STOCK-BASED COMPENSATION

2014

Equity Incentive Plan (the

“2014

Plan”)

The Board of Directors adopted the

2014

Plan in

April 2013,

and the stockholders approved it in

June 2013.

October 2014,

the Board of Directors approved certain amendments to the

2014

Plan. The

2014

Plan, as amended, became effective on

November 13, 2014

and provides for the issuance of up to

5.5

million shares. The

2014

Plan will expire on

November 13, 2024.

As of

December 31, 2018,

2.0

million shares remained available for future issuance under the

2014

Plan.

Stock-Based Compensation Expense

The Company recognized stock-based compensation expense as follows (in thousands):

	Year Ended December 31,
	2018		2017		2016
Cost of revenue	$	1,888	$	1,654	$	1,575
Research and development		15,990		14,816		14,041
Selling, general and administrative		42,729		36,147		29,373
Total stock-based compensation expense	$	60,607	$	52,617	$	44,989
Tax benefit related to stock-based compensation	$	4,383	$	5,054	$	-

In the

first

quarter of

2016,

the Company’s former Chief Financial Officer retired. As the service or performance conditions for her outstanding RSUs had

not

been satisfied at the time of her departure, the Company reversed previously accrued stock-based compensation expenses of

$2.9

million associated with the unvested RSUs and this credit was reflected in selling, general and administrative expenses for the year ended

December 31, 2016.

RSUs

The Company’s RSUs include time-based RSUs, RSUs with performance conditions (“PSUs”), RSUs with market conditions (“MSUs”), and RSUs with both market and performance conditions (“MPSUs”). Vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performance goals and the approval of such achievement by the Compensation Committee of the Board of Directors (the “Compensation Committee”). All awards include service conditions which require continued employment with the Company.

A summary of RSU activity is presented in the table below (in thousands, except per-share amounts):

	Time-Based RSUs					PSUs and MPSUs						MSUs					Total
	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			Weighted-Average Grant Date Fair Value Per Share		Number of Shares			Weighted-Average Grant Date Fair Value Per Share
Outstanding at January 1, 2016		499		$	40.75		1,933			$	38.99		1,800		$	23.57		4,232		$	32.64
Granted		133		$	63.00		1,216		(1)	$	41.12		-		$	-		1,349		$	43.28
Vested		(239	)	$	36.43		(736	)		$	29.71		-		$	-		(975	)	$	31.36
Forfeited		(27	)	$	45.35		(129	)		$	36.82		(180	)	$	23.57		(336	)	$	30.38
Outstanding at December 31, 2016		366		$	51.35		2,284			$	43.24		1,620		$	23.57		4,270		$	36.47
Granted		81		$	94.25		585		(1)	$	62.72		-		$	-		666		$	66.56
Vested		(175	)	$	48.35		(597	)		$	41.94		-		$	-		(772	)	$	43.39
Forfeited		(14	)	$	61.80		(6	)		$	49.82		-		$	-		(20	)	$	58.46
Outstanding at December 31, 2017		258		$	66.30		2,266			$	48.59		1,620		$	23.57		4,144		$	39.91
Granted		133		$	114.36		630		(1)	$	85.06		600		$	68.48		1,363		$	80.62
Vested		(136	)	$	60.23		(717	)		$	41.08		-		$	-		(853	)	$	44.13
Forfeited		(15	)	$	82.20		(5	)		$	63.16		(1	)	$	68.48		(21	)	$	76.92
Outstanding at December 31, 2018		240		$	95.38		2,174			$	61.61		2,219		$	35.69		4,633		$	50.94

(

)

Amount reflects the number of PSUs and MPSUs that

may

ultimately be earned based on management’s probability assessment of the achievement of performance conditions at each reporting period. In addition, MPSUs are subject to the achievement of market conditions.

The intrinsic value related to vested RSUs was

$90.0

million,

$74.0

million and

$62.9

million for the years ended

December 31, 2018,

2017

and

2016,

respectively. As of

December 31, 2018,

the total intrinsic value of all outstanding RSUs was

$494.0

million, based on the closing stock price of

$116.25.

As of

December 31, 2018,

unamortized compensation expense related to all outstanding RSUs was

$124.5

million with a weighted-average remaining recognition period of approximately

3.5

years.

Cash proceeds from vested PSUs with a purchase price totaled

$10.6

million for the year ended

December 31, 2018.

There were

proceeds for the years ended

December 31, 2017

and

2016.

