Associate Benefit Plans

12 Months Ended

Aug. 29, 2020

12. ASSOCIATE BENEFIT PLANS

The Company accounts for all share-based payments in accordance with ASC 718. Stock-based compensation expense included in operating expenses for the fiscal years ended August 29, 2020, August 31, 2019, and September 1, 2018 was as follows:


	For the Fiscal Years Ended
	August 29,		August 31,		September 1,
	2020		2019		2018
Stock options	$	3,645	$	4,786	$	4,534
Restricted share awards		185		1,552		2,856
Restricted stock units		12,319		9,633		7,281
Performance share units		575		—		—
Associate Stock Purchase Plan		208		312		263
Total		16,932		16,283		14,934
Deferred income tax benefit		(4,182)		(4,006)		(4,376)
Stock-based compensation expense, net	$	12,750	$	12,277	$	10,558

Stock Compensation Plans

2015 Omnibus Incentive Plan

At the Company’s annual meeting of shareholders held on January 15, 2015, the shareholders approved the MSC Industrial Direct Co., Inc. 2015 Omnibus Incentive Plan (“2015 Omnibus Plan”). The 2015 Omnibus Plan replaced the

Company’s 2005 Omnibus Incentive Plan (the “Prior Plan”) and, beginning January 15, 2015, all awards are granted under the 2015 Omnibus Plan. Awards under the 2015 Omnibus Plan may be made in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, other share-based awards, and performance cash, performance shares or performance units. All outstanding awards under the Prior Plan will continue to be governed by the terms of the Prior Plan. Upon approval of the 2015 Omnibus Plan, the maximum aggregate number of shares of common stock authorized to be issued under the 2015 Omnibus Plan was 5,217 shares, of which 2,132 authorized shares of common stock were remaining as of August 29, 2020.

Stock Options

A summary of the status of the Company’s stock options at August 29, 2020 and changes during the fiscal year then ended is presented in the table and narrative below:


	2020
	Shares	Weighted-Average Exercise Price
Outstanding - beginning of year	1,894	$	74.73
Granted	—		-
Exercised	(215)		63.75
Canceled/Forfeited	(140)		80.18
Outstanding - end of year	1,539	$	75.76
Exercisable - end of year	1,033	$	73.80

The total intrinsic value of options exercised during the fiscal years ended August 29, 2020, August 31, 2019 and September 1, 2018 was $2,604, $1,882, and $7,516, respectively. The unrecognized share-based compensation cost related to stock option expense at August 29, 2020 was $3,700 and will be recognized over a weighted average of 1.4 years.

Stock option awards outstanding under the Company’s incentive plans have been granted at exercise prices that are equal to the market value of its common stock on the date of grant. Such options generally vest over a period of four years and expire at seven years after the grant date. The Company recognizes compensation expense ratably over the vesting period, net of estimated forfeitures. The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options granted, which requires the input of both subjective and objective assumptions as follows:

Expected Term — The estimate of expected term is based on the historical exercise behavior of grantees, as well as the contractual life of the option grants.

Expected Volatility — The expected volatility factor is based on the volatility of the Company's common stock for a period equal to the expected term of the stock option.

Risk-free Interest Rate — The risk-free interest rate is determined using the implied yield for a traded zero-coupon U.S. Treasury bond with a term equal to the expected term of the stock option.

Expected Dividend Yield — The expected dividend yield is based on the Company's historical practice of paying quarterly dividends on its common stock.

The Company discontinued its grants of stock options in fiscal year 2020. The Company’s weighted-average assumptions used to estimate the fair value of stock options granted during the fiscal years ended August 31, 2019 and September 1, 2018 were as follows:


		2019			2018
Expected life (in years)		4.0			4.0
Risk-free interest rate		2.98	%		1.87	%
Expected volatility		23.1	%		22.1	%
Expected dividend yield		2.70	%		2.30	%
Weighted-Average Grant-Date Fair Value	$	14.05		$	12.25

The following table summarizes information about stock options outstanding and exercisable at August 29, 2020:



Range of Exercise Prices	Number of Options Outstanding at August 29, 2020	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price		Intrinsic Value		Number of Options Exercisable at August 29, 2020	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price		Intrinsic Value
$ 58.90 – $ 71.33	584	2.7	$	65.99	$	1,941	488	2.6	$	64.94	$	1,941
71.34 – 79.60	336	4.1		79.60		—	170	4.1		79.60		—
79.61 – 81.76	108	2.1		81.76		—	108	2.1		81.76		—
81.77 – 83.09	511	4.1		83.15		—	267	3.1		83.09		—
	1,539	3.4	$	75.76	$	1,941	1,033	3.0	$	73.80	$	1,941

