Equity Compensation

The Company is currently granting equity awards from the 2006 Stock Incentive Plan (the “Plan”), which was approved by stockholders in July 2006. The Plan provides for granting of stock options, restricted stock awards, performance awards, phantom stock awards, and bonus stock awards, or any combination of the foregoing. To date, the Company has granted stock options, restricted stock awards, phantom stock awards (also called restricted stock units), and performance awards (also called market stock units) under the Plan. Each stock option granted reduces the total shares available for grant under the Plan by one share. Each full value award granted (including restricted stock awards, restricted stock units and market stock units) reduces the total shares available for grant under the Plan by 1.5 shares. Stock options generally vest between zero and four years, and are exercisable for a period of ten years from the date of grant. Restricted stock units are generally subject to vesting from zero to three years, depending upon the terms of the grant. Market stock units are subject to a vesting schedule of three years.

The following table summarizes the activity in total shares available for grant (in thousands):



	Shares
	Available for
	Grant
Balance, March 28, 2015	3,896
Shares added	4,900
Granted	(2,676	)
Forfeited	167
Balance, March 26, 2016	6,287
Shares added	—
Granted	(1,719	)
Forfeited	124
Balance, March 25, 2017	4,692
Shares added	—
Granted	(1,755	)
Forfeited	128
Balance, March 31, 2018	3,065

As of March 31, 2018, approximately 11.9 million shares of common stock were reserved for issuance under the Plan.

Stock Compensation Expense

The following table summarizes the effects of stock-based compensation on cost of goods sold, research and development, sales, general and administrative, pre-tax income, and net income after taxes for shares granted under the Plan (in thousands, except per share amounts):



	Fiscal Year
	2018			2017			2016
Cost of sales	$	1,474		$	1,071		$	1,145
Research and development	26,137			21,186			17,173
Sales, general and administrative	21,130			17,336			15,188
Effect on pre-tax income	48,741			39,593			33,506
Income Tax Benefit	(5,953		)	(12,482		)	(10,306		)
Total share-based compensation expense (net of taxes)	42,788			27,111			23,200
Share-based compensation effects on basic earnings per share	$	0.67		$	0.43		$	0.37
Share-based compensation effects on diluted earnings per share	0.65			0.41			0.35

The total share based compensation expense included in the table above and which is attributable to restricted stock units and market stock units was $44.2 million, $35.5 million, $30.3 million, for fiscal years 2018, 2017, and 2016, respectively. Share based compensation expense recognized is presented within operating activities in the Consolidated Statement of Cash Flows.

As of March 31, 2018, there was $83.1 million of compensation costs related to non-vested stock options, restricted stock units, and market stock units granted under the Company’s equity incentive plans not yet recognized in the Company’s financial statements. The unrecognized compensation cost is expected to be recognized over a weighted average period of 1.27 years for stock options, 1.44 years for restricted stock units, and 1.42 years for market stock units.

In addition to the income tax benefit of share-based compensation expense shown in the table above, the Company recognized excess tax benefits of $11.7 million and $22.9 million in fiscal years 2018 and 2017, respectively, as a result of the Company’s early adoption of ASU 2016-09. No excess tax benefits were recognized within income tax expense in fiscal year 2016.

Stock Options

We estimated the fair value of each stock option granted on the date of grant using the Black-Scholes option-pricing model using a dividend yield of zero and the following additional assumptions:



	March 31, 2018		March 25, 2017		March 26, 2016
Expected stock price volatility	37.36	%	47.66	%	40.13 - 45.07%
Risk-free interest rate	1.67	%	1.13	%	0.94 - 1.05%
Expected term (in years)	3.03		2.79		2.72 - 2.97

The Black-Scholes valuation calculation requires us to estimate key assumptions such as stock price volatility, expected term, risk-free interest rate and dividend yield. The expected stock price volatility is based upon implied volatility from traded options on our stock in the marketplace. The expected term of options granted is derived from an analysis of historical exercises and remaining contractual life of stock options, and represents the period of time that options granted are expected to be outstanding after becoming vested. The risk-free interest rate reflects the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption. Finally, we have never paid cash dividends, do not currently intend to pay cash dividends, and thus have assumed a zero percent dividend yield.

Using the Black-Scholes option valuation model, the weighted average estimated fair values of employee stock options granted in fiscal years 2018, 2017, and 2016, were $19.87, $22.84, and $12.58, respectively.

During fiscal years 2018, 2017, and 2016, we received a net $4.4 million, $16.4 million, $6.5 million, respectively, from the exercise of 0.2 million, 1.4 million, and 0.8 million, respectively, stock options granted under the Company’s Stock Plan.

The total intrinsic value of stock options exercised during fiscal year 2018, 2017, and 2016, was $9.8 million, $52.2 million, and $19.7 million, respectively. Intrinsic value represents the difference between the market value of the Company’s common stock at the time of exercise and the strike price of the stock option.

Additional information with respect to stock option activity is as follows (in thousands, except per share amounts):



	Outstanding Options
	Number		Weighted Average Exercise Price
Balance, March 28, 2015	3,333		$	14.31
Options granted	387		31.39
Options exercised	(773	)	8.46
Options forfeited	—		—
Options expired	(22	)	35.41
Balance, March 26, 2016	2,925		$	17.96
Options granted	215		54.65
Options exercised	(1,382	)	11.87
Options forfeited	—		—
Options expired	—		—
Balance, March 25, 2017	1,758		$	27.25
Options granted	216		55.72
Options exercised	(234	)	18.84
Options forfeited	—		—
Options expired	—		—
Balance, March 31, 2018	1,740		$	31.91

Additional information with regards to outstanding options that are vesting, expected to vest, or exercisable as of March 31, 2018 is as follows (in thousands, except years and per share amounts):



	Number of Options	Weighted Average Exercise price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Vested and expected to vest	1,738	$	31.89	6.11	$	21,446
Exercisable	1,182	$	25.20	4.96	$	19,243

In accordance with U.S. GAAP, stock options outstanding that are expected to vest are presented net of estimated future option forfeitures, which are estimated as compensation costs are recognized. Options with a fair value of $3.8 million, $3.8 million, and $3.4 million, became vested during fiscal years 2018, 2017, and 2016, respectively.

