Stockholders’ Equity and Share-based Compensation

Dividends

Through December 29, 2013, the Company’s Board of Directors declared the following dividends:

Declaration Date

Dividend per Share

Record Date

Total Amount Declared

Payment Date

(In millions)

July 30, 2013

0.225

August 12, 2013

51.6

August 30, 2013

October 15, 2013

0.225

November 4, 2013

51.5

November 25, 2013

No dividends were declared or paid by the Company during the first two quarters of fiscal year 2013. On January 21, 2014, the Company’s Board of Directors declared a dividend of $0.225 per share for holders of record as of February 3, 2014, to be paid on February 24, 2014. Future dividends are subject to declaration by the Company’s Board of Directors.

Share-based Benefit Plans

2013 Incentive Plan. On June 12, 2013, the Company’s stockholders approved the 2013 Incentive Plan (“2013 Plan”). Shares of the Company’s common stock may be issued under the 2013 Plan pursuant to two separate equity incentive programs: (i) the discretionary grant program under which stock options and stock appreciation rights may be granted to officers and other employees, non-employee board members and independent consultants, and (ii) the stock issuance and cash bonus program under which eligible persons may, at the discretion of the plan administrator, be issued shares of the Company’s common stock pursuant to restricted stock awards, restricted stock units (“RSUs”) or other share-based awards which vest upon the completion of a designated service period or the attainment of pre-established performance milestones, be awarded cash bonus opportunities which are earned through the attainment of pre-established performance milestones, or be issued shares of the Company’s common stock through direct purchase or as a bonus for services rendered to the Company. Options eligible for exercise may be exercised for shares of the Company’s common stock at any time prior to the expiration of the seven-year option term or any earlier termination of those options in connection with the optionee’s cessation of service with the Company. Outstanding RSU awards under the 2013 Plan have dividend equivalent rights which entitle holders of RSUs to the same dividend value per share as holders of common stock. Dividend equivalent rights are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. Dividend equivalent rights are accumulated and paid when the underlying shares vest. A total of 20,000,000 shares of the Company’s common stock have initially been reserved for issuance under the 2013 Plan. The 2013 Plan share reserve may be increased by up to 10,000,000 shares of common stock to the extent that outstanding share-based awards under the 1995 Stock Option Plan, the 1995 Non-Employee Directors Stock Option Plan, and the 2005 Incentive Plan expire, terminate or lapse, of which 349,675 shares of common stock as of December 29, 2013 had been added to the 2013 Plan share reserve. All options granted under the 2013 Plan are granted with an exercise price equal to the fair market value of the common stock on the date of grant and will expire seven years from the date of grant.

2005 Incentive Plan. The 2005 Incentive Plan terminated on June 12, 2013 and no further share-based awards were made under this plan after that date. Share-based awards that were outstanding under this plan on December 29, 2013 continue to be governed by their existing terms. Options eligible for exercise may be exercised for shares of the Company’s common stock at any time prior to the expiration of the seven-year option term or any earlier termination of those options in connection with the optionee’s cessation of service with the Company. Outstanding RSU awards under this plan have dividend equivalent rights which entitle holders of RSUs to the same dividend value per share as holders of common stock. Dividend equivalent rights are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs.

1995 Stock Option Plan and 1995 Non-Employee Directors Stock Option Plan. Both of these plans terminated on May 27, 2005 and no further option grants were made under the plans after that date. Options eligible for exercise that were outstanding under these plans on December 29, 2013 continue to be governed by their existing terms and may be exercised for shares of the Company’s common stock at any time prior to the expiration of the ten-year option term or any earlier termination of those options in connection with the optionee’s cessation of service with the Company.

