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 (“SARs”) 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 and the 2005 Incentive Plan expire, terminate or lapse, of which 974,603 shares of common stock as of January 3, 2016 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 as of January 3, 2016 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.

2005 Employee Stock Purchase Plan. The 2005 Employee Stock Purchase Plan (“ESPP”) was originally approved by the stockholders on May 27, 2005 and amended and restated with approval by the stockholders on June 19, 2014. 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 2,960,487 shares were available to be issued as of January 3, 2016. In 2015, 2014 and 2013, a total of 745,914 shares, 639,265 shares and 623,887 shares of common stock, respectively, were issued under this plan.

Acquired Plans. In connection with the Company’s acquisitions of Fusion‑io, SMART Storage, FlashSoft Corporation (“FlashSoft”), Pliant and msystems Ltd., 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 as of January 3, 2016 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.

Valuation Assumptions

The Company estimates the fair value of stock options granted and ESPP shares issued 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 declaration date. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term.

Option Plan Shares. The fair value of the Company’s stock options granted to employees, officers and non-employee board members, excluding unvested stock options assumed through acquisitions, was estimated using the following weighted-average assumptions:



	Years ended
	January 3, 2016	December 28, 2014	December 29, 2013
Dividend yield	1.52% - 2.16%	1.14% - 1.42%	0% - 1.65%
Expected volatility	0.32	0.32	0.37
Risk-free interest rate	1.19%	1.22%	0.74%
Expected term	4.2 years	4.4 years	4.4 years
Estimated annual forfeiture rate	8.20%	8.79%	8.51%
Weighted-average fair value at grant date	$19.29	$18.96	$16.26

RSU Plan Shares. The fair value of the Company’s RSU awards granted, excluding unvested RSU awards assumed through acquisitions, was based upon the closing price of the Company’s stock price on the date of grant.

Employee Stock Purchase Plan Shares. The fair value of shares issued under the Company’s ESPP program was estimated using the following weighted-average assumptions:



	Years ended
	January 3, 2016	December 28, 2014	December 29, 2013
Dividend yield	1.52% - 2.16%	1.14% - 1.25%	0% - 1.65%
Expected volatility	0.35	0.31	0.34
Risk-free interest rate	0.17%	0.07%	0.11%
Expected term	½ year	½ year	½ year
Weighted-average fair value at purchase date	$16.55	$19.39	$13.08

Share-based Compensation Plan Activities

Stock Options and SARs. A summary of stock option and SARs activities under all of the Company’s share-based compensation plans as of January 3, 2016 and changes during 2015, 2014 and 2013 are presented below:



	Shares		Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
	(In thousands)				(Years)	(In thousands)
Options and SARs outstanding as of 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 as of December 29, 2013	6,593			$40.66	4.2	$	195,018
Granted	1,032			$76.82
Exercised	(3,635	)		$40.54		$	163,623
Forfeited	(318	)		$51.88
Expired	(9	)		$41.09
Options assumed through acquisition	427			$68.49
Options and SARs outstanding as of December 28, 2014	4,090			$51.94	4.5	$	202,044
Granted	998			$81.17
Exercised	(694	)		$37.41		$	25,185
Forfeited	(191	)		$67.70
Expired	(30	)		$59.87
Options and SARs outstanding as of January 3, 2016	4,173			$60.57	4.2	$	72,093
Options and SARs vested and expected to vest after January 3, 2016, net of forfeitures	4,007			$59.91	4.2	$	71,487
Options and SARs exercisable as of January 3, 2016	2,235			$50.23	3.2	$	59,023

As of January 3, 2016, the total unrecognized compensation cost related to stock options, net of estimated forfeitures, was approximately $26.7 million, and this amount is expected to be recognized over a weighted-average period of approximately 2.3 years. As of January 3, 2016, the Company had fully expensed all of its SAR 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 2015, 2014 and 2013 are presented below:



	Shares		Weighted-Average Grant Date Fair Value Per Share		Aggregate Fair Market Value⁽¹⁾
	(In thousands)				(In thousands)
Non-vested share units as of December 30, 2012	3,077			$43.51
Granted	2,665			$53.99
Vested	(950	)		$41.97	$	50,268
Forfeited	(338	)		$46.93
Non-vested share units as of December 29, 2013	4,454			$49.87
Granted	2,888			$81.62
Vested	(1,594	)		$51.19	$	129,945
Forfeited	(606	)		$70.81
Assumed through acquisition	445			$94.35
Non-vested share units as of December 28, 2014	5,587			$67.18
Granted	2,668			$77.86
Vested	(1,904	)		$62.60	$	146,487
Forfeited	(782	)		$76.87
Non-vested share units as of January 3, 2016	5,569			$72.47


⁽¹⁾	Aggregate Fair Market Value represents the aggregated market value of RSUs vested during the period as of their individual vest dates.

The number of vested RSUs includes shares of common stock that the Company withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements. Total payments for the employees’ tax obligations to taxing authorities are reflected as a financing activity within the Consolidated Statements of Cash Flows. These net-share settlements had the same effect as share repurchases by the Company as the net share settlements reduced and retired the number of shares that would have otherwise been issued as a result of the vesting. See Note 8, “Stock Repurchases.”

As of January 3, 2016, the total unrecognized compensation cost related to RSUs, net of estimated forfeitures, was approximately $260.3 million, and this amount is expected to be recognized over a weighted-average period of approximately 2.4 years.

Employee Stock Purchase Plan. As of January 3, 2016, the total unrecognized compensation cost related to ESPP was approximately $1.3 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:



	Years ended
	January 3, 2016			December 28, 2014			December 29, 2013
	(In thousands)
Share‑based compensation expense by caption:
Cost of revenue	$	19,306		$	14,720		$	9,820
Research and development	87,626			74,842			51,521
Sales and marketing	37,600			35,972			19,193
General and administrative	27,864			29,779			19,222
Total share‑based compensation expense	172,396			155,313			99,756
Total tax benefit recognized	(44,548		)	(42,685		)	(28,183		)
Decrease in net income	$	127,848		$	112,628		$	71,573

Share‑based compensation expense by type of award:
Stock options	$	26,193		$	35,607		$	32,803
RSUs	133,573			108,259			59,962
ESPP	12,630			11,447			6,991
Total share‑based compensation expense	172,396			155,313			99,756
Total tax benefit recognized	(44,548		)	(42,685		)	(28,183		)
Decrease in net income	$	127,848		$	112,628		$	71,573

Share-based compensation expense of $5.4 million and $4.3 million related to manufacturing personnel was capitalized into inventory as of January 3, 2016 and December 28, 2014, respectively.

In 2014, the Company recognized $10.8 million in share-based compensation expense related to acceleration of equity awards held by former Fusion‑io employees.

The total grant date fair value of options and RSUs vested during the period was as follows:



	Years ended
	January 3, 2016		December 28, 2014		December 29, 2013
	(In thousands)
Options	$	26,004	$	37,986	$	36,703
RSUs	118,969		81,619		39,885
Total grant date fair value of options and RSUs vested during the period	$	144,973	$	119,605	$	76,588