Note 15 - Stock-based Compensation

12 Months Ended

Dec. 31, 2021

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, 2021, the total future compensation cost related to unvested stock-based awards that are expected to vest is $8.9 million, which will be recognized over a weighted average period of 1.2 years.

During the years ended December 31, 2021, 2020 and 2019, the Company recorded compensation related to stock-based awards as follows:

	Year Ended December 31,
	2021		2020		2019
	(Dollars in thousands)
Cost of revenues	$	4,656	$	4,435	$	3,633
Selling and marketing expenses		766		1,081		916
General and administrative expenses		3,746		4,314		4,810
Total stock-based compensation expense		9,168		9,830		9,359
Tax effect on stock-based compensation expense		872		858		736
Net effect of stock-based compensation expense	$	8,296	$	8,972	$	8,623

During the fourth quarter of 2021, 2020 and 2019, the Company evaluated the trends the employees stock-based award forfeiture rate and determined that the actual rates are 11.1%, 10.8% and 10.7%, respectively. This represents an increase of 2.8%, 0.9%, and 101.9%, 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 Complex Lattice, Tree-based option-pricing model. The dividend yield forecast is expected to be at least 20% of the Company’s yearly net profit, which is equivalent to a 0.6% yearly weighted average dividend rate in the year ended December 31, 2021. 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,
	2021			2020			2019
For stock based awards issued by the Company:
Risk-free interest rates		0.7	%		0.4	%		1.8	%
Expected lives (in weighted average years)		3.8			5.8			3.5
Dividend yield		0.6	%		0.6	%		0.7	%
Expected volatility (weighted average)		36.7	%		28.8	%		25.1	%

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

	Year Ended December 31,
	2021			2020			2019
Weighted average forfeiture rate		6.1	%		8.2	%		8.6	%

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: 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of 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, Performance Stock Units ("PSUs"), 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, RSUs and PSUs 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, RSUs and PSUs 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.

As of December 31, 2021, 2,591,783 shares of the Company’s common stock are available for future grants under the 2018 Incentive Plan.

In November 2021, the Company granted its directors an aggregate of 11,804 RSUs under the Company’s 2018 Incentive Plan. The RSUs have a vesting period of one year from the grant date.

The average fair value of each RSU on the grant date was $76.2. The Company calculated the fair value of each RSU on the grant date using the complex lattice, tree-based option-pricing model based on the following assumptions:

Risk-free interest rates	0.14%	-	0.16%
Expected life (in years)		1
Dividend yield		0.65%
Expected volatility (weighted average)		43.26%

On December 31, 2020, the Company granted certain members of its management an aggregate of 573 Stock Appreciation Rights ("SARs"), 2,103 RSUs and 1,952 Performance Stock Units ("PSUs") under the Company’s 2018 Incentive Plan. The exercise price of each SAR was $90.28 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 the grant and the SARs, RSUs and PSUs have a vesting period of between 2 to 4 years from the grant date.

The average fair value of each SAR, RSU and PSU on the grant date was $25.50, $89.15 and $96.10, respectively. The Company calculated the fair value of each SAR on the grant date using the complex lattice, tree-based option-pricing model based on the following assumptions:

Risk-free interest rates	0.13%	-	0.51%
Expected life (in years)	2	-	6
Dividend yield		0.61%
Expected volatility (weighted average)	37.68%	-	30.15%

On November 3, 2020, the Company granted some of its directors an aggregate of 11,835 SARs and 10,010 RSUs under the Company’s 2018 Incentive Plan. The exercise price of each SAR was $67.54 which represented the fair market value of the Company’s common stock on the grant date. The SARs will expire in six years from date of the grant and the SARs and RSUs have a vesting period one year from the grant date.

The average fair value of each SAR and RSU on the grant date was $18.25 and $67.13, respectively. The Company calculated the fair value of each SAR on the grant date using the complex lattice, tree-based option-pricing model based on the following assumptions:

Risk-free interest rates	0.12%	-	0.44%
Expected life (in years)	1	-	6
Dividend yield		0.61%
Expected volatility (weighted average)	45.2%	-	29.4%

On May 12, 2020, the Company granted certain members of its management an aggregate of 46,795 SARs, 6,142 RSUs and 5,637 PSUs under the Company’s 2018 Incentive Plan. The exercise price of each SAR was $68.34 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 the SARs, RSUs and PSUs have a vesting period of between 2 to 4 years from the grant date.

The fair value of each SAR, RSU and PSU on the grant date was $17.6, $67.2 and $73.2, respectively. The Company calculated the fair value of each SAR on the grant date using the complex lattice, tree-based option-pricing model based on the following assumptions:

Risk-free interest rates		0.44%
Expected life (in years)	2	-	6
Dividend yield		0.63%
Expected volatility (weighted average)		28.14%

On June 15, 2020, the Company granted certain directors, members of its management and employees an aggregate of 852,475 SARs, 11,068 RSUs and 10,962 PSUs under the Company’s 2018 Incentive Plan. The exercise price of each SAR was $69.14 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, except for 1,156 SARs which have an expiration date of 5 months from the grant date, and the SARs, RSUs and PSUs have a vesting period of between 2 to 4 years from the grant date.

