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, 2017

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 2017, 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 2017, fiscal 2016 and fiscal 2015 are as follows:



		Options Outstanding
		Number of Shares		Weighted Average Exercise Price
Balance at March 31, 2014		558,466		$	7.96
	Exercised	(88,050	)	6.87
	Forfeited	(5,374	)	12.04
Balance at March 31, 2015		465,042		$	8.12
	Exercised	(29,056	)	8.25
	Forfeited	(2,260	)	17.10
Balance at March 31, 2016		433,726		$	8.07
	Granted	28,499		19.64
	Exercised	(47,484	)	6.77
	Forfeited	(2,802	)	19.58
Balance at March 31, 2017		411,939		$	8.94

For fiscal 2017, fiscal 2016 and fiscal 2015 the intrinsic value of stock option exercises was $627, $384, and $1,654, respectively. For the fiscal years ended March 31, 2017 and 2016, the Company recognized an excess tax deduction for options exercised of $(448) and $92, respectively, and was recorded in additional paid in capital.



		Unvested Options
		Number of Shares		Weighted Average Grant Date Fair Value
Balance at March 31, 2014		105,398		$	8.33
	Vested	(26,575	)	6.94
	Forfeited	(5,374	)	6.14
Balance at March 31, 2015		73,449		$	7.19
	Vested	(30,379	)	6.93
	Forfeited	(2,260	)	7.53
Balance at March 31, 2016		40,810		$	7.39
	Granted	28,499		19.64
	Vested	(28,678	)	6.93
	Forfeited	(2,802	)	7.53
Balance at March 31, 2017		37,829		$	8.86

For fiscal 2017, fiscal 2016 and fiscal 2015, we recorded stock based compensation of $3,402, $3,749, and $3,295, respectively. Total unrecognized expense related to non-vested stock option awards was approximately $221 as of March 31, 2017. We anticipate this expense will be recognized over a weighted average period of approximately 2.16 years.

The following table summarizes information about stock options outstanding as of March 31, 2017:



	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, 2017			Number Vested and Exercisable	Weighted Average Contractual Life (Years)	Weighted Average Exercise Price		Aggregate Intrinsic Value at March 31, 2017
$5.20	273,221	3.55	$	5.20	$	4,273,176		273,221	3.55	$	5.20	$	4,273,176
$9.82	13,339	3.91	9.82		146,996			13,339	3.91	9.82		146,996
$12.00	54,100	4.09	12.00		477,619			54,100	4.09	12.00		477,619
$19.64	28,499	9.76	$	19.64	34,199			—	9.76	19.64		$	—
$21.52	42,780	5.34	21.52		(28,820		)	33,450	5.34	21.52		(22,530		)
$5.20-$21.52	411,939	4.25	$	8.94	$	4,903,170		374,110	4.25	$	7.81	$	4,875,261

The aggregate intrinsic value in the preceding table represents the total intrinsic value based on our closing stock price of $20.84 as of March 31, 2017, 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.

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 issued to directors during fiscal 2017, fiscal 2016 and fiscal 2015.



	Restricted Stock Awards	Number of Shares		Weighted Average Grant Price
Balance of unvested awards at March 31, 2014		17,516		$	20.09
	Granted	—		—
	Released	(17,516	)	20.09
	Forfeited	—		—
Balance of unvested awards at March 31, 2015		—		$	—
	Granted	—		—
	Released	—		—
	Forfeited	—		—
Balance of unvested awards at March 31, 2016		—		$	—
	Granted	—		—
	Released	—		—
	Forfeited	—		—
Balance of unvested awards at March 31, 2017		—		$	—

During fiscal 2015, we established a plan to issue our directors awards of fully vested common stock in lieu of restricted stock awards. During fiscal 2017 and fiscal 2016, we issued 19,824 and 18,578 fully vested common shares which had a total fair value of $385 and $385 based on the closing price of our common stock on the date of issuance, respectively.

The following table summarizes the activity with regard to unvested restricted stock units issued to employees during fiscal 2017, fiscal 2016, and fiscal 2015.



	Restricted Stock Units	Number of Shares		Weighted Average Grant Fair Value
Balance of unvested units at March 31, 2014		164,325		$	20.53
	Granted	96,462		24.44
	Released	(46,623	)	20.67
	Forfeited	(15,342	)	20.76
Balance of unvested units at March 31, 2015		198,822		$	22.38
	Granted	98,009		24.08
	Released	(69,704	)	21.97
	Forfeited	(34,906	)	22.53
Balance of unvested units at March 31, 2016		192,221		$	23.36
	Granted	135,855		18.65
	Released	(111,611	)	22.74
	Forfeited	(8,319	)	21.25
Balance of unvested units at March 31, 2017		208,146		$	20.64

Based on our closing stock price of $20.84, the aggregate intrinsic value of the unvested restricted stock units at March 31, 2017 was $4,338. Total unrecognized expense related to unvested restricted stock awards was approximately $2,817 as of March 31, 2017. We anticipate this expense to be recognized over a weighted average period of approximately 1.76 years.

Performance Stock Units. During fiscal 2017, fiscal 2016 and fiscal 2015, performance stock unit awards were issued to our executive officers and had total estimated grant date fair values of $881, $1,113 and $1,187, respectively. For the fiscal 2017 awards, the performance indicator for these awards is a combination of stock price and the Company's Adjusted EBIDTA over a three year period. The target number of shares is 15,141 and 32,345 for the stock price awards and Adjusted EBITDA awards, respectively. The stock price indicator measures our stock price compared to a pre-determined peer group of companies with similar business characteristics as ours. Since the stock price indicator is market based, we prepared a Monte Carlo valuation model to calculate the probable outcome of the market for our stock to arrive at the fair value. The fair value of the market based units will be expensed over three years, whether or not the market condition is met. The Adjusted EBITDA indicator establishes target for the combined total of Adjusted EBITDA for the three years ending March 31, 2019. Since this is a performance based stock award, the Company will make estimates of periodic expense until the Adjusted EBITDA target is known and the expense for actual number of shares earned is determinable.

During fiscal 2017, performance stock awards that were scheduled to vest, did not meet the minimum market based indicator. Accordingly 50,799 previously outstanding performance stock units were forfeited. For performance stock units issued in fiscal 2015 and fiscal 2016, the performance period will end on the third fiscal year end subsequent to the award being granted. 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.

The following table summarized the target number of performance stock units outstanding and the minimum and maximum number of shares that can be earned as of March 31, 2017.



Fiscal Year Granted	Target	Minimum	Maximum
Fiscal 2016	38,086	—	76,172
Fiscal 2017	47,486	—	94,972

The following table summarizes the number of awards earned and released during each fiscal year based on the results achieved for respective performance period:



Fiscal Year Earned	Number of Shares Earned	Number of Shares Withheld for Tax Obligation	Number of Shares Released
Fiscal 2015	19,446	4,284	15,162
Fiscal 2016	31,658	8,669	22,989
Fiscal 2017	—	—	—

At March 31, 2017, there was $761 in stock compensation that remained to be expensed, which will be recognized over a period of 1.55 years.