Note 14. Stock-Based Compensation

Overview

The impact on the Company’s results of operations of recording stock-based compensation by function for the three months ended September 30, 2017 and October 1, 2016 was as follows (in millions):



	Three Months Ended
	September 30, 2017		October 1, 2016
Cost of revenues	$	0.9	$	1.0
Research and development	1.1		1.7
Selling, general and administrative	5.5		6.0
Stock-based compensation	$	7.5	$	8.7

Approximately $0.7 million and $0.8 million of stock-based compensation was capitalized to inventory at September 30, 2017 and October 1, 2016 respectively.

Full Value Awards

Full Value Awards refer to restricted stock units that are granted with the exercise price equal to zero and are converted to shares immediately upon vesting. These Full Value Awards are time-based, performance-based or a combination of both and expected to vest over three to four years. When converted into shares upon vesting, shares equivalent in value to the minimum withholding taxes liability on the vested shares are withheld by the Company for the payment of such taxes.

During the three months ended September 30, 2017 and October 1, 2016, the Company granted 2.9 million and 3.5 million time-based awards, respectively. The fair value of the time-based Full Value Awards is based on the closing market price of the Company’s common stock on the date of award. The majority of these time-based awards vest over three years, with 33% vesting after one year and the balance vesting quarterly over the remaining two years.

During the three months ended September 30, 2017 and October 1, 2016, the Company granted 0.5 million and 0.4 million, performance-based awards, respectively. These performance-based shares represent the target amount of grants, and the actual number of shares awarded upon vesting may vary depending upon the achievement of the relevant performance conditions. The shares attained over target upon vesting are reflected as awards granted during the period. Accordingly, during the three months ended September 30, 2017 and October 1, 2016, the Company granted additional 0.2 million and 0.1 million shares due to performance-bases shares attained over target. The aggregate grant-date fair value of performance-based awards granted during the three months ended September 30, 2017 and October 1, 2016 were estimated to be $6.1 million and $3.3 million, respectively. The majority of performance-based awards vest in equal annual installments over three years based on the attainment of certain performance measures and the employee’s continued service through the vest date. The performance-based awards with market condition were valued using a Monte Carlo simulation.

As of September 30, 2017, $60.8 million of unrecognized stock-based compensation cost related to Full Value Awards remains to be amortized. That cost is expected to be recognized over an estimated amortization period of 2.1 years.

The Company adopted the new authoritative guidance that simplified several aspects of accounting for share-based payment award transactions including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Under the new guidance, companies can make an accounting policy election to either continue to estimate forfeitures or account for forfeitures as they occur. Upon adoption, the Company elected to account for forfeitures when they occur, on a modified retrospective basis. The Company recognized net cumulative effect of $0.6 million as an increase to accumulated deficit as of the first day of fiscal 2018. Additionally, the new authoritative guidance required the employee tax paid by withholding shares of restricted stock units on the statements of cash flows to be classified as financing cash flows. Accordingly, upon adoption, the Company reclassified $5.2 million and $4.6 million of tax payment withheld on vesting of restricted stock from operating cash flows to financing cash flows for the three months ended September 30, 2017 and October 1, 2016, respectively. Further, the new authoritative guidance required previously unrecognized deferred tax benefits to be recorded as deferred tax assets. Upon adoption, the Company had $117.7 million of net operating loss carryforwards resulting from excess tax benefit deductions. In accordance with the new authoritative guidance, there was no impact to retained earnings resulting from adoption, as the deferred tax assets associated with these net operating loss carryforwards were fully offset by a corresponding valuation allowance. All other aspects of the guidance did not have a material effect on the Company’s consolidated financial statements.