Annual report pursuant to Section 13 and 15(d)

Common Stock and Stockholders??? Equity (Deficit)

v3.6.0.2
Common Stock and Stockholders’ Equity (Deficit)
 12 Months Ended
Dec. 31, 2016
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Common Stock and Stockholders’ Equity (Deficit)
Common Stock and Stockholders’ Equity (Deficit)
Common stock
During the third quarter of 2016, the Company completed its registered underwritten public offering of 115 million shares of the Company’s common stock, par value $0.01 per share, at a public offering price of $6.00 per share, pursuant to an underwriting agreement with J.P. Morgan Securities LLC, Barclays Capital Inc. and Credit Suisse Securities (USA) LLC, as representatives of the several underwriters named therein. The resulting aggregate net proceeds to the Company from the common stock offering were approximately $667 million, after deducting underwriting discounts and offering expenses totaling approximately $23 million. As of December 31, 2016, there were 935 million shares of common stock outstanding.


Stock-Based Incentive Compensation Plans
The Company’s stock-based incentive programs are intended to attract, retain and motivate highly qualified employees. On April 29, 2004, the Company’s stockholders approved the 2004 Equity Incentive Plan (the 2004 Plan). As of December 31, 2016, the Company also has stock options outstanding under equity compensation plans that the Company assumed as part of its SeaMicro acquisition. Shares reserved for future grants under the Company’s prior equity compensation plans were consolidated into the 2004 Plan; none of the reserved shares under the SeaMicro plan were consolidated into the 2004 Plan. As of December 31, 2016, the Company had 31.5 million shares of common stock that were available for future grants and 72.1 million shares reserved for issuance upon the exercise of outstanding stock options or the vesting of unvested restricted stock units.
Under the 2004 Plan, stock options generally vest and become exercisable over a three-year period from the date of grant and expire within ten years after the grant date. Unvested shares that are reacquired by the Company from forfeited outstanding equity awards become available for grant and may be reissued as new awards.
Under the 2004 Plan, the Company can grant fair market value awards or full value awards. Fair market value awards are awards granted at or above the fair market value of the Company’s common stock on the date of grant. Full value awards are awards granted at less than the fair market value of the Company’s common stock on the date of grant. Awards can consist of (i) stock options and stock appreciation rights granted at the fair market value of the Company’s common stock on the date of grant and (ii) restricted stock or restricted stock units, as full value awards. The following is a description of the material terms of the awards that may be granted under the 2004 Plan.
Stock Options. A stock option is the right to purchase shares of the Company’s common stock at a fixed exercise price for a fixed period of time. Under the 2004 Plan, nonstatutory and incentive stock options may be granted. The exercise price of the shares subject to each nonstatutory stock option and incentive stock option cannot be less than 100% of the fair market value of the Company’s common stock on the date of the grant. The exercise price of each option granted under the 2004 Plan must be paid in full at the time of the exercise.
Stock Appreciation Rights. Awards of stock appreciation rights may be granted pursuant to the 2004 Plan. Stock appreciation rights may be granted to employees and consultants. No stock appreciation right may be granted at less than fair market value of the Company’s common stock on the date of grant or have a term of over ten years from the date of grant. Upon exercising a stock appreciation right, the holder of such right is entitled to receive payment from the Company in an amount determined by multiplying (i) the difference between the closing price of a share of the Company’s common stock on the date of exercise and the exercise price by (ii) the number of shares with respect to which the stock appreciation right is exercised. The Company’s obligation arising upon the exercise of a stock appreciation right may be paid in shares or in cash, or any combination thereof.
Restricted Stock. Restricted stock can be granted to any employee, director or consultant. The purchase price for an award of restricted stock is $0.00 per share.
Restricted Stock Units. Restricted stock units (RSUs) are awards that can be granted to any employee, director or consultant and that obligate the Company to issue a specific number of shares of the Company’s common stock in the future if the vesting terms and conditions are satisfied. The purchase price for the shares is $0.00 per share.
Performance-based Restricted Stock Units. Performance-based Restricted Stock Units (PRSUs) can be granted to certain of the Company’s senior executives. The performance metrics can be financial performance, non-financial performance and/or market condition. Each PRSU award reflects a target number of shares (Target Shares) that may be issued to an award recipient before adjusting based on the Company’s financial performance, non-financial performance and/or market conditions. The actual number of shares that a grant recipient receives at the end of the period may range from 0% to 250% of the Target Shares granted, depending upon the degree of achievement of the performance target designated by each individual award.
Stock options, stock appreciation rights, restricted stock, RSUs and PRSUs granted after April 29, 2015, generally may not vest in less than one year following the date of grant.
Valuation and Expense Information
Stock-based compensation expense related to employee stock options and restricted stock units, including PRSUs, was allocated in the consolidated statements of operations as follows:
 
2016
 
2015
 
2014
 
(In millions)
Cost of sales
$
2

 
$
3

 
$
3

Research and development
49

 
36

 
44

Marketing, general, and administrative
35

 
24

 
34

Total stock-based compensation expense, net of tax of $0
$
86

 
$
63

 
$
81


During 2016, 2015 and 2014, the Company did not realize any excess tax benefits related to stock-based compensation and therefore the Company did not record any effects relating to financing cash flows. The Company did not capitalize stock-based compensation cost as part of the cost of an asset because the cost was immaterial.
Stock Options. The Company uses the lattice-binomial model in determining the fair value of the employee stock options.
The weighted-average estimated fair value of employee stock options granted for the years ended December 31, 2016, December 26, 2015 and December 27, 2014 was $3.10, $1.02 and $1.46 per share, respectively, using the following weighted-average assumptions:
 
