<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------
FOR QUARTERLY PERIOD ENDED NOVEMBER 30, 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
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
$1.00 par value, 27,533,109 shares outstanding as of NOVEMBER 30, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AAR CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
NOVEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets............................................... 3
Condensed Consolidated Statements of Income......................................... 4
Condensed Consolidated Statements of Cash Flows..................................... 5
Condensed Consolidated Statements of Comprehensive Income........................... 6
Notes to Condensed Consolidated Financial Statements................................ 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................. 10-13
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................................. 14
Item 6. Exhibits and Reports on Form 8-K
Exhibits............................................................................ 14
Reports on Form 8-K................................................................. 14
SIGNATURE PAGE....................................................................................... 15
</TABLE>
2
<PAGE>
PART I, ITEM 1 - FINANCIAL STATEMENTS
AAR CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF NOVEMBER 30, 1998 AND MAY 31, 1998
(000S OMITTED)
<TABLE>
<CAPTION>
MAY 31, 1998
-------------
(DERIVED FROM
NOVEMBER 30, AUDITED
1998 FINANCIAL
--------------- STATEMENTS)
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 27,091 $ 17,222
Accounts receivable, less allowances of $4,045 and $3,157 respectively.......... 178,975 163,359
Inventories..................................................................... 276,449 229,930
Equipment on or available for short-term lease.................................. 35,311 33,495
Deferred tax assets, deposits and other......................................... 29,674 24,394
--------------- -------------
Total current assets.......................................................... 547,500 468,400
--------------- -------------
Property, plant and equipment, net................................................ 91,856 82,905
Other assets:
Investments in leveraged leases................................................. 26,733 36,533
Equipment on long-term leases................................................... -- 24,611
Cost in excess of underlying net assets of acquired companies................... 35,683 26,565
Joint ventures, retirement benefits, notes receivable and other................. 35,644 31,545
--------------- -------------
98,060 119,254
--------------- -------------
$ 737,416 $ 670,559
--------------- -------------
--------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............................................ $ 257 $ 237
Accounts payable................................................................ 161,958 112,980
Accrued liabilities............................................................. 30,578 29,614
Accrued taxes on income......................................................... 7,393 6,317
--------------- -------------
Total current liabilities..................................................... 200,186 149,148
--------------- -------------
Long-term debt, less current maturities........................................... 178,927 177,509
Deferred tax liabilities.......................................................... 40,488 36,850
Retirement benefit obligation and other liabilities............................... 3,029 6,202
--------------- -------------
222,444 220,561
--------------- -------------
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 250 shares, none issued............ -- --
Common stock, $1.00 par value, authorized 80,000 shares; issued 28,897 and
28,832 shares, respectively................................................... 28,897 28,832
Capital surplus................................................................. 142,323 140,898
Retained earnings............................................................... 167,193 152,233
Treasury stock, 1,343 and 1,128 shares at cost, respectively.................... (20,425) (16,470)
Accumulated other comprehensive income (expense):
Cumulative translation adjustments............................................ (3,202) (4,643)
--------------- -------------
314,786 300,850
--------------- -------------
$ 737,416 $ 670,559
--------------- -------------
--------------- -------------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements
3
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1997
(UNAUDITED)
(000S OMITTED EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales....................................................... $ 228,798 $ 180,156 $ 444,696 $ 351,062
---------- ---------- ---------- ----------
Costs and operating expenses:
Cost of sales................................................. 186,058 146,101 360,907 285,079
Selling, general and administrative........................... 23,839 19,139 46,849 38,173
---------- ---------- ---------- ----------
209,897 165,240 407,756 323,252
Operating income................................................ 18,901 14,916 36,940 27,810
Interest expense................................................ (4,611) (3,057) (8,873) (5,816)
Interest income................................................. 108 157 137 476
---------- ---------- ---------- ----------
Income before provision for income taxes........................ 14,398 12,016 28,204 22,470
Provision for income taxes...................................... 4,363 3,605 8,546 6,749
---------- ---------- ---------- ----------
Net income...................................................... $ 10,035 $ 8,411 $ 19,658 $ 15,721
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share - Basic.................................... $ .36 $ .31 $ .71 $ .57
Net income per share - Diluted.................................. $ .36 $ .30 $ .70 $ .56
Weighted average common shares outstanding
- Basic....................................................... 27,570 27,529 27,642 27,509
