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-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: [email protected]
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<IMS-DOCUMENT>0000912057-94-002818.txt : 19940829
<IMS-HEADER>0000912057-94-002818.hdr.sgml : 19940829
ACCESSION NUMBER: 0000912057-94-002818
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 19940531
FILED AS OF DATE: 19940824
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AAR CORP
CENTRAL INDEX KEY: 0000001750
STANDARD INDUSTRIAL CLASSIFICATION: 5080
IRS NUMBER: 362334820
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-06263
FILM NUMBER: 94545798
BUSINESS ADDRESS:
STREET 1: 1111 NICHOLAS BLVD
CITY: ELK GROVE VILLAGE
STATE: IL
ZIP: 60007
BUSINESS PHONE: 7084393939
MAIL ADDRESS:
STREET 1: 1111 NICHOLAS BLVD
CITY: ELK GROVE VILLAG
STATE: IL
ZIP: 60007
FORMER COMPANY:
FORMER CONFORMED NAME: ALLEN AIRCRAFT RADIO INC
DATE OF NAME CHANGE: 19700204
</IMS-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>10-K
<TEXT>
<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1994 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.)
1111 NICHOLAS BOULEVARD, ELK GROVE VILLAGE, ILLINOIS 60007
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (708) 439-3939
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- - ----------------------------------- -----------------------------------
COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
COMMON STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
At June 30, 1994, the aggregate market value of the Registrant's voting
stock held by nonaffiliates was approximately $218,718,000. The calculation of
such market value has been made for the purposes of this report only and should
not be considered as an admission or conclusion by the Registrant that any
person is in fact an affiliate of the Registrant.
On June 30, 1994, there were 15,906,792 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the Registrant's Annual Meeting
of Stockholders, to be held October 12, 1994, is incorporated by reference in
Part III to the extent described therein.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I
Item 1. Business..................................................................................... 2
Item 2. Properties................................................................................... 3
Item 3. Legal Proceedings............................................................................ 4
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 4
Executive Officers of the Registrant......................................................... 4
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters.................................................................................... 6
Item 6. Selected Financial Data...................................................................... 7
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition........................................................................ 8
Item 8. Financial Statements and Supplementary Data.................................................. 13
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 36
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 37
Item 11. Executive Compensation....................................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 37
Item 13. Certain Relationships and Related Transactions............................................... 37
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K...................................... 38
39
SIGNATURES..................................................................................................
</TABLE>
1
<PAGE>
PART I
ITEM 1. BUSINESS
AAR CORP. and its subsidiaries are referred to herein collectively as the
"Company," unless the context indicates otherwise. The Company was organized in
1955 as the successor to a business founded in 1951 and was reincorporated in
Delaware in 1966. The Company supplies a variety of products and services for
aviation in the United States and abroad.
Certain of the Company's aviation-related activities and products are
subject to licensing, certification and other requirements imposed by the
Federal Aviation Administration and other regulatory agencies, both domestic and
foreign. The Company believes that it has all licenses and certifications that
are material to the conduct of its business.
The Company's trading activities include the purchase, sale and lease of a
wide variety of new, used and overhauled aviation products, principally aircraft
equipment such as engines, avionics, accessories, airframe and engine parts and
components. The Company also provides customized inventory supply and management
programs for certain aircraft and engine parts in support of customer
maintenance activities. The Company is also a distributor of new aviation
hardware and parts. The Company's primary sources of aviation products are
domestic and foreign airlines, independent aviation service companies and
airframe, engine and other original equipment manufacturers. The Company's
trading activities also include the purchase, sale, lease and lease financing of
new and used jet aircraft.
The Company provides a wide range of services, parts, component exchange and
other products as part of its overhaul activities. The Company overhauls,
repairs and modifies components for commercial and military aircraft, including
landing gear and engine components for most models of commercial aircraft. It
provides aircraft terminal services (fueling and aircraft storage), maintenance,
modification, special equipment installation and painting services for
commercial and business aircraft.
The Company manufactures, installs and repairs specialized aviation
products, including pallets, containers, cargo handling systems and lightweight
air logistics shelters, primarily for domestic and foreign military
organizations, airframe manufacturers, commercial airlines and others.
The Company furnishes Aviation Services directly through its own employees.