Time-Based RSUs

For the years ended

December 31, 2018,

2017

and

2016,

the Compensation Committee granted

133,000,

81,000

and

133,000

RSUs, respectively, with service conditions to non-executive employees and non-employee directors. The RSUs vest over

four

years for employees and

one

year for directors, subject to continued service with the Company.

PSUs and MPSUs

2019

PSUs:

October 2018,

the Compensation Committee granted

53,000

PSUs to certain non-executive employees, which represent a target number of shares to be earned based on the Company’s

2020

revenue goals for certain regions or product line divisions, or based on the Company’s average

two

-year (

2019

and

2020

) revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association (

“2019

Non-Executive PSUs”). The maximum number of shares that an employee can earn is either

200%

300%

of the target number of the

2019

Non-Executive PSUs, depending on the job classification of the employee.

50%

of the

2019

Non-Executive PSUs will vest in the

first

quarter of

2021

if the pre-determined performance goals are met during the performance period. The remaining

2019

Non-Executive PSUs will vest over the following

two

years on an annual or quarterly basis. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the

2019

Non-Executive PSUs is

$10.9

million.

The

2019

Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company

$30

per share upon vesting of the shares. Shares that do

not

vest will

not

be subject to the purchase price payment. The Company determined the grant date fair value of the

2019

Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock price of

$108.43,

expected term of

2.9

years, expected volatility of

28.7%

and risk-free interest rate of

2.9%.

2018

PSUs:

February 2018,

the Compensation Committee granted

188,000

PSUs to the executive officers, which represent a target number of shares to be earned based on the Company’s average

two

-year (

2018

and

2019

) revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association (

“2018

Executive PSUs”). The maximum number of shares that an executive officer can earn is

300%

of the target number of the

2018

Executive PSUs.

50%

of the

2018

Executive PSUs will vest in the

first

quarter of

2020

if the pre-determined performance goals are met during the performance period. The remaining

2018

Executive PSUs will vest over the following

two

years on a quarterly basis. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the

2018

Executive PSUs is

$46.1

million.

February 2018,

the Compensation Committee granted

44,000

PSUs to certain non-executive employees, which represent a target number of shares to be earned based on the Company’s

2019

revenue goals for certain regions or product line divisions, or based on the Company’s average

two

-year (

2018

and

2019

) revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association (

“2018

Non-Executive PSUs”). The maximum number of shares that an employee can earn is either

200%

300%

of the target number of the

2018

Non-Executive PSUs, depending on the job classification of the employee.

50%

of the

2018

Non-Executive PSUs will vest in the

first

quarter of

2020

if the pre-determined performance goals are met during the performance period. The remaining

2018

Non-Executive PSUs will vest over the following

two

years on an annual or quarterly basis. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the

2018

Non-Executive PSUs, excluding cancelled shares for the terminated employees, is

$8.8

million.

The

2018

Executive PSUs and the

2018

Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company

$30

per share upon vesting of the shares. Shares that do

not

vest will

not

be subject to the purchase price payment. The Company determined the grant date fair value of the

2018

Executive PSUs and the

2018

Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock price of

$110.00,

expected term of

2.6

years, expected volatility of

27.5%

and risk-free interest rate of

2.3%.

2017

PSUs:

February 2017,

the Compensation Committee granted

200,000

PSUs to the executive officers, which represented a target number of shares that would be earned based on the Company’s average

two

-year (

2017

and

2018

) revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association (

“2017

Executive PSUs”). The maximum number of shares that an executive officer could earn was

300%

of the target number of the

2017

Executive PSUs. In

February 2019,

the Compensation Committee approved the revenue achievement for the

2017

Executive PSUs and a total of

521,000

shares were earned by the executive officers.

50%

of the

2017

Executive PSUs vested in the

first

quarter of

2019.

The remaining

2017

Executive PSUs vest over the following

two

years on a quarterly basis. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2017

Executive PSUs is

$31.5

million.

February 2017,

the Compensation Committee granted

48,000

PSUs to certain non-executive employees, which represented a target number of shares that would be earned based on the Company’s

2018

revenue goals for certain regions or product line divisions, or based on the Company’s average

two

-year (

2017

and

2018

) revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association (

“2017

Non-Executive PSUs”). The maximum number of shares that an employee could earn was either

200%

300%

of the target number of the

2017

Non-Executive PSUs, depending on the job classification of the employee. In

February 2019,

the Compensation Committee approved the revenue achievement for the

2017

Non-Executive PSUs and a total of

101,000

shares were earned by the employees.

