Thermon Group Holdings, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Stock-Based Compensation Expense

Stock-Based Compensation Expense

12 Months Ended

Mar. 31, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Since the completion of the CHS Transactions on April 30, 2010, the Board of Directors has adopted and the shareholders have approved two stock option award plans. The 2010 Thermon Group Holdings, Inc. Restricted Stock and Stock Option Plans (“2010 Plan”) was approved on July 28, 2010. The plan authorized the issuance of 2,767,171 stock options or restricted shares (on a post stock split basis). On April 8, 2011, the Board of Directors approved the Thermon Group Holdings, Inc. 2011 Long-Term Incentive Plan (“2011 LTIP”). The 2011 LTIP made available 2,893,341 shares of the Company's common stock that may be awarded to employees, directors or non-employee contractor's compensation in the form of stock options or restricted stock awards. Collectively, the 2010 Plan and the 2011 LTIP are referred to as the “Stock Plans.” The Company does not hold any shares of its own stock as treasury shares. Accordingly, the vesting of restricted stock units and performance stock units and the exercise of stock options result in the issuance of additional new shares of the Company's stock.

At the completion of the IPO on May 5, 2011, 2,757,524 options that were then unvested became vested and exercisable. Accordingly, the Company recorded stock compensation expense of $6,310 which represented all unamortized stock compensation expense related to the outstanding stock options under the 2010 Plan.

Unvested options outstanding are scheduled to vest over five years with 20% vesting on the anniversary date of the grant each year. Stock options must be exercised within 10 years from date of grant. Stock options were issued with an exercise price which was equal to the market price of our common stock at the grant date. We estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods. During fiscal 2014, we did not make any changes in accounting principles or methods of estimates relating to stock-based compensation expense.

Stock Options

A summary of stock option activity under our Stock Plans for fiscal 2014, fiscal 2013 and fiscal 2012 are as follows:



		Options Outstanding
		Number of Shares		Weighted Average Exercise Price
Balance at March 31, 2011		2,757,524		$	5.38
	Granted	117,600		12.00
	Exercised	(683,443	)	5.38
	Forfeited	(12,056	)	6.46
Balance at March 31, 2012		2,179,625		$	5.74
	Granted	56,532		21.52
	Exercised	(1,086,486	)	5.31
	Forfeited	(16,891	)	7.98
Balance at March 31, 2013		1,132,780		$	6.98
	Exercised	(566,487	)	5.90
	Forfeited	(7,827	)	15.73
Balance at March 31, 2014		558,466		$	7.96

For fiscal 2014, fiscal 2013 and fiscal 2012 the intrinsic value of stock option exercises was $10,285, $18,387, and $8,860, respectively. For the year ended March 31, 2014, the Company had a tax loss in the United States and therefore did not recognize an excess tax deduction from options exercised of $1,452. For the years ended March 31, 2013 and 2012, this benefit was $4,131 and $2,181, respectively and was recorded in Additional paid in capital.



		Unvested Options
		Number of Shares		Weighted Average Grant Date Fair Value
Balance at March 31, 2011		2,757,524		$	2.97
	Granted	117,600		5.99
	Vested	(2,757,524	)	2.97
Balance at March 31, 2012		117,600		$	5.99
	Granted	56,532		12.26
	Vested	(23,520	)	5.99
	Forfeited	(4,386	)	8.32
Balance at March 31, 2013		146,226		$	8.34
	Vested	(33,001	)	6.92
	Forfeited	(7,827	)	8.32
Balance at March 31, 2014		105,398		$	8.33

For fiscal 2014, fiscal 2013 and fiscal 2012, we recorded stock based compensation of $2,203, $1,341, and $6,514, respectively. Total unrecognized expense related to non-vested stock option awards was approximately $704 as of March 31, 2014. We anticipate this expense will be recognized over a weighted average period of approximately 2.58 years.

The following table summarizes information about stock options outstanding as of March 31, 2014:



	Options Outstanding						Options Vested and Exercisable
Exercise Price	Number Outstanding	Weighted Average Contractual Life (Years)	Weighted Average Exercise Price		Aggregate Intrinsic Value at March 31, 2014		Number Vested and Exercisable	Weighted Average Contractual Life (Years)	Weighted Average Exercise Price		Aggregate Intrinsic Value at March 31, 2014
$5.20	393,327	6.55	$	5.20	$	7,072,019	393,327	6.55	$	5.20	$	7,072,019
$9.82	26,821	6.91	9.82		358,329		26,821	6.91	9.82		358,329
$12.00	88,104	7.12	12.00		985,003		24,054	7.12	12.00		268,924
$21.52	50,214	8.34	21.52		83,355		8,866	8.34	21.52		14,718
$5.20-$21.52	558,466	6.81	$	7.96	$	8,498,706	453,068	6.64	$	6.15	$	7,713,990

The aggregate intrinsic value in the preceding table represents the total intrinsic value based on our closing stock price of $23.18 as of March 31, 2014, which would have been received by the option holders had all option holders exercised as of that date.

