Note 9. Share-Based Compensation

Our Board of Directors approved the 2006 Incentive Stock Plan (the "2006 Plan"). The 2006 Plan was last amended in May 2012. Participation in the 2006 Plan is limited to employees, directors, and consultants. Shares reserved for future issuance under the 2006 Plan may be used for grants of stock options ("options"), restricted stock units ("RSUs"), and other types of awards. Options granted under the 2006 Plan are either incentive or nonqualified stock options and generally become exercisable in equal annual installments over a period of four years from the date of grant and expire generally ten years from the grant date. RSUs generally vest in equal annual installments over a four-year period.

The Board of Directors authorizes the granting of options, RSUs and other type of awards to employees and consultants. The exercise prices of the options shall not be less than the fair market value of common stock on the date of grant. The fair value of RSUs granted is determined based on the number of RSUs granted and the quoted price of our common stock on the date of grant. As of December 28, 2013, approximately 3.3 million shares remained available for issuance under the 2006 Plan.

Additionally, we sponsor the Employee Stock Purchase Plan (the "ESPP") in which eligible employees may contribute up to 15% of their base compensation to purchase shares of common stock at a price equal to 85% of the lower of the market value of the stock at the beginning or end of each six-month offer period. In fiscal 2013, 143,593 shares of common stock were issued under the ESPP. As of December 28, 2013, 279,350 shares remained available for issuance under this plan.

Share-based compensation expense and related share award activity is presented on a consolidated basis, unless otherwise presented as continuing or discontinued operations.

Share-based compensation consists of the following:

	Fiscal Years

	2013		2012		2011
	(in thousands)
Cost of product sales	$	2,365	$	2,130	$	1,543
Selling, general and administrative		16,897		13,235		10,387
Research and development		7,735		6,327		4,171


Total share-based compensation expense before taxes		26,997		21,692		16,101
Tax benefit for share-based compensation expense		10,083		8,501		5,688


Total share-based compensation expense (net of taxes)	$	16,914	$	13,191	$	10,413

Share-based compensation costs of $0.5 million, $0.2 million, and $0.4 million were capitalized to inventory as of December 28, 2013, December 29, 2012, and December 31, 2011, respectively.

We receive a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the fair market value of the options at the date of exercise over the exercise prices of the options. The excess tax benefits (i.e., windfalls only for tax deductions in excess of the share-based compensation expense recognized) are reported as financing cash flows of $2.4 million, $3.2 million, and $1.7 million for fiscal 2013, 2012, and 2011, respectively, on the consolidated statements of cash flows.

Cash proceeds from the exercise of stock options were $16.7 million, $10.1 million, and $11.5 million for fiscal 2013, 2012, and 2011, respectively. Cash proceeds from our employee stock purchase plan were $4.4 million, $3.5 million, and $3.1 million for fiscal 2013, 2012, and 2011, respectively. The actual income tax benefit realized from stock option exercises was $2.4 million, $3.4 million, and $1.8 million for fiscal 2013, 2012, and 2011, respectively.

Stock Options

The fair value of each option is estimated at the date of grant using the Black- Scholes option pricing formula with the following assumptions:

	Fiscal Years

	2013	2012	2011
Risk-free interest rate	1.40%	1.40%	2.71%
Expected volatility	37%	43%	44%
Expected option life	4.92 - 5.71 years	4.76 - 5.84 years	4.69 - 5.33 years
Dividends	None	None	None

Determining Fair Value for Options

•

Valuation and amortization method—We estimate the fair value of stock options granted using the Black-Scholes option-pricing formula. This fair value is then amortized over the requisite service periods of the awards.

•

Expected term—The expected term of options represents the period of time that options are expected to be outstanding. We use separate assumptions for groups of employees (for example, officers) that have similar historical exercise behavior, giving consideration to the contractual terms of the share-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of our share-based awards. The range above reflects the expected option impact of these separate groups.

•

Expected volatility—Our expected volatility was based on a combination of historical volatility trends and market-based implied volatility because we determined that this combination of historical volatility trends and market-based implied trends is reflective of market conditions. In determining the extent of use of implied volatility, we considered: (i) the volume of market activity of traded options; (ii) the ability to reasonably match the input variables of traded options to those of stock options granted by us, including the date of grant; (iii) the similarity of the exercise prices; and (iv) the length of term of traded options.

