STOCK-BASED COMPENSATION

At September 29, 2018, the Company had one stock incentive plan, the Company's 1996 Stock Incentive Plan (the “1996 Plan”) and one employee stock purchase plan, the 2008 Employee Stock Purchase Plan (the “2008 ESPP”). The 1996 Plan was adopted by the board of directors to provide the grant of incentive stock options, non-statutory stock options, restricted stock units (“RSUs”), and market stock units (“MSUs”) to employees, directors, and consultants.

Pursuant to the 1996 Plan, the exercise price for incentive stock options and non-statutory stock options is determined to be the fair market value of the underlying shares on the date of grant. Options typically vest ratably over a four-year period measured from the date of grant. Options generally expire no later than seven years after the date of grant, subject to earlier termination upon an optionee's cessation of employment or service.

RSUs granted to employees typically vest ratably over a four-year period and are converted into shares of the Company's common stock upon vesting, subject to the employee's continued service to the Company over that period. RSUs granted after August 2017 will continue to vest post-employment at the Company for certain individuals satisfying specific eligibility requirements.

MSUs granted to employees typically vest over a four-year cliff period and are converted into shares of the Company's common stock upon vesting, subject to the employee's continued service to the Company over that period. The number of shares that are released at the end of the performance period can range from zero to a maximum cap depending on the Company's performance. For MSUs granted prior to September 2017, the performance metrics of this program are based on relative performance of the Company’s stock price as compared to the Semiconductor Exchange Traded Fund index SPDR S&P (the “XSD”). For MSUs granted September 2017 and after, the performance metrics for this program are based on the total shareholder return ("TSR") of the Company relative to the TSR of the other companies included in the XSD; these MSUs vest based upon annual performance subject to continued service through the end of the four-year cliff period. MSUs granted after August 2017 will continue to vest post-employment at the Company for certain individuals satisfying specific eligibility requirements.

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 months ended September 29, 2018 and September 23, 2017, respectively:



	Three Months Ended
	September 29, 2018								September 23, 2017
	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	$	10	$	1,761	$	507	$	2,278	$	86	$	1,836	$	478	$	2,400
Research and development	11		8,692		1,155		9,858		308		6,588		970		7,866
Selling, general and administrative	56		7,645		661		8,362		363		6,130		528		7,021
Pre-tax stock-based compensation expense	$	77	$	18,098	$	2,323	$	20,498	$	757	$	14,554	$	1,976	$	17,287
Less: income tax effect							1,964								2,890
Net stock-based compensation expense							$	18,534							$	14,397

The expenses included in the Condensed Consolidated Statements of Income for RSUs include expenses related to MSUs of $2.4 million and $1.4 million for the three months ended September 29, 2018 and September 23, 2017, respectively.

Stock Options

The fair value of options granted to employees under the 1996 Plan is estimated on the date of grant using the Black-Scholes option valuation model.

There were no stock options granted in the three months ended September 29, 2018 or September 23, 2017.

The following table summarizes outstanding, exercisable and vested and expected to vest stock options as of September 29, 2018 and their activity for the three months ended September 29, 2018:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (1)
Balance at June 30, 2018	1,688,253		$	27.72
Options Granted	—		—
Options Exercised	(331,332	)	26.66
Options Cancelled	(3,439	)	28.08
Balance at September 29, 2018	1,353,482		$	27.98	1.7	$	42,687,390
Exercisable, September 29, 2018	1,353,482		$	27.98	1.7	$	42,687,390
Vested and expected to vest, September 29, 2018	1,353,482		$	27.98	1.7	$	42,687,390



(1)	Aggregate intrinsic value represents the difference between the exercise price and the closing price per share of the Company’s common stock on September 28, 2018, 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 September 29, 2018.

As of September 29, 2018, there was no unrecognized stock compensation from unvested stock options.

