AAR CORP — Interim / Quarterly Report 2011

Sep 23, 2010

10-Q 1 a10-18134_110q.htm 10-Q

Table of Contents

*UNITED STATES*

*SECURITIES AND EXCHANGE COMMISSION*

*Washington, D.C. 20549*

*FORM 10-Q*

*x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934*

*For the Quarterly Period Ended August 31, 2010*

*or*

*o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934*

*For the transition period from to*

*Commission File No. 1-6263*

*AAR CORP.*

(Exact name of registrant as specified in its charter)

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

One AAR Place, 1100 N. Wood Dale Road Wood Dale, Illinois	60191
(Address of principal executive offices)	(Zip Code)

*(630) 227-2000*

(Registrant’s telephone number, including area code)

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 31, 2010, there were 39,662,816 shares of the registrant’s Common Stock, $1.00 par value per share, outstanding.

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Table of Contents

AAR CORP. and Subsidiaries

Quarterly Report on Form 10-Q

For the Quarter Ended August 31, 2010

Table of Contents

		Page
Part I — FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	3-4
	Condensed Consolidated Statements of Income	5
	Condensed Consolidated Statements of Cash Flows	6
	Condensed Consolidated Statement of Changes in Equity	7
	Notes to Condensed Consolidated Financial Statements	8-18
Item 2.	Management’s
Discussion and Analysis of Financial Condition and Results of Operations	19-24
Item 3.	Quantitative
and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and
Procedures	24
Part II — OTHER
INFORMATION
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item
6.	Exhibits	25
Signature Page		26
Exhibit Index		27

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Table of Contents

*PART I — FINANCIAL INFORMATION*

*Item 1 — Financial Statements*

AAR CORP. and Subsidiaries

Condensed Consolidated Balance Sheets

As of August 31, 2010 and May 31, 2010

(In thousands)

	August 31,	May 31,
	2010	2010
	(Unaudited)
Assets:
Current
assets:
Cash
and cash equivalents	$ 52,155	$ 79,370
Accounts
receivable, less allowances of $4,783 and $4,773, respectively	245,096	238,466
Inventories	378,171	370,282
Rotable
spares and equipment on or available for short-term lease	141,830	126,622
Deposits,
prepaids and other	33,516	27,194
Deferred
tax assets	21,495	21,495
Total
current assets	872,263	863,429
Property,
plant and equipment, net of accumulated depreciation of $202,940 and
$194,139, respectively	250,492	224,866
Other
assets:
Goodwill
and other intangible assets, net	165,731	169,253
Equipment
on long-term lease	104,920	109,564
Investment
in joint ventures	47,744	48,433
Other	91,583	85,497
	409,978	412,747
	$ 1,532,733	$ 1,501,042

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 August 31, 2010 and May 31, 2010

(In thousands)

	August 31, — 2010		May 31, — 2010
	(Unaudited)
Liabilities and equity:
Current liabilities:
Short-term debt	$ 60,000		$ 45,009
Current maturities of long-term debt	53,278		53,292
Current maturities of non-recourse long-term debt	773		757
Current maturities of long-term capital lease
obligations	1,827		1,775
Accounts payable	130,112		114,906
Accrued liabilities	103,243		109,811
Total current liabilities	349,233		325,550
Long-term debt, less current maturities	313,191		317,594
Non-recourse debt	11,655		11,855
Capital lease obligations	6,253		6,742
Deferred tax liabilities	58,138		57,335
Other liabilities and deferred income	34,604		35,616
	423,841		429,142
Equity:
Preferred stock, $1.00 par value, authorized 250
shares; none issued	—		—
Common stock, $1.00 par value, authorized 100,000
shares; issued 45,262 and 44,870 shares, respectively	45,262		44,870
Capital surplus	419,577		416,842
Retained earnings	432,961		419,287
Treasury stock, 5,599 and 5,386 shares at cost,
respectively	(108,049	)	(104,447	)
Accumulated other comprehensive loss	(29,536	)	(29,646	)
Total AAR shareholders’ equity	760,215		746,906
Noncontrolling interest	(556	)	(556	)
Total equity	759,659		746,350
	$ 1,532,733		$ 1,501,042

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 Income

For the Three Months Ended August 31, 2010 and 2009

(Unaudited)

(In thousands, except per share data)

	Three Months Ended August 31, — 2010		2009
Sales:
Sales
from products	$ 287,709		$ 272,529
Sales
from services	124,488		68,994
	412,197		341,523
Cost
and operating expenses:
Cost
of products	242,352		243,469
Cost
of services	98,957		44,031
Selling,
general and administrative	42,705		36,892
	384,014		324,392
Earnings
from joint ventures	28		83
Operating
income	28,211		17,214
Gain
on extinguishment of debt	97		913
Interest
expense	(7,431	)	(6,557	)
Interest
income	160		316
Income
before provision for income taxes	21,037		11,886
Provision
for income taxes	7,363		2,728
Net
income attributable to AAR and noncontrolling interest	13,674		9,158
Loss
attributable to noncontrolling interest	—		1,046
Net
income attributable to AAR	$ 13,674		$ 10,204
Earnings
per share – basic	$ 0.36		$ 0.27
Earnings
per share – diluted	$ 0.35		$ 0.27
Weighted
average common shares outstanding – basic	38,411		38,090
Weighted
average common shares outstanding – diluted	42,854		42,574

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 Three Months Ended August 31, 2010 and 2009

(Unaudited)

(In thousands)

