| Stock Based Compensation | 7. Stock Based Compensation
The Company adopted the A. O. Smith Combined Incentive Compensation
Plan (the “Plan”) effective January 1, 2007. The
Plan was reapproved by stockholders 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 or share units at September 30, 2016 was
3,268,580. Upon stock option exercise or share unit vesting, shares
are issued from treasury stock.
Total stock based compensation expense recognized in the three
months ended September 30, 2016 and 2015 was $1.2 million
and $1.0 million, respectively. Total stock based compensation
expense recognized in the nine months ended
September 30, 2016 and 2015 was $8.1 million and $7.8
million, respectively.
Stock Options
The stock options granted in the nine months ended
September 30, 2016 and 2015 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 2016 and 2015 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 nine months
ended September 30, 2016 and 2015 was 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
expense attributable to stock options in the three months ended
September 30, 2016 and 2015 was $0.5 million and $0.5 million,
respectively. Stock based compensation expense attributable to
stock options in the nine months ended September 30, 2016 and
2015 was $3.9 million and $3.6 million, respectively.
Changes in option awards, all of which relate to Common Stock, were
as follows for the nine months ended September 30, 2016:
Weighted-Avg. Number of Average Aggregate
Outstanding at January 1, 2016 $ 18.03 2,653,558
Granted 32.08 553,370
Exercised 14.01 (508,022 )
Forfeited 28.99 (5,762 )
Outstanding at September 30, 2016 21.64 2,693,144 7 years $ 73.8
Exercisable at September 30, 2016 $ 16.11 1,626,562 6 years $ 53.6
The weighted-average fair value per option at the date of grant
during the nine months ended September 30, 2016 and 2015 using
the Black-Scholes option-pricing model was $8.03 and $8.58,
respectively. Assumptions were as follows:
Nine Months Ended September 30,
2016 2015
Expected life (years) 5.8 5.9
Risk-free interest rate 1.7 % 2.0 %
Dividend yield 1.3 % 1.0 %
Expected volatility 27.7 % 29.3 %
The expected lives of options for purposes of these models are
based on historical exercise behaviors. The risk-free interest
rates for purposes of these models are based on the U.S. Treasury
yield curves in effect on the dates of grant for the respective
expected lives of the options. The expected dividend yields for
purposes of these models are based on the dividends paid on Common
Stock in the preceding four quarters divided by the grant date
market value of the Common Stock. The expected volatility for
purposes of these models are based on the historical volatility of
the Common Stock.
Stock Appreciations Rights (SAR)
Certain non-U.S.-based employees have been 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 have three year pro rata vesting from the date
of grant. SARs were 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 initially
measured based on the 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
reporting period based on a revised Black-Scholes value. No SARs
were granted in 2016. As of September 30, 2016, there were
24,940 SARs outstanding and 8,320 were exercisable. In the nine
months ended September 30, 2016, 430 SARs were exercised and
860 SARs were forfeited. In the first nine months of 2015, the
Company granted 26,230 cash-settled SARs.
Restricted Stock and Share Units
Participants may also be awarded shares of restricted stock or
share units under the Plan. The Company granted 160,428 and 152,070
share units under the Plan in the nine months ended
September 30, 2016 and 2015, respectively. The share units
were valued at $5.2 million and $4.7 million at the dates of
issuance in 2016 and 2015, respectively, based on the prices of the
Common Stock at the dates of grant. The share units are recognized
as compensation expense ratably over the three-year vesting period;
however, included in share unit expense in the three and nine
months ended September 30, 2016 and 2015 was 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. Stock based
compensation expense attributable to share units of $0.7 million
and $0.5 million was recognized in the three months ended
September 30, 2016 and 2015, respectively. Stock based
compensation expense attributable to share units of $4.2 million
was recognized in each of the nine month periods ended
September 30, 2016 and 2015. 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 nine months
ended September 30, 2016:
Number of Units Weighted-Average
Issued and unvested at January 1, 2016 658,524 $ 22.15
Granted 160,428 32.21
Vested (268,306 ) 17.39
Forfeited (3,660 ) 29.32
Issued and unvested at September 30, 2016 546,986 $ 27.39 |
