Share-Based Compensation

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 compensation cost related to unvested stock options not yet recognized as of March 31, 2016 is $2.9 million and is expected to be recognized over a weighted-average period of 2.2 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 three months ended March 31, 2016 and 2015 using a Black Scholes Model:



	Three months ended
	March 31, 2016			March 31, 2015
Director and Officers:
Expected dividend rate	$	0.22		$	0.18
Expected volatility	42.38		%	44.14		%
Risk-free interest rate	2.02		%	1.96		%
Expected life (in years)	8			8

Employees:
Expected dividend rate	$	0.22		$	0.18
Expected volatility	42.34		%	44.13		%
Risk-free interest rate	2.03		%	2.08		%
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 March 31, 2016:



Range of Exercise Prices	Number of Shares	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Intrinsic Value (in thousands)
$4.31-$8.65	317,618	4.99	$	7.34	$	6,563
$8.70-$22.76	32,987	7.59	15.95		398
$23.57-$25.84	7,664	8.91	23.57		34
Total	358,269	5.31	$	8.48	$	6,995

The following is a summary of stock options vested and exercisable as of March 31, 2015:



Range of Exercise Prices	Number of Shares	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Intrinsic Value (in thousands)
$4.31-$7.18	331,944	4.04	$	5.71	$	6,246
$7.44-$8.17	15,300	6.19	7.65		258
$8.65-$23.57	152,175	6.98	8.84		2,388
Total	499,419	5.00	$	6.73	$	8,892

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



Options	Shares		Weighted Average Exercise Price
Outstanding at December 31, 2015	1,130,910		$	13.38
Granted	81,400		21.85
Exercised	(107,945	)	6.57
Forfeited or Expired	(20,132	)	17.22
Outstanding at March 31, 2016	1,084,233		$	14.63
Exercisable at March 31, 2016	358,269		$	8.48

The total intrinsic value of options exercised during the three months ended March 31, 2016 and 2015 was $2.0 million and $3.2 million, respectively. The cash received from options exercised during the three months ended March 31, 2016 and 2015 was $0.7 million and $1.1 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, Inc. 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 March 31, 2016, unrecognized compensation cost related to unvested restricted stock awards was approximately $6.0 million, which is expected to be recognized over a weighted average period of 2.2 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, 2015	410,023		$	18.78
Granted	91,385		20.78
Vested	(22,237	)	19.51
Forfeited	(5,740	)	18.53
Unvested at March 31, 2016	473,431		$	19.13

A summary of share-based compensation is as follows:



	Three months ended
	March 31, 2016		March 31, 2015
Grant date fair value of awards during the period:	(in thousands)
Options	$	780	$	657
Restricted stock	1,899		1,722
Total	$	2,679	$	2,379



Share-based compensation expense:
Options	$	337	$	152
Restricted stock	611		286
Total	$	948	$	438



Income tax benefit related to share-based compensation:
Options	$	713	$	1,076
Restricted stock	32		22
Total	$	745	$	1,098

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which makes several modifications to Topic 718 including: accounting for excess tax benefits and deficiencies; classifying excess tax benefits on the statement of cash flows; accounting for forfeitures; classifying awards that permit share repurchases to satisfy statutory tax-withholding requirement; and classifying tax payments on behalf of employees on the statement of cash flows. The ASU becomes effective for interim and annual reporting periods beginning after December 31, 2016.

The impact of adopting this ASU may be material. The Company cannot predict the impact as it is dependent of the Company’s stock price in the future, the timing of when restricted stock vests and the timing of when employees choose to exercise stock options. The changes for excess tax benefits and tax deficiencies will be applied prospectively. These changes will require the Company to report excess tax benefits and tax deficiencies as an income tax benefit or expense on the income statement rather than as a component of additional paid-in capital as it does now. Excess tax benefits and deficiencies will be treated as discrete items to the tax provision in the reporting period in which they occur.

Additionally, ASU 2016-09 will impact the calculation of diluted weighted average shares under the treasury stock method as the Company will no longer increase or decrease the assumed proceeds from an employee vesting in, or exercising, a share-based payment award by the amount of excess tax benefits or deficiencies taken to additional paid-in capital.

The Company plans to retrospectively apply the guidance for classification of the excess tax benefits in the statement of cash flows. The excess tax benefits are classified currently as both a cash inflow from financing activities and a cash outflow from operating activities in the statement of cash flows. Upon adoption, these will be classified as cash flows in operating activities as part of cash payments for taxes. The Company does not believe this change will have a material impact on the prior periods in the consolidated statement of cash flows.

The Company plans to retrospectively apply the guidance for classification of tax payments on employee’s behalf to classify these payments as cash outflows from financing activities. This is not expected to have a material impact of the consolidated statement of cash flows.