Domestic and foreign airlines, airframe, engine and other original equipment
manufacturers, aircraft leasing companies, domestic and foreign military
organizations and independent aviation support companies are the principal
customers for the Company's aviation trading activities. Principal customers of
the Company's aviation overhaul activities are commercial airlines, aircraft
leasing companies, business aircraft operators, military overhaul depots,
military contractors and original equipment manufacturers. Sales of Aviation
Services to commercial airlines are generally affected by such factors as the
number, type and average age of aircraft in service, the levels of aircraft
utilization (E.G., frequency of schedules), the number of airline operators and
the level of sales of new and used aircraft.
The Company is a leading independent supplier of Aviation Services to the
aviation aftermarket, which is highly competitive. Competition is based on
quality, ability to provide a broad range of products and services, speed of
delivery and price. During the past three years, demand for aviation aftermarket
products and services declined as airlines reduced operations and curtailed
purchases to counter the impact of the airlines' reduced traffic demand which
has not until recently showed signs of improvement. Additionally, during this
period many airlines continued experiencing financial losses, and certain
carriers ceased operations. Aggressive price competition among the airlines has
led carriers to continue to reduce costs and to defer or curtail
2
<PAGE>
nonessential spending. The ongoing soft demand for aviation products and
services was exacerbated by increased competition due to availability of parts
removed from grounded aircraft and from entry onto the market of inventories
from liquidated airlines. Aerospace manufacturers have over the last few years
experienced reduced demand caused by cancellations of new aircraft orders and
government spending cuts reducing their parts support requirements.
The Company competes with other independent distributors and independent
support facilities, as well as with airlines and original equipment
manufacturers, including aerospace equipment manufacturers, some of which have
greater resources than the Company. In certain of its leasing and commercial jet
aircraft trading activities, the Company faces competition from financial
institutions, syndicators, commercial and specialized leasing companies and
other entities that provide financing, some of which have greater resources than
the Company. The Company believes it has maintained a satisfactory competitive
position.
In addition to its aviation-related activities, the Company manufactures
highly engineered proprietary products, including industrial floor cleaning and
materials handling equipment and nuclear shielding material. The Company sells
these products directly and through independent distributors to a wide variety
of commercial customers and domestic and foreign governments. The markets for
these products are highly competitive, based on price, quality and availability.
At May 31, 1994, backlog believed to be firm was approximately $84,550,000
compared to $77,520,000 at May 31, 1993. An additional $82,620,000 of unfunded
government options on awarded contracts also existed at May 31, 1994. Of the
1994 year-end backlog that is firm, $41,460,000 is attributable to government
contracts for products related to the U.S. Government's rapid deployment
programs. It is expected that approximately $70,523,000 of the backlog will be
shipped in fiscal 1995.
Sales to the United States government and its agencies were approximately
$77,500,000 (19.0% of total net sales), $57,600,000 (15.0% of total net sales)
and $54,000,000 (12.8% of total net sales) in fiscal 1994, 1993 and 1992,
respectively. Because such sales are subject to competitive bidding and
government funding, no assurance can be given that such sales will continue at
levels previously experienced. The majority of the Company's government
contracts are for aviation products and services used for ongoing routine
military logistic support activities; unlike weapons systems and other high
technology military requirements, these products and services are less likely to
be affected by reductions in defense spending. The Company's contracts with the
United States government and its agencies are typically firm agreements to
provide aviation products and services at a fixed price and have a term of one
year or less, frequently subject to extension for one or more additional periods
of one year at the option of the government agency. Although the Company's
government contracts are subject to termination at the election of the
government, in the event of such a termination the Company would be entitled to
recover from the government all allowable costs incurred by the Company through
the date of termination.
At May 31, 1994, the Company employed approximately 1,860 persons worldwide.
For information concerning the Company's Business Segment activities,
including classes of similar products and services, see Item 7, "Management's
Discussion and Analysis of Results of Operations and Financial Condition." For
information concerning export sales, see "Business Segment Information" in Note
1 of Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES
Aviation trading activities are conducted from two buildings in Elk Grove
Village, Illinois, one owned by the Company, the other subject to an industrial
revenue bond mortgage until 1995. In addition to warehouse space, which is
mechanized for efficient access to the diverse inventory, these facilities
include executive offices, sales offices and a service center. Warehouse
facilities are
3
<PAGE>
leased in Cerritos, California and Hawthorne, New York for the purpose of
aviation hardware distribution and in Hamburg, Germany and Nantgarw, United
Kingdom for the purpose of aviation part and component distribution.
