Share-Based Compensation

Financial Statement Effects and Presentation. The following table summarizes pre-tax share-based compensation included in the Statements of Income for fiscal years 2019, 2018, and 2017:



	Fiscal Year Ended
(in thousands)	January 27, 2019		January 28, 2018			January 29, 2017
Revenue offset (Warrant)	$	21,501	$	16,219		$	5,396
Cost of sales	1,639		1,477			1,591
Selling, general and administrative	41,581		22,423			18,019
Product development and engineering	9,138		7,817			5,822
Share-based compensation	$	73,859	$	47,936		$	30,828
Net change in share-based compensation capitalized into inventory	$	—	$	(414	)	$	38

Grant Date Fair Values and Underlying Assumptions:

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.

The following table summarizes the assumptions used in the Black-Scholes model to determine the fair value of stock options granted in fiscal years 2019, 2018, and 2017:



	Fiscal Year Ended
	January 27, 2019	January 28, 2018	January 29, 2017
Expected lives, in years	4.5	4.2	4.1 - 4.5
Estimated volatility	32.2%	31.7%	31% - 32%
Dividend yield	—	—	—
Risk-free interest rate	2.55% - 2.68%	1.68%	1.04% - 1.51%
Weighted average fair value on grant date	$14.53	$10.70	$5.71

The assumptions used in the Black-Scholes option pricing model were determined as follows:


•	Fair Value of Common Stock - The closing price on the date of the grant.


•	Expected Term - The expected term represents the period that the Company's stock-based awards are expected to be outstanding.


•	Expected Volatility - The expected volatility was derived from the annualized volatility of the Company's closing stock price over the preceding three or four years depending upon the life of the option award.


•	Risk-Free Interest Rate - The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the expected term of the stock option grants.


•	Dividend Rate - The Company has never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future, and, therefore, use an expected dividend yield of zero.

Stock Options. The Company has historically granted non-qualified stock options to both employees and non-employee directors. The fair value of these grants was measured on the grant date. 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 3-4 years). The number of shares authorized per the equity incentive plan is 17,031,653. The maximum contractual term of equity share options is ten years.

The following table summarizes the activity for stock options for fiscal years 2019:



(in thousands, except for per share amounts)	Number of Shares		Weighted Average Exercise Price (per share)		Aggregate Intrinsic Value ⁽¹⁾		Number of Shares Exercisable	Weighted Average Contractual Term (years)
Balance at January 28, 2018	1,345		$	26.17	$	13,953	807
Options granted	147		47.99
Options exercised	(595	)	27.36		12,280
Options cancelled/forfeited	(20	)	26.15
Balance at January 27, 2019	877		$	29.03	$	18,226	472
Exercisable at January 27, 2019	472		$	24.37	$	11,991		2.3
Vested and expected to vest after January 27, 2019	877		$	29.03	$	18,226		3.4

⁽¹⁾ The aggregate intrinsic value of stock options vested and exercisable and vested and expected to vest as of January 27, 2019 is calculated based on the difference between the exercise price and the closing price $49.77 of the Company's common stock on January 25, 2019.

The aggregate unrecognized compensation as of January 27, 2019, is $3.2 million to be recognized over 3.0 years.

The following table summarizes information regarding unvested stock option awards at January 27, 2019:



(in thousands, except for per share amounts)	Number of Shares		Weighted Average Exercise Price (per share)		Weighted Average Grant Date Fair Value (per share)
Balance at January 28, 2018	534		$	25.50	$	7.10
Options granted	147		47.99		14.53
Options vested	(261	)	24.28		6.86
Options forfeited	(20	)	26.15		7.30
Balance at January 27, 2019	400		$	34.52	$	10.07

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. Prior to fiscal year 2018, the Company granted performance-based restricted stock units with performance metrics that were based on a pre-defined cumulative three-year performance of the Company’s revenue and non-GAAP operating income measured against internal goals. For these awards, the performance was tied to the Company’s performance in the grant 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). At January 27, 2019, the performance metrics associated with the remaining outstanding awards, which were issued in fiscal year 2017, were met at a level which resulted in a grant that vested at 180.8% of target. Under the terms of these awards, 187,116 shares will be settled in shares and 187,116 shares will be settled in cash. Shares to be settled in cash have been classified as liabilities and the value of these awards are accrued under "Other liabilities" within the Consolidated Balance Sheets.

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.

Beginning in fiscal year 2018, the Company granted 215,857 performance-based restricted stock units that have a pre-defined market condition and service condition. These grants are accounted for as equity awards. The market condition is determined based upon the Company’s total shareholder return ("TSR") benchmarked against the TSR of the S&P SPDR Semiconductor ETF (NYSE:XSD) over a one, two and three-year performance period (one-third of the awards vesting each performance period). Award recipients must be employed for the entire performance period and be an active employee at the time of vesting. The Company used a Monte Carlo simulation to determine the grant-date fair value for these awards, which takes into consideration the possible outcomes pertaining to the TSR market condition. The grant-date fair value per unit of the awards granted in the first quarter of fiscal year 2018 for each one, two and three-year performance period is $38.01, $39.76 and $40.89, respectively. The portion of the awards that vested at the end of fiscal year 2019 reflected a performance achievement of 158.1% of target. At January 27, 2019, the market metrics associated with the outstanding awards issued in fiscal year 2018 is expected to be met at a level which would result in a performance achievement of 158.1% of target.

