Employee Benefits and Share-Based Compensation

Stock purchase plan

1997 Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan ("ESPP"), under which employees can purchase shares of our common stock based on a percentage of their compensation, but not greater than 15% of their earnings; provided, however, an eligible employees' right to purchase shares of our common stock may not accrue at a rate which exceeds $25,000 of the fair market value of such shares for each calendar year in which such rights are outstanding. The purchase price per share must be equal to the lower of 85% of the fair value of the common stock at the beginning of a 24-month offering period or the end of each six-month purchasing period.

At our 2009 Annual Meeting of Stockholders ("2009 Annual Meeting"), the stockholders approved an amendment to the ESPP, which added 2.6 million shares to the reserve for future issuance. There was a total of 0.4 million shares reserved for future issuance under the ESPP as of March 31, 2015. For the three months ended March 31, 2015, 0.2 million shares of common stock were purchased under the ESPP and an aggregate of 4.9 million shares were issued under the ESPP as of March 31, 2015.

The unrecognized compensation cost related to the shares to be purchased under our ESPP was approximately $3.1 million, and is expected to be recognized over a weighted-average period of 0.7 years as of March 31, 2015.

Stock award plans

2009 Equity Incentive Plan

There were 1.5 million shares of common stock reserved for future issuance under the 2009 Equity Incentive Plan, as amended (the "2009 Plan") as of March 31, 2015.

Performance-based restricted stock units

In 2011, we began incorporating performance-based restricted stock units ("PSUs") as an element of our executive compensation plans. In 2014, we granted 132,500 PSUs to our executive officers, all of which became eligible for vesting based on the achievement of a certain level of shareholder return for the period from January 1, 2014 through February 27, 2015. In 2015, we granted 60,000 PSUs to our executive officers, all, none or a portion of which may become eligible for vesting depending on the level of shareholder return for 2015 and eligible for further time-based vesting based on the ranking of our total shareholder return.

On March 3, 2015, the Compensation Committee confirmed 74.4% as the percentile rank of our 2014 total stockholder return. This resulted in 100% of the 2014 PSUs, or 132,500 shares, as eligible for further time-based vesting. The eligible performance based restricted stock unit awards will vest as follows: 25% of the eligible shares vested immediately on March 3, 2015 with the remaining eligible awards vesting in equal increments, semi-annually, over the subsequent three-year period beginning on June 15th and December 15th of the year after the date of grant and each subsequent year. Vesting is contingent upon continued service. Of the 132,500 shares eligible for time-based vesting under the 2014 PSUs, 33,124 shares vested during the quarter ended March 31, 2015.

On February 6, 2015, the Compensation Committee approved PSUs of 60,000 shares. If the minimum performance threshold is met as determined by the Compensation Committee in 2016, the eligible performance-based restricted stock unit awards will vest as follows: 25% of the eligible shares will vest immediately, with the remaining eligible awards vesting in equal increments, semi-annually, over the subsequent three year period beginning on June 15th and December 15th of the year after the date of grant and each subsequent year. Vesting is contingent upon continued service.

Share-based compensation expense

We account for share-based awards granted to employees and directors, including employee stock option awards, restricted stock, PSUs and RSUs issued pursuant to the 2009 Plan and employee stock purchases made under our ESPP using the estimate grant date fair value method of accounting in accordance with ASC 718, Stock Compensation. We value options and ESPP shares using the Black-Scholes-Merton option-pricing model. Restricted stock and time-based RSUs are valued at the grant date fair value of the underlying common shares. The PSUs are valued using the Monte Carlo simulation model.