Aviation overhaul facilities are located in The Netherlands near Schiphol
International Airport (owned by the Company); Garden City, New York (owned by
the Company); Frankfort, New York (subject to an industrial revenue bond lease
to the Company until 2001, at which time the Company shall purchase the facility
for a nominal consideration); Windsor, Connecticut (in a building owned by the
Company); Miami, Florida (in leased facilities near the airport); Singapore (in
leased facilities adjacent to the airport); London, England (in leased
facilities); Paris, France (in leased facilities) and Oklahoma City, Oklahoma
(in facilities leased from airport authorities). The Company's experience
indicates that lease renewal is available on reasonable terms consistent with
its business needs.
The Company's principal manufacturing activities are conducted at owned
facilities in Cadillac and Livonia, Michigan. Industrial floor cleaning
equipment is manufactured in a plant located in Aberdeen, North Carolina
(subject to an industrial revenue bond lease to the Company until October 1994,
at which time the Company shall purchase the facility for a nominal
consideration) with a sales office in Bad Hamburg, Germany.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings other than
routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
SUPPLEMENTAL INFORMATION:
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning each executive officer of the Company is set forth
below:
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION WITH THE COMPANY
- - --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Ira A. Eichner............................... 63 Chairman of the Board and Chief Executive Officer; Director
David P. Storch.............................. 41 President and Chief Operating Officer; Director
Robert D. Johnson............................ 47 Vice President-Services and Manufacturing Group
Howard A. Pulsifer........................... 51 Vice President; General Counsel; Secretary
</TABLE>
The term of each of the current executive officers of the Company expires on
October 12, 1994, the date of the annual meeting of the Board of Directors,
which will be held immediately after the 1994 Annual Meeting of Stockholders.
Mr. Eichner, the founder of the Company, has been Chairman of the Board of
the Company since 1973, and his directorship expires at the 1996 Annual Meeting.
Mr. Eichner has been a director and the Chief Executive Officer of the Company
since 1955. Mr. Eichner also serves as a director of United Stationers, Inc. Mr.
Eichner is Mr. Storch's father-in-law.
Mr. Storch was elected President of the Company in July, 1989. He had been a
Vice President of the Company since January, 1988. Mr. Storch joined the Company
in 1979 and had been President of a major subsidiary since June, 1984. Mr.
Storch has been a director of the Company since 1989, and his directorship
expires at the 1994 Annual Meeting. Mr. Storch is Mr. Eichner's son-in-law.
4
<PAGE>
Mr. Johnson joined the Company as Vice President-Services and Manufacturing
Group in June, 1993. He was previously with the General Electric Company for
more than 24 years in various management positions, most recently as General
Manager of several General Electric aircraft engines service and overhaul
operations. Mr. Johnson resigned from the Company effective July 6, 1994.
Mr. Pulsifer joined the Company as General Counsel in August, 1987 and was
elected a Vice President in October, 1989 and Secretary in May, 1990. He was
previously with United Airlines, Inc. for 14 years, most recently as Senior
Counsel.
5
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange and the
Chicago Stock Exchange. On June 30, 1994, there were approximately 14,500
holders of the Common Stock of the Company, including participants in security
position listings.
Certain of the Company's debt agreements contain provisions restricting the
payment of dividends or repurchase of its shares. See Note 2 of Notes to
Consolidated Financial Statements included herein. Under the most restrictive of
these provisions, the Company may not pay dividends (other than stock dividends)
or acquire its capital stock if after giving effect thereto the aggregate
amounts paid on or after June 1, 1991 exceed the sum of (i) $29,300,000 plus
(ii) 50% of Consolidated Net Income of the Company after June 1, 1991. At May
31, 1994, unrestricted consolidated retained earnings available for payment of
dividends and purchase of the Company's shares totalled approximately
$10,320,000. Effective June 1, 1994 unrestricted consolidated retained earnings
increased to $15,067,000 due to the inclusion of 50% of the Consolidated Net
Income of the Company for fiscal 1994.
The table below sets forth for each quarter of the fiscal year indicated the
reported high and low sales price of the Company's Common Stock on the New York
Stock Exchange and the amount of dividends declared.
