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 net share-based compensation expense recognized for employee stock awards and for the option component of the employee stock purchase plan shares:

	Three Months Ended
(In thousands, except per share amounts)	December 27, 2013			December 28, 2012
Cost of revenues – Product	$	707		$	1,111
Cost of revenues – Service		947			363
Research and development		1,301			1,739
Selling, general and administrative		6,089			6,950
Taxes on earnings		(2,798	)		(3,169	)
Net share-based compensation expense	$	6,246		$	6,994

During the three months ended December 27, 2013, total share-based compensation expense recognized in earnings before taxes was $9.0 million and the total related recognized tax benefit was $2.8 million. During the three months ended December 28, 2012, total share-based compensation expense recognized in earnings before taxes was $10.2 million, respectively, and the total related recognized tax benefit was $3.2 million.

During the three months ended December 27, 2013, the Company granted performance units to certain employees under the Third Amended 2005 Plan. 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
	December 27, 2013			December 28, 2012
Employee Stock Option Plans
Expected term (in years)		4.87			4.76
Risk-free interest rate		1.3	%		0.6	%
Expected volatility		27.2	%		32.4	%
Expected dividend		0.0	%		0.0	%
Weighted average fair value at grant date	$	19.44		$	19.76

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:

	Three Months Ended
	December 27, 2013			December 28, 2012
Employee Stock Purchase Plan
Expected term (in years)		0.50			0.50
Risk-free interest rate		0.1	%		0.2	%
Expected volatility		14.5	%		19.3	%
Expected dividend		0.0	%		0.0	%
Weighted average fair value at grant date	$	13.98		$	13.45

A summary of share-based awards available for grant is as follows:

(In thousands, except per share amounts)	Shares Available for Grant
Balance at September 27, 2013		9,925
Granted		(310	)
Cancelled or expired		24
Balance at December 27, 2013		9,639

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.

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

	Options Outstanding
(In thousands, except per share amounts)	Number of Shares			Weighted Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value ⁽¹⁾
Balance at September 27, 2013		4,485		$	53.02
Granted		11			74.28
Cancelled or expired		(6	)		65.76
Exercised		(489	)		47.92
Balance at December 27, 2013		4,001		$	53.68		3.0	$	92,915
Exercisable at December 27, 2013		3,419		$	51.71		2.6	$	86,142

(1) 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 $76.91 as of December 27, 2013, that last trading date of the first quarter of fiscal year 2014, 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 December 27, 2013, there was $7.7 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 1.5 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 27, 2013		1,035		$	64.36
Granted		81			76.91
Vested		(312	)		62.73
Cancelled or expired		(7	)		64.70
Balance at December 27, 2013		797		$	66.30

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 service 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.

As of December 27, 2013, unrecognized compensation expense totaling $31.0 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 1.9 years.