Stock-Based Compensation Expense

6 Months Ended

Jul. 01, 2012

Stock-Based Compensation Expense [Abstract]

Stock-Based Compensation Expense

NOTE 10: Stock-Based Compensation Expense

The Company’s share-based payments that result in compensation expense consist solely of stock option grants. As of July 1, 2012, the Company had 6,319,161 shares available for grant under two stock option plans: the 2001 General Stock Option Plan (4,953,176) and the 2007 Stock Option and Incentive Plan (1,365,985). Each of these plans expires ten years from the date the plan was approved. In December 2011, the 2001 General Stock Option Plan received shareholder approval for an amendment and restatement of the plan, extending the plan until September 2021. Stock options are granted with an exercise price equal to the market value of the Company’s common stock at the grant date. Generally, stock options vest over four years based upon continuous service and expire ten years from the grant date.

The following table summarizes the Company’s stock option activity for the six-month period ended July 1, 2012:

	Shares (in  thousands)			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2011		4,473		$	24.48
Granted		17			41.40
Exercised		(654	)		21.33
Forfeited or expired		(81	)		24.89
Outstanding as of July 1, 2012		3,755		$	25.15		7.5	$	26,464
Exercisable as of July 1, 2012		1,347		$	20.90		5.8	$	14,648

The fair values of stock options granted in each period presented were estimated using the following weighted-average assumptions:

	Three-months Ended						Six-months Ended
	July 1, 2012			July 3, 2011			July 1, 2012			July 3, 2011
Risk-free rate		2.0	%		3.6	%		2.0	%		3.6	%
Expected dividend yield		1.2	%		1.0	%		1.2	%		1.0	%
Expected volatility		44	%		42	%		44	%		42	%
Expected term (in years)		5.7			5.2			5.7			5.4

Risk-free rate

The risk-free rate was based upon a treasury instrument whose term was consistent with the contractual term of the option.

Expected dividend yield

The current dividend yield was calculated by annualizing the cash dividend declared by the Company’s Board of Directors for the current quarter and dividing that result by the closing stock price on the grant date. The current dividend yield was then adjusted to reflect the Company’s expectations relative to future dividend declarations.

Expected volatility

The expected volatility was based upon a combination of historical volatility of the Company’s common stock over the contractual term of the option and implied volatility for traded options of the Company’s stock.

Expected term

The expected term was derived from the binomial lattice model from the impact of events that trigger exercises over time.

The weighted-average grant-date fair values of stock options granted during the three-month periods ended July 1, 2012 and July 3, 2011 were $13.50 and $11.95, respectively. The weighted-average grant-date fair values of stock options granted during the six-month periods ended July 1, 2012 and July 3, 2011 were $13.35 and $11.77, respectively.

The Company stratifies its employee population into two groups: one consisting of senior management and another consisting of all other employees. The Company currently expects that approximately 67% of its stock options granted to senior management and 66% of its options granted to all other employees will actually vest. Therefore, the Company currently applies an estimated forfeiture rate of 12% to all unvested options for senior management and a rate of 14% for all other employees.

The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended July 1, 2012 were $1,989,000 and $646,000, respectively, and for the three-month period ended July 3, 2011 were $1,957,000 and $654,000, respectively. The total stock-based compensation expense and the related income tax benefit recognized for the six-month period ended July 1, 2012 were $5,303,000 and $1,733,000, respectively, and for the six-month period ended July 3, 2011 were $4,309,000 and $1,445,000, respectively. No compensation expense was capitalized as of July 1, 2012 or December 31, 2011.

The following table details the stock-based compensation expense by caption for each period presented on the Consolidated Statements of Operations (in thousands):

	Three-months Ended				Six-months Ended
	July 1, 2012		July 3, 2011		July 1, 2012		July 3, 2011
Product cost of revenue	$	135	$	105	$	375	$	270
Service cost of revenue		40		39		108		109
Research, development, and engineering		483		529		1,350		1,338
Selling, general, and administrative		1,331		1,284		3,470		2,592
	$	1,989	$	1,957	$	5,303	$	4,309

The total intrinsic values of stock options exercised for the three-month periods ended July 1, 2012 and July 3, 2011 were $672,000 and $7,969,000, respectively. The total intrinsic values of stock options exercised for the six-month periods ended July 1, 2012 and July 3, 2011 were $13,308,000 and $12,637,000, respectively.

As of July 1, 2012, total unrecognized compensation expense related to non-vested stock options was $9,803,000, which is expected to be recognized over a weighted-average period of 1.7 years.