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 unit 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 programs, 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 unit 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 in equal annual installments over a 4-year period and subsequent grants to non-employee board members generally 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.

FlashSoft Corporation Amended and Restated 2011 Equity Plan. The FlashSoft Corporation Amended and Restated 2011 Equity Plan was assumed pursuant to the Company’s acquisition of FlashSoft on February 13, 2012. Unvested restricted stock unit awards that were outstanding under this plan on February 13, 2012 were assumed by the Company and are governed by the existing terms of the plan. Restricted stock unit awards granted under this plan generally vest in equal annual installments over a 4-year period.

Valuation Assumptions

Option Plan Shares. The fair value of the Company’s stock options granted to employees, officers and non-employee board members was estimated using the following weighted average assumptions:



	Three months ended		Nine months ended
	September 30, 2012	October 2, 2011	September 30, 2012	October 2, 2011
Dividend yield	None	None	None	None
Expected volatility	0.45	0.42	0.43	0.42
Risk-free interest rate	0.51%	0.80%	0.60%	1.52%
Expected term	4.3 years	4.3 years	4.3 years	4.2 years
Estimated annual forfeiture rate	8.59%	8.57%	8.59%	8.57%
Weighted average fair value at grant date	$15.39	$13.99	$16.63	$17.72

Employee Stock Purchase Plan Shares. The fair value of the Company’s ESPP shares issued to employees was estimated using the following weighted average assumptions:



	Three months ended		Nine months ended
	September 30, 2012	October 2, 2011	September 30, 2012	October 2, 2011
Dividend yield	None	None	None	None
Expected volatility	0.44	0.44	0.41	0.43
Risk-free interest rate	0.14%	0.08%	0.15%	0.13%
Expected term	½ year	½ year	½ year	½ year
Weighted average fair value at purchase date	$11.38	$10.44	$11.87	$12.30

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 September 30, 2012 and changes during the nine months ended September 30, 2012 is presented below (in thousands, except for weighted average exercise price and remaining contractual term):



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Options and SARs outstanding at January 1, 2012	17,559		$	36.55	3.4	$	257,251
Granted	2,171		46.82
Exercised	(2,853	)	22.42			66,663
Forfeited	(275	)	36.28
Expired	(235	)	52.82
Options and SARs outstanding at September 30, 2012	16,367		40.15		3.3	130,753
Options and SARs vested and expected to vest after September 30, 2012, net of forfeitures	15,797		40.00		3.2	129,132
Options and SARs exercisable at September 30, 2012	10,878		39.71		2.2	99,862

At September 30, 2012, 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 $78.1 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over a weighted average period of approximately 2.5 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 plans during the nine months ended September 30, 2012 is presented below (in thousands, except for weighted average grant date fair value):



	Shares		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Non-vested share units at January 1, 2012	2,051		$	40.22	$	100,913
Granted	1,697		45.25
Vested	(640	)	47.82		29,227
Forfeited	(144	)	42.54
Assumed through acquisition	59		46.63
Non-vested share units at September 30, 2012	3,023		42.74		131,307

As of September 30, 2012, the Company had approximately $92.9 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 September 30, 2012, there was approximately $2.4 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 (in thousands):



	Three months ended						Nine months ended
	September 30, 2012			October 2, 2011			September 30, 2012			October 2, 2011
Share-based compensation expense by caption:
Cost of product revenues	$	1,929		$	1,283		$	5,389		$	3,316
Research and development	10,379			8,345			31,029			23,273
Sales and marketing	3,794			2,704			11,057			7,746
General and administrative	3,848			3,397			11,808			10,343
Total share-based compensation expense	19,950			15,729			59,283			44,678
Total tax benefit recognized	(5,464		)	(3,977		)	(15,309		)	(11,709		)
Decrease in net income	$	14,486		$	11,752		$	43,974		$	32,969

Share-based compensation expense by type of award:
Stock options and SARs	$	8,550		$	8,224		$	27,192		$	23,873
RSUs	9,405			6,201			25,907			15,311
ESPP	1,995			1,304			6,184			5,494
Total share-based compensation expense	19,950			15,729			59,283			44,678
Total tax benefit recognized	(5,464		)	(3,977		)	(15,309		)	(11,709		)
Decrease in net income	$	14,486		$	11,752		$	43,974		$	32,969

Share-based compensation expense of $1.9 million and $1.4 million related to manufacturing personnel was capitalized into inventory as of September 30, 2012 and January 1, 2012, respectively.

The total grant date fair value of options and RSUs vested was as follows (in thousands):



	Three months ended				Nine months ended
	September 30, 2012		October 2, 2011		September 30, 2012		October 2, 2011
Fair value of options vested	$	7,751	$	7,153	$	30,725	$	26,554
Fair value of RSUs vested	520		539		24,104		10,884
Total fair value of options and RSUs vested	$	8,271	$	7,692	$	54,829	$	37,438