STOCK-BASED COMPENSATION

2014

Equity Incentive Plan (the

“2014

Plan”)

The Board of Directors adopted the

2014

Plan in

April

2013,

and the stockholders approved it in

June

2013.

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

March

31,

2017,

3.2

million shares remained available for future issuance under the

2014

Plan.

Stock-Based Compensation Expense

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

	Three Months Ended March 31,
	2017		2016
Cost of revenue	$	358	$	434
Research and development		3,498		3,698
Selling, general and administrative		7,806		4,847
Total	$	11,662	$	8,979

In the

first

quarter of

2016,

the Company’s then Chief Financial Officer retired. As the service or performance conditions for her outstanding 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 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, 2017		366		$	51.35		2,284		$	43.24		1,620	$	23.57		4,270		$	36.47
Granted		47		$	89.37		527	(1)	$	62.86		-	$	-		574		$	65.02
Released		(61	)	$	46.83		(360	)	$	43.71		-	$	-		(421	)	$	44.16
Forfeited		(5	)	$	60.85		(3	)	$	52.30		-	$	-		(8	)	$	57.51
Outstanding at March 31, 2017		347		$	57.12		2,448		$	47.38		1,620	$	23.57		4,415		$	39.41

(1)	Amount reflects the number of PSUs and MPSUs that may ultimately be earned based on management’s probability assessment of the performance conditions at each reporting period. In addition, MPSUs are subject to the achievement of market conditions.

The intrinsic value related to awards released was

$37.4

million and

$29.1

million for the

three

months ended

March

31,

2017

and

2016,

respectively. As of

March

31,

2017,

the total intrinsic value of all outstanding awards was

$373.3

million, based on the closing stock price of

$92.10.

As of

March

31,

2017,

unamortized compensation expense related to all outstanding awards was approximately

$110.1

million with a weighted-average remaining recognition period of approximately

four

years.

Time-Based RSUs:

For the

three

months ended

March

31,

2017,

the Board of Directors granted

47,000

RSUs with service conditions to non-executive employees and non-employee directors. The RSUs generally vest over

four

years for employees and

one

year for directors, subject to continued employment with the Company.

2017

PSUs:

February

2017,

the Board of Directors granted

200,000

PSUs to the executive officers, which represent a target number of shares to be awarded based on the Company’s average

two

-year

(2017

and

2018)

revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association

(“2017

Executive PSUs”). The maximum number of shares that an executive officer can earn is

300%

of the target number of the

2017

Executive PSUs.

50%

of the

2017

Executive PSUs will vest in the

first

quarter of

2019

if the pre-determined performance goals are met during the performance period and approved by the Board of Directors. The remaining

2017

Executive PSUs will vest over the following

two

years on a 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

2017

Executive PSUs is approximately

$36.3

million.

February

2017,

the Board of Directors granted

48,000

PSUs to certain non-executive employees, which represent a target number of shares to be awarded based on the Company’s

2018

revenue goals for certain regions or product line divisions, or the Company’s average

two

-year

(2017

and

2018)

revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association

(“2017

Non-Executive PSUs”). The maximum number of shares that an employee can earn is either

200%

300%

of the target number of the

2017

Non-Executive PSUs, depending on the job classification of the employee.

50%

of the

2017

Non-Executive PSUs will vest in the

first

quarter of

2019

if the pre-determined performance goals are met during the performance period and approved by the Board of Directors. The remaining

2017

Non-Executive PSUs 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

2017

Non-Executive PSUs is approximately

$7.2

million.

The

2017

Executive PSUs and the

2017

Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company

$30

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

2017

Executive PSUs and the

2017

Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock price of

$89.37,

expected term of

2.6

years, expected volatility of

28.6%

and risk-free interest rate of

1.3%.

2015

MPSUs:

December

31,

2015,

the Board of Directors granted

127,000

MPSUs to the executive officers and certain key employees, which represent a target number of shares to be awarded upon achievement of both market conditions and performance conditions

(“2015

MPSUs”). The maximum number of shares that an employee can earn is

500%

of the target number of the

2015

MPSUs. 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

$95.57

with a performance period from

January

2016

December

31,

2019.

The

second,

third

and

fourth

tranches contain both market conditions and performance conditions. Each tranche requires the achievement of

five

MPS stock price targets measured against a base price equal to the greater of:

(1)

the average closing stock price during the

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. The MPS stock price targets for the

second

tranche range from

$89.56

$106.81

with a performance period from

January

2017

December

31,

2019.

The stock price targets for the

third

tranche will be determined on

December

31,

2017

with a performance period from

January

2018

December

31,

2019.

The stock price targets for the

fourth

tranche will be determined on

December

31,

2018

with a performance period from

January

2019

December

31,

2019.

In addition, each of the

second,

third

and

fourth

tranches requires the achievement of

one

of following

six

operating metrics:

Successful implementation of full digital solutions vs. current analog topology for certain products.

Successful implementation, and adoption by a key player, of an integrated, software-based field-oriented-control

with sensors to motor drivers.

Successful implementation of certain advanced power analog processes.

Successful design wins and achievement of a specific level of revenue with a global networking customer.

Achievement of a specific level of revenue with a global electronics manufacturer.

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

2020

if the pre-determined individual market and performance goals in each tranche are met during the performance periods and approved by the Board of Directors. In addition, the

2015

MPSUs contain post-vesting sales restrictions on 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

2015

MPSUs as a result of the departure of its then Chief Financial Officer. Assuming the achievement of all of the required market and 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 recognized over the requisite service period even if the market conditions are not satisfied. For the

second,

third

and

fourth

tranches, stock-based compensation expense for each tranche is recognized depending upon the number of the operating metrics management deems probable of being achieved in each reporting period. As of

March

31,

2017,

based on management’s assessment,

three

of the

six

operating metrics were considered probable of being achieved during the performance periods. Accordingly, stock-based compensation expense is being recognized for the

second,

third

and

fourth

tranches over the requisite service period.

Stock Options

options were granted for the

three

months ended

March

31,

2017

and

2016.

Total intrinsic value of options exercised was

$0.3

million and

$1.1

million for the

three

months ended

March

31,

2017

and

2016,

respectively. The net cash proceeds from the exercise of stock options were

$0.1

million and

$0.5

million for the

three

months ended

March

31,

2017

and

2016,

respectively. As of

March

31,

2017,

there was

unamortized compensation expense and outstanding options were not material.

Employee Stock Purchase Plan (“ESPP”)

For the

three

months ended

March

31,

2017

and

2016,

22,000

and

29,000

shares, respectively, were issued under the ESPP. As of

March

31,

2017,

4.6

million shares were available for future issuance.

The intrinsic value of shares issued was

$0.5

million and

$0.4

million for the

three

months ended

March

31,

2017

and

2016,

respectively. As of

March

31,

2017,

the unamortized expense was

$0.3

million, which will be recognized through the

third

quarter of

2017.

The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions:

	Three Months Ended March 31,
	2017			2016
Expected term (years)		0.5			0.5
Expected volatility		23.4	%		29.7	%
Risk-free interest rate		0.7	%		0.4	%
Dividend yield		0.9	%		1.4	%

Cash proceeds from the shares issued under the ESPP were

$1.4

million and

$1.3

million for the

three

months ended

March

31,

2017

and

2016,

respectively.