Stock-Based Compensation

3 Months Ended

Oct. 31, 2011

Stock-Based Compensation

Stock-Based Compensation

Note 2.                   Stock-Based Compensation

The following table shows the income statement components of stock-based compensation expense recognized in the Condensed Consolidated Statements of Income:

	Three Months Ended
	October 31,
	2011			2010
Cost of sales	$	33,000		$	38,000
Operating expenses:
Selling	78,000			115,000
General and administrative	813,000			604,000
Research and development	7,000			8,000
Total operating expenses	898,000			727,000
Stock-based compensation before income taxes	931,000			765,000
Income tax benefits	(331,000		)	(275,000		)
Total stock-based compensation expense, net of tax	$	600,000		$	490,000
Decrease in earnings per common share due to stock-based compensation:
Basic	$	0.03		$	0.03
Diluted	$	0.03		$	0.03

The above stock-based compensation expense before income taxes was recorded in the Condensed Consolidated Financial Statements as stock-based compensation expense and an increase to additional paid-in capital. The related income tax benefits were recorded as an increase to long-term deferred income tax assets (which are netted with long-term deferred income tax liabilities) and a reduction to income tax expense.

All of our stock options and stock awards (which consist only of restricted stock) are subject to graded vesting in which portions of the award vest at different times during the vesting period, as opposed to awards that vest at the end of the vesting period. We recognize compensation expense for awards subject to graded vesting using the straight-line basis over the vesting period, reduced by estimated forfeitures.  At October 31, 2011, total unrecognized stock-based compensation expense before income taxes related to total nonvested stock options and stock awards was $7,605,000 with a remaining weighted average period of 23 months over which such expense is expected to be recognized.

We determine the fair value of each stock award using the closing market price of our Common Stock on the date of grant. Such stock awards are deductible for tax purposes (exclusive of stock awards granted to international employees) and were tax-effected using the Company’s estimated U.S. effective tax rate at the time of grant.

A summary of nonvested stock award activity follows:

			Weighted
	Number of		Average
	Shares		Fair Value
Nonvested stock awards at July 31, 2011	242,595		$	18.03
Granted	227,457		20.57
Canceled	(3,333	)	17.90
Vested	(64,597	)	17.68
Nonvested stock awards at October 31, 2011	402,122		$	19.52

There were no option grants during the three months ended October 31, 2011 and 2010.  The aggregate intrinsic value (i.e., the excess market price over the exercise price) of all options exercised was $447,000 and $52,000 for the three months ended October 31, 2011 and 2010, respectively.

A summary of stock option activity follows:

			Weighted
	Number of		Average
	Shares		Exercise Price
Outstanding at July 31, 2011	686,208		$	14.55
Canceled	(6,666	)	15.58
Exercised	(39,579	)	13.66
Outstanding at October 31, 2011	639,963		$	14.60
Exercisable at July 31, 2011	381,783		$	13.48
Exercisable at October 31, 2011	474,296		$	14.12

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).

If certain criteria are met when options are exercised or restricted stock becomes vested, the Company is allowed a deduction on its United States income tax return. Accordingly, we account for the income tax effect on such income tax deductions as a reduction of deferred income tax assets (which are netted with long-term deferred income tax liabilities) and as a reduction of income taxes payable, with differences between actual tax deductions and the related deferred income tax assets recorded as additional paid-in capital. For the three months ended October 31, 2011 and 2010, such income tax deductions reduced income taxes payable by $703,000 and $107,000, respectively.

We classify the cash flows resulting from excess tax benefits as financing cash flows on our Condensed Consolidated Statements of Cash Flows. Excess tax benefits arise when the ultimate tax effect of the deduction for tax purposes is greater than the tax benefit on stock compensation expense which was determined based upon the award’s fair value.