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-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: [email protected]
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<SEC-DOCUMENT>0000912057-96-018355.txt : 19960928
<SEC-HEADER>0000912057-96-018355.hdr.sgml : 19960928
ACCESSION NUMBER: 0000912057-96-018355
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 19960531
FILED AS OF DATE: 19960820
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: AAR CORP
CENTRAL INDEX KEY: 0000001750
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080]
IRS NUMBER: 362334820
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0531
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-06263
FILM NUMBER: 96617988
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
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<DESCRIPTION>10-K405
<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, 1996 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 (847) 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 July 31, 1996, the aggregate market value of the Registrant's voting
stock held by nonaffiliates was approximately $284,855,000. 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 July 31, 1996, there were 15,953,817 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 9, 1996, 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................................................................................... 4
Item 3. Legal Proceedings............................................................................ 4
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 5
Executive Officers of the Registrant......................................................... 5
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.................................................................................... 6
Item 6. Selected Financial Data...................................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................... 8
Item 8. Financial Statements and Supplementary Data.................................................. 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 33
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 34
Item 11. Executive Compensation....................................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 34
Item 13. Certain Relationships and Related Transactions............................................... 34
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K...................................... 35
SIGNATURES.................................................................................................. 36
</TABLE>
1
<PAGE>
PART I
ITEM 1. BUSINESS (IN THOUSANDS, EXCEPT PERCENTAGE AND EMPLOYEE DATA)
AAR CORP. and its subsidiaries are referred to herein collectively as 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, aviation original equipment manufacturers,
aircraft leasing companies, domestic and foreign military organizations and
independent aviation support companies are the principal customers for the
Company's 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
highly competitive worldwide aviation aftermarket. 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, there has been an increase in
demand for aviation aftermarket products and services. Previously, global
commercial aviation had experienced significant financial losses from reduced
traffic demands and increased costs. Airlines curtailed purchases and reduced
or, in some cases, ceased operations, leading to a decline in demand for
aviation aftermarket products and services during the early 1990s. This decline
in demand was exacerbated by the availability of parts from grounded aircraft,
excess airline inventories and material from airlines that ceased operations.
2
<PAGE>
Demand improved during this three-year period as many airlines worldwide
experienced increased revenue passenger and freight miles, increased aircraft
fleet utilization, improved financial stability and, in some cases, infusions of
new capital or financial restructurings. During this period of improvement,
start-up airlines emerged in niche markets, recorded operating earnings and, in
some instances, expanded operations. The improvement in the operating results of
many airlines worldwide stem from increased traffic demands, internal cost
controls and from outsourcing certain support activities to third-party
providers to achieve greater operational efficiencies. Additionally, the supply
of surplus aircraft and parts inventories that increased during the industry
downturn in the early 1990s has been absorbed at a faster rate due to the
increased utilization by air carriers worldwide of aircraft fleets and
conversion of aircraft from passenger to the more rapidly growing cargo and
small package delivery market.
Aerospace and defense manufacturers also experienced lower demand during the
beginning of this three-year period as orders for new aircraft were reduced or
canceled. While manufacturers' orderbooks have not yet achieved the level of new
aircraft orders experienced in the late 1980s, increased orders for new aircraft
have been received from a growing number of aircraft leasing companies and
airlines worldwide. Certain manufacturers have responded to these increases by
announcing expanded production of aircraft. Also during the beginning of this
period, government budget cuts resulted in a downsizing and restructuring of the
United States military. While this adversely affected the aerospace/aviation
industry, the military continued to require products to support ongoing rapid
deployment requirements and services previously performed within the military to
meet their strategic objectives.
The Company competes with independent aviation aftermarket distributors and
support facilities, as well as airlines and aerospace/aviation original
equipment manufacturers. 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. The Company believes it has maintained a satisfactory
competitive position and a strong financial base.
In addition to its aviation-related activities, the Company manufactures
highly engineered proprietary products, including industrial floor cleaning
machines 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, 1996, backlog believed to be firm was approximately $86,061
compared to $79,407 at May 31, 1995. An additional $55,463 of unfunded
government options on awarded contracts also existed at May 31, 1996. Of the
1996 year-end backlog that is firm, $17,339 is attributable to contracts for
products with the U.S. Government. It is expected that approximately $82,833 of
the backlog will be shipped in fiscal 1997.
