13.

Share-based compensation

Share-based compensation

In determining the grant date fair value of equity awards, the Company is required to make estimates of expected dividends to be issued, expected volatility of Fabrinet’s ordinary shares, expected forfeitures of the awards, risk free interest rates for the expected term of the awards and expected terms of the awards. Forfeitures are estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. The fair value of restricted share units is based on the market value of our ordinary shares on the date of grant.

The effect of recording share-based compensation expense for the three and six months ended December 29, 2017 and December 30, 2016 was as follows:


	Three Months Ended				Six Months Ended
(amount in thousands)	December 29, 2017		December 30, 2016		December 29, 2017		December 30, 2016
Share-based compensation expense by type of award:
Restricted share units		4,586		7,633		9,433		12,453
Performance share units		872		964		2,945		1,755

Total share-based compensation expense		5,458		8,597		12,378		14,208
Tax effect on share-based compensation expense		—		—		—		—

Net effect on share-based compensation expense	$	5,458	$	8,597	$	12,378	$	14,208

Share-based compensation expense was recorded in the unaudited condensed consolidated statements of operations and comprehensive income as follows:


	Three Months ended				Six Months Ended
(amount in thousands)	December 29, 2017		December 30, 2016		December 29, 2017		December 30, 2016
Cost of revenue	$	1,812	$	1,514	$	3,713	$	2,528
Selling, general and administrative expense		3,646		7,083		8,665		11,680

Total share-based compensation expense	$	5,458	$	8,597	$	12,378	$	14,208

The Company did not capitalize any share-based compensation expense as part of any asset costs during the three and six months ended December 29, 2017 and December 30, 2016.

Share-based award activity

Fabrinet maintains the following equity incentive plans: the Amended and Restated 2010 Performance Incentive Plan (the “2010 Plan”) and the 2017 Inducement Equity Incentive Plan (the “2017 Inducement Plan”).

On March 12, 2010, Fabrinet’s shareholders adopted the 2010 Plan. On December 20, 2010, December 20, 2012 and December 14, 2017, Fabrinet’s shareholders adopted amendments to the 2010 Plan to increase the number of ordinary shares authorized for issuance under the 2010 Plan by 500,000 shares, 3,700,000 shares and 2,100,000 shares, respectively. As of December 29, 2017, there were an aggregate of 34,057 share options outstanding, 1,163,994 restricted share units outstanding and 605,892 performance share units outstanding under the 2010 Plan. As of December 29, 2017, there were 2,547,960 ordinary shares available for future grant under the 2010 Plan.

On November 2, 2017, Fabrinet adopted the 2017 Inducement Plan with a reserve of 160,000 ordinary shares authorized for future issuance solely for the granting of inducement share options and equity awards to new employees. The 2017 Inducement Plan was adopted without shareholder approval in reliance on the “employment inducement exemption” provided under the New York Stock Exchange Listed Company Manual. As of December 29, 2017, there were an aggregate of 48,653 restricted share units outstanding and 97,306 performance share units outstanding under the 2017 Inducement Plan. As of December 29, 2017, there were 14,041 ordinary shares available for future grant under the 2017 Inducement Plan.

Share options

Share options have been granted to directors and employees. Fabrinet’s board of directors has the authority to determine the type of option and the number of shares subject to an option. Options generally vest and become exercisable over four years and expire, if not exercised, within seven years of the grant date. In the case of a grantee’s first grant, 25 percent of the underlying shares vest 12 months after the vesting commencement date and 1/48 of the underlying shares vest monthly over each of the subsequent 36 months. In the case of any additional grants to a grantee, 1/48 of the underlying shares vest monthly over four years, commencing one month after the vesting commencement date.

