Employee Stock Purchase Plans

The 2014 ESPP Plan was adopted by the Board of Directors on February 10, 2014 and approved by the Company’s stockholders on May 5, 2014. The 2014 ESPP Plan authorizes the issuance of up to an aggregate of

2,500,000

shares of common stock to participating employees. Offerings under the 2014 ESPP Plan commence on June 1 and December 1 and terminate, respectively, on November 30 and May 31. Historically, under the 2014 ESPP Plan, eligible employees could purchase shares of common stock through payroll deductions of up to 10% of their compensation or up to an annual maximum amount of $21,250. The price at which an employee’s purchase option was exercised for each offering period was the lower of (1) 85% of the closing price of the common stock on the Nasdaq Global Select Market on the day that each offering commences, or (2) 85% of the closing price on the day that the offering terminated. On January 31, 2017, the Compensation Committee of the Board of Directors approved an increase in the exercise price to the lower of (1) 90% of the closing price o

the common stock on the Nasdaq Global Select Market on the day that each offering

commences

, or (2) 90% of the closing price on the day that

the

offering terminates. The increase in the exercise price became effective for the

ffering commencing on June 1, 2017. As a result of this change, the annual maximum payroll deduction was increased from $21,250 to $22,500. During 2019, 2018, and 2017, the Company issued 126,407, 105,672, and

105,506 shares, respectively, of common stock to employees who participated in the 2014 ESPP Plan at exercise prices of $64.31 and $63.78 per share in 2019, $84.11 and $70.61 per share in 2018, and $46.37 and $74.12 per share in 2017. As of December 31, 2019, there were 1,800,324 shares reserved for future issuance under the 2014 ESPP Plan.

Equity Incentive Plans

The Company grants restricted stock units (“RSUs”) to employees and directors under the 2014 Stock Incentive Plan (the “2014 Plan”). The 2014 Plan is administered by the Compensation Committee of the Company’s Board of Directors. The 2014 Plan is intended to attract and retain employees and directors, and to provide an incentive for these individuals to assist the

Company to achieve long-range performance goals and to enable these individuals to participate in the long-term growth of the Company.

The 2014 Plan was adopted by the Board of Directors on February 10, 2014 and was approved by the Company’s stockholders on May 5, 2014. Up to

18,000,000

shares of common stock (subject to adjustment in the event of stock splits and other similar events) may be issued pursuant to awards granted under the 2014 Plan. The Company may grant options, RSUs, restricted stock, stock appreciation rights (“SARs”) and other stock-based awards to employees, officers, directors, consultants and advisors under the 2014 Plan. Any full-value awards granted under the 2014 Plan will be counted against the shares reserved for issuance under the 2014 Plan as 2.4 shares for each share of common stock subject to such award and any award granted under the 2014 Plan that is not a full-value award (including, without limitation, any option or SAR) will be counted against the shares reserved for issuance under the plan as one share for each one share of common stock subject to such award. “Full-value award” means any RSU, or other stock-based award with a per share price or per unit purchase price lower than

100

% of fair market value on the date of grant. To the extent a share that was subject to an award that

counted as one share is returned to the 2014 Plan, each applicable share reserve will be credited with one share. To the extent that a share that was subject to an award that counts as 2.4 shares is returned to the 2014 Plan, each applicable share reserve will be credited with 2.4 shares. As of December 31, 2019, there were

13,268,546

shares reserved for future issuance under the 2014 Plan.

Time-based

RSUs granted to employees in 2019, 2018 and 2017 generally vest 33% per year beginning on the first anniversary of the date of grant.

Performance-based RSUs granted to the Company’s executive officers in 2019, 2018 and 2017 were based on the Company’s achievement of

non-GAAP

cash flows from operations for the relevant year, defined as GAAP net income plus depreciation, amortization and

non-cash

stock-based compensation and excluding any charges or income not related to the operating performance of the Company, set at varying revenue levels. The final number of performance-based RSUs that vest vary based on the level of performance achieved from 0% to 150% of the underlying target shares. The performance-based RSUs earned will vest 33% per year beginning on the first anniversary of the date of grant. RSUs granted to certain employees who meet certain retirement eligibility requirements will vest in full upon each such employee’s retirement and are expensed immediately. RSUs granted to directors generally vest at the earliest of (1) one day prior to the next annual meeting, (2) 13 months from date of grant, or (3) the effective date of a change in control of the Company.

