SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For Quarterly Period Ended AUGUST 31, 1999 Commission file number 1-6263
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AAR CORP.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-2334820
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE AAR PLACE, 1100 N. WOOD DALE ROAD, WOOD DALE, ILLINOIS 60191
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (630) 227-2000
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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 .
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(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each on the issuer's classes of
common stock, as of the latest practicable date.
$1.00 par value, 27,401,250 shares outstanding as of AUGUST 31, 1999 .
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AAR CORP. and Subsidiaries
Quarterly Report on Form 10-Q
August 31, 1999
Table of Contents
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income (Revised) 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
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits 14
Reports on Form 8-K 14
Signature Page 15
2
PART I, ITEM 1 - FINANCIAL STATEMENTS
AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of August 31, 1999 and May 31, 1999
(000s omitted)
August 31, May 31,
1999 1999
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(Unaudited) (Derived from
audited financial
Statements)
ASSETS
Current assets:
Cash and cash equivalents $ 1,444 $ 8,250
Accounts receivable, less allowances of $4,686
and $4,830, respectively 142,903 164,302
Inventories 270,475 270,654
Equipment on or available for short-term leases 42,590 33,845
Deferred tax assets, deposits and other 40,240 31,135
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Total current assets 497,652 508,186
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Property, plant and equipment, net 106,353 104,012
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Other assets:
Investments in leveraged leases 34,146 34,053
Cost in excess of underlying net assets of acquired companies, net 39,786 40,093
Other 40,976 40,286
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114,908 114,432
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$ 718,913 $ 726,630
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 23,500 $ --
Current maturities of long-term debt 510 420
Accounts and trade notes payable 90,962 129,703
Accrued liabilities 33,338 36,803
Accrued taxes on income 8,271 6,660
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Total current liabilities 156,581 173,586
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Long-term debt, less current maturities 180,800 180,939
Deferred tax liabilities 45,308 44,870
Retirement benefit obligation 1,200 1,200
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227,308 227,009
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Stockholders' equity:
Preferred stock, $1.00 par value, authorized 250 shares; none issued -- --
Common stock, $1.00 par value, authorized 80,000
shares; issued 29,037 and 28,998 shares, respectively 29,037 28,998
Capital surplus 144,474 144,095
Retained earnings 193,032 184,529
Treasury stock, 1,635 and 1,617 shares at cost, respectively (25,574) (25,463)
Accumulated other comprehensive income (loss) -
Cumulative translation adjustments (5,945) (6,124)
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335,024 326,035
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$ 718,913 $ 726,630
========= =========
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements
3
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Income
For the Three Months Ended August 31, 1999 and 1998
(Unaudited)
(000s omitted except per share data)
Three Months Ended
August 31,
(Revised)
-----------------------------
1999 1998
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Sales $ 245,909 $ 215,898
Pass through sales 20,774 34,593
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Total sales 266,683 250,491
Costs and operating expenses:
Cost of sales 222,493 209,442
Selling, general and administrative 23,683 23,010
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246,176 232,452
Operating income 20,507 18,039
Interest expense (5,809) (4,262)
Interest income 688 29
--------- ---------
Income before provision for income taxes 15,386 13,806
Provision for income taxes 4,555 4,183
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Net income $ 10,831 $ 9,623
========= =========
Earnings per share - Basic $ .40 $ .35
Earnings per share - Diluted $ .39 $ .34
Weighted average common shares outstanding - Basic 27,394 27,713
Weighted average common shares outstanding - Diluted 27,827 28,312
Dividends paid and declared per share of $ .085 $ .085
common stock
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
4
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended August 31, 1999 and 1998
(Unaudited)
(000s omitted)
Three Months Ended
August 31,
---------------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,831 $ 9,623
Adjustments to reconcile net income to net cash
provided from (used in) operating activities:
Depreciation and amortization 4,570 4,228
Deferred taxes 438 876
Change in certain assets and liabilities:
Accounts receivable 21,451 (17,586)
Inventories 123 (10,982)
Equipment on or available for short-term leases (8,610) 799
Accounts and trade notes payable (38,773) 30,566
Accrued liabilities and taxes on income (1,644) (1,236)
Other assets (9,056) (1,187)
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Net cash provided from (used in) operating activities (20,670) 15,101
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment expenditures, net (6,047) (8,357)
Investment in equipment on long-term leases
and leveraged leases (93) 9,304
Notes receivable and other (1,205) (5,106)
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Net cash used in investing activities (7,345) (4,159)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank 23,500 --
Change in borrowings (49) (57)
Cash dividends (2,329) (2,355)
Other (50) 15
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Net cash provided from (used in) financing activities 21,072 (2,397)
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Effect of exchange rate changes on cash 137 (59)
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Increase (decrease) in cash equivalents (6,806) 8,486
Cash and cash equivalents, beginning of period 8,250 17,222
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Cash and cash equivalents, end of period $ 1,444 $ 25,708
======== ========
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
5
AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
For the Three Months Ended August 31, 1999 and 1998
(000s omitted)
Three Months Ended
August 31,
-----------------------------
1999 1998
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Net income $10,831 $ 9,623
Other comprehensive income -
Foreign currency translation 179 145
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Total Comprehensive Income $11,010 $ 9,768
======= =======
The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.
