Stock-Based Compensation

Financial Statement Effects and Presentation. The following table shows total stock-based compensation expense included in the consolidated statements of operations for fiscal years 2015, 2014 and 2013:



	Fiscal Year Ended
(in thousands)	January 25, 2015		January 26, 2014		January 27, 2013
Cost of sales	$	1,621	$	1,664	$	1,218
Selling, general and administrative	17,387		12,071		14,965
Product development and engineering	10,621		10,854		8,345
Stock-based compensation, pre-tax	$	29,629	$	24,589	$	24,528
Net change in stock-based compensation capitalized out of (into) inventory	$	111	$	36	$	(33	)

The tax benefit realized from option exercise activity for fiscal years 2015, 2014 and 2013 was $0.0 million, $12.8 million and $0.0 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 25, 2015, 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 2015, 2014 and 2013:



	Fiscal Year Ended
	January 25, 2015	January 26, 2014	January 27, 2013
Expected lives, in years	3.0 - 4.4	4.1 - 4.7	4.4 - 4.6
Estimated volatility	33% - 40%	30% - 35%	38% - 41%
Dividend yield	—	—	—
Risk-free interest rate	0.74% - 1.47%	0.65% - 1.6%	0.66% - 0.73%
Weighted average fair value on grant date	$7.18	$8.92	$9.52

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 2015 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 2015, 2014 and 2013 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 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
Options granted	376		30.62
Options exercised	(970	)	16.61		16,052
Options cancelled/forfeited	(50	)	26.10
Balance at January 26, 2014	1,935		21.33		7,722		4,354		1,275
Options granted	426		24.87
Options exercised	(554	)	16.04		5,446
Options cancelled/forfeited	(44	)	26.69
Balance at January 25, 2015	1,763		$	23.70	$	7,722	$	4,688	986
Exercisable at January 26, 2015	986		$	21.03	$	6,582				2.3
Vested and expected to vest after January 26, 2015	1,670		$	23.60	$	7,498				3.3


(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 25, 2015:



(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	4	$	4.04	2.6
$7.97 - $13.76	24	10.57		1.0
$15.54 - $23.33	697	18.42		1.8
$23.56 - $35.17	1,037	27.63		4.6
Total outstanding	1,762	$	23.70	3.5
Price Range Analysis - Exercisable
$1.15 - $4.53	4	$	4.04	2.6
$7.97 - $13.76	24	10.57		1.0
$15.54 - $23.33	679	18.31		1.8
$23.56 - $35.17	279	28.80		3.7
Total exercisable	986	$	21.03	2.3

The following table summarizes information regarding unvested stock option awards at January 25, 2015:



(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 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
Options granted	376		30.62		8.92			3,355
Options vested	(310	)	21.58		7.77			2,406
Options forfeited	(48	)	26.16		8.53			422
Balance at January 26, 2014	660		28.39		8.88		2.3	5,856
Options granted	426		24.87		7.18			3,058
Options vested	(275	)	27.03		8.77			2,414
Options forfeited	(35	)	26.32		8.02			283
Balance at January 25, 2015	776		$	27.09	$	8.01	2.4	$	6,217

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 year 2013 (there was no activity in fiscal years 2015 and 2014):



(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 January 27, 2013	—		$	—			$	—	0


(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 854,064. In this scenario, the maximum number of shares that could be issued thereunder would be 427,032 and the Company would have a liability accrued in the consolidated balance sheet equal to the value of 427,032 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 25, 2015, 0% of the units from the fiscal year 2013 grant vested and were cancelled in fiscal 2015. At January 25, 2015, the performance metrics associated with the outstanding awards issued in fiscal years 2015 and 2014, are expected to be met at a level which would result in vesting at 95% and 75% of target, respectively.

