Annual report pursuant to Section 13 and 15(d)

Stock-Based Compensation

v2.4.0.6
Stock-Based Compensation
 12 Months Ended
Jun. 30, 2012
Share-based Compensation [Abstract]  
Stock-Based Compensation
STOCK-BASED COMPENSATION
Equity Incentive Program
Under the Company’s current equity incentive program, the Company issues equity awards from its 2004 Equity Incentive Plan (the “2004 Plan”), which provides for the grant of options to purchase shares of its common stock, stock appreciation rights, restricted stock units, performance shares, performance units and deferred stock units to its employees, consultants and members of its Board of Directors. The 2004 Plan permits the issuance of up to 32.0 million shares of common stock. Any 2004 Plan awards of restricted stock units, performance shares, performance units or deferred stock units with a per share or unit purchase price lower than 100% of fair market value on the grant date are counted against the total number of shares issuable under the 2004 Plan as 1.8 shares for every one share subject thereto.
The following table summarizes the combined activity under the equity incentive plans for the indicated periods:
(In thousands)
Available
For Grant
Balances as of June 30, 2009(1)
7,702

Shares added to 2004 Plan
11,000

Restricted stock units granted(2)
(5,213
)
Restricted stock units canceled (2)
1,140

Restricted stock units withheld for taxes(2)(3)
244

Options canceled/expired/forfeited
1,161

Plan shares expired(4)
(872
)
Balances as of June 30, 2010(1)
15,162

Restricted stock units granted(2)(5)
(4,062
)
Restricted stock units canceled(2)
367

Options canceled/expired/forfeited
1,141

Plan shares expired(4)
(1,054
)
Balances as of June 30, 2011(1)
11,554

Restricted stock units granted(2)(6)
(4,145
)
Restricted stock units canceled(2)
508

Options canceled/expired/forfeited
788

Plan shares expired(4)
(736
)
Balances as of June 30, 2012(1)
7,969


__________________  
(1)
Includes shares available for issuance under the 2004 Plan, as well as under the Company’s 1998 Outside Director Option Plan (the “Outside Director Plan”), which only permits the issuance of stock options to the Company’s non-employee members of the Board of Directors. As of June 30, 2012, 1.7 million shares were available for grant under the Outside Director Plan.
(2)
The number of restricted stock units provided in this row reflects the application of the 1.8x multiple described above.
(3)
Effective November 4, 2009, any shares withheld by the Company after such date in satisfaction of applicable withholding taxes upon the issuance, vesting or settlement of equity awards under the 2004 Plan are no longer available for future issuance under the 2004 Plan.
(4)
Represents the portion of shares listed as “Options canceled/expired/forfeited” above that were issued under the Company’s equity incentive plans other than the 2004 Plan or the Outside Director Plan. Because the Company is only currently authorized to issue equity awards under the 2004 Plan and the Outside Director Plan, any equity awards that are canceled, expire or are forfeited under any other Company equity incentive plans do not result in additional shares being available to the Company for future grant.
(5)
Includes 0.3 million restricted stock units granted to senior management during the fiscal year ended June 30, 2011 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such restricted stock units that are deemed to have been earned). As of June 30, 2012, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria of such restricted stock units had been satisfied. Therefore, this line item includes all such performance-based restricted stock units granted during such fiscal year, reported at the maximum possible number of shares that may ultimately be issuable under such restricted stock units if all applicable performance-based and service-based criteria are fully satisfied.
(6)
Includes 0.2 million restricted stock units granted to senior management during the fiscal year ended June 30, 2012 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such restricted stock units that are deemed to have been earned). As of June 30, 2012, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria of such restricted stock units had been satisfied. Therefore, this line item includes all such performance-based restricted stock units granted during such fiscal year, reported at the maximum possible number of shares that may ultimately be issuable under such restricted stock units if all applicable performance-based and service-based criteria are fully satisfied.
 