6
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 1999
(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.
The Company conducts portions of its business through joint venture investments
accounted for under the equity method. These equity affiliates are primarily
engaged in the distribution of certain engine parts and aircraft rotable spares
to worldwide aviation customers.
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, 1999 has been derived from
audited financial statements. To prepare the financial statements in conformity
with generally accepted accounting principles, management has made a number of
estimates and assumptions relating to the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities. Actual results
could differ from those estimates. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
rules and regulations of the SEC. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's latest annual report on
Form 10-K.
In the opinion of management of the Company, the condensed consolidated
financial statements reflect all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the condensed consolidated
financial position of AAR CORP. and its subsidiaries as of August 31, 1999 and
the condensed consolidated results of operations, cash flows and comprehensive
income for the three-month periods ended August 31, 1999 and 1998. The results
of operations for such interim periods are not necessarily indicative of the
results for the full year.
NOTE B - REVENUE RECOGNITION
Sales and related cost of sales are recognized primarily upon shipment of
products and performance of services. Lease revenue is recognized as earned.
In connection with certain long-term inventory management programs, the Company
purchases factory new products on behalf of its customers from original
equipment manufacturers. These products are purchased from the manufacturer and
"passed through" to the Company's customer at the Company's cost. Previously,
the Company disclosed these "pass through" sales in the notes to the
consolidated financial statements and excluded these transactions from sales and
cost of sales.
In December 1999, during the Company's third quarter, the SEC issued Staff
Accounting Bulletin (SAB) No. 101 summarizing the SEC's views in applying
generally accepted accounting principles to revenue recognition. As a result of
SAB No. 101, the Company now believes that pass through sales should be included
in sales. Prior to issuance of SAB No. 101, the Company believed that excluding
pass through sales from sales was appropriate given the limited nature of the
services provided for these transactions. The Company has revised the quarterly
Income Statement in this Form 10-Q/A to reflect the inclusion of pass through
sales in sales and cost of sales. This change has no impact on the current
period or historical net income, earnings per share, the condensed consolidated
balance sheets, statements of cash flows or comprehensive income.
7
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 1999 (Continued)
(000s omitted)
NOTE C - INVENTORY
The following is a summary of inventories:
August 31, May 31,
1999 1999
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Raw materials and parts $ 51,012 $ 50,352
Work-in-process 11,214 12,733
Purchased aircraft, parts, engines and components held for sale 208,249 207,569
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$270,475 $270,654
======== ========
NOTE D - SUPPLEMENTAL CASH FLOWS INFORMATION
Supplemental information on cash flows follows:
Three Months Ended
August 31,
--------------------------
1999 1998
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Interest paid $4,016 $2,487
Income taxes paid 2,375 1,658
Income tax refunds received 300 17
NOTE E - 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. The computation of
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-month periods ended August 31, 1999
and 1998.
8
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 1999 (Continued)
(000s omitted)
NOTE E - COMMON STOCK AND EARNINGS PER SHARE OF COMMON STOCK (CONTINUED)
Three Months Ended
August 31,
------------------------
1999 1998
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BASIC EPS
Net income $10,831 $ 9,623
Common shares outstanding 27,394 27,713
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Basic earnings per share $ 0.40 $ 0.35
======= =======
DILUTED EPS
Net income $10,831 $ 9,623
Common shares outstanding 27,394 27,713
Additional shares due to hypothetical
exercise of stock options 433 599
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27,827 28,312
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Diluted earnings per share $ 0.39 $ 0.34
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9
PART I, ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AAR CORP. AND SUBSIDIARIES
RESULTS OF OPERATIONS
(000s omitted except percent data)
THREE-MONTH PERIOD ENDED AUGUST 31, 1999
(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 sales for the Company's classes of
similar products and services within this segment for the three month periods
ended August 31, 1999 and 1998.
