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 and nine months ended October 28, 2012 and October 30, 2011.



(in thousands)	Three Months Ended				Nine Months Ended
	October 28, 2012		October 30, 2011		October 28, 2012		October 30, 2011
Cost of sales	$	313	$	238	$	841	$	712
Selling, general and administrative	3,970		2,757		9,852		11,041
Product development and engineering	2,199		2,046		6,034		5,396
Stock-based compensation, pre-tax	$	6,482	$	5,041	$	16,727	$	17,149
Net change in stock-based compensation capitalized into inventory	$	63	$	34	$	79	$	(8	)

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 October 28, 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 and nine months ended October 28, 2012 and October 30, 2011:



	Three Months Ended		Nine Months Ended
	October 28, 2012	October 30, 2011	October 28, 2012	October 30, 2011
Expected lives, in years	4.5	4.4	4.4 - 4.6	4.4 - 4.7
Estimated volatility	40%	41%	40% - 41%	40% - 41%
Dividend yield	—	—	—	—
Risk-free interest rate	0.7%	0.8%	0.7%	0.8% - 1.8%
Weighted average fair value on grant date	$8.50	$7.13	$9.64	$8.46

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 is re-measured at the end of each quarter.

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 2013 is presented below:



(in thousands, except for per share amounts)
	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	213		28.17
Options exercised	(660	)	15.35
Options cancelled/forfeited	(110	)	25.68
Balance at October 28, 2012	3,133		$	17.73	$	23,410	$	4,044	2,475
Exercisable at October 28, 2012	2,475		$	16.39	$	21,175				2.2

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 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	(32	)	$	14.57	$	902
Restricted stocks cancelled	—
Balance at October 28, 2012	—		$	—			$	—


(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 696,400. In this scenario, the maximum number of shares that could be issued thereunder would be 353,200 and the Company would have a liability accrued in the Unaudited Consolidated Condensed Balance Sheet equal to the value of 343,200 shares on the settlement date, which would be settled in cash. Only cash performance unit awards are classified as liabilities and the value of these awards is re-measured at each reporting date. At October 28, 2012, the performance metrics associated with the outstanding 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%, 108%, and 200% of target, respectively.

The following table summarizes the activity for performance units for the first nine months of fiscal year 2013:



(in thousands, except for per share amounts)			Subject to Share Settlement		Subject to Cash Settlement					Weighted Average Grant Date		Aggregate		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	(7	)	(4	)	(3	)				29.35
Change in liability							(2,833		)
Balance at October 28, 2012	353		181		172		$	3,201		$	23.50	$	5,396	1.4

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 nine 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	1,393		26.98
Stock units vested	(543	)	26.35		$	14,297
Stock units forfeited	(205	)	23.47
Balance at October 28, 2012	2,627		$	23.09			$	52,053	2.6


(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. These awards are vested after 1 year of service. However, because these awards are not typically settled until a non-employee director's separation from service, the value of these awards is re-measured at the end of each reporting period until settlement. Vested awards and the pro-rata vested portion of unvested awards are recognized as a liability. The following table summarizes the activity for stock unit awards for the first nine 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	20					24.46
Stock units vested	(18	)				27.60
Stock units forfeited	—
Change in liability			(190		)
Balance at October 28, 2012	20		$	3,683		$	24.46	$	336	0.7

As of October 28, 2012, the total number of vested but unsettled stock units for Non-Employee Directors is 141,155 units.