Weighted average common shares outstanding
- Diluted..................................................... 28,042 28,109 28,210 28,067
Dividends paid and declared per share of common stock........... $ .085 $ .08 $ .17 $ .16
</TABLE>
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
4
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1997
(UNAUDITED)
(000S OMITTED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................. $ 19,658 $ 15,721
Adjustments to reconcile net income to net cash provided from (used in) operating
activities:
Depreciation and amortization........................................................ 8,430 7,251
Change in certain assets and liabilities:
Accounts receivable................................................................ (18,657) (8,964)
Inventories........................................................................ (49,333) (24,185)
Equipment on or available for short term lease..................................... 2,038 (10,478)
Retirement benefit obligation, deferred taxes, deposits and other.................. 1,729 (1,865)
Accounts payable and other liabilities............................................. 49,361 9,598
Accrued liabilities and taxes on income............................................ (7,615) (4,980)
---------- ----------
Net cash provided from (used in) operating activities.................................. 5,611 (17,902)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment expenditures, net........................................ (16,262) (6,326)
Acquisitions, less cash acquired....................................................... (6,000) (18,973)
Proceeds from sale of business......................................................... 11,685 --
Investment in equipment on long-term leases and leveraged leases....................... 30,689 (8,723)
Notes receivable and other............................................................. (7,541) (4,023)
---------- ----------
Net cash provided from (used in) investing activities.................................. 12,571 (38,045)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in borrowings................................................................... (123) 14,032
Cash dividends......................................................................... (4,697) (4,405)
Purchases of treasury stock............................................................ (3,520) --
Proceeds from exercise of stock options and other...................................... 30 1,573
---------- ----------
Net cash provided from (used in) financing activities.................................. (8,310) 11,200
---------- ----------
Effect of exchange rate changes on cash.................................................. (3) 32
---------- ----------
Increase (decrease) in cash and cash equivalents......................................... 9,869 (44,715)
Cash and cash equivalents, beginning of period........................................... 17,222 51,705
---------- ----------
Cash and cash equivalents, end of period................................................. $ 27,091 $ 6,990
---------- ----------
---------- ----------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
5
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1997
(000S OMITTED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income............................................................................... $ 19,658 $ 15,721
Other comprehensive income (loss):
Foreign currency translation........................................................... 1,441 (1,534)
---------- ----------
Total Comprehensive Income............................................................... $ 21,099 $ 14,187
---------- ----------
---------- ----------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
6
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998
(000S OMITTED)
NOTE A -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of AAR CORP. ("the Company") and its subsidiaries after elimination of
intercompany accounts and transactions.
Turbine Engine Asset Management, L.L.C. (TEAM), a joint venture, was
formed in the fiscal year ending May 31, 1998 ("fiscal year") to distribute
certain engine parts to aviation customers worldwide. During the first
quarter of fiscal 1999, Aviation Inventory Management Co. L.L.C. (AIMCO), a
joint venture, was formed. AIMCO offers customers an alternative to owning
aircraft rotable spares. The Company's investment in the joint ventures are
being accounted for under the equity method of accounting. During the second
quarter of fiscal 1999, the Company divested substantially all of the assets
and liabilities of its floor maintenance products manufacturing subsidiary.
Proceeds of $11.7 million received from the sale of this business
approximated the Company's net value.
These statements have been prepared by the Company without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC").
The condensed consolidated balance sheet as of May 31, 1998 has been derived
from audited financial statements. To prepare the financial statements in
conformity with generally accepted accounting principles, management has made a
number of estimates and assumptions relating to the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities. Actual
results could differ from those estimates. Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been condensed or omitted
pursuant to such rules and regulations of the SEC. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's latest annual
report on Form 10-K.
In the opinion of management of the Company, the condensed consolidated
financial statements reflect all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the condensed consolidated
financial position of AAR CORP. and its subsidiaries as of November 30, 1998
and the condensed consolidated results of operations, for the three and
six-month periods ended November 30, 1998 and 1997 and condensed consolidated
statement of cash flows and comprehensive income for the six-month periods
ended November 30, 1998 and 1997. The results of operations for such interim
periods are not necessarily indicative of the results for the full year.
