Annual report pursuant to Section 13 and 15(d)

Common Stock and Stock-Based Incentive Compensation Plans

v3.10.0.1
Common Stock and Stock-Based Incentive Compensation Plans
 12 Months Ended
Dec. 29, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Common Stock and Stock-Based Incentive Compensation Plans
Common Stock and Stock-Based Incentive Compensation Plans
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.
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).
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 granted at the fair market value of the Company’s common stock on the date of grant and (ii) 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.
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.
Employee Stock Purchase Plan. The Company has introduced the Employee Stock Purchase Plan (ESPP) in the fourth quarter of 2017. Under the ESPP, eligible employees who participate in an offering period may have up to 10% of their earnings withheld, up to certain limitations, to purchase shares of common stock at 85% of the lower of the fair market value on the first or the last business day of the six-month offering period. The offering periods commence in November and May each year.
As of December 29, 2018, the Company had 40 million shares of common stock that were available for future grants and 38 million shares reserved for issuance upon the exercise of outstanding stock options or the vesting of unvested restricted stock units. In addition, the Company had 45 million shares of common stock that were available for issuance under the ESPP.
Valuation and Expense
Stock-based compensation expense related to employee stock options, restricted stock units, including PRSUs and the ESPP, was allocated in the consolidated statements of operations as follows:
 
2018
 
2017
 
2016
 
(In millions)
Cost of sales
$
4

 
$
2

 
$
2

Research and development
91

 
57

 
49

Marketing, general, and administrative
42

 
38

 
35

Total stock-based compensation expense, net of tax of $0
$
137

 
$
97

 
$
86


During 2018, 2017 and 2016, the Company did not realize any excess tax benefits related to stock-based compensation and therefore the Company did not record any related financing cash flows.
Stock Options. The Company uses the lattice-binomial model in determining the fair value of the stock options.
The weighted-average estimated fair value of employee stock options granted for the years ended December 29, 2018, December 30, 2017 and December 31, 2016 was $7.62, $5.46 and $3.10 per share, respectively, using the following assumptions:
 
2018
 
2017
 
2016
Expected volatility
51.51% - 60.46%

 
57.26
%
 
62.33
%
Risk-free interest rate
2.20% - 2.83%

 
1.68
%
 
1.02
%
Expected dividends
—
%
 
—
%
 
—
%
Expected life (in years)
3.92 - 3.94

 
3.92

 
3.98


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 and related information:
  
Outstanding Number
of Shares
 
Weighted-
Average
Exercise
Price
 
Aggregate Intrinsic Value
 
Weighted-Average Remaining Contractual Life (in years)
 
(In millions, except share price)
 
 
Balance as of December 30, 2017
17

 
$
4.32

 
$
104

 
3.75
Granted
1

 
$
18.35

 
 
 
 
Canceled
—


$
8.93

 
 
 
 
Exercised
(5
)
 
$
4.65

 
 
 
 
Balance as of December 29, 2018
13

 
$
5.33

 
$
152

 
3.49
Exercisable December 29, 2018
11

 
$
3.64

 
$
145

 
3.15

The total intrinsic value of stock options exercised for 2018, 2017 and 2016 was $67 million, $27 million and $10 million, respectively.
As of December 29, 2018, the Company had $9 million of total unrecognized compensation expense related to stock options that will be recognized over the weighted-average period of 1.89 years.
RSUs. The Company uses the fair value of the Company’s common stock on the date of the grant in determining the fair value of the RSUs. The weighted-average grant date fair values of RSUs granted during 2018, 2017 and 2016 were $14.81, $11.63 and $4.72 per share, respectively.
The following table summarizes RSU activity, including PRSU activity, and related information:
  
Number
of Shares
 
Weighted-
Average
Fair Value
 
(In millions except share price)
Unvested shares as of December 30, 2017
35

 
$
6.60

Granted
15

 
$
14.81

Forfeited
(2
)
 
$
8.74

Vested
(22
)
 
$
4.46

Unvested shares as of December 29, 2018
26

 
$
13.14


The total fair value of RSUs vested during 2018, 2017 and 2016 was $399 million, $328 million and $151 million, respectively.
As of December 29, 2018, the Company had $267 million of total unrecognized compensation expense related to RSUs that will be recognized over the weighted-average period of 1.75 years.
PRSUs. The Company uses the Monte Carlo simulation model on the date of grant in determining the fair value of the PRSUs with a market condition. The weighted-average grant date fair values of PRSUs granted during 2018, 2017 and 2016 were $21.67, $17.18 and $9.00, respectively, using the following assumptions:
 
2018
 
2017
 
2016
Stock price at valuation date
$12.02 - $32.72
 
$12.83
 
$5.14
Expected volatility
63.77% - 67.97%

 
64.39
%
 
57.83
%
Risk-free interest rate
2.06% - 2.82%

 
1.50
%
 
0.88
%
Expected dividends
—
%
 
—
%
 
—
%
Expected term (in years)
2.48 - 3.00

 
3.00

 
3.07


The following table summarizes PRSU activity and related information:
 
(Shares in millions)
Unvested shares as of December 30, 2017
3

Granted
3

Forfeited
—

Vested
(4
)
Unvested shares as of December 29, 2018
2


ESPP. The Company uses the Black-Scholes model in determining the fair value of the ESPP. The weighted-average grant date fair value for the ESPP during 2018 and 2017 was within a range from $3.42 to $6.43 and $3.46 per share, respectively, using the following assumptions:
 
2018
 
2017
Expected volatility
45.88% - 66.66%

 
56.07
%
Risk-free interest rate
2.05% - 2.52%

 
1.36
%
Expected dividends
—
%
 
—
%
Expected term (in years)
0.49 - 0.50

 
0.49


During 2018, 2.2 million and 2.5 million shares of common stock were purchased in each of the two six-month offering periods under the ESPP at a purchase price of $9.57 and $10.31 per share, respectively, resulting in aggregate cash proceeds of $47 million. As of December 29, 2018, the Company had $9 million of total unrecognized compensation expense related to the ESPP that will be recognized over the weighted-average period of 0.36 years.