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Share-Based Compensation | 12 Months Ended
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Dec. 31, 2019
Share-based Payment Arrangement [Abstract] |
Share-Based Compensation | We recognize compensation expense of all employee and non-employee director share-based compensation awards in the financial statements based upon the grant date fair value of the awards over the requisite service or vesting period, less any expense incurred for estimated forfeitures. As of December 31, 2019, we have 3.6 million maximum shares that can be issued as options, stock appreciation rights, and other share-based awards. Shares of our common stock delivered upon exercise or vesting may consist of newly issued shares of our common stock or shares acquired in the open market. Share-based compensation expense is recognized in the “Selling, general and administrative expense” line in the Consolidated Statements of Operations and Comprehensive Income (Loss) except for $1.0 million attributable to discontinued operations for the year ended December 31, 2017. The following table lists the components of share-based compensation expense by type of award.
|  | Year Ended December 31,
|  | 2019 |  | 2018 |  | 2017
Stock options |  | $ | 881 |  |  | $ | 678 |  |  | $ | 1,078 |
Restricted stock |  | 1,897 |  |  | 1,630 |  |  | 1,968 |
Performance share units |  | 1,155 |  |  | 2,076 |  |  | 2,450 |
Change in estimate of share-based award vesting (1) |  | (1,111 | ) |  | (1,968 | ) |  | — |
Share-based compensation expense |  | $ | 2,822 |  |  | $ | 2,416 |  |  | $ | 5,496 |
_______________________ (1) Amounts reflect the decrease in share-based compensation expense based on the change in estimate of the probability of vesting of share-based awards. The total tax benefit for share-based compensation cost was $0.1 million, $0.7 million, and $1.6 million for the years ended December 31, 2019, 2018, and 2017, respectively. Unrecognized compensation cost related to unvested awards was $2.7 million as of December 31, 2019. We expect that cost to be recognized over a weighted-average period of 2.1 years. Stock Options Option awards are typically granted to key employees on an annual basis. A single option grant is typically awarded to eligible employees each year by the Compensation Committee of the Board of Directors. The Compensation Committee occasionally awards additional individual grants to eligible employees. All employees are awarded options at an exercise price equal to the closing price of our stock on the date of grant. The term life of options is generally ten years with a vesting period of generally three years. During the years ended 2019, 2018, and 2017, we granted options to purchase 210,400, 57,800, and 125,700 shares, respectively, to certain key employees. The weighted average grant date fair value of the options granted during 2019, 2018, and 2017 was $2.77, $10.60, and $11.84 per share, respectively. The fair value of our options cannot be determined by market value because they are not traded in an open market. Accordingly, we utilized the Black Scholes financial pricing model to estimate the fair value. The following table shows the weighted average assumptions relevant to determining the fair value of stock options granted in each year.
|  | 2019 |  | 2018 |  | 2017
Expected term |  | 6 years |  |  | 6 years |  |  | 6 years |
Average risk-free interest rate |  | 2.47 | % |  | 2.66 | % |  | 2.03 | %
Expected dividend yield |  | 3.53 | % |  | 1.15 | % |  | 1.16 | %
Expected volatility |  | 49.53 | % |  | 47.69 | % |  | 56.56 | %
Expected forfeiture rate |  | 4.00 | % |  | 4.00 | % |  | 3.00 | %
The expected term is derived from using the simplified method of determining stock option terms as described under the SAB Topic 14, Share-based payment. The simplified method was used because sufficient historical stock option exercise experience was not available, primarily due to the transformation of the management structure over the past several years. The average risk-free interest rate is derived from United States Department of Treasury published interest rates of daily yield curves for the same time period as the expected term. The expected dividend yield is derived by a mathematical formula which uses the expected annual dividends over the expected term divided by the fair market value of our common stock at the grant date. The expected volatility is derived from our actual common stock historical volatility over the same time period as the expected term. The expected volatility rate is derived by mathematical formula utilizing daily closing price data. The expected forfeiture rate is determined from examining the historical pre-vesting forfeiture patterns of past option issuances to key employees. While the expected forfeiture rate is not an input of the Black Scholes financial pricing model for determining the fair value of the options, it is an important determinant of stock option compensation expense to be recorded. The following table summarizes stock option activity for the year ended December 31, 2019.
