Stock-Based Compensation

The Company has a stock option and grant plan—the Fifth Amended and Restated 1996 Stock Option and Grant Plan (Stock Plan). The Stock Plan, as amended, authorizes the grant of up to 39.8 million shares of the Company's common stock in the form of: (i) incentive stock options (ISOs), (ii) nonqualified stock options, (iii) common stock with or without vesting or other restrictions, (iv) common stock upon the attainment of specified performance goals, (v) restricted stock awards, (vi) the right to receive cash dividends with the holders of the common stock as if the recipient held a specified number of shares of the common stock, (vii) deferred stock awards, (viii) restricted stock unit awards, (ix) stock appreciation rights and (x) cash-based awards.

The Stock Plan provides that: (i) the exercise price of an ISO must be no less than the fair value of the stock at the date of grant and (ii) the exercise price of an ISO held by an optionee who possesses more than 10% of the total combined voting power of all classes of stock must be no less than 110% of the fair market value of the stock at the time of grant. The Compensation Committee of the Board of Directors has the authority to set expiration dates no later than ten years from the date of grant (or five years for an optionee who meets the 10% criterion), payment terms, and other provisions for each grant. The majority of options granted have a four-year vesting period. Shares associated with unexercised options or reacquired shares of common stock (except those shares withheld as a result of tax withholding or net issuance) become available for option grants and common stock issuances under the Stock Plan. The Compensation Committee of the Board of Directors may, at its sole discretion, accelerate or extend the date or dates on which all or any particular award or awards granted under the Stock Plan may vest or be exercised.

In the event of a "sale event," defined in the Stock Plan as a "Transaction," all outstanding awards will be assumed or continued by the successor entity, with appropriate adjustment in the awards to reflect the transaction. In such event, except as the Compensation Committee may otherwise specify with respect to particular awards in the award agreements, if the service relationship of the holder of an award is terminated without cause within 18 months after the sale event, then all awards held by such holder will become fully vested and exercisable at that time. If there is a sale event in which the successor entity refuses to assume or continue outstanding awards, then subject to the consummation of the sale event, all awards with time-based vesting conditions will become fully vested and exercisable at the effective time of the sale event and all awards with performance-based vesting conditions may become vested and exercisable in accordance with the award agreements at the discretion of the Compensation Committee. If awards are not assumed or continued after a sale event, then all such awards will terminate at the time of the sale event. In the event of the termination of stock options or stock appreciation rights in connection with a sale event, the Compensation Committee may either make or provide for a cash payment to the holders of such awards equal to the difference between the per share transaction consideration and the exercise price of such awards or permit each holder to have at least a 15-day period to exercise such awards prior to their termination.

The Company currently issues shares related to exercised stock options or vested awards from its existing pool of treasury shares and has no specific policy to repurchase treasury shares as stock options are exercised or as awards vest. If the treasury pool is depleted, the Company will issue new shares.

Total stock-based compensation expense recognized for the years ended December 31, 2017, 2016 and 2015 is as follows:



	Year Ended December 31,
(in thousands, except per share amounts)	2017			2016			2015
Cost of sales:
Software licenses	$	969		$	701		$	745
Maintenance and service	2,533			1,578			1,868
Operating expenses:
Selling, general and administrative	30,817			15,990			17,153
Research and development	18,835			15,078			14,185
Stock-based compensation expense before taxes	53,154			33,347			33,951
Related income tax benefits	(20,503		)	(10,538		)	(11,656		)
Stock-based compensation expense, net of taxes	$	32,651		$	22,809		$	22,295
Net impact on earnings per share:
Basic earnings per share	$	(0.38	)	$	(0.26	)	$	(0.25	)
Diluted earnings per share	$	(0.38	)	$	(0.26	)	$	(0.24	)

Information regarding stock option transactions is summarized below:



	Year Ended December 31,
	2017				2016				2015
(options in thousands)	Options		Weighted- Average Exercise Price		Options		Weighted- Average Exercise Price		Options		Weighted- Average Exercise Price
Outstanding, beginning of year	3,136		$	56.37	3,986		$	51.07	4,932		$	48.76
Granted	—		$	—	260		$	94.38	57		$	88.10
Issued pursuant to acquisitions	—		$	—	—		$	—	8		$	12.26
Exercised	(956	)	$	49.78	(1,082	)	$	45.57	(975	)	$	40.52
Forfeited	(10	)	$	80.92	(28	)	$	72.07	(36	)	$	70.15
Outstanding, end of year	2,170		$	59.17	3,136		$	56.37	3,986		$	51.07
Vested and Exercisable, end of year	1,930		$	55.11	2,762		$	51.80	3,539		$	48.29



