SHARE-BASED ARRANGEMENTS

General

The Company accounts for stock options, restricted stock awards, restricted stock units and performance shares as equity awards and measures the cost of all share-based payments, including stock options, at fair value on the grant date and recognizes this cost in the statement of operations. The Company also has an employee stock purchase plan which is accounted for as a liability award.

Compensation expense for stock options, restricted stock awards and restricted stock units is recognized on a straight-line basis over the vesting period of the awards. Share-based compensation expense recorded for the years ended December 31, 2015, 2014, and 2013 was $6.4 million, $5.4 million, and $5.0 million, respectively.

Stock Incentive Plan

On April 17, 2013, the shareholders of the Company approved the 2013 Management Incentive Plan (the "2013 Plan"), which replaced the 2003 Stock Incentive Plan. The 2013 Plan provides the Company with the ability to use equity-based awards of up to 2,250,000 authorized shares and is designed as a flexible share authorization plan, such that the Company's share authorization is based on the least costly type of award (stock options). Shares issued pursuant to “Full Value Awards” as defined in the 2013 Plan (awards other than stock options or stock appreciation rights which are settled by the issuance of shares, e.g., restricted stock, restricted stock units, performance shares, performance units if settled with stock, or other stock-based awards) count against the 2013 Plan's share authorization at a rate of 3 to 1, while shares issued upon exercise of stock options or stock appreciation rights count against the share authorization at a rate of 1 to 1. This means that every time an option is granted, the authorized pool of shares is reduced by one (1) share and every time a Full Value Award is granted, the authorized pool of shares is reduced by 3 shares. In deriving the valuation ratio used in the 2013 Plan, the Company used the Black Scholes Fair Value model as the basis for determining the approximate value of an option as compared to a "full value share." As of December 31, 2015, there were 1,299,635 shares available for grant under the plan.

LTIP awards provide certain senior executives an opportunity to receive award payments in either stock or cash as determined by the Personnel and Compensation Committee of the Board of Directors in accordance with the Plan, at the end of each performance cycle. For the performance cycle, the Company’s financial results are compared to the Russell 2000 indices for the same periods based upon the following: (a) average return on total capital, (b) earnings per share growth and (c) total return to shareholders. No awards will be payable if the Company’s performance is in the bottom quartile of the designated indices. The maximum award is payable if performance reaches the 75^th percentile of the designated indices. Awards are paid out at 100% at the 50^th percentile. Awards for performance between the 25^th and 75^th percentiles are determined by straight-line interpolation between 0% and 200%. Generally, LTIP awards are paid in cash.

Stock options are granted with an exercise price equal to the average market price of our stock at the date of grant. Stock options and Stock Appreciation Rights ("SARs") granted under the plan generally expire ten years from the date of grant and vest 20% each year over a 5-year period on each of the first five anniversaries of the date of grant. Restricted Stock Awards ("RSAs") are generally granted with restrictions that lapse at the rate of 20% per year over a 5-year period on each of the first five anniversaries of the date of grant. Generally, these awards are subject to forfeiture if a recipient separates from service with the Company.

During the first quarter of 2015, the Company issued additional stock awards with market and performance based conditions, bringing the total of these shares to 8,238, assuming a 100% achievement level. The Company measures the cost of these awards based on their grant date fair value to the extent of the probable number of shares to be earned upon vesting. Amortization of this cost will be recorded on a straight-line basis over the requisite service period. Throughout the course of the requisite service period, the Company will monitor the level of achievement compared to the target and adjust the number of shares expected to be earned, and the related compensation expense recorded thereafter, to reflect the updated most probable outcome. Compensation expense for these awards for the year ended December 31, 2015, was not material.