Sales to the United States Government, its agencies and its contractors were
approximately $92,362 (18.3% of total net sales), $82,708 (18.3% of total net
sales) and $77,500 (19.0% of total net sales) in fiscal years 1996, 1995 and
1994, 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
3
<PAGE>
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, 1996, the Company employed approximately 2,140 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 Financial Condition and Results of Operations." For
information concerning export sales, see "Business Segment Information" in Note
9 of Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES
Aviation trading activities are conducted from three buildings in Elk Grove
Village, Illinois, two owned by the Company and the third is leased. 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 leased in Cerritos, California and
Hawthorne, New York for the purpose of aviation hardware distribution and in
Hamburg and Hannover, Germany and Nantgarw, Wales for the purpose of aviation
parts distribution.
Aviation overhaul facilities are located in The Netherlands near Schiphol
International Airport (in a building owned by the Company); Garden City, New
York (in a building owned by the Company); Frankfort, New York (subject to an
industrial revenue bond lease to the Company until 2001, at which time the
Company expects to purchase the facility for a nominal consideration); Windsor,
Connecticut (in a building owned by the Company); Miami, Florida (in leased
facilities near the airport); Singapore (in leased facilities near the airport);
London, England (in leased facilities) and Oklahoma City, Oklahoma (in
facilities leased from airport authorities). The Company's experience indicates
that lease renewal is available on reasonable terms consistent with its business
needs.
The Company's principal manufacturing activities are conducted at owned
facilities in Port Jervis, New York, and Cadillac and Livonia, Michigan and a
plant located in Aberdeen, North Carolina (subject to an expired industrial
revenue bond lease to the Company which provided for the Company to purchase the
facility for a nominal consideration).
ITEM 3. LEGAL PROCEEDINGS
A subsidiary of the Company has negotiated a settlement in principle
resolving an enforcement action brought on behalf of the United States
Environmental Protection Agency ("EPA") in the U.S. District Court for the
Western District of Michigan in January, 1996, alleging violations of the Clean
Air Act relating to exceeding volatile organic compound emission rates under a
permit issued to the subsidiary by the Michigan Department of Natural Resources.
The EPA had previously issued a Notice of Proposed Civil Penalty for the alleged
violations in the amount of $600,000. The settlement provides for dismissal of
the alleged violations without admission of wrong doing and for the payment of
approximately $200,000 by the subsidiary.
Except as otherwise set forth in this Item 3 the Company is not a party to
any pending material, governmental or environmental legal proceedings other than
routine litigation incidental to its business.
4
<PAGE>
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............................... 65 Chairman of the Board and Chief Executive Officer; Director
David P. Storch.............................. 43 President and Chief Operating Officer; Director
Philip C. Slapke............................. 43 Vice President-Engine Group
Howard A. Pulsifer........................... 53 Vice President; General Counsel; Secretary
Timothy J. Romenesko......................... 39 Vice President; Chief Financial Officer; Treasurer
</TABLE>
The term of each of the current executive officers of the Company expires on
October 9, 1996, the date of the Annual Meeting of the Board of Directors, which
will be held immediately after the 1996 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 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 1997 Annual Meeting. Mr. Storch is Mr. Eichner's son-in-law.
Mr. Slapke was elected Vice President of the Company in July 1994. He is
also President of a major subsidiary, a position he has held since July, 1989.
He has been with the Company in various positions since 1982.
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.
Mr. Romenesko was elected Vice President in January, 1994 and Chief
Financial Officer and Treasurer in December, 1994. He had served as Controller
of the Company from 1991 to 1995 and has been with the Company in various
positions since 1981.
On July 9, 1996, the Board of Directors selected Mr. Storch to succeed Mr.
Eichner as Chief Executive Officer of the Company; the selection becomes
effective at the Company's Annual Meeting of Stockholders October 9, 1996. Mr.
Eichner will remain Chairman of the Board.
5
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS (IN THOUSANDS, EXCEPT PER SHARE, PERCENTAGE DATA AND
NUMBER OF STOCKHOLDERS)
The Company's Common Stock is traded on the New York Stock Exchange and the
Chicago Stock Exchange. On June 30, 1996, there were approximately 11,500
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, 1995 exceed the sum of (i) $25,000 plus (ii)
50% of Consolidated Net Income of the Company after June 1, 1995. At May 31,
1996, unrestricted consolidated retained earnings available for payment of
dividends and purchase of the Company's shares totalled approximately $15,772.