NOTE B -- INVENTORY
The summary of inventories is as follows:
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
1998 1998
--------------- -----------
<S> <C> <C>
Raw materials and parts......................................... $ 48,998 $ 46,573
Work-in-process................................................. 17,178 15,787
Purchased aircraft, parts, engines and components held for
sale.......................................................... 210,273 166,140
Finished goods.................................................. -- 1,430
--------------- -----------
$ 276,449 $ 229,930
--------------- -----------
--------------- -----------
</TABLE>
7
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 -- (CONTINUED)
(000S OMITTED)
NOTE C -- SUPPLEMENTAL CASH FLOWS INFORMATION
Supplemental information on cash flows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Interest paid............................................................ $ 8,285 $ 5,703
Income taxes paid........................................................ 2,975 2,850
Income tax refunds received.............................................. 370 215
</TABLE>
NOTE D -- COMMON STOCK AND EARNINGS PER SHARE OF COMMON STOCK
The computation of basic earnings per share is based on the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is based on the weighted average number of common shares
outstanding during the period plus, when their effect is dilutive,
incremental shares 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 the three and six-month periods
ended November 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic EPS
Net income................................... $ 10,035 $ 8,411 $ 19,658 $ 15,721
Common shares outstanding.................... 27,570 27,529 27,642 27,509
--------- --------- --------- ---------
Basic earnings per share..................... .36 .31 .71 .57
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted EPS
Net income................................... $ 10,035 $ 8,411 $ 19,658 $ 15,721
Common shares outstanding.................... 27,570 27,529 27,642 27,509
Additional shares due to hypothetical
exercise of stock options.................. 472 580 568 558
--------- --------- --------- ---------
28,042 28,109 28,210 28,067
--------- --------- --------- ---------
Diluted earnings per share................... $ .36 $ .30 $ .70 $ .56
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
8
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1998 -- (CONTINUED)
(000S OMITTED)
NOTE D -- COMMON STOCK AND EARNINGS PER SHARE OF COMMON STOCK (CONTINUED)
In January, 1998 the Board of Directors declared a three-for-two stock split
which was paid February 23, 1998 to stockholders of record February 2, 1998 and
a quarterly cash dividend of 8.5 cents per share on the increased shares, which
effectively increased the cash dividend payment by 6.25%. All prior year common
shares outstanding and earnings per share amounts have been restated to reflect
the three-for-two stock split.
NOTE E -- NEW ACCOUNTING STANDARDS
SFAS No. 130, "Reporting Comprehensive Income" is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company adopted the provisions of SFAS No. 130
during the three-month period ended August 31, 1998.
9
<PAGE>
PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AAR CORP. AND SUBSIDIARIES
RESULTS OF OPERATIONS
(000S OMITTED EXCEPT PERCENT DATA)
Three and Six-Month Period Ended November 30, 1998
(as compared with the same period of the prior year)
The Company reports its activities in one business segment: Aviation
Services. The table below sets forth consolidated net sales for the Company's
classes of similar products and services within this segment for the three and
six months ended November 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales:
Aircraft and Engines.................. $ 98,271 $ 76,943 $ 188,340 $ 156,724
Airframe and Accessories.............. 96,969 74,535 189,884 144,601
Manufacturing......................... 33,558 28,678 66,472 49,737
----------- ----------- ----------- -----------
$ 228,798 $ 180,156 $ 444,696 $ 351,062
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Three-Month Period Ended November 30, 1998
(as compared with the same period of the prior year)
Consolidated net sales for the second quarter of the Company's fiscal
year ending May 31, 1999 (fiscal 1999) increased $48.6 million or 27.0% over
the same period in the prior fiscal year. Net sales increased in all three of
the Company's classes of similar products and services reflecting strong
demand for the Company's products and services and the impact of
acquisitions. Aircraft and Engine sales increased $21.3 million or 27.7%
reflecting growth in the engine parts and aircraft sales and leasing
businesses, partially offset by the unfavorable impact of certain engine part
sales which were recorded by Turbine Engine Asset Management L.L.C. (an
unconsolidated joint venture company) during the second quarter of fiscal
1999, but which were recorded by Aircraft and Engines during the second
quarter of fiscal 1998. Net sales in Airframe and Accessories increased $22.4
million or 30.0% during the second quarter of fiscal 1999 reflecting the
inclusion of sales from AVSCO, which was acquired December 31, 1997, and
higher demand for the Company's aircraft maintenance and certain large
component overhaul services. Net sales in Manufacturing increased $4.9
million or 17.0%, reflecting the inclusion of sales from ATR, which was
acquired in October 1997, and higher sales of cargo loading handling systems.
