AAR CORP. 10-K Summary: Fiscal Year Ended May 31, 1995
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended May 31, 1995, for AAR CORP., a leading independent supplier of aviation services, products, and equipment. The Company operates in a single business segment, Aviation Services, which includes trading (sale/lease of aircraft parts and engines), overhaul (repair and modification of components), and manufacturing (cargo systems and industrial equipment). The reporting period reflects a recovery in the aerospace/aviation industry following the downturn of the early 1990s, characterized by increased airline fleet utilization and profitability.
Key Financial Metrics
| Metric | Fiscal 1995 | Fiscal 1994 |
|---|---|---|
| Net Sales | $451,395,000 | $407,754,000 |
| Gross Profit | $77,871,000 | $71,910,000 |
| Operating Income | $24,438,000 | $21,824,000 |
| Net Income | $10,463,000 | $9,494,000 |
| Diluted EPS | $0.66 | $0.60 |
| Cash Flow from Operations | $15,255,000 | $6,697,000 |
| Total Debt | $121,398,000 | $116,297,000 |
| Working Capital | $248,492,000 | $240,009,000 |
| Current Ratio | 4.4:1 | 4.5:1 |
| Unused Credit Lines | $133,750,000 | $132,500,000 |
Margins: Gross profit margin was 17.3% in 1995, down slightly from 17.6% in 1994. Operating margin was approximately 5.4%.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 10.7% ($43.6 million) driven by growth across all three product classes: Trading (+13.5%), Overhaul (+5.6%), and Manufacturing (+10.1%).
- Profitability: Net income rose 10.2% ($969,000) despite a slight decline in gross margin and increased interest expense due to higher rates and additional borrowings.
- Cash Flow: Operating cash flow more than doubled to $15.3 million, primarily due to increased earnings and effective working capital management, despite a $23.4 million increase in accounts receivable.
- Debt Structure: Total debt increased by $5.1 million. The Company issued $6.2 million in long-term debt to support inventory management programs. Short-term borrowings were reduced, and the ratio of long-term debt to capitalization improved to 37.8%.
Outlook, Risks, and Management Commentary
Management Commentary: Management attributes the improved results to the recovery of the aerospace/aviation industry, increased aircraft utilization, and the absorption of surplus parts inventories. The Company notes that start-up airlines are expanding and outsourcing support activities, benefiting AAR's trading and overhaul segments.
Backlog: Firm backlog at May 31, 1995, was $79.4 million, down from $84.6 million in 1994. Approximately $68.2 million is expected to ship in fiscal 1996. An additional $85.1 million in unfunded government options exists.
Risks and Contingencies:
- Government Sales: Sales to the U.S. government represented 18.3% of total net sales. These contracts are subject to competitive bidding and funding availability, with no assurance of continued levels.
- Competition: The industry is highly competitive based on price, quality, and delivery speed. Overhaul margins declined due to competitive pricing and changes in labor/parts mix.
- Dividend Restrictions: Debt agreements restrict dividend payments and share repurchases. As of June 1, 1995, unrestricted retained earnings available for these purposes were $25.2 million.
Investor Verification Checklist
- Inventory Valuation: Verify the adequacy of inventory realization reserves ($6.3 million at year-end) given the historical volatility of aviation parts values.
- Accounts Receivable: Confirm the collectability of the $110.4 million receivable balance, which increased significantly ($23.4 million) due to record sales in the fourth quarter.
- Government Contract Renewals: Assess the risk of non-renewal for the $23.5 million in backlog attributable to U.S. Government rapid deployment programs.
- Interest Rate Exposure: Review the impact of rising interest rates on the $121.4 million debt load, particularly the $50 million in 7.25% notes due 2003.
- Leveraged Lease Performance: Monitor the cash flow and tax benefits from the four leveraged aircraft leases, which generated no operating revenue in 1995 but provided tax deductions.