14. Stock-based Compensation

The consolidated statements of income for fiscal years 2012, 2011 and 2010 include pre-tax stock-based compensation expense of $12.6 million ($8.4 million after-tax), $10.5 million ($7.2 million after-tax) and $8.8 million ($6.2 million after-tax), respectively, recorded in accordance with the provisions of ASC Topic 718 “Stock Compensation”. All pre-tax expense is included in operating expenses within the consolidated statements of income. The consolidated statement of cash flows present the pre-tax stock-based compensation expense as an adjustment to reconcile net income to net cash provided by operating activities. In addition, benefits associated with tax deductions in excess of recognized compensation expense are presented as a cash inflow from financing activities. For fiscal years 2012, 2011 and 2010, these excess benefits totaled $1.4, $1.3 and $0.4, respectively.

As of April 28, 2012, the total compensation cost, before income taxes, related to non-vested awards yet to be recognized was $23.1 million, and it is expected to be recognized over a weighted average period of approximately 3.4 years.

Description of General Methods and Assumptions Used to Estimate Fair Value

Described below are certain methods and assumptions used to estimate the fair value of stock-based compensation awards. Further information is presented below within this Note that may be unique to a particular award or group of awards.

Expected dividend yield—Patterson’s initial quarterly dividend occurred in the fourth quarter of fiscal 2010. Accordingly, the expected dividend yield used had been 0% for awards issued prior to that time. For awards issued since, Patterson has included an expected dividend yield based on estimates as of the grant date of awards.

Expected stock price volatility—We have considered historical volatility trends, implied future volatility based on certain traded options and other factors.

Risk-free interest rate—We base the risk-free interest rate on the U.S. Treasury yield curve in effect at the grant date with similar terms to the expected term of the award.

Expected term of stock options and restricted stock—We estimate the expected term, or life, of awards based on several factors, including grantee types, vesting schedules, contractual terms and various factors surrounding exercise behavior of different groups.

Director and Employee Stock Option Plans

In June 1992, we adopted a Director Stock Option Plan. Options were granted at the fair market value of the underlying stock on the date of grant, vest over one year, and are exercisable for a period of four years commencing one year after the date of grant. This plan terminated during fiscal 2002.

In September 2001, we adopted a new Director Stock Option Plan. A total of 800,000 shares of common stock have been reserved for issuance under this plan. Options are granted at fair market value of the underlying stock on the option grant date, vest over one year, and are exercisable for a period of nine years commencing one year after the grant date.

In June 1992, we adopted the Patterson Dental Company 1992 Stock Option Plan, a plan for employees. Due to the expiration of this plan in fiscal 2003, no options remain available for future issuance under this plan. In September 2002, we adopted a new employee equity award plan. A total of 6,000,000 shares of common stock were reserved for issuance under the plan. In September 2004, our shareholders voted to approve the Amended and Restated 2002 Stock Option Plan, a restatement of the 2002 plan. Upon approval, the Plan was renamed the “Patterson Companies, Inc. Equity Incentive Plan” (“Equity Incentive Plan”).

The Equity Incentive Plan amendments did not change the number of shares reserved for awards under the plan. The Equity Incentive Plan authorizes various award types to be issued under the plan, including stock options, restricted stock and restricted stock units, stock bonuses, cash bonuses, stock appreciation rights, performance awards and dividend equivalents. Awards may have a term no longer than ten years and vesting terms are determined by the compensation committee of the Board of Directors. The minimum restriction period for restricted stock and restricted stock units is three years, or one year in the case of performance-based awards. Additionally, a plan amendment in September 2010 increased the maximum number of shares that may be issued pursuant to awards of restricted stock, restricted stock awards and stock bonuses from 2,000,000 shares to 6,000,000 shares. Prior to fiscal 2006, only stock option awards had been granted under the Equity Incentive Plan. During fiscal years 2012, 2011 and 2010, expense recognized related to stock options was $1.6 million, $1.7 million and $2.0 million, respectively.