Consolidated gross profit increased $8.7 million or 25.5% over the prior
year period due to increased consolidated net sales, partially offset by a
slight decrease in the consolidated gross profit margin to 18.7% from 18.9%. The
reduction in the consolidated gross profit margin was primarily attributable to
the mix of inventories sold and lower margins in the Company's new parts
distribution business as a result of business interruptions from new systems
integration. Consolidated operating income increased $4.0 million or 26.7%
compared to the prior year period as a result of increased consolidated net
sales, partially offset by higher selling, general and administrative expenses.
Selling, general and administrative expenses were lower as a percentage of
consolidated net sales, however total expenses increased principally due to the
impact of acquisitions and higher marketing support and personnel costs.
Consolidated net income increased $1.6 million or 19.3% over the prior year
period due primarily to the factors discussed above.
10
<PAGE>
PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AAR CORP. AND SUBSIDIARIES
RESULTS OF OPERATIONS
(000S OMITTED EXCEPT RATIOS)
Six-Month Period Ended November 30, 1998
(as compared with the same period of the prior year)
Consolidated net sales for the first half of fiscal 1999 increased $93.6
million or 26.7% over the prior year six month period reflecting increased
demand for the Company's products and services and the impact of acquisitions.
Aircraft and Engine sales increased $31.6 million or 20.2% principally due to
higher sales in the Company's engine parts business. Airframe and Accessories
sales increased $45.3 million or 31.3% reflecting the inclusion of sales from
the AVSCO acquisition and higher demand for the Company's aircraft maintenance
and certain large component overhaul services. Net sales in Manufacturing
increased $16.7 million or 33.6% due to the inclusion of sales from the ATR
acquisition, and higher demand for products supporting the United States
Government's rapid deployment program and cargo loading handling systems.
Consolidated gross profit increased $17.8 million or 27.0% over the prior
year period due to increased consolidated net sales. The Company's consolidated
gross profit margin remained unchanged at 18.8% for the six month period ended
November 30, 1998. Consolidated operating income increased $9.1 million or 32.8%
compared to the prior year period as a result of increased consolidated net
sales, partially offset by higher selling, general and administrative expenses.
Selling, general and administrative expenses were lower as a percentage of
consolidated net sales, however total expenses increased principally due to the
impact of acquisitions and higher marketing support and personnel costs.
Consolidated net income increased $3.9 million or 25.0% over the prior year
period due primarily to the factors discussed above.
11
<PAGE>
PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AAR CORP. AND SUBSIDIARIES
FINANCIAL CONDITION
(000S OMITTED EXCEPT RATIOS)
At November 30, 1998
At November 30, 1998, the Company's liquidity and capital resources included
cash of $27.1 million and working capital of $347.3 million. At November 30,
1998, the Company's ratio of long-term debt to capitalization was 36.2%, down
from 37.1% at May 31, 1998. The Company continues to maintain its available
external sources of financing including $186.3 million of unused bank lines, a
universal shelf registration 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,
and an accounts receivable securitization program where the Company may sell an
interest in a defined pool of accounts receivable up to $35 million.
During the six month period ended November 30, 1998, the Company generated
$5.6 million of cash from operations compared to using $17.9 million of cash in
operations during the six month period ended November 30, 1997. The increase in
cash generated from operations was principally due to the timing of the payment
of accounts payable and higher net income during the six-month period ended
November 30, 1998.
During the six month period ended November 30, 1998, the Company's investing
activities generated $12.6 million of cash compared to using $38.0 million of
cash during the six month period ended November 30, 1997. The increase in cash
provided from investing activities was attributable to cash received from the
divestiture of the Company's floor maintenance products manufacturing subsidiary
of $11.7 million, and proceeds from the sale of equipment on long-term lease and
the sale of an equity interest in a leveraged lease, offset by an increase in
capital expenditures related to systems enhancements and facility expansions.
During the six month period ended November 30, 1998, the Company's financing
activities used $8.3 million of cash reflecting the payment of cash dividends
and the purchase of $3.5 million of the Company's stock.
