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Share-based Payment Arrangements
6 Months Ended
Jul. 01, 2017
Share-based Payment Arrangements

(1) Share-based Payment Arrangements

As of July 1, 2017, the Company had two employee equity incentive plans, the 2002 employee stock option and stock incentive plan (the “ESOSIP”) and the 2011 equity incentive plan (the “2011 EIP”). No further grants can be made under the ESOSIP. The Company also has a stock compensation plan for members of its Board of Directors, the Amended and Restated 2013 Directors Stock Compensation Plan (as amended and restated as of May 17, 2016, the “2013 DSCP”). 6,000,000 shares of the Company’s common stock were authorized for issuance under the 2011 EIP and 115,000 shares of the Company’s common stock were authorized for issuance under the 2013 DSCP. The ESOSIP, 2011 EIP and 2013 DSCP are each referred to herein as a “Plan,” and, collectively, as the “Plans.” Amounts recognized in the financial statements with respect to these Plans are as follows (in thousands):

 

     Twenty Six Weeks Ended      Thirteen Weeks Ended  
     July 1,
2017
     June 25,
2016
     July 1,
2017
     June 25,
2016
 

Total cost of the Plans during the period

   $ 2,237      $ 2,066      $ 1,243      $ 966  

Amount of related income tax benefit recognized during the period

     (1,814      (836      (687      (365
  

 

 

    

 

 

    

 

 

    

 

 

 

Net cost of the Plans during the period

   $ 423      $ 1,230      $ 556      $ 601  
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in income tax benefits recognized in the twenty-six-week periods ended July 1, 2017 and June 25, 2016 were income tax benefits of $270,000 and $172,000, respectively, recognized on disqualifying dispositions of the Company’s common stock by employees who obtained shares of common stock through exercises of incentive stock options. Also included in income tax benefits recognized in the twenty-six-week period ended July 1, 2017 were excess tax benefits from stock-based awards of $751,000, as required by the Company’s adoption of Accounting Standards Update 2016-09 during the first fiscal quarter of 2017. See Note 10, Recent Accounting Pronouncements, for further information.

As of July 1, 2017, there were 78,682 shares of the Company’s common stock reserved for issuance under the 2013 DSCP and 4,747,396 shares of the Company’s common stock reserved for issuance in the aggregate under the ESOSIP and 2011 EIP.

Restricted Stock Units

The following table summarizes information regarding the Company’s outstanding restricted stock unit (“RSU”) awards with either a performance condition or a market condition under the Plans:

 

     Number of     

Weighted Average

Grant Date

 
     RSUs      Fair Value  

Outstanding at December 31, 2016

     378,238      $ 50.46  

Granted

     67,577      $ 76.90  

Forfeited

     (56,771    $ 45.35  
  

 

 

    

Outstanding at July 1, 2017

     389,044      $ 55.80  
  

 

 

    

During the twenty-six-week period ended July 1, 2017, the Company granted RSUs with a performance condition. RSUs with a performance condition granted on February 2, 2017 may vest on January 31 of 2020, 2021 and 2022 based on growth in operating income and diluted earnings per share from continuing operations as compared to the results from the 2016 fiscal year. Outstanding RSUs at both December 31, 2016 and July 1, 2017 include RSUs with a performance condition and RSUs with a market condition, as further described below.

 

RSUs with a performance condition vest over a 5 year period from the date of grant based on growth in operating income and diluted earnings per share as compared to a base year, being the year immediately preceding the year of grant. At the time of grant, the target number of common shares available for issuance under the February 2, 2017, January 29, 2016 and January 27, 2015 grants equals 100% of the number of RSUs granted, and the maximum number of common shares available for issuance under the February 2, 2017, January 29, 2016 and January 27, 2015 grants equals 200% of the number of RSUs granted. In the event actual results exceed the target, the number of shares that will be granted will exceed the number of RSUs granted. The maximum number of common shares available for issuance under grants made prior to 2015 equals 100% of the number of RSUs granted. The fair value of an RSU with a performance condition was determined based on the market value of the Company’s common stock on the date of grant, discounted for lack of marketability for a minimum post-vesting holding requirement. The discount rate due to lack of marketability used for RSU award grants with a performance condition for all periods was 7%. With respect to RSU awards with a performance condition, the Company reports compensation expense over the life of the award based on an estimated number of units that will vest over the life of the award, multiplied by the fair value of an RSU.

