

11.		STOCK-BASED COMPENSATION

The components and classification of stock-based compensation expense were as follows (in thousands):



	Year Ended
	January 1, 2016		January 2, 2015		January 3, 2014
Stock options	$	2,708	$	2,523	$	3,490
Restricted stock and units	6,668		6,417		5,843
401(k) stock contribution	—		4,246		4,768
Total stock-based compensation expense	$	9,376	$	13,186	$	14,101

Cost of sales	$	795	$	3,530	$	3,864
Selling, general and administrative expenses	7,510		7,923		7,907
Research, development and engineering costs, net	982		1,440		1,194
Other operating expenses, net (Note 13)	89		293		1,136
Total stock-based compensation expense	$	9,376	$	13,186	$	14,101

During 2014 and 2013, the Company recorded stock modification expense related to employee separation costs incurred during 2014 and 2013 in connection with realignment initiatives. This modification expense was included within Other Operating Expenses, Net. Refer to Note 13 “Other Operating Expenses, Net” for further discussion of these initiatives.

Summary of Plans

The Company’s 2005 Stock Incentive Plan (“2005 Plan”) has been frozen to any new award issuances. Stock options remain outstanding under this plan.

The Company’s 2009 Stock Incentive Plan (“2009 Plan”) authorizes the issuance of up to 1,350,000 shares of equity incentive awards including nonqualified and incentive stock options, restricted stock, restricted stock units, stock bonuses and stock appreciation rights subject to the terms of the 2009 Plan. The 2009 Plan limits the amount of restricted stock, restricted stock units and stock bonuses that may be awarded in the aggregate to 200,000 shares of the 1,350,000 shares authorized.

The Company’s 2011 Stock Incentive Plan (“2011 Plan”), as amended, authorizes the issuance of up to 1,350,000 shares of equity incentive awards including nonqualified and incentive stock options, restricted stock, restricted stock units, stock bonuses and stock appreciation rights, subject to the terms of the 2011 Plan. The 2011 Plan does not limit the amount of restricted stock, restricted stock units or stock bonuses that may be awarded.

As of January 1, 2016, there were 289,734 and 75,361 shares available for future grants under the 2011 Plan and 2009 Plan, respectively. Due to plan sub-limits, of the shares available for grant, only 9,728 shares may be awarded under the 2009 Plan in the form of restricted stock, restricted stock units or stock bonuses.

Stock Options

Stock options granted generally vest over a three year period, expire 10 years from the date of grant, and are granted at exercise prices equal to or greater than the fair value of the Company’s common stock on the date of grant. Performance-based stock options have not been granted since 2010.

The Company utilizes the Black-Scholes option pricing model to determine the fair value of stock options. Management is required to make certain assumptions with respect to selected model inputs. Expected volatility is based on the historical volatility of the Company’s stock over the most recent period commensurate with the estimated expected life of the stock options. The expected life of stock options, which represents the period of time that the stock options are expected to be outstanding, is based on historical data. The expected dividend yield is based on the Company’s history and expectation of future dividend payouts. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period commensurate with the estimated expected life. If factors change and result in different assumptions, the stock option expense that the Company records for future grants may differ significantly from what the Company recorded in the current period. Stock-based compensation expense is only recorded for those awards that are expected to vest. Pre-vesting forfeiture estimates for determining appropriate stock-based compensation expense are estimated at the time of grant based on historical experience. Revisions are made to those estimates in subsequent periods if actual forfeitures differ from estimated forfeitures.

The weighted-average fair value and assumptions used are as follows:



	Year Ended
	January 1, 2016			January 2, 2015			January 3, 2014
Weighted average grant date fair value	$	12.18		$	16.43		$	8.38
Risk-free interest rate	1.55		%	1.73		%	0.73		%
Expected volatility	26		%	39		%	39		%
Expected life (in years)	4.7			5.3			5.3
Expected dividend yield	0		%	0		%	0		%
Annual prevesting forfeiture rate	9		%	9		%	9		%

The following table summarizes time and performance-vested stock option activity:



