Stock-Based Compensation Expense

3 Months Ended

Mar. 31, 2020

Share-based Payment Arrangement [Abstract]

Stock-Based Compensation Expense

12.   Stock-Based Compensation Expense. Stock-based compensation expense before income tax expense for the three-month periods ended March 31, 2020 and 2019 consisted of the following (in thousands):

	Three Months Ended
	March 31,
	2020		2019
Cost of sales	$	339	$	252
Research and development		285		192
Selling, general and administrative		2,153		1,322
Stock-based compensation expense before taxes	$	2,777	$	1,766

Nonqualified Stock Options

During the three-month periods ended March 31, 2020 and 2019, we granted stock options representing 216,494 and 909,603 shares of our common stock, respectively. We use the Black-Scholes methodology to value the stock-based compensation expense for options. In applying the Black-Scholes methodology to the option grants, the fair value of our stock-based awards granted was estimated using the following assumptions for the periods indicated below:

	Three Months Ended
	March 31,
	2020	2019
Risk-free interest rate	0.52% - 1.67%	2.42% - 2.56%
Expected option term	4.0 - 5.0 years	3.0 - 5.0 years
Expected dividend yield	—	—
Expected price volatility	38.65% - 43.24%	28.93% - 33.69%

The average risk-free interest rate is determined using the U.S. Treasury rate in effect as of the date of grant, based on the expected term of the stock award. We determine the expected term of the stock options using the historical exercise behavior of employees. The expected price volatility was determined using a weighted average of daily historical volatility of our stock price over the corresponding expected option term and implied volatility based on recent trends of the daily historical volatility. For awards with a vesting period, compensation expense is recognized on a straight-line basis over the service period, which corresponds to the vesting period.

We recognize stock-based compensation expense (net of a forfeiture rate) for those awards which are expected to vest on a straight-line basis over the requisite service period. We estimate the forfeiture rate based on our historical experience and expectations about future forfeitures. As of March 31, 2020, the total remaining unrecognized compensation cost related to non-vested stock options was approximately $28.4 million, which was expected to be recognized over a weighted average period of 2.93 years.

Stock-Settled Performance-Based Restricted Stock Units

During the three-month period ended March 31, 2020, we granted stock-settled performance-based restricted stock units (“performance stock units”) to certain of our executive officers representing up to 152,475 shares of our common stock. Conversion of the performance stock units occurs at the end of one, two and three-year performance periods, or one year after the agreement date, whichever is later. The conversion ratio is based upon attaining targeted levels of free cash flow (“FCF”) and relative shareholder return as compared to the Russell 2,000 (“rTSR”), as defined in the award agreements. The payout for each unit is equal to one share of common stock multiplied by a FCF multiplier (between 0% and 200%) and a rTSR multiplier (between 75% and 125%). If FCF is below a specified threshold, no shares will be awarded. The potential maximum payout per performance stock units is 250% of the target shares. Performance stock units convey no shareholder rights, including voting rights, unless and until shares are issued in settlement of the award. As performance stock units represent contingently issuable shares, we have excluded them from the calculation of weighted average shares outstanding for the calculation of diluted EPS.

We use Monte-Carlo simulations to estimate the grant-date fair value of the performance stock units linked to total shareholder return. The fair value of each performance stock unit was estimated using the following assumptions for the periods indicated below:

	Three Months Ended
	March 31,
	2020
Risk-free interest rate	1.1% - 1.3%
Performance period	0.8 - 2.8 years
Expected dividend yield	—
Expected price volatility	40.2% - 56.1%

The risk-free interest rate of return was determined using the U.S. Treasury rate at the time of grant with a remaining term equal to the expected term of the award. The expected volatility was based on a weighted average volatility of our stock price and the average volatility of our compensation peer group's volatilities. The expected dividend yield was assumed to be zero because, at the time of the grant, we had no plans to declare a dividend.

Compensation expense is recognized using the grant-date fair value for the number of shares that are probable of being awarded based on the performance conditions. Each reporting period, this probability assessment is updated, and cumulative catchups are recorded based on the level of FCF that is expected to be achieved. At the end of the performance period, cumulative expense is calculated based on the final number of shares awarded. For the three-month period ended March 31, 2020, we recognized stock-based compensation expense associated with the performance stock units of approximately $0.3 million. As of March 31, 2020, the total remaining unrecognized compensation cost related to performance stock units was approximately $5.0 million, which is expected to be recognized over a weighted average period of 1.83 years.

Cash-Settled Performance-Based Share-Based Awards

During the three-month period ended March 31, 2020, we granted cash-settled performance-based share-based awards to our Chief Executive Officer. These awards entitle him to a cash payment equal to a target cash incentive multiplied by rTSR and FCF multipliers, as defined in the award agreements. The potential maximum payout is 250% of the target cash incentive. Settlement generally occurs at the end of one, two and three-year performance periods based upon the same performance metrics and vesting period as our performance stock units.

For the three-month period ended March 31, 2020, we recognized expense associated with these cash-settled performance-based restricted stock units of approximate $0.1 million within selling, general and administrative expenses in our consolidated statement of income (loss). The fair value of these awards will be remeasured at each reporting period until the awards are settled. These awards are classified as liabilities and reported in accrued expenses and other long-term assets within our consolidated balance sheet. As of March 31, 2020, the total remaining unrecognized compensation cost related to cash-settled performance-based share-based awards was approximately $2.2 million, which is expected to be recognized over a weighted average period of 1.83 years.