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.
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
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.
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.
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.
ITEM 4.
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:
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.
PART II
ITEM 5.
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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
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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.
ITEM 7.
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.
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.
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
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.
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:
EFFECTS OF INFLATION
The Company believes that results of operations for the periods reported were not materially affected by inflation.
ITEM 8.
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
AAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes to consolidated financial statements are an integral part of these statements.
AAR CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS
The accompanying notes to consolidated financial statements are an integral part of these statements.
AAR CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
The accompanying notes to consolidated financial statements are an integral part of these statements.
AAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED MAY 31, 1996
The accompanying notes to consolidated financial statements are an integral part of these statements.
AAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes to consolidated financial statements are an integral part of these statements.
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS
AAR CORP. supplies a variety of products and services to the aerospace/aviation industry in the United States and abroad. Products and services are sold primarily to commercial domestic and foreign airlines, business aircraft operators, aviation original equipment manufacturers, aircraft leasing companies, domestic and foreign military organizations and independent aviation support companies.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany accounts and transactions.
REVENUE RECOGNITION
Sales and related cost of sales are recognized primarily upon shipment of products and performance of services. Sales and related cost of sales on long-term contracts are recognized as units are delivered, determined by the percentage of completion method based on the relationship of costs incurred to date to estimated total costs under the respective contracts. Lease revenue is recognized as earned.
ACCOUNTING CHANGES
Effective June 1, 1993 the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes." Prior years' results were not restated. The cumulative effect of the accounting change was a tax benefit of $900 ($.06 per share) recorded in the three-month period ended August 31, 1993. The adoption of SFAS No. 109 changes the Company's method of accounting for income taxes from the deferred method of Accounting Principles Board Opinion ("APB") No. 11 to the asset and liability method of accounting.
Effective June 1, 1993 the Company adopted SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions." Prior years' results were not restated. SFAS No. 106 requires that the projected future cost of nonpension postretirement benefits be recognized as an expense as employees render services instead of when claims are incurred, as the Company had done in the past. Upon adoption, the Company elected, as permitted under SFAS No. 106, to record a one-time transition obligation of $1,350 ($890 after tax or $.06 per share) which represents that portion of future retiree benefit costs related to service already rendered by both active and retired employees up to the date of adoption. The initial accumulated postretirement benefit obligation of $1,350 primarily represented health and life insurance benefits for certain current employees and retirees.
In fiscal 1995 the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 112 "Employers' Accounting for Postemployment Benefits." Prior years' results were not restated. This standard requires an accrual method of recognizing the costs of providing postemployment benefits relating to employee severance, disability, health and life insurance. Since the Company either does not provide such benefits or accounted for those benefits provided on an accrual basis, the cumulative after-tax charge of accruing the cost of benefits under this statement was not significant to the results of operations in fiscal 1995.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " in March 1995 and SFAS No. 123 "Accounting for Stock-Based Compensation" in October 1995. The requirements
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) of SFAS No. 121 are that a company review for impairment long-lived assets and certain identifiable intangibles held or to be disposed of by an entity when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable as defined by the standard. Under SFAS No. 123, the Company is encouraged, but not required, to adopt a fair value-based method of accounting for stock-based employee compensation plans. This method measures compensation cost based on the fair value of the stock-based award and recognizes that cost over the employee's service period. Entities may elect to adopt the method recommended under this standard or to continue to account for these types of compensation plans under the current accounting standard, APB No. 25 "Accounting for Stock Issued to Employees" with additional disclosures. The Company is required to adopt these new standards in its fiscal year ending May 31, 1997 and does not expect the adoption of these statements to have a material impact on the Company's financial condition and results of operations.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. At May 31, 1996 and 1995, cash equivalents of approximately $25,504 and $19,129, respectively, held by the Company represent investments in funds holding high-quality commercial paper, Eurodollars and U.S. Government agency-issued securities. The carrying amount of cash equivalents approximates fair value at May 31, 1996 and 1995, respectively.
FOREIGN CURRENCY
Gains and losses on foreign currency translation and foreign exchange contracts are determined in accordance with the method of accounting prescribed by SFAS No. 52. All balance sheet accounts of foreign and certain domestic subsidiaries transacting business in currencies other than the Company's functional currency are translated at year-end or historical exchange rates. Revenues and expenses are translated at average exchange rates during the year. Translation adjustments are excluded from the results of operations and are recorded in Stockholders' equity as Cumulative translation adjustments.