2005 Employee Stock Purchase Plan. The 2005 Employee Stock Purchase Plan (“ESPP”) was approved by the stockholders on May 27, 2005. The ESPP allows eligible employees to purchase shares of the Company’s common stock at the end of each six-month offering period at a purchase price equal to 85% of the lower of the fair market value per share on the start date of the offering period or the fair market value per share on the purchase date. The ESPP has 10,000,000 shares reserved for issuance, of which 4,345,666 shares were available to be issued as of December 29, 2013. In fiscal years 2013, 2012 and 2011, a total of 623,887 shares, 684,646 shares and 613,452 shares of common stock, respectively, were issued under this plan.

Acquired Plans. In connection with the Company’s acquisitions of SMART Storage, FlashSoft, Pliant, msystems Ltd. and Matrix Semiconductor, Inc., the Company adopted various equity incentive plans, which were effective upon completion of the applicable acquisition. Each of these plans was terminated as of the date of acquisition and no further grants were made under any of these plans after their termination. Any unvested option grants that were outstanding under these plans at December 29, 2013 continue to be governed by their existing terms and may be exercised for shares of the Company’s common stock. Vested options may be exercised for shares of the Company’s common stock at any time prior to the expiration of the option term or any earlier termination of those options in connection with the optionee’s cessation of service with the Company.

Accounting for Share-based Compensation Expense

For share-based awards expected to vest, compensation cost is based on the grant-date fair value. The Company recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period of each of these awards, net of estimated forfeitures.

The Company estimates the fair value of stock options and RSUs granted using the Black-Scholes-Merton option-pricing formula and a single-option award approach. The Company’s expected term represents the period that the Company’s share-based awards are expected to be outstanding and was determined based on historical experience for similar awards, giving consideration to the contractual terms of the share-based awards. The Company’s expected volatility is based on the implied volatility of its traded options. The Company’s dividend yield is based on the annualized dividend and the share price at each dividend record date. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term.

Valuation Assumptions

Option Plan Shares. The fair value of the Company’s stock options granted, excluding unvested stock options assumed through acquisitions, was estimated using the following weighted average assumptions:



	Fiscal years ended
	December 29, 2013	December 30, 2012	January 1, 2012
Dividend yield	0% - 1.63%	—%	—%
Expected volatility	0.37	0.43	0.43
Risk-free interest rate	0.74%	0.60%	1.49%
Expected term	4.4 years	4.3 years	4.3 years
Estimated annual forfeiture rate	8.51%	8.59%	8.57%
Weighted average fair value at grant date	$16.26	$16.45	$17.37

The fair value of the Company’s RSU awards granted was valued using the closing price of the Company’s stock price on the date of grant.

Employee Stock Purchase Plan Shares. The fair value of the Company’s ESPP shares for plans entered into during the fiscal year was estimated using the following weighted average assumptions:



	Fiscal years ended
	December 29, 2013	December 30, 2012	January 1, 2012
Dividend yield	0% - 1.63%	—%	—%
Expected volatility	0.34	0.41	0.43
Risk-free interest rate	0.11%	0.15%	0.13%
Expected term	½ year	½ year	½ year
Weighted average fair value at purchase date	$13.08	$11.87	$12.17

Share-based Compensation Plan Activities

Stock Options and SARs. A summary of stock option and stock appreciation rights (“SARs”) activity under all of the Company’s share-based compensation plans as of December 29, 2013 and changes during the three fiscal years ended December 29, 2013 is presented below (in thousands, except for weighted average exercise price and remaining contractual term):



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Options and SARs outstanding at January 2, 2011	20,393		$	32.18	3.8	$	393,996
Granted	3,157		44.96
Exercised	(5,310	)	24.81			126,929
Forfeited	(536	)	29.09
Expired	(354	)	51.79
Options assumed through acquisition	209		4.35
Options and SARs outstanding at January 1, 2012	17,559		36.55		3.4	257,251
Granted	2,336		46.49
Exercised	(3,403	)	21.32			81,622
Forfeited	(469	)	38.12
Expired	(597	)	53.10
Options and SARs outstanding at December 30, 2012	15,426		40.73		3.2	109,411
Granted	1,142		52.69
Exercised	(7,362	)	35.53			163,992
Forfeited	(433	)	43.72
Expired	(2,363	)	60.70
Options assumed through acquisition	183		19.37
Options and SARs outstanding at December 29, 2013	6,593		40.66		4.2	195,018
Options and SARs vested and expected to vest after December 29, 2013, net of forfeitures	6,291		40.31		4.1	188,288
Options and SARs exercisable at December 29, 2013	3,208		33.99		3.1	116,294