	Three Months Ended August 31, — 2010		2009
Cash flows from operating activities:
Net
income attributable to AAR and noncontrolling interest	$ 13,674		$ 9,158
Adjustments
to reconcile net income attributable to AAR and noncontrolling interest to
net cash provided from operating activities:
Depreciation
and amortization	14,367		8,697
Amortization
of debt discount	3,011		2,867
Deferred
tax provision	1,352		(5,609	)
Tax
benefits from exercise of stock options	(1	)	(189	)
Gain
on extinguishment of debt	(97	)	(913	)
Earnings
from joint ventures	(28	)	(83	)
Changes
in certain assets and liabilities:
Accounts
and notes receivable	(2,859	)	24,469
Inventories	(8,482	)	3,046
Rotable
spares and equipment on or available for short-term lease	(15,276	)	7,795
Equipment
on long-term lease	2,076		2,407
Accounts
payable	15,221		(6,369	)
Accrued
liabilities	(7,206	)	(14,249	)
Other
liabilities	109		87
Other,
primarily deposits and program costs	(8,643	)	3,008
Net
cash provided from operating activities	7,218		34,122
Cash flows from investing activities:
Property,
plant and equipment expenditures	(37,046	)	(8,943	)
Proceeds
from disposal of assets	15		30
Proceeds
from aircraft joint ventures	598		37
Investment
in aircraft joint ventures	(1,207	)	(472	)
Proceeds
from leveraged leases	—		5,220
Other	(1,188	)	(984	)
Net
cash used in investing activities	(38,828	)	(5,112	)
Cash flows from financing activities:
Change
in short-term borrowings, net	14,991		103
Reduction
in borrowings	(7,446	)	(18,768	)
Reduction
in capital lease obligations	(436	)	(540	)
Reduction
in equity due to convertible bond repurchases	(236	)	(254	)
Purchase
of treasury stock	(2,539	)	—
Stock
option exercises	47		323
Tax
benefits from exercise of stock options	1		189
Contributions
from noncontrolling interest	—		231
Net
cash provided from (used in) financing activities	4,382		(18,716	)
Effect
of exchange rate changes on cash	13		41
Increase
(decrease) in cash and cash equivalents	(27,215	)	10,335
Cash
and cash equivalents, beginning of period	79,370		112,505
Cash
and cash equivalents, end of period	$ 52,155		$ 122,840

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 Statement of Changes in Equity

For the Three Months Ended August 31, 2010

(Unaudited)

(In thousands)

	Common Stock	Treasury Stock		Capital Surplus	Retained Earnings	Accumulated Other Comprehensive Income (Loss)		Total AAR Stockholders’ Equity		Noncontrolling Interest		Total Equity
Balance, May 31, 2010	$ 44,870	$ (104,447	)	$ 416,842	$ 419,287	$ (29,646	)	$ 746,906		$ (556	)	$ 746,350
Net income	—	—		—	13,674	—		13,674		—		13,674
Exercise of stock options and stock awards	4	(926	)	938	—	—		16		—		16
Restricted stock activity	388	—		1,347	—	—		1,735		—		1,735
Repurchase of shares	—	(2,539	)	—	—	—		(2,539	)	—		(2,539	)
Bond hedge and warrant activity	—	(137	)	137	—	—		—		—		—
Equity portion of bond repurchase	—	—		313	—	—		313		—		313
Foreign currency translation gain	—	—		—	—	110		110		—		110
Balance, August 31, 2010	$ 45,262	$ (108,049	)	$ 419,577	$ 432,961	$ (29,536	)	$ 760,215		$ (556	)	$ 759,659

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

August 31, 2010

(Unaudited)

(Dollars in thousands, except per share amounts)

Note 1 — Basis of Presentation

AAR CORP. and its subsidiaries are referred to herein collectively as “AAR,” “Company,” “we,” “us,” and “our” unless the context indicates otherwise. The accompanying condensed consolidated financial statements include the accounts of AAR and its subsidiaries after elimination of intercompany accounts and transactions.

We have prepared these statements 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, 2010 has been derived from audited financial statements. To prepare the financial statements in conformity with U.S. generally accepted accounting principles, 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 note disclosures, normally included in comprehensive financial statements prepared in accordance with U.S. generally accepted accounting principles, 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 our latest annual report on Form 10-K.

In the opinion of management, 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 August 31, 2010, the condensed consolidated statements of income and cash flows for the three-month periods ended August 31, 2010 and 2009 and the condensed consolidated statement of changes in equity for the three-month period ended August 31, 2010. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Note 2 — Accounting for Stock-Based Compensation

We provide stock-based awards under the AAR CORP. Stock Benefit Plan (“Stock Benefit Plan”) which has been approved by our stockholders. Under this plan, we are authorized to issue stock options to employees and non-employee directors that allow the grant recipients to purchase shares of common stock at a price not less than the fair market value of the common stock on the date of grant. Generally, stock options awarded expire ten years from the date of grant and are exercisable in three, four or five equal annual increments commencing one year after the date of grant. We issue common stock upon the exercise of stock options. In addition to stock options, the Stock Benefit Plan also provides for the grant of restricted stock awards and performance based restricted stock awards. The amount of performance-based awards earned is based on achievement of certain company wide financial goals or stock price targets. The Stock Benefit Plan also provides for the grant of stock appreciation units; however, to date, no stock appreciation units have been granted.

We measure share-based compensation based on the fair value of the award at the grant date, and recognize the cost of share-based awards over the applicable service period, which is generally the vesting period. Performance-based restricted stock compensation is recognized over the applicable service period and based on the level of achievement that is considered probable.

During the three-month periods ended August 31, 2010 and 2009, we granted stock options representing 691,471 shares and 687,000 shares, respectively.

