Stock-Based Compensation Expense

The Company’s share-based payments that result in compensation expense consist of stock option grants and restricted stock awards. As of April 2, 2017, the Company had 6,258,551 shares available for grant. Stock options are granted with an exercise price equal to the market value of the Company’s common stock at the grant date and generally vest over four years based upon continuous service and expire ten years from the grant date. Restricted stock awards are granted with an exercise price equal to the market value of the Company's common stock at the time of grant. Conditions of the award may be based on continuing employment and/or achievement of pre-established performance goals and objectives. Vesting for performance-based restricted stock awards and time-based restricted stock awards must be greater than one year and three years, respectively.

The following table summarizes the Company’s stock option activity for the three-month period ended April 2, 2017:



	Shares (in thousands)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2016	6,433		$	32.16
Granted	1,849		76.78
Exercised	(1,087	)	26.81
Forfeited or expired	(29	)	36.01
Outstanding as of April 2, 2017	7,166		$	44.47	8.02	$	282,876
Exercisable as of April 2, 2017	2,256		$	26.49	5.95	$	129,647
Options vested or expected to vest as of April 2, 2017 (1)	6,167		$	42.66	7.82	$	254,614

(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
	April 2, 2017		April 3, 2016
Risk-free rate	2.4	%	1.7	%
Expected dividend yield	0.39	%	0.84	%
Expected volatility	41	%	41	%
Expected term (in years)	5.3		5.5

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.

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 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 75% of its stock options granted to senior management and 72% of its options granted to all other employees will actually vest. Therefore, the Company currently applies an estimated annual forfeiture rate of 10% 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 quarter of 2017, resulting in a decrease to compensation expense of $673,000. The Company also revised its estimated forfeiture rates in the first quarter of 2016, resulting in an increase to compensation expense of $334,000.

The weighted-average grant-date fair values of stock options granted during the three-month periods ended April 2, 2017 and April 3, 2016 were $29.90 and $12.25, respectively.

The total intrinsic values of stock options exercised for the three-month periods ended April 2, 2017 and April 3, 2016 were $53,043,000 and $3,724,000, respectively. The total fair values of stock options vested for the three-month periods ended April 2, 2017 and April 3, 2016 were $17,987,000 and $15,337,000, respectively.

As of April 2, 2017, total unrecognized compensation expense related to non-vested stock options was $54,233,000, which is expected to be recognized over a weighted-average period of 2.10 years.

The following table summarizes the Company's restricted stock activity for the three-month period ended April 2, 2017:



	Shares (in thousands)	Weighted-Average Grant Fair Value		Aggregate Intrinsic Value (in thousands)(1)
Nonvested as of December 31, 2016	20	$	34.05
Granted	—	—
Vested	—	—
Forfeited or expired	—	—
Nonvested as of April 2, 2017	20	$	34.05	$	1,679

(1) Fair market value as of April 2, 2017.

The fair values of restricted stock awards granted were determined based upon the market value of the Company's common stock at the time of grant. The initial cost is then amortized over the period of vesting until the restrictions lapse. These restricted shares will be fully vested in 2018. Participants are entitled to dividends on restricted stock awards, but only receive those amounts if the shares vest. The sale or transfer of these shares is restricted during the vesting period.

The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended April 2, 2017 were $7,483,000 and $2,439,000, respectively, and for the three-month period ended April 3, 2016 were $6,804,000 and $2,228,000, respectively. No compensation expense was capitalized as of April 2, 2017 or December 31, 2016.

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



	Three-months Ended
	April 2, 2017		April 3, 2016
Cost of revenue	$	430	$	293
Research, development, and engineering	2,610		2,179
Selling, general, and administrative	4,443		4,332
	$	7,483	$	6,804