Share-Based Compensation

As discussed in Note 13, the Company had a three-for-two stock split effective July 16, 2014. All share and per share information has been updated to reflect the effect of this stock split.

We have historically maintained a stock option plan for key employees, directors and consultants (“the 1992 Plan”). The 1992 Plan provided for 14.9 million shares to be issued under the plan in the form of stock options. Under the terms of the 1992 Plan, the exercise price of shares granted may not be less than 85% of the fair market value at the date of the grant. Options granted to directors prior to May 25, 2004, vest one year from the date of grant and are exercisable for nine years thereafter. Options granted to directors on or after May 25, 2004, vest one-third each year, commencing one year after the date of grant. All other options granted vest at a rate of 20% per year, commencing one year after date of grant, and are exercisable during years 2-10.

On May 22, 2007, our stockholders adopted a Long-Term Incentive Plan (“LTIP”) which provides an additional 3.3 million shares that can be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance units and performance awards. Since inception of the LTIP, non-qualified stock options and restricted stock awards have been granted with the same vesting schedule as the previous plan. Under the LTIP, the exercise price of shares granted may not be less than 100% of the fair market value at the date of the grant.

The total pre-tax compensation cost related to unvested stock options not yet recognized as of June 30, 2014 is $2.0 million and is expected to be recognized over a weighted-average period of 2.0 years.

The following weighted average assumptions were used to determine the fair value of the stock options granted on the original grant date for expense recognition purposes for options granted during the six months ended June 30, 2014 and 2013 using a Black Scholes Model:



	Six months ended
	June 30, 2014		June 30, 2013
Director and Officers:
Expected dividend yield	N/A		1.19	%
Expected volatility	N/A		47.08	%
Risk-free interest rate	N/A		1.55	%
Expected life (in years)	N/A		7

Employees:
Expected dividend yield	2.36	%	1.03	%
Expected volatility	45.77	%	45.66	%
Risk-free interest rate	2.40	%	1.23	%
Expected life (in years)	8		8

The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date.

The following is a summary of stock options vested and exercisable as of June 30, 2014:



Range of Exercise Prices	Number of Shares	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Intrinsic Value (in thousands)
$3.21-$6.89	472,028	3.62	$	5.04	$	8,171
$7.13-$8.17	56,175	6.92	7.25		848
$8.65-$19.27	196,298	6.79	8.76		2,668
Total	724,501	4.73	$	6.22	$	11,687

The following is a summary of stock options vested and exercisable as of June 30, 2013:



Range of Exercise Prices	Number of Shares	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Intrinsic Value (in thousands)
$3.21-$4.31	116,100	2.51	$	3.65	$	1,282
$4.53-$5.77	330,975	4.86	4.79		3,281
$6.09-$8.65	284,367	7.96	7.64		2,007
Total	731,442	5.70	$	5.72	$	6,570

A summary of option activity under the plans is as follows:



Options	Shares		Weighted Average Exercise Price
Outstanding at December 31, 2013	1,398,080		$	7.23
Granted	21,000		19.06
Exercised	(91,455	)	6.91
Forfeited or Expired	(30,750	)	12.07
Outstanding at June 30, 2014	1,296,875		$	7.33
Exercisable at June 30, 2014	724,501		$	6.22

The total intrinsic value of options exercised during the six months ended June 30, 2014 and 2013 was $1.3 million and $1.1 million, respectively. The cash received from options exercised during the six months ended June 30, 2014 and 2013 was $0.6 million and $0.8 million, respectively. The impact of these cash receipts is included in financing activities in the accompanying Consolidated Statements of Cash Flows.

Since 2007, as part of the LTIP, the Compensation Committee of the Board of Directors has authorized and issued restricted stock awards to directors and key employees. Restricted stock awards granted to directors vest one-third each year. All other restricted stock awards vest at a rate of 20% per year. The fair value of restricted stock awards is based on the fair market value of AAON common stock on the respective grant dates, reduced for the present value of dividends.

These awards are recorded at their fair value on the date of grant and compensation cost is recorded using straight-line vesting over the service period. At June 30, 2014, unrecognized compensation cost related to unvested restricted stock awards was approximately $5.0 million, which is expected to be recognized over a weighted average period of 2.5 years.

A summary of the unvested restricted stock awards is as follows:




Restricted stock	Shares		Weighted Average Grant Date Fair Value
Unvested at December 31, 2013	236,031		$	12.77
Granted	162,878		18.63
Vested	(44,472	)	10.12
Forfeited	(10,163	)	16.76
Unvested at June 30, 2014	344,274		$	15.77

A summary of share-based compensation is as follows:



	Three months ended				Six months ended
	June 30, 2014		June 30, 2013		June 30, 2014		June 30, 2013
Grant date fair value of awards during the period:	(in thousands)
Options	$	68	$	121	$	188	$	272
Restricted stock	2,765		524		3,035		649
Total	$	2,833	$	645	$	3,223	$	921



Share-based compensation expense:
Options	$	312	$	182	$	520	$	461
Restricted stock	260		121		464		234
Total	$	572	$	303	$	984	$	695



Income tax benefit related to share-based compensation:
Options	$	160	$	183	$	484	$	292
Restricted stock	164		93		196		93
Total	$	324	$	276	$	680	$	385