Stock-Based Compensation

The Company’s 2013 Omnibus Incentive Plan (the “2013 Omnibus Plan”) was approved by shareholders on May 7, 2013 and replaced the 2003 Incentive Stock and Awards Plan (the “2003 Stock Plan”) and 2004 Non-Employee Director Stock and Awards Plan (the “2004 Stock Plan”). The 2013 Omnibus Plan also replaced the Company’s Short-Term Incentive Plan (the “STIP”) as of December 31, 2013. The 2003 Stock Plan, the 2004 Stock Plan and the STIP are referred to as the “Prior Plans.” No new awards may be granted under the Prior Plans after the respective termination dates, but the Prior Plans continue to govern awards outstanding; outstanding awards will continue in force and effect until vested, exercised or forfeited pursuant to their terms. The 2013 Omnibus Plan provides for both short-term and long-term incentive awards for employees and non-employee directors. Stock-based awards may take the form of stock options, stock appreciation rights, restricted stock, restricted stock units, and performance share or performance unit awards. The total number of shares of the Company’s common stock originally available for awards under the 2013 Omnibus Plan was 8.0 million shares. On March 18, 2016, the Board of Directors approved an amendment to the 2013 Omnibus Plan to reflect the effect of the Spin-Off of MFS. The amendment adjusted the number of shares of common stock reserved for future awards under the Plan, and in February 2017 the Company registered an additional 22,145,082 shares for issuance under the Plan. The adjustment is in accordance with plan provisions, as the number of shares available under the 2013 Omnibus Plan is subject to adjustments for stock splits, stock dividends and certain other transactions or events in the future.

The 2003 Stock Plan and the 2013 Omnibus Plan provided for both short-term and long-term incentive awards for employees, and the 2013 Omnibus Plan also provided for granting of long-term incentive awards for non-employee members of the Board of Directors. Options granted prior to 2011 became exercisable in 25% increments beginning on the second anniversary of the grant date over a four-year period and expire ten years subsequent to the grant date. Option grants to employees beginning in 2011 became exercisable in 25% increments beginning on the first anniversary of the grant date over a four-year period and expire ten years subsequent to the grant date. Restrictions on restricted stock awards and restricted stock units granted to employees lapse 100% on the third anniversary of the grant date. Restrictions on restricted stock units granted to non-employee members of the Board of Directors lapse 100% on the second anniversary of the grant date. Performance shares are earned based on the extent to which performance goals are met over the applicable performance period. The performance goals and the applicable performance period vary for each grant year. An explanation of the performance goals and the applicable performance period for the 2016 and 2014 awards is set forth below.

The 2004 Stock Plan provided for the granting of stock options to non-employee members of the Board of Directors. No new awards may be made under the 2004 Stock Plan. Stock options awarded under the plan were granted at an exercise price equal to the market price of the common stock at the date of grant and vest immediately and expire ten years subsequent to the grant date. Restrictions on restricted stock awarded to date under the plan lapse on the third anniversary of the award date.

The Company recognizes expense for all stock-based compensation on a straight-line basis over the vesting period of the entire award.

Total stock-based compensation expense recognized within engineering, selling and administrative expenses in the Consolidated Statements of Operations was $4.9 million, $9.7 million and $10.3 million during 2016, 2015 and 2014, respectively. In 2016, the Company also recognized $2.8 million of expense before tax related to restricted stock retention awards and modification of performance awards due to the Spin-Off, and $1.3 million of expense before tax related to the modification of stock awards associated with employee severance; these expenses are included in “other expense” and “restructuring expense,” respectively, within operating earnings in the Consolidated Statements of Operations. The Company recognized stock-based compensation expense before tax of $0.3 million, $4.7 million and $2.4 million related to MFS which is included in “(loss) income from discontinued operations” in the Consolidated Statements of Operations.

Shares are issued out of treasury stock upon exercise for stock options and vesting of restricted stock awards and restricted stock units.

