Annual report pursuant to Section 13 and 15(d)

Stock-based Expense

v3.8.0.1
Stock-based Expense
12 Months Ended
Dec. 31, 2017
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-based Expense
Stock-based Expense
Our Amended and Restated 1998 Stock Incentive Plan (“Stock Incentive Plan”) provided for awards which could be granted in the form of incentive stock options, non-qualified stock options, restricted stock, stock appreciation rights, and performance restricted stock. In August 2010, we discontinued issuance of new awards under the Stock Incentive Plan and concurrently adopted the 2010 Equity Incentive Plan (“Equity Incentive Plan”). The Equity Incentive Plan, as amended, provides for awards which may be granted in the form of incentive stock options, non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units, and performance shares under substantially the same terms as the Stock Incentive Plan.
We also grant awards to our directors in accordance with the Board of Directors Policy (“Board Plan”). Prior to 2010, these awards were generally in the form of stock options. Beginning in 2010, the awards granted to our directors are generally in the form of restricted stock. The awards granted to directors generally vest ratably over a period of four quarters; however, should a director leave the board, we have the right to repurchase shares as if the awards vested on a pro rata basis.
Our board of directors periodically approves increases to the number of shares of common stock reserved for issuance under the Equity Incentive Plan. At both December 31, 2017 and 2016, there were 27,634,259 shares of the Company’s common stock reserved for awards under the Equity Incentive Plan. The Plan permits the exercise of stock options and grants of restricted stock to be fulfilled through the issuance of previously authorized but unissued common stock shares, or the reissuance of shares held in treasury. Beginning in March 2017, we began to primarily utilize treasury shares when stock options are exercised or restricted stock is granted. Prior to this date, we have historically utilized unissued common stock shares to satisfy these items.
Total compensation expense related to our stock-based expense plans was $45.8 million, $36.9 million, and $38.1 million for the years ended December 31, 2017, 2016, and 2015, respectively. Total unrecognized compensation expense related to our stock-based expense plans was $48.2 million at December 31, 2017, and is expected to be recognized over a weighted average period of 2.0 years. Cash proceeds related to stock-based expense transactions totaled $27.0 million, $28.5 million, and $12.1 million during the years ended December 31, 2017, 2016, and 2015, respectively.
Stock Option Awards
Stock options granted prior to February 2014 generally vest over a period of sixteen quarters, with 75% vesting ratably over fifteen quarters and the remaining 25% vesting in the sixteenth quarter. Beginning in February 2014, stock options granted generally vest ratably over a period of twelve quarters. Expense is recognized over the requisite service period in a manner that reflects the vesting of the related awards. Awards under the plan generally expire ten years from the date of the grant. All outstanding options were granted at exercise prices equal to or exceeding our estimate of the fair market value of our common stock at the date of grant.
The following table summarizes stock option transactions under our Stock Incentive Plan, Equity Incentive Plan, Board Plan, and MTS Plan:
 
 
Number of Shares
 
Range of
Exercise Prices
 
Weighted Average
Exercise Price
Balance as of January 1, 2015
 
5,566,888

 
$
0.91

$
29.50

 
$
18.89

Granted
 
2,434,198

 
18.79

23.10

 
19.81

Exercised
 
(809,303
)
 
0.91

21.60

 
14.97

Forfeited/cancelled
 
(1,389,910
)
 
5.04

29.50

 
20.54

Balance at December 31, 2015
 
5,801,873

 
0.91

29.50

 
19.43

Exercised
 
(1,568,699
)
 
1.68

27.18

 
18.16

Forfeited/cancelled
 
(625,431
)
 
4.28

29.50

 
21.77

Expired
 
(654
)
 
0.91

0.91

 
0.91

Balance at December 31, 2016
 
3,607,089

 
2.55

29.50

 
19.58

Exercised
 
(1,344,569
)
 
5.04

29.50

 
20.09

Forfeited/cancelled
 
(61,892
)
 
