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,
	2016		2015		2014

Cost of sales	$	438,000	$	270,000	$	337,000
Operating expenses:
Selling		929,000		608,000		665,000
General and administrative		6,881,000		4,897,000		4,339,000
Research and development		113,000		92,000		68,000
Total operating expenses		7,923,000		5,597,000		5,072,000
Stock-based compensation before income taxes		8,361,000		5,867,000		5,409,000
Income tax benefits		(2,956,000)		(2,026,000)		(1,909,000)
Total stock-based compensation expense, net of tax	$	5,405,000	$	3,841,000	$	3,500,000

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 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 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, 2016, total unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock options and stock awards was $8,960,000 with a remaining weighted average period of 15 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, 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
Granted	175,700		55.40
Canceled	(4,807)		45.06
Vested	(183,045)		30.06
Nonvested stock awards at July 31, 2016	331,367	$	46.09

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, 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

(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 2016 and 2015, the weighted average fair value of options granted was $26.49 and $11.54, respectively. There were no option exercises during the twelve months ended July 31, 2016. The aggregate intrinsic value (i.e. the excess market price over the exercise price) of all options exercised was approximately $5,178,000 and $5,702,000 in fiscals 2015 and 2014, respectively. The aggregate fair value of all options vested was approximately $344,000, $248,000 and $127,000 in fiscals 2016, 2015 and 2014, respectively.

A summary of stock option activity follows:


		Weighted
	Number of	Average
	Shares	Exercise Price

Outstanding at July 31, 2013	403,831	$	8.25
Granted	30,000		31.81
Canceled	(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
Granted	15,000		55.36
Outstanding at July 31, 2016	122,500	$	29.36

Exercisable at July 31, 2014	157,492	$	8.21

Exercisable at July 31, 2015	45,000	$	20.32

Exercisable at July 31, 2016	80,834	$	22.72

The outstanding options at July 31, 2016 and 2015 had an aggregate intrinsic value of approximately $4,605,000 and $3,133,000, respectively. As of July 31, 2016 and 2015, 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 2016 and 2015, such income tax deductions reduced income taxes payable by $3,059,000 and $5,317,000, respectively, and increased additional paid-in capital by $1,179,000 and $3,168,000, 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, 2016:


	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, 2016		(Months)	Price		at July 31, 2016		(Months)	Price

$17.04		52,500	15	$	17.04		52,500	15	$	17.04
$31.81 - $36.70		55,000	32	$	34.03		28,334	31	$	33.25
$55.36		15,000	51	$	55.36		—	—	$	—
		122,500		$	29.36		80,834		$	22.72

Total Intrinsic Value	$	4,605,000				$	3,575,000

A summary of our stock award plan follows:

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.

We believe that the ability to offer key employees and non-employee directors long-term, equity based compensation will help enable Cantel Medical Corp. to attract, motivate, and retain experienced and highly qualified employees and directors who will contribute to the Company’s financial success. 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 will also provide 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 of each stock option and SAR determined by the committee at the time of grant,

may not be at an exercise price less than the fair market value of the stock on the date the option is granted and the aggregate fair market value (determined as of the date the option is granted) of shares underlying incentive stock options (“ISOs”) that are exercisable for the first time in any calendar year may not exceed $100,000,

granted to an individual who owns more than 10% of the outstanding voting stock of the Company, may not have the exercise price of each ISO granted be less than 110% of the fair market value of the stock on the date the ISO is granted,

will include terms where the Committee determines the exercise period of each stock option and SAR; however the terms of the options and SARs granted under the Plan 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, 2016, 13,345 unvested restricted stock shares were outstanding under the 2016 plan. No options were outstanding under the 2016 plan. At July 31, 2016, 1,194,054 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. 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.

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, 2016, options to purchase 122,500 shares of common stock were outstanding, and 317,932 unvested restricted stock shares were outstanding under the 2006 Plan. No additional stock awards will be granted under this plan.