10. Stock-based Compensation

Long-term Stock Incentive Plan

The Company issues stock-based compensation awards under its 2010 Stock Incentive Plan (as amended, the “2010 Stock Plan”), which was approved by the Company’s shareholders on December 17, 2010. The 2010 Stock Plan provides for the granting of either incentive stock options or non-qualified options to purchase shares of common stock, as well as the award of shares of restricted stock and other stock-based awards (including restricted stock units), to eligible employees and directors of the Company. The 2010 Stock Plan is scheduled to expire on September 30, 2021.

As of October 27, 2012, there were approximately 0.6 million shares under the 2010 Stock Plan available for future grants. All of the Company’s prior stock option plans have expired as to the ability to grant new options. The Company issues new shares of common stock when stock option awards are exercised.

Impact on Results

A summary of the total compensation expense and associated income tax benefit recognized related to stock-based compensation arrangements is as follows:



			Three Months Ended
		October 27, 2012			October 29, 2011
			(millions)

Compensation expense	$	7.5		$	7.5
Income tax benefit	$	(2.7)		$	(2.8)

Stock Options

Stock option awards outstanding under the Company’s current plans have been granted at exercise prices that are equal to or exceed the market value of its common stock on the date of grant. Such options generally vest over four or five years and expire no later than ten years after the grant date. The Company recognizes compensation expense ratably over the vesting period, net of estimated forfeitures. The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options granted, which requires the input of both subjective and objective assumptions as follows:

Expected Term — The estimate of expected term is based on the historical exercise behavior of grantees, as well as the contractual life of the option grants.

Expected Volatility — The expected volatility factor is based on the historical volatility of the Company's common stock for a period equal to the stock options expected term.

Expected Dividend Yield — The expected dividend yield is based on the Company's historical practice of not paying dividends on its common stock.

Risk-free Interest Rate — The risk-free interest rate is determined using the implied yield for a traded zero-coupon U.S. Treasury bond with a term equal to the option's expected term.

The Company’s weighted-average assumptions used to estimate the fair value of stock options granted during the three months ended October 27, 2012 and October 29, 2011 are presented as follows:



		Three Months Ended
	October 27, 2012		October 29, 2011

Expected term (years)	4.0		4.0
Expected volatility	41.7%		41.7%
Risk-free interest rate	0.7%		0.9%
Expected dividend yield	0%		0%
Weighted-average grant date fair value	$ 7.39		$ 4.71

A summary of the stock option activity under all plans during the three months ended October 27, 2012 is as follows:



			October 27, 2012
	Number of Shares	Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Terms	Aggregate Intrinsic Value ^(a)
	(thousands)			(years)	(millions)
Options outstanding- July 28, 2012	14103.0	$ 9.69		6.4	$ 130.1
Granted	2110.3	20.79
Exercised	(1755.5)	8.16
Cancelled/Forfeited	(350.1)	11.67
Options outstanding – October 27, 2012	14107.7	$ 11.49		6.8	$ 122.2

Options vested and expected to vest at October 27, 2012 ^(b)	13839.3	$ 11.41		6.8	$ 120.9
Options exercisable at October 27, 2012	7181.5	$ 8.47		5.2	$ 83.1

^(a)The intrinsic value is the amount by which the market price at the end of the period of the underlying share of stock exceeds the exercise price of the stock option.

^(b)The number of options expected to vest takes into consideration estimated expected forfeitures.

As of October 27, 2012, there was $34.5 million of total unrecognized compensation cost related to non-vested options, which is expected to be recognized over a remaining weighted-average vesting period of 2.9 years. The total intrinsic value of options exercised during the three months ended October 27, 2012 was approximately $22.0 million and during the three months ended October 29, 2011 was approximately $1.7 million. The total fair value of options that vested during the three months ended October 27, 2012 was approximately $10.1 million and during the three months ended October 29, 2011 was approximately $7.2 million.

Restricted Equity Awards

The 2010 Stock Plan also allows for the issuance of shares of restricted stock and restricted stock units (“RSUs”). Any shares of restricted stock or RSUs are counted against the shares available for future grant limit as three shares for every one restricted share or RSU granted. In general, if options are cancelled for any reason or expire, the shares covered by such options again become available for grant. If a share of restricted stock or a RSU is forfeited for any reason, three shares become available for grant.

