NOTE 9—STOCK-BASED COMPENSATION

The Stock Compensation Topic of the ASC requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant.

The company grants equity awards under the Fairchild Semiconductor 2007 Stock Plan. The company also maintains the 2000 Executive Stock Option Plan and the Fairchild Semiconductor Stock Plan. Fairchild Semiconductor 2007 Stock Plan replaced the Fairchild Semiconductor Stock Plan when the company's stockholders approved the new plan on May 2, 2007. On that date the shares that remained available for grant under the Fairchild Semiconductor Stock Plan were assumed by the new plan and no further awards were granted under the Fairchild Semiconductor Stock Plan after that date. In addition, the company has occasionally granted equity awards outside its equity compensation plans when necessary.

Fairchild Semiconductor 2007 Stock Plan. Under this plan, officers, employees, non-employee directors, and certain consultants may be granted stock options, stock appreciation rights, restricted stock including restricted stock units (RSUs), performance units (PUs), deferred stock units (DSUs), and other stock-based awards. The plan has been approved by stockholders. The maximum number of shares of common stock that may be delivered under the plan is equal to 18,493,619 shares, plus shares available for issuance as of May 2, 2007, under the Fairchild Semiconductor Stock Plan and shares subject to outstanding awards under the Fairchild Semiconductor Stock Plan as of May 2, 2007, that cease for any reason to be subject to such awards. The maximum life of any option is ten years from the date of grant for incentive stock options and non-qualified stock options. Actual terms for outstanding non-qualified stock options are eight years, although options may be granted under the plan with up to ten year terms. Options granted under the plan are exercisable at the determination of the compensation committee, generally vesting ratably over four years. PUs are contingently granted depending on the achievement of certain predetermined performance goals. DSUs, RSUs and PUs entitle participants to receive one share of common stock for each DSU, RSU or PU awarded. For RSUs and PUs, the settlement date is the vesting date. For DSUs, the settlement date is selected by the participant at the time of the grant. Grants of PUs generally vest under the plan over a period of three years, and DSUs and RSUs generally vest over a period of three or four years.

Fairchild Semiconductor Stock Plan. The Fairchild Semiconductor Stock Plan authorizes shares of common stock to be issued upon the exercise of equity awards granted under the plan. The plan has been approved by stockholders. The plan was frozen when the Fairchild Semiconductor 2007 Stock Plan was approved on May 2, 2007, and awards are no longer granted under this plan. Under this plan, executives, key employees, non-employee directors and certain consultants were granted non-qualified stock options and RSUs, PUs, and DSUs. Options generally vest over four years with maximum terms ranging from eight to ten years. DSUs, RSUs and PUs entitle participants to receive one share of common stock for each DSU, RSU or PU awarded. For RSUs and PUs, the settlement date is the vesting date. For DSUs, the settlement date is selected by the participant at the time of the grant. Grants of PUs generally vest under the plan over a period of three years, and DSUs and RSUs generally vest over a period of three or four years.

The 2000 Executive Stock Option Plan. The 2000 Executive Stock Option Plan authorizes up to 1,671,669 shares of common stock to be issued upon the exercise of options under the plan. The plan has been approved by stockholders. Individuals receiving options under the plan may not receive in any one year options to purchase more than 1,500,000 shares of common stock. Options generally vest over four years with a maximum term of ten years.

Equity Awards Made Outside Stockholder-Approved Plans. The company has granted equity awards representing a total of 820,000 shares outside its equity compensation plans. As of December 25, 2011, equity awards representing 275,000 shares remain outstanding, all of which are options.

On May 6, 2009, the company's shareholders approved a proposal to allow for a stock option exchange program, designed to provide eligible employees an opportunity to exchange certain outstanding underwater stock options for a lesser amount of new RSUs. Stock options eligible for exchange were those with an exercise price per share greater than $14.37 that were granted on or before June 9, 2008. The company's executive officers and members of the company's board of directors were not eligible to participate in the stock option exchange program.

On June 9, 2009, the company commenced the option exchange program, which expired on July 7, 2009. A total of 6.1 million eligible options were tendered by employees, representing 74% of the total stock options eligible for the exchange. On July 7, 2009, the company granted an aggregate of 0.4 million new RSUs in exchange for the eligible stock options surrendered. The fair value of the new RSUs was $7.00, which was the closing price of the company's common stock on July 7, 2009. The RSUs were granted under the Fairchild Semiconductor 2007 Stock Plan. With the assistance of a third party actuarial firm, the company determined the incremental value of the RSUs to be $0.5 million. The remaining compensation expense associated with the exchanged options and the new incremental expense will be amortized over the 4 year vesting period of the new RSUs.

The following table presents a summary of the company's stock options for the year ended December 25, 2011.


	Year Ended
	December 25, 2011
	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
	(000's)					(In years)		(In millions)
Outstanding at beginning of period		9,413		$	17.76
Granted		0			—
Exercised		(2,569	)		13.78
Forfeited		(36	)		11.49
Expired		(339	)		18.10

Outstanding at end of period		6,469		$	19.36		1.1		0.6

Exercisable at end of period		6,246		$	19.65		1.0		0.4

The weighted average grant-date fair value for options granted during the year ended December 27, 2009 was $2.31. There were no options granted during the years of 2010 and 2011.

The following table presents a summary of the company's DSUs for the year ended December 25, 2011.


