Annual report pursuant to Section 13 and 15(d)

Share-based Compensation

v3.10.0.1
Share-based Compensation
12 Months Ended
Dec. 31, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Share-based Compensation
16. Share-based Compensation
The Global Brass and Copper Holdings, Inc. 2013 Omnibus Equity Incentive Plan (“2013 Plan”) was adopted by the Board of Directors and approved by shareholders on April 10, 2013, and further amended and restated effective May 26, 2016. The 2013 Plan provides for an aggregate of 3,361,053 shares of our common stock to be available for awards in the form of options, restricted stock, restricted stock units, performance-based shares and other equity-based awards. Pursuant to the 2013 Plan, in 2018, 2017, and 2016, we granted restricted stock and performance-based shares to certain employees and members of our management and our Board of Directors, and in 2017 and 2016 we granted non-qualified options to certain employees. At December 31, 2018, 1,580,918 shares were available for future grant.
We will satisfy the requirement for common stock for share-based payments by issuing shares out of authorized but unissued common stock or treasury stock.
Stock Options
Stock options are granted to certain employees with exercise prices equal to no less than the fair market value of common stock on the date of the grant. Stock options generally vest in three equal installments on the anniversary of the date of grant and have a maximum term of 10 years. We use the straight-line attribution method to recognize expense for all stock options. Stock options are generally subject to immediate forfeiture if employment terminates prior to vesting, except under certain conditions, in which case the options expire no more than 90 days after the date of such termination. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted-average inputs for the option pricing model:
 
2017
 
2016
Expected volatility
36
%
 
41
%
Risk-free interest rate
2.2
%
 
1.6
%
Dividend yield
0.4
%
 
0.6
%
Expected term
6.0 years

 
6.0 years


Because we have only been a public company since May 2013, there is limited historical data on the volatility of our common stock. As a result, the expected volatility of the 2017 option grants was estimated based on the average volatility of the common stock of a group of our publicly traded peers and Company specific information. The expected volatility of the 2016 option grants was estimated based on the average volatility of the common stock of a group of our publicly traded peers. There were no options granted in 2018.
The risk-free interest rate assumption in the Black-Scholes option-pricing model is based upon the U.S. Treasury Strips available with maturity period consistent with the expected term assumption. The dividend yield assumption is based on our expectation of dividend payouts.
Because we have only very limited historical information concerning stock option exercise behavior by our employees and such information is not readily available from a peer group of companies, we estimated the expected term using the “simplified” method permitted by Staff Accounting Bulletin Topic 14 issued by the SEC.
A summary of the stock option activity is summarized as follows:
 
 
Shares
 
Weighted Average Exercise Price of Shares
 
Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
(in millions)
Outstanding at December 31, 2015
 
374,685

 
$
13.90

 
8.5
 
$
2.8

Granted
 
140,740

 
26.99

 
 
 
 
Exercised
 
(41,066
)
 
12.92

 
 
 
 
Forfeited or expired
 

 

 
 
 
 
Outstanding at December 31, 2016
 
474,359

 
$
17.87

 
8.1
 
$
7.8

Granted
 
92,879

 
33.93

 
 
 
 
Exercised
 
(38,381
)
 
19.51

 
 
 
 
Forfeited or expired
 

 

 
 
 
 
Outstanding at December 31, 2017
 
528,857

 
$
20.57

 
7.4
 
$
6.7

Granted
 

 

 
 
 
 
Exercised
 
(81,100
)
 
17.09

 
 
 
 
Forfeited or expired
 
(19,374
)
 
31.25

 
 
 
 
Outstanding at December 31, 2018
 
428,383

 
$
20.74

 
6.4
 
$
2.8

Options exercisable at December 31, 2018
 
341,993

 
$
18.11

 
6.1
 
$
2.8


The weighted-average grant date fair value of stock options granted during 2017 and 2016 was $12.38 and $10.53, respectively. The total intrinsic value of stock options exercised in 2018, 2017 and 2016 was $1.4 million, $0.7 million and $0.7 million, respectively.
As of December 31, 2018, we had $0.3 million of total unrecognized compensation expense related to stock option grants that will be recognized over the weighted average period of 1.0 year.
Restricted Stock
Restricted stock is granted to certain employees and non-employee directors. The cost of these awards is determined using the market price of our common stock on the date of grant. Restricted stock shares granted represent newly issued shares and have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding. Restricted stock awards granted to employees vest over periods ranging from one to three years after the grant date, and awards granted to non-employee directors generally vest one year following the grant date. Management uses the straight-line attribution method to recognize expense for all restricted stock awards. The awards are generally subject to forfeiture if employment terminates prior to vesting, except under certain conditions. The cash dividends on restricted stock shares are forfeitable, and payments of cash dividends on restricted stock shares are withheld until the shares vest. Compensation is recognized over the period during which the employees and non-employee directors provide the requisite service to the Company.
A summary of restricted stock activity under the 2013 Plan is presented below: 
 
