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 Income for the three months ended April 29, 2012 and May 1, 2011.


(in thousands)	Three Months Ended
	April 29,		May 1,
	2012		2011
Cost of sales	$	231	$	279
Selling, general and administrative		3,224		5,618
Product development and engineering		1,871		1,590

Stock-based compensation, pre-tax	$	5,326	$	7,487

Net change in stock-based compensation capitalized into inventory	$	66	$	(84	)

Share-based Payment Arrangements. The Company has various equity award 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 available forms of stock compensation. As of April 29, 2012, the Company has granted options and restricted stock under the plans and has also issued some 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 date 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 months ended April 29, 2012 and May 1, 2011:


	Three Months Ended
	April 29, 2012			May 1, 2011
Expected lives, in years		4.4			4.4
Estimated volatility		41	%		40	%
Dividend yield		—			—
Risk-free interest rate		0.7	%		1.8	%
Weighted average fair value on grant date	$	10.06		$	8.21

The estimated fair value of restricted stock awards was calculated based on the market price of the Company's common stock on the date of grant. Some of the restricted stock units awarded in fiscal year 2013 and prior years are classified as liabilities rather than equity. For awards classified as liabilities, the value of these awards was re-measured on April 29, 2012.

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 three months of fiscal year 2013 is presented below:


	Number of 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 29, 2012		3,690		$	16.94	$	44,435	$	4,699		2,767
Options granted		161			29.35
Options exercised		(240	)		17.05
Options cancelled/forfeited		(34	)		26.47

Balance at April 29, 2012		3,577		$	17.39	$	35,803	$	5,324		2,709

Exercisable at April 29, 2012		2,709		$	16.23	$	30,011						2.4

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 three months of fiscal year 2013:

(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 29, 2012		32		$	14.57			$	81		0.1
Restricted stocks granted		—
Restricted stocks vested		(22	)		13.15	$	646
Restricted stocks cancelled		—

Balance at April 29, 2012		10		$	17.63			$	8		0.0

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

Performance Units. The Company grants performance vested restricted stock units 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 710,400. In this scenario, the maximum number of shares that could be issued thereunder would be 360,200 and the Company would have a liability accrued in the Unaudited Consolidated Condensed Balance Sheet equal to the value of 350,200 shares on the settlement date, which would be settled in cash. At April 29, 2012, the performance metrics associated with the awards issued in fiscal years 2013, 2012 and 2011 are expected to be met at a level which would result in a grant at 100%, 100%, and 200% of target, respectively. The following table summarizes the activity for performance units for the first three months of fiscal year 2013:

(in thousands, except for per share amount)


				Subject to Share Settlement			Subject to Cash Settlement						Weighted Average Grant Date		Aggregate		Weighted Average Period Over Which Expected
	Total Units			Units			Units			Recorded Liability			Fair Value (per share)		Unrecognized Compensation		to be Recognized (in years)
Balance at January 29, 2012		360			180			180		$	6,034		$	16.65	$	4,829		1.0
Performance units granted		144			77			67						29.30
Performance units vested		(144	)		(72	)		(72	)					11.92
Performance units cancelled/forfeited		—			—			—
Change in liability											(3,621	)

Balance at April 29, 2012		360			185			175		$	2,413		$	23.62	$	7,788		1.9

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 stock unit award activity for the first three months of fiscal year 2013:

(in thousands, except per share 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 29, 2012		1,982		$	19.06			$	31,472		2.4
Stock units granted		782			28.64
Stock units vested		(188	)		17.97	$	5,403
Stock units forfeited		(42	)		20.86

Balance at April 29, 2012		2,534		$	22.07			$	49,229		2.7

(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 restricted stock units 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 three months of fiscal year 2013:

(in thousands, except per share 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 29, 2012		18	$	3,873		$	27.60	$	216		0.4
Stock units granted		—
Stock units vested		—
Stock units forfeited		—
Change in liability				(104	)

Balance at April 29, 2012		18	$	3,769		$	27.60	$	300		0.2

As of April 29, 2012, the number of vested but unsettled stock units for Non-Employee Directors is 29,820, 30,282, 35,476, 27,825 in fiscal year 2012, 2011, 2010, and 2009, respectively.