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Share-Based Compensation | 9 Months Ended
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Sep. 30, 2024
Share-Based Payment Arrangement [Abstract] |
Share-Based Compensation | Share-Based Compensation On May 22, 2007, our stockholders adopted a Long-Term Incentive Plan (“LTIP”) which provided 5.0 million shares that could be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance units and performance awards. Under the LTIP, the exercise price of shares granted could not be less than 100% of the fair market value at the date of the grant. On May 24, 2016, our stockholders adopted the 2016 Long-Term Incentive Plan ("2016 Plan") which provides for approximately 13.4 million shares, comprised of 5.1 million new shares provided for under the 2016 Plan, approximately 0.6 million shares that were available for issuance under the previous LTIP that were then authorized for issuance under the 2016 Plan, approximately 3.9 million shares that were approved by the stockholders on May 15, 2018, and an additional 3.8 million shares that were approved by the stockholders on May 12, 2020. On May 21, 2024, our stockholders adopted the 2024 Long-Term Incentive Plan ("2024 Plan") which provides for approximately 2.7 million new shares and approximately 3.7 million shares that were issued and outstanding under the 2016 Plan (as of May 21, 2024) that are now authorized for issuance under the 2024 Plan. The 3.7 million shares issued and outstanding under the 2016 Plan are only eligible for issuance under the 2024 Plan upon forfeiture, expiration, or cancellation. Under the 2024 Plan and previously under the 2016 Plan (collectively, the "Plans"), shares can be granted in the form of stock options, stock appreciation rights, restricted stock awards, performance awards, dividend equivalent rights, and other awards. Under the Plans, the exercise price of shares granted may not be less than 100% of the fair market value at the date of the grant. The Plans are administered by the Compensation Committee of the Board of Directors or such other committee of the Board of Directors as is designated by the Board of Directors (the “Committee”). Membership on the Committee is limited to independent directors. The Committee may delegate certain duties to one or more officers of the Company as provided in the Plans. The Committee determines the persons to whom awards are to be made, determines the type, size and terms of awards, interprets the Plans, establishes and revises rules and regulations relating to the Plans and makes any other determinations that it believes necessary for the administration of the Plans. Options The following weighted average assumptions were used to determine the fair value of the stock options granted on the original grant date for expense recognition purposes for options granted during the nine months ended September 30, 2024 and 2023, using a Black Scholes-Merton Model:
| Nine months ended
| September 30, 2024 |  | September 30, 2023
Senior Leadership 1: |  |  |
Expected (annual) dividend rate | $0.32 |  | $0.32
Expected volatility | 37.90% |  | 37.89%
Risk-free interest rate | 4.14% |  | 4.39%
Expected life (in years) | 4.0 |  | 4.0
Employees: |  |  |
Expected (annual) dividend rate | $0.32 |  | $0.32
Expected volatility | 33.56% |  | 38.30%
Risk-free interest rate | 4.27% |  | 4.41%
Expected life (in years) | 3.0 |  | 3.0
1 Senior Leadership consists of officers and key members of management.
The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date. The following is a summary of stock options vested and exercisable as of September 30, 2024:
Range of Exercise Prices |  | Number of Shares |  | Weighted Average Remaining Contractual Life (in years) |  | Weighted Average Exercise Price |  | Intrinsic Value (in thousands)
$ | 13.95 |  | - | $ | 27.58 |  |  | 1,267,078 |  |  | 3.75 |  | $ | 25.27 |  |  | $ | 104,618 |
$ | 28.28 |  | - | $ | 37.07 |  |  | 534,194 |  |  | 6.01 |  | 31.63 |  |  | 40,709 |
$ | 37.09 |  | - | $ | 107.85 |  |  | 332,194 |  |  | 6.97 |  | 50.80 |  |  | 18,947 |
|  | Total |  | 2,133,466 |  |  | 4.82 |  | $ | 30.84 |  |  | $ | 164,274 |
A summary of stock option activity under the plans is as follows:
Stock Options | Shares |  | Weighted Average Exercise Price
Outstanding at December 31, 2023 | 3,619,585 |  |  | $ | 33.09 |
Granted | 414,016 |  |  | 79.77 |
Exercised | (820,177) |  |  | 31.26 |
Forfeited or Expired | (44,816) |  |  | 52.50 |
Outstanding at September 30, 2024 | 3,168,608 |  |  | $ | 39.34 |
Exercisable at September 30, 2024 | 2,133,466 |  |  | $ | 30.84 |
The total pre-tax compensation cost related to unvested stock options not yet recognized as of September 30, 2024, is $10.8 million and is expected to be recognized over a weighted average period of approximately 2.0 years. The total intrinsic value of options exercised during the nine months ended September 30, 2024 and 2023, was $45.7 million and $27.6 million, respectively. The cash received from options exercised during the nine months ended September 30, 2024 and 2023, was $25.6 million and $25.3 million, respectively. The impact of these cash receipts is included in financing activities in the accompanying consolidated statements of cash flows. Restricted Stock The fair value of restricted stock awards is based on the fair market value of AAON, Inc. common stock on the respective grant dates, reduced for the present value of dividends. At September 30, 2024, unrecognized compensation cost related to unvested restricted stock awards was approximately $5.9 million, which is expected to be recognized over a weighted average period of approximately 1.8 years. A summary of the unvested restricted stock awards is as follows:
| Shares |  | Weighted Average Grant Date Fair Value
Unvested at December 31, 2023 | 187,084 |  |  | $ | 44.07 |
Granted | 65,187 |  |  | 78.26 |
Vested | (96,672) |  |  | 40.87 |
Forfeited | (5,560) |  |  | 56.41 |
Unvested at September 30, 2024 | 150,039 |  |  | $ | 60.53 |
PSUs We have awarded performance restricted stock units ("PSUs") to certain officers and employees under our 2016 Plan. Unlike our restricted stock awards, these PSUs are not considered legally outstanding and do not accrue dividends during the vesting period. These PSUs vest based on the level of achievement with respect to the Company's total shareholder return ("TSR") benchmarked against similar companies included in the capital goods sector of the S&P SmallCap 600 Index. The TSR measurement period is three years. At the end of the measurement period, each award will be converted into common stock at 0% to 200% of the PSUs held, depending on overall TSR as compared to the S&P SmallCap 600 Index benchmark companies. The total pre-tax compensation cost related to unvested PSUs not yet recognized as of September 30, 2024, is $6.0 million and is expected to be recognized over a weighted average period of approximately 1.7 years. The following weighted average assumptions were used to determine the fair value of the PSUs granted on the original grant date for expense recognition purposes for PSUs granted during the nine months ended September 30, 2024 and 2023, using a Monte Carlo Model:
| Nine months ended
| September 30, 2024 |  | September 30, 2023
Expected (annual) dividend rate | $0.32 |  | $0.32
Expected volatility | 33.99% |  | 32.71%
Risk-free interest rate | 4.31% |  | 4.66%
Expected life (in years) | 2.8 |  | 2.8
The expected term of the PSUs is based on their remaining performance period. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of our stock over time periods equal to the expected life at grant date. A summary of the unvested PSUs is as follows:
| Shares |  | Weighted Average Grant Date Fair Value
Unvested at December 31, 2023 | 152,112 |  |  | $ | 54.88 |
Granted | 47,965 |  |  | 106.24 |
Additional payout 1 | 2,059 |  |  | 58.53 |
Vested | (21,919) |  |  | 58.53 |
Forfeited | (5,957) |  |  | 69.81 |
Unvested at September 30, 2024 2 | 174,260 |  |  | $ | 68.09 |
1 The additional number of PSUs earned based on a 110% achievement at December 31, 2023 for awards vesting in 2024.
2 Consists of 70,852 PSUs cliff vesting December 31, 2024, 56,528 PSUs cliff vesting December 31, 2025, and 46,880 PSUs cliff vesting December 31, 2026.
