STOCK-BASED COMPENSATION

2004

Equity Incentive Plan (the

“2004

Plan”)

The Board of Directors adopted the

2004

Plan in

March 2004,

and the stockholders approved it in

November 2004.

The

2004

Plan provided for annual increases in the number of shares available for issuance equal to the least of

of the outstanding shares of common stock on the

first

day of the year,

2.4

million shares, or a number of shares determined by the Board of Directors. The

2004

Plan expired on

November 12, 2014,

and equity awards can

longer be granted under the

2004

Plan. As of

November 12, 2014,

2.9

million shares that were available for issuance expired under the

2004

Plan.

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, as amended, 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

December 31, 2017,

3.2

million shares remained available for future issuance under the

2014

Plan.

Stock-Based Compensation Expense

The Company recognized s

tock-based compensation expense as follows (in thousands):

	Year Ended December 31,
	2017		2016		2015
Cost of revenue	$	1,654	$	1,575	$	1,166
Research and development		14,816		14,041		11,156
Selling, general and administrative		36,147		29,373		29,241
Total stock-based compensation expense	$	52,617	$	44,989	$	41,563
Tax benefit related to stock-based compensation	$	5,054	$	-	$	-

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

$2.9

million associated with the unvested RSUs and this credit was reflected in selling, general and administrative expenses for the year ended

December 31, 2016.

RSUs

The

Company’s RSUs include time-based RSUs, RSUs with only performance conditions (“PSUs”), RSUs with both market and performance conditions (“MPSUs”), and RSUs with only 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, 2015		589		$	28.48		1,659		$	28.11		1,800		$	23.57		4,048		$	26.14
Granted		271		$	49.82		927	(1)	$	47.61		-		$	-		1,198		$	48.11
Released		(319	)	$	26.56		(629	)	$	23.40		-		$	-		(948	)	$	24.47
Forfeited		(42	)	$	35.60		(24	)	$	28.68		-		$	-		(66	)	$	33.06
Outstanding at December 31, 2015		499		$	40.75		1,933		$	38.99		1,800		$	23.57		4,232		$	32.64
Granted		133		$	63.00		1,216	(1)	$	41.12		-		$	-		1,349		$	43.28
Released		(239	)	$	36.43		(736	)	$	29.71		-		$	-		(975	)	$	31.36
Forfeited		(27	)	$	45.35		(129	)	$	36.82		(180	)	$	23.57		(336	)	$	30.38
Outstanding at December 31, 2016		366		$	51.35		2,284		$	43.24		1,620		$	23.57		4,270		$	36.47
Granted		81		$	94.25		585	(1)	$	62.72		-		$	-		666		$	66.56
Released		(175	)	$	48.35		(597	)	$	41.94		-		$	-		(772	)	$	43.39
Forfeited		(14	)	$	61.80		(6	)	$	49.82		-		$	-		(20	)	$	58.46
Outstanding at December 31, 2017		258		$	66.30		2,266		$	48.59		1,620		$	23.57		4,144		$	39.91

_________________

(

)

Amount reflects the number of PSUs and MPSUs that

may

ultimately be earned based on management’s probability assessment of the achievement of performance conditions at each reporting period. In addition, MPSUs are subject to the achievement of market conditions.

The intrinsic

value related to RSUs released was

$74.0

million,

$62.9

million and

$49.2

million for the years ended

December 31, 2017,

2016

and

2015,

respectively. As of

December 31, 2017,

the total intrinsic value of all outstanding RSUs was

$430.6

million, based on the closing stock price of

$112.36.

As of

December 31, 2017,

unamortized compensation expense related to all outstanding RSUs was

$75.9

million with a weighted-average remaining recognition period of approximately

three

years.

Time-Based RSUs:

For the years ended Decemb

31,

2017,

2016

and

2015,

the Compensation Committee of the Board of Directors (the "Compensation Committee") granted

81,000,

133,000

and

271,000

RSUs, respectively, with time-based vesting conditions to employees and non-employee directors. The RSUs generally vest over

three

four

years for employees and

one

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

2017

PSUs:

February 2017,

the Compensation Committee 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 Compensation Committee. 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

$36.3

million.

