Stock-Based Compensation

12 Months Ended

Dec. 31, 2012

Stock-Based Compensation

NOTE 13: Stock-Based Compensation

Stock Option Plans

The Company’s share-based payments that result in compensation expense consist solely of stock option grants. As of December 31, 2012, the Company had 6,319,454 shares available for grant under two stock option plans: the 2001 General Stock Option Plan (4,953,469) 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. Generally, stock options are granted with an exercise price equal to the market value of the Company’s common stock at the grant date, 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 year ended December 31, 2012:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
	(in thousands)					(in years)		(in thousands)
Outstanding as of December 31, 2011		4,473		$	24.48
Granted		53			36.60
Exercised		(842	)		20.72
Forfeited or expired		(125	)		24.11
Outstanding as of December 31, 2012		3,559		$	25.56		7.1	$	40,098
Exercisable as of December 31, 2012		1,186		$	21.37		5.4	$	18,351
Options vested or expected to vest at December 31, 2012 (1)		3,203		$	25.15		6.9	$	37,424

(1) In addition to the vested options, the Company expects a portion of the unvested options to vest at some point in the future. Options expected to vest are calculated by applying an estimated forfeiture rate to the unvested options.

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

	Year Ended December 31,
	2012			2011			2010
Risk-free rate		2.0	%		2.9	%		3.3	%
Expected dividend yield		1.2	%		1.1	%		1.3	%
Expected volatility		44	%		43	%		44	%
Expected term (in years)		5.7			5.5			5.3

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 value of stock options granted was $13.16 in 2012, $12.32 in 2011, and $7.33 in 2010.

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 Company revised its estimated forfeiture rates in the first quarter of 2012 and 2011 and the second quarter of 2010, resulting in an increase to compensation expense of $200,000 in 2012, and a reduction to compensation expense of $80,000 and $600,000 in 2011 and 2010, respectively.

The total stock-based compensation expense and the related income tax benefit recognized was $8,520,000 and $2,772,000, respectively, in 2012, $8,068,000 and $2,660,000, respectively, in 2011, and $3,027,000 and $996,000, respectively, in 2010. No compensation expense was capitalized in 2012, 2011, or 2010.

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

	Year Ended December 31,
	2012		2011		2010
Product cost of revenue	$	581	$	456	$	206
Service cost of revenue		161		172		72
Research, development, and engineering		2,149		2,268		1,020
Selling, general, and administrative		5,629		5,172		1,729
	$	8,520	$	8,068	$	3,027

The total intrinsic value of stock options exercised was $16,296,000 in 2012, $20,108,000 in 2011, and $10,918,000 in 2010. The total fair value of stock options vested was $9,362,000 in 2012, $10,202,000 in 2011, and $13,159,000 in 2010.

As of December 31, 2012, total unrecognized compensation expense related to non-vested stock options was $6,742,000, which is expected to be recognized over a weighted-average period of 1.3 years.