MSC INDUSTRIAL DIRECT CO INC - 10-Q filing on 2020-07-08

Stock-Based Compensation

9 Months Ended

May 30, 2020

Note 4. Stock-Based Compensation

The Company accounts for all share-based payments in accordance with ASC Topic 718, “Compensation—Stock Compensation,” as subsequently amended. Stock-based compensation expense included in operating expenses for the thirteen and thirty-nine-week periods ended May 30, 2020 and June 1, 2019 was as follows:


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	May 30,		June 1,		May 30,		June 1,
	2020		2019		2020		2019
	(Dollars in thousands)
Stock options	$	1,089	$	1,215	$	2,818	$	3,541
Restricted share awards		1		346		185		1,216
Restricted stock units		2,970		2,452		8,885		7,181
Performance share units		171		—		385		-
Associate Stock Purchase Plan		54		76		190		229
Total		4,285		4,089		12,463		12,167
Deferred income tax benefit		(1,068)		(1,026)		(3,116)		(3,054)
Stock-based compensation expense, net	$	3,217	$	3,063	$	9,347	$	9,113

Stock Options

The Company discontinued its grants of stock options in fiscal 2020. For the thirteen and thirty-nine-week periods ended June 1, 2019, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:


	Thirteen and Thirty-Nine Weeks Ended
		June 1,
		2019
Expected life (in years)		4.0
Risk-free interest rate		2.98	%
Expected volatility		23.13	%
Expected dividend yield		2.70	%
Weighted-average grant-date fair value		$14.05

A summary of the Company’s stock option activity for the thirty-nine-week period ended May 30, 2020 is as follows:


	Options	Weighted-Average Exercise Price per Share		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding on August 31, 2019	1,894	$	74.73
Granted	—		—
Exercised	(212)		63.81
Canceled/Forfeited	(114)		80.26
Outstanding on May 30, 2020	1,568	$	75.80	3.7	$	2,646
Exercisable on May 30, 2020	1,042	$	73.81	3.2	$	2,646

The unrecognized share-based compensation cost related to stock option expense at May 30, 2020 was $4,627 and will be recognized over a weighted average period of 1.7 years. The total intrinsic value of options exercised, which

represents the difference between the exercise price and market value of common stock measured at each individual exercise date, during the thirty-nine-week periods ended May 30, 2020 and June 1, 2019 was $2,574 and $1,882, respectively.

Performance Share Units

Beginning in fiscal 2020, the Company grants performance share units (“PSU”) as part of its long-term stock-based compensation program. PSUs cliff vest after a three year performance period based on achievement of specific performance goals. Based on the extent to which the targets are achieved, vested shares may range from zero to 200 percent of the target award amount.

The following table summarizes all transactions related to PSUs under the Company’s 2015 Omnibus Incentive Plan (based on target award amounts) for the thirty-nine weeks ended May 30, 2020:


	Shares	Weighted-Average Grant-Date Fair Value
Non-vested PSUs at August 31, 2019	—	$	—
Granted	31		76.32
Vested	—		—
Canceled/Forfeited	(3)		76.32
Non-vested PSUs at May 30, 2020 ⁽¹⁾	28	$	76.32
⁽¹⁾ Excludes 3 shares of accrued incremental dividend equivalent rights on outstanding PSUs granted under the Company's 2015 Omnibus Incentive Plan.

The fair value of each PSU is the closing stock price on the NYSE of the Company’s Class A common stock on the date of grant. Upon vesting, subject to achievement of performance goals, a portion of the PSU award may be withheld to satisfy the statutory income tax withholding obligation. The remaining PSUs will be settled in shares of the Company’s Class A common stock when vested. These awards accrue dividend equivalents on the underlying PSUs (in the form of additional stock units) based on dividends declared on the Company’s Class A common stock and these dividend equivalents are paid out in unrestricted common stock on the vesting dates of the underlying PSUs, subject to the same performance vesting requirements. The unrecognized share-based compensation cost related to the PSUs at May 30, 2020 was $1,731 and is expected to be recognized over a period of 2.4 years.

Restricted Share Awards

A summary of the non-vested restricted share award (“RSA”) activity under the Company’s 2005 Omnibus Incentive Plan and 2015 Omnibus Incentive Plan for the thirty-nine-week period ended May 30, 2020 is as follows:


	Shares	Weighted-Average Grant-Date Fair Value
Non-vested RSAs at August 31, 2019	21	$	82.00
Granted	—		—
Vested	(19)		82.86
Canceled/Forfeited	(2)		70.40
Non-vested RSAs at May 30, 2020	—	$	—

The fair value of each RSA is the closing stock price on the NYSE of the Company’s Class A common stock on the date of grant. Upon vesting, a portion of the RSA award may be withheld to satisfy the statutory income tax withholding obligation. The remaining RSAs vested in March 2020. There are no non-vested RSAs or remaining unrecognized share-based compensation costs at May 30, 2020.

Restricted Stock Units

A summary of the Company’s non-vested Restricted Stock Unit (“RSU”) award activity under the Company’s 2015 Omnibus Incentive Plan for the thirty-nine-week period ended May 30, 2020 is as follows:


	Shares	Weighted-Average Grant-Date Fair Value
Non-vested RSUs at August 31, 2019	416	$	76.93
Granted	237		75.97
Vested	(128)		74.82
Canceled/Forfeited	(37)		77.24
Non-vested RSUs at May 30, 2020 ⁽¹⁾	488	$	77.00
⁽¹⁾ Excludes approximately 66 shares of accrued incremental dividend equivalent rights on outstanding RSUs granted under the Company's 2015 Omnibus Incentive Plan.

The fair value of each RSU is the closing stock price on the NYSE of the Company’s Class A common stock on the date of grant. Upon vesting, a portion of the RSU award may be withheld to satisfy the statutory income tax withholding obligation. The remaining RSUs will be settled in shares of the Company’s Class A common stock when vested. These awards accrue dividend equivalents on the underlying RSUs (in the form of additional stock units) based on dividends declared on the Company’s Class A common stock and these dividend equivalents are paid out in unrestricted common stock on the vesting dates of the underlying RSUs. The unrecognized share-based compensation cost related to the RSUs at May 30, 2020 was $29,685 and is expected to be recognized over a weighted average period of 2.9 years.