STOCK-BASED COMPENSATION

We compensate our officers, directors and employees with stock-based compensation under the 2011 Stock Incentive Plan (the 2011 Plan) approved by our shareholders and administered under the supervision of our Board of Directors. During fiscal year 2016, our shareholders approved a 1,500 share increase in the number of shares that may be issued under the 2011 Plan, bringing the aggregate total to 3,800 shares. During fiscal years 2016, 2015 and 2014, we awarded stock options and restricted stock units under the 2011 Plan. During fiscal year 2014, we awarded restricted stock under the 2011 Plan. At October 1, 2016, a total of 2,074 shares were available for future grant under the 2011 Plan. These shares will be available for issuance under the 2011 Plan until January 31, 2018.

In fiscal year 2011, our shareholders approved a 2012 Employee Stock Purchase Plan (the 2012 ESPP) that was effective on January 1, 2012. During fiscal years 2016, 2015 and 2014, we issued shares of our common stock to participants under the 2012 ESPP. At October 1, 2016, a total of 665 shares were available for issuance under the 2012 ESPP. Shares will be available for issuance under the 2012 ESPP until December 31, 2021.

Stock-Based Compensation Expense

Stock-based compensation expense for fiscal years 2016, 2015 and 2014 was as follows:



(in thousands)	2016			2015			2014
Stock-based compensation expense by type of award
Employee stock options	$	2,436		$	2,683		$	2,769
Employee stock purchase plan (ESPP)	519			239			212
Restricted stock and restricted stock units	4,203			4,536			3,073
Amounts capitalized as inventory	(2,354		)	(1,985		)	(1,608		)
Amounts recognized in income for amounts previously capitalized as inventory	2,420			1,878			1,315
Total stock-based compensation included in income from operations	7,224			7,351			5,761
Income tax benefit on stock-based compensation	(2,421		)	(2,564		)	(1,999		)
Net compensation expense included in net income	$	4,803		$	4,787		$	3,762

At October 1, 2016, there was $2,502 of total unrecognized stock option expense related to non-vested awards, which is expected to be recognized over a weighted average period of approximately 0.9 years. At October 1, 2016, there was $4,691 of total unrecognized restricted stock expense related to non-vested awards of restricted stock units, which is expected to be recognized over a weighted average period of approximately 1.1 years.

Stock options are granted at an exercise price equal to the closing market price of our stock on the date of grant. The fair value of stock options granted under stock-based compensation programs has been estimated as of the date of each grant using the multiple option form of the Black-Scholes valuation model, based on the grant price and assumptions regarding the expected grant life, stock price volatility, dividends and risk-free interest rates. Each vesting period of an option award is valued separately, with this value being recognized evenly over the vesting period. The weighted average per share fair value of stock options granted during fiscal years 2016, 2015 and 2014 was $11.71, $12.16 and $14.32, respectively. The weighted average assumptions used to determine fair value of stock options granted during those fiscal years were as follows:



	2016		2015		2014
Expected life (in years)	4.1		3.5		4.1
Risk-free interest rate	1.5	%	1.1	%	1.1	%
Expected volatility	26.7	%	27.4	%	31.3	%
Dividend yield	2.0	%	1.8	%	1.8	%

The expected life represents the period that the stock option awards are expected to be outstanding and was determined based on historical and anticipated future exercise and expiration patterns. The risk-free interest rate used is based on the yield of constant maturity U.S. Treasury bonds on the grant date with a remaining term equal to the expected life of the grant. We estimate stock price volatility based on a historical weekly price observation. The dividend yield assumption is based on the annualized current dividend divided by the share price on the grant date.

Awards of both restricted stock and restricted stock units are valued based on the market value of our shares at the date of grant. The value is allocated to expense evenly over the restricted period. Awards of performance restricted stock units are valued based on the market value of our shares at the date of grant with the value recognized as expense once the performance criteria has been met. Employee stock purchase plan share awards are valued based on the value of the discount feature plus the fair value of the optional features, which is determined as of the date of grant using the Black-Scholes valuation model. The value of these share awards is allocated to expense evenly over each purchase period.

Stock Options

Stock options are granted at exercise prices equal to the closing market price of our stock on the date of grant. Generally, stock options vest proportionally on the first three anniversaries of the grant date and expire, depending on the date of grant, five or seven years from the grant date.

