STOCK-BASED COMPENSATION

We compensate our officers, directors and employees with stock-based compensation under the 2011 Stock Incentive Plan (the 2011 Plan) and the 2017 Stock Incentive Plan (the 2017 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 could be issued under the 2011 Plan, bringing the aggregate total to 3,800 shares. In the third quarter of fiscal year 2017, the 2017 Plan was approved by our shareholders. The 2017 Plan provides stock incentive awards in the form of stock options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock, performance stock units and other stock awards. Awards under the 2017 Plan may be granted to officers, directors, employees and key service providers. Effective upon approval of the 2017 Plan, no new awards may be granted under the 2011 Plan, and carryover activity for forfeitures and cancellations of unvested grants under the 2011 Plan will become available for issuance under the 2017 Plan. In addition to the carryover activity from the 2011 Plan, 1,500 shares are authorized for issuance under the 2017 Plan. As of September 30, 2017, a total of 1,566 shares were available for issuance under the 2017 Plan. Shares will be available for issuance under the 2017 Plan until June 6, 2027.

In fiscal year 2011, our shareholders approved a 2012 Employee Stock Purchase Plan (the 2012 ESPP) that was effective beginning January 1, 2012. During fiscal years 2017, 2016 and 2015, we issued shares of our common stock to participants under the 2012 ESPP. As of September 30, 2017, a total of 639 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 was as follows:



(in thousands)	2017			2016			2015
Stock-based compensation expense by type of award
Employee stock options	$	1,588		$	2,436		$	2,683
Employee stock purchase plan	298			519			239
Restricted stock and restricted stock units	3,737			4,203			4,536
Amounts capitalized as inventory	(1,444		)	(2,354		)	(1,985		)
Amounts recognized in income for amounts previously capitalized as inventory	1,421			2,420			1,878
Total stock-based compensation included in income from operations	5,600			7,224			7,351
Income tax benefit on stock-based compensation	(1,893		)	(2,421		)	(2,564		)
Net compensation expense included in net income	$	3,707		$	4,803		$	4,787

As of September 30, 2017, there was $2,457 of total unrecognized stock option expense related to non-vested awards, which is expected to be recognized over a weighted average period of approximately 1.2 years. As of September 30, 2017, there was $6,190 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 1.2 years.

Stock Options

Stock options are granted at exercise price 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.

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, and recognized evenly over the respective vesting period. The weighted average per share fair value of stock options granted during fiscal years 2017, 2016 and 2015 was $8.91, $11.71 and $12.16, respectively.

The weighted average assumptions used to determine fair value of stock options granted were as follows:



	2017		2016		2015
Expected life (in years)	4.0		4.1		3.5
Risk-free interest rate	1.6	%	1.5	%	1.1	%
Expected volatility	29.2	%	26.7	%	27.4	%
Dividend yield	2.6	%	2.0	%	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. Stock price volatility is estimated 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.

Stock option activity was as follows:



	2017				2016				2015
(in thousands, except per share data)	Shares		WAEP¹		Shares		WAEP¹		Shares		WAEP¹
Options outstanding at beginning of year	784		$	60.34	687		$	58.17	634		$	53.72
Granted	288		$	46.35	316		$	61.57	172		$	67.28
Exercised	(112	)	$	40.68	(68	)	$	41.10	(92	)	$	42.88
Forfeited or expired	(194	)	$	60.74	(151	)	$	61.74	(27	)	$	63.39
Options outstanding at end of year	766		$	57.86	784		$	60.34	687		$	58.17
Options eligible for exercise at year end	329		$	64.52	331		$	56.23	304		$	48.56


¹	Weighted Average Exercise Price

Options outstanding at September 30, 2017 had a weighted average remaining contractual term of 5.0 years and an aggregate intrinsic value of $1,899. Options eligible for exercise at September 30, 2017 had a weighted average remaining contractual term of 3.7 years and an aggregate intrinsic value of $18.

The total intrinsic value of stock options exercised during the fiscal years ended September 30, 2017, October 1, 2016 and October 3, 2015 was $1,467, $1,082 and $2,484, respectively.

Restricted Stock, Restricted Stock Units and Performance Restricted Stock Units

We award restricted stock units to directors. The restricted stock units vest one year from the date of the grant, provided the director continues to serve on the Board of Directors. The directors are entitled to cash dividend equivalents on restricted stock units, but they do not have voting rights on the unvested shares until they become owners of the shares, unless otherwise approved by the Compensation and Leadership Development Committee of the Board of Directors. 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 to key employees. Awards are valued based on the market value of our stock as of the date of grant with the value recognized as expense evenly over the restricted period. Restricted stock units vest proportionally on the first three anniversaries of the grant date. Participants awarded restricted stock units are not entitled to cash dividends or voting rights on unvested units.

We award performance restricted stock units to key employees. 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 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 our shares as of 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 was as follows:



	2017			2016				2015
(in thousands, except per share data)	Shares	WAGDFV²		Shares		WAGDFV²		Shares		WAGDFV²
Unvested shares at beginning of year	—	$	—	3		$	57.01	9		$	54.16
Granted	—	$	—	—		$	—	—		$	—
Vested and released	—	$	—	(3	)	$	57.01	(6	)	$	53.03
Forfeited	—	$	—	—		$	—	—		$	—
Unvested shares at end of year	—	$	—	—		$	—	3		$	57.01


²	Weighted Average Grant Date Fair Value per Share

Restricted stock unit and performance restricted stock unit activity was as follows:



	2017				2016				2015
(in thousands, except per share data)	Shares		WAGDFV³		Shares		WAGDFV³		Shares		WAGDFV³
Outstanding at beginning of year	165		$	58.98	119		$	64.77	98		$	60.51
Granted	157		$	45.05	114		$	55.84	74		$	65.93
Vested and released	(68	)	$	59.07	(47	)	$	64.69	(47	)	$	57.68
Forfeited	(31	)	$	53.08	(21	)	$	62.15	(6	)	$	67.96
Outstanding at end of year	223		$	49.95	165		$	58.98	119		$	64.77


³	Weighted Average Grant Date Fair Value per Share

Employee Stock Purchase Plan

Our U.S. employees are eligible to participate in the 2012 ESPP. Employee purchases of our stock are funded through payroll deductions over calendar six-month periods. The purchase price is 85% of the lower of the market price at 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. 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.

Two purchase periods closed in fiscal year 2017 with the combined issuance of 25 shares at a weighted average price of $40.49 per share. In fiscal years 2016 and 2015, purchases were 24 shares and 16 shares, respectively, with weighted average prices per share of $44.20 and $58.96, respectively.