. Interest expense increased $3,708 or 34.4% over the prior year
principally due to the impact of the Company's sale of $60 million of unsecured
6.875% Notes in December 1997.
Consolidated net income increased $12,632 or 54.9% over the prior year as a
result of the factors previously discussed.
FISCAL 1997 COMPARED WITH FISCAL 1996
The Company's operating results showed improvement over the prior fiscal
year as it experienced higher demand for its products and services in a strong
aviation/aerospace market. Consolidated net sales increased $84,338 or 16.7%
over the prior fiscal year reflecting higher sales in the Company's Aircraft and
Engines and Airframe and Accessories businesses. Consolidated operating income
increased $10,448 or 32.2% over the prior year due to increased consolidated net
sales and a higher consolidated gross profit margin, partially offset by higher
selling, general and administrative costs. Net income increased $7,013 or 43.8%
due to increased consolidated net sales and gross profit margin.
Aircraft and Engines sales increased $80,845 or 44.4% over the prior year
due to growth in its engine parts business and higher sales in its engine and
aircraft sales and leasing businesses. Increased volume through the Company's
long-term inventory management programs contributed to the sales increase in the
engine parts business. Airframe and Accessories sales increased $18,550 or 9.1%,
reflecting increased demand for certain aircraft and aircraft component repair
and maintenance services and higher airframe parts sales. Sales in Manufacturing
declined $15,057 or 12.6% resulting from lower demand for its products
supporting the U.S. Government's rapid deployment program.
Consolidated gross profit increased $17,776 or 19.6% due to increased
consolidated net sales and an increase in the consolidated gross profit margin
to 18.4% from 18.0% in the prior year. The increase in the consolidated gross
profit margin during fiscal 1997 was attributable to the favorable mix of
products and services sold in its Aircraft and Engines and Airframe and
Accessories businesses, partially offset by lower margins on certain
manufactured products due to lower sales volume.
9
<PAGE>
Consolidated operating income increased $10,448 or 32.2% over the prior year
as a result of the increase in consolidated net sales and the higher
consolidated gross profit margin, partially offset by higher selling, general
and administrative costs. The increase in selling, general and administrative
costs was driven by increased personnel and marketing support costs.
Consolidated net income increased $7,013 or 43.8% over the prior year as a
result of the factors discussed above.
FISCAL 1996 COMPARED WITH FISCAL 1995
The Company's operating results continued to improve in fiscal 1996 as it
took advantage of business opportunities available in the improved
aviation/aerospace marketplace and as the Company successfully implemented
certain strategic marketing initiatives. Consolidated net sales for fiscal 1996
increased $53,595 or 11.9% over the prior fiscal year due to increased sales
across all classes of similar products and services. Consolidated operating
income increased $8,004 or 32.8% over the prior year due to increased
consolidated net sales and a higher consolidated gross profit margin, partially
offset by increased selling, general and administrative costs. Net income
increased $5,549 or 53.0% over the prior year primarily due to increased
consolidated net sales and gross profit margin.
Aircraft and Engines sales increased $11,048 or 6.5% over the prior year as
a result of increased sales of engines and engine parts, which included sales
from inventory management programs and inventory provisioning for air carriers.
Airframe and Accessories sales increased $36,053 or 21.6% primarily as a result
of increased airframe parts sales and airframe and large airframe component
overhaul services, supplemented by other airframe component overhaul services.
Manufacturing sales increased $6,494 or 5.7% over the prior year primarily due
to increased sales of products and product repair services supporting rapid
deployment requirements, aircraft cargo systems and floor maintenance equipment,
partially offset by a decline from the disposition of small manufactured product
lines since the prior year.
Consolidated gross profit increased $12,894 or 16.6% over the prior fiscal
year due to increased consolidated net sales and an improved gross profit margin
of 18.0% versus the prior year's 17.3% margin. The margin on principal Aircraft
and Engines and Airframe and Accessories products and services improved over the
prior year as a result of favorable product mix and improved pricing of certain
products and services. The margin on manufactured products declined slightly as
a result of the mix of products and product repair services supporting rapid
deployment requirements, partially offset by aircraft cargo systems and floor
maintenance equipment.
Consolidated operating income increased $8,004 or 32.8% over the prior year
as a result of increased consolidated net sales and gross profit margin,
partially offset by increased total selling, general and administrative costs.
While selling, general and administrative costs declined as a percentage of
sales, the total costs increased over the prior year as a result of increased
personnel costs, increased marketing support programs and costs to enhance
information technology systems.
Consolidated net income increased $5,549 or 53.0% over the prior fiscal year
primarily as a result of the increased consolidated net sales and improved
consolidated gross profit margin. Net income also increased by a reduction in
interest expense resulting from substantially lower short-term borrowings during
the current year, partially offset by a small increase in the Company's current
year effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1998, the Company's liquidity and capital resources included cash
of $17,222 and working capital of $319,252. At May 31, 1998, the Company's
long-term debt-to-capitalization ratio was 37.1%, compared to 30.3% at May 31,
1997. The increase in the long-term debt-to-capitalization
10
<PAGE>
ratio primarily results from the Company's December 1997 sale of $60 million
Notes at 6.875% due December 15, 2007. The Notes were priced at 99.8% of par to
yield 6.903%. The Company continues to maintain its available external sources
of financing from $190,970 of unused available bank lines and a shelf
registration statement on file with the Securities and Exchange Commission under
which up to $200 million of common stock, preferred stock or medium- or
long-term debt securities may be issued or sold subject to market conditions.
During fiscal 1998, the Company generated $22,823 of cash from operations
compared to $9,531 and $24,760 during fiscal 1997 and 1996, respectively. The
increase in cash generated from operations during fiscal 1998 compared to fiscal
1997 was principally attributable to increased net income and effective working
capital management.
During fiscal 1998, the Company's investing activities used $99,129 of cash,
compared to $31,968 in fiscal 1997. The increase in cash used in investing
activities was attributable to the acquisitions of ATR and AVSCO, an investment
in an aircraft subject to a leveraged lease as well as equipment purchased and
leased to customers under long-term leases, and an investment in a joint
venture, partially offset by a reduction in capital expenditures. Cash provided
from financing activities during fiscal 1998 was $41,701, which resulted from
the sale of $60 million of Notes in December 1997, partially offset by the
payment of cash dividends of $9,118, the repayment of debt assumed in the Cooper
acquisition and the repayment of an installment note.
The Company believes that its cash and cash equivalents and available
sources of capital 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 indicators of financial condition and lines of credit
follows:
<TABLE>
<CAPTION>
MAY 31,
------------------
DESCRIPTION 1998 1997
- ------------------------------------------------------------- -------- --------
<S> <C> <C>
Working capital.............................................. $319,252 $314,119
Current ratio................................................ 3.1:1 4.1:1
Bank credit lines:
Borrowings outstanding..................................... $ -- $ --
Available but unused lines................................. 190,970 136,283
-------- --------
Total credit lines........................................... $190,970 $136,283
-------- --------
-------- --------
Long-term debt, less current maturities...................... $177,509 $116,818
Ratio of long-term debt to capitalization.................... 37.1% 30.3%
</TABLE>
YEAR 2000
During fiscal 1997, the Company initiated a comprehensive information
technology systems review which resulted in a formal plan to replace and enhance
certain of the Company's business application systems to meet current
operational requirements and provide for future expansion. These replacement
systems are Year 2000 compliant and include new information technology systems
in the Company's recently acquired new parts distribution business, the
Company's manufacturing businesses and the Company's overhaul businesses. The
capital outlay associated with the replacement systems, which are scheduled to
be in place by June 1999, is expected to be approximately $9,000, of which
approximately $3,300 was paid during fiscal 1998.*
The Company has conducted a preliminary Year 2000 compliance review of its
internal systems which are not being replaced. At this time, the Company
believes that its existing major financial systems and the significant business
application systems not being replaced are Year 2000 compliant.*
11
<PAGE>
In addition to the cost of the replacement information technology systems being
implemented to meet operational requirements, the Company expects to incur other
Year 2000 compliance costs unrelated to the replacement systems referenced
above; at this time the Company does not believe such costs will be material.*
As part of its continuing review, the Company is currently communicating
with its material vendors and suppliers regarding their Year 2000 compliance.
