Note 3 - Stock-based Compensation

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Share-Based Payment Arrangement [Text Block]

3. STOCK-BASED COMPENSATION

2014 Equity Incentive Plan

In  April 2013, the Board of Directors adopted the 2014 Equity Incentive Plan (the “2014 Plan”), which the Company’s stockholders approved in  June 2013. In  October 2014, the Board of Directors approved certain amendments to the 2014 Plan. The amended 2014 Plan became effective on  November 13, 2014 and provided for the issuance of up to 5.5 million shares. In  April 2020, the Board of Directors further amended and restated the amended 2014 Plan (the “Amended and Restated 2014 Plan”), which the Company’s stockholders approved in  June 2020. The Amended and Restated 2014 Plan became effective on  June 11, 2020 and provides for the issuance of up to 10.5 million shares. The Amended and Restated 2014 Plan will expire on  June 11, 2030. As of  September 30, 2022, 5.0 million shares remained available for future issuance under the Amended and Restated 2014 Plan.  

Stock-Based Compensation Expense

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Cost of revenue	$	1,186	$	922	$	3,691	$	2,622
Research and development		9,287		6,646		26,875		19,564
Selling, general and administrative		32,524		24,004		95,157		70,096
Total stock-based compensation expense	$	42,997	$	31,572	$	125,723	$	92,282
Tax benefit related to stock-based compensation (1)	$	654	$	488	$	1,879	$	1,299

(1) Amount reflects the tax benefit related to stock-based compensation recorded for equity awards that are expected to generate tax deductions when they vest in future periods. Equity awards granted to the Company’s executive officers are subject to the tax deduction limitations set by Section 162(m) of the Internal Revenue Code.

Restricted Stock Units (“RSUs”)

The Company’s RSUs include time-based RSUs, RSUs with performance conditions (“PSUs”), RSUs with market conditions (“MSUs”), and RSUs with both market and performance conditions (“MPSUs”). Vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performance goals and the approval of such achievement by the Compensation Committee of the Board of Directors (the “Compensation Committee”). All awards include service conditions which require continued employment with the Company. A summary of RSU activity is presented in the table below (in thousands, except per-share amounts):

	Time-Based RSUs					PSUs and MPSUs					MSUs					Total
	Number of Shares			Weighted-Average Grant Date Fair Value Per Share		Number of Shares			Weighted-Average Grant Date Fair Value Per Share		Number of Shares			Weighted-Average Grant Date Fair Value Per Share		Number of Shares			Weighted-Average Grant Date Fair Value Per Share
Outstanding at January 1, 2022		125		$	235.82		1,166		$	222.78		1,218		$	44.59		2,509		$	136.87
Granted		44		$	396.77		442	(1)	$	363.74		120		$	270.15		606		$	347.57
Vested		(53	)	$	188.73		(375	)	$	141.02		(243	)	$	23.57		(671	)	$	102.22
Forfeited		(6	)	$	308.76		(1	)	$	374.87		(6	)	$	216.37		(13	)	$	268.11
Outstanding at September 30, 2022		110		$	318.11		1,232		$	298.24		1,089		$	73.23		2,431		$	198.26

(1) Amount reflects the number of awards that  may ultimately be earned based on management’s probability assessment of the achievement of performance conditions at each reporting period.

The intrinsic value related to vested RSUs was $62.3 million and $76.8 million for the three months ended September 30, 2022 and 2021, respectively. The intrinsic value related to vested RSUs was $277.9 million and $297.7 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the total intrinsic value of all outstanding RSUs was $881.1 million, based on the closing stock price of $363.40. As of September 30, 2022, unamortized compensation expense related to all outstanding RSUs was $239.3 million with a weighted-average remaining recognition period of approximately two years.

Cash proceeds from vested PSUs with a purchase price requirement totaled $4.3 million and $15.1 million for the nine months ended September 30, 2022 and 2021, respectively.

Time-Based RSUs:

For the nine months ended September 30, 2022, the Compensation Committee granted 44,000 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 service with the Company.

2022 PSUs:

In February 2022, the Compensation Committee granted 81,000 PSUs to the executive officers, which represented a target number of shares that could be earned subject to the achievement of two sets of performance goals ( “February 2022 Executive PSUs”). For the first goal, the executive officers could earn up to 300% of the target number of the February 2022 Executive PSUs based on the achievement of the Company’s average two-year (2022 and 2023) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association. 50% of the February 2022 Executive PSUs would vest in the first quarter of 2024 if the pre-determined revenue goal was met during the performance period. The remaining February 2022 Executive PSUs would vest over the following two years on a quarterly basis. For the second goal, the executive officers could earn up to an additional 200% of the target number of the February 2022 Executive PSUs if the Company secured additional wafer capacity during a three-year performance period. The February 2022 Executive PSUs related to the second goal would fully vest in the first quarter of 2025 if the pre-determined goal was met during the performance period. In addition, all vested shares related to the second goal would be subject to a post-vesting sales restriction period of one year. Assuming the achievement of the highest level of the performance goals, the total stock-based compensation cost for the February 2022 Executive PSUs would be $145.7 million.

