Note 5: Equity-Based Compensation Plans

The Company has stock plans that provide for grants of equity-based awards to eligible participants, including stock options and restricted stock units (“RSUs”), of Lam Research common stock (“Common Stock”). An option is a right to purchase Common Stock at a set price. An RSU award is an agreement to issue a set number of shares of Common Stock at the time of vesting. The Company’s options and RSU awards typically vest over a period of three years or less, although awards assumed in connection with the acquisition of Novellus Systems, Inc. (“Novellus”), have vesting terms up to four years. The Company also has an employee stock purchase plan that allows employees to purchase its Common Stock at a discount through payroll deductions.

The Company recognized the following equity-based compensation expense and benefits in the Condensed Consolidated Statements of Operations:


	Year Ended
	June 28, 2015		June 29, 2014		June 30, 2013
	(in thousands)
Equity-based compensation expense	$	135,354	$	103,700	$	99,310
Income tax benefit recognized in the related to equity-based compensation	$	23,660	$	16,937	$	17,647
Income tax benefit realized from the exercise and vesting of options and RSUs	$	40,401	$	31,993	$	21,625

The estimated fair value of the Company’s equity-based awards, less expected forfeitures, is amortized over the awards’ vesting term on a straight-line basis.

Stock Options and RSUs

The Lam Research Corporation 2007 Stock Incentive Plan, as amended and restated, and 2011 Stock Incentive Plan, as amended and restated (collectively the “Stock Plans”), provide for the grant of non-qualified equity-based awards to eligible employees, consultants and advisors, and non-employee directors of the Company and its subsidiaries. A summary of stock plan transactions is as follows:


	Options Outstanding					Restricted Stock Units Outstanding
	Number of Shares			Weighted-Average Exercise Price		Number of Shares			Weighted-Average Fair Market Value at Grant
June 24, 2012		3,902,077		$	25.14		4,331,478		$	41.01
Granted		288,867		$	42.59		2,563,670		$	38.76
Exercised		(1,546,028	)	$	25.47		N/A			N/A
Canceled		(73,993	)	$	26.24		(299,079	)	$	39.70
Vested restricted stock		N/A			N/A		(1,754,273	)	$	42.52

June 30, 2013		2,570,923		$	26.87		4,841,796		$	39.32
Granted		166,455		$	51.76		2,811,602		$	53.21
Exercised		(1,403,019	)	$	24.75		N/A			N/A
Canceled		(2,473	)	$	30.21		(281,476	)	$	41.16
Vested restricted stock		N/A			N/A		(1,736,453	)	$	40.39

June 29, 2014		1,331,886		$	32.20		5,635,469		$	45.83
Granted		76,659		$	80.60		1,804,937		$	79.74
Exercised		(564,558	)	$	31.05		N/A			N/A
Cancelled		(8,155	)	$	29.32		(174,879	)	$	50.16
Vested restricted stock		N/A			N/A		(2,311,439	)	$	41.17

June 28, 2015		835,832		$	37.44		4,954,088		$	60.13

Outstanding and exercisable options presented by price range at June 28, 2015 were as follows:


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Options Outstanding		Weighted-Average Remaining Life (Years)		Weighted-Average Exercise Price		Number of Options Exercisable		Weighted-Average Exercise Price
$9.44-$19.05		130,682		0.52	$	12.94		130,682	$	12.94
$21.04-$25.60		89,907		0.30	$	22.13		86,845	$	22.08
$26.87-$29.68		193,978		0.86	$	29.26		190,025	$	29.32
$31.45-$35.68		30,042		0.21	$	32.94		30,042	$	32.94
$42.41-$80.60		391,223		2.53	$	53.54		185,101	$	43.58

$9.44-$51.76		835,832		4.42	$	37.44		622,695	$	29.29

As of June 28, 2015, there were a total of 5,789,920 shares subject to options and RSUs issued and outstanding under the Company’s Stock Plans. As of June 28, 2015, there were a total of 6,572,350 shares available for future issuance under the Stock Plans.

