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Stock Based Compensation | 12 Months Ended
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Dec. 31, 2017
Stock Based Compensation |
9. | Stock Based Compensation
The Company adopted the A. O. Smith Combined Incentive Compensation Plan (the “Plan”) effective January 1, 2007. The Plan was reapproved by stockholders on April 16, 2012. The Plan is a continuation of the A. O. Smith Combined Executive Incentive Compensation Plan which was originally approved by shareholders in 2002. The number of shares available for granting of options or share units at December 31, 2017, was 2,885,001. Upon stock option exercise or share unit vesting, shares are issued from treasury stock. Total stock based compensation expense recognized in 2017, 2016 and 2015 was $9.9 million, $9.4 million and $8.8 million, respectively. Stock options The stock options granted in 2017, 2016 and 2015 have three year pro rata vesting from the dates of grant. Stock options are issued at exercise prices equal to the fair value of Common Stock on the date of grant. For active employees, all options granted in 2017, 2016 and 2015 expire ten years after date of grant. Stock option compensation expense recognized in 2017, 2016 and 2015 was $4.7 million, $4.5 million and $4.0 million, respectively. Included in the stock option expense recognized in 2017, 2016 and 2015 is expense associated with the accelerated vesting of stock option awards for certain employees who either are retirement eligible or become retirement eligible during the vesting period. Changes in option shares, all of which are Common Stock, were as follows:
|  | Weighted-Avg. Per Share Exercise Price |  |  | Years Ended December 31 |  |  | (dollars in millions) Aggregate Intrinsic Value |
|  |  | 2017 |  |  | 2016 |  |  | 2015 |  |
Outstanding at beginning of year |  | $ | 21.69 |  |  |  | 2,664,333 |  |  |  | 2,653,558 |  |  |  | 3,154,006 |  |  |  |  |
Granted |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
2017—$50.16 to $50.16 per share |  |  |  |  |  |  | 358,150 |  |  |  |  |  |  |  |  |  |  |  |  |
2016—$31.49 to $46.93 per share |  |  |  |  |  |  |  |  |  |  | 553,370 |  |  |  |  |  |  |  |  |
2015—$23.24 to $25.34 per share |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 484,990 |  |  |  |  |
Exercised |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
2017—$4.75 to $31.67 per share |  |  |  |  |  |  | (752,603 | ) |  |  |  |  |  |  |  |  |  | $ | 12.7 |
2016—$4.75 to $30.77 per share |  |  |  |  |  |  |  |  |  |  | (531,933 | ) |  |  |  |  |  |  | 7.5 |
2015—$4.10 to $17.46 per share |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (978,208 | ) |  |  | 10.2 |
Forfeited |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
2017—$30.77 to $50.16 per share |  |  |  |  |  |  | (6,754 | ) |  |  |  |  |  |  |  |  |  |  |  |
2016—$23.24 to $46.93 per share |  |  |  |  |  |  |  |  |  |  | (10,662 | ) |  |  |  |  |  |  |  |
2015—$17.46 to $23.24 per share |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (7,230 | ) |  |  |  |
Outstanding at end of year |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(2017—$4.75 to $50.16 per share) |  |  | 27.73 |  |  |  | 2,263,126 |  |  |  | 2,664,333 |  |  |  | 2,653,558 |  |  |  |  |
Exercisable at end of year |  |  | 20.48 |  |  |  | 1,387,259 |  |  |  | 1,602,651 |  |  |  | 1,544,186 |  |  |  |  |
The aggregate intrinsic value for the outstanding and exercisable options as of December 31, 2017 is $75.9 million and $56.6 million, respectively. The average remaining contractual life for outstanding and exercisable options is seven years and six years, respectively. The following table summarizes weighted-average information by range of exercise prices for stock options outstanding and exercisable at December 31, 2017:
Range of Exercise Prices |  | Options Outstanding at December 31, 2017 |  |  | Weighted- Average Exercise Price |  |  | Options Exercisable at December 31, 2017 |  |  | Weighted- Average Exercise Price |  |  | Weighted- Average Remaining Contractual Life |
$4.75 to $11.50 |  |  | 414,134 |  |  | $ | 9.56 |  |  |  | 414,134 |  |  | $ | 9.56 |  |  |  | 4 years |