February 2017,

the Compensation Committee 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 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

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 Compensation Committee. 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, excluding cancelled shares, is

$7.1

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%.

2016

PSUs:

February 2016,

the Compensation Committee granted

285,000

PSUs to the executive officers, which represented a target number of shares 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 published by the Semiconductor Industry Association (

“2016

Executive PSUs”). The maximum number of shares that an executive officer could earn was

300%

of the target number of the

2016

Executive PSUs.

50%

of the

2016

Executive PSUs would vest in the

first

quarter of

2018

if the pre-determined performance goals were met during the performance period and approved by the Compensation Committee. The remaining

2016

Executive PSUs would vest over the following

two

years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. In

July 2016,

the Compensation Committee granted

12,000

2016

Executive PSUs to the Company’s new Chief Financial Officer.

February 2018,

the Compensation Committee approved the revenue achievement for the

2016

ecutive PSUs and a total of

651,000

shares were earned by the executive officers. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2016

Executive PSUs, excluding cancelled shares, is

$26.1

million.

February 2016,

the Compensation Committee granted

64,000

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

2017

revenue goals for certain regions or product line divisions, or 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 published by the Semiconductor Industry Association (

“2016

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

200%

300%

of the target number of the

2016

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

50%

of the

2016

Non-Executive PSUs would vest in the

first

quarter of

2018

if the pre-determined performance goals were met during the performance period and approved by the Compensation Committee. The remaining

2016

Non-Executive PSUs would vest over the following

two

years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment with the Company.

February 2018,

the Compensation Committee approved the revenue achievement for the

2016

Non-Exe

cutive PSUs and a total of

128,000

shares were earned by the employees. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2016

Non-Executive PSUs, excluding cancelled shares, is

$5.1

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 granted in

February 2016

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%.

For the

2016

Executive PSUs granted in

July 2016,

the Company used the following assumptions: stock price of

$70.98,

expected term of

2.3

years, expected volatility of

29.6%

and risk-free interest rate of

0.7%.

2015

PSUs:

February 2015,

the Compensation Committee granted

172,000

PSUs to the executive officers, which represented a target number of shares to be awarded based on the Company

’s average

two

-year (

2015

and

2016

) revenue growth rate compared against the analog industry’s average

two

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

“2015

Executive PSUs”). The maximum number of shares that an executive officer could earn was

300%

of the target number of the

2015

Executive PSUs. In

February 2017,

the Compensation Committee approved the revenue achievement for the

2015

Executive PSUs and a total of

432,000

shares were earned by the executive officers.

50%

of the

2015

Executive PSUs vested in the

first

quarter of

2017.

The remaining

2015

Executive PSUs vest over the following

two

years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2015

Executive PSUs, excluding cancelled shares, is

$21.0

million.

February 2015,

the Compensation Committee granted

58,000

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

’s

2016

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

two

-year (

2015

and

2016

) revenue growth rate compared against the analog industry’s average

two

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

“2015

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

200%

300%

of the target number of the

2015

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

February 2017,

the Compensation Committee approved the revenue achievement for the

2015

Non-Executive PSUs and a total of

118,000

shares were earned by the non-executive employees.

50%

of the

2015

Non-Executive PSUs vested in the

first

quarter of

2017.

The remaining

2015

Non-Executive PSUs vest over the following

two

years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2015

Non-Executive PSUs, excluding cancelled shares, is

$5.7

million.

2015

SUs:

December 31, 2015,

the Compensation Committee

granted

86,000

MPSUs to the executive officers and

41,000

MPSUs to certain non-executive 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

stock price targets ranging from

$71.36

$95.57

with a performance period from

January 1, 2016

December 31, 2019.

As of

September 30, 2017,

all

five

price targets for the

first

tranche have been achieved and approved by the Compensation Committee.

The second,

third

and

fourth

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

five

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

) the average closing stock price during the

consecutive trading days immediately bef

ore the start of the performance period for that tranche, or (

) the closing stock price immediately before the start of the performance period for that tranche. The stock price targets for the

second

tranche range from

$89.56

$106.81

with a performance period from

January 1, 2017

December 31, 2019.