Stock Options

The fair value of the Company’s stock options granted during fiscal years 2015, 2014, and 2013, was estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions, including expected stock price volatility and the estimated life of each award:


	Year Ended
	June 28, 2015		June 29, 2014		June 30, 2013
Expected volatility		34.45%		35.28%		36.60%
Risk-free interest rate		1.46%		1.39%		0.81%
Expected term (years)		4.80		4.78		4.79
Dividend yield		0.89%		—		—

The year-end intrinsic value relating to stock options for fiscal years 2015, 2014, and 2013 is presented below:


	Year Ended
	June 28, 2015		June 29, 2014		June 30, 2013
	(in thousands)
Intrinsic value - options outstanding	$	37,961	$	46,283	$	44,919
Intrinsic value - options exercisable	$	33,360	$	31,653	$	36,870
Intrinsic value - options exercised	$	26,806	$	41,379	$	25,430

As of June 28, 2015, there was $2.9 million of total unrecognized compensation expense related to unvested stock options granted and outstanding; that expense is expected to be recognized over a weighted-average remaining vesting period of 2.1 years.

Restricted Stock Units

The fair value of the Company’s RSUs was calculated based upon the fair market value of the Company’s stock at the date of grant, discounted for dividends. As of June 28, 2015, there was $197.6 million of total unrecognized compensation expense related to all unvested RSUs granted; that expense is expected to be recognized over a weighted-average remaining vesting period of 2.1 years.

During the fiscal years 2015 and 2014, the Company issued certain RSUs with both a market condition and a service condition (market-based performance RSUs, or “market-based PRSUs”). Based upon the terms of such awards, the number of shares that can be earned over the performance periods is based on the Company’s Common Stock price performance compared to the market price performance of the Philadelphia Semiconductor Sector Index (“SOX”), ranging from 0% to 150% of target. The stock price performance or market price performance is measured using the closing price for the 50-trading days prior to the dates the performance period begins and ends. The target number of shares represented by the market-based PRSUs is increased by 2% of target for each 1% that Common Stock price performance exceeds the market price performance of the SOX index. The result of the vesting formula is rounded down to the nearest whole number. Total stockholder return is a measure of stock price appreciation in this performance period. As of June 28, 2015, 0.9 million market-based PRSUs were outstanding. These market-based PRSUs generally vest two or three years from the grant date and require continued employment. Stock compensation expense for the market-based PRSUs was $13.5 million and $3.8 million for the years ended June 28, 2015 and June 29, 2014, respectively. No market-based PRSUs were awarded in earlier periods.

The fair value of the Company’s market-based PRSUs granted during fiscal years 2015 and 2014, was calculated using a Monte Carlo simulation model at the date of the grant. This model requires the input of highly subjective assumptions, including expected stock price volatility and the estimated life of each award:


	Year Ended
	June 28, 2015		June 29, 2014
Expected volatility		27.93%		29.27%
Risk-free interest rate		1.05%		0.55%
Expected term (years)		2.98		2.67
Dividend yield		0.89%		—

ESPP

The 1999 Employee Stock Purchase Plan (the “1999 ESPP”) allows employees to designate a portion of their base compensation to be deducted and used to purchase the Company’s Common Stock at a purchase price per share of the lower of 85% of the fair market value of the Company’s Common Stock on the first or last day of the applicable purchase period. Typically, each offering period lasts 12 months and comprises three interim purchase dates. The Plan Administrator (the Compensation Committee of the Board) is authorized to set a limit on the number of shares a plan participant can purchase on any single plan exercise date. During fiscal years 2015, 2014, and 2013, there was no increase to the number of shares of Lam Research Common Stock reserved for issuance under the 1999 ESPP.

During fiscal year 2015, a total of 943,055 shares of the Company’s Common Stock were sold to employees under the 1999 ESPP. At June 28, 2015, 7,434,523 shares were available for purchase under the 1999 ESPP.

The 1999 ESPP rights were valued using the Black-Scholes model. During fiscal years 2015, 2014, and 2013, the 1999 ESPP was valued using the following weighted-average assumptions:


	Year Ended
	June 28, 2015		June 29, 2014		June 30, 2013
Expected term (years)		0.67		0.68		0.64
Expected stock price volatility		27.60%		30.24%		32.42%
Risk-free interest rate		0.07%		0.07%		0.15%
Dividend Yield		0.69%		—		—

As of June 28, 2015, there was $2.6 million of total unrecognized compensation cost related to the 1999 ESPP that is expected to be recognized over a remaining vesting period of 2 months.