13. EMPLOYEE STOCK PLANS

Employee Stock Plans

During fiscal year 1991, VMS adopted the stockholder-approved Omnibus Stock Plan (the “Omnibus Plan”) under which shares of common stock could be issued to officers, directors, key employees and consultants. The Omnibus Plan was amended and restated as of the Spin-offs. The maximum number of shares that could have been issued was limited to 20,000,000 shares. Stock options granted under the Omnibus Plan have an exercise price equal to the closing market price of the underlying stock on the grant date (unless the stock market was closed on the grant date, in which case the exercise price was equal to the average of the highest and lowest quoted selling prices on the stock market on the day before and the day after the grant date) and expire no later than ten years from the grant date. Options granted under the Omnibus Plan before November 2000 were generally exercisable in cumulative installments of one third each year, commencing one year following the date of grant. Options granted after November 2000 were exercisable in the following manner: the first one-third one year from the date of grant, with the remainder vesting monthly during the following two-year period. No further awards may be made under the Omnibus Plan.

In November 2000, VMS adopted the 2000 Stock Option Plan (the “2000 Plan”), which was intended to supplement the Omnibus Plan. The maximum number of shares that could have been issued was limited to 12,000,000 shares. The 2000 Plan is similar to the Omnibus Plan in all material respects, with the exception that shares available for awards under the 2000 Plan could not be issued to directors or officers of VMS. Stock options granted under the 2000 Plan are exercisable for the first one-third of the option shares one year from the date of grant, with the remainder vesting monthly during the following two-year period. Other terms of the 2000 Plan mirror the Omnibus Plan. No further awards may be made under the 2000 Plan.

In February 2005, VMS’s stockholders approved the 2005 Omnibus Stock Plan (the “2005 Plan”), which was last amended and restated in February 2012. The 2005 Plan, as amended and restated to date, is referred to as the “Third Amended 2005 Plan.” The Third Amended 2005 Plan provides for the grant of equity incentive awards, including stock options, restricted stock, stock appreciation rights, performance units, restricted stock units and performance shares to officers, directors, key employees and consultants. The Third Amended 2005 Plan also provides for the grant of deferred stock units to non-employee directors. The maximum number of shares issuable under the Third Amended 2005 Plan is (a) 24,950,000, plus (b) the number of shares authorized for issuance, but never issued, under the Omnibus Plan and the 2000 Plan, plus (c) the number of shares subject to awards previously granted under the Omnibus Plan and 2000 Plan that terminate, expire, or lapse, plus (d) amounts granted in substitution of options in connection with certain transactions.

For purposes of the total number of shares available for grant under the Third Amended 2005 Plan, any shares subject to awards of stock options or stock appreciation rights are counted against the available-for-grant limit as one share for every one share subject to the award. Awards other than stock options and stock appreciation rights are counted against the available-for-grant limit as three shares for every one share awarded before February 16, 2007, as 2.5 shares for every one share awarded between February 16, 2007 and February 8, 2012 and as 2.6 shares for every one share awarded on or after February 9, 2012. All awards may be subject to restrictions on transferability and continued employment as determined by the Compensation and Management Development Committee.

Stock options granted under the Third Amended 2005 Plan generally have an exercise price equal to the closing market price of a share of VMS common stock on the grant date. Except for directors, stock options granted under the Third Amended 2005 Plan generally are exercisable in the following manner: the first one-third one year from the date of grant, with the remainder vesting monthly during the following two-year period. Stock option grants to directors are immediately exercisable. For grants of non-qualified stock options made on or after November 17, 2005 under the Third Amended 2005 Plan to employees who retire from the Company within one year of the grant date, the number of shares subject to the stock option shall be adjusted proportionally by the time during such one-year period that the employee remained an employee of the Company (based upon a 365 day year). The revised number of shares subject to the stock option would continue to vest in accordance with the original vesting schedule, and the remaining shares would be cancelled as of the date of retirement. Under the Third Amended 2005 Plan, stock options granted on or prior to February 16, 2007 generally have a term of ten years and stock options granted after February 16, 2007 generally have a term of seven years. The Third Amended 2005 Plan prohibits the repricing of stock options and stock appreciation rights without the approval of VMS’s stockholders.

