Stock-Based Compensation

3 Months Ended

May 01, 2011

Stock-Based Compensation

Stock-Based Compensation

Note 5: Stock-Based Compensation

Financial Statement Effects and Presentation . The following table shows total pre-tax, stock-based compensation expense included in the consolidated condensed statements of operations for the three month periods ended May 1, 2011 and May 2, 2010, respectively.

Allocation of Stock-based Compensation

(in thousands)	Three Months Ended
	May 1, 2011			May 2, 2010
Cost of sales	$	279		$	526
Selling, general and administrative		5,618			5,604
Product development and engineering		1,590			2,170
Stock-based compensation, pre-tax	$	7,487		$	8,300
Net change in stock-based compensation capitalized into inventory	$	(84	)	$	(150	)

Share-based Payment Arrangements. The Company has various equity award plans (the "Plans") that provide for granting stock-based awards to employees and non-employee directors of the Company. The Plans provide for the granting of several forms of stock-based compensation. As of May 1, 2011, the Company has granted stock options ("Options") and restricted stock under the Plans and has also issued stock-based compensation outside of the Plans, including Options and restricted stock issued as inducements to join the Company.

Grant Date Fair Values and Underlying Assumptions; Contractual Terms. The Company uses the Black-Scholes pricing model to value Options. For awards classified as equity, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as an expense over the employee's or director's requisite service period. For awards classified as liabilities, stock-based compensation cost is measured at fair value at each reporting date until the date of settlement, and is recognized as an expense over the employee or director's requisite service period. Expected volatilities are based on historical volatility using daily and monthly stock price observations.

	Three Months Ended
	May 1, 2011			May 2, 2010
Expected lives, in years		4.4			5.0
Estimated volatility		40	%		40	%
Dividend yield		—			—
Risk-free interest rate		1.8	%		2.3	%

The estimated fair value of restricted stock was calculated based on the market price of the Company's common stock on the date of grant. Some of the restricted stock awarded in fiscal year 2012 and prior years are classified as liabilities rather than equity. For awards classified as liabilities, the value of these awards was re-measured on May 1, 2011.

Stock Option Awards. The Company has historically granted stock option awards to both employees and non-employee directors. The grant date for these awards is equal to the measurement date. These awards were valued as of the measurement date and are amortized over the requisite vesting period (typically 3-4 years). A summary of the activity for stock option awards during the first quarter of fiscal year 2012 is presented below:

Information regarding outstanding stock option awards

(in thousands, except per share amounts)
	Shares			Weighted average exercise price (per  share)		Weighted average grant date fair value (per share)		Aggregate intrinsic value		Aggregate unrecognized compensation		Number of shares exercisable		Weighted average contractual term (years)
Outstanding as of January 30, 2011		6,622		$	16.84			$	35,492	$	7,067		5,160
Granted		212			23.33	$	8.21
Exercised		(1,108	)		17.05
Cancelled/forfeited		(55	)		23.51
Outstanding as of May 1, 2011		5,671		$	16.98			$	63,189	$	7,729		4,293
Exercisable as of May 1, 2011		4,293		$	17.09			$	47,452						2.76

Restricted Stock. The Company has not granted any restricted stock to employees since fiscal year 2009. The grant date for these awards is equal to the measurement date. These awards are valued as of the measurement date and recognized as compensation expense over the requisite vesting period (typically 3-4 years). A summary of the activity for restricted stock awards for the first quarter of fiscal year 2012 is presented below:

(in thousands, except for per share amounts)
	Number of Shares			Weighted Average Grant Date Fair Value (per share)		Aggregate Intrinsic Value (1)		Aggregate Unrecognized Compensation		Weighted Average Period Over Which Expected to be Recognized (in years)
January 30, 2011		135		$	14.44			$	984		0.8
Granted		—
Vested		(60	)		13.15	$	1,426
Forfeited		(5	)		15.78
May 1, 2011		70		$	15.45			$	671		0.6

(1) Represents the value of Semtech stock on the date that the restricted stock vested.

Performance Unit Awards. The Company grants performance vested RSU's to select employees. These awards have a performance condition in addition to a service condition. The performance condition generally relates to the Company's revenue and operating income measured against internal goals. Under the terms of these awards, assuming the highest level of performance with no cancellations due to forfeitures, the maximum number of shares that can be earned in the aggregate is 960,400. In this scenario, the maximum number of shares that could be issued thereunder would be 527,700 and the Company would have a liability accrued in the Consolidated Balance Sheet equal to the value of 432,700 shares on the settlement date, which would be settled in cash. At May 1, 2011, the performance metrics associated with the awards issued in fiscal years 2012, 2011 and 2010 are expected to be met at a level which would result in a grant at 100%, 200% and 200% of target, respectfully. The following table summarizes performance unit award activity during the first quarter of fiscal year 2012:

(in thousands, except for per share amount)																Weighted Average Period Over Which Expected to be Recognized (in years)
				Subject to Share Settlement			Subject to Cash Settlement					Weighted Average Grant Date Fair Value (per share)		Aggregate Unrecognized Compensation
	Total Units			Units			Units			Recorded Liability
January 30, 2011		556			326			230		$	3,924.9	$	14.26	$	7,971		1.0
Granted		117			59			58					23.33
Vested		(123	)		(62	)		(61	)				13.15
Cancelled/forfeited		(22	)		(11	)		(11	)				13.15
Change in liability											286.9
May 1, 2011		528			312			216		$	4,211.8	$	16.57	$	10,695		1.5

Stock Unit Awards, Employees. The Company issues stock unit awards to employees which are expected to be settled with stock. The grant date for these awards is equal to the measurement date. These awards are valued as of the measurement date and amortized over the requisite vesting period (typically 4 years). The following table summarizes stock unit award activity for the first quarter of fiscal year 2012:

(in thousands, except per share price)										Weighted Average Period Over Which Expected to be Recognized (in years)
	Number of Units			Weighted Average Grant Date Fair Value (per unit)		Aggregate Intrinsic Value (1)		Aggregate Unrecognized Compensation
January 30, 2011		2,058		$	16.70			$	29,763		2.7
Granted		259			23.33
Vested		(150	)		15.03	$	3,506
Forfeited		(29	)		17.59
May 1, 2011		2,138		$	17.61			$	33,229		2.6

(1) Reflects the value of Semtech stock on the date that the stock unit vested.

Stock Unit Awards, Non-Employee Directors. The Company grants stock unit awards to non-employee directors. These RSUs are accounted for as liabilities and accrued in the consolidated balance sheets because they are cash settled. The value of these awards is re-measured at each reporting period until settlement, which typically occurs upon the director's separation from service. Vested awards and the pro-rata vested portion of unvested awards are recognized as a liability. These awards vest after one year of service. The following table summarizes stock unit award activity for the first quarter of fiscal year 2012:

(in thousands, except per share price)					Weighted Average Grant Date Fair Value (per unit)		Aggregate Unrecognized Compensation		Period Over Which  Expected to be Recognized (in years)
	Number of Units		Recorded Liability
January 30, 2011		30	$	2,413.5	$	16.43	$	269		0.4
Granted		—
Vested		—
Forfeited		—
Change in Liability				910.9
May 1, 2011		30	$	3,324.4	$	16.43	$	140		0.2