	2017		2016		2015
Weighted-Average Remaining Contractual Term (in years)
Outstanding	4.10		4.62		4.85
Vested and Exercisable	3.57		4.04		4.53
Aggregate Intrinsic Value (in thousands)
Outstanding	$	191,895	$	113,822	$	165,131
Vested and Exercisable	$	178,456	$	112,379	$	156,487

Historical and future expected forfeitures have not been significant and, as a result, the outstanding option amounts reflected in the tables above approximate the options expected to vest.

The fair value of each option grant is estimated on the date of grant, or date of acquisition for options issued in a business combination, using the Black-Scholes option pricing model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Company's options have characteristics significantly different from those of traded options, and changes in input assumptions can materially affect the fair value estimates. The interest rates used were determined by using the five-year Treasury Note yield at the date of grant or date of acquisition for options issued in a business combination. The volatility was determined based on the historic volatility of the Company's stock during the preceding six years for 2017, 2016 and 2015.

The table below presents the weighted average input assumptions used and resulting fair values for options granted or issued in business combinations during each respective year:



	Year Ended December 31,
	2016	2015
Risk-free interest rate	1.19% to 1.93%	1.18% to 1.65%
Expected dividend yield	—%	—%
Expected volatility	24%	25%
Expected term	5.7 years	5.6 years
Weighted-average fair value per share	$23.96	$30.83

The Company did not grant stock option awards in 2017. Forfeitures of awards are accounted for as they occur. The effect of pre-vesting forfeitures on the Company's recorded expense has historically been negligible due to the relatively low turnover of stock option holders.

The Company's determination of fair value of share-based payment awards on the date of grant using an option pricing model is affected by the Company's stock price as well as assumptions regarding a number of variables. The total estimated grant-date fair values of stock options that vested during the years ended December 31, 2017, 2016 and 2015 were $2.9 million, $7.4 million and $12.3 million, respectively. As of December 31, 2017, total unrecognized estimated compensation cost related to unvested stock options granted prior to that date was $5.0 million, which is expected to be recognized over a weighted-average period of 1.8 years. The total intrinsic values of stock options exercised during the years ended December 31, 2017, 2016 and 2015 were $58.5 million, $49.8 million and $47.1 million, respectively. As of December 31, 2017, 0.2 million unvested options with an aggregate intrinsic value of $13.4 million are expected to vest and have a weighted-average exercise price of $91.71 and a weighted-average remaining contractual term of 8.3 years. The Company recorded cash received from the exercise of stock options of $47.6 million and net tax benefits related to stock activity of $20.5 million for the year ended December 31, 2017.

Information regarding stock options outstanding as of December 31, 2017 is summarized below:



(options in thousands)	Options Outstanding				Options Exercisable
Range of Exercise Prices	Options	Weighted- Average Remaining Contractual Life (years)	Weighted- Average Exercise Price		Options	Weighted- Average Exercise Price
$5.91 - $40.89	437	1.74	$	32.01	434	$	32.15
$48.97 - $55.30	392	2.80	$	49.11	392	$	49.11
$58.67	492	3.85	$	58.67	492	$	58.67
$61.68 - $95.09	849	6.05	$	78.06	612	$	72.35

Under the terms of the ANSYS, Inc. Long-Term Incentive Plan, the Company issues various restricted stock awards, which may have a market condition, an operating performance condition or a service condition, or any combination of the three. The Company granted 26,227, 35,000 and 34,450 performance-based restricted stock units with a market condition in 2017, 2016 and 2015, respectively. The percentage of the award that vests is based on the Company's performance as measured by total shareholder return relative to the appreciation of a specified stock index over the measurement period, subject to each participant's continued employment with the Company through the conclusion of the measurement period. As of December 31, 2017, 33,187 units of the total 2015 awards granted were earned and will be issued in 2018. The measurement periods for the restricted stock units granted pursuant to the Long-Term Incentive Plan are one-, two- and three-year periods beginning January 1 of the year of the grant. Each restricted stock unit relates to one share of the Company's common stock. The weighted-average fair value of each restricted stock unit granted in 2017, 2016 and 2015 was estimated on the grant date to be $120.94, $78.71 and $81.61, respectively. The fair value of the restricted stock units was estimated using a Monte Carlo simulation model. The determination of the fair value of the awards was affected by the grant date and a number of variables, each of which has been identified in the chart below. Share-based compensation expense based on the fair value of the award is being recorded from the grant date through the conclusion of the three-year measurement period. Total compensation expense associated with the market condition awards recorded for the years ended December 31, 2017, 2016 and 2015 was $1.8 million, $2.2 million and $3.1 million, respectively.

