Share-based Compensation

Share-based Benefit Plans

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, and performance-based cash bonus awards for Section 16 executive officers. 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, subject to continued service. Under the Company’s current non-employee director compensation policy, stock option awards granted to non-employee board members are immediately exercisable upon grant but vest in one installment on the earlier of (i) the first anniversary of the grant date or (ii) the day immediately preceding the Company’s next annual meeting of stockholders following the grant date and are subject to the Company’s right of repurchase for any shares that have been exercised but have not yet vested. Restricted stock unit awards granted to non-employee board members vest in one installment on the earlier of (i) the first anniversary of the grant date or (ii) the day immediately preceding the Company’s next annual meeting of stockholders following the grant date. 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.

2013 Incentive Plan. On June 12, 2013, the Company’s stockholders approved the 2013 Incentive Plan (“2013 Plan”). Shares of the Company’s common stock may be issued under the 2013 Plan pursuant to two separate equity incentive programs: (i) the discretionary grant program under which stock options and stock appreciation rights may be granted to officers and other employees, non-employee board members and independent consultants, and (ii) the stock issuance and cash bonus program under which eligible persons may, at the discretion of the plan administrator, be issued shares of the Company’s common stock pursuant to restricted stock awards, restricted stock units or other share-based awards which vest upon the completion of a designated service period or the attainment of pre-established performance milestones, be awarded cash bonus opportunities which are earned through the attainment of pre-established performance milestones, or be issued shares of the Company’s common stock through direct purchase or as a bonus for services rendered to the Company. A total of 20,000,000 shares of the Company’s common stock have initially been reserved for issuance under the 2013 Plan. The 2013 Plan share reserve may be increased by up to 10,000,000 shares of common stock to the extent that outstanding share-based awards under the 1995 Stock Option Plan, the 1995 Non-Employee Directors Stock Option Plan, and the 2005 Incentive Plan expire, terminate or lapse, of which 31,626 shares of common stock as of June 30, 2013 had been added to the 2013 Plan share reserve. All options granted under the 2013 Plan are granted with an exercise price equal to the fair market value of the common stock on the date of grant and will expire seven years from the date of grant.

2005 Incentive Plan. The 2005 Incentive Plan terminated on June 12, 2013, and no further share-based awards were made under this plan after that date. However, share-based awards that were outstanding under this plan on June 12, 2013 continue to be governed by their existing terms. Options granted may be exercised for shares of the Company’s common stock at any time prior to the expiration of the seven-year option term or any earlier termination of those options in connection with the optionee’s cessation of service with the Company.

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		Six months ended
	June 30, 2013	July 1, 2012	June 30, 2013	July 1, 2012
Dividend yield	None	None	None	None
Expected volatility	0.32	0.40	0.38	0.43
Risk-free interest rate	0.72%	0.53%	0.68%	0.61%
Expected term	4.3 years	3.9 years	4.4 years	4.3 years
Estimated annual forfeiture rate	8.51%	8.59%	8.51%	8.59%
Weighted average fair value at grant date	$16.22	$11.34	$16.44	$16.72

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		Six months ended
	June 30, 2013	July 1, 2012	June 30, 2013	July 1, 2012
Dividend yield	None	None	None	None
Expected volatility	0.33	0.38	0.33	0.38
Risk-free interest rate	0.13%	0.15%	0.13%	0.15%
Expected term	½ year	½ year	½ year	½ year
Weighted average fair value at purchase date	$12.54	$12.24	$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 June 30, 2013 and changes during the six months ended June 30, 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	1,010		52.14
Exercised	(4,954	)	34.17			98,469
Forfeited	(300	)	43.20
Expired	(2,316	)	60.78
Options and SARs outstanding at June 30, 2013	8,866		40.38		4.2	183,720
Options and SARs vested and expected to vest after June 30, 2013, net of forfeitures	8,440		40.00		4.1	178,132
Options and SARs exercisable at June 30, 2013	4,748		35.12		3.1	123,343

At June 30, 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 $79.3 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over a weighted average period of approximately 2.4 years. As of June 30, 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 six months ended June 30, 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	2,131		52.25
Vested	(851	)	42.18		44,068
Forfeited	(180	)	45.97
Non-vested share units at June 30, 2013	4,177		48.15		201,113

As of June 30, 2013, the Company had approximately $149.9 million of unrecognized compensation expense, net of estimated forfeitures, related to RSUs, which will be recognized over a weighted average estimated remaining life of three years.

Employee Stock Purchase Plan. At June 30, 2013, there was approximately $0.9 million of total unrecognized compensation cost related to the Company’s ESPP that is expected to be recognized over a period of one month.

Share-based Compensation Expense. The following tables set forth the detailed allocation of the share-based compensation expense (in thousands):



	Three months ended						Six months ended
	June 30, 2013			July 1, 2012			June 30, 2013			July 1, 2012
Share-based compensation expense by caption:
Cost of revenues	$	2,447		$	1,923		$	4,164		$	3,460
Research and development	12,704			10,623			24,344			20,650
Sales and marketing	4,701			3,634			8,572			7,263
General and administrative	4,809			4,073			9,315			7,960
Total share-based compensation expense	24,661			20,253			46,395			39,333
Total tax benefit recognized	(6,222		)	(4,676		)	(13,138		)	(9,845		)
Decrease in net income	$	18,439		$	15,577		$	33,257		$	29,488

Share-based compensation expense by type of award:
Stock options and SARs	$	8,054		$	9,426		$	16,323		$	18,642
RSUs	14,788			8,608			26,758			16,502
ESPP	1,819			2,219			3,314			4,189
Total share-based compensation expense	24,661			20,253			46,395			39,333
Total tax benefit recognized	(6,222		)	(4,676		)	(13,138		)	(9,845		)
Decrease in net income	$	18,439		$	15,577		$	33,257		$	29,488

Share-based compensation expense of $2.6 million and $1.8 million related to manufacturing personnel was capitalized into inventory as of June 30, 2013 and December 30, 2012, respectively.

The total grant date fair value of options and RSUs vested during the three and six months ended June 30, 2013 and July 1, 2012 was as follows (in thousands):



	Three months ended				Six months ended
	June 30, 2013		July 1, 2012		June 30, 2013		July 1, 2012
Fair value of options vested	$	7,282	$	8,214	$	21,850	$	22,974
Fair value of RSUs vested	6,082		4,283		35,903		23,584
Total fair value of options and RSUs vested	$	13,364	$	12,497	$	57,753	$	46,558