2. Share-based compensation expense

On January 29, 2010, our stockholders approved the “2009 Stock Incentive Plan”, or 2009 Plan, which provided for the issuance of up to 1,600,000 shares of common stock. Stockholders approved amendments to the 2009 Plan on January 23, 2012 and January 21, 2014 which increased the number of shares available for issuance under the 2009 Plan to 2,200,000 and 4,453,518, respectively. As of July 31, 2016 the remaining number of shares available for issuance under the 2009 Plan is 2,828,781.

The 2009 Plan includes a number of different types of awards. Non-GAAP EPS performance-based (non-GAAP EPS) awards are performance based restricted stock unit (RSU) awards issued to executive officers and other high level management employees of Analogic. Non-GAAP EPS awards align compensation with the performance of our non-GAAP earnings per share. Total shareholder return performance-based (TSR) awards are performance based RSU awards issued to executive officers and other high level management employees of Analogic. TSR awards align compensation with the performance of Analogic’s stock as compared to the stock performance of its peer group. Time based RSU awards are stock awards issued to Analogic employees and Board Members. Time based RSU’s are not aligned with performance measures and generally vest over a 3 year period of time. Stock options have been granted to executive officers and employees of Analogic to give them the right to purchase stock at a set price when vested.

Share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period, net of forfeitures. The following table sets forth the stock option and RSU transactions for fiscal year 2016:


(Amounts in thousands, except share and per share data)	Stock Options Outstanding									Time-Based Unvested Restricted RSUs					Performance-Based Unvested Contingent Restricted RSUs
	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value		Number of Shares/ Units			Weighted Average Grant Date Fair Value		Number of Shares/ Units (1)			Weighted Average Grant Date Fair Value
Outstanding at July 31, 2015		286,298		$	68.93		5.01	$	3,332		128,062		$	74.06		158,947		$	85.98
Granted		—			—						100,341			82.63		57,265			98.81
Exercised		(61,384	)		68.00						—			—		—			—
Vesting of restricted stock		—			—						(80,393	)		75.97		(18,984	)		95.89
Cancelled (forfeited and expired)		(7,009	)		73.11						(14,450	)		77.43		(30,114	)		80.00

Outstanding at July 31, 2016		217,905		$	69.06		4.15	$	3,265		133,560		$	78.98		167,114		$	90.33
Options vested or expected to vest at July 31, 2016 (2)		215,696			69.03		4.15	$	3,237
Options exercisable at July 31, 2016		148,022		$	67.03		3.87	$	2,517

(1)	The performance-based unvested RSU’s are shown in this table at target, except for the number of shares vested, which reflect the shares earned. As of July 31, 2016, the maximum number of performance-based unvested RSU’s available to be earned is 334,228.

(2)	In addition to the vested options, we expect a portion of the unvested options to vest at some point in the future. Stock options expected to vest are calculated by applying an estimated forfeiture rate to the unvested options.

The following table presents share-based compensation expense included in our Consolidated Statements of Operations:


	For the Year ended July 31,
(in millions)	2016			2015			2014
Cost of product sales	$	0.5		$	0.7		$	0.7
Cost of engineering sales		0.1			0.2			0.4
Research and product development		2.3			2.7			2.8
Selling and marketing		1.6			1.4			1.2
General and administrative		4.3			5.9			6.4

Total share-based compensation expense before tax		8.8			10.9			11.5
Income tax effect		(3.0	)		(3.2	)		(3.5	)

Share-based compensation expense included in net income	$	5.8		$	7.7		$	8.0

As of July 31, 2016, the unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options, time based RSU’s and performance based RSU’s was $9.1 million. This cost will be recognized over an estimated weighted average amortization period of 1.0 years and assumes target performance for the non-GAAP EPS RSU’s.

Stock options

We estimate the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the grant date fair values of stock options include the exercise price of the award, the expected option term, the expected volatility of our stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and our expected annual dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards. No stock options were granted for FY 2016. The fair values of option grants were estimated on the grant date using the following assumptions for fiscal years 2015 and 2014:


	For the Year ended July 31,
	2015			2014
Expected option term in years (1)		5.31			5.37
Expected volatility (2)		29.3	%		38.6	%
Risk-free interest rate (3)		1.82	%		1.77	%
Expected annual dividend yield (4)		0.56	%		0.52	%
Weighted average grant date fair value	$	19.95		$	27.55

(1)	The expected option term was estimated using historical data.

