Stock-Based Compensation Expense

6 Months Ended

Jul. 01, 2012

Stock-Based Compensation Expense [Abstract]

Stock-Based Compensation Expense

Note 2 — Stock-Based Compensation Expense

In May 2012, the Company’s 2003 Equity Incentive Plan was amended to increase the number of shares available for new awards to a total of 25 million, of which 15 million shares were available for restricted stock and/or restricted stock units (“RSUs”). In addition, the period during which incentive stock options can be granted was extended to February 9, 2022, and the maximum number of shares that may be issued upon exercise of incentive stock options was set at 25 million.

Stock-based compensation expense included in continuing operations, net of estimated forfeitures, related to the Company’s stock options, Employee Stock Purchase Plan (“ESPP”) and restricted stock unit awards by expense category was as follows:

	Three Months Ended				Six Months Ended
	July 1, 2012		July 3, 2011		July 1, 2012		July 3, 2011
	(In thousands)
Cost of revenues	$	3,003	$	2,051	$	6,515	$	3,864
Research and development		11,973		6,653		24,281		12,876
Selling, general and administrative		10,342		4,948		25,356		10,579
Total stock-based compensation expense	$	25,318	$	13,652	$	56,152	$	27,319

In connection with the SandForce acquisition, the Company assumed stock options and RSUs originally granted by SandForce. Stock-based compensation expense for the six months ended July 1, 2012 included $4.5 million of expense related to the accelerated vesting of stock options and RSUs for certain SandForce employees in January 2012. Stock-based compensation expense for the three and six months ended July 1, 2012 also includes $3.3 million and $5.7 million, respectively, related to stock options and RSUs assumed.

The Company has issued RSUs that will not vest unless specified performance criteria are met. In the first quarter of 2012, the compensation committee of the board of directors authorized additional vesting of performance-based RSUs where the Company’s performance had been adversely affected as a result of the flooding that occurred in Thailand in the fourth quarter of 2011 and as a result, vesting levels would have been lower. The Company recognized $1.6 million and $6.0 million of stock-based compensation expense related to the additional vesting for the three and six months ended July 1, 2012, respectively. No executive officers were included in the group of employees that received additional vesting. Executive officers hold RSUs, the vesting of which depends on the Company’s performance compared to specified peer companies over a three-year period. Based on the Company’s latest available financial performance, the Company recognized $1.6 million and $4.0 million of stock-based compensation expense related to the executive officer performance grants for the three and six months ended July 1, 2012, respectively. There was no stock-based compensation expense related to the executive officer performance grants for the three or six months ended July 3, 2011.

Stock Options

The fair value of each option grant is estimated as of the date of grant using a reduced-form calibrated binomial lattice model (“lattice model”). The following table summarizes the weighted-average assumptions that the Company applied in the lattice model:

	Three Months Ended						Six Months Ended
	July 1, 2012			July 3, 2011			July 1, 2012			July 3, 2011
Estimated grant date fair value per share	$	2.64		$	2.65		$	2.86		$	2.14
Expected life (years)		4.52			5.01			4.46			4.51
Risk-free interest rate		1	%		2	%		1	%		2	%
Volatility		49	%		47	%		47	%		47	%

The following table summarizes changes in stock options outstanding:

	Number of Shares			Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
	(In thousands)					(In years)		(In thousands)
Options outstanding at December 31, 2011		64,245		$	6.19
Assumed in SandForce acquisition		7,542		$	0.75
Granted		5,033		$	8.50
Exercised		(11,942	)	$	5.69
Canceled		(2,757	)	$	9.32
Options outstanding at July 1, 2012		62,121		$	5.67		4.09	$	91,608
Options exercisable at July 1, 2012		37,288		$	6.15		2.81	$	43,806

As of July 1, 2012, the total unrecognized compensation expense related to unvested stock options, net of estimated forfeitures, was $46.8 million and is expected to be recognized over the next 2.3 years on a weighted-average basis.

Restricted Stock Units

The cost of service-based and performance-based RSUs is determined using the fair value of the Company’s common stock on the date of grant. For performance-based RSU expense, the Company also considers the probability that those RSUs will vest.

Service-based:

The vesting of service-based RSUs requires that the employees remain employed by the Company for a specified period of time.

The following table summarizes changes in service-based RSUs outstanding:

	Number of Units			Weighted-Average Grant Date Fair Value per Share
	(In thousands)
Unvested service-based RSUs at December 31, 2011		12,085		$	5.94
Assumed in SandForce acquisition		1,576		$	6.17
Granted		7,012		$	8.32
Vested		(3,035	)	$	5.90
Forfeited		(464	)	$	6.32
Unvested service-based RSUs at July 1, 2012		17,174		$	6.93

As of July 1, 2012, the total unrecognized compensation expense related to service-based RSUs, net of estimated forfeitures, was $98.7 million and will be recognized over the next 2.9 years on a weighted-average basis.

Performance-based:

The vesting of performance-based RSUs is contingent upon the Company meeting specified performance criteria and requires that the employees remain employed by the Company for a specified period of time.

The following table summarizes changes in performance-based RSUs outstanding:

	Number of Units			Weighted-Average Grant Date Fair Value per Share
	(In thousands)
Unvested performance-based RSUs at December 31, 2011		4,729		$	5.98
Granted		2,986		$	8.52
Vested		(1,446	)	$	5.85
Forfeited		(535	)	$	6.41
Unvested performance-based RSUs at July 1, 2012		5,734		$	7.30

As of July 1, 2012, the total unrecognized compensation expense related to performance-based RSUs, net of estimated forfeitures, was $30.0 million and, if the performance conditions are fully met, will be recognized over the next 3 years.

A total of 9,117,372 shares of common stock were reserved for future issuance upon exercise of options and RSUs assumed in the SandForce acquisition. Those options and RSUs are included in the preceding tables. The options vest over four years and have ten year terms. The RSUs vest over one to four years.

Employee Stock Purchase Plan

Compensation expense for the Company’s ESPP is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model. Under the ESPP, rights to purchase shares are granted during the second and fourth quarters of each year. The Company issued 2.8 million and 2.9 million shares under the ESPP during the three months ended July 1, 2012 and July 3, 2011, respectively. The following table summarizes the weighted-average assumptions that the Company applied in the calculation of the fair value for the May 2012 and May 2011 grants:

	Three Months Ended
	July 1, 2012			July 3, 2011
Estimated grant date fair value per share	$	2.19		$	2.10
Expected life (years)		0.8			0.8
Risk-free interest rate		0.17	%		0.02	%
Volatility		41	%		37	%