| Stock Based Compensation | 6. Stock Based Compensation
The Company adopted the A. O. Smith Combined Incentive Compensation
Plan (the “plan”) effective January 1, 2007.
Stockholders reapproved the plan on April 16, 2012. The plan
is a continuation of the A. O. Smith Combined Executive Incentive
Compensation Plan which was originally approved by stockholders in
2002. The number of shares available for granting of options,
restricted stock or share units under the plan at
June 30, 2015 was 1,994,284. Upon stock option exercise
or share unit vesting, shares are issued from treasury stock.
Total stock based compensation cost recognized in the three months
ended June 30, 2015 and 2014 was $1.1 million and $2.0
million, respectively. Total stock based compensation cost
recognized in the six months ended June 30, 2015 and 2014
was $6.7 million and $7.8 million, respectively.
Stock Options
The stock options granted in the six months ended June 30,
2015 and 2014 have three year pro rata vesting from the date of
grant. Stock options are issued at exercise prices equal to the
fair value of Common Stock on the date of grant. For active
employees, all options granted in 2015 and 2014 expire ten years
after date of grant. The Company’s stock options are expensed
ratably over the three-year vesting period; however, included in
the stock option expense for the three and six months ended
June 30, 2015 and 2014 is expense associated with the
accelerated vesting of stock option awards for certain employees
who either are retirement eligible or become retirement eligible
during the vesting period. Stock based compensation cost
attributable to stock options in the three months ended
June 30, 2015 and 2014 was $0.5 million and $0.9 million,
respectively. Stock based compensation expense attributable to
stock options in the six months ended June 30, 2015 and 2014
was $3.0 million and $3.7 million, respectively.
Changes in option awards, all of which relate to Common Stock, were
as follows for the six months ended June 30, 2015:
Weighted- Six Months Average Aggregate
Outstanding at January 1, 2015 $ 27.50 1,577,003
Granted 61.53 242,495
Exercised 21.31 (240,760 )
Forfeited 34.10 (2,265 )
Outstanding at June 30, 2015 33.63 1,576,473 7 years $ 60.5
Exercisable at June 30, 2015 $ 24.43 1,028,157 7 years $ 48.9
The weighted-average fair value per option at the date of grant
during the six months ended June 30, 2015 and 2014 using the
Black-Scholes option-pricing model was $17.17 and $16.55,
respectively. Assumptions were as follows:
Six Months Ended June 30,
2015 2014
Expected life (years) 5.9 6.0
Risk-free interest rate 2.0 % 2.7 %
Dividend yield 1.0 % 1.1 %
Expected volatility 29.3 % 36.6 %
The expected life is based on historical exercise behavior and the
projected exercise of unexercised stock options. The risk free
interest rate is based on the U.S. Treasury yield curve in effect
on the date of grant for the expected life of the option. The
actual dividend yield is based on the actual annual dividends
divided by the grant date market value of the Company’s
Common Stock. The expected volatility is based on the historical
volatility of the Company’s Common Stock.
Stock Appreciations Rights (SARs)
Certain non-U.S.-based employees are granted SARs. Each SAR award
grants the employee the right to receive cash equal to the excess
of the share price of the Common Stock on the date that a
participant exercises such right over the grant date price of the
stock. SARs granted in the six months ended June 30, 2015 have
three year pro rata vesting from the date of grant. SARs are issued
at exercise prices equal to the fair value of Common Stock on the
date of grant and expire ten years from the date of grant.
Compensation expense for SARs is remeasured at each reporting
period based on the estimated fair value on the date of grant using
the Black-Scholes option-pricing model, using assumptions similar
to stock option awards. SARs are subsequently remeasured at each
interim reporting period based on a revised Black-Scholes value. In
the first six months of 2015, the Company granted 13,115
cash-settled SARs and no SARs were exercisable. Stock based
compensation expense attributable to SARS was minimal in the three
and six months ended June 30, 2015.
Restricted Stock and Share Units
Participants may also be awarded shares of restricted stock or
share units under the plan. The Company granted 76,035 and 100,310
share units under the plan in the six months ended June 30,
2015 and 2014, respectively. The share units were valued at $4.7
million and $5.1 million at the dates of issuance in 2015 and 2014,
respectively, based on the Company’s stock price at the dates
of grant. The Company’s share units are recognized as
compensation expense ratably over the three year vesting period;
however, included in share unit expense in the three and six months
ended June 30, 2015 and 2014 is expense associated with
accelerated vesting of share unit awards for certain employees who
either are retirement eligible or will become retirement eligible
during the vesting period. Share based compensation expense
attributable to share units of $0.6 million and $1.1 million was
recognized in the three months ended June 30, 2015 and
2014, respectively. Stock based compensation expense attributable
to share units of $3.7 million and $4.1 million was recognized in
the six months ended June 30, 2015 and 2014,
respectively. Certain non-U.S.-based employees receive the cash
value of vested shares at the vesting date in lieu of shares.
A summary of share unit activity under the plan for the six months
ended June 30, 2015 is as follows:
Number of Units Weighted-Average
Issued and unvested at January 1, 2015 416,289 $ 33.06
Granted 76,035 61.57
Vested (154,748 ) 22.90
Forfeited (635 ) 35.44
Issued and unvested at June 30, 2015 336,941 $ 44.16 |
