Stock-Based Compensation

2016 Equity Incentive Plan

On January 7, 2016, the Company terminated the Cantel Medical Corp. 2006 Equity Incentive Plan (the “2006 Plan”) and adopted the Cantel Medical Corp. 2016 Equity Incentive Plan (the “2016 Plan”). As a result, no further options or awards will be granted under the Cantel Medical Corp. 2006 Equity Incentive Plan.

The 2016 Plan provides for the granting of stock options, stock appreciation rights (SARs), restricted stock awards, restricted stock units (RSUs) and performance-based awards to our employees, independent contractors and consultants. It also provides the flexibility to grant equity-based awards to our non-employee directors. The 2016 Plan does not permit the granting of discounted options or discounted stock appreciation rights.

The maximum number of shares as to which equity awards may be granted under the 2016 Plan is 1,200,000 shares. The 2016 Plan will terminate on the date of our annual meeting of stockholders following the close of our fiscal year ending in 2025, unless terminated earlier by the Board of Directors. Stock awards under this plan:


•	will be granted at the closing market price at the time of the grant,


•	will include terms which may not exceed ten years, subject to certain exceptions set forth in the Plan, and


•	may be granted in the form of Restricted Stock and Restricted Stock Units, Performance Awards, or Dividends.

Stock awards outstanding under this plan are subject to risk of forfeiture solely due to an employment length-of-service restriction, with such restriction lapsing as to one-third of the shares of each of the first three anniversaries of the grant date subject to being employed by the Company through such vesting date. At July 31, 2017, 113,926 unvested restricted stock shares were outstanding under the 2016 plan. No options were outstanding under the 2016 plan. At July 31, 2017, 1,086,911 shares are collectively available pursuant to restricted stock and other stock awards and stock options and stock appreciation rights.

2006 Equity Incentive Plan

A total of 5,591,000 shares of common stock, of which 2,700,000 shares were authorized for issuance pursuant to stock options and stock appreciation rights and 2,891,000 shares were authorized for issuance pursuant to restricted stock and other stock awards under the 2006 Plan, which was terminated on January 7, 2016 in conjunction with the adoption of the 2016 Plan.

Restricted stock shares outstanding under this plan are subject to risk of forfeiture solely due to an employment length-of-service restriction, with such restriction lapsing as to one-third of the shares on each of the first three anniversaries of the grant date subject to being employed by the Company through such vesting date. At July 31, 2017, options to purchase 122,500 shares of common stock were outstanding, and 108,372 unvested restricted stock shares were outstanding under the 2006 Plan. No additional awards will be granted under this plan.

The following table shows the income statement components of stock-based compensation expense recognized in the consolidated statements of income:



	Year Ended July 31,
	2017		2016		2015
Cost of sales	$	371	$	438	$	270
Operating expenses:
Selling	1,582		929		608
General and administrative	6,774		6,881		4,897
Research and development	117		113		92
Total operating expenses	8,473		7,923		5,597
Stock-based compensation before income taxes	$	8,844	$	8,361	$	5,867

Our stock options and time-based stock awards are subject to graded vesting in which portions of the awards vest at different times during the vesting period. We recognize compensation expense for awards subject to graded vesting using the straight-line basis over the vesting period.

In October 2016, we granted for the first time to certain employees both equity awards with performance conditions and equity awards with market conditions. The actual number of equity awards earned and eligible to vest will be determined based on the level of achievement against budgeted revenue and a defined gross profit percentage, with respect to the awards with performance conditions, and the Company’s 3-year relative total stockholder return performance as measured against the S&P Healthcare Equipment Index, with respect to the awards with market conditions. The maximum share attainment of these awards are 200% of the initial granted shares. We recognize compensation expense for the awards with performance conditions using the accelerated attribution method over the requisite service period for each separately vesting portion of the award when it is probable that the performance condition will be achieved. We record expense for the awards that are subject to market conditions ratably over the vesting period regardless of whether the market condition is satisfied.

At July 31, 2017, total unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock options and restricted stock awards was $9,741 with a remaining weighted average period of 17 months over which such expense is expected to be recognized. The majority of our nonvested awards relate to restricted stock awards. As a result of the adoption of ASU 2016-09 on August 1, 2016, we have elected to account for forfeitures as they occur, rather than estimate expected forfeitures over the vesting period.

