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Note 22 - Stock Based Compensation

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Text Block]

22.	Stock Based Compensation

All share and per share amounts have been adjusted for the stock dividends distributed during 2019 and 2017, as applicable.

Determining Fair Value of Share-Based Option Awards. Most options that we grant contain only a service condition (“Service-Based” option) and therefore vest over a specified number of years as long as the employee is employed by the Company. For Service-Based options, we use the Black-Scholes option pricing model to determine the grant date fair value.

The fair values for Service-Based options granted for the years ended December 31, 2019 and 2018 were estimated using the Black-Scholes option pricing model with the below weighted-average assumptions. For the year ended December 31, 2017, there were no options granted.

	Year Ended December 31,
	2019			2018			2017
Expected lives of options (years)		9.5			9.1			N/A
Expected volatility		29.9	%		29.7	%		N/A
Risk free interest rate		1.7	%		3.0	%		N/A
Dividend yield rate		3.4	%		3.9	%		N/A

Based on calculations using the Black-Scholes option pricing model, the weighted-average grant date fair values of stock options granted during 2019 and 2018 were $7.88 and $6.32, respectively. The expected life of options in the table above represents the weighted-average period for which the options are expected to remain outstanding and are derived primarily from historical exercise patterns. The expected volatility is determined based on our review of the implied volatility that is derived from the price of exchange traded options of the Company. The risk-free interest rate assumption is determined based upon observed interest rates appropriate for the expected term of our employee stock options. The dividend yield assumption is based on our history of dividend payouts.

Stock Option Award Activity. Stock option activity under our option plans, restated as applicable for stock dividends, for the years ended December 31, 2019, 2018 and 2017 were as follows.

	Year Ended December 31,
	2019					2018					2017
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
	Number of			Exercise		Number of			Exercise		Number of			Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding Stock Option Activity
Outstanding, beginning of year		5,974,433		$	23.50		6,094,033		$	23.35		7,175,816		$	24.20
Granted		412,247			35.55		486,000			28.45		-			N/A
Exercised		(987,496	)		25.65		(393,571	)		25.06		(411,249	)		23.00
Forfeited		-			N/A		(9,950	)		20.46		-			N/A
Cancelled		-			N/A		(202,079	)		27.94		(670,534	)		32.63
Outstanding, end of year		5,399,184		$	24.00		5,974,433		$	23.50		6,094,033		$	23.35

Year Ended December 31,

2019

2018

2017

Weighted-

Weighted-

Weighted-

Number of

Average

Number of

Average

Number of

Average

Shares

Fair Value

Shares

Fair Value

Shares

Fair Value

Unvested Stock Option Activity

Outstanding, beginning of year
483,542 $ 6.26 135,481 $ 5.76 2,670,744 $ 4.72

Granted
412,247 7.88 486,000 6.32 - N/A

Vested
(195,541 ) 5.93 (127,989 ) 6.18 (2,535,263 ) 4.66

Forfeited
- N/A (9,950 ) 3.90 - N/A

Unvested, end of year
700,248 $ 7.20 483,542 $ 6.26 135,481 $ 5.76

The total intrinsic value of options (difference between price per share as of the exercise date and the exercise price, times the number of options outstanding) exercised during the years ended December 31, 2019, 2018 and 2017 was $8.2 million, $1.9 million and $2.5 million, respectively.

The following table provides data for our stock options that are vested or expected to vest as of December 31, 2019.

Exercisable or expected to vest
Number outstanding		5,397,398
Weighted-average exercise price	$	24.00
Aggregate intrinsic value (in thousands)	$	76,431
Weighted-average remaining contractual term (years)		4.75

Exercisable
Number outstanding		4,698,936
Weighted-average exercise price	$	22.75
Aggregate intrinsic value (in thousands)	$	72,411
Weighted-average remaining contractual term (years)		4.12

The aggregate intrinsic values in the tables above represent the total pretax intrinsic values (the difference between the closing price of MDC’s common stock on the last trading day of fiscal 2019 and the exercise price, multiplied by the number of in-the-money stock option shares) that would have been received by the option holders had all in-the-money outstanding stock options been exercised on December 31, 2019.

The following table summarizes information associated with outstanding and exercisable stock options at December 31, 2019.

