Share-Based Compensation

3 Months Ended

Apr. 28, 2019

Financial Statement Effects and Presentation. The following table summarizes pre-tax share-based compensation included in the Statements of Income for the three months ended April 28, 2019 and April 29, 2018.



	Three Months Ended
(in thousands)	April 28, 2019		April 29, 2018
Revenue offset	$	—	$	21,501
Cost of sales	427		328
Selling, general and administrative	8,344		11,462
Product development and engineering	2,557		2,225
Share-based compensation	$	11,328	$	35,516

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 had been recognized based on the fair value at each reporting date until vesting which was the measurement date. On April 27, 2018, the Company accelerated the vesting of the remaining 586,956 unvested shares from the Warrant ("Acceleration Event"), resulting in the full recognition of the remaining costs to be recognized for the Warrant. For the three month period ended April 29, 2018, the revenue offset reflects the cost associated with the Warrant of $21.5 million, including $15.9 million related to the Acceleration Event. 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.

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. 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.

In the first quarter of fiscal year 2020, the Company granted 106,000 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 total stockholder return ("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 2020 award recipients must be employed for the entire performance period and be an active employee at the time of vesting of the awards. 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 2020 for each one, two and three year performance period is $55.82, $59.36 and $61.45, respectively.

In the first quarter of fiscal year 2020, the Company granted to the CEO, 160,000 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, three and four year period (one-fourth of the awards vesting each performance period). The CEO must be employed for the entire performance period and be an active employee at the time of vesting of the awards. 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 2020 for each one, two, three and four year performance period is $55.82, $59.36, $61.45 and $62.98, respectively.

Market Performance Restricted Stock Units. On March 5, 2019, the Company granted its CEO 320,000 restricted stock units with a market performance condition. The award is eligible to vest during the period commencing March 5, 2019, and ending March 5, 2024 (the "Performance Period") as follows: 30% of the restricted stock units covered by the award will vest if, during any consecutive 30 trading 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 $71.00 ("Tranche 1") and the remaining 70% of the restricted stock units covered by the award will vest if, during any consecutive 30 trading 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 $95.00 ("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 equal to or in excess of the per-share performance targets. Specifically, if stockholders become entitled to receive per-share consideration equal to or in excess of $71.00 then thirty percent (30%) of the award will vest and become nonforfeitable. If the per share consideration is greater than $71.00 but less than $95.00 then 30% of the award and a pro-rata percentage of the remaining 70% of the award will vest and become nonforfeitable. If the per share consideration is equal to or greater than $95.00 the entire award will vest and become nonforfeitable. The fair value for each unit of the awards was determined to be $44.32 and $33.19 for Tranche 1 and Tranche 2, respectively, on the grant date by application of the Monte Carlo simulation model.

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 2020 for both Tranche 1 and Tranche 2.



	April 28, 2019
	Tranche 1	Tranche 2
Expected life, in years	1.0	2.1
Estimated volatility	34.3%	34.3%
Dividend yield	—%	—%
Risk-free interest rate	2.5%	2.5%
Weighted average fair value on grant date	$44.32	$33.19

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.