Stock-Based Compensation Expense

9 Months Ended

Oct. 02, 2011

Stock-Based Compensation Expense [Abstract]

Stock-Based Compensation Expense

NOTE 11: Stock-Based Compensation Expense

The Company’s share-based payments that result in compensation expense consist solely of stock option grants. As of October 2, 2011, the Company had 7,013,112 shares available for grant under two stock option plans: the 2001 General Stock Option Plan (5,519,627) and the 2007 Stock Option and Incentive Plan (1,493,485). Each of these plans expires ten years from the date the plan was approved. The 2001 General Stock Option Plan will expire in December of 2011, unless the Company’s shareholders approve an amendment and restatement of the plan which would extend the plan until September of 2021. 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 nine-month period ended October 2, 2011:

						Weighted-
				Weighted-		Average		Aggregate
				Average		Remaining		Intrinsic
	Shares			Exercise		Contractual		Value
	(in thousands)			Price		Term (in years)		(in thousands)
Outstanding as of December 31, 2010		4,318		$	20.05
Granted		986			30.43
Exercised		(1,351	)		20.70
Forfeited or expired		(67	)		21.96
Outstanding as of October 2, 2011		3,886		$	22.46		7.2	$	21,850
Exercisable as of October 2, 2011		1,305		$	20.39		4.9	$	8,989

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

	Three-months Ended						Nine-months Ended
	October 2,			October 3,			October 2,			October 3,
	2011			2010			2011			2010
Risk-free rate		3.6	%		3.2	%		3.6	%		3.4	%
Expected dividend yield		1.0	%		1.4	%		1.0	%		1.3	%
Expected volatility		42	%		44	%		42	%		44	%
Expected term (in years)		5.2			5.3			5.4			5.3

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

The current dividend yield was calculated by annualizing the cash dividend declared by the Company’s Board of Directors for the current quarter and dividing that result by the closing stock price on the grant date. The current dividend yield was then adjusted to reflect the Company’s expectations relative to future dividend declarations.

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 October 2, 2011 and October 3, 2010 were $11.89 and $6.89, respectively. The weighted-average grant- date fair values of stock options granted during the nine-month periods ended October 2, 2011 and October 3, 2010 were $11.78 and $7.10, 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 66% of its stock options granted to senior management and 68% of its options granted to all other employees will actually vest. Therefore, the Company currently applies an estimated forfeiture rate of 13% to all unvested options for senior management and a rate of 14% for all other employees. The Company revised its estimated forfeiture rates in the first quarter of 2011, and the cumulative effect of this change resulted in a reduction in compensation expense of approximately $80,000.

The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended October 2, 2011 were $1,520,000 and $502,000, respectively, and for the three-month period ended October 3, 2010 were $1,278,000 and $421,000, respectively. The total stock-based compensation expense and the related income tax benefit recognized for the nine-month period ended October 2, 2011 were $5,829,000 and $1,947,000, respectively, and for the nine-month period ended October 3, 2010 were $1,672,000 and $552,000, respectively. No compensation expense was capitalized as of October 2, 2011 or December 31, 2010.

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				Nine-months Ended
	October 2,		October 3,		October 2,		October 3,
	2011		2010		2011		2010
Product cost of revenue	$	80	$	63	$	350	$	135
Service cost of revenue		27		32		136		44
Research, development, and engineering		394		346		1,732		680
Selling, general, and administrative		1,019		837		3,611		813
	$	1,520	$	1,278	$	5,829	$	1,672

The total intrinsic values of stock options exercised for the three-month periods ended October 2, 2011 and October 3, 2010 were $5,254,000 and $2,004,000, respectively. The total intrinsic values of stock options exercised for the nine-month periods ended October 2, 2011 and October 3, 2010 were $17,808,000 and $2,055,000, respectively.

The total fair values of stock options vested for the three-month periods ended October 2, 2011 and October 3, 2010 were $469,000 and $557,000, respectively. The total fair values of stock options vested for the nine-month periods ended October 2, 2011 and October 3, 2010 were $9,846,000 and $12,790,000, respectively. As of October 2, 2011, total unrecognized compensation expense related to non-vested stock options was $8,789,000, which is expected to be recognized over a weighted-average period of 1.6 years.