Stock-Based Compensation

The Company accounts for the cost of all share-based payments, including stock options, by measuring the payments at fair value on the grant date and recognizing the cost in the results of operations. The fair values of stock options are estimated using the Black-Scholes option-pricing model based on certain assumptions. The fair values of service and performance based stock awards are estimated based on the fair market value of the Company’s stock price on the grant date. The fair value of market based performance share awards are estimated using the Monte Carlo valuation method. Estimated forfeiture rates are applied to outstanding awards.

Refer to Note 17 for a description of the Company’s stock-based compensation plans and their general terms. As of December 31, 2018, incentives have been awarded in the form of performance share awards and restricted stock unit awards (collectively, “Rights”) and stock options. The Company has elected to use the straight-line method to recognize compensation costs. Stock options and awards typically vest over a period ranging from six months to five years. The maximum term of stock option awards is 10 years. Upon exercise of a stock option or upon vesting of Rights, shares may be issued from treasury shares held by the Company or from authorized shares.

In March 2016, the FASB amended its guidance related to the accounting for certain aspects of share-based payments to employees. The amended guidance requires that all tax effects related to share-based payments are recorded at settlement (or expiration) through the income statement, rather than through equity. Cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The amended guidance also allows for an employer to repurchase additional employee shares for tax withholding purposes without requiring liability accounting and clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the Consolidated Statements of Cash Flows. The guidance also allows for a policy election to account for forfeitures as they occur, rather than accounting for them on an estimated basis. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

The Company elected to early adopt this guidance in the third quarter of 2016. This adoption requires the Company to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The most significant impact of adoption was the recognition of excess tax benefits in the provision for income taxes rather than through equity for all periods in fiscal year 2016. This resulted in the recognition of excess tax benefits in the provision for income taxes of $2,229 for the year ended December 31, 2016. In connection with the additional amendments within the amended guidance, the Company recognized state tax loss carryforwards in the amount of $198, which impacted retained earnings as of January 1, 2016. The cumulative effect of this change is required to be recorded in retained earnings. The Company elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.

The presentation requirements for cash flows related to excess tax benefits and employee taxes paid for withheld shares were applied retrospectively to all periods presented. This resulted in an increase in both net cash provided by operating activities and net cash used by financing activities of $413 and $524 for the three and six month periods ended March 31 and June 30, 2016, respectively.

During 2018, 2017 and 2016, the Company recognized $12,175, $12,285, and $11,493 respectively, of stock-based compensation cost and $2,613, $4,579, and $4,284 respectively, of related tax benefits in the accompanying consolidated statements of income. Additionally, the Company recognized excess tax benefits in the tax provision of $1,687, $2,463 and $2,229 in 2018, 2017 and 2016, respectively. The Company has realized all available tax benefits related to deductions from excess stock awards exercised or restricted stock unit awards and performance share awards vested. At December 31, 2018, the Company had $15,084 of unrecognized compensation costs related to unvested awards which are expected to be recognized over a weighted average period of 2.20 years.

The following table summarizes information about the Company’s stock option awards during 2018:



	Number of Shares		Weighted-Average Exercise Price
Outstanding, January 1, 2018	618,780		$	33.15
Granted	102,400		59.28
Exercised	(37,031	)	18.18
Forfeited	—		—
Outstanding, December 31, 2018	684,149		37.87

The following table summarizes information about stock options outstanding at December 31, 2018:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Shares	Average Remaining Life (Years)	Average Exercise Price		Number of Shares	Average Exercise Price
$11.45 to $15.83	44,760	0.76	$	14.19	44,760	$	14.19
$20.69 to $26.32	73,460	3.39	23.73		73,460	23.73
$26.59 to $34.92	164,117	6.88	31.11		111,425	30.98
$36.31 to $38.93	171,247	5.75	36.64		169,900	36.62
$38.93 to $63.38	230,565	8.50	52.71		43,861	45.98

The Company received cash proceeds from the exercise of stock options of $673, $1,964 and $4,184 in 2018, 2017 and 2016, respectively. The total intrinsic value (the amount by which the stock price exceeds the exercise price of the option on the date of exercise) of the stock options exercised during 2018, 2017 and 2016 was $1,589, $2,887 and $4,464, respectively.

