Dialog Semiconductor
Annual Report 2018

Plain-text annual report

Dialog Semiconductor Plc Annual report and accounts 2018 Powering the smart connected future Powe ring The world is being re-shaped by the convergence of social, mobile, cloud and big data. The combination of these technologies unlocks an incredible opportunity to connect everything together in a new way which is dramatically transforming the way we live and work. Marc Benioff the smartPowe ring the smartconn ected conn ected Millennials, and the generations that follow, are shaping technology. This generation has grown up with computing in the palm of their hands. They are more socially and globally connected through mobile internet devices than any prior generation. And they don’t question; they just learn. Brad D. Smith fut ure Some people call this artificial intelligence, but the reality is this technology will enhance us. So instead of artificial intelligence, I think we’ll augment our intelligence. Ginni Rometty fut ure Who we are Powering the smart connected future We are a fabless semiconductor company primarily focused on the development of highly-integrated and power-efficient mixed-signal ICs for consumer electronics and other high-growth markets. Our passion for innovation and entrepreneurial spirit ensures we remain at the core of the Internet of Things (“IoT”) and mobile computing. Introduction Who we are 2018 Financial highlights Industry drivers Industry dynamics Investment case Our technologies Our framework and values Chairman’s statement Q&A with our CEO, Dr Jalal Bagherli What we do At a glance Our business model Managing our resources and relationships: U Engaging with our colleagues U The strength of our customer relations U Managing our production partners and suppliers U Through our business activity we create value for society U We operate and promote environmentally responsible practices Our markets and strategy Governance IFC Our markets and strategy Our strategy Our strategic priorities: U Extending our product portfolio U Achieving a broader and deeper customer base U Delivering continuous innovation U Focusing on strategic initiatives and M&A Our performance Key performance indicators “KPIs” Segmental review: U Mobile Systems U Advanced Mixed Signal U Connectivity U Automotive & Industrial Financial review Sustainability and risk Managing risk and uncertainty 01 02 04 05 06 07 08 10 12 14 16 18 20 21 22 23 24 25 26 26 27 30 31 34 36 36 38 40 42 43 52 Introduction to governance Leadership – Board of Directors Leadership – Management team Directors’ report Corporate governance statement Directors’ remuneration report Remuneration at a glance Directors’ remuneration policy Annual report on remuneration Statement of Directors’ responsibilities Responsibility statement Financial statements Independent auditor’s report Consolidated financial statements Notes to the consolidated financial statements Company financial statements Notes to the Company financial statements Financial performance measures Other information Glossary of Terms – Technical Glossary of Terms – Financial Advisers and corporate information Group directory Related undertakings Branches and representative offices 57 58 60 62 64 70 72 73 79 86 86 87 94 99 149 151 156 162 164 165 166 167 168 01 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n 2018 Financial highlights Gross margin (%) 47.9% 2018 2017 2016 Diluted EPS (US$) US$1.80 2018 2017 2016 1.80 2.21 Year-on-year revenue growth (US$m) +7% 2018 2017 2016 Operating margin (%) 13.8% 2018 2017 2016 13.8 13.8 1,442 1,353 1,198 25.9 Cash flow from operating activities (US$m) US$288.6m 2018 2017 2016 288.6 284.7 248.8 Underlying year-on-year revenue growth (US$m) Underlying gross margin (%) +7% 2018 2017 2016 1,442 1,353 1,198 48.3% 2018 2017 2016 Underlying operating margin (%) 19.5% 2018 2017 2016 Underlying diluted EPS (US$) US$2.90 19.5 19.2 18.5 2018 2017 2016 2.09 47.9 47.7 47.3 3.25 48.3 47.9 47.4 2.90 2.92 Underlying measures of performance are non-IFRS measures because they exclude amounts that are included in, or include amounts that are excluded from, the most directly comparable measure calculated and presented in accordance with IFRS or are calculated using financial measures that are not calculated in accordance with IFRS. We do not regard non-IFRS measures as a substitute for, or superior to, the equivalent IFRS measures. Non-IFRS measures presented by Dialog may not be directly comparable with similarly-titled measures used by other companies. An explanation of the adjustments made to the equivalent IFRS measures in calculating the non- IFRS measures and reconciliations of the non-IFRS measures to the equivalent IFRS measures for each of the periods presented are set out in the section entitled “Financial performance measures” on pages 156 to 161. Dialog Semiconductor PlcAnnual report and accounts 2018 Industry drivers A number of external factors are creating new opportunities for the industry and driving growth 02 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n driving The semiconductor industry is enabling a smart connected future where consumers benefit from an array of new technologies. Our challenge is to deliver innovation and make it happen. Technological advancements and industry dynamics are creating new investment opportunities and growth. 1 IOT: SMART CONNECTED FUTURE Semiconductors serve as the foundation for enabling a connected world. There will be a major focus on smaller chips that consume less power and provide better support for wireless connectivity. Consumers are more connected than ever, owning an average of four IoT devices that communicate with the cloud. Globally, an estimated 127 new devices connect to the Internet every second.1 The IoT is also benefiting from infrastructure improvements that have enhanced connectivity. Similarly, technological advances are reducing power requirements, decreasing costs, and promoting the development of more integrated IoT solutions. 1 McKinsey & Company, “What’s new with the Internet of Things”, May 2017. Dialog Semiconductor PlcAnnual report and accounts 2018 3 5 5G AND AR/VR TECHNOLOGIES SECURITY Major telecommunications companies, together with mobile phone device manufacturers, are preparing to release 5G capabilities. The US started the 5G roll-out in H2 2018 while Japan and Korea are expected to start in 2019. 5G will enable an increasing number and range of machines to transmit and receive data. Bandwidth-intensive applications, such as high-resolution video streaming and AR/VR, now accounts for 70% of broadband data usage; and that is expected to rise rapidly. Security concerns around connected devices pose a major threat to semiconductor companies. These include home automation systems, wearable devices, and industrial automation products. Semiconductor products, especially those used in areas such as connected health and industrial automation, will therefore, need to place more focus on developing secure chips. growth 03 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n 2 RISE OF ARTIFICIAL INTELLIGENCE AI is viewed as a source of differentiation from their competition by businesses. The next generation of AI is set to be combined with self-driving cars, surgical robots, autonomous drones, and smartphones. Semiconductor chips consume a huge amount of power to do such AI intensive tasks. 4 LONGER BATTERY LIFE Semiconductors are used extensively in electronic devices, such as smartphones, wearables, flat-screen monitors and LED TVs. The industry is set to grow as needs such as long battery life continue to be driven by the increasing power consumption brought by data processing and AI capabilities. 6 CONSOLIDATION THROUGH M&A As semiconductor industry growth slows in certain segments, companies are increasingly turning towards M&A to sustain profitability, seek new sources of revenue, and reduce revenue volatility through a diversified portfolio of products. Dialog Semiconductor PlcAnnual report and accounts 2018 Industry dynamics Our position is shaped by industry dynamics… TOP INDUSTRY DYNAMICS IN THE NEXT THREE YEARS IMPLICATIONS FOR DIALOG DIVERSE CUSTOMER DEMANDS U Most OEMs offer a wide range of electronic applications to consumers, in some cases requiring a complete system approach to solve all semiconductor requirements. To meet this challenge, Dialog continues to broaden its product portfolio through a combination of organic development and M&A. Companies are seizing the opportunities to serve new sectors, applications and geographies. Read more about our customers on Page 20 INCREASING COMPETITION FOR TALENT U Electronic engineers are in high demand and companies outside of the semiconductor industry are now establishing internal teams to take care of some of their semiconductor requirements. For a number of years, Dialog has established policies, processes and a number of programmes to recruit, develop and retain talent globally. Read more about our people on Pages 18-19 CROSS-BORDER REGULATIONS U The global nature of the supply chain and the increasingly complex geopolitical environment are becoming a concern for our industry. ASP EROSION U The semiconductor industry is highly competitive, and the price of ICs erodes every year. Our fabless operating model provides our business with the ability to adapt to different trading scenarios whenever they may arise. Read more about our risks on Pages 52-56 Dialog’s continuous innovation results in differentiated and innovative products which create value for our customers. This helps to offset the price erosion which is intrinsic to our industry. Additionally, with higher volumes, we can extract lower prices from our fabrication partners. Read more about our segmental review on Pages 36-42 04 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Dialog Semiconductor PlcAnnual report and accounts 2018 05 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Investment case SUPPORT ORGANIC AND INORGANIC EXPANSION U We reinvest our cash in organic and inorganic initiatives which aim to enhance our competitive advantage, expand our technology portfolio and our customer base. Number of Sales Opportunities with a value higher than US$250k KPI 1,011 Read more about our KPIs  on Pages 34-35 Year-on-year revenue growth in CMIC* KPI +24% * Compared to 2017 12 months’ actual revenue of US$84.3 million. SOLID COMPETITIVE POSITIONING U The quality of our products is rooted in deep and focused R&D investment and intellectual property. U Our engineers deliver technical excellence and high level of integration through short design cycles. Expensed in R&D in 2018 US$326m Number of employees in engineering functions in 2018 KPI 1,599 Read more about how we are enhancing our competitive advantages on Page 15 A growing business built on innovation HIGH RETURNS, STRONG CASH GENERATION U We outsource the production of our semiconductors to leading foundries. Our high touch fabless model enables a low capital intensity business. U The combination of low capital intensity and rigorous working capital management results in strong cash flow generation. Free cash flow in 2018* KPI US$230m Read more about cash flow on Page 48 * Free cash flow is a non-IFRS measure. See “Financial performance measures” on pages 156-161. STRUCTURAL GROWTH U Our technical competencies are aligned with secular trends in efficient power management and power-efficient technologies in connected (“Internet of Things”) devices, mobile, automotive and computing & storage. KPI Year-on-year revenue growth in 2018 +7% Year-on-year revenue growth in Bluetooth® low energy +21% Read more about our industry drivers on Pages 02-03 which underpin our investment case Dialog Semiconductor PlcAnnual report and accounts 2018 Our technologies POWER MANAGEMENT With its unique focus and expertise in system power management Dialog brings high-quality power supply and efficiency to a wide range of applications, such as mobile phones, tablets, notebooks, headsets, gaming and automotive infotainment systems. More information Pages 36-37 CONNECTIVITY AUDIO Reliable, powerful and easy-to- use, our wireless connectivity product family delivers outstanding performance, flexibility and improved battery life to wearables and smart home applications. More information Pages 40-41 Our high definition audio amplifiers, CODECs and audio integrated PMICs are suitable for a wide range of digital, low power, portable audio products. More information Pages 40-41 With strength in a range of technologies... CONFIGURABLE MIXED-SIGNAL POWER CONVERSION A new category of products, bringing programmability to the analog space, enabling customers a fast time-to-market through a proprietary software platform to design, test and deploy analog circuits. More information Pages 38-39 Our AC/DC primary-side converters, secondary-side ICs and synchronous rectifiers solve power consumption, size and cost issues in power adapters and power supplies for smartphones, tablets, laptops, portable electronics, networking and home appliances. More information Pages 38-39 LIGHTING Innovative LED drivers to solve our customers’ design challenges in solid state lighting and display backlighting. More information Pages 38-39 06 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Dialog Semiconductor PlcAnnual report and accounts 2018 Our framework and values Ideas We have a passion for innovation and thrive on new ideas. This is about pushing boundaries and taking pride in new approaches. Agility We believe in being entrepreneurial, always moving and decisive: delivering excellence, and keeping things simple. OUR PURPOSE Powering the smart connected future OUR VISION To build a vibrant and innovative mixed-signal business STRATEGIC PRIORITIES Extend our product portfolio Broaden our customer base Deliver continuous innovation Strategic initiatives and M&A ADDING VALUE FOR OUR CUSTOMERS (END-MARKETS) IoT Mobile Automotive Computing & Storage EMBEDDING SUSTAINABLE AND RESPONSIBLE PRACTICES INTO OUR BUSINESS Our people Our products Our fabrication partners We are at our best when we work together, across geographic and cultural boundaries. This is about sharing ideas, challenging each other and building strong relationships with our customers, employees and suppliers. Many Difference We care about our impact and know that we make a difference to our customers and their end-consumers, to employees and society. 07 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n ...our values and a strategic framework to deliver growth Dialog Semiconductor PlcAnnual report and accounts 2018 08 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Chairman’s statement We are entering a new chapter with exciting opportunities to create long-term value for all our stakeholders “We are entering a new chapter in the story of our Company. We are confident about the future of our business and the opportunity to create long-term value for a wider range of stakeholders.” Richard Beyer Chairman Engaging with our stakeholders Our ongoing engagement with internal and external stakeholders helps us understand the impact of our activities and relationships on others – and how we can best manage these impacts in a responsible manner, as well as the potential risks and opportunities, to create value for all our stakeholders. Our people Customers Investors Strategic partners and suppliers Society/ Communities Fellow shareholder, 2018 was an important year in the history of our Company. In October 2018 we signed a landmark agreement with Apple Inc. which clarified our long-term business relationship and monetised our unique IP. Increasing penetration of technology and connected devices, despite some softness in consumer demand in the high-end of the smartphone market, resulted in 7% revenue growth, increasing underlying profitability and strong cash flow generation. In November 2018, we restarted the share buyback programme, with a new tranche of up to €150 million and a maximum maturity date of 21 May 2019 (2017: US$125 million returned to shareholders, approximately €114 million). Our culture and employees The Board is firmly aware that listening to and involving our people in shaping the business are key to the long-term success of the Company. The energy and commitment of our 2,100 colleagues are vital to our success. Our four key values, Agility, Difference, Many and Ideas, are the guiding values of our culture, including what guides employees’ priorities and actions. Central to a high performing business is a diverse workforce and an ability to retain and develop our talent. All of our efforts in this area are focused on ensuring that we can attract, retain, develop, engage and inspire the very best people. value for our stake Dialog Semiconductor PlcAnnual report and accounts 2018 09 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n In 2019, we will enter a new chapter in the story of Dialog together with all our stakeholders. Following the announcement of our agreement with Apple, at our Capital Markets Day on 1 November 2018, Dialog’s management set out the strategic path to protect and create shareholder value over the long term. Our confidence in the future of our business would not be possible without the hard work and passion of all our colleagues, and the Board would like to express its sincere thanks for their efforts and commitment. Finally, I would also like to thank our shareholders and other stakeholders for their continued support. Sincerely, Richard M. Beyer Chairman Relationships with customers, partners and communities Building a constructive dialogue with our shareholders Strong and responsible relationships with customers, partners and communities are part of our DNA. Our engagement with customers, partners and suppliers has evolved into a close collaboration, resulting in the development of leading technology, product quality and operational excellence. Given the speed of technological change in our markets, our focus is to develop and retain long-term relationships, adopting a true partnership approach. The Board also recognises our wider responsibility to society, and we promote responsible business practices across our value chain to protect our ability to create sustainable value for our stakeholders. Annually, we undertake audits of all fabrication partners to ensure our relationships continue to operate effectively. Read more about our value chain in our Sustainability Report 2018 As a thought leader in semiconductors and technology, we engage with universities and professional bodies to share our knowledge and contribute to the continuing development of students and professionals. Additionally, in 2018 we distributed approximately US$1.3 billion across a range of stakeholders, including employees, tax authorities and local community projects across the world. Some of our most important societal impacts come from the quality and energy efficiency of our semiconductors and the contribution they make towards the reduction of power consumption in consumer electronics. The Board is committed to engaging in constructive dialogue with shareholders to provide a clear understanding of our strategy and to foster mutual understanding of what is important to the Board and shareholders. During 2018, we consulted with our shareholders regarding the revisions to our remuneration policy. As detailed in the 2018 report on remuneration, the Board found the feedback from shareholders to be helpful in determining our final approach to remuneration. Our decisions as a Board are intended to protect and enhance enterprise value and the capital entrusted to us by you as shareholders. Read more about our relations with shareholders in our Governance section on Page 67 Governance and the right balance of skills Our ability to create value for our stakeholders is heavily linked to our commitment to high standards of corporate governance. The Board and I feel we have the right balance of skills, experience and backgrounds to oversee the evolution of our strategy and, when necessary, challenge the management team. At the 2018 AGM, Chris Burke stepped down from the Board and our ongoing programme of Board refreshment will continue in 2019 when Aidan Hughes retires from the Board at the 2019 AGM. I would like to recognise the contribution of Aidan Hughes, who will not stand for re-election at the next AGM. Aidan has played a key role in helping Dialog create value for our shareholders and other stakeholders, and we were fortunate to have his contribution for over 14 years. holders Dialog Semiconductor PlcAnnual report and accounts 2018 10 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Q&A with our CEO, Dr Jalal Bagherli Dear shareholder We are building a vibrant and ambitious mixed-signal business. Our expertise, proven track record and talent, gives me confidence in the future success of our business. “The agreement to license certain Power Management IC technologies to Apple Inc. demonstrates the strength of Dialog’s mixed-signal expertise. In 2018, revenue outside Mobile Systems grew 33% and operating profit almost tripled.” Dr Jalal Bagherli Chief Executive Officer Our strategy We continued to make good progress on our corporate strategy. Our framework incorporates a wider range of stakeholders and aims to drive our competitive advantages. Innovation Strategic initiatives and M&A Extending our product portfolio Broadening and deepening our customer base Read more on Page 25 2018 has been an important year in the history of Dialog. We are entering into the next chapter of the Company’s history from a position of strength and I am truly excited for what this means for all our stakeholders. On 11 October 2018 we reached an agreement with Apple Inc. to license certain of our PMIC technologies, and transfer of certain assets and over 300 employees. With this agreement, expected to complete in the first half of 2019, we are setting the stage for the next phase of revenue growth, building on our strong expertise in mixed- signal semiconductors, talented colleagues, IP and customer relationships. Dialog will focus on growing its market share in high- growth segments of Internet of Things (“IoT”), Mobile, Automotive, and Computing & Storage. Despite customer-specific headwinds, in 2018 the business delivered 7% year-on-year revenue growth and increasing underlying operating margin. During the year, we successfully completed the integration of Silego Technology Inc. and the LED backlighting business from ams AG, which contributed to the positive financial performance in 2018. Q. How would you describe Dialog’s financial performance in 2018? I am very pleased with the financial performance of the business in 2018. Revenue was up 7% and we delivered almost US$200 million operating profit, US$282 million on an underlying basis. The combined performance of Connectivity, Advanced Mixed Signal (“AMS”) and Automotive & Industrial (“A&I”) was strong, 36% year-on-year revenue growth and 14.4% operating margin on an underlying basis. Strong cash flow generation is a distinctive feature of our business, and 2018 was no exception with US$289 million cash flow from operating activities. Confidence in the future Dialog Semiconductor PlcAnnual report and accounts 2018 11 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Q. What are the main sustainability priorities for Dialog? In 2018 we maintained a strong focus on the energy-efficiency of our products, our people and a responsible supply chain. We remain fully committed to playing an active role in promoting the high standards of responsible business across the supply chain and ensure we meet our customers’ high standards. It was very rewarding to see Dialog listed in the Carbon Clean 200 Index for another year. A testimony of the role our technology plays in supporting the move to a cleaner and more energy-efficient economy. Q. Is there anything else you would like to add? I would like to thank our employees for their continued hard work and dedication. Together we are setting the stage for the next chapter in the Company’s story, building a vibrant and ambitious mixed- signal business and creating long-term value for our shareholders. I look forward to the future with confidence, together with our colleagues, customers, partners and suppliers, and our shareholders. Dr Jalal Bagherli Chief Executive Officer Consumer demand in the high-end smartphone segment remained stable during the first half of the year but we saw some softness in consumer demand in the December quarter. Mobile Systems revenue in 2018 was 1% below 2017 due to softness in consumer demand and customer-specific headwinds announced in May which reduced our share of volume for the main PMIC product in the 2018 iPhone platform. As more devices get connected, the Bluetooth® low energy market also experienced strong growth during 2018. Building on the quality of our products and market growth, Connectivity delivered 9% year-on-year revenue growth and 19% increase in operating profit. Across a range of end-markets, customers value the benefits of our Configurable Mixed-signal IC, which delivered 24% year- on-year revenue growth1, ahead of our initial expectations. The adoption of rapid charge technologies and LED backlighting gathered momentum during 2018, also contributing to higher revenue. Our CMIC, rapid charge and lighting products are grouped under Advanced Mixed Signal (AMS) which grew 73% year-on-year, including revenue from the acquisition of Silego in November 2017. Automotive and Industrial revenue was broadly stable from 2017. Q. How do you see consumer Internet of Things (“IoT”) and mobile computing evolving, and how would you describe Dialog’s competitive position? IoT and mobile computing are our main end-markets. Our expertise and IP in mixed- signal semiconductors are aligned with customer requirements for energy-efficient and configurable products. Our highly-integrated power-efficient ICs contribute to improving the battery life of mobile and connected devices. Our know- how and IP have been built over the years, working together with the leading consumer electronics companies. We have a number of initiatives aiming to generate new revenue growth opportunities, such as leveraging our existing technology into new applications, expanding our range of high- voltage chargers, and entering the growing Indian smartphone market. Rapid charge technologies continue to be adopted across Asian markets. In 2019, we expect adoption of new technologies, such as USB PD Type C™ to become more prevalent and with approximately 60% market share in rapid charge for smartphones we are well positioned to continue to benefit from this trend. Our presence in the IoT segment is built on the success and technical excellence of our Bluetooth® low energy (“BLE”) products, and increasingly our Configurable Mixed-signal ICs. This year the Bluetooth® SIG launched the 5.0 standard, adding mesh functionality to the standard and our products introduced it soon after. SmartBond™ performed well, offering low power consumption, small size and low system cost without compromise. The market continued to grow and we expect it to grow at approximately 23% CAGR for the period 2016–20212. In 2018, BLE grew 21% year-on-year, the fourth consecutive year of strong double- digit growth; a clear testament of the value it brings to customers. Q. Can you explain the rationale behind the agreement reached with Apple? This agreement strengthens Dialog and Apple’s long-term partnership, enabling us to establish a clear path for the future of our business and generating immediate value from certain PMIC technologies and assets. At closing, Dialog will receive US$300 million in cash for the licensing of certain PMIC technologies and transfer of certain PMIC assets and employees. This includes over 300 employees from four of our European sites who will join Apple to support their future chip research and development efforts. Employees who will transfer to Apple represent around 16% of our global workforce, and Dialog will have approximately 1,800 employees following the transfer. Apple will also make a prepayment of approximately US$300 million to Dialog at closing which will be credited to future product purchases over the next three years. 1 Compared to 12 months’ revenue in 2017 of US$84.3 million. 2 Source: IHS Technology Q1 2018 Report, Dialog Internal. Dialog Semiconductor PlcAnnual report and accounts 2018 12 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n At a glance Our power-efficient mixed-signal products are primarily focused on consumer applications, enabling people to be connected on the move. Our technologies enhance consumer experience by extending battery life and enabling faster and more efficient charging of their portable devices. We are at the centre of the IoT and mobile computing revolution since its inception and we are expanding our product portfolio through a combination of organic and inorganic initiatives. Read more on the markets in which we operate on Page 24 54 3 2 1. Mobile Systems 2. Advanced Mixed Signal 3. Connectivity 4. Automotive & Industrial 5. Corporate 1 % of total Group revenue 72% 16% 10% 2% 0% MOBILE SYSTEMS ADVANCED MIXED SIGNAL 72% 16% of total Group revenue in 2018 of total Group revenue in 2018 -1% +73% Year-on-year revenue decline Year-on-year revenue growth U Our products replace discrete power management U Configurable Mixed-signal ICs (“CMICs”) can integrate components with highly-integrated single chip solutions that provide higher energy efficiency, design simplicity and lower costs for portable and mobile devices. High-quality efficient charging technologies have become increasingly important for our customers. many system functions while minimising component count, board space and power consumption. We also provide AC/DC controller solutions which enable fast and efficient charging for portable applications and LED drivers for Solid State Lighting and display backlighting. Revenue (US$m) Revenue (US$m) US$1,030m US$230m 2018 2017 2016 1,030 2018 1,043 2017 923 2016 133 117 230 Key products U Power Management Integrated Circuits (“PMICs”) for battery and tethered applications. U Sub-PMICs for high performance multi-core System-on-Chip based systems. U Charger ICs for smartphones and tablets. U Automotive grade PMICs for in-vehicle infotainment and cluster systems. U Audio CODECs for computing, portable media players and audio accessories. Key products U Configurable Mixed-signal ICs. U AC/DC rapid charge adapters. U AC/DC converters. U AC/DC power adapters. U AC/DC embedded networking converters. U SSL LED and backlight drivers. Segment review on Page 36 Segment review on Page 38 Dialog Semiconductor PlcAnnual report and accounts 2018 13 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Operations countries 16 2,100 29 employees Locations Head offices Design and Test Sales offices CONNECTIVITY AUTOMOTIVE & INDUSTRIAL 10% 2% of total Group revenue in 2018 of total Group revenue in 2018 +9% -1% Year-on-year revenue growth Year-on-year revenue decline U We provide short-range wireless connectivity solutions that deliver outstanding performance, flexibility and power efficiency. Our Bluetooth® low energy solutions enable the Internet of My Things. In 2018, we added Bluetooth® Mesh support to the SmartBond™ product family. U We produce custom motor control and power management ICs for the mid to high-end European automotive segment. We also design electronic ballasts for industrial lighting and energy-efficient controllers for LED lighting solutions. Revenue (US$m) US$149m Revenue (US$m) US$33m 2018 2017 2016 149 2018 136 118 2017 2016 33 33 30 Key products U Bluetooth® low energy ICs. U Voice over DECT for cordless phones and professional Key products U Motor control ICs. U ASIC controllers for LED lighting. audio applications. U Digital audio and audio CODEC ICs for headsets and headphones. Segment review on Page 40 Segment review on Page 42 Dialog Semiconductor PlcAnnual report and accounts 2018 14 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Our business model Our partnership approach, operational flexibility and the quality of our products are key sources of value to our customers. HOW WE MONETISE OUR BUSINESS We invest in R&D up to 18 months ahead of product launch and we recover our investments through the sale of our semiconductors. Our customers’ product cycles range from one to five years. This, together with the strength of our customer relationships, means the Company typically has long-term visibility of business opportunities and revenue streams, a rare characteristic for semiconductor companies operating in consumer markets. A fabless business model based on Tier 1 customer penetration results in high volumes, longer-term revenue streams and ultimately in strong cash generation. On the other hand, our relatively high customer concentration can lead to significant fluctuations in revenue based on customer success and sourcing strategies. Aligned interests Dialog is committed to the continuing development of market-leading innovative products which we believe will generate profitable revenue streams and create long- term value for our shareholders. We achieve this by setting stretching performance targets, which align with shareholders’ interests, and then motivating our executives and employees to achieve those targets with appropriate incentive arrangements. Dialog’s remuneration policy is set out in greater detail within the Directors’ remuneration policy on pages 73-78. DESIGN CYCLE 6–18 MONTHS We develop our products in short and collaborative design cycles MANUFACTURING CYCLE 3 MONTHS We work closely with leading and responsible production partners – “High-touch fabless model” INVESTMENT PHASE Short development times Focused R&D* investment in target markets 17% – 19% of revenue INVESTMENT PHASE Low capital intensity Variable cost of goods sold Gross margins* 47% – 48% We operate in a competitive and changing market and need to be able to respond quickly to evolving consumer requirements. We outsource production to industry-leading wafer foundries, assembly and test partners. $ FINANCIAL FLOWS * Underlying long-term financial model. OUR CYCLE IN DETAIL Design cycle The reciprocal cooperation with customers and fabrication partners and decentralised R&D approach enhances our innovation capacity. In the consumer electronics market, product development times are short due to rapidly evolving consumer requirements in a highly competitive market. The design of our customised Application Specific ICs (“ASIC”) is well embedded in our customers’ design cycle. For the REINVESTMENT Strategic growth initiatives (such as strategic investments or M&A) design of ASIC solutions, we engage with our customers as an “extended R&D team”, delivering differentiation in short design cycles. Our passion for innovation is reflected in the commitment to our people, our products and IP. Our ability to recruit, retain and develop new talent is vital to generating innovation. Our focus is to maintain a sustainable skills pipeline. We seek to ensure that our intellectual property (“IP”) is adequately safeguarded. Manufacturing cycle We have developed a strong and responsible relationship with our foundry, test and packaging partners. We outsource production to industry- leading wafer foundries such as TSMC, UMC and Global Foundries. This approach enables flexibility to deploy advanced production processes and maintain low capital intensity. Our assembly and test partners are leading companies such as SPIL, ASE and UTAC. Dialog Semiconductor PlcAnnual report and accounts 2018quality Our competitive advantage is built on OUR PEOPLE AND CULTURE Highly skilled engineers and entrepreneurial values. IP AND PRODUCTS Mixed-signal, highly-integrated power- efficient technologies that extend battery life and reduce materials consumption. STRONG BALANCE SHEET A strong balance sheet gives us the financial flexibility to pursue our growth strategy. CUSTOMER RELATIONS We work with the leading consumer electronics companies. A close R&D collaboration is at the heart of our customer relations. ROBUST AND RESPONSIBLE SUPPLY CHAIN We promote responsible business practices internally and across our supply chain. 