Note 11: Incentive Compensation Plans

At December 31, 2012, the Company has three incentive compensation plans that are described below:

Omnibus Incentive Plan

The Company maintains an Omnibus Incentive Plan (“OIP”) which was approved by the Company’s stockholders in May 2012. The OIP replaced the Stock Incentive Plan, which was maintained by the Company until the approval of the OIP. The OIP permits the issuance of stock options, restricted stock, restricted stock units and other stock-based awards to non-employee directors, other than those directors owning more than 5% of the Company’s outstanding Common Stock, consultants, officers and other key employees of the Company who are expected to contribute to the Company’s future growth and success. An aggregate of 2,150,000 shares of Common Stock were authorized for issuance under the OIP, of which 678,318 were available for grant at December 31, 2012.

Stock Options

The option price for options granted under the OIP is equal to the fair market value of the Common Stock at the date of grant. Options granted to non-employee directors vest over a three-year period, and options granted to employees vest over a four-year period. All options under the OIP will expire no later than ten years after the grant date. Forfeited options may be reissued and are included in the amount available for grants.

A summary of stock option activity as of and for the years ended December 31, 2012, 2011 and 2010 is presented below:


	Non-vested stock options outstanding					Stock options outstanding
	Number of shares			Weighted- average grant-date fair value		Number of shares			Weighted- average exercise price
Balance, January 1, 2010		284,075		$	12.94		561,300		$	20.04
Stock options granted		130,000			12.49		130,000			22.10
Stock options exercised							(40,550	)		11.49
Stock options vested		(95,700	)		13.85
Stock options forfeited		(36,400	)		12.55		(45,150	)		20.62

Balance, December 31, 2010		281,975			12.59		605,600			22.02
Stock options granted		146,000			21.27		146,000			36.33
Stock options exercised							(27,500	)		13.64
Stock options vested		(142,050	)		14.78
Stock options forfeited		(1,000	)		16.08		(4,000	)		32.07

Balance, December 31, 2011		284,925			15.56		720,100			25.19
Stock options granted		40,000			20.60		40,000			36.66
Stock options exercised							(72,050	)		18.06
Stock options vested		(125,071	)		15.31
Stock options forfeited		(41,000	)		16.68		(41,000	)		27.84

Balance, December 31, 2012		158,854		$	18.81		647,050		$	26.52

The following table summarizes information about stock options outstanding at December 31, 2012:

Stock options outstanding

Stock options
exercisable

Range of exercise prices

Number
of shares

Weighted-
average
remaining
years
contractual
life

Weighted-
average
exercise
price

Number
of shares

Weighted-
average
exercise
price

$5.12 to $16.95

121,600

4.8

12.93

115,663

12.73

$16.98 to $20.61

127,150

7.2

18.18

117,872

18.13

$20.76 to $32.07

134,000

7.3

26.95

104,826

27.82

$32.20 to $36.15

129,150

7.8

34.65

91,650

34.64

$36.25 to $42.50

135,150

8.6

38.40

58,185

38.73

Stock outstanding at end of year

647,050

7.2

26.52

488,196

24.48

Stock options exercisable at end of year

488,196

6.5

Proceeds from stock option exercises totaled $1.3 million, $375,000 and $466,000 for the years ended December 31, 2012, 2011 and 2010, respectively. Shares issued in connection with stock option exercises are issued from available authorized shares. Tax benefits realized from stock options exercised totaled $335,000, $172,000 and $143,000 for the years ended December 31, 2012, 2011 and 2010, respectively.

Based upon the closing stock price of $36.77 at December 31, 2012, the aggregate intrinsic value of outstanding in-the-money stock options and outstanding exercisable in-the-money stock options was $7.0 million and $6.2 million, respectively. Intrinsic value of stock options is calculated as the amount by which the market price of the Company’s Common Stock exceeds the exercise price of the options. The aggregate intrinsic value of stock options exercised for the years ended December 31, 2012, 2011 and 2010 was $1.6 million, $549,000 and $560,000, respectively. The total fair value of stock option awards vested was $1.5 million, $2.1 million and $1.3 million during the years ended December 31, 2012, 2011 and 2010, respectively.