				Options Outstanding						Options Exercisable
						Weighted-						Weighted-
						Average						Average
						Remaining		Weighted-				Remaining		Weighted-
						Contractual		Average				Contractual		Average
				Number		Life (in		Exercise		Number		Life (in		Exercise
Range of Exercise Price				Outstanding		years)		Price		Outstanding		years)		Price
$ 15.01	-	$	20.00		1,269,604		2.26	$	19.89		1,260,418		2.24	$	19.90
$ 20.01	-	$	25.00		2,894,522		4.97		23.17		2,891,460		4.96		23.17
$ 25.01	-	$	30.00		804,440		5.58		27.40		516,440		4.01		26.78
$ 30.01	-	$	35.00		30,618		3.08		32.37		30,618		3.08		32.37
$ 35.01	-	$	40.00		400,000		9.59		35.55		-		NA		N/A
Total					5,399,184		4.75	$	24.00		4,698,936		4.12	$	22.75

Total compensation expense relating to stock options was $1.5 million, $1.2 million and $0.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. Our recognized tax benefit from this expense for the years ended December 31, 2019, 2018 and 2017 was $0.0 million, $0.2 million and $0.2 million, respectively.

As of December 31, 2019, $4.0 million of total unrecognized compensation cost related to stock options was expected to be recognized as an expense by the Company in the future over a weighted-average period of approximately 2.2 years.

For the years ended December 31, 2019, 2018 and 2017 the company received cash from the exercise of stock option awards of $25.3 million, $9.9 million and $9.5 million, respectively. Our realized tax benefit from stock options exercised for the years ended December 31, 2019, 2018 and 2017 was $0.2 million, $0.4 million and $1.0 million, respectively.

Restricted and Unrestricted Stock Award Activity. Non-vested restricted stock awards, restated as applicable for stock dividends, at December 31, 2019, 2018 and 2017 and changes during those years were as follows:

	Year Ended December 31,
	2019					2018					2017
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
	Number of			Grant Date		Number of			Grant Date		Number of			Grant Date
	Shares			Fair Value		Shares			Fair Value		Shares			Fair Value
Unvested, beginning of year		337,909		$	25.61		317,390		$	23.89		221,133		$	19.85
Granted		167,676			33.85		143,214			29.51		160,620			27.42
Vested		(156,235	)		27.24		(117,404	)		25.45		(57,375	)		22.57
Forfeited		(5,292	)		30.56		(5,292	)		28.84		(6,988	)		21.81
Unvested, end of year		344,058		$	30.54		337,909		$	25.61		317,390		$	23.89

Total compensation expense relating to restricted stock awards was $4.8 million, $3.6 million and $2.6 million for the years ended December 31, 2019, 2018 and 2017, respectively. Our recognized tax benefit from this expense for the years ended December 31, 2019, 2018 and 2017 was $0.7 million, $0.8 million and $1.0 million, respectively.

At December 31, 2019, there was $4.6 million of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized as an expense by us in the future over a weighted-average period of approximately 1.6 years. The total intrinsic value of unvested restricted stock awards (the closing price of MDC’s common stock on the last trading day of fiscal 2019 multiplied by the number of unvested awards) at December 31, 2019 was $13.1 million. The total intrinsic value of restricted stock which vested during each of the years ended December 31, 2019, 2018 and 2017 was $5.3 million, $3.2 million and $1.4 million, respectively.

Performance Share Unit Awards. On August 5, 2019, May 23, 2018, June 20, 2017 and July 25, 2016, the Company granted long term performance share unit awards (“PSUs”) to each of the CEO, the COO, and the Chief Financial Officer (“CFO”) under the Company’s 2011 Equity Incentive Plan. The PSUs are earned based upon the Company’s performance, over a three year period (the “Performance Period”), measured by increasing home sale revenues over a “Base Period.” Each award is conditioned upon the Company achieving an average gross margin from home sales (excluding impairments) of at least fifteen percent (15%) over the Performance Period. Target goals will be earned if the Company’s three year average home sale revenues over the Performance Period (“Performance Revenues”) exceed the home sale revenues over the Base Period (“Base Revenues”) by at least 10% but less than 20%. If Performance Revenues exceed the Base Revenues by at least 5% but less than 10%, 50% of the Target Goals will be earned (“Threshold Goals”). If Performance Revenues exceed the Base Revenues by at least 20%, 200% of the Target Goals will be earned (“Maximum Goals”). For the PSUs granted in 2017, 2018 and 2019, the number of PSUs earned shall be adjusted to be proportional to the partial performance between the Threshold Goals, Target Goals and Maximum Goals. Details for each defined term above for both grants have been provided in the table below.