The Company from time to time uses forward exchange contracts or options to hedge its loss exposure from the translation of foreign subsidiaries' results of operations from functional currencies into United States dollars. Forward exchange contracts or options losses are included in results of operations in the period the loss is determinable. Gains are recorded when realized upon contract settlement. At May 31, 1996 and during fiscal 1996 and 1995 there were no forward exchange contracts or options outstanding. Foreign and certain domestic subsidiaries incur transaction gains and losses upon settlement of obligations in currencies other than their functional currency. The aggregate net transaction gains (losses), including those related to forward exchange contracts, reported in results of operations were $239, $45, and $(32) for fiscal 1996, 1995 and 1994, respectively.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF MARKET OR CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of market or credit risk consist principally of forward exchange contracts or options and trade receivables. The forward exchange contracts previously discussed subject the Company to market risk from exchange rate movements. Accordingly, the Company recognizes losses in the period such losses are determinable. While the Company's trade receivables are diverse based on the number of
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) entities and geographic locations, the majority are concentrated in the aerospace/aviation industry. The Company performs evaluations of customers' financial condition prior to extending credit privileges and performs ongoing credit evaluations of payment experience, current financial condition and risk analysis. The Company typically requires collateral in the form of security interest in assets, letters of credit, obligation guarantees from financial institutions, or sells its receivables, usually on a nonrecourse basis, for transactions other than normal trade terms.
SFAS No. 107 "Disclosures About Fair Value of Financial Instruments" requires disclosure of the fair value of certain financial instruments. Cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable and accrued liabilities are reflected in the financial statements at fair value because of the short-term maturity of these instruments. Noncurrent notes receivable and long-term debt bearing a variable interest rate are reflected in the financial statements at fair value. Those bearing a fixed interest rate have fair values based on estimates using discounted future cash flows at an assumed discount rate for borrowing currently prevailing in the marketplace for similar instruments.
Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
INVENTORIES
Inventories are priced at the lower of cost or market. Cost is determined by either the specific identification, average cost or first-in, first-out method. Inventoried costs relating to long-term contracts and programs are stated at the actual production costs, including factory burden and initial tooling, incurred to date, reduced by amounts identified with revenue recognized on units delivered. The costs attributed to units delivered under long-term contracts and programs are based on the estimated average cost of all units scheduled to be produced. Progress billings under government contracts are based on an allowable percentage of the cost of material received and labor and factory burden incurred.
The following is a summary of inventories at:
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) EQUIPMENT UNDER OPERATING LEASES
Lease revenue is recognized as earned. The cost of the asset under lease is original purchase price plus overhaul costs. Depreciation of the cost is computed on a straight-line method over the estimated service life of the equipment and maintenance costs are expensed as incurred. The balance sheet classification is based on the lease term with fixed term leases under twelve months classified as short-term and all others classified as long-term.
Equipment on short-term lease consists of aircraft engines and parts on or available for lease to satisfy immediate short-term customer requirements. The leases are renewable with fixed terms, which generally vary from one to six months.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is computed on the straight-line method over useful lives of 10-40 years for buildings and improvements and 3-10 years for equipment, furniture and fixtures. Leasehold improvements are amortized over the estimated useful life or the term of the applicable lease.
Repairs and maintenance expenditures are expensed as incurred. Upon sale or disposal, cost and accumulated depreciation are removed from the accounts and related gains and losses included in results of operations.
LEVERAGED LEASES
The Company acts as an equity participant in leveraged lease transactions. The equipment cost in excess of equity contribution is furnished by third-party financing in the form of secured debt. Under the lease agreements, the third parties have no recourse against the Company for nonpayment of the obligations. The third-party debt is collateralized by the lessees' rental obligations and the leased equipment. The Company has ownership rights to the leased assets and is entitled to the investment tax credits, and benefits of tax deductions for depreciation on the leased assets and for interest on the secured debt financing.