15 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n PRODUCTS CYCLE 1–5 YEARS We focus on highly-integrated power management and power-efficient mixed- signal ICs for consumer electronics REVENUE GENERATION Long-term visibility Our integrated design approach helps to reduce component size and number, which improves the energy efficiency of our customers’ products. SHAREHOLDERS Consistent return of capital through share buybacks Our Global Operations and Quality functions have teams based at our partners’ manufacturing sites. We maintain deep expertise on advanced processes, test and packaging development in our own teams (“High-touch”). These areas of expertise support the development of products which are thin and light, features which consumers value highly in portable devices. In order to meet our stringent product quality and qualification requirements, all test programmes are developed and maintained by our Test and Product teams and deployed to our partners. This approach enables a continuous quality improvement process and delivers high levels of assurance to us and our customers regarding the potential risks they are exposed to through the supply chain. We promote responsible business practices internally and across our supply chain. Although fabless, we are responsible for delivering our products to customers. An efficient and responsible supply chain is important to us and our customers. Product cycle Dialog’s focus and expertise in power management and power-efficient semiconductors contributes to better energy efficiency and lower power consumption for a range of portable devices and applications in the consumer products market. Our integrated design approach helps to reduce component size and number, meaning our customers can reduce materials consumption, costs, maximise performance and accelerate their go-to-market. Our customers are attracted by the quality, performance and energy efficiency of our products and our focus on consumer devices. Dialog Semiconductor PlcAnnual report and accounts 2018 16 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Managing our resources and relationships Managing our resources and relationships to create a sustainable business model sustainable VISION To embed sustainable and responsible practices into the way we act internally and engage externally in order to preserve and create long- term value for a wide range of stakeholders. APPLICABLE EXTERNAL STANDARDS U United Nations Global Compact. U ISO14001 environmental management system standard. Our ongoing engagement with internal and external stakeholders helps us understand the impact of our activities and relationships on others – and how we can best manage these impacts in a responsible manner, as well as the potential risks and opportunities, to create value for all our stakeholders. This section provides high-level analysis of our most material business sustainability issues, details on how we manage them and selected data on how we have performed. In 2018, we carried out an interim review of our materiality matrix and we aim to undertake a full materiality assessment in 2019 in line with our policy. U ISO9001 quality management system standard. U ISO50001 energy management system standard. U Global Reporting Initiative Standards (GRI Standards). The outcome of our interim materiality assessment resulted in no major changes. Our core materiality areas remained as in 2017 with only one change in the prioritisation of our core material issues. During the year we continued to strengthen our audit verification process relating to human and labour rights, health and safety, and the environment. Further detail is available in our 2018 Sustainability Report and on our website at www.dialog-semiconductor.com/company/ corporate-social-responsibility Economic performance and impact Technological innovation and agility Product impacts Labour rights and human rights (supply chain) Diversity and equality Intellectual property Compliance with customer standards Enhancing the external skills pool Environmental impacts (supply chain) Energy and carbon emissions Health and safety Conflict minerals Employee development Recruitment of professionals and graduates Corporate governance and compliance Transparency (supply chain) Corruption/ bribery Retention, morale and engagement MATERIALITY MATRIX Society Business ethics Value chain Environment People Major Significant Philanthropy 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 l s r e d o h e k a t s n o t c a p m I Pollution, resources and waste Moderate 1.0 1.0 1.5 2.0 2.5 3.0 Impact on Dialog 3.5 4.0 4.5 5.0 Dialog Semiconductor PlcAnnual report and accounts 2018 17 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n OUR SUSTAINABILITY PRIORITIES These are the issues that are most important to our business and key stakeholders. Although our sustainability activities cover a wider range of topics, our effort is focused on these. The re-prioritisation of our core issues reflects our stakeholders’ perception of their relative importance. It does not indicate a change in the Company’s effort. Our core material issues U Economic performance and impact U Technological innovation and agility U Intellectual property U Compliance with customer standards U Product impacts U Labour rights and human rights (supply chain) U Retention, morale and engagement U Employee development U Corporate governance and compliance U Diversity and equality Change from 2017 = = = = = = ! ! = = + New material issue = No change ! ! Re-prioritisation of material issues Mapping to business issue Society Society Business ethics Value chain Environment Value chain People People Business ethics People Read more about our approach to sustainability in our 2018 Sustainability Report at www.dialog-semiconductor.com/company/sustainability/reports-and-presentations At Dialog, we are a team. We work together with our internal and external stakeholders and we aim to build strong long-term relationships. This is an important element of our Company values. Dialog employees are based in many of the premises of our partners. We undertake annual audits of our existing fabrication partners covering operational and sustainability aspects. We work with the leading consumer electronics companies. Our engagement goes beyond customer satisfaction. A close R&D collaboration is at the heart of customer relations. Customers are at the core of our DNA. Our passion for innovation and the quality of our products attract the leading consumer electronic brands. We engage with our customers to better understand their requirements and their perception of the quality of the products we design for them. This helps us increase the value we bring into our products and our performance. Read more about our customers on Page 20 Over the years, we have built strong and responsible relationships with our foundry, test, and packaging partners, as well as the communities within which we operate. Over time, our engagement has evolved into a close R&D and supply chain collaboration. Read more about our fabrication partners on Page 21 We understand and care about our impact. As a company, we are proud of the energy efficiency of our semiconductors and its positive impact in helping reduce power consumption in consumer applications. As a publicly listed company, we aim to generate value for our shareholders. In that process, we engage with a wider range of stakeholders and seek mutually beneficial relations which share the economic value created. Corporate governance and legal compliance remains a core sustainability priority for the Company and our stakeholders. Read more about governance on Page 57 Dialog Semiconductor PlcAnnual report and accounts 2018 18 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Managing our resources and relationships continued Engaging with our colleagues Our people and culture Customer Customer relations relations IP and IP and products products Robust and responsible Robust and responsible supply chain supply chain Strong balance Strong balance sheet sheet Building our competitive advantage “We understand the value of an engaged and diverse workforce. Our culture and values encourage innovation, entrepreneurial spirit and diversity, and our programmes strive to ensure our employees remain engaged and motivated.” Julie Pope Senior Vice President, Human Resources Our performance Employee turnover (%) Employee retention (%) Manager retention rate Overall employee retention rate Engineering talent ratio (%) Diversity (%) Women overall Part-time employees Number of nationalities Dialog People and Culture Dialog’s ongoing success and growth is dependent on our ability to continue to attract and retain employees who are passionate about working within Dialog’s agile business model, designing and developing leading-edge products tailored to the needs of our customer base. We work to ensure that the environment at Dialog is a place where employees are motivated to deliver for our customers. This means having the right culture – one in which employees can perform at their best and deliver “best-in-class”, innovative products. 2018 10.7 91.0 89.3 76.1 17.6 3.4 69 2017 10.3 94.7 89.7 74.7 16.8 3.2 65 We are an engineering-led organisation with 76% of employees in engineering functions. We have a diverse global workforce of 2,100 employees who are vital to our success. Our goal is to offer them a combination of responsibility, recognition and benefits that are relevant and meaningful at every stage of their career. In 2018, we signed an agreement with Apple which, subject to the requisite regulatory approvals, will result in over 300 employees transferring to Apple in 2019. One of our key focus areas in 2019 will be to support these employees during their transition to Apple and to provide employees remaining with Dialog with the leadership and resources to ensure that they feel engaged and excited about Dialog’s future. Our overall employee retention rates remain stable in 2018 at 89.3%. TO HELP US MANAGE OUR HUMAN RESOURCES, WE MONITOR INTERNAL KPIs TO CHECK WE ARE ON TRACK: 76% Engineering talent ratio (%) KPI 250 New employees globally in 2018 (29 net additions) 2,100 2018 headcount (2017: 2,071 +1%) Talent attraction Dialog values diversity and fresh thinking, and our recruitment approach reflects this by spanning early careers to experienced hire recruitment. In 2018, we welcomed 250 new employees globally (29 net additions) and successfully integrated Silego employees into our teams in China, Japan, Korea, Taiwan, Ukraine and the US. Passionate about developing employees and managers Dialog recognises the importance of developing the engineering talent of the future. Our Graduate & Early Careers Programme is key to this. In 2018, we supported graduate hires with bespoke learning programmes that included technical training, group projects, opportunities for work shadowing, and coaching and mentoring programmes. To ensure our employees maintain leading- edge technical capability, we invest heavily in the development of Dialog’s engineering population. In 2018, we rolled out key technical leadership skills development workshops for our analog, digital and technical populations. Engineers are able to access development appropriate to their needs through internally run courses, cross-functional projects and mentoring. We also recognise the value of an external perspective, and facilitate attendance at key external courses and conferences. Dialog Semiconductor PlcAnnual report and accounts 2018 19 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n In addition to their accountabilities to our customers, our managers and leaders coach and mentor their own teams with technical skills and advice. To support this critical population, we continue to expand the reach and scope of our manager development programmes. In 2018, the total number of training hours for our managers was 3,454 with an average of 15 training hours per person. Dialog recognises that an effective learning organisation depends on the employee’s ability to acquire and share knowledge critical to their development. In 2019, Dialog will focus on building employee capability, providing them with the tools and resources to enable them to diagnose their own learning needs and proactively access development that maximises their potential and puts them in the driving seat of their careers. Diversity and inclusion Diversity and inclusion are vital in maintaining a creative, dynamic and innovative business environment. We currently have operations in 16 countries, and we are proud that our employees represent 69 nationalities. We acknowledge and respect differences between and within cultures and are committed to promoting respect, fairness and equal opportunity for all employees, irrespective of their gender, race, ethnicity, beliefs, sexual orientation, disability as well as diversity of thought and experience. Our 2018 global gender balance is 82.4% men to 17.6% women, an 0.8% increase in female representation from 2017. Skills and professional expertise form the basis of Dialog’s recruitment processes, and our job offers are gender-neutral, ensuring a bias-free selection. We remain committed to encouraging more women to apply for roles within Dialog and participate in several initiatives that support women in engineering. In 2018, we partnered with the Women in Engineering Society (WES) to work towards increasing the number of women engineers in the Company. In June 2018, female engineers from the Swindon site held an exclusive event with our CEO and senior executive team members to discuss how to address the gender gap that prevails across the electrical engineering sector. Equal pay is an area which we monitor closely and our salary systems, regular reviews and processes are designed to avoid any gender-based discrimination. For the second year running we will be reporting our gender pay gap statistics as they relate to our total UK population as at 5 April 2018. As required by the UK Equality Act 2010 (Gender Pay Gap Information) Regulations 2017, we submit data to the UK government via their website. Read more about the gender pay gap on our website at www.dialog-semiconductor.com Employee engagement We understand that an actively engaged workforce is critical to our success. In a year of change, we are actively focusing on ensuring the positive engagement of our employees by equipping our leaders and managers with the skills to help employees navigate a changing environment, support employee development and create an environment in which employees are excited for their future with Dialog. By operating a flexible, decentralised HR model, we enable our business units and locations to have the autonomy to work in partnership with us to put in place organisational plans that motivate and engage employees in ways that are relevant to their locations. In 2018 we took the decision to review our approach to annual employee engagement surveying. In 2019, we intend to move to a more regular, dynamic survey approach, consistent with the pace of change of the work environment. Additionally, in 2019, in line with best practice, we will be appointing one of our Board members to take responsibility for overseeing employee engagement in collaboration with our global HR teams. Employee communications Open and continuous two-way communication is a vital part of employee engagement. We keep employees regularly updated on Company performance, business strategy and other relevant news that concerns employees across the Company via regular “All Hands” meetings. We use our intranet to post news articles and regular video updates from our CEO and other senior leaders, and we use our “Enginews” site to share information on our engineering products – recent developments, ideas and celebrations. Rewarding and recognising employees We offer market-competitive pay and employee benefits, along with opportunities for individual and team recognition, all within a supportive working environment. We regularly benchmark our pay and benefits against the employment markets in which we operate. This includes close analysis of total compensation offered by our direct competitors, both global and local, to ensure that our offering remains attractive. Our compensation programmes include short- and long-term share and cash- based bonus plans that allow us to clearly differentiate levels of reward, thereby recognising critical skills and high performance. We encourage regular recognition and will shortly be launching a technology platform that will allow managers to recognise and reward those employees who have gone “above and beyond”. Work environment Our workspaces offer our employees the highest standard of safety, comfort, technology and accessibility. We will continue to support employee well-being through the provision of free refreshments, healthy snacks and fruit at key locations. Human and labour rights Our Code of Business Conduct is directly informed by international, industry and customer standards. Given the highly specialised nature of our industry we believe our supply chain has relatively low levels of slavery and human trafficking risk. Our Modern Slavery and Human Trafficking statement reflects our ongoing commitment to remain vigilant through compliance monitoring and verification, especially in selecting new suppliers. Read our modern slavery and human trafficking statement on our website at www.dialog-semiconductor.com Anti-bribery and corruption Compliance with global anti-bribery and corruption (“ABC”) legislation is vital in our approach to business dealings, and it is compulsory for all employees to complete online ABC training when they first join the Company and at regular intervals thereafter. Julie Pope Senior Vice President, Human Resources Dialog Semiconductor PlcAnnual report and accounts 2018 20 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Managing our resources and relationships continued The strength of our customer relations Our people Our people and culture and culture Customer relations IP and IP and products products Robust and responsible Robust and responsible supply chain supply chain Strong balance Strong balance sheet sheet Building our competitive advantage 75% Customer concentration (%) 2018 2017 2016 Read more on our KPIs on Pages 34-35 KPI 75 77 74 Technological innovation and agility A close R&D collaboration with our customers enhances our innovation capacity and creates strong and long lasting customer relations. Our customers want our focused innovation, technical expertise, high integration and fast product development and support. Given the speed of technological change in our markets, our focus is to develop and retain long-term relationships with all our major customers, adopting a true partnership approach. Customers with a significant contribution to revenue include Apple, Xiaomi, Huawei, Samsung and Panasonic. These top five customers represented 83% of Dialog revenue in 2018 (2017 82%; 2016: 92%). We recognise there is a risk associated with this level of customer concentration and the revenue derived from our largest customer (Apple Inc.) is shown on page 144, note 33c. See details of customer concentration in the Risk section on Page 53 During 2018 we reached a landmark agreement with Apple Inc., a testimony of the quality and strength of our mixed-signal technology. Dialog will continue on its path to create a more diversified business, welcoming new customers across multiple business segments. Customer and industry standards As a supplier of semiconductors to manufacturers of sophisticated electronic goods we are subject to a significant body of technical, legal, social responsibility, and quality control requirements defined by our customers. For more information see our 2018 Sustainability Report Our target end-markets IoT MOBILE AUTOMOTIVE COMPUTING & STORAGE A landmark agreement with Apple Inc. On 11 October 2018, Dialog announced an agreement with Apple Inc. to license certain of its power management technologies, transfer certain of its assets and over 300 employees to support chip research and development. The employees who will be transferred when the deal closes have worked closely with Apple for many years, and this transition will foster deeper collaboration between the two companies. This agreement was the result of a long- standing and close R&D collaboration which resulted in the creation of unique power management technology for mobile applications. Apple will remain an important customer and innovation partner to Dialog and we expect to continue to collaborate with them to develop innovative technologies for many years to come. Dialog Semiconductor PlcAnnual report and accounts 2018 21 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Managing our production partners and suppliers Our people Our people and culture and culture Customer Customer relations relations IP and IP and products products Robust and responsible supply chain Strong balance Strong balance sheet sheet Building our competitive advantage 100% On Time Delivery performance (%) 2018 2017 2016 100 99 99 About our Supplier Code of Conduct We expect all of our major suppliers to comply with our Supplier Code of Conduct. For more information see our 2018 Sustainability Report We operate a high-touch fabless business model and we have developed strong and responsible relationships with our foundry, test and packaging partners. Over time, our engagement has evolved into a close R&D and supply chain collaboration. Dialog employees are based in many of the premises of our partners. We undertake annual audits of our existing fabrication partners covering operational and sustainability aspects. We outsource our wafer production to leading foundries like TSMC and Global Foundries, mostly in Taiwan and China. They provide high-quality products and have the ability to meet both our stringent qualification requirements and tight deadlines. Over the years we have worked closely with TSMC to introduce new manufacturing technologies for our highly-integrated power management ICs, such as 130 nanometre BCD. The final assembly of our chips is outsourced to a number of qualified subcontractors in Asia. Our test programmes, based on our own and individual customers’ specifications are developed by our test engineers in parallel with the design process. Leveraging the outsourcing model to its fullest for volume manufacturing, we still retain in-house a prototype test facility, including physical analysis capabilities. This facilitates fast ramping to volume manufacturing at the foundry and at packaging and test sub-contractors, achieving best-in-class industry yields and extremely high quality and reliable products. Equally important, it allows us to minimise the scope of tests required and the device test time, helping to reduce unit costs. A resilient supply chain How we manage our value chain Materiality* Given the nature of our business model and our commercial relationships, value chain management is a particularly important issue for Dialog. This not only includes operational aspects (including the avoidance and mitigation of supply chain disruption and supply constraints), but also sustainability aspects such as: U The impact of our business partners on human rights and labour rights. U Health and safety performance amongst our suppliers. U The environmental impacts of both our suppliers and the contents of our products. This reflects: U Evolving stakeholder expectations, which place ever-growing emphasis on the need for companies to identify, and use their legitimate influence to proactively manage, their indirect sustainability impacts. U Dialog’s duty to help protect its own customers from reputational, contractual or commercial harm. We manage our value chain through: U A policy of only dealing with fabrication partners who are accredited to or are compliant with the ISO14001 (environment) and ISO9001 (quality) management standards. U Screening of all new fabrication partners against our Self-Audit Checklist (which covers labour and human rights, health and safety, the environment and business ethics), as well as pre-qualification audits prior to the integration of new fabrication partners into our supply chain. U Annual auditing (by joint Dialog and third-party auditing teams) of all existing fabrication partners against our Supplier Audit Checklist and Corporate Social Responsibility Checklist. In addition to requirements relating to ISO14001, OHSAS18001 and ISO9001, auditing covers a range of broader corporate social responsibility issues, including those drawn from the SA8000 social accountability standard. In 2018, we carried out 22 supplier audits on this basis (2017: 18). Responsibility in this respect sits with the Senior Vice President Global Manufacturing Operations. He is supported in this role on a day-to-day basis by the Environmental Manager. Proportion of major fabrication partners screened/ audited for sustainability performance by issue type (new fabrication partners screened1/ existing fabrication partners audited2) Health and safety (%) Environment (%) Labour rights (incl. human rights) (%) Society (%) 2016 100/100 100/100 100/100 100/100 2017 100/100 100/100 100/100 100/100 2018 100/100 100/100 100/100 100/100 Type and number of “major” negative audit findings3 Health and safety Environment Labour practices (incl. human rights) Society 2016 0 1 0 0 2017 6 2 3 0 20185 7 54 206 0 1 Screening activity is aimed at improving the performance of our fabrication partners where necessary, 2 3 rather than their exclusion from our supply chain. Includes both documentary auditing and on-site auditing. All our fabrication partners were subjected to auditing in 2018. i.e. audit findings of sufficient seriousness that Dialog requires immediate correction on the part of the supplier. 4 Such as, boundary noise management, waste management and indoor air quality management. 5 In 2018, we continued to strengthen our audit processes and expanded the scope of our audits to include Silego Technology Inc., acquired in November 2017. 6 Such as working hours management above and beyond local law and foreign contract worker protection. * As indicated on page 16, material sustainability issues. Dialog Semiconductor PlcAnnual report and accounts 2018 22 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Managing our resources and relationships continued Through our business activity we create value for society Our people and culture Customer Customer relations relations IP and products Robust and responsible Robust and responsible supply chain supply chain Strong balance Strong balance sheet sheet Building our competitive advantage Our most important societal impact is the generation of economic value, much of which is distributed amongst investors, employees, suppliers, host governments and other beneficiaries. The nature of products means we play an important role in helping millions of end-users access affordable and life-enhancing technology. Furthermore, our position at the forefront of semiconductor R&D means we are constantly contributing towards the advancement of scientific knowledge in this area, laying the ground for future technological innovation, whether by ourselves or others. Our products are based around a range of power-efficient IC solutions, and we aim to have a positive impact on the wider environment through the development and marketing of energy- saving technology. Societal benefits Economic impact In pursuit of the generation of profit we also generate broader economic value, much of which is distributed to a wider set of stakeholders. For more information see our 2018 Sustainability Report Our products Materiality* Our products are based around a range of power-efficient IC solutions, and we aim to have a positive impact on the wider environment through the development and marketing of energy-saving technology. Positive product impacts The technology that we design, develop and market supports the wider provision (by our business partners) of advanced, affordable technology to consumers in a range of global mass-markets, including: U Personal, portable computing devices. U IoT applications. U LED solid state lighting and LED backlighting. Total value generation and distribution by type (US$ millions) Economic value generated Economic value distributed Operating costs1 Employee wages and benefits2 Payments to providers of capital Payments to government Community investments Economic value retained 1 Excluding employee wages and benefits and property tax. 2 Including share-based payments. 