SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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, 2000 Commission file number 1-6263
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 incorporation or organization) (I.R.S. Employer Identification No.)
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
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, 26,856,055 shares outstanding as of AUGUST 31, 2000.
AAR CORP. and Subsidiaries
Quarterly Report on Form 10-Q
August 31, 2000
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 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 -12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 12
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits 13
Reports on Form 8-K 13
Signature Page 14
2
PART I, ITEM 1 - FINANCIAL STATEMENTS
AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of August 31, 2000 and May 31, 2000
(000s omitted)
August 31, May 31,
2000 2000
--------- ---------
(Unaudited) (Derived from
audited financial
statements)
ASSETS
Current assets:
Cash and cash equivalents $ 669 $ 1,241
Accounts receivable, less allowances of $10,113
and $10,080, respectively 126,206 128,348
Inventories 275,228 275,817
Equipment on or available for short-term leases 68,587 60,201
Deferred tax assets, deposits and other 39,588 45,660
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Total current assets 510,278 511,267
--------- ---------
Property, plant and equipment, net 108,033 110,003
--------- ---------
Other assets:
Investments in leveraged leases 36,348 34,487
Cost in excess of underlying net assets of acquired companies, net 38,551 38,840
Other 54,333 46,401
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129,232 119,728
--------- ---------
$ 747,543 $ 740,998
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 47,722 $ 25,885
Current maturities of long-term debt 429 429
Accounts and trade notes payable 93,983 107,879
Accrued liabilities 25,205 26,596
Accrued taxes on income 943 3,027
--------- ---------
Total current liabilities 168,282 163,816
Long-term debt, less current maturities 180,367 180,447
Deferred tax liabilities 58,441 56,020
Retirement benefit obligation 1,200 1,200
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240,008 237,667
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Stockholders' equity:
Preferred stock, $1.00 par value, authorized 250 shares; none issued - -
Common stock, $1.00 par value, authorized 100,000
shares; issued 29,171 and 29,168 shares, respectively 29,171 29,168
Capital surplus 146,566 146,557
Retained earnings 211,349 210,474
Treasury stock, 2,314 and 2,303 shares at cost, respectively (37,392) (37,236)
Accumulated other comprehensive income (loss) -
Cumulative translation adjustments (10,441) (9,448)
--------- ---------
339,253 339,515
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$ 747,543 $ 740,998
========= =========
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, 2000 and 1999
(Unaudited)
(000s omitted except per share data)
Three Months Ended
August 31,
2000 1999
--------- ---------
Sales $ 224,888 $ 245,909
Pass through sales 16,882 20,774
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Total sales 241,770 266,683
Costs and operating expenses:
Cost of sales 207,355 222,493
Selling, general and administrative 24,544 23,683
--------- ---------
231,899 246,176
Operating income 9,871 20,507
Interest expense (5,988) (5,809)
Interest income 506 688
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Income before provision for income taxes 4,389 15,386
Provision for income taxes 1,230 4,555
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Net income $ 3,159 $ 10,831
========= =========
Earnings per share - Basic $ .12 $ .40
Earnings per share - Diluted $ .12 $ .39
Weighted average common shares outstanding
- Basic 26,859 27,394
Weighted average common shares outstanding
- Diluted 26,962 27,827
Dividends declared and paid per share of
common stock $ .085 $ .085
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, 2000 and 1999
(Unaudited)
(000s omitted)
Three Months Ended
August 31,
-------------------------
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,159 $ 10,831
Adjustments to reconcile net income to net cash
provided from (used in) operating activities:
Depreciation and amortization 4,694 4,570
Deferred taxes 2,346 438
Change in certain assets and liabilities:
Accounts receivable 1,794 21,451
Inventories 255 123
Equipment on or available for short-term leases (8,515) (8,610)
Accounts and trade notes payable (13,790) (38,773)
Accrued liabilities and taxes on income (3,164) (1,644)
Other assets 5,478 (9,056)
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Net cash used in operating activities (7,743) (20,670)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment expenditures, net (2,986) (6,047)
Investment in equipment on long-term leases
and leveraged leases (1,861) (93)
Investment in joint ventures and other (7,449) (1,205)
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Net cash used in investing activities (12,296) (7,345)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank lines 21,837 23,500
Change in long-term debt (80) (49)
Cash dividends (2,283) (2,329)
Other 11 (50)
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Net cash provided from financing activities 19,485 21,072
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Effect of exchange rate changes on cash (18) 137
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Decrease in cash and cash equivalents (572) (6,806)
Cash and cash equivalents, beginning of period 1,241 8,250
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Cash and cash equivalents, end of period $ 669 $ 1,444
========= =========
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, 2000 and 1999
(Unaduited)
(000s omitted)
Three Months Ended
August 31,
------------------
2000 1999
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Net income $ 3,159 $ 10,831
Other comprehensive income (loss)-
Foreign currency translation (993) 179
------- --------
Total comprehensive income $ 2,166 $ 11,010
======= ========
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, 2000
(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, 2000 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 accounting
principles generally accepted in the United States, 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, 2000 and
the condensed consolidated results of operations, cash flows and comprehensive
income for the three-month periods ended August 31, 2000 and 1999. 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 customers from original equipment
manufacturers. These products are purchased from the manufacturer and "passed
through" to the customer at the Company's cost. During the Company's third
quarter of fiscal 2000, 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 believes that
pass through sales should be included in sales and began reporting pass through
sales on the consolidated income statement beginning with the third quarter of
fiscal 2000 Form 10-Q. 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.