The following table sets forth the total share-based compensation expense recognized in our Condensed Consolidated Statements of Income:



	Three Months Ended
	March 31, 2015		March 31, 2014
	(In thousands)
Cost of product and service revenues	$	517	$	268
Research and development	434		369
Selling, general and administrative	2,714		2,092
Total share-based compensation expense	$	3,665	$	2,729

Stock options activity

A summary of the stock option activity under the 2009 Plan is presented below:



	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Years	Aggregate Intrinsic Value⁽¹⁾
	(In thousands, except per share data)
Outstanding at December 31, 2014	2,672		$	19.02	6.5
Granted	151		33.73
Exercised	(132	)	15.69
Expired	—		—
Forfeited	(16	)	22.60
Outstanding at March 31, 2015	2,675		$	19.98	6.6	$	40,442
Exercisable at March 31, 2015	1,529		$	16.11	5.0	$	29,042
Vested and expected to vest at March 31, 2015	2,643		$	19.88	6.5	$	40,234

_________________________________________________


⁽¹⁾	Intrinsic value is calculated as the difference between the market value or closing price of our common stock as of the last trading day of the year as reported by the NASDAQ Global Select Market, and the exercise price of the option.

The weighted-average fair value per share of options granted during the three months ended March 31, 2015 and March 31, 2014 was $9.82 and $8.29, respectively. The intrinsic value of options exercised during the three months ended March 31, 2015 and March 31, 2014 was $2.4 million and $5.3 million, respectively.

As of March 31, 2015, total unrecognized compensation cost related to unvested stock options was $9.2 million, which is expected to be recognized over a weighted-average vesting period of 2.8 years.

Restricted stock activity

A summary of the restricted stock activity under the 2009 Plan is presented below:



	Number of Shares		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Years	Aggregate Intrinsic Value
	(In thousands, except per share data)
Restricted Stock Units
Outstanding at December 31, 2014	399		$	24.00	1.5
Granted	44		33.97
Vested	(26	)	22.07
Forfeited	(6	)	21.73
Outstanding and unvested at March 31, 2015	411		$	25.21	1.4	$	14,431
Expected to vest at March 31, 2015	399				1.4	$	13,997

The weighted-average grant date fair value per share of RSUs granted during the three months ended March 31, 2015 and March 31, 2014 was $33.97 and $25.54, respectively. The total fair value of RSUs that vested during the three months ended March 31, 2015 and March 31, 2014 was $0.9 million and $0.9 million, respectively.

As of March 31, 2015, total unrecognized compensation expense related to RSUs was $9.0 million, which is expected to be recognized over the remaining weighted-average vesting period of 2.5 years.



	Number of Shares	Weighted-Average Grant Date Fair Value
	(In thousands, except per share data)
Restricted Stock Awards
Outstanding at December 31, 2014	36	$	17.49
Granted	—	—
Vested	—	—
Forfeited	—	—
Outstanding and unvested at March 31, 2015	36	$	17.49

No RSAs were granted nor vested during the three months ended March 31, 2015 and March 31, 2014.

As of March 31, 2015, total unrecognized compensation cost related to RSAs was $0.1 million, which is expected to be recognized over the remaining weighted-average vesting period of 0.2 years.

Performance-based restricted stock units activity

A summary of the performance-based restricted stock activity under the 2009 Plan is presented below:



	Number of Shares		Weighted-Average Grant Date Fair Value Per Unit
	(In thousands, except per share data)
Unvested at December 31, 2014	233		$	17.96
Granted	60		29.56
Vested	(33	)	21.26
Cancelled	—		—
Unvested at March 31, 2015	260		$	20.23

The weighted-average grant date fair value per share of PSUs granted during the three months ended March 31, 2015 and March 31, 2014 was $29.56 and $16.59, respectively. The total fair value of PSUs that vested during the three months ended March 31, 2015 and March 31, 2014 was $1.2 million and $1.0 million, respectively.

As of March 31, 2015, total unrecognized compensation cost related to PSUs was approximately $3.1 million, which is expected to be recognized over the remaining weighted-average period of 1.3 years.

Preferred Stock

There were 5.0 million preferred shares authorized, and no preferred shares issued or outstanding as of March 31, 2015 and December 31, 2014.