Restricted stock awards and restricted stock unit awards generally vest over a period of one to five years from the date of grant. For awards of restricted stock and restricted stock units prior to fiscal year 2010, any unvested awards are generally forfeited at the time of termination. However, restricted stock units granted in fiscal year 2010 and thereafter that are unvested at death become fully vested and unvested restricted stock units will generally continue to vest in accordance with the original vesting schedule if an employee retires one year or more from grant date. If an employee retires within one year of the grant date, the number of restricted stock units shall be adjusted proportionally by the time during such one year period that the employee remained an employee of the Company (based upon a 365 day year). The revised number of restricted stock units would vest in accordance with the original vesting schedule and the remaining restricted stock units would be cancelled as of the date of retirement.

Deferred stock unit awards to non-employee directors vest over a period of not less than one year from the date of grant, unless otherwise provided in the grant agreement as determined by VMS’s Board of Directors, and vesting may be pro rata during the vesting period. Each deferred stock unit is deemed to be the equivalent of one share of VMS common stock. Payment of deferred stock units generally will be made in shares of VMS common stock upon the earlier of the third anniversary of the grant date or the director’s termination.

In fiscal year 2012, the Company granted performance units to certain employees under the Third Amended 2005 Plan (before and after its amendment and restatement). The number of shares of VMS common stock ultimately issued under the performance units at the end of a three-year performance period will depend on the Company’s business performance during the three-year period against specified performance targets set by the Compensation and Management Development Committee of the Board of Directors at the beginning of the period. Any unvested performance unit awards are generally forfeited at the time of termination, except in the case of death, in which case the employee is considered to have been continuously employed through the last day of the performance period. Also, similar to the adjustments discussed above for restricted stock unit awards, the number of performance units that ultimately vest is adjusted in the case of retirement.

The fair value of options granted and the option component of the shares purchased under the Employee Stock Purchase Plan (which is described further below) shares were estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:


	Employee Stock Plans									Employee Stock Purchase Plan
	Fiscal Years									Fiscal Years
	2012			2011			2010			2012			2011			2010(1)
Expected term (in years)		4.64			4.75			4.72			0.50			0.50			—
Risk-free interest rate		0.8	%		2.0	%		2.0	%		0.1	%		0.1	%		—
Expected volatility		36.9	%		35.5	%		37.3	%		19.3	%		14.0	%		—
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		—
Weighted average fair value at grant date	$	18.75		$	23.26		$	18.17		$	12.17		$	12.61			—

(1)	No purchases were made under an employee stock purchase plan in fiscal year 2010.

The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. The expected term is based on the observed and expected time to post-vesting exercise and post-vesting cancellations of stock options by Company employees. The Company determined the expected term of stock options based on the demographic grouping of employees and retirement eligibility. The Company used a combination of historical and implied volatility, or blended volatility, in deriving the expected volatility assumption. Blended volatility represents the weighted average of implied volatility and historical volatility. Implied volatility was derived based on traded options on VMS common stock. Implied volatility is weighted in the calculation of blended volatility based on the ratio of the term of the exchange-traded options to the expected terms of the employee stock options. Historical volatility represents the remainder of the weighting. The decision to incorporate implied volatility was based on the Company’s assessment that implied volatility of publicly traded options on VMS common stock is reflective of market conditions and is generally reflective of both historical volatility and expectations of how future volatility will differ from historical volatility. In determining the extent of use of implied volatility, the Company considered: (i) the volume of market activity of traded options; (ii) the ability to reasonably match the input variables of traded options to those of stock options granted by the Company, including the date of grant; (iii) the similarity of the exercise prices; and (iv) the length of term of traded options. After considering the above factors, the Company determined that it cannot rely exclusively on implied volatility based on the fact that the term of VMS exchange-traded options is less than one year and that it is different from the expected terms of the stock options granted by the Company. Therefore, the Company believes a combination of the historical volatility over the expected terms of the stock options granted by the Company and the implied volatility of exchange-traded options best reflects the expected volatility of VMS common stock. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of VMS’s stock options. The dividend yield assumption is based on the Company’s history and expectation of no dividend payouts.

As share-based compensation expense recognized in the Consolidated Statements of Earnings is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. In fiscal years 2012, 2011 and 2010, the Company adjusted share-based compensation expense based on its actual forfeitures.

