Stock-Based Compensation Expense

9 Months Ended

Sep. 30, 2012

Stock-Based Compensation Expense

NOTE 10: Stock-Based Compensation Expense

The Company’s share-based payments that result in compensation expense consist solely of stock option grants. As of September 30, 2012, the Company had 6,306,506 shares available for grant under two stock option plans: the 2001 General Stock Option Plan (4,940,521) and the 2007 Stock Option and Incentive Plan (1,365,985). Each of these plans expires ten years from the date the plan was approved. In December 2011, the 2001 General Stock Option Plan received shareholder approval for an amendment and restatement of the plan, extending the plan until September 2021. Stock options are granted with an exercise price equal to the market value of the Company’s common stock at the grant date. Generally, stock options 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 September 30, 2012:

	Shares (in  thousands)			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2011		4,473		$	24.48
Granted		34			37.24
Exercised		(745	)		20.89
Forfeited or expired		(87	)		22.77
Outstanding as of September 30, 2012		3,675		$	25.37		7.3	$	34,143
Exercisable as of September 30, 2012		1,265		$	21.12		5.6	$	17,123

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
	September 30, 2012			October 2, 2011			September 30, 2012			October 2, 2011
Risk-free rate		2.0	%		3.6	%		2.0	%		3.6	%
Expected dividend yield		1.2	%		1.0	%		1.2	%		1.0	%
Expected volatility		44	%		42	%		44	%		42	%
Expected term (in years)		5.6			5.2			5.6			5.4

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 September 30, 2012 and October 2, 2011 were $12.96 and $11.89, respectively. The weighted-average grant-date fair values of stock options granted during the nine-month periods ended September 30, 2012 and October 2, 2011 were $13.16 and $11.78, 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 67% of its stock options granted to senior management and 66% of its options granted to all other employees will actually vest. Therefore, the Company currently applies an estimated annual forfeiture rate of 12% to all unvested options for senior management and a rate of 14% for all other employees.

The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended September 30, 2012 were $1,492,000 and $478,000, respectively, and for the three-month period ended October 2, 2011 were $1,520,000 and $502,000, respectively. The total stock-based compensation expense and the related income tax benefit recognized for the nine-month period ended September 30, 2012 were $6,795,000 and $2,212,000, respectively, and for the nine-month period ended October 2, 2011 were $5,829,000 and $1,947,000, respectively. No compensation expense was capitalized as of September 30, 2012 or December 31, 2011.

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
	September 30, 2012		October 2, 2011		September 30, 2012		October 2, 2011
Product cost of revenue	$	99	$	80	$	474	$	350
Service cost of revenue		26		27		134		136
Research, development, and engineering		385		394		1,735		1,732
Selling, general, and administrative		982		1,019		4,452		3,611
	$	1,492	$	1,520	$	6,795	$	5,829

The total intrinsic values of stock options exercised for the three-month periods ended September 30, 2012 and October 2, 2011 were $1,436,000 and $5,254,000, respectively. The total intrinsic values of stock options exercised for the nine-month periods ended September 30, 2012 and October 2, 2011 were $14,744,000 and $17,808,000, respectively.

As of September 30, 2012, total unrecognized compensation expense related to non-vested stock options was $8,273,000, which is expected to be recognized over a weighted-average period of 1.5 years.