2016 1,197.6 1,076.2 794.9 230.3 3.4 47.4 0.2 121.4 2017 1,352.8 1,183.1 881.3 274.5 1.3 25.8 0.2 169.7 2018 1,442.1 1,304.2 933.7 311.2 3.1 56.0 0.2 137.9 Minimisation of negative product impacts The nature of our integrated circuits means that their actual and potential negative impacts are relatively limited. Nonetheless, we design our products in a way that is intended to minimise any negative impacts they might have over their lifecycle. This includes efforts to reduce the size of our integrated circuits (thus reducing the amount of input materials required, as well as the amount of packaging used to protect and ship them). In addition, and as described above, we aim to make our integrated circuits as energy-efficient as possible – while also enhancing the energy efficiency of the larger products in to which they are incorporated. Given the important role our integrated circuits play in managing the power supply of more than a billion consumer end- products, we place significant emphasis on ensuring they do not pose any health and safety risks to end-users. In this context, our products offer a range of advantages to end-users (and, by extension, our customers who are selling to them). These include: U Mobile power management: Greater power efficiency, resulting in longer battery life and increased mobility. For example, typical usage tests suggest our Power Management Integrated Circuits decrease the power consumption of smartphones, tablets and Ultrabooks™ by up to 30%**. U Power conversion: Our high efficiency AC/DC power converters and LED drivers help maximise power conversion efficiency using digital technology and fewer components. This includes converters that use little or no power while on standby – a particularly important aspect when you consider that standby demand consumes more than 100 billion kilowatt-hours of electricity annually in the United States alone (enough to power more than nine million American households). Furthermore, our solid state lighting (“SSL”) LED drivers support very high efficiency, long-lifespan SSL bulbs. U Connectivity: Our Bluetooth® low energy, SmartBond™ System-On- Chip helps increase the battery life of relevant wireless products by up to 100%*** – reducing overall power usage and enhancing the mobility of connected products. * As indicated on page 16, material sustainability issues. ** Compared to discrete solutions. *** Compared to similar products available in the market. Dialog Semiconductor PlcAnnual report and accounts 2018 23 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n We operate and promote environmentally responsible practices Our people and culture Customer Customer relations relations IP and IP and products products Robust and responsible Robust and responsible supply chain supply chain Strong balance Strong balance sheet sheet Building our competitive advantage Environmental responsibility Energy and carbon emissions We are working across our offices to significantly reduce CO2 emissions and minimise the carbon footprint of our business. This year, we have offset 100% of emissions from all air travel and the use of rental cars from our two main design centres – Nabern and Swindon. We work with Climate Care to offset CO2 emissions through various renewable energy projects in Turkey, China and Taiwan. Scope 1 Scope 2 Scope 3 2017 Total 92.5 1,651.5 5,210.2 2017 per employee 0.05 0.86 2.71 2018 Total 81.2 1,170.3 4,203.6 2018 per employee 0.04 0.56 1.99 Scope 1: Direct emissions from self-generation. Scope 2: Indirect emissions from the consumption of purchased electricity, heat or steam. Scope 1 and 2 emissions from our two largest design centres – Nabern and Swindon. Scope 3: Other indirect emissions including those related to transport. Includes all air travel and car hire. Materiality* We operate responsible practices within our own business and promote them across our supply chain. Our products themselves are based around a range of energy-efficient IC solutions, and we aim to have a positive impact on the wider environment through the development and marketing of energy-saving technology. We make an ongoing effort to minimise our: U Energy consumption and carbon emissions. U Pollution and waste. U Use of natural resources. Management approach Responsibility for environmental performance sits with our Senior Vice President Global Manufacturing Operations. We further govern our environmental responsibility through the application of the Dialog Code of Conduct, which addresses our emissions to air and water, resource use, management of hazardous substances and waste management. Furthermore, we are certified to the ISO14001 environmental management standard, and our Company Quality and Management Manual support our efforts to achieve continuous improvement. In 2016, we implemented a new energy management system in Germany, achieving ISO50001 certification. * As indicated on page 16, material sustainability issues. Dialog Semiconductor PlcAnnual report and accounts 2018 24 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Our markets and strategy The opportunities in our markets The major markets in which we operate are below (market size in US$) PMICs, Charger ICs and Haptics Key Drivers 3% 2017-2021 CAGR Source: Gartner 2018, Dialog internal. Audio Codec 1% 2021 2017 2021 2017 2017-2021 CAGR Source: Gartner 2017, IDC 2016, Dialog internal. Bluetooth® low energy 23% 2021 2017 $334m 2017-2021 CAGR Source: IHS Technology Q1 2018 Report, Dialog internal. Wireless, USB audio 10% 2021 2017 $505m 2017-2021 CAGR Source: Future source (October 2018) and Dialog internal. $6.2bn $5.5bn U Increasing daily use of mobile devices. U Larger batteries and battery charge time reduction. U Larger, higher resolution screens, higher rate of data transmission and multi-core application processors. U Industry increase in “always-on” applications. U Acceleration of mobile technology into the Automotive space. $542m $523m U More power-efficient audio solutions which help to extend battery life. U High-quality audio technology capturing speech and audio. U Industry increase in “always-on” applications. $762m U Increase in the number of smart connected devices. U Very low power data transmission from peripherals to smartphones and tablets. U Solutions enabling customers a fast go-to-market. $735m U Increase in power-efficient, feature-rich wireless audio applications. U Fast growing USB type-C Hi-res audio headsets for the mobile market. U Fast growing semi-professional Unified Communication headsets with low-latency microphone features. Configurable Mixed-signal ICs 4% 2021 2017 $1,683m $1,436m 2017-2021 CAGR Source: Gartner 2018, Dialog internal estimates. Power Conversion 43% 2021 2018 $197m 2018-2021 CAGR Source: Statista (2018), WitsView (Dec 2015), Gartner (2018), Dialog internal estimates. U Initially focused on consumer markets requiring reliable and cost sensitive products, as well as fast time-to-market. U CMICs replace incumbent discrete components so its growth potential is higher than the end-market growth. U Addressing the opportunity in consumer, mobile, IoT, automotive, communications and computing end-markets. $579m U Larger smartphone/mobile device batteries and higher power adapters needed to charge them. U Consumer demand for faster mobile device charging and smaller travel adapters/power supplies requires very efficient, higher power density AC/DC IC solutions. U An expanding array of new rapid charging protocols, including the new USB Power Delivery 3.0 (USB-PD 3.0), Qualcomm® Quick Charge™ 4+ and other new proprietary OEM protocols. U Market shift from edge-lit design to multi-segment and direct backlighting to enable higher resolution and high dynamic range (“HDR”) displays. Dialog Semiconductor PlcAnnual report and accounts 2018 25 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Our strategy A path for future revenuegrowth Our ambition is to power the smart connected future, enhancing the usability, effectiveness and sustainability of consumer electronic products. Read about Managing risk and uncertainty on Page 52 We made good progress in 2018, moving forward with initiatives in each of our strategic priorities. Our goal is to generate sustainable long-term value for our customers, our shareholders, our employees and other stakeholders. The strategic framework aims to give a comprehensive view of our business and the links between our strategy, risks and the progress made during the year. STRATEGIC PRIORITY WHY IT IS IMPORTANT EXTEND OUR PRODUCT PORTFOLIO We aim to continuously extend our product portfolio of highly-integrated mixed-signal, lower power products. This helps us to diversify, open up new addressable markets and stay ahead of the competition. HOW WE MEASURE OUR PROGRESS 48 New products introduced and sold in 2018 with revenues greater than US$200,000. ACHIEVE A BROADER AND DEEPER CUSTOMER BASE The quality of our products has attracted the leading brands in each of our markets. We want to maintain and grow those strong relationships while further diversifying our customer base by launching new products and opening up new addressable markets. 26 New customers welcomed to Dialog with revenues greater than US$200,000. Additionally, we deepened our existing customer base with new ASIC and ASSP products. DELIVER CONTINUOUS INNOVATION STRATEGIC INITIATIVES AND M&A Innovation is at the core of our business. Our top talent and technology, paired with an innovative product development philosophy and sustained R&D investment, enables Dialog to deliver high value to our customers. US$326m Expensed in R&D programmes during 2018, an increase of 8% compared with 2017. We support the expansion of our business through a combination of organic initiatives, such as investments in new technologies and establishing regional partnerships, and M&A. In Q4 2018 we entered the Indian smartphone market with the first PMIC volume production for the latest Micromax smartphone. Our ongoing collaborations with Renesas and Xilinx will strengthen our presence in the automotive segment. Dialog Semiconductor PlcAnnual report and accounts 2018 Our strategic priorities Extending our product portfolio Applying our mixed-signal expertise into the development of new products HOW WE MEASURE OUR PROGRESS Dialog entered the growing haptics market with ultra-low power and compact Haptic IC. The DA7280 offers a unique and highly responsive haptic experience to the next generation of smartphones, gaming and automotive UI systems. This product offers lower power consumption and approximately 50% reduction in cost (Bill of Materials) compared to existing solutions on the market. As haptic drivers spend the majority of their time in standby/idle mode, the DA7280 was designed to utilise very low idle current consumption (360nA) to maximise battery life. 48 New products introduced and sold in 2018 with revenue greater than US$200,000 2018 2017 2016 48 39 29 Touchscreens are becoming a necessity, both in the consumer and increasingly in the automotive market, and this new IC will help provide a superior user experience. extend KEY RISKS U Human Capital. U Information technology and security. U Dependency on mobile and consumer electronics. U Supply chain interruption. U Quality assurance. U Return on research and development investment. PROGRESS IN 2018 U New 15 Degrees-of-Freedom (“DOF”) SmartBond™ Multi-Sensor Kit to support sensor connectivity in the Internet of Things (“IoT”). Built on Dialog’s DA14585 SmartBond™ System-on-Chip (“SoC”), the kit allows engineers to easily connect sensors to the cloud at the lowest power and smallest footprint. U Added Bluetooth® Mesh support to SmartBond™ product family. Enhanced by the Bluetooth® mesh standard, SmartBond™ SoCs will now enable extended-range applications within the home and industrial environments. 26 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Dialog Semiconductor PlcAnnual report and accounts 2018 Our strategic priorities Achieving a broader and deeper customer base Four billion Configurable Mixed-signal ICs shipped to date This is a significant milestone for our Configurable Mixed-signal ICs (“CMICs”) technology, with over four billion CMICs having been shipped to date. The milestone validates Dialog’s configurable technology, including the highly successful GreenPAK™ product family, as the leading choice for the market. As market demand for CMIC technology intensifies, Dialog has added to its suite of development tools to further accelerate customer product designs across IoT and mobile end-markets. PROGRESS IN 2018 U Jabra introduces the first product on the market featuring Dialog’s DA14495 hi-fi audio SoC, delivering superior connectivity and industry- leading performance, even in busy work environments. U Dialog Semiconductor USB PD chipset was adopted by Hosiden for its latest smartphone adapters. Hosiden selected Dialog to reduce BOM and minimise adapter size for one of Japan’s leading mobile TELCO providers. KEY RISKS U Dependency on key customers. U Dependency on mobile and consumer electronics. HOW WE MEASURE OUR PROGRESS 26 New customers welcomed to Dialog in 2018 with revenue greater than US$200,000. Additionally, we deepened our existing customer base with new ASIC and ASSP products. 2018 2017 2016 5 26 16 broaden 27 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Dialog Semiconductor PlcAnnual report and accounts 2018 28 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Connectedhealth A chip a day keeps the doctor away The number of patients being treated for chronic diseases reached almost two billion* in 2017. In that context, connected health represents a new growth area for our business. Dialog is working with some of the leading pharma companies in the development of new Bluetooth® low energy ICs targeting disposable medical products. Our technology is enabling new ways to meet market needs in areas such as glucose monitoring and prescription drugs timestamping and dosage. Applications such as glucose monitors, injectors, inhalers, blood pressure meter, and thermometers will be optimised and get connected using our Bluetooth® low energy and Configurable Mixed-signal ICs. * Source: Statista and 2017 Dialog internal. Dialog Semiconductor PlcAnnual report and accounts 2018 health 29 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Dialog Semiconductor PlcAnnual report and accounts 2018 Our strategic priorities Delivering continuous innovation Dialog Semiconductor First to Demonstrate Stereo HiFi Quality Audio Over Bluetooth® low energy The technology, which enables True Wireless Stereo audio streaming over Bluetooth® low energy, was showcased in a proof of concept implementation to Bluetooth® SIG Associate members at Bluetooth® World 2018 in Santa Clara, California. This allows developers to overcome challenges of battery life and synchronisation for True Wireless Stereo systems. innovation 30 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l PROGRESS IN 2018 U Nanopower PMIC press release. U Introduced the first Configurable Mixed-signal ICs with In-System- Programming, adding significant value in a wide range of battery powered applications and extending the range of addressable applications. KEY RISKS U Dependency on mobile and consumer electronics. U IP protection. U IP infringement. HOW WE MEASURE OUR PROGRESS US$326m Expensed in R&D programmes during 2018, an increase of 8% compared to 2017. 2018 2017 2016 76% Engineering talent ratio (2017: 75%; 2016: 75%) 326m 303m 261m KPI 860 Inventions for which we are pursuing or have already obtained patent protection (2017 approximately 800; 2016: approximately 700) s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Dialog Semiconductor PlcAnnual report and accounts 2018 Our strategic priorities Focusing on strategic initiatives and M&A... Entering the Indian smartphone market with our partner UNISOC In 2018 we partnered with UNISOC, formerly Spreadtrum Communications, to develop the SC2703, an optimised high-performance Power Management Integrated Circuit (“PMIC”) that is powering the latest addition to the new Micromax Canvas LTE smartphone series. The smartphone market in India has taken off in recent years, largely due to the entrance of mobile network operator Reliance Jio and has driven tremendous adoption of 4G-enabled devices. Micromax, one of the leading handset players in India, began rolling out its Canvas series of smartphones with 4G capabilities for first time smartphone users, and the Canvas series quickly became the highest selling phone series in the under Rs 5,000 budget (approximately US$70) segment in India after its launch. Our collaboration with an innovator like UNISOC unlocks new possibilities for our business. 31 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n focus PROGRESS IN 2018 U Powered the latest addition to the new Micromax Canvas LTE smartphone series through our collaboration with UNISOC. U Energous Corporation Announces New DA2223 Receiver IC Designed for Small Electronic Devices. The Smallest IC in the Energous portfolio increases the available market for wireless charging by providing Energous WattUp® to smaller form factors devices. KEY RISKS U Human capital. U Dependency on key customers. U Dependency on mobile and consumer electronics. HOW WE MEASURE OUR PROGRESS During 2018 we continued developing our partnerships with UNISOC and Energous Inc. Our ongoing collaborations with Renesas and Xilinx will strengthen our presence in the automotive segment. Dialog Semiconductor PlcAnnual report and accounts 2018 Evolve and develop The gaming experience continues to evolve and the development of richer virtual reality experiences is taking the gaming industry into an exciting new phase. 32 i S t r a t e g c r e p o r t Dialog’s technology supports a richer gaming experience, enabling efficient power management of the main console and controllers, low power connectivity (Bluetooth® low energy) for AR/VR controllers, a sharper and stronger haptic experience at ultra-low power, and high-performance audio with our audio ICs. game on s t a t e m e n t s F n a n c a l i i C o r p o r a t e g o v e r n a n c e A d d i t i o n a l i f n o r m a t i o n By using special input/output devices (joysticks, data gloves or other devices), users can receive feedback from computer applications in the form of felt sensations in the hand or other parts of the body. In combination with a visual display, haptics technology can be used to train people for tasks requiring hand- eye coordination, such as surgery and space ship manoeuvres. It can also be used for games in which you feel as well as see your interactions with images. For example, you might play tennis with another computer user somewhere else in the world. Both of you can see the moving ball and, using the haptic device, position and swing your tennis racket and feel the impact of the ball. Dialog Semiconductor PlcAnnual report and accounts 2018 game on 33 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Dialog Semiconductor PlcAnnual report and accounts 2018 34 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Key performance indicators “KPIs” Our KPIs We are a business built on innovation and deep mixed-signal semiconductor expertise, and our four strategic objectives support the ambition to power the smart connected future. Through our KPIs we monitor our pool of talent, vital to fostering innovation. Alongside, we remain focused on delivering a more diversified, cash- generative growth which will, in turn, support the expansion of our business. Our key performance indicators seek to ensure performance is aligned to strategy and stakeholders’ interests. Additionally, the Company works with a wide range of metrics covering different aspects of our business activities. Performance indicators Definition and relevance 2018 performance Employee turnover 2018 10.7% 2018 2017 2016 10.7% 10.3% 7.9% Engineering talent ratio 2018 76% 2018 2017 2016 76% 75% 75% Number of sales opportunities 2018 1,011 2018 2017 2016 1,011 1,038 823 Customer concentration 2018 75% 2018 2017 2016 75% 77% 74% Free cash flow 2018 US$230m 2018 2017 2016 US$230m US$205m US$195m Number of leavers in the last 12 months divided by the average headcount during that period expressed as a percentage. Monitoring our ability to recruit and retain experienced engineering and commercial professionals is vital given the strong competition for skills in the sector, ageing population, and our business growth ambitions. In 2018, employee turnover was broadly stable at 10.7%. Our ability to recruit and retain engineering professionals remained high. In 2018 the total number of employees remained broadly in line with 2017. Dialog has a performance management system to ensure we reward our best employees through appropriate mechanisms. Proportion of employees in engineering functions as a percentage of the total employee base. Monitoring the size of our engineering pool and our ability to generate innovation. In 2018, the engineering talent ratio was 76%, slightly above 2017. Number of sales opportunities recorded in the pipeline in a given year, with a value higher than US$250k excluding cancelled, rejected, lost, and opportunities which reached their end of life. In 2018, the number of sales opportunities with a value higher than US$250k was broadly in line with 2017. However, the number of opportunities with a value lower than US$250k almost doubled. This is a reflection of the increasing number of revenue opportunities in our various business segments. Proportion of Group revenue from the single largest customer. Monitoring the risk associated with reliance on a single source of income. In 2018, customer concentration was slightly below the previous year at 75%, two percentage points lower than in 2017. Revenue growth in 2018, excluding our largest customer, was 16%. Free cash flow is a non-IFRS measure that represents cash flow from operating activities, less capital expenditure. It provides a measure of the cash available for expansion, to make strategic investments in, or acquire, other businesses, to repay borrowings and to fund distributions to shareholders. Free cash flow in 2018 was 12% above 2017. This was the result of the higher profitability in 2018 alongside the Company’s ability to convert profit into cash, partially offset by higher tax payments. In 2018, we saw a net outflow from income taxes of US$41.1 million (2017: inflow US$8.3 million). Dialog Semiconductor PlcAnnual report and accounts 2018 35 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l Performance indicators Definition and relevance 2018 performance Revenue growth IFRS 2018 Underlying 2018 +7% 2018 -12% -12% +7% +7% +7% 2018 2018 2017 2017 2016 2016 +13% +13% Gross margin IFRS 2018 47.9% Underlying 2018 48.3% 2018 2018 2017 2017 2016 2016 47.9% 48.3% 47.7% 47.9% 47.3% 47.4% Actual and prior year’s full-year revenue measured in our reporting currency, US dollars. Monitoring this revenue trend provides a measure of business growth. Actual and prior year’s gross margin. Gross margin is gross profit expressed as a percentage of revenue and shows the value of the Group’s products. Monitoring this trend provides a measure of our ability to obtain profit margin from our products and manage our manufacturing costs over a period of time. Revenue in 2018 was 7% above 2017. Excluding the contribution from the acquisition of Silego Technology Inc., revenue in 2018 was broadly in line with 2017. The main contributors to the revenue performance in 2018 were the acquisition of Silego Technology, the solid performance of our connectivity technologies, in particular SmartBond™, our Bluetooth® low energy products, and the increased adoption of rapid charge technologies. Excluding revenue from Silego Technology, revenue in 2018 was in line with 2017. Gross margin in 2018 (both IFRS and underlying) was slightly above 2017. This increase was mainly the result of lower manufacturing costs. Operating expenses as a percentage of revenue IFRS 2018 Underlying 2018 34.3% 28.9% 2018 2018 2017 2017 2016 2016 34.3% 33.1% 28.9% 28.8% 32.9% 29.0% Operating margin IFRS 2018 Underlying 2018 13.8% 19.5% 2018 2018 2017 2017 2016 2016 13.8% 13.8% 19.5% 19.2% 18.5% 25.9% Diluted EPS (US$) IFRS 2018 Underlying 2018 1.80 2.90 2018 2018 2017 2017 2016 2016 1.80% 2.90% 2.92 3.25 2.21 2.09 Actual and prior year’s operating expenses (“OpEx”) expressed as a percentage of revenue. OpEx % provides a measure of our effort in innovation and the efficiency of our operating structure over a period of time and it reflects the need for current returns as well as an investment in future revenue growth. OpEx % and underlying OpEx % provide a useful reflection of the focus and efficiency of our operating structure. OpEx includes Selling & Marketing expenses, General & Administrative expenses and Research & Development expenses. OpEx % in 2018 was 120bps above 2017 mainly due to the acquisition of Silego. On an underlying basis, OPEX % was 10bps above 2017. Underlying R&D % was at the same level as 2017, a reflection of our commitment to innovation. SG&A % was 10bps above 2017. We made further investment in our sales network but G&A functions did not increase significantly. It is important to note that our R&D effort is not directly linked to the revenue of the same period. It represents an investment in future revenue streams. s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Actual and prior year’s operating margin. Monitoring this trend provides a measure of our ability to increase the profitability of our operating activity over a period of time. Underlying operating margin provides a useful link to our ability to generate cash as we are a low capital intensity business. Operating margin in 2018 was in line with 2017 which includes the acquisitions of Silego Technology Inc. and the ams AG LED backlighting business in 2017. On an underlying basis, operating margin was 30bps above 2017. This increase is mostly the result of the improvement in underlying gross margin. Actual and prior year’s diluted EPS. Monitoring this trend provides a useful measure of our ability to generate earnings and the inherent value of our business for our shareholders over a period of time. Underlying diluted EPS provides a useful reflection of the inherent value of the business. Diluted EPS was 19% below 2017 to US$1.80 in line with the movement in net income which is mostly due to the recognition of a fair value loss of US$10.9 million on the warrants we hold over shares of Energous. 2016 diluted EPS included the impact from the Atmel termination fee. Underlying diluted EPS was 1% below 2017, due to a US$1.0 million currency translation loss. In 2017 we recognised a currency translation gain of US$1.7 million. Dialog Semiconductor PlcAnnual report and accounts 2018 36 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Segmental review Mobile Systems Leveraging our mixed-signal expertise to create the next wave of innovation Energy efficiency is a key feature of our power management, charging and audio ICs. We have been at the centre of the mobile computing revolution since its early days and we are investing to leverage our expertise into new segments. Dialog is well positioned to create the next wave of innovation in smart power management, charging and haptics. “As consumer demands continue to push design boundaries, Dialog’s expertise and IP contribute to solving the complex challenge of extending battery life while adding new features, all in a small form factor.” Udo Kratz Senior Vice President and General Manager, Mobile Systems Business Group KEY FACTS US$1,030m Revenue (US$m) US$248.8m Underlying operating profit Underlying operating profit reconciliation on Pages 45-46 Highlights U Reached an agreement with Apple Inc. to license certain of our PMIC technologies, and transfer certain assets and over 300 employees. U Introduced the first fully-integrated nanopower PMIC for low power IoT applications. U Entered the growing Indian smartphone market with first PMIC volume production for the latest Micromax smartphone. U Entered the haptics market with an ultra- low power and compact Haptic IC. U Leveraged our power management technology into new markets such as gaming, solid state drives and automotive. Our markets U System power and battery management ICs for large-screen smartphones and tablets (5”–11” category). U High-efficiency battery chargers for smartphones and tablets. U Audio CODECs for mobile computing and accessories. U High-voltage power management for Chromebooks™, Ultrabooks™, and convertible tablets. U Automotive-grade PMICs for in-vehicle infotainment, electronic instrument cluster, telematic systems and driver- assisted displays. U Low-power and highly-integrated power management for connected consumer applications including smart wearables, home and building automation, and connected medical devices. Our products Dialog replaces discrete power management components with highly- integrated, single-chip solutions that reduce energy usage, provide design simplicity at a lower cost and improve the overall power density of mobile products. Our PMICs are highly configurable. This allows them to be factory-tailored to meet the exact voltage and current needs of every component on a circuit board. This flexibility is attractive to both platform vendors and customers. Platform vendors can validate one PMIC and use it in multiple platform variants, and end-customers who wish to differentiate from other platform customers can modify some peripheral functions. Our leadership position in PMICs allows us to quickly address developing market trends and we continue to see significant focus on battery charging. 72% of total Group revenue in 2018 Dialog Semiconductor PlcAnnual report and accounts 2018 37 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n A fully-integrated nanopower PMIC to power connected devices Today’s “always-on” IoT devices such as fitness trackers, smartwatches and smart home products are expected to spend less time tethered to a charger, but expanding feature sets present new challenges to battery life. With board area already at a premium for engineers, new power management solutions are favoured over increasing battery capacity. Dialog’s first fully-integrated nanopower PMICs build on our expertise in power management and IoT connectivity to provide engineers with a compact, powerful solution that solves these challenges while reducing overall form factor of the system. Key drivers U Battery charge time reduction. U Increasing efficiency requirements to address tightening thermal budgets. U Industry increase in “always-on” applications requiring ultra-low power solutions to extend battery life. U Broader adoption and reliance upon platform reference designs for lower customer development cost and faster time-to-market. U Expansion of high-performance processors into Automotive infotainment systems driving adoption of integrated power solutions. U Utilising haptics technology to further differentiate consumer devices. The increasing electrification of the automobile is driving additional business potential for Dialog power management solutions. High resolution screens within the cabin for advanced infotainment systems and clusters, combined with always on driver assistance features require high- performance processing solutions. Dialog’s experience in power management of multi-core processors and our AECQ100 Automotive qualified products have us perfectly positioned to respond to our customers’ needs. Always-on sensing combined with increased context awareness in a wide range of smart devices has the effect of exponentially increasing the number of use cases that customers wish to support. Strategies to manage leakage and quiescent current are now evolving in parallel with new topologies to deliver higher power density to support the next level of “full power” benchmark performance. Accommodating such diverse requirements while maintaining battery life is one reason why customers continue to turn to Dialog to support their next power challenge. With such powerful market dynamics at play in high-volume segments, the stage is set for the next wave of innovation in smart power management – Dialog is well positioned to deliver. 