9. SHARE-BASED COMPENSATION/STOCK OPTION AND PURCHASE PLANS

Description of Share-Based Compensation Plans

Stock Option and Award Plans

We have three stock option plans for officers and certain other employees: the 1994 Stock Option Plan (1994 Plan); the 2003 Stock Option Plan (2003 Plan); and the 2007 Incentive Award Plan (2007 Plan). The 1994 Plan and 2003 Plan authorized the grant of incentive stock options and non-qualified stock options to employees. The 2007 Plan authorizes the grant of stock options, restricted stock, restricted stock units, stock appreciation rights and other types of equity awards to employees. We no longer grant stock option grants under the 1994 Plan or 2003 Plan. Since 2007, all share-based compensation grants have been from the 2007 Plan. A total of 1,650,360 shares have been reserved for issuance of equity awards under the 2007 Plan and may be of either Class A or Class B common stock. At December 31, 2013, there were 492,310 shares available to be granted in the future.

Under the above plans, Class A and Class B options are granted at prices not less than fair market value of the underlying common stock on the date of grant. Generally, options granted have a term of 10 years and vest in increments of 20% per year over a five-year period on the yearly anniversary date of the grant. Stock awards issued under the 2007 Plan generally vest in increments of 20% per year over a five-year period on the yearly anniversary date of the grant.

Employee Stock Purchase Plans

Our Amended and Restated 1988 Employee Stock Purchase Plan (1988 ESPP) and our 2011 Employee Stock Purchase Plan (2011 ESPP) provides that eligible employees may contribute up to 10% of their compensation up to $25,000 annually toward the quarterly purchase of our Class A common stock. The employees’ purchase price is 85% of the lesser of the fair market value of the stock on the first business day or the last business day of each calendar quarter. As of January 1, 2012, we no longer issue shares from the 1988 ESPP.

The 2011 ESPP includes two components: a Code Section 423 Component that we intend to qualify as an “employee stock purchase plan” under Section 423 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) and a Non-423 Component, which authorizes the grant of purchase rights that does not qualify as an “employee stock purchase plan” under Section 423 of the Code. We have authorized the sale of 600,000 shares of Class A common stock under the 2011 ESPP.

Share-Based Compensation Expense

Included in our share-based compensation expense is the cost related to stock option grants, ESPP stock purchases, restricted stock and restricted stock unit awards. Share-based compensation expense is allocated to Cost of goods sold, Research and development expense, and Selling, general and administrative expense in the Consolidated Statements of Income.

For 2013, 2012 and 2011, we recognized share-based compensation expense of $13.7 million, $13.2 million and $10.7 million, respectively. We did not capitalize any share-based compensation expense in inventory.

For options and awards, we amortize the fair value on a straight-line basis. All stock compensation awards are amortized over the requisite service periods of the awards, which are generally the vesting periods.

Stock Options

The following table summarizes stock option activity:



	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding, January 1, 2011	1,057,819		$	57.12
Granted	58,500		$	99.49
Exercised	(220,372	)	$	42.44
Forfeited/expired	(7,197	)	$	62.98
Outstanding, December 31, 2011	888,750		$	63.50
Granted	55,250		$	107.32
Exercised	(181,707	)	$	44.66
Forfeited/expired	(15,000	)	$	87.78
Outstanding, December 31, 2012	747,293		$	70.83
Granted	55,050		$	117.67
Exercised	(159,450	)	$	54.16
Forfeited/expired	(13,250	)	$	91.32
Outstanding, December 31, 2013	629,643		$	78.72	4.53	$	28.3
Vested and expected to vest,
December 31, 2013	612,946		$	77.91	4.41	$	28.0
Exercisable, December 31, 2013	472,193		$	70.14	3.23	$	25.2

The following summarizes information about stock options outstanding at December 31, 2013:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted-Average Remaining Contractual Term (in years)	Weighted -Average Exercise Price		Number Exercisable	Weighted - Average Exercise Price
$ 53.75 - $ 62.47	191,930	1.41	$	58.40	191,930	$	58.40
$ 63.00 - $ 75.38	178,413	3.53	$	69.87	168,313	$	69.56
$ 84.57 - $107.32	204,250	6.93	$	95.03	111,950	$	91.11
$117.00 - $122.36	55,050	9.71	$	117.67	—	$	—
Totals	629,643				472,193

Intrinsic value for stock options is defined as the difference between the current market value and the grant price. The total intrinsic value on the date of exercise of stock options exercised during 2013, 2012 and 2011 was approximately $11 million, $11 million and $14 million, respectively. The total fair value of options vested during 2013, 2012 and 2011 was $2.2 million, $2.3 million and $3.3 million, respectively.