In the first quarter of fiscal year 2019, the Company granted 200,442 performance-based restricted stock units that have a pre-defined market condition and a service condition that are accounted for as equity awards. The market condition is determined based upon the Company’s TSR benchmarked against the TSR of the S&P SPDR Semiconductor ETF (NYSE:XSD) over a one, two, and three-year period (one-third of the awards vesting each performance period). The fiscal year 2019 award recipients must be employed for the entire performance period and be an active employee at the time of vesting. The Company used a Monte Carlo simulation to determine the grant-date fair value for these awards, which takes into consideration the possible outcomes pertaining to the TSR market condition. The grant-date fair value per unit of the awards granted in the first quarter of fiscal year 2019 for each one, two, and three-year performance period is $33.02, $34.85, and $36.52, respectively. The portion of the awards that vested at the end of fiscal year 2019 reflected a performance achievement of 180.2% of target. At January 27, 2019, the market metrics associated with the outstanding awards issued in fiscal year 2019 is expected to be met at a level which would result in a performance achievement of 180.2% of target.

The following table summarizes the activity for performance-based restricted stock units for fiscal years 2019 and 2018:



			Subject to Share Settlement		Subject to Cash Settlement				Weighted Average Grant Date
(in thousands, except for per share amounts)	Total Units		Units		Units		Recorded Liability		Fair Value (per share)
Balance at January 28, 2018	363		255		108		$	6,468	$	26.58
Performance units granted	287		244		43				32.93
Performance units vested	(431	)	(286	)	(145	)	—		25.83
Performance units cancelled/forfeited	(16	)	(10	)	(6	)			20.28
Change in liability			—				2,845
Balance at January 27, 2019	203		203		—		$	9,313	$	37.51

The liability associated with performance-based restricted stock units increased by $2.8 million in fiscal year 2019 due to the re-measurement adjustments and changes in the expected performance results. The aggregate unrecognized compensation as of January 27, 2019, is $6.8 million which will be recognized over 1.3 years.

Market Performance Restricted Stock Units. On February 26, 2014, the Company granted its Chief Executive Officer ("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. These awards were fully expensed prior to fiscal year 2018.

The following tables summarize the assumptions used in the Monte Carlo simulation model to determine the fair value of restricted stock units granted in fiscal year 2015 for both Tranche 1 and Tranche 2.



	January 25, 2015
	Tranche 1	Tranche 2
Expected life, in years	1.6	2.1
Estimated volatility	34%	34%
Dividend yield	—%	—%
Risk-free interest rate	1.5%	1.5%
Weighted average fair value on grant date	$17.26	$14.88

The following table summarizes the activity for the market performance restricted stock units for the fiscal year ended January 27, 2019:



(in thousands, except for per share amounts)	Total Units		Weighted Average Grant Date Fair Value (per share)
Balance at January 28, 2018	154		$	14.88
Market performance units granted	—		—
Market performance units vested	(154	)	14.88
Market performance units cancelled/forfeited	—		—
Balance at January 27, 2019	—		$	—

Restricted Stock Units, Employees. The Company grants restricted stock units to employees which are expected to be settled with shares of the Company's common 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).



(in thousands, except for per share amounts)	Restricted Stock Units, Stock Grants, and Stock Units						Performance Shares ⁽¹⁾
	2019		2018		2017		2019		2018		2017
Units granted	998		983		1,228		287		216		231
Weighted-average grant date fair value	$	45.36	$	36.96	$	22.12	$	32.93	$	39.55	$	17.51

⁽¹⁾ Restricted stock units granted includes awards that will be cash settled of 146,827 units in fiscal year 2019, 0 units in fiscal year 2018, and 115,500 units in fiscal year 2017.

The following table is a summary of the status of non-vested restricted stock unit awards as of January 27, 2019, and changes during the year.



	Restricted Stock Units, Stock Grants, and Stock Units				Performance Shares
(in thousands, except for per share amounts)	Shares		Weighted Average Grant Date Fair Value (per share)		Shares		Weighted Average Grant Date Fair Value (per share)
Nonvested at January 28, 2018	2,175		$	28.42	363		$	26.58
Granted	998		45.36		287		32.93
Vested	(848	)	26.45		(431	)	25.83
Forfeited	(121	)	32.56		(16	)	20.28
Nonvested at January 27, 2019	2,204		$	36.62	203		$	37.51

The aggregate unrecognized compensation for the non-vested restricted stock units and performance shares as of January 27, 2019, is $63.7 million and $6.8 million, respectively, which will be recognized over 2.3 and 1.3 years, respectively.

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 stock units granted under the program would be settled in cash and a portion would be settled in shares of the Company's common 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 shares of 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.

As of January 27, 2019, the total number of vested but unsettled restricted stock units for non-employee directors is 176,861. As of January 27, 2019, $9.2 million of the liability associated with these awards is included in "Other long-term liabilities" within the 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 shares of the Company's common 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). As of January 27, 2019, the total number of unvested shares is 12,257.

Award Modifications. In the first quarter of fiscal year 2019, the Company modified the terms of 159,000 fully vested shares held by 8 employees. As a result of the modification, additional compensation cost of $2.8 million was recognized during the first quarter of fiscal year 2019.

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 common stock of Semtech Corporation. 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 in the U.S., based on the Company’s LoRa® devices and wireless radio frequency technology. The Warrant was accounted for as equity and the cost was recognized as an offset to net sales over the respective performance period. The Warrant consisted 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. On April 27, 2018, the Company accelerated the vesting of the remaining 586,956 unvested shares from the Warrant, resulting in the full recognition of the remaining costs to be recognized for the Warrant. For the fiscal year ended January 27, 2019, the revenue offset reflects the cost associated with the Warrant of $21.5 million, including $15.9 million related to the acceleration. As of January 27, 2019, the Warrant was fully-vested and exercisable for a total of 869,565 shares, with no additional costs to be recognized in future periods. The Warrant was fully exercised and no longer outstanding as of March 15, 2019.