STOCK-BASED COMPENSATION

The Company grants stock-based awards under its 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan replaced the Company’s 2003 Stock Option Plan (the “2003 Plan”) and certain other prior stock option plans. The 2003 Plan and these other plans terminated upon the 2006 Plan’s initial stockholder approval in June 2006, other than with respect to outstanding options, which continued to be governed by the applicable prior plan. Only awards under the 2003 Plan continue to be outstanding insofar as these prior plans are concerned. Shares issued as a result of stock-based compensation transactions generally have been funded with the issuance of new shares of the Company’s common stock.

The Company may grant the following types of incentive awards under the 2006 Plan: (i) non-qualified stock options (“NQs”); (ii) incentive stock options (“ISOs”); (iii) stock appreciation rights; (iv) restricted stock; (v) restricted stock units (“RSUs”); (vi) performance shares and performance share units (“PSUs”); and (vii) other stock-based awards. Each award granted under the 2006 Plan is subject to an award agreement that incorporates, as applicable, the exercise price, the term of the award, the periods of restriction, the number of shares to which the award pertains, performance period(s) and performance measure(s), and such other terms and conditions as the plan committee determines.

Through January 31, 2016, the Company has granted under the 2006 Plan (i) service-based NQs, RSUs and restricted stock; (ii) contingently issuable PSUs; and (iii) RSUs that are intended to satisfy the performance-based condition for deductibility under Section 162(m) of the Internal Revenue Code. According to the terms of the 2006 Plan, for purposes of determining the number of shares available for grant, with the exception of the Warnaco employee replacement awards discussed below, each share underlying a stock option award reduces the number available by one share and each share underlying a restricted stock award, RSU or PSU reduces the number available by two shares. Each share underlying a Warnaco employee replacement stock option, restricted stock, RSU or PSU reduces the number available by one share. The per share exercise price of options granted under the 2006 Plan cannot be less than the closing price of the common stock on the date of grant (the business day prior to the date of grant for awards granted prior to September 21, 2006).

The Company currently has service-based NQs outstanding under the 2003 Plan. Such stock options were granted with a per share exercise price equal to the closing price of the Company’s common stock on the business day immediately preceding the date of grant.

Under the terms of the merger agreement in connection with the Warnaco acquisition, each outstanding award of stock options, restricted stock and restricted stock units made by Warnaco was assumed by the Company and converted into an award of the same type, and subject to the same terms and conditions, but payable in shares of Company common stock. The replacement stock options are generally exercisable in three equal annual installments commencing one year after the date of original grant and the replacement RSUs and restricted stock awards generally vest three years after the date of original grant, principally on a cliff basis. The Company accounted for the replacement awards as a modification of the existing awards. As such, a new fair value was assigned to the awards, a portion of which was included as part of the merger consideration. The merger consideration of $39.8 million was determined by multiplying the estimated fair value of the Warnaco awards outstanding at the effective time of the Warnaco acquisition, net of the estimated value of awards to be forfeited, by the proportionate amount of the vesting period that had lapsed as of the acquisition date. The remaining fair value, net of estimated forfeitures, was expensed over the awards’ remaining vesting periods.

Net income for 2015, 2014 and 2013 included $42.0 million, $48.7 million and $58.0 million, respectively, of pre-tax expense related to stock-based compensation, with recognized income tax benefits of $10.7 million, $12.7 million and $17.0 million, respectively.

Stock options currently outstanding, with the exception of the Warnaco employee replacement awards discussed above, are generally exercisable in four equal annual installments commencing one year after the date of grant. The vesting of such options outstanding is also generally accelerated upon retirement (as defined in the applicable plan). Such options are granted with a 10-year term.

The Company estimates the fair value of stock options granted at the date of grant using the Black-Scholes-Merton model. The estimated fair value of the options, net of estimated forfeitures, is expensed over the options’ vesting periods. At January 31, 2016, there was $11.5 million of unrecognized pre-tax compensation expense, net of estimated forfeitures, related to non-vested stock options, which is expected to be recognized over a weighted average period of 1.6 years.

The following summarizes the assumptions used to estimate the fair value of service-based stock options granted during 2015, 2014 and 2013 (with the exception of the Warnaco employee replacement stock options):



	2015			2014			2013
Weighted average risk-free interest rate	1.54		%	2.15		%	1.05		%
Weighted average expected option term (in years)	6.25			6.25			6.22
Weighted average Company volatility	36.26		%	44.12		%	45.20		%
Expected annual dividends per share	$	0.15		$	0.15		$	0.15
Weighted average grant date fair value per option	$	40.20		$	56.21		$	51.51

The risk-free interest rate is based on United States Treasury yields in effect at the date of grant for periods corresponding to the expected option term. The expected option term represents the weighted average period of time that options granted are expected to be outstanding, based on vesting schedules and the contractual term of the options. Company volatility is based on the historical volatility of the Company’s common stock over a period of time corresponding to the expected option term. Expected dividends are based on the Company’s common stock cash dividend rate at the date of grant.

The Company has continued to utilize the simplified method to estimate the expected term for its “plain vanilla” stock options granted due to a lack of relevant historical data resulting, in part, from changes in the pool of employees receiving option grants, mainly due to acquisitions. The Company will continue to evaluate the appropriateness of utilizing such method.

The following summarizes the assumptions used to estimate the fair value of the Warnaco employee stock options that were replaced on February 13, 2013:



Weighted average risk-free interest rate	0.24		%
Weighted average expected option term (in years)	1.70
Weighted average Company volatility	29.40		%
Expected annual dividends per share	$	0.15
Weighted average grant date fair value per option	$	40.60

Service-based stock option activity for the year was as follows:



(In thousands, except years and per option data)	Options	Weighted Average Exercise Price Per Option		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding at February 1, 2015	1,472	$	64.14	5.5	$	70,737
Granted	175	107.18
Exercised	162	45.60
Cancelled	42	86.53
Outstanding at January 31, 2016	1,443	$	70.79	5.3	$	26,643
Exercisable at January 31, 2016	1,066	$	56.40	4.2	$	26,643

As of January 31, 2016, any service-based stock options that were outstanding but not yet exercisable had an intrinsic value of zero.

The aggregate grant date fair value of service-based options granted during 2015, 2014 and 2013 was $7.0 million, $7.9 million and $9.4 million, respectively. At the effective time of the Warnaco acquisition, the aggregate fair value of the Warnaco employee service-based options that were replaced during 2013 was $18.0 million.

The aggregate grant date fair value of service-based options that vested during 2015, 2014 and 2013 was $7.2 million, $9.8 million and $18.4 million, respectively.

The aggregate intrinsic value of service-based options exercised was $8.4 million, $15.6 million and $70.8 million in 2015, 2014 and 2013, respectively.

RSUs granted to employees, with the exception of the Warnaco employee replacement awards, generally vest in three annual installments of 25%, 25% and 50% commencing two years after the date of grant. Service-based RSUs granted to non-employee directors vest in full one year after the date of grant. The underlying RSU award agreements (excluding agreements for non-employee director awards made during or after 2010) generally provide for accelerated vesting upon the award recipient’s retirement (as defined in the 2006 Plan). The fair value of service-based RSUs, with the exception of the Warnaco employee replacement awards, is equal to the closing price of the Company’s common stock on the date of grant and is expensed, net of estimated forfeitures, over the RSUs’ vesting periods.

RSU activity for the year was as follows:



(In thousands, except per RSU data)	RSUs	Weighted Average Grant Date Fair Value Per RSU
Non-vested at February 1, 2015	640	$	107.42
Granted	303	104.59
Vested	206	87.76
Cancelled	84	112.95
Non-vested at January 31, 2016	653	$	111.61

The aggregate grant date fair value of RSUs granted during 2015, 2014 and 2013 was $31.7 million, $29.3 million and $29.3 million, respectively. At the effective time of the Warnaco acquisition, the aggregate fair value of the Warnaco employee RSUs that were replaced during 2013 was $14.5 million. The aggregate grant date fair value of RSUs vested during 2015, 2014 and 2013 was $18.1 million, $18.5 million and $18.1 million, respectively.

At January 31, 2016, there was $39.1 million of unrecognized pre-tax compensation expense, net of estimated forfeitures, related to non-vested RSUs, which is expected to be recognized over a weighted average period of 1.8 years.

The Company’s restricted stock awards consisted solely of awards to Warnaco employees that were replaced with Company restricted stock as of the effective time of the Warnaco acquisition. No other awards of restricted stock have been granted during 2015, 2014 or 2013. The fair value of restricted stock with respect to awards for which the vesting period had not lapsed as of the acquisition date was equal to the closing price of the Company’s common stock on February 12, 2013 and was expensed, net of forfeitures, over the vesting period.

Restricted stock activity for the year was as follows:



(In thousands, except per share data)	Restricted Stock	Weighted Average Grant Date Fair Value Per Share
Non-vested at February 1, 2015	20	$	120.72
Granted	—	—
Vested	19	120.72
Cancelled	1	120.72
Non-vested at January 31, 2016	—	$	—

At the effective time of the Warnaco acquisition, the aggregate fair value of the Warnaco employee restricted stock awards that were replaced during 2013 was $32.7 million. The aggregate grant date fair value of restricted stock vested during 2015, 2014 and 2013 was $2.4 million, $2.7 million and $26.0 million, respectively.

At January 31, 2016, there was no unrecognized pre-tax compensation expense related to non-vested restricted stock.

The Company granted contingently issuable PSUs to certain of the Company’s senior executives during the first quarter of each of 2012, 2013 and 2014. These awards were subject to achievement of an earnings per share and, in the case of the awards made in 2012, a return on equity goal for the two-year performance period beginning with the year of grant and a service period of one year beyond the certification of performance. For the awards granted in the first quarter of 2014, the two-year performance period has ended and the holders are not expected to earn any shares based on earnings per share growth over the performance period. For the awards granted in the first quarter of 2013, the holders earned an aggregate of 26,000 shares, which will vest and be paid out subject to and following the additional one-year service period. The holders of the awards granted in the first quarter of 2012 earned an aggregate of 54,000 shares, which were paid out in the first quarter of 2015. For such awards, the Company records expense ratably over each applicable vesting period based on fair value and the Company’s current expectations of the probable number of shares that will ultimately be issued. The fair value of these contingently issuable PSUs is equal to the closing price of the Company’s common stock on the date of grant, reduced for the present value of any dividends expected to be paid on the Company’s common stock during the performance cycle, as these contingently issuable PSUs do not accrue dividends prior to the completion of the performance cycle.

The Company granted contingently issuable PSUs to certain of the Company’s executives during the second quarter of 2013 and to certain of the Company’s senior executives during the first quarter of 2015 subject to a three-year performance period. For the awards granted in the second quarter of 2013 and the first quarter of 2015, the final number of shares that will be earned, if any, is contingent upon the Company’s achievement of goals for the applicable performance period, of which 50% is based upon the Company’s absolute stock price growth during the applicable performance period and 50% is based upon the Company’s total shareholder return during the applicable performance period relative to other companies included in the S&P 500 as of the date of grant. The Company records expense ratably over the applicable vesting period, net of estimated forfeitures, regardless of whether the market condition is satisfied because the awards are subject to market conditions. The fair value of the awards granted in the first quarter of 2015 and the second quarter of 2013 was established for each grant on the grant date using the Monte Carlo simulation model, which was based on the following assumptions:



	2015			2013
Risk-free interest rate	0.90		%	0.34		%
Expected Company volatility	29.10		%	38.67		%
Expected annual dividends per share	$	0.15		$	0.15
Grant date fair value per PSU	$	101.23		$	123.27

PSU activity for the year was as follows:



(In thousands, except per share data)	PSUs	Weighted Average Grant Date Fair Value Per PSU
Non-vested at February 1, 2015	553	$	119.95
Granted	46	101.23
Vested	54	88.52
Cancelled	52	122.17
Non-vested at January 31, 2016	493	$	121.41

The aggregate grant date fair value of PSUs granted during 2015, 2014 and 2013 was $4.6 million, $10.4 million and $62.6 million, respectively. The aggregate grant date fair value of PSUs vested during 2015 and 2013 was $4.8 million and $25.4 million, respectively. No PSUs vested during 2014. PSUs in the above table and the aggregate grant date fair value amounts reflect (i) PSUs subject to market conditions at the target level, which is consistent with how expense will be recorded, regardless of the numbers of shares actually earned; and (ii) PSUs that are not subject to market conditions at the maximum level.

At January 31, 2016, based on the Company’s current estimate of the most likely number of shares that will ultimately be issued, there was $6.8 million of unrecognized pre-tax compensation expense related to non-vested PSUs, which is expected to be recognized over a weighted average period of 1.3 years.

The Company receives a tax deduction for certain transactions associated with its stock plan awards. The actual income tax benefits realized from these transactions were $10.2 million, $20.1 million and $69.7 million in 2015, 2014 and 2013, respectively. Of those amounts, $5.5 million, $11.0 million and $37.6 million, respectively, were reported as excess tax benefits. Excess tax benefits arise when the actual tax benefit resulting from a stock plan award transaction exceeds the tax benefit associated with the grant date fair value of the related stock award.

Total shares available for grant at January 31, 2016 amounted to 6.6 million shares.