Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.          )

Filed by the Registrant ý

Filed by a Party other than the Registrant o

Check the appropriate box:

o

 

Preliminary Proxy Statement

o

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

ý

 

Definitive Proxy Statement

o

 

Definitive Additional Materials

o

 

Soliciting Material under §240.14a-12

 

AAR CORP.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

ý

 

No fee required.

o

 

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
    (1)   Title of each class of securities to which transaction applies:
        
 
    (2)   Aggregate number of securities to which transaction applies:
        
 
    (3)   Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
        
 
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Fee paid previously with preliminary materials.

o

 

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

 

(1)

 

Amount Previously Paid:
        
 
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LOGO

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON WEDNESDAY, OCTOBER 9, 2013

August 30, 2013

To Our Stockholders:

We cordially invite you to attend our 2013 annual meeting of stockholders. Information about the annual meeting is set forth below and in the accompanying proxy statement.

Date:   Wednesday, October 9, 2013

Time:

 

9:00 a.m., Chicago time

Place:

 

AAR CORP.
One AAR Place
1100 North Wood Dale Road
Wood Dale, Illinois 60191

Purposes:

 

At the annual meeting, you will be asked to:

 

Elect four Class II directors;

Vote on an advisory resolution to approve Fiscal 2013 executive compensation;

Approve the AAR CORP. 2013 Stock Plan;

Ratify the appointment of KPMG LLP as the Company's independent registered public accounting firm; and

Transact any other business that may properly come before the annual meeting or any adjournment or postponement of the meeting.


Record Date:

 


You may vote your shares at the annual meeting if you were a stockholder on August 19, 2013.


Voting:


 


Your vote is important. We encourage you to vote your shares as soon as possible over the Internet, by telephone, or by completing and returning the enclosed proxy card in the postage-paid envelope provided.

 

    By Order of the Board of Directors,

 

 

Robert J. Regan
Vice President, General Counsel and Secretary

Table of Contents

LOGO

PROXY STATEMENT FOR THE
2013 ANNUAL MEETING OF STOCKHOLDERS

TABLE OF CONTENTS

 
  Page

2013 PROXY STATEMENT SUMMARY

  iii

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING

  1

Why am I receiving the proxy materials?

  1

What information is contained in the proxy materials?

  1

How do I access the proxy materials electronically?

  1

What proposals are stockholders voting on at the annual meeting?

  1

Who is entitled to vote?

  2

How do stockholders vote by proxy or in person?

  2

How do stockholders vote by telephone or over the Internet?

  2

How do stockholders revoke a proxy?

  2

How will the proxy holders vote the shares?

  3

What are the quorum and vote requirements?

  3

Who is the Company's proxy solicitor?

  4

PROPOSAL 1 — ELECTION OF DIRECTORS

  5

Information about Our Director Nominees and Our Continuing Directors

  5

PROPOSAL 2 — ADVISORY RESOLUTION ON FISCAL 2013 EXECUTIVE COMPENSATION

  10

PROPOSAL 3 — APPROVAL OF THE AAR CORP. 2013 STOCK PLAN

  12

PROPOSAL 4 — RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS THE COMPANY'S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  20

Independent Registered Public Accounting Firm Fees and Services

  20

Audit Committee Report for Fiscal 2013

  21

CORPORATE GOVERNANCE

  23

Director Nominations and Qualifications

  23

Director Independence

  25

Board Leadership, Including Lead Director

  25

Risk Management Oversight

  26

Executive Sessions

  27

Communications with the Board of Directors

  27

Corporate Governance Guidelines

  27

Code of Business Ethics and Conduct

  27

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  Page

Related Person Transaction Policy

  28

Board Committees

  29

Board Meetings and Attendance

  32

Director Compensation

  32

Director Compensation Table

  33

Compensation Committee Interlocks and Insider Participation

  34

EXECUTIVE COMPENSATION

  35

Compensation Discussion and Analysis

  35

Compensation Committee Report on Executive Compensation for Fiscal 2013

  56

Summary Compensation Table

  57

Fiscal 2013 Grants of Plan-Based Awards

  60

Outstanding Equity Awards at Fiscal 2013 Year-End

  62

Fiscal 2013 Option Exercises and Stock Vested

  64

Retirement Program Benefits

  65

Fiscal 2013 Pension Benefits

  65

Fiscal 2013 Non-Qualified Deferred Compensation

  68

Potential Payments Upon Termination of Employment or a Change in Control of the Company

  71

Tables of Potential Payments Upon Termination of Employment or a Change in Control

  76

SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS

  78

Security Ownership of Management

  78

Security Ownership of Certain Beneficial Owners

  79

Section 16(a) Beneficial Ownership Reporting Compliance

  80

EQUITY COMPENSATION PLAN INFORMATION

  81

STOCKHOLDER PROPOSALS FOR THE 2014 ANNUAL MEETING

  82

OTHER BUSINESS

  82

EXHIBIT A — AAR CORP. 2013 STOCK PLAN

  A-1

EXHIBIT B — RECONCILIATION OF NON-GAAP MEASURES

  B-1

Important Notice Regarding the Availability of Proxy Materials
for the Annual Meeting of Stockholders to be Held on Wednesday, October 9, 2013:

Copies of this Notice and Proxy Statement,
the Company's 2013 Annual Report to Stockholders
and its Annual Report on Form 10-K for the fiscal year ended May 31, 2013
are available free of charge at
www.proxyvote.com.

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LOGO


2013 PROXY STATEMENT SUMMARY

This summary highlights certain information addressed in more detail elsewhere in this proxy statement.
Please read carefully the entire proxy statement before voting your shares.

Annual        
Meeting:   •  Time and Date:   Wednesday, October 9, 2013 at 9:00 a.m., Chicago time

 

 

•  Place:

 

AAR CORP.
One AAR Place
1100 North Wood Dale Road
Wood Dale, Illinois 60191

 

 

•  Record Date:

 

Monday, August 19, 2013

 

 

•  Voting:

 

Stockholders of record as of the record date may vote by Internet at www.proxy.vote.com; by telephone at 1-800-690-6903; by completing and returning their proxy card or voting information card; or in person at the annual meeting.

 

   
Proposal
 
  Board
Recommendation
 
Proposal 1:   Election of four Class II directors (pages 5-9):   FOR ALL
NOMINEES

 

 
 
Name
  Age   Brief Biography    
    Norman R. Bobins   70   Since 2008, Non-Executive
Chairman of The PrivateBank
and Trust Company — Chicago
(a financial services company).
   

 

 

Ronald R. Fogleman

 

71

 

Since 2009, Non-Executive Chairman of Alliant Techsystems, Inc. (an aerospace, defense and commercial products company); since 1997, President and Chief
Operating Officer of B Bar J
Cattle & Consulting Company (a
consulting company).

 

 

 

 

James E. Goodwin

 

69

 

Since 2009, Chairman of Federal
Signal Corporation (a safety and
security products manufacturer).

 

 

 

 

Marc J. Walfish

 

61

 

Since 2003, Founding Partner of
Merit Capital Partners (a
mezzanine investor company).

 

 

 

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Proposal
 
  Board
Recommendation
 
Proposal 2:   Vote on an advisory resolution to approve the Fiscal 2013 executive compensation paid to the Company's named executive officers (pages 10-11).   FOR

Proposal 3:

 

Approval of the AAR CORP. 2013 Stock Plan (pages 12-19).

 

FOR

Proposal 4:

 

Ratification of the appointment of KPMG LLP as the Company's independent registered public accounting firm (page 20).

 

FOR

 

Business    
Performance:   Fiscal 2013 Highlights

 

 

The Company reported solid performance results in Fiscal 2013 (beginning June 1, 2012 and ending May 31, 2013), including:

 

Record annual sales of $2.14 billion, including a 14.4% increase in sales to commercial customers;

 

Earnings per share of $1.85 before adjustment for a defense logistics program charge, and $1.38 after adjustment;

 

Free cash flow of $125.3 million and cash flow from operations of $163 million;

 

Reduction in net debt of $91 million, and reduction of 3,657,091 shares in its diluted share count from 42,143,292 shares on June 1, 2012 to 38,486,201 shares on May 31, 2013;

 

Repurchase of nearly one million shares of common stock at an average price of $14.90; and

 

Stock price increase of 73.5% during Fiscal 2013 to $20.06 on May 31, 2013 from $11.56 on June 1, 2012 (the closing stock price on August 29, 2013 was $25.77 per share).


Executive

 

 
Compensation:   Fiscal 2013 Highlights

 

 

The Compensation Committee of the Board of Directors took the following key executive compensation actions in Fiscal 2013:

 

Froze the base salaries of the named executive officers of the Company for the first half of Fiscal 2013 pending review of the Company's performance and the operating environment in which the Company conducts business, and then approved a 2.5% prospective increase for the second half of Fiscal 2013 in response to the Company's improved performance;

 

Approved above-target annual cash incentives for the named executive officers based upon the Company's Fiscal 2013 earnings per share and free cash flow results;

 

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Reduced, at management's recommendation, the long-term stock incentive compensation opportunities awarded to the named executive officers at the beginning of Fiscal 2013 by approximately 40% of their Fiscal 2012 levels in response to the Company's stock price performance in Fiscal 2012;

 

Implemented a new incentive compensation recoupment policy to provide for the "clawback" of incentive compensation in the event of a restatement of the Company's financial statements involving the misconduct of an executive officer;

 

Increased stock ownership and retention guidelines for directors and executive officers; and

 

Added hedging and pledging prohibitions to the Company's insider trading policy.

 

    The following table reflects the impact of the Compensation Committee's decisions on the total direct compensation (base salary, annual cash incentive and long-term incentive compensation) paid to David P. Storch, the Company's Chief Executive Officer, in Fiscal 2013 as compared to Fiscal 2012:

 
 
  Chief Executive Officer — Total Direct Compensation
   
 
  Compensation Element
   
  Fiscal 2012
   
  Fiscal 2013
   

  

 

Base Salary

      $ 867,000       $ 877,838    

  

 

Annual Cash Incentive

      $ 850,000       $ 1,350,685    

  

 

Long-Term Incentive Compensation

      $ 2,274,210       $ 1,314,720    

  

 

    Total Direct Compensation

      $ 3,991,210       $ 3,543,243    

 

   

Approximately 75% of the CEO's Fiscal 2013 total direct compensation was variable performance-based compensation, consisting of annual cash incentives and long-term incentive compensation (stock awards whose value is based on the Company's stock price performance):


 

 

Fiscal 2013 CEO Compensation Mix    

 

 


GRAPHIC

 

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    Key Compensation Policies and Practices

 

 

The following policies and practices are key elements of the Company's executive compensation program:

 

 

 

 


 

Annual advisory stockholder approval of executive compensation

 

 

 

 


 

Non-guaranteed performance-based bonuses

 

 

 

 


 

Significant vesting periods for stock options and stock awards

 

 

 

 


 

No repricing of underwater stock options

 

 

 

 


 

No dividends on unearned performance-based restricted stock

 

 

 

 


 

Stock ownership and retention guidelines for directors and executive officers

 

 

 

 


 

Policy prohibiting short sales, pledging and hedging transactions

 

 

 

 


 

No tax gross-ups (except in two grandfathered contracts that were not up for renewal in Fiscal 2013)

 

 

 

 


 

Clawback of incentive compensation in the event of certain financial restatements

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Corporate    
Governance:   Good corporate governance is an essential part of the Company's culture. The following table identifies the Company's key corporate governance practices and related director information:

 
 
  Corporate Governance Information
   
  As of August 30, 2013
   
     Size of Board       11    
     Number of Independent Directors       9    
     Average Age of Directors       64    
     Average Tenure of Directors       9 years    
     Director Retirement Age       72 on nomination date    
     Lead Director       Yes    
     Stock Ownership and Retention Guidelines       Yes    
     Annual Stock Grant to Non-Employee Directors       Yes    
     Independent Directors — Executive Sessions       Yes    
     Independent Compensation Consultant       Yes    
     Annual Board and Committee Self-Evaluations       Yes    
     Code of Business Ethics and Conduct       Yes    
     Ethics Hotline Policy       Yes    
     Related Person Transaction Policy       Yes    
     Disclosure Committee for Financial Reporting       Yes    
     Annual Advisory Stockholder Approval of Executive Compensation       Yes    

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AAR LOGO

One AAR Place
1100 North Wood Dale Road
Wood Dale, Illinois 60191

We will hold our 2013 annual meeting of stockholders on Wednesday, October 9, 2013, at 9:00 a.m., Chicago time, at AAR CORP.'s corporate headquarters located at One AAR Place, 1100 North Wood Dale Road, Wood Dale, Illinois 60191. We cordially invite you to attend the annual meeting and ask that you vote on the proposals described in this proxy statement.


QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING

Why am I receiving the proxy materials?

Our Board of Directors is providing these proxy materials to you, beginning on or about August 30, 2013, in connection with its solicitation of proxies for use at the Company's 2013 annual meeting of stockholders.


What information is contained in the proxy materials?

The proxy materials contain information about the proposals to be voted on at the annual meeting, the compensation of our directors and most highly paid executive officers, corporate governance and other information about the Company.


How do I access the proxy materials electronically?

Again this year we are pleased to be distributing our proxy materials via the Internet under the "notice and access" approach permitted by the rules of the Securities and Exchange Commission ("SEC"). This approach reduces the cost and environmental impact of printing and distributing the proxy materials for our annual meeting.

We mailed a "Notice of Internet Availability of Proxy Materials" to all of our stockholders on or about August 30, 2013 so that you can choose to receive your proxy materials and vote your shares over the Internet. The Notice provides you with instructions on how to:

This proxy statement and our annual report to stockholders for the fiscal year ended May 31, 2013 (referred to in this proxy statement as "Fiscal 2013") may be viewed online at www.proxyvote.com.


