Note 15: Stock-Based Compensation Plans

The Company accounts for its stock-based compensation in accordance with FASB ASC 718, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors based on their estimated fair value. The Company recognizes stock-based compensation expense for share-based payment awards over the requisite service period for vesting of the award or to an employee's eligible retirement date, if earlier.

The following table summarizes the total stock-based compensation expense included in the Consolidated Statements of Operations and the realized excess tax benefits included in the consolidated statements of cash flows for the years ended December 31, 2011, 2010 and 2009.


	2011			2010			2009
Selling and administrative expenses	$	6,453			6,398			2,980
Total stock-based compensation expense included in operating expenses		6,453			6,398			2,980
Income (loss) before income taxes		(6,453	)		(6,398	)		(2,980	)
Provision for income taxes		1,821			2,031			836
Net income (loss)	$	(4,632	)		(4,367	)		(2,144	)
Net cash provided by operating activities	$	(3,396	)		(3,195	)		(479	)
Net cash used in financing activities	$	3,396			3,195			479

Plan Descriptions

Under the Company's Amended and Restated Long-Term Incentive Plan (the "Incentive Plan"), designated employees and non-employee directors are eligible to receive awards in the form of restricted stock and restricted stock units ("restricted shares"), stock options, stock appreciation rights or performance shares, as determined by the Management Development and Compensation Committee of the Board of Directors (the "Compensation Committee"). The Company's Incentive Plan is intended to assist the Company in recruiting and retaining employees and directors, and to associate the interests of eligible participants with those of the Company and its stockholders. An aggregate of 10,000,000 shares of common stock has been authorized for issuance under the Incentive Plan. Under the Incentive Plan, the grant price of an option is determined by the Compensation Committee, but must not be less than the market close price of the Company's common stock on the date of grant.

The Incentive Plan provides that the term of any stock option granted may not exceed ten years. There are no vesting provisions tied to performance or market conditions for any of the outstanding stock options and restricted shares. Vesting for all outstanding stock options and restricted shares is based solely on continued service as an employee or director of the Company and generally occurs upon retirement, death or cessation of service due to disability, if earlier.

Stock Option Awards

Under the terms of existing awards, employee stock options become vested and exercisable ratably on each of the first three anniversaries of the date of grant. The options granted to employees in 2011, 2010 and 2009 expire seven years after the date of grant.

Pursuant to the Incentive Plan, the Company also issues share-based payment awards to directors who are not employees of Gardner Denver or its affiliates. Each non-employee director is eligible to receive stock options to purchase common stock on the day after the annual meeting of shareholders. These options become exercisable on the first anniversary of the date of grant and expire five years after the date of grant.

A summary of the Company's stock option activity for the year ended December 31, 2011 is presented in the following table (underlying shares in thousands):


	Shares			Outstanding Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life
Outstanding at December 31, 2010		863		$	32.69
Granted		188			76.20
Exercised		(252	)		29.86
Forfeited		(51	)		47.12
Expired or canceled		(2	)		41.95

Outstanding at December 31, 2011		746			43.47	$	25,170		4.2 years
Exercisable at December 31, 2011		389		$	33.83	$	16,831		3.1 years

The aggregate intrinsic value was calculated as the difference between the exercise price of the underlying stock options and the quoted closing price of the Company's common stock at December 31, 2011 multiplied by the number of in-the-money stock options. The weighted-average per share estimated grant-date fair values of employee and director stock options granted during the years ended December 31, 2011, 2010, and 2009 were $28.10, $16.64, and $7.28, respectively.

The total pre-tax intrinsic values of options exercised during the years ended December 31, 2011, 2010, and 2009, were $12.2 million, $16.6 million and $3.8 million, respectively. Pre-tax unrecognized compensation expense for stock options, net of estimated forfeitures, was $3.7 million as of December 31, 2011, and will be recognized as expense over a weighted-average period of 1.8 years.

Valuation Assumptions

The fair value of each stock option grant under the Incentive Plan was estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based on the historical volatility of the Company's common stock calculated over the expected term of the option. The expected option term represents the period of time that the options granted are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the awards, vesting schedules and expectations of future employee behavior. The expected terms for options granted to certain executives and non-employee directors that have similar historical exercise behavior were determined separately for valuation purposes. The assumed risk-free rate over the expected term of the options was based on the U.S. Treasury yield curve in effect at the date of grant. The weighted-average assumptions used in the valuation of stock option awards granted during the years ended December 31, 2011, 2010 and 2009 are noted in the table below.


	2011			2010			2009
Assumptions:
Risk-free interest rate		1.9	%		2.2	%		1.7	%
Dividend yield		0.3	%		0.5	%		—
Volatility factor		44			43			42
Expected life (in years)		4.3			4.7			4.6

Restricted Share Awards

The Company began granting restricted stock units in lieu of restricted stock in the first quarter of 2008. Upon vesting, restricted stock units result in the issuance of an equivalent number of shares of the Company's common stock. Restricted share awards generally cliff vest three years after the date of grant.

A summary of the Company's restricted share activity for the year ended December 31, 2011 is presented in the following table (underlying shares in thousands):


	Shares			Weighted-Average Grant Date Fair Value
Nonvested at December 31, 2010		161		$	35.13
Granted		53			78.28
Vested		(56	)		39.03
Forfeited		(10	)		43.18

Nonvested at December 31, 2011		148		$	48.59

The restricted share awards were valued at the market close price of the Company's common stock on the date of grant. Pre-tax unrecognized compensation expense for nonvested restricted share awards, net of estimated forfeitures, was $3.5 million as of December 31, 2011 and will be recognized as expense over a weighted-average period of 2.0 years. The total fair value of restricted share awards that vested during the years ended December 31, 2011, 2010 and 2009 was $4.2 million, $1.9 million and $2.8 million, respectively.

The Company's income taxes currently payable have been reduced by the tax benefits from employee stock option exercises and the vesting of restricted share awards. The actual income tax benefits realized totaled approximately $5.1 million, $6.3 million and $1.0 million for the years ended December 31, 2011, 2010, and 2009, respectively.