Note 6 – Stock-Based Compensation

Our shareholders approved the adoption of and subsequent amendments to the Lancaster Colony Corporation 2005 Stock Plan (the “2005 Plan”). The 2005 Plan reserved 2,000,000 common shares for issuance to our employees and directors, and all awards granted under the 2005 Plan will be exercisable at prices not less than fair market value as of the date of the grant. The vesting period for awards granted under the 2005 Plan varies as to the type of award granted, but generally these awards have a maximum term of five years.

Stock-Settled Stock Appreciation Rights

We use periodic grants of stock-settled stock appreciation rights (“SSSARs”) as a vehicle for rewarding certain employees with long-term incentives for their efforts in helping to create long-term shareholder value. We calculate the fair value of SSSARs grants using the Black-Scholes option-pricing model. Our policy is to issue shares upon SSSARs exercise from new shares that had been previously authorized.

In 2013, 2012 and 2011, we granted SSSARs to various employees under the terms of the 2005 Plan. The following table summarizes information relating to these grants:


	2013			2012			2011

SSSARs granted		108			187			94
Weighted average grant date fair value per right	$	9.04		$	9.07		$	10.12
Assumptions used in fair value calculations:
Risk-free interest rate		0.33	%		0.41	%		1.27	%
Dividend yield		2.09	%		2.11	%		2.28	%
Volatility factor of the expected market price of our common stock		23.23	%		24.30	%		28.78	%
Weighted average expected life in years		2.67			2.76			3.11
Estimated forfeiture rate		2	%		4	%		4	%

For each grant, the volatility factor was estimated based on actual historical volatility of our stock for a time period equal to the term of the SSSARs. The expected average life was determined based on historical exercise experience for this type of grant. The SSSARs from each grant vest one-third on the first anniversary of the grant date, one-third on the second anniversary of the grant date and one-third on the third anniversary of the grant date.

We recognize compensation expense over the requisite service period. Compensation expense was reflected in Cost of Sales or Selling, General and Administrative Expenses based on the grantees’ salaries expense classification and was allocated to each segment appropriately. We recorded tax benefits and gross windfall tax benefits related to SSSARs. These windfall tax benefits were included in the financing section of the Consolidated Statements of Cash Flows. The following table summarizes SSSARs compensation expense and tax benefits recorded for each of the years ending June 30:


	2013		2012		2011

Compensation expense	$	1,436	$	1,624	$	1,120
Tax benefits	$	503	$	569	$	392
Intrinsic value of exercises	$	1,851	$	559	$	922
Gross windfall tax benefits	$	659	$	230	$	334

The total fair values of SSSARs vested for each of the years ended June 30 were as follows:


	2013		2012		2011

Fair value of vested rights	$	1,476	$	1,107	$	1,095

The following table summarizes the activity relating to SSSARs granted under the 2005 Plan for the year ended June 30, 2013:


	Number of Rights	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years	Aggregate Intrinsic Value

Outstanding at beginning of year	446	$	60.55
Exercised	(175)	$	55.48
Granted	108	$	72.67
Forfeited	(5)	$	63.50
Outstanding at end of year	374	$	66.42	3.51	$	4,323
Exercisable and vested at end of year	111	$	60.89	2.46	$	1,904
Vested and expected to vest at end of year	365	$	66.41	3.50	$	4,220

The following table summarizes information about the SSSARs outstanding by grant year at June 30, 2013:


	Outstanding						Exercisable
				Weighted Average
Grant Years	Range of Exercise Prices		Number Outstanding	Remaining Contractual Life in Years	Exercise Price		Number Exercisable	Weighted Average Exercise Price

2013	$	72.67	108	4.66	$	72.67	-	$	-
2012	$	63.50 - 68.12	158	3.65	$	68.07	34	$	68.12
2011	$	57.78	54	2.65	$	57.78	23	$	57.78
2010	$	58.79	50	1.66	$	58.79	50	$	58.79
2009	$	39.86	4	0.66	$	39.86	4	$	39.86

At June 30, 2013, there was approximately $1.5 million of unrecognized compensation expense related to SSSARs that we will recognize over a weighted-average period of approximately 2.04 years.

Restricted Stock

We use periodic grants of restricted stock as a vehicle for rewarding our nonemployee directors and certain employees with long-term incentives for their efforts in helping to create long-term shareholder value.

In 2013, 2012 and 2011, we granted shares of restricted stock to various employees under the terms of the 2005 Plan. The following table summarizes information relating to these grants:


	2013			2012			2011
Employees
Restricted stock granted		8			25			7
Grant date fair value	$	572		$	1,705		$	390
Weighted average grant date fair value per award	$	72.67		$	68.08		$	57.78
Estimated forfeiture rate		3	%		4	%		4	%

The restricted stock under each of these employee grants vests on the third anniversary of the grant date. Under the terms of the grants, employees receive dividends on unforfeited restricted stock regardless of their vesting status. Approximately 23,000, 6,000 and 22,000 shares of employee restricted stock vested in 2013, 2012 and 2011, respectively.

In 2013, 2012 and 2011, we also granted shares of restricted stock to our seven nonemployee directors under the terms of the 2005 Plan. The following table summarizes information relating to each of these grants:


	2013		2012		2011
Nonemployee directors
Restricted stock granted		7		7		8
Grant date fair value	$	490	$	490	$	420
Weighted average grant date fair value per award	$	73.29	$	65.97	$	51.52

The 2013 grant vests over a one-year period, and all of these shares are expected to vest. Dividends earned on the stock during the vesting period will be paid to the directors at the time the stock vests. Approximately 7,000, 8,000 and 8,000 shares of nonemployee director restricted stock vested in 2013, 2012 and 2011, respectively, and the directors were paid the related dividends.

We recognize compensation expense over the requisite service period. Compensation expense was reflected in Cost of Sales or Selling, General and Administrative Expenses based on the grantees’ salaries expense classification and was allocated to each segment appropriately. We recorded tax benefits and gross windfall tax benefits related to restricted stock. These windfall tax benefits were included in the financing section of the Consolidated Statements of Cash Flows. The following table summarizes restricted stock compensation expense and tax benefits recorded for each of the years ending June 30:


	2013		2012		2011

Compensation expense	$	1,465	$	1,298	$	1,177
Tax benefits	$	513	$	454	$	412
Gross windfall tax benefits	$	135	$	71	$	145

The total fair values of restricted stock vested for each of the years ended June 30 were as follows:


	2013		2012		2011

Fair value of vested shares	$	1,842	$	645	$	1,258

The following table summarizes the activity relating to restricted stock granted under the 2005 Plan for the year ended June 30, 2013:


	Number of Shares	Weighted Average Grant Date Fair Value

Unvested restricted stock at beginning of year	62	$	63.25
Granted	15	$	72.95
Vested	(31)	$	60.58
Forfeited	(1)	$	62.88
Unvested restricted stock at end of year	45	$	68.16

At June 30, 2013, there was approximately $1.7 million of unrecognized compensation expense related to restricted stock that we will recognize over a weighted-average period of approximately 1.76 years.