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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File No. 1-6263

AAR CORP.
(Exact name of registrant as specified in its charter)

        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 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 ý    No o

        As of December 31, 2002, there were 31,844,196 shares of the registrant's Common Stock, $1.00 par value per share, outstanding.

AAR CORP. and Subsidiaries
Quarterly Report on Form 10-Q
November 30, 2002

Table of Contents

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PART I,    ITEM 1—FINANCIAL STATEMENTS

AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of November 30, 2002 and May 31, 2002
(In thousands)

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

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AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of November 30, 2002 and May 31, 2002
(In thousands)

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

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AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended November 30, 2002 and 2001
(Unaudited)
(In thousands except per share data)

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

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AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended November 30, 2002 and 2001
(Unaudited)
(In thousands)

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

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AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
For the Six Months Ended November 30, 2002 and 2001
(Unaudited)
(In thousands)

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

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AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2002
(Unaudited)
(In thousands)

Note A—Basis of Presentation

        The accompanying condensed consolidated financial statements include the accounts of AAR CORP. and its subsidiaries ("the Company") after elimination of intercompany accounts and transactions.

        These statements have been prepared by the Company without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC"). The condensed consolidated balance sheet as of May 31, 2002 has been derived from audited financial statements. To prepare the financial statements in conformity with accounting principles generally accepted in the United States of America, management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain information and footnote disclosures, normally included in comprehensive financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to such rules and regulations of the SEC. 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 condensed consolidated financial position of AAR CORP. and its subsidiaries as of November 30, 2002 and the condensed consolidated results of operations for the three- and six-month periods ended November 30, 2002 and 2001, and the condensed consolidated cash flows and comprehensive income for the six-month periods ended November 30, 2002 and 2001. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Note B—New Accounting Standards

        In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company intends to adopt the provisions of SFAS No. 146 for any exit or disposal activities initiated after December 31, 2002.

Note C—Revenue Recognition

        Sales and related cost of sales for products are recognized upon shipment to the customer. Service revenues and the related cost of services are generally recognized when customer owned material is shipped to the customer. Sales and related cost of sales on certain long-term manufacturing contracts and on certain large airframe maintenance contracts are recognized by the percentage of completion method, based on the relationship of costs incurred to date to estimated total costs under the respective contracts. Lease revenues are recognized as earned.

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Note D—Impairment and Special Charges

        Prior to September 11, 2001 the Company was executing its plan to reduce its investment in support of older generation aircraft in line with the commercial airlines' scheduled retirement plans for these aircraft. The events of September 11 caused a severe and sudden disruption in the commercial airline industry, which brought about a rapid acceleration of those retirement plans. System-wide capacity was reduced by approximately 20% and many airlines cancelled or deferred new aircraft deliveries. Based on management's assessment of these and other conditions, the Company in the second quarter ended November 30, 2001, reduced the value of and provided loss accruals for certain of its inventories and engine leases which support older generation aircraft by $75,900, of which $57,900 was related to the Inventory and Logistic Services segment and $18,000 was related to the Aircraft and Engine Sales and Leasing segment.

        In addition, the Company recorded special charges of $10,100 during the three-month period ended November 30, 2001 principally related to an increase in the allowance for doubtful accounts to reflect its inability to recover certain accounts receivable.

        A summary of the carrying value of impaired inventory and engines, after giving effect to the impairment charges as described above, is as follows:

        Proceeds from sales of impaired inventory and engines for the six-month period ended November 30, 2002 and the six-month period ended May 31, 2002 were $7,200 and $15,600 respectively.

Note E—Inventory

Note F—Investment in Joint Ventures

        At May 31, 2002, the Company owned a 50% equity interest in each of two joint ventures. The remaining 50% equity interest in each joint venture was owned by a major U.S. financial institution. Each joint venture owned one wide-body aircraft, on lease to a major foreign carrier. Each joint venture financed the purchase of its aircraft primarily with debt that is without recourse to the joint venture and to the joint venture partners. On June 20, 2002, the Company purchased the other 50% equity interest in one of the joint ventures from the joint venture partner for nominal consideration. As

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a result, the book value of the aircraft and the non-recourse debt were recorded on the Company's balance sheet at November 30, 2002. The book value of the aircraft and the non-recourse debt recorded on the Company's consolidated balance sheet were $35,611 and $32,938 respectively at November 30, 2002.