Cash received from stock options exercised during 2013, 2012 and 2011 was $4.1 million, $3.4 million and $7.7 million, respectively. The actual tax benefit realized for the tax deductions from stock options exercised totaled $6.6 million, $6.5 million and $6.0 million in 2013, 2012 and 2011, respectively.

As of December 31, 2013, there was $6.1 million of total unrecognized compensation cost from stock options. This amount is expected to be recognized in the future over a weighted-average period of approximately 3 years.

The weighted-average fair value of stock options granted was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions:



	Year Ended December 31,
	2013			2012			2011
Expected volatility	28		%	30		%	32		%
Risk-free interest rate	2.65		%	1.53		%	1.71		%
Expected life (in years)	8.9			9.0			8.6
Expected dividend	—			—			—
Weighted-average fair value of options granted	$	47.25		$	41.82		$	40.81

Volatility is based on the historical volatilities of our common stock for a period equal to the stock option’s expected life. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life represents the number of years that we estimate, based primarily on historical experience, that the options will be outstanding prior to exercise. We do not anticipate paying any cash dividends in the future and therefore use an expected dividend yield of zero.

Restricted Stock

Under the 2007 Plan, restricted stock was last granted in 2008 and there will be no further grants. The fair value of each share of restricted stock is the market value as determined by the closing price of the stock on the day of grant.

The following table summarizes restricted stock activity:



	Year Ended December 31,
	2013				2012				2011
	Restricted Stock Shares		Weighted- Average Grant-Date Fair Value		Restricted Stock Shares		Weighted- Average Grant-Date Fair Value		Restricted Stock Shares		Weighted- Average Grant-Date Fair Value
Nonvested shares, at
beginning of year	12,957		$	88.09	39,629		$	84.07	68,893		$	83.21
Vested	(12,610	)	$	88.09	(25,124	)	$	81.98	(26,179	)	$	81.98
Cancelled/forfeited	(347	)	$	88.00	(1,548	)	$	84.20	(3,085	)	$	82.63
Nonvested shares, at
end of year	—		$	—	12,957		$	88.09	39,629		$	84.07

As of December 31, 2013, there was no unrecognized compensation cost related to restricted stock.

Restricted Stock Units

Restricted stock units, which are rights to receive shares of company stock, were granted from 2007 through 2013 under the 2007 Plan. The fair value of each restricted stock unit is the market value as determined by the closing price of the stock on the day of grant.

The following table summarizes restricted stock unit activity:



	Restricted Stock Units		Weighted- Average Grant-Date Fair Value		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value as of December 31, 2013 (in millions)
Outstanding, January 1, 2011	242,222		$	80.61
Granted	127,920		$	98.25
Vested	(54,350	)	$	79.67
Forfeited	(16,430	)	$	80.70
Outstanding, December 31, 2011	299,362		$	88.31
Granted	138,840		$	107.32
Vested	(75,466	)	$	85.52
Forfeited	(14,235	)	$	89.31
Outstanding, December 31, 2012	348,501		$	96.45
Granted	144,445		$	117.09
Vested	(92,273	)	$	92.26
Forfeited	(25,243	)	$	96.08
Outstanding, December 31, 2013	375,430		$	105.44	2.13	$	46.4

As of December 31, 2013, there was approximately $30.5 million of total unrecognized compensation cost related to restricted stock units. This amount is expected to be recognized over a remaining weighted-average period of approximately 4 years.

Employee Stock Purchase Plans

The fair value of the employees’ purchase rights under the 2011 ESPP and the 1988 ESPP was estimated using a Black-Scholes model with the following weighted-average assumptions:



	Year Ended December 31,
	2013			2012			2011
Expected volatility	19		%	27		%	20		%
Risk-free interest rate	0.05		%	0.07		%	0.06		%
Expected life (in years)	0.25			0.25			0.25
Expected dividend	—			—			—
Weighted-average fair value
of purchase rights	$	21.76		$	20.70		$	20.35

The major assumptions are primarily based on historical data. Volatility is based on the historical volatilities of our common stock for a period equal to the expected life of the purchase rights. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. We do not anticipate paying any cash dividends in the future and therefore use an expected dividend yield of zero.

We sold 103,669 shares for $10.0 million, 107,749 shares for $9.2 million and 96,362 shares for $8.1 million under the 2011 ESPP and 1988 ESPP to employees in 2013, 2012 and 2011, respectively. At December 31, 2013, 388,582 shares remain authorized and available for issuance under the 2011 ESPP.

We currently issue new shares to satisfy stock option exercises, restricted stock issuances and ESPP stock purchases.