While the Company is aggressively addressing the Year 2000 issue internally, the
compliance status of third parties with which the Company has material
relationships is presently unknown and the failure of third parties to be
compliant could potentially have an adverse effect on the Company's operations.*
As any Year 2000 compliance failure risk is specifically identified, appropriate
action will be taken to develop alternative plans.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein, including those under "Year
2000" above that are identified with an asterisk (*), are forward looking and
are based on the beliefs of Company management as well as assumptions and
estimates made based on information currently available to the Company. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions. It is
not reasonably possible to itemize the many factors and specific events that
might cause the actual results to differ from the expected results; however,
they may include replacement system implementation problems, unidentified Year
2000 problems, failure of third parties to be Year 2000 compliant, economic and
aviation/aerospace market stability and Company profitability. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions or estimates prove incorrect, actual results may vary materially
from those described.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF AAR CORP.:
We have audited the accompanying consolidated balance sheets of AAR CORP.
and subsidiaries as of May 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended May 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AAR CORP.
and subsidiaries as of May 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 31, 1998 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
June 24, 1998
13
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------
1998 1997 1996
-------- -------- --------
(000S OMITTED EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net sales............................................................ $782,123 $589,328 $504,990
-------- -------- --------
Costs and operating expenses:
Cost of sales...................................................... 633,717 480,787 414,225
Selling, general and administrative................................ 83,690 65,651 58,323
-------- -------- --------
717,407 546,438 472,548
-------- -------- --------
Operating income..................................................... 64,716 42,890 32,442
Interest expense..................................................... (14,494) (10,786) (10,616)
Interest income...................................................... 935 871 956
-------- -------- --------
Income before provision for income taxes............................. 51,157 32,975 22,782
Provision for income taxes........................................... 15,500 9,950 6,770
-------- -------- --------
Net income........................................................... $ 35,657 $ 23,025 $ 16,012
-------- -------- --------
-------- -------- --------
Earnings per share of common stock--basic............................ $ 1.29 $ .92 $ .67
-------- -------- --------
-------- -------- --------
Earnings per share of common stock--diluted.......................... $ 1.27 $ .91 $ .66
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
14
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MAY 31,
------------------
1998 1997
-------- --------
(000S OMITTED)
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 17,222 $ 51,705
Accounts receivable................................................................ 163,359 122,944
Inventories........................................................................ 229,930 176,921
Equipment on or available for short-term leases.................................... 33,495 40,318
Deferred tax assets, deposits and other............................................ 24,394 22,212
-------- --------
Total current assets................................................................. 468,400 414,100
-------- --------
Property, plant and equipment, at cost:
Land............................................................................... 6,181 5,204
Buildings and improvements......................................................... 57,388 53,603
Equipment, furniture and fixtures.................................................. 92,142 72,622
-------- --------
155,711 131,429
Accumulated depreciation............................................................. (72,806) (60,321)
-------- --------
82,905 71,108
-------- --------
Other assets:
Investment in leveraged leases..................................................... 36,533 27,606
Equipment on long-term leases...................................................... 24,611 --
Cost in excess of underlying net assets of acquired companies, net................. 26,565 5,653
Joint ventures, retirement benefits, notes receivable and other.................... 31,545 11,117
-------- --------
119,254 44,376
-------- --------
$670,559 $529,584
-------- --------
-------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
15
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MAY 31,
------------------
1998 1997
-------- --------
(000S OMITTED)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt............................................... $ 237 $ 1,474
Accounts payable................................................................... 112,980 77,567
Accrued liabilities................................................................ 29,614 17,647
Accrued taxes on income............................................................ 6,317 3,293
-------- --------
Total current liabilities............................................................ 149,148 99,981
-------- --------
Long-term debt, less current maturities.............................................. 177,509 116,818
Deferred tax liabilities............................................................. 36,850 32,560
Other liabilities.................................................................... 1,699 6,294
Retirement benefit obligation and deferred credits................................... 4,503 4,672
-------- --------
220,561 160,344
-------- --------
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 250 shares; none issued............... -- --
Common stock, $1.00 par value, authorized 80,000 shares; issued 28,832 and 18,932,
respectively..................................................................... 28,832 18,932
Capital surplus.................................................................... 140,898 141,016
Retained earnings.................................................................. 152,233 125,694
Treasury stock, 1,128 and 728 shares at cost, respectively......................... (16,470) (13,365)
Cumulative translation adjustments................................................. (4,643) (3,018)
-------- --------
300,850 269,259
-------- --------
$670,559 $529,584
-------- --------
-------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
16
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED MAY 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK CUMULATIVE
----------------- --------------------- CAPITAL RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS ADJUSTMENTS
------- -------- --------- --------- ---------- --------- -----------
(000S OMITTED)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1995........................ 16,284 $16,284 323 $ (3,733) $ 82,132 $102,309 $ 1,497
Net income................................. -- -- -- -- -- 16,012 --
Cash dividends............................. -- -- -- -- -- (7,676) --
Treasury stock............................. -- -- 83 (1,552) -- -- --
Exercise of stock options and stock
awards................................... 120 120 -- -- 1,843 -- --
Adjustment for net translation loss........ -- -- -- -- -- -- (2,601)
Minimum pension liability.................. -- -- -- -- -- -- --
------- -------- --------- --------- ---------- --------- -----------
Balance, May 31, 1996........................ 16,404 $16,404 406 $ (5,285) $ 83,975 $110,645 $ (1,104)
Net income................................. -- -- -- -- -- 23,025 --
Cash dividends............................. -- -- -- -- -- (7,976) --
Issuance of common stock................... 2,000 2,000 -- -- 48,075 -- --
Treasury stock............................. -- -- 322 (8,080) -- -- --
Exercise of stock options and stock
awards................................... 528 528 -- -- 8,966 -- --
Adjustment for net translation loss........ -- -- -- -- -- -- (1,914)
------- -------- --------- --------- ---------- --------- -----------
Balance, May 31, 1997........................ 18,932 $18,932 728 $(13,365) $ 141,016 $125,694 $ (3,018)
Net income................................. -- -- -- -- -- 35,657 --
Cash dividends............................. -- -- -- -- -- (9,118) --
Issuance of common stock................... -- -- (93) 1,699 1,158 -- --
Treasury stock............................. -- -- 126 (4,804) -- -- --
Three-for-two stock split.................. 9,589 9,589 367 -- (9,589) -- --
Exercise of stock options and stock
awards................................... 311 311 -- -- 8,313 -- --
Adjustment for net translation loss........ -- -- -- -- -- -- (1,625)
------- -------- --------- --------- ---------- --------- -----------
Balance, May 31, 1998........................ 28,832 $28,832 1,128 $(16,470) $ 140,898 $152,233 $ (4,643)
------- -------- --------- --------- ---------- --------- -----------
------- -------- --------- --------- ---------- --------- -----------
<CAPTION>
MINIMUM
PENSION
LIABILITY
ADJUSTMENTS
-----------
<S> <C>
Balance, May 31, 1995........................ $ (1,370)
Net income................................. --
Cash dividends............................. --
Treasury stock............................. --
Exercise of stock options and stock
awards................................... --
Adjustment for net translation loss........ --
Minimum pension liability.................. 1,370
-----------
Balance, May 31, 1996........................ $ --
Net income................................. --
Cash dividends............................. --
Issuance of common stock................... --
Treasury stock............................. --
Exercise of stock options and stock
awards................................... --
Adjustment for net translation loss........ --
-----------
Balance, May 31, 1997........................ $ --
Net income................................. --
Cash dividends............................. --
Issuance of common stock................... --
Treasury stock............................. --
Three-for-two stock split.................. --
Exercise of stock options and stock
awards................................... --
Adjustment for net translation loss........ --
-----------
Balance, May 31, 1998........................ $ --
-----------
-----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
17
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------
1998 1997 1996
-------- -------- --------
(000S OMITTED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................................. $ 35,657 $ 23,025 $ 16,012
Adjustments to reconcile net income to net cash provided from operating
activities:
Depreciation and amortization.......................................... 14,283 12,287 10,115
Change in certain assets and liabilities:
Accounts receivable.................................................. (14,922) (16,333) 2,584
Inventories.......................................................... (34,706) (35,930) (124)
Equipment on or available for short-term leases...................... 6,664 (3,808) (6,247)
Deferred tax assets, deposits and other.............................. (4,114) 1,734 (4,818)
Accounts payable and other liabilities............................... 2,730 25,637 7,901
Accrued liabilities and taxes on income.............................. 16,936 5,935 1,859
Deferred tax liabilities and other deferred credits.................. 295 (3,016) (2,522)
-------- -------- --------
Net cash provided from operating activities.............................. 22,823 9,531 24,760
-------- -------- --------
Cash flows from investing activities:
Property, plant and equipment expenditures, net............................ (17,495) (30,292) (7,547)
Acquisitions, less cash acquired........................................... (28,148) -- --
Investment in equipment on long-term leases and leveraged leases........... (33,538) 3,299 1,047
Notes receivable and other................................................. (19,948) (4,975) 1,872
-------- -------- --------
Net cash used in investing activities.................................... (99,129) (31,968) (4,628)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term notes payable.......................... 59,347 -- --
Change in borrowings....................................................... (10,170) (1,474) (1,632)
Cash dividends............................................................. (9,118) (7,976) (7,676)
Purchases of treasury stock................................................ -- (1,165) (1,552)
Proceeds from exercise of stock options and other.......................... 1,642 1,191 1,963
Proceeds from common stock offering........................................ -- 50,075 --
-------- -------- --------
Net cash provided from (used in) financing activities.................... 41,701 40,651 (8,897)
-------- -------- --------
Effect of exchange rate changes on cash...................................... 122 (115) (116)
-------- -------- --------
Increase in cash and cash equivalents........................................ (34,483) 18,099 11,119
Cash and cash equivalents, beginning of year................................. 51,705 33,606 22,487
-------- -------- --------
Cash and cash equivalents, end of year....................................... $ 17,222 $ 51,705 $ 33,606
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
18
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
AAR CORP. (the Company) supplies a variety of products and services to the
aviation/aerospace industry in the United States and abroad. Products and
services are sold primarily to commercial, domestic and foreign airlines,
business aircraft operators, aviation original equipment manufacturers, aircraft
leasing companies, domestic and foreign military agencies and independent
aviation support companies.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries after elimination of intercompany accounts and
transactions.