The Company believes that its cash and cash equivalents and available
sources of financing will continue to provide the Company with the ability to
meet its ongoing working capital requirements, make anticipated capital
expenditures, meet contractual commitments, and pay dividends.* A summary of key
financial conditions, ratios, and lines of credit follows:
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
DESCRIPTION 1998 1998
- ------------------------------------------------------------------------------------ --------------- -----------
<S> <C> <C>
Working capital..................................................................... $ 347,314 $ 319,252
Current ratio....................................................................... 2.7:1 3.1:1
Bank credit lines:
Borrowings outstanding............................................................ $ -- $ --
Available but unused lines........................................................ 186,290 190,970
--------------- -----------
Total credit lines.................................................................. $ 186,290 $ 190,970
--------------- -----------
--------------- -----------
Long-term debt, less current maturities............................................. $ 178,927 $ 177,509
Ratio of long-term debt to capitalization........................................... 36.2% 37.1%
</TABLE>
- -------------------
* See "Forward Looking Statements" section of this item.
12
<PAGE>
PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AAR CORP. AND SUBSIDIARIES
FINANCIAL CONDITION
(000S OMITTED EXCEPT RATIOS)
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
$10,400 of which approximately $4,800 and $3,300 was paid during the six
month period ended November 30, 1998 and the twelve month period ended May
31, 1998, respectively.* The Company is developing alternate plans in the
event the new systems are not successfully implemented within the planned
time frame.
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 are Year 2000 compliant.* In
addition to the cost of the business application systems being implemented to
meet operational requirements, the Company expects to incur other Year 2000
compliance costs unrelated to the replacement systems referenced above. The
Company has numerous local-area networks, wide-area networks, servers and other
technical support systems (the "sub-systems"). The Company is in the process of
completing an inventory of the sub-systems, as well as the compliance status of
the sub-systems. At this time, the Company believes that the cost to bring the
sub-systems which are not Year 2000 compliant to compliance will be less than
$1,000.*
As part of its continuing review, the Company is communicating with its
material vendors, customers 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
contingency 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.
- ------------------------
* See "Forward Looking Statements" section of this item.
13
<PAGE>
PART II -- OTHER INFORMATION
AAR CORP. AND SUBSIDIARIES
NOVEMBER 30, 1998
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on October 14,
1998.
The following item was acted upon:
Election of three Class II directors to serve until the 2001 Annual Meeting
of Stockholders. Three directors were nominated for election. Directors
nominated who receive the majority of votes cast are elected as directors.
Those directors and the voting results were as follows:
<TABLE>
<CAPTION>
VOTES VOTES BROKER
"FOR" "ABSTAINED" "NON-VOTES"
------------- ---------------- -----------------
<S> <C> <C> <C>
Edward D. Jannotta........................... 25,163,939 270,615 --
Lee B. Stern................................. 25,265,125 169,429 --
Richard D. Tabery............................ 25,273,577 160,977 --
</TABLE>
No other matters were presented to the Company's shareholders for action at
the Annual Meeting of Stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
ITEM
- ----------------------------------
<S> <C> <C>
10. Material Contracts 10.1 Fifth Amendment to AAR Corp. Stock
Benefit Plan dated December 16, 1998.
27. Financial Data Schedule 27.1 Financial Data Schedule for the Registrant's six-month interim period
ended November 30, 1998.
</TABLE>
(B) REPORTS ON FORM 8-K FOR QUARTER ENDED NOVEMBER 30, 1998:
The Company filed no reports on Form 8-K during the three months ended
November 30, 1998.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AAR CORP.
(Registrant)
Date: January 13, 1999
/s/ TIMOTHY J. ROMENESKO
--------------------------------------
Timothy J. Romenesko
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER
(PRINCIPAL ACCOUNTING OFFICER AND
OFFICER DULY AUTHORIZED TO SIGN ON
BEHALF OF REGISTRANT)
15
<PAGE>
FIFTH AMENDMENT TO
AAR CORP. STOCK BENEFIT PLAN
WHEREAS, AAR CORP. (the "Company") adopted the AAR CORP. Stock Benefit Plan
(the "Plan"), amended the Plan by a First Amendment dated July 29, 1996, a
Second Amendment dated January 2, 1997, a Third Amendment dated May 6, 1997, and
a Fourth Amendment dated March 20, 1998, and reserved the right to further amend
the Plan; and
WHEREAS, the Board of Directors of the Company deems it appropriate to
further amend the Plan as described below and approved such amendment at its
July 14, 1998 meeting.
NOW, THEREFORE, the Plan is hereby amended as follows, effective July 14,
1998:
1. Section 2.1 is amended to read as follows:
"2.1 "Award" shall mean an Option or a Restricted Stock Award."