Shares of restricted stock and RSUs are issued with either service-based or performance-based conditions, and some even have market-based conditions (collectively, “Restricted Equity Awards”). Service-based Restricted Equity Awards entitle the holder to receive unrestricted shares of common stock of the Company at the end of a vesting period, subject to the grantee’s continuing employment. Service-based Restricted Equity Awards generally vest over a 4 year period of time.

Performance-based or market-based Restricted Equity Awards also entitle the holder to receive shares of common stock of the Company at the end of a vesting period. However, such awards are subject to (a) the grantee’s continuing employment, (b) the Company’s achievement of certain performance goals over a pre-defined performance period and (c) in the case of market-based conditions, the Company’s achievement of certain market-based goals over the pre-defined performance period. Both performance-based and market-based Restricted Equity Awards generally vest over a 3 year period of time.

The fair values of both service-based and performance-based Restricted Equity Awards are based on the fair value of the Company’s unrestricted common stock at the date of grant. However, for market-based Restricted Equity Awards, the effect of the market conditions is reflected in the fair value of the awards on the date of grant using a Monte-Carlo simulation model. A Monte-Carlo simulation model estimates the fair value of the market-based award based on the expected term, risk-free interest rate, expected dividend yield and expected volatility measure for the Company and its peer group.

Compensation expense for both service-based and performance-based Restricted Equity Awards is recognized over the vesting period based on the grant-date fair values of the awards that are expected to vest based upon the service and performance-based conditions. However, compensation expense for market-based Restricted Equity Awards is recognized over the vesting period regardless of whether the market conditions are expected to be achieved.

A summary of Restricted Equity Awards activity during the three months ended October 27, 2012 is as follows:



		Service-based Restricted Equity Awards			Performance-based Restricted Equity Awards			Market-based Restricted Equity Awards
	Number of Shares		Weighted-Average Grant Date Fair Value Per Share	Number of Shares		Weighted-Average Grant Date Fair Value Per Share	Number of Shares		Weighted-Average Grant Date Fair Value Per Share
	(thousands)			(thousands)			(thousands)
Nonvested at July 28, 2012	1206.1		$ 14.27	1475.0		$ 12.69	326.6		$ 12.90
Granted	1116.6		20.63	--		--	--		--
Vested	(414.5)		16.83	--		--	--		--
Cancelled/Forfeited	(26.0)		12.66	(1060.0)		12.72	(213.0)		13.70
Nonvested at October 27, 2012	1882.2		$ 17.56	415.0		$ 12.61	113.6		$ 11.40



		Service-based Restricted Equity Awards		Performance-based Restricted Equity Awards		Market-based Restricted Equity Awards

Total unrecognized compensation at October 27, 2012 (millions)	$	29.6	$	3.9	$	1.0
Weighted-average years expected to be recognized over (years)		2.2		0.8		1.0

Cash-Settled Long-Term Incentive Plan Awards

In October 2012, the Compensation Committee of the Board of Directors approved certain modifications to a portion of the Company’s outstanding, performance-based stock-settled awards. In particular, an aggregate of approximately 554 thousand performance-based, stock-settled awards held by 44 employees were canceled in exchange for grants of a corresponding amount of new awards that will be settled in cash (collectively, the “Cash-Settled LTIP Awards”). Other than the terms of settlement, the Cash-Settled LTIP Awards have identical restrictions and rights as the prior awards. The Cash-Settled LTIP Awards entitle the holder to a cash payment equal to the value of the number of shares of the Company’s common stock earned at the end of an original three-year performance period. Consistent with the terms of the original awards, such awards are subject to (a) the grantee’s continuing employment and (b) the Company’s achievement of certain performance goals over a pre-defined three year performance period for, separately, the Fiscal 2011-2013 period and the Fiscal 2012-2014 period.

Compensation expense for the Cash-Settled LTIP Awards will be recognized over the original vesting period based on changes in the Company’s stock price over time. As a result of this modification to the outstanding, original awards, the Company recognized a $1.7 million, one-time charge during the first quarter of Fiscal 2013. Such amount has been included as a component of selling, general and administrative expenses in the accompanying statement of operations.