STOCK-BASED COMPENSATION

The following table shows total stock-based compensation expense by type of award, and the resulting tax effect, included in the Condensed Consolidated Statements of Income for the three and six months ended December 28, 2013 and December 29, 2012:



	Three Months Ended
	December 28, 2013								December 29, 2012
	Stock Options		Restricted Stock Units		Employee Stock Purchase Plan		Total		Stock Options		Restricted Stock Units		Employee Stock Purchase Plan		Total
	(in thousands)
Cost of goods sold	$	438	$	2,395	$	533	$	3,366	$	477	$	2,572	$	634	$	3,683
Research and development	2,616		8,728		1,153		12,497		2,288		8,401		1,451		12,140
Selling, general and administrative	1,476		4,996		534		7,006		1,286		5,152		584		7,022
Pre-tax stock-based compensation expense	$	4,530	$	16,119	$	2,220	$	22,869	$	4,051	$	16,125	$	2,669	$	22,845
Less: income tax effect							3,749								3,938
Net stock-based compensation expense							$	19,120							$	18,907



	Six Months Ended
	December 28, 2013								December 29, 2012
	Stock Options		Restricted Stock Units		Employee Stock Purchase Plan		Total		Stock Options		Restricted Stock Units		Employee Stock Purchase Plan		Total
	(in thousands)
Cost of goods sold	$	787	$	4,313	$	1,008	$	6,108	$	875	$	4,743	$	1,053	$	6,671
Research and development	4,452		15,168		2,475		22,095		4,117		17,611		2,735		24,463
Selling, general and administrative	2,740		9,523		1,143		13,406		2,841		10,271		1,096		14,208
Pre-tax stock-based compensation expense	$	7,979	$	29,004	$	4,626	$	41,609	$	7,833	$	32,625	$	4,884	$	45,342
Less: income tax effect							6,478								8,770
Net stock-based compensation expense							$	35,131							$	36,572

Volterra Substitute Awards

In connection with the Volterra acquisition, the Company issued substitute awards to certain Volterra employees. Substitute awards included options to purchase approximately 673,185 shares of Maxim Integrated's common stock at a weighted-average grant date fair value of approximately $10.56 and a weighted-average exercise price of approximately $22.26 per share and also issued approximately 418,955 restricted stock units with a weighted-average grant date fair value of $29.53. The terms of these awards were substantially the same as granted by Volterra. The intrinsic value of these awards was substantially the same immediately prior to and after the substitution as of October 1, 2013.

Stock Options

The fair value of options granted to employees under the Company’s Amended and Restated 1996 Stock Incentive Plan is estimated on the date of grant using the Black-Scholes option valuation model.

Expected volatilities are based on the historical volatilities from the Company’s traded common stock over a period equal to the expected term. The Company is utilizing the simplified method to estimate expected holding periods. The risk-free interest rate is based on the U.S. Treasury yield. The Company determines the dividend yield by dividing the annualized dividends per share by the prior quarter’s average stock price. The result is analyzed by the Company to decide whether it represents expected future dividend yield. The Company also estimates forfeitures at the time of grant and makes revisions to forfeitures on a quarterly basis.

The fair value of options granted to employees has been estimated at the date of grant using the Black-Scholes option valuation model and the following weighted-average assumptions:



	Stock Options (1)
	Three Months Ended				Six Months Ended
	December 28, 2013		December 29, 2012		December 28, 2013		December 29, 2012
Expected holding period (in years)	5.0		5.1		5.3		5.4
Risk-free interest rate	1.5	%	0.7	%	1.4	%	0.7	%
Expected stock price volatility	34.1	%	37.6	%	34.9	%	37.8	%
Dividend yield	3.7	%	3.6	%	3.2	%	3.3	%

(1) Table excludes impact from assumptions used in valuing the Volterra substitute options granted on October 1, 2013 based on an expected holding period of 3.8 years, risk-free interest rate of 1.0%, expected stock price volatility of 27.5% and dividend yield of 3.4%.

The weighted-average fair value of stock options granted was $9.15 and $6.59 per share for the three months ended December 28, 2013 and December 29, 2012, respectively. The weighted-average fair value of stock options granted was $7.44 and $6.26 per share for the six months ended December 28, 2013 and December 29, 2012, respectively.

