Stock-Based Compensation

As of December 31, 2017, the Company had various stock-based awards outstanding which were issued to executives and other key employees. The Company recognizes the grant-date fair value of all stock-based awards to employees over their respective requisite service periods (generally equal to an award’s vesting period), net of estimated forfeitures. A stock-based award is considered vested for expense attribution purposes when the employee’s retention of the award is no longer contingent on providing subsequent service. Accordingly, the Company generally recognizes compensation cost immediately for awards granted to retirement-eligible individuals or over the period from the grant date to the date retirement eligibility is achieved, if less than the stated vesting period.

The Company’s long-term incentive program for awarding stock-based compensation uses a combination of restricted stock, stock appreciation rights (“SARs”), and performance shares of the Company’s Common Stock pursuant to the Award Plan. The Award Plan was amended and restated during 2015 to add an additional 2.8 million shares. Under the Award Plan, the Company may authorize up to 9.7 million shares of Common Stock in settlement of restricted stock, performance shares, SARs or any-post 2004 grants of stock options. The Company issues new shares for settlement of any stock-based awards. In 2017, the Company granted stock-based awards using a combination of restricted stock, SARs and performance shares.

On December 23, 2015, the Company completed the reclassification of its dual-class common stock into a single class of Common Stock (the “Reclassification”), as more fully described in Note 15 — Capital Stock. At the effective time of the Reclassification, each outstanding stock-based award granted under the Award Plan was adjusted by substituting, on a one for one basis, shares of Common Stock for shares the of Class B Common Stock granted under the Award Plan.

Stock-based compensation expense recognized by the Company was $22.3 million in 2017 and 2016, and was $17.0 million in 2015. The total income tax benefit recognized in 2017 was $5.4 million including the impact of the TCJA, $8.2 million during 2016, and $6.2 million during 2015. The net tax windfall recorded as a result of exercise or vesting (depending on the type of award) was $2.5 million, $3.7 million, and $0.9 million for the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, there was $31.1 million, pretax, of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized through 2020.

Stock-based compensation expense is recorded in S&A expense as well as Cost of goods sold. Of the total 2017 expense, $21.1 million was recorded to S&A expense and $1.2 million was recorded to Cost of goods sold. In 2016 and 2015, $21.6 million and $16.2 million, respectively, was recorded to S&A expense and $0.7 million in 2016 and $0.8 million in 2015, was recorded to Cost of goods sold. Stock-based compensation costs capitalized to inventory was $0.3 million in 2017, and $0.2 million in 2016 and 2015.

Each of the compensation arrangements is discussed below.

Restricted Stock

The Company issues several types of restricted stock awards all of which are considered outstanding at the time of grant, as the award holders are entitled to dividends and voting rights. Unvested restricted stock awards are considered participating securities in computing earnings per share. Restricted stock granted is not transferable and is subject to forfeiture in the event of the recipient’s termination of employment prior to vesting.

Restricted Stock Issued to Employees - Service Condition

Service-based restricted stock awards are expensed on a straight-line basis over the requisite service period. The restricted stock vests in one-third increments annually for three years on each anniversary of the date of grant. The restricted stock fair values are measured using the average of the high and low trading prices of the Company’s common stock on the most recent trading day immediately preceding the grant date (“measurement date”).

Restricted Stock Issued to Employees - Market Condition

Certain restricted stock awards issued in 2015, 2016 and 2017 will vest subject to the achievement of a market-based condition. The awards are expensed on a straight-line basis over the requisite service period which starts on the date of the grant and ends upon the completion of the performance period. Expense is recognized irrespective of the market condition being achieved.

The market-based condition is the Company’s total shareholder return (“TSR”) compared to the TSR generated by the companies that comprise the S&P Capital Goods 900 Index and is measured over a three year performance period beginning on January 1st of the first year and ending on December 31st of the third year. The awards will vest contingent upon achievement of the market condition, service through the requisite service period or the retirement-eligibility date. If the market-based condition is achieved, the awards will vest at 100% of the restricted stock awards granted. If the market-based condition is not achieved the awards will not vest. The fair value of these awards was determined based upon a lattice model.

The performance condition for year ending December 31, 2017 was met and 23,280 shares vested and were approved by the Compensation Committee in February 2018. The fair value of the shares at vesting was $3.1 million.

The following table summarizes the assumptions used in estimating the fair value of these awards:



Grant Date	Stock Price on Measurement Date		Expected Volatility		Risk Free Interest Rate		Expected Term	Weighted Avg. Grant Date Fair Value
2017	$	127.51	24.7	%	1.9	%	3 Years	$	119.88
2016	$	113.69	25.6	%	1.4	%	3 Years	$	104.93
2015	$	97.48	23.3	%	1.3	%	3 Years	$	87.61

Restricted Stock Issued to Non-employee Directors

In 2017, 2016 and 2015, each non-employee director received a restricted stock grant. These grants were made on the date of the annual meeting of shareholders and vested or will vest at the following year’s annual meeting of shareholders, upon a change of control or termination of service by reason of death. These shares will be subject to forfeiture if the director’s service terminates prior to the date of the next regularly scheduled annual meeting of shareholders to be held in the following calendar year. During the years 2017, 2016 and 2015, the Company issued to non-employee directors 8,480 shares, 9,128 shares, and 8,008 shares, respectively.

Activity related to both employee and non-employee restricted stock for the year ended December 31, 2017 is as follows (in thousands, except per share amounts):



	Shares		Weighted Average Grant Date Fair Value/Share
RESTRICTED STOCK AT DECEMBER 31, 2016	224		$	102.37
Shares granted	81		123.39
Shares vested	(62	)	106.06
Shares forfeited	(4	)	104.54
RESTRICTED STOCK AT DECEMBER 31, 2017	239		$	108.51

The weighted average fair value per share of restricted stock granted during the years 2017, 2016 and 2015 was $123.39, $109.95 and $96.26, respectively. The total fair value of restricted stock vested during the years 2017, 2016 and 2015 was $6.6 million, $6.4 million and $7.7 million, respectively.