At December 29, 2013, the total unrecognized compensation cost related to stock options, net of estimated forfeitures, was approximately $47.4 million, and this amount is expected to be recognized over a weighted average period of approximately 2.2 years. As of December 29, 2013, the Company had fully expensed all of its SARs awards.

Restricted Stock Units. RSUs are settled in shares of the Company’s common stock upon vesting on a one-for-one basis. Typically, vesting of RSUs is subject to the employee’s continuing service to the Company. The cost of these awards is determined using the fair value of the Company’s common stock on the date of grant, and compensation is recognized on a straight-line basis over the requisite vesting period.

A summary of the changes in RSUs outstanding under the Company’s share-based compensation plans during the three fiscal years ended December 29, 2013 is presented below (in thousands, except for weighted average grant date fair value):



	Shares		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Non-vested share units at January 2, 2011	1,244		$	28.64	$	62,007
Granted	1,335		47.56
Vested	(396	)	29.63		19,309
Forfeited	(132	)	37.24
Non-vested share units at January 1, 2012	2,051		40.22		100,913
Granted	1,840		45.04
Vested	(646	)	47.75		29,479
Forfeited	(227	)	42.85
Assumed through acquisition	59		46.63
Non-vested share units at December 30, 2012	3,077		43.51		131,622
Granted	2,665		53.99
Vested	(950	)	41.97		50,268
Forfeited	(338	)	46.93
Non-vested share units at December 29, 2013	4,454		49.87		221,457

At December 29, 2013, the total unrecognized compensation cost related to RSUs, net of estimated forfeitures, was approximately $144.5 million, and this amount is expected to be recognized over a weighted average period of approximately 2.6 years.

Employee Stock Purchase Plan. At December 29, 2013, the total unrecognized compensation cost related to ESPP was approximately $0.9 million, and this amount is expected to be recognized over a period of one month.

Share-based Compensation Expense. The following tables set forth the detailed allocation of the share-based compensation expense (in thousands):



	Fiscal years ended
	December 29, 2013			December 30, 2012			January 1, 2012
Share-based compensation expense by caption:
Cost of revenue	$	9,820		$	7,459		$	4,674
Research and development	51,521			41,009			34,202
Sales and marketing	19,193			14,585			10,593
General and administrative	19,222			15,390			13,641
Total share-based compensation expense	99,756			78,443			63,110
Total tax benefit recognized	(28,183		)	(20,122		)	(17,008		)
Decrease in net income	$	71,573		$	58,321		$	46,102

Share-based compensation expense by type of award:
Stock options and SARs	$	32,803		$	35,428		$	33,684
RSUs	59,962			35,260			22,355
ESPP	6,991			7,755			7,071
Total share-based compensation expense	99,756			78,443			63,110
Total tax benefit recognized	(28,183		)	(20,122		)	(17,008		)
Decrease in net income	$	71,573		$	58,321		$	46,102

Share-based compensation expense of $2.7 million and $1.8 million related to manufacturing personnel was capitalized into inventory as of the end of fiscal years 2013 and 2012, respectively.

The total grant date fair value of options and RSUs vested during the three fiscal years ended December 29, 2013 was as follows (in thousands):



	Fiscal years ended
	December 29, 2013		December 30, 2012		January 1, 2012
Fair value of options vested	$	36,703	$	37,674	$	33,868
Fair value of RSUs vested	39,885		24,327		11,747
Total fair value of options and RSUs vested	$	76,588	$	62,001	$	45,615