Performance Share Units

Beginning in fiscal year 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 2015 Omnibus Plan (based on target award amounts) for the year ended August 29, 2020:


	2020
	Shares	Weighted-Average Grant-Date Fair Value
Non-vested performance share units at the beginning of the year	—	$	—
Granted	31		76.32
Vested	—		—
Canceled/Forfeited	(3)		76.32
Non-vested performance share units at the end of the year ⁽¹⁾	28	$	76.32
(1) Excludes 3 shares of accrued incremental dividend equivalent rights on outstanding PSUs.

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 August 29, 2020 was $1,536 and is expected to be recognized over a period of 2.2 years.

Restricted Stock Awards

A summary of the non-vested restricted share awards (“RSA”) granted under the Company’s incentive plans for the fiscal year ended August 29, 2020 is as follows:


	2020
	Shares		Weighted-Average Grant-Date Fair Value
Non-vested restricted share awards at the beginning of the year	21	$	82.00
Granted	—		—
Vested	(19)		82.86
Canceled/Forfeited	(2)		70.40
Non-vested restricted share awards at the end of the year	—	$	—

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 may be withheld to satisfy the minimum statutory withholding taxes. The

fair value of shares vested during the fiscal years ended August 29, 2020, August 31, 2019 and September 1, 2018 was $1,581, $3,368 and $7,222, respectively. The remaining RSAs vested in March 2020. There are no non-vested RSA’s or remaining unrecognized share-based compensation costs at August 29, 2020.

Restricted Stock Units

A summary of the Company’s non-vested restricted stock unit (“RSU”) award activity for the fiscal year ended August 29, 2020 is as follows:


	2020
	Shares		Weighted-Average Grant-Date Fair Value
Non-vested restricted stock unit awards at the beginning of the year	416	$	76.93
Granted	254		75.64
Vested	(140)		75.02
Canceled/Forfeited	(48)		77.70
Non-vested restricted stock unit awards at the end of the year ⁽¹⁾	482	$	76.73
(1) Excludes approximately 69 shares of accrued incremental dividend equivalent rights on outstanding RSUs.

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 minimum statutory withholding taxes. The remaining RSUs will be settled in shares of the Company’s Class A common stock after the vesting period. These awards accrue dividend equivalents on outstanding units (in the form of additional stock units) based on dividends declared on the Company’s Class A common stock and these additional RSUs are subject to the same vesting periods as the RSUs in the underlying award. The dividend equivalents are not included in the RSU table above. The unrecognized compensation cost related to the RSUs at August 29, 2020 was $26,623 and is expected to be recognized over a period of 2.7 years.

Associate Stock Purchase Plan

The Company has established a qualified Associate Stock Purchase Plan, the terms of which allow for eligible associates (as defined in the Associate Stock Purchase Plan) to participate in the purchase of up to a maximum of five shares of the Company’s Class A common stock at a price equal to 90% of the closing price at the end of each stock purchase period. On January 7, 2009, the shareholders of the Company approved an increase to the authorized but unissued shares of the Class A common stock of the Company reserved for sale under the Associate Stock Purchase Plan from 800 to 1,150 shares. On January 15, 2015, the shareholders of the Company approved an increase to the authorized but unissued shares of the Class A common stock of the Company reserved for sale under the Associate Stock Purchase Plan from 1,150 to 1,500 shares. As of August 29, 2020, approximately 54 shares remain reserved for issuance under this plan. Associates purchased approximately 69 and 64 shares of common stock during fiscal years 2020 and 2019 at an average per share price of $59.71 and $71.65, respectively.

Savings Plan

The Company maintains a defined contribution plan with both a profit sharing feature and a 401(k) feature which covers all associates who have completed at least one month of service with the Company. For fiscal years 2020, 2019, and 2018, the Company contributed $5,491, $8,439 and $7,730, respectively, to the plan. The Company contributions are discretionary. In April 2020, the Company temporarily suspended the employer matching contribution to eligible participants in the Company’s 401(k), and the matching contribution was reinstated at the beginning of fiscal year 2021.

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