The Company’s share-based payments that result in compensation expense consist solely of stock option grants. As of March 30, 2014, the Company had 10,024,230 shares available for grant. Generally, stock options are granted with an exercise price equal to the market value of the Company’s common stock at the grant date, vest over four years based upon continuous service, and expire ten years from the grant date.

The following table summarizes the Company’s stock option activity for the three-month period ended March 30, 2014:



	Shares (in thousands)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2013	6,138		$	15.65
Granted	1,206		39.31
Exercised	(396	)	15.02
Forfeited or expired	(73	)	18.02
Outstanding as of March 30, 2014	6,875		$	19.80	7.4	$	98,435
Exercisable as of March 30, 2014	2,481		$	13.59	5.8	$	48,212
Options vested or expected to vest at March 30, 2014 (1)	6,130		$	18.93	7.2	$	92,123

(1) In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. Options expected to vest are calculated by applying an estimated forfeiture rate to the unvested options.

The fair values of stock options granted in each period presented were estimated using the following weighted-average assumptions:



	Three-months Ended
	March 30, 2014		March 31, 2013
Risk-free rate	2.7	%	2.1	%
Expected dividend yield	—	%	—	%
Expected volatility	41	%	42	%
Expected term (in years)	5.4		5.9

Risk-free rate

The risk-free rate was based upon a treasury instrument whose term was consistent with the contractual term of the option.

Expected dividend yield

Generally, the current dividend yield is calculated by annualizing the cash dividend declared by the Company’s Board of Directors and dividing that result by the closing stock price on the grant date. However, in the fourth quarter of 2012, the Company paid the full annual dividends for 2013 and 2014 in advance, and therefore, the dividend yield for those years has been adjusted to zero. At the time of the 2014 valuation, a dividend yield of 0.56% was estimated for future periods from 2015 through the expected life of the option.

Expected volatility

The expected volatility was based upon a combination of historical volatility of the Company’s common stock over the contractual term of the option and implied volatility for traded options of the Company’s stock.

Expected term

The expected term was derived from the binomial lattice model from the impact of events that trigger exercises over time.

The weighted-average grant-date fair values of stock options granted during the three-month periods ended March 30, 2014 and March 31, 2013 were $15.34 and $8.07, respectively.

The Company stratifies its employee population into two groups: one consisting of senior management and another consisting of all other employees. The Company currently expects that approximately 72% of its stock options granted to senior management and 70% of its options granted to all other employees will actually vest. Therefore, the Company currently applies an estimated annual forfeiture rate of 11% to all unvested options for senior management and a rate of 12% for all other employees. The Company revised its estimated forfeiture rates in the first quarters of 2014 and 2013, resulting in an increase to compensation expense of $288,000 and $300,000, respectively.

The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended March 30, 2014 were $4,004,000 and $1,306,000, respectively, and for the three-month period ended March 31, 2013 were $3,298,000 and $1,094,000, respectively. No compensation expense was capitalized as of March 30, 2014 or December 31, 2013.

The following table details the stock-based compensation expense by caption for each period presented on the Consolidated Statements of Operations (in thousands):



	Three-months Ended
	March 30, 2014		March 31, 2013
Product cost of revenue	$	285	$	227
Service cost of revenue	63		63
Research, development, and engineering	1,056		813
Selling, general, and administrative	2,600		2,195
	$	4,004	$	3,298

The total intrinsic values of stock options exercised for the three-month periods ended March 30, 2014 and March 31, 2013 were $8,933,000 and $7,193,000, respectively. The total fair values of stock options vested for the three-month periods ended March 30, 2014 and March 31, 2013 were $8,361,000 and $6,932,000, respectively.

As of March 30, 2014, total unrecognized compensation expense related to non-vested stock options was $19,791,000, which is expected to be recognized over a weighted-average period of 1.60 years.