Note 9. Stock-Based Compensation

The Company has outstanding stock-based compensation awards granted under the 2013 Stock Incentive Plan (“2013 Plan”) and the 2017 Omnibus Incentive Plan (“2017 Plan”) as described in Note 15, “Stock-Based Compensation” of the Consolidated Financial Statements in its annual report on Form 10-K for the fiscal year ended December 31, 2017.

Prior to the Company’s initial public offering in May 2017, the Company had certain repurchase rights on stock acquired through the exercise of a stock option that created an implicit service period and created a condition in which an optionee may not receive the economic benefits of the option until the repurchase rights are eliminated. The repurchase rights creating the implicit service period were eliminated at the earlier of an initial public offering or change of control event. Before the elimination of the repurchase rights, because an initial public offering or change of control were not probable of occurring, no compensation expense was recorded for equity awards. The Company recognized a liability for compensation expense measured at intrinsic value when it was probable that an employee would receive benefits under the terms of the plan due to the termination of employment.

Under the terms of the 2013 Plan, concurrent with the initial public offering, the Company no longer retains repurchase rights on stock acquired through the exercise of a stock option and the implicit service period was eliminated on outstanding stock options.

In the three and nine month periods ended September 30, 2017, the Company recognized stock-based compensation expense of approximately $7.8 million and $69.2 million, respectively. The Company recognized stock-based compensation expense of approximately $0.9 million and $6.1 million for the three and nine month periods ended September 30, 2018, respectively. These costs are included in “Other operating expense, net” in the Condensed Consolidated Statements of Operations.

The $6.1 million of stock-based compensation expense for the nine month period ended September 30, 2018 included expense for modifications of equity awards for certain former employees of $3.8 million and expense for equity awards granted under the 2013 Plan and 2017 Plan of $5.3 million reduced by a benefit for a reduction in the liability for stock appreciation rights (“SAR”) of $3.0 million.

The $3.8 million stock-based compensation expense for modifications for the nine month period ended September 30, 2018 provided continued vesting through scheduled vesting dates and extended expiration dates for certain former employees. The incremental stock-based compensation was determined using the Black-Scholes option pricing model based on assumptions which included expected lives of 1.0 to 1.3 years, a risk-free rate of 2.0%, assumed volatility of 26.8% to 27.3% and an expected dividend rate of 0.0%.

As of September 30, 2018, there was $22.8 million of total unrecognized compensation expense related to outstanding stock options and restricted stock awards.

SARs, granted under the 2013 Plan are expected to be settled in cash and are accounted for as liability awards. As of September 30, 2018, a liability of approximately $13.8 million for SARs was included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.

Stock Option Awards

The following assumptions were used to estimate the fair value of options granted (excluding previously disclosed modified awards) during the nine month periods ended September 30, 2018 and 2017 using the Black-Scholes option-pricing model.

	Nine Month Period Ended September 30, 2018			Nine Month Period Ended September 30, 2017
Assumptions:
Expected life of options (in years)		7.0 - 7.5			5.0 - 6.3
Risk-free interest rate		2.9% - 3.0	%		1.9% - 2.1	%
Assumed volatility		34.4 - 35.4			41.2 - 45.8	%
Expected dividend rate		0.0	%		0.0	%

A summary of the Company’s stock option (including SARs) activity for the nine month period ended September 30, 2018 is presented in the following table (underlying shares in thousands).

	Shares			Weighted-Average Exercise Price (per share)
Outstanding at December 31, 2017		12,834		$	9.54
Granted		848		$	31.74
Exercised or settled		(752	)	$	8.36
Forfeited		(433	)	$	16.21
Outstanding at September 30, 2018		12,497		$	10.88

Vested at September 30, 2018		8,612		$	9.03

Restricted Stock Unit Awards

A summary of the Company’s restricted stock unit activity for the nine month period ended September 30, 2018 is presented in the following table (underlying shares in thousands).

	Shares			Weighted-Average Grant-Date Fair Value
Non-vested as of December 31, 2017		-		$	-
Granted		365		$	31.84
Vested		-		$	-
Forfeited		(10	)	$	32.06
Non-vested as of September 30, 2018		355		$	31.83

Deferred Stock Units

Concurrent with the Company’s initial public offering in May of 2017, the Company’s Board authorized the grant of 5.5 million deferred stock units (“DSU”) to all permanent employees that had not previously received stock-based awards under the 2013 Plan. The DSUs vested immediately upon grant, however contained restrictions such that the employee may not sell or otherwise realize the economic benefits of the award until certain dates through April 2019. $2.0 million and $96.8 million of compensation expense for the DSU awards was recognized in the three month and nine month periods ended September 30, 2017, respectively, and included in “Other operating expense, net” in the Condensed Consolidated Statements of Operations.

As of the date of the grant, the fair value of a DSU was determined to be $17.20 assuming a share price at the pricing date of the initial public offering of $20.00 and a discount for lack of marketability commensurate with the period of the sale restrictions. The Company estimated the fair value of DSUs at the time of grant using the Finnerty discount for lack of marketability pricing model. The model assumed a holding restriction period of 1.42 years and volatility of 51.5%.