Management Compensation and Incentive Plans

Stock-Based Compensation

We have historically maintained several stock incentive plans. The plans permitted the granting of options, restricted stock and other awards. As of December 31, 2014, the aggregate number of shares authorized under the plans since their initial adoption was 23,300,000. Shares issued upon vesting of awards or exercise of options are new share issuances or issuances from treasury shares. Upon the vesting or payment of stock awards, an employee may elect receipt of the full share amount and either pay the resulting taxes or sell shares in the open market to cover the tax obligation. We sometimes elect to purchase these shares rather than allow them to be sold in the open market.

Stock-Based Compensation

We recognized $9.6 million, $7.7 million, and $5.6 million in stock-based compensation expense in 2012, 2013 and 2014, respectively. A majority of the expense, $8.7 million, $6.9 million, and $4.8 million, respectively, was recorded as selling and administrative expenses in the Consolidated Statements of Income, with the remainder recorded as cost of sales and research and development. We expect our stock-based compensation expense to approximate $5.6 million in 2015.

As of December 31, 2014, the total compensation expense related to non-vested restricted stock and stock options not yet recognized was $12.3 million which will be recognized over the weighted average life of 2.0 years.

In November 2014, the 2015-2017 grant to senior leadership under our Equity Incentive Plan was approved. We granted 526,900 stock options with an exercise price of $4.24; 395,186 restricted share units; and up to 1,317,266 performance share units, which represent the right to receive shares contingent upon the achievement of one or more performance measures. The options vest as to 1/3 of the grant on December 3rd over the next three years and expire 10 years from the grant date. The restricted share units vest as to 1/3 of the grant on December 3rd over the next three years. Performance shares are earned based on our return on invested capital and our cumulative free cash flow for a three year period beginning January 1, 2015. Compensation for performance shares can fluctuate based on how we perform to the targets. Performance shares earned will vest on March 31, 2018, provided the participant is still employed by us on that date.

Additionally, in December 2014, we granted 195,000 restricted share units to 45 leaders under the Equity Recognition Program. These shares will vest as to 100% of the grant on December 3, 2016.

Accounting for Stock-Based Compensation

Restricted Stock and Performance Shares. Compensation expense for restricted stock and performance share awards is based on the closing price of our common stock on the date of grant, less our assumptions of dividend yield and expected forfeitures or cancellations of awards throughout the vesting period, which generally range between one and three years. The weighted average grant date fair value of restricted stock and performance shares was approximately $11.16 and $5.19 per share at December 31, 2013 and 2014, respectively.

Restricted stock and performance share awards activity under the plans for the year ended December 31, 2014, was:



	Number of Shares		Weighted- Average Grant Date Fair Value
Outstanding unvested at December 31, 2013	1,633,491		$	10.98
Granted	1,466,919		5.19
Vested	(411,062	)	12.50
Forfeited/canceled/expired	(875,218	)	10.25
Outstanding at December 31, 2014	1,814,130		$	6.31

During 2014, we granted 1,466,919 shares of restricted stock and performance units to certain directors, officers and employees at prices ranging from $4.24 to $11.90. Of the total shares granted, 519,286 will vest over a three year period, with one-third of the shares vesting on the anniversary date of the grant in each of the next three years. An additional 747,633 shares will vest over a 39 month period, subject to performance multipliers, based on company performance against a peer group. The remaining 200,000 shares vest over a period of one or two years. Unvested shares granted to each employee also vest upon the occurrence of a change in control, as defined. Unvested shares are forfeited based on the terms of the award.

Stock Options. Compensation expense for stock options is based on the estimated fair value of the option on the date of the grant. We calculate the estimated fair value of the option using the Black-Scholes option-pricing model. During 2012, we granted 441,700 options to certain of our directors, officers and employees. The weighted-average fair value of the options granted in 2012 was $9.82. During 2013, we granted 348,106 options to certain of our officers and employees. The weighted-average fair value of the options granted in 2013 was $11.53. During 2014, we granted 671,939 options to certain of our officers and employees.The weighted-average fair value of the options granted in 2014 was $5.82. The weighted average assumptions used in our Black-Scholes option-pricing model for options granted in 2012, 2013 and 2014 are:



	For the Year Ended December 31, 2012		For the Year Ended December 31, 2013		For the Year Ended December 31, 2014
Dividend yield	—	%	—	%	—	%
Expected volatility	55.33%-57.32%		55.89%-57.01%		45.42%-55.89%
Risk-free interest rate	0.66% - 0.90%		0.76% - 1.38%		1.38% - 1.66%
Expected term in years	6 years		6 years		6 years

Dividend Yield. A dividend assumption of 0% is used for all grants based on our history of not paying dividends.

Expected Volatility. We estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock. The volatility factor we use is based on our historical stock prices over the most recent period commensurate with the estimated expected life of the award.

Risk-Free Interest Rate. We base the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.

Expected Term In Years. The expected life of awards granted represents the time period that the awards are expected to be outstanding. We determined the expected term of the grants using the “simplified” method as described by the SEC, since we do not have a history of stock option awards to provide a reliable basis for estimating such.

Stock option activity under the plans for the year ended December 31, 2014 was:



	Number of Shares		Weighted- Average Exercise Price
Outstanding at December 31, 2013	1,916,718		$	12.47
Granted	671,939		5.82
Exercised	(316,733	)	8.88
Forfeited/canceled/expired	(229,850	)	11.64
Outstanding at December 31, 2014	2,042,074		$	10.93

Options outstanding at December 31, 2014, have a weighted average remaining contractual life of 7.8 years, a weighted average remaining vesting period of 1.5 years, and an aggregate intrinsic value of $0.4 million. The intrinsic value of options exercised for the year ended December 31, 2014 was $0.5 million.

Stock options outstanding and exercisable under our plans at December 31, 2014 are:



			Options Outstanding			Options Exercisable
Range of Exercise Prices			Number Outstanding	Weighted Average Remaining Contractual Life in Years	Weighted Average Exercise Prices	Number Exercisable	Weighted Average Exercise Prices
$4.24	-	$22.57	2,042,074	7.8	$10.93	1,187,758	$	13.94

At December 31, 2014, we have 1,601,124 options vested and expected to vest in the next year. Options exercisable at December 31, 2014, have a weighted-average contractual life of 6.6 years and an aggregate intrinsic value of zero.

Incentive Compensation Plans

We have a global incentive program for our worldwide salaried and hourly employees, the Incentive Compensation Program (the “ICP”), which includes a shareholder-approved executive incentive compensation plan. The ICP is based primarily on earnings before income taxes and achieving cash flow targets and, to a lesser extent, strategic targets. The balance of our accrued liability for ICP was $0.4 million at December 31, 2013 and $0.0 million at December 31, 2014.