SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                 ______________

                                    FORM 10-Q

                   QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                                ________________


For Quarter Ended   NOVEMBER 30, 1993             Commission file number 1-6263
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                                    AAR CORP.
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             (Exact name of registrant as specified in its charter)

          DELAWARE                                     36-2334820
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(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

1111 NICHOLAS BOULEVARD, ELK GROVE VILLAGE, ILLINOIS                  60007
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      (Address of principal executive offices)                      (Zip Code)

Registrant's telephone number, including area code   (708)  439-3939
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Former name, former address and former fiscal year, if changed since last
report.


     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           .
                             -----------     ----------


         (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                        DURING THE PRECEDING FIVE YEARS)


     Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under plan
confirmed by a court.
                         Yes              No           .
                             ----------      ----------

                     (APPLICABLE ONLY TO CORPORATE ISSUERS)

     Indicate the number of share outstanding of each on the issuer's classed of
common stock, as of the close of the period covered by this report.


  $1.00   par value,  15,909,216  shares outstanding as of  NOVEMBER 30, 1993 .
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                                    AAR CORP.

                                 PART I, ITEM I

                              FINANCIAL INFORMATION


The condensed consolidated financial statements as of November 30, 1993 and 1992
included herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.  The
condensed consolidated financial statements as of May 31, 1993 have been derived
from audited financial statements. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
rules and regulations.  Effective June 1, 1993, the Company adopted required
accounting principles under Statement of Financial Accounting Standards ("SFAS")
No. 106, "Employer's Accounting for Postretirement Benefits Other Than
Pensions", and SFAS No. 109, "Accounting for Income Taxes".  These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
latest annual report on Form 10-K.

In the opinion of management of the Company, the condensed consolidated
financial statements reflect all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the consolidated financial
position of the Company as of November 30, 1993 and the consolidated results of
operations and cash flows for the three months and six months ended November 30,
1993 and 1992.  The results of operations for such interim periods are not
necessarily indicative of the results for the full year.