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AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

August 31, 2010

(Unaudited)

(Dollars in thousands, except per share amounts)

The weighted average fair value of stock options granted during the three-month periods ended August 31, 2010 and 2009 was $7.94 and $7.40, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	Three Months Ended
	August 31,
	2010	2009
Risk-free interest rate	1.9 %	2.3 %
Expected volatility of common stock	47.0 %	49.2 %
Dividend yield	0.0 %	0.0 %
Expected option term in years	5.8	6.0

The following table summarizes stock option activity for the three-month period ended August 31, 2010:

				Weighted
			Weighted	Average
	Number of		Average	Remaining	Aggregate
	Options		Exercise	Contractual	Intrinsic
	(in thousands)		Price	Life (years)	Value
Outstanding at May 31, 2010	1,543		$ 19.28
Granted	691		$ 17.27
Exercised	(3	)	$ 15.51
Cancelled	(42	)	$ 23.80
Outstanding at August 31, 2010	2,189		$ 18.51	5.6	$ 831
Exercisable at August 31, 2010	911		$ 19.82	5.5	$ 715

The total fair value of stock options that vested during the three-month periods ended August 31, 2010 and 2009 was $2,275 and $682, respectively. The total intrinsic value of stock options exercised during the three-month periods ended August 31, 2010 and 2009 was $4 and $534, respectively. The tax benefit realized from stock options exercised during the three-month periods ended August 31, 2010 and 2009 was $1 and $189, respectively. Expense charged to operations for stock options during the three-month periods ended August 31, 2010 and 2009 was $888 and $407, respectively. As of August 31, 2010, we had $9,930 of unearned compensation related to stock options that will be amortized over an average remaining period of 2.5 years.

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AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

August 31, 2010

(Unaudited)

(Dollars in thousands, except per share amounts)

The fair value of restricted stock awards is the market value of our common stock on the date of grant. Amortization expense related to restricted stock awards during the three-month periods ended August 31, 2010 and 2009 was $1,735 and $1,415, respectively.

Restricted share activity during the three-month period ended August 31, 2010 is as follows:

	Number of — Shares		Weighted Average — Fair Value
	(in thousands)		on Grant Date
Unvested at May 31, 2010	1,205		$ 23.93
Granted	400		$ 17.32
Vested	(210	)	$ 17.62
Forfeited	(12	)	$ 20.53
Unvested at August 31, 2010	1,383		$ 23.01

During the three-month period ended August 31, 2010, we granted a total of 36,000 restricted shares to members of the Board of Directors. As of August 31, 2010 we had $18,528 of unearned compensation related to restricted shares that will be amortized to expense over a weighted average period of 2.8 years.

Stock Repurchase Authorization

On June 20, 2006 our Board of Directors authorized us to purchase up to 1,500,000 shares of our common stock on the open market. During the first quarter of fiscal 2011, we purchased 150,000 shares of our common stock on the open market at an average price of $16.92, leaving 1,028,300 shares still available for repurchase.

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AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

August 31, 2010

(Unaudited)

(Dollars in thousands, except per share amounts)

Note 3 — Inventory

The summary of inventories is as follows:

	August 31,	May 31,
	2010	2010
Raw materials and parts	$ 66,206	$ 62,737
Work-in-process	57,411	51,523
Purchased aircraft, parts, engines and components
held for sale	254,554	256,022
	$ 378,171	$ 370,282

Note 4 — Supplemental Cash Flow Information

	Three Months Ended
	August 31,
	2010	2009
Interest paid	$ 3,609	$ 4,154
Income taxes paid	3,053	6,382
Income tax refunds
received	67	55

Note 5 — Comprehensive Income

A summary of the components of comprehensive income is as follows:

	Three Months Ended
	August 31,
	2010	2009
Net income attributable to AAR and noncontrolling
interest	$ 13,674	$ 10,204
Other comprehensive income —
Cumulative translation adjustments	110	432
Total comprehensive income	$ 13,784	$ 10,636

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AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

August 31, 2010

(Unaudited)

(Dollars in thousands, except per share amounts)

Note 6 — Financing Arrangements

A summary of our recourse and non-recourse long-term debt is as follows:

	August 31, — 2010		May 31, — 2010
Recourse debt
Notes payable due May 15, 2011 with interest
at 8.39% payable semi-annually on June 1 and December 1	$ 42,000		$ 42,000
Note payable due July 19, 2012 with interest
at 7.22%, payable monthly	3,657		4,116
Note payable due May 1, 2015 with interest at
3.5%, payable monthly	61,905		64,225
Mortgage loan (secured by Wood Dale, Illinois
facility) due August 1, 2015 with interest at 5.01%	11,000		11,000
Convertible notes payable due March 1, 2014
with interest at 1.625% payable semi-annually on March 1 and
September 1	70,801		69,957
Convertible notes payable due March 1, 2016
with interest at 2.25% payable semi-annually on March 1 and
September 1	49,623		53,652
Convertible notes payable due February 1,
2026 with interest at 1.75% payable semi-annually on February 1 and
August 1	102,425		100,828
Industrial revenue bonds (secured by trust
indenture on property, plant and equipment) due December 1, 2010 and
August 1, 2018 with floating interest rate, payable monthly	25,058		25,108
Total recourse debt	366,469		370,886
Current maturities of recourse debt	(53,278	)	(53,292	)
Long-term recourse debt	$ 313,191		$ 317,594
Non-recourse debt
Non-recourse note payable due July 19, 2012 with
interest at 7.22%	$ 8,201		$ 8,201
Non-recourse note payable due April 3, 2015
with interest at 8.38%	4,227		4,411
Total non-recourse debt	12,428		12,612
Current maturities of non-recourse debt	(773	)	(757	)
Long-term non-recourse debt	$ 11,655		$ 11,855

During the first quarter of fiscal 2011, we retired $6,000 par value of our 2.25% convertible notes due March 1, 2010. The notes were retired for $4,667 cash, and the gain of $97, after consideration of unamortized discount and debt issuance costs, is recorded in gain on extinguishment of debt on the condensed consolidated statements of income.

During the first quarter of fiscal 2010, we retired $10,500 par value of our 1.625% convertible notes due March 1, 2014 and $2,000 par value of our 2.25% convertible notes due March 1, 2016. Collectively, the convertible notes were retired for $9,115 cash, and the gain of $913, after consideration of unamortized discount and debt issuance costs, is recorded in gain on extinguishment of debt on the condensed consolidated statements of income.