The table below represents the assumptions used in the Monte Carlo simulation model to determine the fair value of the restricted stock units during each respective year:



	Year Ended December 31,
Assumptions used in Monte Carlo lattice pricing model	2017	2016	2015
Risk-free interest rate	1.5%	1.0%	1.1%
Expected dividend yield	—%	—%	—%
Expected volatility—ANSYS stock price	19%	21%	23%
Expected volatility—NASDAQ Composite Index	15%	16%	14%
Expected term	2.8 years	2.8 years	2.8 years
Correlation factor	0.70	0.65	0.60

The Company issued 104,910, 35,000 and 115,485 performance-based restricted stock awards during 2017, 2016 and 2015, respectively. Of the cumulative performance-based restricted stock awards issued, defined operating metrics were assigned to 85,132, 63,462 and 51,795 awards with grant-date fair values of $106.95, $84.61 and $86.38 during 2017, 2016 and 2015, respectively. The grant-date fair value of the awards is being recorded from the grant date through the conclusion of the measurement period associated with each operating metric based on management's estimates concerning the probability of vesting. As of December 31, 2017, 11,059 units of the total 2015 awards granted were earned and will be issued in 2018. As of December 31, 2017, a total of 69,908 units of the 2017 awards granted were earned and of this total, 34,954 units will be issued in 2018 and 34,954 will be issued in 2020. Total compensation expense associated with the awards recorded for the years ended December 31, 2017, 2016 and 2015 was $6.6 million, $0.4 million and $0.4 million, respectively.

In addition, in 2017, 2016 and 2015, the Company granted restricted stock units of 762,732, 488,622 and 344,500, respectively, that will vest over a three- or four-year period with weighted-average grant-date fair values of $109.56, $88.51 and $86.34, respectively. During 2017, 2016 and 2015, 261,618, 162,019 and 85,713 shares vested and were released, respectively. As of December 31, 2017, 2016 and 2015, 1,262,496, 838,327 and 571,462 units were outstanding, respectively. Total compensation expense is being recorded over the service period and was $37.3 million, $19.1 million and $12.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.

In conjunction with a 2015 acquisition, ANSYS issued 68,451 shares of replacement restricted stock with a weighted-average grant-date fair value of $90.48. Of the $6.2 million grant-date fair value, $3.5 million, related to partially vested awards, was recorded as non-cash purchase price consideration. The remaining fair value will be recognized as stock compensation expense through the conclusion of the service period. Total compensation expense associated with the awards recorded for the years ended December 31, 2017, 2016 and 2015 was $0.6 million, $1.2 million and $0.6 million, respectively.

The Company has granted deferred stock awards to non-affiliate Independent Directors, which are rights to receive shares of common stock upon termination of service as a Director. In 2015 and prior, the deferred stock awards were granted quarterly in arrears and vested immediately upon grant. Associated with these awards, the Company established a non-qualified 409(a) deferred compensation plan with assets held under a rabbi trust to provide Directors an opportunity to diversify their vested awards. During open trading windows and at their elective option, the Directors may convert their Company shares into a variety of non-Company-stock investment options in order to diversify their holdings. As of December 31, 2017, 29,500 shares have been diversified and 159,599 undiversified deferred stock awards have vested with the underlying shares remaining unissued until the service termination of the respective Director owners. In 2017 and 2016, the Company granted 18,018 and 38,400 deferred stock awards, respectively, which will vest in full on the one-year anniversary of the grant. Total compensation expense associated with the awards recorded for the years ended December 31, 2017, 2016 and 2015 was $2.6 million, $1.9 million and $4.0 million, respectively.