The fair value of each SAR, RSU and PSU on the grant date was $18.0, $68.0 and $65.0, respectively. The Company calculated the fair value of each SAR on the grant date using the complex lattice, tree-based option-pricing model based on the following assumptions:

Risk-free interest rates	0.44%	-	0.28%
Expected life (in years)	2	-	6
Dividend yield		0.64%
Expected volatility (weighted average)	28.5%	-	5.2%

On July 1, 2020, the Company granted its newly appointed CEO an aggregate of 45,365 SARs, 6,020 RSUs and 6,540 PSUs under the Company’s 2018 Incentive Plan. The exercise price of each SAR was $63.40 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 the SARs, RSUs and PSUs have a vesting period of between 2 to 4 years from the grant date.

The fair value of each SAR, RSU and PSU on the grant date was $16.5, $62.3 and $57.3, respectively. The Company calculated the fair value of each SAR on the grant date using the complex lattice, tree-based option-pricing model based on the following assumptions:

Risk-free interest rates	0.41%	-	0.17%
Expected life (in years)	2	-	6
Dividend yield		0.64%
Expected volatility (weighted average)	28.5%	-	35.7%

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)	1	-	6
Dividend yield		0.57%
Expected volatility		24.80%

Information on the awards outstanding and the related weighted average exercise price as of and for the years ended December 31, 2021, 2020 and 2019 are presented in the table below:

	Year Ended December 31,
	2021					2020					2019
	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		2,240		$	57.68		1,792		$	50.39		2,527		$	46.77
Granted:
SARs (1)		15			77.22		957			68.82		38			69.13
RSUs (2)		12			—		35			—		9			—
PSUs (3)		0			—		25			—		—			—
Exercised		(159	)		40.47		(469	)		45.71		(711	)		37.83
Forfeited		(83	)		64.34		(100	)		55.05		(71	)		50.59
Expired		—			—		—			—		—			—
Outstanding at end of year		2,025			58.70		2,240			57.68		1,792			50.39
Options and SARs exercisable at end of year		881			53.20		704			51.64		479			48.35
Weighted-average fair value of awards granted during the year				$	46.23				$	20.84				$	29.24

⁽¹⁾ 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.

⁽²⁾ 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.

⁽³⁾ The Performance shares units shall be paid out based on achievement of three-year relative total stockholder return compared to other companies in S&P 500 index.

The following table summarizes information about stock-based awards outstanding at December 31, 2021 (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
$	—		66		1.3	$	5,208		—		—	$	—
	42.87		187		0.5		6,796		187		0.5		6,796
	47.46		15		1.9		478		15		1.9		478
	51.71		8		3.0		221		4		3.0		110
	53.16		31		2.9		819		26		2.9		689
	53.44		386		2.5		9,985		227		2.5		5,859
	55.16		296		1.9		7,137		296		1.9		7,137
	57.97		15		2.6		320		15		2.6		320
	58.79		1		0.5		19		1		0.5		19
	63.35		88		1.9		1,401		88		1.9		1,401
	63.40		45		4.5		721		—		4.5		—
	67.54		12		4.9		139		12		4.9		139
	68.34		47		4.4		513		—		4.4		—
	69.14		799		4.4		8,123		1		4.4		12
	70.10		1		0.5		5				0.5		—
	71.71		4		3.6		30		2		3.6		15
	76.43		8		3.9		24		8		3.9		24
	76.54		9		5.9		23		—		5.9
	78.53		6		5.3		5		—		5.3
	90.28		1		5.0		—		—		5		—
			2,025		3.0	$	41,967		882		1.8	$	22,999

The following table summarizes information about stock-based awards outstanding at December 31, 2020 (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
$	—		85		2.1	$	7,677		—		—	$	—
	42.87		235		1.5		11,129		235		1.5		11,129
	47.46		15		2.9		642		15		2.9		642
	51.71		8		4.0		309		0		4.0		0
	53.16		31		3.9		1,164		21		3.9		792
	53.44		486		3.5		17,893		129		3.5		4,719
	55.16		296		2.9		10,384		213		2.9		7,484
	57.97		15		3.6		485		15		3.6		485
	58.79		1		1.5		33		—		1.5		—
	63.35		94		2.9		2,525		68		2.9		1,843
	63.40		45		5.5		1,219		—		5.5		—
	67.54		12		5.9		269		—		5.9		—
	68.34		47		5.4		1,027		—		5.4		—
	69.14		842		5.4		17,820		—		5.4		—
	71.71		4		4.6		74		—		4.6		—
	72.14		15		4.7		272		—		4.7		—
	76.43		8		4.9		117		8		4.9		117
	90.28		1		2.8		—		—		2.8		—
			2,240		3.9	$	73,039		704		2.6	$	27,211

The aggregate intrinsic value in the above tables represents the total pretax intrinsic value, based on the Company’s stock price of $79.3 and $90.28 as of December 31, 2021 and 2020, 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, 2021 and 2020 was 881,393 and 704,169, respectively.

The total pretax intrinsic value of options exercised during the year ended December 31, 2021 and 2020 was $6.1 million and $11.0 million, respectively, based on the average stock price of $78.4 and $69.2 during the years ended December 31, 2021 and 2020, respectively.