Stock-Based Compensation

Compensation expense related to the Company’s share-based awards for the years ended December 31, 2014, 2013 and 2012 was $6.7 million, $8.8 million and $6.6 million, respectively, of which $4.3 million, $4.0 million and $3.8 million, respectively, related to stock options and $2.1 million, $4.0 million and $2.2 million, respectively, related to restricted stock (“stock awards”). For the years ended December 31, 2014, 2013 and 2012 the Company recorded $0.3 million, $0.8 million and $0.6 million in stock-based compensation expense, respectively, associated with the deferred bonus compensation program, described in Note 4. During the years ended December 31, 2014, 2013 and 2012, $0.3 million, $0.7 million and $0.5 million, respectively, were initially recorded as a component of accrued payroll and related expenses.

Total stock-based compensation expense, related to all of the Company’s share-based awards, was comprised as follows (in millions):



	Year ended December 31,
	2014		2013		2012
Cost of sales	$	0.6	$	0.8	$	0.6
Research and development	1.1		1.9		1.1
Sales and marketing	1.1		0.9		0.6
General and administrative	3.9		5.2		4.3
	$	6.7	$	8.8	$	6.6

Compensation expense capitalized to inventory and compensation expense related to the Company’s ESPP were not material for the years ended December 31, 2014, 2013 and 2012.

Stock Options

Compensation expense related to stock options granted is recognized ratably over the service vesting period for the entire option award. For stock option awards with graded vesting, the Company ensures that the cumulative amount of compensation expense recognized at the end of any reporting period at least equals the portion of the stock option award that has vested at that date. The total number of stock option awards expected to vest is adjusted by estimated forfeiture rates. The estimated fair value of each stock option award was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for the option grants:



	Year ended December 31,
	2014		2013		2012
Risk-free interest rate	1.59	%	0.86	%	0.83	%
Expected option life (in years)	5.78		5.53		5.52
Volatility rate	42	%	44	%	46	%
Dividend rate	—	%	—	%	—	%

The computation of the expected option life is based on a weighted-average calculation combining the average life of options that have already been exercised and post-vest cancellations with the estimated life of the remaining vested and unexercised options. The expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the U.S. Treasury yield curve over the expected term of the option. The Company has never paid any cash dividends on its common stock, and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model. The Company’s estimated forfeiture rate is based on its historical experience and future expectations.

The Company’s determination of fair value is affected by the Company’s stock price as well as a number of assumptions that require judgment. The weighted-average fair value per share was $10.96, $9.19 and $6.51 for options granted during the years ended December 31, 2014, 2013 and 2012, respectively. The total intrinsic value was $2.8 million, $8.1 million and $2.0 million for options exercised during the years ended December 31, 2014, 2013 and 2012, respectively. As of December 31, 2014, total unrecognized compensation expense related to stock options was approximately $6.0 million and the related weighted-average period over which it is expected to be recognized is approximately 2.1 years. The maximum contractual term of the Company’s stock options is ten years.

A summary of the status of stock option activity for the years ended December 31, 2012, 2013 and 2014 is as follows (in thousands, except price data and years):



	Number of Shares		Weighted- average exercise price per share		Weighted- average remaining contractual term (in years)	Aggregate intrinsic value
Outstanding at January 1, 2012	3,417		$	12.60
Granted	624		15.23
Exercised	(351	)	11.85
Cancelled	(90	)	11.94
Outstanding at December 31, 2012	3,600		13.15
Granted	529		22.36
Exercised	(642	)	12.16
Cancelled	(13	)	10.61
Outstanding at December 31, 2013	3,474		14.74
Granted	559		26.63
Exercised	(251	)	13.67
Cancelled	(175	)	20.63
Outstanding at December 31, 2014	3,607		$	16.37	6.08	$	41,157
Vested and expected to vest at December 31, 2014	3,461		$	16.04	5.97	$	40,629
Exercisable at December 31, 2014	2,330		$	13.33	4.89	$	33,667
Available for future grant at December 31, 2014	2,162

Stock Awards

The fair value of stock awards is determined based on the closing market price of the Company’s common stock on the grant date. The Company grants both time-based and performance-based stock awards. Compensation expense for time-based stock awards is measured at the grant date and recognized ratably over the vesting period. A portion of the stock awards granted in 2012 and 2013 was performance-based and vesting is tied to achievement of specific Company goals in 2014 and 2013, respectively. For purposes of measuring compensation expense, the amount of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. The recognition of compensation expense associated with performance-based stock award requires judgment in assessing the probability of meeting the performance goals, as well as defined criteria for assessing achievement of the performance-related goals. The grant date of the performance-based stock award takes place when the grant is authorized and the specific achievement goals are communicated. The communication date of the performance goals can impact the valuation and associated expense of the stock award. See further discussion of amended performance metrics and the impact to stock-based compensation expense in Note 4.

A summary of the status of stock awards activity for the years ended December 31, 2012, 2013 and 2014 is as follows (in thousands, except price data):



	Shares		Weighted-average grant date fair value
Non-vested at January 1, 2012	502		$	13.65
Granted	145		15.69
Vested	(107	)	15.29
Forfeited	(18	)	13.81
Non-vested at December 31, 2012	522		13.87
Granted	74		23.53
Vested	(141	)	23.43
Forfeited	(1	)	15.26
Non-vested at December 31, 2013	454		16.22
Granted	145		25.73
Vested	(174	)	28.27
Forfeited	(23	)	18.19
Non-vested at December 31, 2014	402		$	14.84

In 2014, 2013 and 2012, the Company issued approximately 0.1 million restricted share units each year in exchange for the deferred bonus liability of $0.7 million , $0.4 million and $0.9 million, respectively.

The total amount of unrecognized compensation expense related to non-vested stock awards as of December 31, 2014 was approximately $1.9 million, which is expected to be recognized over a weighted-average period of approximately 2.6 years.