Annual report pursuant to Section 13 and 15(d)

Share-Based Compensation

v2.4.0.8
Share-Based Compensation
12 Months Ended
Sep. 30, 2014
Share-Based Compensation.  
Share-Based Compensation

9.Share-Based Compensation

 

We have share-based compensation plans under which 12,685,436 shares were initially registered and available for issuance.  As of September 30, 2014, 4,166,230 shares were outstanding under these plans and 3,730,889 shares had been issued, leaving 4,788,317 shares available for future issuance.  This included our primary plan, the Hillenbrand, Inc. Stock Incentive Plan, which provides for long-term performance compensation for key employees and members of the Board of Directors.  It also included our Supplemental Retirement 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.

 

 

 

Year Ended September 30,

 

 

 

2014

 

2013

 

2012

 

Stock-based compensation cost

 

$

7.5 

 

$

6.4 

 

$

8.7 

 

Less impact of income tax

 

2.8 

 

2.3 

 

3.2 

 

Stock-based compensation cost, net of tax

 

$

4.7 

 

$

4.1 

 

$

5.5 

 

 

The Company realized current tax benefits of $3.7 from the exercise of stock options and the payment of stock awards during 2014.

 

Stock Options — The fair values of option grants under the Hillenbrand, Inc. Stock Incentive Plan are estimated on the date of grant using the binomial option-pricing model, which incorporates the possibility of early exercise of options into the valuation as well as our historical exercise and termination experience to determine the option value.  The grants are contingent upon continued employment and generally vest over a three-year period.  Option terms generally do not exceed 10 years.  The weighted-average fair value of options granted was $6.97, $4.91, and $5.88 per share for 2014, 2013, and 2012.  The following assumptions were used in the determination of fair value:

 

 

 

Year Ended September 30,

 

 

 

2014

 

2013

 

2014

 

Risk-free interest rate

 

0.1 – 2.8%

 

0.2 – 1.6%

 

0.1 – 2.0%

 

Weighted-average dividend yield

 

2.8%

 

3.8%

 

3.4%

 

Weighted-average volatility factor

 

33.5%

 

34.9%

 

37.4%

 

Exercise factor

 

29.5%

 

32.1%

 

32.9%

 

Post-vesting termination rate

 

5.0%

 

5.0%

 

5.0%

 

Expected life (years)

 

4.2

 

4.1

 

4.2

 

 

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 and is a derived output of the binomial model.  The post-vesting termination rate and the exercise factor are based on the history of exercises and forfeitures for previous stock options.

 

The following tables provide a summary of outstanding stock option awards:

 

 

 

Number

 

Weighted-Average

 

 

 

of Shares

 

Exercise Price

 

Outstanding at September 30, 2013

 

3,045,402

 

$

21.13

 

Granted

 

455,922

 

28.18

 

Exercised

 

(914,113

)

23.15

 

Forfeited

 

(93,292

)

24.69

 

Expired

 

(14,552

)

27.36

 

Outstanding at September 30, 2014

 

2,479,367

 

21.52

 

 

 

 

 

 

 

Exercisable at September 30, 2014

 

1,664,177

 

19.95

 

 

As of September 30, 2014, there was $2.8 of unrecognized stock-based compensation associated with unvested stock options expected to be recognized over a weighted-average period of 1.9 years.  This unrecognized compensation expense included a reduction for our estimate of potential forfeitures.  As of September 30, 2014, the average remaining life of the outstanding stock options was 5.8 years with an aggregate intrinsic value of $23.9.  As of September 30, 2014, the average remaining life of the exercisable stock options was 4.6 years with an aggregate intrinsic value of $18.7.  The total intrinsic value of options exercised by employees and directors during 2014, 2013, and 2012 was $6.1, $0.9, and $0.7.

 

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 leadership team with the appropriate incentives to create long-term value for shareholders while taking thoughtful and prudent risks to grow the value of the Company.  The vesting of a portion of performance-based stock 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 performance-based stock awards may become more volatile as we approach the final performance measurement date at the end of the three-year period.

 

In 2014, in addition to the performance-based stock awards described above, we also granted performance-based stock awards based on a relative total shareholder return formula (“TSR”).  The Monte-Carlo simulation method is used to determine fair value of the TSR award.  The Monte-Carlo simulation is a generally accepted statistical technique used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of ours and the Peer Group’s future expected stock prices.  Expense for the TSR award is determined at the grant date based upon the projected performance and recorded on a straight-line basis over the vesting period.

 

The value of time-based stock awards and performance-based stock awards in our common stock is the fair value at the date of grant. The total vest date fair value of shares held by Hillenbrand employees and directors which vested during 2014, 2013, and 2012 was $5.8, $6.5, and $10.3 (including dividends). A summary of the unvested stock award activity presented below represents the maximum number of shares that could be earned or vested:

 

 

 

 

 

Weighted-Average

 

 

 

Number of

 

Grant Date

 

Time-Based Stock Awards 

 

Shares

 

Fair Value

 

Non-vested time-based stock awards at September 30, 2013

 

113,074

 

$

20.59

 

Granted

 

99,518

 

29.50

 

Vested

 

(73,865

)

25.33

 

Forfeited

 

(19,644

)

20.67

 

Non-vested time-based stock awards at September 30, 2014

 

119,083

 

25.09

 

 

 

 

 

 

Weighted-Average

 

 

 

Number of

 

Grant Date

 

Performance-Based Stock Awards 

 

Shares

 

Fair Value

 

Non-vested performance-based stock awards at September 30, 2013

 

1,406,994

 

$

21.49

 

Granted

 

583,573

 

28.56

 

Vested

 

(98,702

)

22.33

 

Forfeited

 

(682,547

)

22.57

 

Non-vested performance-based stock awards at September 30, 2014

 

1,209,318

 

24.22

 

 

As of September 30, 2014, $2.3 and $4.6 of unrecognized stock-based compensation was associated with our unvested time-based stock awards and performance-based stock awards based upon projected performance to date.  These costs are expected to be recognized over a weighted-average period of 2.0 and 1.7 years.  This unrecognized compensation expense included a reduction for an estimate of potential forfeitures.  As of September 30, 2014, the outstanding time-based stock awards and performance-based stock awards had an aggregate fair value of $3.7 and $37.7.  The weighted-average grant date fair value of time-based stock awards was $22.25 and $21.47 per share for 2013 and 2012.  The weighted-average grant date fair value of performance-based stock awards was $20.76 and $22.34 per share for 2013 and 2012.

 

Dividends payable in stock accrue on both time-based and performance-based stock awards, and are subject to the same terms as the original grants.  As of September 30, 2014, a total of 54,198 stock units had accumulated on unvested stock awards due to dividend reinvestments and were excluded from the tables above.  The aggregate fair value of these units at September 30, 2014 was $1.7.

 

Vested Deferred Stock — Past stock-based compensation programs allowed deferrals after vesting to be set up as deferred stock.  As of September 30, 2014, there were 304,264 shares that were deferred fully-vested and were excluded from the tables above.  The aggregate fair value of these shares at September 30, 2014 was $9.4.