Accounting for Stock-Based Compensation

9 Months Ended

Feb. 29, 2012

Accounting for Stock-Based Compensation

Accounting for Stock-Based Compensation

Note 3 — 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, subject to vesting, 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 nine-month periods ended February 29, 2012 and February 28, 2011, we granted stock options representing 162,281 shares and 720,970 shares, respectively.

The weighted average fair value of stock options granted during the nine-month periods ended February 29, 2012 and February 28, 2011 was $11.64 and $8.06, 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:

	Nine Months Ended
	February 29/28,
	2012		2011
Risk-free interest rate	1.5	%	1.8	%
Expected volatility of common stock	45.8	%	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 nine-month period ended February 29, 2012:

					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	162		$	28.96
Exercised	(335	)	$	20.00
Cancelled	(78	)	$	18.69
Outstanding at February 29, 2012	1,743		$	19.61	5.9	$	8,835
Exercisable at February 29, 2012	862		$	18.20	4.0	$	5,186

The total fair value of stock options that vested during the nine-month periods ended February 29, 2012 and February 28, 2011 was $3,827 and $2,275, respectively.  The total intrinsic value of stock options exercised during the nine-month periods ended February 29, 2012 and February 28, 2011 was $3,339 and $898, respectively.  The tax benefit realized from stock options exercised during the nine-month periods ended February 29, 2012 and February 28, 2011 was $533 and $146, respectively.  Expense charged to operations for stock options during the three-month periods ended February 29, 2012 and February 28, 2011 was $1,078 and $1,177, respectively.  Expense charged to operations for stock options during the nine-month periods ended February 29, 2012 and February 28, 2011 was $3,279 and $3,222, respectively.  As of February 29, 2012, we had $4,924 of unearned compensation related to stock options that will be amortized over an average remaining period of 1.0 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 February 29, 2012 and February 28, 2011 was $2,711 and $2,462, respectively.   Amortization expense related to restricted stock awards during the nine-month periods ended February 29, 2012 and February 28, 2011 was $6,635 and $6,245, respectively.

Restricted share activity during the nine-month period ended February 29, 2012 was as follows:

	Number of		Weighted Average
	Shares		Fair Value
	(in thousands)		on Grant Date
Unvested at May 31, 2011	1,374		$	23.06
Granted	677		$	24.64
Vested	(325	)	$	26.71
Forfeited	(107	)	$	23.90
Unvested at February 29, 2012	1,619		$	22.92

During the nine-month period ended February 29, 2012, we granted a total of 45,000 restricted shares to members of the Board of Directors.  As of February 29, 2012 we had $19,577 of unearned compensation related to restricted shares that will be amortized to expense over a weighted average period of 2.3 years.