Allison Transmission Holdings Inc Stock Compensation Disclosure

NOTE 14.

STOCK-BASED COMPENSATION

In March 2015, the Company’s Board of Directors adopted and, in May 2015, the Company’s stockholders approved the Allison Transmission Holdings, Inc. 2015 Equity Incentive Award Plan (“2015 Plan”), which became effective on May 14, 2015. Under the 2015 Plan, certain employees (including executive officers), consultants and directors are eligible to receive equity-based compensation, including non-qualified stock options, incentive stock options, restricted stock, dividend equivalents, stock payments, restricted stock units (“RSU”), performance awards, stock appreciation rights and other equity-based awards, or any combination thereof. The 2015 Plan limits the aggregate number of shares of common stock available for issue to 15.3 million and will expire on, and no option or other equity award may be granted pursuant to the 2015 Plan after, the tenth anniversary of the date the 2015 Plan was approved by the Board of Directors.

Prior to the adoption of the 2015 Plan, the Company’s equity-based awards were granted under the Allison Transmission Holdings, Inc. 2011 Equity Incentive Award Plan (“2011 Plan”) and the Equity Incentive Plan of Allison Transmission Holdings, Inc. (“Equity Plan” and, together with the 2011 Plan, the “Prior Plans”). As of the effective date of the 2015 Plan, no new awards will be granted under the Prior Plans, but the Prior Plans will continue to govern the equity awards issued under the Prior Plans.

Restricted Stock Units

RSUs were issued to certain employees in 2016 under the 2015 Plan and in 2015 and 2014 under the 2011 Plan, and to certain directors in 2016 and 2015 under the 2015 Plan and in 2014 under the 2011 Plan, at fair market value at the date of grant. These awards entitle the holder to receive one common share for each RSU upon vesting, which generally occurs over one to three years upon continued performance of services by the RSU holders. A summary of RSU activity as of December 31, 2016, 2015 and 2014, and changes during the period then ended is presented below:

 

Non-vested RSUs:		RSUs (in millions)				Weighted-Average Grant-Date Fair Value
Non-vested as of December 31, 2013			0.8			$	20.90
Granted			0.0				29.85
Vested			(0.6	)			20.32
Non-vested as of December 31, 2014			0.2			$	26.57
Granted			0.1				31.96
Vested			(0.1	)			23.95
Non-vested as of December 31, 2015			0.2			$	30.61
Granted			0.2				24.93
Vested			(0.1	)			30.22
Non-vested as of December 31, 2016			0.3			$	26.62

As of December 31, 2016 and 2015, there were $3.1 million and $2.8 million, respectively, of unrecognized compensation cost related to non-vested RSUs granted under the 2015 Plan and 2011 Plan. This cost is expected to be recognized, on a straight line basis, over a period of approximately two years. RSU incentive compensation expense recorded was $3.5 million, $3.0 million and $9.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. The total fair value of RSUs vested during the years ended December 31, 2016, 2015 and 2014 was approximately $2.7 million, $3.8 million and $20.2 million, respectively.

Pursuant to the share withholding provisions of the 2015 Plan and 2011 Plan and the related RSU award agreement, certain employees, in lieu of paying withholding taxes on the vesting of RSUs, authorized the withholding of an aggregate of approximately 0.1 million, 0.1 million and 0.3 million shares of the Company’s common stock to satisfy their minimum statutory tax withholding requirements related to such vesting events during 2016, 2015 and 2014, respectively. The withheld shares were recorded as a reduction to equity on the applicable vesting dates of approximately $0.8 million, $1.4 million and $8.4 million during 2016, 2015 and 2014, respectively.

