Note 15 - Stock-based Compensation

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

NOTE 15 — STOCK-BASED COMPENSATION

The Company makes an estimate of expected forfeitures and recognizes compensation costs only for those stock-based awards expected to vest. As of December 31, 2019, the total future compensation cost related to unvested stock-based awards that are expected to vest is $8.4 million, which will be recognized over a weighted average period of 1.2 years.

During the years ended December 31, 2019, 2018 and 2017, the Company recorded compensation related to stock-based awards as follows:

	Year Ended December 31,
	2019		2018		2017
	(Dollars in thousands)
Cost of revenues	$	3,633	$	3,488	$	3,369
Selling and marketing expenses		4,810		792		452
General and administrative expenses		916		5,938		4,939
Total stock-based compensation expense		9,359		10,218		8,760
Tax effect on stock-based compensation expense		736		668		604
Net effect of stock-based compensation expense	$	8,623	$	9,550	$	8,156

During the fourth quarter of 2019, 2018 and 2017, the Company evaluated the trends in the stock-based award forfeiture rate and determined that the actual rates are 10.7%, 5.3% and 1.1%, respectively. This represents an increase of 101.9%, an increase of 381.8%, and a decrease of 89.3%, respectively, from prior estimates. As a result of the change in the estimated forfeiture rate, there was an immaterial impact on stock-based compensation expense for each of the respective periods.

Valuation assumptions

The Company estimates the fair value of the stock-based awards using the Exercise Multiple-Based Lattice Model as it enables a degree of accounting for the complexities of option valuation and reduces the probability of a measurement error. The dividend yield forecast is expected to be 20% of the Company’s yearly net profit, which is equivalent to a 0.7% yearly weighted average dividend rate in the year ended December 31, 2019. The risk-free interest rate was based on the yield from U.S. constant treasury maturities bonds with an equivalent term. The forfeiture rate is based on trends in actual stock-based awards forfeitures.

The Company calculated the fair value of each stock-based award on the date of grant based on the following assumptions:

	Year Ended December 31,
	2019			2018			2017
For stock based awards issued by the Company:
Risk-free interest rates		1.8	%		2.8	%		1.9	%
Expected lives (in weighted average years)		3.5			3.5			3.1
Dividend yield		0.7	%		0.9	%		0.62	%
Expected volatility (weighted average)		25.1	%		25.5	%		27.2	%

The Company estimated the forfeiture rate (on a weighted average basis) as follows:

	Year Ended December 31,
	2019			2018			2017
Weighted average forfeiture rate		8.6	%		3.1	%		—	%

Stock-based awards

The 2012 Incentive Compensation Plan

In May 2012, the Company’s shareholders adopted the 2012 Incentive Plan, which provides for the grant of the following types of awards: incentive stock options, non-qualified stock options, restricted stock units ("RSUs"), stock appreciation rights ("SARs”), stock units, performance awards, phantom stock, incentive bonuses, and other possible related dividend equivalents to employees of the Company, directors and independent contractors. Under the 2012 Incentive Plan, a total of 4,000,000 shares of the Company’s common stock were reserved for issuance, all of which could be issued as options or as other forms of awards. Options and SARs granted to employees under the 2012 Incentive Plan typically vest and become exercisable as follows: 25% vest 24 months after the grant date, an additional 25% vest 36 months after the grant date, and the remaining 50% vest 48 months after the grant date. Options granted to non-employee directors under the 2012 Incentive Plan will vest and become exercisable one year after the grant date. Restricted stock units granted to directors and members of senior management vest according to a vesting schedule as follows: for the directors, 100% on the first anniversary of the grant date and for members of senior management, 25% on each of the first, second, third and fourth anniversaries of the grant date.  The term of stock-based awards typically ranges from six to ten years from the grant date. The shares of common stock issued in respect of awards under the 2012 Incentive Plan are issued from the Company’s authorized share capital upon exercise of options or SARs. The 2012 Incentive Plan expired in May 2018 upon adoption of the 2018 Incentive Compensation Plan (“2018 Incentive Plan”), except as to stock-based awards outstanding under the 2012 Incentive Plan on that date.

The 2018 Incentive Compensation Plan

In May 2018, the Company held its 2018 Annual Meeting of Stockholders at which the Company's stockholders approved the 2018 Incentive Plan. The 2018 Incentive Plan provides for the grant of the following types of awards: incentive stock options, RSUs, SARs, stock units, performance awards, phantom stock, incentive bonuses and other possible related dividend equivalents to employees of the Company, directors and independent contractors. Under the 2018 Incentive Plan, a total of 5,000,000 shares of the Company’s common stock were authorized and reserved for issuance, all of which could be issued as options or as other forms of awards. SARs and RSUs granted to employees under the 2018 Incentive Plan typically vest and become exercisable as follows: 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date.  SARs and Restricted stock units granted to directors under the 2018 Incentive Plan typically vest and become exercisable (100%) on the first anniversary of the grant date. The term of stock-based awards typically ranges from six to ten years from the grant date. The shares of common stock issued in respect of awards under the 2018 Incentive Plan are issued from the Company’s authorized share capital upon exercise of options or SARs.