Stock options are valued by using a Black-Scholes-Merton option pricing model. We calculate the value of our stock option awards when they are granted. Accordingly, we update our valuation assumptions for volatility and the risk free interest rate each quarter that option grants are awarded. Annually, we prepare an analysis of the historical activity within our option plans as well as the demographic characteristics of the grantees of options within our stock option plan to determine the estimated life of the grants and possible ranges of estimated forfeiture. The expected life was determined using the simplified method for estimating expected option life, which qualify as “plain-vanilla” options. Due to the fact that the common stock underlying the options was not publicly traded for an equivalent period of the expected term of the options, the expected volatility was based on a comparable group of companies in conjunction with the historical volatility from traded shares of our stock. The risk-free interest rate is based on the rate of a zero-coupon U.S. Treasury instrument with a remaining term approximately equal to the expected term. We do not expect to pay dividends in the near term and therefore do not incorporate the dividend yield as part of our assumptions.

The following table reflects the assumptions used for fiscal 2013 and 2012. No options were granted in fiscal 2014.



	Year Ended March 31, 2013		Year Ended March 31, 2012
Expected life	6.50		6.66
Expected volatility	59.9	%	45.0	%
Risk free interest rate	0.98	%	3.25	%
Dividend expense yield	—		—

Restricted Stock Awards and Units

Restricted stock awards have been issued to members of our board of directors and restricted stock units have been issued to certain employees. For restricted stock awards, the actual common shares have been issued with voting rights and are included as part of our total common shares outstanding. The common shares may not be sold or exchanged until the vesting period is completed. For restricted stock units, no common shares are issued until the vesting period is completed. For restricted stock units, the Company allows its employees to withhold a portion of their units upon the vesting dates in order to satisfy their tax obligation. For both restricted stock awards and units, fair value is determined by the market value of our common stock on the date of the grant

The following table summarizes the activity with regard to unvested restricted stock awards during fiscal 2014, fiscal 2013 and fiscal 2012.



	Restricted Stock Awards	Number of Shares		Weighted Average Grant Price
Balance at March 31, 2011		—		$	—
	Granted	16,136		12.42
	Released	—		—
	Forfeited	—		—
Balance of unvested awards at March 31, 2012		16,136		$	12.42
	Granted	13,012		21.52
	Released	(8,068	)	12.42
	Forfeited	—		—
Balance of unvested awards at March 31, 2013		21,080		$	18.09
	Granted	17,416		20.09
	Released	(20,980	)	18.09
	Forfeited	—		—
Balance of unvested awards at March 31, 2014		17,516		$	20.09

Based on our closing stock price of $23.18, the aggregate intrinsic value of the unvested restricted stock awards at March 31, 2014 was $406. Total unrecognized expense related to unvested restricted stock awards was approximately $130 as of March 31, 2014. We anticipate this expense to be recognized over a weighted average period of approximately 0.3 years.

The following table summarizes the activity with regard to unvested restricted stock units during fiscal 2014 and fiscal 2013. There were no restricted stock units granted or outstanding during fiscal 2012.



	Restricted Stock Units	Number of Shares		Weighted Average Grant Fair Value
Balance at March 31, 2012		—		$	—
	Granted	71,923		21.52
	Released	—		—
	Forfeited	(814	)	21.52
Balance of unvested units at March 31, 2013		71,109		$	21.52
	Granted	117,904		20.14
	Released	(18,786	)	21.52
	Forfeited	(5,902	)	21.52
Balance of unvested units at March 31, 2014		164,325		$	20.53

Based on our closing stock price of $23.18, the aggregate intrinsic value of the unvested restricted stock units at March 31, 2014 was $3,809. Total unrecognized expense related to unvested restricted stock awards was approximately $2,558 as of March 31, 2014. We anticipate this expense to be recognized over a weighted average period of approximately 2.17 years.

Performance Stock Units

During fiscal 2014 and fiscal 2013, performance stock unit awards were issued to our four named executive officers and had a total fair value at grant date of $480 and $960, respectively. The performance indicator for these stock awards is based on the market performance of our stock price as compared to a pre-determined peer group of companies with similar business characteristics as ours. Since the performance indicator is market based, we prepared a Monte Carlo valuation model to calculate the probable outcome of the performance measure to arrive at the fair value. The fair value of the performance stock units will be expensed over three years, whether or not the market condition is met. At the end of each fiscal year, one-third of the performance stock units will be evaluated. It will then be determined how many shares of stock will be issued. In each year of the performance period, the possible number of shares will range from zero percent to two hundred percent of the target shares. In fiscal 2014 the target amount of shares ranged from zero to 29,036 in the aggregate and zero to 29,430 in fiscal 2013. In fiscal 2014, 10,594 shares in respect of vested performance stock units were issued to our four named executive officers. The Company withheld an additional 1,660 shares, to satisfy our named executive officers' tax obligations, for a total of 12,254 vested shares earned in fiscal 2014. No performance stock units were vested in fiscal 2013. Shares that are not awarded in a given year will be forfeited. At March 31, 2014, there was $384 in stock compensation that remained to be expensed.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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