What proposals are stockholders voting on at the annual meeting?

Stockholders will vote on four proposals at the annual meeting:


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Who is entitled to vote?

You are entitled to vote your shares if you were an AAR CORP. stockholder at the close of business on August 19, 2013. This date is referred to in this proxy statement as the "record date."

Stockholder of Record.    If you were a "stockholder of record" at the close of business on the record date, you may vote your shares at the annual meeting. You are a "stockholder of record" if your shares are registered in your name with the Company's transfer agent.

Beneficial Owner.    If you were a "beneficial owner" of shares at the close of business on the record date, you must give voting instructions to your broker, bank or other intermediary who is the "nominee" holder of your shares. You are a "beneficial owner" of shares if your shares are held in a stock brokerage account or by a bank or other nominee. The Company has directed brokers, banks and other nominees to obtain voting instructions from their beneficial owners. Proxies submitted by nominees on behalf of beneficial owners will count toward a quorum and will be voted as instructed by the beneficial owners. You will receive additional instructions from your broker, bank or other nominee explaining how you may vote your shares held in street name.

A list of stockholders of record entitled to vote will be available at the Company's corporate headquarters for 10 days prior to the meeting and at the meeting location during the meeting.

On the record date, 39,589,654 shares of common stock of the Company were outstanding. Each share of common stock is entitled to one vote for each director nominee and one vote for each of the other proposals to be voted on at the annual meeting.


How do stockholders vote by proxy or in person?

Stockholders of record at the close of business on the record date may vote on the matters that are before the annual meeting by proxy by completing, signing, dating and returning the enclosed proxy card, by voting by telephone or over the Internet, or by attending the annual meeting and voting in person.


How do stockholders vote by telephone or over the Internet?

Specific instructions for using the telephone and Internet voting methods are set forth on the proxy card. These instructions are designed to authenticate your identity, allow you to give your voting instructions and confirm that those instructions have been properly recorded. You may vote by telephone or over the Internet 24 hours a day, seven days a week, until 10:59 p.m. (Chicago time) on the day prior to the annual meeting. If you vote by telephone or over the Internet, please do not return your proxy card.


How do stockholders revoke a proxy?

You may revoke your proxy (e.g., to change your vote) at any time before it is exercised by:

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How will the proxy holders vote the shares?

The proxy holders will vote shares in accordance with instructions on the proxy card. If no instructions are given, the proxy holders will vote the shares as follows:

If any other matter properly comes before the annual meeting, the proxy holders will use their judgment to vote in a manner consistent with the best interest of stockholders. If any director nominee becomes unavailable for election for any reason prior to the annual meeting vote, the Board may reduce the number of directors to be elected or substitute another person as nominee, in which case the proxy holders will vote for the substitute nominee.


What are the quorum and vote requirements?

A quorum of stockholders is necessary to hold a valid meeting. A quorum will exist if a majority of the outstanding shares of common stock entitled to vote at the meeting is present in person or by proxy at the annual meeting. Abstentions and broker non-votes, if any, will be counted as present for purposes of determining whether there is a quorum. A "broker non-vote" will occur when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that proposal and has not received instructions from the beneficial owner.

Please note that brokers will have discretionary authority to vote your shares on the ratification of KPMG; however, brokers may not vote your shares on the election of directors, the advisory resolution on executive compensation or approval of the AAR CORP. 2013 Stock Plan without your specific instructions. Please return your proxy card or vote by telephone or over the Internet so that your vote can be counted.

Inspectors of election appointed for the annual meeting will tabulate all votes cast in person or by proxy at the annual meeting. In the event a quorum is not present at the annual meeting, we expect that the annual meeting will be adjourned or postponed to solicit additional proxies.

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The following table indicates the vote required for approval of each matter to be presented to the stockholders at the annual meeting and the effect of "withhold" votes, abstentions, and broker non-votes.

 
 
   
   
  Required Vote
   
  Effect of "Withhold" Votes,
Abstentions and Broker Non-Votes

   

  

 

Proposal 1 —
Election of Class II Directors

     

Affirmative vote of a plurality of the shares of common stock present and entitled to vote (the four nominees who receive the greatest number of votes will be elected directors of the Company).

     

"Withhold" votes and broker non-votes will have no effect on the voting for the election of directors.

   

  

 

Proposal 2 —
Advisory Resolution on Fiscal 2013 Executive Compensation

     

Affirmative vote of a majority of the shares of common stock present and entitled to vote.

     

Abstentions will have the effect of a vote "against" and broker non-votes will have no effect on the voting for this matter.

   

  

 

Proposal 3 —
Approval of the AAR CORP. 2013 Stock Plan

     

Affirmative vote of a majority of the shares of common stock present and entitled to vote.

     

Abstentions will have the effect of a vote "against" and broker non-votes will have no effect on the voting for this matter.

   

  

 

Proposal 4 —
Ratification of the Appointment of KPMG LLP

     

Affirmative vote of a majority of the shares of common stock present and entitled to vote.

     

Abstentions will have the effect of a vote "against"; there will be no broker non-votes for this matter.

   


Who is the Company's proxy solicitor?

The Company has engaged D. F. King & Co., Inc., 48 Wall Street, New York, New York 10005, to assist the Company in soliciting proxies at a total estimated cost of $11,500, plus reasonable out-of-pocket expenses. The cost of soliciting proxies will be paid by the Company. D. F. King & Co., Inc. may solicit proxies by mail, telephone, facsimile, e-mail, or in person. Certain officers, directors and employees of the Company may also solicit proxies for no additional compensation.

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PROPOSAL 1 — ELECTION OF DIRECTORS

The Company's Restated Certificate of Incorporation and By-Laws provide that the Board of Directors shall consist of between three and 15 directors, with the exact number of directors to be set from time to time by the Board. The number of directors is currently set at 11. The members of the Board are divided into three classes, each having a three-year term that expires in successive years: Class I (three directors), Class II (four directors), and Class III (four directors).

The Board of Directors has nominated four individuals to be elected as Class II directors at the annual meeting, each to serve a three-year term expiring at the 2016 annual meeting or until the individual is succeeded by another qualified director who has been duly elected. The nominees for director in Class II at the annual meeting are Norman R. Bobins, Ronald R. Fogleman, James E. Goodwin and Marc J. Walfish.

Each nominee is currently serving as a director of the Company. Each nominee has been determined by the Board to be "independent" within the meaning of the rules of the New York Stock Exchange ("NYSE") and the Securities and Exchange Commission ("SEC").

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR THE ELECTION OF ALL OF THE DIRECTOR NOMINEES.


Information about Our Director Nominees and Our Continuing Directors

Information about the director nominees and continuing directors whose terms expire in future years is set forth below:

DIRECTOR NOMINEES

Class II Directors whose terms expire at the 2013 annual meeting
  Director
Since

 

NORMAN R. BOBINS, 70: Since 2008, Non-Executive Chairman of The PrivateBank and Trust Company - Chicago (a financial services company). From May 2007 until October 2007, Chairman of the Board of LaSalle Bank Corporation. From 2002 to 2007, President and Chief Executive Officer of LaSalle Bank Corporation. From 2006 to 2007, President and Chief Executive Officer of ABN AMRO North America. From 2002 to 2007, Senior Executive Vice President at ABN AMRO Bank N.V., the Dutch parent of LaSalle Bank Corporation.

   
2007
 

Current public company directorships: AGL Resources Inc., Aviv REIT, Inc., PrivateBancorp, Inc. and SIMS Metal Management Limited.

       

Director Qualifications: The Board of Directors concluded that Mr. Bobins should serve as a director of the Company based on his 44 years of banking experience, his financial and accounting knowledge, his service as a director of other public companies, and his civic involvement as a director of various not-for-profit organizations.

       

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RONALD R. FOGLEMAN, 71: Since 2009, Non-Executive Chairman of Alliant Techsystems, Inc. (an aerospace, defense and commercial products company); since 1997, President and Chief Operating Officer of B Bar J Cattle & Consulting Company (a consulting company). From 1994 to 1997, General, Chief of Staff of the United States Air Force, Washington, D.C.

    2001  

Current public company directorship: Alliant Techsystems, Inc.

       

Director Qualifications: The Board of Directors concluded that General Fogleman should serve as a director of the Company based on his leadership skills and record of accomplishment during a 34-year career with the United States Air Force, his business experience and business relationships gained through his senior management positions at two consulting organizations, his understanding of the government defense and services markets and his service as a director of other public companies. General Fogleman was elected as the Lead Director in April 2013.

       

JAMES E. GOODWIN, 69: Since 2009, Chairman of Federal Signal Corporation (a safety and security products manufacturer). From 2007 to 2008, Interim President and Chief Executive Officer of Federal Signal Corporation. From 2001 to 2007, an independent business consultant. From 1999 to 2001, Chairman and Chief Executive Officer of UAL, Inc. and United Airlines, Inc., from which he retired after 34 years. From 1998 to 1999, President and Chief Operating Officer of United Airlines, Inc. From 1992 to 1998, Senior Vice President of United Airlines, Inc.

   
2002
 

Current public company directorships: Federal Signal Corp. and John Bean Technologies Corporation.

       

Director Qualifications: The Board of Directors concluded that Mr. Goodwin should serve as a director of the Company based on his airline industry experience and expertise, including his leadership positions at UAL, Inc. and United Airlines, Inc., his management experience and his financial expertise, as well as his global consulting experience and his service as a director of other public companies.

       

MARC J. WALFISH, 61: Since 2003, Founding Partner of Merit Capital Partners (a mezzanine investor company). From 1991 to 2003, partner at William Blair Mezzanine Capital Partners. From 1978 to 1991, various positions at Prudential Capital Corporation, most recently as Senior Vice President.

   
2003
 

Director Qualifications: The Board of Directors concluded that Mr. Walfish should serve as a director of the Company based on his experience in the finance industry, including as a founding partner of Merit Capital Partners, a mezzanine investor company, his knowledge of the capital markets and his expertise in corporate finance, strategic planning and risk management.

       

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CONTINUING DIRECTORS

Class III Directors whose terms expire at the 2014 annual meeting
  Director
Since

 

PATRICK J. KELLY, 58: Since 1986, Managing Director of KMK & Associates, LLC (a private equity firm with interests in companies operating in the food, distribution, technology, financial services, real estate and energy industries).

   
2006
 

Director Qualifications: The Board of Directors concluded that Mr. Kelly should serve as a director of the Company based on his leadership and operational experience at various businesses, his background as a long-term chief executive officer and his business expertise gained through his experience at a private equity firm with a diversified portfolio of operating companies.

       

PETER PACE, 67: General, U.S. Marine Corps (Retired). From 2005 to 2007, Chairman of the Joint Chiefs of Staff.

   
2012
 

Current public company directorships: Laserlock Technologies, Inc., Pike Electric Corp., Qualys, Inc. and Textura Corporation.

       

Other public company directorship held in the past five years: Wi2Wi Corporation.

       

Director Qualifications: The Board of Directors concluded that General Pace should serve as a director of the Company based on his leadership and management skills and experience from over 40 years of service with the United States Marine Corps, culminating in his appointment as the 16th Chairman of the Joint Chiefs of Staff (the most senior position in the United States Armed Forces), where he served from 2005 to 2007 as the principal military adviser to the President, the Secretary of Defense, the National Security Council and the Homeland Security Council.

       

TIMOTHY J. ROMENESKO, 56: Since 2007, President and Chief Operating Officer of AAR CORP. From 1994 to 2007, Vice President, Chief Financial Officer and Treasurer of AAR CORP. From 1991 to 1994, Corporate Controller of AAR CORP.

   
2007
 

Director Qualifications: The Board of Directors concluded that Mr. Romenesko should serve as a director of the Company based on his current leadership position as President and Chief Operating Officer of the Company, his experience in various accounting and financial capacities during his 32-year career with the Company and his knowledge of the Company's commercial aviation and government and defense services markets.

       

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RONALD B. WOODARD, 70: Since 2003, Chairman of MagnaDrive, Inc. (an industrial torque transfer equipment company, which he co-founded following his retirement from The Boeing Company after 32 years). From 1995 to 1998, President of the Boeing Commercial Airplane Group. From 1991 to 1994, Vice President and General Manager of the Renton Division of Boeing Commercial Aircraft. From 1987 to 1991, President of deHavilland Aircraft. Prior to that, Vice President and General Manager of the Materiel Division of Boeing Commercial Aircraft, and various other management positions.

    2004  

Current public company directorship: Coinstar, Inc.

       

Other public company directorship held in the past five years: Continental Airlines, Inc.

       

Director Qualifications: The Board of Directors concluded that Mr. Woodard should serve as a director of the Company based on his management and manufacturing experience as a senior officer of The Boeing Company, his knowledge of the commercial aviation industry and his experience as a director of other public companies, including Continental Airlines, Inc.

       

 

Class I Directors whose terms expire at the 2015 annual meeting
  Director
Since

 

ANTHONY K. ANDERSON, 57: Since 2012, an independent business consultant. From 2006 to April 2012, Vice Chairperson and Managing Partner of Midwest Area at Ernst & Young LLP (a global accounting firm). Prior thereto, served in various management positions during a 35-year career with Ernst & Young LLP.

   
2012
 

Current public company directorships: Avery Dennison Corp., Exelon Corp. and First American Financial Corporation.

       

Director Qualifications: The Board of Directors concluded that Mr. Anderson should serve as a director of the Company based on his 35 years working with a global accounting firm, his accounting and financial knowledge, his leadership in developing management talent programs, his service as a director of other public companies, and his professional, civic and charitable service, including as a director of numerous not-for-profit organizations.

