STOCK-BASED COMPENSATION

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 over the respective requisite service period of the awards.

Determining Fair Value

The fair values of shares purchased under the Employee Stock Purchase Plan (“ESPP”) for the three months ended December 30, 2017 and December 31, 2016, respectively, were estimated using the following weighted-average assumptions:



	Employee Stock Purchase Plan
	Three Months Ended
	December 30, 2017			December 31, 2016
Expected life in years	0.5			0.5
Expected volatility	47.9		%	31.6		%
Risk-free interest rate	1.21		%	0.47		%
Expected dividend yield	—		%	—		%
Weighted average fair value per share	$	70.75		$	23.37

There were no stock options granted during the three months ended December 30, 2017 and December 31, 2016.

We grant performance restricted stock units to officers and certain employees. The performance restricted stock unit agreements provide for the award of performance restricted 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 1000 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:



	Three Months Ended
	December 30, 2017		December 31, 2016
Risk-free interest rate	1.7	%	1.3	%
Volatility	37.0	%	31.0	%
Weighted average fair value	$315.05		$163.17

We recognize the estimated cost of these awards, as determined under the simulation model, over the related service period of approximately 3 years, 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 condensed consolidated statements of operations for the three months ended December 30, 2017 and December 31, 2016 (in thousands):



	Three Months Ended
	December 30, 2017			December 31, 2016
Cost of sales	$	988		$	960
Research and development	668			1,053
Selling, general and administrative	5,420			7,642
Income tax benefit	(1,609		)	(1,489		)
	$	5,467		$	8,166

As a result of our acquisition of Rofin on November 7, 2016, we made a payment of $15.3 million due to the cancellation of options held by employees of Rofin. The payment was allocated between total estimated merger consideration of $11.1 million and post-merger stock-based compensation expense of $4.2 million, recorded in the three months ended December 31, 2016, based on the portion of the total service period of the underlying options that have not been completed by the merger date.

During the three months ended December 30, 2017, $1.0 million was capitalized into inventory for all stock plans, $1.0 million was amortized to cost of sales and $1.3 million remained in inventory at December 30, 2017. During the three months ended December 31, 2016, $0.8 million was capitalized into inventory for all stock plans, $0.7 million was amortized to cost of sales and $1.0 million remained in inventory at December 31, 2016.

At December 30, 2017, the total compensation cost related to unvested stock-based awards granted to employees under our stock plans but not yet recognized was approximately $57.4 million. We do not estimate forfeitures. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 1.8 years.

Stock Awards Activity

The following table summarizes the activity of our time-based and performance restricted stock units for the first three months of fiscal 2018 (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 30, 2017	399		$	118.83	176		$	105.34
Granted	90		260.64		78		315.05
Vested ⁽¹⁾	(198	)	83.69		(95	)	70.57
Forfeited	(1	)	145.96		—		—
Nonvested stock at December 30, 2017	290		$	152.82	159		$	155.76

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