Share‑based Compensation

Share-based Benefit Plans

Share-based Plans. The Company has a share-based compensation program that provides its Board of Directors with broad discretion in creating equity incentives for employees, officers, non-employee board members and non-employee service providers. This program includes incentive and non-statutory stock option awards, stock appreciation right awards (“SARs”), restricted stock unit (“RSU”) awards, performance-based cash bonus awards for Section 16 executive officers and an automatic grant program for non-employee board members pursuant to which such individuals receive option grants or other stock awards at designated intervals over their period of board service. These awards are granted under various share incentive plans, all of which are stockholder approved. Stock option awards generally vest as follows: 25% of the shares vest on the first anniversary of the vesting commencement date and the remaining 75% vest proportionately each quarter over the next 12 quarters of continued service. RSU awards generally vest in equal annual installments over a four-year period. Grants to non-employee board members generally vest in one installment on the earlier of (i) the first anniversary of the grant date or (ii) the day immediately preceding the next annual meeting of the Company’s stockholders following the grant date. Additionally, the Company has an Employee Stock Purchase Plan (“ESPP”) that allows employees to purchase shares of common stock at 85% of the fair market value at the subscription date or the date of purchase, whichever is lower.

Valuation Assumptions

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



	Three months ended
	April 3, 2016	March 29, 2015
Dividend yield	—%	1.52%
Expected volatility	0.22	0.32
Risk-free interest rate	1.20%	1.18%
Expected term	4.1 years	4.2 years
Estimated annual forfeiture rate	8.20%	8.79%
Weighted-average fair value at grant date	$15.05	$19.56

RSU Plan Shares. The fair value of the Company’s RSU awards granted 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:



	Three months ended
	April 3, 2016	March 29, 2015
Dividend yield	—%	1.52%
Expected volatility	0.24	0.36
Risk-free interest rate	0.42%	0.07%
Expected term	½ year	½ year
Weighted-average fair value at purchase date	$13.26	$20.20

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 April 3, 2016 and changes during the first quarter of 2016 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 January 3, 2016	4,173			$60.57	4.2	$	72,093
Granted	13			$75.80
Exercised	(526	)		$38.65		$	18,169
Forfeited	(58	)		$74.19
Expired	(4	)		$82.61
Options and SARs outstanding as of April 3, 2016	3,598			$63.58	4.2	$	52,688
Options and SARs vested and expected to vest after April 3, 2016, net of forfeitures	3,467			$63.07	4.2	$	52,302
Options and SARs exercisable as of April 3, 2016	2,147			$56.87	3.5	$	44,283

As of April 3, 2016, the total unrecognized compensation cost related to stock options, net of estimated forfeitures, was approximately $22.2 million, and this amount is expected to be recognized over a weighted-average period of approximately 2.1 years. As of April 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 the first quarter of 2016 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 January 3, 2016	5,569			$72.47
Granted	2,718			$68.35
Vested	(1,495	)		$67.29	$	102,793
Forfeited	(164	)		$75.09
Non-vested share units as of April 3, 2016	6,628			$71.89


⁽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 Condensed 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 April 3, 2016, the total unrecognized compensation cost related to RSUs, net of estimated forfeitures, was approximately $371.2 million, and this amount is expected to be recognized over a weighted-average period of approximately 3.0 years.

Employee Stock Purchase Plan. As of April 3, 2016, the total unrecognized compensation cost related to ESPP was approximately $0.8 million and will be recognized over the planned purchase interval.

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



	Three months ended
	April 3, 2016			March 29, 2015
	(In thousands)
Share‑based compensation expense by caption:
Cost of revenue	$	5,376		$	4,062
Research and development	21,960			21,043
Sales and marketing	9,355			9,535
General and administrative	7,008			6,770
Total share‑based compensation expense	43,699			41,410
Total tax benefit recognized	(11,903		)	(11,069		)
Decrease in net income	$	31,796		$	30,341

Share‑based compensation expense by type of award:
Stock options	$	5,809		$	8,028
RSUs	35,705			30,225
ESPP	2,185			3,157
Total share‑based compensation expense	43,699			41,410
Total tax benefit recognized	(11,903		)	(11,069		)
Decrease in net income	$	31,796		$	30,341

Share-based compensation expense of $5.3 million and $5.4 million related to manufacturing personnel was capitalized into inventory as of April 3, 2016 and January 3, 2016, respectively.

Grant Date Fair Value of Vested Options and RSUs. The total grant date fair value of options and RSUs vested during the period was as follows:



	Three months ended
	April 3, 2016		March 29, 2015
	(In thousands)
Options	$	8,065	$	10,787
RSUs	100,584		79,628
Total grant date fair value of options and RSUs vested during the period	$	108,649	$	90,415