Lumentum Holdings Inc.LITE
Lumentum Holdings Inc. Stock Compensation Disclosure
Note 17. Stock-Based Compensation and Stock Plans
Description of Lumentum Stock-Based Benefit Plans
Equity Incentive Plan
As of June 29, 2019, we had 2.4 million shares subject to stock options, restricted stock units, restricted stock awards, and performance stock units issued and outstanding under the 2015 Equity Incentive Plan (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 June 29, 2019, 3.9 million shares of common stock under the 2015 Plan were available for grant.
Replacement Awards
In connection with the acquisition of Oclaro, we issued equity awards to Oclaro employees, consisting of stock options and restricted stock units (“replacement awards”) in exchange for their Oclaro equity awards. The replacement awards consisted of less than 0.1 million stock options with a weighted average grant date fair value of $34.34, and 1.0 million restricted stock units with a weighted average grant date fair value of $41.80. The terms of these replacement awards are substantially similar to the original Oclaro equity awards. The fair value of the replacement awards for services rendered through December 10, 2018, the acquisition date, was recognized as a component of the merger consideration, with the remaining fair value of the replacement awards related to the post-combination services recorded as stock-based compensation over the remaining vesting period.
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.
In November 2018, our board of directors approved the grant of 0.2 million PSUs to senior members of our management team. At the beginning of fiscal 2019, we determined that the achievement of the performance conditions was probable, and as such, began recording stock-based compensation associated with these PSUs. Based on performance conditions actually achieved in fiscal 2019, we recorded $2.0 million expense related to these grants.
Employee Stock Purchase Plan
Our 2015 Employee Stock Purchase Plan (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, 2.0 million shares remained available for issuance as of June 29, 2019.
Stock-Based Compensation
The impact on our results of operations of recording stock-based compensation by function during fiscal 2019, 2018, and 2017 was as follows (in millions):
Years Ended | |||||||||||
June 29, 2019 | June 30, 2018 | July 1, 2017 | |||||||||
Cost of sales | $ | 15.1 | $ | 12.6 | $ | 7.5 | |||||
Research and development | 13.8 | 14.2 | 11.6 | ||||||||
Selling, general and administrative | 41.8 | 20.0 | 13.6 | ||||||||
$ | 70.7 | $ | 46.8 | $ | 32.7 | ||||||
Total income tax benefit associated with stock-based compensation recognized in our consolidated statements of operations during the years presented was as follows (in millions):
Years Ended | |||||||||||
June 29, 2019 | June 30, 2018 | July 1, 2017 | |||||||||
Income tax benefit associated with stock-based compensation | $ | (8.9 | ) | $ | (16.6 | ) | $ | (13.1 | ) | ||
Approximately $3.5 million and $2.6 million of stock-based compensation was capitalized to inventory as of June 29, 2019 and June 30, 2018, respectively.
In connection with the acquisition of Oclaro, we accelerated certain equity awards for Oclaro employees. The total stock-based compensation expense associated with the acceleration of equity awards was $15.2 million, out of which $10.0 million was settled in cash in our second quarter of fiscal 2019. Refer to “Note 5. Business Combination.”
Stock Option and Stock Award Activity
We did not grant any stock options during fiscal 2019, 2018, or 2017, other than those assumed in connection with the Oclaro merger. As of June 29, 2019, there were less than 0.05 million stock options outstanding under the 2015 Plan, all of which were replacement awards issued in connection with the Oclaro acquisition.
