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, 2017 the remaining number of shares available for issuance under the 2009 Plan is 1,754,003.

The company issues various awards under the 2009 Plan. 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’s stock 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 restricted stock transactions for fiscal year 2017:

															Performance-Based
										Time-Based Unvested					Unvested Contingent
	Stock Options Outstanding									Restricted Stock					Restricted Stock
						Weighted
						Average
				Weighted		Remaining							Weighted		Number			Weighted
	Number			Average		Contractual		Aggregate		Number			Average		of			Average
	of			Exercise		Term		Intrinsic		of Shares/			Grant Date		Shares/			Grant Date
(Amounts in thousands, except share and per share data)	Shares			Price		(years)		Value		Units			Fair Value		Units (1)			Fair Value
Outstanding at July 31, 2016		217,905		$	69.06		4.15	$	3,265		133,560		$	78.98		167,114		$	90.33
Granted		-			-						92,613			88.13		93,260			87.46
Exercised		(119,661	)		69.52						-			-		-			-
Vesting of restricted stock		-			-						(72,246	)		75.69		(24,205	)		115.59
Cancelled (forfeited and expired)		(26,395	)		72.90						(56,486	)		85.88		(40,650	)		80.55
Outstanding at July 31, 2017		71,849		$	66.87		3.13	$	480		97,441		$	86.11		195,519		$	87.86
Options vested or expected to vest at July 31, 2017 (2)		71,779			66.86		3.13	$	480
Options exercisable at July 31, 2017		64,604		$	66.40		3.02	$	480

(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, 2017, the maximum number of performance-based unvested RSU’s available to be earned is 343,020.

(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)	2017			2016			2015
Cost of product sales	$	0.3		$	0.5		$	0.7
Cost of engineering sales		0.1			0.1			0.2
Research and product development		1.7			2.3			2.7
Selling and marketing		1.3			1.6			1.4
General and administrative		6.0			4.3			5.9
Total share-based compensation expense before tax		9.4			8.8			10.9
Income tax effect		(2.7	)		(3.0	)		(3.2	)
Share-based compensation expense included in net income	$	6.7		$	5.8		$	7.7

As of July 31, 2017, the unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options and restricted stock was $6.0 million. This cost will be recognized over an estimated weighted average amortization period of 1.0 year 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 during fiscal years 2017 and 2016.

The total intrinsic value of options exercised during fiscal years 2017, 2016, and 2015, was $2.2 million, $0.9 million, and $4.3 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 options was $8.3 million, $4.2 million, and $7.3 million, respectively.

The actual tax benefit realized for the tax deductions from option exercises was less than $0.1 million for fiscal years 2017, 2016 and 2015.

Restricted stock and restricted stock units

We estimate the fair value of time based 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 28,749, 24,821, and 28,455 TSR and 62,626, 32,444, and 36,641 non-GAAP EPS awards during fiscal years 2017, 2016, and 2015, 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,
	2017			2016			2015
Stock price (1)	$	89.88		$	84.06		$	71.33
Expected volatility (2)		27.00	%		26.40	%		29.3	%
Risk-free interest rate (3)		0.85	%		1.04	%		1.00	%
Expected annual dividend yield (4)		0.00	%		0.00	%		0.00	%
Weighted average grant date fair value of time-based restricted stock awards	$	88.13		$	82.63		$	73.23
Weighted average grant date fair value of performance based restricted stock awards	$	86.88		$	98.81		$	78.62

(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 2017, 2016, and 2015 was $7.5 million, $8.2 million and $9.8 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 2017, 2016 and 2015, the compensation expense from ESPP shares was immaterial.