NOTE 8. STOCK-BASED COMPENSATION

STOCK OPTION PLANS

2010 Incentive Award Plan

In April 2010, the Company’s stockholders approved the 2010 Incentive Award Plan (“2010 Plan”). Under this plan, the Company issues nonqualified stock options (“NSOs”) to employees and certain consultants. The 2010 Plan generally permits NSOs to be granted at no less than the fair market value of the common stock on the date of grant, with terms of 10 years from the date of grant. The 2010 Plan expires in 2020. As of December 31, 2012, approximately 1.5 million shares were reserved for future issuance under the 2010 Plan.

2009 Employment Commencement Incentive Plan

In October 2009, the Board of Directors adopted the 2009 Employment Commencement Incentive Plan (“New Hire Plan”). The New Hire Plan provides for the shares to be used exclusively for the grant of NSOs to new employees (“New Hire Options”)., who were not previously an employee or non-employee director of the Company. Options are granted at an exercise price not less than the fair market value of the stock on the date of grant and have a term not to exceed ten years. As of December 31, 2012, approximately 20,000 shares were reserved for future issuance under the New Hire Plan.

2000 Equity Incentive Plan

In March 2000, the Board of Directors adopted the 2000 Equity Incentive Plan (“2000 Plan”), which took effect upon the closing of the Company’s initial public offering. Under this plan, certain employees, consultants and non-employee directors may be granted Incentive Stock Options (“ISOs”) and Nonstatutory Stock Options (“NSOs”) to purchase shares of the Company’s common stock. The 2000 Plan permitted ISOs to be granted at an exercise price not less than the fair value on the date of the grant and NSOs at an exercise price not less than 85% of the fair value on the date of grant. Options granted under the 2000 Plan generally expire 10 years from the date of grant and become exercisable upon grant subject to repurchase rights in favor of the Company until vested. The 2000 Plan expired in March 2010. However, options granted prior to the plan’s expiration continue to vest or remain outstanding until their original expiration date.

Employee Option Vesting

Prior to 2012, stock options were granted to employees at their start date (“New Hire Options”) and on February 15^th of each year or the next business day if the date is not a business day (“Annual Grant”). The Annual Grant and New Hire Options generally vest 12.5% upon completion of 6 months service and 1/48^th per month thereafter. Beginning in 2013, the Company split the annual grant into a grant on February 15^th (or the next business day if the date is not a business day) and a separate grant on August 15^th (or the next business day if the date is not a business day). The February 15^th grants vest 12.5% upon completion of 6 months service and 1/48^th per month thereafter. The August 15^th stock option awards vest 7/48 at the end of one month and 1/48 per month thereafter through a 3.5 year vesting period. Option vesting terms are determined by the Board of Directors and, in the future, may vary from past practices.

2000 Non-Employee Directors’ Stock Option Plan

In March 2000, the Board of Directors adopted the 2000 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”). In October 2009, the automatic evergreen increase provisions were eliminated so that no further automatic increases will be made to the number of shares reserved for issuance under the Directors’ Plan. In addition, the common stock authorized for issuance under the Directors’ Plan was reduced to 150,000. Options are granted at an exercise price not less than the fair market value of the stock on the date of grant and have a term not to exceed 10 years. Initial grants are vested over a three-year period with 33.3% of the shares vesting after 1 year from the date of grant and 1/36^th of the shares vesting monthly thereafter. Annual grants are vested one year from the date of the grant. As of December 31, 2012, approximately 82,000 shares were reserved for future issuance under the Directors’ Plan.

2000 Employee Stock Purchase Plan

In March 2000, the Board of Directors adopted the 2000 Employee Stock Purchase Plan (ESPP). Employees are generally eligible to participate in the ESPP if they are customarily employed by the Company for more than 20 hours per week and more than 5 months in a calendar year and are not 5% stockholders of the Company. Under the ESPP, eligible employees may select a rate of payroll deduction up to 15% of their eligible compensation subject to certain maximum purchase limitations. The duration for each offering period is twenty-four months long and is divided into four shorter purchase periods approximately six months in length. Offerings are concurrent. The purchase price of the shares under the offering is the lesser of 85% of the fair market value of the shares on the offering date or 85% of the fair market value of the shares on the purchase date. A two-year look-back feature in the ESPP causes the offering period to reset if the fair value of the Company’s common stock on the first or last day of the purchase period is less than that on the original offering date. ESPP purchases by employees are settled with newly-issued common stock from the ESPP’s previously authorized and available pool of shares.

The Company issued 0.1 million, 0.1 million and 0.1 million shares under the ESPP, representing approximately $27.8 million, $18.5 million, and $14.3 million in employee contributions for the years ended December 31, 2012, 2011, and 2010, respectively. As of December 31, 2012, there were approximately 0.5 million shares reserved for grant under the ESPP.

