Note 11: Equity-Based Compensation Plans

The Company has adopted stock plans that provide for the grant to employees of equity-based awards, including stock options and RSUs, of Lam Research Common Stock. In addition, these plans permit the grant of nonstatutory equity-based awards to consultants and outside directors. An option is a right to purchase the Company’s stock at a set price. An RSU award is an agreement to issue shares of the Company’s stock at the time of vesting. Pursuant to the plans, the equity-based award exercise price is determined by the Board of Directors or its designee, the plan administrator, but in no event will the exercise price for any option be less than the fair market value of the Company’s Common Stock on the date of grant. Equity-based awards granted under the plans vest over a period determined by the Board of Directors or the plan administrator, typically over a period of three years or less. The Company also has an ESPP that allows employees to purchase shares of its Common Stock through payroll deduction at a discounted price. A summary of stock plan transactions is as follows:


	Options Outstanding					Restricted Stock Units Outstanding
	Number of Shares			Weighted- Average Exercise Price		Number of Shares			Weighted- Average Fair Market Value at Grant
June 26, 2011		309,933		$	21.50		2,331,340		$	39.90
Awards assumed in Novellus acquisition		3,932,143		$	25.17		1,291,808		$	35.99
Granted		—		$	—		2,336,283		$	41.23
Exercised		(74,615	)	$	23.70
Canceled		(265,384	)	$	21.71		(120,070	)	$	40.91
Vested restricted stock							(1,507,883	)	$	35.47

June 24, 2012		3,902,077		$	25.14		4,331,478		$	41.01
Granted		288,867		$	42.59		2,563,670		$	38.76
Exercised		(1,546,028	)	$	25.47
Canceled		(73,993	)	$	26.24		(299,079	)	$	39.70
Vested restricted stock							(1,754,273	)	$	42.52

June 30, 2013		2,570,923		$	26.87		4,841,796		$	39.32
Granted		166,455		$	51.76		2,811,602		$	53.21
Exercised		(1,403,019	)	$	24.75
Canceled		(2,473	)	$	30.21		(281,476	)	$	41.16
Vested restricted stock							(1,736,453	)	$	40.39

June 29, 2014		1,331,886		$	32.20		5,635,469		$	45.83

Outstanding and exercisable options presented by price range at June 29, 2014 were as follows:


	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Options Outstanding		Weighted- Average Remaining Life (Years)		Weighted- Average Exercise Price		Number of Options Exercisable		Weighted- Average Exercise Price
$9.44-$19.05		152,182		4.41	$	13.09		152,182	$	13.09
$21.04-$25.60		201,958		2.86	$	22.46		192,569	$	22.42
$26.87-29.68		476,518		4.21	$	29.26		377,573	$	29.28
$31.45-$35.68		45,906		6.77	$	32.63		19,446	$	33.09
$42.41-$51.76		455,322		6.00	$	45.94		—		—

$9.44-$51.76		1,331,886		4.73	$	32.20		741,770	$	24.28

The Lam Research Corporation 2007 Stock Incentive Plan, as amended, and 2011 Stock Incentive Plan, as amended, (collectively the “Stock Plans”) provide for the grant of non-qualified equity-based awards to eligible employees, consultants and advisors, and non-employee directors of the Company and its subsidiaries. As of June 29, 2014 there were a total of 6,967,355 shares subject to options and RSUs issued and outstanding under the Company’s Stock Plans. As of June 29, 2014, there were a total of 9,189,362 shares available for future issuance under the Stock Plans.

The ESPP allows employees to designate a portion of their base compensation to be deducted and used to purchase the Company’s Common Stock at a purchase price per share of the lower of 85% of the fair market value of the Company’s Common Stock on the first or last day of the applicable purchase period. Typically, each offering period lasts 12 months and comprises three interim purchase dates. The Plan Administrator (the Compensation Committee of the Board) is authorized to set a limit on the number of shares a plan participant can purchase on any single plan exercise date. During fiscal years 2014 and 2013, there was no increase to the number of shares of Lam Research Common Stock reserved for issuance under the 1999 ESPP. During fiscal year 2012 the number of shares of Lam Research Common Stock reserved for issuance under the 1999 ESPP increased by 1.8 million.

