Share-Based Compensation

9 Months Ended

Oct. 01, 2011

Share-Based Compensation

Share-Based Compensation

10.   Share-Based Compensation

Share-based compensation expense is measured based on the grant-date fair value of the share-based awards. We recognize share-based compensation expense for the portion of the award that is expected to vest over the requisite service period for those awards with graded vesting and service conditions. We develop an estimate of the number of share-based awards which will ultimately vest, primarily based on historical experience. The estimated forfeiture rate is re-assessed periodically throughout the requisite service period. Such estimates are revised if they differ materially from actual forfeitures. As required, the forfeiture estimates will be adjusted to reflect actual forfeitures when an award vests.

Share-based compensation included in the condensed consolidated statements of operations consists of the following:

	Three Months Ended				Nine Months Ended
	October 1, 2011		October 2, 2010		October 1, 2011		October 2, 2010
	(in thousands)
Cost of product sales	$	378	$	322	$	1,081	$	947
Selling, general and administrative	2,539		1,858		7,577		6,074
Research and development	1,013		791		3,074		2,603
Total share-based compensation expense before taxes	3,930		2,971		11,732		9,624
Tax benefit for share-based compensation expense	1,921		948		4,100		3,747
Total share-based compensation — continuing operations (net of taxes)	$	2,009	$	2,023	$	7,632	$	5,877
Total share-based compensation — discontinued operations (net of taxes)	$	—	$	751	$	—	$	1,524

For the nine months ended October 1, 2011 and October 2, 2010, share-based compensation expense of $0.4 million and $0.3 million, respectively, was capitalized to inventory.

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. Our unaudited condensed consolidated statements of cash flows presentation reports the excess tax benefits (i.e., windfall only for tax deductions in excess of the share-based compensation expense recognized) as financing cash flows of $1.4 million and $9.5 million for the nine months ended October 1, 2011 and October 2, 2010, respectively.

Cash proceeds from the exercise of stock options were $10.2 million and $22.0 million for the nine months ended October 1, 2011 and October 2, 2010, respectively. Cash proceeds from our employee stock purchase plan were $1.9 million for each of the nine months ended October 1, 2011 and October 2, 2010. The Company purchased $3.7 million and $4.7 million of restricted stock for payment of income tax withholding due upon vesting for the nine months ended October 1, 2011 and October 2, 2010, respectively.  The actual income tax benefit realized from stock option exercises was $1.3 million and $10.3 million for the nine months ended October 1, 2011 and October 2, 2010, respectively.

Equity Plan

In April 2006, the Board of Directors approved the 2006 Incentive Stock Plan (“2006 Plan”) and in May 2006 the 2006 Plan was approved by our shareholders. In May 2006 and April 2008, the 2006 Plan was amended by the Board of Directors and in May 2008 the 2006 Plan as amended was approved by our shareholders. In May 2008 and March 2010, the 2006 Plan was further amended by the Board of Directors and approved by our shareholders in May 2008 and May 2010, respectively. The 2006 Plan allows us to grant to our employees, directors, and consultants up to a total of 8.6 million shares of stock awards. Each share issued from and after May 20, 2008 through May 18, 2010 as a restricted stock bonus, restricted stock unit, phantom stock unit, performance share bonus, or performance share unit reduces the number of shares available for issuance under the 2006 Plan by one and seventy-four hundredths (1.74) shares, each share issued from and after May 19, 2010 as a restricted stock bonus, restricted stock unit, phantom stock unit, performance share bonus or performance share unit reduces the number of shares available for issuance under the 2006 Plan by one and seven-tenths (1.7) shares, and each share issued as a stock option, restricted stock purchases or stock appreciation rights reduces the shares available for issuance under the 2006 Plan on a share-for-share basis. During the nine months ended October 1, 2011, approximately 628,000 options were granted under the 2006 Plan at an exercise price equal to the fair market value on the date of grant, and approximately 590,000 shares of restricted stock units were granted under the 2006 Plan. As of October 1, 2011, 2.9 million shares remained available for grant under the 2006 Plan.

Stock Options

Upon approval in May 2006, the 2006 Plan replaced our previous common stock option plans and equity incentive plans. As of October 1, 2011, we had 2.6 million options outstanding under the 2006 Plan and the replaced plans. Options under the 2006 Plan may be granted by the Board of Directors at the fair market value on the date of grant and generally become fully exercisable within four years after the date of grant and expire between five and ten years from the date of grant. The fair value of each option is estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:

	Three Months Ended				Nine Months Ended
	October 1, 2011		October 2, 2010		October 1, 2011		October 2, 2010
Risk-free interest rate (weighted average)	1.66	%	2.13	%	2.74	%	3.05	%
Expected volatility	43	%	40	%	44	%	40	%
Expected option term (years)	4.80		4.83		4.80 to 5.46		4.88 to 6.04
Dividends	None		None		None		None

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. 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. The range above reflects the expected option impact of these separate groups. Prior to fiscal 2010, our estimated volatility was based solely on the historical volatility of our common stock, and beginning in fiscal 2010 we base our expected volatility on a combination of historical volatility trends and market-based implied volatility because we have determined that this combination of historical volatility trends and market-based implied trends is reflective of market conditions. The decision to incorporate implied volatility was based on our assessment that implied volatility of publicly traded options in our common stock is reflective of market conditions and is generally reflective of both historical volatility and expectations of how future volatility will differ from historical volatility. 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.

