OPTIONS AND AWARDS

12 Months Ended

Dec. 31, 2022

Share-Based Payment Arrangement [Abstract]

Stock-based compensation expense consists of stock-based payment awards made to employees and directors, including employee stock options and restricted stock awards, based on estimated fair values. As stock-based compensation expense recognized in the Company’s consolidated statements of income for the years ended December 31, 2022, 2021, and 2020 was based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The Company estimates forfeitures at the time of grant and, if necessary, revises the estimate in subsequent periods if actual forfeitures differ.

The Company has one active stock incentive plan, the 2022 Omnibus Incentive Plan (the 2022 Plan), which was approved by the Company's stockholders on May 26, 2022, and replaced the Company's prior option plan, the 2017 Omnibus Incentive Plan (the 2017 Plan).

2022 Omnibus Incentive Plan (2022 Plan) — During the second quarter of 2022, the Company's shareholders approved the 2022 Plan. Including the shares rolled over from the 2017 Plan, the 2022 Plan provides for the issuance of 3,452 shares of common stock. The number of shares available to be issued under the 2022 Plan will be reduced by (i) one share for each share that relates to an option or stock appreciation right award and (ii) two shares for each share which relates to an award other than a stock option or stock appreciation right award (a full-value award). Non-employee director options, to the extent granted, will vest and become exercisable in three equal annual installments, or the length of the term if less than three years, on the completion of each year of service measured from the grant date. All other options generally vest over five years at 20% per year on the anniversary of the grant date. Options expire ten years from the date of grant. At December 31, 2022, the total number of shares available for issuance under the 2022 Plan was 2,861.

2017 Omnibus Incentive Plan (2017 Plan) — The 2017 Plan provided for the issuance of 6,881 shares of common stock which are to be proportionally adjusted in the event of any Equity Restructuring. The number of shares available to be issued under the 2017 Plan were adjusted to 8,118 shares of common stock in order to reflect the proportional adjustments as part of the spin-off transaction that occurred in October 2019. The number of shares available to be issued under the 2017 Plan will be reduced by (i) one share for each share that relates to an option or stock appreciation right award and (ii) 2.5 shares for each share which relates to an award other than a stock option or stock appreciation right award (a full-value award). Granted non-employee director options vest and become exercisable in three equal annual installments, or the length of the term if less than three years, on the completion of each year of service measured from the grant date. All other options generally vest over five years at 20% per year on the anniversary of the grant date. Options expire ten years from the date of grant. The Company granted 165 stock options and 116 restricted stock awards from the 2017 Plan in the first half of 2022 prior to the retirement of the 2017 plan.

The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense for stock option awards. Determining the appropriate fair-value model and calculating the fair value of stock option awards at the grant date requires judgment, including estimating stock price volatility, expected option life, and forfeiture rates. The fair-value of the restricted stock awards at the grant date is based on the market price on the grant date, adjusted for forfeiture rates. The Company develops estimates based on historical data and market information, which can change significantly over time. The Black-Scholes model required the Company to make several key judgments including:

•The expected option term is calculated by the average of the contractual term of the options and the weighted average vesting period for all options. The calculation of the expected option term is based on the Company's experience due to sufficient history.

•The Company utilizes its own experience to calculate estimated volatility for options granted.

•The dividend yield is based on the Company's historical pattern of dividends as well as expected dividend patterns.

•The risk-free rate is based on the implied yield of U.S. Treasury notes as of the grant date with a remaining term approximately equal to the expected term.

•Estimated forfeiture rate of approximately 7.84% per year is based on the Company's historical forfeiture activity of unvested stock options.

Stock Options

The Company granted 581, 621 and 669 stock options from the available plans during the year ended December 31, 2022, 2021 and 2020, respectively. The Company used the following assumptions for stock options granted during the years ended December 31, 2022, 2021 and 2020:


Grant Year	Options Granted	Weighted Average Risk-Free Rate	Expected Life	Weighted Average Volatility	Weighted Average Dividend Yield
2022	581	2.8%	6.2 years	42.1%	0.3%
2021	621	1.0%	6.2 years	42.4%	0.3%
2020	669	0.6%	6.2 years	39.4%	0.4%

For the years ended December 31, 2022, 2021 and 2020, the following represents the exercise price and fair value displayed at grant date for stock option grants:


Grant Year	Granted	Weighted Average Exercise Price		Weighted Average Fair Value of Options
2022	581	$	85.74	$	37.83
2021	621	$	80.19	$	32.82
2020	669	$	52.20	$	19.52

The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all options granted during the periods ended December 31, 2022, 2021 and 2020 and therefore, the intrinsic value was $0 at the date of grant.

