Stock-Based Compensation Plans

Teledyne has long-term incentive plans pursuant to which it has granted non-qualified stock options, restricted stock and performance shares to certain employees. The Company also has non-employee director stock compensation plans, pursuant to which non-qualified stock options and common stock have been issued to its directors.

Stock Incentive Plan

The following disclosures are based on stock options granted to Teledyne’s employees and directors. The Company recorded a total of $2.7 million in stock option compensation expense for the first quarter of 2014 and $1.8 million for the first quarter of 2013. Employee stock option grants are charged to expense evenly over the three year vesting period. Director stock option grants are charged to expense evenly over the one-year vesting period. In 2014, the Company currently expects approximately $15.4 million in stock option compensation expense based on stock options already granted and current assumptions regarding the estimated fair value of stock option grants expected to be issued during the remainder of the year. However, our assessment of the estimated compensation expense will be affected by our stock price and actual stock option grants during the remainder of the year as well as assumptions regarding a number of complex and subjective variables and the related tax impact. These variables include, but are not limited to, the volatility of our stock price and employee stock option exercise behaviors. The Company issues shares of common stock upon the exercise of stock options.

The Company uses a combination of its historical stock price volatility and the volatility of exchange traded options, if any, on the Company stock to compute the expected volatility for purposes of valuing stock options issued. The period used for the historical stock price corresponded to the expected term of the options and was seven years, three months. The period used for the exchange traded options, if any, included the longest-dated options publicly available, generally three months. The expected dividend yield is based on Teledyne’s practice of not paying dividends. The risk-free rate of return is based on the yield of U. S. Treasury Strips with terms equal to the expected life of the options as of the grant date. The expected life in years is based on historical actual stock option exercise experience.

On April 23, 2014, the Company granted 557,258 employee stock options and 36,000 non-employee director stock options at an exercise price of $94.24 per share. The following assumptions will be used in the valuation of stock options granted in 2014:



	2014
Expected dividend yield	—
Expected volatility	30.7	%
Risk-free interest rate	1.7	%
Expected life in years	7.5

Based on the assumptions in the table above, the grant date weighted average fair value of stock options granted in 2014 was $36.25.

Stock option transactions for Teledyne’s employee stock option plans for the first quarter ended March 30, 2014 are summarized as follows:



	Shares		Weighted Average Exercise Price
Beginning balance	2,419,372		$	53.77
Exercised	(175,756	)	$	38.13
Canceled or expired	(10,831	)	$	65.04
Ending balance	2,232,785		$	54.94
Options exercisable at end of period	1,371,429		$	44.51

Stock option transactions for Teledyne’s non-employee director stock option plans for the first quarter ended March 30, 2014 are summarized as follows:



	Shares	Weighted Average Exercise Price
Beginning balance	324,381	$	44.99
Granted	2,957	$	60.03
Ending balance	327,338	$	45.13
Options exercisable at end of period	285,402	$	41.11

Performance Share Plan and Restricted Stock Award Program

The first of three annual installments of the 2009 to 2011 Performance Share Plan was paid entirely in cash in the first quarter of 2012. For the second installment, 23,519 shares of Teledyne common stock were issued in the first quarter of 2013. For the third installment, 19,742 shares of Teledyne common stock were issued in the first quarter of 2014. Also in the first quarter of 2014, the restriction was removed for 40,257 shares of Teledyne common stock and 3,397 shares were forfeited related to the 2011 to 2013 Restricted Stock Award Program. In the first three months of 2014, the Company granted 36,734 shares of restricted stock at a weighted average fair value of $87.98 per share.