2018 progress U Since 11 October 2018 we have worked towards the closing of the licensing agreement with Apple Inc. which is expected during H1 2019. U Successful mass production release of industry-leading Nanopower PMIC products for connected consumer applications: DA9230 & DA9231. U Launched first fully integrated nanopower PMIC including system power and battery management, DA9070 and DA9073. U Entered the growing Indian smartphone market with the first PMIC volume production for latest Micromax smartphone. U Entered into new markets with production of custom application specific (“ASICs”) PMICs for the gaming and DSLR camera markets. U Continued leadership of audio codec product for a leading computing platform. U Expanded our automotive PMICs solutions for Renesas R-Car H3, M3 and V3M computing platforms. U Launched industry’s lowest power high definition haptics driver, DA7280. Forward focus areas for 2019 Extend product portfolio U Extend our Automotive PMIC portfolio. U Expanding our engagement in gaming and Solid State Drives PMIC design. Deliver continuous innovation U Accelerate System-on-Chip partner collaboration. U Leverage Dialog internal synergies to provide signal chain solutions to our customers. Strategic initiatives and M&A U Deepen our collaboration with strategic partners. Dialog Semiconductor PlcAnnual report and accounts 2018 38 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Segmental review continued Advanced Mixed Signal Configurable and programmable ICs enable our customers a fast time-to-market Configurable Mixed-signal ICs pioneer a new category of ICs which enable our customers to customise and integrate multiple analog, logic and discrete functions into a single chip. This can be prototyped in hours, accelerating time-to-market and reducing board space. PrimAccurate™ digital control technology is at the heart of our AC/DC converters, backlight driver ICs and solid state lighting LED driver ICs. It enables energy-efficient products and helps our customers meet ever increasing government standards and energy regulations. “In 2018, we maintained our commanding share in the rapid charge market and grew our backlighting business over 3X.” Davin Lee Senior Vice President and General Manager of Advanced Mixed Signal Highlights U Launched the first in-system programmable CMIC. U We sustained our strong position in the fast charging smartphone/tablet market with approximately 60% market share. U We began shipping USB PD 3.0 solutions in volume to customers. U We introduced a unique silicon-optimised state machine solution that simplifies induction heat cooker power supply controller design. U We grew our backlighting revenue by more than 3X, through both organic growth and the acquisition of ams AG LED backlighting business. Our markets U Configurable Mixed-signal ICs for IoT, mobile computing and automotive. U AC/DC controller solutions for smartphones, tablets, appliances, industrial products – digital intelligence and state machine solutions for high power density rapid charge and non-rapid charge applications, and power supplies. U LED drivers for display backlighting in TV, automotive and LED displays. U LED drivers for solid state lighting in residential and commercial lighting applications. 16% of total Group revenue in 2018 KEY FACTS US$230m Revenue (US$m) US$30.5m Underlying operating profit Underlying operating profit reconciliation on Pages 45-46 Our products Configurable Mixed-signal IC A new product category, integrating analog mixed-signal functionality on an easily configurable software platform. CMICs use non-volatile memory to configure multiple analog, digital, and power functions allowing customers to easily replace standard analog, logic and discrete board components. The CMIC enables a fast go-to-market, reduces board space and costs. There are over 30 different products already available, addressing a wide range of consumer IoT and mobile applications. Its configurability allows our customers to adapt through the design cycle, differentiate, and achieve a lower power consumption than using discrete components. AC/DC Power Conversion and Control As large screens and powerful applications continue to drive portable device purchasing decisions, consumers now also make their choices based on fast charging capability. In fact, rapid charging continues to be the fastest growing segment in the highest volume market – smartphones, and Dialog remains the number one player with approximately 60% market share. Dialog Semiconductor PlcAnnual report and accounts 2018 39 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Dialog’s AC/DC travel adapter IC solutions support virtually all fast charge protocols, including the newest USB Power Delivery 3.0 specification with programmable power supply (PPS); Qualcomm® Quick Charge™ 4+; Samsung Adaptive Fast Charging (“AFC”); Huawei SuperCharge™ technology and Fast Charger Protocol (“FCP”) as well as other proprietary OEM protocols. In 2018, we introduced our new state machine-based USB Power Delivery (“USB PD”) 3.0 RapidCharge interface IC that uses far fewer components, simplifies design and lowers the BOM cost versus conventional microcontroller- based approaches. Our AC/DC high power density RapidCharge chipsets and AC/DC converter ICs deliver efficiency as high as 90% and support output power up to 45W, using fewer and smaller components. In 2018 we developed a new high power density topology that reduces heat dissipation and enables low system cost, resulting in an easy-to-use, ultra-high power density travel adapter solution. We expanded our SAM in 2018 with two new AC/DC solutions that lower BOM costs and improve performance for the appliances and small electrics markets. We introduced a unique silicon-optimised state machine solution for induction heat cookers and an AC/DC converter for small electric appliances, such as toasters and coffee makers. LED Backlight Drivers When it comes to buying a new display, consumers consistently cite best picture quality as their number one buying consideration. That’s why manufacturers are transitioning LED displays from edge-lit to multi-segment (zone) direct backlighting technology: to enable the vibrant visual experience of 4K, 8K and high dynamic range (“HDR”) TVs, with MiniLED backlight displays emerging now and MicroLED capability on the horizon. Direct backlighting requires LED drivers that can drive many LED zones and plays to Dialog’s core BroadLED™ IP. This technology lowers the bill of materials (“BOM”) cost, improves picture quality and reduces power dissipation for better thermal performance, higher reliability and longer lifetime. LED Solid State Lighting (“SSL”) With its energy savings, improved performance and lower costs, solid state lighting (“SSL”) has become the preferred technology for new residential and commercial installations. Dialog addresses the SSL market with a broad range of high performance, low BOM cost LED driver ICs. We support both dimmable and non-dimmable solutions, with ongoing investment in both commercial and residential SSL applications. 2018 progress U Over four billion CMICs shipped since launch. U Introduced the first in-system programmable CMIC. U Maintained our dominant position in the mobile device rapid charging market with approximately 60% market share. U Delivered solutions in volume for virtually all fast charge protocols, including USB PD 3.0. U Shipped LED backlight driver ICs in volume for virtually all leading TV manufacturers. Key drivers U Consumer applications have very short design cycles and demand low-power, low-cost small form factor ICs. U Consumer demand for faster mobile device charging and smaller travel adapters requiring very efficient, higher power density solutions. U Stringent government regulations continue to raise the bar for efficiency and standby power in electronic products. Forward focus areas for 2019 Extend product portfolio The first Configurable Mixed-signal IC with in-system programming The introduction of in-system programming streamlines the development process as it allows the installation of an un-programmed CMIC (GreenPAK) on the printed circuit board, simplifying modifications late in the design cycle, in-field or in the production line. These features and the ultra-low power consumption will add significant value in a wide range of battery powered applications and extend the range of addressable applications. U Increase the value of our configurable platform incorporating additional analog and power management IP. U Continue to deliver next-generation RapidCharge™ adapter solutions, including USB PD high power density solutions, to meet emerging fast charging standards and sustain our leadership position. U Extend our leadership in LED backlighting, delivering products for next-generation MiniLED and MicroLED displays. U Expand our SSL LED driver solutions for commercial and professional LED lighting. Achieve a broader and deeper customer base U Increase cross-selling of CMICs across our customer base, particularly in Asia. U Extend our RapidCharge™ AC/DC USB PD power supply solutions to a broader customer base. U Leverage our AC/DC converter IP and ASSP technologies to address the appliances and small electrics markets. U Extend our core BroadLED™ technology for performance innovations in the computing, automotive and TV LED backlighting markets. Dialog Semiconductor PlcAnnual report and accounts 2018 40 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Segmental review continued Connectivity Everything is connected As the Internet of Things continues to develop and evolve, more and more applications are getting connected. Our low power connectivity technologies and audio ICs help our customers to succeed in these highly-competitive markets. “In 2018 shipments of SmartBond™ SoCs sailed past the 200 million units mark.” Sean McGrath Senior Vice President and General Manager, Connectivity, Automotive & Industrial Business Group Highlights U Delivered strong revenue growth in Bluetooth®* low energy. U Completed the upgrade of our SmartBond™ product portfolio to support Bluetooth® 5.0. U Launched our Bluetooth® Mesh software development kit (SDK). 10% of total Group revenue in 2018 Our markets U Single chip transceivers for DECT- based cordless telephones, wireless microphones, headsets and gaming consoles. U SmartBond™ single chip wireless ICs, certified to the Bluetooth® low energy standard, for enabling IoT node connectivity to the cloud. U SmartBeat™ provides a platform for robust, low-power wireless audio over USB, DECT, and as a Bluetooth co-processor. This platform offers a highly-integrated solution for high quality and fixed low-latency wireless audio applications supporting sample frequencies up to 192kHz. * The Bluetooth® word mark and logos are registered trademarks owned by Bluetooth SIG, Inc. and any use of such marks by Dialog Semiconductor B.V. is under licence. Other trademarks and trade names are those of their respective owners. KEY FACTS US$149m Revenue (US$m) US$17.0m Underlying operating profit Underlying operating profit reconciliation on Pages 45-46 Our products Bluetooth® low energy is the gateway to personal connectivity and easy access to the cloud. Dialog’s SmartBond™ family is the simplest route to delivering power-friendly and flexible Bluetooth® low energy connected products to the market. SmartBond™ DA14585 is still the market-leading low power, high integration Bluetooth® low energy SoC, covering a broad range of applications. In 2018, we introduced the DA14682 and DA14683, two new devices that bring support for the Bluetooth® 5.0 standard to our high-end product line. These new products offer customers the ability to take advantage of the standard’s features while enjoying the benefits of the integration on a complete power management unit and charger for rechargeable applications. Alongside this, the new products bring an increased level of security ensuring end-to- end encryption of the application’s data. This is all backed up by our powerful SmartSnippets™ software tooling and extensive applications support, making it easy for designers to get the most out of their system. Our innovation roadmap ensures designers will have the Bluetooth solutions they need, when they need them. Dialog Semiconductor PlcAnnual report and accounts 2018 41 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n The newly introduced SmartBond™ DA14585 IoT SDK makes prototyping and developing sensor node-to-cloud application easy. The kit includes 15 degrees-of-freedom (“DoF”) covering motion sensing, temperature, pressure, humidity, air quality, light and sound sensing. Couple to an intuitive smartphone application and several cloud connectivity options, the kit is an ideal solution for customers to accelerate their development and time-to-market. SmartBond™ has a strong base for further growth, building on a solid partner ecosystem, an increasing portfolio of reference designs, and a growing online engineering community. SmartBeat™ products support the trend to replace the analog 3.5mm audio jack headset connection with digital alternatives. The SmartBeat™ chip-set, DA14195 audio processor and DA7217 ultra-low power codec, is aimed at Bluetooth® and USB type-C™ digital audio connections with smartphones. In 2018, Dialog launched the DA14495 single chip, which integrates the fastest 1.9GHz DECT radio in industry. This new product aims at the professional headset and pro-audio segment, benefiting from the interference free radio technology and the advanced audio processing. 2018 progress: U Strong revenue growth in Bluetooth® low energy. U Completed the upgrade of our Bluetooth® low energy products to support Bluetooth 5.0. U Strengthened market position in the wearable segment with key design wins at multiple customers. U Launched our Bluetooth® mesh SDK in support of the newly introduced Bluetooth® mesh standard. U Launched the DA14495 SmartBeat™ Audio IC platform for 1.9GHz professional headphones. Key drivers U Rapid market expansion of Bluetooth® low energy fuelled by the connectivity needs of the Internet of Things. U New market trend for digital headsets for smartphone aftermarket using the Bluetooth® 1.9GHz DECT and USB type-C™ audio interface. U Focusing on the fast-growing Unified Communication products segment with 1.9GHz DECT audio and USB- audio headsets. U Maturity of DECT handset market. Sailing past the 200 million units of SmartBond™ In 2018, shipments of SmartBond™, our Bluetooth® low energy product sailed past the 200 million units. Wearable devices, Human Interface devices, Smart Home applications, proximity tags and portable medical devices are some of the applications driving the growth in the market. The introduction of the Bluetooth® mesh standard, which enables many-to-many communication in a mesh network topology will enable new applications in the Smart Building, Smart Home and Industrial space to take advantage of this standardised protocol and fuel further growth of the standard in the medium term. Forward focus areas for 2019 Achieve a broader and deeper customer base U Continue to invest in the Bluetooth® low energy (“BLE”) platform and increase market footprint. U Leverage distribution and Sales representative network to expand our BLE customer base. Deliver continuous innovation U BLE focus on wearables, smart home and connected health. U Expand our low latency wireless audio towards microphones and headset brands. U Expand our audio expertise for voice user interfaces and audio enhancements in consumer headsets. Dialog Semiconductor PlcAnnual report and accounts 2018 42 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Segmental review continued Automotive & Industrial Capitalising on our experience and mixed- signal expertise, Dialog continues to support its loyal customers in the mid-to high-end European automotive segment and the industrial lighting segment through customer-specific parts. “Our custom motor control ICs capitalise on our power management and mixed- signal expertise.” Sean McGrath Senior Vice President and General Manager, Connectivity, Automotive & Industrial Business Group KEY FACTS US$33m Revenue (US$m) US$11.7m Underlying operating profit Underlying operating profit reconciliation on Pages 45-46 Our heritage in mixed-signal expertise Over the years, we have built a wealth of mixed-signal expertise. We deploy this know-how to support our customers, to remain competitive, and to play in this market through specific customer programmes. Highlights U Continued to support our customers to Our markets U Custom motor control ICs for remain competitive. windscreen wipers. U We played in this market with customer- specific programmes. 2% of total Group revenue in 2018 U Electronic ballasts for fluorescent or high-intensity industrial lighting and energy-efficient controllers for LED lighting solutions. 2018 progress U Successful development of new LED lighting solutions. Key drivers U Increasing market for reverse wipers and LED lighting solutions. Our products Dialog supplies motor control ICs to leading automotive suppliers, who in turn deliver Dialog-based windscreen wiper motor products addressing mid to high-end European and Japanese cars. These devices capitalise on Dialog’s expertise and knowledge of technologies ranging from power management systems and mixed-signal design, to high-voltage circuits and embedded microprocessors on a single integrated circuit in an automotive- qualified CMOS process, including flash memory. For the industrial market, Dialog develops innovative control ASICs for conventional light sources, such as fluorescent, and for other industrial applications. Our future development focus is on energy-efficient controllers for LED lighting solutions. These devices seek to deliver optimal control and regulation of light sources, while maximising their service life. Through intelligent control, using advanced digital signal processing, these devices help to minimise energy consumption. Forward focus areas for 2019 Achieve a broader and deeper customer base U Support our customers to remain competitive. U Follow this market with appropriate investments. Dialog Semiconductor PlcAnnual report and accounts 2018 43 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Financial review Our disciplined approach to capital allocation aims to create shareholder value Our people Our people and culture and culture Customer Customer relations relations IP and IP and products products Robust and responsible Robust and responsible supply chain supply chain Strong balance sheet Building our competitive advantage In 2018, we delivered another year of revenue growth, increased underlying operating margin and free cash flow, while investing over US$325 million in the development of new products. We successfully integrated Silego and launched a new share buyback tranche for up to €150 million. “Our highly cash generative business gives us the financial flexibility to support the next phase of growth.” Wissam Jabre Chief Financial Officer, Senior Vice President Finance Year ended 31 December US$ millions unless stated otherwise Revenue2 Gross profit3 Gross margin %2, 3 R&D % of revenue3 SG&A % of revenue EBITDA1 EBITDA margin %1 Operating profit Operating margin %2 Profit before tax Net income Basic EPS (US$) Diluted EPS (US$)2 Cash flow from operating activities Free cash flow1, 2 IFRS basis Underlying basis1 2018 Change Change 2017 2017 2018 +7% +7% 1,442.1 1,352.8 1,442.1 1,352.8 +7% 648.4 +7% 644.9 696.0 691.1 48.3% 47.9% +40bps 47.9% 47.7% +20bps 22.6% 22.4% +20bps 0bps 20.4% 20.4% 8.5% 8.4% +10bps 11.7% 10.7% +100bps n/a +8% 315.8 339.6 23.5% 23.3% +20bps n/a +7% +9% 259.5 281.6 19.5% 19.2% +30bps 0bps +9% 266.6 +1% 289.7 -1% 228.0 -17% 225.4 -1% 3.08 -19% 3.05 -1% 2.92 -19% 2.90 n/a n/a +1% n/a +12% 205.3 n/a 229.9 n/a n/a n/a n/a 187.0 199.7 13.8% 13.8% 194.8 196.2 169.4 139.8 2.34 1.89 2.21 1.80 284.7 288.6 n/a n/a 1 Non-IFRS measures (see explanations and reconciliations to the nearest equivalent IFRS measures in the section entitled “Financial performance measures” on pages 156 to 161). 2 Key performance indicators. 3 Certain product development costs have been reclassified from cost of sales to research and development expenses (see note 1 to the consolidated financial statements). Basis of preparation Accounting policies The consolidated financial statements of Dialog Semiconductor Plc (“the Company”) and its subsidiaries (together, “Dialog” or “the Group”) for the year ended 31 December 2018 are set out on pages 94 to 98. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted for use in the European Union and those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS. The consolidated financial statements also comply with IFRS as issued by the International Accounting Standards Board. The Group’s significant accounting policies are unchanged compared with the year ended 31 December 2017, except for the adoption of IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments with effect from 1 January 2018. Recent accounting pronouncements that have not yet been adopted by the Group are outlined in note 1 to the consolidated financial statements. Revenue recognition IFRS 15 Revenue from Contracts with Customers provides a single, principles- based five step model to be applied to all contracts with customers. Adoption of IFRS 15 had no impact on the recognition and measurement of the majority of the Group’s revenue. Under our previous revenue recognition policy, however, revenue on certain sales to distributors and the related cost of sales were not recognised until the onward sale of the products by the distributors to the end customers. Under IFRS 15, we are required to recognise revenue on all sales to distributors when the products are physically transferred to the distributors, net of allowances for estimated rebates and returns. Dialog Semiconductor PlcAnnual report and accounts 2018 44 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Financial review continued We applied IFRS 15 using the modified retrospective approach, whereby prior periods were not restated and we recognised a credit of US$1.5 million to the opening balance of retained earnings as at 1 January 2018 representing the cumulative effect of the adoption of IFRS 15. Revenue recognised in 2018 was US$10.1 million higher than it would have been under our previous revenue recognition policy, of which US$9.4 million was recognised in our Advanced Mixed Signal operating segment and US$0.7 million in Connectivity. Further details are set out in note 35 to the consolidated financial statements. Financial Instruments IFRS 9 Financial Instruments introduced a new model for classification and measurement of financial assets and financial liabilities, a single, forward- looking “expected loss” model for measuring impairment of financial assets (including trade receivables) and a new approach to hedge accounting that is more closely aligned with an entity’s risk management activities. Adoption of IFRS 9 had no immediate impact on the Group’s results or financial position. Further details are set out in note 35 to the consolidated financial statements. Reclassification of certain product development costs With effect from 1 January 2018, we changed the income statement classification of the amortisation of capitalised product development costs, the amortisation of acquired technology-based intangible assets and royalties payable for the use of intellectual property in our product development activities. Previously, we included these costs within cost of sales. We now include them within research and development expenses. We made this change in order that our results are more comparable with our industry peers. As shown in note 1 to the consolidated financial statements, comparative information has been re-presented on a consistent basis with the effect that cost of sales was US$24.2 million lower and R&D expenses were US$24.2 million higher in 2017 than previously reported. Critical accounting judgements and estimates Details of the critical accounting judgements made in preparing the consolidated financial statements and key sources of estimation uncertainty that may affect the carrying amount of the Group’s assets and liabilities within the next financial year are set out in note 2 to the consolidated financial statements. Non-IFRS measures We assess the performance of the Group’s businesses using a number of measures. Certain of them are non-IFRS measures because they exclude amounts that are included in, or include amounts that are excluded from, the most directly comparable measure calculated and presented in accordance with IFRS, or are calculated using financial measures that are not calculated in accordance with IFRS. All underlying measures of profitability and free cash flow are non-IFRS measures. An explanation of the adjustments made to the equivalent IFRS measures in calculating the non-IFRS measures and reconciliations of the non-IFRS measures to the equivalent IFRS measures for the periods presented are set out in the section entitled “Financial performance measures” on pages 156 to 161. We report non-IFRS measures because they provide useful additional information about the financial performance of the Group’s businesses. We do not regard these non-IFRS measures as a substitute for, or superior to, the equivalent IFRS measures. Non-IFRS measures used by Dialog may not be directly comparable with similarly-titled measures used by other companies. Agreements entered into with Apple On 11 October 2018, we announced that we have entered into an agreement with Apple Inc. (“Apple”) to license our power management technologies and to transfer to Apple certain assets and over 300 employees from our design centres in the UK, Germany and Italy. Apple will pay US$300 million for the licence and asset transfers. The transaction is expected to complete in the first half of 2019, subject to applicable regulatory approvals and other customary closing conditions. We have accordingly classified the assets to be transferred to Apple and certain directly associated liabilities as held for sale. Our revenue for 2018 was unaffected by this agreement and we will continue to supply Apple with PMICs for their current generation of products. Revenue associated with those products, which totalled approximately US$870 million in 2018, will begin to decline in the second half of 2019 and phase out by 2022. We expect to continue to provide PMICs to other customers across the globe. When we announced this agreement with Apple, we also announced that we have been awarded a broad range of new contracts from Apple for the development and supply of power management, audio sub-system, charging and other mixed- signal integrated circuits. Revenue from the new contracts is expected to commence in 2019 and accelerate in 2020 and 2021. On completion of the licence and asset transfer agreement, Apple will make a prepayment of US$300 million that is expected to be recouped against the sale of our products over the following three years. During 2018, we incurred transaction costs of US$7.8 million in relation to the agreements with Apple (within general and administrative expenses). Recent acquisitions Silego Technology Inc. We completed the acquisition of Silego Technology Inc. (“Silego”) on 1 November 2017. Silego is included in our Advanced Mixed Signal operating segment. Silego contributed US$104.2 million to the Group’s revenue in 2018 compared with US$11.4 million in 2017. When compared on a full-year basis, Silego’s revenue in 2018 was 24% higher than in 2017. We incurred integration costs of US$2.8 million in relation to Silego during 2018, taking the total integration costs incurred to US$5.0 million. Contingent consideration of up to US$30.4 million was payable for the acquisition of Silego dependent on Silego’s revenue in 2017 and 2018. Based on Silego’s revenue in 2017, the first instalment of US$10.0 million was paid in full and a further US$17.9 million was payable based on Silego’s revenue for 2018. During 2018, we recognised a credit of US$0.9 million arising from the finalisation of the contingent consideration and a credit of US$0.2 million due to the forfeiture by former employees of deferred consideration payable for Silego. Dialog Semiconductor PlcAnnual report and accounts 2018 45 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n LED backlight business We acquired ams AG’s LED backlight technology and product portfolio on 15 November 2017. We have included the business in our Advanced Mixed Signal operating segment where it contributed US$11.3 million to revenue in 2018 compared with US$0.8 million in 2017. Dyna Image Corporation Deconsolidation and subsequent accounting under the equity method We hold a 48.5% shareholding in Dyna Image Corporation (“Dyna Image”). Dyna Image was accounted for as a subsidiary until it was deconsolidated at the end of 2017. Details are set out in note 4 to the consolidated financial statements. With effect from 1 January 2018, we have accounted for Dyna Image as an associate using the equity method with an initial carrying amount of US$1.1 million. During 2018, Dyna Image continued to make losses. We recognised our share of those losses in the consolidated income statement until the carrying amount of our investment was reduced to nil during the fourth quarter of 2018. Under the equity method, the Group’s revenue no longer includes any contribution from Dyna Image. During 2017, the Group’s revenue included Dyna Image’s revenue of US$5.5 million. Agreement to dispose of our shareholding in Dyna Image Following the termination of negotiations with a potential investor in December 2017, it had been the intention of the shareholders in Dyna Image to gradually wind down the company in a way that would safeguard the interests of its creditors. During early 2018, however, the shareholders were approached by a potential acquirer of the business. On 7 December 2018, each of the shareholders in Dyna Image entered into an agreement to dispose of their respective interests in a transaction that is expected to complete in the first half of 2019, subject to applicable regulatory approvals. We expect to receive consideration of between US$2.4 million and US$5.0 million in exchange for our shareholding in Dyna Image. Synaptics Incorporated During 2018, we held discussions with regard to the potential acquisition of Synaptics Incorporated. On 31 July 2018, we announced that these discussions had been terminated. We incurred related costs of US$3.6 million (within general and administrative expenses). Results of operations Analysis by operating segment Mobile Systems segment revenue was US$1,029.6 million in 2018 compared with US$1,042.9 million in 2017, a decrease of 1%. Revenue declined principally due to the effect in the fourth quarter of 2018 of our reduced share of volume for the main PMIC on Apple’s 2018 smartphone platform, though this was partially offset by higher demand for our custom PMICs on other platforms. Mobile Systems’ operating profit was $248.5 million in 2018 compared with $271.7 million in 2017. Operating profit benefited from favourable product mix but this was outweighed by the effect of the lower sales volume and higher R&D expenses. Operating margin declined to 24.1% (2017: 26.1%). Mobile Systems’ underlying operating profit was US$248.8 million in 2018 compared with US$271.8 million in 2017. Underlying operating margin was also lower at 24.2% (2017: 26.1%). Mobile Systems’ underlying operating profit excludes payroll taxes arising on share-based compensation of US$0.3 million (2017: US$0.1 million). Connectivity segment revenue was US$148.8 million in 2018 compared with US$136.4 million in 2017, an increase of 9%. Connectivity’s revenue increased principally due to strong growth in demand for Bluetooth® low energy products and our new range of audio ICs. Connectivity’s operating profit was higher at US$16.9 million in 2018 compared with US$14.3 million in 2017, with the effect of the higher sales volume and improved product margins being only partially offset by higher R&D expenses. Operating margin improved to 11.4% (2017: 10.5%). Connectivity’s underlying operating profit was broadly the same as its reported operating profit in both 2018 and 2017. Automotive & Industrial segment revenue was US$32.7 million in 2018 compared with US$33.0 million in 2017, a decrease of 1%. Revenue declined over the year as a whole principally due to lower demand for automotive products in the fourth quarter of 2018. Automotive & Industrial’s operating profit was US$11.7 million in 2018 compared with US$12.5 