STOCK-BASED COMPENSATION

We compensate our officers, directors and employees with stock-based compensation under the 2017 Stock Incentive Plan (the 2017 Plan) approved by our shareholders and administered under the supervision of our Board of Directors. 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 awards. In fiscal year 2017, our shareholders approved the 2017 Plan and authorized 1,500 shares for issuance. As of September 29, 2018, a total of 1,313 shares were available for issuance under the 2017 Plan. Shares will be available for issuance under the 2017 Plan until June 6, 2027. We make an annual stock grant under the 2017 Plan of stock options, restricted stock units and performance restricted stock units, as well as stock grants throughout the fiscal year. For fiscal years 2018, 2017 and 2016, the annual stock grant occurred in April 2018, April 2017 and December 2015, respectively.

In fiscal year 2018, we adopted ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. See Note 1 for additional information regarding the impact of adoption.

Stock-based Compensation Expense

Stock-based compensation expense recognized in the Consolidated Statements of Income is as follows:



	2018			2017			2016
Stock-based compensation expense by type of award
Employee stock options	$	1,849		$	1,588		$	2,436
Employee stock purchase plan	283			298			519
Restricted stock units, performance restricted stock units and restricted stock	5,112			3,737			4,203
Amounts capitalized as inventory	(1,799		)	(1,444		)	(2,354		)
Amounts recognized in income for amounts previously capitalized as inventory	1,838			1,421			2,420
Total stock-based compensation included in income from operations	7,283			5,600			7,224
Income tax benefit on stock-based compensation	(1,763		)	(1,893		)	(2,421		)
Net stock-based compensation expense included in net income	$	5,520		$	3,707		$	4,803

As of September 29, 2018, there was $2,462 of total unrecognized expense related to non-vested awards of stock options which is expected to be recognized over a weighted average period of approximately 1.2 years. As of September 29, 2018, there was $6,559 of total unrecognized expense related to non-vested awards of restricted stock units and performance 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 an 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 is estimated as of the date of each grant using the multiple option form of the Black-Scholes valuation model based on the exercise 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 2018, 2017 and 2016 was $11.10, $8.91 and $11.71, respectively.

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



	2018		2017		2016
Expected life (in years)	4.0		4.0		4.1
Risk-free interest rate	2.6	%	1.6	%	1.5	%
Expected volatility	29.4	%	29.2	%	26.7	%
Dividend yield	2.3	%	2.6	%	2.0	%

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 is as follows:



	2018				2017				2016
	Shares		WAEP¹		Shares		WAEP¹		Shares		WAEP¹
Options outstanding at beginning of year	766		$	57.86	784		$	60.34	687		$	58.17
Granted	245		$	52.30	288		$	46.35	316		$	61.57
Exercised	(19	)	$	47.26	(112	)	$	40.68	(68	)	$	41.10
Forfeited or expired	(111	)	$	57.64	(194	)	$	60.74	(151	)	$	61.74
Options outstanding at end of year	881		$	56.57	766		$	57.86	784		$	60.34
Options eligible for exercise at year end	443		$	61.61	329		$	64.52	331		$	56.23


¹	Weighted Average Exercise Price

Options outstanding as of September 29, 2018 had a weighted average remaining contractual term of 4.6 years and an aggregate intrinsic value of $2,426. Options eligible for exercise as of September 29, 2018 had a weighted average remaining contractual term of 3.3 years and an aggregate intrinsic value of $589.

The total intrinsic value of stock options exercised during fiscal years 2018, 2017 and 2016 was $121, $1,467 and $1,082, 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 vested 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 as of the date of grant with the value allocated to expense evenly over the restricted period.

We award restricted stock units to key employees. Employees awarded restricted stock units are not entitled to cash dividends or voting rights on unvested units. 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.

We award performance restricted stock units to key employees. Performance restricted stock units vest based on attainment of average return on invested capital performance targets over a one or three year performance period. 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 performance period. Once the performance criteria has been met, the value of the performance restricted stock units is finalized at the end of the performance period.

Restricted stock activity is as follows:



	2018			2017			2016
	Shares	WAGDFV²		Shares	WAGDFV²		Shares		WAGDFV²
Unvested shares at beginning of year	—	$	—	—	$	—	3		$	57.01
Granted	—	$	—	—	$	—	—		$	—
Vested and released	—	$	—	—	$	—	(3	)	$	57.01
Forfeited	—	$	—	—	$	—	—		$	—
Unvested shares at end of year	—	$	—	—	$	—	—		$	—


²	Weighted Average Grant Date Fair Value per share

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



	2018				2017				2016
	Shares		WAGDFV³		Shares		WAGDFV³		Shares		WAGDFV³
Outstanding at beginning of year	223		$	49.95	165		$	58.98	119		$	64.77
Granted	140		$	49.67	157		$	45.05	114		$	55.84
Vested and released	(75	)	$	52.45	(68	)	$	59.07	(47	)	$	64.69
Forfeited	(21	)	$	48.96	(31	)	$	53.08	(21	)	$	62.15
Outstanding at end of year	267		$	48.99	223		$	49.95	165		$	58.98


³	Weighted Average Grant Date Fair Value per share

Employee Stock Purchase Plan

Our U.S. employees are eligible to participate in the 2012 Employee Stock Purchase Plan (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 18 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 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.

In fiscal year 2011, our shareholders approved the 2012 ESPP that was effective beginning January 1, 2012. As of September 29, 2018, a total of 615 shares were available for issuance under the 2012 ESPP. Shares will be available for issuance under the 2012 ESPP until December 31, 2021.

In fiscal years 2018, 2017 and 2016, purchases under the 2012 ESPP were 24, 25 and 24 shares, respectively, with weighted average prices per share of $44.39, $40.49 and $44.20, respectively.