Note 19. Stock-based compensation

Stock options

Woodward’s 2006 Omnibus Incentive Plan (the “2006 Plan”), which has been approved by Woodward’s stockholders, provides for the grant of up to 7,410 stock options to its employees and directors. Woodward believes that these stock options align the interests of its employees and directors with those of its stockholders. Stock option awards are granted with an exercise price equal to the market price of Woodward’s stock at the date of grant, a ten-year term, and a four-year vesting schedule at a rate of 25% per year.

The fair value of options granted was estimated on the date of grant using the Black-Scholes-Merton option-valuation model using the assumptions in the following table. Woodward calculates the expected term, which represents the period of time that stock options granted are expected to be outstanding, based upon historical experience of plan participants. Expected volatility is based on historical volatility using daily stock price observations. The estimated dividend yield is based upon Woodward’s historical dividend practice and the market value of its common stock. The risk-free rate is based on the U.S. treasury yield curve, for periods within the contractual life of the stock option, at the time of grant.



	Three-Months Ended				Six-Months Ended
	March 31,				March 31,
	2014		2013		2014				2013
Expected term (years)		n/a		5.8		5.8	-	8.6		5.8	-	8.6
Estimated volatility		n/a		54.9%		38.5%				48.7%	-	54.9%
Estimated dividend yield		n/a		0.8%		0.8%				0.8%	-	1.0%
Risk-free interest rate		n/a		1.0%		1.7%	-	2.5%		0.8%	-	1.3%

The following is a summary of the activity for stock option awards during the three and six-months ended March 31, 2014:



	Three-Months Ended				Six-Months Ended
	March 31, 2014				March 31, 2014
	Number of options		Weighted-Average Exercise Price per Share		Number of options		Weighted-Average Exercise Price per Share
Options, beginning balance		4,947	$	27.23		4,423	$	25.06
Options granted		-		n/a		694		40.99
Options exercised		(197)		13.93		(354)		19.39
Options forfeited		(28)		34.30		(41)		34.75
Options, ending balance		4,722		27.74		4,722		27.74

Changes in non-vested stock options during the three and six-months ended March 31, 2014 were as follows:



	Three-Months Ended				Six-Months Ended
	March 31, 2014				March 31, 2014
	Number of options		Weighted-Average Exercise Price per Share		Number of options		Weighted-Average Exercise Price per Share
Options, beginning balance		1,771	$	34.75		1,737	$	29.97
Options granted		-		n/a		694		40.99
Options vested		(36)		32.66		(683)		28.82
Options forfeited		(28)		34.30		(41)		34.75
Options, ending balance		1,707		34.80		1,707		34.80

Information about stock options that have vested, or are expected to vest, and are exercisable at March 31, 2014 was as follows:



	Number		Weighted- Average Exercise Price		Weighted- Average Remaining Life in Years		Aggregate Intrinsic Value
Options outstanding		4,722	$	27.74		5.9	$	65,132
Options vested and exercisable		3,014		23.75		4.5		53,614
Options vested and expected to vest		4,596		27.51		5.9		64,465

Restricted Stock

In the first quarter of fiscal year 2014, Woodward granted an award of 24 shares of restricted stock to its Chief Executive Officer and President, Thomas Gendron. Subject to Mr. Gendron’s continued employment by the Company, these shares of restricted stock will vest 100% following the end of the Company’s fiscal year 2017 if a cumulative earnings per share (“EPS”) target is met or exceeded for fiscal years 2014 through 2017. If this EPS target is not met, all shares of restricted stock will be forfeited by Mr. Gendron.

The shares of restricted stock were awarded to Mr. Gendron pursuant to a form restricted stock agreement approved by Woodward’s Compensation Committee (the “Committee”), which generally provides that: if the recipient of a restricted stock award is terminated from the Company for any reason other than death or disability during the restricted period, all shares of restricted stock will be immediately forfeited; if the recipient dies or becomes permanently disabled prior to the recipient’s termination and during the restricted period, all restrictions will lapse and the shares of restricted stock will fully vest immediately; similarly, in the event of a Change in Control (as defined in the form of restricted stock agreement) of the Company during the restricted period and prior to the recipient’s termination for any reason, all restrictions will lapse and the shares of restricted stock will fully vest immediately; during the restricted period, a recipient may exercise full voting rights with respect to the shares of restricted stock; dividends on the shares of restricted stock will accrue, but will not be paid, during the restricted period; and all dividends accrued during the restricted period will be paid upon any vesting of the shares of restricted stock, without payment of interest, provided that if the shares of restricted stock are forfeited for any reason, all accrued dividends will likewise be forfeited. The form of restricted stock agreement also includes adjustment provisions in the event the Company engages in certain recapitalization or similar transactions or in the event of a change of law or regulation. Upon vesting, shares become freely transferrable.

Woodward recognizes stock compensation on a straight-line basis over the requisite service period.

A summary of the activity for restricted stock awards in the three and six-months ended March 31, 2014 follows:



	Three-Months Ended				Six-Months Ended
	March 31, 2014				March 31, 2014
		Number		Fair Value per Share		Number		Fair Value per Share
Beginning balance		24	$	39.43		-	$	n/a
Shares granted		-		n/a		24		39.43
Shares vested		-		n/a		-		n/a
Shares forfeited		-		n/a		-		n/a
Ending balance		24		39.43		24		39.43

At March 31, 2014, there was approximately $15,984 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, both stock options and restricted stock awards, granted under the 2002 Plan (for which no further grants will be made) and the 2006 Plan. The pre-vesting forfeiture rates for purposes of determining stock-based compensation cost recognized were estimated to be 0% for members of Woodward’s board of directors and 9% for all others. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 2.1 years.