Share-Based Compensation

The following table lists the components of share-based compensation expense by type of award.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Stock options	$	371		$	173		$	732		$	531
Restricted stock	446			388			1,407			1,244
Performance share units	334			530			991			1,650
Change in estimate of share-based award vesting	(1,275		)	(802		)	(1,275		)	(802		)
Share-based compensation expense	$	(124	)	$	289		$	1,855		$	2,623

Stock Options

During the nine months ended September 30, 2019, we granted options to purchase 210,400 shares to certain key employees. The weighted average grant date fair value of the options granted during the nine months ended September 30, 2019, was $2.77 per share. The fair value of our options cannot be determined by market value because they are not traded in an open market. Accordingly, we utilized the Black Scholes financial pricing model to estimate the fair value.

The following table shows the weighted average assumptions relevant to determining the fair value of stock options granted in 2019.



	2019
Expected term	6 years
Risk free interest rate	2.47	%
Dividend yield	3.53	%
Expected volatility	49.53	%
Expected forfeiture rate	4.00	%

The expected term is derived from using the simplified method of determining stock option terms as described under the Staff Accounting Bulletin Topic 14, Share-based payment. The simplified method was used because sufficient historical stock option exercise experience was not available, primarily due to the transformation of the management structure over the past several years.

The average risk-free interest rate is derived from United States Department of Treasury published interest rates of daily yield curves for the same time period as the expected term.

The expected dividend yield is derived by a mathematical formula which uses the expected annual dividends over the expected term divided by the fair market value of our common stock at the grant date.

The expected volatility rate is derived from our actual common stock historical volatility over the same time period as the expected term. The volatility rate is derived by a mathematical formula utilizing daily closing price data.

The forfeiture rate is determined from examining the historical pre-vesting forfeiture patterns of past option issuances to key employees. While the forfeiture rate is not an input of the Black Scholes model for determining the fair value of the options, it is an important determinant of stock option compensation expense to be recorded.

The following table presents stock option activity for the nine months ended September 30, 2019.



	Number of Options (in thousands)		Weighted- Average Exercise Price (per share)		Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Outstanding at January 1, 2019	771		$	15.17
Granted	210		7.93
Exercised	(5	)	4.42			$	7
Forfeited or expired	(139	)	15.61
Outstanding at September 30, 2019	837		$	13.34	6.0	$	—	⁽¹⁾
Exercisable at September 30, 2019	570		$	14.24	4.6	$	—	⁽¹⁾

_______________________________


(1)	The aggregate intrinsic value is the sum of intrinsic values for each exercisable individual option grant. The intrinsic value is the amount by which the closing market price of our stock at September 30, 2019, was greater than the exercise price of any individual option grant.

Restricted Stock

During the nine months ended September 30, 2019, we granted 309,234 restricted stock awards to non-executive directors, officers and certain other key employees. The shares of restricted stock granted during the nine months ended September 30, 2019, vest pro-rata over three years for officers and certain other key employees and over one year for non-executive directors. We determined the fair value of the shares awarded by using the closing price of our common stock as of the date of grant. The weighted average grant date value of restricted stock granted in the nine months ended September 30, 2019, was $7.85 per share. Total grant-date fair value of restricted stock that vested in the nine months ended September 30, 2019, was $2.6 million.

The following table presents the status of unvested restricted stock awards as of September 30, 2019, and changes during the nine months then ended.



	Nonvested Restricted Shares (in thousands)		Weighted Average Grant-Date Fair Value (per share)
Nonvested at January 1, 2019	146		$	22.07
Granted	309		7.85
Vested	(144	)	18.14
Forfeited	(79	)	10.09
Nonvested at September 30, 2019	232		$	9.62

Performance Share Units

Performance Share Units (“PSUs”) are a form of long-term incentive compensation awarded to executive officers and certain other key employees designed to directly align the interests of employees to the interests of our stockholders, and to create long-term stockholder value. PSUs granted in 2019 were made pursuant to the NN, Inc. 2016 Omnibus Incentive Plan and a Performance Share Unit Agreement (the “2016 Omnibus Agreement”). Some PSUs are based on total shareholder return (“TSR Awards”), and other PSUs are based on return on invested capital (“ROIC Awards”).

