STOCK-BASED COMPENSATION

The Company recognizes stock-based compensation expense for its equity incentive plan and employee stock purchase plan. The following table summarizes stock-based compensation expense recognized by the Company in each of the years in the three-year period ended March 31, 2016.



	Years Ended March 31,
(In thousands)	2016			2015			2014
Stock-based compensation expense related to:
Equity Incentive Plan	$	24,464		$	25,935		$	24,892
Employee Stock Purchase Plan - options to purchase stock	3,293			4,092			4,069
	27,757			30,027			28,961
Tax benefit	(9,850		)	(10,624		)	(10,392		)
Stock-based compensation expense, net of tax	$	17,907		$	19,403		$	18,569

2006 Equity Incentive Plan

On August 14, 2012, the Company’s stockholders approved the Second Amended and Restated 2006 Equity Incentive Plan (the “2006 Equity Plan”), which included, among other things, a 4.0 million increase in the maximum number of shares available for issuance under the plan. At March 31, 2016, a total of 11.9 million shares were authorized under the 2006 Equity Plan, as amended, for grants of stock options, stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants of the Company, of which 2.3 million shares of common stock were available for issuance.

Stock options granted to employees vest 25% annually and have a maximum term of eight years. Stock options granted to directors vest and are fully exercisable immediately upon being granted.

Fair Value

The Company utilizes the Black-Scholes option pricing model to determine the fair value of stock options. The weighted-average grant date fair value of stock options granted during the fiscal years ended March 31, 2016, 2015 and 2014 was $19.87, $28.72 and $32.41, respectively. The following assumptions were used by the Company in valuing the stock options grants issued in each fiscal year:



	Fiscal 2016		Fiscal 2015		Fiscal 2014
Expected volatility	24.8	%	34.3	%	40.5	%
Expected dividend yield	2.31	%	2.06	%	1.95	%
Expected term	5.6 years		5.6 years		5.6 years
Risk-free interest rate	1.7	%	1.7	%	1.0	%

The expected volatility assumption used in valuing stock options was determined based on anticipated changes in the underlying stock price over the expected term using historical daily changes of the Company’s closing stock price. The expected dividend yield was based on the Company’s history and expectation of future dividend payouts. The expected term represents the period of time that the options are expected to be outstanding prior to exercise or forfeiture. The expected term was determined based on historical exercise patterns. The risk-free interest rate was based on U.S. Treasury rates in effect at the time of grant commensurate with the expected term.

Summary of Stock Option Activity

The following table summarizes the stock option activity during the three years ended March 31, 2016:



	Number of Stock Options		Weighted-Average Exercise Price		Aggregate Intrinsic Value (In thousands)
Outstanding at March 31, 2013	5,052,016		$	60.26
Granted	959,700		$	102.96
Exercised	(817,016	)	$	47.38
Forfeited	(90,276	)	$	85.04
Outstanding at March 31, 2014	5,104,424		$	69.91	$	186,816
Granted	977,500		$	104.80
Exercised	(1,034,325	)	$	53.49
Forfeited	(73,929	)	$	98.24
Outstanding at March 31, 2015	4,973,670		$	79.76	$	131,135
Granted	1,019,675		$	103.57
Exercised	(837,455	)	$	62.06
Forfeited	(91,550	)	$	101.83
Outstanding at March 31, 2016	5,064,340		$	87.08	$	276,296
Vested or expected to vest at March 31, 2016	5,051,024		$	87.04	$	275,798
Exercisable at March 31, 2016	2,911,622		$	75.47	$	192,649

The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of each fiscal year and the exercise price of in-the-money stock options multiplied by the number of stock options outstanding or exercisable as of that date. The total intrinsic value of stock options exercised during the years ended March 31, 2016, 2015 and 2014 was $52.5 million, $60.8 million and $47.0 million, respectively. The weighted-average remaining contractual term of stock options outstanding as of March 31, 2016 was 4.6 years. Common stock to be issued in conjunction with future stock option exercises will be obtained from either new shares or shares from treasury stock.

As of March 31, 2016, $35.3 million of unrecognized non-cash compensation expense related to non-vested stock options is expected to be recognized over a weighted-average vesting period of 1.6 years.

Under the terms of the Merger Agreement (see Note 2), all of the stock options outstanding upon the closing of the Merger under the Equity Incentive Plan, whether vested or unvested, would be canceled in consideration for the right of each stock option holder to receive a cash payment equal to the number of stock options held multiplied by the excess of the Merger consideration of $143 per share over the exercise price per share of the Company’s common stock subject to the stock options.

Employee Stock Purchase Plan

The Amended and Restated Airgas, Inc. 2003 Employee Stock Purchase Plan (“Employee Stock Purchase Plan” or “ESPP”) encourages and assists employees in acquiring an equity interest in the Company. As of March 31, 2016, the ESPP was authorized to issue up to 5.5 million shares of Company common stock, of which 900 thousand shares were available for issuance at March 31, 2016.

Under the terms of the ESPP, eligible employees may elect to have up to 15% of their annual gross earnings withheld to purchase common stock at 85% of the market value. Employee purchases are limited in any calendar year to an aggregate market value of $25 thousand. Market value under the ESPP is defined as either the closing share price on the New York Stock Exchange as of an employee’s enrollment date or the closing price on the first business day of a fiscal quarter when the shares are purchased, whichever is lower. An employee may lock-in a purchase price for up to 12 months. The ESPP effectively resets at the beginning of each fiscal year at which time employees are re-enrolled in the plan and a new 12-month purchase price is established. The ESPP is designed to comply with the requirements of Sections 421 and 423 of the Internal Revenue Code.

Fair Value

Compensation expense is measured based on the fair value of the employees’ option to purchase shares of common stock at the grant date and is recognized over the future periods in which the related employee service is rendered. The fair value per share of employee options to purchase shares under the ESPP was $17.59, $20.44 and $19.27 for the years ended March 31, 2016, 2015 and 2014, respectively. The fair value of the employees’ option to purchase shares of common stock was estimated using the Black-Scholes model. The following assumptions were used by the Company in valuing the employees’ option to purchase shares of common stock under the ESPP:



	Fiscal 2016		Fiscal 2015		Fiscal 2014
Expected volatility	17.9	%	17.1	%	19.5	%
Expected dividend yield	2.60	%	2.07	%	1.96	%
Expected term	3 to 9 months		3 to 9 months		3 to 9 months
Risk-free interest rate	0.04	%	0.06	%	0.08	%

ESPP - Purchase Option Activity

The following table summarizes the activity of the ESPP during the three years ended March 31, 2016:



	Number of Purchase Options		Weighted-Average Exercise Price		Aggregate Intrinsic Value (In thousands)
Outstanding at March 31, 2013	62,137		$	68.74
Granted	211,093		$	82.88
Exercised	(218,109	)	$	79.38
Outstanding at March 31, 2014	55,121		$	80.77	$	1,419
Granted	200,030		$	90.82
Exercised	(201,037	)	$	89.24
Outstanding at March 31, 2015	54,114		$	86.47	$	1,063
Granted	187,265		$	78.93
Exercised	(241,379	)	$	81.26
Outstanding at March 31, 2016	—		$	—	$	—

In accordance with the terms of the Merger Agreement, there were no outstanding purchase options at March 31, 2016 as the January 2016 purchase represented the final purchase under the ESPP, with no further grants of options to purchase common stock under the ESPP. As a result, all compensation expense related to the outstanding purchase options under the ESPP was recognized in full at December 31, 2015, and no additional expense was incurred related to the Company’s ESPP for the remainder of fiscal 2016.