Stock-Based Compensation

2016 Equity Incentive Plan

On January 7, 2016, we 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 2006 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 through such vesting date. At July 31, 2018, 179,133 unvested restricted stock shares were outstanding under the 2016 plan. No options were outstanding under the 2016 plan. At July 31, 2018, 974,659 shares are collectively available pursuant to restricted stock and other stock awards, stock options and stock appreciation rights.

2006 Equity Incentive Plan

A total of 5,591,000 shares of common stock were granted under the 2006 Plan, 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. 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 through such vesting date. At July 31, 2018, options to purchase 70,000 shares of common stock were outstanding, and 32,973 unvested restricted stock shares were outstanding under the 2006 Plan.

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



	Year Ended July 31,
	2018		2017		2016
Cost of sales	$	663	$	371	$	438
Operating expenses:
Selling	1,458		1,582		929
General and administrative	7,292		6,774		6,881
Research and development	202		117		113
Total operating expenses	8,952		8,473		7,923
Stock-based compensation before income taxes	$	9,615	$	8,844	$	8,361

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 our 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, 2018, total unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock options and restricted stock awards was $12,102 with a remaining weighted average period of 18 months over which such expense is expected to be recognized. The majority of our nonvested awards relate to restricted stock awards. We 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 a Monte Carlo simulation on the date of grant using the following assumptions:



	2018		2017
Volatility of common stock	26.60	%	27.75	%
Average volatility of peer companies	33.72	%	32.98	%
Average correlation coefficient of peer companies	32.26	%	35.35	%
Risk-free interest rate	1.62	%	0.96	%

A summary of nonvested stock award activity for fiscal 2018, 2017 and 2016 follows:



	Number of Time-based Shares		Number of Performance-based Shares		Number of Market-based Shares		Number of Total Shares		Weighted Average Fair Value
August 1, 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
Granted	94,309		17,486		10,465		122,260		$	101.74
Vested⁽¹⁾	(115,943	)	(5,845	)	—		(121,788	)	$	60.25
Forfeited	(6,864	)	(1,800	)	(2,000	)	(10,664	)	$	95.09
July 31, 2018	168,320		26,076		17,710		212,106		$	88.87

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(1)	The aggregate fair value of all nonvested stock awards which vested was approximately $7,338, $9,431 and $5,503 in fiscal 2018, 2017 and 2016, respectively.

There were no options granted during fiscal 2018 and 2017. The fair value of each option grant in fiscal 2016 was estimated on the date of grant using the Black-Scholes option valuation model with the following assumptions:



	2016
Dividend yield	0.22	%
Expected volatility⁽¹⁾	55.90	%
Risk-free interest rate⁽²⁾	1.41	%
Expected lives (in years)⁽³⁾	5.00

________________________________________________


(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 fiscal 2018 follows:



	Number of shares		Weighted Average Exercise Price		Weighted Average Contractual Life Remaining (Years)	Aggregate Intrinsic Value
Outstanding at August 1, 2017	122,500		$	29.36
Granted	—		—
Exercised	(52,500	)	17.04
Outstanding at July 31, 2018	70,000		$	38.60	0.95	$	3,788
Exercisable at July 31, 2018	65,000		$	37.31	0.86	$	3,601

In fiscal 2018, 2017 and 2016, 13,333, 23,333 and 35,834, respectively, options vested, with an aggregate fair value of approximately $226, $349 and $344, respectively. The weighted average fair value of options granted was $26.49 in fiscal 2016. At July 31, 2018, 2017 and 2016, there were 70,000, 122,500 and 122,500, respectively, outstanding options with an aggregate fair value of $3,788, $5,493 and $4,605, respectively. At July 31, 2018 and 2017, all of the outstanding options had vested or were expected to vest in future periods.

We do not currently have a publicly announced stock repurchase program. All of the shares purchased during fiscal 2018 and 2017 represent shares surrendered 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 2018 and 2017, such purchases amounted to 72,058 and 89,607 shares at a total average price per share of $98.16 and $77.12, 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 our 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 our 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. For fiscal 2018, income tax deductions of $4,161 were generated, of which $1,988 were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefit of $2,173 was recorded as a reduction in income tax expense. For fiscal 2017, income tax deductions of $5,592 were generated, of which $3,351 were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefits of $2,241 were recorded as a reduction in income tax expense.