|  | Number of Options (in thousands) |  | Weighted- Average Exercise Price (per share) |  | Weighted- Average Remaining Contractual Term (years) |  | Aggregate Intrinsic Value |  |
Outstanding at January 1, 2019 |  | 771 |  |  | $ | 15.17 |  |  |  |  |  |  |
Granted |  | 210 |  |  | 7.93 |  |  |  |  |  |  |
Exercised |  | (5 | ) |  | 4.42 |  |  |  |  | $ | 7 |  |  |
Forfeited or expired |  | (201 | ) |  | 11.96 |  |  |  |  |  |  |
Outstanding at December 31, 2019 |  | 775 |  |  | $ | 13.24 |  |  | 5.5 |  | $ | 291 |  |  | (1)
Exercisable at December 31, 2019 |  | 530 |  |  | $ | 14.23 |  |  | 4.0 |  | $ | 30 |  |  | (1)
_______________________________
(1) | The aggregate intrinsic value is the sum of intrinsic values for each exercisable individual option grant. The intrinsic value is the amount by which the closing market price of our stock at December 31, 2019, was greater than the exercise price of any individual option grant.
Cash proceeds from the exercise of options in the years ended December 31, 2019, 2018, and 2017 totaled less than $0.1 million, $0.3 million, and $3.1 million, respectively. The tax benefit recognized from stock option exercises was less than $0.1 million, $0.1 million, and $0.2 million in the years ended December 31, 2019, 2018, and 2017, respectively. For the years ended December 31, 2019, 2018, and 2017, proceeds from stock options are presented exclusive of tax benefits in cash flows from financing activities in the Consolidated Statements of Cash Flows. The total intrinsic value of options exercised during the years ended December 31, 2019, 2018, and 2017 was $7 thousand, $0.5 million, and $3.8 million, respectively. Restricted Stock During the years ended December 31, 2019, 2018, and 2017, we granted 339,498, 86,516, and 85,393 restricted stock awards to non-executive directors, officers, and certain other key employees. The shares of restricted stock granted during the years ended December 31, 2019, 2018, and 2017, vest pro-rata generally over three years for officers and certain other key employees and over one year for non-executive directors. We determined the fair value of the shares awarded by using the closing price of our common stock as of the date of grant. The weighted average grant date fair value of restricted stock granted in the years ended December 31, 2019, 2018, and 2017, was $7.74, $24.55, and $24.29 per share, respectively. The total grant date fair value of restricted stock that vested in the years ended December 31, 2019, 2018, and 2017, was $2.9 million, $1.8 million, and $2.1 million, respectively. The following table summarizes unvested restricted stock award activity for the year ended December 31, 2019.
|  | Number of Unvested Restricted Shares (in thousands) |  | Weighted Average Grant Date Fair Value
Unvested at January 1, 2019 |  | 146 |  |  | $ | 22.07 |
Granted |  | 339 |  |  | 7.74 |
Vested |  | (172 | ) |  | 16.62 |
Forfeited |  | (91 | ) |  | 9.98 |
Unvested at December 31, 2019 |  | 222 |  |  | $ | 9.33 |
Performance Share Units Performance Share Units (“PSUs”) are a form of long-term incentive compensation awarded to executive officers and certain other key employees designed to directly align the interests of employees to the interests of our stockholders, and to create long-term stockholder value. PSUs granted in 2019, 2018 and 2017 were made pursuant to the NN, Inc. 2016 Omnibus Incentive Plan and a Performance Share Unit Agreement (the “2016 Omnibus Agreement”). Some PSUs are based on total shareholder return (“TSR Awards”), and other PSUs are based on return on invested capital (“ROIC Awards”). The TSR Awards vest, if at all, upon our achieving a specified relative total shareholder return, which will be measured against the total shareholder return of the S&P SmallCap 600 Index during specified performance periods as defined in the 2016 Omnibus Agreement. The ROIC Awards will vest, if at all, upon our achieving a specified average return on invested capital during the performance periods. Each performance period generally begins on January 1 of the year of grant and ends 36 months later on December 31. We recognize compensation expense over the performance period in which the performance and market conditions are measured. If the PSUs do not vest at the end of the performance periods, then the PSUs will expire automatically. Upon vesting, the PSUs will be settled by the issuance of shares of our common stock, subject to the executive officer’s continued employment. The actual number of shares of common stock to be issued to each award recipient at the end of the performance periods will be interpolated between a threshold and maximum payout amount based on actual performance results. No dividends will be paid on outstanding PSUs during the performance period; however, dividend equivalents will be paid based on the number of shares of common stock that are ultimately earned at the end of the performance periods. With respect to the TSR Awards, a participant will earn 50% of the target number of PSUs for “Threshold Performance,” 100% of the target number of PSUs for “Target Performance,” and 150% of the target number of PSUs for “Maximum Performance.” With respect to the ROIC Awards, a participant will earn 35% of the target number of PSUs for “Threshold Performance,” 100% of the target number of PSUs for “Target Performance,” and 150% of the target number of PSUs for “Maximum Performance.” For performance levels falling between the values shown below, the percentages will be determined by interpolation. The following table presents the goals with respect to TSR Awards and ROIC Awards granted in 2019, 2018, and 2017.
