Stock Options and Employee Stock Purchase Plan

9 Months Ended

Sep. 30, 2021

Share-based Payment Arrangement [Abstract]

Stock Options and Employee Stock Purchase Plan

The Company’s share-based compensation plans include the 2007 Stock Plan (the “2007 Plan”), 2015 Stock Option Plan (the “2015 Plan”) and 2001 Employee Stock Purchase Plan (the “Purchase Plan”). Each plan is described below.

The 2007 Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units and other share-based awards. 4,500,000 shares of the Company’s common stock are authorized to be used for 2007 Plan purposes. Options under the 2007 Plan may be granted at exercise prices determined by the Board of Directors, provided that the exercise prices shall not be less than the fair market value of the Company’s common stock on the date of grant for incentive stock options and not less than 85% of the fair market value of the Company’s common stock on the date of grant for non-statutory stock options. As of September 30, 2021, 7,000 shares underlying options and zero shares of restricted units were outstanding under the 2007 Plan. The 2007 Plan terminated on February 14, 2017.

The 2015 Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance share units and other share-based awards. 4,200,000 shares of the Company’s common stock are authorized to be used for 2015 Plan purposes. Options under the 2015 Plan may be granted at exercise prices determined by the Board of Directors, provided that the exercise prices shall not be less than the higher of the par value or 100% of the fair market value of the Company’s common stock subject to the option on the date the option is granted. As of September 30, 2021, 400,000 shares underlying options and 246,018 shares of restricted stock units were outstanding under the 2015 Plan.

All stock option grants are approved by “outside directors” within the meaning of Internal Revenue Code Section 162(m).

Stock Options

The following table represents stock option activity for the nine months ended September 30, 2021:


	Number of Shares	Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2021	475,601	$	69.61
Granted	—	—
Exercised	(68,601)	42.08
Canceled	—	—
Outstanding at September 30, 2021	407,000	$	74.25	6.2	$	25,385,630
Exercisable at September 30, 2021	157,000	$	73.00	6.0	$	9,988,130
Vested and expected to vest at September 30, 2021	346,640	$	74.11	6.1	$	21,668,058

The total intrinsic values of options exercised during the nine months ended September 30, 2021 and 2020 were $5.6 million and $3.0 million, respectively.

The Company recognized $0.2 million and $0.2 million of compensation expense related to stock options for the three months ended September 30, 2021 and 2020, respectively, and $0.6 million and $0.7 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021 and December 31, 2020, unrecognized stock compensation related to non-vested stock options granted under each of the share-based compensation plans approximated $5.1 million and $5.8 million, respectively. Unrecognized stock compensation expense related to non-vested stock options granted under these plans is expected to be recognized ratably over a weighted-average period of 4.3 (i.e., the remaining requisite service period).

Fair Value Disclosure

The Company uses the Black-Scholes option pricing model to calculate the fair value of each option grant. The expected volatility is based on historical volatility of the Company’s common stock. The Company estimates the expected term based upon the historical exercise behavior of its employees. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. The Company uses an annualized dividend yield based upon the per share dividends declared by its Board of Directors. Estimated forfeiture rates were 12.4% and 11.8% as of September 30, 2021 and 2020, respectively.

Restricted Stock and Restricted Stock Units

The Company has awarded restricted stock and restricted stock units to its Board of Directors and senior staff pursuant to certain share-based compensation plans. Compensation expense resulting from restricted stock and restricted unit grants is measured at fair value on the date of grant and is recognized as share-based compensation expense over the applicable vesting period. Vesting periods are approximately one year for awards to members of the Company’s Board of Directors, four or five years for senior staff (excluding market-based awards discussed below) and eight years for the Chief Executive Officer.