Turbine Engine Asset Management, L.L.C. is a joint venture between the
Company and its partner and was formed during fiscal 1998 to distribute certain
engine parts to aviation customers worldwide. The Company's investment in the
joint venture is being accounted for under the equity method of accounting. The
results of operations for the joint venture during fiscal 1998 are not material.
REVENUE RECOGNITION
Sales and related cost of sales are recognized primarily upon shipment of
products and performance of services. Sales and related cost of sales on
long-term contracts are recognized as units are delivered, determined by the
percentage of completion method based on the relationship of costs incurred to
date to estimated total costs under the respective contracts. Lease revenue is
recognized as earned. Certain purchases made for customers under outsourcing
arrangements are not included in revenues or cost of sales based on the nature
of the services performed under the agreements.
ACCOUNTING CHANGES
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 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
those 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.
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 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 will adopt SFAS
No. 130 in fiscal 1999.
19
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 public companies to 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 fiscal 1999.
SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement
Benefits" is effective for fiscal years beginning after December 15, 1997. SFAS
No. 132 revises disclosures for pension and other postretirement plans, but does
not change the measurement or recognition of liabilities or expense related to
pension or other postretirement plans. The Company will adopt SFAS No. 132 in
fiscal 1999.
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
is effective for fiscal years beginning after June 15, 1999. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for certain hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company is evaluating
the new Statement's provisions to determine the impact, if any, and will adopt
SFAS No. 133 in its first quarter of fiscal 2001.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less to be cash equivalents. At May 31, 1998 and 1997, cash
equivalents of approximately $177 and $41,619, respectively, represent
investments in funds holding high-quality commercial paper, Eurodollars and U.S.
Government agency-issued securities. The carrying amount of cash equivalents
approximates fair value at May 31, 1998 and 1997, respectively.
ACCOUNTS RECEIVABLE
In May 1998, the Company entered into a three-year agreement to sell, on a
revolving basis, an interest in a defined pool of trade accounts receivable up
to $50 million. At May 31, 1998, no accounts receivable had been sold under this
agreement. The Company, as agent for the purchaser of the accounts receivable,
retains collection and administrative responsibilities for the participating
interests of the defined pool.
FOREIGN CURRENCY
Gains and losses on foreign currency translation and foreign exchange
contracts are determined in accordance with the method of accounting prescribed
by SFAS No. 52. All balance sheet accounts of foreign and certain domestic
subsidiaries transacting business in currencies other than the Company's
functional currency are translated at year-end or historical exchange rates.
Revenues and expenses are translated at average exchange rates during the year.
Translation adjustments are
20
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
excluded from the results of operations and are recorded in Stockholders' equity
as Cumulative translation adjustments.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF MARKET OR CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of market or credit risk consist principally of trade receivables. While the
Company's trade receivables are diverse based on the number of entities and
geographic regions, the majority are concentrated in the aviation/ aerospace
industry. The Company performs evaluations of customers' financial condition
prior to extending credit privileges and performs ongoing credit evaluations of
payment experience, current financial condition and risk analysis. The Company
typically requires collateral in the form of security interest in assets,
letters of credit, obligation guarantees from financial institutions, or sells
its receivables, usually on a nonrecourse basis, for transactions other than
normal trade terms.
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments"
requires disclosure of the fair value of certain financial instruments. Cash and
cash equivalents, accounts receivable, short-term borrowings, accounts payable
and accrued liabilities are reflected in the financial statements at fair value
because of the short-term maturity of these instruments. Noncurrent notes
receivable and long-term debt bearing a variable interest rate are reflected in
the financial statements at fair value.
Fair value estimates are made at a specific point in time based on relevant
market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
INVENTORIES
Inventories are priced at the lower of cost or market. Cost is determined by
either the specific identification, average cost or first-in, first-out method.
The following is a summary of inventories:
<TABLE>
<CAPTION>
MAY 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Raw materials and parts....................................................... $ 46,573 $ 36,067
Work-in-process............................................................... 15,787 15,477
Purchased aircraft, parts, engines and components held for sale............... 166,140 124,212
Finished goods................................................................ 1,430 1,165
----------- -----------
$ 229,930 $ 176,921
----------- -----------
----------- -----------
</TABLE>
EQUIPMENT UNDER OPERATING LEASES
Lease revenue is recognized as earned. The cost of the asset under lease is
original purchase price plus overhaul costs. Depreciation is computed on a
straight-line method over the estimated service life of the equipment and
maintenance costs are expensed as incurred. The balance sheet classification is
21
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
based on the lease term with fixed-term leases less than twelve months
classified as short term and all others classified as long term.
Equipment on short-term lease consists of aircraft engines and parts on or
available for lease to satisfy customers' immediate short-term requirements. The
leases are renewable with fixed terms, which generally vary from one to twelve
months. Equipment on long-term lease consists of aircraft and engines on lease
to customers with a lease term greater than twelve months. Future rentals under
long-term leases were $4,140 for fiscal 1999, fiscal 2000, fiscal 2001 and
fiscal 2002, respectively and $3,300 for fiscal 2003.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is computed on the straight-line method over useful lives of
10-40 years for buildings and improvements and 3-10 years for equipment,
furniture and fixtures. Leasehold improvements are amortized over the shorter of
the estimated useful life or the term of the applicable lease.
Repairs and maintenance expenditures are expensed as incurred. Upon sale or
disposal, cost and accumulated depreciation are removed from the accounts and
related gains and losses are included in results of operations.
LEVERAGED LEASES
The Company acts as an equity participant in leveraged lease transactions.
The equipment cost in excess of equity contribution is furnished by third-party
financing in the form of secured debt. Under the lease agreements, the third
parties have no recourse against the Company for nonpayment of the obligations.
The third-party debt is collateralized by the lessees' rental obligations and
the leased equipment.
The Company has ownership rights to the leased assets and is entitled to the
investment tax credits and benefits of tax deductions for depreciation on the
leased assets and for interest on the secured debt financing.
COST IN EXCESS OF UNDERLYING NET ASSETS OF ACQUIRED COMPANIES
The cost in excess of underlying net assets of acquired companies, including
those companies acquired during fiscal 1998, is being amortized over a period of
forty years. The increase in cost in excess of underlying net assets of acquired
companies at May 31, 1998 is attributable to the Company's acquisition of ATR,
AVSCO, and Cooper during fiscal 1998. Amortization was $565 in fiscal 1998, $223
in fiscal 1997 and $230 in fiscal 1996, respectively. Accumulated amortization
is $4,173, $3,608, and $3,385 at May 31, 1998, 1997 and 1996, respectively. The
Company evaluates the existence of impairment on the basis of whether the cost
in excess of underlying net assets of acquired companies is fully recoverable
from projected, undiscounted net cash flows.
INCOME TAXES
Income taxes are determined in accordance with SFAS No. 109.
22
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Federal income taxes were provided on the earnings of foreign subsidiaries
as the Company fully distributed these earnings. The earnings are treated as
taxable in the United States; however, the related tax expense was offset by
foreign tax credits. Foreign income taxes are provided at the local statutory
rates and reflect estimated taxes payable.
The benefits of investment tax credits are recognized for book purposes
under the deferral method of accounting for leveraged leases. The investment tax
credits are recognized in the year earned for income tax purposes.
STATEMENTS OF CASH FLOWS
Supplemental information on cash flows follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest paid.............................................. $ 11,600 $ 10,500 $ 10,500
Income taxes paid.......................................... 6,200 8,600 5,300
Income tax refunds and interest received................... 6,000 500 900
</TABLE>
USE OF ESTIMATES
Management of the Company has made estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
RECLASSIFICATION
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform to the current year's presentation.
