NOTE 2STOCK-BASED COMPENSATION

We compensate our officers, directors and employees with stock-based compensation under the 2011 Stock Incentive Plan (2011 Plan) approved by our shareholders in 2011 and administered under the supervision of our Board of Directors. During fiscal year 2013, our shareholders approved a 1,300 increase in the number of shares that may be issued under the 2011 Plan, bringing the aggregate total to 2,300. During fiscal years 2015, 2014 and 2013, we awarded stock options and restricted stock units under the 2011 Plan. During fiscal year 2014 and 2013, we awarded restricted stock under the 2011 Plan. At October 3, 2015, a total of 972 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 (2012 ESPP) that was effective on January 1, 2012. During fiscal years 2015, 2014 and 2013, we issued shares of our common stock to participants under the 2012 ESPP. At October 3, 2015, a total of 688 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 2015, 2014, and 2013 was as follows:



(in thousands)		2015		2014		2013

Stock-based compensation expense by type of award:
Employee stock options	$	2,683	$	2,769	$	1,811
Employee stock purchase plan (ESPP)		239		212		199
Restricted stock and restricted stock units		4,536		3,073		1,653
Amounts capitalized as inventory		(1,985)		(1,608)		(806)
Amounts recognized in income for amounts previously
capitalized as inventory		1,878		1,315		879

Total stock-based compensation included in income
from operations		7,351		5,761		3,736
Income tax benefit on stock-based compensation		(2,564)		(1,999)		(1,277)
Net compensation expense included in net income	$	4,787	$	3,762	$	2,459

At October 3, 2015, there was $2,025 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 3, 2015, there was $3,093 and $21 of total unrecognized restricted stock expense related to non-vested awards of restricted stock units and restricted stock, respectively, each of which is expected to be recognized over a weighted average period of approximately 0.9 years.

The stock options were 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 2015, 2014 and 2013 was $12.16, $14.32 and $10.25, respectively. The weighted average assumptions used to determine fair value of stock options granted during those fiscal years were as follows:



	2015		2014		2013
Expected life (in years)	3.5		4.1		3.1
Risk-free interest rate	1.1	%	1.1	%	0.4	%
Expected volatility	27.4	%	31.3	%	33.8	%
Dividend yield	1.8	%	1.8	%	2.3	%

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 five or seven years from the grant date.

Stock option activity for fiscal years 2015, 2014 and 2013 was as follows:



	2015			2014			2013
(in thousands, except per share data)	Shares		WAEP1	Shares		WAEP1	Shares		WAEP1
Options outstanding at beginning of year	634	$	53.72	518	$	39.52	754	$	36.84
Granted	172	$	67.28	355	$	65.34	24	$	52.81
Exercised	(92)	$	42.88	(182)	$	37.01	(243)	$	32.51
Forfeited or expired	(27)	$	63.39	(57)	$	51.45	(17)	$	39.21
Options outstanding at end of year	687	$	58.17	634	$	53.72	518	$	39.52
Options eligible for exercise at year-end	304	$	48.56	194	$	40.36	226	$	36.45
1 Weighted Average Exercise Price

Prior to the fiscal year ended September 28, 2013, our historical practice was to grant an annual Company-wide award of stock options to officers and employees in July. The timing of the Company-wide award was changed from July to December beginning in December 2013 and for each subsequent fiscal year thereafter so that the grants would align with a review of individual and Company performance. As a consequence of this timing shift, the only stock option awards granted during fiscal year 2013 were related to inducement grants for a new officer as well as other new employees. During fiscal year 2014, the annual grant was adjusted to make grantees whole as a result the delay in the annual 2013 grant.

Options outstanding at October 3, 2015 had a weighted average remaining contractual term of 4.3 years and an aggregate intrinsic value of $3,494. Options eligible for exercise at October 3, 2015 had a weighted average remaining contractual term of 2.6 years, and an aggregate intrinsic value of $3,459.

The total intrinsic value of stock options exercised during the fiscal years ended October 3, 2015, September 27, 2014 and September 28, 2013 was $2,484, $5,838 and $6,237, respectively.

Restricted Stock

We award directors restricted stock units. Directors vest in the restricted stock units over one year and are entitled to cash dividend equivalents on unvested shares, but do not receive 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 with a vesting period of three years. 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.

We award key employees restricted stock units and performance restricted stock units. 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.

Restricted stock activity for fiscal years 2015, 2014 and 2013 was as follows:



	2015			2014			2013
(in thousands, except per share data)	Shares		WAGDFV2	Shares		WAGDFV2	Shares		WAGDFV2
Unvested shares at beginning of year	9	$	54.16	24	$	51.68	27	$	41.52
Granted	-	$	-	-	$	-	12	$	56.44
Vested	(6)	$	53.03	(14)	$	49.71	(15)	$	37.20
Forfeited	-	$	-	(1)	$	53.99	-	$	-
Unvested shares at end of year	3	$	57.01	9	$	54.16	24	$	51.68
2 Weighted Average Grant Date Fair Value

Restricted stock unit activity for fiscal years 2015, 2014 and 2013 was as follows:



	2015			2014			2013
(in thousands, except per share data)	Shares		WAGDFV3	Shares		WAGDFV3	Shares		WAGDFV3
Outstanding at beginning of year	98	$	60.51	38	$	40.91	62	$	38.90
Granted	74	$	65.93	88	$	63.86	3	$	55.38
Vested	(47)	$	57.68	(17)	$	41.01	(26)	$	37.61
Forfeited	(6)	$	67.96	(11)	$	50.10	(1)	$	40.79
Outstanding at end of year	119	$	64.77	98	$	60.51	38	$	40.91
3 Weighted Average Grant Date Fair Value

Prior to the fiscal year ended September 28, 2013, our historical practice was to grant an annual Company-wide award of restricted stock units to officers and employees in July. The timing of the Company-wide award was changed from July to December so that the grants would align with a review of individual and Company performance. As a consequence of this timing shift, the only restricted stock units granted during the fiscal year 2013 were related to inducement grants for a new officer as well as other new employees.

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 2015 with the combined issuance of 16 shares at a weighted average price of $58.96. In fiscal years 2014 and 2013, purchases were 16 shares and 20 shares, respectively, with weighted average share prices of $53.01 and $37.68, respectively.