Stock-Based Compensation

Overview of Employee Stock-Based Compensation Plans

Prior to the second quarter of fiscal 2014, the Company had one equity-based compensation plan, the 2004 Long-Term Incentive Compensation Plan (2004 LTIP), from which stock-based compensation awards could be granted to employees and directors. The Company’s 2013 Long-Term Incentive Compensation Plan (2013 LTIP) became effective in the second quarter of fiscal 2014, and replaced the 2004 LTIP as the sole plan for providing stock-based compensation awards to employees and directors on January 1, 2014. The 2004 LTIP has been terminated as to future grants although outstanding awards under the 2004 LTIP will continue to be governed by that plan. In addition, the Company has other equity-based compensation plans that have been terminated so that no future grants can be made under those plans, but under which options are currently outstanding.

Prior to fiscal 2013, the Company’s stock-based awards had been service-based only. Beginning in fiscal 2013, the Company issued grants of awards that also contain performance-based conditions. Performance-based conditions are generally tied to future financial and/or operating performance of the Company. The compensation expense with respect to performance-based grants is recognized if the Company believes it is probable that the performance condition will be achieved. The Company reassesses the probability of the achievement of the performance condition at each reporting period, and adjusts the compensation expense for subsequent changes in the estimate or actual outcome. As with non-performance based awards, compensation expense is recognized over the vesting period. The vesting period runs from the date of grant to the expected date that the performance objective is likely to be achieved.

The 2013 Long-Term Incentive Compensation Plan provides for awards in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other awards. As of June 29, 2014, there were 7.3 million shares authorized for issuance under the plan and 7.2 million shares remaining for future grants. Awards issued under the plan to date include non-qualified stock options, restricted stock, restricted stock units, performance shares and performance units.

The Company also has an Employee Stock Purchase Plan (ESPP) that provides employees with the opportunity to purchase common stock at a discount. As of June 29, 2014, there were 4.5 million shares authorized for issuance under the ESPP, as amended, with 2.2 million shares remaining for future issuance. The ESPP limits employee contributions to 15% of each employee’s compensation (as defined in the plan) and originally allowed employees to purchase shares at a 15% discount to the fair market value of common stock on the purchase date two times per year. The ESPP was amended in the second quarter of fiscal 2012 to increase the six-month participation period to a twelve-month participation period, divided into two equal six-month purchase periods, and to provide for a look-back feature. At the end of each six-month period in April and October, employees participating in the plan purchase the Company’s common stock through the ESPP at a 15% discount to the fair market value of the common stock on the first day of the twelve-month participation period or the purchase date, whichever is lower. The plan amendment also provides for an automatic reset feature to start participants on a new twelve-month participation period if the fair market value of common stock declines during the first six-month purchase period.

Stock Option Awards

The following table summarizes option activity as of June 29, 2014 and changes during the fiscal year then ended (total and shares in thousands):



	Number of Shares		Weighted Average Exercise price		Weighted Average Remaining Contractual Term	Total Intrinsic Value
Outstanding at June 30, 2013	8,657			$35.67
Granted	3,012		55.14
Exercised	(2,339	)	36.08
Forfeited or expired	(408	)	42.00
Outstanding at June 29, 2014	8,922			$41.85	4.74		$89,311
Vested and expected to vest at June 29, 2014	8,709			$41.65	4.71		$88,445
Exercisable at June 29, 2014	3,311			$40.56	3.36		$36,759

The total intrinsic value in the table above represents the total pretax intrinsic value, which is the total difference between the closing price of the Company’s common stock on June 27, 2014 (the last trading day of fiscal 2014) of $48.48 and the exercise price for in-the-money options that would have been received by the holders if all instruments had been exercised on June 29, 2014. As of June 29, 2014, there was $54.0 million of unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted average period of 1.56 years.

