Stock-Based Compensation

Equity Compensation Plan Information

The following table summarizes information with respect to shares of the Company’s common stock that may be issued under the Company’s existing equity compensation plans as of October 31, 2015 (in thousands, except per share amounts):



Plan Category	A Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights		B Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		C Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excludes Securities Reflected in Column A)
Equity compensation plans approved by stockholders ⁽¹⁾	4,291	⁽³⁾	$	8.48	36,834	⁽⁵⁾
Equity compensation plans not approved by stockholders ⁽²⁾	2,400	⁽⁴⁾	$	5.66	—
Total	6,691		$	7.47	36,834


⁽¹⁾	Primarily consist of the 2009 ESPP, the 2009 and 1999 Director Plans, and the 2009 and 1999 Stock Plans.


⁽²⁾	Consist solely of the 2013 Inducement Award Plan described in Note 11, “Employee Compensation Plans,” of the Notes to Consolidated Financial Statements.


⁽³⁾	Amount excludes purchase rights accrued under the 2009 ESPP. As of October 31, 2015, the 2009 ESPP had a stockholder-approved reserve of 65.0 million shares, of which 10.5 million shares were available for future issuance.


⁽⁴⁾	All shares were granted in the first quarter of fiscal year 2013. Information relating to equity compensation plans is set forth in Note 11, “Employee Compensation Plans,” of the Notes to Consolidated Financial Statements.


⁽⁵⁾	Amount consists of 10.5 million, 1.0 million, and 25.3 million shares available for future issuance under the 2009 ESPP, the 2009 Director Plan, and the 2009 Stock Plan, respectively.

Stock-based compensation expense, net of estimated forfeitures, was included in the following line items of the Company’s Consolidated Statements of Income as follows (in thousands):



	Fiscal Year Ended
	October 31, 2015		November 1, 2014		October 26, 2013
Cost of revenues	$	12,946	$	14,963	$	14,519
Research and development	18,714		18,635		17,509
Sales and marketing	38,340		31,650		29,425
General and administrative	18,528		19,666		12,165
Total stock-based compensation expense	$	88,528	$	84,914	$	73,618

The following table presents stock-based compensation expense, net of estimated forfeitures, by grant type (in thousands):



	Fiscal Year Ended
	October 31, 2015		November 1, 2014		October 26, 2013
Stock options	$	3,675	$	4,581	$	2,581
RSUs, including restricted stock units with market conditions	67,735		62,906		50,522
Employee stock purchase plan (“ESPP”)	17,118		17,427		20,515
Total stock-based compensation expense	$	88,528	$	84,914	$	73,618

The following table presents the unrecognized compensation expense, net of estimated forfeitures, of the Company’s equity compensation plans as of October 31, 2015, which is expected to be recognized over the following weighted-average periods (in thousands, except for the weighted-average period):



	Unrecognized Compensation Expense		Weighted- Average Period (In years)
Stock options	$	2,379	1.11
RSUs, including restricted stock units with market conditions	$	119,848	2.03
ESPP	$	6,663	0.87

In accordance with the applicable accounting guidance for stock-based compensation, the compensation expense for stock-based awards is reduced by an estimate for forfeitures and is recognized over the requisite service period of the respective awards. To the extent that the actual forfeitures differ from the estimated forfeitures, the Company records the difference in the period that the awards vest. The Company estimates the forward-looking forfeiture rate, using the Company’s historical forfeiture rates, annually during the second fiscal quarter, and whenever events occur or facts and circumstances indicate that the current forfeiture rate estimate is significantly different from historical forfeitures. Changes in the estimated forfeiture rates and differences between the estimated forfeiture rates and actual forfeiture rates may result in significant increases or decreases in stock-based compensation expense from period to period.

Based on the results of the annual forfeiture rate analysis performed during the second fiscal quarter of 2015, the Company increased its expected forfeiture rate, which resulted in the Company recording a cumulative adjustment to stock-based compensation expense of $5.6 million in fiscal year 2015.

There was no significant impact related to the change in the estimated forfeiture rates in fiscal year 2014.

Stock Options

The fair value of each option granted during the respective period is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table. The dividend yield reflects the cash dividends paid by Brocade starting in the third quarter of fiscal year 2014. The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The expected volatility is based on an equal weighted-average of implied volatilities from traded options of the Company’s common stock and historical volatility of the Company’s common stock. The expected term is based on historical exercise behavior.