Restricted Stock and Restricted Stock Units with Market Conditions

The Company has awarded certain key employees market-based restricted stock and restricted stock units pursuant to the 2015 Plan. The market-based shares have vesting conditions that are based on specified stock price targets of the Company’s common stock. Market conditions were factored into the grant date fair value using a Monte Carlo valuation model, which utilized multiple input variables to determine the probability of the Company achieving the specified stock price targets with a 20-day and 30-day lookback (trading days). Stock-based compensation expense related to an award with a market condition will be recognized over the requisite service period using the graded-vesting method regardless of whether the market condition is satisfied, provided that the requisite service period has been completed. During the nine months ended September 30, 2021 and 2020, the Company awarded 73,094 and 82,112 market-based shares, respectively. The per share weighted average grant-date fair values of the market-based shares granted during the nine months ended September 30, 2021 and 2020 were $94.40 and $70.99, respectively.

The weighted-average fair values of market-based shares granted have been estimated utilizing the following assumptions:


	September 30, 2021			September 30, 2020
Underlying stock price at valuation date	$	113.27		$	91.17
Expected volatility	30.3		%	27.0		%
Risk-free interest rate	1.3		%	0.7		%

Restricted stock award activity for the nine months ended September 30, 2021 is set forth below:


	Shares	Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2021	820,566	$	62.66
Granted	—	—
Vested	(421,923)	62.47
Canceled	(3,277)	82.96
Nonvested at September 30, 2021	395,366	$	61.62

Restricted stock unit award activity for the nine months ended September 30, 2021 is set forth below:


	Number of Shares	Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2021	209,784
Granted	164,257
Vested	(124,761)
Canceled	(3,262)
Outstanding at September 30, 2021	246,018	3.2	$	33,610,979
Vested and expected to vest at September 30, 2021	170,143	2.5	$	23,244,890

The Company recognized $5.7 million and $5.1 million of compensation expense related to restricted stock, restricted stock units and market-based awards for the three months ended September 30, 2021 and 2020, respectively, and $16.4 million and $16.4 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021 and December 31, 2020, the Company had unrecognized share-based compensation cost of approximately $37.3 million and $38.6 million, respectively, associated with these awards. This cost is expected to be recognized over a weighted-average period of 3.6 for awards and 4.1 for units.

Employee Stock Purchase Plan

The Purchase Plan provides for the issuance of a maximum of two million shares of the Company’s common stock. Under the Purchase Plan, eligible employees can have up to 15% of their earnings withheld, up to certain maximums, to be used to purchase shares of the Company’s common stock at certain plan-defined dates. The price of the Company’s common stock purchased under the Purchase Plan for the offering periods is equal to 85% of the lesser of the fair market value of a share of common stock of the Company on the beginning or the end of the offering period.

The Company determined that a plan provision exists which allows for the more favorable of two exercise prices, commonly referred to as a “look-back” feature. The purchase price discount and the look-back feature cause the Purchase Plan to be compensatory and the Company to recognize compensation expense. The compensation cost is recognized on a straight-line basis over the requisite service period. The Company used the Black-Scholes option pricing model to calculate the estimated fair value of the purchase right issued under the ESPP. The expected volatility is based on historical volatility of the Company’s common stock. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. The Company uses an annualized dividend yield based upon the per share dividends declared by its Board of Directors. Estimated forfeiture rates were 11.15% and 16.50% as of September 30, 2021 and 2020, respectively. The increase in forfeiture rate comes as a result of the Purchase Plan being offered to all employees regardless of employment location.

For the nine months ended September 30, 2021 and 2020, 58,145 and 53,694 shares were purchased under the Purchase Plan, respectively. Cash received upon the issuance of the Company’s common stock under the Purchase Plan was $4.2 million and $3.3 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, 1,346,794 shares were available under the Purchase Plan for future issuance.

The Company recognized $0.8 million and $0.5 million of compensation expense related to the Purchase Plan for the three months ended September 30, 2021 and 2020, respectively, and $2.1 million and $1.5 million for the nine months ended September 30, 2021 and 2020, respectively.

The compensation expense related to the Purchase Plan has been estimated utilizing the following assumptions:


	September 30, 2021	September 30, 2020
Risk-free interest rate	0.06%	0.13%
Expected term (in years)	0.5	0.5
Dividend yield	0.00%	0.00%
Expected volatility	35.62%	23.95%
Weighted average volatility	35.62%	23.95%