The fair value of stock options granted was estimated as of the grant date using a Black-Scholes option-pricing model with the following weighted average assumptions during fiscal years 2012, 2011 and 2010:


	April 28, 2012			April 30, 2011			April 24, 2010
Expected dividend yield		1.5	%		1.2	%		—
Expected stock price volatility		33.0	%		38.0	%		32.7	%
Risk-free interest rate		2.5	%		3.6	%		2.7	%
Expected life of options (years)		7.4			8.8			8.3

Following is a summary of stock option activity for all plans during fiscal years 2012, 2011 and 2010:


	Total Outstanding
	Number of Options			Exercise Price (a)		Intrinsic Value
Balance as of April 25, 2009		1,898		$	25.24
Granted		86			20.76
Exercised		(281	)		12.36
Canceled		(55	)		33.15

Balance as of April 24, 2010		1,648		$	26.94
Granted		51			32.08
Exercised		(334	)		17.82
Canceled		(92	)		23.02

Balance as of April 30, 2011		1,273		$	29.82
Granted		64			33.90
Exercised		(232	)		24.11
Canceled		(119	)		29.64

Balance as of April 28, 2012		986		$	31.45	$	4,453

Vested or expected to vest as of April 28, 2012		863		$	31.15	$	4,161

Exercisable as of April 28, 2012		576		$	29.94	$	3,479

(a)	Weighted-average exercise price

The weighted average fair values of options granted during fiscal years 2012, 2011 and 2010 were $11.47, $14.07, and $8.95, respectively. The weighted average remaining contractual lives of options outstanding and options exercisable as of April 28, 2012 were 3.3 and 2.3 years, respectively. We settle stock option exercises with newly issued common shares.

Related to stock options exercised, the intrinsic value, cash received and tax benefits realized were $1.7, $5.6 and $0.4 million, respectively, in fiscal 2012; $4.4, $6.1 and $1.2 million, respectively, in fiscal 2011; and $3.4, $3.5 and $1.3 million, respectively, in fiscal 2010.

Restricted Stock and Performance Unit Awards

In fiscal 2006, we began to issue restricted stock and performance unit awards under the Equity Incentive Plan. The grant date fair value is based on the closing stock price on the day of the grant. Restricted stock awards to employees generally vest over a five, seven or nine-year period and are subject to forfeiture provisions. Certain restricted stock awards, which are held by line management, are subject to accelerated vesting provisions beginning three years after the grant date, based on certain operating goals. Restricted stock awards are also granted to non-employee directors on the date of each annual board meeting. These awards vest over three years. The performance unit awards, issued primarily to executive management, are earned at the end of a three-year period if certain operating goals are met, and are settled in an equivalent number of common shares or in cash as determined by the compensation committee of the Board of Directors. The satisfaction of operating goals is not finally determined until the end of a three-year period. Accordingly, Patterson recognizes expense related to performance unit awards over the requisite service period using the straight-line method based on the outcome that is probable. During fiscal years 2012, 2011 and 2010, expense recognized related to restricted stock and performance unit awards was $8.0 million, $5.5 million and $3.7 million, respectively. The total intrinsic value of restricted stock awards that vested in fiscal 2012, 2011 and 2010 was $4.6 million, $3.5 million and $0.8 million, respectively. No performance units were granted in fiscal 2011 or fiscal 2010 and none of the performance units that had been awarded prior to fiscal 2010 were ultimately earned. Patterson granted performance units in fiscal 2012 which can be earned at the end of fiscal 2014, subject to the achievement of certain financial objectives.

