Stock-Based Compensation and Stockholder' Equity

The Company accounts for stock-based compensation under the provisions of ASC 718-10, Compensation — Stock Compensation (“ASC 718-10”), which requires all share-based payments to employees and directors, including grants of stock options and restricted stock units, to be recognized in the income statement based on their fair values. Share-based payments that contain performance conditions are recognized when such conditions are probable of being achieved.

The Company grants share-based awards to employees in the form of options to purchase the Company’s common stock, the ability to purchase stock at a discounted price under the employee stock purchase plan and restricted stock units. The Company uses the Black-Scholes option pricing model to determine the weighted-average fair value of options granted and determines the intrinsic value of restricted stock units based on the closing price of its common stock on the date of grant. The Company recognizes the compensation expense of share-based awards on a straight-line basis for awards with only service conditions and on an accelerated basis for awards with performance conditions. Compensation expense is recognized over the vesting period of the awards.

The following table reflects the Company's stock-based compensation expense related to share-based awards recognized in the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,				Unamortized Expense		Weighted Average Remaining Expense Period (Years)
($ in thousands)	2018		2017		At March 31, 2018
Stock options	$	2,358	$	2,779	$	19,572	2.7
Restricted stock units	5,528		4,237		39,744		2.3
Employee stock purchase plan	294		108		196		0.2
Total	$	8,180	$	7,124	$	59,512

Equity Award Plans

In May 2007, in conjunction with the Company's initial public offering, the Company adopted its 2007 Stock Option and Incentive Plan (the "2007 Plan"). The 2007 Plan was amended and restated in November 2008, May 2012 and May 2015 to provide for the issuance of additional shares and to amend certain other provisions. Under the 2007 Plan, awards were granted to persons who were, at the time of grant, employees, officers, non-employee directors or key persons (including consultants and prospective employees) of the Company or the Company's subsidiaries. The 2007 Plan provided for the grant of stock options, restricted stock units, stock appreciation rights, deferred stock awards, restricted stock, unrestricted stock, cash-based awards, performance share awards or dividend equivalent rights. Options granted under the 2007 Plan generally vest over a period of four years and expire ten years from the date of grant. In May 2017, the Company adopted the 2017 Stock Option and Incentive Plan (the "2017 Plan"), which has replaced the 2007 Plan as the means by which the Company makes equity and cash awards. Effective May 18, 2017, the 2017 Plan became effective (the "2017 Plan Effective Date") and the Company ceased granting awards from the 2007 Plan. Outstanding awards under the 2007 Plan remain subject to the terms of the 2007 Plan. Under the 2017 Plan, awards may be granted to persons who are, at the time of grant, employees, officers, non-employee directors, consultants, or advisers of the Company or the Company's subsidiaries and affiliates. The 2017 Plan provides for the grant of stock options, restricted stock units, stock appreciation rights, deferred stock awards, restricted stock, unrestricted stock, cash-based awards, performance share awards or dividend equivalent rights. Stock options granted under the 2017 Plan generally vest over a period of four years and expire ten years from the date of grant. Shares of stock subject to awards granted under the 2007 Plan and the 2017 Plan that are forfeited, expire or otherwise terminate without delivery generally become available for future issuance under the 2017 Plan.

As of March 31, 2018, approximately 4 million shares remain available for future grant under the 2017 Plan.

Stock Options

There were no shares of performance-based incentive stock options awarded in the three months ended March 31, 2018 and there were 34,500 shares of performance-based incentive stock options awarded in the three months ended March 31, 2017. The stock options were granted under the 2007 and 2017 Plans and vest over a four year period from the grant date with the potential of an accelerated vesting period pursuant to the achievement of certain performance conditions.

The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the stock price and the following assumptions, including expected volatility, expected life of the awards, the risk-free interest rate, and the dividend yield.


•	Expected volatility measures the amount that a stock price has fluctuated or is expected to fluctuate during a period and is computed over expected terms based upon the historical volatility of the Company's stock.


•	The expected life of the awards is estimated based on the midpoint scenario, which combines historical exercise data with hypothetical exercise data for outstanding options, as the Company believes this data currently represents the best estimate of the expected life of a new employee option. The Company stratifies its employee population into two groups based upon organizational hierarchy.


•	The risk-free interest rate assumption is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.


•	The dividend yield assumption is based on Company history and expectation of paying no dividends. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation.

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense recognized in the financial statements is based on awards that are ultimately expected to vest. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.

The Company evaluates the assumptions used to value the awards on a quarterly basis and if factors change and different assumptions are utilized, stock-based compensation expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.