In connection with the completion of the Newport Merger, the Company assumed:

•

all RSUs granted under any Newport equity plan that were outstanding immediately prior to the effective time of the Newport Merger, and as to which shares of Newport common stock were not fully distributed in connection with the closing of the Newport Merger (the “Newport RSUs”), and

•

all SARs granted under any Newport equity plan, whether vested or unvested, that were outstanding immediately prior to the effective time of the Newport Merger (the “Newport SARs”).

As of the effective time of the Newport Merger, based on a formula provided in the Newport Merger Agreement, (a) the Newport RSUs were converted automatically into RSUs with respect to

360,674

shares of the Company’s common stock

(the “Newport Assumed RSUs”), and (b) the Newport SARs were converted automatically into SARs with respect

899,851

shares of the Company’s common stock (the “

Newport

Assumed SARs”).

Included in the total number of

Newport

Assumed RSUs were 36,599 RSUs for outside directors that were part of the Newport Deferred Compensation Plan (the “

Newport

DC Plan”), from which

5,515 shares were released in May 2017, 5,561 shares were released in May 2018 and 967 shares were released in May 2019. As of December 31, 2019, 5,794 Company RSUs remained outstanding under the

Newport

DC Plan, and an additional 57 shares of the Company’s common stock were added to the

Newport

DC Plan due to reinvested dividends. As of December 31, 2018, 6,694 Company RSUs remained outstanding under the

Newport

DC Plan, and an additional 66 shares of the Company’s common stock were added to the

Newport

DC Plan due to reinvested dividends. As of December 31, 2017, 12,134 Company RSUs remained outstanding under the

Newport

DC Plan, and an additional 122 shares of the Company’s common stock were added to the

Newport

DC Plan due to reinvested dividends. These

Newport

Assumed RSUs will not become issued shares until their respective release dates.

The shares of the Company’s common stock that are subject to the

Newport

Assumed SARs and the

Newport

Assumed RSUs are issuable pursuant to the Company’s 2014 Plan.

The 1,260,525 shares of the Company’s common stock that are issuable pursuant to the

Newport

Assumed RSUs and the

Newport

Assumed SARs under the 2014 Plan were registered under the Securities Act of 1933, as amended (“Securities Act”), on a registration statement on Form

S-8.

These shares are in addition to the 18,000,000 shares of the Company’s common stock reserved for issuance under the 2014 Plan and previously registered under the Securities Act on a registration statement on Form

S-8.

In connection with the completion of the ESI Merger, the Company assumed:

•

all RSUs that vest based solely on the satisfaction of service conditions, granted under any ESI equity plan, arrangement or agreement (“ESI Plan”) that were outstanding immediately prior to the effective time of the ESI Merger, and as to which shares of ESI common stock were not fully distributed in connection with the closing of the ESI Merger (“ESI Time-Based RSUs”),

•

all RSUs that were granted subject to vesting based on both the achievement of performance goals and the satisfaction of service conditions granted under any ESI Plan that were outstanding immediately prior to the effective time of the ESI Merger (“ESI Performance-Based RSUs and collectively with the ESI Time-Based RSUs, the “ESI RSUs”), and

•

all SARs granted under any ESI Plan, whether vested or unvested, that were outstanding immediately prior to the effective time of the ESI Merger and held by an individual who was a service provider of ESI as of the date on which the effective time of the ESI Merger occurred (the “ESI SARs”).

As of the effective time of the ESI Merger, based on a formula in the ESI Merger Agreement, (a) such ESI RSUs were converted automatically into RSUs with respect to

736,133

shares of the Company’s common stock (the “ESI Assumed RSUs”), and (b)

such ESI SARs were converted automatically into SARs with respect

12,787

shares of the Company’s common stock (the “ESI Assumed SARs”).

Included in the total number of ESI Assumed RSUs are 326,283 shares of the Company’s common stock for employees and outside directors that are part of the ESI Deferred Compensation plan (the “ESI DC Plan”). These shares will not become issued shares until their respective release dates. As of December 31, 2019, 327,328 Company RSUs remained outstanding under the ESI DC Plan, and an additional 3,086 shares of the Company’s common stock were added to the ESI DC Plan due to reinvested dividends.

The 748,920

shares of the Company’s common stock that are issuable pursuant to the ESI Assumed RSUs and the ESI Assumed SARs under the 2014 Plan were registered under the Securities Act on a registration statement on Form

S-8.

These shares are in addition to

the 18,000,000

shares of the Company’s common stock reserved for issuance under the 2014 Plan and the 1,260,525 shares of the Company’s common stock that were issuable in connection with the Newport Merger, all of which shares were previously registered under the Securities Act on a registration statement on Form

S-8.