The following tables summarize information concerning non-vested restricted stock awards and performance unit awards for fiscal years 2012, 2011 and 2010:


	Restricted Stock Awards
	Shares			Weighted Average Grant-Date Fair Value
Outstanding at April 25, 2009		537		$	35.77
Granted		451			20.35
Vested		(34	)		(36.65	)
Forfeitures		(35	)		(29.21	)

Outstanding at April 24, 2010		919		$	28.42
Granted		406			31.91
Vested		(104	)		(33.07	)
Forfeitures		(110	)		(28.81	)

Outstanding at April 30, 2011		1,111		$	29.22
Granted		272			34.60
Vested		(138	)		(25.45	)
Forfeitures		(83	)		(29.25	)

Outstanding at April 28, 2012		1,162		$	30.92


	Performance Unit Awards
	Shares			Weighted Average Grant-Date Fair Value
Outstanding at April 25, 2009		63		$	32.80
Forfeitures and cancellations		(36	)		(34.24	)

Outstanding at April 24, 2010		27		$	30.88
Forfeitures and cancellations		(27	)		(30.88	)

Outstanding at April 30, 2011		0		$	0
Granted		102			35.41
Forfeitures and cancellations		(6	)		(35.41	)

Outstanding at April 28, 2012		96		$	35.41

Employee Stock Purchase Plan

In June 1992, Company adopted an Employee Stock Purchase Plan (the “Stock Purchase Plan”). A total of 4,750,000 shares of common stock are reserved for issuance under the Stock Purchase Plan. The Stock Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue Code, is administered by the Board of Directors or by a committee appointed by the Board of Directors and follows a calendar plan year. Employees are eligible to participate after nine months of employment, if they are employed for at least 20 hours per week and more than five months per year. The Stock Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 10 percent of an employee’s compensation, at 85 percent of the lower of the fair market value of the common stock on the offering date or at the end of each three-month period following the offering date during the applicable offering period. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment. At April 28, 2012, there were 271,886 shares available for purchase under the Stock Purchase Plan.

The Stock Purchase Plan includes a look-back option and accordingly there are several option elements for which the fair value is estimated on the grant date using the Black-Scholes option-pricing model. Total expense recognized related to the employee stock purchase plan was $1.8, $1.8 and $1.6 million during fiscal years 2012, 2011 and 2010, respectively. The following table summarizes the weighted-average assumptions relating to the Stock Purchase Plan for fiscal years 2012, 2011 and 2010:


	2012			2011			2010
Expected dividend yield		1.4	%		0.4	%		0.0	%
Expected stock price volatility		31.3	%		31.3	%		29.0	%
Risk-free interest rate		0.2	%		0.2	%		0.1	%
Expected life of options (years)		0.5			0.5			0.5

Capital Accumulation Plan

In 1996, we adopted an employee Capital Accumulation Plan (the “CAP Plan”). A total of 6,000,000 shares of common stock are reserved for issuance under the CAP Plan. Key employees of Patterson or its subsidiaries are eligible to participate by purchasing common stock through payroll deductions, which must be between 5% and 25% of an employee’ compensation, at 75% of the price of the common stock at the beginning of or the end of the calendar year, whichever is lower. The shares issued are restricted stock and are held in the custody of Patterson until the restrictions lapse. The restriction period is three years from the beginning of the plan year, but restricted shares are subject to forfeiture provisions. At April 28, 2012, 2,345,792 shares were available for purchase under the CAP Plan.

Based on the provisions of the CAP Plan, there are option elements for which the fair value is estimated on the grant date using the Black-Scholes option-pricing model. Total expense recognized related to the CAP Plan was $1.3, $1.4 and $1.6 million during fiscal years 2012, 2011 and 2010, respectively. The following table summarizes the weighted-average assumptions relating to the CAP Plan for fiscal years 2012, 2011 and 2010:


	2012			2011			2010
Expected dividend yield		1.4	%		0.4	%		0.0
Expected stock price volatility		31.3	%		31.3	%		29.0	%
Risk-free interest rate		0.3	%		0.4	%		1.1	%
Expected life of options (years)		1.0			1.0			1.0