50%

of the

2017

Non-Executive PSUs vested in the

first

quarter of

2019.

The remaining

2017

Non-Executive PSUs vest over the following

two

years on an annual or quarterly basis. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2017

Non-Executive PSUs, excluding cancelled shares for the terminated employees, is

$6.1

million.

The

2017

Executive PSUs and the

2017

Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company

$30

per share upon vesting of the shares. Shares that do

not

vest will

not

be subject to the purchase price payment. The Company determined the grant date fair value of the

2017

Executive PSUs and the

2017

Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock price of

$89.37,

expected term of

2.6

years, expected volatility of

28.6%

and risk-free interest rate of

1.3%.

2016

PSUs:

February 2016,

the Compensation Committee granted

285,000

PSUs to the executive officers, and in

July 2016,

the Compensation Committee granted

12,000

PSUs to the Company’s new Chief Financial Officer, which represented a target number of shares that would be earned based on the Company’s average

two

-year (

2016

and

2017

) revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association (

“2016

Executive PSUs”). The maximum number of shares that an executive officer could earn was

300%

of the target number of the

2016

Executive PSUs. In

February 2018,

the Compensation Committee approved the revenue achievement for the

2016

Executive PSUs and a total of

651,000

shares were earned by the executive officers.

50%

of the

2016

Executive PSUs vested in the

first

quarter of

2018.

The remaining

2016

Executive PSUs vest over the following

two

years on a quarterly basis. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2016

Executive PSUs, excluding cancelled shares for the Company’s former Chief Financial Officer, is

$26.1

million.

February 2016,

the Compensation Committee granted

64,000

PSUs to certain non-executive employees, which represented a target number of shares that would be earned based on the Company’s

2017

revenue goals for certain regions or product line divisions, or based on the Company’s average

two

-year (

2016

and

2017

) revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association (

“2016

Non-Executive PSUs”). The maximum number of shares that an employee could earn was either

200%

300%

of the target number of the

2016

Non-Executive PSUs, depending on the job classification of the employee. In

February 2018,

the Compensation Committee approved the revenue achievement for the

2016

Non-Executive PSUs and a total of

128,000

shares were earned by the employees.

50%

of the

2016

Non-Executive PSUs vested in the

first

quarter of

2018.

The remaining

2016

Non-Executive PSUs vest over the following

two

years on an annual or quarterly basis. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2016

Non-Executive PSUs, excluding cancelled shares for the terminated employees, is

$5.1

million.

The

2016

Executive PSUs and the

2016

Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company

$20

per share upon vesting of the shares. Shares that do

not

vest will

not

be subject to the purchase price payment. The Company determined the grant date fair value of the

2016

Executive PSUs and the

2016

Non-Executive PSUs granted in

February 2016

using the Black-Scholes model with the following assumptions: stock price of

$58.98,

expected term of

2.6

years, expected volatility of

31.1%

and risk-free interest rate of

0.9%.

For the

2016

Executive PSUs granted in

July 2016,

the Company used the following assumptions: stock price of

$70.98,

expected term of

2.3

years, expected volatility of

29.6%

and risk-free interest rate of

0.7%.

2015

PSUs:

February 2015,

the Compensation Committee granted

172,000

PSUs to the executive officers, which represented a target number of shares that would be earned based on the Company’s average

two

-year (

2015

and

2016

) revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association (

“2015

Executive PSUs”). The maximum number of shares that an executive officer could earn was

300%

of the target number of the

2015

Executive PSUs. In

February 2017,

the Compensation Committee approved the revenue achievement for the

2015

Executive PSUs and a total of

432,000

shares were earned by the executive officers.

50%

of the

2015

Executive PSUs vested in the

first

quarter of

2017.

The remaining

2015

Executive PSUs vest over the following

two

years on a quarterly basis. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2015

Executive PSUs, excluding cancelled shares for the Company’s former Chief Financial Officer, is

$21.0

million.

February 2015,

the Compensation Committee granted

58,000

PSUs to certain non-executive employees, which represented a target number of shares that would be earned based on the Company’s

2016

revenue goals for certain regions or product line divisions, or based on the Company’s average

two

-year (

2015

and

2016

) revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association (

“2015

Non-Executive PSUs”). The maximum number of shares that an employee could earn was either

200%

300%

of the target number of the

2015

Non-Executive PSUs, depending on the job classification of the employee. In

February 2017,

the Compensation Committee approved the revenue achievement for the

2015

Non-Executive PSUs and a total of

118,000

shares were earned by the employees.

