Stock Plans

6 Months Ended

Jun. 30, 2019

Share-based Payment Arrangement [Abstract]

The 2016 Management Equity Incentive Plan provides for various forms of stock-based compensation for eligible key employees through May 2026. Management stock-based compensation includes stock options, restricted stock, restricted stock units and performance stock units. Additionally, 2019 amounts granted include outstanding Sierra Monitor Corporation awards converted into MSA awards after the merger and acquisition. See Note 19 - Acquisitions for more information. The 2017 Non-Employee Directors’ Equity Incentive Plan provides for grants of stock options and restricted stock to non-employee directors through May 2027. We issue treasury shares for stock option exercises, and grants of restricted stock and performance stock. Please refer to Note 7—Capital Stock for further information regarding stock compensation share issuance.

Stock compensation expense is as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2019		2018		2019		2018
Stock compensation expense	$	3,340	$	2,085	$	6,086	$	7,692
Income tax benefit	815		507		1,485		1,869
Stock compensation expense, net of income tax benefit	$	2,525	$	1,578	$	4,601	$	5,823

Stock options are granted at market value option prices and expire after ten years. Stock options are exercisable beginning three years after the grant date. Stock option expense is based on the fair value of stock option grants estimated on the grant dates using the Black-Scholes option pricing model and the following weighted average assumptions for options granted in 2019.



	2019
Fair value per option	$	59.07
Risk-free interest rate	2.3		%
Expected dividend yield	1.7		%
Expected volatility	31		%
Expected life (years)	6.4

The risk-free interest rate is based on the the U.S. Treasury yield curve. Expected dividend yield is based on the most recent annualized dividend divided by the 1 year average closing share price. Expected volatility is based on the historical volatility using daily stock prices. Expected life is based on historical stock option exercise data.

A summary of stock option activity for the six months ended June 30, 2019, follows:



	Shares		Weighted Average Exercise Price
Outstanding at January 1, 2019	735,001		$	43.79
Granted (Note 19)	23,285		43.54
Exercised	(87,619	)	38.09
Outstanding at June 30, 2019	670,667		44.53
Exercisable at June 30, 2019	657,453		$	44.56

Restricted stock and restricted stock units are valued at the market value of the stock on the grant date. A summary of restricted stock and unit activity for the six months ended June 30, 2019, follows:



	Shares		Weighted Average Grant Date Fair Value
Unvested at January 1, 2019	205,449		$	68.97
Granted	60,760		102.96
Vested	(67,311	)	49.31
Forfeited	(3,701	)	83.88
Unvested at June 30, 2019	195,197		$	87.93

Performance stock units have a market condition modifier and are valued at an estimated fair value using the Monte Carlo model. The final number of shares to be issued for performance stock units granted in the first quarter of 2019 may range from 0% to 200% of the target award based on achieving the specified performance targets over the performance period plus an additional payout modifier based on total shareholder return (TSR) performance. The following weighted average assumptions were used in the Monte Carlo model for units granted in the first quarter of 2019 with a market condition modifier.



Fair value per unit	$99.82
Risk-free interest rate	2.47%
Expected dividend yield	1.57%
Expected volatility	26.6%
MSA stock beta	1.094

The risk-free interest rate is based on the U.S. Treasury Constant Maturity rates as of the grant date converted into an implied spot rate yield curve. Expected dividend yield is based on the most recent annualized dividend divided by the one year average closing share price. Expected volatility is based on the ten year historical volatility using daily stock prices. Expected life is based on historical stock option exercise data.

A summary of performance stock unit activity for the six months ended June 30, 2019, follows:



	Shares		Weighted Average Grant Date Fair Value
Unvested at January 1, 2019	218,886		$	68.43
Granted	79,319		100.77
Performance adjustments	76,960		44.24
Vested	(139,478	)	44.75
Unvested at June 30, 2019	235,687		$	85.14

The performance adjustments above relate primarily to the final number of shares issued for the 2016 Management Performance Units which vested in the first quarter of 2019 at 237.6% of the target award based on cumulative performance against the Operating Margin % and Revenue Growth targets with a payout modifier based upon MSA's Total Shareholder Return during the three year performance period.