COST IN EXCESS OF UNDERLYING NET ASSETS OF ACQUIRED COMPANIES
The cost in excess of underlying net assets of companies acquired is being amortized over a period of forty years. Amortization was $230 in fiscal 1996 and 1995 and $240 in fiscal 1994. Accumulated amortization is $3,385, $3,155 and $2,950 at May 31, 1996, 1995 and 1994, respectively.
INCOME TAXES
Income taxes are determined in accordance with the method of accounting prescribed by SFAS No. 109.
Federal income taxes are not provided on the undistributed earnings of certain foreign subsidiaries (approximately $8,000 and $15,200 at May 31, 1996 and 1995, respectively), as it is the Company's intention to reinvest a portion of these earnings indefinitely in the foreign operations. From time to time, as the earnings are treated as taxable in the United States, the related tax expense would be offset substantially by foreign tax credits. Foreign income taxes are provided at the local statutory rates and reflect estimated taxes payable.
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) The benefits of investment tax credits are recognized for book purposes under the deferral method of accounting for leveraged leases. The investment tax credits are recognized in the year earned for income tax purposes.
STATEMENTS OF CASH FLOWS
Supplemental information on cash flows follows:
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made in the fiscal 1995 and 1994 financial statements to conform to the fiscal 1996 presentation.
2. FINANCING ARRANGEMENTS Bank loans consisted of:
Short-term borrowing activity was as follows:
At May 31, 1996, aggregate unsecured bank credit arrangements were $132,977. Of this amount, $66,000 was available under credit lines with domestic banks, $60,000 was available under revolving credit and term loan agreements with domestic banks and $6,977 was available under credit agreements with foreign banks. All domestic and foreign credit lines were unused at May 31, 1996. There are no compensating balance requirements in connection with domestic or foreign lines of credit. Borrowings under domestic bank lines bear interest at or below the corporate base rate.
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
2. FINANCING ARRANGEMENTS -- (CONTINUED) The Company may borrow a maximum of $60,000 ($30,000 available through August 31, 1996 and an additional $30,000 available through October 15, 1996) under revolving credit and term loan agreements with domestic banks. Revolving credit borrowings may, at the Company's option, be converted to term loans payable in equal quarterly installments over five years. Interest is based on corporate base rate or quoted Eurodollar or multicurrency rates during the revolving credit period, and 1/2% over corporate base rate or quoted Eurodollar rate thereafter. There were no borrowings under these agreements outstanding at May 31, 1996. There are no compensating balance requirements on any of the committed lines but the Company is required to pay a commitment fee. There are no restrictions on the withdrawal or use of these funds.
Long-term debt was as follows:
The Company is subject to a number of covenants under the revolving credit and term loan agreements, including restrictions which relate to the payment of cash dividends, maintenance of minimum net working capital and tangible net worth levels, sales of assets, additional financing, purchase of the Company's shares and other matters. The Company is in compliance with all restrictive financial provisions of the agreements. At May 31, 1996, unrestricted consolidated retained earnings available for payment of dividends and purchase of the Company's shares was approximately $15,772. Effective June 1, 1996, unrestricted consolidated retained earnings increased to $23,778 due to inclusion of 50% of the consolidated net income of the Company for fiscal 1996.
The aggregate amount of long-term debt maturing during each of the next five fiscal years is $1,474 in 1997, $1,474 in 1998, $1,545 in 1999, $184 in 2000 and $57 in 2001. The fair value of the Company's long-term debt approximates carrying value.
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
3. INCOME TAXES The provision for income taxes included the following components:
The deferred tax provisions result primarily from differences between book and tax income arising from depreciation and leveraged leases. Refundable income taxes included within Deferred tax assets, deposits and other, principally represent refunds of Federal income taxes resulting from additional tax benefits generated from export sales and foreign tax credits carried back to prior years. Interest income relating to refundable income taxes was $371 and $576 for fiscal 1995 and 1994, respectively.
Deferred tax liabilities and assets result primarily from the differences in the timing of the recognition for transactions between book and income tax purposes and consist of the following components:
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
3. INCOME TAXES -- (CONTINUED) The Company has determined, more likely than not, that a valuation allowance is not required, based upon the Company's history of prior operating earnings, its expectations for continued future earnings and the scheduled reversal of deferred tax liabilities, primarily related to leveraged leases, which exceed the amount of the deferred tax assets.
