Share-Based Compensation

12 Months Ended

Oct. 30, 2011

Share-Based Compensation [Abstract]

SHARE-BASED COMPENSATION

7. SHARE-BASED COMPENSATION

During the first quarter of fiscal 2010, our board of directors unanimously adopted a resolution to submit to a vote of our stockholders a proposal to approve an amendment and restatement of our Incentive Plan to increase the number of shares of Common Stock reserved for issuance under the Incentive Plan by 5.7 million shares of Common Stock (after giving effect to the Reverse Stock Split). On February 19, 2010, the stockholders approved the amendment and restatement of the Company’s Incentive Plan. The amendment and restatement of the Incentive Plan increased the number of Common Shares reserved for issuance under the Incentive Plan by 5.7 million to a total of 6.4 million Common Shares (in each case, after giving effect to the Reverse Stock Split), increased the maximum number of shares that may be granted to an individual in any fiscal year to 0.9 million and extended the effective date of the Incentive Plan to 10 years after the date the Compensation Committee of the Company’s board of directors approved the amendments.

Our 2003 Long-Term Stock Incentive Plan (“Incentive Plan”) is an equity-based compensation plan that allows us to grant a variety of types of awards, including stock options, restricted stock, restricted stock units, stock appreciation rights, performance share awards, phantom stock awards and cash awards. On December 11, 2009, our board of directors approved the right of employees and officers to receive grants of 1.5 million shares of restricted stock and the right of officers to receive grants of 1.8 million stock options, both of which were conditioned upon shareholder approval. Our majority stockholder, had informed the Company in writing of its intention to vote in favor of the amendment and restatement of the Incentive Plan. Based on the approval of our board of directors and our majority stockholder, we determined that the finalization of stockholder vote to approve the amendment and restatement of the Incentive Plan was perfunctory and we established a grant date of December 11, 2009 for the restricted stock and stock option awards. As discussed in Note 12 — Series B Cumulative Convertible Participating Preferred Stock, at January 31, 2010, the Company did not have sufficient common shares available to settle the restricted stock and stock option awards, and thus, we classified a portion of the awards as liability awards in accordance with ASC Subtopic 718-10, Compensation-Stock Compensation (“ASC 718-10”). ASC 718-10 requires that liability awards be remeasured at fair value at each reporting date with changes in fair value recognized in earnings. During fiscal 2010, the changes in fair value were immaterial. On March 5, 2010, the Company effected a Reverse Stock Split at an exchange ratio of 1-for-5 which caused the shares to become available and resulted in all restricted stock and stock option awards being classified as equity awards. As such, on March 5, 2010, all liability awards were reclassified to equity awards and remeasured using a valuation date of March 5, 2010. The total unrecognized compensation cost related to the share-based compensation arrangements reclassified from liability awards to equity awards was $9.9 million.

As a general rule, awards terminate on the earlier of (i) 10 years from the date of grant, (ii) 30 days after termination of employment or service for a reason other than death, disability or retirement, (iii) one year after death or (iv) one year for incentive stock options or five years for other awards after disability or retirement. Awards are non-transferable except by disposition on death or to certain family members, trusts and other family entities as the Compensation Committee of our Board of Directors (the “Committee”) may approve. Awards may be paid in cash, shares of our common stock or a combination, in lump sum or installments and currently or by deferred payment, all as determined by the Committee. As of October 30, 2011, and for all periods presented, our share-based awards under this plan have consisted of restricted stock grants and stock option grants, none of which can be settled through cash payments. Both our stock options and restricted stock awards are subject only to vesting requirements based on continued employment at the end of a specified time period and typically vest over four years or earlier upon death, disability or a change in control. However, our annual restricted stock awards also vest upon retirement and, only in the case of certain special one-time restricted stock awards, a portion vest on termination without cause or for good reason, as defined by the agreements governing such awards. In addition, our December 11, 2009 stock option grants contain restrictions on the employees’ ability to exercise and sell the options prior to January 1, 2013, or if earlier, the employees’ death, disability, or qualifying termination (as defined in the Incentive Plan), or upon a change in control of the Company. A total of approximately 1,930,000 and 2,500,000 shares were available at October 30, 2011 and October 31, 2010, respectively, under the Incentive Plan for the further grants of awards.

Since December 2006, the Committee’s policy has been to provide for grants of restricted stock once per year, with the size of the awards based on a dollar amount set by the Committee. For executive officers and designated members of senior management, a portion of the award may be fixed and a portion may be subject to adjustment, up or down, depending on the average rate of growth in NCI’s earnings per share over the three fiscal years ended prior to the award date. The number of shares awarded on the grant date equals the dollar value specified by the Committee (after adjustment with regard to the variable portion) divided by the closing price of the stock on the grant date, or if the grant date is not a trading day, the trading day prior to the grant date. All restricted stock awards to all award recipients, including executive officers, are subject to a cap in value set by the Committee.

Our option awards and restricted stock awards are typically subject to graded vesting over a service period, which is typically four years. We recognize compensation cost for these awards on a straight-line basis over the requisite service period for the entire award. In addition, certain of our awards provide for accelerated vesting upon qualified retirement, after a change of control or upon termination without cause or for good reason. We recognize compensation cost for such awards over the period from grant date to the date the employee first becomes eligible for retirement. On October 20, 2009, we completed a financial restructuring that resulted in a change of control of the Company. With the exception of certain executive officers who received 2004 Long-Term Restricted Stock Awards that vest in full only on retirement, the vesting of all unvested restricted stock and stock options within our Incentive Plan accelerated upon the change of control. As a result, we recorded $9.1 million in share-based compensation expense upon the accelerated vesting under our Incentive Plan. None of the fiscal 2010 option grants vested during fiscal 2010.

