NOTE

— STOCK-BASED COMPENSATION

The Company makes an estimate of expected forfeitures and recognizes compensation costs only for those stock-based awards expected to vest. As of

December 31, 2017,

the total future compensation cost related to unvested stock-based awards that are expected to vest is $

7.7

million, which will be recognized over a weighted average period of

1.2

years.

During the years ended

December 31, 2017,

2016

and

2015,

the Company recorded compensation related to stock-based awards as follows

	Year Ended December 31,
	2017		2016		2015
	(Dollars in thousands, except per share data)
Cost of revenues	$	3,369	$	2,400	$	1,753
Selling and marketing expenses		452		247		123
General and administrative expenses		4,939		2,510		2,079
Total stock-based compensation expense		8,760		5,157		3,955
Tax effect on stock-based compensation expense		604		617		440
Net effect of stock-based compensation expense	$	8,156	$	4,540	$	3,515

During the

fourth

quarters of

2017,

2016

and

2015,

the Company evaluated the trends in the stock-based award forfeiture rate and determined that the actual rates are

1.1%,

10.3%

and

9.66%,

respectively. This represents a decrease of

89.3%,

and an increase of

and

20%,

respectively, from prior estimates. As a result of the change in the estimated forfeiture rate, there was an immaterial impact on stock-based compensation expense for each of the respective periods.

Valuation assumptions

Prior to

2016,

the fair value of each grant of stock-based awards was estimated using the Black-Scholes valuation model and the assumptions noted in the following table. The Company

’s expected term represented the period that the Company’s stock-based awards were expected to be outstanding. In the absence of enough historical information, the expected term was determined using the simplified method giving consideration to the contractual term and vesting schedule. Starting in

2016,

the Company estimated the fair value of the stock-based awards using the Exercise Multiple-Based Lattice Model as it enables a degree of accounting for the complexities of option valuation and reduces the probability of a measurement error. The dividend yield forecast is expected to be

20%

of the Company’s yearly net profit, which is equivalent to a

0.6%

yearly weighted average dividend rate in the year ended

December 31, 2017.

The risk-free interest rate was based on the yield from U.S. constant treasury maturities bonds with an equivalent term. The forfeiture rate is based on trends in actual stock-based awards forfeitures.

The Company calculated the fair value of each stock-based award on the date of grant based on the following assumptions

	Year Ended December 31,
	2017			2016			2015
For stock options issued by the Company:
Risk-free interest rates		1.9	%		1.3	%		1.4	%
Expected lives (in weighted average years)		3.1			4.5			4.0
Dividend yield		0.62	%		1.10	%		0.70	%
Expected volatility (weighted average)		27.2	%		30.7	%		29.2	%
Forfeiture rate (weighted average)		0.0	%		8.4	%		0.0	%

Stock-based awards

The

2004

Incentive Compensation Plan

2004,

the Company

’s Board of Directors adopted the

2004

Incentive Compensation Plan (

“2004

Incentive Plan”), which provides for the grant of the following types of awards: incentive stock options, non-qualified stock options, restricted stock, stock appreciation rights (“SARs”), stock units, performance awards, phantom stock, incentive bonuses, and other possible related dividend equivalents to employees of the Company, directors and independent contractors. Under the

2004

Incentive Plan, a total of

3,750,000

shares of the Company’s common stock have been reserved for issuance, all of which could be issued as options or as other forms of awards. Options and SARs granted to employees under the

2004

Incentive Plan cliff vest and are exercisable from the grant date as follows:

25%

after

months,

25%

after

months, and the remaining

50%

after

months. Options granted to non-employee directors under the

2004

Incentive Plan cliff vest and are exercisable

one

year after the grant date. Vested shares

may

be exercised for up to

ten

years from the date of grant. The shares of common stock will be issued upon exercise of options or SARs from the Company’s authorized share capital. The

2004

Incentive Plan expired in

May 2012

upon adoption of the

2012

Incentive Plan, except as to share based awards outstanding on that date.