Restricted Stock Units and Other Awards

The fair value of RSUs and other awards under the Company’s 1996 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 and other awards granted was $54.98 and $41.69 per share for the three months ended September 29, 2018 and September 23, 2017, respectively.

The following table summarizes the outstanding and expected to vest RSUs and other awards as of September 29, 2018 and their activity during the three months ended September 29, 2018:



	Number of Shares		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (1)
Balance at June 30, 2018	5,524,432
Restricted stock units and other awards granted	1,232,654
Restricted stock units and other awards released	(407,431	)
Restricted stock units and other awards cancelled	(127,997	)
Balance at September 29, 2018	6,221,658		3.0	$	370,516,643
Outstanding and expected to vest, September 29, 2018	5,121,814		2.9	$	304,850,402



(1)	Aggregate intrinsic value for RSUs and other awards represents the closing price per share of the Company’s common stock on September 28, 2018, the last business day preceding the fiscal quarter-end, multiplied by the number of RSUs outstanding or expected to vest as of September 29, 2018.

The Company withheld shares totaling $7.5 million in value as a result of employee withholding taxes based on the value of the RSUs on their vesting date for the three months ended September 29, 2018. 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 September 29, 2018, there was $187.7 million of unrecognized compensation expense related to 6.2 million unvested RSUs and other awards, which is expected to be recognized over a weighted average period of approximately 3.0 years.

Market Stock Units (MSUs)

The Company grants MSUs to senior members of management in lieu of granting stock options. For MSUs granted prior to September 2017, the performance metrics of this program are based on relative performance of the Company’s stock price as compared to the Semiconductor Exchange Traded Fund index SPDR S&P (the “XSD”). For MSUs granted in September 2017 and after, the performance metrics for this program are based on the total shareholder return ("TSR") of the Company relative to the TSR of the other companies included in the XSD. 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 XSD or the TSR of the companies included in the XSD, as applicable. Vesting for MSUs is contingent upon both service and market conditions and has a four-year vesting cliff period. MSUs granted in September 2017 vest based upon annual performance and are subject to continued service through the end of the four-year period, but will continue to vest post-employment at the Company for certain individuals satisfying specific eligibility requirements.

The weighted-average fair value of MSUs granted was $75.48 and $51.03 per share for the three months ended September 29, 2018 and September 23, 2017, respectively.

The following table summarizes the number of MSUs outstanding and expected to vest as of September 29, 2018 and their activity during the three months ended September 29, 2018:



	Number of Shares		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (1)
Balance at June 30, 2018	1,079,064
Market stock units granted	247,804
Market stock units released	(13,594	)
Market stock units cancelled	(245,082	)
Balance at September 29, 2018	1,068,192		3.1	$	63,578,788
Outstanding and expected to vest, September 29, 2018	925,295		3.0	$	55,073,544



(1)	Aggregate intrinsic value for MSUs represents the closing price per share of the Company’s common stock on September 28, 2018, the last business day preceding the fiscal quarter-end, multiplied by the number of MSUs outstanding or expected to vest as of September 29, 2018.

As of September 29, 2018, there was $38.0 million of unrecognized compensation expense related to 1.1 million unvested MSUs, which is expected to be recognized over a weighted average period of approximately 3.1 years.

Employee Stock Purchase Plan

Employees are granted rights to acquire common stock under the 2008 ESPP.

The fair value of 2008 ESPP rights granted to employees has been estimated at the date of grant using the Black-Scholes option valuation model using the following assumptions for the offering periods outstanding:



	Three Months Ended
	September 29, 2018	September 23, 2017
Expected holding period (in years)	0.5 years	0.5 years
Risk-free interest rate	1.6% - 2.1%	0.8% - 1.1%
Expected stock price volatility	19.6% - 32.7%	19.1% - 24.7%
Dividend yield	2.8% -3.1%	3.0% - 3.4%

As of September 29, 2018 and September 23, 2017, there was $3.5 million and $2.9 million, respectively, of unrecognized compensation expense related to the 2008 ESPP.