STOCK-BASED COMPENSATION

The following table shows total stock-based compensation expense recognized under ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), for employees and directors and the effect on the accompanying Consolidated Statement of Operations for the years ended December 31:



In thousands	2013		2012		2011
Cost of sales	$	782	$	653	$	458
Research, development, and engineering	2,523		1,860		1,482
Selling, general and administrative expenses	12,168		9,999		7,077
Total stock-based compensation expense	$	15,473	$	12,512	$	9,017

Compensation cost capitalized as part of inventory was $0.5 million, $0.3 million and $0.3 million during the years ended December 31, 2013, 2012 and 2011, respectively.

The estimated fair value of our stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period using a single grant approach on a ratable basis for awards granted after the adoption of ASC 718 and using a multiple grant approach on an accelerated basis for awards granted prior to the adoption of ASC 718.

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table. The expected life of options is based on observed historical exercise patterns. Groups of employees that have similar historical exercise patterns have been considered separately for valuation purposes. The Black-Scholes valuation input for expected volatility used for our stock options for all years presented was based on the historical volatility of our common stock. The risk free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The dividend yield reflects that we have not paid any cash dividends since inception and do not intend to pay any cash dividends in the foreseeable future.

We used the following weighted-average assumptions to estimate the fair value of stock options at the date of grant using the Black-Scholes option-pricing model for the years ended December 31:



	2013		2012		2011
Expected life (in years)	5.9		8.0		8.2
Risk-free interest rate	1.1	%	1.5	%	2.8	%
Volatility factor	47	%	48	%	48	%
Dividend yield	—		—		—

The weighted-average fair value per share of stock options granted during 2013, 2012 and 2011 was $14.09, $16.03, and $14.61 respectively.

1993 Stock Option Plan/Stock Issuance Plan

On July 19, 2011, our stockholders approved amendments to our 1993 Stock Option/Stock Issuance Plan which increased the number of shares available for issuance pursuant to the 1993 Plan by 3.3 million shares. The amendments, which were adopted by our Board of Directors on May 31, 2011, effective as of their approval by our stockholders, increased the share reserve, altered share-counting procedures, made changes to the non-employee director automatic grant program and enabled the granting of performance-based awards under the plan. These plans provide for the grant of stock-based awards to our eligible employees, consultants and advisers and non-employee directors.

Under our 1993 Stock Option Plan/Stock Issuance Plan, as amended and restated as of May 31, 2011, officers and other key employees, non-employee Board members and consultants may receive equity incentive awards in the form of stock options to purchase shares of common stock at no less than 100% of fair value at the grant date or restricted stock or restricted stock units. Options historically have vested in equal monthly installments over a fifty-month period or one hundred-month period, with a minimum vesting period of twelve months from the grant date, and generally expire ten years from the date of grant or upon the expiration of a limited period following any earlier termination of employment. The plan was amended in January 2006 to allow the issuance of shares pursuant to restricted stock unit awards, and during the years ended December 31, 2012, 2011 and 2010, restricted stock unit awards were made which generally vest in equal annual installments over a three-year period measured from the award date but which defer the issuance of the vested shares until the end of the vesting period, subject to earlier issuance upon termination of employment under certain circumstances or a change in control. Awards under the plan may be subject to accelerated vesting under certain circumstances should a change in control occur. The plan terminates on the earlier of June 6, 2020 or the date on which all shares available for issuance under the plan have been issued. Under the plan, approximately 1.2 million, 1.8 million and 3.2 million shares were available for issuance at December 31, 2013, 2012 and 2011, respectively.

1998 Supplemental Stock Option/Stock Issuance Plan

Under our 1998 Supplemental Stock Option/Stock Issuance Plan, as amended, eligible employees (i.e. other than executive officers and employees holding the title of Vice President or General Manager) were able to receive options to purchase shares of common stock at not less than 100% of fair value on the grant date. These options generally vest in equal monthly installments over a fifty-month period, with a minimum vesting period of twelve months from grant date, and generally expire ten years from date of grant, subject to earlier termination following the optionee’s cessation of employee status. Direct stock issuances may also be made under the plan, subject to similar vesting provisions. The plan was amended in January 2008 to allow the issuance of shares pursuant to restricted stock unit awards. Since the plan terminated on October 19, 2008, there were no options available for issuance under the plan at December 31, 2013, 2012 and 2011.