•

Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.

•

Expected dividend—The expected dividend assumption is based on our current expectations about our anticipated dividend policy.

Option activity is summarized as follows:

			Weighted Average Exercise Price Per Share

Outstanding as of January 1, 2011 (1,883 exercisable at $17.60 weighted average price per share)	2,694		$	19.81	5.05
Granted	643			27.72
Cancelled and expired	(112	)		24.11
Exercised	(687	)		16.72


Outstanding as of December 31, 2011 (1,484 exercisable at $19.04 weighted average price per share)	2,538		$	22.46	5.96
Granted	602			33.74
Cancelled and expired	(76	)		31.13
Exercised	(566	)		17.78


Outstanding as of December 29, 2012 (1,265 exercisable at $21.29 weighted average price per share)	2,498		$	25.98	6.27
Granted	596			35.70
Cancelled and expired	(74	)		32.45
Exercised	(759	)		21.97


Outstanding as of December 28, 2013	2,261		$	29.68	6.95

As of December 28, 2013, there was $7.1 million of unrecognized compensation expense, net of estimated forfeitures, related to stock options, which we expect to recognize over a weighted average period of 1.29 years. The aggregate intrinsic value of in-the-money options outstanding as of December 28, 2013 was $14.7 million. The total intrinsic value of options exercised during fiscal 2013, 2012, and 2011 was $12.8 million, $10.0 million, and $8.1 million, respectively. The weighted average grant-date fair value of options granted during fiscal 2013, 2012, and 2011 was $13.00 per share, $14.99 per share, and $13.53 per share, respectively.

The following table summarizes outstanding options that have vested or are expected to vest and are exercisable as of December 28, 2013:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

	(in thousands)				(in years)		(in millions)
Vested or expected to vest		2,198	$	29.55		6.9	$	14.6
Exercisable		926	$	24.57		4.9	$	10.7

Options outstanding as of December 28, 2013 are summarized as follows:

	Options Outstanding						Options Exercisable

	(in thousands, except contractual life and exercise price)
Exercise Price Range	Number		Weighted Average Remaining Contractual Life (In Years)		Weighted Average Exercise Price		Number		Weighted Average Exercise Price
$8.52 - $23.93		482		2.96	$	19.55		482	$	19.55
$24.35 - $29.81		633		6.82		28.10		311		28.32
$30.44 - $33.99		548		8.22		33.61		123		33.62
$34.50 - $35.10		18		8.39		34.81		5		34.83
$35.68 - $43.30		580		9.17		35.93		5		42.89


		2,261		6.95	$	29.68		926	$	24.57

Restricted Stock Units

As of December 28, 2013, we had $33.3 million of unrecognized compensation expense, net of estimated forfeitures, which we expect to recognize over a weighted average period of 2.22 years. The aggregate intrinsic value of the RSUs outstanding was $52.8 million.

RSU activity is summarized as follows:



Outstanding units as of January 1, 2011	688		28.86	1.53
Granted	736		28.73
Released	(209	)	28.25
Forfeited or expired	(64	)	27.94


Outstanding units as of December 31, 2011	1,151		28.88	1.50
Granted	730		34.22
Released	(327	)	28.54
Forfeited or expired	(92	)	30.74


Outstanding units as of December 29, 2012	1,462		31.52	1.37
Granted	649		35.30
Released	(553	)	30.74
Forfeited or expired	(97	)	32.91


Outstanding units as of December 28, 2013	1,461		33.40	1.27

Employee Stock Purchase Plan

The estimated subscription date fair value of the offering under the ESPP for each fiscal year 2013, 2012, and 2011 were $0.6 million as calculated using the Black-Scholes option pricing model and the following assumptions:

	Fiscal Years

	2013			2012			2011
Risk-free interest rate		0.08	%		0.15	%		0.05	%
Expected volatility		29	%		39	%		36	%
Expected option life		0.50 years			0.50 years			0.50 years
Dividends		None			None			None

As of December 28, 2013, there was $0.4 million of unrecognized compensation expense related to ESPP subscriptions that began on November 1, 2013, which we expect to recognize during the first four months of 2014.