million in 2017, a decrease of 7%. Operating profit was lower principally due to higher R&D expenses. Operating margin declined to 35.8% (2017: 38.1%). Automotive & Industrial’s underlying operating profit was broadly the same as its reported operating profit in both 2018 and 2017. Advanced Mixed Signal segment revenue was US$229.8 million in 2018 compared with US$132.7 million in 2017, an increase of 73%. When adjusted to reflect the contribution of Silego for comparable periods and for the effect of IFRS 15, Advanced Mixed Signal’s revenue in 2018 was broadly unchanged compared with 2017. Growth in sales of Rapid ChargeTM smartphone power adaptors was offset by lower sales of residential solid state lighting driver ICs. Advanced Mixed Signal made an operating profit of US$1.8 million in 2018 compared with an operating loss of US$15.1 million in 2017, the improvement being principally due to the contribution of Silego for the full year in 2018. Operating margin was 0.8% in 2018 compared with (11.4)% in 2017. Advanced Mixed Signal’s underlying operating profit was US$30.5 million in 2018 compared with US$5.9 million in 2017. Underlying operating margin was 13.3% in 2018 compared with 4.5% in 2017. Results by operating segment Year ended 31 December US$ millions Mobile Systems Connectivity Automotive & Industrial Advanced Mixed Signal Total segments Corporate activities Total Group Revenue Operating profit/(loss) 2018 1,029.6 148.8 32.7 229.8 1,440.9 1.2 1,442.1 2017 1,042.9 136.4 33.0 132.7 1,345.0 7.8 1,352.8 Change -1% +9% -1% +73% +7% -84% +7% 2018 248.5 16.9 11.7 1.8 278.9 (79.2) 199.7 2017 271.7 14.3 12.5 (15.1) 283.4 (96.4) 187.0 Dialog Semiconductor PlcAnnual report and accounts 2018 46 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Financial review continued Advanced Mixed Signal’s underlying operating result excludes the increase in cost of sales of US$3.1 million (2017: US$2.3 million) arising from consumption of the fair value uplift on acquired inventory, amortisation of US$22.6 million (2017: US$15.3 million) on the fair value uplift of acquired intangible assets, integration costs of US$1.4 million (2017: US$2.0 million) and deferred consideration payable for Silego treated as compensation expense of US$1.5 million (2017: US$1.4 million). Corporate activities principally comprise the costs of operating central corporate functions, the Group’s share-based compensation expense and certain other unallocated costs. Corporate activities also comprise various development stage businesses and, until its deconsolidation at the end of 2017, included the results of Dyna Image. Corporate activities showed an operating loss of US$79.2 million in 2018 compared with an operating loss of US$96.4 million in 2017. Corporate’s underlying operating loss was US$26.4 million in 2018 compared with US$45.2 million in 2017, with the improvement being principally due to lower R&D expenses in development stage businesses. Corporate’s underlying operating result excludes the Group’s share-based compensation expense of US$41.2 million (2017: US$35.4 million), transaction costs of US$11.3 million (2017: US$4.5 million), integration costs of US$1.4 million (2017: US$0.3 million), credits totalling US$1.1 million in relation to the remeasurement and forfeiture of contingent and deferred consideration payable for Silego, and, in 2017, amortisation of US$1.1 million on the fair value uplift of acquired intangible assets and losses totalling US$9.9 million on the impairment of assets held by Dyna Image and its subsequent deconsolidation. Analysis of the Group’s results Revenue was US$1,442.1 million in 2018 compared with US$1,352.8 million in 2017, an increase of 7%. When adjusted to reflect the contribution of Silego for comparable periods and for the effect of IFRS 15, revenue in 2018 was broadly unchanged compared with 2017. Revenue growth in Connectivity was offset by the net reduction in demand for our custom PMICs in Mobile Systems in the fourth quarter of 2018. Dialog’s revenue, particularly in its Mobile Systems segment, is dependent on the life cycle of its customers’ products and the seasonal nature of the spending pattern in the consumer markets in which they operate. As a result, Dialog’s business may fluctuate seasonally with lower revenue in the first half of the year, since many of its larger consumer-focused customers tend to have stronger sales later in the year as they prepare for the major holiday selling seasons. Cost of sales was US$751.1 million in 2018 compared with US$708.0 million in 2017, an increase of 6% that was principally due to the acquisition of Silego. Gross profit was US$691.1 million in 2018 compared with US$644.9 million in 2017, an increase of 7%. Gross margin was 20 basis points higher at 47.9% in 2018 compared with 47.7% in 2017. Gross margin improved largely due to a favourable change in product unit costs. Underlying gross profit was US$696.0 million in 2018 compared with US$648.4 million in 2017, an increase of 7%. Underlying gross margin was 40 basis points higher at 48.3% in 2018 compared with 47.9% in 2017. Underlying gross profit excludes share- based compensation expenses and related payroll taxes of US$1.8 million (2017: US$1.2 million) and consumption of the fair value uplift on acquired inventory of US$3.1 million (2017: US$2.3 million). Selling and marketing expenses were US$83.9 million in 2018 compared with US$70.4 million in 2017. We maintained tight control of selling and marketing costs but they increased due to the acquisition of Silego. Underlying selling and marketing expenses increased to US$65.0 million in 2018 compared with US$56.6 million in 2017, and were higher as a percentage of the Group’s revenue at 4.5% in 2018 compared with 4.2% in 2017. Underlying selling and marketing expenses exclude share-based compensation expenses and related payroll taxes totalling US$4.4 million (2017: US$4.1 million), amortisation of US$14.0 million (2017: US$8.9 million) on the fair value uplift of acquired intangible assets, deferred consideration payable for Silego treated as compensation expense of US$0.5 million (2017: US$0.4 million) and, in 2017, integration costs of US$0.4 million. General and administrative expenses were US$84.3 million in 2018 compared with US$74.9 million in 2017, with the increase being largely due to the acquisition of Silego and corporate transaction costs. Underlying general and administrative expenses increased slightly to US$57.4 million in 2018 compared with US$56.9 million in 2017, but were lower as a percentage of the Group’s revenue at 4.0% in 2018 compared with 4.2% in 2017. Underlying general and administrative expenses exclude share-based compensation and related payroll taxes totalling US$12.8 million (2017: US$12.2 million), transaction costs of US$11.3 million (2017: US$4.5 million), deferred consideration payable for Silego treated as compensation expense of US$0.5 million (2017: US$0.5 million), integration costs of US$2.5 million (2017: US$0.7 million) and, in 2018, a credit of US$0.2 million on the forfeiture of deferred consideration payable for Silego. R&D expenses were US$326.3 million in 2018 compared with US$303.0 million in 2017, an increase of 8%. R&D costs totalled US$356.3 million in 2018 (2017: US$331.2 million), of which US$24.8 million (2017: US$21.0 million) were capitalised, and we recognised R&D expenditure credits of US$5.2 million (2017: US$7.2 million). Dialog has an extensive R&D engineering team focused on mixed-signal semiconductor power saving technologies. Dialog believes that its R&D activities are critical to support its strategy of growth and product diversification. Underlying R&D expenses were US$294.2 million in 2018 compared with US$275.8 million in 2017, an increase of 7%. When adjusted to reflect the contribution of Silego on a like-for-like basis, underlying R&D expenses were broadly unchanged in 2018 compared with 2017, because higher spending in Mobile Systems was largely offset by lower spending in development stage businesses. Underlying R&D expenses represented 20.4% of the Group’s revenue in 2018, broadly unchanged compared with 2017. Dialog Semiconductor PlcAnnual report and accounts 2018 47 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Underlying R&D expenses exclude share- based compensation expenses and related payroll taxes totalling US$22.7 million (2017: US$18.0 million), amortisation of US$8.6 million (2017: US$7.5 million) on the fair value uplift of acquired technology, integration costs of US$0.2 million (2017: US$1.2 million) and deferred consideration payable for Silego treated as compensation expense of US$0.6 million (2017: US$0.5 million). Other operating income was US$3.2 million in 2018 compared with an expense of US$9.6 million in 2017. In 2018, we recognised income from R&D contracts of US$2.3 million and a credit of US$0.9 million arising from the finalisation of the contingent consideration payable for Silego. In 2017, we recognised income from R&D contracts of US$0.3 million and losses totalling US$9.9 million on the impairment of assets held by Dyna Image and its subsequent deconsolidation. Operating profit was US$199.7 million in 2018 compared with $187.0 million in 2017. Underlying operating profit was US$281.6 million in 2018 compared with US$259.5 million in 2017, an increase of 9%. Underlying operating profit improved because the effect of higher overall sales volumes outweighed the increase in underlying sales and marketing and R&D expenses. Underlying operating margin was 30 basis points higher at 19.5% in 2018 compared with 19.2% in 2017. Interest income was US$9.9 million in 2018 compared with US$6.0 million in 2017, with the increase reflecting higher US dollar interest rates. Interest expense increased to US$3.1 million in 2018 compared with US$1.3 million in 2017, principally due to the additional interest expense recognised on the contingent consideration payable for Silego. Other finance expense was US$10.3 million in 2018 compared with income of US$3.1 million in 2017. Other finance income/(expense) comprises foreign currency translation gains and losses that arise on monetary assets and liabilities that are denominated in currencies other than the functional currencies of the entities by which they are held and fair value gains and losses recognised in relation to certain of our strategic investments. We recognised a net currency translation loss of US$1.0 million in 2018 compared with a net gain of US$1.7 million in 2017. During 2018, we recognised a fair value loss of US$10.9 million (2017: gain of US$0.9 million) on the warrants that we hold over shares in Energous and amortisation of the gain on initial recognition of the second tranche of warrants amounting to US$1.6 million (2017: US$0.8 million). During 2017, we recognised losses totalling US$0.3 million on other strategic investments. Share of loss of associate was US$1.1 million (2017: US$nil) in relation to Dyna Image. Income tax Our approach to tax is to support our business strategy and the creation of long-term value for our shareholders by conducting the Group’s affairs in a tax efficient manner whilst remaining in compliance with applicable laws and regulations. Our “Approach to Tax” can be found at www.dialog-semiconductor.com. Income tax expense was US$55.3 million (2017: US$25.4 million) on profit before tax of US$196.2 million (2017: US$194.8 million), an effective tax rate for the year of 28.2% (2017: 13.0%). Our effective tax rate is sensitive to the geographic mix of the Group’s profits, reflecting a combination of different tax rates in different countries, changes in tax legislation and tax rates, the impact of acquisitions, disposals and restructuring and to currency exchange rate movements, which give rise to tax effects where an entity’s functional currency differs from the currency in which it is required to calculate and pay income taxes. A large proportion of Dialog’s R&D activities are undertaken in the UK and the Netherlands and we are therefore able to benefit from the UK and Netherlands tax regimes that provide incentives for innovation. Our income tax expense for 2018 includes a charge of US$2.8 million (2017: credit of US$1.5 million) resulting from the finalisation of prior year tax items with tax authorities. Our income tax expense for 2017 reflected a non-cash deferred tax credit of US$6.7 million resulting from US tax reform. We excluded this non-recurring credit in determining our underlying income tax expense for 2017. Our underlying income tax expense was US$63.2 million (2017: US$38.6 million) on underlying profit before tax of US$289.7 million (2017: US$266.6 million). Our underlying effective tax rate for 2018 was therefore 21.8%, which compares with 14.5% for 2017. Excluding the charge of US$2.8 million in respect of the agreement of prior year items (2017: credit of US$1.5 million), our underlying effective tax rate for 2018 was 20.8%, which compares with 15.0% for 2017. Our underlying effective tax rate for 2017 was unusually low, principally because of the tax effects of unpredictable, and significant in the year, currency exchange rate movements. Net income was US$139.8 million in 2018 compared with US$169.4 million in 2017. Net income in 2017 reflected a loss of US$4.5 million that was attributable to the non-controlling interest in Dyna Image. Underlying net income was US$225.4 million in 2018 compared with US$228.0 million in 2017, a decrease of 1%. Basic earnings per share were US$1.89 (2017: US$2.34) based on the weighted average of 74.0 million shares (2017: 74.5 million shares) that were in issue during the year excluding 2.4 million shares (2017: 2.1 million shares) held by employee benefit trusts and, in 2017, the weighted average of 1.4 million of our own shares that were held in treasury. Underlying basic earnings per share were US$3.05 (2017: US$3.08). Diluted earnings per share were US$1.80 (2017: US$2.21). Diluted earnings per share additionally reflect the weighted average of 3.7 million (2017: 4.1 million) dilutive employee share options. Underlying diluted earnings per share were US$2.90 (2017: US$2.92). Dialog Semiconductor PlcAnnual report and accounts 2018 Financial review continued Cash flows Summary cash flow statement Cash flow from operating activities was US$288.7 million in 2018 compared with US$284.7 million in 2017, reflecting higher cash generated from operations that was partially offset by the timing of income tax cash flows. Cash generated from operations before changes in working capital was US$322.3 million in 2018 compared with US$301.5 million in 2017. Excluding the effect of acquisitions, net working capital increased by US$1.0 million compared with an increase of US$30.9 million in 2017. Demand for our products is typically higher in the fourth quarter of the year and lower in the first and second quarters. Inventory levels therefore usually decline between the end of the third quarter and the end of the year. We anticipated higher than usual sales of new customer products in the first quarter of 2018 and therefore had unusually high levels of inventory at the end of 2017. Inventory levels were therefore lower at the end of 2018 compared with the end of 2017, releasing cash of US$13.6 million. At the end of 2018, inventories represented 61 days’ cost of sales in the preceding quarter (end of 2017: 60 days’ cost of sales). Trade and other receivables were higher at the end of 2018 compared with the end of 2017, absorbing cash of US$36.3 million. At the end of 2018, trade and other receivables represented 24 days’ sales in the preceding quarter (end of 2017: 15 days’ sales) and reflected our reduced use of receivables financing facilities. Trade and other payables were higher at the end of 2018 compared with the end of 2017 releasing cash of US$16.0 million, principally due to lower materials purchases in the fourth quarter of 2018 compared with 2017. At the end of 2018, trade and other payables represented 50 days’ cost of sales in the preceding quarter (2017: 51 days’ cost of sales). Movements on other working capital items had the effect of releasing cash of US$6.0 million during 2018. Interest paid was US$0.5 million in 2018 compared with US$0.4 million in 2017. Year ended 31 December US$ millions Cash generated from operations Interest received, net Income taxes (paid)/received Cash flow from operating activities Purchase of property, plant and equipment Purchase of intangible assets Capitalised development expenditure Capital element of finance lease payments Free cash flow Payment of contingent consideration Purchase of businesses, net Purchase of other investments, net Purchase of own shares into treasury Purchase of Dialog shares by EBTs, net Other cash flows, net Net cash inflow/(outflow) during the period Currency translation differences Increase/(decrease) in cash and cash equivalents 2018 321.6 8.2 (41.1) 288.7 (26.1) (6.2) (24.8) (1.7) 229.9 (9.4) (3.5) – – (18.2) 0.1 198.9 (0.3) 198.6 2017 270.6 5.8 8.3 284.7 (47.9) (6.2) (21.0) (4.3) 205.3 – (267.9) (13.7) (125.0) (17.1) 0.4 (218.0) 0.2 (217.8) Interest received was US$8.7 million in 2018 compared with US$6.2 million in 2017. During 2018, we made net income tax payments of US$41.1 million compared with net receipts of US$8.3 million in 2017. Income tax cash flows comprise payments on account in respect of current year taxable profits and adjusting payments or receipts in respect of earlier years. During 2017, we received repayments of income taxes overpaid in respect of earlier years totalling US$38.1 million. Capital expenditure totalled US$58.8 million in 2018 compared with US$79.4 million in 2017, with the reduction principally reflecting the unusually high expenditure on testing equipment during 2017. Free cash flow was US$229.9 million in 2018 compared with US$205.3 million in 2017. Our robust free cash flow provides a basis for financing strategic investments and for making distributions to shareholders. Cash outflow in relation to acquired businesses was US$12.9 million in 2018 compared with US$267.9 million in 2017. During 2018, we made a number of payments in relation to the purchase of Silego. We paid a purchase price adjustment of US$0.7 million following agreement with the vendors of Silego’s cash, debt and working capital levels on completion. We also paid US$9.4 million in relation to the first tranche of the contingent consideration payable for Silego and US$2.8 million in settlement of deferred consideration. During 2017, there was a net cash outflow of US$258.4 million on completion of the purchase of Silego and we paid US$9.5 million in cash for ams’s LED backlight business. Cash outflow on other investments was US$nil in 2018 compared with US$13.7 million in 2017. During 2017, we paid US$15.0 million on subscription for shares in Energous and received US$1.3 million on the sale of our shareholding in Arctic Sand. 48 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Dialog Semiconductor PlcAnnual report and accounts 2018 Net cash outflow on share purchases was US$18.2 million in 2018 compared with US$142.1 million in 2017. Employee benefit trusts purchased the Company’s ordinary shares in the market at a cost of US$21.8 million (2017: US$24.3 million) and received proceeds of US$3.6 million (2017: US$7.2 million) on the exercise of share options. During 2017, we made settlements in relation to the Company’s share buyback programme totalling US$125.0 million including transaction costs. Liquidity and capital resources Financial risk management Dialog is exposed to financial risks including counterparty credit risk, liquidity risk and market risks, which include foreign exchange risk and interest rate risk. Disclosures about these risks and the ways in which we manage them are presented in note 32 to the consolidated financial statements. Dialog has a centralised treasury function that is responsible for ensuring that adequate funding is available to meet the Group’s requirements as they arise and for maintaining an efficient capital structure, together with managing the Group’s counterparty credit risk, foreign currency and interest rate exposures. All treasury operations are conducted in accordance with strict policies and guidelines that are approved by the Board. We use currency derivatives to manage currency risks and we hold certain equity options and warrants for strategic reasons. We do not hold derivative financial instruments for speculative purposes. Cash and cash equivalents Cash is managed in line with Treasury policy to ensure there is no significant concentration of credit risk in any one financial institution. Credit risk is measured using counterparty credit ratings. As a minimum, a counterparty must have a long-term public rating of at least ‘single A’. Counterparty limits are based on a rating matrix and closely monitored. Credit risk is further limited by investing only in liquid instruments. At the end of 2018, cash and cash equivalents included US$96.1 million (end of 2017: US$145.1 million) in relation to receivables sold under these facilities. Currency hedging activities Dialog uses forward currency contracts and currency swaps to manage the Group’s exposure to currency risk on highly probable forecast cash flows denominated in foreign currencies; principally employment costs, rents and other contractual payments. We also use derivatives to hedge the currency translation exposure on the Euro-denominated liabilities that arise in relation to successive tranches of the Company’s share buyback programme. Derivative financial instruments are measured at fair value that is determined based on market forward exchange rates at the balance sheet date. At the end of 2018, currency derivatives held by the Group were represented by a liability of US$6.2 million (end of 2017: asset of US$6.6 million). All currency derivatives held to hedge forecast cash flows were designated as hedging instruments in cash flow hedge relationships. During 2018, a loss of US$10.1 million (2017: gain of US$16.4 million) was recognised in other comprehensive income representing the change during the year in the fair value of derivatives in effective hedging relationships and a cumulative fair value gain of US$2.3 million (2017: gain of US$0.4 million) was transferred from equity to profit or loss on the occurrence of the hedged cash flows. After taking into account hedging, we recognised a net currency translation loss of US$0.9 million (2017: net loss of US$0.2 million) in profit or loss in relation to liabilities to purchase shares under the Company’s share buyback programme. At the end of 2018, cash and cash equivalents amounted to US$677.8 million (end of 2017: US$479.3 million), which principally comprised investments in money market funds and bank deposits with a maturity of three months or less. Revolving credit facility In July 2017, the Company and certain of its subsidiaries, as guarantors, entered into a US$150 million three-year revolving credit facility provided by four financial institutions. The facility is committed and available for general corporate purposes. In June 2018, we exercised our option to extend the maturity date by a year but reduced the amount of the facility to US$112.5 million from July 2020 until it matures in July 2021. On the second anniversary of the facility, we have the option to extend the maturity date by a further year subject to the consent of the lenders. We also have the option to increase the amount of the facility by US$75 million subject to certain conditions. The credit agreement contains various provisions, covenants and representations that are customary for such a facility. We have not yet made any drawings under the facility. We consider that the revolving credit facility and our significant cash balances are sufficient to satisfy the Group’s working capital requirements in the near-to medium-term. Receivables financing facilities We utilise non-recourse receivables financing facilities provided by two financial institutions in an aggregate amount of US$240 million. In March 2018, we extended the principal facility of US$220 million for a period of 18 months and it now matures on 31 October 2019. Gross receivables sold under the facilities decreased by US$57.8 million to stand at US$113.5 million at the end of 2018 compared with US$171.3 million at the end of 2017. 49 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Dialog Semiconductor PlcAnnual report and accounts 2018 Financial review continued Balance sheet Summary balance sheet As at 31 December US$ millions Assets Cash and cash equivalents Other current assets Total current assets Goodwill Other intangible assets Property, plant and equipment Deferred tax assets Other non-current assets Total non-current assets Total assets Liabilities and equity Current liabilities Deferred tax liabilities Other non-current liabilities Total liabilities Total equity Total liabilities and equity 2018 2017 677.8 296.2 974.0 439.5 217.4 66.4 6.0 13.8 743.1 1,717.1 393.9 8.0 12.7 414.6 1,302.5 1,717.1 479.3 281.2 760.5 439.5 235.6 83.9 7.5 49.8 816.3 1,576.8 199.7 4.0 30.7 234.4 1,342.4 1,576.8 Share buyback programme We initiated our share buyback programme in May 2016. By the end of 2017, we had purchased a total of 4,483,816 shares at a cost of €168.7 million (US$184.7 million). Details of the share purchases made during 2016 and 2017 are set out in note 26 to the consolidated financial statements. At the Company’s 2018 AGM, the Directors were granted a new authority to purchase up to 7,638,214 of the Company’s ordinary shares. Such authority shall (unless previously renewed, varied or revoked) expire on the day before the next AGM of the Company or on 30 June 2019, whichever is the earlier. Purchases made under the share buyback programme are off-market and are effected by way of contingent forward purchase contracts entered into with brokers. Barclays, Goldman Sachs, HSBC or Merrill Lynch may be appointed as brokers for purchases under the 2018 AGM authority. On 6 November 2018, the Company announced details of the first tranche of the share buyback programme pursuant to the 2018 AGM authority, under which it committed to purchase shares with a minimum cost of €100.0 million and a maximum cost of €150.0 million. We have not yet been required by the appointed broker to make any intermediate settlements in relation to this tranche, under which the broker may continue to purchase shares until 21 May 2019. We do not expect to announce another tranche of share purchases under the 2018 AGM authority but we will seek renewal of the share buyback authority at the Company’s 2019 AGM. We will consider initiating further tranches of share purchases in the context of our regular assessment of the Group’s future growth opportunities and its strategic objectives. Capital management The Group’s capital is represented by its total equity. We seek to maintain a capital structure that supports the ongoing activities of our business and its strategic objectives in order to deliver long-term returns to shareholders. We allocate capital to support organic and inorganic growth, investing to support research and development and our product pipeline. We will fund our growth strategy using a mix of equity and debt after giving consideration to prevailing market conditions. Goodwill At the end of 2018 and 2017, the carrying amount of goodwill was US$439.5 million. Goodwill impairment tests carried out during 2018 showed that the recoverable amount of each operating segment to which goodwill is allocated was comfortably in excess of its carrying amount and therefore no impairment was recognised. Other intangible assets At the end of 2018, the carrying amount of other intangible assets was US$217.4 million (end of 2017: US$235.6 million). During 2018, additions amounted to US$31.2 million, comprising capitalised product development costs of US$24.8 million and purchased software, licences and patents totalling US$6.4 million. During 2018, the amortisation expense was US$49.1 million (2017: US$42.0 million). Property, plant and equipment Since Dialog operates a fabless business model, it does not have any manufacturing facilities but it does occupy R&D facilities and administrative offices. At the end of 2018, Dialog operated in 29 locations worldwide covering a total of 57,800 square metres. Dialog’s facilities are all held under operating leases. Management believes that Dialog’s facilities are adequate for its current requirements. Property, plant and equipment principally comprises test equipment, office equipment and leasehold improvements. At the end of 2018, the carrying amount of property, plant and equipment was US$66.4 million (end of 2017: US$83.9 million). Additions during the year amounted to US$26.1 million. During 2018, the depreciation expense was US$31.5 million (2017: US$30.8 million). Other non-current assets Other non-current assets decreased by US$37.5 million to US$19.8 million (end of 2017: US$57.3 million), primarily due to the recognition of losses totalling US$34.6 million on the remeasurement of our investments in Energous shares and warrants. 