       

MICHAEL R. BOYCE, 65: Since 2005, Chairman and Chief Executive Officer of PQ Corporation (a specialty chemicals and catalyst company). Since 1998, Chairman and Chief Executive Officer of The Peak Group (an operating and acquisition company). From 1990 to 1998, President and Chief Operating Officer of Harris Chemical Group, Inc. (a chemicals company).

   
2005
 

Current public company directorship: Stepan Company.

       

Director Qualifications: The Board of Directors concluded that Mr. Boyce should serve as a director of the Company based on his experience as Chairman and Chief Executive Officer of two leading global organizations, his insight into global manufacturing, supply and distribution practices and his international business development skills.

       

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DAVID P. STORCH, 60: Since 2007, Chairman of the Board and Chief Executive Officer of AAR CORP. From 2005 to 2007, Chairman of the Board, President and Chief Executive Officer of AAR CORP. From 1996 to 2005, President and Chief Executive Officer of AAR CORP. From 1989 to 1996, President and Chief Operating Officer of AAR CORP. From 1988 to 1989, Vice President of AAR CORP.

    1989  

Current public company directorships: KapStone Paper and Packaging Corp. and Kemper Corporation.

       

Director Qualifications: The Board of Directors concluded that Mr. Storch should serve as a director of the Company based on his current position as Chairman and Chief Executive Officer of the Company, his leadership and management skills, his understanding of the Company's businesses gained during his 35-year career with the Company, his knowledge of the commercial aviation and government and defense services markets, and his leadership role in transforming the Company into a leading international provider of products and services to the commercial aviation and government and defense services markets, with front-end manufacturing and after-market support to domestic and international customers.

       

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PROPOSAL 2 — ADVISORY RESOLUTION ON
FISCAL 2013 EXECUTIVE COMPENSATION

We are asking our stockholders to approve the following advisory resolution on the compensation awarded to our named executive officers for Fiscal 2013, as disclosed in this proxy statement:

We encourage our stockholders to read the "Compensation Discussion and Analysis" and the "Summary Compensation Table" and other related compensation tables and narrative located elsewhere in this proxy statement. These sections, which are incorporated herein by reference, describe our executive compensation policies and practices and provide detailed information about the compensation of our named executive officers.

Our Board of Directors recommends a vote "FOR" this advisory resolution because it believes that the executive compensation paid to the named executive officers was fair and appropriate in light of the Company's Fiscal 2013 performance. In support of this conclusion, the Board relied on the following principal factors, all of which are more fully explained in the "Compensation Discussion and Analysis" section of this proxy statement:

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Our Board of Directors determined that the advisory resolution, commonly known as a "say on pay" proposal, should be voted on annually by our stockholders given the importance of the Company's executive compensation program. While the advisory resolution is not binding on the Board of Directors, the Board will review and consider the results of the "say on pay" vote, the opinions of our stockholders, and other relevant factors in making future decisions regarding the Company's executive compensation program.

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE ADVISORY RESOLUTION ON EXECUTIVE COMPENSATION.

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PROPOSAL 3 — APPROVAL OF THE AAR CORP. 2013 STOCK PLAN

The Board of Directors of the Company, upon the recommendation of the Compensation Committee, approved, subject to the approval of the Company's stockholders, the AAR CORP. 2013 Stock Benefit Plan, effective as of October 9, 2013 (the "Plan"). The Board recommends approval of the Plan by the Company's stockholders. If approved by the stockholders, the Plan will succeed the AAR CORP. Stock Benefit Plan (the "Prior Plan").

The Plan will be the only active stock-based compensation plan maintained by the Company. It provides for discretionary grants of stock options, stock awards, stock unit awards and stock appreciation rights ("SARs") to key employees and non-employee directors. The purpose of the Plan is to encourage key employees and non-employee directors to increase their investment in the Company and to provide additional opportunities to share in the success of the Company. These opportunities are intended to foster in key employees and non-employee directors a strong incentive to put forth maximum effort for the continued success and growth of the Company, to aid in retaining individuals who put forth such efforts and to assist in attracting the best available individuals in the future.

Annual equity awards to key employees and non-employee directors were granted in June and July 2013 under the Prior Plan. It is expected that there will not be sufficient shares of the Company's common stock under the Prior Plan to cover future grants. If the Plan is approved by the Company's stockholders at this annual meeting, any shares of the Company's common stock not subject to outstanding awards under the Prior Plan as of the date of the stockholder approval will no longer be available for issuance under the Prior Plan. No awards will be made under the Plan unless it is approved by the stockholders. If the Plan is not approved by the stockholders, the Prior Plan will remain in effect in accordance with its terms.

Reasons Why Stockholders Should Approve the Plan

The Company believes that its future success depends in large part on its ability to attract, retain and motivate high quality employees and non-employee directors, and that its ability to provide equity-based and performance-based awards is critical to achieving this success. The Company believes that it would be at a severe competitive disadvantage if it could not use these types of awards to recruit and compensate its employees and non-employee directors.

The Company views its use of stock-based awards as an essential part of the Company's compensation program and as an important element in achieving the program's goals. These awards help align pay with performance and allow the Company to better link the financial interests of employees and non-employee directors with stockholders. The Company also believes that equity compensation motivates employees and non-employee directors to create stockholder value because the value they realize from equity compensation is based in large part on the Company's common stock price performance.

The Plan contains certain restrictions that the Company believes further the objectives of the Plan and reflect sound corporate governance principles:

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The Company, through its Compensation Committee, believes that it has prudently managed awards under the Prior Plan, giving proper consideration to the dilutive impact of stock awards on stockholder equity. The Company expects its practice of repurchasing shares of its common stock will mitigate, at least in part, the impact of any dilution. In Fiscal 2013, the Company repurchased nearly one million shares at an average price of $14.90. The Company further expects share usage under the Plan to be generally consistent with share usage under the Prior Plan, with the Plan shares likely to be awarded over the next two years at which time the Company would seek stockholder approval for the award of any additional shares under the Plan.

Description of the Plan

The following is a summary of the Plan. It is qualified by reference to the full text of the Plan, which is attached as Exhibit A to this proxy statement. Stockholders are encouraged to review the Plan carefully.

Administration.    The Plan is administered by the Compensation Committee (the "Committee"), which is comprised of directors who satisfy the "non-employee director" definition under Rule 16b-3 of the Securities Exchange Act of 1934 and the "outside director" definition under Section 162(m) of the Internal Revenue Code. The Committee has full authority to select the individuals who will receive awards under the Plan, determine the form and amount of each of the awards to be granted and establish the terms and conditions of awards.

As permitted by the Plan, the Committee has delegated to the Chief Executive Officer (acting in his capacity as a director of the Company) authority to grant Awards to key employees other than himself who are not officers subject to Section 16 of the Securities Exchange Act of 1934 or who are or may become subject to Section 162(m) of the Internal Revenue Code. Such awards will be consistent with the terms and conditions set forth in the forms of award agreement approved by the Committee. The CEO's grant authority for Fiscal 2014 is limited to awards covering 50,000 shares.

Number of Shares of Common Stock.    The number of shares of the Company's common stock that may be issued under the Plan is 2,500,000 shares. Stock options and SARs will reduce the number of available shares by one share for each share subject to the option or SAR, and stock awards and stock units settled in shares will reduce the number of available shares by two shares for every one share delivered. Awards that may be settled only in cash will not reduce the number of shares available for issuance.

Shares issuable under the Plan may be authorized and unissued shares or treasury shares. If there is a lapse, forfeiture, expiration, termination or cancellation of any award for any reason, the

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shares subject to the award will again be available for issuance under the Plan, to be added back in the same multiple as when they were awarded. By contrast, any shares subject to an award that are delivered to the Company by a participant, or withheld by the Company on behalf of a participant, as payment for an award or payment of withholding taxes due in connection with an award will not again be available for issuance, and all such shares will count toward the number of shares issued under the Plan. The number of shares of common stock issuable under the Plan is subject to adjustment in the event of any reorganization, recapitalization, stock split, stock dividend or other distribution, merger, consolidation, split-up, spin-off, combination, subdivision, consolidation or exchange of shares, any change in the capital structure of the Company or any similar corporate transaction. In each case, the Committee will make adjustments it deems necessary to preserve the intended benefits under the Plan.

Of the shares available for issuance, the maximum number of shares as to which a single key employee may receive stock options and SARs in any calendar year is 800,000, and the maximum number of shares issuable as stock awards and stock unit awards intended to qualify as "performance-based" under Section 162(m) of the Internal Revenue Code to any single key employee in any calendar year is 300,000.

Eligibility.    All employees of the Company designated as key employees for purposes of the Plan and all non-employee directors of the Company are eligible to receive awards under the Plan. As of August 1, 2013, approximately 200 key employees and all non-employee directors were eligible to participate in the Plan.

Awards to Participants.    The Plan provides for discretionary grants of stock options, stock awards, stock unit awards and SARs to participants. Each award made under the Plan will be evidenced by a written award agreement specifying the terms and conditions of the award as determined by the Committee in its sole discretion, consistent with the terms of the Plan.

Stock Options.    The Committee may grant non-qualified stock options or incentive stock options to key employees and non-qualified stock options to non-employee directors. Each stock option represents the participant's right to purchase a share of common stock of the Company by paying the exercise price of the option. The Committee has the discretion to set the terms and conditions applicable to the options, including the number of shares subject to the option and the vesting schedule; provided that (i) the exercise price of each stock option will not be less than the closing price of the Company's common stock on the date on which the option is granted ("fair market value"), (ii) each option will expire ten years from the date of grant, and (iii) no option can be amended such that it would be considered a "repricing" without stockholder approval. It is intended that stock options qualify as "performance-based compensation" under Section 162(m) of the Internal Revenue Code and thus be fully deductible by the Company for federal income tax purposes, to the extent permitted by law.

In addition, an incentive stock option is subject to the following rules: (i) the aggregate fair market value (determined at the time the option is granted) of the shares of common stock with respect to which an incentive stock option is exercisable for the first time by a key employee during any calendar year (under all incentive stock option plans of the Company and its subsidiaries) cannot exceed $100,000, and if this limitation is exceeded, so much of the incentive stock option that does not exceed the $100,000 limit will be an incentive stock option and the remainder will be a non-qualified stock option; (ii) if an incentive stock option is granted to a key employee who owns stock possessing more than 10% of the total combined voting power of all

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class of stock of the Company, the exercise price of the incentive stock option will be 110% of the closing price of the common stock on the date of grant and the incentive stock option will expire no later than five years from the date of grant; and (iii) no incentive stock option may be granted after 10 years from the date the Plan is adopted.

Stock Awards.    The Committee may grant stock awards to participants. Stock awards consist of shares of common stock granted without any consideration from the participant. The number of shares awarded to each participant, and the restrictions, terms and conditions of the award, will be at the discretion of the Committee. Subject to the restrictions, a participant will be a stockholder with respect to the shares awarded to him or her and will have the rights of a stockholder with respect to the shares, including the right to vote the shares and receive dividends on the shares; provided that dividends otherwise payable on any performance-based stock award will be held by the Company and will be paid only when and to the extent the restrictions on such stock award lapse, and the Committee in its discretion can accumulate and hold the dividends on any other stock award until the restrictions on the shares lapse.

Stock Units.    The Committee may grant stock unit awards to participants. Each stock unit entitles the participant to receive, on a specified date or event set forth in the award agreement, one share of common stock of the Company or cash equal to the fair market value of one share on such date or event, as provided in the award agreement. The number of stock units awarded to each participant, and the terms and conditions of the award, will be at the discretion of the Committee. A participant will not be a stockholder with respect to the stock units awarded to him prior to the date they are settled in shares of common stock. The Committee may provide that the participant will be paid an amount equal to the dividends that would have been paid had the stock units been actual shares; provided that dividend equivalents payable on performance-based stock units will be held by the Company and paid only when and to the extent the restrictions lapse, and the Committee in its discretion can accumulate and hold such amounts payable on any other stock units until the restrictions on the stock units lapse.

SARs.    SARs may be awarded to key employees under the Plan. Each SAR entitles the key employee to receive the difference between the fair market value of the common stock on the date of exercise of the right and the exercise price thereof, multiplied by the number of shares with respect to which the right is being exercised. Upon exercise, the SAR will be paid in cash or in shares of common stock (based upon the fair market value on the date of exercise) or a combination thereof, as set forth in the award agreement. The Committee has the discretion to set the terms and conditions applicable to SARs, provided that (i) the exercise price of each SAR will not be less than the fair market value of the shares on the date the SAR is granted, (ii) each SAR will expire ten years from the date of grant, and (iii) no SAR can be amended such that it would be considered a "repricing" without stockholder approval. It is intended that SARs qualify as "performance-based compensation" under Section 162(m) of the Internal Revenue Code and thus be fully deductible by the Company for federal income tax purposes, to the extent permitted by law.

Performance-Based Awards.    The Committee has the discretion to establish restrictions on any stock awards and stock unit awards to qualify the awards as "performance-based compensation" under Section 162(m) of the Internal Revenue Code so that they are fully deductible by the Company for federal income tax purposes. In such case, the Committee may establish performance goals for certain performance periods and targets for achievement of the

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performance goals, and the restrictions on the award will lapse if the performance goals and targets are achieved for the designated performance period. The performance goals will be based on one or more of the following criteria: earnings, earnings per share or earnings per share growth; earnings before interest and taxes, or earnings before interest, taxes, depreciation and/or amortization; share price; total stockholder return; return on assets; net asset turnover; inventory turnover; return on capital or return on invested capital; return on equity; cash flow; net or pre-tax income; profit margin; market share; expense management; revenue; revenue growth; stockholder equity; leverage ratio; investment rating; and debt coverage. Such goals may be applicable to the Company as a whole or one or more of its business units and may be applied on an absolute basis or relative to other companies or indices, as determined by the Committee. In addition, the Committee may provide that performance goals will be adjusted for any events or occurrences (including acquisition or disposition expenses, litigation, judgments or settlements, changes in United States tax laws or accounting principles, reorganization or restructuring expenses, extraordinary charges, significant, non-recurring charges or credits and changes in foreign exchange rates), as may be determined by the Committee.