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1993
------------------------------- ----------------------------
PER COMMON SHARE: MARKET PRICES MARKET PRICES
- - ---------------------------- -------------------- QUARTERLY ----------------- QUARTERLY
QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
- - ---------------------------- --------- --------- --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
First..................... 14 1/8 12 5/8 $.12 13 5/8 11 7/8 $.12
Second.................... 14 1/4 12 5/8 .12 12 1/2 11 1/8 .12
Third..................... 16 5/8 13 1/2 .12 12 7/8 11 .12
Fourth.................... 17 3/8 14 3/8 .12 14 5/8 11 5/8 .12
--------- ---------
$.48 $.48
--------- ---------
--------- ---------
</TABLE>
6
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ------------ ------------ ------------ ------------
(000'S OMITTED EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
- - ----------------------------------------------
Net sales................................... $407,754 $382,780 $422,657 $466,542 $444,875
Gross profit................................ 71,910 68,436 83,440 92,246 100,763
Operating income............................ 21,824 5,343(2) 20,730(3) 30,401(4) 46,851
Interest expense............................ 9,564 8,107 8,356 10,073 9,989
Income (loss) before provision (benefit) for
income taxes.............................. 13,684 (1,917)(2) 13,620(3) 21,351(4) 38,155
Net income.................................. 9,494 283(2) 10,020(3) 14,801(4) 25,655
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Per share data:
Net income................................ $ .60 $ .02(2) $ .63(3) $ .93(4) $ 1.60
Cash dividends............................ $ .48 $ .48 $ .48 $ .48 $ .47
Average common shares
outstanding............................. 15,904 15,855 15,895 15,952 16,053
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
FINANCIAL POSITION AT YEAR END:
- - ------------------------------------------------------------
Working capital............................. $240,009(1) $193,399 $197,246 $189,172 $184,932
Total assets................................ 417,626 365,151 395,351 379,958 388,521
Short-term debt............................. 568(1) 25,025 25,005 16,500 33,821
Long-term debt.............................. 115,729(1) 66,298 67,323 68,953 72,329
Total debt.................................. 116,297(1) 91,323 92,328 85,453 106,150
Stockholders' equity........................ 189,488 189,216 196,737 193,778 189,548
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Number of shares outstanding at end of
year...................................... 15,906 15,900 15,899 15,891 16,082
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Book value per share of common stock........ $ 11.91 $ 11.90 $ 12.37 $ 12.19 $ 11.79
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
<FN>
- - ------------------------
Notes:
(1) In October 1993, the Company sold $50,000,000 of unsecured 7.25% Notes due
October 15, 2003. Proceeds were used to repay short-term bank borrowings
and utilized in the Company's operations.
(2) Fiscal 1993 includes non-cash restructuring expenses of $11,000,000 (or
$7,200,000 after-tax) primarily related to the writedown of certain
inventories to reflect the impact of market conditions (See Note 11 of
Notes to Consolidated Financial Statements) and a reduction in income tax
expense of $1,200,000 (See Note 3 of Notes to Consolidated Financial
Statements).
(3) Fiscal 1992 includes expenses of $5,800,000 (or $3,800,000 after-tax)
related to the Company's restructuring of its Oklahoma City maintenance
subsidiary (See Note 11 of Notes to Consolidated Financial Statements) and
a reduction in income tax expense of $700,000 (See Note 3 of Notes to
Consolidated Financial Statements).
(4) Fiscal 1991 includes expenses of $3,300,000 (or $2,150,000 after-tax)
primarily related to the restructuring of the Oklahoma City maintenance
subsidiary and an airline customer bankruptcy.
</TABLE>
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company reports its activities in one business segment: Aviation
Services. The table below sets forth net sales for the Company's classes of
similar products and services within this segment for each of the last three
fiscal years ended May 31.
THREE-YEAR NET SALES SUMMARY
Any comparison of net sales for the last three fiscal years should be viewed
in light of the economic weakness of the aerospace/aviation industry during much
of this period. The Company believes that industry conditions have stabilized
and in certain respects improved toward the end of this time frame. Airlines, in
general, have recently experienced increased aircraft utilization, seen growth
in revenue passenger and freight miles and posted modest operating gains. The
Company continued to aggressively pursue market opportunities, resulting in
improved revenues in fiscal 1994.
