SHARE-BASED COMPENSATION

Our 2003 Long-Term Stock Incentive Plan (“Incentive Plan”) is an equity-based compensation plan that allows us to grant a variety of types of awards, including stock options, restricted stock, restricted stock units, stock appreciation rights, performance share units (“PSUs”), phantom stock awards, long-term incentive awards with performance conditions ("Performance Share Awards") and cash awards. As a general rule, option awards terminate on the earlier of (i) 10 years from the date of grant, (ii) 30 days after termination of employment or service for a reason other than death, disability or retirement, (iii) one year after death or (iv) one year for incentive stock options or five years for other awards after disability or retirement. Awards are non-transferable except by disposition on death or to certain family members, trusts and other family entities as the Compensation Committee of our Board of Directors (the “Committee”) may approve. Awards may be paid in cash, shares of our common stock or a combination, in lump sum or installments and currently or by deferred payment, all as determined by the Committee. In addition, our December 11, 2009 stock option grants contain restrictions on the employees’ ability to exercise and sell the options prior to January 1, 2013, or if earlier, the employees’ death, disability, or qualifying termination (as defined in the Incentive Plan), or upon a change in control of the Company.

As of November 1, 2015, and for all periods presented, our share-based awards under this plan have consisted of restricted stock grants, PSUs and stock option grants, none of which can be settled through cash payments, and Performance Share Awards. Both our stock options and restricted stock awards are subject only to vesting requirements based on continued employment at the end of a specified time period and typically vest over three to four years or earlier upon death, disability or a change in control. However, our annual restricted stock awards issued prior to December 15, 2013 also vest upon attainment of age 65 and, only in the case of certain special one-time restricted stock awards, a portion vest on termination without cause or for good reason, as defined by the agreements governing such awards. Restricted stock awards issued after December 15, 2013 do not vest upon attainment of age 65, as provided by the agreements governing such awards. The vesting of our Performance Share Awards is described below.

A total of approximately 4,254,000 and 2,538,000 shares were available at November 1, 2015 and November 2, 2014, respectively, under the Incentive Plan for the further grants of awards.

Our option awards and time-based restricted stock awards are typically subject to graded vesting over a service period, which is typically four years. Our performance-based and market-based restricted stock awards are typically subject to cliff vesting at the end of the service period, which is typically three years. We recognize compensation cost for these awards on a straight-line basis over the requisite service period for each annual award grant. In addition, certain of our awards provide for accelerated vesting upon qualified retirement, after a change of control or upon termination without cause or for good reason. We recognize compensation cost for such awards over the period from grant date to the date the employee first becomes eligible for retirement.

Since December 2006, the Committee’s policy has been to provide for grants of restricted stock once per year, with the type and size of the awards based on a dollar amount set by the Committee. For executive officers and designated members of senior management, a portion of the award may be fixed and a portion may be subject to adjustment, up or down, depending on the average rate of growth in NCI’s earnings per share over the three fiscal years ended prior to the award date. The number of shares awarded on the grant date equals the dollar value specified by the Committee (after adjustment with regard to the variable portion) divided by the closing price of the stock on the grant date, or if the grant date is not a trading day, the trading day prior to the grant date. All restricted stock awards to all award recipients, including executive officers, are subject to a cap in value set by the Committee.

The total recurring pre-tax share-based compensation cost that has been recognized in results of operations was $9.4 million, $10.2 million and $14.9 million for the fiscal years ended November 1, 2015, November 2, 2014 and November 3, 2013, respectively. Of these amounts, $8.3 million, $8.9 million and $14.2 million were included in engineering, selling, general and administrative expense for the fiscal years ended November 1, 2015, November 2, 2014 and November 3, 2013, respectively, with the remaining costs in each period included in cost of sales. As of November 1, 2015, we do not have any amounts capitalized for share-based compensation cost in inventory or similar assets. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $3.7 million, $3.9 million and $5.7 million for the fiscal years ended November 1, 2015, November 2, 2014 and November 3, 2013, respectively.

Stock Option Awards

The fair value of each option award is estimated as of the date of grant using a Black-Scholes-Merton option pricing formula. Expected volatility is based on normalized historical volatility of our stock over a preceding period commensurate with the expected term of the option and adjusted to exclude the increased volatility associated with the refinancing the Company experienced in fiscal 2009 because this volatility is not relevant to the expected future volatility of the stock. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not considered in the option pricing formula since we do not currently pay dividends on our Common Stock and have no current plans to do so in the future.

Cash received from option exercises from a retired executive due to expiration in accordance with the terms of the agreement was $0.7 million during fiscal 2013. There were 40,000 options exercised during fiscal 2015. Cash received from the option exercises was $0.4 million during fiscal 2015. The actual tax benefit realized for the tax deductions from option exercises totaled $0.2 million for fiscal 2013. There were no options exercised during fiscal 2014.

The weighted average assumptions for the equity awards granted on December 15, 2014, December 16, 2013 and December 17, 2012 are as follows:



	December 15, 2014		December 16, 2013		December 17, 2012
Expected volatility	49.45	%	54.29	%	55.24	%
Expected term (in years)	5.50		5.75		5.75
Risk-free interest rate	1.63	%	1.75	%	0.90	%

During fiscal 2015, 2014 and 2013, we granted 10,543, 5,058 and 2,101 stock options, respectively, and the weighted average grant-date fair value of options granted during fiscal 2015, 2014 and 2013 was $7.91, $9.09 and $7.22, respectively. As of November 1, 2015 and November 2, 2014, there was approximately $0.1 million and $0.3 million, respectively, of total unrecognized compensation cost related to stock option share-based compensation arrangements and this cost is expected to be recognized over a weighted-average remaining period of 1.9 years and 1.4 years, respectively.

The following is a summary of stock option transactions during fiscal 2015, 2014 and 2013 (in thousands, except weighted average exercise prices and weighted average remaining life):



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Life	Aggregate Intrinsic Value
Balance October 28, 2012	2,100		16.11
Granted	2		14.28
Exercised	(76	)	(8.85	)
Cancelled	(18	)	(111.55	)
Balance November 3, 2013	2,008		15.55
Granted	5		17.79
Cancelled	(65	)	(148.82	)
Balance November 2, 2014	1,948		11.05
Granted	10		17.07
Exercised	(40	)	(8.85	)
Cancelled	(14	)	(175.08	)
Balance November 1, 2015	1,904		9.85		4.3	$	2,708
Exercisable at November 1, 2015	1,797		9.83		4.3	$	2,581

The following summarizes additional information concerning outstanding options at November 1, 2015 (in thousands, except weighted average remaining life and weighted average exercise prices):



Options Outstanding
Number of Options	Weighted Average Remaining Life	Weighted Average Exercise Price
1,882	4.3 years	$	9.13
21	6.6 years	68.48
1	0.6 years	303.20
1,904	4.3 years	$	9.85

The following summarizes additional information concerning options exercisable at November 1, 2015 (in thousands, except weighted average exercise prices):



Options Exercisable
Number of Options	Weighted Average Exercise Price
1,790	$	9.13
6	180.88
1	303.20
1,797	$	9.83

Restricted stock and performance awards

On August 1, 2012, we granted performance stock unit awards with a fair value of $12.0 million or 1,027,500 units. The performance period ended June 30, 2015 and earned PSU shares vested on July 15, 2015 with an actual payout of 52.675% or 541,240 units. 281,842 shares, net of 114,541 shares withheld for taxes, were issued in July 2015. The remaining 144,857 shares were deferred under the Company's Deferred Compensation Plan. The Company amended its Deferred Compensation Plan to allow deferral of vested 2012 PSU awards. In connection with this amendment, the Company will hold the 144,857 shares in its treasury shares until participants are eligible to receive benefits under the terms of the plan. In accordance with the terms of the plan, the deferred compensation obligation related to the Company's stock may only be settled by the delivery of a fixed number of shares held on the participants' behalf.

The purpose of the PSU grants is to closely align the incentive compensation of the executive leadership team for the duration of the three-year performance cycle (beginning on July 1, 2012 and ending on June 30, 2015) with returns to NCI’s shareholders and thereby further motivate the executive leadership team to create sustained value for NCI shareholders. The design of the PSU grants effectuates this purpose by placing a material amount of incentive compensation for each executive at risk and by offering extraordinary reward for the attainment of extraordinary results. Design features of the PSU grants that are in furtherance of this purpose include the following: (1) Unless the Board determines otherwise, the one-time grant of PSUs is in lieu of annual time-vesting restricted stock awards that would otherwise be granted to these executives in accordance with NCI’s current grant practices in December of 2012, 2013 and 2014. (2) The vesting of the PSUs is based solely on “absolute” total shareholder return (“TSR”), rather than based on a comparison to the returns of a peer group. (3)TSR must be sustained through the end of the three-year performance period, rather than at any point during the performance period, and TSR achievement during the performance period that is not sustained through the end of the performance period will not result in vesting of the PSUs. (4) The ultimate number of shares to be issued pursuant to the PSU awards will vary in proportion to the TSR achieved during the performance period, with no shares being issued if the 20-day average common share trading price is at or below $10 per share at the end of the performance period; the target number of shares (1,027,500) being issued if the 20-day average share price is $20 per share at the end of the performance period; the maximum number of shares (3,082,500) being issued if the 20-day average share price is $30 per share at the end of the performance period. (5) Unless there is a Qualifying Termination (as defined in the Performance Share Award Agreement), the PSUs of an executive will be forfeited upon an executive’s termination of employment during the performance period.

The fair value and compensation expense of the PSU grant was estimated based on the Company’s stock price as of the date of grant using a Monte Carlo simulation. Though the value of the PSU grant may change for each participant, the compensation expense recorded by the Company is determined on the date of grant. Expected volatility is based on historical volatility of our stock over a preceding period commensurate with the expected term of the PSU. The expected volatility considers factors such as the volatility of our share price, implied volatility of our share price, length of time our shares have been publicly traded, appropriate and regular intervals for price observations and our corporate and capital structure. The forfeiture rate in our calculation of share-based compensation expense for the PSUs is based on historical experience and is estimated at 0% for our officers. The risk-free rate for the expected term of the PSU is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not considered in the Monte Carlo simulation since we historically have not paid dividends on our common shares and have no current plans to do so in the future. We applied a discount due to the required eighteen month holding period subsequent to vesting. The weighted average assumptions for the PSUs granted on August 1, 2012 are as follows:



	August 1, 2012
Expected volatility	56.9	%
Expected term (in years)	2.9
Risk-free interest rate	0.30	%
Lack of marketability discount	20	%

Our PSUs vest pro rata if an executive’s employment terminates prior to the three-year performance period ending on June 30, 2015 due to death, disability, or termination by NCI without cause or by the executive with good reason. If the executive’s employment terminates for any other reason prior to the end of the performance period, all PSUs are forfeited. If a change in control of NCI occurs prior to the end of the performance period, the performance period will immediately end at the time of the change in control and an executive will earn a percentage of the target number of PSUs based on the TSR achieved determined by reference to the value of NCI common stock at the time of the change in control.

In December 2014, we granted long-term incentive awards with a three-year performance period to our senior executives (“2014 Executive Awards”). 40% of the value of the long-term incentive awards consists of time-based restricted stock and 60% of the value of the award consists of PSUs. The restricted stock is time-vesting based on continued employment, with two-thirds of the restricted stock vesting on December 15, 2016 and one-third vesting on December 15, 2017. The PSUs vest based on the achievement of performance goals and continued employment, with one-half of the award vesting on December 15, 2016 and the remaining one-half vesting on December 15, 2017. The PSU performance goals are based on three metrics: (1) cumulative free cash flow (weighted 40%); (2) cumulative earnings per share (weighted 40%); and (3) total shareholder return (weighted 20%), in each case during the performance period. The number of shares that may be received on vesting of the PSUs will depend upon the satisfaction of the performance goals, up to a maximum of 200% of the target number of the PSUs. The PSUs vest pro rata if an executive’s employment terminates prior to the end of the performance period due to death, disability, or termination by NCI without cause or by the executive for good reason. If an executive’s employment terminates for any other reason prior to the end of the performance period, all outstanding unvested PSUs, whether earned or unearned, will be forfeited and cancelled. If a change in control of NCI occurs prior to the end of the performance period, the PSU payout will be calculated and paid assuming that the maximum benefit had been achieved. If an executive’s employment terminates due to death or disability while any of the restricted stock is unvested, then all of the unvested restricted stock will become vested. If an executive’s employment is terminated by NCI without cause or after reaching normal retirement age, the unvested restricted stock will be forfeited. If a change in control of NCI occurs prior to the end of the performance period, the restricted stock will fully vest.

The fair value of the 2014 Executive Awards is based on the Company’s stock price as of the date of grant. A portion of the compensation cost of the 2014 Executive Awards is based on the probable outcome of the performance conditions associated with the respective shares, as determined by management. During the fiscal year ended November 1, 2015, we granted PSUs with a fair value of approximately $3.6 million.

Also in December 2014, we granted Performance Share Awards to our key employees that will be paid 50% in cash and 50% in stock (“2014 Key Employee Awards”). The final number of 2014 Key Employee Awards earned for these awards granted in December 2014 will be based on the achievement of free cash flow and earnings per share targets over a three-year performance period. These 2014 Key Employee Awards cliff vest three years from the date of grant and are earned based on the performance against the pre-established targets for the requisite service period. The 2014 Key Employee Awards also vest earlier upon death, disability or a change of control. However, a portion of the awards may vest on termination without cause or after reaching normal retirement age prior to the vesting date, as defined by the agreements governing such awards. The fair value of the 2014 Key Employee Awards is based on the Company’s stock price as of the date of grant. Compensation cost is recorded based on the probable outcome of the performance conditions associated with the respective shares, as determined by management. During the fiscal year ended November 1, 2015, we granted 2014 Key Employee Awards with an equity fair value of $1.5 million and a cash value of $1.7 million.

In December 2013, we granted long-term incentive Performance Share Awards with performance conditions that will be paid 50% in cash and 50% in stock. The final number of Performance Share Awards earned for these awards granted in December 2013 will be based on the achievement of free cash flow and earnings per share targets over a three-year period. These Performance Share Awards cliff vest three years from the date of grant and are earned based on the performance against the pre-established targets for the requisite service period. The Performance Share Awards also vest earlier upon death, disability or a change of control. However, a portion of the awards may vest on termination without cause or after reaching normal retirement age prior to the vesting date, as defined by the agreements governing such awards. The fair value of Performance Share Awards is based on the Company’s stock price as of the date of grant. Compensation cost is recorded based on the probable outcome of the performance conditions associated with the respective shares, as determined by management. During fiscal 2014, we granted Performance Share Awards with a fair value of $2.2 million.

The Committee approved a modification to our existing long term incentive plan (“Modification”) on May 29, 2014 (the “Modification Date”). The Modification revised certain financial performance thresholds of the Performance Share Awards by making 50% of the award time-based and 50% of the award performance-based. The Modification did not result in the recognition of any incremental compensation cost on the Modification Date for the 82 employees who were impacted by the Modification.

The fair value of restricted stock awards classified as equity awards is based on the Company’s stock price as of the date of grant. We have estimated a forfeiture rate of 7.5% for our non-officers and 0% for our officers in our calculation of share-based compensation expense for the fiscal years ended November 1, 2015 and November 2, 2014. We estimated a forfeiture rate of 10% for our non-officers and 0% for our officers in our calculation of share-based compensation expense for the fiscal year ended November 3, 2013. These estimates are based on historical forfeiture behavior exhibited by our employees. During fiscal 2015, 2014 and 2013, we granted time-based restricted stock awards with a fair value of $6.8 million or 409,782 shares, $3.5 million or 192,005 shares and $6.4 million or 446,566 shares, respectively. As of November 1, 2015 and November 2, 2014, there was approximately $7.3 million and $7.7 million, respectively, of total unrecognized compensation cost related to time-based restricted stock share-based compensation arrangements and this cost is expected to be recognized over a weighted-average remaining period of 2.1 years and 2.5 years, respectively. As of November 1, 2015 and November 2, 2014, there was approximately $3.6 million and $4.2 million respectively, of total unrecognized compensation cost related to performance-based and market-based restricted stock share-based compensation arrangements and this cost is expected to be recognized over a weighted average remaining period of 1.8 years and 1.2 years, respectively. Restricted stock and performance award transactions during fiscal 2015, 2014 and 2013 were as follows (in thousands, except weighted average grant prices):



	Restricted Stock and Performance Awards
	Time-Based				Performance-Based				Market-Based
	Number of Shares		Weighted Average Grant Price		Number of Shares⁽¹⁾		Weighted Average Grant Price		Number of Shares⁽¹⁾		Weighted Average Grant Price
Balance October 28, 2012	1,720		$	12.09	—		$	—	1,028		$	11.71
Granted	447		14.30		—		—		—		—
Vested	(612	)	9.98		—		—		—		—
Forfeited	(46	)	11.69		—		—		—		—
Balance November 3, 2013	1,509		$	13.62	—		$	—	1,028		$	11.71
Granted	192		18.28		125		17.47		—		—
Vested	(765	)	13.01		—		—		—		—
Forfeited	(81	)	13.49		(8	)	17.47		—		—
Balance November 2, 2014	855		$	15.22	117		$	17.47	1,028		$	11.71
Granted	410		16.60		270		17.04		45		12.76
Vested	(352	)	13.11		—		—		(541	)	11.71
Forfeited	(85	)	23.71		(44	)	16.22		(492	)	11.72
Balance November 1, 2015	828		$	15.87	343		$	17.19	40		$	11.78


(1)	The number of restricted stock shown reflects the shares that would be granted if the target level of performance is achieved. The number of shares actually issued may vary.