Historical Share Grant and Delivery/Vesting Table.    The table below highlights for the prior three fiscal years the timing of (i) the grant of all equity awards and (ii) the vesting of the equity awards. Non-performance-based stock awards granted during this period vest 50% on the fourth anniversary of the grant date and 50% on the fifth anniversary of the grant date. Performance-based stock awards granted during this period are conditioned on meeting the applicable performance goals at the end of a three-year vesting period, and then are subject to a three-year time-based vesting schedule, vesting 331/3% each year. Stock options vest 25% on each of the first four anniversaries of the grant date. The Company believes that this disclosure helps to evaluate the dilutive impact of its equity compensation program, taking into account (i) the shares that are actually delivered pursuant to the vesting of the stock awards and (ii) the shares that are subject to vested stock options.

 
 
   
   
   
   
   
   
   
   
   
   
   
   
   
   
 
   
   
  Shares Granted (#)
   
  Shares Delivered/Vested (#)1
 
   
   
  2011
   
  2012
   
  2013
   
  2011
   
  2012
   
  2013
   

  

 

Performance-based restricted stock

        269,000         363,000         53,000         187,000         296,000         304,000    

  

 

Non-performance based restricted stock

        135,000         344,000         114,000         30,000         74,000         22,000    

  

 

Stock options

        721,000         169,000         972,000         501,000         484,000         447,000    

  

 

Total

        1,125,000         876,000         1,139,000         718,000         854,000         1,627,000    

  

 

Average weighted shares outstanding (in millions)

        38.4         38.8         38.3         38.4         38.8         38.3    
1
Represents shares delivered in connection with the vesting of stock awards and shares subject to stock options that vest.

The Company commits that, with respect to the number of shares subject to awards granted over the next three fiscal years (Fiscal 2014, Fiscal 2015 and Fiscal 2016), it will maintain an average annual burn rate over that period that does not exceed 3.70% of weighted common shares outstanding, which is the burn rate cap established by Institutional Shareholder Services ("ISS") for companies in our GICs code. The Company's average burn rate for the period of Fiscal 2012, 2013 and 2014 (to date) was 3.67%, and its burn rates for Fiscal 2013 and 2014 (to date) were 3.41% and 3.53%, respectively, all of which comply with the ISS cap. The Company's average burn rate for the three-year period of Fiscal 2011, 2012 and 2013 was 3.82%, slightly above the

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ISS cap, due to a higher than normal burn rate in Fiscal 2012 when the Company had a grant of performance-based stock triggered by a stock price acceleration feature under its long-term incentive compensation plan. For purposes of calculating the number of shares in a particular year, all shares will first be converted into option-equivalent shares, meaning in the Company's case that each share that is subject to performance-based and time-based restricted stock awards will count as equivalent to two option shares.

Provisions Relating to a Change in Control of the Company.    The Plan gives the Committee the discretion to determine how Plan awards are treated upon a change in control. The current award agreements to be approved by the Committee provide that upon a change in control, outstanding awards become immediately vested and exercisable, all restrictions on awards lapse and any performance-based goals are deemed satisfied at the target level.

Amendment of Award Agreements; Amendment and Termination of the Plan; Term of the Plan.    The Committee may amend any award agreement at any time, provided that no amendment may adversely affect the right of any participant under any agreement in a material way without the written consent of the participant, unless such amendment is required by applicable law, regulation or stock exchange rule.

The Board may terminate, suspend or amend the Plan, in whole or in part, from time to time, without the approval of the stockholders, unless such approval is required by applicable law, regulation or stock exchange rule, and provided that no amendment may adversely affect the right of any participant under any outstanding award in a material way without the written consent of the participant, unless such amendment is required by applicable law, regulation or stock exchange rule.

Notwithstanding the foregoing, neither the Plan nor any outstanding award agreement can be amended in a way that results in the repricing of a stock option or SAR without prior stockholder approval. Repricing is broadly defined to include reducing the exercise price of a stock option or SAR or cancelling a stock option or SAR in exchange for cash, other stock options or SARs with a lower exercise price or other stock awards. An equitable adjustment to the awards to reflect changes in the capital structure of the Company or similar events does not constitute repricing for purposes of this prohibition.

No awards may be granted under the Plan on or after October 9, 2023.

Summary of Federal Income Tax Consequences

The following is a summary of the federal income tax consequences of the Plan. It is based on the federal tax laws and regulations currently in effect and existing administrative rulings of the Internal Revenue Service. Participants may also be subject to state and local taxes in connection with the grant of awards under the Plan. Participants should consult with their individual tax advisers to determine the tax consequences associated with awards granted under the Plan. This information may not be applicable to employees of foreign subsidiaries or to employees who are not residents of the United States.

Non-Qualified Stock Options.    A participant will not recognize any income at the time the participant is granted a non-qualified stock option. On the date the participant exercises the non-qualified stock option, the participant will recognize ordinary income in an amount equal to the excess of the fair market value of the shares on the date of exercise over the exercise price. The participant will be responsible for remitting to the Company the withholding tax obligation

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that arises at the time the option is exercised. The Company generally will receive a tax deduction for the same amount of ordinary income recognized by the participant. When the participant sells these shares, any gain or loss recognized by the participant is treated as either short-term or long-term capital gain or loss depending on whether the participant has held the shares more than one year.

Incentive Stock Options.    A participant will not recognize any income at the time the participant is granted an incentive stock option. If the participant is issued shares pursuant to the exercise of an incentive stock option, and if the participant does not make a disqualifying disposition of the shares within one year after the date of exercise or within two years after the date of grant, the participant will not recognize any income, for federal income tax purposes, at the time of the exercise. When the participant sells the shares issued pursuant to the incentive stock option, the participant will be taxed, for federal income tax purposes, as a long-term capital gain on any amount recognized by the participant in excess of the exercise price, and any loss sustained by the participant will be a long-term capital loss. No deduction will be allowed to the Company for federal income tax purposes. If, however, the participant sells the shares before the expiration of the holding periods, the participant will recognize ordinary income on the difference between the exercise price and the fair market value at exercise, and the Company generally will receive a tax deduction in the same amount. Upon exercise of an incentive stock option, the excess of the fair market value over the exercise price is an item of tax preference to the participant for purposes of determining the alternative minimum tax.

In order to qualify as an incentive stock option, the option must be exercised no later than three months after the participant's termination of employment for any reason other than death or disability and no later than one year after termination of the participant's employment due to disability. If the option is not exercised within this time period, it will be treated as a non-qualified stock option and taxed accordingly.

Stock Awards and Stock Unit Awards.    If the participant receives a stock award, the participant generally will recognize ordinary income upon becoming entitled to transfer the shares at the end of any restriction period without forfeiture. A participant generally will recognize ordinary income when he receives shares or cash pursuant to the settlement of stock units, provided that if the shares are subject to any further restrictions on transfer, the participant will recognize ordinary income upon becoming entitled to transfer the shares at the end of the restriction period without forfeiture. The amount of income the participant recognizes will be equal to the fair market value of the shares on the day the restrictions lapse, or the amount of cash received. This amount will also be the participant's tax basis for the shares. The participant will be responsible for remitting to the Company the withholding tax obligation that arises at the time the ordinary income is recognized. In addition, the holding period begins on the day the restrictions lapse, or the date the shares are received if not subject to any restrictions, for purposes of determining whether the participant has long-term or short-term capital gain or loss on a subsequent sale of the shares. The Company generally will be entitled to a deduction with respect to the ordinary income recognized by the participant.

If a participant who receives a stock award subject to restrictions makes an election under Section 83(b) of the Internal Revenue Code within 30 days after the date of the grant, the participant will have ordinary income equal to the fair market value on the date of grant, and the participant will recognize no additional income until the participant subsequently sells the shares. The participant will be responsible for remitting to the Company the withholding tax obligation

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that arises at the time the ordinary income is recognized. When the participant sells the shares, the tax basis will be equal to the fair market value on the date of grant, and the holding period for capital gains purposes begins on the date of the grant. If the participant forfeits the shares subject to the Section 83(b) election, the participant will not be entitled to any deduction, refund, or loss for tax purposes (other than a capital loss with respect to the amount of ordinary income previously recognized by the participant), and the Company will have to include the amount that it previously deducted from its gross income in the taxable year of the forfeiture.

SARs.    A participant will not recognize any income at the time of the grant of an SAR. Upon exercise of the SAR, the participant will recognize ordinary income equal to the amount received upon exercise. The participant will be responsible for remitting to the Company the withholding tax obligation that arises at the time the ordinary income is recognized. The Company generally will be entitled to a deduction with respect to the ordinary income recognized by the participant.

Awards Granted under the Plan

Awards granted under the Plan are within the discretion of the Committee, and the Committee has not determined future awards or who might receive them. In Fiscal 2013, the Committee made the following grants under the Prior Plan:

 
   
   
 
   
   
  Performance-Based
Restricted Stock

   
  Time-Based
Restricted Stock

   
  Stock
Options

   

  

 

David P. Storch

        24,000         24,000         144,000    

  

 

Timothy J. Romenesko

        12,000         12,000         72,000    

  

 

Richard J. Poulton

        7,200         7,200         43,200    

  

 

Michael J. Sharp

        2,880         2,880         17,280    

  

 

Randy J. Martinez

        0         0         25,000    

  

 

Robert J. Regan

        7,200         7,200         43,200    

  

 

All current executives (including those above)

        46,080         46,080         351,480    

  

 

All non-employee directors

        0         45,000         0    

  

 

All other employees

        0         7,500         611,700    

On August 29, 2013, the Company's closing stock price was $25.77 per share.

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR APPROVAL OF THE AAR CORP. 2013 STOCK PLAN.

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PROPOSAL 4 — RATIFICATION OF THE APPOINTMENT OF KPMG LLP  AS THE COMPANY'S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Company's independent registered public accounting firm reports to, and is engaged at the direction of, the Audit Committee of the Company's Board of Directors.

The Audit Committee appointed KPMG LLP ("KPMG") as the Company's independent registered public accounting firm for Fiscal 2014, after consideration and determination of KPMG's independence in light of all services rendered to the Company and its performance as the Company's independent registered public accounting firm. The Board of Directors asks that stockholders ratify the appointment of KPMG as the Company's independent registered public accounting firm for Fiscal 2014. Representatives of KPMG are expected to be present at the annual meeting, with the opportunity to make a statement if they so desire and to respond to appropriate questions of stockholders.


Independent Registered Public Accounting Firm Fees and Services

The following table sets forth the aggregate fees billed by KPMG to the Company for Fiscal 2012 and Fiscal 2013 for audit, audit-related, tax, and other services provided by the Company's independent registered public accounting firm.

 
 
  Description of Fees
   
  Fiscal 2012 ($)
   
  Fiscal 2013 ($)
   

  

 

Audit Fees

        1,745,635         1,689,980    

  

  Audit-Related Fees1         221,781         136,375    

  

  Tax Fees2         298,776         373,317    

  

 

All Other Fees

                   
1
Audit-related fees in Fiscal 2012 were for a comfort letter, due diligence, technical research on convertible debt accounting and statutory audits of foreign subsidiaries. Fiscal 2013 audit-related fees were for two comfort letters, purchase price allocation and related acquisition work, technical research and statutory audits of foreign subsidiaries.

2
Tax fees include domestic and foreign income tax return reviews.

Audit Committee pre-approval is required for any audit, audit-related, tax or other services to be provided by the independent registered public accounting firm.

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
THE RATIFICATION OF THE APPOINTMENT OF KPMG AS THE COMPANY'S
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL 2014.

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Audit Committee Report for Fiscal 2013

The Audit Committee reviews the Company's financial reporting process on behalf of the Board of Directors. The Company's management is primarily responsible for the Company's financial statements and the quality and integrity of the reporting process and systems of internal control. The Company's independent registered public accounting firm is responsible for auditing the Company's financial statements and the effectiveness of internal controls over financial reporting and for expressing opinions thereon.

In fulfilling its oversight responsibilities, the Audit Committee has reviewed and discussed the Company's audited financial statements for the fiscal year ended May 31, 2013 with the Company's management and representatives of the Company's independent registered public accounting firm, including a discussion of the reasonableness of significant judgments and accounting estimates, and clarity of disclosures in the financial statements. The Audit Committee also reviewed with management and the independent registered public accounting firm the preparation of the financial statements and related disclosures contained in the Company's earnings announcements and quarterly reports. Management has represented to the Audit Committee that the Company's financial statements were prepared in accordance with United States generally accepted accounting principles ("GAAP"), and the independent registered public accounting firm has expressed an opinion based on their audit that the financial statements are in conformance with GAAP in all material respects. The Audit Committee is not responsible for planning or conducting audits, or the determination that the Company's financial statements are complete and accurate and in accordance with GAAP. That is the responsibility of management and the independent registered public accounting firm.

The Audit Committee reviewed and discussed with the independent registered public accounting firm and management the overall scope and plans for the audit, the quality, adequacy and assessment of the effectiveness of internal controls over financial reporting, and the Internal Audit Department's management, organization, responsibilities, budget and staffing. The Audit Committee also met with the independent registered public accounting firm representatives without management present and discussed the results of their audits, their evaluation of the Company's internal controls over financial reporting, disclosure controls and the overall quality (not just acceptability) of the Company's accounting policies and financial reporting.

