Stock-Based Compensation

9 Months Ended

Apr. 30, 2013

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						Nine Months Ended
	April 30,						April 30,
	2013			2012			2013			2012
Cost of sales	$	41,000		$	51,000		$	133,000		$	141,000
Operating expenses:
Selling	69,000			109,000			250,000			300,000
General and administrative	802,000			533,000			2,396,000			2,545,000
Research and development	7,000			13,000			27,000			33,000
Total operating expenses	878,000			655,000			2,673,000			2,878,000
Stock-based compensation before income taxes	919,000			706,000			2,806,000			3,019,000
Income tax benefits	(332,000		)	(247,000		)	(1,008,000		)	(1,073,000		)
Total stock-based compensation expense, net of tax	$	587,000		$	459,000		$	1,798,000		$	1,946,000
Decrease in earnings per common share due to stock-based compensation:
Basic	$	0.02		$	0.02		$	0.07		$	0.07
Diluted	$	0.02		$	0.02		$	0.07		$	0.07

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 shares) are expected to be deductible for tax purposes and were tax-effected using the Company’s estimated U.S. effective tax rate at the time of grant, except for certain options and restricted shares granted to employees residing outside of the United States.

All of our stock options and stock awards 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 April 30, 2013, total unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock options and stock awards was $5,371,000 with a remaining weighted average period of 19 months over which such expense is expected to be recognized. The majority of our nonvested awards relate to stock awards.

We determine the fair value of each stock award using the closing market price of our common stock on the date of grant.

A summary of nonvested stock award activity follows:

	Number of Shares		Weighted Average Fair Value
Nonvested stock awards at July 31, 2012	472,005		$	13.73
Granted	132,692		25.60
Canceled	(8,830	)	17.23
Vested	(181,435	)	13.06
Nonvested stock awards at April 30, 2013	414,432		$	17.75

For the nine months ended April 30, 2013, 35,000 options were granted in October 2012.  There were no option grants during the three and nine months ended April 30, 2012.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions for options granted during the nine months ended April 30, 2013:

Weighted-Average Black-Scholes Option Valuation Assumptions	Nine Months Ended April 30, 2013
Dividend yield	0.37	%
Expected volatility (1)	0.509
Risk-free interest rate (2)	0.67	%
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 on the expected life at the date of grant.

(3) Based on historical exercise behavior.

These non-qualified options had a weighted average fair value of $10.91.

The aggregate intrinsic value (i.e., the excess market price over the exercise price) of all options exercised was $537,000 and $4,025,000 for the three and nine months ended April 30, 2013 and $1,566,000 and $3,413,000 for the three and nine months ended April 30, 2012, respectively.

A summary of stock option activity follows:

	Number of Shares		Weighted Average Exercise Price
Outstanding at July 31, 2012	548,823		$	9.86
Granted	35,000		25.56
Canceled	(6,000	)	12.61
Exercised	(209,266	)	9.80
Outstanding at April 30, 2013	368,557		$	11.34
Exercisable at July 31, 2012	364,110		$	9.43
Exercisable at April 30, 2013	333,557		$	9.85

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. However, during the first six months of the nine months ended April 30, 2013, we reissued 316,177 shares, (and 107,269 shares during the fourth quarter of fiscal 2012) from treasury stock for the exercise of stock options and grant of stock awards.

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 previously recorded long-term deferred income tax assets (which are netted with long-term deferred income tax liabilities) and as a reduction of income taxes payable in the year of the deduction. 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 at the time the award was granted. The differences noted above between actual tax deductions and the previously recorded long-term deferred income tax assets are recorded as additional paid-in capital. For the nine months ended April 30, 2013 and 2012, income tax deductions of $3,073,000 and $2,435,000, respectively, were generated and increased additional paid-in capital by $1,986,000 and $1,315,000, respectively. We classify the cash flows resulting from excess tax benefits as financing cash flows in our Condensed Consolidated Statements of Cash Flows.