Note 12. Stock-Based Compensation

Overview

Prior to the Separation, we participated in Viavi’s stock-based benefit plans and recorded stock-based compensation based on the equity awards granted to our employees as well as an allocation of expenses from Viavi’s employees in shared services functions. Upon the Separation, outstanding employee stock options, Restricted Stock Units (RSUs) and Restricted Stock Units based on market conditions previously issued to our employees under the Viavi equity plans were converted into proportionately equivalent Lumentum equity awards under our 2015 Equity Incentive Plan, using a formula designed to preserve the fair value of the awards immediately prior to the Separation. All other terms of the awards remain unchanged. During the first quarter of fiscal 2016, the Restricted Stock Units based on market conditions were modified to performance-based RSUs, and the impact of the modification resulted in additional expenses of $0.1 million.

The impact on our results of operations of recording stock-based compensation by function for the three and six months ended December 26, 2015 and December 27, 2014 was as follows (in millions):



	Three Months Ended				Six Months Ended
	December 26, 2015		December 27, 2014		December 26, 2015		December 27, 2014
Cost of sales	$	1.5	$	1.2	$	2.7	$	2.6
Research and development	2.3		1.8		4.2		3.7
Selling, general and administrative	2.5		3.7		5.9		7.3
	$	6.3	$	6.7	$	12.8	$	13.6

Approximately $1.1 million of stock-based compensation was capitalized in inventory at December 26, 2015. The table above includes allocated stock-based compensation from Viavi of $1.9 million for the three months ended December 27, 2014, and $0.5 million and $3.9 million for the six months ended December 26, 2015 and December 27, 2014, respectively.

Stock Option Activity

We granted no stock options during fiscal 2016 and 2015. The total intrinsic value of options exercised by our employees during the three and six months ended December 26, 2015 was $0.1 million.

Restricted Stock Units Activity

During the six months ended December 26, 2015, we granted 1.8 million RSUs, of which 41,000 also have performance conditions. The aggregate grant-date fair value of time-based RSUs and performance-based RSUs are $35.0 million and $0.8 million, respectively. The majority of the time-based RSUs vests over three years, with 33.3% vesting after one year and the balance vesting quarterly over the remaining two years. The vesting of the performance based RSUs is over three years and contingent upon the achievement of specific revenue targets and the employee’s continued service. The performance based RSU shares have a target number of shares, and the actual number of shares awarded upon vesting may be higher or lower depending upon the level of achievement of the performance conditions.

A summary of the status of our outstanding RSUs as of December 26, 2015 and changes during the six months ended December 26, 2015 is presented below (amount in millions):



	Full Value Awards
	Time-based shares		Performance-based shares		Total number of shares
Outstanding at June 27, 2015, as converted	1.5		0.2		1.7
Awards granted	1.8		—		1.8
Awards vested	(0.4	)	(0.1	)	(0.5	)
Awards cancelled	(0.1	)	—		(0.1	)
Outstanding at December 26, 2015	2.8		0.1		2.9

As of December 26, 2015, $49.1 million of unrecognized stock-based compensation cost related to RSUs remains to be amortized. That cost is expected to be recognized over an estimated amortization period of 2.3 years.

RSUs are converted into shares upon vesting. Shares equivalent in value to the minimum statutory withholding tax on the vested shares are withheld by the Company at the employees discretion for the payment of such taxes. During the six months ended December 26, 2015 and December 27, 2014, the Company paid $3.9 million and $4.5 million for employee withholding taxes, respectively, and classified the payments as operating cash outflows in the consolidated statements of cash flows.

Employee Stock Purchase Plans

In June 2015, the Company adopted the 2015 Employee Stock Purchase Plan (the “Plan”). The Plan, which became effective June 23, 2015, provides eligible employees, consultants and directors of the Company and one or more of its parent or subsidiary companies with the opportunity to acquire a proprietary interest in the Company through participation in a plan designed to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. The Plan will terminate on the date on which all shares available for issuance have been sold. The first offering period is from November 17, 2015 to May 15, 2016. The Plan provides a 15% discount on the lesser of (i) the fair market value of a share on the date of purchase or (ii) the fair market value of a share on the commencement date of the purchase period.