The Audit Committee also discussed with the representatives of the independent registered public accounting firm (i) the matters required to be discussed by Public Company Accounting Oversight Board AU 380 ("Communication with Audit Committee"), and (ii) the independent registered public accounting firm's independence from the Company and its management, including the matters in the written disclosures and letter furnished to the Audit Committee by the independent registered public accounting firm and required by applicable requirements of the Public Company Accounting Oversight Board. The Audit Committee determined that the non-audit services provided to the Company by the independent registered public accounting firm are compatible with maintaining the independent registered public accounting firm's independence.

In reliance on its review of the audited financial statements and the discussions referred to above and subject to the limitations on the role and responsibilities of the Audit Committee referred to above and in its charter, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company's Annual Report on Form 10-K for the year ended May 31, 2013 for filing with the SEC.

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The Audit Committee also reviewed and assessed the adequacy of the Audit Committee charter and conducted an Audit Committee self-assessment in which it concluded that the Committee operates effectively and successfully carried out all of its charter responsibilities.

Respectfully submitted,

Audit Committee

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CORPORATE GOVERNANCE

The Company is committed to good corporate governance. We regularly review our policies and procedures, giving due consideration to current developments and "best practices." We believe that we comply with all applicable SEC and NYSE rules and regulations, and we have adopted additional corporate governance practices that we believe are in the best interests of the Company and its stockholders.

Copies of the following corporate governance documents are available on the Company's website at www.aarcorp.com under "Investor Relations/Corporate Governance":

These corporate governance documents are also available in print to any stockholder upon written request to the Secretary of the Company at the Company's address listed on the first page of this proxy statement.

The Company maintains an Ethics Hotline through an independent third-party provider to receive confidential complaints, information, suggestions or recommendations concerning the Company, its officers, directors, employees, policies, procedures, employment and business practices, accounting or audit matters, financial reporting or compliance with other Company policies or applicable regulatory or legal requirements. The Ethics Hotline is toll-free and permits callers to identify themselves or remain anonymous at their election.


Director Nominations and Qualifications

The Board of Directors, acting through its Nominating and Governance Committee, is responsible for identifying, evaluating and recommending candidates for director. The Nominating and Governance Committee obtains recommendations from management, other directors, business and community leaders, and stockholders, and may retain the services of a consultant to assist in identifying candidates. The Nominating and Governance Committee considers all director candidates in the same manner, including director candidates recommended by stockholders, regardless of the source of the recommendation. In its evaluation of director candidates, the Nominating and Governance Committee considers the factors specified in the Company's Corporate Governance Guidelines, including:

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The Nominating and Governance Committee considers the racial, ethnic and gender diversity of the Board and director candidates, as well as the diversity of their knowledge, skills, experience, background and perspective, to assure that the Company maintains the benefit of a diverse, balanced and effective Board.

A full list of the qualifications of director candidates considered by the Committee is set forth in the Corporate Governance Guidelines on the Company's website at www.aarcorp.com under "Investor Relations/Corporate Governance" and is available in print to any stockholder upon written request to the Secretary of the Company at the address listed on the first page of this proxy statement. The Nominating and Governance Committee regularly reviews these qualifications and the performance of individual directors and the Board as a whole.

Following its evaluation of director candidates, the Nominating and Governance Committee recommends its director nominees to the Board of Directors. Based on its review and consideration of the Committee's recommendation, the Board makes the final determination of director nominees to be elected by the Company's stockholders.

Stockholders may submit a proposed nomination to the Nominating and Governance Committee for consideration with respect to the 2014 annual meeting of stockholders by writing to the Secretary, AAR CORP., One AAR Place, 1100 North Wood Dale Road, Wood Dale, Illinois 60191. To be considered, proposed nominations must be received by the Secretary of the Company no later than April 12, 2014, must state the reasons for the proposed nomination and contain the information required under the Company's By-Laws, including the full name and address of each proposed nominee, as well as a brief biographical history setting forth past and present directorships, employment and occupations, information as to stock ownership, other arrangements regarding the common stock, and any other qualifications. Proposed nominations must also include a statement indicating that the proposed nominees have consented to being named in the proxy statement and to serve if elected.

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Director Independence

A majority of the members of the Board of Directors must be independent directors under the Company's Corporate Governance Guidelines and applicable SEC and NYSE rules. The Nominating and Governance Committee and the Board of Directors review each director annually and make a determination concerning independence after consideration of all known facts and circumstances. The Board has established categorical standards to assist it in determining director independence. The Company's "Categorical Standards for Determining Director Independence" include all of the elements of the applicable SEC and NYSE rules with respect to director independence, as well as those of the Company, and are available on the Company's website. Based on these categorical standards, its review of all relevant facts and information available, and the recommendations of the Nominating and Governance Committee, the Board, at its meeting in July 2013, affirmatively determined that no director has a material relationship with the Company that would impair the director's ability to exercise independent judgment and, accordingly, that each director is an independent director, except for David P. Storch, due to his status as Chairman of the Board and Chief Executive Officer of the Company, and Timothy J. Romenesko, due to his status as President and Chief Operating Officer of the Company. Under the NYSE rules, a director employed by the Company is not an independent director by definition.


Board Leadership, Including Lead Director

The Board of Directors determines the leadership structure for the Board and the Company in a manner that it believes best serves the interests of the Company's stockholders.

The Board amended the Corporate Governance Guidelines in April 2013 to create the position of a Lead Director. Elected by the independent directors, the Lead Director chairs all executive sessions of the independent directors and works closely with the Chief Executive Officer on Board agendas, schedules and meetings. In April 2013, the independent directors elected Ronald R. Fogleman as the Company's Lead Director.

The Board has no fixed policy with respect to combining or separating the offices of Chairman of the Board and Chief Executive Officer. Currently, the Company's Chief Executive Officer, David P. Storch, is also Chairman of the Board. The Board believes a combined Chairman and Chief Executive Officer is the most effective and appropriate leadership structure for the Board and the Company at this time for the following principal reasons:

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Risk Management Oversight

The Board of Directors, directly and through its committees, is responsible for overseeing management's process for assessing and managing the Company's exposure to risks. In that role, the Board regularly reviews and responds to management's business strategies and initiatives, the Company's quarterly and annual financial results, and information relating to the Company's competitive position, customer base, and capital and liquidity position. The Board holds an annual strategy session with senior management devoted entirely to a review and consideration of the Company's businesses, markets, customers, competitors, and strategic initiatives and direction. This meeting includes an assessment of the key challenges and risks of the Company's businesses, and the opportunities for addressing and responding to these challenges and risks.

The Audit Committee, on behalf of the Board, oversees the enterprise risk management committee, which is composed of Company employees and is responsible for identifying the principal risks to the Company, developing and implementing risk mitigation strategies, auditing the effectiveness of the risk mitigation strategies and reporting to the Audit Committee. The enterprise risk management committee meets regularly with the Audit Committee to review and discuss the Company's principal risks and outline its risk mitigation approach for addressing these risks. The Audit Committee reports to the Board on risks relating to accounting, financial reporting and legal compliance, risks identified by the Company's internal and external auditors, and matters raised through the Company's Ethics Hotline. The Compensation Committee oversees and reports to the Board on the Company's incentive compensation programs to assure that they are appropriately structured to incentivize officers and key employees while assuring appropriate risk. The Nominating and Governance Committee oversees and reports to the Board on corporate governance risks, including director independence and related party transactions.

The Board and its committees receive information from and have regular access to the individual members of management responsible for managing risk, including the Company's Chief Executive Officer, President, Chief Financial Officer, Group Vice Presidents, Controller, General Counsel and Internal Auditor. The directors meet each quarter with a broader group of the Company's employees at regularly scheduled Board dinners as an informal way of learning more about the Company's businesses and its employees. The Board also schedules at least one meeting per year at a Company facility to promote interaction with local management and

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employees and allow directors a first-hand opportunity to inspect the Company's business operations. In Fiscal 2013, the Board visited two of the Company's facilities.


Executive Sessions

Independent directors of the Board meet in executive session without management as part of each regular Board meeting and otherwise when circumstances make it advisable or necessary. The Lead Director presides at the executive sessions of independent directors.


Communications with the Board of Directors

Stockholders and other interested parties may communicate with the Board, the Chairman of the Board, the Lead Director, independent directors as a group, or any individual director or Committee Chairman by mail addressed to:

The independent members of the Board of Directors have approved procedures for the processing, review and disposition of all communications sent by stockholders or other interested parties to the Board of Directors, most recently in April 2013.


Corporate Governance Guidelines

The Board of Directors adopted Corporate Governance Guidelines to codify long-standing policies and procedures and to demonstrate its commitment to corporate governance best practices. These Guidelines, under the administration of the Nominating and Governance Committee of the Board of Directors, address director qualification standards, director responsibilities, director access to management and independent advisors, director compensation, management evaluation and succession, and the annual performance evaluation of the Board of Directors. These Guidelines are reviewed and approved annually by the Nominating and Governance Committee and the Board of Directors, most recently in April 2013.


Code of Business Ethics and Conduct

The Company's Code of Business Ethics and Conduct adopted by the Board of Directors applies to all directors, officers, and employees, including the Chairman and Chief Executive Officer, the President and Chief Operating Officer, the Chief Financial Officer, and the Chief Accounting Officer and Controller. The purpose of the Code of Business Ethics and Conduct is to promote the highest ethical standards in the Company's business practices and procedures, including the ethical handling of actual or apparent conflicts of interest; full, fair and timely disclosure; and compliance with applicable laws and governmental rules and regulations. Employees are encouraged to report to the Company any conduct that they believe in good faith to be in violation of the Code of Business Ethics and Conduct. We will post any amendments to the Code of Business Ethics and Conduct and any waivers from the Code granted by the Board to directors or executive officers on the Company's website, as required under SEC rules.

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The Board reviewed and revised the Code of Business Ethics and Conduct in Fiscal 2013 to ensure that it reflects evolving best practices.


Related Person Transaction Policy

The purpose of the Related Person Transaction Policy, as adopted by the Board of Directors, is to provide for the identification, review, and consideration of transactions between the Company or its subsidiaries and any related persons. "Related persons" means: the Company's directors; director nominees; executive officers; greater than five percent beneficial owners of the Company's voting securities; members of their immediate families; and any firm, corporation or other entity in which any of the foregoing persons is employed or is a partner, a principal, or in a similar position, or in which such person has a 10% or greater beneficial ownership interest.

Under the Policy, any related person transaction involving amounts in excess of $120,000 must be reviewed, considered, and approved by the Board of Directors directly or through the Nominating and Governance Committee. Review of a proposed related person transaction takes into consideration the purpose of, and the potential benefits to the Company from, the related person transaction, and the impact of the related person transaction on a director's independence in the event that the related person is a director or an immediate family member of a director. No member of the Board or the Nominating and Governance Committee may participate in any review, consideration, or approval of any related person transaction with respect to which such member or any of his or her immediate family members is the related person.

The Policy provides that the Company may undertake certain pre-approved related person transactions (e.g., transactions in which the related person's interest derives solely from his or her service as a director of another corporation or entity that is a party to the transaction) without further specific review, consideration and approval.

The Company has a Founder's Agreement with Ira A. Eichner, the Founder and former Chairman of the Board of the Company. The Founder's Agreement recognizes Mr. Eichner's extraordinary contributions to the Company for over 55 years and the value to the Company of an ongoing relationship with Mr. Eichner. Under the Founder's Agreement, upon request of the Company and subject to his availability, Mr. Eichner serves as an ambassador for the Company and provides consulting services on operational and strategic issues. Mr. Eichner receives a quarterly retainer of $25,000. Mr. Eichner also participates in the Company's Non-Employee Directors' Retirement Plan until December 1, 2015 (see "— Director Compensation Table," footnote 5). Mr. Eichner is Mr. Storch's father-in-law.

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Board Committees

The Board has an Audit Committee, a Compensation Committee, a Nominating and Governance Committee, and an Executive Committee. The following table identifies the current members of each committee:

 
 
  Director
   
  Audit
Committee

   
  Compensation
Committee

   
  Nominating and
Governance
Committee

   
  Executive
Committee

   

 

 

Anthony K. Anderson

      X       X                    

 

 

Norman R. Bobins

      X       X                    

 

 

Michael R. Boyce

              X       X            

 

 

Ronald R. Fogleman

              X       Chair       X    

 

 

James E. Goodwin

      Chair               X       X    

 

 

Patrick J. Kelly

      X               X            

 

 

Peter Pace

              X       X            

 

 

Timothy J. Romenesko

                                   

 

 

David P. Storch

                              Chair    

 

 

Marc J. Walfish

      X               X       X    

 

 

Ronald B. Woodard

      X       Chair                    

                                       

Audit Committee

The Audit Committee is comprised entirely of independent directors qualified to serve on the Audit Committee under applicable SEC and NYSE rules and the Company's Categorical Standards for Determining Director Independence. Its members are James E. Goodwin (Chairman), Anthony K. Anderson, Norman R. Bobins, Patrick J. Kelly, Marc J. Walfish, and Ronald B. Woodard. The Board of Directors has determined that each Audit Committee member is an "audit committee financial expert" within the meaning of applicable SEC rules.

The Audit Committee acts pursuant to a written charter adopted by the Board of Directors. The charter was reviewed and approved by the Audit Committee and the Board of Directors at their July 2013 meetings. The full text of the Audit Committee charter appears on the Company's website and is available in print to any stockholder upon written request to the Secretary of the Company at the Company's address listed on the first page of this proxy statement.

The Audit Committee is primarily concerned with the integrity of the Company's financial statements, compliance with legal and regulatory requirements and the performance of the Company's internal audit function and independent registered public accounting firm. The Audit Committee performs the specific functions described in its charter, including:

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The Audit Committee held seven meetings during Fiscal 2013. The Audit Committee Report for Fiscal 2013 appears on pages 21-22.

