Note 5: Stock-Based Compensation

Financial Statement Effects and Presentation . The following table shows total pre-tax, stock-based compensation expense included in the unaudited consolidated condensed statements of operations for the three and nine months ended October 30, 2011 and October 31, 2010.


	Three Months Ended				Nine Months Ended
(in thousands)	October 30, 2011		October 31, 2010		October 30, 2011			October 31, 2010
Cost of sales	$	238	$	305	$	712		$	1,477
Selling, general and administrative		2,757		5,206		11,041			15,512
Product development and engineering		2,046		1,908		5,396			5,936

Stock-based compensation, pre-tax	$	5,041	$	7,419	$	17,149		$	22,925


Net change in stock-based compensation capitalized into inventory	$	34	$	20	$	(8	)	$	(70	)

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 October 30, 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 the end of each reporting period until the date of settlement, and is recognized as an expense over the employee's or director's requisite service period. Expected volatilities are based on historical volatility using daily and monthly stock price observations.

The following table summarizes the assumptions used in the Black-Scholes model to determine the fair value of options granted in the three and nine months ended October 30, 2011 and October 31, 2010:


	Three Months Ended		Nine Months Ended
	October 30, 2011	October 31, 2010	October 30, 2011	October 31, 2010
Expected lives, in years	4.4	4.3	4.4 - 4.7	4.3 - 5.0
Estimated volatility	41%	40%	40% - 41%	40%
Dividend yield	—	—	—	—
Risk-free interest rate	0.8%	1.2%	0.8% - 1.8%	1.2% - 2.3%
Weighted average fair value on grant date	$7.13	$5.73	$8.46	$6.30

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 October 30, 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 nine months of fiscal year 2012 is presented below:


(in thousands, except per share amounts)	Shares			Weighted average exercise price (per share)		Aggregate intrinsic value		Aggregate unrecognized compensation		Number of shares exercisable		Weighted average contractual term (years)
Balance at January 30, 2011		6,622		$	16.84	$	35,492	$	7,067		5,160
Options granted		273			23.93
Options exercised		(2,266	)		16.92
Options cancelled/forfeited		(443	)		21.51

Balance at October 30, 2011		4,186		$	16.77	$	36,499	$	5,011		3,248


Exercisable as of October 30, 2011		3,248		$	16.50	$	29,246						2.46

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). The following table summarizes the activity for restricted stock awards for the first nine months of fiscal year 2012:


(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)
Balance at January 30, 2011		135		$	14.44			$	984		0.8
Restricted stock vested		(76	)		13.99	$	1,853
Restricted stock forfeited		(12	)		15.25

Balance at October 30, 2011		47		$	14.99			$	209		0.3

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

Performance Units. The Company grants performance vested RSUs 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 814,400. In this scenario, the maximum number of shares that could be issued thereunder would be 454,700 and the Company would have a liability accrued in the unaudited consolidated condensed balance sheet equal to the value of 359,700 shares on the settlement date, which would be settled in cash. At October 30, 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 the activity for performance units for the first nine months of fiscal year 2012:


				Subject to Share Settlement			Subject to Cash Settlement					Weighted Average Grant Date Fair Value (per share)		Aggregate Unrecognized Compensation		Weighted Average Period Over Which Expected to be Recognized (in years)
(in thousands, except for per unit amount)	Total Units			Units			Units			Recorded Liability		Weighted Average Grant Date Fair Value (per share)		Aggregate Unrecognized Compensation
Balance at January 30, 2011		556			326			230			3,925	$	14.26	$	7,971		1.0
Performance units granted		117			59			58					23.33
Performance units vested		(123	)		(62	)		(61	)				13.15
Performance units cancelled/forfeited		(95	)		(48	)		(47	)				15.26
Change in liability											577

Balance at October 30, 2011		455			275			180			4,502	$	16.69	$	5,799		1.0

Stock Units, 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 the activity for stock unit awards for the first nine months of fiscal year 2012:


(in thousands, except per unit amount)	Number of Units			Weighted Average Grant Date Fair Value (per unit)		Aggregate Intrinsic Value (1)		Aggregate Unrecognized Compensation		Weighted Average Period Over Which Expected to be Recognized (in years)
Balance at January 30, 2011		2,058		$	16.70			$	29,763		2.7
Stock units granted		692			22.56
Stock units vested		(452	)		16.30	$	10,280
Stock units forfeited		(245	)		17.68

Balance at October 30, 2011		2,053		$	18.64			$	32,158		2.5

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

Stock Units, Non-Employee Directors. The Company grants stock unit awards to non-employee directors. These RSUs are accounted for as liabilities and accrued in the unaudited consolidated condensed balance sheets because they are cash settled. The value of these awards is re-measured at the end of 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 are vested after one year of service. The following table summarizes the activity for stock unit awards for the first nine months of fiscal year 2012:


(in thousands, except per unit amount)	Number of Units			Recorded Liability		Weighted Average Grant Date Fair Value (per unit)		Aggregate Unrecognized Compensation		Period Over Which Expected to be Recognized (in years)
Balance at January 30, 2011		30		$	2,414	$	16.43	$	269		0.4
Stock units granted		18				$	27.60
Stock units vested		(30	)			$	16.43
Stock units forfeited		—
Change in liability					860

Balance at October 30, 2011		18		$	3,274	$	27.60	$	300		0.7