2. FINANCING ARRANGEMENTS
Bank loans consisted of:
<TABLE>
<CAPTION>
MAY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current maturities of long-term debt....................................... $ 237 $ 1,474 $ 1,474
--------- --------- ---------
--------- --------- ---------
</TABLE>
23
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
2. FINANCING ARRANGEMENTS -- (CONTINUED)
Short-term borrowing activity was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Maximum amount borrowed............................................... $ 59,200 $ 25,300 $ 4,900
Average daily borrowings.............................................. 20,689 3,624 437
Average interest rate during the year................................. 6.0% 5.8% 5.5%
--------- --------- ---------
--------- --------- ---------
</TABLE>
At May 31, 1998, aggregate unsecured bank credit arrangements were $190,970.
Of this amount, $75,000 was available under credit lines with domestic banks,
$110,000 was available under revolving credit and term loan agreements with
domestic banks and $5,970 was available under credit agreements with foreign
banks. All domestic and foreign credit lines were unused at May 31, 1998. There
are no compensating balance requirements in connection with domestic or foreign
lines of credit. Borrowings under domestic bank lines bear interest at or below
the corporate base rate.
The Company may borrow a maximum of $110,000 (available through August 31,
1999) under revolving credit and term loan agreements with domestic banks.
Revolving credit borrowings may, at the Company's option, be converted to term
loans payable in equal quarterly installments over five years. Interest is based
on corporate base rate or quoted Eurodollar or multicurrency rates during the
revolving credit period and 1/2% over corporate base rate or quoted Eurodollar
rate thereafter. There were no borrowings under these agreements outstanding at
May 31, 1998. There are no compensating balance requirements on any of the
committed lines, but the Company is required to pay a commitment fee. There are
no restrictions on the withdrawal or use of these funds.
24
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
2. FINANCING ARRANGEMENTS -- (CONTINUED)
Long-term debt was as follows:
<TABLE>
<CAPTION>
MAY 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Notes payable due November 1, 2001 with interest of 9.5% payable semi-annually
on May 1 and November 1..................................................... $ 65,000 $ 65,000
Notes payable due October 15, 2003 with interest of 7.25% payable
semi-annually on April 15 and October 15.................................... 50,000 50,000
Notes payable due December 15, 2007 with interest of 6.875% payable
semi-annually on June 15 and December 15.................................... 60,000 --
Installment note due June, 1999 bearing interest at 5% per annum, compounded
monthly payable in equal monthly payments of principal and interest......... -- 3,033
Industrial revenue bonds due in quarterly installments to 2011 with weighted
average interest of approximately 3.69% at May 31, 1998 (secured by trust
indentures on property, plant and equipment)................................ 2,543 --
Industrial revenue bonds due in installments to 2002 with weighted average
interest of approximately 7.60% at May 31, 1998 (secured by trust indentures
on property, plant and equipment)........................................... 203 259
----------- -----------
177,746 118,292
Current maturities............................................................ (237) (1,474)
----------- -----------
$ 177,509 $ 116,818
----------- -----------
----------- -----------
</TABLE>
In December 1997, the Company sold $60,000 of 6.875% Notes due December 15,
2007. The Notes were priced at 99.8% of par to yield 6.903%.
The Company is subject to a number of covenants under the revolving credit
and term loan agreements, including restrictions which relate to the payment of
cash dividends, maintenance of minimum net working capital and tangible net
worth levels, sales of assets, additional financing, purchase of the Company's
shares and other matters. The Company is in compliance with all restrictive
financial provisions of the agreements. At May 31, 1998, unrestricted
consolidated retained earnings available for payment of dividends and purchase
of the Company's shares was approximately $17,590. Effective June 1, 1998,
unrestricted consolidated retained earnings increased to $35,419 due to
inclusion of 50% of the consolidated net income of the Company for fiscal 1998.
The aggregate amount of long-term debt maturing during each of the next five
fiscal years is $237 in 1999, $262 in 2000, $257 in 2001, $65,232 in 2002 and
$200 in 2003. The Company's long-term debt was estimated to have a fair value of
approximately $186,150 at May 31, 1998 and was based on estimates using
discounted future cash flows at an assumed rate for borrowings currently
prevailing in the marketplace for similar instruments.
25
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
3. INCOME TAXES
The provision for income taxes included the following components:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current
Federal............................................................. $ 9,950 $ 8,605 $ 4,215
Foreign............................................................. 720 535 895
State............................................................... 1,050 890 800
--------- --------- ---------
$ 11,720 $ 10,030 $ 5,910
Deferred.............................................................. 3,780 (80) 860
--------- --------- ---------
$ 15,500 $ 9,950 $ 6,770
--------- --------- ---------
--------- --------- ---------
</TABLE>
The deferred tax provisions result primarily from differences between book
and tax income arising from depreciation and leveraged leases.
Deferred tax liabilities and assets result primarily from the differences in
the timing of the recognition for transactions between book and income tax
purposes and consist of the following components:
<TABLE>
<CAPTION>
MAY 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Depreciation................................................................... $ 9,770 $ 9,740
Leveraged leases............................................................... 26,980 22,230
Other.......................................................................... 300 950
--------- ---------
Total deferred tax liabilities................................................. $ 37,050 $ 32,920
--------- ---------
--------- ---------
Deferred tax assets-current:
Inventory costs................................................................ $ 5,420 $ 5,630
Employee benefits.............................................................. 2,540 1,320
Doubtful account allowance..................................................... 130 700
Other.......................................................................... 750 680
--------- ---------
Total deferred tax assets-current.............................................. $ 8,840 $ 8,330
--------- ---------
Deferred tax assets-noncurrent:
Postretirement benefits........................................................ $ 200 $ 360
--------- ---------
Total deferred tax assets-noncurrent........................................... 200 360
--------- ---------
Total deferred tax assets...................................................... $ 9,040 $ 8,690
--------- ---------
--------- ---------
</TABLE>
The Company has determined, more likely than not, that a valuation allowance
is not required based upon the Company's history of prior operating earnings,
its expectations for continued future earnings and the scheduled reversal of
deferred tax liabilities, primarily related to leveraged leases, which exceed
the amount of the deferred tax assets.
26
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
3. INCOME TAXES -- (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the U.S. Federal statutory income tax rate of 35% for fiscal 1998, 1997 and
1996, for the following reasons:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Provision for income taxes at the Federal statutory rate............. $ 17,905 $ 11,540 $ 7,970
Tax benefits on exempt earnings from export sales.................. (3,100) (2,000) (1,600)
State income taxes, net of Federal benefit and refunds............. 900 800 520
Amortization of goodwill........................................... 200 80 90
Differences between foreign tax rates and the U.S. Federal
statutory rate................................................... (200) (200) 100
Other, net......................................................... (205) (270) (310)
--------- --------- ---------
Provision for income taxes as reported............................... $ 15,500 $ 9,950 $ 6,770
--------- --------- ---------
--------- --------- ---------
Effective income tax rate............................................ 30.3% 30.2% 29.7%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Pretax income from foreign subsidiaries was approximately $2,000, $1,500 and
$2,100 at May 31, 1998, 1997 and 1996, respectively. Foreign income taxes were
provided on all earnings from foreign subsidiaries.
4. COMMON STOCK AND STOCK OPTION PLANS
The Company has established stock option plans for officers and key
employees of the Company. Stock option awards typically expire ten years from
the date of grant or earlier upon termination of employment, become excercisable
in five equal increments on successive grant anniversary dates at the New York
Stock Exchange closing stock price on the date of grant and are accompanied by
reload features and, for certain individuals, stock rights excercisable in the
event of a change in control of the Company.