Compensation Committee

The Compensation Committee is comprised entirely of independent directors as defined under applicable SEC and NYSE rules and the Company's Categorical Standards for Determining Director Independence. Its members are Ronald B. Woodard (Chairman), Anthony K. Anderson, Norman R. Bobins, Michael R. Boyce, Ronald R. Fogleman and Peter Pace.

The Compensation Committee acts pursuant to a written charter adopted by the Board of Directors. The charter was reviewed and approved by the Compensation Committee and the Board of Directors at their July 2013 meetings. The full text of the Compensation Committee charter appears on the Company's website and is available in print to any stockholder upon written request to the Secretary of the Company at the Company's address listed on the first page of this proxy statement.

The Compensation Committee is primarily concerned with establishing, reviewing and approving Chief Executive Officer compensation, reviewing and approving other senior executive compensation and overseeing the AAR CORP. Stock Benefit Plan and any other compensation and employee benefit plans. The Compensation Committee performs the specific functions described in its charter, including:

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The Compensation Committee held three meetings during Fiscal 2013. The Compensation Committee Report on Executive Compensation for Fiscal 2013 appears on page 56. Information about the role of the Compensation Committee consultant and management in the executive compensation process is set forth under the "Compensation Discussion and Analysis" section on pages 51 - 52.

Nominating and Governance Committee

The Nominating and Governance Committee is comprised entirely of independent directors as defined under applicable SEC and NYSE rules and the Company's Categorical Standards for Determining Director Independence. Its members are Ronald R. Fogleman (Chairman), Michael R. Boyce, James E. Goodwin, Patrick J. Kelly, Peter Pace, and Marc J. Walfish.

The Nominating and Governance Committee acts pursuant to a written charter adopted by the Board of Directors. The charter was reviewed and approved by the Nominating and Governance Committee and the Board of Directors at their July 2013 meetings. The full text of the Nominating and Governance Committee charter appears on the Company's website and is available in print to any stockholder upon written request to the Secretary of the Company at the Company's address listed on the first page of this proxy statement.

The Nominating and Governance Committee is responsible for both nominating and governance matters as described in its charter. The Nominating and Governance Committee performs the specific functions described in its charter, including:

The Nominating and Governance Committee held four meetings during Fiscal 2013.

Executive Committee

The Executive Committee is comprised of David P. Storch (Chairman), James E. Goodwin, Ronald R. Fogleman and Marc J. Walfish, each of whom is an independent director as defined by applicable SEC and NYSE rules and the Company's Categorical Standards for Determining Director Independence.

The Executive Committee acts pursuant to a written charter adopted by the Board of Directors. The charter was reviewed and approved by the Executive Committee and the Board of Directors at their July 2013 meetings. The full text of the Executive Committee charter appears on the Company's website and is available in print to any stockholder upon written request to the Secretary of the Company at the Company's address listed on the first page of this proxy statement.

The Executive Committee is authorized to meet between meetings of the Board of Directors and exercise certain powers of the Board with respect to urgent matters or other matters referred to it by the Board for deliberation or action, subject to limitations imposed by the Committee's charter, the Board, applicable law and the Company's By-Laws.

The Executive Committee held one meeting during Fiscal 2013.

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Board Meetings and Attendance

During Fiscal 2013, the Board held five meetings and acted by unanimous written consent on two occasions. All persons who were directors during Fiscal 2013 attended at least 75% of the Board meetings and meetings of Board committees on which they served.

The Company's Corporate Governance Guidelines provide that directors are expected to attend all stockholder meetings. All the members of the Company's Board of Directors attended the Company's 2013 annual meeting of stockholders.


Director Compensation

The Board believes that compensation for any director who is not an officer or employee of the Company or any subsidiary should be a mix of cash and equity compensation. Director compensation and benefits are recommended to the Board of Directors from time to time by the Compensation Committee for Board approval. Directors who are officers or employees of the Company or any subsidiary receive no additional compensation for service on the Board or any of its committees.

The following table identifies the elements of director compensation in effect during Fiscal 2013:

 
 
  Compensation Element
   
  Fiscal 2013 Non-Employee Director
Compensation Program

   

 

 

Annual Retainer

      $50,000    

 

 

Lead Director Annual Retainer

      $30,000    

 

 

Committee Chair Annual Retainer

      $10,000    

 

 

Board and Committee Meeting Fees

      $2,500 per meeting
($1,250 for telephone meetings)
   

 

 

Annual Stock Award

      5,000 shares of common stock
(vesting after one year)
   

               

All retainers are paid quarterly, and meeting fees are paid promptly following each meeting attended. The annual stock award was approved at the Board's January 2013 meeting with an effective date of June 1, 2013. Each non-employee director may elect to defer receipt of the retainers and meeting fees pursuant to the Company's Non-Employee Directors' Deferred Compensation Plan (the "Director Plan"). Under the Director Plan, deferred retainer fees are converted into stock units equivalent to shares of common stock, and deferred meeting fees are credited with interest quarterly based on the 10-Year United States Treasury Bond rate. Distributions of deferred retainer fees under the Director Plan are paid in cash or in shares of common stock of equivalent value, at the participant's election, and distribution of deferred meeting fees are made in cash, in each case upon termination of service on the Board or on the happening of certain other events, as specified in the Director Plan.

Each non-employee director, upon being elected a director, receives term life insurance coverage of $200,000 and is eligible (with spouse) to participate in a Company-paid, annual physical program. The Company also reimburses its directors for travel, lodging and related expenses they incur in attending Board and committee meetings.

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At its January 2013 meeting, the Board approved the same director compensation program in Fiscal 2014 that was in effect in Fiscal 2013. The Board further decided, at its April 2013 meeting, that the Lead Director shall receive an annual retainer of $30,000 beginning September 2013.


Director Compensation Table

The following table sets forth all compensation paid to each non-employee director for Fiscal 2013:

 
 
  Name1
   
  Fees Earned
or Paid
in Cash ($)2

   
  Stock
Awards
($)3

   
  Option
Awards
($)4

   
  Non-Equity
Incentive
Plan
Compensation
($)

   
  Change in
Pension
Value and
Non-Qualified
Deferred
Compensation
Earnings ($)5

   
  All Other
Compensation
($)6

   
  Total ($)
   

 

 

Anthony K. Anderson

        60,000         54,628         0         0         0         13,124         127,752    

 

 

Norman R. Bobins

        81,250         57,800         0         0         0         720         139,770    

 

 

Michael R. Boyce

        78,750         57,800         0         0         0         720         137,270    

 

 

James G. Brocksmith, Jr.

        42,500         57,800         0         0         0         300         100,600    

 

 

Ronald R. Fogleman

        87,500         57,800         0         0         0         1,867         147,167    

 

 

James E. Goodwin

        96,250         57,800         0         0         0         6,220         160,270    

 

 

Patrick J. Kelly

        85,000         57,800         0         0         0         5,956         148,756    

 

 

Peter Pace

        77,500         57,800         0         0         0         7,612         142,912    

 

 

Marc J. Walfish

        86,250         57,800         0         0         0         8,548         152,598    

 

 

Ronald B. Woodard

        91,250         57,800         0         0         0         720         149,770    

                                                                             
1
Mr. Storch and Mr. Romenesko are not included in this table as they are employee directors of the Company and receive no additional compensation for their service as directors. Their compensation from the Company is set forth in the Summary Compensation Table in this proxy statement. Mr. Brocksmith retired from the Board on October 10, 2012.

2
The following table provides a breakdown of director fees earned or paid in cash for Fiscal 2013:

 
 
  Name
   
  Annual
Retainer ($)

   
  Committee Chair
Retainer Fees ($)

   
  Meeting Fees ($)
   
  Total ($)
   

 

 

Anthony K. Anderson

        37,500         0         22,500         60,000    

 

 

Norman R. Bobins

        50,000         0         31,250         81,250    

 

 

Michael R. Boyce

        50,000         0         28,750         78,750    

 

 

James G. Brocksmith, Jr.

        25,000         0         17,500         42,500    

 

 

Ronald R. Fogleman

        50,000         10,000         27,500         87,500    

 

 

James E. Goodwin

        50,000         10,000         36,250         96,250    

 

 

Patrick J. Kelly

        50,000         0         35,000         85,000    

 

 

Peter Pace

        50,000         0         27,500         77,500    

 

 

Marc J. Walfish

        50,000         0         36,250         86,250    

 

 

Ronald B. Woodard

        50,000         10,000         31,250         91,250    

                                               
3
The amounts in this column reflect the aggregate grant date fair value of the Fiscal 2013 stock awards granted to each non-employee director computed in accordance with FASB ASC Topic 718. As of May 31, 2013, each non-employee director held 1,334 unvested restricted shares, other than Mr. Anderson who held 0 unvested restricted shares, and General Pace who held 668 unvested

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4
No stock options were granted to non-employee directors in Fiscal 2013. The aggregate number of shares issuable pursuant to stock options held by each non-employee director as of May 31, 2013 was as follows: Mr. Anderson, 0; Mr. Bobins, 0; Mr. Boyce, 0; Mr. Brocksmith, 7,000; General Fogleman, 3,500; Mr. Goodwin, 7,000; Mr. Kelly, 0; General Pace, 0; Mr. Walfish, 3,500; and Mr. Woodard, 3,500.

5
Mr. Brocksmith, who retired in October 2012, receives benefits under the Company's Non-Employee Directors' Retirement Plan. Effective April 10, 2001, the Company froze the Plan to new directors and Mr. Brocksmith is the last remaining participant. The Plan provides for quarterly cash payments following retirement in an amount equal to 25% of the annual retainer for a period equal to the total number of years of service as a director, up to a maximum of 10 years, or until death. The amount in this column represents the increase in the present value of accumulated benefits under the Plan during Fiscal 2013, determined by using assumptions consistent with those used for reporting purposes in the Company's 2013 Form 10-K. There were no preferential or above-market earnings credited under the Plan.

6
This column includes reimbursed expenses in connection with spousal travel and/or travel and hotel expense in connection with the Company-paid director/spouse annual physical program as well as the cost of the annual physical program and the cost of term life insurance.


Compensation Committee Interlocks and Insider Participation

Messrs. Anderson, Bobins, Boyce, and Woodard, General Fogleman and General Pace, all of whom are independent non-employee directors, are the current members of the Compensation Committee of the Board of Directors of the Company. During Fiscal 2013, none of the executive officers of the Company served on the board of directors or compensation committee of any entity whose officers served either on the Board of Directors of the Company or on the Compensation Committee of the Board of Directors of the Company.

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

This Compensation Discussion and Analysis ("CD&A") describes our Fiscal 2013 executive compensation program. It provides information about the goals and the key elements of the program and explains the reasons behind the Compensation Committee's executive compensation decisions.

Our focus in this CD&A is the Fiscal 2013 compensation of the following "named executive officers" of the Company:

 
 
  Name
   
  Title
   
     David P. Storch       Chairman of the Board and Chief Executive Officer    
     Timothy J. Romenesko       President and Chief Operating Officer    
     Richard J. Poulton       Former Vice President, Chief Financial Officer and Treasurer until October 26, 2012    
     Michael J. Sharp       Vice President, Chief Financial Officer and Treasurer from October 27, 2012 to July 25, 2013; Vice President, Controller and Chief Accounting Officer    
     Randy J. Martinez       Aviation Services Group Vice President — Airlift    
     Robert J. Regan       Vice President, General Counsel and Secretary    

Executive Summary

Goals of Our Executive Compensation Program

The primary goals of our executive compensation program are to:

Fiscal 2013 Business Highlights

The Company reported solid performance results in Fiscal 2013, including:

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  Fiscal 2012 ($)
   
  Fiscal 2013 ($)
   

  

 

Sales

      2,065.0       2,137.3      

  

 

Net Income Attributable to AAR

      67.7       55.0      

  

 

Diluted Earnings Per Share

      1.65       1.38*    

  

 

AAR Stockholders' Equity

      864.6       918.6      
    *
    Represents earnings per share under generally accepted accounting principles after adjustment for a defense logistics program charge; earnings per share before the adjustment was $1.85, and earnings per share for purposes of calculating annual cash incentives under the Fiscal 2013 short-term incentive plan was $1.62. See Exhibit B for a reconciliation of the $1.85 and $1.38 earnings per share figures, as well as reconciliations of free cash flow and reduction in net debt.

Fiscal 2013 Executive Compensation Highlights

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  Performance Measure
   
  Target
   
  Actual
   

  

 

Earnings per share

      $1.65       $1.62*    

  

 

Free cash flow

      $60 million       $125.3 million    
    *
    Represents earnings per share for purposes of calculating annual cash incentives under the Fiscal 2013 short-term incentive plan.

 
 
  Named Executive Officer
   
  Target
   
  Actual
   

  

 

David P. Storch

      $ 1,110,844       $ 1,350,685    

  

 

Timothy J. Romenesko

      $ 556,229       $ 676,324    

  

 

Richard J. Poulton

      $ 340,495       $ 0    

  

 

Michael J. Sharp

      $ 264,974       $ 322,185    

  

 

Randy J. Martinez

      $ 345,000       $ 638,178    

  

 

Robert J. Regan

      $ 349,008       $ 424,362    

 
 
  Named Executive Officer
   
  Fiscal 2012
   
  Fiscal 2013
   
  Change
   
     David P. Storch       $ 2,274,203       $ 1,314,720       -42.2%    
     Timothy J. Romenesko       $ 1,098,802       $ 657,360       -40.2%    
     Richard J. Poulton       $ 654,957       $ 394,416       -39.8%    
     Michael J. Sharp         N/A       $ 157,766       N/A    
     Randy J. Martinez         N/A       $ 120,750       N/A    
     Robert J. Regan       $ 654,957       $ 394,416       -39.8%    

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  Named Executive Officer
   
  Fiscal 2012*
   
  Fiscal 2013
   
  Change
   
     David P. Storch       $ 3,991,210       $ 3,543,243       -11.2%    
     Timothy J. Romenesko       $ 1,999,619       $ 1,817,197       -9.1%    
     Richard J. Poulton       $ 1,295,098         N/A       N/A    
     Michael J. Sharp         N/A       $ 792,527       N/A    
     Randy J. Martinez         N/A       $ 1,107,998       N/A    
     Robert J. Regan       $ 1,295,098       $ 1,197,998       -7.5%    
    *
    Does not include the following dollar value of shares of restricted stock granted on July 15, 2011 when the stock price acceleration provisions of the Fiscal 2011 long-term incentive plan were triggered: Mr. Storch: $969,002; Mr. Romenesko: $468,172; Mr. Poulton: $279,066; and Mr. Regan $279,066.