On May 1, 2015, the Company granted 20,000 RSUs that vest based on a market condition. These RSUs may vest on April 30 of 2019, 2020 and 2021 based on the Company’s total shareholder return (“TSR”) compound annual growth rate over the vesting periods, adjusted to reflect dividends (if any) paid during such periods and capital adjustments as may be necessary. The target number of common shares available for issuance under the May 1, 2015 grant equals 100% of the number of RSUs granted, and the maximum number of common shares available for issuance under the May 1, 2015 grant equals 150% of the number of RSUs granted. In the event actual results exceed the target TSR compound annual growth rate, the number of shares that will be granted will exceed the number of RSUs granted. The fair value of this RSU award was determined at the time of grant based on the expected achievement of the market condition at the end of each vesting period. With respect to these RSU awards with a market condition, compensation expense is recognized ratably over the requisite service period under an award based on the fair market value of the award at the time of grant, regardless of whether the market condition is satisfied. Previously recognized compensation cost would be reversed, however, if the employee terminated employment prior to completing such requisite service period.

The Company recognized approximately $1,309,000 and $1,130,000 of share-based compensation expense related to RSU awards in the twenty-six-week periods ended July 1, 2017 and June 25, 2016, respectively. As of July 1, 2017, there was a maximum of $33.3 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately 3 years. With respect to RSU awards with a performance condition, the amount of future compensation expense to be recognized will be determined based on future operating results.

Stock Options

The following table summarizes information regarding the Company’s outstanding stock options under the Plans:

 

     Number of
Options
     Weighted
Average
Exercise Price
per Share
     Weighted
Average
Remaining
Contractual
Term (years)
     Aggregate
Intrinsic
Value (000s)
 

Options outstanding at December 31, 2016

     372,561      $ 48.24        

Exercised

     (114,009    $ 46.10        

Forfeited

     (600    $ 54.93        
  

 

 

          

Options outstanding at July 1, 2017

     257,952      $ 49.16        4.3      $ 9,399  
  

 

 

          

Options exercisable at July 1, 2017

     237,452      $ 48.53        4.1      $ 8,802  
  

 

 

          

The total intrinsic value of stock options exercised during the twenty-six-week periods ended July 1, 2017 and June 25, 2016 was $4,480,000 and $1,236,000, respectively.

As of July 1, 2017, there was $157,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plans. The unrecognized compensation cost related to these non-vested options is expected to be recognized during 2017.

 

Non-vested Restricted Stock and Deferred Stock Units

The following table summarizes information regarding the Company’s outstanding shares of non-vested restricted stock and Deferred Stock Units (defined below) under the Plans:

 

     Number of Shares
and Deferred Stock
Units
     Weighted Average
Grant Date
Fair Value
 

Non-vested at December 31, 2016

     28,409      $ 58.91  

Granted

     39,267      $ 83.45  

Vested

     (16,227    $ 61.50  
  

 

 

    

Non-vested at July 1, 2017

     51,449      $ 76.83  
  

 

 

    

The fair value of each share of non-vested restricted stock issued and Deferred Stock Unit granted under the Plans are based on the fair value of a share of the Company’s common stock on the date of grant. Shares of non-vested restricted stock are subject to vesting in three equal annual installments either on the first, second and third anniversary of the date of the grant or the third, fourth and fifth anniversary of the date of the grant, or 100% on the first anniversary of the date of the grant. For restricted stock awards granted under the 2013 DSCP plan, each recipient may elect to defer receipt of shares and instead receive restricted stock units (“Deferred Stock Units”), which represent contingent rights to receive shares of the Company’s common stock on the date of recipient separation from service from the Board of Directors, or, if earlier, upon a change in control event of the Company. Deferred Stock Units become vested 100% on the first anniversary of the date of the grant. Deferred Stock Units do not represent actual ownership in shares of the Company’s common stock and the recipient will not have voting rights or other incidents of ownership until the shares are issued. However, Deferred Stock Units do contain the right to receive dividend equivalent payments prior to settlement into shares.

As of July 1, 2017, there was $3,500,000 of total unrecognized compensation cost related to non-vested shares of restricted stock and Deferred Stock Units granted under the Plans. The unrecognized compensation cost related to these non-vested shares of restricted stock and Deferred Stock Units is expected to be recognized over a weighted average period of 3 years.