Stock option activity for fiscal years 2016, 2015 and 2014 was as follows:



	2016				2015				2014
(in thousands, except per share data)	Shares		WAEP¹		Shares		WAEP¹		Shares		WAEP¹
Options outstanding at beginning of year	687		$	58.17	634		$	53.72	518		$	39.52
Granted	316		$	61.57	172		$	67.28	355		$	65.34
Exercised	(68	)	$	41.10	(92	)	$	42.88	(182	)	$	37.01
Forfeited or expired	(151	)	$	61.74	(27	)	$	63.39	(57	)	$	51.45
Options outstanding at end of year	784		$	60.34	687		$	58.17	634		$	53.72
Options eligible for exercise at year-end	331		$	56.23	304		$	48.56	194		$	40.36

¹Weighted Average Exercise Price

Our annual stock option grant is typically made in December. Options outstanding at October 1, 2016 had a weighted average remaining contractual term of 4.5 years and an aggregate intrinsic value of $719. Options eligible for exercise at October 1, 2016 had a weighted average remaining contractual term of 2.9 years, and an aggregate intrinsic value of $712.

The total intrinsic value of stock options exercised during the fiscal years ended October 1, 2016, October 3, 2015 and September 27, 2014 was $1,082, $2,484 and $5,838, respectively.

Restricted Stock and Restricted Stock Units

Our annual restricted stock unit grant is typically made in December. We award restricted stock units to directors. The restricted stock units vest on the date of the next annual meeting after grant. The directors are entitled to cash dividend equivalents on unvested shares, but they do not have voting rights on the unvested shares. The sale and transfer of these units is restricted during the vesting period. Additionally, in fiscal year 2013, we awarded restricted stock to our directors that vest proportionately on the first three anniversaries of the grant date. For restricted stock awarded to directors, participants are entitled to cash dividends and voting rights on unvested shares, but the sale and transfer of these shares is restricted during the vesting period. Restricted stock and restricted stock units are valued based on the market value of the shares at the date of grant with the value allocated to expense evenly over the restricted period.

We award restricted stock units and performance restricted stock units to key employees. Restricted stock units vest proportionally on the first three anniversaries of the grant date, and performance restricted stock units vest based on attainment of return on invested capital performance targets at the end of one, two and three year performance periods. Participants awarded restricted stock units and performance restricted stock units are not entitled to cash dividends or voting rights on unvested units. Performance restricted stock units are valued based on the market value of the shares at the date of grant with the value recognized as an expense over the life of the performance period. Once the performance criteria has been met, the value of the performance restricted stock units is finalized.

Restricted stock activity for fiscal years 2016, 2015 and 2014 was as follows:



	2016				2015				2014
(in thousands, except per share data)	Shares		WAGDFV²		Shares		WAGDFV²		Shares		WAGDFV²
Unvested shares at beginning of year	3		$	57.01	9		$	54.16	24		$	51.68
Granted	—		$	—	—		$	—	—		$	—
Vested	(3	)	$	57.01	(6	)	$	53.03	(14	)	$	49.71
Forfeited	—		$	—	—		$	—	(1	)	$	53.99
Unvested shares at end of year	—		$	—	3		$	57.01	9		$	54.16

²Weighted Average Grant Date Fair Value per Share

Restricted stock unit activity for fiscal years 2016, 2015 and 2014 was as follows:



	2016				2015				2014
(in thousands, except per share data)	Shares		WAGDFV³		Shares		WAGDFV³		Shares		WAGDFV³
Outstanding at beginning of year	119		$	64.77	98		$	60.51	38		$	40.91
Granted	114		$	55.84	74		$	65.93	88		$	63.86
Vested	(47	)	$	64.69	(47	)	$	57.68	(17	)	$	41.01
Forfeited	(21	)	$	62.15	(6	)	$	67.96	(11	)	$	50.10
Outstanding at end of year	165		$	58.98	119		$	64.77	98		$	60.51

³ Weighted Average Grant Date Fair Value per Share

Employee Stock Purchase Plan

Our U.S. employees are eligible to participate in our Employee Stock Purchase Plan (ESPP). Employee purchases of our stock are funded by payroll deductions over calendar six-month periods. The purchase price is 85% of the lower of the market price at either the beginning or end of the six-month period. The shares are required to be held by the employee for at least eighteen months subsequent to the purchase. Two purchase periods closed in fiscal year 2016 with the combined issuance of 24 shares at a weighted average price of $44.20. In fiscal years 2015 and 2014, purchases were 16 shares and 16 shares, respectively, with weighted average share prices of $58.96 and $53.01, respectively.