Effective June 1, 1996 unrestricted consolidated retained earnings increased to
$23,778 due to inclusion of 50% of Consolidated Net Income of the Company for
fiscal 1996.
The table below sets forth for each quarter of the fiscal year indicated the
reported high and low market prices of the Company's Common Stock on the New
York Stock Exchange and the quarterly dividends declared.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1995
----------------------------------- -----------------------------------
PER COMMON SHARE: MARKET PRICES MARKET PRICES
- ------------------------ ---------------------- QUARTERLY ---------------------- QUARTERLY
QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
- ------------------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
First................. 17 7/8 14 7/8 $ .12 15 1/8 13 3/8 $ .12
Second................ 19 16 3/4 .12 13 1/2 12 .12
Third................. 22 18 1/2 .12 14 1/8 12 1/2 .12
Fourth................ 23 5/8 19 1/2 .12 15 1/4 12 1/8 .12
--------- ---------
$ .48 $ .48
--------- ---------
--------- ---------
</TABLE>
6
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
- ----------------------------------------------
Net sales................................... $504,990 $451,395 $407,754 $382,780 $422,657
Gross profit................................ 90,765 77,871 71,910 68,436 83,440
Operating income............................ 32,442 24,438 21,824 5,343(3) 20,730(4)
Interest expense............................ 10,616 10,900 9,564 8,107 8,356
Income (loss) before provision (benefit) for
income taxes.............................. 22,782 14,713 13,684 (1,917)(3) 13,620(4)
Net income.................................. 16,012 10,463 9,494 283(3) 10,020(4)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Per share data:
Net income................................ $ 1.00 $ .66 $ .60 $ .02(3) $ .63(4)
Cash dividends............................ $ .48 $ .48 $ .48 $ .48 $ .48
Average common shares
outstanding............................. 15,978 15,932 15,904 15,855 15,895
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
FINANCIAL POSITION AT YEAR END:
- ---------------------------------------------------------
Working capital............................. $258,627 $248,492 $240,009(2) $193,399 $197,246
Total assets................................ 437,846 425,814 411,016(1) 365,151 395,351
Short-term debt............................. 1,474 1,632 568(2) 25,025 25,005
Long-term debt.............................. 118,292 119,766 115,729(2) 66,298 67,323
Total debt.................................. 119,766 121,398 116,297(2) 91,323 92,328
Stockholders' equity........................ 204,635 197,119 189,488 189,216 196,737
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Number of shares outstanding at end of
year...................................... 15,998 15,961 15,906 15,900 15,899
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Book value per share of common stock........ $ 12.79 $ 12.35 $ 11.91 $ 11.90 $ 12.37
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
Notes:
(1) Reflects reclassification of $6,610 of noncurrent deferred tax assets
against noncurrent deferred tax liabilities to conform to the fiscal 1995
presentation.
(2) In October 1993, the Company sold $50,000 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.
(3) Fiscal 1993 includes noncash restructuring expenses of $11,000 ($7,200
after tax) primarily related to the writedown of certain inventories to
reflect the impact of market conditions and a reduction in income tax
expense of $1,200.
(4) Fiscal 1992 includes expenses of $5,800 ($3,800 after tax) related to the
Company's restructuring of its Oklahoma City maintenance subsidiary and a
reduction in income tax expense of $700.
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
RESULTS OF OPERATIONS
The Company reports its activities in one business segment: Aviation
Services. The table below sets forth net sales for the Company's classes of
similar products and services within this segment for each of the last three
fiscal years ended May 31.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales:
Trading...................................................... $ 259,702 $ 236,723 $ 208,561
Overhaul..................................................... 133,587 108,737 102,972
Manufacturing................................................ 111,701 105,935 96,221
----------- ----------- -----------
$ 504,990 $ 451,395 $ 407,754
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THREE-YEAR NET SALES SUMMARY
The comparison of net sales of the Company over the last three fiscal years
covers a period of relatively strong general economic conditions and improving
conditions in the aerospace/aviation industry. Airlines continue to improve
their overall financial condition which was weakened due to an extended period
of operating losses during the early 1990s. Airlines continue to experience
increased fleet utilization and higher revenue passenger and freight miles which
are contributing to improved operating earnings. Airlines' operating earnings
are also being positively affected by their aggressive initiatives to control
costs through restructuring operations, exiting unprofitable routes and by
outsourcing certain support activities to outside providers. Start-up airlines,
which emerged in niche markets during the beginning of this period, are
recording higher operating earnings and, in many instances, are expanding
operations. Supplies of surplus aircraft and parts inventories that increased
during the industry downturn in the early 1990s are now being absorbed at a
faster rate due to increased aircraft utilization and conversion of aircraft to
alternate uses, such as cargo capabilities.