The following table presents the activity for RSUs under the Plans:


	Year Ended December 31, 2019
	RSUs			Weighted Average Grant Date Fair Value
RSUs — beginning of period		647,394		$	74.04
Assumed from ESI Merger		736,133		$	84.10
Accrued dividend shares		5,222		$	85.67
Granted		434,970		$	87.11
Vested		(577,688	)	$	70.27
Forfeited or expired		(143,498	)	$	89.55

RSUs — end of period		1,102,533		$	85.93

The following table presents the activity for SARs under the Plans:


	Year Ended December 31, 2019
	Outstanding and Exercisable SARs			Weighted Average Base Value
SARs — beginning of period		177,538		$	28.52
Assumed from ESI Merger		12,787		$	17.38
Exercised		(77,473	)	$	26.29
Forfeited or expired		(3,998	)	$	23.00

SARs Outstanding — end of period		108,854		$	29.05

At December 31, 2019, the Company’s outstanding and exercisable SARs, the weighted-average base value, the weighted average remaining contractual life and the aggregate intrinsic value thereof, were as follows:


	Number of Shares		Weighted Average Base Value		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value
SARs outstanding and exercisable		108,854	$	29.05		1.6	$	8,813

The Company settles employee RSU vesting and SARs exercises with newly issued shares of the Company’s common stock.

Stock-Based Compensation Expense

The Company recognized the full impact of its share-based payment plans in the consolidated statements of operations and comprehensive income for the years 2019, 2018 and 2017.

As of December 31, 2019, the Company capitalized $1,595 of such cost on its consolidated balance sheet.

As of December 31, 2018, and 2017, the Company capitalized $471 of such cost on its consolidated balance sheet. The following table reflects the effect of recording stock-based compensation for the years 2019, 2018 and 2017:


	Years Ended December 31,
	2019			2018			2017
Stock-based compensation expense by type of award:
RSUs	$	47,005		$	24,883		$	22,428
SARs		73			98			529
Employee stock purchase plan		2,116			2,281			1,421

Total stock-based compensation	$	49,194			27,262			24,378
Windfall tax effect on stock-based compensation		(2,244	)		(8,277	)		(11,071	)

Net effect on net income	$	46,950		$	18,985		$	13,307

Effect on net earnings per share:
Basic	$	0.86		$	0.35		$	0.25

Diluted	$	0.85		$	0.35		$	0.24

The

pre-tax

effect within the consolidated statements of operations and comprehensive income of recording stock-based compensation for the years 2019, 2018 and 2017 was as follows:


	Years Ended December 31,
	2019		2018		2017
Cost of revenues	$	2,789	$	3,516	$	3,894
Research and development expense		3,847		2,750		2,816
Selling, general and administrative expense		20,457		20,996		17,668
Acquisition and integration related expense		21,728		—		—
Restructuring related expense		373		—		—

Total pre-tax stock-based compensation expense	$	49,194	$	27,262	$	24,378

Valuation Assumptions

The Company determines the fair value of RSUs based on the closing market price of the Company’s common stock on the date of the award and estimates the fair value of stock appreciation rights and employee stock purchase plan rights using the Black-Scholes valuation model. Such values are recognized as expense on a straight-line basis for time-based awards and using the accelerated graded vesting method for performance-based awards, both over the requisite service periods, net of estimated forfeitures except for retirement eligible employees in which the Company expenses the fair value of the grant in the period in which the grant was

awarded. The estimation of stock-based awards that will ultimately vest requires significant judgment. The Company considers many factors when estimating expected forfeitures, including types of awards and historical experience. Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates.

The weighted average fair value per share of employee stock purchase plan rights granted in 2019, 2018 and 2017 was $16.04, $21.74, and $13.14, respectively. The fair value of the employees’ purchase plan rights was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:


	Years Ended December 31,
	2019			2018			2017
Employee stock purchase plan rights:
Expected life (years)		0.5			0.5			0.5
Risk-free interest rate		2.4	%		1.8	%		0.8	%
Expected volatility		38.7	%		38.6	%		26.5	%
Expected annual dividends per share	$	0.80		$	0.76		$	0.69

Expected volatilities for 2019, 2018 and 2017 are based on a combination of implied and historical volatilities of the Company’s common stock; the expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and the Company’s historical exercise patterns; and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

The total intrinsic value of SARs exercised and the total fair value of RSUs vested during 2019, 2018 and 2017 was approximately $68,123, $61,626 and $60,302, respectively. As of December 31, 2019, the unrecognized compensation cost related to RSUs and SARs was approximately $26,137 and will be recognized over an estimated weighted average amortization period of 1.0 year.