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 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.

Valuation Assumptions

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



	Three months ended
	March 31, 2013	April 1, 2012
Dividend yield	None	None
Expected volatility	0.38	0.43
Risk-free interest rate	0.67%	0.62%
Expected term	4.4 years	4.3 years
Estimated annual forfeiture rate	8.59%	8.57%
Weighted average fair value at grant date	$16.46	$17.09

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
	March 31, 2013	April 1, 2012
Dividend yield	None	None
Expected volatility	0.33	0.38
Risk-free interest rate	0.13%	0.15%
Expected term	½ year	½ year
Weighted average fair value at purchase date	$12.54	$12.24

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 March 31, 2013 and changes during the three months ended March 31, 2013 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 December 30, 2012	15,426		$	40.73	3.2	$	109,411
Granted	910		51.38
Exercised	(2,942	)	32.29			55,870
Forfeited	(113	)	42.77
Expired	(2,169	)	60.94
Options and SARs outstanding at March 31, 2013	11,112		39.87		4.0	168,991
Options and SARs vested and expected to vest after March 31, 2013, net of forfeitures	10,589		39.51		3.9	164,943
Options and SARs exercisable at March 31, 2013	6,435		35.84		2.9	124,402

At March 31, 2013, 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 $70.9 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. As of March 31, 2013, the Company had fully expensed all of its SARs awards.

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 three months ended March 31, 2013 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 December 30, 2012	3,077		$	43.51	$	131,622
Granted	1,839		51.50
Vested	(697	)	42.83		35,026
Forfeited	(68	)	43.81
Non-vested share units at March 31, 2013	4,151		47.18		195,851

As of March 31, 2013, the Company had approximately $151.9 million of unrecognized compensation expense, net of estimated forfeitures, related to RSUs, which will be recognized over a weighted average estimated remaining life of 3.1 years.

Employee Stock Purchase Plan. At March 31, 2013, there was approximately $2.8 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
	March 31, 2013			April 1, 2012
Share-based compensation expense by caption:
Cost of revenues	$	1,717		$	1,537
Research and development	11,640			10,027
Sales and marketing	3,871			3,629
General and administrative	4,506			3,887
Total share-based compensation expense	21,734			19,080
Total tax benefit recognized	(6,916		)	(5,169		)
Decrease in net income	$	14,818		$	13,911

Share-based compensation expense by type of award:
Stock options and SARs	$	8,269		$	9,216
RSUs	11,970			7,894
ESPP	1,495			1,970
Total share-based compensation expense	21,734			19,080
Total tax benefit recognized	(6,916		)	(5,169		)
Decrease in net income	$	14,818		$	13,911

Share-based compensation expense of $2.4 million and $1.8 million related to manufacturing personnel was capitalized into inventory as of March 31, 2013 and December 30, 2012, respectively.

The total grant date fair value of options and RSUs vested during the three months ended March 31, 2013 and April 1, 2012 was as follows (in thousands):



	Three months ended
	March 31, 2013		April 1, 2012
Fair value of options vested	$	14,568	$	14,760
Fair value of RSUs vested	29,821		19,301
Total fair value of options and RSUs vested	$	44,389	$	34,061