Note 15. Stock-Based Compensation and Stock Plans

Description of Lumentum Stock-Based Benefit Plans

Equity Incentive Plan

On June 23, 2015, we adopted, and the board of directors of JDSU 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 our 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. 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.

On November 4, 2016, our stockholders approved an amendment to increase the number of shares that may be issued under the 2015 Plan by 3.0 million shares, and certain other material terms of the 2015 Plan.

As of September 29, 2018, we had 2.0 million shares subject to restricted stock units, restricted stock awards, and performance stock units issued and outstanding under the 2015 Plan. Restricted stock units, restricted stock awards, and performance 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 these grants is based on the closing market price of our 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. We issue 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 September 29, 2018, 5.0 million shares of common stock under the 2015 Plan were available for grant.

Restricted Stock Units

Restricted stock units (“RSUs”) under the 2015 Plan are grants of shares of our common stock, the vesting of which is based on the requisite service requirement. Generally, our RSUs are subject to forfeiture and expected to vest over one to four years. For annual refresh grants, RSUs generally vest ratably on an annual, or combination of annual and quarterly, basis over three years.

Restricted Stock Awards

Restricted stock awards (“RSAs”) under the 2015 Plan are grants of shares of our common stock that are subject to various restrictions, including restrictions on transferability and forfeiture provisions. RSAs are expected to vest over one to four years, and the shares acquired may not be transferred by the holder until the vesting conditions (if any) are satisfied.

Performance Stock Units

Performance stock units (“PSUs”) under the 2015 Plan are grants of shares of our common stock that vest upon the achievement of certain performance and service conditions. We begin recognizing compensation expense when we conclude that it is probable that the performance conditions will be achieved. We reassess the probability of vesting at each reporting period and adjust our compensation cost based on this probability assessment. Our PSUs are subject to risk of forfeiture until performance and service conditions are satisfied and generally vest over three years.

During the three months ended September 29, 2018, our board of directors preliminary approved the grant of 0.2 million PSUs to senior members of our management team. The grant date has not been established for these awards as the performance targets will only be set and approved by our board in the quarter ending December 29, 2018. As such, no stock-based compensation has been recorded for these grants during the three months ended September 29, 2018.

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 15% purchase price discount as well as a six-month 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, 2.3 million shares remained available for issuance as of September 29, 2018.

Stock-Based Compensation

The impact on our results of operations of recording stock-based compensation by function for the three months ended September 29, 2018 and September 30, 2017 was as follows (in millions):



	Three Months Ended
	September 29, 2018		September 30, 2017
Cost of sales	$	3.3	$	2.7
Research and development	2.8		3.1
Selling, general and administrative	4.7		3.5
	$	10.8	$	9.3

Approximately $2.1 million and $2.6 million of stock-based compensation was capitalized to inventory as of September 29, 2018 and June 30, 2018, respectively.

Stock Option and Stock Award Activity

We did not grant any stock options during the three months ended September 29, 2018 and September 30, 2017. As of September 29, 2018 and June 30, 2018, there were no options outstanding under the 2015 Plan.

During the three months ended September 30, 2017, there were 40,270 options exercised by our employees with the total intrinsic value of $0.7 million.

The following table summarizes our awards activity for the three months ended September 29, 2018 (in millions, except per share amounts):



	Restricted Stock Units				Restricted Stock Awards			Performance Stock Units
	Number of Shares		Weighted-Average Grant Date Fair Value per Share		Number of Shares	Weighted-Average Grant Date Fair Value per Share		Number of Shares ⁽¹⁾		Weighted-Average Grant Date Fair Value per Share
Unvested balance as of beginning of period	1.7		$	43.1	0.1	$	32.5	0.2		$	52.0
Granted	0.7		67.8		—	—		—		—
Vested	(0.5	)	38.4		—	—		(0.1	)	52.0
Canceled	(0.1	)	49.6		—	—		—		—
Unvested balance as of end of period	1.8		$	55.2	0.1	$	32.5	0.1		$	—

(1) In fiscal 2018, we granted 0.1 million PSUs to senior members of our management team subject to revenue performance condition. The number of awards granted in fiscal 2018 represented 100% of target goal; under the terms of the awards, the recipient could earn between 0% and 200% of the original grant. The performance condition was achieved in fiscal 2018. During the three months ended September 29, 2018, our board of directors approved an increase in the original number of PSUs based on the actual achievement.

As of September 29, 2018, $97.8 million of stock-based compensation cost related to awards granted to our employees remains to be amortized. That cost is expected to be recognized over an estimated amortization period of 2.1 years.

A summary of awards available for grant is as follows (in millions):



	Awards Available for Grant
Balance as of beginning of period	5.6
Granted	(0.7	)
Canceled	0.1
Balance as of end of period	5.0

Employee Stock Purchase Plan Activity

The 2015 Purchase Plan expense for the three months ended September 29, 2018 and September 30, 2017 was $1.0 million and $0.8 million, respectively. The expense related to the 2015 Purchase Plan is recorded on a straight-line basis over the relevant subscription period. During the three months ended September 29, 2018 and September 30, 2017, there were no shares issued to employees through the 2015 Purchase Plan.

We estimate the fair value of the 2015 Purchase Plan shares on the date of grant using the Black-Scholes option-pricing model. During the three months ended September 29, 2018 and September 30, 2017, the assumptions used to estimate the fair value of the 2015 Purchase Plan shares to be issued were as follows:



	September 29, 2018		September 30, 2017
Expected term (years)	0.5		0.5
Expected volatility	58.8	%	53.0	%
Risk-free interest rate	2.02	%	1.02	%
Dividend yield	—	%	—	%