STOCK-BASED COMPENSATION

Stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date and is recognized over the requisite service period.

We have three compensation plans that provide for the granting of stock options and other share-based awards to key employees and members of the Board of Directors. The 2004 Equity Incentive Plan (“2004 Plan”), the 2009 Equity Incentive Plan (“2009 Plan”), and the 2014 Equity Incentive Plan (“2014 Plan”) provide for granting options, restricted stock, restricted stock units or stock appreciation rights to employees and directors. There are awards still outstanding under the 2004 Plan and 2009 Plan; however, we will not make any further grants under either of those plans.

Annually, we grant restricted stock to our directors. These director awards are granted the day following our Annual Meeting of Shareholders during the second quarter of each fiscal year and vest the day before our Annual Meeting of Shareholders in the following year, subject to a director’s continued membership on the board. The fair value of these awards is determined by using the current market price of our common stock on the grant date.

Annually, upon approval by our Compensation Committee, we grant stock options and restricted stock units to certain employees. We also grant stock options and restricted stock units to certain new employees throughout the year. Prior to 2016, these awards vested in three equal annual installments beginning one year after the grant date. The fair value of these stock-based awards is determined by using (a) the current market price of our common stock on the grant date in the case of restricted stock units or (b) the Black-Scholes option valuation model in the case of stock options.

In 2015, we granted performance-based stock options and restricted stock units to certain executives. These awards vest in three annual installments beginning one year after the grant date if the applicable performance measures or strategic objectives are achieved. The related stock-based compensation expense is recognized over the requisite service period, taking into account the probability that we will satisfy the performance measures or strategic objectives. In addition to certain strategic objectives, the performance-based stock options and restricted stock units granted in 2015 are earned and vest based upon (1) our achievement of specified revenue and earnings per share targets, and (2) our total shareholder return (“TSR”) relative to the TSR attained by companies within our defined peer group.

Due to the TSR presence in certain performance-based grants, the fair value of these awards is determined using the Monte Carlo Simulation valuation model. We expense these market condition awards over the three-year vesting period regardless of the value the award recipients ultimately receive. In February 2016, our Compensation Committee determined the number of performance-based stock options and restricted stock units that were earned for the 2015 performance period. Based on the performance and strategic objectives achieved in 2015, 7,225 stock options and 226 restricted stock units were earned and vested and 23,328 stock options and 677 restricted stock units were determined to be unearned, as the required metrics were not achieved.

We did not grant performance-based stock options and restricted stock units to our employees during the nine months ended September 30, 2016. Instead, our annual grant in March 2016 consisted of stock options and restricted stock units that are subject to only time-based vesting. The number of stock options and/or restricted stock units granted was based on the employee’s individual objectives, performance against operational metrics assigned to the employee and overall contribution over the last year. The restricted stock unit awards vest in full on the three-year anniversary of the grant date. The stock options vest in three equal annual installments beginning one year after the grant date. The fair value of these stock-based awards is determined by using (a) the current market price of our common stock on the grant date in the case of restricted stock units or (b) the Black-Scholes option valuation model in the case of stock options.

In May 2016, we granted an aggregate of 18,615 restricted stock units to certain non-executive key employees as a retention incentive in recognition of the significant efforts required from such employees to assist us in executing our initiatives in 2016 to reorganize our business around certain vertical markets, modernize our sales process to improve the efficiency of our sales organization, accelerate and maintain a consistent schedule of new product introductions, and harmonize our global functions to improve effectiveness. These restricted stock unit awards vest in full on the three-year anniversary of the grant date. The fair value of these restricted stock units is determined by using the current market price of our common stock on the grant date.

The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. The weighted-average grant-date fair value of the stock options that were granted during the nine months ended September 30, 2016 and September 26, 2015 and valued using the Black-Scholes option valuation model was $12.42 and $16.33 per option, respectively. For stock options granted during the nine months ended September 30, 2016 and September 26, 2015 valued using the Black-Scholes option valuation model, we used the following assumptions:



	Nine Months Ended
	September 30, 2016		September 26, 2015
Risk-free interest rate	1.06% - 1.21%		0.80% - 1.09%
Expected dividend yield	—	%	—	%
Expected option life	4 years		3 years
Expected volatility	46.7% - 47.0%		42.3% - 48.5%
Weighted-average expected volatility	46.7	%	43.1	%

Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and the expected lives of the options. The risk-free interest rate was based on the yields of U.S. zero coupon issues and U.S. Treasury issues, with a term equal to the expected life of the option being valued.

There were no market condition awards granted during the nine months ended September 30, 2016 and, as such, the Monte Carlo Simulation valuation model was not used to determine the fair value of the stock options and restricted stock units granted in the first, second or third quarter of 2016. In 2015, we granted performance-based stock options and restricted stock units which included the presence of a market condition and were valued using the Monte Carlo Simulation model. This valuation model incorporates assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. The assumptions used to estimate the fair value of the performance-based stock options and restricted stock units granted during the nine months ended September 26, 2015 and valued under the Monte Carlo Simulation model were as follows:



	Nine Months Ended
	September 30, 2016		September 26, 2015
Risk-free interest rate	—	%	0.95% - 1.48%
Expected dividend yield	—	%	—	%
Expected option life	—		4 years
Expected volatility	—	%	44.5	%
Weighted-average expected volatility	—	%	44.5	%

A summary of stock option activity and weighted-average exercise prices during the nine months ended September 30, 2016 follows:



	Options		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value as of September 30, 2016
Outstanding at January 1, 2016	1,178,585		$	48.14
Granted	194,740		33.17
Forfeited	(192,304	)	45.59
Exercised	(105,207	)	17.66
Unearned performance-based options	(23,328	)	59.97
Outstanding at September 30, 2016	1,052,486		$	48.61	4.6	$	1,070,788
Options exercisable at September 30, 2016	816,776		$	50.64	2.3	$	258,330

The total intrinsic value of stock options exercised during the three months ended September 30, 2016 and September 26, 2015 was $0.0 million and $0.1 million, respectively. For the nine months ended September 30, 2016 and September 26, 2015, the total intrinsic value of stock options exercised was $1.7 million in each period. The fair value of stock options vested during both the three months ended September 30, 2016 and September 26, 2015 was $0.1 million. The fair value of stock options vested during the nine months ended September 30, 2016 and September 26, 2015 was $3.5 million and $3.9 million, respectively.

The following table summarizes the restricted stock and restricted stock unit activity and weighted average grant-date fair values for the nine months ended September 30, 2016:



	Shares		Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2016	15,916		$	43.47
Granted	160,228		33.20
Forfeited	(8,212	)	33.05
Vested	(13,247	)	42.79
Unearned performance-based awards	(677	)	53.74
Non-vested at September 30, 2016	154,008		$	33.40

We recorded total stock-based compensation expense of $1.4 million and $1.3 million for the three months ended September 30, 2016 and September 26, 2015, respectively, and $4.1 million and $3.8 million for the nine months ended September 30, 2016 and September 26, 2015, respectively.

As of September 30, 2016, there was $8.9 million of total unrecognized stock-based compensation expense related to non-vested stock-based compensation arrangements. The expense is expected to be recognized over a weighted average period of 2.0 years.