Stock-Based Compensation Plans

6 Months Ended

Jun. 30, 2020

Share-based Payment Arrangement [Abstract]

Effective January 1, 2020, our shareholders approved the Flowserve Corporation 2020 Long-Term Incentive Plan (“2020 Plan”). The 2020 Plan replaces and supersedes the Flowserve Corporation Equity and Incentive Compensation Plan ("2010 Plan") in its entirety. See Note 7 to our consolidated financial statements included in our 2019 Annual Report for additional information on the 2010 Plan. The 2020 Plan authorizes the issuance of 12,500,000 shares of our common stock in the form of restricted shares, restricted share units and performance-based units (collectively referred to as "Restricted Shares"), incentive stock options, non-statutory stock options, stock appreciation rights and bonus stock, in addition to any shares available for issuance or subject to forfeiture under the 2010 Plan as of its expiration on December 31, 2019. Of the shares of common stock authorized under the 2020 Plan and remaining shares under the 2010 Plan, 13,380,817 were available for issuance as of June 30, 2020. Restricted Shares primarily vest over a three year period. Restricted Shares granted to employees who retire and have achieved at least 55 years of age and 10 years of service continue to vest over the original vesting period ("55/10 Provision"). As of June 30, 2020, 114,943 stock options were outstanding, with a grant date fair value of $2.0 million recognized over three years. As of June 30, 2020, compensation associated with these stock options was fully earned. The total fair value of stock options vested during both the three and six months ended June 30, 2020 was $2.0 million, compared to no stock options vested during both the three and six months ended June 30, 2019. The fair value of each option award was estimated on the date of grant using the Black-Scholes option pricing model. No stock options were granted during the six months ended June 30, 2020 and 2019.

Restricted Shares – Awards of Restricted Shares are valued at the closing market price of our common stock on the date of grant. The unearned compensation is amortized to compensation expense over the vesting period of the restricted shares, except for awards related to the 55/10 Provision which are expensed in the period granted. We had unearned compensation of $32.4 million and $23.4 million at June 30, 2020 and December 31, 2019, respectively, which is expected to be recognized over a remaining weighted-average period of approximately one year. These amounts will be recognized into net earnings in prospective periods as the awards vest. The total fair value of Restricted Shares vested during the three months ended June 30, 2020 and 2019 was $2.9 million and $2.4 million, respectively. The total fair value of Restricted Shares vested during the six months ended June 30, 2020 and 2019 was $21.0 million and $16.3 million, respectively.

We recorded stock-based compensation expense of $3.3 million ($4.2 million pre-tax) and $5.9 million ($7.7 million pre-tax) for the three months ended June 30, 2020 and 2019, respectively. We recorded stock-based compensation expense of $14.4 million ($18.5 million pre-tax) and $11.9 million ($15.3 million pre-tax) for the six months ended June 30, 2020 and 2019, respectively. Performance-based shares granted in 2016 did not vest due to performance targets not being achieved, resulting in 115,302 forfeited shares and a $4.5 million reduction of stock-based compensation expense for the six months ended June 30, 2019.

The following table summarizes information regarding Restricted Shares:


	Six Months Ended June 30, 2020
	Shares	Weighted Average Grant-Date Fair Value
Number of unvested shares:
Outstanding - January 1, 2020	1,690,600	$	46.71
Granted	697,472	47.12
Vested	(458,639)	45.76
Forfeited	(325,048)	49.72
Outstanding as of June 30, 2020	1,604,385	$	46.55

Unvested Restricted Shares outstanding as of June 30, 2020 included approximately 562,000 units with performance-based vesting provisions. Performance-based units are issuable in common stock and vest upon the achievement of pre-defined performance targets. Performance-based units have performance targets based on our average return on invested capital and our total shareholder return ("TSR") over a three-year period. Most unvested units were granted in three annual grants since January 1, 2018 and have a vesting percentage between 0% and 200% depending on the achievement of the specific performance targets. Except for shares granted under the 55/10 Provision, compensation expense is recognized ratably over a cliff-vesting period of 36 months, based on the fair value of our common stock on the date of grant, as adjusted for actual forfeitures. During the performance period, earned and unearned compensation expense is adjusted based on changes in the expected achievement of the performance targets for all performance-based units granted except for the TSR-based units. Vesting provisions range from 0 to approximately 1,124,000 shares based on performance targets. As of June 30, 2020, we estimate vesting of approximately 618,000 shares based on expected achievement of performance targets.