Note 13. Stock-Based Compensation and Stock Plans

Description of Lumentum Stock-Based Benefit Plans

Stock Option Plans

On June 23, 2015, we adopted, and the board of directors of JDS Uniphase Corporation (“JDSU” and, now, Viavi Solutions Inc.) approved, the 2015 Equity Incentive Plan (the "2015 Plan") under which 8.5 million shares of our Common Stock were authorized for issuance, which was ratified by the Company’s board of directors in August 2015. In connection with our Separation from JDSU on July 31, 2015, outstanding JDSU equity-based awards held by service providers continuing in service after the Separation were converted into equity-based awards under the 2015 Plan reducing the number of shares remaining available for grant under the 2015 Plan. As of immediately following our Separation from JDSU, 2.1 million shares of our Common Stock were reserved pursuant to outstanding equity-based awards under the 2015 Plan that were converted from JDSU equity-based awards.

As of July 2, 2016, the Company had 2.9 million shares of stock options, performance stock units and restricted stock units issued and outstanding to employees and directors under the 2015 Plan. Performance stock units and restricted stock units are performance-based, time-based or a combination of both and are expected to vest over one to four years. The fair value of the time-based performance stock units or restricted stock units is based on the closing market price of the Company’s common stock on the date of award.

The exercise price for stock options is equal to the fair value of the underlying stock at the date of grant. The Company issues new shares of common stock upon exercise of stock options. Options generally become exercisable over a three-year or four-year period and, if not exercised, expire from five to ten years after the date of grant. As of July 2, 2016, 5.0 million shares of common stock under the 2015 Plan were available for grant.

Employee Stock Purchase Plan

On June 23, 2015, we adopted, and the board of directors of JDSU approved, the 2015 Employee Stock Purchase Plan (the “2015 Purchase Plan”) under which 3.0 million shares of our Common Stock were authorized for issuance, which was ratified by our board of directors in August 2015. The 2015 Purchase Plan provides eligible employees with the opportunity to acquire an ownership interest in the Company through periodic payroll deductions and provides a discounted purchase price as well as a look-back period. The 2015 Purchase Plan is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986. However, the 2015 Purchase Plan is not intended to be a qualified pension, profit sharing or stock bonus plan under Section 401(a) of the Internal Revenue Code of 1986 and is not subject to the provisions of the Employee Retirement Income Security Act of 1974. The 2015 Purchase Plan will terminate upon the date on which all shares available for issuance have been sold. Of the 3.0 million shares authorized under the 2015 Purchase Plan, 2.8 million shares remained available for issuance as of July 2, 2016. The 2015 Purchase Plan provides a 15% discount and a six month look-back period.

Restricted Stock Units

RSUs are granted with the exercise price equal to zero and converted to shares immediately upon vesting. These RSUs have service conditions, performance conditions, or a combination of both and are expected to vest over one to four years. The fair value of the time-based RSUs was based on the closing market price of the common stock on the date of award.

Stock-Based Compensation

The impact on our results of operations of recording stock-based compensation by function for fiscal 2016, 2015 and 2014 was as follows (in millions):



	Years Ended
	July 2, 2016		June 27, 2015		June 28, 2014
Cost of sales	$	6.1	$	5.1	$	5.6
Research and development	9.0		7.3		7.3
Selling, general and administrative	11.8		14.7		12.9
	26.9		27.1		25.8

Approximately $1.2 million of stock-based compensation was capitalized to inventory as of July 2, 2016. The table above includes allocated stock-based compensation from Viavi of $2.0 million, $8.9 million, and $7.3 million for fiscal 2016, 2015 and 2014, respectively. Refer to "Note 3. Related Party Transactions" in the Notes to Consolidated Financial Statements.

Stock Option and Restricted Stock Units Activity

We granted no stock options during fiscal 2016 and 2015. As of July 2, 2016, the total intrinsic value of options exercised by our employees during the year ended July 2, 2016 was $1.0 million. In connection with these exercises, the tax benefit realized by us was immaterial due to the fact that Lumentum has no material tax benefit in foreign jurisdictions and a full valuation allowance on its domestic deferred tax assets.

As of July 2, 2016, we have $36.9 million of stock-based compensation cost related to RSUs granted to our employees remain to be amortized. That cost is expected to be recognized over an estimated amortization period of 2.0 years.

The following table summarizes our stock options activities in fiscal 2016 (amount in millions except per share amounts):



	Options Outstanding				Restricted Stock Units Outstanding
	Number of Shares		Weighted-Average Exercise Price		Number of Shares (MSU/PSU)		Number of Shares (RSU)		Weighted-Average Grant Date Fair Value
Outstanding as of June 28, 2014	1.2		$	9.97	0.3		2.7		$	13.17
Granted	—				0.2		1.6		11.77
Exercised / Vested	(0.4	)	8.56		(0.1	)	(1.4	)	12.99
Canceled	—				(0.1	)	(0.4	)	14.28
Outstanding as of June 27, 2015	0.8		10.37		0.3		2.5		12.42
Outstanding as of June 27, 2015, as converted	0.5		19.01		0.2		1.5		22.70
Granted	—				—		1.9		20.39
Exercised / Vested	(0.2	)	15.21		(0.1	)	(0.7	)	22.60
Canceled	—				—		(0.2	)	21.85
Outstanding as of July 2, 2016	0.3		$	17.83	0.1		2.5		21.04

Vested and expected to vest	0.3		$	17.83	0.1		2.2		21.02

The following table summarizes significant ranges of our outstanding and exercisable options as of July 2, 2016:



	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Aggregate Intrinsic Value (in millions)		Number of Shares	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Aggregate Intrinsic Value (in millions)
$6.53 - 6.53	27,004	0.6	$	6.53	$	0.5	27,004	0.6	$	6.53	$	0.5
10.76 - 10.76	96,971	1.1	10.76		1.2		96,971	1.1	10.76		1.2
18.82 - 45.89	160,562	2.2	24.00		0.6		160,562	2.2	24.00		0.6
	284,537	1.7	17.83		$	2.3	284,537	1.7	17.83		$	2.3

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on Lumentum's closing stock price of $23.65 as of July 2, 2016, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of July 2, 2016 was $0.3 million.

Employee Stock Purchase Plan Activity

The ESPP expense we recorded for the year ended July 2, 2016 was $1.3 million. The expense related to the plan is recorded on a straight-line basis over the relevant subscription period. During fiscal 2016, 202,479 shares were issued to our employees with the fair market value at the purchase date of $15.46 through the ESPP program.