The table below summarizes the effect of recording share-based compensation expense:


	Fiscal Years
(In thousands, except per share amounts)	2012			2011			2010
Cost of revenues—Product	$	4,419		$	3,917		$	3,680
Cost of revenues—Service contracts and other		1,472			1,977			2,475
Research and development		6,378			5,467			4,931
Selling, general and administrative		35,606			30,657			28,727
Taxes on earnings		(15,406	)		(14,063	)		(14,373	)

Net decrease in net earnings	$	32,469		$	27,955		$	25,440

Increase (decrease) on:
Cash flows from operating activities	$	(8,929	)	$	(22,570	)	$	(15,072	)
Cash flows from financing activities	$	8,929		$	22,570		$	15,072

During fiscal years 2012, 2011 and 2010, total share-based compensation expense recognized in earnings before taxes was $47.9 million, $42.0 million and $39.8 million, respectively, and the total related recognized tax benefit was $15.4 million, $14.1 million and $14.4 million, respectively. Total share-based compensation expense capitalized as part of inventory as of September 28, 2012, September 30, 2011 and October 1, 2010 was $3.2 million, $2.9 million and $0.4 million, respectively.

Activity under the Company’s employee stock plans is presented below:


	Shares Available for Grant			Options Outstanding
(In thousands, except per share amounts)	Shares Available for Grant			Number of Shares			Weighted Average Exercise Price
Balance at October 2, 2009 (10,140 options exercisable at a weighted average exercise price of $40.18)		5,352			11,853		$	40.59
Authorized		5,500			0			0.00
Granted(1)		(2,661	)		1,113			52.59
Canceled, expired or forfeited(2)		216			(141	)		51.13
Exercised		0			(2,651	)		31.85

Balance at October 1, 2010 (8,449 options exercisable at a weighted average exercise price of $43.16)		8,407			10,174			44.03
Granted(1)		(108	)		48			69.67
Canceled, expired or forfeited(2)		125			(46	)		48.64
Exercised		0			(3,259	)		40.38

Balance at September 30, 2011 (6,188 options exercisable at a weighted average exercise price of $45.42)		8,424			6,917			45.90
Authorized		6,000			0			0.00
Granted(1)		(2,680	)		743			58.50
Canceled, expired or forfeited(2)		124			(30	)		55.73
Exercised		0			(1,171	)		40.18

Balance at September 28, 2012		11,868			6,459		$	48.34

(1)

The difference between the number of shares granted listed in the column headed “Shares Available for Grant” and the number of shares granted listed in the column headed “Options Outstanding—Number of Shares” represents the awards of deferred stock units, restricted stock units, shares of restricted common stock and performance units. Awards other than stock options set forth in the table were counted against the shares available for grant limit of the Third Amended 2005 Plan as 2.5 shares for every one share awarded before February 9, 2012 and were counted against the shares available for grant limit as 2.6 shares for every one awarded on or after February 9, 2012. In addition, the shares available for grant limit was further adjusted to reflect a maximum payout of 1.5 shares that could be issued for each performance unit granted.

(2)

The difference between the number of cancelled or expired shares listed in the column headed “Shares Available for Grant” and the number of cancelled or expired shares listed in the column headed “Options Outstanding—Number of Shares” represents the cancellation of shares of restricted common stock and restricted stock units due to employee terminations.

For fiscal year 2012, the total pre-tax intrinsic value of options exercised was $29.8 million. The following table summarizes information related to options outstanding and exercisable under the Company’s employee stock plans at September 28, 2012:


	Options Outstanding								Options Exercisable
Range of Exercise Prices	Number of Shares		Weighted Average Remaining Contractual Term (in years)		Weighted Average Exercise Price		Aggregate Intrinsic Value (1)		Number of Shares		Weighted Average Remaining Contractual Term (in years)		Weighted Average Exercise Price		Aggregate Intrinsic Value (1)
(In thousands, except years and per-share amounts)
$21.50 – $29.19		115		0.2	$	24.60	$	4,105		115		0.2	$	24.60	$	4,105
$32.10 – $39.85		1,584		2.4		37.27		36,517		1,584		2.4		37.27		36,517
$40.21 – $52.07		2,316		3.6		50.11		23,647		2,315		3.6		50.11		23,638
$52.08 – $72.19		2,444		4.4		54.94		13,871		1,526		3.6		53.74		10,607

Total		6,459		3.5	$	48.34	$	78,140		5,540		3.2	$	46.91	$	74,867

(1)

The aggregate intrinsic value represents the total pre-tax intrinsic value, which is computed based on the difference between the exercise price and the closing price of VMS common stock of $60.32 as of September 28, 2012, the last trading date of fiscal year 2012, and which represents the amount that would have been received by the option holders had all option holders exercised their options and sold the shares received upon exercise as of that date.

