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:

	Quarter Ended
(Unaudited, amounts in thousands)	7/26/14			7/27/13
Equity-based awards expense	$	3,010		$	3,193
Liability-based awards expense (income)	(448		)	1,904
Total stock-based compensation expense	$	2,562		$	5,097

The table below summarizes the grants made during the first quarter of fiscal 2015:

(Unaudited, shares/units in thousands)	Shares/units granted	Liability/ Equity award	Settlement
Stock options	374	Equity	Common shares
Restricted stock	92	Equity	Common shares
Performance-based shares	192	Equity	Common shares

Stock Options. We granted 373,711 stock options to employees during the first quarter of fiscal 2015, and we also have stock options outstanding from previous grants. 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, with accelerated vesting upon retirement. Options granted to retirement eligible employees are expensed immediately. 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 2015 was calculated using the following assumptions:

(Unaudited)	7/26/14
Risk-free interest rate	1.59		%
Dividend rate	1.00		%
Expected life in years	5.0
Stock price volatility	54.40		%
Fair value per share	$	10.45

Stock Appreciation Rights. We did not grant any SARs to employees during the first quarter of fiscal 2015, but have SARs outstanding from previous grants. SARs will be paid in cash upon exercise 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, with accelerated vesting upon retirement. SARs granted to retirement eligible employees are expensed immediately. 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.

In fiscal 2014, we granted SARs as described in our Form 10-K for the fiscal year ended April 26, 2014. The fair value of the SARs granted during fiscal 2014 was remeasured at July 26, 2014, using the following assumptions:

(Unaudited)	7/26/14
Risk-free interest rate	1.68		%
Dividend rate	1.10		%
Expected life in years	3.88
Stock price volatility	45.62		%
Fair value per share	$	8.21

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 July 26, 2014, using the following assumptions:

(Unaudited)	7/26/14
Risk-free interest rate	0.90		%
Dividend rate	1.10		%
Expected life in years	2.96
Stock price volatility	41.13		%
Fair value per share	$	10.50

Restricted Stock. We awarded 92,161 shares of restricted stock to employees during the first quarter of fiscal 2015. Restricted stock is issued at no cost to the employees, and the shares are held in an escrow account until the vesting period ends. In the event of an employee’s termination during the escrow period, the shares are returned at no cost to the company. Restricted stock awards are accounted for as equity-based awards because upon vesting they will be settled in common shares. The fair value of each share was $23.63, and was equal to the market value of our common shares on the date of grant. Compensation expense for restricted stock is equal to the fair value on the date the award was approved and is recognized over the vesting period. Restricted stock awards vest at 25% per year, beginning one year from the grant date for a term of four years.

Restricted Stock Units. We did not grant any restricted stock units to employees during the first quarter of fiscal 2015, but have restricted stock units outstanding from previous grants. 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 each outstanding restricted stock unit at July 26, 2014, was $21.63, and was equal to the market value of our common shares on the last day of the reporting period. 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.

Performance Awards. During the first quarter of fiscal 2015, we granted 191,783 performance-based shares, and we also have performance-based share awards outstanding from previous grants. 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 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 the award was $22.91 for the fiscal 2015 grant 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 the performance-based shares that vest based on market conditions, as determined by the Monte Carlo valuation, at the grant date was $29.64 and $26.08 for the fiscal 2015 grant and the fiscal 2014 grant, respectively.

We did not grant any performance-based units during the first quarter of fiscal 2015, but we have outstanding performance-based unit awards outstanding from previous grants. 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 $21.15 and $21.39 at July 26, 2014, for the awards granted in fiscal 2014 and fiscal 2013, respectively, 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 $26.78 and $30.70 at July 26, 2014, for the awards granted in fiscal 2014 and fiscal 2013, respectively.