15.19

25.70

 
19.66

Expired
 
(163
)
 
2.55

2.82

 
2.73

Balance at December 31, 2017
 
2,200,465

 
4.28

29.50

 
19.26


The below table provides information regarding outstanding stock options which were fully vested and expected to vest and exercisable options at December 31:
 
 
2017
 
2016
 
 
Options Fully Vested and Expected to Vest
 
Options Exercisable
 
Options Fully Vested and Expected to Vest
 
Options Exercisable
Number of options
 
2,200,465

 
1,999,278

 
3,606,462

 
2,477,474

Weighted-average remaining contractual term (in years)
 
5.5

 
5.3

 
6.5

 
5.9

Weighted-average exercise price
 
$
19.26

 
$
19.16

 
$
19.58

 
$
19.24

Aggregate intrinsic value, in thousands
 
$
55,106

 
$
50,257

 
$
37,581

 
$
26,659


The aggregate intrinsic value of options exercised during the years ended December 31, 2017, 2016, and 2015, was $25.1 million, $11.3 million, and $5.0 million, respectively.
The fair value of each stock option grant was estimated as of the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions and resulting weighted-average fair value per share for the year ended December 31, 2015. There were no stock options awarded during the years ended December 31, 2017 and 2016.
 
2015
Risk-free interest rate
1.5
%
Expected option life (in years)
4.6

Expected volatility
42.3
%
Weighted-average grant date fair value
$
7.42


Risk-free interest rate. This is the average U.S. Treasury rate (having a term that most closely approximates the expected life of the option) for the period in which the option was granted.
Expected option life. This is the period of time that the options granted are expected to remain outstanding. This estimate is primarily based on the historical experience of the plans.
Forfeiture rate. This is the projected annual rate at which we expect awards to be forfeited in the future. We used a forfeiture rate of zero to value the awards granted during 2015 due to the timing of when our shares vest and the expense is recorded.
Expected volatility. Volatility is a measure of the amount by which a financial variable, such as a share price, has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. We estimate expected volatility based on the Company’s historic and expected volatility.
Dividend yield. This metric indicates how much the Company is expected to pay out in dividends relative to its share price during a period. We utilized a dividend yield of zero in estimating the fair value of stock options awarded in 2015, as we did not anticipate paying dividends in the foreseeable future.
Restricted Stock Awards
Restricted stock awards entitle the holder to receive shares of our common stock as the award vests. Grants of restricted stock are classified as time-based, market-based, or performance-based depending on the vesting criteria of the award.
Time-based restricted stock awards:
Time-based restricted stock awards granted prior to February 2014, generally vest ratably over sixteen quarters following the date of grant. Awards granted during 2014 and 2015, generally vest ratably over a period of twelve quarters beginning on the first day of the quarter immediately following the grant date. Beginning in 2016, awards granted generally vest ratably over a period of twelve quarters beginning on the first day of the second calendar quarter immediately following the grant date. The fair value of time-based restricted stock awards is based on the closing price of our common stock on the date of grant. Compensation expense for time-based restricted stock awards is recognized over the vesting period on a straight-line basis.
During the years ended December 31, 2017, 2016, and 2015, the aggregate grant date fair value of time-based restricted shares that vested during the year was $22.6 million, $16.9 million, and $21.5 million, respectively.
A summary of time-based restricted stock award activity is presented in the table below.
 
 
Number of
Shares
 
Weighted
Average Grant-Date Fair Value
Non-vested shares at January 1, 2015
 
1,624,519

 
$
20.01

Granted
 
913,077

 
19.84

Vested
 
(1,077,102
)
 
19.78

Forfeited/cancelled
 
(391,788
)
 
18.65

Non-vested shares at December 31, 2015
 
1,068,706

 
20.05

Granted
 
1,793,257

 
20.79

Vested
 
(841,983
)
 
20.14

Forfeited/cancelled
 
(386,479
)
 
20.21

Non-vested shares at December 31, 2016
 
1,633,501

 
20.78

Granted
 
1,359,578

 
36.25

Vested
 
(953,749
)
 
