Share-Based Compensation

Financial Statement Effects and Presentation. The following table summarizes pre-tax, share-based compensation included in the unaudited condensed consolidated statements of income for the three and nine months ended October 30, 2016 and October 25, 2015.



	Three Months Ended					Nine Months Ended
(in thousands)	October 30, 2016		October 25, 2015			October 30, 2016		October 25, 2015
Revenue offset	$	3,669	$	—		$	3,669	$	—
Cost of sales	360		197			1,108		1,071
Selling, general and administrative	3,965		2,933			12,001		6,006
Product development and engineering	1,401		1,987			4,420		6,320
Share-based compensation	$	9,395	$	5,117		$	21,198	$	13,397
Net change in share-based compensation capitalized into inventory	$	124	$	(233	)	$	106	$	45

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 the first nine months of fiscal year 2017 and prior years are classified as liabilities rather than equity. For grants classified as equity, share-based compensation 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, share-based compensation 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 the three and nine months ended October 30, 2016 and October 25, 2015, respectively:



	Three Months Ended		Nine Months Ended
	October 30, 2016	October 25, 2015	October 30, 2016	October 25, 2015
Expected lives, in years	4.2	4.2	4.1 - 4.5	4.2 - 4.3
Estimated volatility	32%	32%	32%	29% - 32%
Dividend yield	—	—	—	—
Risk-free interest rate	1.0%	1.3%	1.1% - 1.3%	1.24% - 1.29%
Weighted average fair value on grant date	$7.10	$4.80	$5.67	$6.09

Stock Options. The Company has historically granted stock options to both employees and non-employee directors. The fair values of these grants were measured on the grant date. The grant dates for these awards are 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 the nine months ended October 30, 2016:




(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 (in years)
Balance at January 31, 2016	1,507		$	25.18	$	962	$	3,748	775
Options granted	356		20.58
Options exercised	(86	)	19.17		482
Options cancelled/forfeited	(95	)	22.10
Balance at October 30, 2016	1,682		$	24.69	$	3,419	$	3,796	902
Exercisable at October 30, 2016	902		$	26.30	$	873				2.3

Performance-Based Restricted Stock 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 net revenue and non-GAAP 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 582,032 shares and an additional 582,032 shares would be settled in cash. The Company would have a liability accrued under “Other liabilities” within the condensed consolidated balance sheets equal to the value of 582,032 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 October 30, 2016, the performance metrics associated with the outstanding awards issued in fiscal years 2017 and 2016 are expected to be met at a level which would result in a grant at 190% and 0% of target, respectively.

In the first quarter of fiscal year 2016, the Company granted performance-based vesting restricted stock units to select employees as part of the EnVerv acquisition. These awards have a performance condition in addition to a service condition. The performance metrics are determined based on a pre-defined net revenue target. In addition to the performance vesting condition, these awards have a requisite four year vesting term (which is also the requisite vesting period) whereby 25% will vest, subject to attainment of the performance condition, on each anniversary of the grant date. Under the terms of these awards, assuming the highest performance level of 100% with no cancellations due to forfeitures, the maximum number of shares that can be earned would be 24,000. At October 30, 2016, the performance metrics associated with the outstanding awards issued in fiscal year 2016 are not expected to be met which would result in none of the shares being issued.

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 the nine months ended October 30, 2016:



			Subject to Share Settlement		Subject to Cash Settlement				Weighted Average Grant Date Fair Value (per unit)		Aggregate Unrecognized Compensation		Weighted Average Period Over Which Expected to be Recognized (in years)
(in thousands, except for per unit amounts)	Total Units		Units		Units		Recorded Liability		Weighted Average Grant Date Fair Value (per unit)		Aggregate Unrecognized Compensation
Balance at January 31, 2016	384		203		181		$	237	$	26.57	$	1,925	1.5
Performance-based units granted	231		116		115				17.51
Performance-based units vested	—		—		—				—
Performance-based units cancelled/forfeited	(12	)	(6	)	(6	)			17.51
Change in liability							621
Balance at October 30, 2016	603		313		290		$	858	$	23.29	$	7,989	1.3

Changes in the liability associated with performance-based restricted stock units, which is recorded in “Other long-term liabilities” within the condensed consolidated balance sheets, is due to changes in proportionate vesting and estimated forfeitures, re-measurement adjustments related to changes in market value 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 table summarizes the activity for market performance restricted stock units for the nine months ended October 30, 2016:



		Weighted Average Grant Date Fair Value (per unit)		Aggregate Unrecognized Compensation		Period Over Which Expected to be Recognized (in years)
(in thousands, except for per unit amounts)	Total Units	Weighted Average Grant Date Fair Value (per unit)		Aggregate Unrecognized Compensation		Period Over Which Expected to be Recognized (in years)
Balance at January 31, 2016	220	$	15.59	$	143	0.1
Market performance units granted	—	—
Market performance units vested	—	—
Market performance units cancelled/forfeited	—	—
Balance at October 30, 2016	220	$	15.59	$	—	0.0

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 the nine months ended October 30, 2016:



(in thousands, except for per unit amounts)	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, 2016	2,032		$	23.70			$	35,692	2.4
Restricted stock units granted	1,147		21.76
Restricted stock units vested	(714	)	25.28		$	16,134
Restricted stock units forfeited	(270	)	20.77
Balance at October 30, 2016	2,195		$	22.53			$	41,348	2.6


(1)	Reflects the value of Semtech Corporation stock on the date that the restricted 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 restricted 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 the nine months ended October 30, 2016:



(in thousands, except for per unit amounts)	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, 2016	28		$	3,870	$	19.70	$	221	0.4
Restricted stock units granted	25				23.40
Restricted stock units vested	(30	)			19.65
Restricted stock units forfeited	—				—
Change in liability			502
Balance at October 30, 2016	23		$	4,372	$	23.67	$	403	0.6

As of October 30, 2016, the total number of vested but unsettled restricted stock units for non-employee directors is 173,657 units. As of October 30, 2016, $4.4 million of the liability associated with these awards is included in “Other long-term liabilities” within the condensed consolidated balance sheets.

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 the nine months ended October 30, 2016:



(in thousands, except for per unit amounts)	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 31, 2016	24		$	19.70			$	186	0.4
Restricted stock units granted	21		23.40
Restricted stock units vested	(25	)	24.16		$	616
Restricted stock units forfeited	—		—
Balance at October 30, 2016	20		$	23.67			$	312	0.6


(1)	Reflects 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 or the three or nine month periods ended October 30, 2016 and October 25, 2015.

Warrant. On October 5, 2016 the Company issued a warrant (the “Warrant”) to Comcast Cable Communications Management LLC (“Comcast”) to purchase up to 1,086,957 shares (the “Warrant Shares”) of the Company’s common stock, par value $0.01 per share, representing a total of $30.0 million worth of common stock based on the average closing price over the 10-trading day period ending October 4, 2016, at an exercise price of $0.01 per Warrant Share. The Warrant provides for net share settlement that, if elected by Comcast, will reduce the number of Warrant Shares issued upon exercise to reflect net settlement of the exercise price. Comcast may also request cash settlement of the Warrant upon exercise in lieu of the issuance of Warrant Shares; however, such cash settlement is at the sole and absolute discretion of the Company. The Warrant vested 10% on its issuance, and the remainder vests based on the achievement during the subsequent 30-month period (“Milestone Period”) by Comcast (or its designee) of certain milestones related to the deployment of a LoRaWAN™-based network in cities around the country. The number of Warrant Shares are subject to customary adjustment provisions for stock split, reclassification, reorganization, consolidation, merger, and similar transactions. The Warrant has a term of seven years from October 5, 2016.

The Warrant was issued by the Company to Comcast in connection with an agreement between the parties regarding the intended trial deployment by Comcast of a low-power wide-area Network (LPWAN) in the United States, based on the Company’s LoRa® Wireless Radio Frequency Technology.

The Warrant is accounted for as equity. The cost of the Warrant is recognized as an offset to net sales over the respective performance period. The Warrant consists of five performance tranches. The cost associated with each tranche is recognized based on the fair value at each reporting date until vesting which is the measurement date.

The following table summarizes the underlying Warrant Shares issued to Comcast for the nine months ended October 30, 2016:



(in thousands, except for per Warrant Share amounts)	Number of Warrant Shares		Weighted Average Grant Date Fair Value (per Warrant Share)		Aggregate Intrinsic Value (1)		Aggregate Unrecognized Expense
Balance at January 31, 2016	—		$	—	—		$	—
Warrant shares granted	1,087		27.74
Warrant shares vested	(109	)	27.74		$	3,015
Change in value	—		—				23,674
Balance at October 30, 2016	978		$	27.74			$	23,674


(1)	Reflects the value of Semtech Corporation Warrant Shares on the date the Warrant Shares vested.

Given the nominal exercise price of the Warrant Shares, the Company valued the awards using the closing price of the Company’s stock on the measurement date for shares that have vested and the fair value on the condensed consolidated balance sheets date for the other shares. As of October 30, 2016, no part of the Warrant has been exercised, and the Warrant has an estimated life of seven years.