2. Section 2.4 is amended to read as follows:
"2.4 "Change in Control" means the earliest of:
(a) any person (as such term is used in Section 13(d) of
the Securities Exchange Act of 1934, as amended ("Exchange Act")), has acquired
(other than directly from the Company) beneficial ownership (as that term is
defined in Rule 13d-3 under the Exchange Act), of more than 20% of the
outstanding capital stock of the Company entitled to vote for the election of
directors;
(b) the effective time of (i) a merger or consolidation or
other business combination of the Company with one or more other corporations as
a result of which the holders of the outstanding voting stock of the Company
immediately prior to such business combination hold less than 60% of the voting
stock of the surviving or resulting corporation, or (ii) a transfer of
substantially all of the assets of the Company other than to an entity of which
the Company owns at least 80% of the voting stock; or
<PAGE>
(c) the election, over any period of time, to the Board of
Directors of the Company without the recommendation or approval of the incumbent
Board of Directors of the Company, of the lesser of (i) three directors, or (ii)
directors constituting a majority of the number of directors of the Company then
in office; or
3. Section 2.14 is amended by deleting the entire section and inserting
the following in lieu thereof:
"2.14 INTENTIONALLY LEFT BLANK."
4. Section 4.1 is amended by deleting the following sentence from the end
of the Section:
"Shares in respect of which Limited Rights are exercised shall
not thereafter be available for issuance in satisfaction of Awards."
5. Section 4.3 is amended to read as follows:
"4.3 The total number of shares with respect to which options may
be granted under the Plan to any Grantee during any 12 month period shall not
exceed 300,000 shares."
6. Section 10 is amended by deleting the entire section and inserting the
following in lieu thereof:
"10. INTENTIONALLY LEFT BLANK."
7. Section 11 is amended to change the second sentence of the second
paragraph to read as follows:
"In such event, the spouse, lineal descendant, trustee,
partnership or tax exempt organization will be entitled to all of the rights of
the Grantee with respect to the assigned portion of such Award, and such portion
of the Award will continue to be subject to all of the terms, conditions and
restrictions applicable to the Award, as set forth herein, and in the related
Option Agreement or Restricted Stock Agreement, immediately prior to the
effective date of the assignment."
8. Sections 12 and 13 are amended by deleting the language "or Limited
Right", "and Limited Rights", "or Limited Rights", "Limited Rights", or "limited
rights", wherever it occurs.
9. Section 14 is amended by deleting the language "or Limited Right"
wherever it occurs in the first sentence of 14.1 and by deleting the third
sentence
2
<PAGE>
of 14.1 which reads: "The notice of exercise of a Limited Right shall
be accompanied by the Grantee's copy of the writing or writings evidencing the
grant of the Limited Right and the related Option."
This Fifth Amendment has been executed by the Company, by its duly
authorized officer, on this 16th day of December, 1998, and attested by its
Secretary.
AAR CORP.
By /s/ David P. Storch
----------------------------------------
David P. Storch
President and Chief Executive Officer
ATTEST:
/s/ Howard A. Pulsifer
- -----------------------------
Howard A. Pulsifer, Secretary
SEAL
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE REGISTRANT'S REPORT ON FORM 10-Q FOR THE SIX MONTH INTERIM PERIOD ENDED
NOVEMBER 30, 1998
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 27,091
<SECURITIES> 0
<RECEIVABLES> 183,020
<ALLOWANCES> 4,045
<INVENTORY> 276,449
<CURRENT-ASSETS> 547,500
<PP&E> 167,348
<DEPRECIATION> 75,492
<TOTAL-ASSETS> 737,416
<CURRENT-LIABILITIES> 200,186
<BONDS> 178,927
0
0
<COMMON> 28,897
<OTHER-SE> 285,889
<TOTAL-LIABILITY-AND-EQUITY> 737,416
<SALES> 444,696
<TOTAL-REVENUES> 444,696
<CGS> 360,907
<TOTAL-COSTS> 407,756
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,342<F1>
<INTEREST-EXPENSE> 8,736<F2>
<INCOME-PRETAX> 28,204
<INCOME-TAX> 8,546
<INCOME-CONTINUING> 19,658
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,658
<EPS-PRIMARY> .71
<EPS-DILUTED> .70
<FN>
<F1>Provision for doubtful accounts is included in total costs and expenses
<F2>Interest Expense is presented net of $137 of interest income
</FN>
</TABLE>