The following table summarizes outstanding, exercisable and vested and expected to vest stock options as of December 28, 2013 and their activity for the six months ended December 28, 2013:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (1)
Balance at June 29, 2013	20,081,339		$	26.00
Options Granted	2,671,444		27.11
Volterra substitute options granted	673,185		22.26
Options Exercised	(739,949	)	16.21
Options Cancelled	(2,365,894	)	32.51
Balance at December 28, 2013	20,320,125		$	25.62	3.7	$	96,469,224
Exercisable, December 28, 2013	9,202,394		$	27.62	1.9	$	51,039,289
Vested and expected to vest, December 28, 2013	18,917,227		$	25.59	3.6	$	93,908,211



(1)	Aggregate intrinsic value represents the difference between the exercise price and the closing price per share of the Company’s common stock on December 27, 2013, the last business day preceding the fiscal quarter-end, multiplied by the number of options outstanding, exercisable or vested and expected to vest as of December 28, 2013.

As of December 28, 2013, there was $45.1 million of total unrecognized stock compensation cost related to 11.1 million unvested stock options, which is expected to be recognized over a weighted average period of approximately 3.0 years.

Restricted Stock Units

The fair value of Restricted Stock Units (“RSUs”) under the Company’s Amended and Restated 1996 Stock Incentive Plan is estimated using the value of the Company’s common stock on the date of grant, reduced by the present value of dividends expected to be paid on the Company’s common stock prior to vesting. The Company also estimates forfeitures at the time of grant and makes revisions to forfeitures on a quarterly basis.

The weighted-average fair value of RSUs granted was $28.16 and $26.82 per share for the three months ended December 28, 2013 and December 29, 2012, respectively. The weighted-average fair value of RSUs granted was $25.95 and $24.67 per share for the six months ended December 28, 2013 and December 29, 2012, respectively.

The following table summarizes outstanding and expected to vest RSUs as of December 28, 2013 and their activity during the six months ended December 28, 2013:



	Number of Shares		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (1)
Balance at June 29, 2013	7,965,532
Restricted stock units granted	2,529,831
Volterra substitute restricted stock units granted	418,955
Restricted stock units released	(1,411,774	)
Restricted stock units cancelled	(459,152	)
Balance at December 28, 2013	9,043,392		2.9	$	259,214,755
Outstanding and expected to vest, December 28, 2013	8,080,689		2.8	$	225,693,652



(1)	Aggregate intrinsic value for RSUs represents the closing price per share of the Company’s common stock on December 27, 2013, the last business day preceding the fiscal quarter-end, multiplied by the number of RSUs outstanding or expected to vest as of December 28, 2013.

The Company withheld shares totaling $7.1 million and $14.2 million in value as a result of employee withholding taxes based on the value of the RSUs on their vesting date for the three and six months ended December 28, 2013, respectively. The total payments for the employees’ tax obligations to the taxing authorities are reflected as financing activities within the Condensed Consolidated Statements of Cash Flows.

As of December 28, 2013, there was $154.6 million of unrecognized compensation expense related to 8.6 million unvested RSUs, which is expected to be recognized over a weighted average period of approximately 2.9 years.

Employee Stock Purchase Plan

The fair value of rights to acquire common stock under the Company’s 2008 Employee Stock Purchase Plan (the “ESPP”) is estimated on the date of grant using the Black-Scholes option valuation model.

The fair value of ESPP granted to employees has been estimated at the date of grant using the Black-Scholes option valuation model and the following weighted-average assumptions:



	ESPP
	Three Months Ended				Six Months Ended
	December 28, 2013		December 29, 2012		December 28, 2013		December 29, 2012
Expected holding period (in years)	0.5		0.5		0.5		0.5
Risk-free interest rate	0.1	%	0.1	%	0.1	%	0.1	%
Expected stock price volatility	21.7	%	26.1	%	21.7	%	26.1	%
Dividend yield	3.7	%	3.6	%	3.7	%	3.6	%

As of December 28, 2013, there was $7.8 million of unrecognized compensation expense related to the ESPP.