Note 14. Stock-Based Compensation

Overview

The impact on the Company’s results of operations of recording stock-based compensation by function for the three and six months ended January 2, 2016 and December 27, 2014 was as follows (in millions):



	Three Months Ended				Six Months Ended
	January 2, 2016		December 27, 2014		January 2, 2016		December 27, 2014
Cost of sales	$	1.4	$	1.0	$	2.6	$	2.0
Research and development	1.9		2.0		4.7		3.9
Selling, general and administrative	5.6		7.5		17.6		15.1
Stock-based compensation	$	8.9	$	10.5	$	24.9	$	21.0

Approximately $0.9 million of stock-based compensation was capitalized to inventory at January 2, 2016.

Full Value Awards

Full Value Awards refer to RSUs and Performance Units that are granted with the exercise price equal to zero and are converted to shares immediately upon vesting. These Full Value Awards are performance-based, time-based or a combination of both and expected to vest over one to four years. The fair value of the time-based Full Value Awards is based on the closing market price of the Company’s common stock on the date of award.

During the six months ended January 2, 2016 and December 27, 2014, the Company granted 5.3 million and 5.2 million RSUs, of which 0.5 million and 0.7 million, respectively, are performance-based RSUs with market conditions (“MSUs”). These MSU shares represent the target amount of grants, and the actual number of shares awarded upon vesting of the MSUs may be higher or lower depending upon the achievement of the relevant market conditions. The majority of MSUs vest in equal annual installments over three years based on the attainment of certain total shareholder return performance measures and the employee’s continued service through the vest date. The aggregate grant-date fair value of MSUs granted during the first quarter of fiscal 2016 and fiscal 2015 was estimated to be $2.9 million and $8.5 million, respectively, and was calculated using a Monte Carlo simulation. The remaining 4.8 million and 4.5 million granted during the six months ended January 2, 2016 and December 27, 2014 are mainly time-based RSUs. The majority of these time-based RSUs vest over three years, with 33% vesting after one year and the balance vesting quarterly over the remaining two years. The grant amounts and grant-date fair values during the three and six months ended December 27, 2014 represent the Company’s historical grant information and have not been adjusted to remove grants made to employees who transferred to Lumentum as part of the Separation.

As of January 2, 2016, $52.3 million of unrecognized stock-based compensation cost related to Full Value Awards remains to be amortized. That cost is expected to be recognized over an estimated amortization period of 2.2 years.

Full Value Awards are converted into shares upon vesting. Shares equivalent in value to the minimum withholding taxes liability on the vested shares are withheld by the Company for the payment of such taxes. During the six months ended January 2, 2016 and December 27, 2014, the Company paid $7.8 million and $11.9 million, respectively, and classified the payments as operating cash outflows in the Consolidated Statement of Cash Flows.

Impact on Stock-based Compensation Due to Separation

In connection with the separation of the Lumentum business on August 1, 2015 and in accordance with the Employee Matters Agreement, the Company made certain adjustments to the exercise price and number of shares underlying stock-based compensation awards with the intention of preserving the economic value of the awards for Viavi employees. These adjustments resulted in a modification of equity awards with total incremental stock-based compensation of $13.6 million, of which $8.3 million was expensed in the first two quarters of fiscal 2016. The remaining $5.3 million will be amortized over the remaining requisite service period from Separation Date to the end of the vesting term.

Valuation Assumptions

The Company estimates the fair value of the new MSUs granted using a Monte Carlo simulation based on the assumptions described below for the following periods:



	Six Months Ended
	January 2, 2016		December 27, 2014
Volatility of common stock	33.0	%	40.8	%
Average volatility of peer companies	52.6	%	53.4	%
Average correlation coefficient of peer companies	0.0887		0.2156
Risk-free interest rate	0.8	%	0.6	%