Stock-Based Compensation

Financial Statement Effects and Presentation. The following table shows total pre-tax, stock-based compensation expense included in the consolidated statements of income for fiscal years 2013, 2012 and 2011.



	Fiscal Year Ended
(in thousands)	January 27, 2013			January 29, 2012			January 30, 2011
Cost of sales	$	1,218		$	983		$	1,802
Selling, general and administrative	14,965			15,839			19,310
Product development and engineering	8,345			7,198			7,898
Stock-based compensation, pre-tax	$	24,528		$	24,020		$	29,010
Net change in stock-based compensation capitalized into inventory	$	(33	)	$	(83	)	$	(116	)

The below table summarizes the net impact of stock-based compensation, after tax, on net income for fiscal years 2013, 2012 and 2011.



	Fiscal Year Ended
(in thousands)	January 27, 2013			January 29, 2012			January 30, 2011
Stock-based compensation	$	24,528		$	24,020		$	29,010
Associated tax effect	(5,120		)	(5,693		)	(9,170		)
Net effect on net income	$	19,408		$	18,327		$	19,840

The tax benefit realized from option exercise activity for fiscal years 2013, 2012 and 2011 was $14.3 million, $12.9 million and $7.1 million, respectively.

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 January 27, 2013, 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 fiscal years 2013, 2012 and 2011:



	Fiscal Year Ended
	January 27, 2013	January 29, 2012	January 30, 2011
Expected lives, in years	4.4 - 4.6	4.4 - 4.7	4.3 - 5.1
Estimated volatility	38% - 41%	40% - 41%	39% - 40%
Dividend yield	—	—	—
Risk-free interest rate	0.66% - 0.73%	0.71% - 1.8%	1.2% - 2.3%
Weighted average fair value on grant date	$9.52	$8.43	$6.56

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 for fiscal years 2013, 2012 and 2011 is presented below:




(in thousands, except for per share amounts)	Number of Shares		Weighted Average Exercise Price (per share)		Aggregate Intrinsic Value (1)		Aggregate Unrecognized Compensation		Number of Shares Exercisable	Weighted Average Contractual Term (years)
Balance at January 31, 2010	9,151		$	16.44	$	8,998	$	9,436	6,302
Options granted	403		17.61
Options exercised	(2,329	)	14.22		11,495
Options cancelled/forfeited	(603	)	21.35
Balance at January 30, 2011	6,622		16.84		35,492		7,067		5,160
Options granted	343		24.05
Options exercised	(2,781	)	16.64		22,537
Options cancelled/forfeited	(494	)	22.30
Balance at January 29, 2012	3,690		16.94		44,435		4,699		2,767
Options granted	258		28.21
Options exercised	(1,254	)	15.70		14,508
Options cancelled/forfeited	(115	)	25.30
Balance at January 27, 2013	2,579		$	18.29	$	29,789	$	3,817	1,937
Exercisable at January 27, 2013	1,937		$	16.51	$	25,822				2.1
Vested and expected to vest after January 27, 2013	2,495		$	18.10	$	29,293				2.6


(1)	Represents the difference between the exercise price and the value of the Company’s stock at the time of exercise, for exercised grants. For outstanding awards, represents the difference between the exercise price and the value of the Company’s stock at fiscal year end.

The following table summarizes information about stock options outstanding at January 27, 2013.



(number of shares in thousands)	Number of Shares	Weighted Average Exercise Price (per share)		Weighted Average Contractual Term (years)
Price Range Analysis - Outstanding
$1.15 - $4.53	9	$	2.52	4.3
$7.79 - $13.15	247	11.59		2.1
$13.76 - $20.90	1,671	16.58		2.1
$21.02 - $29.68	652	25.43		4.4
Total outstanding	2,579	$	18.29	2.7
Price Range Analysis - Exercisable
$1.15 - $4.53	9	$	2.52	4.3
$7.79 - $13.15	241	11.62		2.0
$13.76 - $20.90	1,494	16.52		2.0
$21.02 - $29.68	193	23.18		2.8
Total exercisable	1,937	$	16.51	2.1

The following table summarizes information regarding unvested stock option awards at January 27, 2013:



(in thousands, except for per share amounts)	Number of Shares		Weighted Average Exercise Price (per share)		Weighted Average Grant Date Fair Value (per share)		Weighted Average Remaining Expense Period (years)	Total Fair Value
Balance at January 31, 2010	2,849		$	13.31	$	7.48	1.9	$	21,311
Options granted	403		17.61		6.56			2,644
Options vested	(1,575	)	13.07		8.26			13,006
Options forfeited	(215	)	11.57		8.56			1,845
Balance at January 30, 2011	1,462		15.00		6.23		1.9	$	9,103
Options granted	343		24.05		8.43			2,893
Options vested	(650	)	14.30		6.33			4,115
Options forfeited	(231	)	16.59		6.39			1,479
Balance at January 29, 2012	924		18.47		6.99		1.8	$	6,452
Options granted	258		28.21		9.52			2,457
Options vested	(484	)	16.42		6.49			3,144
Options forfeited	(56	)	21.69		7.74			432
Balance at January 27, 2013	642		$	23.66	$	8.31	1.9	$	5,333

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 fiscal years 2013, 2012 and 2011:



(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 31, 2010	418		$	15.15			$	3,193	1.2
Restricted stocks granted	—
Restricted stocks vested	(270	)	17.33		$	4,678
Restricted stocks cancelled	(13	)	17.44
Balance at January 30, 2011	135		14.44				984		0.8
Restricted stocks granted	—
Restricted stocks vested	(91	)	14.29		2,201
Restricted stocks cancelled	(12	)	15.25
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 January 27, 2013	—		$	—			$	—	—


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

Performance Units. The Company grants performance-based vesting 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 consolidated 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 January 27, 2013, 85% of the units from the fiscal year 2009 grant vested and 200% of the units from the fiscal year 2010 grant are expected to vest. At January 27, 2013, 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 during fiscal years 2013, 2012 and 2011:



			Subject to Share Settlement		Subject to Cash Settlement					Weighted Average Grant Date		Aggregate		Period Over Which Expected
(in thousands, except for per share amounts)	Total Units		Units		Units		Recorded Liability			Fair Value (per share)		Unrecognized Compensation		to be Recognized (in years)
Balance at January 31, 2010	593		363		230		$	259		$	14.29	$	580	1.3
Performance units granted	143		72		71					16.68
Performance units vested	—		—		—		—			—
Performance units cancelled/forfeited	(180	)	(109	)	(71	)				16.28
Change in liability							3,666			—
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	(218	)	(157	)	(61	)	(1,335		)	14.74
Performance units cancelled/forfeited	(95	)	(48	)	(47	)				15.26
Change in liability							3,444
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	)	(4,172		)	11.92
Performance units cancelled/forfeited	(7	)	(4	)	(3	)				29.35
Change in liability							2,560
Balance at January 27, 2013	353		181		172		$	4,422		$	23.50	$	4,754	1.1

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 fiscal years 2013, 2012 and 2011:



(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 31, 2010	1,410		$	15.72			$	17,713	3.4
Stock units granted	1,181		17.62
Stock units vested	(404	)	19.20		$	7,749
Stock units forfeited	(129	)	19.50
Balance at January 30, 2011	2,058		16.70				29,763		2.7
Stock units granted	810		22.74
Stock units vested	(627	)	16.61		14,333
Stock units forfeited	(259	)	17.75
Balance at January 29, 2012	1,982		19.06				31,472		2.4
Stock units granted	1,517		26.73
Stock units vested	(699	)	18.20		$	18,438
Stock units forfeited	(242	)	23.65
Balance at January 27, 2013	2,558		$	23.41			$	49,374	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 restricted stock units are accounted for as liabilities and accrued in the consolidated 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. The following table summarizes the activity for stock unit awards for fiscal years 2013, 2012 and 2011:




(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 31, 2010	35		$	1,389	$	16.18	$	232	0.4
Stock units granted	30				16.43
Stock units vested	(35	)			16.18
Stock units forfeited	—
Change in liability			1,025
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			1,459
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			684
Balance at January 27, 2013	20		$	4,557	$	24.46	$	253	0.4

As of January 27, 2013, the total number of vested but unsettled stock units for Non-Employee Directors is 141,155 units which are included in the recorded liability.