	Year Ended
	December 25, 2011
	Shares			Weighted Average Grant-date Fair Value
	(000's)
Outstanding at beginning of period		256		$	12.45
Granted		90			19.80
Vested and released		(42	)		20.34
Forfeited		0			0.00

Outstanding at end of period		304		$	13.53

The weighted average grant-date fair value for DSUs granted during the years ended December 26, 2010 and December 27, 2009 was $10.62 and $5.72, respectively. The total grant-date fair value for DSUs vested during the years ended December 25, 2011, December 26, 2010, and December 27, 2009 was $0.8 million, $0.5 million and $1.1 million, respectively. The number, weighted-average exercise price, aggregate intrinsic value and weighted average remaining contractual term for DSUs vested and outstanding is 304,596 units, zero (as these are zero strike price awards), $1.8 million and 1.73 years, respectively.

The company's plan documents governing DSUs contain contingent cash settlement provisions upon a change of control. Accordingly, the company presents previously recorded expense associated with unvested and unsettled DSUs under the balance sheet caption "Temporary equity-deferred stock units" as required by Securities and Exchange Commission (SEC) Accounting Series Release 268 and the Distinguishing Liabilities from Equity Topic in the ASC.

The following table presents a summary of the company's RSUs for the year ended December 25, 2011.


	Year Ended
	December 25, 2011
	Shares			Weighted Average Grant-date Fair Value
	(000's)
Nonvested at beginning of period		4,286		$	7.49
Granted		1,953			17.14
Vested		(1,400	)		7.84
Forfeited		(385	)		9.21

Nonvested at end of period		4,454		$	11.43

The weighted average grant-date fair value for RSUs granted during the years ended December 26, 2010 and December 27, 2009 was $10.72 and $4.40, respectively. The total grant-date fair value for RSUs vested during the year ended December 25, 2011, December 26, 2010, and December 27, 2009 was $11.0 million, $13.6 million and $5.4 million, respectively.

The following table presents a summary of the company's PUs for the year ended December 25, 2011.


	Year Ended
	December 25, 2011
	Shares			Weighted Average Grant-date Fair Value
	(000's)
Nonvested at beginning of period		1,876		$	7.22
Granted		624			17.38
Vested		(702	)		6.30
Forfeited		(242	)		9.01

Nonvested at end of period		1,556		$	11.42

The weighted average grant-date fair value for PUs granted during the years ended December 26, 2010 and December 27, 2009 was $10.63 and $4.10, respectively. The total grant-date fair value for PUs vested during the year ended December 25, 2011, December 26, 2010 and December 27, 2009 was $4.4 million, $2.8 million and $4.8 million, respectively.

The following table summarizes the total intrinsic value for stock options exercised and DSUs, RSUs and PUs vested (i.e. the difference between the market price at exercise and the price paid by employees to exercise the award) for 2011, 2010 and 2009, respectively.


	Year Ended
	December 25, 2011		December 26, 2010		December 27, 2009
	(In millions)
Options	$	10.8	$	1.6	$	—
DSUs	$	0.8	$	0.4	$	0.4
RSUs	$	24.0	$	22.2	$	2.5
PUs	$	12.4	$	5.5	$	1.3

The company's practice is to issue shares of common stock upon exercise or settlement of options, DSUs, RSUs and PUs from previously unissued shares. For the year ended December 25, 2011 and December 26, 2010, $35.5 million and $6.4 million, respectively, was received from exercises of stock-based awards.

Valuation and Expense Information

The following table summarizes stock-based compensation expense by financial statement line, for the years ended December 25, 2011, December 26, 2010 and December 27, 2009.


	Year Ended
	December 25, 2011		December 26, 2010		December 27, 2009
	(In millions)
Cost of Sales		4.3	$	5.7	$	5.8
Research and Development		4.8		4.1		3.8
Selling, General and Administrative		15.7		11.1		7.9

		24.8	$	20.9	$	17.5

The company also capitalized $0.6, $0.3 and $1.2 million of stock-based compensation into inventory for the years ended December 25, 2011, December 26, 2010 and December 27, 2009, respectively. In addition, due to the valuation allowance for U.S. deferred income tax assets recorded by the company, no tax benefit on U.S. based stock compensation expense was recognized in the years ended December 25, 2011, December 26, 2010 and December 27, 2009. No material income tax benefit was recognized by foreign tax jurisdictions for the year ended December 25, 2011, December 26, 2010 and December 27, 2009

The following table summarizes total compensation cost related to unvested awards not yet recognized and the weighted average period over which it is expected to be recognized at December 25, 2011.


	December 25, 2011
	Unrecognized Compensation Cost for Unvested Awards		Weighted Average Remaining Recognition Period
	(In millions)		(In years)
Options		0.2		0.4
DSUs		0.4		1.6
RSUs		28.2		1.9
PUs		5.9		1.9

The fair value of each option grant for the company's plans is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions. No options were granted in 2011 or 2010. The fair value of each DSU, RSU and PU is equal to the closing market price of the company's common stock on the date of grant.


	Year Ended
	December 27, 2009
Expected volatility		58.6	%
Dividend yield		—
Risk-free interest rate		1.9	%
Expected life, in years		5.3

Expected volatility. The company utilizes an average of implied volatility and the most recent historical volatility commensurate with expected life.

Dividend yield. The company does not pay a dividend, therefore this input is not applicable.

Risk-free interest rate. The company estimated the risk-free interest rate based on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected life assumption.

Expected life. The company has evaluated expected life based on history and exercise patterns across its demographic population. The company believes that this historical data is the best estimate of the expected life of a new option, and that generally all groups of the company's employees exhibit similar exercise behavior.

Prior to December 26, 2005 the company expensed all options and awards over the service period for each separately vesting tranche. The company switched to a straight-line attribution method on December 26, 2005 for all grants that include only a service condition. Due to the performance criteria, the company's performance units will be expensed over the service period for each separately vesting tranche.