Share-based compensation to employees and directors is recognized as compensation expense in the consolidated statements of operations based on the stock options fair values on the measurement date, which is the date of the grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods. The compensation expense recognized and its related tax effects are included in additional paid-in capital. Additional paid-in capital is further adjusted for the difference between compensation expense recorded under the accounting standard and compensation expense reported for tax purposes upon actual exercise of employee stock options.

Share-based compensation expense related to stock options totaled $1.6 million, $1.6 million and $1.8 million for the years ended December 31, 2012, 2011 and 2010, respectively. Share-based compensation expense is recognized ratably over the requisite service period for all stock option awards. The tax benefit associated with the share-based compensation expense recognized in the accompanying consolidated statements of operations was $577,000 in 2012, $563,000 in 2011 and $420,000 in 2010. Unrecognized share-based compensation expense related to non-vested stock option awards totaled $3.0 million at December 31, 2012. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 2.8 years.

The fair value of the Company’s stock options granted is estimated on the measurement date, which, for the Company, is the date of grant. The Company uses the Black-Scholes option-pricing model. The weighted-average fair value of stock options granted was $824,000 for 2012, $3.1 million for 2011, and $1.6 million for 2010. The Company’s determination of fair value of stock option awards on the date of grant is affected by the Company’s stock price as well as assumptions regarding the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.

The assumptions used to determine the fair value of stock options granted are detailed in the table below:

2012

2011

2010

Risk-free interest rate

0.80 to 1.10 %

1.23 to 2.66 %

1.53 to 2.68 %

Dividend yield

0.0%

0.0%

Expected market price volatility

59 to 62%

55 to 62 %

54 to 59 %

Weighted-average expected market price volatility

61.2%

56.1%

56.3%

Expected term

6.0 to 6.3 years

6.0 to 7.9 years

6.0 to 7.8 years

The risk-free interest rate was developed using the U.S. Treasury yield curve for periods equal to the expected life of the stock options at the grant date. No dividend yield was assumed because the Company does not pay cash dividends on Common Stock and currently has no plans to pay a dividend. Expected volatility is based on the long-term historical volatility (estimated over a period equal to the expected term of the stock options) of the Company’s stock. In estimating the fair value of stock options under the Black-Scholes option-pricing model, separate groups of employees that have similar historical exercise behavior are considered separately. The expected term of options granted represents the period of time that options granted are expected to be outstanding.

Restricted Stock

During the year ended December 31, 2012, the Company granted 35,000 time-based shares of Restricted Common Stock to certain employees. The fair value of the non-vested time-based Restricted Common Stock awards was calculated using the market value of the stock on the date of issuance, which was $35.26.

As of December 31, 2012, total unrecognized compensation cost related to non-vested time-based Restricted Common Stock awards was $1.2 million. That cost is expected to be recognized over a weighted-average period of 2.9 years.

Employee Stock Purchase Plan

In May 2012, an amendment to the 1996 Employee Stock Purchase Plan (the “Plan”) was approved by the Company’s stockholders. The amendment increased the number of shares authorized for issuance under the Plan by 50,000 to an aggregate 200,000 shares of Common Stock to its full-time employees, nearly all of whom are eligible to participate. Under the terms of the Plan, employees can choose as of January 1 and July 1 of each year to have up to 10% of their total earnings withheld to purchase up to 100 shares of the Company’s Common Stock each six-month period. The purchase price of the stock is 85% of the lower of its beginning-of-the-period or end-of-the-period market prices. At December 31, 2012, the Company has issued 141,062 shares of Common Stock since the Plan’s inception.

Cash Incentive Plans

The Company has a Variable Compensation Plan covering certain key executives and employees and profit-sharing plans that cover the remaining employees. The profit-sharing plans provide for the sharing of pre-tax profits in excess of specified amounts. For the years ended December 31, 2012, 2011 and 2010, the Company expensed $4.0 million, $6.8 million and $5.0 million, respectively, under these plans of which $3.9 million, $4.5 million and $2.7 million, respectively was included as a component of cost of products sold while the remainder is included in selling and administrative expense.