18. SHARE-BASED ARRANGEMENTS (CONTINUED)

Stock Incentive Plan - continued

Stock option activity is as follows:



	Options		Weighted average- exercise price
Options outstanding at December 31, 2014	904,091		$	31.26
Granted	202,345		39.54
Exercised	(61,002	)	24.93
Forfeited or expired	(5,398	)	36.88
Options outstanding at December 31, 2015	1,040,036		$	33.22

The following table presents information regarding options outstanding as of December 31, 2015:



Weighted-average remaining contractual term - options outstanding (years)	5.9
Aggregate intrinsic value - options outstanding (in thousands)	$	8,216
Weighted-average exercise price - options outstanding	$	33.22
Options exercisable	527,122
Weighted-average remaining contractual term - options exercisable (years)	4.1
Aggregate intrinsic value - options exercisable (in thousands)	$	6,509
Weighted-average exercise price - options exercisable	$	28.77

The intrinsic value represents the amount by which the market price of the stock on the measurement date exceeds the exercise price of the option. The intrinsic value of options exercised in 2015, 2014 and 2013 was $1.0 million, $2.9 million and $1.9 million, respectively. The Company currently has an open stock repurchase plan, which would enable the Company to repurchase shares as needed. Since 2008 the Company has generally issued shares related to option exercises and RSAs from its authorized but unissued common stock.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The following table indicates the weighted-average assumptions used in estimating fair value:



	2015			2014			2013
Expected option term (years)	5.1			5.1			5.2
Expected volatility	29.0		%	37.5		%	45.5		%
Risk-free interest rate	1.6		%	1.5		%	0.9		%
Expected dividend yield	1.6		%	1.7		%	2.0		%
Per share fair value of options granted	$	9.28		$	11.60		$	12.38

The expected term of options granted represents the period of time option grants are expected to be outstanding based upon historical exercise patterns. Forfeitures of options are estimated based upon historical data and are adjusted based upon actual occurrences. The cumulative effect of stock award forfeitures was immaterial. The volatility assumption is based on the historical daily price data of the Company’s stock over a period equivalent to the weighted-average expected term of the options. Management evaluated whether there were factors during that period that were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. The Company relies only on historical volatility since future volatility is expected to be consistent with historical volatility.

The risk-free interest rate assumption is based upon the interpolation of various U.S. Treasury rates determined at the date of option grant. Expected dividends are based upon a historical analysis of our dividend yield over the past year.

18. SHARE-BASED ARRANGEMENTS (CONTINUED)

Stock Incentive Plan - continued

Restricted Stock Award and Restricted Stock Unit activity is as follows:



	Restricted Stock Awards		Weighted- average grant date fair value
Restricted Stock outstanding at December 31, 2014	196,553		$	36.29
Granted	80,494		39.83
Vested	(91,640	)	36.37
Forfeited or expired	(1,864	)	35.87
Restricted Stock outstanding at December 31, 2015	183,543		$	37.80

The grant date fair value for restricted stock is the average market price of the unrestricted shares on the date of grant. The total fair value of restricted stock awards vested during 2015, 2014 and 2013 was $3.8 million, $4.5 million and $4.6 million, respectively.

We record a tax benefit and associated deferred tax asset for compensation expense recognized on non-qualified stock options and restricted stock for which we are allowed a tax deduction. For 2015, 2014 and 2013, respectively, we recorded a tax benefit of $2.2 million, $1.9 million and $1.7 million for these two types of compensation expense.

The windfall tax benefit is the tax benefit realized on the exercise of non-qualified stock options and disqualifying dispositions of stock acquired by exercise of incentive stock options and Employee Stock Purchase Plan stock purchases in excess of the deferred tax asset originally recorded. The total windfall tax benefit realized in 2015, 2014, and 2013 was $0.3 million, $0.8 million, and $0.5 million, respectively.

As of December 31, 2015, future compensation costs related to non-vested stock options and restricted stock grants is $7.4 million. The Company anticipates that this cost will be recognized over a weighted-average period of 3.0 years.

Employees Stock Purchase Plan

The Kaman Corporation Employees Stock Purchase Plan (“ESPP”) allows employees to purchase common stock of the Company, through payroll deductions, at 85% of the market value of shares at the time of purchase. The plan provides for the grant of rights to employees to purchase a maximum of 1,500,000 shares of common stock.

During 2015, 79,294 shares were issued to employees at prices ranging from $31.64 to $36.46. During 2014, 76,805 shares were issued to employees at prices ranging from $32.48 to $36.42. During 2013, 85,702 shares were issued to employees at prices ranging from $28.34 to $32.43. At December 31, 2015, there were 309,338 shares available for purchase under the plan.