12. Stock-Based Compensation and Stock Awards

Stock Options

On May 13, 2004, the Company’s stockholders approved the 2004 Incentive Plan of Dril-Quip, Inc. (as amended in 2012, the “2004 Plan”), which reserved up to 2,696,294 shares of Common Stock to be used in connection with the 2004 Plan. Persons eligible for awards under the 2004 Plan are employees holding positions of responsibility with the Company or any of its subsidiaries and members of the Board of Directors. Options granted under the 2004 Plan have a term of ten years and become exercisable in cumulative annual increments of one-fourth of the total number of shares of Common Stock subject thereto, beginning on the first anniversary of the date of the grant.

The fair value of stock options granted was estimated on the grant date using the Black-Scholes option pricing model. The expected life was based on the Company’s historical trends, and volatility is based on the historical volatility over the expected life of the options. The risk-free interest rate is based on U.S. Treasury yield curve at the grant date. The Company does not pay dividends and, therefore, there is no assumed dividend yield.

Option activity for the year ended December 31, 2014 was as follows:


	Number of Options			Weighted Average Price		Aggregate intrinsic value (in millions)		Weighted Average Remaining Contractual Life (in years)
Outstanding at December 31, 2013		512,895			56.25
Granted		—			—
Exercised		(48,523	)		58.74
Forfeited		(5,125	)		68.18

Outstanding at December 31,2014		459,247		$	55.86	$	9.6		5.2

Exercisable at December 31,2014		417,123		$	54.59	$	9.2		5.0

The total intrinsic value of stock options exercised in 2014, 2013 and 2012 was $2.0 million, $10.7 million and $7.6 million, respectively. The income tax benefit realized from stock options exercised was $718,000 for the year ended December 31, 2014. There were no anti-dilutive stock option shares on December 31, 2014.

Stock-based compensation is recognized as selling, general and administrative expense in the accompanying Consolidated Statements of Income. During the years ended December 31, 2014, 2013 and 2012, stock-based compensation expense for stock option awards totaled $2.5 million, $3.4 million and $3.8 million, respectively. No stock-based compensation expense was capitalized during 2014, 2013 or 2012.

Options granted to employees vest over four years and the Company recognizes compensation expense on a straight-line basis over the vesting period of the options. At December 31, 2014, there was $1.2 million of total unrecognized compensation expense related to nonvested stock options. This expense is expected to be recognized over a weighted average of 0.8 years.

Restricted Stock Awards

On October 28, 2013 and 2014 pursuant to the 2004 Plan, the Company awarded officers, directors and key employees restricted stock awards (“RSA”), which is an award of common stock subject to time vesting. In May 2012, the Board of Directors amended the 2004 Plan to include non-employee directors as eligible for restricted stock awards. RSAs issued under this plan are restricted as to transference, sale and other disposition. These RSAs vest ratably over a three year period. The RSAs may also vest in case of a change of control. Upon termination, whether voluntary or involuntary, the RSAs that have not vested will be returned to the Company resulting in stock forfeitures. The fair market value of the stock on the date of grant is amortized and charged to selling, general and administrative expense over the stipulated time period over which the RSAs vest on a straight-line basis, net of estimated forfeitures.

The Company’s RSA activity and related information is presented below:


	RSA Number of Shares			Weighted Average Grant Date Fair Value Per Share
Nonvested balance at December 31, 2013		148,753		$	90.75
Granted		86,476			91.02
Vested		(71,925	)		83.92
Forfeited		(3,150	)		99.81

Nonvested balance at December 31, 2014		160,154		$	93.78

Restricted stock awards compensation expense for the year ended December 31, 2014 totaled $6.3 million and $3.9 million for 2013 and $1.7 million for 2012. For 2014, total income tax benefit recognized in net income for restricted stock awards was $2.2 million. As of December 31, 2014, there was $13.7 million of total unrecognized compensation cost related to nonvested RSAs, which is expected to be recognized over a weighted average period of 1.6 years. There were 15,400 anti-dilutive restricted shares on December 31, 2014.

Performance Unit Awards

On October 28, 2014 and 2013, the Company awarded 45,729 and 31,707 performance unit awards (“Performance Units”) pursuant to the 2004 Plan to officers and key employees. The Performance Units were valued based on a Monte Carlo simulation at $126.84 for 2014 grants and $138.31 for the 2013 grants, approximately 139.4% and 118.4%, respectively, of the grant share price. Under the plan, participants may earn from 0% to 200% of their target award based upon the Company’s relative total share return (“TSR”) in comparison to the 15 component companies of the Philadelphia Oil Service Index (“OSX index”). The TSR is calculated over a three year period from October 1, 2013 and 2014 to September 30, 2016 and 2017 and assumes reinvestment of dividends for companies within the index that pay dividends, which Dril-Quip does not. Assumptions used in the Monte Carlo simulation are as follows:


	2013	2014
Grant date	October 28, 2013	October 28, 2014
Performance period	October 1, 2013 to September 30, 2016	October 1, 2014 to September 30, 2017
Volatility	34.4%	27.8%
Risk-free interest rate	0.569%	0.8081%
Grant date price	$116.83	$91.02

The Company’s Performance Unit activity and related information is presented below:


	Number of Performance Units		Weighted Average Grant Date Fair Value Per Performance Unit
Nonvested balance at December 31, 2013		78,057	$	106.45
Granted		45,729		126.84
Vested		—		—
Forfeited		—		—

Nonvested balance at December 31, 2014		123,786	$	113.98

Performance Unit compensation expense for the year ended December 31, 2014 totaled $3.1 million, $1.6 million for 2013 and $0.2 million for 2012. As of December 31, 2014, there was $9.2 million (based on 100% result rate) of total unrecognized compensation expense related to nonvested Performance Units which is to be recognized over a weighted average period of 1.6 years. There were 8,144 anti-dilutive performance share units at December 31, 2014.

Director Stock Compensation Awards

In June 2014, the Board of Directors authorized a stock compensation program for the directors pursuant to the 2004 Plan. Under this program, the Directors may elect to receive all or a portion of their fees in the form of restricted directors stock awards (“DSA”) in an amount equal to 125% of the fees in lieu of cash. The awards are made quarterly on the first business day after the end of each calendar quarter and vest on January 1 on the second year after the grant date.

The Company DSA activity for December 31, 2014 is presented below:


	DSA Number of Shares		Weighted Average Grant Date Fair Value Per Performance Unit
Nonvested balance at December 31, 2013		—	$	—
Granted		1,204		89.40
Vested		—		—
Forfeited		—		—

Nonvested balance at December 31, 2014		1,204	$	89.40

Director stock compensation awards expense for 2014 was $21,600. There was $85,500 of unrecognized compensation expense related to nonvested DSAs, which is expected to be recognized over a weighted average period of one year. There were 303 anti-diluted DSA shares on December 31, 2014.

The following table summarizes information for equity compensation plans in effect as of December 31, 2014:


	Number of securities to be issued upon exercise of outstanding options(1)		Weighted-average exercise price of outstanding options		Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a))
Plan category	(a)		(b)		(c)
Equity compensation plans approved by stockholders
Stock options		459,247	$	55.86		639,327
Equity compensation plans not approved by stockholders		—		not applicable		—

Total		459,247	$	55.86		639,327

(1)	Excludes 161,358 shares of unvested restricted stock awards (including DSAs) and 123,786 of unvested performance units, which were granted pursuant to the 2004 Plan approved by the stockholders.