Note 8: Stock-Based Compensation

The table below summarizes the total stock-based compensation expense recognized for all outstanding grants in our consolidated statement of income:

	Third Quarter Ended				Nine Months Ended
(Unaudited, amounts in thousands)	1/25/14		1/26/13		1/25/14		1/26/13
Equity-based awards expense	$	1,700	$	1,239	$	7,371	$	8,198
Liability-based awards expense		2,203		314		5,993		1,205
Total stock-based compensation expense	$	3,903	$	1,553	$	13,364	$	9,403

The table below summarizes the grants made during the first nine months of fiscal 2014:

(Unaudited, shares/units in thousands)	Shares/units granted	Liability/ Equity award	Settlement
Stock options	175	Equity	Common shares
Stock appreciation rights (“SARs”)	142	Liability	Cash
Restricted stock units – employees	125	Liability	Cash
Restricted stock units – directors	34	Equity	Common shares
Performance-based units	35	Liability	Cash
Performance-based shares	191	Equity	Common shares

Stock Options. We granted 174,595 stock options to employees during the first quarter of fiscal 2014. Stock options are accounted for as equity-based awards because upon exercise of the stock option they will be settled in common shares. Compensation expense for stock options is equal to the fair value on the date the award was approved and is recognized over the vesting period. The vesting period for our stock options ranges from one to four years. Options granted to retirement eligible employees are expensed immediately because they vest upon retirement. The fair value for the employee stock options granted was estimated at the date of the grant using the Black-Scholes option-pricing model, which requires management to make certain assumptions. Expected volatility was estimated based on the historical volatility of our common shares. The average expected life was based on the contractual term of the stock option and expected employee exercise and post-vesting employment termination trends. The risk-free rate was based on U.S. Treasury issues with a term equal to the expected life assumed at the date of the grant.

The fair value of stock options granted during the first quarter of fiscal 2014 was calculated using the following assumptions:

(Unaudited)	7/27/13
Risk-free interest rate		0.84	%
Dividend rate		0.84	%
Expected life in years		5.0
Stock price volatility		81.3	%
Fair value per share	$	11.63

Stock Appreciation Rights. We granted 141,546 stock appreciation rights to employees during the first quarter of fiscal 2014. SARs will be paid in cash upon vesting and as such are accounted for as liability-based awards that will be remeasured to reflect the fair value at the end of each reporting period. These awards vest at 25% per year, beginning one year from the grant date for a term of four years. SARs granted to retirement eligible employees are expensed immediately because they vest upon retirement. The fair value for the SARs is estimated at the end of each period using the Black-Scholes option-pricing model, which requires management to make certain assumptions. The average expected life was based on the contractual term of the SARs and expected employee exercise and post-vesting employment termination trends (which is consistent with the expected life of our option awards). The risk-free rate was based on U.S. Treasury issues with a term equal to the expected life assumed at the end of the reporting period.

The fair value of the SARs granted during the first quarter of fiscal 2014 was remeasured at January 25, 2014, using the following assumptions:

(Unaudited)	1/25/14
Risk-free interest rate		1.58	%
Dividend rate		0.90	%
Expected life in years		4.39
Stock price volatility		53.14	%
Fair value per share	$	13.94

In fiscal 2013, we granted SARs as described in our Form 10-K for the fiscal year ended April 27, 2013. The fair value of the SARs granted during fiscal 2013 was remeasured at January 25, 2014, using the following assumptions:

(Unaudited)	1/25/14
Risk-free interest rate		0.69	%
Dividend rate		0.90	%
Expected life in years		3.46
Stock price volatility		50.44	%
Fair value per share	$	16.31

Restricted Stock Units. We granted 125,007 restricted stock units to employees during the first nine months of fiscal 2014. These units are accounted for as liability-based awards because upon vesting these awards will be paid in cash. Compensation expense is initially measured and recognized based on the market value (intrinsic value) of our common stock on the grant date and amortized over the vesting period. The liability is remeasured and adjusted based on the market value (intrinsic value) of our common shares on the last day of the reporting period until paid with a corresponding adjustment to reflect the cumulative amount of compensation expense. The fair value of the restricted stock units at January 25, 2014, was $27.19. Each restricted stock unit is the equivalent of one common share. Restricted stock units vest at 25% per year, beginning one year from the grant date for a term of four years.

During the second quarter of fiscal 2014, we granted 34,200 restricted stock units to our non-employee directors. They vest upon the director leaving the board. They will be settled in shares of our common stock upon vesting, and we account for them as equity-based awards. Compensation expense for these awards is measured and recognized on the grant date based on the market price of our common shares on the date of grant, which was $21.20.

Performance Awards. During the first quarter of fiscal 2014, we granted 35,083 performance-based units and 191,410 performance-based shares. Payout of these grants depends on our financial performance (80%) and a market-based condition based on the total return that our shareholders receive on their investment in our stock relative to returns earned through investments in other public companies (20%). The performance award opportunity ranges from 50% of the employee’s target award if minimum performance requirements are met to a maximum of 200% of the target award based on the attainment of certain financial and shareholder-return goals over a specific performance period, which is generally three fiscal years.

The performance-based units are accounted for as liability-based awards because upon vesting they will be paid in cash. For performance-based units that vest based on performance conditions, the fair value of each unit was $26.59 at January 25, 2014, which was the market value of our common shares on the last day of the reporting period less expected dividends to be paid prior to vesting, and compensation cost is expensed based on the probability that the performance goals will be obtained. For performance-based units that vest based on market conditions, the fair value of the award was estimated using a Monte Carlo valuation model on the last day of the reporting period, and compensation cost is expensed over the vesting period. The liability for these units is remeasured and adjusted based on the Monte Carlo valuation at the end of each reporting period until paid. Based on the Monte Carlo valuation, the fair value of each performance-based unit that vests based on market conditions was $42.93 at January 25, 2014.

The performance-based shares are accounted for as equity-based awards because upon vesting they will be settled in common shares. The grant date fair value of performance-based shares is expensed over the service period. For performance-based shares that vest based on performance conditions, the fair value of each share was $18.58, which was the market value of our common shares on the date of grant less expected dividends to be paid prior to vesting, and compensation cost is expensed based on the probability that the performance goals will be obtained. For performance-based shares that vest based on market conditions, the fair value of each share was estimated using a Monte Carlo valuation model on the date of grant, and compensation cost is expensed over the vesting period, regardless of the ultimate vesting of the award, similar to the expensing of a stock option award. The fair value for each performance-based share that vests based on market conditions, as determined by the Monte Carlo valuation, was $26.08 at the grant date.

In fiscal 2013, we granted performance-based units as described in our Form 10-K for the fiscal year ended April 27, 2013. For those of the performance-based units that vest based on performance conditions, the fair value of each unit was $26.83 at January 25, 2014, which was the market value of our common shares on the last day of the reporting period less expected dividends to be paid prior to vesting. For those of the performance-based units that vest based on market conditions, the fair value of each unit was $47.56 at January 25, 2014, which was based on the Monte Carlo valuation at the end of the reporting period.