Stock-Based Compensation Expense

9 Months Ended

Sep. 30, 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 and nine-month periods ended September 30, 2020 and 2019 consisted of the following (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Cost of sales	$	336	$	346	$	1,022	$	953
Research and development		304		277		851		750
Selling, general and administrative		3,423		2,003		8,395		5,212
Stock-based compensation expense before taxes	$	4,063	$	2,626	$	10,268	$	6,915

Nonqualified Stock Options

During the three and nine-month periods ended September 30, 2020, we granted stock options representing 112,500 and 328,994 shares of our common stock, respectively. During the three and nine-month periods ended September 30, 2019, we granted stock options representing 107,000 and 1.2 million 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:

	Nine Months Ended
	September 30,
	2020	2019
Risk-free interest rate	0.29% - 1.67%	1.39% - 2.56%
Expected option term	4.0 - 5.0 years	3.0 - 5.0 years
Expected dividend yield	—	—
Expected price volatility	38.65% - 45.12%	28.66% - 35.79%

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 September 30, 2020, the total remaining unrecognized compensation cost related to non-vested stock options was approximately $25.0 million, which was expected to be recognized over a weighted average period of 2.8 years.

Stock-Settled Performance-Based Restricted Stock Units (“Performance Stock Units”)

During the nine-month period ended September 30, 2020, we granted performance stock units to certain of our executive officers which, as amended, represent up to 127,060 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 2000 Index (“rTSR”), as defined in the award agreements. After reviewing the anticipated impact of the COVID-19 pandemic on our ongoing and forecasted operations and financial performance, during the three-month period ended June 30, 2020, our Board of Directors amended the performance stock units with a one-year performance period in an effort to more closely align our executive management compensation with the interests of our shareholders. This amendment reduced the targeted levels of FCF and reduced the maximum FCF multiplier to 100% for the one-year awards, which lowered the potential shares of our common stock to be granted pursuant to the one-year awards by 25,415 shares. We have accounted for this amendment in accordance with ASC 718 as a “Type I” modification. The two and three-year performance stock units were not amended.  

The payout for each performance stock unit is equal to one share of common stock multiplied by a FCF multiplier (between 0% and 100% in the case of the one-year awards, as amended, or 0% and 200% in the case of the two and three-year awards) 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 125% of the target shares for the one-year awards, as amended, and 250% of the target shares for the two and three-year awards. 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 as of the grant date using the following assumptions for awards granted in the periods indicated below:

	Nine Months Ended
	September 30,
	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 actual level of FCF achieved. For the three and nine-month periods ended September 30, 2020, we recognized stock-based compensation expense associated with the stock-settled performance stock units of approximately $0.8 million and $2.0 million, respectively. As of September 30, 2020, the total remaining unrecognized compensation cost related to stock-settled performance stock units was approximately $3.3 million, which is expected to be recognized over a weighted average period of 1.5 years.

Cash-Settled Performance-Based Share-Based Awards (“Liability Awards”)

During the nine-month period ended September 30, 2020, we granted liability awards to our Chief Executive Officer. These awards entitle him to a cash payment equal to a target cash incentive of $333,333 per year multiplied by rTSR and FCF multipliers, as defined in the award agreements. During the three-month period ended June 30, 2020, after reviewing the anticipated impact of the COVID-19 pandemic on our ongoing and forecasted operations and financial performance, our Board of Directors amended the liability awards with a one-year performance period in an effort to more closely align our Chief Executive Officer’s compensation with the interests of our shareholders. The two and three-year liability awards were not amended.  As amended, the potential maximum payout of these awards is 125% of the target cash incentive for one-year awards, and 250% of the target cash incentive for two and three-year awards. 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 and nine-month periods ended September 30, 2020, we recognized expense associated with these liability awards of approximately $0.3 million and $0.6 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 liabilities within our consolidated balance sheet. As of September 30, 2020, the total remaining unrecognized compensation cost related to cash-settled performance-based share-based awards was approximately $1.3 million, which is expected to be recognized over a weighted average period of 1.6 years.

Restricted Stock Units

On June 22, 2020, we granted restricted stock units to our non-employee directors representing 33,504 shares of our common stock. The expense recognized for restricted stock units is equal to the closing stock price on the date of grant, which is recognized over the vesting period. Restricted stock units are subject to continued service through the vesting date, which is one year from the date of grant. Restricted stock units represent contingently issuable shares, and are excluded from the calculation of weighted average shares outstanding for the calculation of diluted EPS. For the three and nine-month periods ended September 30, 2020 we recognized expense associated with these restricted stock units of

approximately $363,000 and $395,000 within selling, general and administrative expenses in our consolidated statement of income (loss). As of September 30, 2020, the total remaining unrecognized compensation cost related to restricted stock units was approximately $1.0 million, which will be recognized over the remaining vesting period.