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 June 30, 2013, the Company had 5,614,591 shares available for grant under two stock option plans: the 2001 General Stock Option Plan (4,355,481) and the 2007 Stock Option and Incentive Plan (1,259,110). 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. 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 six-month period ended June 30, 2013:


	Shares (in thousands)			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2012		3,559		$	25.56
Granted		823			42.12
Exercised		(710	)		22.88
Forfeited or expired		(122	)		32.53

Outstanding as of June 30, 2013		3,550		$	29.70		7.4	$	55,132

Exercisable as of June 30, 2013		1,309		$	23.03		5.8	$	29,075

Options vested or expected to vest at June 30, 2013 (1)		3,139		$	28.93		7.3	$	51,172

(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						Six-months Ended
	June 30, 2013			July 1, 2012			June 30, 2013			July 1, 2012

Risk-free rate		2.0	%		2.0	%		2.0	%		2.0	%
Expected dividend yield		0	%		1.2	%		0	%		1.2	%
Expected volatility		42	%		44	%		42	%		44	%
Expected term (in years)		5.9			5.7			5.9			5.7

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 2013 valuation, a dividend yield of 1.04% 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 June 30, 2013 and July 1, 2012 were $16.13 and $13.50, respectively. The weighted-average grant-date fair values of stock options granted during the six-month periods ended June 30, 2013 and July 1, 2012 were $16.13 and $13.35, 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 71% of its stock options granted to senior management and 69% of its options granted to all other employees will actually vest. Therefore, the Company currently applies an estimated forfeiture rate of 12% to all unvested options for senior management and a rate of 13% for all other employees.

The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended June 30, 2013 were $2,781,000 and $911,000, respectively, and for the three-month period ended July 1, 2012 were $1,989,000 and $646,000, respectively. The total stock-based compensation expense and the related income tax benefit recognized for the six-month period ended June 30, 2013 were $6,079,000 and $2,004,000, respectively, and for the six-month period ended July 1, 2012 were $5,303,000 and $1,733,000, respectively. No compensation expense was capitalized as of June 30, 2013 or December 31, 2012.

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				Six-months Ended
	June 30, 2013		July 1, 2012		June 30, 2013		July 1, 2012

Product cost of revenue	$	177	$	135	$	404	$	375
Service cost of revenue		47		40		110		108
Research, development, and engineering		650		483		1,463		1,350
Selling, general, and administrative		1,907		1,331		4,102		3,470

	$	2,781	$	1,989	$	6,079	$	5,303

The total intrinsic values of stock options exercised for the three-month periods ended June 30, 2013 and July 1, 2012 were $6,759,000 and $672,000, respectively. The total intrinsic values of stock options exercised for the six-month periods ended June 30, 2013 and July 1, 2012 were $13,952,000 and $13,308,000, respectively. The total fair values of stock options vested for the three-month periods ended June 30, 2013 and July 1, 2012 were $2,298,000 and $2,286,000, respectively. The total fair values of stock options vested for the six-month periods ended June 30, 2013 and July 1, 2012 were $9,230,000 and $8,686,000, respectively.

As of June 30, 2013, total unrecognized compensation expense related to non-vested stock options was $12,233,000, which is expected to be recognized over a weighted-average period of 1.6 years.