Note 4: Stock-Based Compensation

The Company’s stock-based incentive programs consist of the following: (1) a long-term incentive compensation program for officers and other executives that consists of restricted stock and stock options granted for retention and performance, (2) a discretionary equity program for other management and key employees, and (3) stock awards for non-employee directors. The Company’s Board of Directors and the Officer Nomination and Compensation Committee, as applicable, have discretionary authority to set the terms of the awards of stock under the Company’s Amended and Restated 2008 Incentive Compensation Plan (“Plan”). At present, the Company accomplishes the fulfillment of equity-based grants through the issuance of new common shares. As of March 31, 2017, approximately 1.6 million shares authorized under the Plan remain available for future grants. Employee participants have the opportunity to deliver back to the Company the number of shares from the vesting of stock awards sufficient to satisfy the individual’s minimum tax withholding obligations. These shares are held as treasury shares. The Company recorded stock-based compensation expense of $7.4 million, $4.9 million, and $4.0 million in fiscal 2017, 2016, and 2015, respectively.

Stock Options: The Company recorded $1.1 million, $0.9 million, and $0.9 million of compensation expense related to stock options in fiscal 2017, 2016, and 2015, respectively. The fair value of stock options that vested during fiscal 2017, 2016, and 2015 was $1.0 million, $0.9 million, and $0.9 million, respectively. As of March 31, 2017, the total compensation expense not yet recognized related to non-vested stock options was $2.1 million and the weighted-average period in which the remaining expense is expected to be recognized was 2.5 years.

The Company estimated the fair value of option awards on the date of grant using the Black-Scholes option valuation model and the following assumptions:

	Years ended March 31,
	2017			2016			2015
Weighted-average fair value of options	$	4.60		$	7.11		$	10.21
Expected life of awards in years		6.4			6.3			6.3
Risk-free interest rate		1.4	%		1.9	%		2.1	%
Expected volatility of the Company's stock		45.5	%		66.9	%		76.1	%
Expected dividend yield on the Company's stock		0.0	%		0.0	%		0.0	%

Stock options expire no later than 10 years after the grant date and have an exercise price equal to the fair market value of Modine’s common stock on the date of grant. The risk-free interest rate was based upon yields of U.S. Treasury zero-coupon issues with a term corresponding to the expected life of the options. The expected volatility assumption was based upon changes in the Company’s historical common stock prices over the same time frame as the expected life of the awards. The expected dividend yield is zero, as the Company currently does not anticipate paying dividends over the expected life of the options. The expected lives of the awards are based upon historical patterns and the terms of the options. Outstanding options granted vest 25 percent annually for four years. The Company used a pre-vesting forfeiture rate of 2.5 percent as an estimate of expected forfeitures prior to completing the required service period.

A summary of stock option activity for fiscal 2017 was as follows:

	Shares			Weighted-average exercise price		Weighted-average remaining contractual term (years)		Aggregate intrinsic value
Outstanding, beginning		1.5		$	10.82
Granted		0.3			10.00
Exercised		(0.1	)		9.23
Forfeited or expired		(0.2	)		21.76
Outstanding, ending		1.5		$	9.83		5.5	$	4.4

Exercisable, March 31, 2017		1.0		$	9.27		4.0	$	3.6

The aggregate intrinsic value represents the difference between the closing price of Modine’s common shares on the last trading day of fiscal 2017 over the exercise price of the stock options, multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value is not recorded for financial statement purposes, and this value will change based upon daily changes in the fair value of Modine’s common shares.

Additional information related to stock options exercised is as follows:

	Years ended March 31,
	2017		2016		2015
Intrinsic value of stock options exercised	$	0.5	$	0.4	$	0.4
Proceeds from stock options exercised	$	0.9	$	0.5	$	0.6

Restricted Stock: The Company recorded $3.8 million, $3.5 million, and $2.8 million of compensation expense related to restricted stock in fiscal 2017, 2016, and 2015, respectively. The fair value of restricted stock awards that vested during fiscal 2017, 2016, and 2015 was $4.0 million, $3.4 million, and $2.3 million, respectively. At March 31, 2017, the Company had $4.8 million of unrecognized compensation expense related to non-vested restricted stock, which it expects to recognize over a weighted-average period of 2.4 years. The Company values restricted stock awards using the closing market value of its common shares on the date of grant. The restricted stock awards vest 25 percent annually for four years, with the exception of awards to non-employee directors, which fully vest upon grant.

A summary of restricted stock activity for fiscal 2017 was as follows:

	Shares			Weighted- average price
Non-vested balance, beginning		0.6		$	11.29
Granted		0.4			9.98
Vested		(0.4	)		10.05
Non-vested balance, ending		0.6		$	11.21

Restricted Stock – Performance-Based Shares: The Company recorded $2.5 million, $0.5 million, and $0.3 million of compensation expense related to performance-based stock awards in fiscal 2017, 2016, and 2015, respectively. At March 31, 2017, the Company had $3.2 million of total unrecognized compensation expense related to non-vested performance-based stock awards, which is expected to be recognized over a weighted-average period of 1.8 years. The Company values performance-based stock awards using the closing market value of its common shares on the date of grant.

Shares are earned under the performance portion of the restricted stock award program based upon the attainment of certain financial goals over a three-year period and are awarded after the end of that three-year performance period, if the performance targets have been achieved. The performance components of the programs initiated in fiscal 2017, 2016, and 2015 were based upon both a target three-year average consolidated return on average capital employed (“ROACE”) and a target three-year average annual revenue growth at the end of a three-year performance period, commencing with the fiscal year of grant.