The fair value of each option award is estimated as of the date of grant using a Black-Scholes-Merton option pricing formula. Expected volatility is based on normalized historical volatility of our stock over a preceding period commensurate with the expected term of the option and adjusted to exclude the increased volatility associated with the refinancing the Company experienced in fiscal 2009 because this volatility is not relevant to the expected future volatility of the stock. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not considered in the option pricing formula since we do not currently pay dividends on our Common Stock and have no current plans to do so in the future. There were no options granted during the fiscal year ended November 1, 2009. We have estimated a forfeiture rate of 10% for our non-officers and 0% for our officers in our calculation of share-based compensation expense for the fiscal years ended October 30, 2011, October 31, 2010 and November 1, 2009. These estimates are based on historical forfeiture behavior exhibited by our employees.

The weighted average assumptions for the equity awards granted on December 11, 2009 are noted in the following table:

Expected volatility	46.05	%
Expected term (in years)	5.75
Risk-free interest rate	2.44	%

The weighted average assumptions for the liability awards at the December 11, 2009 grant date and the subsequent reclassification to equity awards remeasured on March 5, 2010 are noted in the following table:

	December 11, 2009			March 5, 2010
Expected volatility		46.05	%		47.01	%
Expected term (in years)		5.75			5.52
Risk-free interest rate		2.44	%		2.49	%

During fiscal 2011 and 2010, we granted 121,669 and 1,781,729 stock options, respectively, and the weighted average grant-date fair value of options granted during fiscal 2011 and 2010 was $5.78 and $4.29, respectively. There were no options granted during the fiscal year ended November 1, 2009.

The following is a summary of stock option transactions during fiscal 2011, 2010 and 2009 (in thousands, except weighted average exercise prices and weighted average remaining life):

	Number of Shares			Weighted Average Exercise Price			Weighted Average Remaining Life		Aggregate Intrinsic Value
Balance November 2, 2008		139		$	140.45
Cancelled		(8	)		(138.91	)
Exercised		(1	)		(75.75	)
Balance November 1, 2009		130		$	140.63
Granted		1,782			8.85
Cancelled		(10	)		(113.26	)
Balance October 31, 2010		1,902		$	17.33
Granted		122			12.00
Cancelled		(5	)		(92.80	)
Balance October 30, 2011		2,019		$	16.85			7.9 years	$	1,105
Exercisable at October 30, 2011		561		$	36.93			7.0 years	$	276

There were no options exercised during fiscal 2011 or 2010. The total intrinsic value of options exercised during 2009 was insignificant. The following summarizes additional information concerning outstanding options at October 30, 2011 (in thousands, except weighted average remaining life and weighted average exercise prices):

Options Outstanding
Number of Options		Weighted Average Remaining Life		Weighted Average Exercise Price
	1,921		8.1 years	$	9.76
	42		2.3 years		136.30
	48		2.8 years		161.62
	8		4.2 years		225.28
	2,019		7.9 years	$	16.85

The following summarizes additional information concerning options exercisable at October 30, 2011 (in thousands, except weighted average exercise prices):

Options Exercisable
Number of Options		Weighted Average Exercise Price
	463	$11.78
	43	136.30
	48	161.62
	7	225.28
	561	$36.93

The fair value of restricted stock awards classified as equity awards is based on the Company’s stock price as of the date of grant. During fiscal 2011, 2010 and 2009, we granted restricted stock awards with a fair value of $6.2 million or 515,053 shares, $13.7 million or 1,498,718 shares and $6.1 million or 141,900 shares, respectively. The fair value of restricted stock awards previously classified as liability awards on March 5, 2010 is based on the Company’s stock price as of March 5, 2010, the date the contingency was resolved. Restricted stock transactions during fiscal 2011, 2010 and 2009 were as follows (in thousands, except weighted average grant prices):

	Number of Shares			Weighted Average Grant Price
Balance November 2, 2008		96		$	167.97
Granted		142			43.27
Distributed		(27	)		180.38
Forfeited		(7	)		142.43
Balance November 1, 2009		204		$	80.57
Granted		1,499			9.10
Forfeited		(6	)		9.10
Balance October 31, 2010		1,697		$	17.70
Granted		515			12.00
Distributed		(375	)		9.11
Forfeited		(61	)		10.35
Balance October 30, 2011		1,776		$	18.11

The total recurring pre-tax share-based compensation cost that has been recognized in results of operations was $6.9 million, $5.0 million and $4.8 million for the fiscal years ended October 30, 2011, October 31, 2010 and November 1, 2009, respectively. Of these amounts, $6.6 million, $4.8 million and $4.3 million were included in engineering, selling, general and administrative expense for the fiscal years ended October 30, 2011, October 31, 2010 and November 1, 2009, respectively, with the remaining costs in each period in cost of goods sold. On October 20, 2009, upon the change of control, we recorded $9.1 million of accelerated unamortized compensation expense which was included in the change of control charges on the Consolidated Statement of Operations. As of October 30, 2011, we do not have any amounts capitalized for share-based compensation cost in inventory or similar assets. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $2.7 million, $1.9 million and $5.3 million for the fiscal years ended October 30, 2011, October 31, 2010 and November 1, 2009, respectively. As of October 30, 2011 and October 31, 2010, there was approximately $18.1 million and $18.2 million, respectively, of total unrecognized compensation cost related to share-based compensation arrangements and this cost is expected to be recognized over a weighted-average remaining period of 2.8 years and 3.7 years, respectively. As a result of the change of control in fiscal 2009, all compensation cost related to share-based compensation arrangements were recognized as of November 1, 2009.

There was no cash received from option exercises during fiscal 2011 or 2010. Cash received from option exercises was insignificant during fiscal 2009.