In February 2022, the Compensation Committee granted 14,000 PSUs to certain non-executive employees, which represent a target number of shares that can be earned subject to the achievement of the Company’s 2023 revenue goals for certain regions or product line divisions, or based on the achievement of the Company’s average two-year (2022 and 2023) revenue growth rate compared against the analog industry’s average two-year revenue growth rate as published by the Semiconductor Industry Association (“2022 Non-Executive PSUs”). The maximum number of shares that an employee can earn is either 200% or 300% of the target number of the 2022 Non-Executive PSUs, depending on the job classification of the employee. 50% of the 2022 Non-Executive PSUs will vest in the first quarter of 2024 if the pre-determined goals are met during the performance period. The remaining 2022 Non-Executive PSUs will vest over the following two years on an annual or quarterly basis. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the 2022 Non-Executive PSUs is $13.7 million. 

The February 2022 Executive PSUs and the 2022 Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company $30 per share upon vesting of the shares. The $30 purchase price requirement is deemed satisfied and waived if the average stock price for 20 consecutive trading days at any time during 2022 and 2023 is $30 higher than the grant date stock price of $393.16. This market condition was achieved in the first quarter of 2022. The Company determined the grant date fair value of the February 2022 Executive PSUs for the first goal and the 2022 Non-Executive PSUs using a Monte Carlo simulation model with the following assumptions: stock price of $393.16, simulation term of four years, expected volatility of 44.6%, risk-free interest rate of 1.5%, and expected dividend yield of 0.8%. In addition, for the February 2022 Executive PSUs related to the second goal, the fair value was determined based on the closing stock price at the end of each reporting period, adjusted for accrued dividends and an illiquidity discount of 10.3% to account for the post-vesting sales restrictions.

In October 2022, the Compensation Committee cancelled the February 2022 Executive PSUs and granted the executive officers MSUs as replacement awards, which can now be earned subject to the achievement of both stock price targets and total stockholder return performance compared to the companies comprising the Philadelphia Semiconductor Sector Index over a three-year performance period ( “October 2022 Executive MSUs”). The October 2022 Executives MSUs will vest at the end of the three-year performance period depending on the degree to which the pre-determined goals are met. Under modification accounting, the Company will continue to recognize stock-based compensation cost for the February 2022 Executive PSUs and any incremental cost of the October 2022 Executive MSUs over the vesting period of the October 2022 Executive MSUs. The Company will determine the grant date fair value of the October 2022 Executive MSUs using a Monte Carlo simulation model, which has not been finalized as of the issuance of this Quarterly Report on Form 10-Q; therefore, we are not able to quantify the impact of the modification at this time.

2022 MSUs:

In February 2022, the Compensation Committee granted 24,000 MSUs to certain non-executive employees, which represent a target number of shares that can be earned upon achievement of stock price targets (“2022 MSUs”). The maximum number of shares that an employee can earn is 500% of the target number of the 2022 MSUs if the Company achieves five stock price targets ranging from $472 to $590 during a performance period from February 3, 2022 to February 3, 2025. Two stock price targets were achieved during the third quarter of 2022. The 2022 MSUs will vest in equal amounts on each of the first, second and third anniversaries of February 3, 2025. The total stock-based compensation cost for the 2022 MSUs is $31.3 million.

The Company determined the grant date fair value of the 2022 MSUs using a Monte Carlo simulation model with the following assumptions: stock price of $393.16, simulation term of six years, expected volatility of 39.0%, risk-free interest rate of 1.7%, and expected dividend yield of 0.8%.

2004 Employee Stock Purchase Plan (“ESPP”)

For each of the three months ended September 30, 2022 and 2021, 7,000 shares were issued under the ESPP. For the nine months ended September 30, 2022 and 2021, 14,000 and 17,000 shares, respectively, were issued under the ESPP. As of September 30, 2022, 4.5 million shares were available for future issuance under the ESPP.

The intrinsic value of the shares issued was $0.9 million and $1.0 million for the three months ended September 30, 2022 and 2021, respectively. The intrinsic value of the shares issued was $1.6 million and $2.4 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the unamortized expense was $1.1 million, which will be recognized through the first quarter of 2023. The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Expected term (in years)		0.5			0.5			0.5			0.5
Expected volatility		63.2	%		43.0	%		50.6	%		43.2	%
Risk-free interest rate		3.1	%		0.1	%		1.9	%		0.1	%
Dividend yield		0.6	%		0.5	%		0.6	%		0.6	%

Cash proceeds from the shares issued under the ESPP were $5.9 million and $4.7 million for the nine months ended September 30, 2022 and 2021, respectively.