2. STOCK-BASED COMPENSATION

Stock Plan

The Board of Directors adopted the 2014 Equity Incentive Plan (the “2014 Plan”) in April 2013, and the stockholders approved it in June 2013. In October 2014, the Board of Directors approved certain amendments to the 2014 Plan. The 2014 Plan became effective on November 13, 2014 and provides for the issuance of up to 5.5 million shares. The 2014 Plan will expire on November 13, 2024. As of June 30, 2016, 3.9 million shares remained available for future issuance.

Stock-Based Compensation Expense

The Company recognized stock-based compensation expenses as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Cost of revenue	$	380	$	284	$	814	$	526
Research and development		3,318		2,503		7,016		5,123
Selling, general and administrative		8,049		6,710		12,896		13,067
Total	$	11,747	$	9,497	$	20,726	$	18,716

In the first quarter of 2016, the Company’s then Chief Financial Officer retired. As the service or performance conditions for certain of her unvested restricted stock units (“RSUs”) had not been satisfied at the time of her departure, the Company reversed previously accrued stock-based compensation expenses of approximately $2.9 million associated with the unvested shares and recorded the one-time credit in selling, general and administrative expenses for the three months ended March 31, 2016.

RSUs

The Company’s RSUs include time-based RSUs, RSUs with performance conditions (“PSUs”), RSUs with market and performance conditions (“MPSUs”), and RSUs with market conditions (“MSUs”). Vesting of all awards requires continued service for the Company. In addition, vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performance goals. A summary of RSU activity is presented in the table below (in thousands, except per-share amounts):

	Time-Based RSUs			Weighted- Average Grant Date Fair Value Per Share		PSUs and MPSUs			Weighted- Average Grant Date Fair Value Per Share		MSUs			Weighted- Average Grant Date Fair Value Per Share		Total			Weighted- Average Grant Date Fair Value Per Share
Outstanding at January 1, 2016		499		$	40.75		1,933		$	38.99		1,800		$	23.57		4,232		$	32.64
Granted		116		$	61.45		1,253	(1)	$	40.77		-		$	-		1,369		$	42.52
Performance adjustment		-		$	-		(234	) (2)	$	41.14		-		$	-		(234	)	$	41.14
Released		(142	)	$	33.69		(563	)	$	30.07		-		$	-		(705	)	$	30.80
Forfeited		(18	)	$	42.92		(129	)	$	36.82		(180	)	$	23.57		(327	)	$	029.87
Outstanding at June 30, 2016		455		$	48.18		2,260		$	42.10		1,620		$	23.57		4,335		$	35.81

(1)	Amount reflects the maximum number of PSUs and MPSUs that can be earned assuming the achievement of the highest level of performance conditions.

(2)	Amount reflects the adjustment to the number of PSUs and MPSUs that have not been earned or may not be earned based on management’s probability assessment at each reporting period.

The intrinsic value related to awards released for the three months ended June 30, 2016 and 2015 was $13.5 million and $8.4 million, respectively. The intrinsic value related to awards released for the six months ended June 30, 2016 and 2015 was $42.6 million and $33.9 million, respectively. As of June 30, 2016, the total intrinsic value of all outstanding awards was $296.1 million, based on the closing stock price of $68.32. As of June 30, 2016, unamortized compensation expense related to all outstanding awards was approximately $105.8 million with a weighted-average remaining recognition period of approximately four years.

2016 Time-Based RSUs:

For the six months ended June 30, 2016, the Board of Directors granted 116,000 shares with service conditions to employees and non-employee directors. The RSUs vest over one year for non-employee directors and four years for employees, subject to continued employment with the Company.

2016 PSUs:

In February 2016, the Board of Directors granted 285,000 shares to the executive officers, which represent a target number of RSUs to be awarded based on the Company’s average two-year (2016 and 2017) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as determined by the Semiconductor Industry Association (“2016 Executive PSUs”). The maximum number of 2016 Executive PSUs that an executive officer can earn is 300% of the target shares. 50% of the 2016 Executive PSUs will vest in the first quarter of 2018 if the pre-determined performance goals are met during the performance period and approved by the Compensation Committee. The remaining shares will vest over the following two years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. In March 2016, the Company cancelled 32,000 shares granted in February 2016 as a result of the departure of its then Chief Financial Officer. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2016 Executive PSUs is approximately $30.0 million.

In February 2016, the Board of Directors granted 64,000 shares to certain non-executive employees, which represent a target number of RSUs to be awarded based on the Company’s 2017 revenue goals for certain regions or product line divisions, or the Company’s average two-year (2016 and 2017) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as determined by the Semiconductor Industry Association (“2016 Non-Executive PSUs”). The maximum number of 2016 Non-Executive PSUs that an employee can earn is either 200% or 300% of the target shares, depending on the job classification of the employee. 50% of the 2016 Non-Executive PSUs will vest in the first quarter of 2018 if the pre-determined performance goals are met during the performance period and approved by the Compensation Committee. The remaining shares will vest over the following two years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2016 Non-Executive PSUs is approximately $6.2 million.