Stock Option Activity

The following table is a summary of our stock option activity and related information for the year ended December 31, 2013:



	Options		Weighted- Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value as of December 31, 2013
Outstanding at January 1, 2013	3,195,573		$	23.33
Granted	61,000		$	31.38
Exercised	(560,808	)	$	22.78
Forfeited and expired	(35,881	)	$	32.58
Outstanding at December 31, 2013	2,659,884		$	23.51	6.7	$	16,096
Exercisable at December 31, 2013	1,010,123		$	19.92	4.9	$	9,472
Vested and expected to vest as of December 31, 2013, net of anticipated forfeitures	2,549,061		$	23.37	6.6	$	15,763

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of the year ended December 31, 2013 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2013. Total intrinsic value of options exercised (selling price of the exercised stock less the option strike price multiplied by the share amount) in the year ended December 31, 2013 was $9.6 million as compared to $14.0 million and $11.6 million in each of 2012 and 2011, respectively. Cash received from option exercises in the years ended December 31, 2013 and 2012 was $12.8 million and $16.7 million, respectively.

The following table is a summary of our option activity for the years ended December 31:



	2012				2011
	Options		Weighted- Average Exercise Price		Options		Weighted- Average Exercise Price
Outstanding at January 1	3,259,142		$	19.44	3,269,147		$	16.35
Granted	951,500		$	30.09	1,091,500		$	25.97
Exercised	(983,998	)	$	16.92	(960,818	)	$	15.47
Forfeited and expired	(31,071	)	$	24.59	(140,687	)	$	25.68
Outstanding at December 31	3,195,573		$	23.33	3,259,142		$	19.44

The following table shows the related information for options outstanding and options exercisable as of December 31, 2013:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Options	Weighted- Average Remaining Contractual Life (Years)	Weighted- Average Exercise Price		Options	Weighted- Average Exercise Price
$9.66 - $15.65	491,382	4.3	$	13.25	333,122	$	12.89
$16.01 - $18.92	455,268	4.7	$	17.72	267,378	$	17.01
$19.79 - $27.75	654,612	7.3	$	24.11	171,547	$	23.78
$28.92 - $30.12	582,440	8.4	$	29.52	133,958	$	29.54
$30.91 - $31.91	455,962	7.9	$	31.12	103,698	$	31.11
$31.94 - $39.92	20,220	9.0	$	39.04	420	$	31.94
Outstanding at December 31	2,659,884	6.7	$	23.51	1,010,123	$	19.92

As of December 31, 2013, $23.7 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 4.7 years.

Restricted Stock Unit Activity

The following table is a summary of our restricted stock unit activity and related information as of December 31:



	2013				2012				2011
	Shares		Weighted- Average Grant Date Fair Value		Shares		Weighted-Average Grant Date Fair Value		Shares		Weighted-Average Grant Date Fair Value
Nonvested stock at January 1	874,370		$	26.04	663,504		$	22.60	431,866		$	15.64
Granted	599,500		$	29.79	496,875		$	30.02	521,875		$	25.98
Vested	(368,076	)	$	26.78	(276,969	)	$	25.15	(271,651	)	$	18.23
Forfeited	(16,440	)	$	32.55	(9,040	)	$	20.02	(18,586	)	$	19.68
Nonvested stock at December 31	1,089,354		$	27.75	874,370		$	26.04	663,504		$	22.60

A total of 384,320 shares of our common stock subject to restricted stock units was vested but not yet distributed as of December 31, 2013. Stock-based compensation expense related to our restricted stock units for the year ended December 31, 2013 was $10.1 million. As of December 31, 2013, $29.4 million of total unrecognized compensation cost related to unvested restricted stock units is expected to be recognized over a weighted-average period of 4.3 years. Total fair value of vested shares in the year ended December 31, 2013 was $9.9 million compared to $7.0 million and $5.0 million in 2012 and 2011, respectively.