A decline in sales of aviation fasteners, due to lower demand by
aerospace/aviation manufacturers, offset what otherwise would have been an
increase in trading sales during the three year period. Further affecting the
decline in fastener sales was the Company's election not to make significant new
investments in inventory for fastener programs with uncertain return potential
in a shrinking market. During this period the Company experienced an increase in
engine and airframe parts sales.
Fiscal 1994 overhaul sales increased from the prior year in part due to an
increase in maintenance services at the Company's Oklahoma City facility.
Additionally, sales of manufactured products increased in fiscal 1994 from the
prior year due primarily to sales to the U.S. government for the rapid
deployment program.
The Company believes it is well positioned to take advantage of available
opportunities in the improving aerospace/aviation industry.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
(000'S OMITTED)
Net Sales:
Trading........................................... $199,433 $202,464 $209,410
Overhaul.......................................... 112,100 102,382 115,250
Manufacturing..................................... 96,221 77,934 97,997
-------- -------- --------
$407,754 $382,780 $422,657
-------- -------- --------
-------- -------- --------
</TABLE>
FISCAL 1994 COMPARED WITH FISCAL 1993
The Company's operating results improved in fiscal 1994 despite the highly
competitive and economically weak aerospace/aviation market. Consolidated net
sales for fiscal 1994 increased $24,974,000 or 6.5% over the prior fiscal year
primarily as a result of increased manufacturing and overhaul sales. Net income
increased $9,211,000 over the prior year, which included restructuring expenses
of $11,000,000 ($7,200,000 after tax) related to the write-down of certain
inventories. Excluding restructuring expenses, net income increased $2,011,000
or 26.9% as the result of sales increases and reduced selling, general and
administrative costs.
Manufacturing sales increased $18,287,000 or 23.5%, primarily from the sale
of products to the U.S. government. Overhaul sales increased $9,718,000 or 9.5%
due to increased demand for maintenance services at the Oklahoma City facility
and increased sales of rotable landing gear inventory. Trading sales increased
in its primary products, such as airframe and engine parts;
8
<PAGE>
however, these gains were offset by reduced demand for aviation fasteners and
the Company's decision not to enter into fastener programs requiring significant
inventory investment with uncertain returns. These factors resulted in an
overall decline in trading sales of $3,031,000 or 1.5%.
Consolidated gross profit increased $3,474,000 or 5.1% over the prior year
primarily due to increased sales revenue. Fiscal 1994 consolidated gross profit
included $700,000 from a reduction in the interest rate on a nonrecourse
leveraged lease obligation negotiated by the Company, and $1,300,000 from
leveraged lease repricing required to adjust for tax rate differentials. The
consolidated gross profit margin was slightly lower than the prior year, down
from 17.9% to 17.6%. Trading and manufacturing margins improved year over year
while overhaul margins declined. The overhaul margin decline was due to
increased price competition resulting from maintenance overcapacity in the
industry and airlines using lower-cost serviceable replacement components in
preference to overhaul services.
Consolidated operating income increased $16,481,000 over the prior year.
Without the fiscal 1993 restructuring expenses of $11,000,000, operating income
increased $5,481,000 or 33.5% due primarily to the increased sales and a
reduction of $2,007,000 in selling, general and administrative costs. The
Company maintained its effort to contain costs, reduce nonessential spending and
create operating efficiencies wherever possible.
Consolidated net income increased $9,211,000 notwithstanding increased
interest expense of $1,457,000 due to higher fixed-rate interest on debt from
the issuance of $50 million of new 7.25% long-term notes issued in October,
1993. Proceeds from this fixed-rate debt repaid $28 million of short-term bank
borrowings at lower interest rates. Higher margins on fiscal 1994 export sales
reduced the effective tax rate, which also contributed to the net income
increase.
FISCAL 1993 COMPARED WITH FISCAL 1992
Consolidated net sales for fiscal 1993 decreased $39,877,000 or 9% from the
prior fiscal year. Net income decreased $9,737,000 or 97% as the result of the
sales decrease, restructuring expenses of $11,000,000 (or $7,200,000 after tax)
and a reduction in the consolidated gross profit margin. The operating results
of each major business activity in fiscal 1993 were adversely impacted by the
continued weak economic environment, particularly in the aerospace/aviation
market.