The following summarizes share option activity:


	Number of Shares			Number of Exercisable Options		Weighted- Average Exercise Price Per Share		Weighted- Average Grant Date Fair Value Per Share
Balance as of June 30, 2017		96,688			96,688	$	15.70
Granted		—					—		—
Exercised		(62,631	)			$	15.80
Forfeited		—					—
Expired		—				$	—

Balance as of December 29, 2017		34,057			34,057	$	15.52


	Number of Shares			Number of Exercisable Options		Weighted- Average Exercise Price Per Share		Weighted- Average Grant Date Fair Value Per Share
Balance as of June 24, 2016		464,334			464,334	$	15.95
Granted		—					—		—
Exercised		(365,066	)			$	16.02
Forfeited		—					—
Expired		(5	)			$	5.75

Balance as of December 30, 2016		99,263			99,263	$	15.71

The following summarizes information for share options outstanding as of December 29, 2017 under the 2010 Plan:


	Range of Exercise Price		Number of Shares Underlying Options		Weighted- Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (amount in thousands)
		$14.12		21,638		0.86
		$15.16		5,369		0.63
		$18.60 -$25.50		7,050		0.93

Options outstanding				34,057		0.84	$	449

Options exercisable				34,057		0.84	$	449

As of December 29, 2017, there was no unrecognized compensation cost for share options issued under the 2010 Plan.

Restricted share units and performance share units

Restricted share units and performance share units have been granted under the 2010 Plan and the 2017 Inducement Plan.

Restricted share units granted to employees generally vest in equal installments over three or four years on each anniversary of the vesting commencement date. Restricted share units granted to non-employee directors generally cliff vest 100% on the first of January, approximately one year from the grant date, provided the director continues to serve through such date.

Performance share units granted to executives will vest, if at all, at the end of a two-year performance period based on the Company’s achievement of pre-defined performance criteria, which consist of revenue and gross margin targets. The actual number of performance share units that may vest at the end of the performance period ranges from 0% to 100% of the award grant.

The following summarizes restricted share unit activity under the 2010 Plan and the 2017 Inducement Plan:


	Number of Shares			Weighted- Average Grant Date Fair Value Per Share
Balance as of June 30, 2017		1,058,605		$	31.59
Granted		430,948			37.12
Issued		(285,902	)		27.00
Forfeited		(39,657	)		35.97

Balance as of December 29, 2017		1,163,994		$	34.62


	Number of Shares			Weighted- Average Grant Date Fair Value Per Share
Balance as of June 24, 2016		1,181,402		$	18.34
Granted		741,973			39.23
Issued		(423,035	)		16.41
Forfeited		(38,170	)		22.35

Balance as of December 30, 2016		1,462,170		$	29.40

The following summarizes performance share unit activity under the 2010 Plan and the 2017 Inducement Plan:


	Number of Shares			Weighted- Average Grant Date Fair Value Per Share
Balance as of June 30, 2017		227,268		$	40.48
Granted		378,624	⁽¹⁾		37.16
Issued		—			—
Forfeited		—			—

Balance as of December 29, 2017		605,892		$	38.41


	Number of Shares			Weighted- Average Grant Date Fair Value Per Share
Balance as of June 24, 2016		—			—
Granted		234,678	⁽¹⁾	$	40.48
Issued		—			—
Forfeited		—			—

Balance as of December 30, 2016		234,678		$	40.48

(1)

This represents the target number of performance share units (PSUs) granted. The actual number of PSUs that may be earned, if any, is dependent upon performance and may range from 0% to 100% percent of the target.

As of December 29, 2017, there was $21.7 million and $5.6 million of unrecognized share-based compensation expense related to restricted share units and performance share units, respectively, under the 2010 Plan and the 2017 Inducement Plan that are expected to be recorded over a weighted-average period of 2.66 years and 1.18 years, respectively.

For the six months ended December 29, 2017 and December 30, 2016, the Company withheld an aggregate of 91,728 shares and 26,085 shares, respectively, upon the vesting of restricted share units, based upon the closing share price on the vesting date to settle the employees’ minimum statutory obligation for the applicable income and other employment taxes. For the six months ended December 29, 2017 and December 30, 2016, the Company then remitted cash of $3.7 million and $1.0 million, respectively, to the appropriate taxing authorities, and presented it as a financing activity within the unaudited condensed consolidated statements of cash flows. The payment had the effect on shares issued by the Company as it reduced the number of shares that would have been issued on the vesting date and was recorded as a reduction of additional paid-in capital.