23.73

Forfeited/cancelled
 
(283,342
)
 
28.01

Non-vested shares at December 31, 2017
 
1,755,988

 
30.05


Market-based restricted stock awards:
Market-based restricted stock awards become eligible for vesting upon on the achievement of specific market-based conditions based on the per share price of the Company’s common stock. Shares that become eligible to vest, if any, become Eligible Shares. Eligible Shares generally vest ratably over a period of four quarters, beginning on the first day of the quarter immediately after they become Eligible Shares. Vesting is conditional upon the recipient remaining a service provider, as defined in the plan document, to the Company through each applicable vesting date.
A summary of market-based restricted stock award activity is presented in the table below.
 
 
Number of
Shares
 
Weighted
Average Grant-Date Fair Value
Balance as of January 1, 2015
 
520,000

 
$
11.26

Granted
 
691,165

 
11.59

Forfeited/cancelled
 
(196,070
)
 
9.39

Balance at December 31, 2015
 
1,015,095

 
11.85

Granted
 
794,025

 
13.58

Vested
 
(51,250
)
 
12.52

Forfeited/cancelled
 
(193,710
)
 
11.61

Balance at December 31, 2016
 
1,564,160

 
12.73

Granted
 
535,441

 
28.18

Vested
 
(1,407,133
)
 
13.69

Forfeited/cancelled
 
(2,303
)
 
13.34

Balance at December 31, 2017
 
690,165

 
22.76


We estimate the fair value of market-based restricted stock awards using a discrete model to analyze the fair value of the subject shares. The discrete model utilizes multiple stock price-paths, through the use of Monte Carlo simulation, which are then analyzed to determine the fair value of the subject shares. The weighted average of assumptions used to value awards granted during 2017, 2016, and 2015 were as follows:
 
 
2017
 
2016
 
2015
Risk-free interest rate
 
1.8
%
 
1.1
%
 
1.1
%
Expected volatility
 
31.6
%
 
41.5
%
 
38.7
%

Risk-free interest rate. We estimated the risk-free rate from the three year U.S. Treasury strip note yield curve as of the valuation date.
Expected volatility. Similar to the methodology for stock options described above, the Company estimates expected volatility based on the Company’s historic and expected volatility rate.
Expense related to the market-based restricted stock awards is recognized over the requisite service period using the graded-vesting attribution method. The requisite service period is a measure of the expected time to achieve the specified market condition plus the time-based vesting period. The expected time to achieve the market condition is estimated utilizing a Monte Carlo simulation, considering only those stock price-paths in which the market condition was achieved. The estimated requisite service period for market-based restricted stock shares issued in 2017 ranged from five to seven quarters. Market-based restricted stock awards granted in 2016 had requisite service periods ranging between seven to nine quarters.
Performance-based restricted stock awards:
The Company has also granted performance-based restricted stock awards. These awards become eligible to vest if specified performance targets are achieved prior to the performance deadline. Subsequent to achievement of the performance target the awards vest quarterly over a one-year service period. The performance-based restricted stock awards are forfeited if the performance targets are not achieved prior to the performance deadline. Compensation expense for performance-based restricted stock awards is recognized on a straight-line basis over the requisite service period, which includes both the performance period and the subsequent time-based vesting period. Expense is only recognized if it is determined that achievement of the performance condition is probable. The fair value of performance-based restricted stock awards is based on the closing price of our common stock on the date of grant.
A summary of performance-based restricted stock award activity is presented in the table below:
 
 
Number of
Shares
 
Weighted
Average Grant-Date Fair Value
Non-vested shares at January 1, 2015
 

 
$

Granted
 
20,000

 
18.79

Non-vested shares at December 31, 2015
 
20,000

 
18.79

Forfeited/cancelled
 
(20,000
)
 
18.79

Non-vested shares at December 31, 2016
 

 

Granted
 

 

Non-vested shares at December 31, 2017