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

nine

months ended

September 1, 2018

and

September 2, 2017

was calculated using the following weighted average assumptions:

	Three Months Ended				Nine Months Ended
	September 1, 2018		September 2, 2017		September 1, 2018			September 2, 2017
Expected life (in years)		4.75		4.75	4.75			4.75
Weighted-average expected volatility		23.36%		23.91%	23.30%			24.84%
Expected volatility		23.36%		23.91%	23.18%	-	23.58%	23.91%	-	24.88%
Risk-free interest rate		2.72%		1.85%	2.38%	-	2.90%	1.89%
Expected dividend yield		1.16%		1.15%	1.14%			1.12%
Weighted-average fair value of grants		$11.75		$10.58	$11.38			$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

$5,005

and

$3,191

for the

three

months ended

September 1, 2018

and

September 2, 2017,

respectively, and

$15,439

and

$12,034

for the

nine

months ended

September 1, 2018

and

September 2, 2017,

respectively. All share-based compensation expense was recorded as selling, general and administrative (SG&A) expense. Beginning with the

nine

months ended

September 1, 2018,

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

No.

2016

09.

For the

three

and

nine

months ended

September 2, 2017,

there was

$151

and

$1,504

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

As of

September 1, 2018,

there was

$14,784

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

1.4

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

$11,749,

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

1.2

years.

Stock Option Activity

The stock option activity for the

nine

months ended

September 1, 2018

is presented below:

				Average
	Options			Exercise Price
Outstanding at December 2, 2017		3,860,764		$	42.28
Granted		810,306			53.07
Exercised		(163,190	)		30.86
Forfeited or cancelled		(6,281	)		44.00
Outstanding at September 1, 2018		4,501,599		$	44.64

The fair value of options granted during the

three

months ended

September 1, 2018

and

September 2, 2017

was

$180

and

$46,

respectively. Total intrinsic value of options exercised during the

three

months ended

September 1, 2018

and

September 2, 2017

was

$2,066

and

$474,

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

nine

months ended

September 1, 2018

and

September 2, 2017

was

$9,217

and

$7,803,

respectively. Total intrinsic value of options exercised during the

nine

months ended

September 1, 2018

and

September 2, 2017

was

$3,876

and

$7,099,

respectively.

Proceeds received from option exercises during the

three

months ended

September 1, 2018

and

September 2, 2017

were

$2,841

and

$1,107,

respectively, and

$5,228

and

$15,033

during the

nine

months ended

September 1, 2018

and

September 2, 2017

, respectively

Restricted Stock Activity

The nonvested restricted stock activity for the

nine

months ended

September 1, 2018

is presented below:

	Units			Weighted- Average Grant Date Fair Value		Weighted- Average Remaining Contractual Life (in Years)
Nonvested at December 2, 2017		462,241		$	44.80		1.0
Granted		147,601			51.29		2.4
Vested		(190,249	)		43.67		-
Forfeited		(2,947	)		47.20		1.3
Nonvested at September 1, 2018		416,646		$	47.60		1.2

Total fair value of restricted stock vested during the

three

months ended

September 1, 2018

and

September 2, 2017

was

$278

and

$250,

respectively. Total fair value of restricted stock vested during the

nine

months ended

September 1, 2018

and

September 2, 2017

was

$8,755

and

$7,643,

respectively. The total fair value of nonvested restricted stock at

September 1, 2018

was

$19,831.

We repurchased

1,945

and

1,837

restricted stock shares during the

three

months ended

September 1, 2018

and

September 2, 2017,

respectively, and

68,881

and

55,646

restricted stock shares during the

nine

months ended

September 1, 2018

and

September 2, 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

nine

months ended

September 1, 2018

is presented below:

	Non-employee Directors		Employees			Total
Units outstanding December 2, 2017		443,570		31,606			475,176
Participant contributions		11,738		6,274			18,012
Company match contributions		19,610		627			20,237
Payouts		-		(6,090	)		(6,090	)
Units outstanding September 1, 2018		474,918		32,417			507,335

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