The following table summarizes information regarding outstanding and exercisable options as of March 31, 2018 (in thousands, except per share amounts):



	Options Outstanding				Options Exercisable
		Weighted Average Remaining Contractual Life	Weighted Average Exercise		Number	Weighted Average
Range of Exercise Prices	Number	(years)	Price		Exercisable	Exercise Price
$2.90 - $16.25	403	2.58	$	13.09	403	$	13.09
$16.28 - $23.34	354	5.87	21.78		320	21.91
$23.80 - $23.80	3	5.43	23.80		3	23.80
$31.25 - $31.25	321	7.60	31.25		170	31.25
$32.29 - $54.65	443	6.74	46.06		286	42.37
$55.72 - $55.72	216	9.59	55.72		—	—
	1,740	6.11	$	31.91	1,182	$	25.20

As of March 31, 2018 and March 25, 2017, the number of options exercisable was 1.2 million and 1.1 million, respectively.

Restricted Stock Units

Commencing in fiscal year 2011, the Company began granting restricted stock units (“RSU’s”) to select employees. These awards are valued as of the grant date and amortized over the requisite vesting period. Generally, RSU’s vest 100 percent on the first to third anniversary of the grant date depending on the vesting specifications. A summary of the activity for RSU’s in fiscal year 2018, 2017, and 2016 is presented below (in thousands, except year and per share amounts):



	Shares		Weighted Average Fair Value
March 28, 2015	2,821		$	25.57
Granted	1,437		31.51
Vested	(992	)	32.48
Forfeited	(103	)	24.75
March 26, 2016	3,163		26.14
Granted	947		52.40
Vested	(1,032	)	24.67
Forfeited	(83	)	28.40
March 25, 2017	2,995		34.91
Granted	936		55.79
Vested	(1,077	)	24.79
Forfeited	(85	)	41.09
March 31, 2018	2,769		$	45.70

The aggregate intrinsic value of RSU’s outstanding as of March 31, 2018 was $112.5 million. Additional information with regards to outstanding restricted stock units that are expected to vest as of March 31, 2018, is as follows (in thousands, except year and per share amounts):



	Shares	Weighted Average Fair Value		Weighted Average Remaining Contractual Term (years)
Expected to vest	2,682	$	45.53	1.42

RSU’s outstanding that are expected to vest are presented net of estimated future forfeitures, which are estimated as compensation costs are recognized. RSU’s with a fair value of $26.7 million and $25.5 million became vested during fiscal years 2018 and 2017, respectively. The majority of RSUs that vested in 2018 and 2017 were net settled such that the Company withheld a portion of the shares at fair value to satisfy tax withholding requirements. In fiscal years 2018 and 2017, the vesting of RSU’s reduced the authorized and unissued share balance by approximately 1.1 million and 1.0 million, respectively. Total shares withheld and subsequently retired out of the Plan were approximately 0.3 million and 0.3 million, and total payments for the employees’ tax obligations to taxing authorities were $17.8 million and $14.1 million for fiscal years 2018 and 2017, respectively.

Market Stock Units

In fiscal year 2015, the Company began granting market stock units (“MSU’s”) to select employees. MSU’s vest based upon the relative total shareholder return (“TSR”) of the Company as compared to that of the Philadelphia Semiconductor Index (“the Index”). The requisite service period for these MSU’s is also the vesting period, which is three years. The fair value of each MSU granted was determined on the date of grant using the Monte Carlo simulation, which calculates the present value of the potential outcomes of future stock prices of the Company and the Index over the requisite service period. The fair value is based on the risk-free rate of return, the volatilities of the stock price of the Company and the Index, the correlation of the stock price of the Company with the Index, and the dividend yield.

The fair values estimated from the Monte Carlo simulation were calculated using a dividend yield of zero and the following additional assumptions:



	Year Ended
	March 31, 2018		March 25, 2017
Expected stock price volatility	37.36	%	47.66	%
Risk-free interest rate	1.74	%	0.98	%
Expected term (in years)	3.00		3.00

Using the Monte Carlo simulation, the weighted average estimated fair value of the MSU’s granted in fiscal year 2018 was $63.36. A summary of the activity for MSU’s in fiscal year 2018, 2017, and 2016 is presented below (in thousands, except year and per share amounts):



	Shares		Weighted Average Fair Value
March 28, 2015	35		$	22.00
Granted	90		39.86
Vested	—		—
Forfeited	—		—
March 26, 2016	125		$	34.85
Granted	55		75.58
Vested	—		—
Forfeited	—		—
March 25, 2017	180		$	47.30
Granted	89		47.26
Vested	(70	)	22.00
Forfeited	—		—
March 31, 2018	199		$	56.16

The aggregate intrinsic value of MSU’s outstanding as of March 31, 2018 was $8.1 million. Additional information with regard to outstanding MSU’s that are expected to vest as of March 31, 2018 is as follows (in thousands, except year and per share amounts):



	Shares	Weighted Average Fair Value		Weighted Average Remaining Contractual Term (years)
Expected to vest	193	$	55.95	1.40

MSU's with a fair value of $1.5 million became vested during fiscal year 2018. No MSU’s became vested in fiscal year 2017 and 2016.