                                       -2-



                                    AAR CORP.
                      Condensed Consolidated Balance Sheets
                    As of November 30, 1993 and May 31, 1993
                                 (000's omitted)
November 30, May 31, 1993 1993 ------------ ----------- (Unaudited) (Derived from audited financial statements) ASSETS: Current assets: Cash and cash equivalents (Note A) $ 28,654 $ 2,255 Accounts receivable, less allowances of $2,000 at each date 81,447 68,849 Inventories 138,281 139,432 Equipment on or available for short-term lease 30,700 33,104 Prepaid income taxes and other 20,906 21,396 --------- -------- Total current assets 299,988 265,036 --------- -------- Property, plant and equipment, net 54,066 56,052 --------- -------- Other assets: Investment in leveraged leases 30,988 30,210 Cost in excess of underlying net assets of acquired companies 6,426 6,571 Prepaid income taxes, retirement benefits, notes receivable and other (Notes A and D) 16,768 7,282 --------- -------- 54,182 44,063 --------- -------- $408,236 $365,151 --------- -------- --------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank loans and current maturities of long- term debt $ 615 $ 25,025 Accounts payable 43,750 32,525 Accrued liabilities and taxes on income 15,165 14,087 --------- -------- Total current liabilities 59,530 71,637 --------- -------- Retirement benefit obligation (Notes A and E) 5,000 - --------- -------- Long-term debt, less current maturities (Note C) 115,990 66,298 --------- -------- Deferred income taxes (Notes A and D) 40,000 38,000 --------- -------- Stockholders' equity: Preferred stock, $1.00 par value, authorized 250 shares; none issued - - Common stock, $1.00 par value, authorized 80,000 shares; issued 16,214 and 16,205 shares at each date 16,214 16,205 Capital surplus 81,279 81,172 Retained earnings 98,690 97,637 Treasury stock, 304 shares at each date, at cost (3,490) (3,490) Cumulative translation adjustments (3,977) (2,308) Minimum pension liability adjustment (Note E) (1,000) - --------- -------- 187,716 189,216 --------- -------- $408,236 $365,151 --------- -------- --------- --------
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. -3- AAR CORP. Condensed Consolidated Statements of Income For the three and six months ended November 30, 1993 and 1992 (Unaudited) (000's omitted except per share data)
Three Months Ended Six Months Ended November 30, November 30, ------------------ ---------------- 1993 1992 1993 1992 ------------------ ---------------- Net sales $93,185 $101,930 $191,491 $200,002 ------ ------- ------- ------- Costs and operating expenses: Cost of sales 76,561 84,613 156,823 163,584 Selling, general and administrative 11,596 13,042 24,018 25,720 ------ ------- ------- ------- 88,157 97,655 180,841 189,304 ------ ------- ------- ------- Operating income 5,028 4,275 10,650 10,698 Interest expense (2,324) (2,060) (4,357) (4,039) Interest income (Note D) 724 160 817 369 ------ ------- ------- ------- Income before provision for income taxes 3,428 2,375 7,110 7,028 Provision for income taxes (Note D) 1,050 800 2,250 2,350 ------ ------- ------- ------- Income before cumulative effect of changes in accounting principles 2,378 1,575 4,860 4,678 Cumulative effect of changes in accounting principles (Note A): Income taxes - - 900 - Postretirement health care benefits, net of tax - - (890) - ------ ------- ------- ------- Net income $ 2,378 $ 1,575 $ 4,870 $ 4,678 ------ ------- ------- ------- ------ ------- ------- ------- Net income per share of common stock: Income before cumulative effect of changes in accounting principles $ .15 $ .10 $ .31 $ .30 Net cumulative effect of changes in accounting principles (Note A): Income taxes - - .06 - Postretirement health care benefits - - (.06) - ------ ------- ------- ------- $ .15 $ .10 $ .31 $ .30 ------ ------- ------- ------- ------ ------- ------- ------- Average shares outstanding 15,906 15,812 15,903 15,828
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. - 4 - AAR CORP. Condensed Consolidated Statements of Cash Flows For the Six Months Ended November 30, 1993 and 1992 (Unaudited) (000's omitted)
Six Months Ended November 30, ------------------- 1993 1992 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,870 $ 4,678 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 4,977 5,622 Cumulative effect of changes in accounting principles: Income tax benefit (900) - Postretirement health care benefit expense 890 - Leveraged lease income (700) - Change in certain assets and liabilities: Accounts receivable (13,120) 15,960 Inventories 488 (18,342) Equipment on or available for short-term lease 2,404 3,968 Prepaid income taxes and other (2,472) (3,594) Accounts payable 11,355 (3,242) Accrued liabilities and taxes on income 880 (4,771) ------- ------- Net cash provided from operating activities 8,672 279 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment expenditures, net (1,960) (5,953) Investment in leveraged leases (78) 436 Notes receivable and other ( 1,537) (452) ------- ------- Net cash used in investing activities ( 3,575) ( 5,969) ------- ------- Net cash provided from (used in) operating and investing activities 5,097 ( 5,690) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Gross proceeds from issurance of long-term notes payable 50,000 - Repayment of bank loans with proceeds from issuance of long-term notes payable (28,200) - Net increase in other borrowings 3,482 13,209 Cash dividends (3,817) (3,798) Purchase of treasury stock - (1,164) Other, net 116 85 ------- ------- Net cash provided from financing activities 21,581 8,332 ------- ------- Effect of exchange rate changes on cash (279) (2) ------- ------- Increase in cash and cash equivalents 26,399 2,640 Cash and cash equivalents beginning of period 2,255 2,250 ------- ------- Cash and cash equivalents end of period $28,654 $ 4,890 ------- ------- ------- -------
