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SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
9 Months Ended
Sep. 30, 2017
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
Share Repurchase Program
On May 17, 2017, our shareholders approved the renewal of the share repurchase program previously approved by the shareholders on May 18, 2016, which replaced the previous share repurchase program. Under the program, we are authorized to purchase up to 4.6 million shares of our common stock, based on a limit of 25% of the outstanding shares of common stock on the date of approval at a minimum price of $1.00 per share and a maximum price of $500.00 per share, for a period of five years from the date of approval. Under the existing and prior programs, we purchased 1.1 million shares of common stock at an average price of $22.48 per share during the nine months ended September 30, 2017 and 1.3 million shares at an average price of $26.94 per share during the nine months ended September 30, 2016 (0.3 million shares at an average price of $23.48 per share for the third quarter of 2017 and 0.5 million shares at an average price of $28.68 per share for the third quarter of 2016). As of September 30, 2017, approximately 3.9 million shares of common stock remain available for repurchase under the program. Our senior secured term loan limits the amount we can spend on share repurchases, which was approximately $403 million as of September 30, 2017, and may prevent repurchases in certain circumstances.
Share-Based Compensation
We issue share-based awards in the form of stock options and restricted shares for certain employees, officers and directors. We recorded share-based compensation expense of $3.2 million and $4.7 million for the nine months ended September 30, 2017 and 2016, respectively ($1.4 million and $1.1 million for the third quarter of 2017 and 2016, respectively). As of September 30, 2017, estimated unrecognized compensation costs related to share-based awards amounted to $9.4 million, which we expect to recognize over a weighted average remaining requisite service period of approximately 2.15 years.
In connection with the January 1, 2017 adoption of FASB ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (see Note 1), the Company made an accounting policy election to account for forfeitures in compensation expense as they occur, rather than continuing to apply the Company’s previous policy of estimating forfeitures. Prior to this accounting change, share-based compensation expense for stock options and restricted shares was recorded net of estimated forfeiture rates ranging from 0% to 40%.
Stock Options
Stock option grants are composed of a combination of service-based, market-based and performance-based options.
Service-Based Options. These options generally vest over three or four years with equal annual vesting and expire on the earlier of ten years after the date of grant or following termination of service. A total of 736 thousand service-based awards were outstanding as of September 30, 2017.
Market-Based Options. These option grants generally have two components, each of which vests only upon the achievement of certain criteria. The first component, which we refer to as “ordinary performance” grants, generally consists of two-thirds of the market-based grant and begins to vest if the stock price is at least double the exercise price, as long as the stock price realizes a compounded annual gain of at least 20% over the exercise price. The remaining third of the market-based options, which we refer to as “extraordinary performance” grants, generally begins to vest if the stock price is at least triple the exercise price, as long as the stock price realizes a compounded annual gain of at least 25% over the exercise price. Market-based awards vest in three or four year installments with the first installment vesting upon the achievement of the criteria and the remaining installments vesting thereafter in equal annual installments. Market-based options generally expire on the earlier of ten years after the date of grant or following termination of service, unless the performance criteria is met prior to termination of service or in the final three years of the option term, in which case vesting will generally continue in accordance with the provisions of the award agreement. A total of 935 thousand market-based awards were outstanding as of September 30, 2017.
Performance-Based Options. These option grants begin to vest upon the achievement of certain specific financial measures. Generally, the awards begin vesting if the performance criteria are achieved; one-third vest on each anniversary of the grant date. For certain other financial measures, awards cliff-vest upon the achievement of the specific performance during the period from 2017 through 2021. The award of performance-based options is adjusted based on the level of achievement specified in the award agreements. If the performance criteria achieved is above threshold performance levels, participants have the opportunity to vest in 70% to 150% of the option grants, depending upon performance achieved. If the performance criteria achieved is below a certain threshold, the award is canceled. The options expire on the earlier of ten years after the date of grant or following termination of service. There were 126 thousand performance-based awards outstanding as of September 30, 2017.
The Company granted 216 thousand stock options (at a weighted average exercise price of $34.07 per share) and 143 thousand stock options (at a weighted average exercise price of $29.22 per share) during the nine months ended September 30, 2017 and 2016, respectively.
The fair values of the service-based options and performance-based options were determined using the Black-Scholes option pricing model and the fair values of the market-based options were determined using a lattice (binomial) model. The following assumptions were used to determine the fair values as of the grant date:
 
