Share-Based Compensation

Stock Plans

On August 7, 2007, in connection with the Company’s initial public offering, the 2007 Stock Incentive Plan (2007 Plan) became effective. Under the 2007 Plan, 3.0 million shares of common stock plus shares available under prior 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, were initially reserved for future issuance. 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, approximately 1.7 million additional shares of common stock were added to the share reserve of the 2007 Plan on each of January 4, 2015, December 29, 2013, December 30, 2012, January 1, 2012, January 3, 2010 and January 4, 2009, which represented 3% of the Company’s total shares outstanding as of each of the years ended January 3, 2015, December 28, 2013, December 29, 2012, December 31, 2011, January 2, 2010 and January 3, 2009. 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.

Beginning in 2015, equity awards granted to employees include a mix of stock options and RSUs. With the exception of the RSUs granted to the Company’s Chairman and Chief Executive Officer in connection with the amendment and restatement of his employment agreement (see “Employment and Severance Agreements” in Note 15 to these consolidated financial statements for further details), the RSUs generally vest one year from date of grant. The number of shares issued on each date that an RSU vests is net of any shares withheld to satisfy the minimum statutory tax withholdings that are paid in cash by the Company to the appropriate taxing authorities.

Stock-Based Award Activity

A summary of stock option activity, as well as the number and weighted-average exercise price of stock options issued and outstanding under all stock plans, is presented below (in thousands, except for exercise price):



	Year ended December 31, 2016				Year ended January 2, 2016				Year ended January 3, 2015
	Shares		Average Exercise Price		Shares		Average Exercise Price		Shares		Average Exercise Price
Options outstanding, beginning of period	9,202		$	25.46	9,956		$	23.59	8,911		$	22.76
Granted	1,290		39.94		914		36.18		1,887		24.83
Canceled	(172	)	29.13		(218	)	24.33		(416	)	24.46
Expired	—		—		—		—		—		—
Exercised	(1,799	)	20.76		(1,450	)	19.54		(426	)	10.95
Options outstanding, end of period	8,521		$	28.56	9,202		25.46		9,956		$	23.59
Options exercisable, end of period	4,988		$	26.33	5,609		$	24.72	5,859		$	23.63

The number and weighted-average exercise price of outstanding and exercisable stock options segregated by exercise price ranges (in thousands, except range of exercise prices and remaining contractual life) were as follows:



	Year ended December 31, 2016			Year ended January 2, 2016
	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
$8.00 to $20.00	565	5.34	296	1,367	3.79	947
$20.01 to $30.00	4,297	5.31	2,940	5,196	6.17	3,006
$30.01 to $40.00	3,233	5.89	1,591	2,349	5.00	1,534
$40.01 to $50.00	311	6.14	161	290	6.81	122
$50.01 to $60.00	91	9.65	—	—		—
$60.01 to $70.00	24	9.90	—	—		—
Total	8,521	5.62	4,988	9,202	5.53	5,609

As of December 31, 2016 and January 2, 2016, the weighted-average remaining contractual term of options outstanding with an exercise price less than the closing price of the Company’s common stock was 5.6 years and 5.5 years, respectively. As of December 31, 2016 and January 2, 2016, the weighted-average remaining contractual term of options exercisable with an exercise price less than the closing price of the Company’s common stock was 3.9 years and 4 years, respectively.

A summary of unvested RSU award activity is presented below (in thousands) except for per share amounts:



	Year ended December 31, 2016				Year ended January 2, 2016			Year ended January 3, 2015
	Units		Weighted Average Grant Date Fair Value		Units	Weighted Average Grant Date Fair Value		Units	Weighted Average Grant Date Fair Value
RSUs outstanding, beginning of period	2,703		$	41.45	—	$	—	—	$	—
Granted	6		43.09		2,703	41.45		—	—
Canceled	—		—		—	—		—	—
Expired	—		—		—	—		—	—
Vested	(3	)	41.45		—	—		—	—
RSUs outstanding, end of period	2,706		$	41.45	2,703	$	41.45	—	$	—

Approximately 2.7 million of the total RSUs granted during the year ended January 2, 2016 were awarded to the Company’s Chairman and Chief Executive Officer in connection with the amendment and restatement of his employment agreement (see “Employment and Severance Agreements” in Note 15 to these consolidated financial statements for further details).

At December 31, 2016, an aggregate of 15.6 million shares of common stock were reserved for future issuance under the 2007 Plan and prior equity incentive plans of which 4.0 million shares were available for future grant under the 2007 Plan.

Valuation of Stock-Based Award Activity

The fair value of each RSU award is determined based on the closing price of the Company’s common stock on the grant date.

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



	Year ended December 31, 2016	Year ended January 2, 2016	Year ended January 3, 2015
Risk-free interest rate	1.0% to 2.1%	1.3% to 1.9%	1.4% to 1.9%
Expected term	5.5 years to 5.7 years	5.5 years to 5.7 years	5.1 years to 5.5 years
Estimated volatility	29.8% to 35.7%	32.0% to 37.4%	31.7% to 36.5%
Expected dividends	0%	0%	0%
Weighted-average fair value of options granted	$13.64 per share	$12.20 per share	$7.85 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 term 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 2015, 2014 and 2013 are based on historical and implied volatilities of the Company’s share price over the expected term of the option.

Expected dividends. The Board 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 Board 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. 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 31, 2016, January 2, 2016 and January 3, 2015, 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 and RSUs that will be forfeited due to employee turnover. Adjustments in the estimated forfeiture rates can have a significant effect on the Company’s 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 31, 2016, there was $27.1 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 31, 2016. 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 that vested during fiscal years 2016, 2015 and 2014 aggregated $10.6 million, $10.4 million and $11.2 million, respectively. As of December 31, 2016, there was $0.1 million of total unrecognized compensation expense related to unvested RSUs that is expected to be recognized over a weighted average period of less than 1 year, excluding any contingent compensation expense related to certain RSUs that were granted to the Company’s Chairman and Chief Executive Officer in connection with the amendment and restatement of his employment agreement (see “Employment and Severance Agreements” in Note 15 to these consolidated financial statements for further details).

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 aggregate intrinsic value of options outstanding, with an exercise price less than the closing price of the Company’s common stock, as of December 31, 2016 was $330.9 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 31, 2016 was $204.9 million. The aggregate intrinsic value of options exercised during the years ended December 31, 2016, January 2, 2016 and January 3, 2015 was $57.0 million, $26.4 million and $6.6 million, respectively.

The total income tax benefit recognized in the consolidated statements of operations for share-based compensation expense was $16.2 million, $3.7 million and $3.7 million for the years ended December 31, 2016, January 2, 2016 and January 3, 2015, respectively. During the year ended December 31, 2016, the Company early adopted ASU 2016-09, which resulted in changes to the recognition of excess tax benefits for share-based compensation. Please see Note 2 - Summary of Significant Accounting Policies under the subheading “Recently Adopted Accounting Pronouncements” for additional information on the impact of such adoption.

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



	Year ended December 31, 2016		Year ended January 2, 2016		Year ended January 3, 2015
Cost of goods sold	$	355	$	348	$	436
Selling, general and administrative	9,443		8,139		8,812
Research and development	2,705		2,338		1,757
Total	$	12,503	$	10,825	$	11,005