Equity

12 Months Ended

May 31, 2024

Equity

Equity

7. Equity

Stock-Based Compensation

We grant stock-based awards under the AAR CORP. 2013 Stock Plan, as Amended and Restated Effective July 13, 2020 (the “2013 Stock Plan”) which has been approved by our stockholders. Under the 2013 Stock 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 annual increments commencing one year after the date of grant. In addition to stock options, the 2013 Stock Plan also provides for the grant of time-based restricted stock awards and performance-based restricted stock awards. The 2013 Stock Plan also provides for the grant of stock appreciation units and restricted stock units; however, to date, no such awards have been granted.

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

Substantially all stock options and restricted stock are subject to forfeiture prior to vesting if the employee’s employment terminates for any reason other than death, disability or retirement. Under the 2013 Stock Plan, we have granted a total of 6,291,628 shares, and there were 2,268,156 shares available for grant as of May 31, 2024.

Stock Options

During fiscal 2024, 2023, and 2022, we granted stock options with respect to 141,545 shares, 221,900 shares and 144,815 shares, respectively. The weighted average fair value per share of stock options granted during fiscal 2024, 2023 and 2022 was $25.31, $17.61 and $13.42, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions:

	Stock Options Granted In Fiscal Year
	2024		2023		2022
Risk-free interest rate	4.1	%	3.1	%	0.8	%
Expected volatility of common stock	42.3	%	42.2	%	41.6	%
Dividend yield	0.0	%	0.0	%	0.8	%
Expected option term in years	5.1		5.2		5.3

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, 2024 consisted of the following (shares in thousands):

	2024			2023			2022
		Weighted			Weighted			Weighted
		Average			Average			Average
	Shares	Exercise Price		Shares	Exercise Price		Shares	Exercise Price
Outstanding at beginning of year	1,573	$	33.24	2,045	$	29.86	2,612	$	28.34
Granted	142		58.27	222		41.88	145		37.84
Exercised	(706)		30.67	(631)		25.31	(686)		25.53
Cancelled	(5)		48.40	(63)		33.25	(26)		36.17
Outstanding at end of year	1,004	$	38.49	1,573	$	33.24	2,045	$	29.86
Options exercisable at end of year	696	$	33.95	1,018	$	35.09	1,189	$	33.57

The weighted-average remaining term (in years) for options outstanding at the end of the year was 6.4 years, 6.2 years, and 6.7 years at May 31, 2024, 2023, and 2022, respectively. The weighted-average remaining term (in years) for options exercisable at the end of the year was 5.5 years, 5.2 years, and 5.7 years at May 31, 2024, 2023, and 2022, respectively.

The total fair value of stock options that vested during fiscal 2024, 2023, and 2022 was $3.3 million, $3.6 million, and $4.3 million, respectively. The total intrinsic value of stock options exercised during fiscal 2024, 2023, and 2022 was $22.5 million, $15.5 million, and $14.4 million, respectively. The aggregate intrinsic value of options outstanding was $32.7 million and $26.6 million as of May 31, 2024 and 2023, respectively.

Expense recognized in Selling, general and administrative expenses for stock options during fiscal 2024, 2023, and 2022 was $3.0 million, $3.5 million, and $3.8 million, respectively. As of May 31, 2024, we had $3.7 million of unrecognized compensation expense related to stock options that will be expensed over an average period of 1.7 years.

Restricted Stock

We provide executives and other key employees an opportunity to be awarded performance-based and time-based restricted stock. The fair value of restricted shares is the market value of our common stock on the date of grant. The performance-based awards are contingent upon the achievement of certain objectives, which generally include cumulative income, average return on capital, and relative total shareholder return over a three-year performance period. Performance-based restricted shares of 81,100, 74,660, and 43,010 were granted to executives and key employees during fiscal 2024, 2023 and 2022, respectively. Time-based restricted shares of 111,018, 93,450, and 260,742 were granted to executives and key employees during fiscal 2024, 2023, and 2022, respectively. We also award time-based restricted stock to our non-employee directors as part of their annual compensation. Time-based restricted shares of 23,888, 28,851, and 32,307 were granted to members of the Board of Directors during fiscal 2024, 2023, and 2022, respectively.

Restricted share activity during fiscal 2024 was as follows (shares in thousands):

		Weighted Average
	Number of	Fair Value
	Shares	on Grant Date
Nonvested at May 31, 2023	572	$	43.92
Granted	192		57.53
Vested	(125)		24.56
Forfeited	(3)		46.58
Nonvested at May 31, 2024	636		48.84

Expense recognized in Selling, general and administrative expenses for all restricted share programs during fiscal 2024, 2023, and 2022 was $12.3 million, $10.0 million, and $4.4 million, respectively. As of May 31, 2024 we had $12.9 million of unearned compensation related to restricted shares that will be expensed over a weighted average period of 1.5 years.