Trading activities benefitted from increased sales of its primary products,
such as airframe and engine parts. Even with these increases, trading sales
decreased $6,946,000 or 3%, primarily due to reduced demand for aviation
fasteners. The demand for fasteners decreased due to aerospace/aviation
manufacturers' reduced requirements caused by delays and cancellations of new
aircraft orders and government budget cuts affecting certain defense
contractors. The sales of overhaul services decreased $13,986,000 or 12%,
primarily as a result of lower demand and the effect of downsizing the Oklahoma
City maintenance facility. The lower demand was caused by airlines downsizing
their active fleets and focusing on lowering maintenance costs. The resulting
maintenance overcapacity increased competition which resulted in lower prices
and a Company decision not to compete for certain overhaul work. Also, airlines
used lower-cost serviceable components, abundant in the marketplace, in
preference to overhauling certain units. Simultaneously, the Company took steps
within its overhaul activities to reduce costs. Manufacturing sales decreased
$18,945,000, or 20%; however, it should be noted that fiscal 1992 included
$11,000,000 of non-recurring product sales for the Persian Gulf conflict. Sales
for the government's rapid deployment program increased during fiscal 1993 and
the order backlog was higher at the end of fiscal 1993 as compared to the same
period in fiscal 1992. Further, sales were reduced due to the reduction and
deferral of orders for commercial and military aircraft cargo systems
9
<PAGE>
and spare parts, and lower sales at the Company's floor maintenance equipment
unit due to a recession-induced decline in demand, intense competition and the
effect of converting to a direct distribution system in Europe.
Consolidated gross profit contribution decreased $15,004,000 or 18% from
fiscal 1992 due to a reduction in sales and a decrease in consolidated gross
profit margin from 19.7% to 17.9%. Lower production and sales levels in relation
to fixed costs at a few units, as well as increased competition, hampered the
margin; the Company's floor maintenance equipment unit was most affected
incurring a loss for the year. Following aggressive cost-reduction efforts and
an improvement in sales, operating performance significantly improved in the
third and fourth quarters. The consolidated gross profit margin benefitted from
sales of airframe and engine parts at margins consistent with the prior year and
the effect of cost reductions at the Oklahoma City maintenance facility. Cost
reductions implemented company wide during fiscal 1993 benefitted ongoing
operations.
The Company reduced selling, general and administrative expenses $4,817,000
or 8% in response to a decrease in sales and competitive market conditions. The
Company continued its focus on cost containment and improvement in operating
efficiencies in an effort to maintain its operating margins.
In February, 1993 the Company recorded noncash restructuring expenses of
$11,000,000 for the writedown of certain inventories and associated costs. The
inventories most affected were parts for older-model commercial aircraft,
certain manufactured products and material supporting original equipment
manufacturers. The writedown resulted from the Company's assessment of the
impact on inventories of then very recent changes in the aerospace/aviation
market, as well as the continued recessionary environment. The Company believes
the reduction in inventory value improved its competitive position and
facilitated sale of the inventories.
The income tax benefit of $2,200,000 reported in fiscal 1993 included an
expense reduction of $1,200,000 from the reversal of income tax liabilities. The
income tax benefit before the expense reduction was higher than that determined
using the statutory rate as the result of state income tax refunds and the
effect of tax benefits on exempt earnings from export sales. The provision for
income taxes in fiscal 1992 was lower than the amount computed using the
statutory Federal income tax rate due to tax benefits generated from export
sales and an income tax expense reduction of $700,000. The income tax expense
reductions were for income tax liabilities recorded in prior years, but no
longer required due to the conclusion by the Internal Revenue Service of its
examination of the Company's Federal income tax returns for prior years.
Fourth quarter fiscal 1993 sales decreased $8,009,000 or 7% as compared to
the same quarter of the prior year; however, net income increased $300,000.
Sales and earnings continued to be impacted by adverse market conditions. The
fourth quarter fiscal 1993 operating results improved from the third quarter
fiscal 1993 as the result of a 22% increase in consolidated sales and lower
operating costs. Fiscal 1992's fourth quarter operating results included
restructuring expenses of $5,800,000, or $3,800,000 after tax, related to the
Oklahoma City maintenance facility.
FISCAL 1992
Consolidated net sales decreased $43,885,000 or 9% primarily as a result of
a cessation of shipments of manufactured logistics support products for the
Allied Coalition in the Persian Gulf conflict and reduced sales at the Company's
Oklahoma City maintenance facility amounting to $53,000,000 in the prior year.