The following table represents the employee stock option activity during the year ended December 31, 2022, 2021 and 2020:


	Number of Options Outstanding	Weighted Average Exercise Price		Number of Options Vested	Weighted Average Exercise Price of Options Vested
January 1, 2020	4,428	$	20.85	2,557	$	12.82
Granted	669	52.20
Forfeited	(80)	33.68
Exercised	(979)	12.93
December 31, 2020	4,038	$	27.71	2,148	$	16.66
Granted	621	80.19
Forfeited	(105)	44.76
Exercised	(516)	17.80
December 31, 2021	4,038	$	36.60	2,183	$	21.02

Granted	581	85.74		—	—
Forfeited	(98)	59.52		—	—
Exercised	(688)	18.43		—	—
December 31, 2022	3,833	$	46.72	2,069	$	28.87

The following summary information reflects stock options outstanding, vested and related details as of December 31, 2022:


	Stock Options Outstanding							Stock Options Vested

				Number Outstanding	Black-Scholes Fair Value		Remaining Contractual Life (Years)	Vested and Exercisable
Year of Grant	Exercise Price

2013	6.76	-	9.74	65	274		1	65
2014	8.94	-	16.05	399	1,930		2	399
2015	18.20	-	21.39	211	1,645		3	211
2016	15.93	-	16.86	198	1,162		4	198
2017	15.80	-	19.41	236	1,387		5	236
2018	22.49	-	32.71	449	4,341		6	330
2019	41.07	-	45.76	590	9,275		7	324
2020	44.84	-	59.49	545	10,734		8	197
2021	73.47	-	83.64	567	18,597		9	109
2022	$79.79		$94.88	573	21,689		10	—
TOTAL				3,833	$	71,034		2,069

The aggregate intrinsic value of options outstanding, vested and expected to vest as of December 31, 2022, 2021 and 2020 is as follows:


	December 31,
Options	2022		2021		2020


Outstanding	$	183,593	$	191,242	$	182,552
Vested	136,000		137,382		120,867
Expected to vest	43,232		48,548		53,366

The intrinsic value is calculated as the difference between the market value of the underlying common stock and the exercise price of the options. The aggregate intrinsic value of options that vested during the year ended December 31, 2022, 2021 and 2020 was $27,955, $27,731, and $26,030, respectively. The total intrinsic value of options exercised during the year ended December 31, 2022, 2021 and 2020 was $47,441, $34,278, and $45,081, respectively.

Restricted Stock Awards

The Company granted 233, 222 and 281 restricted stock awards during the years ended December 31, 2022, 2021 and 2020, respectively. All awards were granted at an issue price of $0 and generally vest over five years. The fair value per share of restricted awards granted during the years ended December 31, 2022, 2021 and 2020 ranged from $73.17 to $94.88, $72.84 to $93.31 and $35.47 to $58.06, respectively. The fair value per share includes quarterly stock awards to non-employee directors.

A summary of the status of the Company's non-vested restricted stock awards as of December 31, 2022 and changes during the years ended December 31, 2022, 2021 and 2020 is presented below:


	Non-Vested Restricted Awards	Weighted Average Grant Date Fair Value
Nonvested at January 1, 2020	610	$	31.35
Granted	281	48.73
Vested	(280)	32.84
Forfeited	(20)	31.71
Nonvested at December 31, 2020	591	$	38.90
Granted	222	81.65
Vested	(244)	47.45
Forfeited	(20)	45.64
Nonvested at December 31, 2021	549	$	52.16
Granted	233	81.57
Vested	(269)	54.06
Forfeited	(26)	57.29
Nonvested at December 31, 2022	487	$	64.92

During the year ended December 31, 2022, the Company granted 18 automatic quarterly stock awards to non-employee directors for their service on the Company's board of directors from the 2017 and 2022 Plan. The fair value per share of these stock awards ranged from $75.33 to $86.34 based on the market price on the grant date.

Long-Term Incentive Plan

On August 27, 2019, the Board approved the Long-Term Incentive Plan (the 2019 LTI Plan). The 2019 LTI Plan provides that certain employees of the Company who assisted in the consummation of the spin-off transaction in 2019 are granted shares of restricted stock upon successful completion. The 2019 LTI Plan provides for the issuance of 500 shares of Pennant restricted stock. The shares are vested over five years at 20% per year on the anniversary of the grant date. If a recipient is terminated or voluntarily leaves the Company, all shares subject to restriction or not yet vested shall be entirely forfeited. The total stock-based compensation related to the 2019 LTI Plan was approximately $836, $854, and $881 for the years ended December 31, 2022, 2021 and 2020, respectively.

Stock-based compensation expense recognized for the Company's equity incentive plans and long-term incentive plan for the years ended December 31, 2022, 2021, and 2020 was as follows:


	Year Ended December 31,
		2022		2021		2020
Stock-based compensation expense related to stock options		$	11,361	$	8,459	$	6,132
Stock-based compensation expense related to restricted stock awards		9,920		8,385		7,373
Stock-based compensation expense related to stock options and restricted stock awards to non-employee directors		1,439		1,834		1,019
TOTAL		$	22,720	$	18,678	$	14,524

In future periods, the Company expects to recognize approximately $43,388 and $29,149 in stock-based compensation expense for unvested options and unvested restricted stock awards, respectively, that were outstanding as of December 31, 2022. Future stock-based compensation expense will be recognized over 3.6 and 3.4 weighted average years for unvested options and restricted stock awards, respectively. There were 1,764 unvested and outstanding options as of December 31, 2022, of which 1,666 shares are expected to vest. The weighted average contractual life for options outstanding, vested and expected to vest as of December 31, 2022 was 6.0 years.