As of

December 31, 2017,

all

five

price targets for the

second

tranche have been achieved and approved by the Compensation Committee. The stock price targets for the

third

tranche range from

$120.80

$135.48

with a performance period from

January 1, 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 1, 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 solut

ions for certain power products.

Successful implementation, and adoption by a key customer, 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.

As of

December 31, 2017,

none

of the operating metrics have

been achieved.

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 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.

Assuming the achievement of all of the required market and performance goals, the total stock-based compensation cost for the

2015

MPSUs, excluding cancelled shares, is

$24.6

million (

$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 the requisite service period. 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 during the performance periods in each reporting period. As of

December 31, 2017,

based on management’s quarterly 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.

2014

PSUs:

February 2014,

the Compensation Committee granted

252,000

PSUs to the executive officers, which represented a target number of shares to be awarded based on the Company

’s average

two

-year (

2014

and

2015

) revenue growth rate compared against the analog industry’s average

two

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

“2014

Executive PSUs”). The maximum number of shares that an executive officer could earn was

300%

of the target number of the

2014

Executive PSUs. In

February 2016,

the Compensation Committee approved the revenue achievement for the

2014

Executive PSUs and a total of

694,000

shares were earned by the executive officers.

50%

of the

2014

Executive PSUs vested in the

first

quarter of

2016.

The remaining

2014

Executive PSUs vest over the following

two

2014

Executive PSUs, excluding cancelled shares, is

$20.7

million.

April 2014,

the Compensation Committee granted

61,000

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

’s

2015

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

two

-year (

2014

and

2015

) revenue growth rate compared against the analog industry’s average

two

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

“2014

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

200%

300%

of the target number of the

2014

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

February 2016,

the Compensation Committee approved the revenue achievement for the

2014

Non-Executive PSUs and a total of

103,000

shares were earned by the non-executive employees.

50%

of the

2014

Non-Executive PSUs vested in the

second

quarter of

2016.

The remaining

2014

Non-Executive PSUs vest over the following

two

2014

Non-Executive PSUs, excluding cancelled shares, is

$3.7

million.

In connection with the acquisition of Sensima in

July 2014,

the Compensation Committee granted

$2.0

million of P

SUs (or

47,000

shares) to key Sensima employees who became employees of the Company, with the right to earn up to

four

equal tranches totaling

$8.0

million based on the achievement of certain cumulative Sensima product revenue targets during the performance period from the acquisition date to

July 2019.

50%

of the awards subject to each revenue goal will vest immediately when the revenue goal is met during the performance period and approved by the Compensation Committee. The remaining shares will vest over the following

two

years. The vesting is subject to the employees’ continued employment with the Company. These equity awards are considered arrangements for post-acquisition services and the compensation cost for the

four

tranches is recognized over the requisite service period if it is probable that the performance goals will be met. As of

December 31, 2017,

stock-based compensation expense of

$2.0

million for the

first

tranche was being recognized over the requisite service period. Stock-based compensation expense for the other tranches was

not

being recognized as their achievement was deemed

not

probable as of

December 31, 2017.

2013

PSUs:

February 2013,

the Compensation Committee granted

220,000

PSUs to the executive officers, which represented a target number of shares to be awarded upon achievement of certain pre-determined revenue targets in

2014

(

“2013

Executive PSUs”). The maximum number of shares that an executive officer could earn was

300%

of the target number of the

2013

Executive PSUs. In

February 2015,

the Compensation Committee approved the revenue achievement for the

2013

Executive PSUs and a total of

622,000

shares were earned by the executive officers.

50%

of the

2013

Executive PSUs vested in the

first

quarter of

2015

and the remaining shares vested over the following

two

years on a quarterly basis. Vesting was subject to the employees

’ continued employment with the Company. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2013

Executive PSUs, excluding cancelled shares, was

$15.0

million.

February 2013,

the Compensation Committee granted

91,000

PSUs to certain non-executive employees, which represented a target number of shares to be awarded upon achievement of certain pre-determined revenue targets for the Company as a whole, certain regions or product-line divisions in

2014

(

“2013

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

200%

300%

of the target number of

2013

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

February 2015,

the Compensation Committee approved the revenue achievement for the

2013

Non-Executive PSUs and a total of

154,000

shares were earned by the non-executive employees.

