Stock-Based Compensation

Financial Statement Effects and Presentation. The following table summarizes pre-tax, stock-based compensation expense included in the unaudited condensed consolidated statements of operations captions for fiscal years 2016, 2015 and 2014:



	Fiscal Year Ended
(in thousands)	January 31, 2016			January 25, 2015		January 26, 2014
Cost of sales	$	1,555		$	1,621	$	1,664
Selling, general and administrative	10,055			17,387		12,071
Product development and engineering	8,858			10,621		10,854
Stock-based compensation	$	20,468		$	29,629	$	24,589
Net change in stock-based compensation capitalized into inventory	$	(98	)	$	111	$	36

The tax benefit realized from option exercise activity for fiscal years 2016, 2015 and 2014 was $5.9 million, $0.0 million and $12.8 million, respectively.

Grant Date Fair Values and Underlying Assumptions: Contractual Terms

The Company uses the Black-Scholes pricing model to value stock options. The estimated fair value of restricted stock units, for which vesting is not linked to a market condition, is calculated based on the market price of the Company’s common stock on the date of grant. For restricted stock units that vest according to a market condition, the Company uses a Monte Carlo simulation model to value the award.

Some of the restricted stock units granted in fiscal year 2016 and prior years are classified as liabilities rather than equity. For grants classified as equity, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the grantee’s requisite service period. For grants 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 grantee’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 stock options granted in fiscal years 2016, 2015 and 2014:



	Fiscal Year Ended
	January 31, 2016	January 25, 2015	January 26, 2014
Expected lives, in years	4.2 - 4.3	3.0 - 4.4	4.1 - 4.7
Estimated volatility	29% - 32%	33% - 40%	30% - 35%
Dividend yield	—	—	—
Risk-free interest rate	1.24% - 1.49%	0.74% - 1.47%	0.65% - 1.6%
Weighted average fair value on grant date	$6.08	$7.18	$8.92

Stock Option Awards. The Company has historically granted stock option awards to both employees and non-employee directors. The fair value of these grants was measured on the grant date. The grant date for these awards is equal to the measurement date. These awards are valued as of the measurement date and recognized as an expense over the requisite vesting period (typically 3-4 years).

The following table summarizes the activity for stock options for fiscal years 2016, 2015 and 2014:



(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 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
Options granted	364		22.74
Options exercised	(359	)	16.34		1,851
Options cancelled/forfeited	(261	)	23.94
Balance at January 31, 2016	1,507		$	25.18	$	962	$	3,748	775
Exercisable at February 1, 2017	775		$	25.49	$	444				2.3
Vested and expected to vest after February 1, 2016	1,435		$	25.31	$	876				3.4


(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 31, 2016:



(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	3	$	4.50	1.6
$7.97 - $13.76	2	11.19		4.0
$15.92 - $24.46	597	20.41		3.4
$24.74 - $35.17	905	28.44		3.5
Total outstanding	1,507	$	25.18	3.5
Price Range Analysis - Exercisable
$1.15 - $4.53	3	$	4.50	1.6
$7.97 - $13.76	2	11.19		4.0
$15.92 - $24.46	316	21.18		1.7
$24.74 - $35.17	454	28.73		2.8
Total exercisable	775	$	25.49	2.3

The following table summarizes information regarding unvested stock option awards at January 31, 2016:



(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 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
Options granted	364		22.74		6.08			2,210
Options vested	(309	)	27.64		8.08			2,494
Options forfeited	(102	)	25.90		7.34			748
Balance at January 31, 2016	729		$	24.84	$	7.00	2.2	$	5,110

Performance-Based Units. The Company grants performance-based restricted stock units to select employees. These awards have a performance condition in addition to a service condition. The performance metrics are determined based on a pre-defined cumulative three-year performance of the Company’s revenue and operating income measured against internal goals. The performance award which is granted in any fiscal year will be tied to the Company’s performance of that fiscal year and the succeeding two fiscal years. The performance award recipients must be employed for the entire three-year period, which is the explicit service and requisite service period, and be an active employee at the time of vesting of the awards (cliff vesting at the end of the third year). Under the terms of these awards, assuming the highest performance level of 200% with no cancellations due to forfeitures, the maximum number of shares that can be earned would be 363,032 shares and an additional 363,032 shares would be settled in cash. The Company would have a liability accrued under “Other liabilities” within the condensed consolidated balance sheet equal to the value of 363,032 shares on the settlement date, which would be settled in cash. Only cash performance-based restricted stock unit awards are classified as liabilities and the value of these awards is re-measured at each reporting date. At January 31, 2016, the performance metrics associated with the outstanding awards issued in fiscal years 2016 and 2015 are expected to be met at a level which would result in a grant at 58% and 0% of target, respectively. The awards for fiscal year 2014 did not meet the required performance level and were cancelled.