				Threshold Goal			Target Goal			Maximum Goal
Date of Award	Performance Period	Base Period	Base Period Revenues	PSUs		Home Sale Revenues	PSUs		Home Sale Revenues	PSUs		Home Sale Revenues	Fair Value per Share		Maximum Potential Expense to be Recognized*		Maximum Remaining Expense to be Recognized*
July 25, 2016	July 1, 2016 to June 30, 2019	July 1, 2015 to June 30, 2016	$1.975 billion		137,781	$2.074 billion		275,562	$2.173 billion		551,124	$2.370 billion	$	19.66	$	10,834	$	-

June 20, 2017	April 1, 2017 to March 31, 2020	April 1, 2016 to March 31, 2017	$2.426 billion		144,342	$2.547 billion		288,684	$2.669 billion		577,368	$2.911 billion	$	27.83	$	16,070	$	1,446

May 23, 2018	April 1, 2018 to March 31, 2021	April 1, 2017 to March 31, 2018	$2.543 billion		145,800	$2.670 billion		291,600	$2.797 billion		583,200	$3.052 billion	$	25.57	$	14,915	$	8,623

August 5, 2019	January 1, 2019 to December 31, 2021	January 1, 2018 to December 31, 2018	$2.982 billion		135,000	$3.131 billion		270,000	$3.280 billion		540,000	$3.578 billion	$	32.60	$	17,604	$	17,604

* Dollars in thousands

In accordance with ASC 718, the PSUs were valued on the date of grant at their fair value. The fair value of these grants was equal to the closing price of MDC stock on the date of grant less the discounted cash flows of expected future dividends over the respective vesting period (as these PSUs do not participate in dividends). The grant date fair value and maximum potential expense if the Maximum Goals were met for these awards has been provided in the table above. ASC 718 does not permit recognition of expense associated with performance-based stock awards until achievement of the performance targets are probable of occurring.

2016 PSU Grants. The 2016 PSU awards vested on August 7, 2019 at the Maximum Goals following the achievement of the Maximum Goals and certification by the Compensation Committee that the Maximum Goals had been achieved. For the years ended December 31, 2019, 2018 and 2017 the Company recorded share-based award expense of $1.8 million, $6.3 million and $2.7 million, respectively, related to these awards.

2017 PSU Grants. As of December 31, 2019, the Company determined that achievement at the Maximum Goals for these awards was probable. For the years ended December 31, 2019 and 2018 the Company recorded share-based award expense of $11.7 million and $3.0 million, respectively. As of December 31, 2017, the Company concluded that achievement of any of the performance metrics had not met the level of probability required to record compensation expense and, as such, no expense related to these awards had been recognized as of December 31, 2017.

2018 PSU Grants. As of December 31, 2019, the Company determined that achievement between the Target and Maximum Goals for these awards was probable and as such, the Company recorded share-based award expense related to the awards of $6.3 million for the year ended December 31, 2019. As of December 31, 2018, the Company concluded that achievement of any of the performance metrics had not met the level of probability required to record compensation expense and as such, no expense related to these awards had been recognized as of December 31, 2018.

2019 PSU Grants. For the PSUs granted in August of 2019, the Company concluded that achievement of any of the performance metrics had not met the level of probability required to record compensation expense and, as such, no expense related to these awards has been recognized as of December 31, 2019.

Our employee equity incentive plans permit us to withhold from the total number of shares that otherwise would be released to a restricted stock or performance share unit award recipient upon distribution that number of shares having a fair value at the time of distribution equal to the applicable income tax withholdings due. For the year ended December 31, 2019, 270,720 shares were withheld resulting in $10.0 million of income tax withholding being remitted on behalf of the employees. There were no shares withheld for the years ended December 31, 2018 and 2017.