In fiscal 1996 and 1995, the Company's revenues benefited from the
aggressive pursuit of market opportunities in the improving aerospace/aviation
industry. The Company's trading sales of airframe and large component parts
increased, as did sales from inventory management programs and inventory
provisioning for air carriers. Sales of certain airframe and large airframe
component overhaul services, as well as commercial cargo systems, were also
higher in fiscal 1996 and 1995.
The U.S. military continues to downsize as a result of government budget
cuts. While this downsizing adversely affected the aerospace/aviation industry
generally, the military continues to require products to support ongoing rapid
deployment requirements and services previously performed within the military.
The Company's response to these changes has resulted in increased sales of
manufactured products. The Company's sales of overhaul services also benefited
from government outsourcing of certain activities previously performed within
the military. Sales of the Company's floor maintenance products were also
higher, reflecting the Company's aggressive pursuit of business opportunities in
the marketplace.
The Company believes that its established market position, its ability to
respond to changes in the industry and its diverse customer base coupled with
continued improvement in the aerospace/aviation industry, positions the Company
to take advantage of opportunities in improving markets.
8
<PAGE>
FISCAL 1996 COMPARED WITH FISCAL 1995
The Company's operating results continued to improve in fiscal 1996 as it
took advantage of business opportunities available in the improved
aerospace/aviation marketplace and as the Company successfully implemented
certain strategic marketing initiatives. Consolidated net sales for fiscal 1996
increased $53,595 or 11.9% over the prior fiscal year due to increased sales
across all classes of similar products and services. Consolidated operating
income increased $8,004 or 32.8% over the prior year due to increased
consolidated net sales and a higher consolidated gross profit margin partially
offset by increased selling, general and administrative costs. Net income
increased $5,549 or 53% over the prior year primarily due to increased
consolidated net sales and gross profit margin.
Trading sales increased $22,979 or 9.7% over the prior year as a result of
increased sales of aircraft, airframe and large component parts, which included
sales from inventory management programs and inventory provisioning for air
carriers. Overhaul sales increased $24,850 or 22.9% primarily as a result of
airframe and large airframe component overhaul services, supplemented by other
airframe component overhaul services. Manufacturing sales increased $5,766 or
5.4% over the prior year primarily due to increased sales of products and
product repair services supporting rapid deployment requirements, aircraft cargo
systems and floor maintenance equipment, partially offset by a decline from the
disposition of small manufactured product lines since the prior-year period.
Consolidated gross profit increased $12,894 or 16.6% over the prior fiscal
year due to increased consolidated net sales and an improved gross profit margin
of 18.0% versus the prior year's 17.3% margin. The margin on principal trading
and overhaul products and services improved over the prior year as a result of
favorable product mix and improved pricing of certain products and services. The
margin on manufactured products declined slightly as a result of the mix of
products and product repair services supporting rapid deployment requirements
partially offset by aircraft cargo systems and floor maintenance equipment.
Consolidated operating income increased $8,004 or 32.8% over the prior year
as a result of increased consolidated net sales and gross profit margin
partially offset by increased total selling, general and administrative costs.
While selling, general and administrative costs declined as a percentage of
sales, the total costs increased over the prior year as a result of increased
personnel costs, increased marketing support programs and costs to enhance
information technology systems.
Consolidated net income increased $5,549 or 53.0% over the prior fiscal year
primarily as a result of the increased consolidated net sales and improved
consolidated gross profit margin. Net income also increased by a reduction in
interest expense resulting from substantially lower short-term borrowings during
the current year partially offset by a small increase in the Company's current
year effective tax rate.
FISCAL 1995 COMPARED WITH FISCAL 1994
The Company's operating results continued to improve in fiscal 1995 building
on improvements in the prior year. Consolidated net sales for fiscal 1995
increased $43,641 or 10.7% over the prior fiscal year primarily due to increased
sales of major products within each of the classes of similar products and
services. Operating income increased $2,614 or 11.9% over the prior year due to
increased consolidated net sales partially offset by a slightly lower
consolidated gross profit margin and increased total selling, general and
administrative costs. Net income increased $969 or 10.2% primarily due to
increased consolidated net sales partially offset by the factors described above
and increased interest expense on additional borrowings and higher interest
rates, primarily resulting from the sale of $50,000 of 10 year, 7.25% notes in
October 1993.
