Kaman

AR 13

Financials

Part II

Financials/Financial Statements and Supplementary Data/Notes to Consolidated Financial Statements – Note 19

For the Years Ended December 31, 2013, 2012 and 2011

19. SHARE-BASED ARRANGEMENTS

General

The Company accounts for stock options and restricted stock as equity awards whereas the stock appreciation rights and employee stock purchase plan are accounted for as liability awards. Compensation expense for stock options and restricted stock awards is recognized on a straight-line basis over the vesting period of the awards.

The following table summarizes share-based compensation expense recorded during each period presented:

For the year ended December 31,
2013 2012 2011
In thousands
Stock options $ 1,605 $ 1,850 $ 1,743
Restricted stock awards 2,902 3,571 4,554
Stock appreciation rights 179
Employee stock purchase plan 466 444 330
Total share-based compensation $ 4,973 $ 5,865 $ 6,806
Stock Incentive Plan

On April 17, 2013, the shareholders of the Company approved the 2013 Management Incentive Plan (the "2013 Plan"), which replaced the 2003 Stock Incentive Plan. The 2013 Plan provides the Company with the ability to use equity-based awards of up to 2,250,000 authorized shares and is designed as a flexible share authorization plan, such that the Company's share authorization is based on the least costly type of award (stock options). Shares issued pursuant to "Full Value Awards" as defined in the 2013 Plan (awards other than stock options or stock appreciation rights which are settled by the issuance of shares, e.g., restricted stock, restricted stock units, performance shares, performance units if settled with stock, or other stock-based awards) count against the 2013 Plan's share authorization at a rate of 3 to 1, while shares issued upon exercise of stock options or stock appreciation rights count against the share authorization at a rate of 1 to 1. This means that every time an option is granted, the authorized pool of shares is reduced by one (1) share and every time a Full Value Award is granted, the authorized pool of shares is reduced by 3 shares. In deriving the valuation ratio used in the 2013 Plan, the Company used the Black Scholes Fair Value model as the basis for determining the approximate value of an option as compared to a "full value share." As of December 31, 2013, there were 2,241,000 shares available for grant under the plan.

LTIP awards provide certain senior executives an opportunity to receive award payments in either stock or cash as determined by the Personnel and Compensation Committee of the Board of Directors in accordance with the Plan, at the end of a three-year performance cycle. For the performance cycle, the Company's financial results are compared to the Russell 2000 indices for the same periods based upon the following: (a) average return on total capital, (b) earnings per share growth and (c) total return to shareholders. No awards will be payable unless the Company's performance is at least in the 25th percentile of the designated indices. The maximum award is payable if performance reaches the 75th percentile of the designated indices. Awards for performance between the 25th and 75th percentiles are determined by straight-line interpolation. Generally, LTIP awards are paid in cash.

Stock options are granted with an exercise price equal to the average market price of our stock at the date of grant. Stock options and Stock Appreciation Rights ("SARs") granted under the plan generally expire ten years from the date of grant and vest 20% each year over a 5-year period on each of the first five anniversaries of the date of grant. Restricted Stock Awards ("RSAs") are generally granted with restrictions that lapse at the rate of 20% per year over a 5-year period on each of the first five anniversaries of the date of grant. Generally, these awards are subject to forfeiture if a recipient separates from service with the Company.

Stock option activity is as follows:

Options Weighted average-
exercise price
Options outstanding at December 31, 2012 921,040 $ 26.21
Granted 156,160 36.29
Exercised (133,969) 22.98
Forfeited or expired (51,299) 31.09
Options outstanding at December 31, 2012 891,932 $ 28.18
The following table presents information regarding options outstanding as of December 31, 2013:
Weighted-average remaining contractual term - options outstanding (years) 6.1
Aggregate intrinsic value - options outstanding (in thousands) $ 10,329
Weighted-average exercise price - options outstanding $ 28.18
Options exercisable 411,250
Weighted-average remaining contractual term - options exercisable (years) 4.8
Aggregate intrinsic value - options exercisable (in thousands) $ 6,360
Weighted-average exercise price - options exercisable $ 24.30

