Annual report pursuant to Section 13 and 15(d)

Stock-based Expense and Employee Benefits

v3.10.0.1
Stock-based Expense and Employee Benefits
12 Months Ended
Dec. 31, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-based Expense and Employee Benefits
Stock-based Expense and Employee Benefits
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 under the Equity Incentive 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, 2018 and 2017, there were 27,634,259 shares of our 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 that point, we generally utilized unissued common stock shares to satisfy these items.
The following table represents a consolidated summary of our stock-based plan activity:
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(in thousands)
Total compensation expense recognized
$
50,641

 
$
45,835

 
$
36,852

Cash proceeds related to stock-based expense transactions
$
13,163

 
$
27,014

 
$
28,490

Aggregate grant-date fair value of shares and stock options that vested during the year
$
49,711

 
$
48,662

 
$
28,624


Total unrecognized compensation expense related to our stock-based expense plans was $73.8 million at December 31, 2018, and is expected to be recognized over a weighted average period of 1.9 years.
Stock Option Awards
Stock options granted prior to February 2014 generally vested 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 vested 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 and Equity Incentive Plan:
 
 
Number of Shares
 
Range of
Exercise Prices
 
Weighted Average
Exercise Price
Balance as of January 1, 2016
 
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

Exercised
 
(658,564
)
 
4.92

29.50

 
20.00

Forfeited/cancelled
 
(11,329
)
 
15.19

25.70

 
18.85

Expired
 
(2,250
)
 
7.00

7.00

 
7.00

Balance at December 31, 2018
 
1,528,322

 
4.28

29.50

 
18.96


The below table provides information regarding outstanding stock options which were fully vested and expected to vest and exercisable options at December 31:
 
 
2018
 
2017
 
 
Options Fully Vested
 
Options Exercisable
 
Options Fully Vested and Expected to Vest
 
Options Exercisable
Number of options
 
1,528,322

 
1,528,322

 
2,200,465

 
1,999,278

Weighted-average remaining contractual term (in years)
 
4.1

 
4.1

 
5.5

 
5.3

Weighted-average exercise price
 
$
18.96

 
$
18.96

 
$
19.26

 
$
19.16

Aggregate intrinsic value, in thousands
 
$
44,674

 
$
44,674

 
$
55,106

 
$
50,257


The aggregate intrinsic value of options exercised during the years ended December 31, 2018, 2017, and 2016, was $23.0 million, $25.1 million, and $11.3 million, respectively. There were no stock options awarded during the years ended December 31, 2018, 2017, and 2016.
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.
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, 2016
 
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

Granted
 
1,289,866

 
53.26

Vested
 
(1,017,367
)
 
31.92

Forfeited/cancelled
 
(242,675
)
 
40.70

Non-vested shares at December 31, 2018
 
1,785,812

 
44.34


Market-based restricted stock awards:
Market-based restricted stock awards become eligible for vesting upon the achievement of specific market-based conditions based on the per share price of our 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 to us, as defined in the plan document, 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, 2016
 
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

Granted
 
517,364

 
35.66

Vested
 
(677,857
)
 
23.02

Balance at December 31, 2018
 
529,672

 
35.03


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 2018, 2017, and 2016 were as follows:
 
 
2018
 
2017
 
2016
Risk-free interest rate
 
2.5
%
 
1.8
%
 
1.1
%
Expected volatility
 
31.2
%
 
31.6
%
 
41.5
%

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. We estimate expected volatility based on our historic and implied 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 is achieved. The estimated requisite service period for market-based restricted stock shares issued in 2018 ranged from six to ten quarters. Market-based restricted stock awards granted in 2017 had requisite service periods ranging from five to seven quarters.
Employee Benefit Plans
In 1998, our board of directors approved a defined contribution plan that provides retirement benefits under the provisions of Section 401(k) of the Internal Revenue Code. Our 401(k) Plan (“Plan”) covers substantially all employees who meet a minimum service requirement. Contributions of $4.2 million, $2.9 million, and $2.4 million were made by us under the Plan for the years ended December 31, 2018, 2017, and 2016, respectively.