The weighted-average grant date fair value of stock options granted in 2018, 2017 and 2016 was $12.80, $10.31 and $7.01, respectively. The fair value of each stock option grant on the date of grant was estimated using the Black-Scholes option-pricing model based on the following weighted average assumptions:



	2018		2017		2016
Risk-free interest rate	2.60	%	1.90	%	1.20	%
Expected life (years)	5.3		5.3		5.3
Expected volatility	24.1	%	26.1	%	29.1	%
Expected dividend yield	1.74	%	1.82	%	1.94	%

The risk-free interest rate is based on the term structure of interest rates at the time of the option grant. The expected life represents an estimate of the period of time that options are expected to remain outstanding. Assumptions of expected volatility of the Company’s common stock and expected dividend yield are estimates of future volatility and dividend yields based on historical trends.

The following table summarizes information about stock options outstanding that are expected to vest and stock options outstanding that are exercisable at December 31, 2018:



Options Outstanding, Expected to Vest						Options Outstanding, Exercisable
Shares	Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted- Average Remaining Term (Years)	Shares	Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted- Average Remaining Term (Years)
666,162	$	37.87	$	11,113	6.37	443,406	$	31.73	$	9,707	5.31

The following table summarizes information about the Company’s Rights during 2018:



	Service Based Rights				Service and Performance Based Rights				Service and Market Based Rights
	Number of Units		Weighted-Average Grant Date Fair Value		Number of Units		Weighted-Average Grant Date Fair Value		Number of Units		Weighted-Average Grant Date Fair Value
Outstanding, January 1, 2018	310,524		$	36.90	155,894		$	37.41	128,392		$	58.19
Granted	128,295		59.06		46,670		59.28		23,335		88.98
Forfeited	(15,653	)	46.28		(492	)	68.08		(408	)	68.10
Additional Earned	—		—		15,826		36.28		30,614		54.53
Issued	(159,185	)	65.85		(70,847	)	36.28		(57,995	)	54.53
Outstanding, December 31, 2018	263,981				147,051				123,938

The Company granted 128,295 restricted stock unit awards and 70,005 performance share awards in 2018. All of the restricted stock unit awards vest upon meeting certain service conditions. "Additional Earned" reflects performance share awards earned above target that have been issued. The performance share awards are part of the long-term Performance Share Award Program (the "Awards Program"), which is designed to assess the long-term Company performance relative to the performance of companies included in the Russell 2000 Index or to pre-established goals. The performance goals are independent of each other and based on equally weighted metrics. For awards granted in 2018, the metrics included the Company's total shareholder return ("TSR"), operating income before depreciation and amortization growth ("EBITDA growth") and return on invested capital ("ROIC"). For awards granted in 2017 and 2016, the metrics included TSR and ROIC. The TSR and EBITDA growth metrics are designed to assess the long-term Company performance relative to the performance of companies included in the Russell 2000 Index over a three year period. ROIC is designed to assess the Company’s performance compared to pre-established goals over a three year performance period. The participants can earn from zero to 250% of the target award and the award includes a forfeitable right to dividend equivalents, which are not included in the aggregate target award numbers. Compensation expense for the awards is recognized over the three year service period based upon the value determined under the intrinsic value method for EBITDA growth and ROIC portions of the award and the Monte Carlo simulation valuation model for the TSR portion of the award since it contains a market condition. The assumptions used to determine the weighted-average fair values of the market based portion of the 2018 awards include a 2.29% risk-free interest rate and a 23.96% expected volatility rate.

Compensation expense for the TSR portion of the awards is fixed at the date of grant and will not be adjusted in future periods based upon the achievement of the TSR performance goal. Compensation expense for the EBITDA growth and the ROIC portions of the awards is recorded each period based upon a probability assessment of achieving the goals with a final adjustment at the end of the service period based upon the actual achievement of those performance goals.