Stock Appreciation Rights

SARs granted entitle the recipient to the difference between the fair market value of the Company’s Common Stock on the date of exercise and the grant price as determined using the average of the high and the low trading prices of the Company’s common stock on the measurement date. This amount is payable in shares of the Company’s Common Stock. SARs vest and become exercisable in three equal installments during the first three years following their grant date and expire ten years from the grant date.

Activity related to SARs for the year ended December 31, 2017 is as follows (in thousands, except per share amounts):



	Number of Rights		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
OUTSTANDING AT DECEMBER 31, 2016	1,811		$	94.51
Granted	432		127.28
Exercised	(191	)	70.78
Forfeited	(9	)	107.39
Canceled	(1	)	97.48
OUTSTANDING AT DECEMBER 31, 2017	2,042		$	103.59	7.4 Years	$	64,841
EXERCISABLE AT DECEMBER 31, 2017	1,241		$	93.89	6.2 Years	$	51,420

The aggregated intrinsic value of SARs exercised during 2017, 2016 and 2015 was $10.1 million, $13.8 million and $4.8 million, respectively.

The fair value of each SAR award was measured using the Black-Scholes option pricing model.

The following table summarizes the weighted-average assumptions used in estimating the fair value of the SARs granted during the years 2017, 2016 and 2015:



Grant Date	Expected Dividend Yield		Expected Volatility		Risk Free Interest Rate		Expected Term	Weighted Avg. Grant Date Fair Value of 1 SAR
2017	2.6	%	18.0	%	2.2	%	5.5 Years	$	17.45
2016	2.6	%	22.3	%	1.9	%	5.5 Years	$	18.76
2015	2.7	%	22.7	%	1.7	%	5.5 Years	$	16.05

The expected dividend yield was calculated by dividing the Company’s expected annual dividend by the average stock price for the past three months. Expected volatilities are based on historical volatilities of the Company’s stock for a period consistent with the expected term. The expected term of SARs granted was based upon historical exercise behavior of stock options and SARs. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the award.

Performance Shares

Performance shares represent the right to receive a share of the Company’s Common Stock after a three year period subject to the achievement of certain market or performance conditions established by the Company’s Compensation Committee. Partial vesting in these awards may occur after separation from the Company for retirement eligible employees. Shares are not vested until approved by the Company’s Compensation Committee.

Performance Shares - Market Condition

In December 2017, 2016 and 2015, the Company granted 24,675, 29,012 and 32,687, respectively, of performance shares that will vest subject to a market condition and service through the performance period. The market condition associated with the awards is the Company's TSR compared to the TSR generated by the companies of a reference index over a three year performance period. Performance at target will result in vesting and issuance of the number of performance shares granted, equal to 100% payout. Performance below or above target can result in issuance in the range of 0%-200% of the number of shares granted. Expense is recognized irrespective of the market condition being achieved.

In February 2018, the Company paid out 15,141 shares related to the December 2014 performance award grant. The performance period associated with this award was from January 1, 2015 through December 31, 2017 and was based upon the Company’s TSR compared to the TSR generated by the other companies that comprise the S&P Capital Goods 900 Index. The number of shares vested in February 2018 was based upon achieving 64% of the market-based criteria and the fair value of the awards at vesting was $2.0 million.

The fair value of the performance share awards with a market condition for the fiscal years 2017, 2016 and 2015 was determined based upon a lattice model.

The following table summarizes the related assumptions used to determine the fair values of the performance share awards with a market condition granted during the years 2017, 2016 and 2015:



Grant Date	Stock Price on Measurement Date		Dividend Yield		Expected Volatility		Risk Free Interest Rate		Expected Term	Weighted Avg. Grant Date Fair Value
2017	$	127.51	2.4	%	24.7	%	1.9	%	3 Years	$	142.89
2016	$	113.69	2.5	%	25.6	%	1.4	%	3 Years	$	126.65
2015	$	97.48	2.6	%	23.3	%	1.3	%	3 Years	$	105.77

Expected volatilities are based on historical volatilities of the Company’s stock over a three year period. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the expected term of the award.

Performance Shares - Performance Condition

In December 2017, 2016 and 2015 the Company granted 24,675, 29,012 and 32,687, respectively, of performance share awards that are subject to a performance condition and service requirement during the three year performance period. The performance condition associated with the awards is based on the Company's net sales growth compared to the net sales growth of the companies of a reference index, further adjusted by the Company achieving a target net income margin, each measured over the same three year performance period. Performance at target will result in vesting and issuance of the number of performance shares granted, equal to 100% payout. Performance below or above target can result in issuance in the range of 0%-250% of the number of shares granted.

The fair value of the award is measured based upon the average of the high and low trading prices of the Company's common stock on the measurement date reduced by the present value of dividends expected to be paid during the requisite service period. The Company expenses these awards on a straight-line basis over the requisite service period and including an assessment of the performance achieved to date. The weighted average fair value per share was $118.55 for the awards granted in 2017.

The following table summarizes the attributes of the performance shares outstanding at December 31, 2017:



Grant Date	Shares Outstanding at 12/31/2017	Fair Value	Performance Period	Payout Range
2017	24,675	118.55	Jan 2018-Dec 2020	0-250%
2016	28,524	105.48	Jan 2017-Dec 2019	0-250%
2015	31,024	97.48	Jan 2016-Dec 2018	0-250%
2014	23,688	106.44	Jan 2015-Dec 2017	0-250%