The

2012

Incentive Compensation Plan

May 2012,

the Company

’s shareholders adopted the

2012

Incentive Compensation Plan (

“2012

Incentive Plan”), which provides for the grant of the following types of awards: incentive stock options, non-qualified stock options, restricted stock, SARs, stock units, performance awards, phantom stock, incentive bonuses, and other possible related dividend equivalents to employees of the Company, directors and independent contractors. Under the

2012

Incentive Plan, a total of

4,000,000

shares of the Company’s common stock have been reserved for issuance, all of which could be issued as options or as other forms of awards. Options and SARs granted to employees under the

2012

Incentive Plan will vest and become exercisable as follows:

25%

vest

months after the grant date, an additional

25%

vest

months after the grant date, and the remaining

50%

vest

months after the grant date. Options granted to non-employee directors under the

2012

Incentive Plan will vest and become exercisable

one

year after the grant date. Vested stock-based awards

may

be exercised for up to

ten

years from the date of grant. The shares of common stock will be issued upon exercise of options or SARs from the Company’s authorized share capital.

The

2012

Incentive Plan empowers our Board of Directors, in its discretion, to amend the

2012

Incentive Plan in certain respects. Consistent with its authority to amend the Incentive Plan, in

February 2014

the Board adopted and approved certain amendments to the

2012

Incentive Plan. The key amendments are as follows:

Increase of per grant limit: Section

(a) of the

2012

Incentive Plan was amended to allow the grant of up to

400,000

shares of our common stock with respect to the initial grant of an equity award to newly hired executive officers in any calendar year. This amendment was adopted by our stockholders on

May 31, 2014;

and

Acceleration of vesting: Section

(l) of the

2012

Incentive Plan was amended to clarify our ability to provide in the applicable award agreement that part and/or all of the award will be accelerated upon the occurrence of certain pre-determined events and/or conditions, such as a "change in control" (as defined in the

2012

Incentive Plan, as amended).

February 11, 2014,

the Company granted its Chief Financial Officer options to purchase

32,500

shares of common stock under the

2012

Incentive Plan. The exercise price of each option is

$24.57,

which represented the fair market value of the Company

’s common stock on the grant date. Such options will expire

five

years from the date of grant and will vest in equal annual installments over a period of

three

years from the grant date, subject to acceleration upon a change of control.

The fair value of each stock option on the grant date was

$5.78.

The Company calculated the fair value of each stock option on the date of grant using the Black-Scholes valuation model based on the following assumptions:

Risk-free interest rates	0.81	%
Expected life (in years)	3.375
Dividend yield	0.80	%
Expected volatility	33.50	%
Forfeiture rate	0.00	%

April 2, 2014,

the Company granted its newly appointed Chief Executive Officer options to purchase up to an aggregate of

400,000

shares of common stock under the

2012

Incentive Plan. The exercise price of each option is

$29.52

per share, which represented the fair market value of the Company

’s common stock on the date of the grant. Options to purchase

300,000

shares of common stock will expire

six

years following the date of grant and will vest in equal annual installments over

four

years from the grant date, subject to acceleration in the event of a change of control. The remaining options to purchase

100,000

shares of common stock will vest on

March 31, 2021,

subject to acceleration associated with a change of control, and will expire

seven

and a half years from the date of grant.

The fair value of each option on the grant date was

$12.88

for grant of options to purchase

300,000

shares of common stock, and

$8.33

for the grant of options to purchase

100,000

shares of common stock. The Company calculated the fair value of each stock option on the date of grant using the Black-Scholes valuation model based on the following assumptions:

	Grant of options to purchase 100,000 shares of common stock			Grant of options to purchase 300,000 shares of common stock
Risk-free interest rates		2.36	%		1.64	%
Expected life (in years)		7.25			4.75
Dividend yield		0.90	%		0.90	%
Expected volatility		42.80	%		33.10	%

November 5, 2014,

the Company granted its directors options to purchase

52,500

shares of common stock under the

2012

Incentive Plan. The exercise price of each option is

$28.23,

which represented the fair market value of the Company

’s common stock on the grant date. Such options will expire

seven

years from the date of grant and will fully vest

one

year from the grant date.

The fair value of each stock option on the grant date was

$7.01.

The Company calculated the fair value of each stock option on the date of grant using the Black-Scholes valuation model based on the following assumptions:

Risk-free interest rates	1.30	%
Expected life (in years)	4.0
Dividend yield	0.70	%
Expected volatility	32.40	%
Forfeiture rate	0.00	%

November 3, 2015,

the Company granted its directors options to purchase

45,000

shares of common stock under the

2012

Incentive Plan. The exercise price of each option is

$38.24,

which represented the fair market value of the Company

’s common stock on the grant date. Such options will expire

seven

years from the date of grant and will fully vest

one

year from the grant date.

The fair value of each stock option on the grant date was

$8.68.

