Note 10. Stock-Based Compensation

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan (the ESPP) that operates in accordance with Section 423 of the Internal Revenue Code. The ESPP is administered by the Compensation Committee of the Board of Directors. Under the ESPP, employees of the Company who elect to participate are granted options to purchase common stock at a 15% discount from the lower of the market value of the common stock at the beginning or end of each offering period. The ESPP permits an enrolled employee to make contributions to purchase shares of common stock, in an amount between 1% and 10% of compensation, subject to limits specified in the Internal Revenue Code. The total number of shares issued under the ESPP was 740,000, 556,000 and 449,000 during fiscal 2013, 2012 and 2011, respectively.

Stock Incentive Compensation Plans

The Company may grant stock-based awards to employees and directors under the QLogic 2005 Performance Incentive Plan (the 2005 Plan). Shares available for future grant were 9.5 million under the 2005 Plan as of March 31, 2013. Prior to the adoption of the 2005 Plan in August 2005, the Company granted options to purchase shares of the Company’s common stock to employees and directors under certain predecessor stock plans. No further awards can be granted under these predecessor plans.

The 2005 Plan provides for the issuance of incentive and non-qualified stock options, restricted stock units and other stock-based incentive awards for employees. The 2005 Plan permits the Compensation Committee of the Board of Directors to select eligible employees to receive awards and to determine the terms and conditions of awards. In general, stock options granted to employees have ten-year terms and vest over four years from the date of grant. Restricted stock units represent a right to receive a share of stock at a future vesting date with no cash payment from the holder. In general, restricted stock units granted to employees vest over four years from the date of grant.

Under the terms of the 2005 Plan, as amended, non-employee directors receive grants of stock-based awards upon initial election or appointment to the Board of Directors and upon annual reelection to the Board. The target fair value of such grants is determined by reference to the equity compensation for non-employee directors of the Company’s peer group of companies. The target value is then allocated 50% to a restricted stock unit award and 50% to a non-qualified stock option grant in the case of the initial grant and allocated 70% to a restricted stock unit award and 30% to a non-qualified stock option grant in the case of the annual grant. All stock-based awards granted to non-employee directors have ten-year terms and vest from one to three years from the date of grant.

A summary of stock option activity is as follows:


	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
	(In thousands)							(In thousands)
Outstanding at March 28, 2010		24,256		$	19.50
Granted		2,829			17.74
Exercised		(2,091	)		14.18
Forfeited (cancelled pre-vesting)		(708	)		15.42
Expired (cancelled post-vesting)		(2,430	)		32.13

Outstanding at April 3, 2011		21,856			18.51
Granted		1,630			15.73
Exercised		(1,544	)		14.83
Forfeited (cancelled pre-vesting)		(686	)		15.86
Expired (cancelled post-vesting)		(2,245	)		24.93

Outstanding at April 1, 2012		19,011			17.91
Granted		1,387			13.67
Exercised		(79	)		14.31
Forfeited (cancelled pre-vesting)		(177	)		15.82
Expired (cancelled post-vesting)		(3,313	)		20.23

Outstanding at March 31, 2013		16,829		$	17.14		4.8	$	52

Vested and expected to vest at March 31, 2013		16,478		$	17.19		4.7	$	44

Exercisable at March 31, 2013		13,841		$	17.56		4.1	$	10

A summary of restricted stock unit activity is as follows:


	Number of Shares			Weighted- Average Grant Date Fair Value
	(In thousands)
Outstanding and unvested at March 28, 2010		2,514		$	14.78
Granted		965			17.79
Vested		(959	)		15.31
Forfeited		(249	)		15.11

Outstanding and unvested at April 3, 2011		2,271			15.80
Granted		1,656			15.63
Vested		(879	)		15.58
Forfeited		(362	)		15.82

Outstanding and unvested at April 1, 2012		2,686			15.77
Granted		1,753			13.52
Vested		(1,002	)		15.43
Forfeited		(186	)		14.94

Outstanding and unvested at March 31, 2013		3,251		$	14.71

During fiscal 2013, 2012 and 2011, the Company issued 638,000, 546,000 and 581,000 shares of common stock, respectively, in connection with the vesting of restricted stock units. The difference between the number of restricted stock units vested and the shares of common stock issued is the result of restricted stock units withheld in satisfaction of minimum tax withholding obligations associated with the vesting.

During fiscal 2013, the Company granted 0.2 million restricted stock units with service conditions and either a performance or market condition to certain senior executives, which are not included in the table above. The restricted stock units had a weighted-average grant date fair value of $14.10 per share. The restricted stock units that are earned will vest over four years from the date of grant.

During fiscal 2012, the Company granted 0.2 million restricted stock units with service and performance conditions to certain senior executives, which are not included in the table above. During fiscal 2013, the Company determined that 0.1 million restricted stock units were earned based on performance during fiscal 2012, at which time the restricted stock units had a fair value of $13.85 per share. The restricted stock units earned vest over four years from the date of grant.

Stock-Based Compensation Expense

A summary of stock-based compensation expense, by functional line item in the consolidated statements of income, is as follows:


	2013		2012		2011
	(In thousands)
Cost of revenues	$	2,372	$	2,506	$	2,247
Engineering and development		13,584		14,199		14,222
Sales and marketing		6,853		6,667		6,768
General and administrative		7,554		8,316		8,398

Total continuing operations		30,363		31,688		31,635
Discontinued operations		—		904		3,372

	$	30,363	$	32,592	$	35,007

The fair value of stock options granted and shares to be purchased under the ESPP have been estimated at the date of grant using a Black-Scholes option-pricing model. The weighted-average fair values and underlying assumptions are as follows:


	2013						2012						2011
	Stock Options			Employee Stock Purchase Plan			Stock Options			Employee Stock Purchase Plan			Stock Options			Employee Stock Purchase Plan
Fair value	$	4.97		$	2.66		$	5.73		$	3.49		$	6.62		$	3.95
Expected volatility		38	%		36	%		36	%		36	%		38	%		36	%
Risk-free interest rate		0.9	%		0.1	%		1.8	%		0.1	%		2.1	%		0.2	%
Expected life (years)		5.5			0.25			5.5			0.25			5.3			0.25
Dividend yield		—			—			—			—			—			—

Restricted stock units granted with (i) a service condition only, or (ii) a service and performance condition, are valued based on the closing market price on the date of grant. Restricted stock units granted with a service and market condition are valued based on a Monte Carlo simulation model on the date of grant.

The Company recognized tax benefits related to stock-based compensation expense for fiscal 2013, 2012 and 2011 of $7.9 million, $7.7 million and $7.1 million, respectively. Stock-based compensation costs capitalized as part of the cost of assets were not material for all periods presented.

As of March 31, 2013, there was $50.9 million of total unrecognized compensation costs related to outstanding stock-based awards. These costs are expected to be recognized over a weighted-average period of 2.4 years.

During fiscal 2013, 2012 and 2011, the grant date fair value of options vested totaled $12.1 million, $16.5 million and $18.5 million, respectively. The intrinsic value of options exercised during fiscal 2013, 2012 and 2011 totaled $0.2 million, $3.8 million and $8.4 million, respectively. Intrinsic value of options exercised is calculated as the difference between the market price on the date of exercise and the exercise price multiplied by the number of options exercised.

The fair value of restricted stock units vested during fiscal 2013, 2012 and 2011 totaled $14.6 million, $14.4 million and $17.1 million, respectively.

The Company currently issues new shares to deliver common stock under its stock-based award plans.