13. EMPLOYEE STOCK PLANS

In February 2012, VMS’s stockholders approved an amendment of the Varian Medical Systems, Inc. 2005 Omnibus Stock Plan and its restatement as the Third Amended and Restated 2005 Omnibus Stock Plan (the “Third Amended 2005 Plan”) to (i) increase the number of shares available for grant under the plan by 6,000,000 shares, (ii) change the number of shares counted against the available-for-grant limit from 2.5 shares to 2.6 shares for every one share issued in connection with awards other than stock options and stock appreciation rights on a go-forward basis and (iii) extend the term of the Third Amended 2005 Plan until November 11, 2021.

The table below summarizes the share-based compensation expense recognized for employee stock awards and for the option component of the employee stock purchase plan shares:


	Three Months Ended						Six Months Ended
(In thousands, except per share amounts)	March 29, 2013			March 30, 2012			March 29, 2013			March 30, 2012
Cost of revenues—Product	$	1,274		$	1,247		$	2,385		$	2,244
Cost of revenues—Service contracts and other		1,098			405			1,461			867
Research and development		1,487			1,727			3,226			3,259
Selling, general and administrative		9,369			11,259			16,319			18,769
Taxes on earnings		(4,009	)		(4,707	)		(7,178	)		(8,048	)

Net decrease in net earnings	$	9,219		$	9,931		$	16,213		$	17,091

During the three and six months ended March 29, 2013, total share-based compensation expense recognized in earnings before taxes was $13.2 million and $23.4 million, respectively, and the total related recognized tax benefit was $4.0 million and $7.2 million, respectively. During the three and six months ended March 30, 2012, total share-based compensation expense recognized in earnings before taxes was $14.6 million and $25.1 million, respectively, and the total related recognized tax benefit was $4.7 million and $8.0 million, respectively.

Total share-based compensation expense capitalized as part of inventory for the three and six months ended March 29, 2013 was $0.6 million and $1.5 million, respectively. Total share-based compensation expense capitalized as part of inventory for the three and six months ended March 30, 2012 was $0.9 million and $1.7 million, respectively.

During the six months ended March 29, 2013, 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. Subject to certain exceptions, any unvested performance unit awards are generally forfeited at the time of termination.

The fair value of options granted was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:


	Three Months Ended						Six Months Ended
	March 29, 2013			March 30, 2012			March 29, 2013			March 30, 2012
Employee Stock Option Plans
Expected term (in years)		4.77			4.77			4.76			4.64
Risk-free interest rate		0.8	%		0.8	%		0.6	%		0.8	%
Expected volatility		30.9	%		35.3	%		32.3	%		36.9	%
Expected dividend		—			—			—			—
Weighted average fair value at grant date	$	19.56		$	20.19		$	19.74		$	18.75

The option component of employee stock purchase plan shares was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:


	Six Months Ended
	March 29, 2013			March 30, 2012
Employee Stock Purchase Plan
Expected term (in years)		0.50			0.50
Risk-free interest rate		0.1	%		0.1	%
Expected volatility		19.3	%		21.9	%
Expected dividend		—			—
Weighted average fair value at grant date	$	13.65		$	12.49

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


				Options Outstanding
(In thousands, except per share amounts)	Shares Available for Grant			Number of Shares			Weighted Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (3)
Balance at September 28, 2012		11,868			6,459		$	48.34
Authorized		—			—			—
Granted ⁽¹⁾		(2,004	)		605			68.93
Cancelled or expired ⁽²⁾		29			(3	)		56.23
Exercised		—			(1,749	)		45.01

Balance at March 29, 2013		9,893			5,312		$	51.77		3.5	$	107,460

Exercisable at March 29, 2013					4,299		$	48.91		2.9	$	99,244

(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 and performance units. Deferred stock unit, restricted stock unit and performance unit awards were counted against the shares available for grant limit as 2.5 shares for every one 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.

(3) The aggregate intrinsic value represents the total pre-tax intrinsic value of options, which is computed based on the difference between the exercise price and VMS’s closing common stock price of $72 as of March 28, 2013, that last trading date of the second quarter of fiscal year 2013, and which would have been received by the option holders had all option holders exercised and sold their options as of that date.

As of March 29, 2013, there was $14.2 million of total unrecognized compensation expense related to outstanding stock options. This unrecognized compensation expense is expected to be recognized over a weighted average period of 1.9 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 September 28, 2012		945		$	57.30
Granted		504			70.36
Vested		(203	)		57.60
Cancelled or expired		(11	)		60.10

Balance at March 29, 2013		1,235		$	62.55

The fair value of restricted stock and restricted stock unit awards is estimated using the value of the Company’s common stock on the date of grant. The fair value of market-based performance units is estimated using a Monte Carlo simulation model on the date of grant. As of March 29, 2013, unrecognized compensation expense totaling $46.0 million was related to awards of restricted stocks, restricted stock units, deferred stock units and performance units. This unrecognized compensation expense is expected to be recognized over a weighted average period of 2.1 years.