Share-Based Compensation

On May 22, 2007, our stockholders adopted a Long-Term Incentive Plan (“LTIP”) which provided an additional 3.3 million shares that could 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 were granted with the same vesting schedule as the previous plan. Under the LTIP, the exercise price of shares granted could not be less than 100% of the fair market value at the date of the grant.

On May 24, 2016, our stockholders adopted the 2016 Long-Term Incentive Plan ("2016 Plan") which provides for approximately 3.8 million shares, comprised of 3.4 million new shares provided for under the 2016 Plan and approximately 0.4 million shares that were available for issuance under the previous LTIP, that are now authorized for issuance under the 2016 Plan, that can be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance awards, dividend equivalent rights, and other awards. Under the 2016 Plan, the exercise price of shares granted may not be less than 100% of the fair market value at the date of the grant. The 2016 Plan will be administered by the Compensation Committee of the Board of Directors or such other committee of the Board of Directors as is designated by the Board of Directors (the “Committee”). Membership on the Committee shall be limited to independent directors. The Committee may delegate certain duties to one or more officers of the Company as provided in the 2016 Plan. The Committee will determine the persons to whom awards are to be made, determine the type, size and terms of awards, interpret the 2016 Plan, establish and revise rules and regulations relating to the 2016 Plan and make any other determinations that it believes necessary for the administration of the 2016 Plan.

The compensation cost related to unvested stock options not yet recognized as of June 30, 2017 is $10.0 million and is expected to be recognized over a weighted-average period of 2.5 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, 2017 and 2016 using a Black Scholes Model:



	Six months ended
	June 30, 2017			June 30, 2016
Director and Officers:
Expected dividend rate	$	0.26		$	0.22
Expected volatility	30.81		%	42.38		%
Risk-free interest rate	1.90		%	2.02		%
Expected life (in years)	5.0			8.0

Employees:
Expected dividend rate	$	0.26		$	0.22
Expected volatility	30.75		%	41.82		%
Risk-free interest rate	1.89		%	1.76		%
Expected life (in years)	5.0			8.0

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, 2017:



Range of Exercise Prices	Number of Shares	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Intrinsic Value (in thousands)
$4.54-$22.76	378,504	4.85	$	10.98	$	9,792
$23.57-$32.80	33,985	7.95	25.34		391
$32.85-$37.30	—	—	—		—
Total	412,489	5.10	$	12.16	$	10,183

The following is a summary of stock options vested and exercisable as of June 30, 2016:



Range of Exercise Prices	Number of Shares	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Intrinsic Value (in thousands)
$4.54-$8.65	344,958	5.06	$	7.67	$	6,843
$8.70-$22.76	37,505	7.39	15.77		440
$23.57-$28.27	7,664	8.66	23.57		30
Total	390,127	5.35	$	8.76	$	7,313

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



Options	Shares		Weighted Average Exercise Price
Outstanding at December 31, 2016	1,450,704		$	21.33
Granted	389,660		34.42
Exercised	(154,368	)	10.19
Forfeited or Expired	(64,886	)	30.51
Outstanding at June 30, 2017	1,621,110		$	25.17
Exercisable at June 30, 2017	412,489		$	12.16

The total intrinsic value of options exercised during the six months ended June 30, 2017 and 2016 was $4.0 million and $3.4 million, respectively. The cash received from options exercised during the six months ended June 30, 2017 and 2016 was $1.6 million and $1.3 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 and since May 2016 as part of the 2016 Plan, 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 June 30, 2017, unrecognized compensation cost related to unvested restricted stock awards was approximately $8.3 million, which is expected to be recognized over a weighted average period of 2.0 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, 2016	408,162		$	20.47
Granted	123,151		33.96
Vested	(121,956	)	21.09
Forfeited	(16,161	)	22.86
Unvested at June 30, 2017	393,196		$	24.41

A summary of share-based compensation is as follows:



	Three months ended				Six months ended
	June 30, 2017		June 30, 2016		June 30, 2017		June 30, 2016
Grant date fair value of awards during the period:	(in thousands)
Options	$	633	$	1,279	$	3,507	$	2,059
Restricted stock	1,582		1,043		4,182		2,942
Total	$	2,215	$	2,322	$	7,689	$	5,001



Share-based compensation expense:
Options	$	703	$	404	$	1,430	$	741
Restricted stock	1,181		691		2,099		1,302
Total	$	1,884	$	1,095	$	3,529	$	2,043



Income tax benefit/(deficiency) related to share-based compensation:
Options	$	494	$	417		$	1,285	$	1,130
Restricted stock	432		(33		)	705		(1		)
Total	$	926	$	384		$	1,990	$	1,129

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 became effective for interim and annual reporting periods beginning after December 31, 2016. We early adopted the ASU effective January 1, 2016.

The Company previously applied a forfeiture rate to its share-based compensation expense and adjusted expense to actual as awards vested and/or were forfeited. Upon adoption of ASU 2016-09, the Company accounts for forfeitures as they occur, rather than estimating forfeitures as of an award's grant date.

Tax payments made on behalf of an employee by repurchasing shares of stock are now shown separately as cash outflows from financing activities on the statement of cash flows. This provision was retrospectively adopted and prior period cash flows have been reclassified to conform with this presentation.

Additionally, the Company retrospectively adopted the provision to classify excess tax benefits and deficiencies as cash flows from operating activities as part of cash payments for taxes on the statement of cash flows. Prior period cash flows have been reclassified to conform with this presentation.

The following table displays the prior period quantitative effects on the consolidated financial statements:



	Three months ended				Six months ended
	June 30, 2016				June 30, 2016
	As Reported		As Restated		As Reported		As Restated
	(in thousands, except share and per share data)
Consolidated Statement of Income
Income tax provision	$	7,934	$	7,550	$	14,145	$	13,016
Net income	14,341		14,725		25,147		26,276
Earnings per share:
Basic	$	0.27	$	0.28	$	0.47	$	0.47
Diluted	0.27		0.27		0.47		0.47
Weighted average shares outstanding:
Diluted	53,401,238		53,574,702		53,395,361		53,563,676

Consolidated Statement of Cash Flows
Change in income taxes					$	5,162	$	4,033