As of September 28, 2012, there was $9.1 million of total unrecognized compensation expense related to stock options granted under the Company’s employee stock plans. This unrecognized compensation expense is expected to be recognized over a weighted average period of 1.6 years.

The activity for restricted stock, restricted stock units, deferred stock units and performance units is summarized as follows:


(In thousands, except per share amounts)	Shares			Weighted Average Grant-Date Fair Value
Balance at October 2, 2009		1,172		$	42.89
Granted		619			52.72
Vested		(438	)		44.53
Cancelled or expired		(20	)		43.27

Balance at October 1, 2010		1,333		$	46.91
Granted		24			68.67
Vested		(590	)		47.27
Cancelled or expired		(32	)		46.59

Balance at September 30, 2011		735		$	47.36
Granted		716			59.06
Vested		(469	)		44.68
Cancelled or expired		(37	)		53.94

Balance at September 28, 2012		945		$	57.30

Share-based compensation expense for restricted common stock, restricted stock units and deferred stock units is measured at the stock’s fair value on the date of grant and is amortized over each award’s respective vesting period. The Company values performance units using the Monte Carlo simulation model on the date of grant with assumptions that includes the historical volatilities of shares of VMS common stock, as well as the shares of common stock of peer companies. In addition, the Company estimates the probability that certain performance conditions that affect the vesting of performance units will be achieved, and recognizes expense only for those awards expected to vest.

For fiscal years 2012, 2011 and 2010, the Company recognized total share-based compensation expense related to restricted stock and restricted stock units of $26.8 million, $25.0 million and $24.8 million, respectively. The Company recognized $0.7 million of share-based compensation expense related to deferred stock units in each of fiscal years 2012, 2011 and 2010. In addition, the Company recognized $4.1 million of share-based compensation expense related to performance units in fiscal year 2012.

As of September 28, 2012, unrecognized compensation expense totaling $28.2 million was related to restricted stock, restricted stock units, deferred stock units and performance units granted under the Company’s employee stock plans. This unrecognized share-based compensation expense is expected to be recognized over a weighted average period of 1.9 years. The 469,078 shares that vested in fiscal year 2012 represented deferred stock units, restricted stock units and restricted common stock, and the total fair value of these shares upon vesting was $29.4 million. The Company withheld 161,859 shares (fair value of approximately $10.1 million) for employees’ minimum withholding taxes at vesting of such awards in fiscal year 2012.

Because amounts related to employee stock plans of Research Instruments, which is classified as a discontinued operation, were not material for any period presented, the Company has not segregated them from continuing operations in this note. See Note 19, “Discontinued Operations” for a detailed discussion.

Employee Stock Purchase Plan

VMS had an Employee Stock Purchase Plan (the “Prior ESPP”) under which VMS common stock could be issued to substantially all employees in the United States. In May 2009, as part of a broader set of cost control initiatives, VMS’s Board of Directors authorized the suspension of purchases under the Prior ESPP beginning in October 2009. In February 2010, VMS’s stockholders approved the 2010 Employee Stock Purchase Plan (the “2010 ESPP”). The 2010 ESPP, like the Prior ESPP, provides eligible employees with an opportunity to purchase shares of VMS common stock at 85% of the lower of its fair market value at the start and end of a six-month purchase period. The 2010 ESPP provides for the purchase of up to 7 million shares of VMS common stock (including shares that were available for purchase under the Prior ESPP as of February 11, 2010, the date the 2010 ESPP became effective). Once the 2010 ESPP became effective, purchases could no longer be made under the Prior ESPP.

VMS issued approximately 262,660 shares for $13.3 million in fiscal year 2012 and 114,000 shares for $6.1 million in fiscal year 2011. No shares were issued in fiscal year 2010. At September 28, 2012, 6.6 million shares were available for issuance under the 2010 ESPP.