The Company calculated the fair value of each stock option on the date of grant using the Black-Scholes valuation model based on the following assumptions:

Risk-free interest rates	1.35	%
Expected life (in years)	4.0
Dividend yield	0.70	%
Expected volatility	29.20	%
Forfeiture rate	0.00	%

June 13, 2016,

the Company granted its employees, an aggregate of

1,080,000

SARs under the Company

’s

2012

Incentive Plan. The exercise price of each SAR is

$42.87,

which represented the fair market value of the Company’s common stock on the grant date. Such SARs will expire

six

years from the date of the grant and will vest over

years as follows:

50%

after

two

years; an additional

25%

after

three

years and the remaining

25%

after

four

years from the grant date.

The fair value of each SAR on the grant date was

$11.98

for senior management and

$11.42

for other employees. The Company calculated the fair value of each SAR on the grant date using the Exercise Multiple-Based Lattice SAR-Pricing model based on the following assumptions:

Risk-free interest rate	1.29	%
Expected life (in years)	6
Dividend yield	1.14	%
Expected volatility	30.7	%
Forfeiture rate:
Senior management	0.0	%
Other employees	10.5	%
Sub-Optimal Exercise Factor:
Senior management	2.5
Other employees	2.0

November 8, 2016,

the Company granted its directors, an aggregate of

60,000

SAR

s under the Company’s

2012

Incentive Plan. The exercise price of each SAR is

$47.46,

which represented the fair market value of the Company’s common stock on the grant date. Such SARs will expire

seven

years from the date of the grant and will vest at the end of the

first

year from the grant date.

The fair value of each SAR on the grant date was

$14.51.

The Company calculated the fair value of each SAR on the grant date using the Exercise Multiple-Based Lattice SAR-Pricing model based on the following assumptions:

Risk-free interest rate	1.65	%
Expected life (in years)	7
Dividend yield	1.1	%
Expected volatility	30.6	%
Forfeiture rate	0.0	%
Sub-Optimal Exercise Factor	2.5

June 7, 2017,

the Company granted its employees, an aggregate of

23,200

SAR

’s under the Company’s

2012

Incentive Plan. The exercise price of each SAR is

$58.79,

which represented the fair market value of the Company’s common stock on the grant date. Such SARs will expire

five

years from the date of the grant. Such SARs will vest according to a vesting schedule as follows:

50%

on the

first

anniversary of the grant date and

25%

on each of the

third

and

fourth

anniversaries of t

he grant date.

The fair value of each SAR on the grant date was

$13.67.

The Company calculated the fair value of each SAR on the grant date using the Exercise Multiple-Based Lattice SAR-Pricing model based on the following assumptions:

Risk-free interest rate	1.74	%
Expected life (in years)	5
Dividend yield	0.66	%
Expected volatility	26.3	%
Forfeiture rate	10.3	%
Sub-Optimal Exercise Factor	2

August 4, 2017,

the Company granted its directors, an aggregate of

30,000

options under the Company

’s

2012

Incentive Plan. The exercise price of each option is

$57.97,

which represented the fair market value of the Company’s common stock on the grant date. Such options will expire

seven

years from the date of the grant and will fully vest

one

year from the grant date.

The fair value of each option on the grant date was

$18.42.

The Company calculated the fair value of each option on the grant date using the Exercise Multiple-Based Lattice SAR-Pricing model based on the following assumptions:

Risk-free interest rate	2.08	%
Expected life (in years)	7
Dividend yield	0.69	%
Expected volatility	29.4	%
Forfeiture rate	0.0	%
Sub-Optimal Exercise Factor	2.5

November 8, 2017,

the Company granted its directors and members of its senior management an aggregate of

108,771

SARs and

22,742

Restricted Stock Units (“RSUs”) under the Company

’s

2012

Incentive Plan. The exercise price of each SAR is

$63.35,

which represented the fair market value of the Company’s common stock on the grant date. Such SARs and RSUs will expire in

six

years and will vest according to a vesting schedule as follows: for the directors,

100%

on the

first

anniversary of

the grant date and for members of senior management,

25%

on each of the first, second,

third

and

fourth

anniversaries of the grant date.