Stock Options

Any option grants to directors are exercisable immediately upon granting and expire ten years subsequent to the grant date. For all outstanding grants made to officers and employees prior to 2011, options become exercisable in 25% increments annually over a four-year period beginning on the second anniversary of the grant date and expire ten years subsequent to the grant date. Starting with 2011 grants to officers and directors, options become exercisable in 25% increments annually over a four-year period beginning on the first anniversary of the grant date and expire ten years subsequent to the grant date.

The Company granted options to acquire 1.8 million, 0.7 million and 0.3 million shares of common stock during 2016, 2015 and 2014, respectively. Stock-based compensation expense is calculated by estimating the fair value of incentive and non-qualified stock options at the time of grant and is amortized over the stock options’ vesting period. The Company recognized $1.8 million, $3.7 million and $4.9 million of compensation expense before taxes associated with stock options during 2016, 2015 and 2014, respectively.

A summary of the Company’s stock option activity is as follows (in millions, except weighted average exercise price per share, which has been adjusted for the Spin-Off):



	Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value
Options outstanding as of January 1, 2015	5.6		$	18.23
Granted	0.7		21.02
Exercised	(0.5	)	9.63
Cancelled	(0.3	)	23.70
Options outstanding as of December 31, 2015	5.5		19.04
Granted	1.8		4.30
Exercised	(2.9	)	3.27
Forfeited	(0.3	)	4.21
Cancelled	(0.2	)	4.32
Options outstanding as of December 31, 2016	3.9		$	4.44	$	7.5
Options exercisable as of:
December 31, 2016	2.0		$	4.55	$	3.9

The outstanding stock options at December 31, 2016 have a range of exercise prices from $0.90 to $9.76 per share. The following table shows the options outstanding and exercisable by range of exercise prices at December 31, 2016 (in millions, except range of exercise price per share, weighted average remaining contractual life and weighted average exercise price):



	Outstanding	Weighted Average Remaining Contractual	Weighted Average		Exercisable	Weighted Average
Range of Exercise Price per Share	Options	Life (Years)	Exercise Price		Options	Exercise Price
$0.90 - $6.00	3.2	7.0	$	3.89	1.3	$	3.25
$6.01 - $7.00	0.4	0.3	6.02		0.4	6.02
$7.01 - $9.00	0.3	1.0	7.90		0.3	7.90
$9.01 - $9.76	—	0.9	9.44		—	9.44
	3.9	3.1	$	4.44	2.0	$	4.55

The Company uses the Black-Scholes valuation model to value stock options. The Company used its historical stock prices as the basis for its volatility assumption for grants prior to the Spin-Off. For grants after the Spin-Off, the Company used an average of historical stock prices of selected peers. The assumed risk-free rates were based on ten-year U.S. Treasury rates in effect at the time of grant. The expected option life represents the period of time that the options granted are expected to be outstanding and is based on historical experience.

As of December 31, 2016, the Company has $2.7 million of unrecognized compensation expense before tax related to stock options, which will be recognized over a weighted average period of 2.9 years.

The weighted average fair value of options granted per share during the years ended December 31, 2016, 2015 and 2014 was $2.05, $10.93 and $14.84, respectively. The fair value of each option grant was estimated at the date of grant using the Black-Scholes option-pricing method with the following assumptions:



	2016		2015		2014
Expected Life (years)	6.5		6.0		6.0
Risk-free Interest rate	1.6	%	1.8	%	1.9	%
Expected volatility	45.0	%	56.0	%	55.0	%
Expected dividend yield	—	%	0.3	%	0.4	%

For the years ended December 31, 2016, 2015 and 2014 the total intrinsic value of stock options exercised was $6.3 million, $5.6 million and $28.5 million, respectively.

Restricted Stock Awards

The Company granted 0.4 million of restricted stock awards granted to employees in 2015 as retention awards to provide incentive for the employees to continue in employment and contribute toward the successful completion of the separation. Under the retention agreements, the restricted shares will vest on the second anniversary of Spin-Off if the employee has been continuously employed with the Company or an affiliate through that second anniversary. In years prior to 2014, the Company granted restricted stock to employees and directors, which vest on the third and second anniversary of the grant, respectively.

The Company recognized $1.8 million, $0.3 million and $1.0 million of compensation expense associated with restricted stock for the years ended December 31, 2016, 2015 and 2014, respectively. Restricted stock award expense is based on the fair value of the Company’s shares as of the grant date.