The following summarizes the activity under the Company’s stock option plans during the three months ended March 31, 2018:



	Number of Options (#)		Weighted Average Exercise Price ($)		Aggregate Intrinsic Value ($)		Weighted Average Remaining Contractual Term (Years)
Outstanding at December 31, 2017	3,377,220		$	35.10
Granted	234,689		74.39
Exercised	(114,042	)	31.35		$	5,438
Canceled	(64,757	)	36.18
Outstanding at March 31, 2018	3,433,110		$	37.89	$	167,501	7.5
Vested, March 31, 2018	2,042,078		$	34.14	$	107,296	6.9
Vested or expected to vest, March 31, 2018 ⁽¹⁾	3,280,220				$	161,681


⁽¹⁾	Represents total outstanding stock options as of March 31, 2018, adjusted for estimated forfeitures.

The aggregate intrinsic value of stock options exercised was calculated based on the positive difference between the estimated fair value of the Company’s common stock on the date of exercise and the exercise price of the underlying options. The aggregate intrinsic value of options exercised in the three months ended March 31, 2018 and 2017 was $5.4 million and $4.9 million, respectively. The aggregate intrinsic value for outstanding awards as of March 31, 2018 was calculated based on the positive difference between the Company’s closing stock price of $86.68 on March 31, 2018 and the exercise price of the underlying options.

Employee stock-based compensation related to stock options in the three months ended March 31, 2018 and 2017 was $2.4 million and $2.8 million, respectively, and was based on awards ultimately expected to vest. At March 31, 2018, the Company had $19.6 million of total unrecognized compensation expense related to stock options that will be recognized over a weighted average period of 2.7 years.

Restricted Stock Units

In the three months ended March 31, 2018, the Company awarded 303,390 restricted stock units to certain employees and non-employee members of the Board of Directors, which included 110,070 restricted stock units subject to the achievement of performance conditions (performance-based restricted stock units). For performance-based restricted stock units for which the performance criteria has not yet been achieved, the Company recognized stock compensation expense of $1.2 million in the three months ended March 31, 2018 as it expects a portion of the performance-based restricted stock units granted in 2017 and 2018 will be earned based on its evaluation of the performance criteria. An additional $1.2 million of stock compensation expense was recognized in the three months ended March 31, 2018 for performance-based restricted stock units for which the performance criteria has been achieved. The restricted stock units were granted under the 2007 and 2017 Plans and generally vest annually over a one or three year period from the grant date, except for the performance-based restricted stock units, which follow different vesting patterns.

The restricted stock units granted during the three months ended March 31, 2018 have a weighted average fair value of $74.49 per share based on the closing price of the Company’s common stock on the date of grant and were valued at approximately $22.4 million on their grant date. The Company is recognizing the compensation expense over the vesting period. Approximately $3.2 million of stock-based compensation expense related to the vesting of non-performance based restricted stock units was recognized in the three months ended March 31, 2018. Under the terms of the awards, the Company will issue shares of common stock on each of the vesting dates.

The following table summarizes the status of the Company’s restricted stock units during the three months ended March 31, 2018:



	Number of Shares (#)		Weighted Average Fair Value ($)
Outstanding at December 31, 2017	994,364		$	38.08
Granted	303,390		74.49
Adjustment ⁽¹⁾	147,301		29.54
Vested	(445,190	)	33.35
Forfeited	(29,063	)	36.81
Outstanding at March 31, 2018	970,802		$	50.37

⁽¹⁾Certain performance-based restricted stock units are subject to a three-year vesting period subject to meeting performance targets and continued employment. During the three months ended March 31, 2018, the Compensation Committee of the Board of Directors determined that the performance was achieved at 200% of target for certain performance-based awards issued in 2016, resulting in an adjustment to the shares that will ultimately vest for these awards.

Employee Stock Purchase Plan

The Employee Stock Purchase Plan (“ESPP”) authorizes the issuance of up to a total of 380,000 shares of common stock to participating employees. The Company typically makes two offerings each year to eligible employees to purchase stock under the ESPP. Offering periods begin on the first business day occurring on or after each December 1 and June 1 and end on the last business day occurring on or before the following May 31 and November 30, respectively.

Each employee who is a participant in the Company’s ESPP may purchase up to a maximum of 800 shares per offering period or $25,000 worth of common stock, valued at the start of the purchase period, per year by authorizing payroll deductions of up to 10% of his or her base salary. Unless the participating employee withdraws from the offering period, his or her accumulated payroll deductions will be used to purchase common stock. The purchase price for each share purchased is 85% of the lower of (i) the fair market value of the common stock on the first day of the offering period or (ii) the fair market value of the common stock on the last day of the offering period.