STOCK-BASED COMPENSATION

The Company grants stock-based awards under its 2006 Stock Incentive Plan (the “2006 Plan”). Shares issued as a result of stock-based compensation transactions generally have been funded with the issuance of new shares of the Company’s common stock.

The Company may grant the following types of incentive awards under the 2006 Plan: (i) non-qualified stock options; (ii) incentive stock options; (iii) stock appreciation rights; (iv) restricted stock; (v) restricted stock units (“RSUs”); (vi) performance shares; (vii) performance share units (“PSUs”); and (viii) other stock-based awards. Each award granted under the 2006 Plan is subject to an award agreement that incorporates, as applicable, the exercise price, the term of the award, the periods of restriction, the number of shares to which the award pertains, performance periods and performance measures, and such other terms and conditions as the plan committee determines. Awards granted under the 2006 Plan are classified as equity awards, which are recorded in stockholders’ equity in the Company’s Consolidated Balance Sheets.

Through February 4, 2018, the Company has granted under the 2006 Plan (i) service-based non-qualified stock options (“stock options”), RSUs and restricted stock; and (ii) contingently issuable PSUs and RSUs. All restricted stock granted by the Company was fully vested at the end of 2015.

According to the terms of the 2006 Plan, for purposes of determining the number of shares available for grant, each share underlying a stock option award reduces the number available by one share and each share underlying a RSU or PSU reduces the number available by two shares. Total shares available for grant at February 4, 2018 amounted to 5.8 million shares.

Net income for 2017, 2016 and 2015 included $44.9 million, $38.2 million and $42.0 million, respectively, of pre-tax expense related to stock-based compensation, with related recognized income tax benefits of $8.8 million, $11.5 million and $10.7 million, respectively.

Effective the first quarter of 2017, the Company adopted an update to accounting guidance that simplifies several aspects of accounting for share-based payment award transactions, which resulted in the Company’s election to recognize forfeitures as they occur rather than continue to estimate expected forfeitures in determining compensation expense. This accounting change was applied on a modified retrospective basis and resulted in a cumulative-effect adjustment to decrease beginning retained earnings by $0.8 million, with an offsetting increase to additional paid in capital of $1.1 million and an increase to deferred tax assets of $0.3 million. Please see Note 1, “Summary of Significant Accounting Policies,” for further discussion.

The Company receives a tax deduction for certain transactions associated with its stock-based plan awards. The actual income tax benefits realized from these transactions in 2017, 2016 and 2015 were $27.2 million, $6.6 million and $10.2 million, respectively. As a result of the Company’s adoption of the update discussed above, the Company recognized a net excess tax benefit of $15.4 million related to share-based payments in its provision for income taxes in 2017. Prior to the adoption of this update, the Company recognized excess tax benefits or tax deficiencies in equity as a component of additional paid in capital. Such amounts were a net excess tax deficiency of $7.2 million in 2016 and a net excess tax benefit of $4.8 million in 2015.

Stock Options

Stock options granted to employees are generally exercisable in four equal annual installments commencing one year after the date of grant. The underlying stock option award agreements generally provide for accelerated vesting upon the award recipient’s retirement (as defined in the 2006 Plan). Such stock options are granted with a 10-year term and the per share exercise price cannot be less than the closing price of the common stock on the date of grant.

The Company estimates the fair value of stock options at the date of grant using the Black-Scholes-Merton model. The estimated fair value of the stock options granted is expensed over the stock options’ vesting periods.

The following summarizes the assumptions used to estimate the fair value of stock options granted during 2017, 2016 and 2015:



	2017			2016			2015
Weighted average risk-free interest rate	2.10		%	1.45		%	1.54		%
Weighted average expected stock option term (in years)	6.25			6.25			6.25
Weighted average Company volatility	29.46		%	34.54		%	36.26		%
Expected annual dividends per share	$	0.15		$	0.15		$	0.15
Weighted average grant date fair value per stock option	$	33.50		$	35.62		$	40.20

The risk-free interest rate is based on United States Treasury yields in effect at the date of grant for periods corresponding to the expected stock option term. The expected stock option term represents the weighted average period of time that stock options granted are expected to be outstanding, based on vesting schedules and the contractual term of the stock options. Company volatility is based on the historical volatility of the Company’s common stock over a period of time corresponding to the expected stock option term. Expected dividends are based on the Company’s common stock cash dividend rate at the date of grant.

The Company has continued to utilize the simplified method to estimate the expected term for its “plain vanilla” stock options granted due to a lack of relevant historical data resulting, in part, from changes in the pool of employees receiving stock option grants. The Company will continue to evaluate the appropriateness of utilizing such method.