        The Company's investment in the remaining joint venture at November 30, 2002 was $1,509 and the Company's investment in the two joint ventures at May 31, 2002 was $4,038. The investment amounts are included in "Other assets" on the Condensed Consolidated Balance Sheets.

        The following table provides combined summarized joint venture financial information at November 30, 2002 and May 31, 2002.

Note G—Supplemental Cash Flows Information

        See Note F for additional information regarding non-cash activities.

Note H—Common Stock and Earnings per Share of Common Stock

        The computation of basic earnings per share is based on the weighted average number of common shares outstanding during each period. The computation of diluted earnings per share is based on the weighted average number of common shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options. The following table provides a

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reconciliation of the computations of basic and diluted earnings per share information for the three- and six-month periods ended November 30, 2002 and 2001.

Note I—Financing Arrangements

        At November 30, 2002, aggregate committed unsecured bank credit arrangements were $67,233. Of this amount, $65,000 was committed under separate revolving credit and term loan agreements with three domestic banks and $2,233 was committed under credit agreements with one foreign bank. In November 2002, the Company completed amendments to two of its domestic credit arrangements. These amendments lowered the commitment amounts under each arrangement and amended the fixed charge coverage ratio at November 30, 2002. In addition, the maturity date for one of the domestic credit arrangements was changed from February 9, 2004 to June 10, 2003. Borrowings outstanding under the unsecured domestic credit arrangements were $39,900 at November 30, 2002 and $40,500 at May 31, 2002. Cash and cash equivalents were $39,310 at November 30, 2002 and $34,522 at May 31, 2002. The Company is actively considering various financing alternatives to replace the maturing credit arrangements.

        On October 15, 2003, the Company's $49,500 of 7.25% notes mature and therefore have been classified as current on the November 30, 2002 Consolidated Balance Sheet.

Note J—Aviation Equipment Operating Leases

        The Company from time to time leases aviation equipment (engines and aircraft) from lessors under arrangements that are classified by the Company as operating leases. The Company may also sublease the aviation equipment to a customer on a short- or long-term basis. The terms of the operating leases in which the Company is the lessee are one year with options to renew annually at the election of the Company for up to four years. If the Company elects not to renew a lease, the Company may elect either to (1) direct the lessor to sell the equipment at which time the Company would be required to reimburse the lessor for the shortfall, if any, between the proceeds on the sale and the scheduled purchase option price, or (2) purchase the equipment from the lessor at its

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scheduled purchase option price. The terms of the lease agreements also allow the Company to purchase the equipment at any time during a lease at its scheduled purchase option price.

        In those instances in which the Company anticipates that it will purchase aviation equipment and that the scheduled purchase option price will exceed the fair value of such equipment, the Company records an accrual for loss. The scheduled purchase option values amounted to $34,803 at November 30, 2002 and $35,623 at May 31, 2002.

        During the fourth quarter of fiscal 2002 ended May 31, 2002, the Company purchased the equity interest in $31,080 of aviation equipment. As a result, this amount was recorded as an asset on the May 31, 2002 Consolidated Balance Sheet. The lease obligations for these assets, owing to the lessor, converted to term loans upon the purchase in the amount of $29,737, which was also recorded on the May 31, 2002 Consolidated Balance Sheet.

Note K—Segment Reporting

        The Company is a leading provider of value-added products and services to the global aviation/aerospace industry. The Company reports its activities in four business segments: Inventory and Logistic Services; Maintenance, Repair and Overhaul; Manufacturing; and Aircraft and Engine Sales and Leasing.

        Revenues in the Inventory and Logistic Services segment are derived from the sale of a wide variety of new, overhauled and repaired engine and airframe parts and components to the commercial, military, general and business aviation markets.

        Revenues in the Maintenance, Repair and Overhaul segment are derived from the repair and overhaul of a wide range of commercial and military aircraft engine and airframe parts and components; repair and overhaul of a wide variety of airframes and the repair and overhaul of parts for industrial gas and steam turbine operators.

        Revenues in the Manufacturing segment are derived from the manufacture and sale of in-plane cargo loading and handling systems, advanced composite materials and components and a wide array of containers, pallets and shelters used to support the U.S. Military's tactical deployment requirements.

        Revenues in the Aircraft and Engine Sales and Leasing segment are derived from the sale and lease of used commercial aircraft and new, overhauled and repaired commercial aircraft engines.

        The accounting policies for the segments are the same as those for the Company. The chief decision making officer of the Company evaluates performance based on the segments. The expenses and assets related to corporate activities are not allocated to the segments.

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        Selected financial information for each reportable segment is as follows: