Stock-Based Compensation Expense

3 Months Ended

Mar. 31, 2024

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, 2024 and 2023 consisted of the following (in thousands):

	Three Months Ended
	March 31,
	2024		2023
Cost of sales
Nonqualified stock options	$	362	$	441
Research and development
Nonqualified stock options		436		428
Selling, general and administrative
Nonqualified stock options		1,682		1,370
Performance-based restricted stock units		1,867		815
Restricted stock units		587		444
Cash-settled performance-based awards		300		471
Total selling, general and administrative		4,436		3,100
Stock-based compensation expense before taxes	$	5,234	$	3,969

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.

Nonqualified Stock Options

During the three-month period ended March 31, 2023, we granted stock options representing 293,294 shares of our Common Stock. We did not grant any stock options during the three-month period ended March 31, 2024. 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,
	2023
Risk-free interest rate	3.7% - 4.5%
Expected option term	4.0 years
Expected dividend yield	—
Expected price volatility	47.1%

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 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.

As of March 31, 2024, the total remaining unrecognized compensation cost related to non-vested stock options was $17.6 million, which was expected to be recognized over a weighted average period of 2.3 years.

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

During the three-month periods ended March 31, 2024 and 2023, we granted performance stock units which represent up to 364,810 and 301,230 shares of Common Stock, respectively. Conversion of the performance stock units occurs at the end of the relevant performance periods, or one year after the agreement date, whichever is later. The number of shares delivered upon vesting at the end of the performance periods are based upon performance against specified financial performance metrics and relative total shareholder return as compared to the Russell 2000 Index (“rTSR”), as defined in the award agreements.

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:

	Three Months Ended
	March 31,
	2024	2023
Risk-free interest rate	4.4%	4.6%
Performance period	2.8 years	2.8 years
Expected dividend yield	—	—
Expected price volatility	31.1%	32.6%

The risk-free interest rate of return was determined using the U.S. Treasury rate at the time of grant with a term equal to the expected term of the award. The expected volatility was based on the weighted average volatility of our stock price and the average volatility of our compensation peer group's stock price. 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 likely to be awarded based on the performance metrics. Each reporting period, this probability assessment is updated, and cumulative adjustments are recorded based on the financial performance metrics expected to be achieved. At the end of the performance period, cumulative expense is calculated based on the actual performance metrics achieved. As of March 31, 2024, the total remaining unrecognized compensation cost related to stock-settled performance stock units was $21.5 million, which is expected to be recognized over a weighted average period of 2.3 years.

Cash-Settled Performance-Based Awards

During the three-month periods ended March 31, 2024 and 2023, we granted performance stock units to our Chief Executive Officer that provide for settlement in cash upon achievement of specific metrics (“Liability Awards”), with total target cash incentives in the amount of $1.6 million and $1.3 million, respectively. The Liability Awards entitle him to a target cash payment based upon our level of rTSR performance and achievement of other performance metrics, as defined in the award agreements.

During the three-month periods ended March 31, 2024 and 2023, we granted additional performance stock units to certain employees that provide for settlement in cash upon our achievement of specified financial metrics. The cash payable upon vesting at the end of the service period is based upon performance against specified financial performance metrics and relative total shareholder return as compared to the rTSR, as defined in the award agreements. Compensation expense is recognized for the cash payment likely to be awarded based on the performance metrics.

The potential maximum payout of these Liability Awards is 250% of the target cash incentive, resulting in a total potential maximum payout of $4.3 million and $4.3 million for Liability Awards granted during the three-month periods ended March 31, 2024 and 2023, respectively. The settlement generally occurs at the end of three-year performance periods based upon the same performance metrics and vesting period as our performance stock units.

The fair value of these Liability Awards is measured at each reporting period until the awards are settled. These Liability Awards are classified as liabilities and reported in accrued expenses and other long-term obligations within our consolidated balance sheets. As of March 31, 2024, the total remaining unrecognized compensation cost related to Liability Awards was $5.1 million, which is expected to be recognized over a weighted average period of 2.2 years.

Restricted Stock Units

During the three-month period ended March 31, 2024 we granted restricted stock units to certain employees representing 134,553 shares of 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 granted to each employee are subject to such employee’s continued employment through the vesting date, which is four years from the date of grant. As of March 31, 2024, the total remaining unrecognized compensation cost related to restricted stock units was $9.3 million, which will be recognized over a weighted average period of 3.8 years.