The intrinsic value represents the amount by which the market price of the stock on the measurement date exceeds the exercise price of the option. The intrinsic value of options exercised in 2013, 2012 and 2011 was $1.9 million, $3.2 million and $2.9 million, respectively. The Company currently has an open stock repurchase plan, which would enable the Company to repurchase shares as needed. Since 2008 the Company has generally issued shares related to option exercises and RSAs from its authorized but unissued common stock.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The following table indicates the weighted-average assumptions used in estimating fair value:

2013 2012 2011
Expected option term (years) 5.2 5.4 6.5
Expected volatility 45.5 % 46.5 % 43.9 %
Risk-free interest rate 0.9 % 0.9 % 2.9 %
Expected dividend yield 2.0 % 1.9 % 2.2 %
Per share fair value of options granted $ 12.38 $ 12.00 $ 12.05

The expected term of options granted represents the period of time that option grants are expected to be outstanding. For 2013 and 2012, in predicting the expected term, the Company based its calculation on historical exercise patterns in order to estimate future exercise patterns. For 2011, in predicting the life of option grants, all stock options met the definition of "plain vanilla" options and therefore, the "simplified" method was used to calculate the term for grants. Forfeitures of options are estimated based upon historical data and are adjusted based upon actual occurrences. The cumulative effect of stock award forfeitures was immaterial. The volatility assumption is based on the historical daily price data of the Company's stock over a period equivalent to the weighted-average expected term of the options. Management evaluated whether there were factors during that period that were unusual and would distort the volatility figure if used to estimate future volatility and concluded that there were no such factors. The Company relies only on historical volatility since future volatility is expected to be consistent with historical volatility.

The risk-free interest rate assumption is based upon the interpolation of various U.S. Treasury rates determined at the date of option grant. Expected dividends are based upon a historical analysis of our dividend yield over the past year.

Restricted Stock activity is as follows:

Restricted Stock
Awards
Weighted-
average grant
date fair value
Restricted Stock outstanding at December 31, 2011 251,359 $ 28.30
Granted 92,155 34.50
Vested (116,496) 27.61
Forfeited or expired (38,371) 30.92
Restricted Stock outstanding at December 31, 2012 188,647 $ 31.23

The grant date fair value for restricted stock is the average market price of the unrestricted shares on the date of grant. The total fair value of restricted stock awards vested during 2013, 2012 and 2011 was $4.6 million, $5.3 million and $4.0 million, respectively.

We record a tax benefit and associated deferred tax asset for compensation expense recognized on non-qualified stock options and restricted stock for which we are allowed a tax deduction. For 2013, 2012 and 2011, respectively, we recorded a tax benefit of $1.7 million, $2.1 million and $2.4 million for these two types of compensation expense.

The windfall tax benefit is the tax benefit realized on the exercise of non-qualified stock options and disqualifying dispositions of stock acquired by exercise of incentive stock options and Employee Stock Purchase Plan stock purchases in excess of the deferred tax asset originally recorded. The total windfall tax benefit realized in 2013, 2012, and 2011 was $0.5 million, $0.9 million, and $0.8 million, respectively.

As of December 31, 2013, future compensation costs related to non-vested stock options and restricted stock grants is $7.5 million. The Company anticipates that this cost will be recognized over a weighted-average period of 3.0 years.

Employees Stock Purchase Plan

The Kaman Corporation Employees Stock Purchase Plan ("ESPP") allows employees to purchase common stock of the Company, through payroll deductions, at 85% of the market value of shares at the time of purchase. The plan provides for the grant of rights to employees to purchase a maximum of 1,500,000 shares of common stock.

During 2013, 85,702 shares were issued to employees at prices ranging from $28.34 to $32.43. During 2012, 90,048 shares were issued to employees at prices ranging from $24.09 to $30.79. During 2011, 68,116 shares were issued to employees at prices ranging from $23.35 to $32.50. At December 31, 2013, there were 465,437 shares available for purchase under the plan.