 
Shares
 
Weighted Average
Grant Date Fair
Value
Nonvested restricted stock - December 31, 2015
 
203,258

 
$
14.53

Granted
 
119,601

 
27.00

Vested
 
(118,097
)
 
16.05

Forfeited
 
(7,438
)
 
17.59

Nonvested restricted stock - December 31, 2016
 
197,324

 
$
21.06

Granted
 
96,724

 
33.11

Vested
 
(117,852
)
 
21.47

Forfeited
 
(5,416
)
 
26.29

Nonvested restricted stock - December 31, 2017
 
170,780

 
$
27.43

Granted
 
122,978

 
29.70

Vested
 
(125,410
)
 
25.88

Forfeited
 
(17,871
)
 
30.22

Nonvested restricted stock - December 31, 2018
 
150,477

 
$
30.25


The total fair value of restricted stock that vested during 2018, 2017 and 2016 was $3.7 million, $3.9 million and $2.9 million, respectively.
At December 31, 2018, total unrecognized compensation cost related to nonvested restricted stock was $2.4 million and is expected to be recognized over a weighted average period of 1.5 years.
Performance Shares
Performance share awards are granted to certain employees and provide for the issuance of common stock if specified Company performance targets and market conditions are achieved. The number of common shares issued is dependent upon vesting and actual performance of the Company relative to the established targets.
The fair value of performance share awards granted is determined based on the market price of our common stock on the date of grant. Additionally, the awards include a market condition that must also be achieved in order to earn more than the performance shares granted; therefore, the fair value of any shares earned in excess of 100% was determined on the date of grant using a Monte Carlo simulation model. The expected volatility is based on the historical volatility of our stock price movements over the two years prior to the grant date. The risk-free interest rate is based on the U.S. Treasury Strips as of the grant date with a term measured to the end of the performance period. Specific to the estimated 2018, 2017, and 2016 performance shares earned in excess of 100%, the fair value and weighted-average inputs used were as follows:
 
2018
 
2017
 
2016
Grant date fair value
$
29.25

 
$
33.92

 
$
20.05

Expected volatility
35
%
 
34
%
 
30
%
Risk-free interest rate
2.1
%
 
1.1
%
 
0.9
%
Dividend yield
%
 
%
 
%

The amount of compensation expense recognized for performance shares reflects our assessment of the probability that performance targets will be achieved. If the performance conditions of the performance awards are met, the performance shares granted in 2018, 2017, and 2016 will vest in two equal installments on the second and third anniversaries of the grant date. Performance shares that have not vested are generally subject to forfeiture if employment terminates, except under certain conditions. Cash dividends accrue on performance shares once the performance conditions have been met, but the dividends are forfeitable if the performance shares do not vest. We recognize compensation expense related to performance share grants using the graded-vesting method over the vesting periods.
A summary of the performance share award activity is summarized as follows: 
 
 
Shares
 
Weighted-Average
Grant-Date Fair
Value
Nonvested performance shares - December 31, 2015
 
218,840

 
$
13.67

Granted (a)
 
146,916

 
26.97

Earned (b)
 
205,833

 
5.54

Vested
 
(5,104
)
 
11.00

Unearned or forfeited
 
(10,072
)
 
16.58

Nonvested performance shares - December 31, 2016
 
556,413

 
$
14.15

Granted (a)
 
98,518

 
33.92

Earned (b)
 
65,017

 
10.03

Vested
 
(291,859
)
 
9.88

Unearned or forfeited
 
(12,719
)
 
28.05

Nonvested performance shares - December 31, 2017
 
415,370

 
$
20.76

Granted (a)
 
152,261

 
29.25

Earned
 

 

Vested
 
(221,339
)
 
14.78

Unearned or forfeited
 
(82,793
)
 
30.80

Nonvested performance shares - December 31, 2018
 
263,499

 
$
27.54

(a)     Reflected at target levels.
(b)    Includes shares earned in excess of target from prior year grant.
The total fair value of performance shares that vested during 2018, 2017 and 2016 was $6.6 million, $9.9 million and $0.1 million, respectively.
At December 31, 2018, total unrecognized compensation cost related to the performance share awards granted of approximately $4.1 million is expected to be recognized over a weighted average period of 1.4 years.
Share-Based Compensation Expense
The following table summarizes share-based compensation expense, reported as a component of selling, general, and administrative expense, related to our stock options, restricted stock and performance share awards:
 
Year Ended December 31,
(in millions)
2018
 
2017
 
2016
Stock options
$
0.5

 
$
1.2

 
$
1.3

Restricted stock
3.2

 
3.0

 
2.4

Performance shares
3.0

 
4.0

 
3.2

Total pre-tax share-based compensation expense
$
6.7

 
$
8.2

 
$
6.9

Net tax benefit related to share-based compensation expense
$
1.2

 
$
3.2

 
$
2.6


Tax benefits realized from the exercise of stock options and the vesting of restricted stock and performance shares were $2.9 million, $5.8 million and $1.6 million in 2018, 2017 and 2016, respectively.