Share-Based Compensation

Share-Based Plans

Current Plan

In May 2007, our shareholders approved the 2007 Long-Term Incentive Plan (the 2007 LTIP), which authorizes the Compensation Committee of our Board of Directors (the Board) to grant non-qualified stock options and restricted stock awards to employees, directors, consultants or advisors. In May 2016, our shareholders approved an amendment and restatement of the 2007 Long‑Term Incentive Plan (the Amended 2007 LTIP) and increased the number of shares that may be issued to a total of 9,315,000 shares. As of December 31, 2018, we had 4,453,450 shares available for future issuance including 1,108,023 shares that may be issued as restricted stock.

Stock options granted under the Amended 2007 LTIP have an exercise price equal to our stock’s closing market price on the grant date and expire ten years from the grant date. Restricted stock awards granted under the Amended 2007 LTIP are issued at no cost to the grantee. Both stock options and restricted stock awards vest over time depending on an employee’s length of service with the Company. Share-based awards to our employees generally vest either five years from the grant date or on a three/five year split vest schedule, where half of the awards vest three years from the grant date and the remainder of the awards vest five years from the grant date. Share‑based awards to our non-employee directors vest one year from the grant date.

Beginning with 2016 grants, certain restricted stock awards to our employees contain performance-based criteria in addition to the service-based vesting criteria discussed above. The awards provide for a three-year performance period for the metric to be achieved. If the performance metric fails to be met, it may be extended by one or two years; however, if it is not met by the end of the extended performance period, then all shares of performance-based restricted stock will be immediately forfeited and canceled. Since each grant date, we have concluded attainment of these performance conditions to be probable to be achieved in the first three-year performance period for the 2018, 2017 and 2016 performance-based grants. Further, we achieved the performance condition for the 2016 grant in the first three-year performance period ending December 31, 2018.

Stock Option Awards

The following table summarizes stock option activity under our share-based plans for the year ended December 31, 2018:



	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Balance at December 31, 2017	2,287,399	$	39.67
Granted	85,375	138.03
Less: Exercised	491,448	23.97
Forfeited	2,175	84.32
Balance at December 31, 2018	1,879,151	$	48.19	3.76	$	188,773,097

Exercisable at December 31, 2018	1,358,874	$	31.52	2.45	$	159,166,141

The following table presents information about stock options outstanding and exercisable at December 31, 2018:



	Outstanding Stock Options				Exercisable Stock Options
Range of Exercise Prices	Shares	Weighted Average Remaining Contractual Term (Years)	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
$ 18.44 to $ 24.50	817,077	1.33	$	21.42	817,077	$	21.42
$ 24.51 to $ 69.85	719,599	4.51	51.06		541,797	46.75
$ 69.86 to $ 138.11	342,475	7.96	106.05		—	—
	1,879,151	3.76	$	48.19	1,358,874	$	31.52

The following table summarizes the cash proceeds and tax benefits realized from the exercise of stock options:



	Year Ended December 31,
(in thousands, except share amounts)	2018		2017		2016
Options exercised	491,448		364,984		343,237
Cash proceeds	$	11,779	$	9,809	$	10,340
Intrinsic value of options exercised	$	61,469	$	33,302	$	21,094
Tax benefits realized	$	15,367	$	12,809	$	7,891

We estimated the fair value of employee stock option awards at the grant date based on the assumptions summarized in the following table:



	Year Ended December 31,
(Weighted average)	2018				2017				2016
Expected volatility	23.7		%		26.6		%		29.7		%
Expected term	7.3			years	7.3			years	7.1			years
Risk-free interest rate	2.87		%		2.44		%		1.75		%
Expected dividend yield	1.5		%		1.5		%		1.5		%
Grant date fair value	$	35.71			$	32.00			$	22.86

We calculated expected volatility over the expected term of the awards based on the historical volatility of our common stock. We use weekly price observations for our historical volatility calculation because we believe this provides the most appropriate measurement of volatility given the trading patterns of our common stock. We estimated the expected term based on the vesting period of the awards and our historical exercise activity for awards with similar characteristics. The weighted average expected term is impacted by a higher expected term estimate for stock option awards granted to our named executive officers. The risk-free interest rate is based on the U.S. Treasury zero-coupon issues with a remaining term approximating the expected term of the option. We determined the expected dividend yield based on the anticipated dividends over the expected term.

For purposes of recognizing share-based compensation expense, we ratably expense the estimated fair value of employee stock options over the options’ requisite service period. The requisite service period for our share-based awards is either the vesting period, or if shorter, the period from the grant date to the date that employees meet the retirement provisions of our share-based award agreements. We recognize compensation cost for awards with graded vesting using the graded vesting recognition method.

The following table presents the total share-based compensation expense for stock option awards for the past three years (in thousands):



	2018		2017		2016
Option grants share-based compensation expense	$	3,218	$	3,553	$	3,735
Option grants share-based compensation tax benefits	805		888		1,409

At December 31, 2018, the unamortized compensation expense related to stock option awards totaled $3.3 million. We anticipate that this expense will be recognized over a weighted average period of 2.4 years.

Restricted Stock Awards

The table below presents restricted stock awards activity under our share-based plans for the year ended December 31, 2018:



	Shares	Weighted Average Grant Date Fair Value
Balance unvested at December 31, 2017	297,524	$	83.36
Granted (at market price) ⁽¹⁾	80,598	138.25
Less: Vested	68,149	64.78
Forfeited	2,200	77.89
Balance unvested at December 31, 2018	307,773	$	101.93

⁽¹⁾The majority of these shares contain performance-based vesting conditions.

At December 31, 2018, the unamortized compensation expense related to the restricted stock awards totaled $7.6 million. We anticipate that this expense will be recognized over a weighted average period of 2.7 years.

The table below presents the total number of restricted stock awards that vested for the past three years and the related fair value of those awards (in thousands, except share amounts):



	2018		2017		2016
Restricted stock awards - shares vested	68,149		79,224		95,420
Fair value of restricted stock awards vested	$	9,642	$	9,260	$	7,960

The following table presents the total share-based compensation expense for restricted stock awards for the past three years (in thousands):



	2018		2017		2016
Restricted stock awards share-based compensation expense	$	9,151	$	8,547	$	5,993

Employee Stock Purchase Plan

In March 1998, the Board adopted the SCP Pool Corporation Employee Stock Purchase Plan (the ESPP). Under the ESPP, employees who meet minimum age and length of service requirements may purchase stock at 85% of the lower of:


a.	as amended in May 2016, the closing price of our common stock at the end of a six month plan period ending either July 31 or January 31 (prior to the amendment, the six month plan period ended on June 30 or December 31); or


b.	the average of the beginning and ending closing prices of our common stock for such six month period.

No more than 956,250 shares of our common stock may be issued under the ESPP. For the two six month offering periods in 2018 and 2017, and the one six month offering period in 2016, our employees purchased the following aggregate number of shares:



2018	2017	2016
15,966	16,610	8,649

The grant date fair value for the most recent ESPP purchase period ended July 31, 2018 was $31.43 per share. Share-based compensation expense related to our ESPP was $0.5 million in 2018, $0.4 million in 2017 and $0.2 million in 2016.