The Company accounts for these plans under APB No. 25, under which no
compensation cost has been recognized. Proforma information regarding net income
and earnings per share is required by SFAS No. 123 and has been determined as if
the Company had accounted for its employee stock options under the fair value
method of SFAS No. 123. The fair value of each option grant, including reloads,
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions for fiscal 1998: dividend yield
of 2.0%; expected volatility of 25.5%, risk-free interest rate of 5.97%; and
expected life of 4.0 years. The following weighted average assumptions were used
to value options granted in fiscal 1997: dividend yield of 2.4%; expected
volatility of 24.0%; risk-free interest rate of 6.4%; and expected life of 3.6
years. The weighted average fair value of options granted during fiscal 1998 and
1997 was $5.04 and $4.57, respectively. Had compensation cost for stock options
awarded under the plans been determined in accordance with
27
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
4. COMMON STOCK AND STOCK OPTION PLANS -- (CONTINUED)
SFAS No. 123, the Company's net income and earnings per share would have been
changed to the following proforma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C> <C>
Net income: As reported $ 35,657 $ 23,025 $ 16,012
Proforma 34,478 22,158 15,874
Earnings per share--basic: As reported 1.29 .92 .67
Proforma 1.25 .89 .66
Earnings per share--diluted: As reported 1.27 .91 .66
Proforma 1.22 .87 .65
</TABLE>
A summary of changes in stock options granted to officers, key employees and
non-employee directors under stock option plans for the three years ended May
31, 1998 follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------- -------------------
<S> <C> <C>
Outstanding, May 31, 1995 (543 exercisable)............................... 1,405 $ 8.57
Granted................................................................. 446 11.78
Exercised............................................................... (75) 7.33
Surrendered/expired/cancelled........................................... (65) 8.91
-----
Outstanding, May 31, 1996 (745 exercisable)............................... 1,711 $ 9.45
-----
Granted................................................................. 935 15.50
Exercised............................................................... (624) 8.79
Surrendered/expired/cancelled........................................... (44) 11.19
-----
Outstanding, May 31, 1997 (664 exercisable)............................... 1,978 $ 12.48
-----
Granted................................................................. 891 23.57
Exercised............................................................... (339) 11.32
Surrendered/expired/cancelled........................................... (46) 16.17
-----
Outstanding, May 31, 1998 (785 exercisable)............................... 2,484 $ 16.54
-----
-----
</TABLE>
The following table provides additional information regarding options
outstanding as of May 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
OPTION EXERCISE OPTIONS REMAINING CONTRACTUAL OPTIONS EXERCISE PRICE OF
PRICE RANGE OUTSTANDING LIFE OF OPTIONS (YEARS) EXERCISABLE OPTIONS EXERCISABLE
- --------------------------------- --------------- ----------------------------- ----------------- -------------------
<S> <C> <C> <C> <C>
$6.69 - 11.69 789 6.3 391 $ 9.21
$13.00 - 18.81 786 8.3 274 15.75
$19.00 - 23.625 830 9.3 42 20.93
$23.69 - 30.625 79 3.5 78 26.82
----- ---
2,484 7.8 785 $ 13.90
----- ---
----- ---
</TABLE>
28
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
4. COMMON STOCK AND STOCK OPTION PLANS -- (CONTINUED)
The AAR CORP. Stock Benefit Plan also provides for the grant of restricted
stock awards. Restrictions are released at the end of applicable restricted
periods. The number of shares and the restricted period, which varies from two
to ten years, are determined by the Compensation Committee of the Board of
Directors. The market value of the award on the date of grant is recorded as a
deferred expense, Common stock and Capital surplus. The deferred expense is
included in results of operations over the restricted term. The expense relating
to outstanding restricted stock awards was $1,400, $1,054 and $516 in fiscal
1998, 1997 and 1996, respectively.
The AAR CORP. Employee Stock Purchase Plan is open to employees of the
Company (other than officers, directors or participants in other stock option
plans of the Company) with six months of service. The plan permits employees to
purchase common stock in periodic offerings at the lesser of the fair market
value on the date of offering or 85% of the fair market value on the date of
exercise. A participating employee pays for shares by payroll deduction over a
two-year period. Upon completion of the purchase, the excess of the proceeds
over the par value (or cost in the case of treasury stock) is credited to
Capital surplus.
The numbers of options and awards outstanding and available for grant or
issuance for each of the Company's stock plans are as follows:
<TABLE>
<CAPTION>
MAY 31, 1998
-----------------------------------------
OUTSTANDING AVAILABLE TOTAL
--------------- ------------- ---------
<S> <C> <C> <C>
Stock Benefit Plan (officers, directors and key employees)......... 2,826 741 3,567
Employee Stock Purchase Plan....................................... 37 145 182
</TABLE>
Pursuant to a shareholder rights plan adopted in 1997, each outstanding
share of the Company's common stock carries with it a Right to purchase one and
one half additional shares at a price of $83.33 per share (adjusted to reflect
the February 23, 1998 stock split and subject to further antidilution
adjustments). The Rights become exercisable (and separate from the shares) when
certain specified events occur, including the acquisition of 15% or more of the
common stock by a person or group (an "Acquiring Person") or the commencement of
a tender or exchange offer for 15% or more of the common stock.
In the event that an Acquiring Person acquires 15% or more of the common
stock, or if the Company is the surviving corporation in a merger involving an
Acquiring Person or if the Acquiring Person engages in certain types of
self-dealing transactions, each Right entitles the holder to purchase for $83.33
per share, (or the then-current exercise price) shares of the Company's common
stock having a market value of $166.66 (or two times the exercise price),
subject to certain exceptions. Similarly, if the Company is acquired in a merger
or other business combination or 50% or more of its assets or earning power is
sold, each Right entitles the holder to purchase at the then-current exercise
price that number of shares of common stock of the surviving corporation having
a market value of two times the exercise price. The Rights, which do not entitle
the holder thereof to vote or to receive dividends, replace the common stock
purchase rights which were initially distributed to the Company's shareholders
in 1987 and which expired by their own terms on August 6, 1997. The Rights will
expire on August 6, 2007, and may be redeemed by the Company for $.01 per Right
under certain circumstances.
29
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
4. COMMON STOCK AND STOCK OPTION PLANS -- (CONTINUED)
On September 21, 1990, the Board of Directors authorized the Company to
purchase up to 1,500 shares (adjusted for the three-for-two stock split) of the
Company's common stock on the open market or through privately negotiated
transactions. As of May 31, 1998, the Company had purchased 696 shares of its
common stock on the open market under this program at an average price of $9.26
per share.
5. EARNINGS PER SHARE
The computation of basic earnings per share is based on the weighted average
number of common shares outstanding during the year. Diluted earnings per share
is based on the weighted average number of common shares outstanding during the
year plus, when their effect is dilutive, common stock equivalents consisting of
shares subject to stock options. The following table provides a reconciliation
of the computations of basic and diluted earnings per share information for each
of the years in the three-year period ended May 31, 1998.
<TABLE>
<CAPTION>
MAY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Basic EPS
Net income.................................................... $ 35,657 $ 23,025 $ 16,012
Average common shares outstanding............................. 27,588 25,026 23,967
Earnings per share--basic..................................... $ 1.29 $ 0.92 $ 0.67
--------- --------- ---------
--------- --------- ---------
Diluted EPS
Net Income.................................................... $ 35,657 $ 23,025 $ 16,012
Average common shares outstanding............................. 27,588 25,026 23,967
Additional shares due to hypothetical exercise of stock
options..................................................... 586 373 281
Earnings per share--diluted................................... $ 1.27 $ 0.91 $ 0.66
--------- --------- ---------
--------- --------- ---------
</TABLE>
In January 1998, the Board of Directors declared a three-for-two stock split
which was effected in the form of a stock dividend on February 23, 1998 to
shareholders 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%. Prior year earnings per share amounts have been
restated to reflect the three-for-two stock split.
In February 1997, the Company completed the sale of two million shares of
common stock, which raised $50,075, net of expenses.
6. EMPLOYEE BENEFIT PLANS
The Company has defined contribution or defined benefit plans covering
substantially all full-time domestic employees and certain employees in The
Netherlands.
30
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
DEFINED BENEFIT PLANS
The pension plans for domestic, salaried employees have benefit formulas
primarily based on years of service and compensation. The pension benefit for
hourly employees is generally based on a fixed amount per year of service. The
Company follows the provisions of SFAS No. 87 "Employers' Accounting for
Pensions" for all pension plans.
The Company's funding policy for domestic plans is to contribute annually,
at a minimum, an amount which is deductible for Federal income tax purposes and
that is sufficient to meet actuarially computed pension benefits. Contributions
are intended to provide for benefits attributed to service to date and for
benefits expected to be earned in the future. The assets of the pension plans
are invested primarily in mutual funds, common stocks, investment grade bonds
and U.S. Government obligations.
Certain foreign operations of domestic subsidiaries also have pension plans.
In most cases, the plans are defined benefit in nature. Assets of the plans are
comprised of insurance contracts. Benefit formulas are similar to those used by
domestic plans. It is the policy of these subsidiaries to fund at least the
minimum amounts required by local law and regulation.
The following table sets forth the plans' funded status and the amount
recognized in the Company's Consolidated Balance Sheets.