2016
 
2015
 
2014
Expected volatility
62.33
%
 
60.14
%
 
53.36
%
Risk-free interest rate
1.02
%
 
1.29
%
 
1.15
%
Expected dividends
—
%
 
—
%
 
—
%
Expected life (in years)
3.98

 
3.91

 
3.86


The Company uses a combination of the historical volatility of its common stock and the implied volatility for publicly traded options on the Company’s common stock as the expected volatility assumption required by the lattice-binomial model. The risk-free interest rate is based on the rate for a U.S. Treasury zero-coupon yield curve with a term that approximates the expected life of the option grant at the date closest to the option grant date. The expected dividend yield is zero as the Company does not expect to pay dividends in the future. The expected term of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and is a derived output of the lattice-binomial model.
The following table summarizes stock option activity, including market-based stock options, and related information:
  
2016
 
2015
 
2014
  
Number
of Shares
 
Weighted-
Average
Exercise
Price
 
Number
of Shares
 
Weighted-
Average
Exercise
Price
 
Number
of Shares
 
Weighted-
Average
Exercise
Price
 
(In millions, except share price)
Stock options:
 
 
 
 
 
 
 
 
 
 
 
Outstanding at beginning of year
32

 
$
4.44

 
36

 
$
4.78

 
35

 
$
5.08

Granted
2

 
$
6.98

 
8

 
$
2.12

 
8

 
$
3.73

Canceled
(9
)
 
$
5.53

 
(9
)
 
$
4.91

 
(4
)
 
$
7.64

Exercised
(5
)
 
$
4.75

 
(3
)
 
$
1.61

 
(3
)
 
$
1.47

Outstanding at end of year
20

 
$
4.15

 
32

 
$
4.44

 
36

 
$
4.78

Exercisable at end of year
13

 
$
4.32

 
21

 
$
5.34

 
23

 
$
5.28


As of December 31, 2016, the weighted-average remaining contractual life of outstanding stock options was 4.29 years and their aggregate intrinsic value was $145 million. As of December 31, 2016, the weighted-average remaining contractual life of exercisable stock options was 3.45 years and their aggregate intrinsic value was $90 million. The total intrinsic value of stock options exercised for 2016, 2015 and 2014 was $10 million, $2 million and $7 million, respectively.
As of December 31, 2016, the Company had $11 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock options that will be recognized over the weighted-average period of 1.78 years.
RSUs. RSUs vest in accordance with the terms and conditions established by the Compensation and Leadership Resources Committee of the Board of Directors, and are based either on continued service or continued service and performance. The cost of RSUs is determined using the fair value of the Company’s common stock on the date of the grant, and the compensation expense is recognized over the service period.
The summary of the changes in RSUs outstanding, including the PRSUs, during 2016, 2015 and 2014 is presented below:
  
2016
 
2015
 
2014
  
Number
of Shares
 
Weighted-
Average
Fair Value
 
Number
of Shares
 
Weighted-
Average
Fair Value
 
Number
of Shares
 
Weighted-
Average
Fair Value
 
(In millions except share price)
Unvested balance at beginning of period
51

 
$
2.61

 
43

 
$
4.05

 
40

 
$
4.52

Granted
29

 
$
4.72

 
38

 
$
2.03

 
23

 
$
3.89

Forfeited
(5
)
 
$
2.95

 
(15
)
 
$
3.71

 
(5
)
 
$
4.48

Vested
(23
)
 
$
2.56

 
(15
)
 
$
4.13

 
(15
)
 
$
4.90

Unvested balance at end of period
52

 
$
3.73

 
51

 
$
2.61

 
43

 
$
4.05


The total fair value of RSUs vested during 2016, 2015 and 2014 was $151 million, $33 million and $60 million, respectively. Compensation expense recognized for the RSUs for 2016, 2015 and 2014 was approximately $80 million, $57 million and $65 million, respectively.
As of December 31, 2016, the Company had $121 million of total unrecognized compensation expense, net of estimated forfeitures, related to RSUs that will be recognized over the weighted-average period of 1.76 years.
PRSUs. The Company estimated the fair value for the PRSUs with a market condition using Monte Carlo simulation model on the date of grant. During 2016, the Company granted 2.0 million PRSUs that included a market condition to certain of the Company’s senior executives. During 2015, the Company granted 5.2 million PRSUs to certain of the Company’s certain senior executives, of which 3.9 million PRSUs included a market condition.
The summary of the changes in the PRSUs during 2016, 2015 and 2014 is presented below.
  
2016
 
2015
 
2014
 
(Shares in millions)
Unvested shares at beginning of period
7

 
9

 
5

Granted
5

 
5

 
5

Forfeited
(2
)
 
(7
)
 
(1
)
Vested
(5
)
 
—

 
—

Unvested shares at end of period
5

 
7

 
9