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AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

August 31, 2010

(Unaudited)

(Dollars in thousands, except per share amounts)

At August 31, 2010, the face value of our long-term recourse debt was $412,000 and the estimated fair value was approximately $374,000. The fair value was estimated using available market information.

Change in method of accounting for Convertible Notes

On June 1, 2009, we adopted a new accounting standard that clarifies the accounting for convertible debt instruments that may be settled wholly or partly in cash when converted, and requires convertible debt to be accounted for as two components: (i) a debt component which is recorded upon issuance at the estimated fair value of a similar straight-debt instrument without the debt-for-equity conversion feature; and (ii) an equity component that is included in capital surplus and represents the estimated fair value of the conversion feature at issuance. The bifurcation of the debt and equity components results in a discounted carrying value of the debt component compared to the principal amount. The discount is accreted to the carrying value of the debt component through interest expense over the expected life of the debt using the effective interest method.

As of August 31, 2010 and May 31, 2010, the long-term debt and equity component (recorded in capital surplus, net of income tax benefit) consisted of the following:

	August 31, — 2010		May 31, — 2010
Long-term debt:
Principal amount	$ 268,380		$ 274,380
Unamortized discount	(45,531	)	(49,943	)
Net carrying amount	$ 222,849		$ 224,437
Equity component, net of tax	$ 74,966		$ 74,653

The discount on the liability component of long-term debt is being amortized using the effective interest method based on an effective rate of 8.48% for our 1.75% convertible notes; 6.82% for our 1.625% convertible notes and 7.41% for our 2.25% convertible notes. For our 1.75% convertible notes, the discount is being amortized through February 1, 2013, which is the first put date for those notes. For our 1.625% and 2.25% convertible notes, the discount is being amortized through their respective maturity dates of March 1, 2014 and March 1, 2016.

As of August 31, 2010, for each of our convertible note issuances, the “if converted” value does not exceed its principal amount.

The interest expense associated with the convertible notes was as follows:

	Three Months Ended
	August 31,
	2010	2009
Coupon interest	$ 1,247	$ 1,288
Amortization of deferred financing fees	189	195
Amortization of discount	3,011	2,867
Interest expense related to convertible notes	$ 4,447	$ 4,350

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AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

August 31, 2010

(Unaudited)

(Dollars in thousands, except per share amounts)

Note 7 — Earnings per Share

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, shares issuable upon vesting of restricted stock awards and shares to be issued upon conversion of convertible debt.

We use the “if-converted” method in calculating the diluted earnings per share effect of the assumed conversion of our contingently convertible debt issued in fiscal 2006 because the principal for that issuance can be settled in stock, cash or a combination thereof. Under the “if converted” method, the after-tax effect of interest expense related to the convertible securities is added back to net income, and the convertible debt is assumed to have been converted into common shares at the beginning of the period.

The following table provides a reconciliation of the computations of basic and diluted earnings per share information for the three-month periods ended August 31, 2010 and 2009.

	Three Months Ended
	August 31,
	2010	2009
Net income attributable to AAR	$ 13,674	$ 10,204
Basic shares:
Weighted average common shares outstanding	38,411	38,090
Earnings per share — basic	$ 0.36	$ 0.27
Net income attributable to AAR	$ 13,674	$ 10,204
Add: After-tax interest on convertible debt	1,371	1,288
Net income for diluted EPS calculation	$ 15,045	$ 11,492
Diluted shares:
Weighted average common shares outstanding	38,411	38,090
Additional shares from the assumed exercise of
stock options	85	110
Additional shares from the assumed vesting of
restricted stock	290	306
Additional shares from the assumed conversion of
convertible debt	4,068	4,068
Weighted average common shares outstanding —
diluted	42,854	42,574
Earnings per share — diluted	$ 0.35	$ 0.27

At August 31, 2010 and 2009, respectively, stock options to purchase 1,232,000 and 631,000 shares of common stock were outstanding, but were not included in the computation of diluted earnings

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AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

August 31, 2010

(Unaudited)

(Dollars in thousands, except per share amounts)

per share because the exercise price of each of these options was greater than the average market price of the common shares during the interim periods then ended.

Note 8 —Aircraft Portfolio

Within our Aviation Supply Chain segment, we own commercial aircraft with joint venture partners as well as aircraft that are wholly-owned. These aircraft are available for lease or sale to commercial air carriers.

Joint Ventures

As of August 31, 2010, the Company had ownership interests in 26 aircraft with joint venture partners. As of August 31, 2010, our equity investment in the 26 aircraft owned with joint venture partners was approximately $41,169 and is included in investment in joint ventures on the Condensed Consolidated Balance Sheet. Our aircraft joint ventures represent investments in limited liability companies that are accounted for under the equity method of accounting. Our membership interest in each of these limited liability companies is 50% and the primary business of these companies is the acquisition, ownership, lease and disposition of certain commercial aircraft. Aircraft are purchased with cash contributions by the members of the companies and debt financing provided to the limited liability companies on a limited recourse basis. Under the terms of servicing agreements with certain of the limited liability companies, we provide administrative services and technical advisory services, including aircraft evaluations, oversight and logistical support of the maintenance process and records management. We also provide remarketing services with respect to the divestiture of aircraft by the limited liability companies. For the three-month periods ended August 31, 2010 and 2009, we were paid $212 and $196, respectively, for such services. The income tax benefit or expense related to the operations of the ventures is recorded by the member companies.

Distributions from joint ventures are classified as operating or investing activities in the consolidated statements of cash flows based upon an evaluation of the specific facts and circumstances of each distribution.