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 31, 1997
-------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation................................................... $ (38,523) $ (32,786)
Nonvested benefit obligation................................................ (2,111) (1,444)
-------------- --------------
Accumulated benefit obligation................................................ (40,634) (34,230)
Effect of projected salary increases on the benefit obligation................ (5,750) (4,540)
-------------- --------------
Projected benefit obligation.................................................. (46,384) (38,770)
Plans' assets at fair value................................................... 42,286 35,825
-------------- --------------
Projected benefit obligation in excess of plans' assets....................... (4,098) (2,945)
Unrecognized net loss......................................................... 6,807 4,409
Unrecognized prior service cost............................................... 1,103 1,241
Unrecognized transition obligation............................................ 618 719
-------------- --------------
Prepaid pension costs......................................................... $ 4,430 $ 3,424
-------------- --------------
-------------- --------------
</TABLE>
The projected benefit obligation for domestic plans is determined using an
assumed weighted average discount rate of 7.5% for fiscal 1998 and 8.25% for
fiscal 1997, respectively and an assumed average compensation increase of 5.0%.
The expected long-term rate of return on assets is 10.0% for fiscal 1998 and
1997. Unrecognized net loss, prior service cost and transition obligation are
amortized on a straight-line basis over the estimated average future service
period.
The projected benefit obligation for nondomestic plans is determined using
an assumed weighted average discount rate of 5.5% for fiscal 1998 and 6.0% for
fiscal 1997, respectively and an assumed average compensation increase of 2.0%
for the first two years and 4.0% thereafter. The expected long-term rate of
return on assets is 6.5% for fiscal 1998 and 1997.
31
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
Pension expense charged to results of operations includes the following
components:
<TABLE>
<CAPTION>
MAY 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Service costs for benefits earned during fiscal year........... $ 1,643 $ 1,455 $ 1,169
Interest cost on projected benefit obligation.................. 3,011 2,785 2,587
Actual investment return on plan assets........................ (3,149) (2,904) (2,618)
Net amortization and deferral.................................. 388 411 224
--------- --------- ---------
Total pension expense.......................................... $ 1,893 $ 1,747 $ 1,362
--------- --------- ---------
--------- --------- ---------
</TABLE>
DEFINED CONTRIBUTION PLAN
The defined contribution plan is a profit sharing plan which is intended to
qualify as a 401(k) plan under the Internal Revenue Code. Under the plan,
employees may contribute up to 15.0% of their pretax compensation, subject to
applicable regulatory limits. The Company may make matching contributions up to
6.0% of compensation. Participants vest immediately in Company contributions.
Expense charged to results of operations was $1,174, $930, and $815 in fiscal
1998, 1997 and 1996 respectively.
DIRECTOR, EXECUTIVE AND KEY EMPLOYEE RETIREMENT BENEFIT AND PROFIT SHARING
PLANS
The Company provides its outside directors with benefits upon retirement on
or after age 65 provided they have completed at least five years of service as a
director. Benefits are paid quarterly in cash in an amount equal to 25.0% of the
annual retainer fee payable by the Company to active outside directors. Payment
of benefits commences upon retirement and continues for a period equal to the
total number of years of the retired director's service as a director to a
maximum of ten years, or death, whichever occurs first.
The Company also provides supplemental retirement and profit sharing
benefits for current and former executives and key employees to supplement
benefits provided by the Company's other benefit plans. The plans are not fully
funded and may require funding in the event of a change in control of the
Company as determined by the Company's Board of Directors. Expense charged to
results of operations for these plans was $1,231, $970, and $555 in fiscal 1998,
1997 and 1996, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health and life insurance benefits for certain eligible
employees and retirees under a variety of plans. Generally these benefits are
contributory with retiree contributions adjusted annually. The postretirement
plans are unfunded and the Company has the right to modify or terminate any of
these plans in the future, in certain cases subject to union bargaining
agreements. In fiscal 1995, the Company completed termination of postretirement
healthcare and life insurance benefits attributable to future services of
collective bargaining and other domestic employees.
32
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
Postretirement benefit cost for the years ended May 31, 1998, 1997 and 1996
included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost................................................... $ -- $ -- $ --
Interest cost.................................................. 89 85 65
--------- --------- ---------
$ 89 $ 85 $ 65
--------- --------- ---------
--------- --------- ---------
</TABLE>
The funded status of the plans at May 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Current retirees....................................................... $ 925 $ 774
Current employees--fully eligible...................................... 429 364
--------- ---------
1,354 1,138
Plans' assets at fair value.............................................. -- --
--------- ---------
Accumulated postretirement benefit obligation in excess of plans'
assets.................................................................. 1,354 1,138
Unrecognized prior service cost, transition obligation and net
(loss)/gain............................................................. (154) (3)
--------- ---------
Accrued postretirement benefit cost in the consolidated balance sheets... $ 1,200 $ 1,135
--------- ---------
--------- ---------
</TABLE>
The assumed discount rate used to measure the accumulated postretirement
benefit obligation was 7.5% at May 31, 1998 and 8.25% at May 31, 1997,
respectively. The assumed rate of future increases in healthcare costs was 8.1%
and 8.8% in fiscal 1998 and 1997, respectively, declining to 5.25% by the year
2004 and remaining at that rate thereafter. A one percent increase in the
assumed healthcare cost trend rate would increase the accumulated postretirement
benefit obligation by approximately $41 as of May 31, 1998 and would not result
in a significant change to the annual postretirement benefit expense.
7. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under agreements that
expire at various dates through 2011. Rental expense under these leases was
$6,991, $6,660, and $6,828 in fiscal 1998, 1997 and 1996, respectively.
Future minimum payments under leases with initial or remaining terms of one
year or more at May 31, 1998 were $4,217 for fiscal 1999, $3,382 for fiscal
2000, $2,591 for fiscal 2001, $1,909 for fiscal 2002 and $2,655 for fiscal 2003
and thereafter.
The Company routinely issues letters of credit, performance bonds or credit
guarantees in the ordinary course of its business. These instruments are
typically issued in conjunction with insurance
33
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
7. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
contracts or other business requirements. The total of these instruments
outstanding at May 31, 1998 was approximately $7,100.
The Company is involved in various claims and legal actions, including
environmental matters, arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's consolidated financial condition or
results of operations.
8. INVESTMENT IN LEVERAGED LEASES
From time to time, the Company acquires aircraft under lease that qualify
for leveraged lease accounting treatment. Typically, these are long-term leases
of late-model aircraft operated by major carriers where the Company is an equity
participant of at least twenty percent and there is a third-party provider of
nonrecourse debt of the remaining equipment cost. During fiscal 1998, the
Company acquired one late-model, wide-body aircraft which qualified for
leveraged lease accounting.
During the lease term the Company is required, in accordance with SFAS No.
13, to adjust the elements of the investment in leveraged leases to reflect
changes in important economic assumptions, such as the renegotiating of the
interest rate on the nonrecourse debt or changes in income tax rates. In
addition, the Company may sell options or other rights to the residual proceeds
over the book value at the end of the lease term.
The Company's net investment in leveraged leases is comprised of the
following elements:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MAY 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Rentals receivable (net of principal and interest on the
nonrecourse debt).......................................................... $ 25,889 $ 11,246
Estimated residual value of leased assets................................... 33,952 23,950
Unearned and deferred income................................................ (23,308) (7,590)
-------- --------
36,533 27,606
Deferred taxes.............................................................. (26,980) (22,230)
-------- --------
Net investment in leveraged leases.......................................... $ 9,553 $ 5,376
-------- --------
-------- --------
</TABLE>
Pretax income from leveraged leases was $1,329 in fiscal 1998, and $0 in
1997 and 1996, respectively.
9. ACQUISITIONS
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 140 thousand common shares (adjusted for the three-for-two stock split)
and was recorded under the purchase method of accounting. In addition, the
Company assumed short-term debt which was paid off by the Company during the
first quarter of fiscal 1998.
34
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
9. ACQUISITIONS -- (CONTINUED)
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 aviation/aerospace industry. The Company acquired ATR for
approximately $19 million cash and the transaction was recorded under the
purchase method of accounting. The Company has included in its consolidated
financial statements the results of operations of ATR since the date of
acquisition.
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 with a combination of cash and a Note and
the transaction was recorded under the purchase method of accounting. The
Company has included in its consolidated financial statements the results of
operations of AVSCO since the date of acquisition.
Sales from acquisitions, net of prior year dispositions, were $77,234 during
fiscal 1998. The historical operating results of the acquisitions for the
periods preceding the acquisitions are not material when compared to the
operating results of the Company.
10. BUSINESS SEGMENT INFORMATION
The Company operates primarily in the aviation/aerospace industry and
reports its activities in one primary business segment: Aviation Services.
Export sales from the Company's U.S. operations to unaffiliated customers,
the majority of which are located in Europe, the Middle East, Canada, Mexico,
South America and Asia (including sales through foreign sales offices of
domestic subsidiaries), were approximately $202,481 (25.9% of total net sales),
$204,808 (34.8% of total net sales) and $148,503 (29.4% of total net sales) in
fiscal 1998, 1997 and 1996, respectively.
Sales to the U.S. Government, its agencies and its contractors were
approximately $83,114 (10.6% of total net sales), $82,125 (13.9% of total net
sales) and $92,362 (18.3% of total net sales) in fiscal 1998, 1997 and 1996,
respectively.
35
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
11. SELECTED QUARTERLY DATA (UNAUDITED)
The unaudited selected quarterly data for fiscal years ended May 31, 1998
and 1997 are as follows.
FISCAL 1998
<TABLE>
<CAPTION>
DILUTED
EARNINGS
QUARTER NET SALES GROSS PROFIT NET INCOME PER SHARE
- -------------------------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
First..................... $ 170,906 $ 31,928 $ 7,310 $ .26
Second.................... 180,156 34,055 8,411 .30
Third..................... 208,492 38,915 9,314 .33
Fourth.................... 222,569 43,508 10,622 .37
--------- ------------ ----------
$ 782,123 $148,406 $35,657 $1.27
--------- ------------ ---------- -----
--------- ------------ ---------- -----
FISCAL 1997
<CAPTION>
DILUTED
EARNINGS
QUARTER NET SALES GROSS PROFIT NET INCOME PER SHARE
- -------------------------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
First..................... $ 136,037 $ 24,588 $ 4,848 $ .20
Second.................... 135,675 24,824 5,144 .21
Third..................... 154,135 28,140 5,940 .24
Fourth.................... 163,481 30,989 7,093 .26
--------- ------------ ---------- -----
$ 589,328 $108,541 $23,025 $0.91
--------- ------------ ---------- -----
--------- ------------ ---------- -----
</TABLE>
12. ALLOWANCES AND RESERVES
ALLOWANCES FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
---------------------------
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Balance, beginning of year................................................ $1,965 $2,490 $ 2,400
Provision charged to operations......................................... 1,261 500 900
Reserves acquired....................................................... 1,679 -- --
Deductions for accounts written off, net of recoveries.................. (1,748) (1,025) (810)
------ ------ -------
Balance, end of year...................................................... $3,157 $1,965 $ 2,490
------ ------ -------
------ ------ -------
</TABLE>
INVENTORY REALIZATION RESERVES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
---------------------------
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Balance, beginning of year................................................ $5,627 $5,528 $ 6,329
Provision charged to operations......................................... 5,580 5,230 5,325
Reserves acquired....................................................... 628 -- --
Inventory written off and loss from disposal, net of recoveries......... (4,296) (5,131) (6,126)
------ ------ -------
Balance, end of year...................................................... $7,539 $5,627 $ 5,528
------ ------ -------
------ ------ -------
</TABLE>
36
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
12. ALLOWANCES AND RESERVES -- (CONTINUED)
The inventory valuation reserve principally represents allowances for
obsolete inventory as well as reserves to reduce the cost of certain surplus
inventory to its net realizable value. The reserve applies to inventory
supporting the Company's Aircraft and Engines, Airframe and Accessories and
Manufacturing activities.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
37
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding the Directors of the Company
is incorporated by reference to the information contained under the caption
"Board of Directors" in the Company's definitive proxy statement for the 1998
Annual Meeting of Stockholders.
The information required by this item regarding the Executive Officers of
the Company appears under the caption "Executive Officers of the Registrant" in
Part I above.
The information required by this item regarding the compliance with Section
16(a) of the Securities Exchange Act of 1934 ("Exchange Act") is incorporated by
reference to the information contained under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's definitive proxy
statement for the 1998 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information contained under the captions "Executive Compensation and Other
Information" (but excluding the following sections thereof, "Compensation
Committee's Report on Executive Compensation" and "Stockholder Return
Performance Graphs"); "Employment and Other Agreements" and "Directors'
Compensation" in the Company's definitive proxy statement for the 1998 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information contained under the caption "Security Ownership of Management and
Others" in the Company's definitive proxy statement for the 1998 Annual Meeting
of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information contained under the caption "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1998 Annual
Meeting of Stockholders.
38
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Independent Auditors' Report, KPMG Peat Marwick LLP......... 13
Financial Statements--AAR CORP. and Subsidiaries:
Consolidated statements of income for the three years
ended May 31, 1998...................................... 14
Consolidated balance sheets as of May 31, 1998 and 1997... 15-16
Consolidated statements of stockholders' equity for the
three years ended May 31, 1998.......................... 17
Consolidated statements of cash flows for the three years
ended May 31, 1998...................................... 18
Notes to consolidated financial statements................ 19-37
Selected quarterly data (unaudited) for the years ended
May 31, 1998 and 1997 (Note 11 to Consolidated Financial
Statements)............................................. 36
Financial data schedule for the twelve-month period ended May 31,
1998............................................. See Exhibit Index
</TABLE>
EXHIBITS
The Exhibits filed as a part of this report are set forth in the Exhibit
Index contained elsewhere herein. Each of the material contracts identified as
Exhibits 10.1 through 10.10 is a management contract or compensatory plan or
arrangement.
REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the three-month period ended
May 31, 1998.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: August 20, 1998
By: /s/ DAVID P. STORCH
-----------------------------------
David P. Storch
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------ ----------------------------------- ---------------
/s/ IRA A. EICHNER CHAIRMAN OF THE BOARD
- ------------------------ DIRECTOR
Ira A. Eichner
/s/ DAVID P. STORCH PRESIDENT AND CHIEF EXECUTIVE
- ------------------------ OFFICER; DIRECTOR (PRINCIPAL
David P. Storch EXECUTIVE OFFICER)
/s/ TIMOTHY J. ROMENESKO VICE PRESIDENT AND CHIEF FINANCIAL
- ------------------------ OFFICER (PRINCIPAL FINANCIAL AND
Timothy J. Romenesko ACCOUNTING OFFICER)
/s/ A. ROBERT ABBOUD DIRECTOR
- ------------------------
A. Robert Abboud
/s/ HOWARD B. BERNICK DIRECTOR
- ------------------------
Howard B. Bernick
August 20, 1998
/s/ EDGAR D. JANNOTTA DIRECTOR
- ------------------------
Edgar D. Jannotta
/s/ ROBERT D. JUDSON DIRECTOR
- ------------------------
Robert D. Judson
/s/ ERWIN E. SCHULZE DIRECTOR
- ------------------------
Erwin E. Schulze
/s/ JOEL D. SPUNGIN DIRECTOR
- ------------------------
Joel D. Spungin
/s/ LEE B. STERN DIRECTOR
- ------------------------
Lee B. Stern
/s/ RICHARD D. TABERY DIRECTOR
- ------------------------
Richard D. Tabery
40
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
INDEX EXHIBITS
- --------------------------------------- ----------------------------------------------------------------
<S> <C> <C>
3. Articles of Incorporation 3.1 Restated Certificate of Incorporation;(1) Amendments thereto
and By-Laws dated November 3, 1987(2) and October 19, 1988.(2)
3.2 By-Laws, as amended.(2) Amendment thereto dated April 12,
1994,(12) and January 13, 1997 (filed herewith).
4. Instruments defining 4.1 Restated Certificate of Incorporation and Amendments (see
the rights of security holders Exhibit 3.1).
4.2 By-Laws, as amended (See Exhibit 3.2).
4.3 Credit Agreement dated September 9, 1996, between the Registrant
and the Bank of America, Illinois.(15)
4.4 Rights Agreement between the Registrant and the First National
Bank of Chicago dated July 8, 1997.(17)
4.5 Indenture dated October 15, 1989 between the Registrant and U.S.
Bank Trust National Association (formerly known as First Trust,
National Association, as successor in interest to Continental
Bank, National Association) as Trustee, relating to debt
securities;(5) First Supplemental Indenture thereto dated August
26, 1991;(6) Second Supplemental Indenture thereto dated Decem-
ber 10, 1997.(18)
4.6 Officers' certificates relating to debt securities dated October
24, 1989 and October 12, 1993.(10)
4.7 Second Amended and Restated Credit Agreement dated February 10,
1998, between the Registrant and The First National Bank of
Chicago.(19)
4.8 Credit Agreement dated November 1, 1997 between the Registrant
and The Northern Trust Company.(20)
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the
Registrant is not filing certain documents. The Registrant
agrees to furnish a copy of each such document upon the request
of the Commission.