Three Months Ended
August 31,
(Revised)
--------------------------
1999 1998
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Sales:
Aircraft and Engines $119,878 $ 90,067
Airframe and Accessories 96,142 92,916
Manufacturing 29,889 32,915
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245,909 215,898
Pass Through Sales 20,774 34,593
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$266,683 $250,491
======== ========
Consolidated sales for the first quarter of the Company's fiscal year ending May
31, 2000, excluding pass through sales, increased $30.0 million or 13.9% over
the same period in the prior year. Sales in Aircraft and Engines increased $29.8
million or 33.1% reflecting higher sales of the Company's aircraft and engine
products, partially offset by lower sales of engine parts in certain long-term
inventory management programs. Sales in Airframe and Accessories increased $3.2
million or 3.5% during the first quarter of fiscal 2000 reflecting higher demand
for the Company's aircraft maintenance and component overhaul repair services.
Sales in Manufacturing decreased $3.0 million or 9.2% due to the impact of the
sale of the Company's floor maintenance products manufacturing subsidiary in
November, 1998, partially offset by increased sales of products supporting the
U.S. Government's rapid deployment program. Adjusting for the sale of the
Company's floor maintenance products manufacturing subsidiary, net sales of the
Company's manufacturing products increased 8.6%. Pass through sales were $20.8
million, compared to $34.6 million in the prior year. As inventory management
programs mature, pass through sales typically decline as the Company sources
more of its customer's parts requirements with used, serviceable parts, rather
than with factory new parts. The reduction in pass through sales during the
period is attributable to the maturing of the Company's existing long-term
inventory programs, as well as lower engine inputs at certain customer
maintenance facilities.
Consolidated gross profit increased $3.1 million or 7.7% over the prior year
period due to increased sales partially offset by a decrease in the consolidated
gross profit margin. Excluding the impact from pass through sales, the gross
profit margin was 18.0% in the current quarter, compared to 19.5% in the prior
year quarter. This reduction in the gross profit margin was primarily
attributable to the mix of inventories sold reflecting lower sales of higher
margin products in certain long-term inventory management programs. Operating
income increased $2.5 million or 13.7% compared to the prior year period as a
result of increased gross profit, partially offset by higher selling, general
and administrative expenses. Selling, general and administrative expenses were
lower as a percentage of consolidated net sales, however total expenses
increased principally due to increased information technology and marketing
support costs.
Consolidated net income increased $1.2 million or 12.6% over the prior year
period due primarily to the factors discussed above.
10
PART I, ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AAR CORP. AND SUBSIDIARIES
FINANCIAL CONDITION
(000s omitted except ratios)
AT AUGUST 31, 1999
At August 31, 1999, the Company's liquidity and capital resources included cash
of $1.4 million and working capital of $341.1 million. At August 31, 1999, the
Company's ratio of long-term debt to capitalization was 35.1%, down from 35.7%
at May 31, 1999. The Company continues to maintain its available external
sources of financing including $155.1 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. Accounts
receivable sold under this arrangement were $25.5 million as of August 31, 1999.
During the three-month period ended August 31, 1999, the Company used $20.7
million of cash from operations compared to generating $15.1 million of cash
from operations during the three-month period ended August 31, 1998. The
decrease in cash generated from operations was due principally to a reduction in
accounts and trade notes payable during the first quarter of fiscal year 2000
primarily reflecting the timing of payments of accounts payable.
During the three-month period ended August 31,1999, the Company's investing
activities used $7.3 million of cash compared to $4.2 million during the
three-month period ended August 31, 1998. The increase in cash used for
investing activities was attributable to the prior year's first quarter
including proceeds from the sale of an equity interest in a leveraged lease,
partially offset by a reduction in capital expenditures reflecting lower system
enhancements and facility expansion expenditures during the first quarter of
fiscal year 2000.
During the three-month period ended August 31, 1999, the Company's financing
activities generated $21.1 million of cash compared to using $2.4 million during
the three-month period ended August 31, 1998. The increase in cash generated
from financing activities was due to proceeds from bank borrowings in the first
quarter of fiscal year 2000 of $23.5 million.
The Company believes that its cash and cash equivalents and available sources of
financing will continue to provide the Company the ability to meet its ongoing
working capital requirements, make anticipated capital expenditures, meet
contractual commitments and pay dividends.*
A summary of key indicators of financial condition and lines of credit follows:
Description August 31, May 31,
------------------------ 1999 1999
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Working capital $341,071 $334,600
Current ratio 3.2:1 2.9:1
Bank credit lines:
Borrowings outstanding 23,500 --
Available but unused lines 155,133 178,800
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Total credit lines $178,633 $178,800
======== ========
Long-term debt, less current maturities $180,800 $180,939
Ratio of long-term debt to capitalization 35.1% 35.7%
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* See "Forward Looking Statements" section of this item.