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I. Principal Compensation Elements of Our Executive Compensation Program

The table below identifies the principal elements of our Fiscal 2013 executive compensation program, and the subsequent narrative provides a fuller description of each element.

 
 
  Compensation Element
   
  Form of Compensation
   
  Performance Criteria
   

  

 

Base salary

      Cash       Individual performance/contributions    

  

 

Annual cash compensation incentive

      Cash       •  Earnings per share
•  Free cash flow
•  Specific business unit goals
   

  

 

Long-term stock incentive compensation

      •  Stock options       •  Individual performance/contributions    

 

       

 

          •  Time-based restricted stock       •  Individual performance/contributions    

 

       

 

          •  Performance-based restricted stock       •  Cumulative net income over three years    

 

 

Retirement benefits

      Eligibility to participate in and receive Company contributions to our 401(k) plan (available to all employees) and, for certain officers, a supplemental deferred compensation plan       Not applicable    

  

 

Perquisites

      Various (see below)       Not applicable    

The Company provides base salaries as a guaranteed minimum amount of compensation in consideration of day-to-day performance. Base salaries are designed to reward individual performance and contributions consistent with an executive officer's position and responsibilities. The Compensation Committee annually reviews the base salaries of all executive officers, including the Chief Executive Officer and the other named executive officers, and may adjust base salaries, typically at the beginning of a fiscal year, based upon consideration of:

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The Compensation Committee believes that annual incentive opportunities, payable in cash, serve as an appropriate incentive for achievement of the Company's short-term (i.e., one-year) performance goals at either the corporate level or at the business group level. A cash-based incentive provides an opportunity that is consistent with market practice and allows the named executive officers to receive the value of their performance over the measurement period.

Within the first 90 days of each fiscal year, the Company establishes specific performance goals for its executive officers, including the named executive officers, that govern the payment of annual cash incentive awards for that fiscal year. The Company pays an annual cash incentive award to each named executive officer, typically measured as a percentage of the executive officer's base salary, based on the extent to which the Company and the executive officer achieve applicable performance goals. Performance at a target level results in a target annual cash incentive award, and performance above or below target results in payment of an annual cash incentive award at a higher or lower percentage of base salary, respectively. Performance below a minimum threshold results in no annual cash incentive award. For named executive officers at the corporate level, the annual cash incentive in Fiscal 2013 was based on two performance goals: earnings per share and free cash flow. For named executive officers in charge of a business group, the annual cash incentive is based on the performance results of the business group, rather than the Company as a whole.

The Company uses stock compensation to provide long-term incentive opportunities for its named executive officers and certain other officers and key employees. The Company believes that the use of stock compensation rewards executives in a manner that aligns their interests with the interests of the Company's stockholders. Given the importance of this alignment, long-term stock-based compensation typically represents the most significant component of total compensation for the Company's executive officers. Long-term stock incentive compensation awards represent potential compensation at the time of grant; their value is realized by a named executive officer only if applicable performance and vesting conditions are satisfied.

Generally, when determining restricted stock and stock option grant opportunities, the Compensation Committee considers the executive's position and responsibilities in the Company, performance and contributions during the preceding year, capabilities and potential for future contributions to the Company, the number of restricted stock shares and options previously granted to the executive and, for senior management (including the named executive officers), their stock ownership relative to the Company's stock ownership guidelines and the Chief Executive Officer's recommendation. In addition, the value of stock grants in any year will vary depending on the Board's assessment of the Company's business and share price performance in the prior fiscal year.

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The Company's named executive officers participate in three retirement plans: the Retirement Plan, the Retirement Savings Plan and the Supplemental Key Employee Retirement Plan (the "SKERP").

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The Company provides certain executive officers, including its named executive officers, with a limited number of perquisites, as identified in the footnote to the "Other Compensation" column of the Summary Compensation Table. The Company believes these perquisites are reasonable, competitive and consistent with the Company's overall executive compensation program. The Compensation Committee reviews on an annual basis the types and costs of perquisites provided by the Company to its executive officers.

II.  Fiscal 2013 Executive Compensation

Each year management and the Compensation Committee review the Company's existing executive compensation program and the programs of peer group companies and other companies known for compensation "best practices." The Company seeks to confirm that each of its compensation elements, as well as its compensation structure, fits the Company in light of its history, culture, performance, and strategy. Particular attention is given to the Company's stock price performance to ensure proper alignment between executive compensation and stock price performance.

The Compensation Committee took the following key actions in setting and approving executive compensation in Fiscal 2013:

 
 
  Date
   
  Compensation Committee Action
   
     April 2012       Approved Fiscal 2013 peer group for executive compensation    
     July 2012       Approved Fiscal 2013 base salaries    

  

 

 

 

 

 

Approved Fiscal 2013 short-term incentive plan, including performance goals for annual cash incentives

 

 

  

 

 

 

 

 

Approved Fiscal 2013 long-term incentive plan, including the grants of performance-based restricted stock (and related performance goals), time-based restricted stock and stock options

 

 

  

 

 

 

 

 

Approved Fiscal 2013 target total direct compensation, consisting of base salaries, target annual cash incentive and long-term incentive compensation

 

 
     July 2013       Approved annual cash incentives awarded under the Fiscal 2013 short-term incentive plan based upon Fiscal 2013 performance    

Total compensation opportunities for the Company's key executives, including each named executive officer, are intended to be competitive with those offered by other companies competing for talent in the Company's employment market.

In April 2012, the Compensation Committee re-examined its peer group for executive compensation purposes using the following criteria: company type (publicly traded on a major exchange); industry classification (using Standard and Poor's GICS codes); annual revenues (one-half to two times the Company's annual revenues); and business model (organizations that conducted business in the Company's then four operating segments). The Compensation

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Committee's objective was to assemble a set of peer group companies to which relevant pay and performance comparisons could be made with the Company.

The Compensation Committee acted on the recommendation of its independent compensation consultant and the Company's management to revise the Company's peer group for Fiscal 2013 to consist of the following 17 companies, down from 20 peer companies in Fiscal 2012:

  

  Applied Industrial Technologies Inc.       Kennametal Inc.    

  

 

B/E Aerospace, Inc.

      Moog Inc.    

  

 

Crane Co.

      MSC Industrial Direct Co., Inc.    

  

 

Cubic Corporation

      Rockwell Collins, Inc.    

  

 

Curtiss-Wright Corporation

      Spirit AeroSystems Holdings, Inc.    

  

 

Esterline Technologies Corporation

      Teledyne Technologies, Inc.    

  

 

Hexcel Corporation

      TransDigm Group Inc.    

  

 

Interline Brands, Inc.

      Triumph Group, Inc.    

  

 

Kaman Corporation

           

The four companies added to the Fiscal 2013 peer group were Crane Co., Cubic Corporation, Kennametal Inc., and MSC Industrial District. The seven companies dropped from the Fiscal 2013 peer group were Aircastle Ltd., Alliant Techsystems Inc., Barnes Group Inc., Ducommun Incorporated, HEICO Corp., ManTech International Corporation and Woodward Governor, Inc. The reason for the change in the peer group was to ensure that the Company's performance and executive compensation program are measured against those of comparably-sized and situated companies.

The Compensation Committee, with the assistance of its independent compensation consultant, compiled relevant base salary, annual cash incentive and long-term stock incentive information for the key executives at the companies in the Company's peer group. The Compensation Committee considered this information, including executive compensation levels of the peer group companies in setting the Fiscal 2013 base salaries, target annual cash incentive compensation and target long-term incentive compensation of the Company's named executive officers.

The Compensation Committee generally sets the base salaries of the Company's named executive officers at or around the 50th percentile of salary levels of comparable positions at its peer group companies. The Company does not target base salaries at any specific percentage of total compensation when setting base salary; however, given the Company's emphasis on the link between pay and performance, base salaries are a less significant percentage of total direct compensation compared to the Company's variable performance-based compensation.

For the first six months of Fiscal 2013, the Company froze base salaries at their Fiscal 2012 levels for employees (including the named executive officers) whose base salary was $100,000 or more, and implemented a 1% increase for employees making $75,000 to $100,000 and a 2% increase

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for employees making less than $75,000. In December 2012, the Company adjusted base salaries so that all employees (including the named executive officers) received a 2.5% increase for the second half of Fiscal 2013. In addition, Mr. Sharp's base salary was increased to an annual rate of $353,287, effective November 1, 2012, in recognition of his contributions to the Company, including his assumption of responsibilities as Acting Chief Financial Officer.

The table below shows Fiscal 2013 base salaries compared to Fiscal 2012 base salaries for the named executive officers:

 
 
  Named Executive Officer
   
  Fiscal 2012 ($)
   
  Fiscal 2013 ($)
   

  

 

David P. Storch

        867,000         877,838    

  

 

Timothy J. Romenesko

        477,544         483,513    

  

 

Richard J. Poulton

        374,544         164,711    

  

 

Michael J. Sharp

        256,865         312,576    

  

 

Randy J. Martinez

        344,760         349,070    

  

 

Robert J. Regan

        374,544         379,220    

The Fiscal 2013 short-term incentive plan provides certain employees, including the named executive officers, with the opportunity to earn an annual cash incentive award. This plan works in collaboration with the AAR CORP. Section 162(m) Annual Cash Incentive Plan, which sets a ceiling on the annual cash incentive awards payable under the short-term incentive plan to enable the awards to qualify as "performance-based compensation" under Section 162(m) of the Internal Revenue Code, as determined by the Compensation Committee. The Section 162(m) Annual Cash Incentive Plan uses as its performance goal the Company's net income for a given fiscal year. It establishes a maximum award opportunity for each participant, expressed as a percentage of net income (e.g., the maximum annual award is 5% of net income for the Chief Executive Officer, 3% for the President and 2% for all others), and then provides that the Compensation Committee has the discretion to reduce these amounts so that the actual awards to be paid to participants will be the awards determined under the Company's Fiscal 2013 short-term incentive plan. In all years since the inception of the Section 162(m) Annual Cash Incentive Plan, including Fiscal 2013, the Compensation Committee has exercised negative discretion to reduce the size of the annual cash incentive awards.

Fiscal 2013 Performance Goals.    The Compensation Committee approved, after consideration of peer group information, other market data, and the current state of the business environment in which the Company operates, two performance goals under the Fiscal 2013 short-term incentive plan for corporate officers, including Mr. Storch, Mr. Romenesko, Mr. Poulton, Mr. Sharp and Mr. Regan: earnings per share and free cash flow. The Compensation Committee approved the Fiscal 2013 earnings per share target at $1.65 and the Fiscal 2013 free cash flow target at $60 million. The performance goals were weighted 75% earnings per share and 25% free cash flow. The Compensation Committee determined that for purposes of measuring attainment of these performance goals in Fiscal 2013: (i) earnings per share means diluted earnings per share as disclosed by the Company in its periodic reports filed with the Securities and Exchange

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Commission, subject to adjustment for special charges or other extraordinary items, and (ii) free cash flow means cash flow from operations minus net capital expenditures, excluding acquisitions. The choice of these two performance goals reflected the strong emphasis placed by the Company on preserving and growing stockholder wealth and maintaining a strong balance sheet.

The annual cash incentive opportunity for Mr. Martinez is a more significant part of his target total direct compensation due to the Company's emphasis on the annual results of its business groups. Mr. Martinez is Aviation Services Group Vice President — Airlift and in that capacity he participates in a separate bonus program tied principally to the performance of this business unit rather than to the overall performance of the Company. Mr. Martinez's Fiscal 2013 performance goals were Airlift's pre-tax income (target of $7.8 million), free cash flow (target of $49.1 million) and the pretax income of the Aviation Services Group (target of $33.9 million). The structure of Mr. Martinez's bonus opportunity was designed to provide appropriate incentive for excellent performance at Airlift and to encourage inter-company collaboration with other businesses within the Aviation Services segment.

The Fiscal 2013 annual cash incentive award opportunities at threshold, target and maximum levels, expressed as a percentage of base salary (after giving effect to the 2.5% increase in December 2012) and in dollar amounts for the named executive officers, are set forth in the table below:

 
 
   
  Threshold
   
  Target
   
  Maximum
   
 
  Name
   
  Percentage of
Base Salary
(%)

   
  $
   
  Percentage of
Base Salary
(%)

   
  $
   
  Percentage of
Base Salary
(%)

   
  $
   
     David P. Storch         62.5         555,422         125.0         1,110,844         250.0         2,221,688    
     Timothy J. Romenesko         56.8         278,114         113.6         556,229         227.3         1,112,458    
     Richard J. Poulton         45.5         170,248         90.9         340,495         181.8         680,990    
     Michael J. Sharp         37.5         132,487         76.7         264,974         150.0         529,949    
     Randy J. Martinez                         97.6         345,000         195.3         690,000    
     Robert J. Regan         45.5         174,504         90.9         349,008         181.8         698,015    

For Messrs. Storch, Romenesko, Sharp, and Regan, an annual cash incentive award required: (i) at the threshold level, attainment of earnings per share of at least $1.32 (80% of the target of $1.65) and free cash flow of at least $48 million (80% of the target of $60 million); (ii) at the target level, attainment of 100% of the performance goal targets (earnings per share of $1.65 and a free cash flow of $60 million); and (iii) at the maximum level, attainment of 120% of such performance goal targets (earnings per share of at least $1.98 and a free cash flow of $72 million or more).