The 2016 Executive PSUs and the 2016 Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $20 per share upon vesting of the shares. Shares that do not vest will not be subject to the purchase price payment. The Company determined the grant date fair value of the 2016 Executive PSUs and the 2016 Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock price of $58.98, expected term of 2.6 years, expected volatility of 31.1% and risk-free interest rate of 0.9%.

2015 MPSUs:

On December 31, 2015, the Board of Directors granted 127,000 shares to the executive officers and certain key employees, which represent a target number of RSUs to be awarded upon achievement of both market conditions and performance conditions (“2015 MPSUs”). The maximum number of 2015 MPSUs that an employee can earn is 500% of the target shares. The 2015 MPSUs consist of four separate tranches with various performance periods ending on December 31, 2019. The first tranche contains market conditions only, which require the achievement of five MPS stock price targets ranging from $71.36 to $95.57 over a four-year period. The second, third and fourth tranches contain both market conditions and performance conditions. Each tranche requires the achievement of five MPS stock price targets to be measured against a base price equal to the greater of: (1) the average closing stock price during the 20 consecutive trading days immediately before the start of the measurement period for that tranche, or (2) the closing stock price immediately before the start of the measurement period for that tranche. In addition, each of the second, third and fourth tranches requires the achievement of one of following six operating metrics:

	1.	Successful implementation of full digital solutions vs. current analog topology for certain products.
	2.	Successful implementation and adoption by a key player of an integrated, software-based, field-oriented-control with 3D hall sensor to motor driver.
	3.	Successful implementation of certain advanced power analog processes.
	4.	Successful design wins and achievement of a specific level of revenue with a global networking customer.
	5.	Achievement of a specific level of revenue with a global electronics manufacturer.
	6.	Achievement of a specific level of market share with certain core power products.

Subject to the employees’ continued employment with the Company, the 2015 MPSUs will fully vest on January 1, 2020 if the pre-determined individual market and performance goals in each tranche are met during the performance periods and approved by the Compensation Committee. In addition, the 2015 MPSUs contain post-vesting restrictions on sales of the vested shares by employees for up to two years.

The Company determined the grant date fair value of the 2015 MPSUs using a Monte Carlo simulation model with the following weighted-average assumptions: stock price of $61.35, expected volatility of 33.2%, risk-free interest rate of 1.3%, and an illiquidity discount of 7.8% to account for the post-vesting sales restrictions. In March 2016, the Company cancelled 13,000 shares of the 2015 MPSUs as a result of the departure of its then Chief Financial Officer. Assuming the achievement of all of the required performance goals, the total stock-based compensation cost for the 2015 MPSUs is approximately $24.6 million to be recognized as follows: $8.3 million for the first tranche, $4.5 million for the second tranche, $5.2 million for the third tranche, and $6.6 million for the fourth tranche.

For the first tranche, stock-based compensation expense is being recognized over four years even if the market conditions are not satisfied. For the second, third and fourth tranches, stock-based compensation expense for each tranche will be recognized depending upon the number of the operating metrics management deems probable of achievement in each reporting period. As of March 31, 2016 and June 30, 2016, based on management’s assessment, two of the six operating metrics were considered probable of being achieved during the performance period. Accordingly, stock-based compensation expense is being recognized for the second and third tranches over four years.

Stock Options

As of June 30, 2016, outstanding and vested options totaled 34,000 shares, with a weighted-average exercise price of $15.68, a weighted-average remaining contractual term of 1.5 years, and an aggregate intrinsic value of $1.8 million.

Total intrinsic value of options exercised was $1.4 million and $12.9 million for the three months ended June 30, 2016 and 2015, respectively. Total intrinsic value of options exercised was $2.5 million and $15.4 million for the six months ended June 30, 2016 and 2015, respectively. The net cash proceeds from the exercise of stock options were $1.0 million and $6.7 million for the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, there was no unamortized compensation expense.

Employee Stock Purchase Plan (“ESPP”)

No shares were issued under the ESPP for the three months ended June 30, 2016 and 2015.

For the six months ended June 30, 2016 and 2015, 29,000 and 30,000 shares, respectively, were issued under the ESPP. As of June 30, 2016, 4.7 million shares were available for future issuance.

The intrinsic value of shares issued was $0.4 million for both the six months ended June 30, 2016 and 2015. As of June 30, 2016, the unamortized expense was $0.1 million, which will be recognized through the third quarter of 2016. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions:

	Six Months Ended June 30,
	2016			2015
Expected term (years)		0.5			0.5
Expected volatility		29.7	%		35.7	%
Risk-free interest rate		0.4	%		0.1	%
Dividend yield		1.4	%		1.2	%

Cash proceeds from the shares issued under the ESPP were $1.3 million and $1.1 million for the six months ended June 30, 2016 and 2015, respectively.