The provision for income taxes differs from the amount computed by applying the United States statutory Federal income tax rate of 35% for fiscal 1996 and 34% for fiscal 1995 and 1994 for the following reasons:
Pretax income from foreign subsidiaries was approximately $2,100, $600 and $1,300 at May 31, 1996, 1995 and 1994, respectively. Total foreign income taxes provided were in excess of total local statutory rates in fiscal 1995 and 1994 due to net operating losses of certain subsidiaries not deductible for tax purposes.
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
4. COMMON STOCK AND STOCK OPTION PLANS A summary of changes in stock options granted to officers, key employees and nonemployee directors under stock option plans for the three years ended May 31, 1996 follows:
The options are granted at prices equal to the closing market price on the date of grant, become exercisable at such times as may be specified by the Board of Directors or as otherwise provided by the applicable stock option plan and expire five to ten years from date of grant. Upon exercise of stock options, the excess of the proceeds over par value, or cost in the case of Treasury stock, is credited to Capital surplus in the Consolidated Balance Sheets.
The AAR CORP. Stock Benefit Plan also provides for the grant of restricted stock awards. Restrictions are released at the end of applicable restricted periods. The number of shares and the restricted period, which varies from two to ten years, are determined by the Compensation Committee of the Board of Directors. The market value of the award on the date of grant is recorded as a deferred expense, Common stock and Capital surplus. The deferred expense is included in results of operations over the restricted term. The expense relating to outstanding restricted stock awards was $516, $266 and $538 in fiscal 1996, 1995 and 1994, respectively.
The AAR CORP. Employee Stock Purchase Plan is open to all employees of the Company (other than officers, directors or participants in other stock option plans of the Company) with six months of service. The plan permits employees to purchase common stock in periodic offerings at the lesser of the fair market value on date of offering or 85% of the fair market value on the date of exercise. A participating employee pays for shares by payroll deduction over a two-year period. Upon completion of the purchase, the excess of the proceeds over the par value (or cost in the case of treasury stock) is credited to Capital surplus.
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
4. COMMON STOCK AND STOCK OPTION PLANS -- (CONTINUED) The number of options and awards outstanding and available for grant or issuance for each of the Company's stock plans is as follows:
Pursuant to a shareholder rights plan adopted in 1987 and amended in 1989, each outstanding share of the Company's Common Stock carries with it a Right to purchase one additional share at a price of $85 (subject to anti-dilution adjustments). The Rights become exercisable (and separate from the shares) when certain specified events occur, including the acquisition of 20% or more of the common stock by a person or group (an "Acquiring Person") or the commencement of a tender or exchange offer for 30% or more of the Common Stock.
In the event that an Acquiring Person acquires 20% or more of the Common Stock, or if the Company is the surviving corporation in a merger involving an Acquiring Person, or if the Acquiring Person engages in certain types of self-dealing transactions, each Right entitles the holder to purchase for $85 (or the then current exercise price) shares of the Company's Common Stock having a market value of $170 (or two times the exercise price), subject to certain exceptions. Similarly, if the Company is acquired in a merger or other business combination or 50% or more of its assets or earning power is sold, each Right entitles the holder to purchase at the then current exercise price that number of shares of Common Stock of the surviving corporation having a market value of two times the exercise price. The Rights, which do not entitle the holder thereof to vote or to receive dividends, expire on August 6, 1997 and may be redeemed by the Company for $.01 per Right under certain circumstances.
On September 21, 1990, the Board of Directors authorized the Company to purchase up to 1,000 shares of the Company's Common Stock on the open market or through privately negotiated transactions. As of May 31, 1996 the Company had purchased 406 shares of Common Stock on the open market under this program at an average price of $13.00 per share.
5. NET INCOME PER SHARE OF COMMON STOCK
Primary net income per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the year. Shares granted as restricted stock awards under The AAR CORP. Stock Benefit Plan are considered outstanding from the date of grant. Common Stock equivalents consist of the average number of shares issuable upon the exercise of all dilutive employee stock options, less the common shares which could have been purchased, at the average market price during each quarter, with the assumed proceeds from the exercise of the options.