Fiscal 2013 Actual Results.    The Company reported Fiscal 2013 earnings per share under generally accepted accounting principles of $1.38, which included the impact of a $29.8 million defense logistics program charge. Fiscal 2013 earnings per share before the charge was $1.85. See Exhibit B for a reconciliation of the $1.85 and $1.38 earnings per share figures. The Fiscal 2013 short-term incentive plan provides that special charges such as the defense logistics program charge may be excluded in their entirety in the calculation of earnings per share; however, the Compensation Committee determined, upon the recommendation of management, to exclude

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only 50% of the defense logistics program charge in calculating earnings per share for purposes of the Fiscal 2013 short-term incentive plan. The resulting earnings per share of $1.62 was 98% of the target of $1.65. The Company reported free cash flow of $125.3 million, 109% above the target of $60 million. Based on Fiscal 2013 earnings per share and free cash flow results, the annual cash incentives paid to Messrs. Storch, Romenesko, Sharp and Regan, as set forth below, represented 121.6% of their target annual cash incentives.

Based upon Airlift's outstanding performance in Fiscal 2013, in which Airlift significantly exceeded its pre-tax income and free cash flow targets and achieved meaningful increases over the prior year's results, Mr. Martinez received an annual cash incentive of $638,178. Of this amount, $556,240 or 87% was due to Airlift's Fiscal 2013 results, with the balance due to the performance of the Aviation Services Group as a whole.

The following table shows actual versus target Fiscal 2013 annual cash incentives for the named executive officers:

 
 
   
   
  Fiscal 2013 Annual Cash Incentives ($)
   
 
  Named Executive Officer
   
  Target
   
  Actual
   
  % of Target
   

  

 

David P. Storch

      $ 1,110,844       $ 1,350,685         121.6    

  

 

Timothy J. Romenesko

      $ 556,229       $ 676,324         121.6    

  

 

Richard J. Poulton

      $ 340,495       $ 0         N/A    

  

 

Michael J. Sharp

      $ 264,974       $ 322,185 *       121.6    

  

 

Randy J. Martinez

      $ 345,000       $ 638,178         185.0    

  

 

Robert J. Regan

      $ 349,008       $ 424,362         121.6    
*
Mr. Sharp's Fiscal 2013 annual cash incentive reflected his base salary increase to $353,287 effective November 1, 2012.

D.
Stock Awards Under the Fiscal 2013 Long-Term Incentive Plan

The Compensation Committee granted awards of performance-based restricted stock, time-based restricted stock and stock options to the named executive officers and certain other officers and key employees under the Fiscal 2013 long-term incentive plan. For the named executive officers, the Compensation Committee allocated the dollar value of the stock awards as follows: performance-based restricted stock — 20%; time-based restricted stock — 20%; and stock options — 60%. Mr. Martinez received only stock option awards in Fiscal 2013, consistent with the Company's general approach in compensating Group Vice Presidents principally in cash and stock options.

Performance-Based Restricted Stock.    At its meeting on July 16, 2012, the Compensation Committee approved the following grants of performance-based restricted stock to Mr. Storch, Mr. Romenesko, Mr. Poulton, Mr. Sharp and Mr. Regan for Fiscal 2013, subject to a three-year

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cumulative net income performance condition and to vesting, each as described below (dollar value based on the grant date fair value):

 
 
   
  Target Performance-Based Restricted Stock
   
 
  Named Executive Officer
   
  Number of Shares
   
  Dollar Value ($)
   
     David P. Storch         24,000         309,600    
     Timothy J. Romenesko         12,000         154,800    
     Richard J. Poulton         7,200         92,880    
     Michael J. Sharp         2,880         37,152    
     Robert J. Regan         7,200         92,880    

Shares of performance-based restricted stock will meet the performance condition, subject to time-based vesting requirements if the Company achieves cumulative net income of $232.7 million for the three-year performance period beginning June 1, 2012 and ending May 31, 2015. If cumulative net income performance is less than $186.16 million (80% of target net income), the performance condition is not met and the shares are forfeited. Cumulative net income performance (i) at a threshold level of $186.16 million (80% of target net income) results in a payout of 50% of the shares, (ii) at a target level of $232.7 million results in a payment of 100% of the shares, (iii) at a maximum level of $279.24 million (120% of target net income) results in a payout of 200% of the shares, and (iv) at levels between threshold and target and target and maximum, the shares will be paid out on a straight-line basis, in each case subject to time-based vesting requirements.

If the performance condition is met, the shares of performance-based restricted stock vest 331/3% on each of May 31, 2015, May 31, 2016, and May 31, 2017. The Compensation Committee believes that the use of a meaningful time vesting period encourages executives to build their careers with the Company and contributes to greater stability within the Company's executive leadership. Performance-based restricted stock, once vested, is not subject to any further holding requirement beyond the Company's stock ownership and retention guidelines. Unlike performance-based restricted stock awarded in prior years, there are no stock price acceleration provisions to accelerate vesting of the awards.

Time-Based Restricted Stock.    At its meeting on July 16, 2012, the Compensation Committee approved the following grants of time-based restricted stock awards for Fiscal 2013, subject to time-based vesting (dollar value based on the grant date fair value):

 
 
   
  Time-Based Restricted Stock
   
 
  Named Executive Officer
   
  Number of Shares
   
  Dollar Value ($)
   
     David P. Storch         24,000         309,600    
     Timothy J. Romenesko         12,000         154,800    
     Richard J. Poulton         7,200         92,880    
     Michael J. Sharp         2,880         37,152    
     Robert J. Regan         7,200         92,880    

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The shares of time-based restricted stock vest 50% on May 31, 2016 and 50% May 31, 2017. Time-based restricted stock, once vested, is not subject to any further holding requirements beyond the Company's stock ownership and retention guidelines.

Stock Options.    At its meeting on July 16, 2012, the Compensation Committee approved the following grants of stock options to the Company's named executive officers for Fiscal 2013, subject to time-based vesting (dollar value based on a Black-Scholes valuation):

 
 
   
  Stock Options
   
 
  Named Executive Officer
   
  Number
   
  Dollar Value ($)
   
     David P. Storch         144,000         695,520    
     Timothy J. Romenesko         72,000         347,760    
     Richard J. Poulton         43,200         208,656    
     Michael J. Sharp         17,280         83,462    
     Randy J. Martinez         25,000         120,750    
     Robert J. Regan         43,200         208,656    

The stock options have an exercise price of $12.90 per share (the closing stock price of the Common Stock on the date of grant), vest 20% on each of July 16, 2013, July 16, 2014, July 16, 2015, July 16, 2016 and July 16, 2017, and generally expire 10 years from the date of grant. Shares issued upon the exercise of stock options, once vested and exercised, are not subject to any further holding requirements beyond the Company's stock ownership and retention guidelines.

The Compensation Committee reviewed and approved Fiscal 2013 target "total direct compensation" for the named executive officers, consisting of the three compensation elements discussed above: base salary, target annual cash incentive compensation and target long-term stock incentive compensation. Total direct compensation is the sum of base salary, annual cash incentive compensation and long-term stock incentive compensation.

The Compensation Committee historically benchmarks target total direct compensation for the Company's named executive officers in the 50th to 75th percentile of total direct compensation levels of comparable positions at its peer group companies. In addition, the Compensation Committee considers the Company's prior year's financial results in setting target total direct compensation for the upcoming year. In setting target total compensation, the Compensation Committee seeks to promote its goals of motivating and rewarding executives and providing appropriate pay-for-performance incentives.

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For Fiscal 2013, the Compensation Committee set target total direct compensation for the named executive officers at significantly lower amounts than Fiscal 2012, principally as a result of the Company's share performance in Fiscal 2012:

 
 
   
   
  Target Total Direct Compensation
   
 
  Named Executive Officer
   
  Fiscal 2012 ($)
   
  Fiscal 2013 ($)
   
  Change (%)
   

  

 

David P. Storch

        4,373,250         3,265,470         -25.3    

  

 

Timothy J. Romenesko

        2,190,657         1,677,567         -23.4    

  

 

Richard J. Poulton

        1,412,719         1,109,455         -21.5    

  

 

Michael J. Sharp

        N/A         604,361         N/A    

  

 

Randy J. Martinez

        N/A         810,270         N/A    

  

 

Robert J. Regan

        1,412,719         1,109,455         -21.5    

The table below divides target total direct compensation into its component parts — base salary (prior to the 2.5% increase in December 2012), target annual cash incentive compensation and target long-term incentive compensation — and shows each as a dollar amount and as a percentage of target total direct compensation, as set by the Compensation Committee at the beginning of Fiscal 2013 for each named executive officer. As shown, target total direct compensation is heavily weighted toward variable performance-based compensation (annual cash incentives and long-term incentive compensation), consistent with the Compensation Committee's view that compensation for the named executive officers should be tied to performance.

 
   
   
  Fiscal 2013 Target Total Direct Compensation
   
 
   
   
  Base
Salary

   
  Target Annual Cash
Incentive

   
  Target Long-Term
Incentive Compensation

   
 
   
   
   
 
  Named Executive Officer
   
  Dollar
Amount
($)

   
  % of Total
Target Direct
Compensation

   
  Dollar
Amount
($)

   
  % of Total
Target Direct
Compensation

   
  Dollar
Amount
($)

   
  % of Total
Target Direct
Compensation

   

 

 

David P. Storch

        867,000         26.6         1,083,750         33.2         1,314,720         40.3    

 

 

Timothy J. Romenesko

        477,544         28.5         542,663         32.3         657,360         39.2    

 

 

Richard J. Poulton

        374,544         33.8         340,495         30.7         394,416         35.6    

 

 

Michael J. Sharp

        256,865         42.5         189,730         31.4         157,766         26.1    

 

 

Randy J. Martinez

        344,760         42.5         344,760         42.5         120,750         14.9    

 

 

Robert J. Regan

        374,544         33.8         340,495         30.7         394,416         35.6    

Actual total direct compensation differs from target total direct compensation by taking into account the actual annual cash incentive award rather than the target annual cash incentive award. As actual annual cash incentive awards were greater than target annual cash incentive awards in Fiscal 2013, the actual total direct compensation for each named executive officer likewise was greater than his target total direct compensation in Fiscal 2013.

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The following table shows target total direct compensation versus actual total direct compensation for the named executive officers for Fiscal 2013:

 
 
   
  Fiscal 2013 Total Direct Compensation
   
 
  Named Executive Officer
   
  Target ($)
   
  Actual ($)
   
     David P. Storch         3,265,470         3,543,243    
     Timothy J. Romenesko         1,677,567         1,817,197    
     Richard J. Poulton         N/A         N/A    
     Michael J. Sharp         604,361         792,527    
     Randy J. Martinez         810,270         1,107,998    
     Robert J. Regan         1,109,455         1,197,998    

III.  Key Executive Compensation Policies and Practices

The following are key factors affecting the executive compensation decisions made by the Compensation Committee for the Company's executives, including its named executive officers:

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  New Guidelines
   
  Prior Guidelines
   

 

 

Directors

      20,000 shares       10,000 shares    

 

 

Executive Officers

                   

 

 

• Chairman and CEO

      6 times salary       3 times salary    

 

 

• President and COO

      3 times salary       .75 times salary    

 

 

• Other Executive Officer

      1 times salary       .75 times salary    

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    The executive compensation program is designed to provide a proper balance between cash and equity compensation, fixed and variable compensation, and short-term and long-term compensation.

 


 

The Fiscal 2013 annual cash incentive awards — a form of variable cash compensation — were based on two different performance metrics: earnings per share and free cash flow.

 


 

The Compensation Committee retains the discretion to reduce any annual cash incentive award for any reason.

 


 

The balance built into the short-term incentive plan is also reflected in long-term incentive compensation awards, which in Fiscal 2013 consisted of stock options, time-based restricted stock and performance-based restricted stock. Each of these long-term equity-based incentive awards contains multi-year vesting periods, thus promoting employee growth, development and retention. They also are linked to the value of the Company's common stock, thus aligning management's interest with those of the Company's stockholders.

 


 

The Company has stock ownership and retention guidelines, an incentive compensation recoupment policy, and an anti-hedging and anti-pledging policy as further protections for the Company.

 


 

Finally, the Compensation Committee and senior management work together to ensure that the aggregate level of executive compensation fits within the Company's budget.

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Compensation Committee Report on Executive Compensation for Fiscal 2013

The Compensation Committee of the Board of Directors of the Company furnishes the following report to the stockholders of the Company in accordance with applicable SEC rules.

The Compensation Committee reviewed and discussed the Compensation Discussion and Analysis set forth above with the Company's management. Based on that review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

Respectfully submitted,

Compensation Committee

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Summary Compensation Table1

The following table sets forth compensation information for the Company's named executive officers for Fiscal 2013, Fiscal 2012 and Fiscal 2011:

 
 
  Name and Principal Position
   
  Year
   
  Salary
($)2

   
  Bonus
($)

   
  Stock
Awards
($)3

   
  Option
Awards
($)4

   
  Non-Equity
Incentive
Plan
Compensation
($)5

   
  Change in
Pension Value
and
Non-Qualified
Deferred
Compensation
Earnings ($)6

   
  All Other
Compensation
($)7

   
  Total ($)
   
    DAVID P. STORCH         2013         877,838         0         619,200         695,520         1,350,685         60,352