Summarized financial information for these limited liability companies is as follows:

	Three Months Ended
	August 31,
	2010	2009
Sales	$ 12,266	$ 11,264
Income before provision for income taxes	254	356

	August 31,	May 31,
	2010	2010
Balance sheet information:
Assets	$ 250,464	$ 259,965
Debt	159,100	167,255
Members’ capital	88,018	89,449

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AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

August 31, 2010

(Unaudited)

(Dollars in thousands, except per share amounts)

Wholly-Owned Aircraft

In addition to the aircraft owned with joint venture partners, we own five aircraft for our own account. A former lessee of two of our wholly-owned aircraft is in arrears for amounts due under the leases. We have obtained a judgment against the lessee and its affiliated guarantor and expect to recover past due rental amounts. Our net investments in these two aircraft after consideration of non-recourse financing are $7,426 and $5,246, respectively. Our investment in the five wholly-owned aircraft, after consideration of financing, is comprised of the following components:

	August 31, — 2010		May 31, — 2010
Gross carrying value	$ 50,518		$ 50,854
Non-recourse debt	(16,085	)	(16,728	)
Non-recourse capital
lease obligation	(8,061	)	(8,492	)
Net AAR investment	$ 26,372		$ 25,634

Information relating to aircraft type, year of manufacture, lessee, lease expiration date and expected disposition upon lease expiration for the 26 aircraft owned with joint venture partners and five wholly-owned aircraft is as follows:

Aircraft owned with joint venture partners

Quantity	Aircraft Type	Year — Manufactured	Lessee	Lease Expiration — Date (FY)	Post-Lease — Disposition
2	737-300	1987	US Airways	2011,2012	Re-lease/Disassemble
2	767-300	1991	United Airlines	2016 and 2017	Re-lease
1	757-200	1989	US Airways	2012	Forward Sale 11/2011
1	747-400	1989	Delta Airlines	2014	Re-lease/Disassemble
1	737-300	1997	flyLAL Charters	2013	Re-lease
1	A320	1992	Air Canada	2015	Disassemble
18	737-400	1992-1997	Malaysia Airlines	Various(1)	Re-lease
26

Wholly-owned aircraft

Quantity	Aircraft Type	Year — Manufactured	Lessee	Lease Expiration — Date (FY)	Post-Lease — Disposition
1	MD83	1989	Meridiana	2011	Sale/Re-lease
2	A320	1992, 1997	Available	—	Re-lease
1	A320	1992	Air Canada	2015	Re-lease
1	CRJ 200	1999	Air Wisconsin	2017	Sale/Disassemble
5

(1) 5 aircraft in 2011; 11 aircraft in 2012 and 2 aircraft in 2013

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AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

August 31, 2010

(Unaudited)

(Dollars in thousands, except per share amounts)

Note 9 — Business Segment Information

We report our activities in four business segments: Aviation Supply Chain; Government and Defense Services; Maintenance, Repair and Overhaul; and Structures and Systems. In fiscal 2010, we revised our segments to align with the way our Chief Executive Officer evaluates performance and the way we are internally organized. Prior year information was revised to conform with our new segment presentation.

Sales in the Aviation Supply Chain segment are derived from the sale and lease of a wide variety of new, overhauled and repaired engine and airframe parts and components principally to the commercial aviation market. We also offer customized inventory supply chain management programs. Sales also include the sale and lease of commercial aircraft and jet engines and technical and advisory services. Cost of sales consists principally of the cost of product, direct labor, overhead (primarily indirect labor, facility cost and insurance) and the cost of lease revenue (primarily depreciation and insurance).

Sales in the Government and Defense Services segment are derived from the sale of new and overhauled engine and airframe parts and components, customized performance based logistics programs, expeditionary airlift services, aircraft modifications and engineering, design, and integration services to our government and defense customers. Cost of sales consists principally of the cost of the product (primarily aircraft and engine parts), direct labor, overhead and aircraft maintenance costs.

Sales in the Maintenance, Repair and Overhaul segment are principally derived from aircraft maintenance, including painting, and the repair and overhaul of landing gear. Cost of sales consists principally of the cost of product (primarily replacement aircraft parts), direct labor and overhead.

Sales in the Structures and Systems segment are derived from the engineering, design and manufacture of containers, pallets and shelters used to support the U.S. military’s tactical deployment requirements, complex machined and fabricated parts, components and sub-systems for various aerospace and defense programs and other applications, in-plane cargo loading and handling systems for commercial and military applications and composite products for aviation and industrial use. Cost of sales consists principally of the cost of product, direct labor and overhead.

The accounting policies for the segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements included in our annual report on Form 10-K for the year ended May 31, 2010. Our chief operating decision making officer (Chief Executive Officer) evaluates performance based on the reportable segments and utilizes gross profit as a primary profitability measure. The expenses and assets related to corporate activities are not allocated to the segments. Our reportable segments are aligned principally around differences in products and services.

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AAR CORP. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

August 31, 2010

(Unaudited)

(Dollars in thousands, except per share amounts)

Gross profit is calculated by subtracting cost of sales from sales. Selected financial information for each reportable segment is as follows:

	Three Months Ended
	August 31,
	2010	2009
Sales:
Aviation Supply Chain	$ 108,070	$ 110,637
Government and Defense Services	129,330	36,743
Maintenance, Repair and Overhaul	76,819	79,217
Structures and Systems	97,978	114,926
	$ 412,197	$ 341,523

	Three Months Ended
	August 31,
	2010	2009
Gross profit:
Aviation Supply Chain	$ 20,127	$ 15,965
Government and Defense Services	23,022	7,705
Maintenance, Repair and Overhaul	10,107	10,539
Structures and Systems	17,632	19,814
	$ 70,888	$ 54,023

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AAR CORP. and Subsidiaries

August 31, 2010

*Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations*

*(Dollars in thousands)*

*General Overview*

We report our activities in four business segments: Aviation Supply Chain; Government and Defense Services; Maintenance, Repair and Overhaul; and Structures and Systems. The table below sets forth consolidated sales for our four business segments for the three-month periods ended August 31, 2010 and 2009.