6. EMPLOYEE BENEFIT PLANS The Company has defined contribution or defined benefit plans covering substantially all full-time domestic employees and certain employees in The Netherlands.
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED) DEFINED BENEFIT PLANS
The pension plans for domestic salaried employees have benefit formulas based primarily on years of service and compensation. The pension benefit for hourly employees is generally based on a fixed amount per year of service. The Company follows the provisions of SFAS No. 87, "Employers' Accounting for Pensions" for all domestic and nondomestic pension plans.
The Company's funding policy for domestic plans is to contribute annually, at a minimum, an amount which is deductible for Federal income tax purposes and that is sufficient to meet actuarially computed pension benefits. Contributions are intended to provide for benefits attributed to service to date and for benefits expected to be earned in the future. The assets of the pension plans are invested primarily in mutual funds, common stocks, investment grade bonds and United States Government obligations.
Certain foreign operations of domestic subsidiaries also have pension plans. In most cases, the plans are defined benefit in nature. Assets of the plans are comprised of insurance contracts. Benefit formulas are similar to those used by domestic plans. It is the policy of these subsidiaries to fund at least the minimum amounts required by local law and regulation.
The following table sets forth the plans' funded status and the amount recognized in the Company's Consolidated Balance Sheets. The plans are grouped according to the portion of the accumulated benefit obligation funded as follows:
The projected benefit obligation for domestic plans is determined using an assumed weighted average discount rate of 8.25% and 8.5% for fiscal 1996 and 1995, respectively, and an assumed average compensation increase of 3.0% in the first two years and 5.0% thereafter. The expected long-term rate of return on assets is 10.0% for fiscal 1996 and 1995. Unrecognized net loss, prior service cost and transition obligation are amortized on a straight-line basis over the estimated average future service period.
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED) The projected benefit obligation for nondomestic plans is determined using an assumed weighted average discount rate of 6.5% and 7.5% for fiscal 1996 and 1995, respectively, and an assumed average compensation increase of 2.0% for the first five years and 4.0% thereafter. The expected long-term rate of return on assets is 6.5% for fiscal 1996 and 1995.
The provisions of SFAS No. 87 "Employers' Accounting for Pensions" require recognition in the balance sheet of an additional minimum liability, an equity reduction and related intangible assets for pension plans with accumulated benefits in excess of plan assets. At May 31, 1995 the Company had a minimum pension liability of $3,765 reported within Retirement benefit obligation and deferred credits in the Consolidated Balance Sheets with $1,370 charged to Stockholders' equity in accordance with the provisions of SFAS No. 87. During fiscal 1996, the Company's funding of the domestic plans eliminated the charge to Stockholders' equity.
Pension expense charged to results of operations includes the following components:
DEFINED CONTRIBUTION PLAN
The defined contribution plan is a profit sharing plan which is intended to qualify as a 401(k) plan under the Internal Revenue Code. Under the plan, employees may contribute up to 15.0% of their pretax compensation, subject to applicable regulatory limits. The Company may make matching contributions up to 6.0% of compensation. Participants vest immediately in Company contributions. Expense charged to results of operations was $815, $830 and $800 in fiscal 1996, 1995 and 1994, respectively.
DIRECTOR, EXECUTIVE AND KEY EMPLOYEE RETIREMENT BENEFIT AND PROFIT SHARING PLANS
The Company provides its outside directors with benefits upon retirement on or after age 65 provided they have completed at least five years of service as a director. Benefits are payable as a quarterly annuity in an amount equal to 25.0% of the annual retainer fee payable by the Company to active outside directors. Payment of benefits commences upon retirement and continues for a period equal to the total number of years of the retired director's service as a director to a maximum of ten years, or death, whichever occurs first. The Company also provides supplemental retirement and profit sharing benefits for current and former executives and key employees to supplement benefits provided by the Company's other benefit plans. The plans are not fully funded and may require funding in the event of a change in control of the Company as determined by the Company's Board of Directors. Expense charged to results of operations for these plans was $555, $585 and $545 in fiscal 1996, 1995 and 1994, respectively.