We determine the fair value of each time-based stock award and performance-based stock award by using the closing market price of our common stock on the date of grant. We determine the fair value of each stock award with market conditions using the Monte Carlo simulation on the date of grant using the following assumptions:



	Year Ended
	July 31, 2017
Volatility of common stock	27.75	%
Average volatility of peer companies	32.98	%
Average correlation coefficient of peer companies	35.35	%
Risk-free interest rate	0.96	%

A summary of nonvested stock award activity for the year ended July 31, 2017 follows:



	Number of Time-based Shares		Number of Performance-based Shares		Number of Market-based Shares		Number of Total Shares		Weighted Average Fair Value
July 31, 2014	525,842		—		—		525,842		$	22.25
Granted	144,278		—		—		144,278		$	39.77
Vested⁽¹⁾	(313,797	)	—		—		(313,797	)	$	18.62
Forfeited	(12,804	)	—		—		(12,804	)	$	26.20
July 31, 2015	343,519		—		—		343,519		$	32.77
Granted	175,700		—		—		175,700		$	55.40
Vested⁽¹⁾	(183,045	)	—		—		(183,045	)	$	30.06
Forfeited	(4,807	)	—		—		(4,807	)	$	45.06
July 31, 2016	331,367		—		—		331,367		$	46.09
Granted	86,305		16,960		9,800		113,065		$	81.77
Vested⁽¹⁾	(214,932	)	(725	)	(555	)	(216,212	)	$	43.62
Forfeited	(5,922	)	—		—		(5,922	)	$	59.40
July 31, 2017	196,818		16,235		9,245		222,298		$	66.28

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(1)	The aggregate fair value of all nonvested stock awards which vested was approximately $9,431, $5,503 and $5,844 in fiscal 2017, 2016 and 2015, respectively.

There were no options granted during the fiscal year ended July 31, 2017. The fair value of each option grant in the prior years was estimated on the date of grant using the Black-Scholes option valuation model with the following assumptions:



	Year Ended		Year Ended
	July 31, 2016		July 31, 2015
Dividend yield	0.22	%	0.25	%
Expected volatility⁽¹⁾	55.90	%	33.90	%
Risk-free interest rate⁽²⁾	1.41	%	1.55	%
Expected lives (in years)⁽³⁾	5.00		5.00

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(1)	Volatility was based on historical closing prices of our common stock.


(2)	The U.S. Treasury rate based on the expected life at the date of grant.


(3)	Based on historical exercise behavior.

A summary of stock option activity for the year ended July 31, 2017 follows:



	Number of shares	Weighted Average Exercise Price		Weighted Average Contractual Life Remaining (Years)	Aggregate Intrinsic Value
Outstanding at July 31, 2016	122,500	$	29.36
Granted	—	—
Exercised	—	—
Outstanding at July 31, 2017	122,500	$	29.36	1.27	$	5,493
Exercisable at July 31, 2017	104,167	$	26.28	1.02	$	4,992

In fiscal 2017, 2016 and 2015, 23,333, 35,834 and 27,500, respectively, options vested, with an aggregate fair value of approximately $349, $344 and $248, respectively. There were no option grants and no options were exercised during fiscal 2017. The weighted average fair value of options granted was $26.49 and $11.54 in fiscal 2016 and 2015, respectively. At July 31, 2017, 2016 and 2015, there were 122,500, 122,500 and 107,500, respectively, outstanding options with an aggregate fair value of $5,493, $4,605 and $3,133, respectively. As of July 31, 2017 and 2016, all of the outstanding options had vested or were expected to vest in future periods.

The Company does not currently have a publicly announced stock repurchase program. All of the shares purchased during fiscal 2017 and 2016 represent shares surrendered to the Company relating to cashless exercises of stock options and to pay employee withholding taxes due upon the vesting of restricted stock or the exercise of stock options. In fiscal 2017 and 2016, such purchases amounted to 89,607 and 67,038 shares at a total average price per share of $77.12 and $55.68, respectively.

Upon exercise of stock options or grant of stock awards, we typically issue new shares of our common stock as opposed to using treasury shares. Additionally, all options were considered to be deductible for tax purposes in the valuation model. Such non-qualified options were tax-effected using the Company’s estimated U.S. effective tax rate at the time of grant. All of our stock options and restricted stock awards are expected to be deductible for tax purposes, except for certain stock awards granted to employees residing outside of the United States, and were tax-effected using the Company’s estimated U.S. effective tax rate at the time of grant.

Excess tax benefits arise when the ultimate tax effect of the deduction for tax purposes is greater than the income tax benefit on stock-based compensation described above. Prior to the adoption of ASU 2016-09 on August 1, 2016, the differences noted above between actual tax deductions and the previously recorded deferred income tax assets were recorded as additional paid-in capital. For the year ended July 31, 2016, income tax deductions of $3,059 were generated, of which $1,880 were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefits of $1,179 were recorded as an increase to additional paid-in capital. As a result of the adoption of ASU 2016-09, we no longer record excess tax benefits as an adjustment to additional paid-in capital, but record such excess tax benefits prospectively as a reduction of income tax expense. For the year ended July 31, 2017, income tax deductions of $5,592 were generated, of which $3,351 were previously recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefit of $2,241 was recorded as a reduction in income tax expense.