	Three Months Ended
	August 31,
	2010	2009
Sales:
Aviation Supply Chain	$ 108,070	$ 110,637
Government and Defense Services	129,330	36,743
Maintenance, Repair and Overhaul	76,819	79,217
Structures and Systems	97,978	114,926
	$ 412,197	$ 341,523

In approximately mid fiscal year 2008, many U.S. air carriers announced a series of cost reduction initiatives, including staffing reductions, route consolidations and capacity reductions. These cost reductions were principally in response to high oil prices. During fiscal 2009, U.S. air carriers further reduced capacity, principally in response to weak economic conditions in the U.S. and most other industrialized nations. Certain foreign carriers also reduced capacity in response to weak world-wide economic conditions. The reduction in the global operating fleet of passenger and cargo aircraft has resulted in reduced demand for parts support and maintenance activities for the types of aircraft affected. Notwithstanding improving economic signs, the airlines are moving slowly to add capacity and resume more historically normal inventory provisioning activities.

Although financial markets stabilized during fiscal 2010, disruptions in the financial markets beginning in fiscal 2008 reduced the amount of liquidity available to certain of our customers, which in turn impacted their ability to buy parts, services, aircraft and engines.

We expect many carriers will continue to seek ways to reduce their cost structure, including outsourcing more of their maintenance and support functions to third parties, while we believe other carriers who have historically outsourced their maintenance requirements will continue to do so. Although we believe we remain well-positioned to respond to the market with our broad range of products and services, the factors above may continue to have an adverse impact on our growth rates and our results of operations and financial condition.

During the first quarter of fiscal 2011, sales to global government and defense customers increased 44.7% compared to prior year and at August 31, 2010 represented 55.4% of consolidated sales. The increase was largely driven by sales attributable to Aviation Worldwide Services (“AWS”), which the Company acquired on April 7, 2010. Although it remains difficult for us to predict long-term demand for these types of products and services, we believe we are well positioned with our current portfolio of products and services and growth plans to benefit from longer-term U.S. military deployment and program management strategies.

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*Results of Operations*

*Three-Month Period Ended August 31, 2010*

Consolidated sales for the first quarter ended August 31, 2010 increased $70,674 or 20.7% compared to the prior year period. Sales to commercial customers were flat compared to the prior year, while sales to government and defense customers increased 44.7% reflecting the inclusion of AWS, and increased sales at the Company’s defense logistics business.

In the Aviation Supply Chain segment, sales declined $2,567 or 2.3% compared to the prior year. Prior year’s sales included a $5,329 sale of an interest in an aircraft leveraged lease. Gross profit in the Aviation Supply Chain segment increased $4,162 or 26.1% and the gross profit margin percentage increased to 18.6% from 14.4% in the prior year as the prior year gross profit was unfavorably impacted by the sale of the interest in a leveraged lease, in which the Company recorded a $3,800 negative gross profit margin.

In the Government and Defense Services segment, sales increased $92,587 or 252.0% compared to the prior year. The sales increase reflects the inclusion of revenue from AWS which contributed $65,269 of revenue during the first quarter, as well as growth in the Company’s defense logistics business due to the ramp-up of a new performance-based logistics program. Gross profit increased $15,317 or 198.8% and the gross profit margin percentage declined to 17.8% from 21.0% in the prior year reflecting lower margins in the defense logistics business due to transition costs associated with a new performance-based logistics program and a contract adjustment which lowered the pricing for services we deliver under another supply chain program.

In the Maintenance, Repair and Overhaul segment, sales declined $2,398 or 3.0% versus the prior year and gross profit declined $432 or 4.1%, and the gross profit margin percentage declined to 13.2% from 13.3% in the prior year. The slight decline in sales and gross profit was attributable to slightly fewer maintenance events by our airline customers.

In the Structures and Systems segment, sales decreased $16,948 or 14.7% over the prior year reflecting an expected decline in the volume of our mobility products business. Gross profit in the Structures and Systems segment decreased $2,182 or 11.0% due to the lower volume, and the gross profit margin percentage increased to 18.0% from 17.2% in the prior year due to the mix of products sold.

Operating income increased $10,997 or 63.9% compared with the prior year due the increase in sales, primarily in the Government and Defense Services segment, as well as an improvement in the consolidated gross profit margin to 17.2% versus 15.8% in the prior year. Selling, general and administrative expenses increased $5,813 or 15.8% reflecting the inclusion of selling, general and administrative expenses of AWS. Earnings from aircraft joint ventures were essentially flat at $28 compared to $83 in the prior year. Net interest expense increased $1,030 or 16.5% compared to the prior year primarily due to an increase in outstanding borrowings. Our effective income tax rate increased to 35.0% in the first quarter of fiscal 2011 compared to 23.0% last year, as the prior year rate reflected a favorable tax impact from the sale of the interest in the aircraft leveraged lease discussed above.

During the first quarter of fiscal 2011, we retired $6,000 par value of our 2.25% convertible notes resulting in a net gain on extinguishment of debt of $97.

Net income attributable to AAR was $13,674 compared to $10,204 in the prior year due to the factors discussed above.

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*Liquidity and Capital Resources*

Historically, we have funded our operating activities and met our commitments through the generation of cash from operations, augmented by the periodic issuance of common stock and debt in the public and private markets. In addition to these cash sources, our current capital resources include our unsecured credit facility. We regularly evaluate various financing arrangements, including the issuance of common stock or debt, which would allow us to improve our liquidity position and finance future growth on commercially reasonable terms. Our continuing ability to borrow from our lenders and issue debt and equity securities to the public and private markets in the future may be negatively affected by a number of factors, including the overall health of the credit markets, general economic conditions, airline industry conditions, geo-political events, and our operating performance. Our ability to generate cash from operations is influenced primarily by our operating performance and changes in working capital. Under a universal shelf registration statement filed with the Securities and Exchange Commission that became effective on December 12, 2008, we may offer and sell up to $300,000 of various types of securities, including common stock, preferred stock and medium-term or long-term debt securities, subject to market conditions.