50 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Dialog Semiconductor PlcAnnual report and accounts 2018 51 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Current assets Going concern Uncertain tax positions IFRIC 23 Uncertainty over Income Tax Treatments clarifies the application of the recognition and measurement requirements of IAS 12 Income Taxes where there is uncertainty over income tax treatments. We already account for income taxes on a basis consistent with IFRIC 23 and therefore do not expect it to affect the Group’s results or financial position. Consequences of Brexit Considerable uncertainty exists as to the timing of the UK’s exit from the EU, scheduled to take place on 29 March 2019, the terms of any withdrawal agreement between the UK and the EU and the effect of Brexit on the UK’s future relationships with the EU, other multilateral organisations and individual countries outside the EU. We continue to believe that Brexit will not have a significant impact on Dialog in the short term because only a small amount of our revenue is derived from customers in the UK. However, since approximately two-thirds of our workforce is based in the EU and our teams are typically comprised of several nationalities, we will monitor very closely any proposed changes to the current regulations in respect of the rights of EU and other nationals to work in the UK, and vice versa. The longer-term effects of Brexit on our operating environment are difficult to predict and subject to wider global macroeconomic trends and events, but may impact ourselves, our customers and other counterparties. While the withdrawal negotiations are ongoing and during any subsequent transition period, we will operate on a business as usual basis within applicable regulations and our continuing focus will be on growing our business. Wissam Jabre Chief Financial Officer, Senior Vice President Finance Current assets totalled US$974.0 million at the end of 2018 compared with US$760.5 million at the end of 2017, an increase of US$213.5 million. Cash and cash equivalents increased by US$198.5 million to US$677.8 million. Other current assets increased by US$15.0 million to US$296.2 million, principally reflecting an increase of US$36.3 million in trade and other receivables that was partially offset by a decrease of US$19.2 million in inventories. Current liabilities Current liabilities totalled US$393.9 million at the end of 2018 compared with US$199.7 million at the end of 2017. Excluding the share buyback obligation of US$171.8 million that was recognised at the end of 2018, current liabilities increased by US$22.0 million to US$221.7 million at the end of 2018, principally reflecting an increase of US$14.9 million in trade and other payables and the reclassification as current of the liability for the remaining contingent consideration payable for Silego. Income tax assets and liabilities At the end of 2018, the Group had net current tax payables of US$6.0 million (end of 2017: net payables of US$0.6 million). At the end of 2018, the Group had net deferred tax liabilities of US$2.0 million (end of 2017: net assets of US$3.5 million), comprising deferred tax assets of US$6.0 million (end of 2017: US$7.5 million) and deferred tax liabilities of US$8.0 million (end of 2017: US$4.0 million). Other non-current liabilities Other non-current liabilities decreased by US$18.0 million to US$12.7 million (end of 2017: US$30.7 million), principally due to the reclassification as current of the liability for the remaining contingent consideration payable for Silego. Total equity Total equity was US$1,302.5 million at the end of 2018 (end of 2017: US$1,342.4 million). At the end of 2018, Dialog shares held by employee benefit trusts amounted to US$22.5 million (end of 2017: US$0.9 million). For the reasons set out on page 62, the Directors continue to adopt the going concern basis in preparing the Group’s and the Company’s financial statements. We outline on pages 52 to 56 the principal risks and uncertainties that the Directors believe could adversely affect the Group’s results, cash flows and financial position. Accounting standards to be adopted in 2019 Leases IFRS 16 Leases provides a single lessee accounting model, requiring lessees to recognise a right-of-use asset and a lease liability for all leases, except those with a short lease term and/or involving an underlying asset of low value. In summary, for lessees, the distinction between an operating lease and a finance lease will disappear and most operating leases will be accounted for similarly to the way in which finance leases were accounted for under the predecessor accounting standard, IAS 17 Leases. Further details on the accounting for leases under IFRS 16 are set out in note 1 to the consolidated financial statements. We will adopt IFRS 16 using a modified retrospective approach whereby prior periods will not be restated but we will recognise cumulative effect adjustments to the opening consolidated balance sheet on the transition date, 1 January 2019. We estimate that we will recognise lease liabilities totalling US$67.6 million on adoption of IFRS 16 and corresponding right-of-use assets totalling US$66.4 million (after deducting existing net accrued lease rentals of US$1.2 million). Going forward, we expect that IFRS 16 will be beneficial to operating profit to the extent that depreciation of the right-of-use assets will be lower than the rental expense that would have been recognised under IAS 17. We expect, however, that operating profit will be only slightly higher in 2019 than it would have been under IAS 17. After taking into account the interest expense on the lease liabilities, we expect that net income will be slightly lower in 2019 than it would have been under IAS 17. As we progress through 2019, we will show in the notes to our consolidated financial statements the effect of adopting IFRS 16 on our quarterly and year to date results. We can confirm that the calculation of the financial covenants associated with our revolving credit facility will be unaffected by the adoption of IFRS 16. Dialog Semiconductor PlcAnnual report and accounts 2018 52 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Managing risk and uncertainty This section sets out a description of the principal risks and uncertainties that could adversely impact the Company’s financial situation or reputation and therefore its ability to execute its strategic objectives. THE BOARD AND AUDIT COMMITTEE The Board is responsible for approving the Company’s strategic aims and objectives and for determining the nature and extent of the risks it is willing to take in achieving those objectives. The Board seeks to maintain sound risk management and internal control systems. It delegates responsibility for monitoring the effectiveness of these to the Audit Committee, which meets a minimum of four times per year. At least annually, the Audit Committee will review the effectiveness of the Group’s risk and control processes. OPERATIONAL MANAGEMENT The Management Team is responsible for managing risk within the business on a day-to-day basis. They set objectives, determine strategy to achieve those objectives and put in place processes to manage the attendant risks. The management team provides input to the Corporate Risk Register which is then reviewed by the Risk Management Office (“RMO”) and the Audit Committee. Our risk management framework THE RISK MANAGEMENT OFFICE The RMO meets quarterly. It is chaired by the Chief Financial Officer and is composed of the heads of the Legal and Risk Management functions, plus senior representation from across the business. The role of the RMO is to improve the identification and quantification of risks, to assign responsibility for risk mitigation and to monitor the progress being made in those activities. The RMO has accountability for reporting key risks and their status to the Management Team and the Audit Committee. INTERNAL AUDIT Internal Audit’s role is to provide independent assurance to the Audit Committee and the Management Team on the effectiveness of risk management and control. To ensure Internal Audit’s independence from line management, the Director of Internal Audit is accountable to the Audit Committee. The Internal Audit activities are governed by an Internal Audit plan, which is developed with reference to, amongst other things, the corporate risk register and the plan is approved by the Audit Committee. Based upon its activity, Internal Audit is responsible for reporting significant risk exposures and identified control issues to the Audit Committee and to Senior Management. Dialog Semiconductor PlcAnnual report and accounts 2018 53 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Our principal risks The Company is affected by a number of risk factors, some of which, including macroeconomic and industry-specific cyclical risks, are outside Dialog’s control. The Company recognises four categories of risks: strategic, operational, financial, and legal and compliance. RISK TREND KEY Risk increasing Risk stable Risk decreasing Strategic risks Dialog management is focused on executing its strategic objectives in order to mitigate its dependencies on key markets and customers. As part of our 2018 review, a political conditions risk has been added to our strategic risks. DEPENDENCY ON MOBILE AND CONSUMER ELECTRONICS Mitigating actions Dialog’s product portfolio is heavily focused upon the mobile and consumer electronics market. Dialog’s revenue is heavily reliant upon the commercial success of its customers’ end products, principally in the high-end mobile phone market. If the market for these products flattens or declines, Dialog’s revenue and profitability will be impacted. Furthermore, the consumer electronics market is characterised by short product cycles and rapid innovation which provide opportunities for customers to change suppliers for subsequent product generations based on competitive factors such as price, quality, technology or specific product specifications. We engage with our customers to understand their requirements and tailor the products we design to their specifications. Dialog expensed US$326 million in R&D in 2018 to anticipate and respond to new product developments and market trends. The Company rapidly implements new designs to meet customer needs and to keep abreast of technological trends. Examples include Configurable Mixed-signal ICs with in-system programming, low power haptic ICs and nanopower PMICs for low power IoT applications. Dialog also looks for technology and product acquisitions where appropriate. Examples include the acquisitions of Silego, Inc. with its Configurable Mixed-signal Integrated Circuit technology and product portfolio, as well as the portfolio of LED backlighting products and technology acquired from ams AG in 2017. DEPENDENCY ON KEY CUSTOMERS Mitigating actions Dialog relies on a relatively small number of customers, within the mobile and consumer electronics market, for a substantial proportion of its revenue. The loss of our largest customer, Apple Inc. or of specific products sold to Apple, would have a material effect on revenue and profitability. Dialog’s 2018 revenue derived from Apple Inc. was US$1,082 million. We recognise that Apple has the resources and capability to internally design PMICs and we expect this capability to be enhanced through the transaction between Dialog and Apple announced in October 2018, when completed. Dialog seeks to diversify its product offerings within its key accounts and to expand its relationships with more top tier global electronics companies. As a result of the announced transaction with Apple, Dialog expects to reduce its dependency on Apple over a three to five year term and diversify its future Apple revenue across a range of power management, audio subsystem, charging and other mixed-signal products. Dialog also monitors and reviews acquisition opportunities to further diversify its product offering and customer base. RETURN ON RESEARCH AND DEVELOPMENT INVESTMENT Mitigating actions Dialog’s investments in research and development of products, technology and methodologies may not result in successful products or anticipated levels of revenue or profitability. Dialog engages with key customers and market leaders to anticipate future product and technology requirements. Dialog’s ongoing product and technology development processes incorporate detailed business justifications and review of business cases. Dialog seeks to manage its technology and product research and development efficiently and effectively through rigorous project management and engineering controls. Dialog Semiconductor PlcAnnual report and accounts 2018 54 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Managing risk and uncertainty continued Strategic risks continued HUMAN CAPITAL Mitigating actions In order to successfully execute its current and future business commitments, Dialog needs to continue to build its organisational capability in two key areas: continuous innovation in product development, manufacturing and packaging technologies; and leadership skills in an expanding and complex global operation. We continue to monitor the progress of Brexit discussions and any impact these may have on our ability to attract and retain key employees from the EU into the UK. Dialog seeks to create a positive working environment that results in low levels of staff turnover. Over the years, it has developed an effective recruitment process to attract and retain high-calibre staff, while succession planning for senior management positions facilitates continuity of leadership. Dialog has dedicated human resource professionals working closely with the business to drive further development of its personnel and benchmark its employment terms to match industry top performers. Dialog has a decentralised approach to research & development with teams around the world. In a highly competitive talent market we believe this flexible approach is advantageous, allowing us to recruit talent where it resides and as a defence mechanism to stop large scale “poaching” by competitors. Emerging talent programmes continued successfully in 2018, with new graduates and interns entering the business – the majority within engineering functions. GEOPOLITICAL EVENTS Mitigating actions The increasing use of tariffs and trade barriers between the US and China could adversely impact end-user demand, with a consequent impact on demand for Dialog’s products. Uncertainty around Brexit and the UK’s withdrawal from the EU may adversely affect economic conditions in the UK, the EU and elsewhere. We continue to believe that Brexit will not have a significant impact on Dialog in the short term because only a small amount of our revenue is derived from customers in the UK. However, approximately two-thirds of our workforce is based in the EU and our teams are typically comprised of several nationalities. We have not yet experienced any material negative impact from Brexit, but we cannot predict its future implications. Tensions exist between Ukraine and Russia which, if escalated further, could potentially affect Dialog’s continuing operations in Western Ukraine. Operational risks Although currently unaffected, Dialog continues to monitor the situation closely. Supply Chain options are constantly under review to ensure the most efficient arrangements are in place. The US represents a significant part of Dialog’s customer’s end-user global market, but the rest of the world should be unaffected by any additional US tariffs on Chinese goods. Dialog will continue to monitor very closely any proposed changes to the current regulations in respect of the rights of EU and other nationals to work in the UK, and vice versa. Dialog will continue to monitor events in Ukraine. Our IT infrastructure ensures that projects could continue at multiple locations should operations in Ukraine become too difficult to maintain. Dialog recognises that time-to-market for high volume supply of complex ICs is a critical factor for the success of its customers. Therefore, the effectiveness and efficiency of Dialog’s internal operations and management of its supplier relationships are significant factors contributing to its short-term and long-term performance. We run programmes to drive continuous improvement through all facets of the value chain from design to order fulfilment. SUPPLY CHAIN INTERRUPTION Mitigating actions Dialog runs a “high-touch” fabless business model and outsources the capital intensive production of silicon wafers, packaging and testing of integrated circuits to leading third-party suppliers, mainly in Asia. The manufacturing of products runs over multiple stages with multiple suppliers. The failure of any of these third- party vendors to deliver products or otherwise perform as required could damage relationships with our customers, decreasing our revenue and limiting our growth. Supplier delivery performance can be adversely affected by multiple issues. For example, if increased demand for these suppliers’ products exceeds their production capacity. Dialog has forged close partnerships with its suppliers, which help capacity planning and management. Dialog’s suppliers are mainly highly respected large-scale operations. Dialog strives to source its high volume components via a dual sourcing strategy where appropriate. Dialog works with a range of foundries and back-end vendors, mainly in Taiwan, China and Singapore, to mitigate the risk of supply chain disruption and constraints. The geographical spread of Dialog’s suppliers also helps with disaster recovery planning. Dialog achieved a total company “On Time Delivery” performance of 100% in 2018, which measures performance against delivery dates confirmed by Dialog at date of order acceptance. Dialog continues to carry out supplier audits which cover a wide range of topics including compliance and product quality (ISO 9000 and ISO 14000) reviews. Dialog conducts regular business reviews with its suppliers to manage supplier performance and future capabilities. Dialog Semiconductor PlcAnnual report and accounts 2018 55 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n INFORMATION TECHNOLOGY AND SECURITY Mitigating actions Dialog is heavily dependent upon the quality, resilience and security of its information systems, which support the engineering, manufacturing and enterprise aspects of the business. Dialog is continuously strengthening its internal monitoring and controls; applying best practice to ensure a robust and secure IT environment. Risks relating to cyber security continue to grow, with consequent risks to assets, intellectual property and the data of the Company, its customers and its employees. Dialog’s IT systems are managed on a global basis to ensure a unified approach, with IT operations being distributed between Europe, Asia and the USA. Engineering tools are being consolidated into regional data centres connected by an upgraded network to allow increased agility, reliability and scale. Joint roadmaps have been developed with the business to align and prioritise IT investment with evolving business needs and to maintain compliance and controls. IT policies and procedures have been reviewed and updated to reflect the changing regulatory environment, including data privacy regulations in various countries. QUALITY ASSURANCE Mitigating actions Given the timetables for some key product introductions, Dialog must ensure tight control over the new product introduction process and in particular quality assurance in high-volume product ramps. Dialog needs to avoid releasing faulty products which may cause delays in the assembly line of its customers and defects in their products. Dialog operates a “high-touch” fabless model, with engineers working closely together with our foundry partners to optimise the manufacturing process. Dialog emphasises quality assurance through product validation prior to mass production, in-line controls and monitoring of yields with real-time information feeds from manufacturing facilities. Dialog works with key suppliers to achieve industry-leading yields based upon typical defect density limitation. To support this, Dialog has engineers located at key supplier sites. Yield performance on key products is monitored during regular internal operational reviews. Financial risks Given the Company’s sector and business model, Dialog tends to be cash generative, operating across the globe. This exposes the Company to several financial risks including fluctuations in interest and foreign exchange rates and credit risk relating to counterparties the Company transacts with. It also needs to ensure access to liquidity at all times to meet its financial obligations and investment in future growth. Through proactive stewardship and financial discipline we seek to mitigate the impact of these risks on the financial performance of the Company. FOREIGN CURRENCY Mitigating actions The majority of Dialog’s revenue and expenses are denominated in US dollars. Some exposure exists to non-USD denominated operating expenditure, primarily Euro and Pound sterling, meaning exchange rate volatility could have an adverse impact on our financial results. Discrete currency exposures are managed on a case by case basis. Transactional currency exposures are managed using forward currency contracts, hedging no further than 12 months out on a layered approach. These are designated as cash flow hedges and at the year-end approximately US$136 million equivalent were outstanding. During the year, share buyback liabilities were hedged using forward currency contracts, forming an economic hedge but not designated for hedge accounting purposes. Please refer to notes 26 and 32 to the consolidated financial statements. COUNTERPARTY RISK Mitigating actions Dialog is exposed to the potential default of banks, suppliers and customers. If their credit worthiness were to change, this could have an adverse effect on Dialog’s business and financial condition. The Company uses non-recourse receivables financing to help manage credit risk of selected customers. When executing financial transactions, Dialog deals with reputable financial institutions in accordance with Board approved policy. Financial stability is a key selection criteria for all suppliers. Annual performance reviews are carried out for key suppliers by Dialog’s Manufacturing Review Board.* * The Manufacturing Review Board is an internal management committee responsible for supplier lifecycle management, supplier performance, onboarding and phasing out of suppliers as required, according to Dialog’s manufacturing strategy. Dialog Semiconductor PlcAnnual report and accounts 2018 Managing risk and uncertainty continued Financial risks continued FUNDING AND LIQUIDITY Mitigating actions The risk of being unable to continue to meet the financial obligations/requirements of our operations and provide resources for future growth. The business has no debt and is cash generative. As such, the Company finances its operations from surplus cash, only raising debt when necessary. The policy is to maintain a sufficient level of liquidity appropriate to meet short-term liabilities and longer-term strategy. Cash flow from operating activities in 2018 was US$289 million. In addition the Company has a US$150 million revolving credit facility which remains undrawn. See note 8b. Legal and compliance risks As Dialog has an increasingly global presence, it continues to update and enhance its policies, processes and procedures to comply with international and local requirements. Dialog recognises the importance of behaving as a good corporate citizen across the globe. In addition, the Company seeks to utilise the legal protection offered across the globe to protect our assets, including specifically our intellectual property rights. COMPLIANCE WITH LAWS AND REGULATIONS Mitigating actions Dialog is subject to national and regional laws and regulations in such diverse areas as product safety, product claims, patents, copyright, trademarks, competition, employee health and safety, the environment, corporate governance, share listing and related disclosure, employment and taxes. Failure to comply with laws and regulations could expose Dialog to civil and/or criminal actions leading to damages, fines and criminal sanctions against us and/or our employees with possible consequences for our financial results and corporate reputation. Changes to laws and regulations could have a material impact on our cost of doing business. Tax, in particular, is a complex area where laws and their interpretation are changing regularly, leading to the risk of unexpected tax exposures. Dialog monitors laws and legal and regulatory changes across the countries in which it operates and continues to update its policies, processes and compliance programmes. We audit our key suppliers to ensure their compliance with industry standards and legal requirements. We also continue to strengthen our system of internal controls, procedures and resources which reinforce compliance with various legal regimes. IP PROTECTION Mitigating actions As a highly innovative company Dialog has IP that is attractive to others. Dialog must ensure that this IP is sufficiently protected both legally (via patents) and physically (via security and IT processes). We seek to protect our current business and our IP from being copied or used by others through appropriate use of patents, copyrights and trademarks on a global basis. Dialog has in excess of 850 patent families and continues an active patent registration programme overseen by its Patent Committee. Dialog has continued to make investments to improve the tools used to protect its IP. Engineering projects are segregated and access controlled via a tracked approval process. IP INFRINGEMENT Mitigating actions The semiconductor industry is characterised by frequent litigation regarding intellectual property rights. We may be subject to claims by third parties who allege that our products infringe their patents or other intellectual property rights. Such claims against us or our customers could adversely affect our business and require us to pay royalties/damages or expend significant resources to modify or redesign our products. Dialog invests significantly in original research and development to address product requirements with innovative solutions. Furthermore, we have invested in a robust patent protection programme to deter frivolous infringement claims by competitors. Dialog also seeks indemnification for intellectual property infringement by its suppliers. Strategic report approved on 6 March 2019 Dr Jalal Bagherli Chief Executive Officer Wissam Jabre Chief Financial Officer, Senior Vice President Finance 56 i S t r a t e g c r e p o r t C o r p o r a t e g o v e r n a n c e i F n a n c a i l s t a t e m e n t s A d d i t i o n a l i f n o r m a t i o n Dialog Semiconductor PlcAnnual report and accounts 2018 57 Introduction to governance Dear shareholder, I am pleased to present our 2018 corporate governance report. As Dialog is incorporated in the UK and listed in Frankfurt, we are not required to follow, and report against, the UK Corporate Governance Code. In line with our commitment to maintaining high standards of corporate governance and oversight, the Board has decided to follow the UK Code to the extent it considers it beneficial to the good governance of the Company. 2018 developments The Board is cognisant of the recent revisions to the UK Code. Following the publication of the latest iteration of the Code in July 2018, the Board was apprised of the key alterations to its framework. The Code became effective on 1 January 2019 and the Board will, where appropriate, act to reflect the revised UK Code in Dialog’s approach to corporate governance. Details of those steps will be provided to shareholders in our 2019 Annual Report. Certain of the key changes in the Code have been made in areas where we have made significant progress in recent years, including in embedding our culture and strengthening engagement with our key stakeholders. New regulations also came into effect for UK companies, relating to the CEO to employee pay ratio and extension of reporting around s.172 of the Companies Act. Reporting in line with those regulations will be included in the 2019 Annual report. Additionally, we published our Gender Pay Gap report and our approach to tax. Culture and stakeholders Dialog is a business built upon the values enshrined in “The Spirit of Dialog”, the cornerstone of our corporate values. As detailed in the Chairman’s statement, the Board and senior management team continued to work closely with our internal and external stakeholders to promote our culture and values. We believe this is an important factor in protecting and delivering sustainable long-term value for shareholders. Succession planning Succession planning is an important element of good governance, ensuring that we are fully prepared for planned or sudden departures from key positions throughout the year. The Nomination Committee has reviewed the succession plans for the Board, the Management Team and other key roles within the organisation. This review also provided visibility of Dialog’s talent pipeline to ensure we are maximising the potential of our people. Board refreshment Aidan Hughes, who has been a key member of the Board since 2004, will step down at the 2019 AGM. As part of our ongoing programme of Board and Committee refreshment, the Board is looking to appoint a new independent non-executive Director who will be, in addition, appointed to the Audit Committee to ensure that Committee’s composition remains aligned with best practice corporate governance. Our Board continues to include an appropriate balance of longer serving and more recently appointed Directors, with diverse backgrounds and experience. This serves to bring fresh thinking to the Board yet preserves the knowledge, experience and understanding of the evolution of the Dialog business within the Board as a whole, all of which provides the platform for fruitful discussion at Board level. The Board has continued to focus on providing effective leadership and oversight of the Group as it seeks to create value for our shareholders. In 2017, we conducted an externally facilitated Board evaluation. Its findings were presented to the Board in February 2018. Later in 2018, we conducted an internal evaluation. The Directors engaged extensively with both the internal and external evaluations and found them to be helpful processes in promoting effectiveness at Board level. The outcome of both reviews were positive and confirmed that the Board and its Committees operate to a high standard. Senior Independent Director (“SID”) Having carefully considered the role and responsibilities of a Senior Independent Director, and the fact that Rich Beyer is a Chairman who was wholly independent on appointment in 2013, the Board does not believe there is a necessity to appoint a SID at this time. Rich is available to shareholders as are all of the Directors, particularly the Chairs of each of the Board Committees. Furthermore, any concerns regarding the performance of the Chairman may be addressed to and will be managed by the Chair of the Nomination Committee. As such, the Board believes that its composition continues to ensure a proper division between management and non-executive oversight; nonetheless, we will review the potential for a new SID on an ongoing basis. Non-executive Director positions We have not set hard guidelines at Dialog but recognise the importance of ensuring Directors have sufficient time to discharge their obligations to Dialog and believe each of the Directors has demonstrated exceptional commitment to their roles for the past fiscal year, as exemplified by their meeting attendance on page 66. Remuneration The Directors’ remuneration report, together with an introductory letter from our Remuneration Committee Chairman, Mike Cannon, is set out on page 70. As set out in the letter and report, we are proposing some changes to the remuneration policy at the 2019 AGM. Understanding our stakeholders As set out in the Chairman’s statement, the Board continues to take account of the impact of its decisions on all of our stakeholders. We have also begun to assess the methods in which we ensure meaningful engagement can take place between the Board and the workforce. This engagement, amongst other things, will allow Directors to gauge how the Group’s new strategic initiatives are embedding within the organisation. The alignment of our strategy, corporate culture and corporate governance framework provides us with the foundation to ably meet any challenges that the business faces, and position us for long-term growth. In 2017, the European Union Directive on disclosure of non-financial and diversity information (the “Non-Financial Reporting Directive”) came into effect. Since 2015, the Company has adopted the Global Reporting Initiative (GRI) framework for the purpose of identifying and reporting on our material sustainability topics. In 2018, we transitioned to the GRI Standards, against which our 2018 Sustainability Report makes a ‘GRI-referenced’ claim. In our annual sustainability report, we provide disclosure on the impacts of our activities; our interaction with stakeholders; and, in respect of environmental, employee, social, human and labour rights, anti- corruption and anti-bribery matters. Finally, as we have outlined before, as a Board, we recognise the importance of constructive dialogue between the Board and Dialog’s investors, and we remain open to all feedback from shareholders. In addition to ongoing meetings and consultation conducted throughout the year, all Directors are available at the Company’s AGM and we encourage you to take advantage of this opportunity should you wish to meet with and engage in discussion with any member of your Board. Nick Jeffery Chairman, Nomination Committee Dialog Semiconductor PlcAnnual report and accounts 2018Leadership – Board of Directors The Board of Dialog currently comprises eight Directors. This includes one Executive Director, and seven independent non-executive Directors (including the Chairman). 