50%

of the

2015

Non-Executive PSUs vested in the

first

quarter of

2017.

The remaining

2015

Non-Executive PSUs vest over the following

two

years on an annual or quarterly basis. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2015

Non-Executive PSUs, excluding cancelled shares for the terminated employees, is

$5.7

million.

2015

MPSUs:

December 2015,

the Compensation Committee granted

86,000

MPSUs to the executive officers and

41,000

MPSUs to certain non-executive employees, which represent a target number of shares to be earned upon achievement of both market conditions and performance conditions (

“2015

MPSUs”). The maximum number of shares that an employee can earn is

500%

of the target number of the

2015

MPSUs. The

2015

MPSUs consist of

four

separate tranches with various performance periods all ending on

December 31, 2019.

The

first

tranche contains market conditions only, which require the achievement of

five

stock price targets ranging from

$71.36

$95.57

with a performance period from

January 1, 2016

December 31, 2019.

The second,

third

and

fourth

tranches contain both market and performance conditions. The

five

stock price targets for the

second

tranche range from

$89.56

$106.81

with a performance period from

January 1, 2017

December 31, 2019.

The

five

stock price targets for the

third

tranche range from

$120.80

$135.48

with a performance period from

January 1, 2018

December 31, 2019.

The

five

stock price targets for the

fourth

tranche range from

$126.08

$136.79

with a performance period from

January 1, 2019

December 31, 2019.

In addition, each of the second,

third

and

fourth

tranches requires the achievement of

one

of following

six

operating metrics:

	1.	Successful implementation of full digital solutions for certain power products.
	2.	Successful implementation, and adoption by a key customer, of an integrated, software-based field-oriented control with sensors to motor drivers.
	3.	Successful implementation of certain advanced power analog processes.
	4.	Successful design wins and achievement of a specific level of revenue with a global networking customer.
	5.	Achievement of a specific level of revenue with a global electronics manufacturer.
	6.	Achievement of a specific level of market share with certain core power products.

The following table summarize the status of the market and performance conditions:

Tranche	Market Conditions	Performance Conditions
One	All stock price targets have been achieved as of September 30, 2017.	Not required.
Two	All stock price targets have been achieved as of December 31, 2017.	Operating metric #1 has been achieved as of December 31, 2018.
Three	All stock price targets have been achieved as of September 30, 2018.	Operating metric #2 has been achieved as of December 31, 2018.
Four	No stock price targets have been achieved as of December 31, 2018.	No operating metric has been achieved as of December 31, 2018.

A total of

394,000

shares have been earned by the employees as of

December 31, 2018.

The

2015

MPSUs will vest on

January 1, 2020,

with post-vesting sales restrictions on the vested shares for up to an additional

two

years.

The Company determined the grant date fair value of the

2015

MPSUs using a Monte Carlo simulation model with the following weighted-average assumptions: stock price of

$61.35,

expected volatility of

33.2%,

risk-free interest rate of

1.3%,

and an illiquidity discount of

7.8%

to account for the post-vesting sales restrictions. Assuming the achievement of all of the required market and performance goals, the total stock-based compensation cost for the

2015

MPSUs, excluding cancelled shares for the terminated employees, is

$24.6

million (

$8.3

million for the

first

tranche,

$4.5

million for the

second

tranche,

$5.2

million for the

third

tranche, and

$6.6

million for the

fourth

tranche).

For the

first

tranche which contains market conditions only, stock-based compensation expense is being recognized over the requisite service period. For the second,

third

and

fourth

tranches, stock-based compensation expense for each tranche is recognized if an operating metric has been achieved, or if management believes it is probable that an operating metric will be achieved during the performance periods. As of

December 31, 2018,

two

operating metrics have been achieved, and based on management’s quarterly assessment,

one

additional operating metric was considered probable of being achieved during the performance period. Accordingly, stock-based compensation expense is being recognized for the second,

third

and

fourth

tranches over the requisite service period.

MSUs

2018

MSUs:

October 2018,

the Compensation Committee granted

60,000

MSUs to the executive officers and

60,000

MSUs to certain non-executive employees, which represent a target number of shares to be earned upon achievement of stock price targets (

“2018

MSUs”). The maximum number of shares that an employee can earn is

500%

of the target number of the

2018

MSUs if the Company achieves

five

stock price targets ranging from

$140

$172.

