| 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 June 30, 2017 was 2,895,234.
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 June 30, 2017 and 2016 was $1.3 million and
$1.8 million, respectively. Total stock based compensation
recognized in the six months ended June 30, 2017 and 2016 was
$7.2 million and $6.9 million, respectively.
Stock Options
The stock options granted in the six months ended June 30,
2017 and 2016 have three year pro rata vesting from the date of
grant. Stock options are issued at exercise prices equal to the
fair value of the Company’s Common Stock on the date of
grant. For active employees, all options granted in 2017 and 2016
expire ten years after date of grant. The Company’s stock
options are expensed ratably over the three year vesting period;
however, included in stock option expense for the three and six
months ended June 30, 2017 and 2016 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 June 30, 2017 and 2016 was $0.5 million and $0.9
million, respectively. Stock based compensation expense
attributable to stock options in the six months ended June 30,
2017 and 2016 was $3.4 million and $3.4 million, respectively.
Changes in option shares, all of which relate to the
Company’s Common Stock, were as follows for the six months
ended June 30, 2017:
Weighted-Avg. Number of Average Aggregate
Outstanding at January 1, 2017 $ 21.69 2,664,333
Granted 50.16 358,150
Exercised 18.65 (468,944 )
Forfeited 36.13 (3,640 )
Outstanding at June 30, 2017 26.22 2,549,899 7 years $ 75.8
Exercisable at June 30, 2017 $ 19.31 1,666,017 6 years $ 61.0
The weighted-average fair value per option at the date of grant
during the six months ended June 30, 2017 and 2016 using the
Black-Scholes option-pricing model was $13.04 and $15.78,
respectively. Assumptions were as follows:
Six Months Ended June 30,
2017 2016
Expected life (years) 5.7 5.8
Risk-free interest rate 2.4 % 1.7 %
Dividend yield 1.0 % 1.3 %
Expected volatility 26.5 % 27.8 %
The expected lives of options for purposes of these models are
based on historical exercise behavior. The risk-free interest rates
for purposes of these models are based on the U.S. Treasury yield
curve in effect on the date of grant for the respective expected
lives of the option. The expected dividend yields for purposes of
these models are based on the dividends paid 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 (SARs)
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 Company’s Common Stock on
the date that a participant exercises such right over the grant
date price of the Common 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 the Company’s Common Stock
on the date of grant and expire ten years from the date of grant.
The fair value and compensation expense related to SARs are
measured at each reporting period using the Black-Scholes
option-pricing model, using assumptions similar to stock option
awards. No SARs were granted in 2017 or 2016. As of June 30,
2017, there were 23,660 SARs outstanding and 15,774 were
exercisable. In the six months ended June 30, 2017, 427 SARs
were exercised and 853 SARs were forfeited. Stock based
compensation expense was minimal in the three and six months ended
June 30, 2017 and 2016.
Restricted Stock and Share Units
Participants may also be awarded shares of restricted stock or
share units under the Plan. The Company granted 107,755 and 155,480
share units under the plan in the six months ended June 30,
2017 and 2016, respectively. The share units were valued at $5.4
million and $4.9 million at the date of issuance in 2017 and 2016,
respectively, based on the price of the Company’s Common
Stock at the date 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 six months
ended June 30, 2017 and 2016 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 $0.8 million and $0.9 million was
recognized in the three months ended June 30, 2017 and
2016, respectively. Stock based compensation expense attributable
to share units of $3.8 million and $3.5 million was recognized in
the six months ended June 30, 2017 and 2016,
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 is as follows for
the six months ended June 30, 2017:
Number of Units Weighted-Average
Issued and unvested at January 1, 2017 544,055 $ 27.35
Granted 107,755 50.16
Vested (213,863 ) 23.25
Forfeited (3,010 ) 32.73
Issued and unvested at June 30, 2017 434,937 34.98 |