 

Restricted Stock Awards

Restricted stock was granted to certain employees in 2015 and 2014 under the 2011 Plan at fair market value on the date of grant. The restrictions lapse upon continued performance by the restricted stock holders on the vest date which generally occurs over one, two or three years. A summary of restricted stock activity as of December 31, 2016, 2015, and 2014, and changes during the period then ended is presented below:

 

Non-vested Shares:		Restricted Stock (in millions)				Weighted-Average Grant-Date Fair Value
Non-vested as of December 31, 2013			—			$	—
Granted			0.2				29.47
Vested			—				—
Non-vested as of December 31, 2014			0.2			$	29.47
Granted			0.0				32.05
Vested			(0.0	)			29.08
Non-vested as of December 31, 2015			0.2			$	30.27
Granted			—				—
Vested			(0.1	)			29.79
Non-vested as of December 31, 2016			0.1			$	30.73

As of December 31, 2016 and 2015, there was $0.6 million and $2.8 million, respectively, of unrecognized compensation cost related to non-vested restricted stock awards granted under the 2011 Plan. This cost is expected to be recognized, on a straight line basis, over a period of approximately two years. Restricted stock incentive compensation expense recorded was $2.2 million, $2.2 million, and $1.6 million for the years ended December 31, 2016, 2015, and 2014, respectively. The total fair value of restricted stock awards vested for the years ended December 2016, 2015, and 2014 was $2.6 million, $1.3 million, and $0.0 million, respectively

Pursuant to the share withholding provisions of the 2011 Plan and the related restricted stock award agreement, certain employees, in lieu of paying withholding taxes on the vesting of restricted stock, authorized the withholding of the Company’s common stock to satisfy their minimum statutory tax withholding requirements related to such vesting events during 2016. The withheld shares were recorded as a reduction to equity on the applicable vesting dates of approximately $0.9 million during 2016.

Performance Awards

Performance awards were granted to certain employees in 2016 under the 2015 Plan and in 2015 under the 2011 Plan. In accordance with the FASB’s authoritative accounting guidance on stock compensation, each performance award granted is to be recorded at fair value. The Company records the fair value of each performance award based on a Monte-Carlo pricing model using the assumptions noted in the following table:

 

		2016		2015
Expected volatility		18%-38%		18%-34%
Expected term (in years)		2.9		2.9
Risk-free rate		0.9%		1.0%

The restrictions lapse on the date the Compensation Committee of the Board of Directors determines the number of shares that shall vest based on the total stockholder return of the Company relative to the specified peer group. A summary of performance award activity as of December 31, 2016, and changes during the period ended December 31, 2016 and 2015 is presented below:

 

Non-vested Shares:		Performance award (in millions)				Weighted-Average Grant-Date Fair Value
Non-vested as of December 31, 2014			—			$	—
Granted			0.1			$	36.53
Vested			—			$	—
Non-vested as of December 31, 2015			0.1			$	36.53
Granted			0.0			$	25.73
Vested			—			$	—
Non-vested as of December 31, 2016			0.1			$	30.01

 

As of December 31, 2016 and 2015, there was $2.2 million and $1.7 million, respectively, of unrecognized compensation cost related to non-vested performance awards granted under the 2015 Plan and the 2011 Plan. This cost is expected to be recognized, on a straight line basis, over a period of approximately three years. Performance award incentive compensation expense recorded was $1.2 million and $0.7 million for the years ended December 31, 2016 and 2015, respectively.

Stock Options

Stock options granted under the Equity Plan after the completion of the Acquisition Transaction and through March 2012, have a per share exercise price based on the fair market value of the Company at the date of grant. Stock options granted under the 2015 Plan and 2011 Plan have a per share exercise price based on the closing price of a share of the Company’s common stock as reported by the NYSE on the date of grant. All stock options expire 10 years after the grant date. The options vest upon the continued performance of services by the option holder over time, with either 20% or 33% of the award vesting on each anniversary of the grant date over three to five years for awards under the Equity Plan, 100% of the award vesting in December of the year that is two years after the year of grant or the third anniversary of the grant date under the 2011 Plan and 100% of the award vesting on the third anniversary of the grant date for awards under the 2015 Plan. Upon termination of employment for reasons other than cause, retirement before the age of 65 with less than 90 points (calculated as age plus years of service), death or disability, the options shall cease to be exercisable ninety days following the date of the optionees’ termination of service. Upon termination of employment for cause, the options shall not be exercisable on the date of such termination. Upon termination of employment for retirement at or after the age of 65, the options shall cease to be exercisable three years following such date. Upon termination of employment for retirement before the age of 65 with 90 or more points, the options shall cease to be exercisable two years following such date. Upon termination of employment for death or disability, the options shall cease to be exercisable twelve months following such date.

