Share-Based Compensation

On August 7, 2007, in connection with the Company’s initial public offering, the 2007 Stock Incentive Plan, or the 2007 Plan, became effective. Under the 2007 Plan, 3.0 million shares of common stock were initially reserved for future issuance, plus shares available under the prior year equity incentive plans, including shares that become available under the 2007 Plan due to forfeitures at prices not less than the fair market value of the Company’s common stock on the date the option is granted. The options generally vest annually over five years using the straight-line method, unless otherwise provided, and expire ten years from the date of grant. Options forfeited under any Stock Incentive Plan are automatically added to the share reserve of the 2007 Plan. Pursuant to the “evergreen” provision contained in the 2007 Plan, an additional 1.7 million shares of common stock were added to the share reserve of the 2007 Plan on both January 1, 2012 and January 3, 2010, which represented 3% of the Company’s total shares outstanding as of the years ended December 31, 2011 and January 2, 2010, respectively. No shares were added to the share reserve for the year ended January 1, 2011. The Company may terminate the 2007 Plan at any time. If not terminated sooner, the 2007 Plan will automatically terminate on August 7, 2017.

The number and weighted average exercise price of options issued and outstanding under all stock option plans are as follows (in thousands, except for exercise price):



	Year ended December 28, 2013				Year ended December 29, 2012				Year ended December 31, 2011
	Shares		Average Exercise Price		Shares		Average Exercise Price		Shares		Average Exercise Price
Options outstanding, beginning of period	8,368		$	22.78	8,277		$	22.68	6,941		$	21.32
Granted	1,653		$	21.17	754		$	22.17	2,277		$	23.85
Canceled	(795	)	$	24.53	(447	)	$	27.30	(312	)	$	27.62
Expired	—		$	—	—		$	—	—		$	—
Exercised	(315	)	$	10.49	(216	)	$	7.62	(629	)	$	9.44
Options outstanding, end of period	8,911		$	22.76	8,368		$	22.78	8,277		$	22.68
Options exercisable, end of period	5,188		$	22.69	4,632		$	21.29	3,636		$	19.45
Options available for grant, end of period	5,795				4,934				3,493

At December 28, 2013, an aggregate of 14.7 million, shares of common stock were reserved for future issuance under the plans.

The Black-Scholes option pricing model is used to estimate the fair value of options granted under the Company’s share-based compensation plans. The range of assumptions used and the resulting weighted-average fair value of options granted at the date of grant were as follows:



	Year ended December 28, 2013	Year ended December 29, 2012	Year ended December 31, 2011
Risk-free interest rate	0.7% to 1.8%	0.7% to 1.3%	0.9% to 2.5%
Expected term	5.1 years to 5.5 years	5.5 years to 5.5 years	5.3 years to 5.5 years
Estimated volatility	31.2% to 39.6%	36.6% to 42.6%	36.7% to 43.2%
Expected dividends	0%	0%	0%
Weighted-average fair value of options granted	$7.53 per share	$7.98 per share	$9.44 per share

Risk-free interest rate. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with a remaining term approximately equal to the expected life of the Company’s stock options.

Expected term. The expected term represents the average period that the Company’s stock options are expected to be outstanding. The expected term is based on both the Company’s specific historical option exercise experience, as well as expected term information available from a peer group of companies with a similar vesting schedule.

Estimated volatility. The estimated volatility is the amount by which the Company’s share price is expected to fluctuate during a period. The Company’s estimated volatilities for 2013 are based on historical and implied volatilities of the Company’s share price over the expected term of the option. The Company's estimated volatilities for 2012 and 2011 are based on historical and implied volatilities of the Company's share price and historical and implied volatilities of a peer group of companies over the expected term of the option.

