Note

Accounting for Share-Based Compensation

Overview

We have various share-based compensation programs, which provide for equity awards including non-qualified stock options, restricted stock shares, restricted stock units, performance awards and deferred compensation. These equity awards fall under several plans and are described in detail in our Annual Report on Form

-K for the year ended

December 2, 2017.

During the

first

quarter of

2018,

we adopted ASU

No.

2016

09,

Improvements to Employee Share-Based Payment Accounting

. The adoption is required to be implemented prospectively. See Note

for additional information regarding ASU

No.

2016

09.

Grant-Date Fair Value

We use the Black-Scholes option pricing model to calculate the grant-date fair value of an award. The fair value of options granted during the

six

months ended

June 2, 2018

and

June 3, 2017

was calculated using the following weighted average assumptions:

	Three Months Ended						Six Months Ended
	June 2, 2018			June 3, 2017			June 2, 2018			June 3, 2017
Expected life (in years)	4.75			4.75			4.75			4.75
Weighted-average expected volatility	23.56%			24.32%			23.30%			24.85%
Expected volatility	23.42%	-	23.58%	24.31%	-	24.33%	23.18%	-	23.58%	24.31%	-	24.88%
Risk-free interest rate	2.54%	-	2.90%	1.81%			2.38%	-	2.90%	1.89%
Expected dividend yield	1.21%			1.11%			1.14%			1.12%
Weighted-average fair value of grants	$11.35			$10.90			$11.37			$10.81

Expected life – We use historical employee exercise and option expiration data to estimate the expected life assumption for the Black-Scholes grant-date valuation. We believe that this historical data is currently the best estimate of the expected term of a new option. We use a weighted-average expected life for all awards.

Expected volatility – Volatility is calculated using our stock’s historical volatility for the same period of time as the expected life. We have

reason to believe that our future volatility will differ materially from historical volatility.

Risk-free interest rate – The rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the same period of time as the expected life.

Expected dividend yield – The calculation is based on the total expected annual dividend payout divided by the average stock price.

Expense

We use the straight-line attribution method to recognize share-based compensation expense for option awards, restricted stock shares and restricted stock units with graded and cliff vesting. Incentive stock options and performance awards are based on certain performance-based metrics and the expense is adjusted quarterly, based on our projections of the achievement of those metrics. The amount of share-based compensation expense recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. The expense is recognized over the requisite service period, which for us is the period between the grant-date and the earlier of the award’s stated vesting term or the date the employee is eligible for early vesting based on the terms of the plans.

Total share-based compensation expense was

$4,848

and

$3,811

for the

three

months ended

June 2, 2018

and

June 3, 2017,

respectively, and

$10,434

and

$8,843

for the

six

months ended

June 2, 2018

and

June 3, 2017,

respectively. All share-based compensation expense was recorded as SG&A expense. Beginning with the

six

months ended

June 2, 2018,

excess tax benefits are recorded as income tax expense in accordance with ASU

No.

2016

09.

For the

three

and

six

months ended

June 3, 2017,

there was

$300

and

$1,353

of excess tax benefit recognized in additional paid-in capital, respectively.

As of

June 2, 2018,

there was

$17,558

of unrecognized compensation costs related to unvested stock option awards, which is expected to be recognized over a weighted-average period of

1.6

years. Unrecognized compensation costs related to unvested restricted stock units was

$13,822,

which is expected to be recognized over a weighted-average period of

1.4

years.

Stock Option Activity

The stock option activity for the

six

months ended

June 2, 2018

is presented below:

				Average
	Options			Exercise Price
Outstanding at December 2, 2017		3,860,764		$	42.28
Granted		794,984			53.06
Exercised		(80,225	)		29.75
Forfeited or cancelled		(5,725	)		43.58
Outstanding at June 2, 2018		4,569,798		$	44.38

The fair value of options granted during the

three

months ended

June 2, 2018

and

June 3, 2017

was

$1,392

and

$373,

respectively. Total intrinsic value of options exercised during the

three

months ended

June 2, 2018

and

June 3, 2017

was

$1,172

and

$2,204,

respectively. Intrinsic value is the difference between our closing stock price on the respective trading day and the exercise price, multiplied by the number of options exercised. The fair value of options granted during the

six

months ended

June 2, 2018

and

June 3, 2017

was

$9,037

and

$7,757,

respectively. Total intrinsic value of options exercised during the

six

months ended

June 2, 2018

and

June 3, 2017

was

$1,811

and

$6,624,

respectively.

Proceeds received from option exercises during the

three

months ended

June 2, 2018

and

June 3, 2017

were

$1,625

and

$5,377,

respectively, and

$2,387

and

$13,926

during the

six

months ended

June 2, 2018

and

June 3, 2017.

Restricted Stock Activity

The nonvested restricted stock activity for the

six

months ended

June 2, 2018

is presented below:

				Weighted-
		Weighted-		Average
		Average		Remaining
		Grant		Contractual
		Date Fair		Life
	Units	Value		(in Years)
Nonvested at December 2, 2017	462,241	$	44.80	1.0
Granted	141,236		51.30	2.7
Vested	(184,666)		43.48	-
Forfeited	(2,501)		46.48	1.5
Nonvested at June 2, 2018	416,310	$	47.58	1.4

Total fair value of restricted stock vested during the

three

months ended

June 2, 2018

and

June 3, 2017

was

$577

and

$432,

respectively. Total fair value of restricted stock vested during the

six

months ended

June 2, 2018

and

June 3, 2017

was

$8,477

and

$7,402,

respectively. The total fair value of nonvested restricted stock at

June 2, 2018

was

$19,808.

We repurchased

3,645

and

3,122

restricted stock shares during the

three

months ended

June 2, 2018

and

June 3, 2017,

respectively, and

66,936

and

53,809

restricted stock shares during the

six

months ended

June 2, 2018

and

June 3, 2017,

respectively. The repurchases relate to statutory minimum tax withholding.

Deferred Compensation Activity

We have a Directors’ Deferred Compensation plan that allows non-employee directors to defer all or a portion of their directors’ compensation in a number of investment choices, including units representing shares of our common stock. We also have a Key Employee Deferred Compensation Plan that allows key employees to defer a portion of their eligible compensation in a number of investment choices, including units, representing shares of our common stock. We provide a

percent match on deferred compensation invested into units, representing shares of our common stock. The deferred compensation unit activity for the

six

months ended

June 2, 2018

is presented below:

	Non-employee
	Directors	Employees	Total
Units outstanding December 2, 2017	443,570	31,606	475,176
Participant contributions	8,058	5,352	13,410
Company match contributions	806	535	1,341
Payouts	-	(5,559)	(5,559)
Units outstanding June 2, 2018	452,434	31,934	484,368

Deferred compensation units are fully vested at the date of contribution.