The following table summarizes information about stock options outstanding and exercisable at June 29, 2014 (shares in thousands):



	Options Outstanding				Options Exercisable
Range of Exercise Price	Number	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number	Weighted Average Exercise Price
$0.01 to $27.47	428	2.38		$23.53	325		$23.11
$27.48 to $27.77	2,188	5.16	27.77		497	27.77
$27.78 to $35.89	2,031	3.69	32.31		1,174	33.17
$35.90 to $54.26	232	4.80	48.10		131	48.42
$54.27 to $75.55	4,043	5.30	55.85		1,184	57.19
Total	8,922	4.74		$41.85	3,311		$40.56

Other information pertaining to the Company’s stock option awards is as follows (in thousands, except per share data):



	Fiscal Years Ended
	June 29, 2014		June 30, 2013		June 24, 2012
Weighted average grant date fair value per share of options		$19.31		$12.05		$11.67
Total intrinsic value of options exercised		$67,044		$62,145		$1,605

Restricted Stock Awards and Units

A summary of nonvested restricted stock awards (RSAs) and restricted stock unit awards (RSUs) outstanding as of June 29, 2014 and changes during the year then ended is as follows (in thousands, except per share data):



	Number of RSAs/RSUs		Weighted Average Grant-Date Fair Value
Nonvested at June 30, 2013	647			$33.80
Granted	527		54.76
Vested	(287	)	32.44
Forfeited	(27	)	42.83
Nonvested at June 29, 2014	860			$46.81

As of June 29, 2014, there was $25.7 million of unrecognized compensation cost related to nonvested awards, which is expected to be recognized over a weighted average period of 3.48 years.

Stock-Based Compensation Valuation and Expense

The Company accounts for its employee stock-based compensation plans using the fair value method. The fair value method requires the Company to estimate the grant-date fair value of its stock-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term.

The Company currently uses the Black-Scholes option-pricing model to estimate the fair value of the Company’s stock option and ESPP awards. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest rate and expected dividends. Due to the inherent limitations of option-valuation models, future events that are unpredictable and the estimation process utilized in determining the valuation of the stock-based awards, the ultimate value realized by award holders may vary significantly from the amounts expensed in the Company’s financial statements.

For RSAs and RSUs, the grant-date fair value is based upon the market price of the Company’s common stock on the date of the grant. This fair value is then amortized to compensation expense over the requisite service period or vesting term.

Stock-based compensation expense is recognized net of estimated forfeitures such that expense is recognized only for those stock-based awards that are expected to vest. A forfeiture rate is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.

Total stock-based compensation expense was as follows (in thousands):



	Fiscal Years Ended
Income Statement Classification:	June 29, 2014		June 30, 2013		June 24, 2012
Cost of revenue, net		$11,353		$9,389		$7,713
Research and development	15,392		13,429		10,378
Sales, general and administrative	34,941		31,081		28,302
Total stock-based compensation expense		$61,686		$53,899		$46,393

The weighted average assumptions used to value stock option grants were as follows:



	Fiscal Years Ended
Stock Option Grants:	June 29, 2014		June 30, 2013		June 24, 2012
Risk-free interest rate	1.16	%	0.42	%	0.47	%
Expected life, in years	3.80		3.64		3.63
Expected volatility	44.5	%	56.8	%	51.7	%
Dividend yield	—		—		—

The following describes each of these assumptions and the Company’s methodology for determining each assumption:

Risk-Free Interest Rate

The Company estimates the risk-free interest rate using the U.S. Treasury bill rate with a remaining term equal to the expected life of the award.

Expected Life

The expected life represents the period that the stock option awards are expected to be outstanding. In determining the appropriate expected life of its stock options, the Company segregates its grantees into categories based upon employee levels that are expected to be indicative of similar option-related behavior. The expected useful lives for each of these categories are then estimated giving consideration to (1) the weighted average vesting periods, (2) the contractual lives of the stock options, (3) the relationship between the exercise price and the fair market value of the Company’s common stock, (4) expected employee turnover, (5) the expected future volatility of the Company’s common stock, and (6) past and expected exercise behavior, among other factors.

Expected Volatility

The Company estimates expected volatility giving consideration to the expected life of the respective award, the Company’s current expected growth rate, implied volatility in traded options for its common stock, and the historical volatility of its common stock.

Expected Dividend Yield

The Company estimates the expected dividend yield by giving consideration to its current dividend policies as well as those anticipated in the future considering the Company’s current plans and projections.