STOCK OPTION PLAN INFORMATION

Option activity during fiscal 2012 under all the stock plans was as follows (in millions, except per share amounts):


				STOCK OPTIONS OUTSTANDING
	Shares Available for Grant			Number Outstanding			Weighted Average Exercise Price Per Share
Balance at December 31, 2011 (with 2.4 options exerciseable at a weighted-average exercise price of $212.43 per share and with 4.5 options vested and expected to vest at a weighted-average exercise price of $252.57 per share)		1.6			4.7		$	254.19
Options authorized		1.4			—
Options granted		(1.4	)		1.4			513.25
Options exercised		—			(1.2	)		203.48
Options forfeited/expired		0.1			(0.1	)		371.29

Balance at December 31, 2012 (with 2.5 options exerciseable at a weighted-average exercise price of $268.31 per share and with 4.8 options vested and expected to vest at a weighted-average exercise price of $340.83 per share)		1.7			4.8		$	340.83

The aggregate intrinsic value of options exercised under our stock option plans determined as of the date of option exercise was $375.7 million, $262.8 million, and $192.9 million during the years ended December 31, 2012, 2011, and 2010 respectively. Cash received from option exercises and employee stock purchase plans for the years ended December 31, 2012, 2011, and 2010 was $263.3 million, $260.6 million, $141.1 million, respectively.

The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2012 (number of shares in millions):


	Options Outstanding								Options Exercisable
Range of Exercise Prices	Number of Shares		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value (1)		Number of Shares		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price Per Share		Aggregate Intrinsic Value (1)
$0.00–$260.65		1.0		5.11	$	117.67				0.9			$	113.33
$264.15–$334.30		1.3		6.46		318.02				1.0				315.11
$341.19–$365.98		1.0		8.05		343.52				0.4				344.75
$368.70–$517.31		1.3		9.31		501.12				0.3				499.46
$518.29–$579.24		0.2		9.58		545.91				0.0				551.72

TOTAL		4.8		7.40	$	340.83	$	746.9		2.5		6.34	$	268.31	$	567.6

(1)	The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $490.37 as of December 31, 2012, which would have been received by the option holders had all in-the-money option holders exercised their options as of that date.

As of December 31, 2012, the shares vested and expected to vest had a weighted average remaining contractual life of 7.4 years and aggregate intrinsic value of $746.9 million.

STOCK-BASED COMPENSATION EXPENSE:

The following table summarizes stock-based compensation expense (in millions):


	Years Ended December 31,
	2012		2011		2010
Cost of sales—products	$	14.1	$	12.3	$	9.6
Cost of sales—services		12.9		11.0		8.4

Total cost of sales		27.0		23.3		18.0
Selling, general and administrative		93.1		84.3		77.0
Research and development		33.2		28.8		22.6

Stock-based compensation expense before income taxes		153.3		136.4		117.6
Income tax effect		47.5		42.9		39.2

Stock-based compensation expense after income taxes	$	105.8	$	93.5	$	78.4

The Black-Scholes option pricing model is used to estimate the fair value of stock options granted under the Company’s stock-based compensation plans and rights to acquire stock granted under the Company’s employee stock purchase plan. The weighted average estimated fair values of the stock options and rights to acquire stock granted under the Company’s employee purchase plan as well as the weighted average assumptions used in calculating these values during the years ended December 31, 2012, 2011, and 2010, were based on estimates at the date of grant as follows:


	Years Ended December 31,
STOCK OPTION PLANS	2012			2011			2010
Average risk free interest rate		0.80	%		2.16	%		2.24	%
Average expected term (years)		4.34			4.75			4.80
Average volatility		33	%		35	%		36	%
Weighted average fair value at grant date	$	146.26		$	116.03		$	111.84
Total stock-based compensation expense (in millions)	$	139.9		$	128.3		$	109.1

EMPLOYEE STOCK PURCHASE PLAN
Average risk free interest rate		0.17	%		0.32	%		0.43	%
Average expected term (years)		1.3			1.30			1.30
Average volatility		32	%		33	%		39	%
Weighted average fair value at grant date	$	138.61		$	99.94		$	106.72
Total stock-based compensation expense (in millions)	$	13.4		$	8.1		$	8.5

As stock-based compensation expense recognized in the Consolidated Statements of Income during the years ended December 31, 2012, 2011, and 2010 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Stock compensation accounting requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimated.

As of December 31, 2012, there was $281.4 million and $4.4 million, of total unrecognized compensation expense related to non-vested stock options and employee stock purchases, respectively. The unrecognized compensation expenses are expected to be recognized over a weighted average period of 2.5 years for non-vested stock options and 1 year for employee stock purchases.

Excess tax benefits are realized tax deductions for exercised options in excess of the deferred tax asset attributable to stock compensation costs for such options. Excess tax benefits of $94.2 million, $58.8 million, and $65.2 million for the years ended December 31, 2012, 2011, and 2010, respectively, have been classified as a financing cash inflow. The total income tax benefit recognized in the income statement for stock-based compensation costs was $47.5 million, $42.9 million, and $39.2 million for the years ended December 31, 2012, 2011, and 2010, respectively.