13. SHARE-BASED COMPENSATION

The Company recognizes the cost of all employee share-based awards on a straight-line attribution basis over their respective vesting periods, net of estimated forfeitures.

The Company issues stock options, restricted shares, restricted share units and shares with performance features to employees under share-based compensation plans. Stock options are issued at the current market price, have a three-year vesting period and a contractual term of 7 years.

Compensation expense for restricted shares, including shares with performance features, is measured at fair value on the date of grant based on the number of shares granted and the quoted market price of the Company’s common stock. Such value is recognized as expense over the vesting period of the award, net of estimated forfeitures.

Compensation expense for restricted share units with performance features and a market condition is measured at fair value, subject to the market condition on the date of grant and based on the number of shares expected to vest subject to the performance condition. Such value is recognized as expense over the vesting period of the award, net of estimated forfeitures.

Compensation expense related to the Company’s share-based payment awards totaled $16.2 million and $12.8 million for the six months ended July 2, 2016 and July 4, 2015, respectively, and $8.2 million and $6.8 million for the three months ended July 2, 2016 and July 4, 2015, respectively. Compensation expense for the six months ended July 4, 2015 included $0.2 million that was classified as restructuring.

Stock Options

The Company grants stock options to certain domestic and international employees. These options are subject to transfer restrictions and risk of forfeiture until earned by continuing employment. Stock options are issued at the current market price and have a three-year vesting period and a contractual term of 7 years.

The Company utilizes the Trinomial lattice pricing model to estimate the fair value of options granted. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates and to allow for actual exercise behavior of option holders.


	Six Months Ended
Valuation Assumptions:	July 4, 2015
Weighted-average fair value of options granted	$	15.92
Expected volatility		76.5%
Weighted-average volatility		58.7%
Expected term (in years)		4.2
Dividend yield		-
Risk-free rate		1.9%
Expected annual forfeiture		15.3%

Expected volatilities are based on a term structure of implied volatility, which assumes changes in volatility over the life of an option. The Company utilizes historical optionee behavioral data to estimate the option exercise and termination rates that are used in the valuation model. The expected term represents an estimate of the period of time options are expected to remain outstanding. The expected term provided in the above table represents an option weighted-average expected term based on the estimated behavior of distinct groups of employees who received options in 2015. The range of risk-free rates is based on a forward curve of interest rates at the time of option grant.

A summary of award activity under stock option plans as of July 2, 2016 and changes therein during the six month period then ended are as follows:


		Weighted		Weighted Average	Aggregate
		Average Exercise		Remaining	Intrinsic Value
	Shares	Price		Contractual Term	(In thousands)
Outstanding January 2, 2016	905,883	$	15.35	3.4	$	5,686
Exercised	(37,500)		6.88			650
Cancelled/expired	(1,370)		35.30
Outstanding at July 2, 2016	867,013	$	15.68	3.0	$	6,918

Vested or expected to vest at July 2, 2016	843,103	$	15.16	2.9	$	6,918

Exercisable at July 2, 2016	739,760	$	12.49	2.5	$	6,918

As of July 2, 2016, there were approximately 0.1 million nonvested stock options. The weighted average grant date fair value per award for nonvested stock options was $15.91.

As of July 2, 2016, there was $1.7 million of total unrecognized compensation cost related to nonvested stock options granted under the Company’s stock option plans. That expense is expected to be recognized over a weighted average period of 1.7 years. The total fair value of shares vested during the six month periods ended July 2, 2016 and July 4, 2015 was $2.3 million.

Restricted Stock

In 2015, the Company granted 105,245 market share units (“MSUs”) to a group of key executives with an aggregate grant date fair value of $4.6 million that vest 50% on each of the second and third anniversaries of the grant date as part of an annual long-term incentive plan (“LTIP”). The MSUs earned will vary from 30% to 200% of the number of MSUs awarded depending on the actual performance of the Company’s stock price over the vesting periods.

The fair value for the MSUs granted was calculated using the Monte Carlo simulation model. For the six months ended July 4, 2015, the following assumptions were used in determining fair value:


	Six Months Ended
Valuation Assumptions:	July 4, 2015
Weighted-average fair value	$	43.35
Expected volatility		43.2%
Dividend yield		—
Risk-free rate		1.1% to 1.7%
Weighted-average expected annual forfeiture		5.0%

In 2016, the Company granted 452,922 performance shares that vest on the third anniversary of the grant date. The number of performance shares earned will vary from zero to 200% of the number of awards granted depending on the Company’s Total Shareholder Return (“TSR”) ranking relative to the TSR’s of the S&P Mid-Cap 400 constituents as well as an earnings-based performance condition. The performance shares have a grant date fair value of $11.8 million that was calculated using a Monte Carlo simulation model.

In 2015, the other portion of the LTIP consisted of an award of 243,419 performance shares that vest on the third anniversary of the grant date. The performance shares have a grant date fair value of $9.1 million that was calculated using a Monte Carlo simulation model. For the six months ended July 2, 2016 and July 4, 2015, the following assumptions were used in determining fair value:


	Six Months Ended
Valuation Assumptions:	July 2, 2016			July 4, 2015
Weighted-average fair value	$	25.99		$	37.47
Expected volatility		42.5	%		41.6	%
Dividend yield		—			—
Risk-free rate		1.0	%		1.0	%
Weighted-average expected annual forfeiture		3.6	%		4.1	%

A summary of award activity under restricted stock plans as of July 2, 2016 and changes therein during the six month period then ended are as follows:


		Weighted
		Average Grant
	Shares	Date Fair Value
Nonvested stock at January 2, 2016	1,924,250	$	44.31
Granted	1,125,970		24.19
Vested (a)	(116,266)		38.84
Cancelled (a)	(52,382)		46.19
Nonvested stock at July 2, 2016 (b)	2,881,572	$	36.63

Expected to vest as of July 2, 2016	2,624,100	$	37.18

^(a)

Includes market share units granted to a group of key executives with the vesting of such units measured by the performance of the Company's stock price over the vesting period.

^(b)

Excludes the potential impact of the performance share multiplier, which will vary from 30% to 200% of the number of MSUs awarded depending on the actual performance of the Company’s stock price over the vesting periods and zero to 200% of the number of LTIP awards granted depending on the Company’s TSR relative to the TSR of the S&P Mid-Cap 400 Index.

As of July 2, 2016, there was $45.7 million of total unrecognized compensation cost related to nonvested stock awards granted under restricted stock plans. That expense is expected to be recognized over a weighted average period of 2.0 years. The total fair value of shares vested during the six month periods ended July 2, 2016 and July 4, 2015 was $4.5 million and $2.5 million, respectively.