Stock-Based Compensation

12 Months Ended

May 31, 2011

Stock-Based Compensation

Stock-Based Compensation

3. 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 grant 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 become 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 number of performance-based shares 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 and restricted stock unit awards; however, to date, no stock appreciation units or restricted stock units have been granted.

        Restricted stock grants are designed, among other things, to align employee interests with the interests of stockholders and to encourage the recipient to build a career with the Company. Restricted stock typically vests over periods of three to ten years from date of grant. Restricted stock grants may be performance-based with vesting to occur over periods of one to ten years. All restricted stock that has been granted and earned according to performance criteria carries full dividend and voting rights, regardless of whether it has vested.

        Typically, stock options and restricted stock are subject to forfeiture prior to vesting if the employee terminates employment for any reason other than death, retirement or disability, or if we terminate employment for cause. A total of 7,933,000 shares have been granted under the Stock Benefit Plan since its inception, and as of May 31, 2011, a total of 3,766,606 shares were available for future grant under the Stock Benefit Plan.

Stock Options

        During fiscal 2011, 2010 and 2009, we granted stock options representing 720,970 shares, 694,500 shares and 184,750 shares, respectively.

        The weighted average fair value of stock options granted during fiscal 2011, 2010 and 2009 was $8.06, $7.45 and $8.27, 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:

	Stock Options Granted In Fiscal Year
	2011			2010			2009
Risk-free interest rate		1.8	%		2.3	%		3.3	%
Expected volatility of common stock		47.0	%		49.1	%		38.9	%
Dividend yield		0.0	%		0.0	%		0.0	%
Expected option term in years		5.8			6.0			6.0

        The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on historical volatility of our common stock and the expected option term represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The dividend yield represents our anticipated cash dividends at the grant date over the expected option term.

        A summary of stock option activity for the three years ended May 31, 2011 follows (shares in thousands):

	2011					2010					2009
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding at beginning of year		1,543		$	19.28		1,225		$	21.18		1,425		$	21.53
Granted		721		$	17.54		695		$	15.21		185		$	19.26
Exercised		(128	)	$	15.85		(217	)	$	12.47		(68	)	$	9.66
Cancelled		(142	)	$	21.79		(160	)	$	22.60		(317	)	$	22.11
Outstanding at end of year		1,994		$	18.56		1,543		$	19.28		1,225		$	21.18
Options exercisable at end of year		935		$	19.40		663		$	20.92		945		$	19.89

        The total fair value of stock options that vested during fiscal 2011, 2010 and 2009 was $4,006, $690 and $434, respectively. The total intrinsic value of stock options exercised during fiscal 2011, 2010 and 2009 was $1,344, $2,353 and $493, respectively. The aggregate intrinsic value of options outstanding as of May 31, 2011 was $18,126. The tax benefit realized from stock options exercised during fiscal 2011, 2010 and 2009 was $247, $817 and $171, respectively. Expense charged to operations for stock options during fiscal 2011, 2010 and 2009 was $4,152, $2,265 and $781, respectively, recorded in selling, general and administrative expenses. As of May 31, 2011, we had $6,731 of unrecognized compensation expense related to stock options that will be amortized over an average period of 1.7 years.

        The following table provides additional information regarding stock options outstanding as of May 31, 2011 (shares in thousands):

	Options Outstanding						Options Exercisable
Option Exercise Price Range	Number Outstanding as of 5/31/11		Weighted-Average Remaining Contractual Life in Years		Weighted- Average Exercise Price		Number Exercisable as of 5/31/11		Weighted- Average Exercise Price
$  3.20—$13.00		70		2.1	$	7.73		70	$	7.73
$13.01—$18.50		1,494		7.6	$	16.32		594	$	16.36
$18.51—$24.50		321		6.1	$	21.59		202	$	22.31
$24.51—$34.50		109		5.3	$	30.56		69	$	30.22
		1,994		6.4	$	18.56		935	$	19.40

Restricted Stock

        We provide executives and other key employees an opportunity to be awarded performance-based restricted stock. The award is contingent upon the achievement of certain performance objectives, including net income, return on capital, and leverage ratios, or the Company's stock price achieving a certain level over a period of time. After the shares are granted, the restrictions are released over a three- to seven-year period. During fiscal 2011, 2010 and 2009, we granted 269,146, 423,000 and 213,000 restricted shares, respectively, under this program.

        In addition to the performance-based restricted stock awards, we also granted a total of 135,027 restricted shares to members of the Board of Directors and certain executive officers during fiscal 2011. These shares vest over a three- to five-year period.

        The fair value of restricted shares is the market value of our common stock on the date of grant. Expense related to all restricted share programs during fiscal 2011, 2010 and 2009 was $8,701, $7,070 and $5,435, respectively, recorded in selling, general and administrative expenses.

        Restricted share activity during the fiscal year ended May 31, 2011 is as follows (shares in thousands):

	Number of Shares			Weighted Average Fair Value on Grant Date
Nonvested at May 31, 2010		1,205		$	23.93
Granted		404		$	17.40
Vested		(217	)	$	17.75
Forfeited		(18	)	$	18.99
Nonvested at May 31, 2011		1,374		$	23.06

        As of May 31, 2011, we had $12,109 of unearned compensation related to restricted shares that will be amortized to expense over a weighted average period of 2.0 years.

Shareholders' Rights Plan

        Pursuant to a shareholder rights plan adopted in 2007, each outstanding share of our common stock carries with it a Right to purchase one share at a price of $140 per share. The Rights become exercisable (and separate from the shares) when certain specified events occur, including the acquisition of 15% or more of the common stock by a person or group (an "Acquiring Person") or the commencement of a tender or exchange offer for 15% or more of the common stock.

        In the event that an Acquiring Person acquires 15% or more of the common stock, or if we are the surviving corporation in a merger involving an Acquiring Person or if the Acquiring Person engages in certain types of self-dealing transactions, each Right entitles the holder to purchase for $140 per share (or the then-current exercise price), shares of our common stock having a market value of $280 (or two times the exercise price), subject to certain exceptions. Similarly, if we are acquired in a merger or other business combination or 50% or more of our assets or earning power is sold, each Right entitles the holder to purchase at the then-current exercise price that number of shares of common stock of the surviving corporation having a market value of two times the exercise price. The Rights do not entitle the holder thereof to vote or to receive dividends. The Rights will expire on August 6, 2017, and may be redeemed by us for $.01 per Right under certain circumstances.

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 market. During 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 purchase.