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Stock-Based Compensation Expense | 9 Months Ended
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Sep. 30, 2012
Stock-Based Compensation Expense | NOTE 10: Stock-Based Compensation Expense The Company’s share-based payments that result in compensation expense consist solely of stock option grants. As of September 30, 2012, the Company had 6,306,506 shares available for grant under two stock option plans: the 2001 General Stock Option Plan (4,940,521) and the 2007 Stock Option and Incentive Plan (1,365,985). Each of these plans expires ten years from the date the plan was approved. In December 2011, the 2001 General Stock Option Plan received shareholder approval for an amendment and restatement of the plan, extending the plan until September 2021. Stock options are granted with an exercise price equal to the market value of the Company’s common stock at the grant date. Generally, stock options vest over four years based upon continuous service and expire ten years from the grant date. The following table summarizes the Company’s stock option activity for the nine-month period ended September 30, 2012:
|  | Shares (in thousands) |  |  | Weighted- Average Exercise Price |  |  | Weighted- Average Remaining Contractual Term (in years) |  |  | Aggregate Intrinsic Value (in thousands) |
Outstanding as of December 31, 2011 |  |  | 4,473 |  |  | $ | 24.48 |  |  |  |  |  |  |  |  |
Granted |  |  | 34 |  |  |  | 37.24 |  |  |  |  |  |  |  |  |
Exercised |  |  | (745 | ) |  |  | 20.89 |  |  |  |  |  |  |  |  |
Forfeited or expired |  |  | (87 | ) |  |  | 22.77 |  |  |  |  |  |  |  |  |
Outstanding as of September 30, 2012 |  |  | 3,675 |  |  | $ | 25.37 |  |  |  | 7.3 |  |  | $ | 34,143 |
Exercisable as of September 30, 2012 |  |  | 1,265 |  |  | $ | 21.12 |  |  |  | 5.6 |  |  | $ | 17,123 |
The fair values of stock options granted in each period presented were estimated using the following weighted-average assumptions:
|  | Three-months Ended |  |  | Nine-months Ended |
|  | September 30, 2012 |  |  | October 2, 2011 |  |  | September 30, 2012 |  |  | October 2, 2011 |
Risk-free rate |  |  | 2.0 | % |  |  | 3.6 | % |  |  | 2.0 | % |  |  | 3.6 | %
Expected dividend yield |  |  | 1.2 | % |  |  | 1.0 | % |  |  | 1.2 | % |  |  | 1.0 | %
Expected volatility |  |  | 44 | % |  |  | 42 | % |  |  | 44 | % |  |  | 42 | %
Expected term (in years) |  |  | 5.6 |  |  |  | 5.2 |  |  |  | 5.6 |  |  |  | 5.4 |
Risk-free rate The risk-free rate was based upon a treasury instrument whose term was consistent with the contractual term of the option. Expected dividend yield The current dividend yield was calculated by annualizing the cash dividend declared by the Company’s Board of Directors for the current quarter and dividing that result by the closing stock price on the grant date. The current dividend yield was then adjusted to reflect the Company’s expectations relative to future dividend declarations. Expected volatility The expected volatility was based upon a combination of historical volatility of the Company’s common stock over the contractual term of the option and implied volatility for traded options of the Company’s stock. Expected term The expected term was derived from the binomial lattice model from the impact of events that trigger exercises over time. The weighted-average grant-date fair values of stock options granted during the three-month periods ended September 30, 2012 and October 2, 2011 were $12.96 and $11.89, respectively. The weighted-average grant-date fair values of stock options granted during the nine-month periods ended September 30, 2012 and October 2, 2011 were $13.16 and $11.78, respectively. The Company stratifies its employee population into two groups: one consisting of senior management and another consisting of all other employees. The Company currently expects that approximately 67% of its stock options granted to senior management and 66% of its options granted to all other employees will actually vest. Therefore, the Company currently applies an estimated annual forfeiture rate of 12% to all unvested options for senior management and a rate of 14% for all other employees. The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended September 30, 2012 were $1,492,000 and $478,000, respectively, and for the three-month period ended October 2, 2011 were $1,520,000 and $502,000, respectively. The total stock-based compensation expense and the related income tax benefit recognized for the nine-month period ended September 30, 2012 were $6,795,000 and $2,212,000, respectively, and for the nine-month period ended October 2, 2011 were $5,829,000 and $1,947,000, respectively. No compensation expense was capitalized as of September 30, 2012 or December 31, 2011. The following table details the stock-based compensation expense by caption for each period presented on the Consolidated Statements of Operations (in thousands):
|  | Three-months Ended |  |  | Nine-months Ended |
|  | September 30, 2012 |  |  | October 2, 2011 |  |  | September 30, 2012 |  |  | October 2, 2011 |
Product cost of revenue |  | $ | 99 |  |  | $ | 80 |  |  | $ | 474 |  |  | $ | 350 |
Service cost of revenue |  |  | 26 |  |  |  | 27 |  |  |  | 134 |  |  |  | 136 |
Research, development, and engineering |  |  | 385 |  |  |  | 394 |  |  |  | 1,735 |  |  |  | 1,732 |
Selling, general, and administrative |  |  | 982 |  |  |  | 1,019 |  |  |  | 4,452 |  |  |  | 3,611 |
|  | $ | 1,492 |  |  | $ | 1,520 |  |  | $ | 6,795 |  |  | $ | 5,829 |
The total intrinsic values of stock options exercised for the three-month periods ended September 30, 2012 and October 2, 2011 were $1,436,000 and $5,254,000, respectively. The total intrinsic values of stock options exercised for the nine-month periods ended September 30, 2012 and October 2, 2011 were $14,744,000 and $17,808,000, respectively. As of September 30, 2012, total unrecognized compensation expense related to non-vested stock options was $8,273,000, which is expected to be recognized over a weighted-average period of 1.5 years.

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- Definition The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Staff Accounting Bulletin (SAB) -Number Topic 14 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5070-113901 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 50 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6406099&loc=d3e25284-112666 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5047-113901 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher AICPA -Name Statement of Position (SOP) -Number 93-6 -Paragraph 53 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 40 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6418621&loc=d3e17540-113929 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 123R -Paragraph 64, 65, A240 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6415400&loc=d3e5444-113901 + Details
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