The TSR Awards vest, if at all, upon our achieving a specified relative total shareholder return, which will be measured against the total shareholder return of the S&P SmallCap 600 Index during specified performance periods as defined in the 2016 Omnibus Agreement. The ROIC Awards vest, if at all, upon our achieving a specified average return on invested capital during the performance periods. Each performance period generally begins on January 1 of the year of grant and ends 36 months later on December 31.

We recognize compensation expense over the performance period in which the performance and market conditions are measured. If the PSUs do not vest at the end of the performance periods, then the PSUs will expire automatically. Upon vesting, the PSUs will be settled by the issuance of shares of our common stock, subject to the award recipient’s continued employment. The actual number of shares of common stock to be issued to each award recipient at the end of the performance periods will be interpolated between a threshold and maximum payout amount based on actual performance results. No dividends will be paid on outstanding PSUs during the performance period; however, dividend equivalents will be paid based on the number of shares of common stock that are ultimately earned at the end of the performance periods.

With respect to the TSR Awards, a participant will earn 50% of the target number of PSUs for “Threshold Performance,” 100% of the target number of PSUs for “Target Performance,” and 150% of the target number of PSUs for “Maximum Performance.” With respect to the ROIC Awards, a participant will earn 35% of the target number of PSUs for “Threshold Performance,” 100% of the target number of PSUs for “Target Performance,” and 150% of the target number of PSUs for “Maximum Performance. For performance levels falling between the values shown below, the percentages will be determined by interpolation.

The following table presents the goals with respect to TSR Awards and ROIC Awards granted in 2019.



TSR Awards:	Threshold Performance (50% of Shares)		Target Performance (100% of Shares)		Maximum Performance (150% of Shares)
2019 grants	35th Percentile		50th Percentile		75th Percentile

ROIC Awards:	Threshold Performance (35% of Shares)		Target Performance (100% of Shares)		Maximum Performance (150% of Shares)
2019 grants ⁽¹⁾	4.7	%	5.8	%	7.0	%


(1)	For the ROIC Awards granted in 2019, the denominator of the calculation is different than in prior years, and therefore the target percentages are not comparable to historical target percentages.

We estimate the grant date fair value of TSR Awards using the Monte Carlo simulation model, as the total shareholder return metric is considered a market condition under ASC Topic 718, Compensation – stock compensation. The grant date fair value of ROIC Awards is based on the closing price of a share of our common stock on the date of grant.

The following table presents the number of PSUs granted and the grant date fair value in the period presented.



	TSR Awards			ROIC Awards
Award Year	Shares (in thousands)	Grant Date Fair Value (per share)		Shares (in thousands)	Grant Date Fair Value (per share)
2019	136	$	9.28	174	$	7.93

We recognize expense for ROIC Awards based on the probable outcome of the associated performance condition. We generally recognize an expense for ROIC Awards based on the Target Performance threshold of 100% because, at the date of grant, the Target Performance is the probable level of performance achievement.

The following table presents the status of unvested PSUs as of September 30, 2019, and changes during the nine months then ended.



	Nonvested TSR Awards				Nonvested ROIC Awards
	Shares (in thousands)		Weighted Average Grant-Date Fair Value (per share)		Shares (in thousands)		Weighted Average Grant-Date Fair Value (per share)
Nonvested at January 1, 2019	94		$	26.84	100		$	24.39
Granted	136		9.28		174		7.93
Forfeited	(139	)	16.76		(164	)	14.20
Nonvested at September 30, 2019	91		$	16.03	110		$	13.53