Stock option activity for the year was as follows:



(In thousands, except years and per stock option data)	Stock Options	Weighted Average Exercise Price Per Stock Option		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding at January 29, 2017	1,466	$	75.74	5.3	$	34,996
Granted	142	101.94
Exercised	671	44.32
Cancelled	16	105.98
Outstanding at February 4, 2018	921	$	102.18	6.6	$	45,020
Exercisable at February 4, 2018	501	$	100.93	5.3	$	25,109

The aggregate grant date fair value of stock options granted during 2017, 2016 and 2015 was $4.8 million, $8.4 million and $7.0 million, respectively.

The aggregate grant date fair value of stock options that vested during 2017, 2016 and 2015 was $7.2 million, $6.9 million and $7.2 million, respectively.

The aggregate intrinsic value of stock options exercised was $56.9 million, $6.9 million and $8.4 million in 2017, 2016 and 2015, respectively.

At February 4, 2018, there was $8.9 million of unrecognized pre-tax compensation expense related to non-vested stock options, which is expected to be recognized over a weighted average period of 1.3 years.

Restricted Stock Units

RSUs granted to employees since 2016 generally vest in four equal annual installments commencing one year after the date of grant. Outstanding RSUs granted to employees prior to 2016 generally vest in three annual installments of 25%, 25% and 50% commencing two years after the date of grant. Service-based RSUs granted to non-employee directors vest in full one year after the date of grant. The underlying RSU award agreements (excluding agreements for non-employee director awards) generally provide for accelerated vesting upon the award recipient’s retirement (as defined in the 2006 Plan). The fair value of RSUs is equal to the closing price of the Company’s common stock on the date of grant and is expensed over the RSUs’ vesting periods.

RSU activity for the year was as follows:



(In thousands, except per RSU data)	RSUs	Weighted Average Grant Date Fair Value Per RSU
Non-vested at January 29, 2017	812	$	105.96
Granted	445	103.28
Vested	263	109.04
Cancelled	77	104.48
Non-vested at February 4, 2018	917	$	103.90

The aggregate grant date fair value of RSUs granted during 2017, 2016 and 2015 was $46.0 million, $38.8 million and $31.7 million, respectively. The aggregate grant date fair value of RSUs vested during 2017, 2016 and 2015 was $28.7 million, $17.3 million and $18.1 million, respectively.

At February 4, 2018, there was $54.7 million of unrecognized pre-tax compensation expense related to non-vested RSUs, which is expected to be recognized over a weighted average period of 1.7 years.

Performance Share Units

The Company granted contingently issuable PSUs to certain of the Company’s senior executives during 2017, 2016 and 2015 subject to a three-year performance period. For such awards, the final number of shares to be earned, if any, is contingent upon the Company’s achievement of goals for the applicable performance period, of which 50% is based upon the Company’s absolute stock price growth during the applicable performance period and 50% is based upon the Company’s total shareholder return during the applicable performance period relative to other companies included in the S&P 500 as of the date of grant. The Company records expense ratably over the applicable vesting period regardless of whether the market condition is satisfied because the awards are subject to market conditions. The fair value of the awards granted in 2017, 2016 and 2015 was established for each grant on the grant date using the Monte Carlo simulation model, which was based on the following assumptions:



	2017			2016			2015
Risk-free interest rate	1.49		%	1.04		%	0.90		%
Expected Company volatility	31.29		%	28.33		%	29.10		%
Expected annual dividends per share	$	0.15		$	0.15		$	0.15
Weighted average grant date fair value per PSU	$	96.81		$	87.16		$	101.23

Certain of the awards granted in 2017 and 2016 are subject to a holding period of one year after the vesting date. For such awards, the grant date fair value was discounted 12.67% and 12.99%, respectively, for the restriction of liquidity, which was calculated using the Chaffe model.

PSU activity for the year was as follows:



(In thousands, except per PSU data)	PSUs	Weighted Average Grant Date Fair Value Per PSU
Non-vested at January 29, 2017	125	$	92.32
Granted	72	96.81
Vested	—	—
Cancelled	—	—
Non-vested at February 4, 2018	197	$	93.97

The aggregate grant date fair value of PSUs granted during 2017, 2016 and 2015 was $7.0 million, $6.9 million and $4.6 million, respectively. No PSUs vested in 2017. The aggregate grant date fair value of PSUs that vested during 2016 and 2015 was $3.0 million and $4.8 million, respectively. PSUs in the above table are subject to market conditions. As such, they are reflected at the target level, which is consistent with how expense will be recorded, regardless of the numbers of shares that will actually be earned.

At February 4, 2018, there was $7.7 million of unrecognized pre-tax compensation expense related to non-vested PSUs, which is expected to be recognized over a weighted average period of 1.8 years.