The following table summarizes the activity for performance units during fiscal years 2015, 2014 and 2013:



			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 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
Performance units granted	186		93		93					30.82
Performance units vested	(114	)	(57	)	(57	)	—			16.68
Performance units cancelled/forfeited	(49	)	(25	)	(24	)				28.82
Change in liability							(3,117		)
Balance at January 26, 2014	376		192		184		1,305			28.50		3,893		1.3
Performance units granted	256		128		128					24.74
Performance units vested	(93	)	(52	)	(41	)	—			23.83
Performance units cancelled/forfeited	(113	)	(57	)	(56	)				28.76
Change in liability							586
Balance at January 25, 2015	426		211		215		$	1,891		$	27.17	$	6,164	1.6

The liability associated with performance units increased by $0.6 million in fiscal year 2015 due to continued employee service partially offset by vesting in the first quarter of fiscal year 2014, forfeitures, re-measurement adjustments and change in the expected performance results.

Market Performance Restricted Stock Units. On February 26, 2014, the Company granted its CEO restricted stock units with a market performance condition. The award is eligible to vest during the period commencing February 26, 2014 and ending February 26, 2019 (the “Performance Period”) as follows: 30% of the restricted stock units covered by the award will vest if, during any consecutive 120 calendar day period that commences and ends during the Performance Period, the average per-share closing price of the Company’s common stock equals or exceeds $35.00 (“Tranche 1”) and the award will vest in full if, during any consecutive 120 calendar day period that commences and ends during the Performance Period, the average per-share closing price of the Company’s common stock equals or exceeds $40.00 (“Tranche 2”). The award will also vest if a majority change in control of the Company occurs during the Performance Period and, in connection with such event, the Company’s stockholders become entitled to receive per-share consideration having a value equal to or greater than $40.00.

The following tables summarize the assumptions used in the Monte Carlo simulation model to determine the fair value of restricted stock units granted in fiscal year 2015 for both Tranche 1 and Tranche 2.

Tranche 1:



	For the fiscal year ended January 25, 2015
Expected life, in years	1.6
Estimated volatility	34		%
Dividend yield	—		%
Risk-free interest rate	1.5		%
Weighted average fair value on grant date	$	17.26

Tranche 2:



	For the fiscal year ended January 25, 2015
Expected life, in years	2.1
Estimated volatility	34		%
Dividend yield	—		%
Risk-free interest rate	1.5		%
Weighted average fair value on grant date	$	14.88

The following table summarizes the activity for the market performance restricted stock units for the fiscal year ended January 25, 2015:



(in thousands, except for per share amounts)	Total Units	Weighted Average Grant Date Fair Value (per unit)		Aggregate Unrecognized Compensation		Weighted Average Period Over Which Expected to be Recognized (in years)
Balance at January 26, 2014	—	$	—	$	—	0.0
Market performance units granted	220	15.59
Market performance units vested	—	—
Market performance units cancelled/forfeited	—	—
Balance at January 25, 2015	220	$	15.59	$	—	1.2

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 2015, 2014 and 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	1,517		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
Stock units granted	891		30.95
Stock units vested	(1,026	)	21.34		31,861
Stock units forfeited	(228	)	25.81
Balance at January 26, 2014	2,195		27.18				49,563		2.5
Stock units granted	929		23.90
Stock units vested	(752	)	25.55		$	18,237
Stock units forfeited	(234	)	26.29
Balance at January 25, 2015	2,138		$	26.43			$	44,506	2.4


(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 2015, 2014 and 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			684
Balance at January 27, 2013	20		4,557			24.46		253		0.4
Stock units granted	18					35.17
Stock units vested	(20	)				24.46
Stock units forfeited	—
Change in liability			(576		)
Balance at January 26, 2014	18		3,981			35.17		177		0.4
Stock units granted	24					26.59
Stock units vested	(18	)				35.17
Stock units forfeited	—
Change in liability			1,233
Balance at January 25, 2015	24		$	5,214		$	26.59	$	275	0.4

As of January 25, 2015, the total number of vested but unsettled stock units for Non-Employee Directors is 179,092 units which are included in the recorded liability.

Modification of Awards

On December 19, 2014, the Company modified the equity awards of certain executive officers by providing for the acceleration of vesting upon termination of their employment in certain circumstances in connection with a change in control of the Company. This modification impacted the stock awards of 12 executive employees and resulted in no incremental compensation cost for the fiscal year ended January 25, 2015.