In accordance with the FASB’s authoritative accounting guidance on stock compensation, each option grant is to be recorded at fair value. When options are granted, the Company uses a Black-Scholes option pricing model to calculate the fair value of each option award using the assumptions noted in the following table:

 

		2016				2015				2014
Expected volatility			29	%			31	%			38	%
Expected dividend yield			2.5	%			1.9	%			1.6	%
Expected term (in years)			6.0				6.0				5.5
Risk-free rate			1.6	%			1.5	%			1.7	%

Expected volatility is based on “the average volatilities of otherwise similar public entities” as defined by authoritative accounting guidance. The Company currently pays a $0.15 dividend per quarter. The expected term is derived from the average of the weighted vesting life and the contractual term. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

A summary of option activity as of December 31, 2016, 2015 and 2014, and changes during the period then ended is presented below:

 

		Options (in millions)				Weighted- Average Exercise Price				Weighted-Average Remaining Contractual Term
Outstanding as of December 31, 2013			8.7			$	15.33				4.30 years
Exercisable as of December 31, 2013			8.1			$	14.79				3.94 years
Granted			0.4			$	30.23
Exercised			(4.2	)			—
Outstanding as of December 31, 2014			4.9			$	17.49				4.19 years
Exercisable as of December 31, 2014			3.9			$	15.32				3.08 years
Granted			0.2			$	32.13
Exercised			(1.5	)			—
Outstanding as of December 31, 2015			3.6			$	19.47				4.12 years
Exercisable as of December 31, 2015			3.0			$	16.87				3.12 years
Granted			0.3			$	23.59
Exercised			(1.4	)			—
Outstanding as of December 31, 2016			2.5			$	21.57				4.73 years
Exercisable as of December 31, 2016			2.0			$	20.11				3.71 years

 

The total fair value of stock options vested during the years ended December 31, 2016, 2015 and 2014 was $4.8 million, $5.9 million and $0.0 million, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2016, 2015 and 2014 was $20.2 million, $25.8 million and $82.3 million, respectively. The aggregate intrinsic value of stock options outstanding and exercisable was $30.3 million and $27.2 million as of December 31, 2016, and $23.1 million and $27.1 million as of December 31, 2015, respectively.

A summary of the status of the Company’s non-vested stock options as of December 31, 2016, 2015 and 2014, and changes during the period ended December 31, 2016, 2015 and 2014 is presented below:

 

Non-vested Stock Options:		Options (in millions)				Weighted-Average Grant-Date Fair Value
Non-vested at December 31, 2013			0.6			$	9.06
Granted			0.4				9.51
Vested			—				—
Non-vested at December 31, 2014			1.0			$	9.44
Granted			0.2				8.39
Vested			(0.6	)			9.76
Non-vested at December 31, 2015			0.6			$	9.12
Granted			0.3				5.28
Vested			(0.4	)			9.52
Non-vested at December 31, 2016			0.5			$	6.59

As of December 31, 2016 and 2015, there was $1.7 million and $2.9 million, respectively, of unrecognized compensation cost related to non-vested stock option compensation arrangements granted under the 2015 Plan and the 2011 Plan. This cost is expected to be recognized, on a straight line basis, over a period of approximately two to three years. Stock option incentive compensation expense recorded was $2.5 million, $3.9 million and $3.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.