The performance-based restricted stock units are valued as of the measurement date and expense is recognized on a straight line basis for the awards expected to vest based on the probability of attainment of the performance condition for each separately vesting portion of the award.

The following table summarizes the activity for performance-based restricted stock units for fiscal years 2016, 2015 and 2014:



			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 27, 2013	353		181		172		$	4,422		$	23.50	$	4,757	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
Performance units granted	235		145		90					28.60
Performance units vested	—		—		—		—			—
Performance units cancelled/forfeited	(275	)	(153	)	(124	)				29.11
Change in liability			—				(1,654		)
Balance at January 31, 2016	386		203		181		$	237		$	26.57	$	1,925	1.5

The liability associated with performance units decreased by $1.7 million in fiscal year 2016 due to the cancellation of the awards from fiscal year 2014, forfeitures, re-measurement adjustments and changes 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 fair value of the awards was determined to be $17.26 and $14.88 for Tranche 1 and Tranche 2, respectively, on the grant date by application of the Monte Carlo simulation model.

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 31, 2016:



(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 25, 2015	220	$	15.59	$	—	1.2
Market performance units granted	—	—
Market performance units vested	—	—
Market performance units cancelled/forfeited	—	—
Balance at January 31, 2016	220	$	15.59	$	143	0.1

Restricted Stock Units, Employees. The Company grants restricted stock units 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 recognized as an expense over the requisite vesting period (typically 4 years).

The following table summarizes the employees' restricted stock unit activity for fiscal years 2016, 2015 and 2014:



(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 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		27.81				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
Stock units granted	1,032		20.79
Stock units vested	(736	)	26.48		$	16,175
Stock units forfeited	(402	)	25.65
Balance at January 31, 2016	2,032		$	23.70			$	35,692	2.4


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

Restricted Stock Units, Cash-Settled, Non-Employee Directors. The Company maintains a compensation program pursuant to which restricted stock units are granted to the Company’s directors that are not employed by the Company or any of its subsidiaries. In June 2015, the Company changed its director compensation program so that a portion of the stock units granted under the program would be settled in cash and a portion would be settled in stock. Restricted stock units awarded under the program are scheduled to vest on the earlier of (i) one year after the grant date or (ii) the day immediately preceding the annual meeting of shareholders in the year following the grant. The portion of a restricted stock unit award under the program that is to be settled in cash will, subject to vesting, be settled when the director who received the award separates from the board of directors. The portion of a restricted stock unit award under the program that is to be settled in stock will, subject to vesting, be settled promptly following vesting. There were no changes to the terms and conditions of the existing awards.

The restricted stock units that are to be settled in cash are accounted for as liabilities. 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 non-employee directors’ activity for restricted stock units settled in cash for fiscal years 2016, 2015 and 2014:



(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 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
Stock units granted	28					19.70
Stock units vested	(24	)				26.59
Stock units forfeited	—
Change in liability			(1,344		)
Balance at January 31, 2016	28		$	3,870		$	19.70	$	221	0.4

As of January 31, 2016, the total number of vested but unsettled restricted stock units for non-employee directors is 175,132. As of January 31, 2016, $3.0 million of the liability associated with these awards is included in “Other long-term liabilities” within the condensed consolidated balance sheet.

Restricted Stock Units, Stock Settled, Non-Employee Directors. As a result of the June 2015 changes to the Company’s director compensation program, beginning in July 2015, the Company began granting new restricted stock units to non-employee Directors which are expected to be settled with stock at the time of vesting. The grant date for these awards is equal to the measurement date. These awards are valued as of the measurement date and recognized as an expense over the requisite vesting period (typically one year).

The following table summarizes the non-employee directors’ activity for restricted stock units settled with stock for fiscal year 2016:



(in thousands, except per share amount)	Number of Units	Weighted Average Grant Date Fair Value (per unit)		Aggregate Intrinsic Value (1)		Aggregate Unrecognized Compensation		Period Over Which Expected to be Recognized (in years)
Balance at January 25, 2015	—	$	—			$	—	0.0
Restricted stock units granted	24	19.70
Restricted stock units vested	—	—		$	—
Restricted stock units forfeited	—	—
Balance at January 31, 2016	24	$	19.70			$	186	0.4


(1)	There was no vesting during the reported period. This value would typically represent the value of Semtech Corporation stock on the date that the restricted stock unit vested.

Modification of Awards

On December 19, 2014 and August 17, 2015, 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. These modifications impacted the stock awards of 12 executive employees and resulted in no incremental compensation cost for the fiscal year ended January 31, 2016.