Except for stock options granted to non-employee Board members as part of their regular compensation package for service through the end of the first quarter of fiscal year 2008, the Company has granted only restricted stock units under its equity incentive program since September 2006. For the preceding several years until September 30, 2006, stock options were granted at the market price of the Company’s common stock on the date of grant (except for the previously disclosed retroactively priced options which were granted primarily prior to the fiscal year ended June 30, 2002), generally with a vesting period of five years and an exercise period not to exceed seven years (ten years for options granted prior to July 1, 2005) from the date of issuance. Restricted stock units may be granted with varying criteria such as service-based and/or performance-based vesting.
The fair value of stock-based awards is measured at the grant date and is recognized as an expense over the employee’s requisite service period. The fair value is determined using a Black-Scholes valuation model for purchase rights under the Company’s Employee Stock Purchase Plan and using the closing price of the Company’s common stock on the grant date for restricted stock units.
The following table shows pre-tax stock-based compensation expense for the indicated periods: 
 
Year ended June 30,
(In thousands)
2012
 
2011
 
2010
Stock-based compensation expense by:
 
 
 
 
 
Costs of revenues
$
13,710

 
$
13,935

 
$
14,275

Engineering, research and development
21,505

 
24,539

 
27,289

Selling, general and administrative
43,620

 
42,956

 
44,418

Total stock-based compensation expense
$
78,835

 
$
81,430

 
$
85,982


The following table shows stock-based compensation capitalized as inventory as of the dates indicated below:
(In thousands)
As of June 30,
2012
 
2011
Inventory
$
7,692

 
$
6,701


Stock Options
The following table summarizes the activity and weighted-average exercise price for stock options under all plans during the fiscal year ended June 30, 2012: 
Stock Options
Shares
(In thousands)
 
Weighted-Average
Exercise Price
Outstanding stock options as of June 30, 2011
7,675

 
$
45.38

Granted
—

 
$
—

Exercised
(3,043
)
 
$
42.50

Canceled/expired/forfeited
(788
)
 
$
46.85

Outstanding stock options as of June 30, 2012
3,844

 
$
47.36

Vested and exercisable as of June 30, 2012
3,843

 
$
47.36


The Company has not issued any stock options since November 1, 2007. The weighted-average remaining contractual terms for total options outstanding under all plans and for total options vested and exercisable under all plans as of June 30, 2012 were each 1.5 years. The aggregate intrinsic values for total options outstanding under all plans and for total options vested and exercisable under all plans as of June 30, 2012 were each $15.6 million. 
The authoritative guidance on stock-based compensation permits companies to select the option-pricing model used to estimate the fair value of their stock-based compensation awards. The Black-Scholes option-pricing model requires the input of assumptions, including the option’s expected term and the expected price volatility of the underlying stock. For purposes of the fair value estimates presented in this report, the Company has based its expected stock price volatility assumption on the market-based implied volatility from traded options of the Company’s common stock. As of June 30, 2012, the unrecognized stock-based compensation balance related to stock options was immaterial.
The following table shows the total intrinsic value of options exercised, total cash received from employees and non-employee Board members as a result of stock option exercises and tax benefits realized by the Company in connection with these stock option exercises for the indicated periods: 
(In thousands)
Year ended June 30,
2012
 
2011
 
2010
Total intrinsic value of options exercised
$
23,395

 
$
19,408

 
$
1,217

Total cash received from employees and non-employee Board members as a result of stock option exercises
$
129,306

 
$
94,488

 
$
15,154

Tax benefits realized by the Company in connection with these exercises
$
7,867

 
$
6,653

 
$
447


The Company generally settles employee stock option exercises with newly issued common shares, except in certain tax jurisdictions where settling such exercises with treasury shares provides the Company or one of its subsidiaries with a tax benefit.
Restricted Stock Units
The following table shows the applicable number of restricted stock units and weighted-average grant date fair value for restricted stock units granted, vested and released, withheld for taxes, and forfeited during the fiscal year ended June 30, 2012 and restricted stock units outstanding as of June 30, 2012 and 2011:
 
Restricted Stock Units
Shares
(In thousands) (1)
 
Weighted-Average
Grant Date
Fair Value
Outstanding restricted stock units as of June 30, 2011
6,540

 
$
33.56

Granted(2)
2,303

 
$
36.63

Vested and released
(1,421
)
 
$
39.69

Withheld for taxes
(722
)
 
$
39.71

Forfeited
(282
)
 