A summary of activity for restricted stock awards for the year ended December 31, 2016 is as follows (in millions except weighted average grant date fair value):



	Shares		Weighted Average Grant Date Fair Value
Unvested as of January 1, 2016	0.4		$	21.73
Granted	—		—
Vested	(0.2	)	21.73
Forfeited	—		21.73
Unvested as of December 31, 2016	0.2		$	21.73

As of December 31, 2016, the Company has $0.5 million of unrecognized compensation expense before tax related to restricted stock awards which will be recognized over a weighted average period of 1.2 years.

Restricted Stock Units

The Company granted 1.4 million, 0.6 million and 0.4 million of restricted stock units in 2016, 2015 and 2014, respectively. The restricted stock units are earned either based on service over the vesting period, or based on service over the vesting period and on the extent to which performance goals are met over the applicable performance period (“performance shares”). The performance goals and the applicable performance period vary for performance shares each grant year. The Company recognized $4.0 million, $7.5 million and $5.9 million of compensation expense associated with restricted stock units during 2016, 2015 and 2014, respectively.

The restricted stock units granted to employees in 2016 generally vest on the third anniversary of the grant date, assuming continued employment. The restricted stock units granted to directors in 2016 vest on the second anniversary of the grant date, assuming continued service. The performance shares granted in 2016 are earned based on the extent to which performance goals are met by the Company over a three-year period from January 1, 2016 to December 31, 2018. The performance goals for the performance shares granted in 2016 were based fifty percent (50%) on total shareholder return relative to a peer group of companies over the three-year period and fifty percent (50%) on return on invested capital over the three-year period. Depending on the foregoing factors, the number of shares awarded could range from zero to 1.6 million for the 2016 performance share grants. For these awards, the expense is based on the fair value of the Company's shares as of the grant date for the return on invested capital criteria and a Monte Carlo model for the total shareholder return criteria.

The restricted stock units granted to employees in 2015 generally vest on the third anniversary of the grant date, assuming continued employment. The restricted stock units granted to directors in 2015 generally vest on the second anniversary of the grant date, assuming continued service. Performance shares were not granted in 2015 due to the anticipated Spin-Off.

The restricted stock units granted to employees in 2014 generally vest on the third anniversary of the grant date, assuming continued employment. The restricted stock units granted to directors in 2014 vest on the second anniversary of the grant date, assuming continued service. Prior to the Spin-Off, the performance shares granted in 2014 were earned based on the extent to which performance goals were expected to be met by the Company over a three-year period from January 1, 2014 to December 31, 2016. The performance goals for the performance shares granted in 2014 were based fifty percent (50%) on total shareholder return relative to a peer group of companies over the three-year period and fifty percent (50%) on EVA^® improvement over the three-year period. Concurrent with the Spin-Off, the Company's Compensation Committee re-evaluated these performance measures and, due to challenges related to the calculation of the results on such measures on account of the Spin-Off, the Compensation Committee exercised discretion and determined that vesting of the 2014 performance shares would be solely based on service through December 31, 2016. As a result, for employees who met the service condition, the 2014 performance shares paid out at 100% of target. For these awards, the grant date expense was based on the fair value of the Company's shares as of the grant date for the EVA^® improvement criteria and a Monte Carlo model for the total shareholder return criteria. Because of the modification of the 2014 performance awards, the Company also recognized an additional $1.0 million of expense before tax; this expense is included in “other expense” within operating earnings in the Consolidated Statements of Operations.

A summary of activity for restricted stock units for the year ended December 31, 2016 is as follows (in millions except weighted average grant date fair value):



	Shares		Weighted Average Grant Date Fair Value
Unvested as of January 1, 2016	0.7		$	25.53
Granted	1.4		5.36
Vested	(0.2	)	22.43
Forfeited	(0.2	)	11.07
Unvested as of December 31, 2016	1.7		$	11.02

As of December 31, 2016, the Company has $5.4 million of unrecognized compensation expense before tax related to restricted stock units which will be recognized over a weighted average period of 2.0 years.