Expected dividends. The Company’s board of directors may from time to time declare, and the Company may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law. Any determination to declare and pay dividends will be made by the Company’s board of directors and will depend upon the Company’s results of operations, earnings, capital requirements, financial condition, business prospects, contractual restrictions and other factors deemed relevant by the board of directors. In the event a dividend is declared, there is no assurance with respect to the amount, timing or frequency of any such dividends. The dividend declared in 2012 was deemed to be a special dividend and there is no assurance that special dividends will be declared again during the expected term. Based on this uncertainty and unknown frequency, for the years ended December 28, 2013, December 29, 2012 and December 31, 2011, no dividend rate was used in the assumptions to calculate the share-based compensation expense.

Estimated forfeiture rate. The Company is required to develop an estimate of the number of stock options that will be forfeited due to employee turnover. Adjustments in the estimated forfeiture rates can have a significant effect on its reported share-based compensation, as it recognizes the cumulative effect of the rate adjustments for all expense amortization in the period the estimated forfeiture rates were adjusted. The Company estimates and adjusts forfeiture rates based on a periodic review of recent forfeiture activity and expected future employee turnover. Adjustments in the estimated forfeiture rates could also cause changes in the amount of expense that it recognizes in future periods.

As of December 28, 2013, there was $25.9 million of total unrecognized share-based compensation expense related to unvested options granted or modified on or after January 1, 2006. That expense is expected to be recognized over a weighted average period of 3.4 years as of December 28, 2013. The Company has elected to recognize share-based compensation expense on a straight-line basis over the requisite service period for the entire award. The total fair value of all options vesting during 2013, 2012 and 2011, aggregated $12.3 million, $14.3 million and $12.1 million, respectively. The aggregate intrinsic value of options outstanding, with an exercise price less than the closing price of the Company’s common stock, as of December 28, 2013 was $59.9 million. The aggregate intrinsic value of options exercisable, with an exercise price less than the closing price of the Company’s common stock, as of December 28, 2013 was $37.0 million. The aggregate intrinsic value of options exercised during 2013, 2012 and 2011 was $4.2 million, $3.1 million and $12.4 million, respectively. The aggregate intrinsic value is calculated as the difference between the market value of the Company’s common stock on the date of exercise or the respective period end, as appropriate, and the exercise price of the options. The weighted average remaining contractual term of options outstanding with an exercise price less than the closing price of the Company’s common stock, as of December 28, 2013 was 6.4 years. The weighted average remaining contractual term of options exercisable with an exercise price less than the closing price of the Company’s common stock, as of December 28, 2013 was 4.5 years. The total income tax benefit recognized in the consolidated statements of comprehensive income for share-based compensation expense was $3.9 million, $4.9 million and $4.8 million for the years ended December 28, 2013, December 29, 2012 and December 31, 2011, respectively.

The following table presents the total share-based compensation expense that is included in each functional line item of the consolidated statements of comprehensive income (in thousands):



	Year ended December 28, 2013		Year ended December 29, 2012		Year ended December 31, 2011
Cost of goods sold	$	354	$	480	$	383
Selling, general and administrative	9,407		10,775		10,268
Research and development	1,913		2,842		3,025
Total	$	11,674	$	14,097	$	13,676

The schedule below reflects the number and weighted average exercise price of outstanding and exercisable options segregated by exercise price ranges (in thousands, except remaining contractual life):



	December 28, 2013			December 29, 2012
	Options Outstanding		Options Exercisable	Options Outstanding		Options Exercisable
Range of Exercise Prices	Number of Options	Average Remaining Contractual Life	Number of Options	Number of Options	Average Remaining Contractual Life	Number of Options
$2.75 to $4.00	279	1.01	279	425	1.49	425
$4.67 to $12.00	696	2.46	696	745	3.44	745
$12.87 to $16.00	549	3.39	549	580	4.39	580
$17.84 to $23.98	3,635	8.06	986	2,592	8.25	662
$24.00 to $28.99	1,708	6.20	1,077	1,811	6.98	885
$29.07 to $31.99	1,734	5.37	1,311	1,902	6.30	1,090
$32.21 to $38.30	117	5.28	98	117	6.28	75
$38.60 to $41.51	193	4.40	192	196	5.41	170
Total	8,911	6.12	5,188	8,368	6.40	4,632