58 1 4 7 2 5 8 3 6 2. Dr Jalal Bagherli Executive Director (Chief Executive Officer) Joined: September 2005 Jalal was previously Vice President and General Manager of the Mobile Multimedia business unit for Broadcom Corporation. Prior to that Jalal was the CEO of Alphamosaic, a venture-funded silicon start-up company in Cambridge focusing on video processing chips for mobile applications. He has extensive experience in the semiconductor industry through his previous professional and executive positions at Sony Semiconductor and Texas Instruments, managing semiconductor product businesses and working with customers in Asia, Europe and North America. Jalal has a BSc (Hons) in Electronics Engineering from Essex University, and holds a PhD in Electronics from Kent University, UK. External Appointments: Jalal has been a non-executive Director of Lime Microsystems Ltd since 2005 and was the Chairman of the Global Semiconductor Association Europe from 2011 to 2013. Board Experience: 1. Rich Beyer Chairman Joined: February 2013 Appointed Chairman in July 2013. Rich has a long-standing career in the technology sector. He was the Chairman and CEO of Freescale Semiconductor from 2008 to 2012. Prior to this, he held positions as CEO and Director of Intersil Corporation, Elantec Semiconductor and FVC.com. He has also held senior leadership positions at VLSI Technology and National Semiconductor Corporation. In 2012, he was Chairman of the Semiconductor Industry Association Board of Directors and served for three years as a member of the US Department of Commerce’s Manufacturing Council. He currently serves on the Board of Micron Technology Inc. and previously served on the Boards of Analog Devices, Microsemi Corporation (now Microchip Technology), Credence Systems Corporation (now LTX-Credence), XCeive Corporation and Signet Solar. Rich served three years as an officer in the United States Marine Corps. He earned Bachelor’s and Master’s degrees in Russian from Georgetown University, and an MBA in marketing and international business from Columbia University Graduate School of Business. External Appointments: Rich currently serves on the Board of Micron Technology Inc. Board Experience: The Board of Dialog currently comprises eight Directors. This includes one Executive Director, and seven independent non-executive Directors (including the Chairman). The Board of Directors comprises a mix of the necessary skills, knowledge and experience required to provide leadership, control and oversight of the management of the Company and to contribute to the development and implementation of the Company’s strategy. In particular, the Board combines a group of Directors with diverse backgrounds within the technology sector, in both public and private companies, which combine to provide the expertise to drive the continuing development of Dialog, advance the Company’s commercial objectives and strategy, thus putting the Company in a strong position to maximise shareholder value. The Board also combines a number of longer serving Directors with more recently appointed Directors. This serves to bring fresh thinking to the Board yet preserves the knowledge, experience and understanding of the evolution of the Dialog business within the Board as a whole. Director biographies are set out above and on page 59 and further details on the composition of the Board, and the Board’s Committees, are detailed on pages 64 and 65. Committee membership A – Audit Committee N – Nomination Committee R – Remuneration Committee Board experience – Technology – Telecommunications – Finance – Governance Dialog Semiconductor PlcAnnual report and accounts 2018 59 3. Alan Campbell Independent non-executive Director Joined: April 2015 5. Mary Chan Independent non-executive Director Joined: December 2016 7. Nick Jeffery Independent non-executive Director Joined: July 2016 Mary’s career has spanned executive leadership roles at some of the world’s most successful international firms, including AT&T, Alcatel Lucent, Dell Inc. and General Motors Corporation (“GM”). At Dell, between 2009 and 2012, Ms Chan led the company’s Enterprise Mobility Solutions and Services business in the USA. Prior to this, at Alcatel- Lucent, Ms Chan served as Executive Vice President of the company’s US 4G LTE Wireless Networks business. Most recently at GM, Ms Chan served between 2012 and 2015 as President, Global Connected Consumers & OnStar Service USA. She holds both Bachelor and Master of Science degrees in Electrical Engineering from Columbia University. Nick has a career of over 20 years in the telecommunications industry. He has held a position on the Vodafone Executive Committee since 2013 and from 1 September 2016 became CEO of Vodafone UK Limited. He has undertaken numerous roles within Vodafone including CEO of the Group’s acquired Cable and Wireless Worldwide operations from 2012 to 2013, and CEO of Vodafone Group Enterprise from 2013 to 2016. Having begun his career at Cable & Wireless plc (Mercury Communications) in 1991, he then founded and led Microfone Limited in 2001, whilst serving as Head of Worldwide Sales and Europe Managing Director at Ciena Inc. from 2002 until 2004. External Appointments: Ms Chan is a managing partner at VectoIQ, LLC., and currently serves as an Independent Director on the Boards of Magna International, Microelectronics Technology Inc, SBA Communications Corporation and WiTricity Corporation. Committee Membership: Nomination, Remuneration Board Experience: 6. Aidan Hughes Independent non-executive Director Joined: October 2004 Aidan is a Fellow of the Institute of Chartered Accountants in England and Wales and qualified as a chartered accountant with PriceWaterhouse in the 1980s. He has held senior finance roles at Lex Service Plc and Carlton Communications Plc. He was a FTSE 100 finance Director, having held that position at the Sage Group Plc from 1993 to 2000. From December 2001 to August 2004 he was a Director of Communisis Plc. External Appointments: Aidan is a non-executive Director and Chair of Audit Committee for Ceres Power Holdings PLC. He is also an investor and adviser to a number of international private technology companies. Committee Membership: Audit Board Experience: External Appointments: CEO, Vodafone UK. Committee Membership: Nomination (Chair), Remuneration Board Experience: 8. Eamonn O’Hare Independent non-executive Director Joined: March 2014 Eamonn has spent over two decades as CFO of some of the world’s fastest-growing consumer and technology businesses. From 2009 to 2013, he was CFO and main board member of Virgin Media Inc. and led its successful sale to Liberty Global Inc. in 2013. From 2005 to 2009, he served as CFO of the UK operations at Tesco plc. Before joining Tesco, he was CFO and Board Director at Energis Communications and led the successful turnaround of this high profile UK telecoms company. Prior to this Eamonn spent ten years at PepsiCo Inc. in a series of senior executive roles in Europe, Asia and the Middle East. Eamonn spent the early part of his career in the aerospace industry with companies that included Rolls-Royce PLC and BAE Systems PLC. External Appointments: Eamonn is the Chairman and CEO of Zegona Communications Plc, and a Director of Tele2 AB. Committee Membership: Audit Board Experience: Alan brings over 30 years of relevant business and financial expertise to Dialog Semiconductor, having extensive experience as a Chief Financial Officer in the semiconductor industry. He began his career in 1979 with Motorola and has spent over 12 years in Europe and 20 years in the USA. In 2004, he guided Freescale through its separation from Motorola and successfully executed an initial public offering (“IPO”) that listed the company on the New York Stock Exchange (“NYSE”). In 2006, he was instrumental in the execution of a Leverage Buy-Out (“LBO”) in one of the largest technology financial transactions at that time. In 2011, he successfully led the company back to the public market to be listed on the NYSE. External Appointments: Alan is currently Chairman of ON Semiconductor. Committee Membership: Audit (Chair) Board Experience: 4. Mike Cannon Independent non-executive Director Joined: February 2013 Mike’s career in the high-tech industry spans 30 years. He was President, Global Operations of Dell from February 2007 until his retirement in 2009. Prior to joining Dell, Mike was the CEO of Solectron Corporation, an electronic manufacturing services company, which he joined as CEO in 2003. From 1996 until 2003, Mike was CEO of Maxtor Corporation, a disk drive and storage systems company, and successfully led the NASDAQ IPO of Maxtor in 1998. Mike previously held senior management positions at IBM and Control Data Corporation. Mike studied Mechanical Engineering at Michigan State University and completed the Advanced Management Program at Harvard Business School. External Appointments: Mike currently serves on the boards of Seagate Technology as the Lead Independent Director and chairman of the Nominating and Governance committee and also serves on the Compensation committee, and on the Lam Research Corporation board on the Audit committee and the Nominating and Corporate Governance committee. Mike was previously on the board of directors of the US – China Business Council. Committee Membership: Remuneration (Chair), Nomination Board Experience: Dialog Semiconductor PlcAnnual report and accounts 2018 Leadership – Management team 60 1 4 7 10 2 5 8 11 3 6 9 12 4. Mohamed Djadoudi Senior Vice President, Global Manufacturing Operations & Quality Mohamed joined Dialog in March 2007 and is responsible for product engineering, test and assembly development, data automation, software support, offshore manufacturing operations and quality. Mohamed has more than 25 years’ experience in the field of semiconductor manufacturing operations, starting initially with IBM in France and the US. He was previously Senior Vice President and Chief Technology Officer of the Unisem group, an assembly and test subcontractor based in Malaysia and China. He also held the position of Vice President of Test Operations at ASAT (Atlantis Technology), based in Hong Kong, before becoming one of the original members of the management buy- out team of ASAT UK, where he served as the Technical Director. Mohamed holds an Electronic and Electrotechnic degree from the Paris University of Technology. Tenure with Dialog: 11 years 1. Dr Jalal Bagherli Chief Executive Officer Jalal joined Dialog as CEO and an Executive Board Director in September 2005. He was previously Vice President & General Manager of the Mobile Multimedia business unit for Broadcom Corporation. Prior to that Jalal was the CEO of Alphamosaic, a venture-funded silicon start-up company in Cambridge focusing on video processing chips for mobile applications. He has extensive experience in the semiconductor industry, through his previous professional and executive positions at Sony Semiconductor and Texas Instruments, managing semiconductor product businesses and working with customers in the Asia, Europe and North America. Jalal is a non-executive Director of Lime Microsystems Ltd since 2005 and was the Chairman of Global Semiconductor Association Europe from 2011 to 2013. He has a BSc (Hons) in Electronics Engineering from Essex University, and holds a PhD in Electronics from Kent University, UK. Tenure with Dialog: 13 years 2. Vivek Bhan Senior Vice President, Engineering Vivek joined Dialog in November 2013 and is responsible for the overall engineering and technology direction, including design and product development across the various business groups within Dialog. He brings a wealth of engineering leadership experience in the semiconductor industry including technology and products for advanced cellular systems, connectivity and medical applications within RF, mixed-signal and SOC space. He has held senior positions at Freescale, Fujitsu Semiconductor and Motorola. Vivek holds a MS in Electrical Engineering and MBA from Arizona State University. Tenure with Dialog: Five years 3. Christophe Chene Senior Vice President, Asia Christophe joined Dialog in November 2011 as Vice President, Asia and is based in Taiwan. He has over 20 years of experience in the semiconductor industry, focusing on building international businesses with a strong Asian footprint. Previously he served as Senior Vice President and General Manager of the TV Business Unit as well as Senior Vice President of worldwide sales for Trident Microsystems. Prior to that, Christophe served in various international executive and managerial positions at Texas Instruments, Sharp and Xilinx. Christophe holds an Electronics Engineering degree from INSA, Toulouse. Tenure with Dialog: Seven years Dialog Semiconductor PlcAnnual report and accounts 201861 8. Sean McGrath Senior Vice President and General Manager, Connectivity, Automotive & Industrial Business Group Sean joined Dialog in November 2012. Sean has more than 15 years’ experience in RF semiconductor businesses, introducing innovative business models and leading organisations to rapid growth. Prior to Dialog, he was General Manager of the Smart Home & Energy group at NXP and General Manager of the RF Power and Base Stations business at NXP/Philips Semiconductors. He previously held senior roles at Philips Semiconductors and Mikron Austria GmbH, focusing on the RFID and connectivity markets. Sean holds an honours degree in Geophysics and Geology from Harvard University and an MBA with distinction from INSEAD. Tenure with Dialog: Six years 9. Julie Pope Senior Vice President, Human Resources An experienced international HR executive, Julie began her career as a consultant at The Wyatt Company progressing to KPMG before joining IBM in 1998. With IBM, Julie spent time in New York and Paris. Julie joined American Express in New York in 2003 in International Benefits and moved to VP Global Mobility and HR Business Partner, Global Business Travel. She relocated to Sydney in 2011 as the VP HR Australia and New Zealand and then moved to the UK as VP HR Business Partner EMEA. During her career, Julie has gained extensive international experience in reward and benefits, global mobility, change management, talent planning, mergers and acquisition and global talent acquisition. Julie holds a Bachelor’s degree in Mathematics and Psychology from Lamar University in Beaumont, Texas and is an Associate of the Society of Actuaries. Tenure with Dialog: One year 5. Wissam Jabre Chief Financial Officer, Senior Vice President, Finance Wissam joined Dialog in 2016 after serving as Corporate Vice President of Finance at Advanced Micro Devices (AMD) since 2014. Between 2003 and 2014, he held various executive positions at Freescale Semiconductor, including Vice President and Chief Procurement Officer, Vice President Global Pricing, Chief Financial Officer of the Networking & Multimedia Solutions Group. Wissam began his career at Schlumberger, gaining international experience in the Middle East, Europe and North America, before joining Motorola. He holds a Bachelor of Electrical Engineering degree from the American University of Beirut and an MBA from Columbia Business School, New York. Wissam is a CFA® charterholder. Tenure with Dialog: Two years 6. Udo Kratz Senior Vice President and General Manager, Mobile Systems Business Group Udo joined Dialog in May 2006. He has over 20 years’ experience in the semiconductor industry, gained in general management, senior marketing and engineering at Robert Bosch GmbH, Sony Semiconductor and Infineon Technologies. Udo holds an Electronic Engineering degree from the University for Applied Sciences, Mannheim. Tenure with Dialog: 12 years 7. Davin Lee Senior Vice President and General Manager, Advanced Mixed Signal Business Group Davin joined Dialog in July 2014. He was previously CEO of Scintera Networks. Prior to that, Davin was the Vice-President and General Manager of the Consumer Business Unit at Intersil Corporation. Prior to that, Davin was Vice-President of Marketing at Xicor. He previously held senior positions within Altera and National Semiconductor. Davin holds a BSEE from The University of Texas at Austin and an MBA from Kellogg School of Management at Northwestern University. Tenure with Dialog: Five years 10. Tom Sandoval Senior Vice President, Worldwide Sales Tom joined Dialog in September 2015 and is responsible for the worldwide sales organisation. He has over 25 years of experience in the semiconductor industry and has held executive management positions in sales, marketing and engineering. Prior to joining Dialog, Tom served as Vice President of Sales for the Americas at Xilinx. He previously served as CEO of Calypto Design Systems. Tom holds a BS degree in Electrical Engineering from the University of Southern California. Tenure with Dialog: Three years 11. Colin Sturt Senior Vice President, General Counsel Colin Sturt joined Dialog Semiconductor in October 2015 as Senior Vice President, General Counsel. Prior to joining Dialog, Colin held the position of Vice President of Corporate Development, General Counsel and Corporate Secretary at Micrel, Incorporated. He was previously a corporate attorney with Davis Polk & Wardwell LLP. Earlier in his career, Colin served in manufacturing management and operational and organisational improvement roles with National Semiconductor Corporation. He holds a Law degree from the Columbia University Law School and a Bachelor’s and two Master’s degrees from Brigham Young University. Tenure with Dialog: Three years 12. Mark Tyndall Senior Vice President, Corporate Development & Strategy and General Manager, Emerging Products Business Group Mark joined Dialog Semiconductor in September 2008. Prior to this, Mark was Vice President of Business Development and Corporate Relations at MIPS Technologies. From 1999 to 2006, he held the position of Vice President of Business Development at Infineon and has also served as a board director of a number of start-up companies, several of which were successfully acquired. Earlier in his career, Mark held management positions in marketing at Fujitsu Microelectronics and in design at Philips Semiconductors. Tenure with Dialog: Ten years Role Tenure with Chief Executive Officer Senior Vice President, Engineering Name Dr Jalal Bagherli Vivek Bhan Christophe Chene Senior Vice President, Asia Mohamed Djadoudi Senior Vice President, Global Manufacturing Operations & Quality Wissam Jabre Udo Kratz Davin Lee Sean McGrath Julie Pope Tom Sandoval Colin Sturt Mark Tyndall Tenure with Dialog (years) 13 5 7 11 2 Chief Financial Officer, Senior Vice President, Finance 12 Senior Vice President and General Manager, Mobile Systems Business Group 5 Senior Vice President and General Manager, Advanced Mixed Signal Business Group 6 Senior Vice President and General Manager, Connectivity, Automotive & Industrial Business Group 1 Senior Vice President, Human Resources 3 Senior Vice President, Worldwide Sales Senior Vice President, General Counsel 3 Senior Vice President, Corporate Development & Strategy and General Manager Emerging Products Business Group 10 Dialog Semiconductor PlcAnnual report and accounts 201862 Directors’ report The Directors of Dialog Semiconductor Plc (‘‘Dialog’’ or the “Company’’) present their Annual report and audited financial statements for the year ended 31 December 2018. These accounts have been prepared under IFRS and are available on the Company’s website: www.dialog- semiconductor.com Principal activities and review of the business Dialog Semiconductor develops and distributes highly-integrated, mixed-signal ICs, optimised for personal portable, Configurable Mixed-signal IC, low energy short-range wireless, LED solid state lighting and automotive applications. The Company provides customers with world-class innovation combined with flexible and dynamic support. The Company is listed on the Frankfurt (FWB: DLG) Stock Exchange (Regulated Market, Prime Standard, ISIN GB0059822006) and is a member of the German TecDax index. The Company is registered in the UK and the registered number is 03505161. A full list of Company subsidiaries outside of the UK is detailed in Dialog’s related undertakings set out on page 167. Further information on the principal activities of the business and the factors affecting future developments are detailed in the Group’s Strategic report. Information on treasury policies and objectives is included in note 32 to the consolidated financial statements. Future developments The Company’s stated objective is to power the smart connected future by becoming the leading global supplier of highly-integrated, power management, AC/DC, solid state lighting and low energy short-range wireless connectivity. The key aspects of the Group’s strategy are set out in the Strategic report on page 25. Research and development R&D The Company believes that its future competitive position will depend on its ability to respond to the rapidly changing needs of its customers by developing new designs in a timely and cost-effective manner. To this end, the Company’s management is committed to investing in R&D of new products and customising existing products. To date, R&D projects have been in response to key customers’ requests to assist in the development of new custom ASICs, and for the development of application-specific standard products (“ASSPs”). The Company does not expect any material change to this approach in the foreseeable future. Greenhouse gases Corporate responsibility and a commitment to sustainable business practices are important to Dialog’s business model and a component of Dialog’s strategy to deliver long-term profitable growth. Our commitment to environmentally oriented, sustainable business practices is evidenced in our commitment to continually reduce CO2 emissions and minimise the carbon footprint of our business. Further details on the Company’s commitment to sustainable and environmentally friendly business practices are set out on pages 21 to 23. Going concern The Directors have formed a judgement at the time of approving the financial statements that there is a reasonable expectation that the Company has adequate resources to continue for the foreseeable future. The Company held US$678 million of cash and cash equivalents at the end of 2018 (2017: US$479 million) and has a US$150 million Revolving Credit Facility, with an initial three-year period to July 2020, which was undrawn at 31 December 2018. The Company expects to continue to deliver revenue and profit growth in the period ahead. For these reasons, the Directors have adopted the going concern basis in preparing the financial statements. Dividends and share repurchases The Company has historically been committed to reinvesting all profits into laying the framework for future growth. Accordingly, since its initial public offering in 1999, Dialog has not paid any cash dividend. Directors do not recommend the payment of a dividend for 2018 (2017: nil). At the 2019 Annual General Meeting, in line with the shareholder approvals obtained in 2017 and 2018, the Board will be asking shareholders for an authority to continue the share buyback programme. The first tranche of the share buyback programme corresponding to the 2018 Buyback Programme was announced by the Company on 6 November 2018, for up to €150 million and a maximum maturity date of 21 May 2019. It should be emphasised that, even if shareholder authority to continue the share buyback programme is granted, no decision has yet been made to implement such a programme and implementation will only occur if the Board considers this in the best interests of the Company depending on the prevailing circumstances. Purchase of own shares by Employee Benefit Trust The Company operates an Employee Benefit Trust, which purchases and sells shares in the Company for the benefit of employees under the Company’s share option scheme, Long-Term Incentive Plan, Executive Incentive Plan and Employee Share Plan. Since the Company has de facto control of the assets and liabilities of the Trust, they are included in the Company and Group balance sheets. At 31 December 2018, the Trust held 2,607,259 shares, which represented 3.4% of the total called-up share capital, at a nominal value of £260,726. Share capital The Company’s issued share capital comprised a single class of shares referred to as ordinary shares. Details of the share capital are set out in note 25 to the consolidated financial statements. Substantial shareholdings Details of substantial shareholdings are on page 67. Directors The Directors, together with their biographies, are listed on pages 58 and 59. Powers of Directors The Directors are authorised to issue the nominal amount of securities representing the aggregate of approximately one third of the issued share capital of the Company; of that one third they can issue an amount equal to 5% of the issued share capital on a non-pre-emptive basis generally and a further 5% on a non-pre-emptive basis in certain limited circumstances related to the financing of a transaction. The Directors have additional power to issue up to a further third of the issued share capital of the Company, provided it is only applied on the basis of a rights issue. Directors’ remuneration and interests Directors’ remuneration and interests are detailed in the Annual report on remuneration on pages 79 to 85 of this report. No Director had a material interest during the year ended 31 December 2018 in any contract of significance with any Group company. The agreement between the Company and its Directors for compensation for loss of office is given in the Director’s remuneration policy report on pages 73 to 78 of this report. Directors’ third-party indemnity provisions The Company has granted an indemnity to its Directors against proceedings brought against them by third parties, by reason of Dialog Semiconductor PlcAnnual report and accounts 201863 their being Directors of the Company, to the extent permitted by the Companies Act 2006. Such indemnity remains in force as at the date of approving the Directors’ report. Election and re-election of Directors In accordance with the Company’s Articles of Association, one third of the Directors have to stand for re-election at the Annual General Meeting. Any Director who has been on the Board for more than nine years is subject to annual re-election. The next Annual General Meeting will be held on 2 May 2019 at 9am at Tower Bridge House, St Katharine’s Way, London, E1W 1AA. Corporate governance The Company’s Corporate governance statement is set out on pages 64 to 69 of this report. While the UK Code does not apply to Dialog, in line with our commitment to maintaining high standards of corporate governance and oversight, the Board will follow the UK Code to the extent it considers it beneficial to the good governance of the Company. Principal risks and uncertainties The Company is exposed to a number of risks and uncertainties that could affect the performance of the Company and its prospects. The Board of Directors and the Audit Committee are responsible for the Company’s process of internal control and risk management and for reviewing its continuing effectiveness. The Board ensures, to the extent possible, that the system of internal procedures and controls is appropriate to the nature and scale of the Company’s activities and that appropriate processes and controls are in place to effectively manage and mitigate strategic, operational, financial and other risks facing the Company. A list of the principal risks and their management is set out on pages 52 to 56. Financial instruments The Group’s financial risk management and policies, and exposure to risks, are set out on pages 55 to 56 of this report and on note 32 to the consolidated financial statements. Employee policies It is our policy to support our people through training, career development and opportunities for promotion. We operate an open management approach and consult with our staff on matters that are of concern to them. We share information with employees on the performance of the Company which, together with profit- related bonuses and stock option awards, encourage staff involvement. Diversity and equal opportunity In 2018, Dialog operated from 29 locations in 16 countries with a highly diverse workforce, incorporating employees from 69 nationalities. Dialog takes equality and equal opportunity for all employees very seriously. We believe diversity among our employee base is an important attribute to a well-functioning business. Diversity spans a range of factors including diversity in terms of geographic origin, background, gender, race, faith, education, experience, viewpoint, interests, technical, and interpersonal skills. We also ensure that we offer equal opportunities in all aspects of employment and advancement regardless of age, disability, gender, marital status, nationality, race, religious or political beliefs or sexual orientation. Where existing employees become disabled, it is the Group’s policy to provide continuing employment wherever practicable in the same or alternative position and to provide appropriate training to achieve this aim. Gender diversity is of particular importance. Women comprise 17.6% of the overall workforce and further details are set out on pages 18 and 19 of this report. Although this is in line with the industry average, the Company is supporting various initiatives in the areas of STEM education to encourage more women to pursue careers in engineering and electronic engineering. Disabled persons Our policy provides for disabled persons, whether registered or not, to be considered for employment, training and career development in accordance with their aptitudes and abilities. We offer equal opportunities in all aspects of employment and advancement regardless of any disability. Statement on disclosure of information to auditors The Directors who were members of the Board at the time of approving the Directors’ report are listed on pages 58 and 59 of this report. Each of the Directors affirms that: U So far as they are aware, there is no relevant audit information of which the Company’s auditors are unaware; and U They have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. Capital structure As at 31 December 2018, the Company’s issued share capital comprised a single class of shares referred to as ordinary shares. Details of the share capital, and changes in share capital, can be found in note 25 to the consolidated financial statements. On a show of hands at a general meeting of the Company every holder of shares present in person and entitled to vote shall have one vote, and on a poll every member present in person or by proxy and entitled to vote shall have one vote for every ordinary share held. The notice of the general meeting specifies deadlines for exercising voting rights either by proxy notice or by presence in person or by proxy in relation to resolutions to be passed at a general meeting. All proxy votes are counted and the numbers for, against or withheld in relation to each resolution are announced at the AGM and published on the Company’s website after the meeting. There are no securities carrying special rights, nor are there any restrictions on voting rights attached to the ordinary shares. There are no restrictions on the transfer of shares in the Company other than: U Certain restrictions may from time to time be imposed by laws and regulations (for example, insider trading laws); and U Directors and senior management of the Company are not allowed to trade in shares or exercise options in certain close periods (such close periods normally start two weeks before the end of each financial quarter and end 48 hours after the release of the financial results). The Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and for voting rights. Dialog has an Employee Benefit Trust which holds Dialog shares for the benefit of employees, including for the purpose of satisfying awards made under the various employee and executive share plans. The trustee may vote the shares as it sees fit, and if there is an offer for the shares the trustee is not obliged to accept or reject the offer but will have regard to the interests of the employees and may otherwise take action with respect to the offer it thinks fair. The Company’s Articles of Association may only be amended by a special resolution at a general meeting of shareholders. Annual General Meeting The notice convening the Annual General Meeting will be published separately and posted on the Company’s website. The meeting will be held at Tower Bridge House, St Katharine’s Way, London, E1W 1AA on 2 May 2019 at 9 a.m. By order of the Board Dr Jalal Bagherli Director 6 March 2019 Dialog Semiconductor PlcAnnual report and accounts 201864 Corporate governance statement Chairman Mr Rich Beyer is Chairman of the Board. Rich was appointed to the Board in February 2013 and as Chairman in July 2013. Upon appointment, he was determined by the Board to be independent. The Chairman is responsible for the effective working of the Board and oversight of management while the CEO, together with the executive management team, is responsible for the day-to-day running of the Company. The functions of Chairman and CEO are not combined and the responsibilities of both roles are clearly divided. The Chairman, CEO and the Company Secretary work together in planning a forward programme of Board meetings and meeting agendas. As part of this process the Chairman ensures that the Board is supplied, in a timely manner, with information in a form and of a quality to enable it to discharge its duties. The Chairman encourages openness, debate and challenge at Board meetings. The Chairman holds a number of other directorships and the Board considers that these do not interfere with the discharge of his duties to the Company. The Chairman is available to meet shareholders on request. Board composition The