Note 2 – Stock-Based Compensation

The Benchmark Electronics, Inc. 2000 Stock Awards Plan (the 2000 Plan) and the Benchmark Electronics, Inc. 2010 Omnibus Incentive Compensation Plan (the 2010 Plan) authorize the Company, upon recommendation of the compensation committee of the Board of Directors, to grant a variety of types of awards, including stock options, restricted shares, restricted stock units, stock appreciation rights, performance compensation awards, phantom stock awards and deferred share units, or any combination thereof, to any director, officer, employee or consultant (including any prospective director, officer, employee or consultant) of the Company. Stock options are granted to employees with an exercise price equal to the market price of the Company's common shares on the date of grant, generally vest over a four-year period from the date of grant and have a term of ten years. Restricted shares, restricted stock units and phantom stock awards granted to employees generally vest over a four-year period from the date of grant, subject to the continued employment of the employee by the Company. The 2000 Plan expired on February 16, 2010 and no additional grants can be made under that plan. The 2010 Plan was approved by the Company's shareholders on May 18, 2010 and replaced the 2000 Plan. Members of the Board of Directors who are not employees of the Company also receive equity awards under the 2010 Plan. Beginning in 2011, these awards were in the form of restricted stock units, which vest in equal quarterly installments over a one-year period, starting from the grant date. As of September 30, 2012, 3.0 million additional common shares are available for issuance under the Company's existing plans.

All share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based on their fair values. The total compensation cost recognized for stock-based awards was $1.7 million and $4.7 million for the three and nine months ended September 30, 2012, respectively, and $1.5 million and $4.1 million for the three and nine months ended September 30, 2011, respectively. The total income tax benefit recognized in the income statement for stock-based awards was $0.8 million and $1.6 million for the three and nine months ended September 30, 2012, respectively, and $0.7 million and $1.5 million for the three and nine months ended September 30, 2011, respectively. The compensation expense for stock-based awards includes an estimate for forfeitures and is recognized over the vesting period of the awards using the straight-line method. Cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for stock-based awards (excess tax benefits) are classified as cash flows from financing activities. Awards of restricted shares, restricted stock units, performance restricted stock units and phantom stock are valued at the closing market price of the Company's common shares on the date of grant. For restricted stock unit awards with performance conditions, compensation expense is based on the probability that the performance goals will be achieved which is monitored by management throughout the requisite service period. If it becomes probable, based on the Company's expectation of performance during the measurement period, that more or less than the previous estimate of the awarded shares will vest, an adjustment to stock-based compensation expense will be recognized as a change in accounting estimate.

As of September 30, 2012, there was approximately $4.8 million of total unrecognized compensation cost related to nonvested stock options. That cost is expected to be recognized over a weighted-average period of 1.5 years. As of September 30, 2012, there was $5.1 million of total unrecognized compensation cost related to restricted share awards. That cost is expected to be recognized over a weighted-average period of 2.7 years. As of September 30, 2012, there was $1.6 million of total unrecognized compensation cost related to restricted stock units and phantom stock awards. That cost is expected to be recognized over a weighted-average period of 2.1 years. As of September 30, 2012, there was $2.3 million of total unrecognized compensation cost related to performance based restricted stock units. That cost is expected to be recognized over a weighted-average period of 3.0 years.

The Company issued one thousand and 431 thousand stock options during the three and nine months ended September 30, 2012, respectively, and 399 thousand stock options during the nine months ended September 30, 2011. The Company did not issue any options during the three months ended September 30, 2011. The weighted-average assumptions used to value the options granted during the three and nine months ended September 30, 2012 and 2011 were as follows:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012			2011		2012			2011

Expected term of options		6.0 years			—		6.3 years			6.2 years
Expected volatility		42	%		—		42	%		41	%
Risk-free interest rate		1.114	%		—		1.305	%		2.674	%
Dividend yield		zero			—		zero			zero

The expected term of the options represents the estimated period of time until exercise and is based on historical experience, giving consideration to the contractual terms, vesting schedules and expectations of future plan participant behavior. Separate groups of plan participants that have similar historical exercise behavior are considered separately for valuation purposes. Expected stock price volatility is based on the historical volatility of the Company's common shares. The risk-free interest rate is based on the U.S. Treasury zero-coupon rates in effect at the time of grant with an equivalent remaining term. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not anticipate paying cash dividends in the foreseeable future.