Trading sales increased $28,162 or 13.5% primarily as a result of increased
sales of airframe and large component parts as well as sales resulting from
inventory management programs and inventory provisioning of start-up airlines.
Overhaul sales increased $5,765 or 5.6% primarily as
9
<PAGE>
a result of increased airframe and airframe component overhaul services
partially offset by reduced sales of large component overhaul services.
Manufacturing sales increased $9,714 or 10.1% primarily due to the sale of
manufactured commercial cargo systems, products and product repairs supporting
the United States Government's rapid deployment program and floor maintenance
products.
Consolidated gross profit increased $5,961 or 8.3% over the prior fiscal
year due to increased consolidated net sales, although the consolidated gross
profit margin of 17.3% was lower than the prior year's 17.6% gross profit
margin. However, the prior fiscal year included $700 from a reduction in the
interest rate on a nonrecourse leveraged lease obligation and $1,300 from
leveraged lease repricing required to adjust for tax rate differentials. The
margin on manufactured products and principal trading products increased year
over year. Overhaul margins declined over the prior year primarily as a result
of changes in the mix of labor and parts provided in overhaul services and
highly competitive pricing on overhaul business.
Consolidated operating income increased $2,614 or 11.9% over the prior year
due to increased consolidated net sales partially offset by the consolidated
margin decline described above and increased selling, general and administrative
costs which declined as a percentage of net sales.
Consolidated net income increased $969 or 10.2% over the prior year due to
the increased consolidated net sales partially offset by the factors described
above and increased interest expense.
FISCAL 1994
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 or 6.5% over the prior fiscal year
primarily as a result of increased manufacturing and overhaul sales. Net income
increased $9,211 over the prior year which included restructuring expenses of
$11,000 ($7,200 after tax) related to the writedown of certain inventories.
Excluding restructuring expenses, net income increased $2,011 or 26.9% as the
result of sales increases and reduced selling, general and administrative costs.
Manufacturing sales increased $18,287 or 23.5%, primarily from the sale of
products to the U.S. Government. Overhaul sales increased $10,082 or 10.9% 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; 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 $3,395 or 1.6%.
Consolidated gross profit increased $3,474 or 5.1% over the prior year
primarily due to increased consolidated sales. Fiscal 1994 consolidated gross
profit included $700 from a reduction in the interest rate on a nonrecourse
leveraged lease obligation negotiated by the Company, and $1,300 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 over the prior year. Without
the fiscal 1993 restructuring expenses of $11,000, operating income increased
$5,481 or 33.5% due primarily to the increased sales and a reduction of $2,007
in selling, general and administative costs. The Company maintained its effort
to contain costs, reduce nonessential spending and create operating efficiencies
wherever possible.
10
<PAGE>
Consolidated net income increased $9,211 notwithstanding increased interest
expense of $1,457 due to higher fixed-rate interest on debt from the issuance of
$50,000 of new 7.25% long-term notes issued in October, 1993. Proceeds from this
fixed-rate debt repaid $28,000 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.
FINANCIAL CONDITION
AT MAY 31, 1996 COMPARED WITH MAY 31, 1995
In fiscal 1996 the Company generated $24,760 of cash from operations. This
represents a $9,505 or 62.3% increase in cash generated from operations over the
prior year. The increase was generated primarily through increased earnings and
working capital management. The Company's cash and cash equivalents increased
$11,119 or 49.4% over the prior year after making capital expenditures of $7,547
and paying dividends of $7,676 during fiscal 1996.
The Company further strengthened its financial position during fiscal 1996
by generating additional working capital of $10,135, utilizing minimal
short-term borrowings during the year and reducing its long-term debt to
capitalization ratio to 36.6%. The Company continues to maintain its available
external sources of financing from $132,977 of unused available bank lines and a
shelf registration on file with the Securities and Exchange Commission for
$85,000 of medium or long-term debt securities which it may issue at its
discretion subject to market conditions. Subsequent to the fiscal 1996 year end
the Company acquired a new headquarters and operating facility for $11,650. This
facility will consolidate and replace certain facilities currently operated by
the Company and will be financed with either internally generated funds, credit
sources currently in place or credit sources obtained for the purpose of the
acquisition. If credit sources are used to finance the new facility, a
significant portion would be repaid from proceeds of the sale of vacated
facilities and any balance remaining would be repaid from internally generated
funds.
