STOCK-BASED COMPENSATION

The following tables show 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 27, 2014 and December 28, 2013, respectively:



	Three Months Ended
	December 27, 2014								December 28, 2013
	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	$	362	$	2,076	$	550	$	2,988	$	438	$	2,395	$	533	$	3,366
Research and development	1,587		8,415		1,219		11,221		2,616		8,728		1,153		12,497
Selling, general and administrative	1,029		5,038		500		6,567		1,476		4,996		534		7,006
Pre-tax stock-based compensation expense	$	2,978	$	15,529	$	2,269	$	20,776	$	4,530	$	16,119	$	2,220	$	22,869
Less: income tax effect							3,365								3,749
Net stock-based compensation expense							$	17,411							$	19,120



	Six Months Ended
	December 27, 2014								December 28, 2013
	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	$	701	$	4,050	$	1,074	$	5,825	$	787	$	4,313	$	1,008	$	6,108
Research and development	3,734		17,247		2,562		23,543		4,452		15,168		2,475		22,095
Selling, general and administrative	2,458		10,262		1,108		13,828		2,740		9,523		1,143		13,406
Pre-tax stock-based compensation expense	$	6,893	$	31,559	$	4,744	$	43,196	$	7,979	$	29,004	$	4,626	$	41,609
Less: income tax effect							6,637								6,478
Net stock-based compensation expense							$	36,559							$	35,131

The expenses included in the Condensed Consolidated Statements of Income related to Restricted Stock Units include expenses related to Market Stock Units of $0.6 million and $0.4 million for the three months ended December 27, 2014 and December 28, 2013, respectively and $0.9 million and $0.7 million for the six months ended December 27, 2014 and December 28, 2013, respectively.

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 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 using the following weighted-average assumptions:



	Stock Options
	Three Months Ended				Six Months Ended
	December 27, 2014		December 28, 2013		December 27, 2014		December 28, 2013
Expected holding period (in years)	5.0		5.0		4.8		5.3
Risk-free interest rate	1.7	%	1.5	%	1.6	%	1.4	%
Expected stock price volatility	26.8	%	34.1	%	26.7	%	34.9	%
Dividend yield	3.5	%	3.7	%	3.2	%	3.2	%

The weighted-average fair value of stock options granted was $4.79 and $9.15 per share for the three months ended December 27, 2014 and December 28, 2013, respectively. The weighted-average fair value of stock options granted was $5.56 and $7.44 per share for the six months ended December 27, 2014 and December 28, 2013, respectively.

The following table summarizes outstanding, exercisable and vested and expected to vest stock options as of December 27, 2014 and their activity for the six months ended December 27, 2014:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (1)
Balance at June 28, 2014	16,163,644		$	25.74
Options Granted	63,584		32.22
Options Exercised	(971,283	)	17.11
Options Cancelled	(1,765,937	)	35.73
Balance at December 27, 2014	13,490,008		$	25.08	3.5	$	94,968,984
Exercisable, December 27, 2014	6,375,584		$	23.57	1.9	$	59,421,570
Vested and expected to vest, December 27, 2014	13,060,118		$	24.96	3.4	$	92,492,587



(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 26, 2014, 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 27, 2014.

As of December 27, 2014, there was $27.2 million of total unrecognized stock compensation cost related to 7.1 million unvested stock options, which is expected to be recognized over a weighted average period of approximately 2.3 years.

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 $27.24 and $28.16 per share for the three months ended December 27, 2014 and December 28, 2013, respectively.

The weighted-average fair value of RSUs granted was $27.18 and $26.08 per share for the six months ended December 27, 2014 and December 28, 2013, respectively.

The following table summarizes outstanding and expected to vest RSUs as of December 27, 2014 and their activity during the six months ended December 27, 2014:



	Number of Shares		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (1)
Balance at June 28, 2014	7,880,997
Restricted stock units granted	2,598,878
Restricted stock units released	(1,344,153	)
Restricted stock units cancelled	(648,653	)
Balance at December 27, 2014	8,487,069		2.9	$	267,916,927
Outstanding and expected to vest, December 27, 2014	7,349,984		2.8	$	229,319,498



(1)	Aggregate intrinsic value for RSUs represents the closing price per share of the Company’s common stock on December 26, 2014, the last business day preceding the fiscal quarter-end, multiplied by the number of RSUs outstanding or expected to vest as of December 27, 2014.

The Company withheld shares totaling $6.8 million and $14.9 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 27, 2014, 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 27, 2014, there was $159.5 million of unrecognized compensation expense related to 8.5 million unvested RSUs, which is expected to be recognized over a weighted average period of approximately 2.9 years.

As of December 28, 2013, there was $153.1 million of unrecognized compensation expense related to 9.2 million unvested RSUs, which is expected to be recognized over a weighted average period of approximately 2.9 years.

Market Stock Units

The Company began granting Market Stock Units (“MSUs”) to senior members of management in September 2014 instead of stock options. MSUs are valued based on the relative performance of the Company’s stock price as compared to the Semiconductor Exchange Traded Fund index, (the “SPDR S&P”). The fair value of MSUs is estimated using a Monte Carlo simulation model on the date of grant. The Company also estimates forfeitures at the time of grant and makes revisions to forfeitures on a quarterly basis. Compensation expense is recognized based on the initial valuation and is not subsequently adjusted as a result of the Company’s performance relative to that of the SPDR S&P index.

The following table summarizes the number of MSUs outstanding and expected to vest as of December 27, 2014 and their activity during the six months ended December 27, 2014:



	Number of Shares				Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (1)
Balance at June 28, 2014	120,000		⁽²	⁾
Market stock units granted	423,044
Market stock units released	(42,476	)
Market stock units cancelled	(20,532	)
Balance at December 27, 2014	480,036				3.5	$	14,977,123
Outstanding and expected to vest, December 27, 2014	480,036				3.5	$	14,977,123



(1)	Aggregate intrinsic value for MSUs represents the closing price per share of the Company’s common stock on December 26, 2014, the last business day preceding the fiscal quarter-end, multiplied by the number of MSUs outstanding or expected to vest as of December 27, 2014.



(2)	Reflects shares previously granted to the Company’s Chief Executive Officer only.

As of December 27, 2014, there was $6.4 million of unrecognized compensation expense related to 0.5 million unvested MSUs, which is expected to be recognized over a weighted average period of approximately 3.5 years.

As of December 28, 2013, there was $1.6 million of unrecognized compensation expense related to 0.1 million unvested MSUs, which is expected to be recognized over a weighted average period of approximately 1.3 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 27, 2014		December 28, 2013		December 27, 2014		December 28, 2013
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	26.4	%	21.7	%	26.4	%	21.7	%
Dividend yield	3.5	%	3.7	%	3.5	%	3.7	%

As of December 27, 2014, there was $7.7 million of unrecognized compensation expense related to the ESPP.

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