|12 Months Ended|
Sep. 30, 2018
|Compensation Related Costs [Abstract]|
We have share-based compensation plans under which 12,685,436 shares are registered. As of September 30, 2018, 2,844,887 shares were outstanding under these plans and 6,334,429 shares had been issued, leaving 3,506,120 shares available for future issuance. Our primary plan, the Hillenbrand, Inc. Stock Incentive Plan, provides for long-term performance compensation for management and members of the Board of Directors. Under the Stock Incentive Plan, a variety of discretionary awards for employees and non-employee directors are authorized, including incentive or non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, and bonus stock. These programs are administered by the Board of Directors and its Compensation and Management Development Committee.
The Company realized current tax benefits of $5.4 from the exercise of stock options and the payment of stock awards during 2018.
Stock Options — The fair values of option grants are estimated on the date of grant using the Black-Scholes option-pricing model. For grants issued prior to 2017, fair values were estimated using the binomial option-pricing model. The grants are contingent upon continued employment and generally vest over a three-year period. Expense is recognized on a straight-line basis over the applicable vesting periods. Option terms generally do not exceed 10 years. The weighted-average fair value of options granted was $11.28, $8.37, and $7.80 per share for 2018, 2017, and 2016. The following assumptions were used in the determination of fair value:
(1) Assumption only applicable to the binomial option-pricing model used in 2016
The risk-free interest rate is based upon observed interest rates appropriate for the term of the employee stock options. The remaining assumptions require significant judgment utilizing historical information, peer data, and future expectations. The dividend yield is based on the history of dividend payouts and the computation of expected volatility is based on historical stock volatility. The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding. In 2018 and 2017, the expected life was based on historical exercise activity. Prior to 2017, the expected life was a derived output of the binomial model. Prior to 2017, the post-vesting termination rate and the exercise factor were based on the history of exercises and forfeitures for previous stock options.
A summary of outstanding stock option awards as of September 30, 2018 and changes during the year is presented below:
As of September 30, 2018, there was $4.2 of unrecognized stock-based compensation associated with unvested stock options expected to be recognized over a weighted-average period of 2.1 years. This unrecognized compensation expense included a reduction for our estimate of potential forfeitures. As of September 30, 2018, the average remaining life of the outstanding stock options was 6.8 years with an aggregate intrinsic value of $34.5. As of September 30, 2018, the average remaining life of the exercisable stock options was 5.4 years with an aggregate intrinsic value of $25.2. The total intrinsic value of options exercised by employees and directors during 2018, 2017, and 2016 was $7.5, $11.2, and $7.5. The grant-date fair value of options that vested during 2018, 2017, and 2016 was $11.1, $11.2, and $9.6.
Time-Based Stock Awards and Performance-Based Stock Awards — These awards are consistent with our compensation program’s guiding principles and are designed to (i) align management’s interests with those of shareholders, (ii) motivate and provide incentive to achieve superior results, (iii) maintain a significant portion of at-risk incentive compensation, (iv) delineate clear accountabilities, and (v) ensure competitive compensation. We believe that our blend of compensation components provides the Company’s management with the appropriate incentives to create long-term value for shareholders while taking thoughtful and prudent risks to grow the value of the Company. Our stock plan enables us to grant several types of restricted stock unit awards including time-based, performance-based contingent on the creation of shareholder value (“SV”), and performance-based based on a relative total shareholder return formula (“TSR”).
Our time-based stock awards provide an unconditional delivery of shares after a specified period of service. We record expense associated with time-based awards on a straight-line basis over the vesting period, net of estimated forfeitures.
The vesting of the SV awards is contingent upon the creation of shareholder value as measured by the cumulative cash returns and final period net operating profit after tax compared to the established hurdle rate over a three-year period and a corresponding service requirement. The hurdle rate is a reflection of the weighted-average cost of capital and targeted capital structure. The number of shares awarded is based upon the fair value of our stock at the date of grant adjusted for the attainment level at the end of the period. Based on the extent to which the performance criteria are achieved, it is possible for none of the awards to vest or for a range up to the maximum to vest. We record expense associated with the awards on a straight-line basis over the vesting period based upon an estimate of projected performance. The actual performance of the Company is evaluated quarterly, and the expense is adjusted according to the new projections. As a result, depending on the degree to which performance criteria are achieved or projections change, expenses related to the SV awards may become more volatile as we approach the final performance measurement date at the end of the three-year period.
The vesting of TSR awards is determined by comparing our total shareholder return during a three-year period to the respective total shareholder returns of companies in a designated performance peer group. Based on the Company’s relative ranking within the performance peer group, it is possible for none of the awards to vest or for a range up to the maximum to vest. The Monte-Carlo simulation method is used to determine fair value of TSR awards at the grant date. The Monte-Carlo simulation model estimates the fair value of this market-based award based upon the expected term, risk-free interest rate, expected dividend yield, and expected volatility measure for the Company and its peer group. Compensation expense for the TSR awards is recognized over the vesting period regardless of whether the market conditions are expected to be achieved.
A summary of the non-vested stock awards, including dividends, as of September 30, 2018 (representing the maximum number of shares that could be vested) and changes during the year is presented below:
The total vest date fair value of shares held by Hillenbrand employees and directors which vested during 2018, 2017, and 2016 was $15.2, $10.9, and $7.4 (including dividends).
As of September 30, 2018, $1.5 and $7.1 of unrecognized stock-based compensation was associated with our unvested time-based and performance-based (including SV and TSR) stock awards. The unrecognized amount of compensation related to the SV awards is based upon projected performance to date. The unrecognized compensation cost of the time-based and performance based awards is expected to be recognized over a weighted-average period of 2.0 and 1.7 years and includes a reduction for an estimate of potential forfeitures. As of September 30, 2018, the outstanding time-based stock awards and performance-based stock awards had an aggregate fair value of $4.8 and $24.2. The weighted-average grant date fair value of time-based stock awards was $35.41 and $30.59 per share for 2017 and 2016. The weighted-average grant date fair value of performance-based stock awards was $39.72 and $33.14 per share for 2017 and 2016.
Dividends payable in stock accrue on both time-based and SV awards during the performance period and are subject to the same terms as the original grants. Dividends do not accrue on TSR awards during the performance period. As of September 30, 2018, a total of 9,135 shares had accumulated on unvested stock awards due to dividend reinvestments and were excluded from the tables above. The aggregate fair value of these shares at September 30, 2018 was $0.5.
Vested Deferred Stock — Certain stock-based compensation programs allow or require deferred delivery of shares after vesting. As of September 30, 2018, there were 403,918 fully vested deferred shares, which were excluded from the tables above. The aggregate fair value of these shares at September 30, 2018 was $21.1.
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.
Reference 1: http://www.xbrl.org/2003/role/presentationRef