Accounting for Stock-Based Compensation

3 Months Ended

Aug. 31, 2011

Accounting for Stock-Based Compensation

Accounting for Stock-Based Compensation

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 the Stock Benefit 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 number 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 and restricted stock units; however, to date, no such awards 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, 2011 and 2010, we granted stock options representing 157,281 shares and 691,471 shares, respectively.

The weighted average fair value of stock options granted during the three-month periods ended August 31, 2011 and 2010 was $11.80 and $7.94, 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,
	2011		2010
Risk-free interest rate	1.5	%	1.9	%
Expected volatility of common stock	45.7	%	47.0	%
Dividend yield	1.0	%	0.0	%
Expected option term in years	5.7		5.8

The following table summarizes stock option activity for the three-month period ended August 31, 2011:

					Weighted
			Weighted		Average
	Number of		Average		Remaining	Aggregate
	Options		Exercise		Contractual	Intrinsic
	(in thousands)		Price		Life (years)	Value
Outstanding at May 31, 2011	1,994		$	18.56
Granted	157		$	29.30
Exercised	(332	)	$	20.03
Cancelled	(31	)	$	17.11
Outstanding at August 31, 2011	1,788		$	19.66	6.9	$	11,362
Exercisable at August 31, 2011	866		$	18.28	4.4	$	6,427

The total fair value of stock options that vested during the three-month periods ended August 31, 2011 and 2010 was $3,720 and $2,275, respectively.  The total intrinsic value of stock options exercised during the three-month periods ended August 31, 2011 and 2010 was $3,323 and $4, respectively.  The tax benefit realized from stock options exercised during the three-month periods ended August 31, 2011 and 2010 was $639 and $1, respectively.  Expense charged to operations for stock options during the three-month periods ended August 31, 2011 and 2010 was $1,099 and $888, respectively.  As of August 31, 2011, we had $7,170 of unearned compensation related to stock options that will be amortized over an average remaining period of 1.4 years.

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, 2011 and 2010 was $1,518 and $1,735, respectively.

Restricted share activity during the three-month period ended August 31, 2011 is as follows:

	Number of		Weighted Average
	Shares		Fair Value
	(in thousands)		on Grant Date
Unvested at May 31, 2011	1,374		$	23.06
Granted	598		$	23.99
Vested	(324	)	$	26.71
Forfeited	(49	)	$	24.54
Unvested at August 31, 2011	1,599		$	22.61

During the three-month period ended August 31, 2011, we granted a total of 45,000 restricted shares to members of the Board of Directors.  As of August 31, 2011 we had $25,373 of unearned compensation related to restricted shares that will be amortized to expense over a weighted average period of 2.7 years.