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, 2018,

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

$17.0

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

1.3

years.

During the years ended

December 31, 2018,

2017

and

2016,

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

	Year Ended December 31,
	2018		2017		2016
	(Dollars in thousands, except per share data)
Cost of revenues	$	3,488	$	3,369	$	2,400
Selling and marketing expenses		792		452		247
General and administrative expenses		5,938		4,939		2,510
Total stock-based compensation expense		10,218		8,760		5,157
Tax effect on stock-based compensation expense		668		604		617
Net effect of stock-based compensation expense	$	9,550	$	8,156	$	4,540

During the

fourth

quarters of

2018,

2017

and

2016,

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

5.3%,

1.1%

and

10.3%,

respectively. This represents an increase of

381.8%,

a decrease of

89.3%,

and an increase of

7%,

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. 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

0.9%

yearly weighted average dividend rate in the year ended

December 31, 2018.

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,
	2018			2017			2016
For stock options issued by the Company:
Risk-free interest rates		2.8	%		1.9	%		1.3	%
Expected lives (in weighted average years)		3.5			3.1			4.5
Dividend yield		0.90	%		0.62	%		1.10	%
Expected volatility (weighted average)		25.5	%		27.2	%		30.7	%
Forfeiture rate (weighted average)		3.1	%		0.0	%		8.4	%

Stock-based awards

The

2012

Incentive Compensation Plan

May 2012,

the Company’s shareholders adopted the

2012

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

2012

Incentive Plan, a total of

4,000,000

shares of the Company’s common stock were 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 typically 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. Restricted stock units granted to directors and members of senior management 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 term of stock-based awards typically ranges from

six

ten

years from the grant date. The shares of common stock issued in respect of awards under the

2012

Incentive Plan are issued from the Company’s authorized share capital upon exercise of options or SARs. The

2012

Incentive Plan expired in

May 2018

upon adoption of the

2018

Incentive Compensation Plan (

“2018

Incentive Plan”), except as to stock-based awards outstanding under the

2012

Incentive Plan on that date.

The

2018

Incentive Compensation Plan

May

2018,

the Company held its

2018

Annual Meeting of Stockholders at which the Company's stockholders approved the

2018

Incentive Plan. The

2018

Incentive Plan provides for the grant of the following types of awards: incentive stock options, restricted stock units (“RSUs”), 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

2018

Incentive Plan, a total of

5,000,000

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

2018

Incentive Plan typically vest and become exercisable as follows:

50%

on the

second

anniversary of the grant date and

25%

on each of the

third

and

fourth

anniversaries of the grant date. SARs and Restricted stock units granted to directors under the

2018

Incentive Plan typically vest and become exercisable (

100%

) on the

first

anniversary of the grant date. The term of stock-based awards typically ranges from

six

ten

years from the grant date. The shares of common stock issued in respect of awards under the

2018

Incentive Plan are issued from the Company’s authorized share capital upon exercise of options or SARs.

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

SARs 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 the 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

May 8, 2018,

the Company granted an aggregate of

295,671

SARs and

40,489

RSUs to the CEO and

one

of the directors under the Company’s

2018

Incentive Plan. The exercise price of each SAR is

$55.16,

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

five

and a half years from the date of grant and will vest according to a vesting schedule as follows: for the director,

100%

after a half year from the grant date and for the CEO,

22%

on the half year and

one

and a half year from the grant date and

28%

on the

two

and a half and

three

and a half year from the grant date.

The fair value of each SAR for the director and the CEO on the grant date was

$14.56

and

$14.57,

respectively. The fair value of each RSU for the director and the CEO on the grant date was

$54.92

and

$54.23,

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	2.84	%
Expected life (in years)	1.9 – 3.5
Dividend yield	0.79	%
Expected volatility	25.24	%
Forfeiture rate	0.0	%
Sub-Optimal Exercise Factor	2.5

June 25, 2018,

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

841,117

SARs and

19,848

RSUs under the Company’s

2018

Incentive Plan. The exercise price of each SAR is

$53.44,

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

six

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

50%

on the

second

anniversary of the grant date and

25%

on each of the

third

and

fourth

anniversaries of the grant date.

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

$13.82

and

$14.64,

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

$52.09,

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	2.79	%
Expected life (in years)	3.5 – 3.7
Dividend yield	0.92	%
Expected volatility	25.64	%
Forfeiture rate for employees	2.78	%
Forfeiture rate for members of the senior management	0.0	%
Sub-Optimal Exercise Factor for employees	2.0
Sub-Optimal Exercise Factor for members of the senior management	2.8

November 7, 2018,

the Company granted its directors and employees an aggregate of

35,395

SARs and

13,688

Restricted Stock Units (“RSUs”) under the Company’s

2018

Incentive Plan. The exercise price of each SAR was

$53.16

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 the employees,

50%

on the

second

anniversary of the grant date and

25%

on each of the

third

and

fourth

anniversaries of the grant date.

The fair value of each SAR for the directors and employees on the grant date was

$14.8

and

$14.0,

respectively. The fair value of each RSU for the directors on the grant date was

$52.6.

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	3.11	%
Expected life (in years)	2.0 – 3.6
Dividend yield	1.03	%
Expected volatility	25.87	%
Forfeiture rate for directors	0.0	%
Forfeiture rate for employees	2.78	%
Sub-Optimal Exercise Factor for directors	2.8
Sub-Optimal Exercise Factor for employees	2.0

	Year Ended December 31,
	2018					2017					2016
	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		1,548		$	41.35		2,565		$	33.36		2,438		$	25.38
Granted, at fair value:
Stock Options		—			—		30			57.97		1,155			43.01
SARs*		1,172			53.87		132			62.55		—			—
RSUs**		74			—		23			—		—			—
Exercised		(203	)		29.75		(1,181	)		25.92		(967	)		25.33
Forfeited		(64	)		45.73		(21	)		46.15		(57	)		24.12
Expired		—			—		—			—		(4	)		26.84
Outstanding at end of year		2,527			46.77		1,548			41.35		2,565			33.36
Options and SARs exercisable at end of year		846			42.06		431			32.61		557			25.22
Weighted-average fair value of options and SARs granted during the year				$	16.45				$	22.82				$	11.61

*	Upon exercise, SARs entitle the recipient to receive shares of common stock 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,

2018,

3,605,740

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

2018

Incentive Plan.

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

2012

and

2004

Incentive Plan as of such date.

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

December

31,

2018

(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

$	-		75		1.8		3,933		-		-		-
	20.13		29		0.3		924		29		0.3		924
	23.34		99		0.4		2,897		99		0.4		2,897
	35.15		15		4.1		257		15		4.1		257
	38.24		15		3.8		211		15		3.8		211
	42.87		942		3.5		8,879		521		3.5		4,918
	47.46		38		4.9		182		38		4.9		182
	53.16		35		5.9		-		-		-		-
	53.44		828		5.5		-		-		-		-
	55.16		296		4.9		-		66		4.9		-
	57.97		30		5.6		-		30		5.6		-
	58.79		16		3.5		-		-		-		-
	63.35		109		4.9		-		33		4.9		-

			2,527		4.3	$	17,283		846		3.3	$	9,389

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 aggregate intrinsic value in the above tables represents the total pretax intrinsic value, based on the Company’s stock price of

$52.30

and

$63.96

as of

December 31, 2018

and

2017,

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, 2018

and

2017

was

846,215

and

431,387,

respectively.

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

December 31, 2018

and

2017

was

$5.2

million and

$38.9

million, respectively, based on the average stock price of

$55.58

and

$58.82

during the years ended

December 31, 2018

and

2017,

respectively.