Equity Incentive Program

12 Months Ended

Dec. 31, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Share-based Compensation, Performance Shares Award Outstanding Activity [Table Text Block]

13. Equity Incentive Program

The following table summarizes the stock-based compensation expense recognized by the Company for the periods presented:



	Years Ended December 31,
(in millions)	2018		2017		2016
Pre-tax stock-based compensation expense
Cost of goods sold	$	1.6	$	1.8	$	1.5
Research and development expenses	7.8		6.1		4.7
Selling and administrative expenses	17.6		16.8		14.7
Total pre-tax stock-based compensation expense	27.0		24.7		20.9
Tax benefit	—		—		—
Total stock-based compensation expense, net of tax	$	27.0	$	24.7	$	20.9

Compensation expense for stock-based awards is measured based on the fair value of the awards as of the date the stock-based awards are granted and adjusted to the estimated number of awards that are expected to vest. Forfeitures are estimated based on historical experience at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. Compensation costs for stock-based awards are amortized over their service period.

Prior to the Separation in 2014, Knowles employees participated in our Former Parent's incentive stock program. Adopted in connection with the Separation, the Knowles' Corporation 2014 Equity and Cash Incentive Plan (the "Plan") provided for the conversion of certain awards granted under our Former Parent's equity incentive program to Knowles equity awards and authorized the grant of several different forms of benefits, including stock options, RSUs, PSUs, and stock-settled appreciation rights ("SSARs"). In general, each award is subject to the same terms and conditions as were in effect prior to the Separation, except that our Former Parent's performance shares converted to time-based RSUs. In addition, the Company made a grant comprised of both stock options and time-based RSUs that vest 50% on the third and fourth anniversaries from the date of the grant. The Company also made grants of both stock options and time-based RSUs that vest evenly over each of the first three years following the date of the grant. The Company elected to use the straight-line method to attribute the expense over the service period of the awards.

Stock Options and SSARs

The fair value of stock options granted by the Company was estimated on the date of grant using a Black-Scholes option-pricing model based on the assumptions shown in the table below.



	2018			2017			2016
Risk-free interest rate	2.59%			1.73%	to	1.93%	1.04%	to	1.25%
Dividend yield	—%			—%			—%
Expected life (years)	4.5			4.5			4.5
Volatility	41.2%			33.2%	to	38.8%	37.0%	to	39.6%
Fair value at date of grant	$4.83	to	$6.59	$5.02	to	$6.73	$3.76	to	$4.83

The determination of expected volatility is based on a blended peer group volatility for companies in similar industries, stage of life, and with similar market capitalization since there is not sufficient historical volatility data for Knowles common stock over the period commensurate with the expected term of stock options, as well as other relevant factors. The risk-free interest rate is based on U.S. government issues with a remaining term equal to the expected life of the stock options. The expected term is the period over which our employees are expected to hold their options. It is based on the simplified method from the SEC’s safe harbor guidelines. The Company does not currently anticipate paying dividends over the expected term.

The exercise price per share for the stock options granted by the Company was equal to the closing price of Knowles' stock on the NYSE on the date of the grant. The period during which options granted by the Company were exercisable was fixed by Knowles' Compensation Committee of the Board of Directors at the time of grant. Generally, stock options vest one-third on each of the first three anniversaries of the grant date and expire 7 years from the grant date.

The following table summarizes the Company's SSAR and stock option activity for the year ended December 31, 2018.



	SSARs							Stock Options
	Number of Shares		Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Term (Years)	Number of Shares		Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Term (Years)
(in millions, except share and per share amounts)
Outstanding at December 31, 2017	850,516		$	21.54				4,901,739		$	18.36
Granted	—		—					963,692		14.34
Exercised	(30,624	)	12.26					(44,326	)	11.02
Forfeited	—		—					(120,458	)	15.54
Expired	(37,897	)	22.79					(229,154	)	21.63
Outstanding at December 31, 2018	781,995		$	21.85	$	—	3.1	5,471,493		$	17.64	$	3.4	4.1

Exercisable at December 31, 2018	781,995		$	21.85	$	—	3.1	3,517,954		$	19.31	$	2.2	3.5

The aggregate intrinsic value in the table above represents the difference between the Company's closing stock price on December 31, 2018 and the exercise price of each SSAR and stock option, multiplied by the number of in-the-money awards.

There was no unrecognized compensation expense related to SSARs at December 31, 2018. Unrecognized compensation expense related to stock options not yet exercisable at December 31, 2018 was $5.8 million. This cost is expected to be recognized over a weighted-average period of 1.3 years.

Other information regarding the exercise of SSARs and stock options is listed below:



	Years Ended December 31,
(in millions)	2018		2017		2016
SSARs
Fair value of SSARs that are exercisable	$	1.8	$	1.9	$	1.9
Aggregate intrinsic value of SSARs exercised	0.1		0.2		0.1

Stock Options
Cash received by Knowles for exercise of stock options	0.5		3.3		—
Aggregate intrinsic value of options exercised	0.2		1.1		—

RSUs

The following table summarizes the Company's RSU balances for the year ended December 31, 2018:



	Share units		Weighted-average grant date fair value
Unvested at December 31, 2017	2,202,576		$	16.54
Granted	1,707,911		14.28
Vested	(1,036,207	)	16.95
Forfeited	(427,849	)	14.84
Unvested at December 31, 2018	2,446,431		$	15.12

RSUs generally vest based on the passage of time. RSUs have a three year vesting schedule and vest one-third on each of the first three anniversaries of the grant date. At December 31, 2018, $23.1 million of unrecognized compensation expense related to RSUs is expected to be recognized over a weighted-average period of 1.3 years.

PSUs

In February 2018 and 2017, the Company granted PSUs to senior management. In each case, the awards will cliff vest three years following the grant date and the number of PSUs that may be earned and vest is based on the Company's revenues and stock price performance over a three year performance period. PSUs will be settled in shares of the Company's common stock. Depending on the Company's overall performance relative to revenues and stock price, the size of the PSU awards are subject to adjustment, up or down, resulting in awards at the end of the performance period that can range from 0% to 225% of the initial grant value. The Company will ratably recognize the expense over the applicable service period for each grant of PSUs and adjust the expense as appropriate. The fair value of the PSUs is determined by using a Monte Carlo simulation.

The following table summarizes the Company's PSU balances for the year ended December 31, 2018:



	Share units	Weighted-average grant date fair value
Unvested at December 31, 2017	176,000	$	15.32
Granted	381,967	13.78
Vested	—	—
Forfeited	—	—
Unvested at December 31, 2018	557,967	$	14.27

At December 31, 2018, $6.3 million of unrecognized compensation expense related to PSUs is expected to be recognized over a weighted-average period of 1.9 years.