At August 31, 2010, our liquidity and capital resources included cash of $52,155 and working capital of $523,030. Our revolving credit agreement, as amended (the “Credit Agreement”) with various financial institutions, as lenders, and Bank of America National Association as successor by merger to LaSalle Bank National Association (“Bank of America”), as administrative agent for the lenders, provides us with unsecured revolving borrowing capacity of up to $250,000. Under certain circumstances, we may request an increase to the revolving commitment by an aggregate amount of up to $75,000, not to exceed $325,000 in total. The term of our Credit Agreement extends to August 31, 2011. Borrowings under the Credit Agreement bear interest at the London Interbank Offered Rate (“LIBOR”) plus 100 to 237.5 basis points based on certain financial measurements. Borrowings outstanding under this facility at August 31, 2010 were $60,000, and there were approximately $9,607 of outstanding letters of credit which reduced the availability of this facility. In addition to our Credit Agreement, we also have $3,247 available under a foreign line of credit.

During the three-month period ended August 31, 2010, cash flow from operations was $7,218 primarily as a result of net income attributable to AAR and noncontrolling interest and depreciation and amortization of $31,052, partially offset by a net increase in certain assets and liabilities of $25,060, primarily reflecting investments in inventory and equipment on or available for short-term lease to support growth initiatives in several of the Company’s business units.

During the three-month period ended August 31, 2010, our investing activities used $38,828 of cash principally as a result of capital expenditures of $37,046, which mainly represent helicopters and other equipment purchased to support growth and improve operating performance in our Government and Defense Services segment.

During the three-month period ended August 31, 2010, our financing activities generated $4,382 of cash primarily due to an increase in short-term borrowings of $14,991, partially offset by a reduction in borrowings of $7,466 which includes the retirement of convertible notes for $4,667 cash, and the purchase of treasury stock for $2,539.

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*Critical Accounting Policies and Significant Estimates*

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Management has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare the consolidated financial statements. The most significant estimates made by management include those related to the allowance for doubtful accounts, assumptions used in assessing goodwill impairment, adjustments to reduce the value of inventories and aviation equipment on or available for lease, revenue recognition, loss accruals for aviation equipment operating leases, program development costs and assumptions used in determining pension plan obligations. Accordingly, actual results could differ materially from those estimates. The following is a summary of the accounting policies considered critical by management.

Allowance for Doubtful Accounts

Our allowance for doubtful accounts is intended to reduce the value of customer accounts receivable to amounts expected to be collected. In determining the required allowance, we consider factors such as general and industry-specific economic conditions, customer credit history, and our customer’s current and expected future financial performance.

Goodwill and Other Intangible Assets

Under accounting standards for goodwill and other intangible assets, goodwill and other intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests. The Company reviews and evaluates its goodwill and indefinite life intangible assets for potential impairment at a minimum annually, on May 31, or more frequently if circumstances indicate that impairment is possible. We use a two step process to evaluate goodwill for impairment. In the first step, we compare the fair value of each reporting unit with the carrying value of the reporting unit, including goodwill. We estimate the fair value of each reporting unit using a valuation technique based on a multiple of earnings or discounted cash flows. If the estimated fair value of the reporting unit is less than the carrying value of the reporting unit, we would be required to complete a second step to determine the amount of goodwill impairment. In the second step, we would determine an implied fair value of the reporting unit’s goodwill by allocating the reporting unit’s fair value to all of the assets and liabilities other than goodwill. We then would compare the implied fair value of goodwill to the carrying amount and recognize the difference as an impairment charge.

On August 31, 2010, our book value was $19.15 per share. On August 31, 2010, our share price closed at $15.36 per share on the New York Stock Exchange and on September 22, 2010, our share price closed at $18.56 per share. We considered this factor, along with other important factors, and concluded it was not necessary to perform a goodwill impairment test as of August 31, 2010. We will continue to monitor market conditions, and the resultant impact, if any, on the carrying value of goodwill.

The assumptions we used to estimate the fair value of our reporting units are based on historical performance as well as forecasts used in our current business plan.

The amount reported under the caption “Goodwill and other intangible assets, net” is comprised of goodwill and intangible assets associated with acquisitions we made, principally since the beginning of fiscal 1998.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined by the specific identification, average cost or first-in, first-out methods. Provisions are made for excess and obsolete inventories and inventories that have been impaired as a result of industry conditions. We have utilized

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certain assumptions when determining the market value of inventories, such as historical sales of inventory, current and expected future aviation usage trends, replacement values and expected future demand. Reductions in demand for certain of our inventories or declining market values, as well as differences between actual results and the assumptions utilized by us when determining the market value of our inventories, could result in the recognition of impairment charges in future periods.

Revenue Recognition

Certain supply chain management programs that we provide to our customers contain multiple elements or deliverables, such as program and warehouse management, parts distribution and maintenance and repair services. We recognize revenue for each element or deliverable that can be identified as a separate unit of accounting at the time of delivery based upon the relative fair value of the products and services. In connection with these programs, we are required to make certain judgments and estimates concerning the overall profitability of the program and the relative fair value of each element of the arrangement. Differences may occur between the judgments and estimates made by management and actual program results.

Equipment on or Available for Lease

The cost of assets under lease is original purchase price plus overhaul costs. Depreciation is computed using the straight-line method over the estimated service life of the equipment, and maintenance costs are expensed as incurred.

We are required to test for impairment of long-lived assets whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable from its undiscounted cash flows. When applying accounting standards addressing impairment to equipment on or available for lease, we have utilized certain assumptions to estimate future undiscounted cash flows, including current and future lease rates, lease terms, residual values and market conditions and trends impacting future demand. Differences between actual results and the assumptions utilized by us when determining undiscounted cash flows could result in future impairments of aircraft and engines which are currently being leased or are available for lease.

