10. Equity Securities and Stock‑Based Compensation

Authorized Stock — In addition to the 200.0 million shares of authorized common stock, Headwaters also has 10.0 million shares of authorized preferred stock. No preferred stock was issued or outstanding as of September 30, 2016 or at any time during the periods presented.

Shelf Registration — In August 2015, Headwaters filed a universal shelf registration statement with the SEC. A prospectus supplement describing the terms of any future securities to be issued is required to be filed before any offering can commence under the registration statement.

Treasury Shares Held for Deferred Compensation Obligation — In accordance with the terms of the Directors’ Deferred Compensation Plan (DDCP), non‑employee directors can elect to defer certain compensation and choose from various options how the deferred compensation will be invested. One of the investment options is Headwaters common stock. When a director chooses Headwaters stock as an investment option, Headwaters purchases the common stock in accordance with the director’s request and holds the shares until such time as the deferred compensation obligation becomes payable, normally when the director retires from the Board. At such time, the shares held by Headwaters are distributed to the director in satisfaction of the obligation. Headwaters accounts for the purchase of common stock as treasury stock, at cost. The corresponding deferred compensation obligation is reflected in capital in excess of par value. Changes in the fair value of the treasury stock are not recognized. As of September 30, 2016, the treasury stock and related deferred compensation obligation had fair values of approximately $1.8 million, which was $0.4 million higher than the carrying values at cost.

Grants and Cancellations of Stock Incentive Awards — The Compensation Committee of Headwaters’ Board of Directors (the Committee) approved grants of approximately 0.5 million, 0.3 million and 0.3 million stock‑based awards during 2014, 2015 and 2016, respectively. The awards consisted of stock‑settled SARs and restricted stock granted to officers and employees.

All stock‑based awards for the years 2014 through 2016 and subsequent thereto were granted under the stockholder-approved 2010 Incentive Compensation Plan, and all of the SARs vest over an approximate three‑year period, have an exercise price equal to the fair market value of Headwaters’ common stock on the dates of grant and a contractual term of 10 years. Vesting of the SARs and restricted stock granted prior to September 30, 2015 was subject to 60‑day average stock price hurdles that precluded vesting unless the stock price exceeded by predetermined amounts the stock prices on the dates of grant, which thresholds must be reached prior to the final vest dates. The stock price thresholds for all of those SAR and restricted stock grants were met. Vesting of the SARs and restricted stock granted in fiscal 2016 was subject to a ratio of adjusted EBITDA compared to 1.5 times cash interest expense added to capital expenditures, which threshold must be reached when computed quarterly on a trailing 12-month basis beginning at the end of the fiscal year prior to the final vest date. The adjusted EBITDA ratio threshold was met at September 30, 2016. When exercised by grantees, stock‑settled SARs are settled in Headwaters’ common stock. Headwaters has also granted cash‑settled SARs as described in Note 12.

Stock‑Based Compensation — Stock‑based compensation expense was approximately $2.2 million in 2014, $2.8 million in 2015 and $3.2 million in 2016. The total income tax benefit recognized for stock‑based compensation in the consolidated statements of income was $0 for 2014, $1.0 million for 2015, and $1.1 million for 2016.

Valuation Assumptions — The fair values of stock‑settled SARs have been estimated using the B‑S‑M model. The following table summarizes the assumptions used in determining the fair values of these awards for the years indicated.


	2014		2015		2016
Expected stock volatility	60	%	60	%	55	%
Risk-free interest rates	1.4% - 2.0	%	1.0% - 1.7	%	1.6% - 2.0	%
Expected lives (beyond vest dates)	4 years		4 years		6 years
Dividend yield	0	%	0	%	0	%

Expected stock price volatility was estimated primarily using historical volatilities of Headwaters’ stock. Implied volatilities of traded options on Headwaters’ stock, volatility predicted by other models, and an analysis of volatilities used by other public companies in comparable lines of business to Headwaters were also considered. Risk‑free interest rates used were the U.S. Treasury bond yields with terms corresponding to the expected terms of the awards being valued. In estimating expected lives, Headwaters considered the contractual and vesting terms of awards, along with historical experience; however, due to insufficient pertinent historical data from which to reliably estimate expected lives, Headwaters used estimates based on the “simplified method” set forth by the SEC in Staff Accounting Bulletins No. 107 and 110, where expected life is estimated by summing the award’s vesting term and contractual term and dividing that result by two. Insufficient historical data from which to more reliably estimate expected lives is expected to exist for the foreseeable future due to the varying terms of awards granted in recent and past years, along with other factors.

Equity Compensation Plans — Headwaters has five equity compensation plans under which outstanding awards have been granted, four of which have been approved by stockholders. In connection with stockholder approval of the newest plan, the 2010 Incentive Compensation Plan (2010 ICP), Headwaters agreed to not issue any additional stock‑based awards under any of its other existing incentive compensation plans. Following the grants of equity‑based awards made subsequent to September 30, 2016, approximately 3.5 million shares were available for future grants under the 2010 ICP.