On November 7, 2019, the Company granted its directors an aggregate of 11,495 SARs and 9,420 RSUs under the Company’s 2018 Incentive Plan. The exercise price of each SAR was $76.87 which represented the fair market value of the Company’s common stock on the grant date. The SARs will expire six years from date of grant and both the SARs and RSUs will fully vest on the first anniversary of the grant date.

The fair value of each SAR and RSU for the directors on the grant date was $19.8 and $76.4, respectively. The Company calculated the fair value of each SAR on the grant date using the Exercise Multiple-Based Lattice Pricing model based on the following assumptions:

Risk-free interest rate	1.79	%
Expected life (in years)	3.5
Dividend yield	0.57	%
Expected volatility	24.80	%
Forfeiture rate for directors	0.0	%
Sub-Optimal Exercise Factor for directors	2.8

Information on the awards outstanding and the related weighted average exercise price as of and for the years ended December 31, 2019, 2018 and 2017 are presented in the table below:

	Year Ended December 31,
	2019					2018					2017
	Awards (In thousands)			Weighted Average Exercise Price		Awards (In thousands)			Weighted Average Exercise Price		Awards (In thousands)			Weighted Average Exercise Price
Outstanding at beginning of year		2,527		$	46.77		1,548		$	41.35		2,565		$	33.36
Granted, at fair value:
Stock Options		—			—		—			—		30			57.97
SARs*		38			69.13		1,172			53.87		132			62.55
RSUs**		9			—		74			—		23			—
Exercised		(711	)		37.83		(203	)		29.75		(1,181	)		25.92
Forfeited		(71	)		50.59		(64	)		45.73		(21	)		46.15
Expired		—			—		—			—		—			—
Outstanding at end of year		1,792			50.39		2,527			46.77		1,548			41.35
Options and SARs exercisable at end of year		479			48.35		846			42.06		431			32.61
Weighted-average fair value of options and SARs granted during the year				$	29.24				$	16.45				$	22.82

* Upon exercise, SARs entitle the recipient to receive shares of common stock equal to the increase in value of the award between the grant date and the exercise date.

** An RSU represents the right to receive one share of common stock once certain vesting conditions are met. The value of an RSU is identical to the value of the underlying stock.

As of December 31, 2019, 3,584,485 shares of the Company’s common stock are available for future grants under the 2018 Incentive Plan. No shares of the Company’s common stock are available for future grants under the 2012 Incentive Plan as of such date.

The following table summarizes information about stock-based awards outstanding at December 31, 2019 (shares in thousands):

		Awards Outstanding						Awards Exercisable
Exercise Price		Number of Stock-based Awards Outstanding		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value		Number of Stock-based Awards Exercisable		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
$	—		59		1.5	$	4,369		—		—	$	—
	42.87		427		2.5		13,517		230		2.5		7,295
	47.46		15		3.9		406		15		3.9		406
	51.71		8		5.0		182		—		—		—
	53.16		35		4.9		756		15		4.9		329
	53.44		783		4.5		16,498		—		—		—
	55.16		296		3.9		5,724		131		3.9		2,527
	57.97		30		4.6		497		30		4.6		497
	58.79		12		2.5		187		6		2.5		94
	63.35		98		3.9		1,094		52		3.9		581
	71.71		4		5.6		11		—		—		—
	72.14		15		5.7		36		—		—		—
	76.43		10		5.9		—		—		—		—
			1,792		3.8	$	43,277		479		3.2	$	11,729

The following table summarizes information about stock-based awards outstanding at December 31, 2018 (shares in thousands):

		Awards Outstanding						Awards Exercisable
Exercise Price		Number of Stock-based Awards Outstanding		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value		Number of Stock-based Awards Exercisable		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value
$	—		75		1.8	$	3,933		—		—	$	—
	20.13		29		0.3		924		29		0.3		924
	23.34		99		0.4		2,897		99		0.4		2,897
	35.15		15		4.1		257		15		4.1		257
	38.24		15		3.8		211		15		3.8		211
	42.87		942		3.5		8,879		521		3.5		4,918
	47.46		38		4.9		182		38		4.9		182
	53.16		35		5.9		—		—		—		—
	53.44		828		5.5		—		—		—		—
	55.16		296		4.9		—		66		4.9		—
	57.97		30		5.6		—		30		5.6		—
	58.79		16		3.5		—		—		—		—
	63.35		109		4.9		—		33		4.9		—
			2,527		4.3	$	17,283		846		3.3	$	9,389

The aggregate intrinsic value in the above tables represents the total pretax intrinsic value, based on the Company’s stock price of $74.52 and $52.30 as of December 31, 2019 and 2018, respectively, which would have potentially been received by the stock-based award holders had all stock-based award holders exercised their stock-based award as of those dates. The total number of in-the-money stock-based awards exercisable as of December 31, 2019 and 2018 was 479,402 and 846,215, respectively.

The total pretax intrinsic value of options exercised during the year ended December 31, 2019 and 2018 was $19.3 million and $5.2 million, respectively, based on the average stock price of $65.04 and $55.58 during the years ended December 31, 2019 and 2018, respectively. The stock price as of December 31, 2019 and 2018 was $75.14 and $52.30, respectively.