Key Employee Awards As part of the December 2021 acquisition of BASX, the Company granted 39,899 awards to key employees of BASX ("Key Employee Awards"). Unlike our restricted stock awards under the 2016 Plan, the Key Employee Awards are not considered legally outstanding and do not accrue dividends during the vesting period. The issuance of the Key Employee Awards was contingent upon BASX meeting certain post-closing earn-out milestones during each of the years ending 2021, 2022 and 2023 as defined by the BASX acquisition membership interest purchase agreement ("MIPA Agreement") and continued employment with the Company. At the end of the earn-out period, ending December 31, 2023, each eligible Key Employee Award vested and was converted into common stock. The fair value of Key Employee Awards is based on the fair market value of AAON common stock on the grant date. The weighted average grant date fair value of the key awards was $53.45. All pre-tax compensation cost has been recognized as of December 31, 2023, and all 39,899 awards vested in March 2024. Share-Based Compensation A summary of share-based compensation is as follows:
| Three Months Ended |  | Nine Months Ended
| September 30, 2024 |  | September 30, 2023 |  | September 30, 2024 |  | September 30, 2023
Grant date fair value of awards during the period: | (in thousands)
Options | $ | 222 |  |  | $ | 106 |  |  | $ | 9,342 |  |  | $ | 5,224 |
PSUs | 39 |  |  | — |  |  | 5,096 |  |  | 4,907 |
Restricted stock | 73 |  |  | 246 |  |  | 5,102 |  |  | 4,396 |
Total | $ | 334 |  |  | $ | 352 |  |  | $ | 19,540 |  |  | $ | 14,527 |
Share-based compensation expense: |  |  |  |  |  |  |
Options | $ | 1,960 |  |  | $ | 2,228 |  |  | $ | 6,213 |  |  | $ | 6,604 |
PSUs | 1,238 |  |  | 737 |  |  | 3,089 |  |  | 1,820 |
Restricted stock | 1,165 |  |  | 1,053 |  |  | 3,512 |  |  | 2,903 |
Key Employee Awards | — |  |  | 261 |  |  | — |  |  | 775 |
Total | $ | 4,363 |  |  | $ | 4,279 |  |  | $ | 12,814 |  |  | $ | 12,102 |
Income tax benefit (deficiency) related to share-based compensation:
Options | $ | 5,066 |  |  | $ | 478 |  |  | $ | 10,294 |  |  | $ | 5,639 |
PSUs | — |  |  | — |  |  | 169 |  |  | — |
Restricted stock | 32 |  |  | 16 |  |  | 1,003 |  |  | 680 |
Key Employee Awards | — |  |  | — |  |  | 282 |  |  | — |
Total | $ | 5,098 |  |  | $ | 494 |  |  | $ | 11,748 |  |  | $ | 6,319 |
Share-based compensation expense is recognized on a straight-line basis over the service period of the related share-based compensation award. Historically, stock options and restricted stock awards, granted to employees, vested at a rate of 20% per year. Restricted stock awards granted to directors historically vested one-third each year or, if granted on or after May 2019, vest over the shorter of directors' remaining elected term or one-third each year. As of March 2021, all new grants of stock options and restricted stock awards, granted to employees, vest at a rate of 33.3% per year. Forfeitures are accounted for as they occur. Historically, if the employee or director is retirement eligible (as defined by the applicable LTIP, 2016 Plan or 2024 Plan) or becomes retirement eligible during the service period of the related share-based compensation award, the service period (and compensation expense recognition) is the lesser of 1) the grant date, if retirement eligible on grant date, or 2) the period between grant date and retirement eligible date. All stock options and restricted stock awards granted on or after March 1, 2020 to retirement eligible employees or directors contain a one-year employment requirement (minimum service period) or the entire award is forfeited. Forfeitures are accounted for as they occur. The PSUs cliff vest on December 31, at the end of the third year from the date of grant. Share-based compensation expense is recognized on a straight-line basis over the service period of PSUs. The PSUs are subject to several service and market conditions, as defined by the PSU agreement, which allows the holder to retain a pro-rata amount of awards as a result of certain termination conditions, retirement, change in common control, or death. Forfeitures are accounted for as they occur.

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