The weighted-average fair value per option granted during the three and nine months ended September 30, 2012 was $6.71 and $6.83, respectively. The total cash received as a result of stock option exercises for the nine months ended September 30, 2012 and 2011was approximately $3.5 million and $1.6 million, respectively. The actual tax benefit realized as a result of stock option exercises and the vesting of other share-based awards during the nine months ended September 30, 2012 and 2011 was $0.9 million and $0.4 million, respectively. For the nine months ended September 30, 2012 and 2011, the total intrinsic value of stock options exercised was $1.2 million and $0.9 million, respectively.

The Company issued performance based restricted stock unit awards to employees during the nine months ended September 30, 2012 and 2011. The number of performance based restricted stock unit awards that will ultimately be earned will not be determined until the end of the performance periods, which are in December 31, 2014 and 2015, and may vary from as low as zero to as high as three times the target number depending on the level of achievement of certain performance goals. The level of achievement of these goals is based upon the audited financial results of the Company for the last full calendar year within the performance period (the years ending December 31, 2014 and 2015) as compared to the base year (the years ended December 31, 2010 and 2011). The performance goals consist of certain levels of achievement using the following financial metrics: revenue growth, operating income margin expansion, and return on invested capital. If the performance goals are not met based on the Company's financial results, the applicable performance based restricted stock unit awards will not vest and will be forfeited.

The following table summarizes the activities relating to the Company's stock options:


						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
(in thousands, except per share data)	Options			Price		Term (Years)		Value

Outstanding as of December 31, 2011		4,525		$	19.69		5.05
Granted		431		$	15.77
Exercised		(288	)	$	12.00
Forfeited or expired		(329	)	$	20.51

Outstanding as of September 30, 2012		4,339		$	19.75		4.97	$	1,678

Exercisable as of September 30, 2012		3,293		$	20.86		3.97	$	999

The aggregate intrinsic value in the table above is before income taxes and is calculated as the difference between the exercise price of the underlying options and the Company's closing stock price as of the last business day of the period ended September 30, 2012 for options that had exercise prices that were below the closing price.

The following table summarizes the activities related to the Company's restricted shares:


				Weighted-
				Average
				Grant Date
(in thousands, except per share data)	Shares			Fair Value

Non-vested shares outstanding as of December 31, 2011		244		$	18.23
Granted		210		$	15.56
Vested		(45	)	$	18.42
Forfeited		(24	)	$	17.53

Non-vested shares outstanding as of September 30, 2012		385		$	16.80

The following table summarizes the activities related to the Company's time based restricted stock units and phantom stock awards:


				Weighted-
				Average
				Grant Date
(in thousands, except per share data)	Shares			Fair Value

Non-vested shares outstanding as of December 31, 2011		83		$	17.88
Granted		95		$	15.50
Vested		(38	)	$	16.67
Forfeited		(13	)	$	17.05
Non-vested shares outstanding as of September 30, 2012		127		$	16.55

The following table summarizes the activities related to the Company's performance based restricted stock unit awards:


				Weighted-
				Average
				Grant Date
(in thousands, except per share data)	Shares			Fair Value

Non-vested shares outstanding as of December 31, 2011		68		$	18.57
Granted⁽¹⁾		103		$	15.11
Forfeited		(7	)	$	18.57

Non-vested shares outstanding as of September 30, 2012		164		$	16.39

⁽¹⁾ Represents target number of shares that can vest based on the achievement of certain performance criteria.