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. - 5 - AAR CORP. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS November 30, 1993 (000's omitted except per share and percent data) NOTE A - SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. At November 30, 1993, cash equivalents of approximately $26,100 held by the Company principally represent investments in funds holding high-quality commercial paper and U.S. government agency-issued securities. The funds used to acquire these short-term investments represent the remaining proceeds from a public debt offering. The carrying amount of cash equivalents approximates their fair value at November 30, 1993. INCOME TAXES 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 to the asset and liability method of accounting. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using statutory tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect of changes in deferred tax assets and liabilities and tax rates will be recognized in the consolidated results of operations in the period the changes occurred. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Effective June 1, 1993, the Company adopted SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions." Prior years' results were not restated. 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. It is important to note the charge to operating results will have no direct impact on cash flows since the Company will continue its current practice of paying benefits when incurred. -6- AAR CORP. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS November 30, 1993 (Continued) (000's omitted except per share and percent data) NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued) The accumulated postretirement benefit obligation of $1,350 primarily represents health and life insurance benefits for current employees and retirees. The assumed discount rate used to measure the accumulated postretirement benefit obligation was 8.0%. The assumed rate of future increases in health care costs was 10.0% in 1993, declining to 6.0% by the year 2004 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 $100 as of June 1, 1993 and would not result in a significant change to the annual postretirement benefit expense. NOTE B - SUPPLEMENTAL CASH FLOWS INFORMATION Supplemental information on cash flows:
Six Months Ended November 30, ------------------ 1993 1992 ------ ------ Interest paid $3,730 $4,100 Income taxes paid 800 3,300 Income tax refunds received 260 830
NOTE C - LONG-TERM DEBT On October 15, 1993, the Company had a public sale of $50,000 of unsecured 7.25% Notes due October 15, 2003 under a debt offering. Interest payments will be made semi-annually on April 15 and October 15. The net proceeds were used to refinance $28,200 of short-term bank borrowings at a weighted average interest rate of 3.8% with the remaining proceeds used to acquire highly liquid investments until such time as the funds are utilized in the Company's business operations. -7- AAR CORP. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS November 30, 1993 (Continued) (000's omitted except per share and percent data) NOTE D - INCOME TAXES The following disclosures are in accordance with SFAS No. 109. Prior year amounts have not been restated. The provision for income taxes before the cumulative effect of the change in accounting principle differs from the amount computed by applying the United States statutory Federal income tax rate of 34% for the six month period ended November 30, 1993 for the following reasons: Provision for income taxes at the Federal statutory rate $2,420 Tax benefits on exempt earnings from export sales (450) State income taxes, net of Federal benefit 130 Amortization of goodwill 60 Other 90 ----- Provision for income taxes as reported $2,250 ----- ----- Effective income tax rate 31.6% ----- -----
The Company believes that its deferred tax assets will be fully realizable, therefore a valuation allowance was not required at November 30, 1993. The cumulative effect of the non-cash accounting charge for postretirement benefits (health care and pension) was tax benefitted at the Federal Statutory rate of 34%. The Company recorded interest income of $430 in the three month period ended November 30, 1993, relating to accrued interest due on Federal income tax refunds. NOTE E - MINIMUM PENSION LIABILITY ADJUSTMENT The Company recorded a minimum pension liability of $3,650 reported within Retirement benefit obligation in the Condensed Consolidated Balance Sheets with $1,000 charged to Stockholders' equity in accordance with the method of accounting prescribed by SFAS No. 87, "Employers' Accounting for Pensions". The liability significantly increased recently as the result of the market driven decrease in the discount rate used by the Company to determine pension obligations. The non-cash adjustment did not impact the Company's results of operations. -8- AAR CORP. PART I, ITEM II Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS (000's omitted except per share and percent data) NET SALES SUMMARY THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 1993 (as compared with the same period of the prior year) The Company reports its activities in one business segment: Aviation Services. The following table sets forth net sales for the Company's classes of similar products and services within this segment:
Three Months Ended Six Months Ended November 30, November 30, ------------------ ------------------ 1993 1992 1993 1992 -------- -------- -------- -------- Net Sales: Trading $ 44,223 $ 60,037 $ 94,775 $112,977 Overhaul 24,729 24,494 50,812 50,202 Manufacturing 24,233 17,399 45,904 36,823 ------ ------ ------ ------ $ 93,185 $101,930 $191,491 $200,002 ------ ------- ------- ------- ------ ------- ------- -------