These reductions were partially mitigated by increases in certain trading and
overhaul activities stemming from the provisioning of transitioned aircraft,
maintenance part activities, and component overhaul activities, despite the
difficult economic environment and airline customer's curtailment of
nonessential spending.
10
<PAGE>
Consolidated operating income decreased $9,671,000 primarily due to the
reductions in consolidated net sales described above and restructuring expenses
of $5,800,000 recorded for restructuring and reduction in size of the Company's
Oklahoma City maintenance facility. The reduction in the overhaul subsidiary
resulted from continued operating losses being experienced by an industry-wide
overcapacity for certain maintenance services, which led to facility and
workforce underutilization.
Consolidated net income decreased $4,781,000 as a result of the events
impacting consolidated net sales and the restructuring expenses previously
described. The impact of these events were moderated by interest expense savings
attributed to a decline in short-term interest rates and a lower provision for
income taxes resulting from tax benefits generated from export sales and a
reduction of previously recorded tax liabilities no longer required due to the
conclusion by the Internal Revenue Service of its examination of previous years
Federal income tax returns of the Company.
FINANCIAL CONDITION
AT MAY 31, 1994 COMPARED WITH MAY 31, 1993
In fiscal 1994, the Company's primary sources of liquidity were the proceeds
of $50,000,000 from the issuance of 7.25% unsecured ten-year notes in October,
1993 and cash provided from operations of $6,697,000. The proceeds from the
issuance of the notes were used to repay all outstanding short-term bank debt,
thus making available to the Company the full amount of its credit lines and
borrowing facilities. The balance of the note proceeds were used for working
capital requirements, primarily inventory and accounts receivable. Net cash
provided from operating activities decreased $10,109,000 in fiscal 1994 from the
prior year as a result of new inventory investments to support government
contracts and deposits made on purchases of inventory (see note 7 in Notes to
Consolidated Financial Statements) to support new inventory provisioning
contracts entered into during fiscal 1994. Cash provided in excess of these
requirements was used primarily for capital expenditures and to pay dividends.
The Company's financial condition remains solid. The Company improved its
current ratio and working capital position during the year in spite of operating
in an aerospace/aviation industry that continued to be financially troubled
although improving. The Company's improved financial condition and available
sources of financing, including its unused bank credit lines and facilities
amounting to $132,500,000, will enable the Company to meet its anticipated
working capital requirements and pursue advantageous business opportunities.
A summary of key indicators of financial condition and lines of credit
follows:
<TABLE>
<CAPTION>
MAY 31,
------------------
DESCRIPTION 1994 1993
- - ------------------------------------------------------------ -------- --------
<S> <C> <C>
(000'S OMITTED)
Working capital............................................. $240,009 $193,399
Current ratio............................................... 4.5:1 3.7:1
Bank credit lines:
Borrowings outstanding.................................... $ -- $ 24,000
Available but unused lines................................ 132,500 103,700
-------- --------
Total credit lines.............................. $132,500 $127,700
-------- --------
-------- --------
Long-term debt, less current maturities..................... $115,729 $ 66,298
Ratio of long-term debt to capitalization................... 37.9% 25.9%
</TABLE>
11
<PAGE>
The Company has a shelf registration statement on file with the Securities
and Exchange Commission for $85,000,000 of medium or long-term debt securities,
which it may issue at its discretion and subject to market conditions.
EFFECTS OF INFLATION
The Company believes that results of operations for the periods reported
were not materially affected by inflation.
12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF AAR CORP.:
We have audited the accompanying consolidated balance sheets of AAR CORP.
and subsidiaries as of May 31, 1994 and 1993 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended May 31, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AAR CORP.
and subsidiaries as of May 31, 1994 and 1993 and the results of their operations
and their cash flows for each of the years in the three-year period ended May
31, 1994, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 3 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR
INCOME TAXES, as of June 1, 1993. As discussed in Notes 1 and 6 to the
consolidated financial statements, the Company also adopted the provisions of
the Financial Accounting Standards Board's SFAS No. 106, EMPLOYERS' ACCOUNTING
FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, as of June 1, 1993.
