15.Stock-Based Compensation

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

	Year Ended July 31,
	2015			2014			2013

Cost of sales	$	270,000		$	337,000		$	174,000
Operating expenses:
Selling	608,000			665,000			329,000
General and administrative	4,897,000			4,339,000			3,198,000
Research and development	92,000			68,000			32,000

Total operating expenses	5,597,000			5,072,000			3,559,000

Stock-based compensation before income taxes	5,867,000			5,409,000			3,733,000
Income tax benefits	(2,026,000		)	(1,909,000		)	(1,343,000		)

Total stock-based compensation expense, net of tax	$	3,841,000		$	3,500,000		$	2,390,000

The above stock-based compensation expense before income taxes was recorded in the Consolidated Financial Statements as stock-based compensation expense and an increase to additional paid-in capital. The related income tax benefits were recorded as either an increase to current deferred income tax assets or 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 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 July 31, 2015, total unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock options and stock awards was $7,491,000 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 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:

			Weighted
	Number of		Average
	Shares		Fair Value

Nonvested stock awards at July 31, 2012	708,008		$	9.15
Granted	210,484		17.55
Canceled	(14,244	)	11.31
Vested	(298,481	)	9.26

Nonvested stock awards at July 31, 2013	605,767		11.96
Granted	258,760		31.95
Canceled	(10,066	)	15.70
Vested	(328,619	)	11.13

Nonvested stock awards at July 31, 2014	525,842		22.25
Granted	144,278		39.77
Canceled	(12,804	)	26.20
Vested	(313,797	)	18.62

Nonvested stock awards at July 31, 2015	343,519		$	32.77

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option valuation model with the following assumptions:

Weighted-Average
Black-Scholes Option	Year Ended		Year Ended
Valuation Assumptions	July 31, 2015		July 31, 2014

Dividend yield	0.25	%	0.28	%
Expected volatility (1)	33.90	%	42.70	%
Risk-free interest rate (2)	1.55	%	1.44	%
Expected lives (in years) (3)	5.00		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.

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. In fiscals 2015 and 2014, the weighted average fair value of options granted was $11.54 and $12.08, respectively. The aggregate intrinsic value (i.e. the excess market price over the exercise price) of all options exercised was approximately $5,178,000, $5,702,000 and $6,616,000 in fiscals 2015, 2014 and 2013, respectively. The aggregate fair value of all options vested was approximately $248,000, $127,000 and $677,000 in fiscals 2015, 2014 and 2013, respectively.

A summary of stock option activity follows:

			Weighted
	Number of		Average
	Shares		Exercise Price

Outstanding at July 31, 2012	823,235		$	6.57
Granted	52,500		17.04
Canceled	(9,000	)	8.40
Exercised	(462,904	)	6.26

Outstanding at July 31, 2013	403,831		8.25
Granted	30,000		31.81
Exercised	(211,339	)	6.82

Outstanding at July 31, 2014	222,492		12.78
Granted	25,000		36.70
Exercised	(139,992	)	7.11

Outstanding at July 31, 2015	107,500		$	25.73


Exercisable at July 31, 2013	351,331		$	6.94


Exercisable at July 31, 2014	157,492		$	8.21


Exercisable at July 31, 2015	45,000		$	20.32

The outstanding options at July 31, 2015 and 2014 had an aggregate intrinsic value of approximately $3,133,000 and $4,616,000, respectively. As of July 31, 2015 and 2014, all of the outstanding options had vested or were expected to vest in future periods.

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 previously recorded deferred income tax assets and as a reduction of income taxes payable. 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 is granted. The differences noted above between actual tax deductions and the previously recorded deferred income tax assets are recorded as additional paid-in capital. In fiscals 2015 and 2014, such income tax deductions reduced income taxes payable by $5,317,000 and $5,905,000, respectively, and increased additional paid-in-capital by $3,168,000 and $4,391,000, respectively. We classify the cash flows resulting from excess tax benefits as financing cash flows on our Consolidated Statements of Cash Flows.

The following table summarizes additional information related to stock options outstanding at July 31, 2015:

	Options Outstanding					Options Exercisable
			Weighted					Weighted
			Average					Average
			Remaining	Weighted				Remaining	Weighted
	Number		Contractual	Average		Number		Contractual	Average
Range of Exercise	Outstanding		Life	Exercise		Exercisable		Life	Exercise
Prices	at July 31, 2015		(Months)	Price		At July 31, 2015		(Months)	Price

$17.04	52,500		27	$	17.04	35,000		27	$	17.04
$31.81 - $36.70	55,000		44	$	34.03	10,000		39	$	31.81

$17.04 - $36.70	107,500			$	25.73	45,000			$	20.32


Total Intrinsic Value	$	3,133,000				$	1,555,000

A summary of our 2006 Equity Incentive Plan follows:

The Cantel Medical Corp. 2006 Equity Incentive Plan (the “2006 Plan”) provides for the granting of stock options (including incentive stock options), restricted stock awards, stock appreciation rights and performance-based awards (collectively “equity awards”) to our employees and non-employee directors. The 2006 Plan does not permit the granting of discounted options or discounted stock appreciation rights. The maximum number of shares as to which stock options and stock awards may be granted under the 2006 Plan is 5,591,000 shares, of which 2,700,000 shares are authorized for issuance pursuant to stock options and stock appreciation rights and 2,891,000 shares are authorized for issuance pursuant to restricted stock and other stock awards. Stock options outstanding under this plan:

were granted at the closing market price at the time of the grant,

were granted as stock options that do not qualify as incentive stock options,

are exercisable in three equal annual installments commencing on the first anniversary of the grant date, and

expire five years from the date of the grant.

Effective August 1, 2010, the annual grants of 10,125 options to non-employee directors and 3,375 options to employee directors were changed to annual grants of 3,375 shares of restricted stock to non-employee directors and 1,125 shares of restricted stock to employee directors, 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 a director of the Company through such vesting date.

Commencing July 31, 2012, the annual grants of 3,375 shares of restricted stock to non-employee directors and 1,125 shares of restricted stock to employee directors were changed to annual grants of shares of restricted stock to non-employee directors equivalent to $35,000 based on the closing price of our common stock on July 31 of each year that are exercisable in full on the first anniversary of the grant date. Employee directors no longer receive shares of restricted stock as part of the grants to the Board of Directors, but would receive shares or stock options as part of their employment compensation.

Commencing July 31, 2014, the annual grants of shares of restricted stock to non-employee directors equivalent to $35,000 was increased to $50,000 based on the closing price of our common stock on July 31 of each year and are exercisable in full on the first anniversary of the grant date.

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, 2015, options to purchase 107,500 shares of common stock were outstanding, and 343,519 unvested restricted stock shares were outstanding, under the 2006 Plan. At July 31, 2015, 361,810 shares are available for issuance pursuant to stock options and stock appreciation rights and 511,089 shares are available for issuance pursuant to restricted stock and other stock awards. The 2006 Plan expires on November 13, 2016.