The following table summarizes our awards activity in fiscal 2019, 2018, and 2017 (in millions, except per share amounts):
Stock Options | Restricted Stock Units | Restricted Stock Awards | Performance Stock Units | ||||||||||||||||||||||||
Number of Shares | Weighted-Average Exercise Price | 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 | ||||||||||||||||||||
Balance as of July 2, 2016 | 0.3 | $ | 17.8 | 2.5 | $ | 21.3 | — | $ | — | 0.1 | $ | 14.4 | |||||||||||||||
Granted | — | — | 1.0 | 35.6 | 0.3 | 32.5 | — | — | |||||||||||||||||||
Vested/Exercised | (0.3 | ) | 14.3 | (1.4 | ) | 22.3 | — | — | (0.1 | ) | 14.4 | ||||||||||||||||
Canceled | — | — | (0.2 | ) | 23.8 | — | — | — | — | ||||||||||||||||||
Balance as of July 1, 2017 | — | $ | — | 1.9 | $ | 27.9 | 0.3 | $ | 32.5 | — | $ | — | |||||||||||||||
Granted | — | — | 1.1 | 54.5 | — | — | 0.1 | 52.0 | |||||||||||||||||||
Vested/Exercised | — | — | (1.1 | ) | 26.6 | (0.2 | ) | 32.5 | — | — | |||||||||||||||||
Canceled | — | — | (0.2 | ) | 38.8 | — | — | — | — | ||||||||||||||||||
Balance as of June 30, 2018 | — | $ | — | 1.7 | $ | 43.1 | 0.1 | $ | 32.5 | 0.1 | $ | 52.0 | |||||||||||||||
Assumed in Oclaro merger | * | 34.3 | 1.0 | 41.8 | — | — | — | — | |||||||||||||||||||
Granted | — | — | 1.0 | 60.3 | — | — | 0.2 | 55.9 | |||||||||||||||||||
Vested/Exercised | * | 26.2 | (1.0 | ) | 41.5 | (0.1 | ) | 32.5 | (0.1 | ) | 49.0 | ||||||||||||||||
Canceled | — | — | (0.5 | ) | 50.2 | * | 32.8 | * | 53.8 | ||||||||||||||||||
Balance as of June 29, 2019 | * | $ | 38.8 | 2.2 | $ | 52.4 | * | $ | 32.5 | 0.2 | $ | 56.0 | |||||||||||||||
* Less than 0.05 million
(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. In first quarter of fiscal 2019, our board of directors approved an increase in the original number of PSUs based on the actual achievement.
As of June 29, 2019, $96.8 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 2.0 years.
A summary of awards available for grant is as follows (in millions):
Awards Available for Grant | ||
Balance as of July 2, 2016 | 4.7 | |
Authorized | 3.0 | |
Granted | (1.3 | ) |
Canceled | 0.2 | |
Balance as of July 1, 2017 | 6.6 | |
Authorized | — | |
Granted | (1.2 | ) |
Canceled | 0.2 | |
Balance as of June 30, 2018 | 5.6 | |
Replacement awards in connection with Oclaro acquisition | (1.0 | ) |
Granted | (1.2 | ) |
Canceled | 0.5 | |
Balance as of June 29, 2019 | 3.9 | |
Employee Stock Purchase Plan Activity
The 2015 Purchase Plan expense for fiscal 2019, 2018, and 2017 were $3.6 million, $3.3 million, and $2.7 million, respectively. The expense related to the 2015 Purchase Plan is recorded on a straight-line basis over the relevant subscription period. During fiscal 2019, 2018, and 2017, there were 0.3 million, 0.2 million, and 0.3 million 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. The assumptions used to estimate the fair value of the 2015 Purchase Plan shares to be issued during the periods presented were as follows:
June 29, 2019 | June 30, 2018 | ||||
Expected term (years) | 0.5 | 0.5 | |||
Expected volatility | 60.1 | % | 58.8 | % | |
Risk-free interest rate | 2.47 | % | 2.02 | % | |
Dividend yield | — | % | — | % | |
About Stock Compensation Disclosures
Stock-based compensation disclosures detail the equity awards granted to employees and executives — including stock options, restricted stock units (RSUs), and performance shares — along with the valuation methods and assumptions used to expense them. This section reveals the true cost of talent retention and the alignment between management incentives and shareholder interests.
Key signals: total unrecognized compensation expense and its expected recognition period signal future earnings headwinds from already-granted awards. For stock options, examine Black-Scholes assumptions — expected volatility, risk-free rate, and expected term — as understating any of these reduces reported compensation expense. Compare stock compensation expense as a percentage of revenue against peers to assess dilution cost. Watch vesting schedules for acceleration clauses tied to change-of-control events. Performance-based awards with undemanding targets may indicate weak governance. Add back stock compensation to operating cash flow to calculate a more conservative free cash flow figure.