7
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2000 (Continued)
(000s omitted)
Note C - Inventory
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The following is a summary of inventories:
August 31, May 31,
2000 2000
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Raw materials and parts $ 47,426 $ 50,452
Work-in-process 23,702 19,849
Purchased aircraft, parts, engines and components held for sale 204,100 205,516
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$275,228 $275,817
======== ========
Note D - Supplemental Cash Flows Information
- --------------------------------------------
Supplemental information on cash flows:
Three Months Ended
August 31,
--------------------------
2000 1999
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Interest paid $4,651 $4,016
Income taxes paid 906 2,375
Income tax refunds received 6,018 300
8
AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
August 31, 2000 (Continued)
(000s omitted)
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 each 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, 2000
and 1999.
Three Months Ended
August 31,
-----------------------
2000 1999
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Basic EPS
Net income $ 3,159 $10,831
Weighted average common shares outstanding 26,859 27,394
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Earnings per share - Basic $ 0.12 $ 0.40
======= ======
Diluted EPS
Net income $ 3,159 $10,831
Weighted average common shares outstanding 26,859 27,394
Additional shares due to hypothetical
exercise of stock options 103 433
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26,962 27,827
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Earnings per share - Diluted $ 0.12 $ 0.39
======= ======
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, 2000
- ----------------------------------------
(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, 2000 and 1999.
Three Months Ended
August 31,
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2000 1999
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Sales:
Airframe and Accessories $104,209 $96,166
Aircraft and Engines 97,673 119,854
Manufacturing 23,006 29,889
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224,888 245,909
Pass Through Sales 16,882 20,774
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$241,770 $266,683
======== ========
Consolidated sales for the first quarter of the Company's fiscal year ending May
31, 2001, excluding pass through sales, decreased $21,021 or 8.5% over the same
period in the prior year. Sales in Airframe and Accessories increased $8,043 or
8.4% during the first quarter of fiscal 2001 reflecting higher demand for the
Company's aircraft maintenance and aircraft component overhaul services. Sales
in Aircraft and Engines decreased $22,181 or 18.5% primarily as a result of
lower revenue in the Company's aircraft sales business. Sales in Manufacturing
decreased $6,883 or 23.0% reflecting lower sales of the Company's cargo handling
systems and products supporting the U.S. Government's rapid deployment program.
Pass through sales were $16,882, compared to $20,774 in the prior year. 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 decreased $9,775 or 22.1% over the prior year period
due to lower sales and a reduction in the consolidated gross profit margin.
Excluding the impact from pass through sales, the gross profit margin was 15.3%
in the current quarter, compared to 18.0% in the prior year quarter. This
reduction in the gross profit margin was principally at the Company's engine
parts, landing gear repair and general aviation parts distribution businesses.
This decline was primarily attributable to pricing pressure on older technology
engine parts, reduced demand from certain inventory management programs,
deferred landing gear removals due to unusually heavy utilization during peak
summer months and lower demand for general aviation parts. Operating income
decreased $10,636 or 51.9% and net income decreased $7,672 or 70.8% over the
prior year 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, 2000
- ------------------
At August 31, 2000, the Company's liquidity and capital resources included cash
of $669 and working capital of $341,996. At August 31, 2000, the Company's ratio
of long-term debt to capitalization was 34.7%, unchanged from May 31, 2000, and
the Company's total debt-to-capitalization ratio was 40.2% at August 31, 2000
compared to 37.8% at May 31, 2000. The Company continues to maintain its
available external sources of financing including $131,489 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 $24,255 as of August 31,
2000.
During the three-month period ended August 31, 2000, the Company used $7,743 of
cash from operations principally reflecting the Company's investment in
equipment on or available for lease.
During the three-month period ended August 31, 2000, the Company's investing
activities used $12,296 of cash, reflecting the investment of property, plant
and equipment of $2,986, and additional investments made in certain of the
Company's joint ventures.
During the three-month period ended August 31, 2000, the Company's financing
activities generated $19,485 reflecting proceeds from bank lines of $21,837,
offset by the payment of cash dividends of $2,283.
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,
----------- 2000 2000
---------- --------
Working capital $341,996 $347,451
Current ratio 3.0:1 3.1:1
Bank credit lines:
Short-term debt $ 47,722 $ 25,885
Available but unused lines 131,489 153,326
-------- --------
Total credit lines $179,211 $179,211
======== ========
Long-term debt, less current maturities $180,367 $180,447
Ratio of long-term debt to capitalization 34.7% 34.7%
Ratio of total debt to capitalization 40.2% 37.8%
- ---------------------------------
* 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)
FORWARD-LOOKING STATEMENTS
Part I, Item 2 - 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: ability to acquire
inventory at favorable prices, integration of acquisitions, marketplace
competition, 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 2001 and 2000, 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 2001 and 2000,
respectively.
12
PART II - OTHER INFORMATION
AAR CORP. and Subsidiaries
August 31, 2000
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Item
- ----
27. Financial 27.1 Financial Data Schedule for the Registrant's three-month interim
Data Schedule period ended August 31, 2000.
(b) REPORTS ON FORM 8-K FOR QUARTER ENDED AUGUST 31, 2000:
The Company filed no reports on Form 8-K during the three months ended
August 31, 2000.
13
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.
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(Registrant)
Date: October 13, 2000 /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)
/s/ Michael J. Sharp
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Michael J. Sharp
Vice President - Controller
(Principal Accounting Officer)
14