	Number of Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In Years)	Aggregate Intrinsic Value (In Millions)
Outstanding at December 28, 2012	2,060,772		$	23.18
Granted	372,676		23.33
Exercised	(551,092	)	23.24
Forfeited or expired	(88,686	)	28.05
Outstanding at January 3, 2014	1,793,670		22.96
Granted	183,571		43.84
Exercised	(353,625	)	23.41
Forfeited or expired	(33,279	)	27.82
Outstanding at January 2, 2015	1,590,337		25.17
Granted	301,547		49.20
Replacement options granted in connection with the Lake Region Medical acquisition	119,900		12.41
Exercised	(280,701	)	23.45
Forfeited or expired	(52,183	)	42.45
Outstanding at January 1, 2016	1,678,900		$	28.32	6.1	$	40.6
Expected to vest at January 1, 2016	1,643,386		$	27.90	6.1	$	40.4
Exercisable at January 1, 2016	1,467,256		$	25.50	5.8	$	39.6

Intrinsic value is calculated for in-the-money options (exercise price less than market price) as the difference between the market price of the Company’s common shares as of January 1, 2016 ($52.50) and the weighted average exercise price of the underlying stock options, multiplied by the number of options outstanding and/or exercisable. As of January 1, 2016, $2.3 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 2 years. Shares are distributed from the Company’s authorized but unissued reserve upon the exercise of stock options or treasury stock if available. The Company does not intend to purchase treasury shares to fund the future exercises of stock options.

Proceeds from the exercise of stock options are credited to common stock at par value and the excess is credited to additional paid-in capital. A small portion of the options outstanding qualify as incentive stock options (“ISO”) for income tax purposes. As such, a tax benefit is not recorded at the time the compensation cost related to the stock options is recorded for book purposes due to the fact that an ISO does not ordinarily result in a tax benefit unless there is a disqualifying disposition. Stock option grants of non-qualified stock options result in the creation of a deferred tax asset, which is a temporary difference, until the time that the option is exercised.

The following table provides certain information relating to the exercise of stock options (in thousands):



	Year Ended
	January 1, 2016		January 2, 2015		January 3, 2014
Intrinsic value	$	8,231	$	7,997	$	6,807
Cash received	6,583		8,278		12,807
Tax benefit realized	1,954		1,704		727

Restricted Stock and Restricted Stock Units

Time-vested restricted stock and restricted stock unit awards granted typically vest in equal annual installments over a three or four year period. The fair value of time-based as well as nonmarket-based performance restricted stock and restricted stock unit awards is equal to the fair value of the Company’s stock on the date of grant. The following table summarizes time-vested restricted stock and unit activity:



	Time-Vested Activity		Weighted Average Fair Value
Nonvested at December 28, 2012	80,269		$	23.48
Granted	67,230		26.76
Vested	(74,062	)	23.93
Forfeited	(5,862	)	22.26
Nonvested at January 3, 2014	67,575		26.37
Granted	63,817		44.78
Vested	(53,568	)	34.16
Forfeited	(9,992	)	35.30
Nonvested at January 2, 2015	67,832		36.22
Granted	44,629		49.84
Vested	(56,119	)	37.93
Forfeited	(17,107	)	40.48
Nonvested at January 1, 2016	39,235		$	47.40

Performance-based restricted stock units granted only vest if certain market-based performance metrics are achieved. The amount of shares that ultimately vest range from 0 shares to 577,825 shares based upon the total shareholder return of the Company relative to the Company’s compensation peer group over a three year performance period beginning in the year of grant. The fair value of the restricted stock units were determined by utilizing a Monte Carlo simulation model, which projects the value of Greatbatch stock versus the peer group under numerous scenarios and determines the value of the award based upon the present value of these projected outcomes. The following table summarizes performance-vested restricted stock and stock unit activity related to the Company’s plans:



	Performance- Vested Activity		Weighted Average Fair Value
Nonvested at December 28, 2012	782,446		$	16.02
Granted	318,169		15.86
Vested	(49,139	)	14.68
Forfeited	(271,798	)	14.94
Nonvested at January 3, 2014	779,678		16.41
Granted	186,825		31.33
Vested	(221,470	)	18.51
Forfeited	(28,870	)	18.42
Nonvested at January 2, 2015	716,163		19.57
Granted	179,940		32.92
Vested	(270,198	)	15.30
Forfeited	(48,080	)	26.96
Nonvested at January 1, 2016	577,825		$	25.11

The realized tax benefit (expense) from the vesting of restricted stock and restricted stock units was $3.4 million, $2.3 million and $(0.4) million for 2015, 2014, 2013, respectively. As of January 1, 2016, there was $7.2 million of total unrecognized compensation cost related to the restricted stock and restricted stock unit awards. That cost is expected to be recognized over a weighted-average period of approximately 2 years. The fair value of shares vested in 2015, 2014, 2013 was $16.1 million, $12.5 million and $4.0 million, respectively.