$
32.54

Outstanding restricted stock units as of June 30, 2012(2)
6,418

 
$
32.66

 __________________ 
(1)
Share numbers reflect actual shares subject to awarded restricted stock units. Under the terms of the 2004 Plan, each of the share numbers presented in this column is multiplied by 1.8 to calculate the impact on the share reserve under the 2004 Plan.
(2)
Includes 0.2 million restricted stock units granted to senior management during the fiscal year ended June 30, 2012 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such restricted stock units that are deemed to have been earned). As of June 30, 2012, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria of such restricted stock units had been satisfied. Therefore, this line item includes all such performance-based restricted stock units, reported at the maximum possible number of shares that may ultimately be issuable under such restricted stock units if all applicable performance-based and service-based criteria are fully satisfied.
The restricted stock units granted by the Company from the beginning of the fiscal year ended June 30, 2007 through the fiscal year ended June 30, 2012 generally vest in two equal installments on the second and fourth anniversaries of the date of grant. Prior to the fiscal year ended June 30, 2007, the restricted stock units granted by the Company generally vested in two equal installments over four or five years from the date of the grant. The value of the restricted stock units is based on the closing market price of the Company’s common stock on the date of award. The restricted stock units have been awarded under the Company’s 2004 Plan, and each unit will entitle the recipient to one share of common stock when the applicable vesting requirements for that unit are satisfied. However, for each share actually issued under the awarded restricted stock units, the share reserve under the 2004 Plan will be reduced by 1.8 shares, as provided under the terms of the 2004 Plan.
The following table shows the grant date fair value after estimated forfeitures and weighted-average grant date fair value per unit for the restricted stock units granted and tax benefits realized by the Company in connection with vested and released restricted stock units for the indicated periods: 
(In thousands, except for weighted-average grant date fair value)
Year ended June 30,
2012
 
2011
 
2010
Grant date fair value after estimated forfeitures
$
60,102

 
$
45,915

 
$
64,230

Weighted-average grant date fair value per unit
$
36.63

 
$
31.24

 
$
34.36

Tax benefits realized by the Company in connection with vested and released restricted stock units
$
28,914

 
$
23,302

 
$
14,181

As of June 30, 2012, the unrecognized stock-based compensation expense balance, net of estimated forfeitures, related to restricted stock units was $103.5 million and will be recognized over an estimated weighted-average amortization period of 2.1 years.
Employee Stock Purchase Plan
KLA-Tencor’s Employee Stock Purchase Plan (“ESPP”) provides that eligible employees may contribute up to 10% of their eligible earnings toward the semi-annual purchase of KLA-Tencor’s common stock. The ESPP is qualified under Section 423 of the Internal Revenue Code. The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the date of purchase (or, if not a trading day, on the immediately preceding trading day).
 Effective January 1, 2010, the offering period (or length of the look-back period) under the ESPP has a duration of six months, and the purchase price with respect to each offering period beginning on or after such date is, until otherwise amended, equal to 85% of the lesser of (i) the fair market value of the Company’s common stock at the commencement of the applicable six-month offering period or (ii) the fair market value of the Company’s common stock on the purchase date.
The Company estimates the fair value of purchase rights under the ESPP using a Black-Scholes valuation model. The fair value of each purchase right under the ESPP was estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach with the following weighted-average assumptions: 
 
Year ended June 30,
 
2012
 
2011
 
2010
Stock purchase plan:
 
 
 
 
 
Expected stock price volatility
36.0
%
 
38.0
%
 
35.0
%
Risk free interest rate
0.1
%
 
0.2
%
 
0.2
%
Dividend yield
3.2
%
 
3.1
%
 
1.6
%
Expected life of options (in years)
0.50

 
0.50

 
0.50


The following table shows total cash received from employees for the issuance of shares under the ESPP, the number of shares purchased by employees through the ESPP, the tax benefits realized by the Company in connection with the disqualifying dispositions of shares purchased under the ESPP and the weighted-average fair value per share for the indicated periods:
(In thousands, except for weighted-average fair value per share)
Year ended June 30,
2012
 
2011
 
2010
Total cash received from employees for the issuance of shares under the ESPP
$
34,263

 
$
30,085

 
$
20,714

Number of shares purchased by employees through the ESPP
918

 
1,123

 
758

Tax benefits realized by the Company in connection with the disqualifying dispositions of shares purchased under the ESPP
$
2,206

 
$
2,194

 
$
994

Weighted-average fair value per share based on Black-Scholes model
$
10.02

 
$
7.41

 
$
8.51


The ESPP shares are replenished annually on the first day of each fiscal year by virtue of an evergreen provision. The provision allows for share replenishment equal to the lesser of 2.0 million shares or the number of shares which KLA-Tencor estimates will be required to be issued under the ESPP during the forthcoming fiscal year. During each of the fiscal years ended June 30, 2011 and 2010, a total of 2.0 million additional shares were reserved under the ESPP. No additional shares were reserved under the ESPP with respect to the fiscal year ended June 30, 2012. As of June 30, 2012, a total of 2.6 million shares were reserved and available for issuance under the ESPP, and, as of the date of this report, no additional shares have been added to the ESPP with respect to the fiscal year ending June 30, 2013.