KPMG Peat Marwick LLP
Chicago, Illinois
July 1, 1994
13
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------
1994 1993 1992
-------- -------- --------
(000'S OMITTED EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net sales.......................................................... $407,754 $382,780 $422,657
-------- -------- --------
Costs and operating expenses:
Cost of sales.................................................... 335,844 314,344 339,217
Selling, general and administrative.............................. 50,086 52,093 56,910
Restructuring expenses (Note 11)................................. -- 11,000 5,800
-------- -------- --------
385,930 377,437 401,927
-------- -------- --------
Operating income................................................... 21,824 5,343 20,730
Interest expense (Note 2).......................................... (9,564) (8,107) (8,356)
Interest income (Note 3)........................................... 1,424 847 1,246
-------- -------- --------
Income (loss) before provision (benefit) for income taxes.......... 13,684 (1,917) 13,620
Provision (benefit) for income taxes (Notes 1 and 3)............... 4,200 (2,200) 3,600
-------- -------- --------
Income before cumulative effects of changes in
accounting principles............................................ 9,484 283 10,020
Cumulative effects of changes in accounting
principles:
Income taxes................................................. 900 -- --
Postretirement health care benefits, net of tax.............. (890) -- --
-------- -------- --------
Net income......................................................... $ 9,494 $ 283 $ 10,020
-------- -------- --------
-------- -------- --------
Net income per share of common stock (Note 5):
Income before cumulative effects of changes in accounting
principles..................................................... $ .60 $ .02 $ .63
Cumulative effects of changes in accounting
principles:
Income taxes................................................. .06 -- --
Postretirement health care benefits, net of tax.............. (.06) -- --
-------- -------- --------
Net income......................................................... $ .60 $ .02 $ .63
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
14
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
($000'S OMITTED)
<TABLE>
<CAPTION>
MAY 31,
------------------
1994 1993
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1)................................................ $ 18,074 $ 2,255
Accounts receivable, less allowances of $2,000
at each date (Note 13).......................................................... 85,947 68,849
Inventories (Notes 1 and 13)...................................................... 146,039 139,432
Equipment on or available for short-term lease (Note 1)........................... 28,881 33,104
Prepaid income taxes, deposits and other (Notes 1, 3 and 7)....................... 28,782 21,396
-------- --------
Total current assets.................................................... 307,723 265,036
-------- --------
Property, plant and equipment, at cost (Notes 1 and 9):
Land.............................................................................. 3,088 3,088
Buildings and improvements........................................................ 34,477 33,910
Equipment, furniture and fixtures................................................. 84,536 81,587
-------- --------
122,101 118,585
Accumulated depreciation (Note 10)................................................ (67,318) (62,533)
-------- --------
54,783 56,052
-------- --------
Other assets:
Investment in leveraged leases (Notes 1 and 12)................................... 32,618 30,210
Cost in excess of underlying net assets
of acquired companies (Note 1).................................................. 6,313 6,571
Prepaid income taxes, retirement benefits, notes receivable and other (Notes 3, 6
and 12)......................................................................... 16,189 7,282
-------- --------
55,120 44,063
-------- --------
$417,626 $365,151
-------- --------
-------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
15
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(000'S OMITTED)
<TABLE>
<CAPTION>
MAY 31,
------------------
1994 1993
-------- --------
<S> <C> <C>
Current liabilities:
Bank loans and current maturities of long-term debt (Note 2)...................... $ 568 $ 25,025
Accounts payable.................................................................. 49,599 32,525
Accrued liabilities............................................................... 13,312 11,693
Accrued taxes on income (Notes 1 and 3)........................................... 4,235 2,394
-------- --------
Total current liabilities............................................... 67,714 71,637
-------- --------
Long-term debt, less current maturities (Note 2).................................... 115,729 66,298
Deferred income taxes (Notes 1, 3 and 12)........................................... 39,000 38,000
Retirement benefit obligation and other deferred credits (Note 6)................... 5,695 --
-------- --------
160,424 104,298
-------- --------
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 250 shares; none issued.............. -- --
Common stock, $1.00 par value, authorized 80,000 shares; issued 16,215 and 16,205
shares at respective dates (Note 4)............................................. 16,215 16,205
Capital surplus................................................................... 81,296 81,172
Retained earnings (Note 2)........................................................ 99,496 97,637
Treasury stock, 309 and 304 shares at respective dates, at cost (Note 4).......... (3,556) (3,490)
Cumulative translation adjustments (Note 1)....................................... (2,963) (2,308)
Minimum pension liability (Note 6)................................................ (1,000) --
-------- --------
189,488 189,216
-------- --------
$417,626 $365,151