	Fiscal Year Ended
	October 31, 2015		November 1, 2014	October 26, 2013
Expected dividend yield	1.3	%	0.0% - 1.5%	0.0	%
Risk-free interest rate	1.1 - 1.8%		0.7 - 2.3%	0.6 - 1.7%
Expected volatility	36.5	%	36.8 - 39.4%	39.9 - 44.9%
Expected term (in years)	4.5		5.0	5.7

Compensation expense computed under the fair value method for stock options issued is being amortized under a graded vesting method over the options’ vesting period. A summary of stock option activity under the equity compensation plans for the fiscal years ended October 31, 2015, November 1, 2014, and October 26, 2013, is presented as follows:



	Shares (In thousands)		Weighted-Average Exercise Price		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Contractual Term (In years)	Aggregate Intrinsic Value (In thousands)
Outstanding as of October 27, 2012	29,497		$	5.43			1.61	$	26,077
Granted	2,875		$	5.64	$	2.34
Exercised	(13,149	)	$	3.99				$	32,324
Forfeited or expired	(6,662	)	$	6.90
Outstanding as of October 26, 2013	12,561		$	6.19			2.37	$	24,784
Granted	1,770		$	9.03	$	3.16
Exercised	(6,971	)	$	5.93				$	24,240
Forfeited or expired	(1,161	)	$	8.93
Outstanding as of November 1, 2014	6,199		$	6.79			4.74	$	24,452
Granted	1,117		$	10.89	$	3.09
Exercised	(564	)	$	6.68				$	2,980
Forfeited or expired	(61	)	$	8.20
Outstanding as of October 31, 2015	6,691		$	7.47			4.37	$	20,252
Vested and expected to vest as of October 31, 2015	6,402		$	7.39			4.32	$	19,845
Exercisable and vested as of October 31, 2015	3,981		$	6.79			3.81	$	14,575

Restricted Stock Units, Including Restricted Stock Units with Market Conditions

Prior to the initial declaration of a quarterly cash dividend on May 22, 2014, the fair value of time-based RSUs was measured based on the grant-date share price because Brocade did not historically pay cash dividends on its common stock. For awards granted on or subsequent to May 22, 2014, the fair value of time-based RSUs is measured based on the grant-date share price, less the present value of expected dividends during the vesting period, discounted at a risk-free interest rate. The fair value of MSUs is estimated using a lattice model that incorporates a Monte Carlo simulation. A summary of the changes in nonvested RSUs, including MSUs, under Brocade’s equity compensation plans during the fiscal years ended October 31, 2015, November 1, 2014, and October 26, 2013, respectively, is presented as follows:



	Shares (In thousands)		Weighted-Average Grant Date Fair Value
Nonvested as of October 27, 2012	21,996		$	3.71
Granted	11,518		$	5.75
Vested	(7,401	)	$	5.69
Forfeited	(3,352	)	$	5.39
Nonvested as of October 26, 2013	22,761		$	3.85
Granted	11,582		$	9.69
Vested	(11,750	)	$	5.59
Forfeited	(3,594	)	$	6.01
Nonvested as of November 1, 2014	18,999		$	5.93
Granted	10,777		$	11.46
Vested	(8,317	)	$	7.81
Forfeited	(2,260	)	$	8.69
Nonvested as of October 31, 2015	19,199		$	9.82
Vested and expected to vest as of October 31, 2015	16,243		$	9.71

A summary of the changes in nonvested MSUs included in the above summary of changes in nonvested RSUs under Brocade’s equity compensation plans during the fiscal year ended October 31, 2015, is presented as follows:



	Shares (In thousands)		Weighted-Average Grant Date Fair Value
Nonvested as of November 1, 2014	2,019		$	11.62
Granted	1,510		$	10.39
Vested	(1,310	)	$	12.30
Forfeited	(283	)	$	11.25
Nonvested as of October 31, 2015	1,936		$	9.65
Vested and expected to vest as of October 31, 2015	1,258		$	9.25

Typically, vesting of RSUs occurs over one to four years and is subject to the employee’s continuing service to Brocade.

The aggregate intrinsic value of nonvested RSUs at October 31, 2015, November 1, 2014, and October 26, 2013, was $200.1 million, $203.9 million, and $178.8 million, respectively.

Employee Stock Purchase Plan

Under Brocade’s employee stock purchase plans, including the 2009 ESPP and the 1999 ESPP (together, the “Brocade ESPP”), eligible employees can participate and purchase shares semiannually at the lower of 85% of the fair market value of the Company’s common stock on (i) the first trading day of the offering period, or (ii) the last day of each six-month purchase period. The Brocade ESPP permits eligible employees to purchase common stock through payroll deductions for up to 15% of qualified compensation. The Company accounts for the Brocade ESPP as a compensatory plan and compensation expense is being amortized under a graded vesting method over the 24-month offering period. In addition, the Company accounts for changes in percentage contribution elected by employees, as well as decreases in the Company’s common stock price on the last day of each six-month purchase period as compared to the common stock price on the first trading day of the offering period, by applying modification accounting which results in an increase in compensation expense during the period of modification.

The fair value of the option component of Brocade ESPP shares was estimated using the Black-Scholes option pricing model and the weighted-average assumptions noted in the following table:



	Fiscal Year Ended
	October 31, 2015		November 1, 2014		October 26, 2013
Expected dividend yield	1.4	%	1.4	%	0.0	%
Risk-free interest rate	0.3	%	0.2	%	0.2	%
Expected volatility	27.3	%	30.1	%	39.5	%
Expected term (in years)	1.2		1.3		1.3