NOTE 15: Stock-Based Compensation

Stock Option Plans

The Company’s share-based payments that result in compensation expense consist solely of stock option grants. As of December 31, 2013, the Company had 11,165,480 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 year ended December 31, 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		7,118		$	12.78
Granted		1,740			21.47
Exercised		(2,445	)		11.37
Forfeited or expired		(275	)		16.39

Outstanding as of December 31, 2013		6,138		$	15.65		7.2	$	138,302

Exercisable as of December 31, 2013		1,678		$	11.72		5.3	$	44,386

Options vested or expected to vest at December 31, 2013 (1)		5,541		$	15.32		7.1	$	126,670

(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:


	Year Ended December 31,
	2013			2012			2011
Risk-free rate		2.0	%		2.0	%		2.9	%
Expected dividend yield		-	%		1.2	%		1.1	%
Expected volatility		42	%		44	%		43	%
Expected term (in years)		5.8			5.7			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. 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 value of stock options granted was $8.21 in 2013, $6.58 in 2012, and $6.16 in 2011.

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 Company revised its estimated forfeiture rates in the first quarter of 2013 and 2012 and the second quarter of 2011, resulting in an increase to compensation expense of $300,000 and $200,000 in 2013 and 2012, respectively, and a reduction to compensation expense of $80,000 in 2011.

The total stock-based compensation expense and the related income tax benefit recognized was $10,620,000 and $3,482,000, respectively, in 2013, $8,520,000 and $2,772,000, respectively, in 2012, and $8,068,000 and $2,660,000, respectively, in 2011. No compensation expense was capitalized in 2013, 2012, or 2011.

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


	Year Ended December 31,
	2013		2012		2011
Product cost of revenue	$	747	$	581	$	456
Service cost of revenue		177		161		172
Research, development, and engineering		2,585		2,149		2,268
Selling, general, and administrative		7,111		5,629		5,172

	$	10,620	$	8,520	$	8,068

The total intrinsic value of stock options exercised was $32,096,000 in 2013, $16,296,000 in 2012, and $20,108,000 in 2011. The total fair value of stock options vested was $9,717,000 in 2013, $9,362,000 in 2012, and $10,202,000 in 2011.

As of December 31, 2013, total unrecognized compensation expense related to non-vested stock options was $8,464,000, which is expected to be recognized over a weighted-average period of 1.18 years.