The fair value of each SAR for the directors and members of senior management on the grant date was

$17.6

and

$17.7,

respectively. The fair value of each RSU for the directors and members of senior management on the grant date was

$62.9

and

$62.3,

respectively. The Company calculated the fair value of each SAR and RSU on the grant date using the Exercise Multiple-Based Lattice Pricing model based on the following assumptions:

Risk-free interest rate	2.1	%
Expected life (in years)	6
Dividend yield	0.6	%
Expected volatility	26.9	%
Forfeiture rate	0.0	%
Sub-Optimal Exercise Factor	2.5

	Year Ended December 31,
	2017					2016					2015
	Shares (In thousands)			Weighted Average Exercise Price		Shares (In thousands)			Weighted Average Exercise Price		Shares (In thousands)			Weighted Average Exercise Price
Outstanding at beginning of year		2,565		$	33.36		2,438		$	25.38		4,477		$	27.48
Granted, at fair value:
Stock Options		30			57.97		1,155			43.01		45			38.24
SARs*		132			62.55		—			—		—			—
RSUs**		23			—
Exercised		(1,181	)		25.92		(967	)		25.33		(1,589	)		26.77
Forfeited		(21	)		46.15		(57	)		24.12		(125	)		27.33
Expired		—			—		(4	)		26.84		(370	)		45.78
Outstanding at end of year		1,548			41.35		2,565			33.36		2,438			25.38
Options and SARs exercisable at end of year		431			32.61		557			25.22		858			26.75
Weighted-average fair value of options and SARs granted during the year				$	22.82				$	11.61				$	8.68

__________

*	Upon exercise, SARs entitle the recipient to receive shares of common stock with a value equal to the increase in value of the award between the grant date and the exercise date.

**	An RSU represents the right to receive one share of common stock once certain vesting conditions are met. The value of an RSU is identical to the value of the underlying stock.

As of

December

31,

2017,

894,437

shares of the Company’s common stock are available for future grants under the

2012

Incentive Plan.

shares of the Company’s common stock are available for future grants under the

2004

Incentive Plan as of such date.

The following table summarizes information about stock-based awards outstanding at

December

31,

2017

(shares in thousands):

		Options Outstanding						Options Exercisable
Exercise Price		Number of Stock-based Awards Outstanding		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value		Number of Stock-based Awards Exercisable		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value

$	-		23		3.9		1,455		-		-		-
	20.13		35		1.3		1,533		35		1.3		1,533
	23.34		176		1.4		7,150		176		1.4		7,150
	25.65		10		0.3		398		10		0.3		398
	35.15		15		5.1		432		15		5.1		432
	38.24		15		4.8		386		15		4.8		386
	42.87		1,074		4.5		22,651		143		4.5		3,005
	47.46		38		5.9		619		38		5.9		619
	57.97		30		6.6		180		-		-		-
	58.79		23		4.5		120		-		-		-
	63.35		109		5.9		66		-		-		-

			1,548		4.2	$	34,990		432		3.0	$	13,523

The following table summarizes information about stock-based awards outstanding at

December

31,

2016

(shares in thousands):

		Options Outstanding						Options Exercisable
Exercise Price		Number of Stock-based Awards Outstanding		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value		Number of Stock-based Awards Exercisable		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value

$	18.56		15		2.8		526		15		2.8		526
	19.69		15		2.6		509		15		2.6		509
	20.13		108		2.3		3,608		108		2.3		3,608
	20.54		53		2.3		1,761		28		2.3		934
	23.34		635		2.4		19,226		140		2.4		4,247
	24.57		9		2.1		269		1		2.1		33
	25.65		68		1.3		1,905		68		1.3		1,905
	26.70		15		3.8		404		15		3.8		404
	28.23		30		4.8		762		30		4.8		762
	29.52		400		3.6		9,640		75		3.6		1,807
	29.95		17		0.3		400		17		0.3		400
	35.15		15		6.1		277		-		-		-
	38.24		45		5.8		692		45		5.8		692
	42.87		1,080		5.5		11,610		-		-		-
	47.46		60		6.9		370		-		-		-


			2,565		4.1	$	51,959		557		2.7	$	15,827

The aggregate intrinsic value in the above tables represents the total pretax intrinsic value, based on the Company

’s stock price of

$63.96

and

$53.62

as of

December 31, 2017

and

2016,

respectively, which would have potentially been received by the stock-based award holders had all stock-based award holders exercised their stock-based award as of those dates. The total number of in-the-money stock-based awards exercisable as of

December 31, 2017

and

2016

was

431,387

and

557,350,

respectively.

The total pretax intrinsic value of options exercised during the year ended

December 31, 2017

and

2016

was

$38.9

million and

million, respectively, based on the average stock price of

$58.82

and

$43.99

during the years ended

December 31, 2017

and

2016,

respectively.