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health and life insurance benefits for certain eligible employees and retirees under a variety of plans. Generally these benefits are contributory, with retiree contributions adjusted annually. The postretirement plans are unfunded and the Company has the right to modify or terminate any of these plans in the future, in certain cases subject to union bargaining agreements. In fiscal 1995 the Company completed termination of postretirement healthcare and life insurance benefits attributable to future services of collective bargaining and other domestic employees. The Company recognized an after tax gain of $250 from the reduction in the accumulated postretirement benefit obligation related to this termination of benefits.
Postretirement benefit cost for the years ended May 31, 1996, 1995 and 1994 included the following components:
The funded status of the plans at May 31, 1996 and 1995 was as follows:
The assumed discount rates used to measure the accumulated postretirement benefit obligation were 8.25% and 8.5% at May 31, 1996 and 1995, respectively. The assumed rate of future increases in health care costs was 10.1% in fiscal 1996 and 1995, declining to 6.0% by the year 2003 and remaining at that rate thereafter. A one percent increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation by approximately $26 as of May 31, 1996 and would not result in a significant change to the annual postretirement benefit expense.
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
7. COMMITMENTS AND CONTINGENCIES The Company leases certain facilities and equipment under agreements that expire at various dates through 2011. Rental expense under these leases was $6,828, $6,545 and $4,840 in fiscal 1996, 1995 and 1994, respectively.
Future minimum payments under leases with initial or remaining terms of one year or more at May 31, 1996 were $4,745 for fiscal 1997, $4,268 for fiscal 1998, $3,775 for fiscal 1999, $3,253 for fiscal 2000 and $1,925 for fiscal 2001 and thereafter.
The Company routinely issues letters of credit, performance bonds or credit guarantees in the ordinary course of its business. These instruments are typically issued in conjunction with insurance, contracts, sales of secured accounts receivables or other business requirements. The total of these instruments outstanding at May 31, 1996 was approximately $25,800.
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial condition.
8. AIRCRAFT LEASING ACTIVITIES The Company is an owner participant in four leveraged lease agreements entered into between March 1986 and May 1988. These agreements cover four narrow-body commercial aircraft and spare parts. The transactions involve aircraft currently operated by major carriers. The remaining terms of the leases range from 5 to 8 years. The Company's equity investment in these aircraft represents approximately one-third of the aggregate equipment cost. The remaining portion of the equipment cost is financed by third-party nonrecourse debt.
The Company has ownership rights to the equipment subject to the right of the lessees to exercise certain purchase, renewal and termination options. For Federal income tax purposes, the Company receives investment tax credits and has the benefit of tax deductions for depreciation on the aggregate equipment cost and interest on the nonrecourse debt. During the early years of the lease, Federal income tax deductions exceeded the lease rental income. In the later years of the lease, rental income will exceed the deductions. In fiscal 1994, the Company's Investment in leveraged leases was repriced approximately $2,000 for the impact of an interest rate reduction on nonrecourse long-term debt secured by aircraft under leveraged lease, the tax rate change under the Omnibus Budget Reconciliation Act of 1993 and the Company's AMT position in accordance with SFAS No. 13 "Accounting for Leases."
In August 1990, the Company sold a partial residual interest in a Boeing 737-300 aircraft currently subject to a leveraged lease. The lease term expires in March 2001. The principal portion of the proceeds from this sale was received in the form of a $2,000 note, bearing interest at 9.9%, due in March 2001 and was included with Retirement benefits, notes receivable and other on the Consolidated Balance Sheets. During fiscal 1996, the note was sold at approximately the outstanding principal and accrued interest receivable balance.
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
8. AIRCRAFT LEASING ACTIVITIES -- (CONTINUED) The condensed operating results and balance sheet financial information for aircraft leasing activities were as follows:
The Company's net investment in leveraged leases is comprised of the following elements:
Pretax income from leveraged leases was $0 in fiscal 1996 and 1995 and $1,955 in fiscal 1994. The tax effect from leveraged leases was $0 in fiscal 1996 and 1995 and $823 in fiscal 1994.
9. BUSINESS SEGMENT INFORMATION The Company operates primarily in the aerospace/aviation industry and reports its activities in one primary business segment, Aviation Services.