10. Material Contracts 10.1 AAR CORP. Stock Benefit Plan,(11) Amendment thereto dated July
29, 1996, January 2, 1997,(15) May 6, 1997,(21) and March 20,
1998.(19)
10.2 Death Benefit Agreement dated August 24, 1984 between the
Registrant and Ira A. Eichner;(8) Amendment thereto dated August
12, 1988.(4)
10.3 Further Restated and Amended Employment Agreement dated August
1, 1985 between the Registrant and Ira A. Eichner;(3) Amendments
thereto dated August 12, 1988,(4) May 25, 1990(16) and July 13,
1994,(16) October 9, 1996(21) and October 31, 1997.(21)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INDEX EXHIBITS
- --------------------------------------- ----------------------------------------------------------------
<S> <C> <C>
10.4 Trust Agreement dated August 12, 1988 between the Registrant and
Ira A. Eichner(4) and amendments thereto dated May 25, 1990(16)
and February 4, 1994.(12)
10.5 AAR CORP. Directors' Retirement Plan, dated April 14, 1992.(9)
10.6 AAR CORP. Supplemental Key Employee Retirement Plan, dated July
13, 1994(13), amended June 1, 1995(16), January 1, 1996(16) and
June 1, 1996.(16)
10.7 Employment agreement dated June 1, 1994 between the Registrant
and David P. Storch;(14) Amendment thereto dated October 9,
1996,(15) May 29, 1997(21) and July 14, 1997.(21)
10.8 Amended and Restated Severance and Change in Control agreement
dated April 8, 1997 between the Registrant and Philip C.
Slapke.(21)
10.9 Amended and Restated Severance and Change in Control agreement
dated April 8, 1997 between the Registrant and Howard A.
Pulsifer.(21)
10.10 Amended and Restated Severance and Change in Control agreement
dated April 8, 1997 between the Registrant and Timothy J.
Romenesko.(21)
21. Subsidiaries of 21.1 Subsidiaries of AAR CORP. (filed herewith).
the Registrant
23. Consents of experts 23.1 Consent of KPMG Peat Marwick LLP (filed herewith).
and counsel
27. Financial Data 27.1 Financial Data Schedule for the Registrant's fiscal year ended
Schedule May 31, 1998.
</TABLE>
- ------------------------
Notes:
(1) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1987.
(2) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1989.
(3) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1986.
(4) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1988.
(5) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the Quarter ended November 30, 1989.
(6) Incorporated by reference to Exhibits to Registrant's Registration
Statement on Form S-3 filed August 27, 1991.
(7) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended November 30, 1991.
<PAGE>
(8) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1985.
(9) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1992.
(10) Incorporated by reference to Exhibits to the Registrant's Current Reports
on Form 8-K dated October 24, 1989 and October 12, 1993, respectively.
(11) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1993.
(12) Incorporated by reference to Exhibits to Registrant's Annual Report on Form
10-K for the fiscal year ended May 31, 1994.
(13) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended November 30, 1994.
(14) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1995.
(15) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended November 30, 1996.
(16) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1996.
(17) Incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated August 4, 1997.
(18) Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-3 filed December 10, 1997.
(19) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended February 28, 1998.
(20) Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-3 filed May 15, 1998.
(21) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended November 30, 1997.
<PAGE>
AMENDMENT TO
THE AAR CORP. BY-LAWS
WHEREAS, AAR CORP. (the "Company") has adopted a form of by-laws (the
"By-Laws") and reserves the right to amend the By-Laws; and
WHEREAS, the Company has amended the By-Laws from time to time in the past,
and now desires to amend the By-Laws further to properly reflect the powers
and duties of the CEO position;
NOW, THEREFORE, the By-laws are hereby amended effective January 13, 1997 in
the following respect:
Article IV, Section 3, of the By-Laws be amended to read as follows:
"SECTION 3. POWERS AND DUTIES. The Chairman of the Board
shall preside at all meetings of the Board of Directors, shall
have such powers and perform such duties as are assigned to him
by these by-laws, and shall have such other powers and perform
such other duties as generally pertains to his office. In the
absence or disability of the Chairman of the Board, the Vice
Chairman of the Board, if one has been appointed, shall assume
the duties, powers and position of the said Chairman. The
President shall be the Chief Executive Officer of the corporation
and, in the absence or disability of the Chairman of the Board
and the Vice Chairman of the Board, if the latter has been
appointed, the President shall assume the duties, powers and
position of the said Chairman. The remaining officers of the
corporation shall each have such powers and duties as generally
pertain to their respective offices, as well as such powers and
duties as from time to time may be conferred by the Board of
Directors. The Vice President or Vice Presidents, the Assistant
Secretary or Assistant Secretaries and the Assistant Treasurer or
Assistant Treasurers shall, in the order of their respective
seniorities, in the absence or disability of the President,
Secretary or Treasurer, respectively, perform the duties of such
officer and shall generally assist the President, Secretary or
Treasurer, respectively; provided, however, and notwithstanding
anything hereinabove to the contrary, that if the Board of
Directors designates a Vice President as an Executive Vice
President, he shall perform the
<PAGE>
duties of the President in his absence or disability, regardless
of the order of seniority of said Executive Vice President to the
other Vice Presidents."
This Amendment has been executed by the Company by its duly authorized
officer effective as of January 13, 1997 and attested by its Secretary.
AAR CORP.
By /s/ Ira A. Eicher
------------------------------------
Ira A. Eichner,
Chairman of the Board
ATTEST:
/s/ Howard A. Pulsifer
- -----------------------------------
Howard A. Pulsifer, Secretary
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF AAR CORP. (1)
<TABLE>
<CAPTION>
State of
Name of Corporation Incorporation
------------------- -------------
<S> <C>
AAR Aircraft Services, Inc. (2) Oklahoma
AAR Airframe & Accessories Group, Inc. (3) Illinois
AAR Allen Services, Inc. (4) Illinois
AAR Aircraft & Engine Group, Inc. (5) Illinois
AAR Engine Services, Inc. (6) Illinois
AAR Financial Services Corp. Illinois
AAR International, Inc. (7) Illinois
AAR Manufacturing Group, Inc. (8) Illinois
AAR PowerBoss, Inc. (9) Illinois
</TABLE>
______________
(1) Subsidiaries required to be listed pursuant to Regulation S-K
Item 601(b)(21).
(2) Formerly know as AAR Aircraft Group, Inc.
(3) Also does business under the names AAR Allen Aircraft, AAR Cooper
Aviation, AAR Expendables, and AAR Defense Systems. Formerly known as
AAR Allen Group, Inc.
(4) Also does business under the names AAR Landing Gear, AAR Component
Services, and Mars Aircraft Radio.
(5) Also does business under the names AAR Aircraft Turbine Center, AAR
Aircraft Sales and Leasing, and AAR Engine Sales & Leasing. Formerly
known as AAR Engine Group, Inc.
(6) Also does business under the name AAR Engine Component Services and
AAR Energy Services.
(7) Also does business under the names AAR Cooper International, AAR Aircraft
Component Services, AAR Engine Group International, and AAR Allen Group
International.
(8) Also does business under the names AAR Cargo Systems, AAR Cadillac
Manufacturing, AAR Composites, AAR Craig Systems, and AAR Skydyne. AAR
Manufacturing Group, Inc. was formerly known as AAR Brooks & Perkins
Corp.
(9) Also does business under the name AAR PowerBoss.
<PAGE>
EXHIBIT 23.1
The Board of Directors
AAR CORP.:
We consent to the incorporation by reference in Registration Statement Nos.
33-19767, 33-26783, 33-38042, 33-43839, 33-58456, 33-56023, 33-57753,
333-00205, 333-15327, 333-22175 and 333-26093 on Form S-8 and in Registration
Statement Nos., 33-30222, 33-42326 and 333-19715 on Form S-3 of AAR CORP. of
our report dated June 24, 1998 relating to the consolidated balance sheets of
AAR CORP. and subsidiaries as of May 31, 1998 and 1997 and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the years in the three-year period ended May 31, 1998, which report
appears in the May 31, 1998 annual report on Form 10-K of AAR CORP.
KPMG Peat Marwick LLP
Chicago, Illinois
August 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED MAY 31,
1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 17,222
<SECURITIES> 0
<RECEIVABLES> 166,509
<ALLOWANCES> 3,150
<INVENTORY> 229,930
<CURRENT-ASSETS> 468,400
<PP&E> 155,711
<DEPRECIATION> 72,806
<TOTAL-ASSETS> 670,559
<CURRENT-LIABILITIES> 149,148
<BONDS> 177,509
0
0
<COMMON> 28,832
<OTHER-SE> 272,018
<TOTAL-LIABILITY-AND-EQUITY> 670,559
<SALES> 782,123
<TOTAL-REVENUES> 782,123
<CGS> 633,717
<TOTAL-COSTS> 717,407
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,261<F1>
<INTEREST-EXPENSE> 13,559<F2>
<INCOME-PRETAX> 51,157
<INCOME-TAX> 15,500
<INCOME-CONTINUING> 35,657
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,657
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.27
<FN>
<F1>PROVISION FOR DOUBTFUL ACCOUNTS IS INCLUDED IN TOTAL COSTS AND EXPENSES.
<F2>INTEREST EXPENSE IS PRESENTED NET OF $935 OF INTEREST INCOME.
</FN>
</TABLE>