The Company believes that its cash and cash equivalents and available
sources of financing will continue to give the Company the ability to meet its
ongoing working capital requirements, make anticipated capital expenditures,
meet contractual commitments, pay dividends, and pursue favorable business
opportunities.
A summary of key indicators of financial condition and lines of credit
follows:
<TABLE>
<CAPTION>
MAY 31,
------------------
DESCRIPTION 1996 1995
- ------------------------------------------------------------ -------- --------
<S> <C> <C>
Working capital............................................. $258,627 $248,492
Current ratio............................................... 4.3:1 4.4:1
Bank credit lines:
Borrowings outstanding.................................... $ -- $ --
Available but unused lines................................ 132,977 133,750
-------- --------
Total credit lines.......................................... $132,977 $133,750
-------- --------
-------- --------
Long-term debt, less current maturities..................... $118,292 $119,766
Ratio of long-term debt to capitalization................... 36.6% 37.8%
</TABLE>
EFFECTS OF INFLATION
The Company believes that results of operations for the periods reported
were not materially affected by inflation.
11
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF AAR CORP.:
We have audited the accompanying consolidated balance sheets of AAR CORP.
and subsidiaries as of May 31, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 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"
and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" as of June 1, 1993.
KPMG Peat Marwick LLP
Chicago, Illinois
June 28, 1996
12
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------
1996 1995 1994
-------- -------- --------
(000S OMITTED EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net sales.......................................................... $504,990 $451,395 $407,754
-------- -------- --------
Costs and operating expenses:
Cost of sales.................................................... 414,225 373,524 335,844
Selling, general and administrative.............................. 58,323 53,433 50,086
-------- -------- --------
472,548 426,957 385,930
-------- -------- --------
Operating income................................................... 32,442 24,438 21,824
Interest expense................................................... (10,616) (10,900) (9,564)
Interest income.................................................... 956 1,175 1,424
-------- -------- --------
Income before provision for income taxes........................... 22,782 14,713 13,684
Provision for income taxes......................................... 6,770 4,250 4,200
-------- -------- --------
Income before cumulative effects of changes in
accounting principles............................................ 16,012 10,463 9,484
Cumulative effects of changes in accounting
principles:
Income taxes................................................. -- -- 900
Postretirement health care benefits, net of tax.............. -- -- (890)
-------- -------- --------
Net income......................................................... $ 16,012 $ 10,463 $ 9,494
-------- -------- --------
-------- -------- --------
Net income per share of common stock:
Income before cumulative effects of changes in accounting
principles..................................................... $ 1.00 $ .66 $ .60
Cumulative effects of changes in accounting
principles:
Income taxes................................................... -- -- .06
Postretirement health care benefits, net of tax................ -- -- (.06)
-------- -------- --------
Net income......................................................... $ 1.00 $ .66 $ .60
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
13
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MAY 31,
------------------
1996 1995
-------- --------
(000S OMITTED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 33,606 $ 22,487
Accounts receivable, less allowances of $2,490 and $2,400, respectively........... 107,138 110,420
Inventories....................................................................... 138,200 139,407
Equipment on or available for short-term lease.................................... 36,884 30,921
Deferred tax assets, deposits and other........................................... 22,184 18,397
-------- --------
Total current assets................................................................ 338,012 321,632
-------- --------
Property, plant and equipment, at cost:
Land.............................................................................. 3,095 3,101
Buildings and improvements........................................................ 36,748 36,227
Equipment, furniture and fixtures................................................. 89,647 88,872
-------- --------
129,490 128,200
Accumulated depreciation............................................................ (74,659) (71,604)
-------- --------
54,831 56,596
-------- --------
Other assets:
Investment in leveraged leases.................................................... 30,905 31,952
Cost in excess of underlying net assets
of acquired companies........................................................... 5,842 6,101
Retirement benefits, notes receivable and other................................... 8,256 9,533
-------- --------
45,003 47,586
-------- --------
$437,846 $425,814
-------- --------
-------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
14
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MAY 31,
------------------
1996 1995
-------- --------
(000S OMITTED)
<S> <C> <C>
Current liabilities: