STOCK AWARD, OPTION AND BENEFIT PLANS

Deferred Compensation Plans

Under our deferred compensation plans ("plans"), eligible employees are permitted to make compensation deferrals up to established limits set under the plans and accrue income on these deferrals based on reference to changes in available investment options. While not required by the plan, the Company chooses to invest in insurance contracts and mutual funds in order to approximate the changes in the liability to the employees. These investments and the liability to the employees were as follows (in thousands):



	Fiscal Year-end
	2015		2014
Cash surrender value of life insurance contracts	$	12,780	$	12,999
Fair value of mutual funds	13,891		15,000
Total assets	$	26,671	$	27,999

Total assets, included in:
Prepaid expenses and other assets	$	1,540	$	1,515
Other assets	25,131		26,484
Total assets	$	26,671	$	27,999



	Fiscal Year-end
	2015		2014
Total deferred compensation liability, included in:
Other current liabilities	$	1,540	$	1,515
Other long-term liabilities	26,691		27,858
Total deferred compensation liability	$	28,231	$	29,373

Life insurance premiums loads, policy fees and cost of insurance that are paid from the asset investments and gains and losses from the asset investments for these plans are recorded as components of other income or expense; such amounts were a net loss of $0.4 million in fiscal year 2015, a net gain of $4.2 million (including a $0.1 million death benefit) in fiscal year 2014 and a net gain of $2.1 million in fiscal year 2013. Changes in the obligation to plan participants are recorded as a component of operating expenses and cost of sales; such amounts were an income of $0.2 million in fiscal year 2015, a loss of $4.3 million in fiscal year 2014 and a loss of $2.8 million in fiscal year 2013. Liabilities associated with participant balances under our deferred compensation plans are affected by individual contributions and distributions made, as well as gains and losses on the participant's investment allocation election.

Coherent Employee Retirement and Investment Plan

Under the Coherent Employee Retirement and Investment Plan, we match employee contributions to the plan up to a maximum of 4% of the employee's individual earnings subject to IRS limitations. Employees become eligible for participation on their first day of employment and for Company matching contributions after completing one year of service. The Company's contributions (net of forfeitures) during fiscal 2015, 2014, and 2013 were $3.6 million, $3.6 million and $3.4 million, respectively.

Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan ("ESPP") whereby eligible employees may authorize payroll deductions of up to 10% of their regular base salary to purchase shares at the lower of 85% of the fair market value of the common stock on the date of commencement of the offering or on the last day of the six-month offering period. During fiscal 2015, 2014 and 2013, a total of 132,004 shares, 134,321 shares and 159,754 shares, respectively, were purchased by and distributed to employees at an average price of $51.34, $48.68 and $37.20 per share, respectively. At fiscal 2015 year-end, we had 661,900 shares of our common stock reserved for future issuance under the plan.

Stock Award and Option Plans

We have a stock plan for which employees and non-employee directors are eligible participants. This plan is the 2011 Equity Incentive Plan (the "2011 Plan") which includes our options, time-based restricted stock units and performance restricted stock units. In prior years, we have had a stock plan for which employees and service providers were eligible participants and a non-employee Directors' Stock Option Plan for which only non-employee directors were eligible participants. Those prior plans have expired. Under the 2011 Plan, Coherent may grant options and awards (time-based restricted stock units and performance restricted stock units) to purchase up to 6,747,691 shares of common stock, of which 5,514,171 shares remained available for grant at fiscal 2015 year-end.

Grants to employees generally expire four years from the original grant date. Since adoption of the 2011 Plan, no stock options have been granted to employees.

Director options were previously automatically granted to our non-employee directors. New directors now initially receive an award of restricted stock units of 3,500 shares which vest over a two year period. The annual grant for non-employee directors is 3,500 shares of restricted stock units that vest on February 15 of the calendar year following the grant.

Restricted stock awards and restricted stock units are typically subject to vesting restrictions—either time-based or market-based conditions for vesting. Until restricted stock vests, shares (including those issuable upon vesting of the applicable restricted stock unit) are subject to forfeiture if employment or service to the Company terminates prior to the release of restrictions and cannot be transferred.


•	The service based restricted stock awards generally vest within three years from the date of grant.


•	The service based restricted stock unit awards are generally subject to annual vesting over three years from the date of grant.

•

The performance restricted stock unit award grants are generally either subject to annual vesting over three years from the date of grant or subject to a single vest measurement three years from the date of grant, depending upon achievement of performance measurements based on the performance of the Company's total shareholder returns (as defined in the plan) compared with the performance of the Russell 2000 Index.

Fair Value of Stock Compensation

We recognize compensation expense for all share-based payment awards based on the fair value of such awards. The expense is recognized on a straight-line basis per tranche over the respective requisite service period of the awards.

Determining Fair Value

Valuation and amortization method—We estimate the fair value of employee stock purchase shares using the Black-Scholes-Merton option-pricing formula. This fair value is then amortized on a straight-line basis over the purchase period.

Expected Term—The expected term represents the period of our employee stock purchase plan.

Expected Volatility—Our process for computing expected volatility considers both historical volatility and market-based implied volatility; however our estimate of expected forfeitures is based on historical employee data and could differ from actual forfeitures.

Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes-Merton valuation method is based on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term.

The fair values of shares purchased under the employee stock purchase plan for fiscal 2015, 2014 and 2013 were estimated using the following weighted-average assumptions:



	Employee Stock Purchase Plans
	Fiscal
	2015			2014			2013
Expected life in years	0.5			0.5			0.5
Expected volatility	28.6		%	24.1		%	32.3		%
Risk-free interest rate	0.1		%	0.1		%	0.1		%
Weighted average fair value per share	$	14.39		$	13.57		$	10.56

Time-Based Restricted Stock Units

Time-based restricted stock units are fair valued at the closing market price on the date of grant.

Performance Restricted Stock Units

We grant performance restricted stock units to officers and certain employees. The performance stock unit agreements provide for the award of performance stock units with each unit representing the right to receive one share of our common stock to be issued after the applicable award vesting period. The final number of units awarded, if any, for these performance grants will be determined as of the vesting dates, based upon our total shareholder return over the performance period compared to the Russell 2000 Index and could range from no units to a maximum of twice the initial award units. The weighted average fair value for these performance units was determined using a Monte Carlo simulation model incorporating the following weighted average assumptions:



	Fiscal
	2015			2014			2013
Risk-free interest rate	0.96		%	0.6		%	0.30	%
Volatility	28.7		%	36.9		%	37.9	%
Weighted average fair value	$	70.57		$	77.10		48.48

We recognize the estimated cost of these awards, as determined under the simulation model, over the related service period, with no adjustment in future periods based upon the actual shareholder return over the performance period.

Stock Compensation Expense

The following table shows total stock-based compensation expense and related tax benefits included in the Consolidated Statements of Operations for fiscal 2015, 2014 and 2013 (in thousands):



	Fiscal 2015			Fiscal 2014			Fiscal 2013
Cost of sales	$	2,530		$	2,393		$	2,151
Research and development	1,946			2,033			1,851
Selling, general and administrative	13,756			14,471			14,889
Income tax benefit	(4,247		)	(5,243		)	(5,292		)
	$	13,985		$	13,654		$	13,599

Total stock-based compensation cost capitalized as part of inventory during fiscal 2015 was $2.5 million; $2.5 million was amortized into income during fiscal 2015, which includes amounts capitalized in fiscal 2015 and amounts carried over from fiscal 2014. Total stock-based compensation cost capitalized as part of inventory during fiscal 2014 was $2.5 million; $2.4 million was amortized into income during fiscal 2014, which includes amounts capitalized in fiscal 2014 and amounts carried over from fiscal 2013. Management has made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

At fiscal 2015 year-end, the total compensation cost related to unvested stock-based awards granted to employees under the Company's stock plans but not yet recognized was approximately $19.0 million, net of estimated forfeitures of $0.6 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 1.4 years and will be adjusted for subsequent changes in estimated forfeitures.

At fiscal 2015 year-end, the total compensation cost related to options to purchase common shares under the ESPP but not yet recognized was approximately $0.2 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately one month.

The stock option exercise tax benefits reported in the statement of cash flows results from the excess tax benefits arising from tax deductions in excess of the stock-based compensation cost recognized, determined on a grant-by-grant basis. During fiscal 2015, 2014 and 2013 we have not generated any excess tax benefits as cash flows from financing activities.

Stock Awards Activity

At fiscal 2015, 2014 and 2013 year-end, we had 86,000, 107,000 and 270,000 shares subject to stock options outstanding. At fiscal 2015 year-end, the $86,000 shares outstanding were at a weighted average exercise price of $30.09 per share and had a weighted average remaining contractual term of 3.4 years.

The following table summarizes our time-based and performance restricted stock units activity for fiscal 2015, 2014 and 2013 (in thousands, except per share amounts):



	Time Based Restricted Stock Units				Performance Restricted Stock Units
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Nonvested stock at September 29, 2012	440		$	47.81	152		$	57.55
Granted	273		44.03		97		48.48
Vested ⁽¹⁾	(254	)	43.06		(28	)	49.50
Forfeited	(6	)	45.59		(8	)	53.30
Nonvested stock at September 28, 2013	453		$	48.22	213		$	54.63
Granted	226		65.80		52		77.10
Vested	(275	)	47.44		(33	)	43.25
Forfeited	(14	)	56.06		(3	)	46.99
Nonvested stock at September 27, 2014	390		$	58.66	229		$	61.46
Granted	237		64.84		51		70.57
Vested	(219	)	53.62		(38	)	53.46
Forfeited	(14	)	59.06		(43	)	53.46
Nonvested stock at October 3, 2015	394		$	65.17	199		$	67.09

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(1)	Service-based restricted stock vested during each fiscal year. Performance awards and units included at 100% of target goal; under the terms of the awards, the recipient may earn between 0% and 200% of the award.

Restricted Stock Units are converted into the right to receive common stock upon vesting; prior to issuance, the Company permits the employee holders to satisfy their tax withholding requirements by net settlement, whereby the Company withholds a portion of the shares to cover the applicable taxes based on the fair market value of the Company's stock at the vesting date. The number of shares withheld to cover tax payments was 91,000 in fiscal 2015, 118,000 in fiscal 2014 and 95,000 in fiscal 2013; tax payments made were $5.3 million, $7.8 million and $4.2 million, respectively.

At fiscal 2015 year-end, 5,514,171 options or restricted stock units were available for future grant under all plans. At fiscal 2015 year-end, all outstanding stock options have been issued under plans approved by our shareholders.