The performance period for the

first

two

stock price targets is from

October 26, 2018

December 31, 2021,

and the performance period for the last

three

price targets is from

October 26, 2018

December 31, 2023.

As of

December 31, 2018,

none

of the stock price targets has been met. If the stock price targets are achieved during the performance periods, the

2018

MSUs will vest on

January 1, 2024,

with post-vesting sales restrictions on the vested shares for up to an additional

two

years. The total stock-based compensation cost for the

2018

MSUs is

$41.1

million.

The Company determined the grant date fair value of the

2018

MSUs using a Monte Carlo simulation model with the following assumptions: stock price of

$108.43,

expected volatility of

31.6%,

a risk-free interest rate of

3.0%,

and an illiquidity discount of

8.7%

to account for the post-vesting sales restrictions.

2013

MSUs:

December 2013,

the Compensation Committee granted

276,000

MSUs to the executive officers and

84,000

MSUs to certain non-executive employees, which represented a target number of shares that would be earned upon achievement of stock price targets (

“2013

MSUs”). The maximum number of shares that an employee could earn was

500%

of the target number of the

2013

MSUs if the Company achieved

five

price targets ranging from

$40

$56

during a performance period from

January 1, 2014

December 31, 2018.

As of

December 31, 2015,

all stock price targets have been met and the employees earned a total of

1.8

million shares. The

2013

MSUs will vest quarterly from

January 1, 2019

December 31, 2023.

The total stock-based compensation cost for the

2013

MSUs, excluding cancelled shares for the terminated employees, is

$38.2

million.

The Company determined the grant date fair value of the

2013

MSUs using a Monte Carlo simulation model with the following assumptions: stock price of

$31.73,

expected volatility of

38.7%

and a risk-free interest rate of

1.6%.

There was

illiquidity discount because the awards do

not

contain any post-vesting sales restrictions.

Stock Options

A summary of stock option activity is presented in the table below:

	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
	(in thousands)					(in years)		(in thousands)
Outstanding at January 1, 2016		90		$	17.50		1.3	$	4,134
Exercised		(76	)	$	17.80
Outstanding at December 31, 2016		14		$	15.88		1.0	$	921
Exercised		(9	)	$	16.79
Outstanding at December 31, 2017		5		$	13.89		0.4	$	465
Exercised		(5	)	$	13.89
Outstanding at December 31, 2018		-		$	-		-	$	-

Total intrinsic value of options exercised was

$0.5

million,

$0.7

million and

$3.7

million for the years ended

December 31, 2018,

2017

and

2016,

respectively. Cash proceeds from stock option exercises were

$0.1

million,

$0.1

million and

$1.3

million for the years ended

December 31, 2018,

2017

and

2016,

respectively.

Employee Stock Purchase Plan (“ESPP”)

Under the ESPP, eligible employees

may

purchase common stock through payroll deductions. Participants

may

not

purchase more than

2,000

shares in a

six

-month offering period, or purchase shares having a value greater than

$25,000

in any calendar year as measured at the beginning of the offering period in accordance with the Internal Revenue Code and applicable Treasury Regulations. The ESPP provides for an annual increase by an amount equal to the least of

1.0

million shares,

of the outstanding shares of common stock on the

first

day of the year, or a number of shares as determined by the Board of Directors. As of

December 31, 2018,

4.6

million shares were available for future issuance. The ESPP will expire in

November 2024.

For the years ended

December 31, 2018,

2017

and

2016,

33,000,

40,000

and

53,000

shares, respectively, were issued under the ESPP. The intrinsic value of the shares issued was

$1.1

million,

$1.0

million and

$1.0

million for the years ended

December 31, 2018,

2017

and

2016,

respectively. The unamortized expense as of

December 31, 2018

was

$0.1

million, which will be recognized through the

first

quarter of

2019.

The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions:

	Year Ended December 31,
	2018			2017			2016
Expected term (years)		0.5			0.5			0.5
Expected volatility		29.5	%		23.5	%		28.6	%
Risk-free interest rate		2.0	%		0.9	%		0.4	%
Dividend yield		1.0	%		0.9	%		1.2	%

Cash proceeds from the shares issued under the ESPP were

$3.0

million,

$2.7

million and

$2.5

million for the years ended

December 31, 2018,

2017

and

2016,

respectively.