COMPARISON OF RESULTS OF OPERATIONS THREE MONTH PERIOD ENDED NOVEMBER 30, 1993 (as compared with the same period of the prior year) Net income increased by $803, or 51%, albeit on lower sales volume, primarily as the result of improved operating margins. The operating income and margins benefitted from sales mix, improved operating efficiencies and previously implemented cost reductions. Also, additional interest income of $430 from income tax refunds was recorded. Net sales decreased $8,745, or 8.6%, primarily due to lower sales of major components and aviation fasteners within trading activities, partially offset by increased shipments of manufactured products related to the government's rapid deployment program. Also, certain overhaul activities increased as airline customers outsourced overhaul work as part of ongoing cost containment programs. The Company's sales order backlog continued to increase during the three-month period as certain operations entered into longer-term customer commitments. The primary contributor to the backlog position was orders for manufactured products related to the government's rapid deployment program. -9- AAR CORP. Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS (Continued) (000's omitted except per share and percent data) SIX MONTH PERIOD ENDED NOVEMBER 30, 1993 (as compared with the same period of the prior year) Net income increased $192 or 4.1% on a reduction in net sales of $8,511 or 4.3%. Net sales during the period were impacted by the same factors described under the three month results of operations discussed above. Operating income remained level year over year as the Company was able to maintain its gross profit margin by offsetting the competitive pressures of the marketplace with the ongoing benefits of operating efficiencies and cost management, particularly in the second quarter. Gross profit contribution included $700 of income from a reduction in the interest rate on a non-recourse leveraged lease obligation negotiated by the Company. The effective tax rate reduction from 33.4% to 31.6% was due primarily to increased benefits from export sales. Effective June 1, 1993, the Company made two required changes in accounting principles. The net cumulative effect of these changes was not material to the results of operations. Specifically, the Company adopted SFAS No. 109, "Accounting for Income Taxes" which resulted in a non-cash income tax benefit of $900 (or $.06 per share) and SFAS No. 106, "Employer's Accounting for Post- retirement Benefits Other Than Pensions" which resulted in a non-cash charge of $1,350 ($890 after tax or $.06 per share). -10- AAR CORP. Management's Discussion and Analysis of Results of Operations and Financial Condition FINANCIAL CONDITION AND LIQUIDITY (000's omitted except ratios) AT NOVEMBER 30, 1993 (as compared with May 31, 1993) During the six month period ended November 30, 1993, cash provided from operating activities was $8,672, and resulted primarily from increased earnings and effective management of working capital. In addition, in October, 1993, the Company sold $50,000 of unsecured ten-year notes (see Note C in Notes to the Condensed Consolidated Financial Statements). The proceeds were used to refinance $28,200 of short-term bank borrowings. Excess proceeds of $21,800 were invested in highly liquid short-term investments. Operating cash in excess of working capital requirements was used primarily to pay dividends of $3,817. The Company believes that the combination of cash flow from operating activities and available bank credit lines of $127,300 position the Company to meet its anticipated working capital requirements and to take advantage of business growth opportunities. In addition, the Company has a shelf registration statement 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 and subject to market conditions. A summary of key indicators of financial condition and lines of credit follows:
Description November 30, 1993 May 31, 1993 ------------------------ ----------------- ------------ Working capital $240,458 $193,399 Current ratio 5.0:1 3.7:1 Bank Credit Lines: Borrowings outstanding $ - $ 24,000 Available but unused lines 127,300 103,700 ------- ------- $127,300 $127,700 ------- ------- ------- ------- Long-term debt less current maturities $115,990 $ 66,298 Ratio of long-term debt to long-term debt plus stockholders' equity 38.2% 25.9%
-11- AAR CORP. PART II OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders of the Company held on October 13, 1993, A. Robert Abboud, Ira A. Eichner and Robert D. Judson were elected as directors of the Company to serve until the 1996 Annual Meeting of Shareholders. There were no abstentions and no broker non-votes for any of the nominees for directors. The number of votes cast for, or withheld, for each nominee for director were as follows:
For Withheld ---------- -------- A. Robert Abboud 14,096,214 107,746 Ira A. Eichner 14,109,317 94,643 Robert D. Judson 14,110,869 93,091
No other matters were presented to the Company's shareholders for action at the Annual Meeting of Shareholders. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS ITEM 4. Instruments defining the rights of security holders 4.1 Restated Certificate of Incorporation:(1) Amendments thereto dated November 3, 1987;(2) and October 19, 1988.(2) 4.2 By-Laws, as amended.(2) 4.3 Credit Agreement dated June 1, 1993 between the Registrant and Continental Bank N.A.(7) 4.4 Rights Agreement between the Registrant and The First National Bank of Chicago;(1) Amendment thereto dated July 18, 1989.(2) 4.5 Indenture dated October 15, 1989 between the Registrant and Continental Bank, N.A., as Trustee, relating to debt securities;(4) First Supplemental Indenture thereto dated August 26, 1991.(5) 4.6 Officer's certificate dated October 24, 1989.(3) 4.7 Credit Agreement dated October 15, 1991 between the Registrant and The First National Bank of Chicago, as Agent.(6) ______________________ 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 Current Report on Form 8-K dated October 24, 1989. (4) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-Q for the quarter ended November 30, 1989. (5) Incorporated by reference to Exhibits to Registrant's Registration Statement on Form S-3 filed August 27, 1991. (6) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991. (7) Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993. -12- AAR CORP. PART II OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) (b) REPORTS ON FORM 8-K FOR QUARTER ENDED NOVEMBER 30, 1993: The Company filed its report on Form 8-K dated October 12, 1993 covering the Company's entering into an Underwriting Agreement and the Officers' Certificate establishing the terms of the Company's offering and sale of 7.25% Notes due October 15, 2003 in the principal amount of $50 million. No financial statements were required to be filed with this report. -13- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AAR CORP. ---------------------------------------- (Registrant) Date: January 13, 1994 /s/ Joseph J. Dzurinko ------------------ ---------------------------------------- Joseph J. Dzurinko Vice President Finance and Chief Financial Officer (Principal financial officer and officer duly authorized to sign on behalf of registrant) -14-