50%

of the

2013

Non-Executive PSUs vested in the

first

quarter of

2015

and the remaining shares vested over the following

two

years on an annual or quarterly basis. Vesting was subject to the employees

’ continued employment with the Company. Based on the actual achievement of the performance goals, the total stock-based compensation cost for the

2013

Non-Executive PSUs, excluding cancelled shares, was

$3.0

million.

2013

MSUs:

December 2013,

the Compensation Committee

granted

276,000

MSUs to the executive officers and

84,000

MSUs to certain non-executive employees, which represented a target number of shares that would be awarded upon achievement of

five

stock price targets ranging from

$40.00

$56.00

during a

five

-year performance period from

January 1, 2014

December 31, 2018 (

“2013

MSUs”). The maximum number of shares that an employee could earn was

500%

of the target number of the

2013

MSUs. As of

December 31, 2015,

all

five

stock price targets have been achieved and approved by the Compensation Committee, and the employees earned a total of

1.8

million shares. The

2013

MSUs will vest quarterly from

January 1, 2019

December 31, 2023.

Vesting is subject to the employees’ continued employment with the Company.

The Company determined the grant date fair value of the

2013

MSUs using a Monte Carlo simulation model with the following assumptions: stock price of

$31.73,

expected volatility of

38.7%

and ris

k-free interest rate of

1.6%.

The total stock-based compensation cost for the

2013

MSUs, excluding cancelled shares, is

$38.2

million.

Stock Options

stock options were granted for the years ended

December 31, 2017,

2016

and

2015.

A summary of stock option activity

is presented in the table below:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
	(in thousands)					(in years)		(in thousands)
Outstanding at January 1, 2015		590		$	15.80		1.2	$	20,039
Exercised		(498	)	$	15.55
Forfeited and expired		(2	)	$	6.10
Outstanding at December 31, 2015		90		$	17.50		1.3	$	4,134
Exercised		(76	)	$	17.80
Outstanding at December 31, 2016		14		$	15.88		1.0	$	921
Exercised		(9	)	$	16.79
Outstanding at December 31, 2017		5		$	13.89		0.4	$	465
Exercisable at December 31, 2017		5		$	13.89		0.4	$	465

Total intrinsic value of options exercised was

$0.7

million,

$3.7

million and

$18.6

million for the years ended

December 31, 2017,

2016

and

2015,

respectively. Proceeds from stock option exercises were

$0.1

million,

$1.3

million and

$7.7

million for the years ended

December 31, 2017,

2016

and

2015,

respectively. At

December 31, 2017,

there was

unamortized compensation expense.

2004

Employee Stock Purchase Plan

(“ESPP”)

Under the ESPP, eligible employees

may

purchase common stock through payroll deductions. Participants

may

not

purchase more than

2,000

shares in a

six

-month offering period or stock having a value greater than

$25,000

in any calendar year as measured at the beginning of the offering period in accordance with the Internal Revenue Code and applicable Treasury Regulations.

The ESPP provides for an annual increase by an amount equal to the least of

1.0

million shares,

of the outstanding shares of common stock on the

first

day of the year, or a number of shares as determined by the Board of Directors. As of

December 31, 2017,

4.6

million shares were available for future issuance. The ESPP will expire in

November 2024.

For the years ended

December 31, 2017,

2016

and

2015,

40,000,

53,000

and

56,000

shares, respectively, were issued under the ESPP. The intrinsic value of the shares issued was

$1.0

million,

$1.0

million and

$0.6

million for the years ended

December 31, 2017,

2016

and

2015,

respectively. The unamortized expense as of

December 31, 2017

was

$92,000,

which will be recognized through the

first

quarter of

2018.

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

	Year Ended December 31,
	2017			2016			2015
Expected term (years)		0.5			0.5			0.5
Expected volatility		23.5	%		28.6	%		30.3	%
Risk-free interest rate		0.9	%		0.4	%		0.2	%
Dividend yield		0.9	%		1.2	%		1.4	%

Cash proceeds from the shares issued under the ESPP

were

$2.7

million,

$2.5

million and

$2.2

million for the years ended

December 31, 2017,

2016

and

2015,

respectively.