Program Development Costs

In June 2005, we announced that our Cargo Systems business was selected to provide cargo handling systems for the new Airbus A400M Military Transport Aircraft (“A400M”). We are a subcontractor to Pfalz Flugzeugwerke GmbH (“PFW”) on this Airbus program. Our portion of the revenue from this program is expected to exceed $300,000 through fiscal 2020, based on sales projections of the A400M. As of August 31, 2010, we have capitalized, net of reimbursements, approximately $54,800 of costs associated with the engineering and development of the cargo system. Sales and related cost of sales will be recognized on the units of delivery method. In determining the recoverability of the capitalized program development costs, we have utilized certain judgments and estimates concerning expected revenues and the cost to manufacture the A400M cargo system. Differences between actual results and the assumptions utilized by us may result in us not fully recovering the value of the program development costs, which would unfavorably impact our financial condition and results of operations.

Pension Plans

The liabilities and net periodic cost of our pension plans are determined utilizing several actuarial assumptions, the most significant of which are the discount rate and the expected long-term rate of return on plan assets.

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Our discount rate is determined based on a review of long-term, high quality corporate bonds as of May 31, 2010, and models that match projected benefit payments to coupons and maturities from the high quality bonds. The assumption for the expected long-term return on plan assets is developed through analysis of historical asset returns by investment category, our fund’s actual return experience and current market conditions. Changes in the discount rate and differences between expected and actual return on plan assets may impact the amount of net periodic pension expense recognized in our consolidated statement of income.

*Forward-Looking Statements*

This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on beliefs of our management, as well as assumptions and estimates based on information available to us as of the dates such assumptions and estimates are made, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors, including those factors discussed under Part II, Item 1A under the heading “Risk Factors” and to those set forth under Part I, Item 1A in our Annual Report on Form 10-K for the year ended May 31, 2010. Should one or more of those risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. Those events and uncertainties are difficult or impossible to predict accurately and many are beyond our control. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

*Item 3 — Quantitative and Qualitative Disclosures About Market Risk*

There were no material changes to our market risk as set forth in Item 7A of our Annual Report on Form 10-K for the year ended May 31, 2010.

*Item 4 — Controls and Procedures*

As required by Rules 13a-15(e) and 15d-15(e) of the Exchange Act, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of August 31, 2010. This evaluation was carried out under the supervision and with participation of our Chief Executive Officer and Chief Financial Officer. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Therefore, effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of August 31, 2010.

There were no changes in our internal control over financial reporting during the first quarter ended August 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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*PART II — OTHER INFORMATION*

*Item 1A — Risk Factors*

There have been no material changes to our risk factors as set forth in our Annual Report on Form 10-K for the year ended May 31, 2010.

*Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds (Dollars in thousands, except per share data)*

(c) The following table provides information about purchases we made during the quarter ended August 31, 2010 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:

Period	Total Number of Shares Purchased (1)	Average Price Paid per Share (1)	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
6/1/2010 – 6/30/2010	—	$ —	—	$ 19,725
7/1/2010 – 7/31/2010	61,416	$ 16.97	—	$ 19,795
8/1/2010 – 8/31/2010	151,215	$ 16.93	150,000	$ 15,795
Total	212,631	$ 16.94	150,000

(1) These amounts include share repurchases pursuant to the Company’s stock repurchase plan, shares transferred to us from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock, the impact of net share settlements on bond hedge and warrants associated with convertible bond repurchases and shares surrendered by employees in payment of the exercise price of stock options.

(2) The Company’s common stock repurchase plan was approved by our Board of Directors on June 20, 2006. As of August 31, 2010, 1,028,300 of the original 1,500,000 shares are still available for repurchase.

*Item 6 — Exhibits*

The exhibits to this report are listed on the Exhibit Index included elsewhere herein. Management contracts and compensatory arrangements have been marked with an asterisk (*) on the Exhibit Index.

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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:	September 23,
2010	/s/
RICHARD J. POULTON
		Richard
J. Poulton
		Vice
President, Chief Financial Officer and Treasurer
		(Principal
Financial Officer and officer duly
		authorized
to sign on behalf of registrant)
		/s/
MICHAEL J. SHARP
		Michael
J. Sharp
		Vice
President, Controller and Chief Accounting Officer
		(Principal
Accounting Officer)

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Table of Contents

EXHIBIT INDEX

Exhibit No.	Description		Exhibits
31.	Rule 13a-14(a)/15(d)-14(a)
Certifications	31.1	Section 302
Certification dated September 23, 2010 of David P. Storch, Chairman and
Chief Executive Officer of Registrant (filed herewith).
		31.2	Section 302
Certification dated September 23, 2010 of Richard J. Poulton, Vice
President, Chief Financial Officer and Treasurer of Registrant (filed
herewith).
32.	Section 1350
Certifications	32.1	Section 906
Certification dated September 23, 2010 of David P. Storch, Chairman and
Chief Executive Officer of Registrant (filed herewith).
		32.2	Section 906
Certification dated September 23, 2010 of Richard J. Poulton, Vice
President, Chief Financial Officer and Treasurer of Registrant (filed
herewith).
101.	Interactive
Data File	101	The
following materials from the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended August 31, 2010, formatted in XBRL (eXtensible
Business Reporting Language); (i) Condensed Consolidated Balance Sheets
at August 31, 2010 and May 31, 2010, (ii) Condensed
Consolidated Statements of Income for the three months ended August 31,
2010 and 2009, (iii) Condensed Consolidated Statements of Cash Flows for
the three months ended August 31, 2010 and 2009, (iv) Condensed
Consolidated Statement of Changes in Equity for the three months ended
August 31, 2010 and (v) Notes to Condensed Consolidated Financial
Statements.*

• Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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