 
Nine months ended
 September 30, 2017
 
Nine months ended
 September 30, 2016
 
 
Black-Scholes
 
Binomial
 
Black-Scholes
 
Binomial
 
 
 
 
 
 
 
 
 
Risk-free interest rate (%)
 
1.89 - 2.29

 
0.77 - 2.38

 
1.25 - 1.89

 
0.23 - 1.97

Expected stock price volatility (%)
 
61.49 - 71.31

 
66.68 - 71.31

 
59.75 - 62.14

 
59.76 - 62.14

Expected dividend yield
 

 

 

 

Expected option life (in years)
 
6.00 - 7.50

 
2.55 - 4.32

 
6.00 - 6.25

 
4.54 - 4.88

Fair value
 
$13.57 - $24.80

 
$11.94 - $24.30

 
$11.15 - $18.60

 
$11.06 - $19.27


We determined the expected option life of all service-based stock option grants using the simplified method. We use the simplified method because we believe that our historical data does not provide a reasonable basis upon which to estimate expected option life.
The following table summarizes the weighted average grant date fair value of stock options granted per share, the total intrinsic value of stock options exercised and the grant date fair value of stock options that vested during the period presented:
 
 
Nine months ended September 30,
(in thousands, except per share amounts)
 
2017
 
2016
 
 
 
 
 
Weighted average grant date fair value of stock options granted per share
 
$
20.95

 
$
16.85

Intrinsic value of options exercised
 
2,524

 
17,280

Grant date fair value of stock options that vested
 
2,063

 
2,372


The following table summarizes the activity related to our stock options:
 
Number of options
 
Weighted average exercise price
 
Weighted average contractual term
(in years)
 
Aggregate intrinsic value
(in thousands)
 
 
 
 
 
 
 
 
Outstanding at December 31, 2016
1,996,509

 
$
25.98

 
5.32
 
$
15,942

Granted
216,430

 
34.07

 
 
 
 
Exercised
(192,378
)
 
10.83

 
 
 
 

Forfeited
(222,920
)
 
31.21

 
 
 
 

 
 
 
 
 
 
 
 
Outstanding at September 30, 2017
1,797,641

 
27.93

 
5.14
 
8,413

 
 
 
 
 
 
 
 
Exercisable at September 30, 2017
1,170,148

 
22.56

 
3.48
 
7,723


Other Share-Based Awards
The Company’s other share-based and similar types of awards are composed of restricted shares and, through August 29, 2016, Equity Appreciation Rights (“EAR”). The restricted shares are composed of a combination of service-based awards and performance-based awards.
Service-Based Awards. These awards generally vest over one to four years with either annual cliff-vesting, vesting of all of the restricted shares at the end of the vesting period or vesting beginning after two years of service. A total of 272 thousand service-based awards were outstanding as of September 30, 2017.
Performance-Based Awards. These awards generally begin to vest upon the achievement of certain specific financial measures. Generally, the awards begin vesting if the performance criteria are achieved; one-third vest on each anniversary of the grant date. The award of performance-based restricted shares is adjusted based on the level of achievement specified in the award agreements. If the performance criteria achieved is above threshold performance levels, participants have the opportunity to vest in 80% to 150% of the restricted share award, depending on performance achieved. If the performance criteria achieved is below a certain threshold, the award is canceled. A total of 42 thousand performance-based awards were outstanding as of September 30, 2017.
The Company granted 189 thousand restricted shares (at a weighted average grant date fair value of $30.94 per share) during the nine months ended September 30, 2017.
The following table summarizes the activity related to our restricted shares:
 
Number of restricted shares
 
 
Outstanding at December 31, 2016
231,730

Granted
188,622

Issued
(49,538
)
Forfeited/canceled
(56,575
)
 
 
Outstanding at September 30, 2017
314,239


Effective August 29, 2016, the EAR plans were terminated.