TSR Awards: |  | Threshold Performance (50% of Shares) |  | Target Performance (100% of Shares) |  | Maximum Performance (150% of Shares)
2019 grants |  | 35 |  | 50 |  | 75
2018 grants |  | 35 |  | 50 |  | 75
2017 grants |  | 35 |  | 50 |  | 75
ROIC Awards: |  | Threshold Performance (35% of Shares) |  | Target Performance (100% of Shares) |  | Maximum Performance (150% of Shares)
2019 grants |  | 4.7 | % |  | 5.8 | % |  | 7.0 | %
2018 grants |  | 15.5 | % |  | 18.0 | % |  | 19.5 | %
2017 grants |  | 15.0 | % |  | 17.5 | % |  | 20.0 | %
We estimate the grant date fair value of TSR Awards using the Monte Carlo simulation model, as the total shareholder return metric is considered a market condition under ASC Topic 718, Compensation – stock compensation. The grant date fair value of ROIC Awards is based on the closing price of a share of our common stock on the date of grant. The following table presents the number of awards granted and the grant date fair value of each award in the periods presented.
|  | TSR Awards |  | ROIC Awards
Award Year |  | Number of Shares (in thousands) |  | Grant Date Fair Value (per share) |  | Number of Shares (in thousands) |  | Grant Date Fair Value (per share)
2019 |  | 136 |  |  | $ | 9.28 |  |  | 174 |  |  | $ | 7.93 |
2018 |  | 55 |  |  | $ | 24.65 |  |  | 55 |  |  | $ | 24.55 |
2017 |  | 46 |  |  | $ | 29.84 |  |  | 53 |  |  | $ | 24.20 |
We recognize expense for ROIC Awards based on the probable outcome of the associated performance condition. We generally recognize an expense for ROIC Awards based on the Target Performance threshold of 100% because, at the date of grant, the Target Performance is the probable level of performance achievement. During 2019, none of the ROIC Awards that were granted in 2017 vested because the actual performance achieved was below the “Threshold Performance” level of 15.0%, as defined by the grant agreement. All of the expense related to the 2017 ROIC Awards was reversed during the year ended December 31, 2018, when we recognized a decrease in share-based compensation expense of $0.8 million in the “Selling, general and administrative expense” line in the Consolidated Statements of Operations and Comprehensive Income (Loss). Also during the year ended December 31, 2018, we determined that the probability of performance achievement for ROIC Awards that were granted in 2018 and 2016 diminished to below the “Threshold Performance” level of 15.5%, as defined by the grant agreement, and recognized a decrease in share-based compensation expense of $1.2 million to reflect the change in estimate of the probability of vesting for the 2018 and 2016 ROIC Awards in the “Selling, general and administrative expense” line in the Consolidated Statements of Operations and Comprehensive Income (Loss). In 2019, we recognized a decrease in share-based compensation expense of $1.1 million in the Selling, general and administrative expense line in the Consolidated Statements of Operations and Comprehensive Income (Loss) to reverse cumulative expense for awards to executives that were forfeited upon termination of employment. Related accrued dividend equivalents of $0.1 million were also reversed in 2019 for awards that are not expected to vest. The following table summarizes changes in unvested PSUs during the year ended December 31, 2019, and changes during the year then ended.
|  | Nonvested TSR Awards |  | Nonvested ROIC Awards
|  | Number of Shares (in thousands) |  | Weighted Average Grant Date Fair Value |  | Number of Shares (in thousands) |  | Weighted Average Grant Date Fair Value
Nonvested at January 1, 2019 |  | 94 |  |  | $ | 26.84 |  |  | 100 |  |  | $ | 24.39 |
Granted |  | 136 |  |  | 9.28 |  |  | 174 |  |  | 7.93 |
Forfeited |  | (151 | ) |  | 16.54 |  |  | (179 | ) |  | 14.21 |
Expired |  | (14 | ) |  | 29.84 |  |  | (16 | ) |  | 24.20 |
Nonvested at December 31, 2019 |  | 65 |  |  | $ | 13.27 |  |  | 79 |  |  | $ | 11.50 |
No TSR Awards or ROIC Awards vested in 2019 or 2018 .

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