EMPLOYEE STOCK PLANS

In connection with the Distribution of Varex, on January 28, 2017, outstanding equity awards for current and former employees of the Company were modified using a conversion ratio designed to preserve the intrinsic value of these awards immediately prior to the Distribution. The modification of the Company's equity awards did not result in any additional fair value of the awards immediately before and after the modification, therefore no additional share-based compensation expense was required. The modification also did not change the original vesting terms of the equity awards immediately prior to the Distribution. The outstanding equity awards for the Company employees who were part of Varex were cancelled on January 27, 2017, and no new Company equity awards were granted to these employees.

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						Nine Months Ended
(In millions)	June 30, 2017			July 1, 2016			June 30, 2017			July 1, 2016
Cost of revenues - Product	$	0.7		$	0.7		$	2.3		$	2.4
Cost of revenues - Service	1.0			1.2			3.1			3.1
Research and development	1.3			1.4			3.9			4.0
Selling, general and administrative	6.1			7.4			21.4			22.1
Total share-based compensation expense	$	9.1		$	10.7		$	30.7		$	31.6
Income tax benefit for share-based compensation	$	(2.7	)	$	(3.3	)	$	(9.1	)	$	(9.6	)

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						Nine Months Ended
	June 30, 2017			July 1, 2016			June 30, 2017			July 1, 2016
Employee Stock Option Plans
Expected term (in years)	3.99			4.13			3.99			4.13
Risk-free interest rate	1.6		%	1.2		%	1.7		%	1.1		%
Expected volatility	17.6		%	20.5		%	21.3		%	20.1		%
Expected dividend	—		%	—		%	—		%	—		%
Weighted average fair value at grant date	$	15.93		$	15.29		$	16.11		$	13.71

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						Nine Months Ended
	June 30, 2017			July 1, 2016			June 30, 2017			July 1, 2016
Employee Stock Purchase Plan
Expected term (in years)	0.50			0.50			0.50			0.50
Risk-free interest rate	1.0		%	0.4		%	0.7		%	0.3		%
Expected volatility	18.2		%	18.3		%	20.3		%	17.6		%
Expected dividend	—		%	—		%	—		%	—		%
Weighted average fair value at grant date	$	18.42		$	16.60		$	18.92		$	16.09

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



(In millions)	Shares Available for Grant
Balance at September 30, 2016	4.6
Granted	(1.7	)
Cancelled or expired	0.3
Adjustment due to Distribution	(0.6	)
Balance at June 30, 2017	2.6

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 are counted against the available-for-grant limit as one share for every one share subject to the award. Awards other than stock options are counted against the available-for-grant limit as 2.6 shares for every one share awarded on or after February 9, 2012. The shares available for grant limit is further adjusted to reflect a maximum payout that could be issued for each performance unit granted. The maximum payouts that could be issued for each performance grant are 1.75 shares beginning in fiscal year 2016, 2.0 shares in fiscal year 2015 and 1.5 shares prior to fiscal year 2015. All awards may be subject to restrictions on transferability and continued employment as determined by the Compensation and Management Development Committee.

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



	Options Outstanding
(In millions, except per share amounts)	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Term (in years)	Aggregate Intrinsic Value (1)
Balance at September 30, 2016	2.6		$	74.69
Granted	0.6		82.09
Adjustment due to Distribution	0.3		70.15
Cancelled or expired	(0.4	)	69.86
Exercised	(0.6	)	65.82
Balance at June 30, 2017	2.5		$	73.23	4.8	$	75.4

Exercisable at June 30, 2017	1.3		$	70.16	3.7	$	43.3

⁽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 $103.19 as of June 30, 2017, the last trading date of the third quarter of fiscal year 2017, 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 June 30, 2017, there was $11.9 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 1.9 years.

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



(In millions, except per share amounts)	Number of Shares		Weighted Average Grant-Date Fair Value
Balance at September 30, 2016	1.0		$	73.10
Granted	0.4		81.32
Adjustment due to Distribution	0.1		74.18
Vested	(0.4	)	72.72
Cancelled or expired	(0.2	)	72.68
Balance at June 30, 2017	0.9		$	76.75

As of June 30, 2017, unrecognized compensation expense totaling $37.9 million was related to awards of 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.