During fiscal year 2014, a total of 1,196,629 shares of the Company’s Common Stock were sold to employees under the 1999 ESPP. At June 29, 2014, 8,377,578 shares were available for purchase under the 1999 ESPP.

The estimated fair value of the Company’s stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis. The Company recognized the following equity-based compensation expenses and benefits during the fiscal years noted:


	Year Ended
	June 29, 2014		June 30, 2013		June 24, 2012
	(in millions)
Equity-based compensation expense	$	103.7	$	99.3	$	81.6
Income tax benefit recognized in the Consolidated Statement of Operations related to equity-based compensation	$	16.9	$	17.6	$	12.2
Tax benefit realized from the exercise and vesting of options and RSUs	$	32.0	$	21.6	$	11.8

Stock Options

The fair value of the Company’s stock options granted during fiscal years 2014, 2013 and fiscal year 2012, in connection with the acquisition of Novellus, was estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions, including expected stock price volatility and the estimated life of each award:


	Year Ended
	June 29, 2014			June 30, 2013			June 24, 2012
Expected volatility		35.28	%		36.60	%		38.04	%
Risk-free interest rate		1.39	%		0.81	%		0.55	%
Expected term (years)		4.78			4.79			3.89
Dividend yield		0	%		0	%		0	%

The year-end intrinsic value relating to stock options for fiscal years 2014, 2013, and 2012 is presented below:


	Year Ended
	June 29,		June 30,		June 24,
	2014		2013		2012
	(millions)
Intrinsic value - options outstanding	$	46.3	$	44.9	$	49.9
Intrinsic value - options exercisable	$	31.7	$	36.9	$	30.1
Intrinsic value - options exercised	$	41.4	$	25.4	$	1.3

As of June 29, 2014, there was $4.7 million of total unrecognized compensation cost related to unvested stock options granted and outstanding; that cost is expected to be recognized over a weighted average remaining vesting period of 1.5 years.

Restricted Stock Units

The fair value of the Company’s RSUs was calculated based upon the fair market value of the Company’s stock at the date of grant. As of June 29, 2014, there was $179.3 million of total unrecognized compensation cost related to unvested RSUs granted; that cost is expected to be recognized over a weighted average remaining vesting period of 2.0 years.

During the fiscal year 2014, the Company issued RSUs with both a market condition and a service condition (market-based performance RSUs, or “market-based PRSUs”). Based upon the terms of such awards, the number of shares that can be earned over the performance periods is based on our Common Stock price performance compared to the market price performance of the Philadelphia Semiconductor Sector Index (“SOX”), ranging from 0% to 150% of target. The stock price performance or market price performance is measured using the closing price for the 50-trading days prior to the dates the performance period begins and ends. The target number of shares represented by the market-based PRSUs is increased by 2% of target for each 1% that Common Stock price performance exceeds the market price performance of the SOX index. The result of the vesting formula is rounded down to the nearest whole number. Total stockholder return is a measure of stock price appreciation in this performance period. As of June 29, 2014 0.6 million market-based PRSUs were outstanding. These market-based PRSUs generally vest two or three years from the grant date and require continued employment. Stock compensation expense for the market-based PRSUs was $3.8 million for the year ended June 29, 2014. No market-based PRSUs were awarded in earlier periods. The total unrecognized compensation expense and weighted-average remaining life for these awards is included in the preceding disclosure.

ESPP

ESPP rights were valued using the Black-Scholes model. During fiscal years 2014, 2013, and 2012 ESPP was valued assuming the following weighted-average assumptions:


	Year Ended
	June 29, 2014			June 30, 2013			June 24, 2012
Expected life (years)		0.68			0.64			0.72
Expected stock price volatility		30.24	%		32.42	%		44.22	%
Risk-free interest rate		0.07	%		0.15	%		0.11	%
Dividend yield		0	%		0	%		0	%

As of June 29, 2014, there was $2.4 million of total unrecognized compensation cost related to the ESPP that is expected to be recognized over a remaining vesting period of 2 months.