Note 11. 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 85% of the lower of the market value of the common stock on either the first day of that offering period or on the applicable purchase date, whichever is less. Each offering period is generally 12 months and includes up to four purchase periods of three months each. If the fair market value of the Company’s common stock on the first day of any purchase period is less than on the date of grant, employee participation in that offering period ends and participants are automatically re-enrolled in a new 12-month 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 845,000, 836,000 and 740,000 during fiscal 2015, 2014 and 2013, 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) and to employees under the 2014 New-Hire Performance Incentive Plan (the 2014 Plan). As of March 29, 2015, shares available for future grant were 7.4 million and 2.3 million under the 2005 Plan and the 2014 Plan, respectively. 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 a predecessor stock plan. No further awards can be granted under this predecessor plan.

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 subject to only a service condition vest over four years from the date of grant. Restricted stock units granted to certain senior executives subject to a service and either a performance or market condition vest over three or four years.

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 100% to a restricted stock unit award 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.

The 2014 Plan was adopted in November 2014 and provides for the issuance of non-qualified stock options, restricted stock units and other stock-based incentive awards for newly-hired officers or employees, where the awards granted are an inducement material to the employee’s entering into employment with the Company or one of its subsidiaries. The 2014 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. The types of awards and terms and conditions of the awards granted under the plan are generally consistent with the awards that may be granted under the 2005 Plan.

A summary of stock option activity is as follows:


	Number of Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
	(In thousands)							(In thousands)
Outstanding at April 1, 2012		19,011		$	17.91
Granted		1,387			13.67
Exercised		(79	)		14.31			$	204
Forfeited (cancelled pre-vesting)		(177	)		15.82
Expired (cancelled post-vesting)		(3,313	)		20.23

Outstanding at March 31, 2013		16,829			17.14
Granted		75			10.90
Exercised		(88	)		12.00				36
Forfeited (cancelled pre-vesting)		(732	)		15.02
Expired (cancelled post-vesting)		(4,881	)		20.45

Outstanding at March 30, 2014		11,203			15.84
Granted		32			9.99
Exercised		(229	)		13.43				264
Forfeited (cancelled pre-vesting)		(273	)		14.88
Expired (cancelled post-vesting)		(2,238	)		15.42

Outstanding at March 29, 2015		8,495		$	16.03		3.6	$	1,556

Vested and expected to vest at March 29, 2015		8,482		$	16.03		3.6	$	1,545

Exercisable at March 29, 2015		8,225		$	16.11		3.5	$	1,213

The intrinsic value of options exercised in the table above 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. During fiscal 2015, 2014 and 2013, the grant date fair value of options vested totaled $2.6 million, $7.7 million and $12.1 million, respectively.

A summary of activity of restricted stock units subject to only a service condition is as follows:


	Number of RSUs			Weighted- Average Grant Date Fair Value		Aggregate Fair Value
	(In thousands)					(In thousands)
Outstanding and unvested at April 1, 2012		2,686		$	15.77
Granted		1,753			13.52
Vested		(1,002	)		15.43	$	14,057
Forfeited		(186	)		14.94

Outstanding and unvested at March 31, 2013		3,251			14.71
Granted		2,207			11.11
Vested		(1,150	)		14.90		11,136
Forfeited		(697	)		13.80

Outstanding and unvested at March 30, 2014		3,611			12.62
Granted		2,061			10.61
Vested		(1,102	)		13.42		11,839
Forfeited		(911	)		11.94

Outstanding and unvested at March 29, 2015		3,659		$	11.42

The table above includes 408,000 and 477,000 restricted stock units granted during fiscal 2015 and 2014, respectively, to employees that joined the Company in connection with acquisitions.

A summary of activity of restricted stock units subject to a service condition and either a performance or market condition is as follows:


	Number of RSUs			Weighted- Average Grant Date Fair Value		Aggregate Fair Value
	(In thousands)					(In thousands)
Outstanding and unvested at April 1, 2012		155		$	13.85
Granted		179			14.10
Vested		(36	)		13.85	$	508
Forfeited		(9	)		13.85

Outstanding and unvested at March 31, 2013		289			14.01
Granted		374			11.67
Vested		(60	)		13.97		558
Forfeited		(180	)		13.86

Outstanding and unvested at March 30, 2014		423			12.02
Granted		721			12.04
Vested		(24	)		13.98		242
Forfeited		(141	)		10.03

Outstanding and unvested at March 29, 2015		979		$	12.27

During fiscal 2015, 2014 and 2013, the Company issued 688,000, 717,000 and 638,000 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.

Stock-Based Compensation Expense

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


	2015		2014		2013
	(In thousands)
Cost of revenues	$	1,049	$	1,349	$	2,372
Engineering and development		10,024		10,918		13,584
Sales and marketing		4,631		5,337		6,853
General and administrative		4,841		5,034		7,554

	$	20,545	$	22,638	$	30,363

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:


	2015						2014						2013
	Stock Options			Employee Stock Purchase Plan			Stock Options			Employee Stock Purchase Plan			Stock Options			Employee Stock Purchase Plan
Fair value	$	3.74		$	2.20		$	4.12		$	2.41		$	4.97		$	2.66
Expected volatility		33	%		30	%		36	%		32	%		38	%		36	%
Risk-free interest rate		2.1	%		0.1	%		1.6	%		0.1	%		0.9	%		0.1	%
Expected life (years)		6.6			0.5			6.2			0.3			5.5			0.25
Dividend yield		—			—			—			—			—			—

Restricted stock units granted subject to either (i) a service condition only, or (ii) service and performance conditions, are valued based on the closing market price on the date of grant. Restricted stock units granted with service and market conditions 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 2015, 2014 and 2013 of $7.2 million, $6.2 million and $7.9 million, respectively. Stock-based compensation costs capitalized as part of the cost of assets were not material to the consolidated financial statements.

As of March 29, 2015, there was $43.3 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 2.6 years.

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