(2)	The expected volatility for each grant is determined based on the review of the average of historical daily price changes of our common stock over the expected option term.

(3)	The risk-free interest rate is determined based on the yield of zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption.

(4)	The expected annual dividend yield is calculated by dividing the expected annual dividends by the stock price on the date of grant.

The total intrinsic value stock options exercised during fiscal years 2016, 2015, and 2014, was $0.9 million, $4.3 million, and $1.9 million, respectively, with intrinsic value defined as the difference between the market price on the date of exercise and the grant date exercise price. The total amount of cash received from the exercise of these stock options was $4.2 million, $7.3 million, and $4.9 million, respectively.

The actual tax benefit realized for the tax deductions from option exercises was less than $0.1 million for fiscal years 2016, 2015 and 2014.

Restricted stock and restricted stock units

We estimate the fair value of RSU’s that vest based on service conditions using the quoted closing price of our common stock on the date of grant. Share-based compensation expense is amortized over each award’s vesting period on a straight-line basis for all awards with service and performance conditions that vest at the end of the performance cycle, while the accelerated method applies to other awards with both service and performance conditions.

For our non-GAAP EPS, awards, the compensation cost is amortized over the performance period on a straight-line basis, net of forfeitures, because such awards vest only at the end of the performance period. The compensation cost is based on the number of shares that are deemed probable of vesting at the end of the three-year performance cycle. This probability assessment is done each quarter and changes in estimates can result in significant expense fluctuations due to the cumulative catch-up adjustment. We estimate the fair value of the non-GAAP EPS awards using the quoted closing price of our common stock on the date of grant.

For our TSR, awards, the compensation cost is amortized over the performance period on a straight-line basis net of forfeitures, because the awards vest only at the end of the measurement period and the probability of actual shares expected to be earned is considered in the grant date valuation. As a result, the expense is not adjusted to reflect the actual shares earned. We estimate the fair value of the TSR awards using the Monte-Carlo simulation model.

We granted 24,821, 28,455, and 27,450 TSR awards and 32,444, 36,641, and 35,686 non-GAAP EPS awards during fiscal years 2016, 2015, and 2014, respectively. The fair value of our TSR awards at the date of grant was estimated using the Monte-Carlo simulation model with the following assumptions:


	For the Year ended July 31,
	2016			2015			2014
Stock price (1)	$	84.06		$	71.33		$	77.14
Expected volatility (2)		26.4	%		29.3	%		27.6	%
Risk-free interest rate (3)		1.04	%		1.00	%		0.82	%
Expected annual dividend yield (4)		0.00	%		0.00	%		0.00	%
Weighted average grant date fair value of time-based restricted stock awards	$	82.63		$	73.23		$	82.46
Weighted average grant date fair value of performance based restricted stock awards	$	98.81		$	78.62		$	93.85

(1)	The stock price is the closing price of our common stock on the date of grant.

(2)	The expected volatility for each grant is determined based on the historical volatility for the peer group companies and our common stock over a period equal to the remaining term of the performance period from the date of grant for all awards.

(3)	The risk-free interest rate is determined based on the yield of zero-coupon U.S. Treasury securities for a period that is commensurate with the performance period.

(4)	Dividends are considered reinvested when calculating TSR. The dividend yield is therefore considered to be 0%.

The total fair value of RSU’s that vested during fiscal years 2016, 2015, and 2014 was $8.2 million, $9.8 million and $24.9 million, respectively.

Employee Stock Purchase Plan

On November 4, 1985, our stockholders approved the Employee Stock Purchase Plan, or ESPP, authorizing the issuances of up to 700,000 shares of our common stock. The ESPP allows qualified participants to purchase our common stock at 85% of its market price on the first business day of the purchase period or the last business day of the six-month purchase period. Stockholders approved amendments to the ESPP on January 22, 1986, January 23, 1998, and January 17, 2003. On January 21, 2014, our stockholders approved amendments to the ESPP which removed the income limitation on participation in the plan and increased the maximum value of stock that each employee can purchase in each of the two payment periods per year.

We estimate the fair value of ESPP shares using the Black-Scholes valuation model. For the fiscal years 2016, 2015 and 2014, the compensation expense from ESPP shares was immaterial.