Export sales from the Company's United States operations to unaffiliated customers, the majority located in Europe, the Middle East, Asia, Canada, Mexico and South America (including sales through foreign sales offices of domestic subsidiaries), were approximately $148,503 (29.4% of total net sales), $144,056 (31.9% of total net sales) and $112,275 (27.5% of total net sales) in fiscal 1996, 1995 and 1994, respectively.
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 1996, 1995 and 1994, respectively.
AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
10. SELECTED QUARTERLY DATA (UNAUDITED) The unaudited selected quarterly data for fiscal years ended May 31, 1996 and 1995 are as follows.
FISCAL 1996
FISCAL 1995
11. ALLOWANCES AND RESERVES
ALLOWANCES FOR DOUBTFUL ACCOUNTS
INVENTORY REALIZATION RESERVES
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding the Directors of the Company is incorporated by reference to the information contained under the caption "Nominees and Continuing Directors" in the Company's definitive proxy statement for the 1996 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
The information required by this item regarding the Executive Officers of the Company appears under the caption "Executive Officers of the Registrant" in Part I above.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item regarding the compliance with Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act") is incorporated by reference to the information contained under the caption "Compliance with Section 16(a) of The Exchange Act" in the Company's definitive proxy statement for the 1996 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the information contained under the captions "Executive Compensation and Other Information" (but excluding the following sections thereof, "Compensation Committee's Report on Executive Compensation" and "Stockholder Return Performance Graphs"); "Employment and Other Agreements" and "Directors Compensation" in the Company's definitive proxy statement for the 1996 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the information contained under the caption "Security Ownership of Management and Others" in the Company's definitive proxy statement for the 1996 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the information contained under the caption "Certain Relationships and Related Transactions" in the Company's definitive proxy statement for the 1996 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
EXHIBITS
The Exhibits filed as a part of this report are set forth in the Exhibit Index contained elsewhere herein. Each of the material contracts identified as Exhibits 10.1 through 10.10 is a management contract or compensatory plan or arrangement.
REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the three month period ended May 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AAR CORP.
(Registrant) Date: August 15, 1996 By: /s/ IRA A. EICHNER
----------------------------------- Ira A. Eichner CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER ------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------- ------------------------- ----------------
/s/ IRA A. EICHNER CHAIRMAN OF THE BOARD AND - --------------------------------- CHIEF EXECUTIVE OFFICER; Ira A. Eichner DIRECTOR (PRINCIPAL EXECUTIVE OFFICER) /s/ DAVID P. PRESIDENT AND CHIEF STORCH OPERATING OFFICER; - --------------------------------- DIRECTOR David P. Storch /s/ TIMOTHY J. ROMENESKO VICE PRESIDENT, - --------------------------------- CHIEF FINANCIAL OFFICER Timothy J. Romenesko AND TREASURER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) /s/ A. ROBERT DIRECTOR ABBOUD - --------------------------------- A. Robert Abboud /s/ HOWARD B. BERNICK DIRECTOR - --------------------------------- Howard B. Bernick /s/ EDGAR D. JANNOTTA DIRECTOR August 15, 1996 - --------------------------------- Edgar D. Jannotta /s/ ROBERT D. DIRECTOR JUDSON - --------------------------------- Robert D. Judson /s/ ERWIN E. DIRECTOR SCHULZE - --------------------------------- Erwin E. Schulze /s/ JOEL D. DIRECTOR SPUNGIN - --------------------------------- Joel D. Spungin /s/ LEE B. STERN DIRECTOR - --------------------------------- Lee B. Stern /s/ RICHARD D. TABERY DIRECTOR - --------------------------------- Richard D. Tabery
EXHIBIT INDEX
- ------------------------ Notes:
(1) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1987.
(2) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1989.
(3) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1986.
(4) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1988.
(5) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended November 30, 1989.
(6) Incorporated by reference to Exhibits to Registrant's Registration Statement on Form S-3 filed August 27, 1991.
(7) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991.
(8) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1985.
(9) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1992.
(10) Incorporated by reference to Exhibits to the Registrant's Current Reports on Form 8-K dated October 24, 1989 and October 12, 1993.
(11) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993.
(12) Incorporated by reference to Exhibits to Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994.
(13) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1994.
(14) Incorporated by reference to Exhibits to the Registrant's Report on Form 10-K for the fiscal year ended May 31, 1995.