Share-Based Compensation

Share-Based Plans. The Company has a share-based compensation program that provides its Board of Directors with broad discretion in creating equity incentives for employees, officers, non-employee board members and non-employee service providers. This program includes incentive and non-statutory stock option awards, stock appreciation right awards, restricted stock awards, performance-based cash bonus awards for Section 16 executive officers and an automatic grant program for non-employee board members pursuant to which such individuals will receive option grants or other stock awards at designated intervals over their period of board service. These awards are granted under various plans, all of which are stockholder approved. Stock option awards generally vest as follows: 25% of the shares vest on the first anniversary of the vesting commencement date and the remaining 75% vest proportionately each quarter over the next 12 quarters of continued service. Restricted stock awards generally vest in equal annual installments over a 4-year period. Initial grants to non-employee board members under the automatic grant program vest over a 4-year period and subsequent grants to non-employee board members vest over a 1-year period in accordance with the specific vesting provisions set forth in that program. Additionally, the Company has an Employee Stock Purchase Plan (“ESPP”) that allows employees to purchase shares of common stock at 85% of the fair market value at the subscription date or the date of purchase, whichever is lower.

Pliant Technology, Inc. 2007 Stock Plan. The Pliant Technology, Inc. 2007 Stock Plan was assumed pursuant to the Company’s acquisition of Pliant on May 24, 2011, and no further grants were made under this plan after that date. Unvested stock options that were outstanding under this plan on May 24, 2011 were assumed by the Company and will continue to be governed by the existing terms of the plan and may be exercised for shares of the Company’s common stock at any time prior to the expiration of the ten-year option term or any earlier termination of those options in connection with the optionee’s termination of service with the Company. Stock options granted under this plan generally vest as follows: 25% of the shares vest on the first anniversary of the vesting commencement date and the remaining 75% vest proportionately each month over the next 36 months of continued service. See Note 14, “Business Acquisition.”

Valuation Assumptions. The fair value of the Company’s stock options granted to employees, officers and non-employee board members and ESPP shares issued to employees, excluding unvested stock options assumed through the acquisition of Pliant, for the three and nine months ended October 2, 2011 and October 3, 2010 was estimated using the following weighted average assumptions.



	Three months ended		Nine months ended
	October 2, 2011	October 3, 2010	October 2, 2011	October 3, 2010
Option Plan Shares
Dividend yield	None	None	None	None
Expected volatility	0.42	0.54	0.42	0.51
Risk free interest rate	0.80%	1.18%	1.52%	1.56%
Expected lives	4.3 years	4.3 years	4.2 years	3.8 years
Estimated annual forfeiture rate	8.57%	7.32%	8.57%	7.32%
Weighted average fair value at grant date	$13.99	$17.41	$17.72	$12.30

Employee Stock Purchase Plan Shares
Dividend yield	None	None	None	None
Expected volatility	0.44	0.50	0.43	0.56
Risk free interest rate	0.08%	0.19%	0.13%	0.18%
Expected lives	½ year	½ year	½ year	½ year
Weighted average fair value at purchase date	$10.44	$12.34	$12.30	$9.95

Share-Based Compensation Plan Activities

Stock Options and SARs. A summary of stock option and stock appreciation rights (“SARs”) activity under all of the Company’s share-based compensation plans as of October 2, 2011 and changes during the nine months ended October 2, 2011, is presented below.



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
	(In thousands, except exercise price and contractual term)
Options and SARs outstanding at January 2, 2011	20,393		$	32.18	3.8	$	393,996
Granted	2,935		44.65
Exercised	(2,953	)	23.09			71,092
Forfeited	(344	)	26.72
Expired	(320	)	51.09
Options assumed through acquisition	209		4.35
Options and SARs outstanding at October 2, 2011	19,920		35.28		3.6	199,996
Options and SARs vested and expected to vest after October 2, 2011, net of forfeitures	19,207		35.24		3.7	194,333
Options and SARs exercisable at October 2, 2011	13,229		36.64		2.7	125,628

At October 2, 2011, the total compensation cost related to stock options granted to employees under the Company’s share-based compensation plans but not yet recognized was approximately $68.1 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over a weighted average period of approximately 2.6 years.

Restricted Stock Units. Restricted stock units (“RSUs”) are settled in shares of the Company’s common stock upon vesting on a one-for-one basis. Typically, vesting of RSUs is subject to the employee’s continuing service to the Company. The cost of these awards is determined using the fair value of the Company’s common stock on the date of grant, and compensation is recognized on a straight-line basis over the requisite vesting period.

A summary of the changes in RSUs outstanding under the Company’s share-based compensation plan during the nine months ended October 2, 2011 is presented below.



	Shares		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
	(In thousands, except for weighted average grant date fair value)
Non-vested share units at January 2, 2011	1,244		$	28.64	$	62,007
Granted	1,317		47.52
Vested	(372	)	29.24		18,128
Forfeited	(79	)	35.21
Non-vested share units at October 2, 2011	2,110		40.08		85,166

As of October 2, 2011, the Company had approximately $59.0 million of unrecognized compensation expense, net of estimated forfeitures, related to RSUs, which will be recognized over a weighted average estimated remaining life of 2.9 years.

Employee Stock Purchase Plan. At October 2, 2011, there was approximately $2.1 million of total unrecognized compensation cost related to the Company’s ESPP that is expected to be recognized over a period of approximately 0.4 years.

Share-Based Compensation Expense. The following tables set forth the detailed allocation of the share-based compensation expense for the three and nine months ended October 2, 2011 and October 3, 2010.



	Three months ended						Nine months ended
	October 2, 2011			October 3, 2010			October 2, 2011			October 3, 2010
	(In thousands)
Share-based compensation expense by caption:
Cost of product revenues	$	1,283		$	1,205		$	3,316		$	4,972
Research and development	8,345			6,629			23,273			19,975
Sales and marketing	2,704			2,959			7,746			8,299
General and administrative	3,397			10,151			10,343			19,545
Total share-based compensation expense	15,729			20,944			44,678			52,791
Total tax benefit recognized	(3,977		)	(6,360		)	(11,709		)	(15,108		)
Decrease in net income	$	11,752		$	14,584		$	32,969		$	37,683

Share-based compensation expense by type of award:
Stock options and SARs	$	8,224		$	15,650		$	23,873		$	36,411
RSUs	6,201			3,339			15,311			11,047
ESPP	1,304			1,955			5,494			5,333
Total share-based compensation expense	15,729			20,944			44,678			52,791
Total tax benefit recognized	(3,977		)	(6,360		)	(11,709		)	(15,108		)
Decrease in net income	$	11,752		$	14,584		$	32,969		$	37,683

Share-based compensation expense of $1.4 million and $0.9 million related to manufacturing personnel was capitalized into inventory as of October 2, 2011 and January 2, 2011, respectively.

The total grant date fair value of options and RSUs vested during the three and nine months ended October 2, 2011 and October 3, 2010 was as follows:



	Three months ended				Nine months ended
	October 2, 2011		October 3, 2010		October 2, 2011		October 3, 2010
	(In thousands)
Fair value of options vested	$	7,153	$	8,016	$	26,554	$	33,048
Fair value of RSUs vested	7,783		12,806		18,128		21,750
Total fair value of options and RSUs vested	$	14,936	$	20,822	$	44,682	$	54,798

Modification of Stock Awards. In the third quarter of fiscal year 2010, the Company recognized expense of $6.3 million related to the modification of stock awards, pursuant to the retirement agreement with the Company’s former Chief Executive Officer.