As of October 1, 2011, there was $6.7 million of unrecognized compensation expense, net of estimated forfeitures, related to stock options, which expense we expect to recognize over a weighted average period of 1.60 years. The aggregate intrinsic value of in-the-money options outstanding was $27.4 million, based on the closing price of our common stock on September 30, 2011, the last trading day in the nine months ended October 1, 2011, of $32.64 per share. As of October 1, 2011, the intrinsic value of options currently exercisable was $21.6 million, and the intrinsic value of options vested and expected to vest was $27.0 million.

The total intrinsic value of options exercised for the three months ended October 1, 2011 and October 2, 2010 was $5.5 million and $0.4 million, respectively. The total intrinsic value of options exercised for the nine months ended October 1, 2011 and October 2, 2010 was $6.8 million and $32.4 million, respectively.

Stock option activity is summarized as follows:

	Number ofOptions(in thousands)		WeightedAverage ExercisePrice Per Share		Weighted AverageRemaining ContractLife (years)
Outstanding options at January 1, 2011	2,694		$	19.81	5.05
Granted	628		27.62
Exercised	(607	)	16.82
Forfeited or expired	(99	)	23.69
Outstanding options at October 1, 2011	2,616		$	22.24	6.04
Outstanding options exercisable at October 1, 2011	1,555		$	18.80	4.23
Outstanding options vested at October 1, 2011 and expected to vest	2,551		$	22.09	5.99

The weighted average grant-date fair value of options granted during the nine months ended October 1, 2011 and October 2, 2010 was $12.10 per share and $12.62 per share, respectively.

Restricted Stock Awards and Units

The 2006 Plan allows for the issuance of restricted stock awards and restricted stock units, which awards or units may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned share-based compensation related to these awards is being amortized to compensation expense over the period of the restrictions, generally four years. The expense for these awards was determined based on the market price of our shares on the date of grant applied to the total number of shares that were granted.

Restricted Stock Awards

Share-based compensation expense related to restricted stock awards was $1.2 million for the nine months ended October 1, 2011. As of October 1, 2011, we had $0.4 million of unrecognized compensation expense, net of estimated forfeitures, related to restricted stock awards, which amount we expect to recognize over 0.44 years. There were no restricted stock awards granted during the nine months ended October 1, 2011.

Restricted stock award activity is summarized as follows:

	Number ofShares(in thousands)		Weighted AverageGrant Date FairValue
Outstanding unvested restricted stock awards at January 1, 2011	234		$	16.11
Granted	—		—
Released	(153	)	16.52
Forfeited or expired	(6	)	15.95
Outstanding unvested restricted stock awards at October 1, 2011	75		$	15.30

Restricted Stock Units

Share-based compensation expense related to restricted stock units was $6.2 million for the nine months ended October 1, 2011. As of October 1, 2011, we had $21.0 million of unrecognized compensation expense, net of estimated forfeitures, related to restricted stock units, which amount we expect to recognize over 2.84 years. The aggregate intrinsic value of the units outstanding, based on our stock price on October 1, 2011, was $33.8 million.

Restricted stock unit activity is summarized as follows:

	Number ofUnits(in thousands)		Weighted AverageGrant Date FairValue		Weighted AverageRemaining ContractLife (in years)
Outstanding unvested restricted stock units at January 1, 2011	688		$	28.86	1.53
Granted	590		28.28
Released	(197	)	28.15
Forfeited or expired	(45	)	27.95
Outstanding unvested restricted stock units at October 1, 2011	1,036		$	28.70	1.64

Employee Stock Purchase Plan

In May 2002, our shareholders approved our Employee Stock Purchase Plan (“ESPP”) under which 500,000 shares of common stock were reserved for issuance. In addition, the ESPP provides for an annual, automatic increase of up to 250,000 shares in the total number of shares available for issuance thereunder on March 1 of each year, unless our Board of Directors specifies a smaller increase or no increase. Under this provision, an additional 250,000 shares were reserved for issuance under the ESPP on each of March 1, 2006, March 1, 2008, March 1, 2009, and March 1, 2011; our Board of Directors specified no increase as of each other year. Eligible employees may purchase a limited number of shares, over a six month period, of our common stock at 85% of the lower of the market value on the offering date or the market value on the purchase date. During the nine months ended October 1, 2011, 72,280 shares of common stock were issued under the ESPP. As of October 1, 2011, approximately 337,900 shares remained available for issuance under this plan.

The estimated subscription-date fair value of the offering under the ESPP for the nine months ended October 1, 2011 and October 2, 2010 was approximately $0.5 million and $0.6 million, respectively, using the Black-Scholes option pricing model and the following assumptions:

	Nine Months Ended
	October 1, 2011		October 2, 2010
Risk-free interest rate	0.11	%	0.25	%
Expected volatility	48	%	43	%
Expected option life	0.50 years		0.50 years
Dividends	None		None

As of October 1, 2011, there was approximately $0.1 million of unrecognized compensation expense related to ESPP subscriptions that began on May 1, 2011, which amount we expect to recognize in the fourth quarter of 2011.