$17.46 to $25.34 |  |  | 556,847 |  |  |  | 20.58 |  |  |  | 556,847 |  |  |  | 20.58 |  |  |  | 7 years |
$26.47 to $50.16 |  |  | 1,292,145 |  |  |  | 36.63 |  |  |  | 416,278 |  |  |  | 31.20 |  |  |  | 8 years |
|  |  | 2,263,126 |  |  |  |  |  |  |  | 1,387,259 |  |  |  |  |  |  |  |  |
The weighted-average fair value per option at the date of grant during 2017, 2016 and 2015, using the Black-Scholes option-pricing model, was $13.04, $8.03 and $8.59, respectively. Assumptions were as follows:
|  | 2017 |  |  | 2016 |  |  | 2015 |
Expected life (years) |  |  | 5.7 |  |  |  | 5.8 |  |  |  | 5.9 |
Risk-free interest rate |  |  | 2.4 | % |  |  | 1.7 | % |  |  | 2.0 | %
Dividend yield |  |  | 1.0 | % |  |  | 1.3 | % |  |  | 1.0 | %
Expected volatility |  |  | 26.5 | % |  |  | 27.7 | % |  |  | 29.3 | %
The expected life of options for purposes of these models is based on historical exercise behaviors. The risk free interest rates for purposes of these models are based on the U.S. Treasury yield curve in effect on the date of grant for the respective expected lives of the option. The expected dividend yields for purposes of these models are based on the dividends paid in the preceding four quarters divided by the grant date market value of the Common Stock. The expected volatility for purposes of these models is based on the historical volatility of the Common Stock. Stock Appreciations Rights (SARs) Certain non-U.S.-based employees were granted SARs. Each SAR award grants the employee the right to receive cash equal to the excess of the share price of the Company’s Common Stock on the date that a participant exercises such right over the grant date value of the SAR. SARs granted have three year pro rata vesting from the date of grant. SARs were issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant and expire ten years from the date of grant. The fair value and compensation expense for SARs are remeasured at each reporting period using the Black-Scholes option-pricing model, using assumptions similar to stock option awards. No SARs were granted in 2017 or 2016. As of December 31, 2017, there were 23,660 SARs outstanding and 15,774 were exercisable. In 2016, there were 24,940 SARs outstanding and 8,320 were exercisable. In 2015, the Company granted 26,230 SARs and no SARs were exercisable. Stock based compensation expense attributable to SARS was not material in 2017, 2016 and 2015. Restricted stock and share units Participants may also be awarded shares of restricted stock or share units under the Plan. The Company granted 107,853, 160,465 and 152,192 share units under the plan in 2017, 2016 and 2015, respectively. The share units were valued at $5.4 million, $5.2 million and $4.7 million at the date of issuance in 2017, 2016 and 2015, respectively, and will be recognized as compensation expense ratably over the three-year vesting period; however, included in share based compensation is expense associated with the accelerated vesting of share unit awards for certain employees who either are retirement eligible or become retirement eligible during the vesting period. Compensation expense of $5.2 million, $4.9 million and $4.8 million was recognized in 2017, 2016 and 2015, respectively. Certain non-U.S.-based employees receive the cash value of vested shares at the vesting date in lieu of shares. A summary of share unit activity under the plan is as follows:
|  | Number of Units |  |  | Weighted-Average Grant Date Value |
Outstanding at January 1, 2017 |  |  | 544,055 |  |  | $ | 27.35 |
Granted |  |  | 107,853 |  |  |  | 50.17 |
Vested |  |  | (213,863 | ) |  |  | 23.25 |
Forfeited/cancelled |  |  | (4,755 | ) |  |  | 34.25 |
Outstanding at December 31, 2017 |  |  | 433,290 |  |  |  | 34.96 |
Total compensation expense for share units not yet recognized is $2.2 million at December 31, 2017. The weighted average period over which the expense is expected to be recognized is 11 months.

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- Definition The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -URI http://asc.fasb.org/topic&trid=2228938 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 50 -URI http://asc.fasb.org/subtopic&trid=2208855 + Details
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