11
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 new-parts distribution business, all of the Company's manufacturing
facilities and three of the Company's overhaul facilities.
During fiscal 1999, the Company successfully completed the implementation of the
replacement systems at its manufacturing facilities and in the Company's new
parts distribution business. The capital outlay associated with the
implementation of these replacement systems was $8,700, which was paid in fiscal
1999 and 1998.
During fiscal 1999 the Company expanded and modified its plans to replace the
existing systems at its overhaul facilities to include, among other things,
purchasing new hardware, upgrading the main existing operating system and
converting the existing business application to ensure Year 2000 compliance (the
upgrades). During the first quarter of fiscal 2000, the Company completed the
upgrades at two of the overhaul facilities at a cost of $600 and expects to
complete the upgrades at the third overhaul facility by October 31, 1999. The
cost to complete the upgrades at the third facility is expected to be
approximately $300 and will be incurred in the third quarter of fiscal 2000.*
Implementation of additional enhancements, which may include the implementation
of new systems which are Year 2000 compliant, may continue into the Year 2000.*
In addition to the above, the Company has conducted an extensive formal Year
2000 compliance review (including testing) of its internal systems which are not
being replaced. Based on the results of this review and program testing, the
Company believes that the business applications supporting the Company's trading
businesses and certain other overhaul businesses are Year 2000 compliant.* In
addition, the Company believes that its existing major financial applications
are Year 2000 compliant, although the Company is in the process of upgrading its
major financial applications to the most recent version.*
In addition to the cost of the business application systems being implemented or
enhanced to meet operational requirements, the Company has incurred other Year
2000 compliance costs unrelated to the replacement systems referenced above. The
Company has numerous local-area networks, wide-area networks, servers, voice
mail systems and other technical support systems (the "sub-systems"). The
Company has completed an inventory of the sub-systems, as well as the compliance
status of the sub-systems, and has taken corrective action where necessary, and
believes essentially 100% of the sub-systems are Year 2000 compliant.*
- --------------------------------
* See "Forward Looking Statements" section of this item.
12
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)
As part of its continuing Year 2000 review, the Company has communicated 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 each of the third parties with which the
Company has material relationships is presently unknown and the failure of one
or more third parties to be compliant could potentially have an adverse effect
on the Company's operations.* The Company believes that the Year 2000 compliance
failure of a significant third-party supplier or customer is the most reasonably
likely worst case scenario for a Year 2000 failure.* As specific significant
risks become known for third parties that could have a significant impact on
AAR's operations, contingency plans will be developed accordingly.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain statements relating to future results, which are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995 and are identified by an asterisk(*). These
forward-looking statements are based on beliefs of Company management, as well
as assumptions and estimates based on information currently available to the
Company, and are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical results or those
anticipated, depending on a variety of factors, including: integration of
acquisitions; marketplace competition; implementation of Year 2000 compliant
information technology systems and system enhancements; unidentified Year 2000
problems; failure of a third-party supplier, service provider or customer to be
Year 2000 compliant; economic and aviation/aerospace market stability and
Company profitability. Should one or more of these risks or uncertainties
materialize adversely, or should underlying assumptions or estimates prove
incorrect, actual results may vary materially from those described.
PART I, ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market risk is limited to fluctuating interest rates
under its unsecured bank credit agreements, and foreign exchange rates. During
the first quarter of fiscal 2000 and 1999, respectively, the Company did not
utilize derivative financial instruments to offset these risks. A hypothetical
10 percent increase to the average interest rate under the Company's bank credit
agreements and a hypothetical 10 percent devaluation of foreign currencies
against the U.S. dollar would not have had a material impact on the results of
operations for the Company during the first quarter of fiscal 2000 and 1999,
respectively.
- --------------------------------
* See "Forward Looking Statements" section of this item.
13
PART II - OTHER INFORMATION
AAR CORP. and Subsidiaries
August 31, 1999
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Item
- ----
27. Financial 27.1 Financial Data Schedule for the Registrant's
Data Schedule three-month interim period ended August 31,
1999 (Revised).
(b) REPORTS ON FORM 8-K FOR QUARTER ENDED AUGUST 31, 1999:
The Company filed no reports on Form 8-K during the three months ended
August 31, 1999.
14
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:October15, 1999 /s/ Timothy J. Romenesko
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Timothy J. Romenesko
Vice President and Chief Financial Officer
(Principal Financial Officer and officer duly
authorized to sign on behalf of registrant)
15