Headwaters uses newly issued shares to meet its obligations to issue stock when awards are exercised. The Committee, or in its absence the full Board, administers and interprets all equity compensation plans. This Committee is authorized to grant stock‑based awards and other awards both under the plans and outside of any plan to eligible employees, officers, directors, and consultants of Headwaters. Terms of awards granted under the plans, including vesting requirements, are determined by the Committee and historically have varied significantly. Most outstanding awards granted under the plans vest over a three-year period, expire ten years from the date of grant and are not transferable other than by will or by the laws of descent and distribution.

Stockholder Approval of Equity Compensation Plans — The following table presents information related to stockholder approval of equity compensation plans as of September 30, 2016:


	(in thousands of shares)
				Shares remaining
		Weighted-average		available for future
	Maximum shares	exercise price of		issuance under existing
	to be issued upon	outstanding		equity compensation plans
	exercise of options	options and other		(excluding shares reflected
Plan Category	and other awards	awards		in the first column)
Plans approved by stockholders	3,448	$	6.73	3,469
Plan not approved by stockholders	203		15.22	—
Total	3,651	$	7.20	3,469

Stock Options — The following table summarizes the activity for all of Headwaters’ stock options:


				Weighted-
		Weighted-		average
		average		remaining	Aggregate
		exercise		contractual term	intrinsic
(in thousands, except per-share amounts)	Shares	price		in years	value
Outstanding at September 30, 2013	618	$	27.42
Forfeited or expired	(437)		26.28
Outstanding at September 30, 2014	181	$	30.17	1.0	$	0
Forfeited or expired	(85)		32.62
Outstanding at September 30, 2015	96	$	27.99	0.8	$	126
Forfeited or expired	(72)		32.80
Outstanding at September 30, 2016	24	$	13.57	1.1	$	80

Exercisable at September 30, 2014	181	$	30.17	1.0	$	0
Exercisable at September 30, 2015	96	$	27.99	0.8	$	126
Exercisable at September 30, 2016	24	$	13.57	1.1	$	80

SARs — The following table summarizes the activity for all of Headwaters’ stock‑settled SARs:


				Weighted-
		Weighted-		average
		average		remaining	Aggregate
		threshold		contractual term	intrinsic
(in thousands, except per-share amounts)	Shares	price		in years	value
Outstanding at September 30, 2013	3,639	$	7.25
Granted	314		9.19
Exercised	(146)		5.18
Forfeited or expired	(77)		16.15
Outstanding at September 30, 2014	3,730	$	7.31	5.7	$	22,893
Granted	234	$	13.03
Exercised	(344)		6.92
Forfeited or expired	(42)		24.83
Outstanding at September 30, 2015	3,578	$	7.52	5.1	$	41,685
Granted	173	$	17.83
Exercised	(195)		7.85
Forfeited or expired	(81)		30.73
Outstanding at September 30, 2016	3,475	$	7.47	4.5	$	33,461

Exercisable at September 30, 2014	3,418	$	7.21	5.5	$	21,604
Exercisable at September 30, 2015	3,320	$	7.21	4.8	$	39,793
Exercisable at September 30, 2016	3,283	$	6.98	4.2	$	33,161

The weighted‑average grant‑date fair value of SARs granted was $4.40, $6.41 and $9.37 in 2014, 2015 and 2016, respectively. The total intrinsic value of SARs exercised was approximately $1.1 million, $3.9 million and $2.1 million in 2014, 2015 and 2016, respectively.

Other Stock‑Based Awards and Unrecognized Compensation Cost — In addition to the SARs granted as reflected in the table above, during 2014 through 2016 Headwaters also issued approximately 0.2 million shares of restricted common stock to officers and employees, all of which vests over an approximate three‑year period. The restricted stock was issued at no cost to the recipients and compensation expense equal to the trading price of the stock on the dates of grant is therefore recognized over the respective vesting periods, which also represent the requisite service periods. The following table summarizes the activity for Headwaters’ nonvested restricted stock during 2016:


		Weighted-
		average
		grant date
(in thousands of shares)	Shares	fair value
Outstanding at beginning of year	126	$	11.51
Granted	90		17.83
Vested	(117)		12.66
Forfeited	(1)		11.46
Outstanding at end of year	98	$	15.98

Headwaters also recognizes compensation expense in connection with its Employee Stock Purchase Plan (ESPP). Compensation expense related to restricted stock and the ESPP was approximately $0.9 million, $1.4 million and $1.6 million in 2014, 2015 and 2016, respectively.

As of September 30, 2016, there was approximately $2.5 million of total compensation cost related to unvested awards not yet recognized, which will be recognized over a weighted‑average period of approximately 1.7 years.