Board currently comprises eight Directors who are listed below. The Board of Directors comprises a mix of the necessary skills, knowledge and experience required to provide leadership, control and oversight of the management of Dialog and to contribute to the development and implementation of the Company’s strategy. In particular, the Board combines a group of Directors with diverse backgrounds within the technology sector, in both public and private companies, which combine to provide the Board with a rich resource and expertise to drive the continuing development of Dialog and advance the Company’s commercial objectives. The Board also combines a number of longer serving Directors with Directors who have joined the Board more recently. This combination provides the Board with a fresh perspective while ensuring there is continuity and experience from Directors who have served during a period of rapid growth and development for the business. In addition, the geographic background of the Board is diverse and includes Directors who have international work experience. Director biographies are set out on pages 58 and 59. Director Rich Beyer Dr Jalal Bagherli Alan Campbell Mike Cannon Mary Chan Aidan Hughes Nick Jeffery Eamonn O’Hare Status Current Current Current Current Current Current Current Current Independent/non-independent Independent (Chairman) Non-independent (Executive) Independent Independent Independent Independent Independent Independent Tenure (years) 5 13 3 5 2 14 2 4 Concurrent tenure* (years) 5 N/A 3 5 2 13 2 4 * Note: Concurrent tenure means tenure on the Board concurrently with the Company’s CEO. Aidan Hughes will step down from the Board immediately prior to the 2019 AGM. The Board of Dialog Semiconductor is committed to maintaining high corporate governance standards to protect the interests of all stakeholders. While the UK Code does not apply to Dialog, the Company has always had regard for UK corporate governance best practice. In line with our commitment to maintaining high standards of corporate governance and oversight, the Board will follow the UK Code to the extent it considers it beneficial to the good governance of the Company. Board of Directors – role and responsibilities The Board has overall responsibility for the leadership, control and oversight of the Company. The day-to-day responsibility for the management of the Company has been delegated by the Board to the Chief Executive Officer (“CEO”), who is accountable to the Board. The CEO executes this authority through an executive management team outlined on pages 60 and 61 of this report. In addition, a number of responsibilities of the Board are delegated to sub-committees of the Board; details of which are set out below. Matters reserved for the Board While the Board has delegated day-to-day responsibility for the management of the Company to the CEO, certain matters are formally reserved for the Board. The Board has overall responsibility for: Company objectives, strategy, annual budgets, risk management, acquisitions or major capital projects, remuneration policy, and Corporate Governance. It defines the roles and responsibilities of the Chairman, CEO, other Directors and the Board Committees. In addition, the Board approves the quarterly financial statements and reviews the Company’s systems of internal control. It approves all resolutions and related documentation put before shareholders at general meetings. Dialog Semiconductor PlcAnnual report and accounts 201865 Board refreshment and renewal The Board is committed to a policy of ongoing Board refreshment and renewal. The Nomination Committee continually reviews the composition and diversity, including gender diversity, of the Board and the skills and experience of each of the Directors. The relevant skills and experience of each Director are set out under individual biographies, which are detailed on pages 58 and 59. Subject to approval at the Annual General Meeting by shareholders, Directors are appointed for a term of three years. Any Director who has been on the Board for more than nine years is subject to annual re- election. The standard terms of the letter of appointment of non-executive Directors are available, on request, at the Annual General Meeting of shareholders. Directors seeking re-election are subject to a performance appraisal, which is overseen by the Nomination Committee. In accordance with its Articles of Association a third of Directors stand for re-election at each Annual General Meeting. Board size At the end of 2018, the Board comprised eight Directors. A maximum of ten Directors is allowable under Dialog’s Articles of Association. The eight members of the Dialog Board include one Executive Director and seven independent, non- executive Directors (including the Chairman). The Nomination Committee has reviewed the size and performance of the Board during the year. The Committee considered that the Board functions effectively; comprises the skills, knowledge and experience required by Dialog; is not so large as to be unwieldy; and meets corporate governance best practice guidelines on independence. Board independence Corporate governance best practice states that at least half the Board, excluding the Chairman, should comprise non-executive Directors determined by the Board to be independent. The Board has determined that Alan Campbell, Mike Cannon, Mary Chan, Aidan Hughes, Eamonn O’Hare, and Nick Jeffery are independent. The Chairman, Rich Beyer, was independent on his appointment to the Board. The Company’s Chief Executive Officer, Dr Jalal Bagherli, is the only Executive Director on the Board. Excluding the Chairman, the Board currently comprises six independent non-executive Directors and one Executive Director and is, therefore, compliant with the principle that at least half the Board, excluding the Chairman, should comprise Directors determined by the Board to be independent. These terms of reference are available on the Company’s website. The Chairman of each Committee attends the Annual General Meeting and is available to answer shareholder questions. The reports of each of the Board Committees are set out on pages 67 and 69. As part of our ongoing programme of Board refreshment and renewal, Mr Hughes will not be standing for re-election at the 2019 AGM. At the time of the appointment of Alan Campbell, the Board considered the prior working relationship between Rich Beyer and Mr Campbell who both served at Freescale. Rich Beyer joined Freescale in March 2008 and held the position of Chairman and CEO through to June 2012. During this period, Alan held the position of Chief Financial Officer of Freescale reporting to Rich. The Board noted the three-year cooling off period between this prior working relationship and Alan’s appointment to the Dialog Board. Having carefully considered all the factors, the Board concluded that Alan Campbell is wholly independent. Senior Independent Director Having carefully considered the position and role of the SID, and the fact that Rich Beyer is a Chairman who was wholly independent on appointment, the Board does not believe there is a necessity to appoint a SID at this time. Comparable to the role of a SID at other companies, Rich Beyer is available to shareholders who have concerns for which contact through the normal channel of CEO has failed to resolve or is inappropriate. Furthermore, any concerns regarding the performance of the Chairman may be addressed to and will be managed by the Chair of the Nomination Committee. Board Committees The Board has established a number of Committees to assist in the execution of its responsibilities. During 2018, these were: Audit Committee, Nomination Committee and Remuneration Committee. Ad hoc committees are formed from time to time to deal with specific matters. The composition of the Board Committees, as at 6 March 2019, is set out below. Attendance at meetings held in 2018 is set out in the table on page 66. Each of the permanent Board Committees has terms of reference under which authority is delegated to them by the Board. Committee members Audit Committee Alan Campbell (Chair) Aidan Hughes Eamonn O’Hare 100% independent (3 of 3) Nomination Committee Nick Jeffery (Chair) Mike Cannon Mary Chan 100% independent (3 of 3) Remuneration Committee Mike Cannon (Chair) Nick Jeffery Mary Chan 100% independent (3 of 3) * Chris Burke served on the Nomination and Remuneration Committees until stepping down from the Board immediately prior to the May 2018 AGM. Alan Campbell, Chairman of the Audit Committee, Nick Jeffery, Chairman of the Nomination Committee and Mike Cannon, Chairman of the Remuneration Committee, are also available to shareholders should they have specific concerns or issues relevant to their respective committees. Company Secretary All Directors have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that Board procedures are complied with. The Company Secretary seeks to ensure that the Board members receive appropriate induction and ongoing training and development to enable them to discharge their duties. The Company Secretary is also responsible for advising the Board on all Corporate Governance matters. The appointment and removal of the Company Secretary is a matter for the Board. Tim Anderson of Reynolds Porter Chamberlain LLP is the Company Secretary and has served in this role for over 18 years. Dialog Semiconductor PlcAnnual report and accounts 2018Corporate governance statement continued 66 Board 5 2018 Board and Committee attendance Audit Director 4 Number of meetings in 2018 Meetings attended Richard Beyer Dr Jalal Bagherli Chris Burke* Alan Campbell Michael Cannon Mary Chan Aidan Hughes Nick Jeffery Eamonn O’Hare 5 5 1 5 5 5 5 5 5 4 4 4 Remuneration Nomination 4 4 1 4 4 4 1 4 4 4 * Chris Burke stepped down immediately before the May 2018 AGM. Director training and development The Board is committed to a programme of periodic training and development of its Directors. As part of this process, at least one Board meeting is held at the location of one of the Company’s international offices each year. During 2018, a Board meeting was held in California. As part of the Board meeting in California the Board received a presentation from local management. In addition, at the October 2018 Board meeting FTI delivered a training session on the new UK Corporate Governance Code. Performance evaluation The Board recognises the importance of continuing evaluation of the performance of the Board and its Committees and a review of the operation and performance of the Board and its Committees is undertaken annually. Such a review is normally conducted internally. However, in line with best practice, every three years there is an externally facilitated review. In 2017, consistent with this best practice, the Board engaged an independent third party to conduct an evaluation. The evaluation in 2017 was conducted by Equity Communications Ltd, a company which has no other connection with Dialog. The findings of the evaluation were presented to the Board in February 2018. The Board will consider a further third-party Board evaluation process in 2020. In 2018, an internally conducted review was undertaken the results of which were presented to the Board in February 2019. Board meetings The Board holds at least four Board meetings each year. The Board may meet more frequently as required. In addition, there are ad hoc Board calls through the year and when necessary. The number of meetings of Board sub-committees each year varies by Committee. There were five Board meetings in 2018. The attendance at Board and Committee meetings by the Directors who held office in 2018 is set out above. The Board places considerable importance on attendance at both scheduled Board and Committee meetings. During the year, no Director attended less than 75% of scheduled Board or Board Committee meetings to which they were entitled to attend. At scheduled Board meetings, the Board also meets without the Executive Director present. In addition, the non-executive Directors meet annually to review the performance of the Chairman. This process, which commenced in 2015, is an annual process and occurred in February 2018. The 2019 review will be held during the course of the calendar year. Director induction and continuing development Following appointment to the Board, new Directors are provided with induction materials and are briefed on the Company, its structure, strategy, technologies, operations, corporate governance practice, and their duties and responsibilities as a Director. Briefings for all non-executive Directors are held with the executive management at Board meetings. Throughout the year, Directors are also provided with detailed briefing materials on the performance of the Company and market analysis on the performance of, and prospects for, the business. External non-executive directorships The Board believes that a broadening of the skills, knowledge and experience of non-executive Directors is of benefit to the Company. As such, the Company welcomes the participation of the non-executives on the Boards of other companies. To avoid potential conflicts of interest, non-executive Directors inform the Chairman of the Nomination Committee before taking up any external appointments. Details of the non- executive positions of each Director are set out under individual biographies, which are detailed on pages 58 and 59. The Board has not established a hard guideline on the number of other executive or non-executive positions that a Director should hold but recognises the guidelines set out by a number of proxy advisers and other influential governance bodies. Directors’ fees The annual fee for non-executive Directors in 2018 was £145,000. The annual fee for the Chairman was £200,000. The Chair of the Audit Committee, the Nomination Committee and the Remuneration Committee received an additional fee of £16,000, £5,000 and £12,000 respectively for their role on that Committee. The other Committee members receive an additional fee for serving on those Committees as set out on page 84. Details of the activities of these Committees during 2018 are set out on pages 67 to 69. Directors’ fees were paid in cash and shares. Non-executive Directors are not eligible to participate in the Company’s bonus or share award schemes. None of the remuneration of the non- executive Directors is performance related. Non-executive Directors’ fees are not pensionable and non-executive Directors are not eligible to join any Company pension plans. Non-executive Directors are reimbursed for their reasonable travel and accommodation expenses incurred in connection with attending meetings of the Board or related committees. The compensation of the Executive Director comprises a base salary and variable components. Variable compensation includes an annual bonus linked to, and dependent on, certain business targets as well as long-term incentives. The executive Director’s remuneration is inclusive of any Director’s fee. Further details are set out in the Directors’ remuneration report which begins on page 70. Dialog Semiconductor PlcAnnual report and accounts 201867 Internal control and risk management In accordance with the EU Transparency Directive (DTR 7.2.5), the Board of Directors (following review and recommendation by the Audit Committee) acknowledge that they are responsible for the Company’s process of internal control and risk management. Such processes are designed to manage rather than eliminate the risk of failure and can only provide reasonable and not absolute assurance against material misstatement or loss. The Board ensures, to the extent possible, that the system of internal procedures and controls is appropriate to the nature and scale of the Company’s activities and that appropriate processes and controls are in place to effectively manage and mitigate strategic, operational, financial and other risks facing the Company. A detailed list of risks and their management is set out on pages 52 to 56. The Company has an ongoing process of identifying, evaluating and managing risk. The process was in place during 2018 and up to the date of the approval of the 2018 Annual report and financial statements. The Board and Audit Committee can confirm that necessary actions are being undertaken to remedy any perceived failings or weakness identified from these ongoing process reviews. Audit Committee The Board of Directors has established an Audit Committee and has delegated authority to the Committee to consider and report to the Board on the Company’s financial reporting, internal control and risk management procedures, and the work of the internal and external auditors. During 2018, the Audit Committee comprised only independent non-executive Directors. Members at the end of 2018 were Alan Campbell (Chairman), Aidan Hughes and Eamonn O’Hare. Share ownership and dealing Significant shareholders The provisions of the UK Disclosure Rules and Transparency Rules (“DTR”) require that any person or fund acquiring a direct or indirect interest of 3% or more of a class of shares issued by the Company – with voting rights at the Company’s general meeting – must inform the Company of its interest within two working days. If the 3% interest is exceeded, the shareholder must inform the Company of any increase or decrease of one percentage point in its interest. In accordance with DTR 5.1.5 with respect to voting rights attached to shares held by investment managers (on behalf of clients), by scheme operators and ICVCs, the first threshold for disclosure is set at 5%, with the next level set at 10% and every percentage above 10%. Once Dialog is notified, the Company must then notify BaFin and the Frankfurt Stock Exchange. Dialog’s shares are listed with Clearstream Germany as legal owner. As far as the Company is aware, based on TR-1 notifications received, those holding a significant beneficial interest (i.e. greater than 3%) in the Company as of 31 December 2018 were: 9.01% – Tsinghua University 3.004% – Norges Bank The free-float includes the following shares held on behalf of discretionary clients as per the share register on 31 December 2018: SIX SIS AG Citigroup Global Markets The Bank of New York Mellon Union Investment Privatfonds GmbH BNP Paribas Securities Services State Street Bank & Trust Corp. 9,216,342 7,690,087 6,902,382 3,186,760 2,779,146 2,752,917 As of 20 February 2019, the Company was aware of the following holdings: 9,052,122 Citigroup Global Markets 8,795,240 The Bank of New York Mellon 8,783,934 SIX SIS AG 3,137,664 State Street Bank & Trust Corp. BNP Paribas Securities Services 2,683,913 2,380,689 Citigroup Global Markets* * Reflecting a different shareholder ID. Dialog’s free-float is 73,774,880 or 96.6% of the outstanding shares. The free-float is calculated by excluding the 2,607,259 shares held in the Dialog Semiconductor Plc Employee Benefit Trust. Details of Directors’ shareholdings are set out on pages 81 and 82. The Company has a policy on dealing in shares that applies to all Directors and senior management. Under this policy, Directors are required to obtain clearance from the Chief Executive Officer (or in the case of the Chief Executive Officer himself, from the Chairman) before dealing. Directors and senior management are prohibited from dealing in the Company’s shares during designated close periods and at any other time when the individual is in possession of Inside Information as defined by Article 7 of Regulation (EU) No. 596/2014 of the European Parliament and the Council of 16 April 2014 (“MAR”). Transactions in securities of the Company’s own shares carried out by members of the Board of Directors and of their family members will be reported within three business days and published without delay, if the total value of such transactions in any one year exceeds €5,000, pursuant to and in accordance with Article 19 of MAR. Loans to Directors or senior executives The Company will not provide or guarantee any loans to Directors or senior executives. Relations with shareholders The Company is committed to ongoing and active communication with its shareholders. Dialog has a Head of Investor Relations who manages communication between the Company, its shareholders and the broader financial community. The Company also retains independent advisers in the UK and Germany to help manage communication with both English and German speaking shareholders. Dialog prepares annual and quarterly consolidated financial statements in accordance with IFRS as adopted by the EU, and IFRS issued by the IASB. The Company maintains an investor relations section on its website: dialog- semiconductor.com/investor-relations. This contains copies of investor presentations and annual reports as well as providing other financial statements and corporate press releases. There is regular discussion between Company management and analysts, brokers and institutional shareholders, ensuring that the market is appropriately informed on business activities. Dialog promptly discloses price- sensitive information to all market participants. Notifications are first sent to the Frankfurt Stock Exchange and the Federal Financial Supervisory Authority in Germany (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) and then published via an electronic information system. Dialog Semiconductor PlcAnnual report and accounts 201868 Corporate governance statement continued Dialog’s Audit Committee has recent and relevant financial experience. In line with best practice, the Board has affirmed that members of the Audit Committee also have significant expertise in Dialog’s business sector. Alan Campbell, Chairman of the Audit Committee, has long-standing experience as a CFO in the semiconductor industry. Eamonn O’Hare also has two decades’ experience as CFO at some of the world’s fastest-growing consumer and technology businesses. Aidan Hughes has experience as a senior accountant and Finance Director at a number of public and private companies, many of which are in the technology sector. Biographies are set out on pages 58 and 59. The Audit Committee meets a minimum of four times a year. In 2018, the Committee met four times. Attendance at meetings held is set out in the table on page 66. The Committee also meets privately with the internal and external auditors and separately with the executive management. The internal audit function is appropriately resourced with the required skills and experience, and is supported by specialist resources where required. The Director of Internal Audit is accountable to the Audit Committee and meets independently with the Committee Chairman regularly during the year. The Committee approves the internal audit plan and receives a report on internal audit activity at each meeting, and monitors the status of findings or improvement actions. The Audit Committee’s main responsibilities include to: U Review and advise the Board on the integrity of the financial statements of the Company, including the Annual report, quarterly financial statements and other formal announcements relating to the Company’s financial performance; U Review and advise the Board on the effectiveness of the Company’s internal controls; U Make recommendations on the appointment and remuneration of external auditors and to monitor their performance and independence; and U Approve and monitor the policy for non- audit services provided by the external auditors to ensure that the independence and objectivity of the auditors is not compromised. In order to fulfil its duties, the Committee receives sufficient, reliable and timely information from the Dialog management team. The full terms of reference of the Committee are available on our website under the Corporate Governance section of the Investor Relations section. Activity in 2018 During the period since the last Annual report to the date of this report, the Audit Committee has: U Reviewed the Annual report and accounts – including the report of the external auditor – for the year ended 31 December 2018; U Reviewed the interim reports issued in May, August and October 2018; U Reviewed and approved the external auditor’s audit plan for 2018, including the auditor’s proposed fee and statement of independence; U Reviewed non-audit fees paid to the external auditor in the year, which totalled US$150,000 and related solely to the review of the Group’s quarterly financial statements; U Received and discussed with the external auditor reports setting out the auditor’s findings from each quarterly review and the full year audit; U Considered the appropriateness and disclosure of accounting policies, key judgements and estimates with a focus on the key audit matters: the carrying amount of goodwill, and the capitalisation of development costs; U Monitored the progress of management’s implementation project for IFRS 16 Leases; U Reviewed the impact of adopting IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments on the Group’s results and financial position, the expected impact of IFRS 16 and the related disclosures made in the Group’s quarterly and annual financial statements; U Reviewed the risk register for updates to key risks and status; U Approved the annual internal audit plan, received and reviewed internal audit reports, including a report on the audit of changes made to the internal controls over revenue recognition in response to IFRS 15 and the annual assessment and review of internal controls, and monitored the effective and timely remediation of any control weaknesses; and U Reviewed and updated the Committee’s terms of reference. The Company believes that an effective and robust system of internal control is essential to achieving reliable business performance. The system of internal control is supported by a strong commitment by the management team, ongoing monitoring by the Audit Committee and a dedicated internal control function. There continues to be ongoing focus on the internal control over financial reporting using the COSO framework to design relevant and sustainable internal controls and test the operating effectiveness of internal controls. The Committee is pleased with the progress achieved in 2018 and will continue to monitor the ongoing work in these areas in 2019. Role of the External Auditor The external auditor audits the Group’s consolidated financial statements. Prior to the Audit Committee proposing the appointment or reappointment of the external auditor, the proposed auditor provides details of any professional, financial and other relationship which may exist between the auditor and the Company that could call its independence into question. This includes the extent to which other (non-audit) services were performed for the Company in the past year or which are contracted for the following year. The external auditor has committed to informing the Chairman of the Audit Committee of any grounds for disqualification or impartiality of the auditor occurring during the audit, unless such grounds are eliminated. The external auditor has committed to report to the Audit Committee, without delay, on all facts and events of importance that should be brought to the attention of the Board of Directors, which come to light during the performance of the audit, including the Company’s financial performance. The external auditor takes part in Audit Committee meetings on the annual consolidated financial statements and reports on the essential results of its audit. Deloitte were appointed auditors in 2015 and their appointment was subsequently confirmed at the 2016 Annual General Meeting. The Company, through the Audit Committee, has a policy of annual review of the external auditors. In compliance with European Union audit legislation, the audit engagement partner is rotated every five years and the audit is put out to tender at least every ten years. Dialog Semiconductor PlcAnnual report and accounts 201869 During the year, the Committee sought and received general advice relating to remuneration from independent adviser Aon Plc. Aon is a signatory to the Remuneration Consultants Group Code of Conduct and any advice was provided in accordance with this code. Aon provided no other services to Dialog during 2018 and has no other connection with the Company other than as adviser on issues relating to remuneration. In 2018, the Committee met formally on four occasions. Attendance at scheduled meetings is set out on page 66. The full terms of reference of the Committee are available on our website under the Corporate governance section of the Investor Relations section. A detailed report on the work of the Remuneration Committee during 2018, is set out on page 85. Tim Anderson Company Secretary External auditor and non-audit work The Company has a policy in place governing the conduct of non-audit work by the external auditor. Under this policy the auditor is prohibited from performing services where the auditor: U May be required to audit his/her own work; U Would participate in activities that would normally be undertaken by management; U Is remunerated through a “success fee” structure; and U Acts in an advocacy role for the Company. Other than the above, the Company does not impose an automatic ban on the external auditor undertaking non-audit work. The external auditor is permitted to provide non-audit services that are not, or are not perceived to be, in conflict with auditor independence, provided it has the skill, competence and integrity to carry out the work and that such work does not conflict with EU regulations. Details of the amounts paid to the external auditor during the year for audit and other services are set out in note 7 to the consolidated financial statements. In line with EU regulations, the Audit Committee will ensure that, for the year ended 31 December 2020, non-audit fees paid to the Company’s auditor will be capped at a maximum of 70% of the average audit fees paid in the last three consecutive financial years. Nomination Committee The Board of Directors has established a Nomination Committee to review Board structure, size and composition and make recommendations to the Board, and to identify and nominate Board candidates for approval by the Board. The Committee is responsible for succession planning for Directors and ensuring there are appropriate succession plans in place for all key executive positions within the Company to minimise “key-man” risk. The full terms of reference of the Committee are available on our website under the Corporate Governance section of the Investor Relations section. At the end of 2018, the Nomination Committee comprised Nick Jeffery (Chair), Mary Chan and Mike Cannon. The Committee comprises only independent non-executive Directors. By invitation, other members of the Board may attend the Committee’s meetings. The Committee is free to seek its own advice free from management as it deems appropriate. During the year, the Committee used the services of an external search and recruitment agency to assist with the non-executive recruitment. The firm, Egon Zehnder, is an independent third party and has no other connection with Dialog. During the year, the Committee met formally on four occasions. Attendance at scheduled meetings is set out on page 66. Activity in 2018 The key activities of the Nomination Committee during the year were to: U Review the composition of the Board to ensure the Directors have the skills and expertise to effectively oversee the implementation of the Group’s stated strategy; and U Review succession arrangements for all key executive positions. Remuneration Committee The Board of Directors has established a Remuneration Committee to review and make recommendations to the Board in respect of the salaries and incentive compensation of the officers of the Company and its subsidiaries, and provide recommendations to the management team for other employees and consultants as appropriate. At the end of 2018, the Remuneration Committee comprised Mike Cannon (Chair), Nick Jeffery and Mary Chan. The Committee comprised only independent non-executive Directors. By invitation, other members of the Board may attend the Committee’s meetings. The CEO and the Senior Vice President, Human Resources, may also attend by invitation but take no part in discussions or decisions on matters relating to their own remuneration. The Committee is free to seek its own advice free from management as it deems appropriate. Dialog Semiconductor PlcAnnual report and accounts 201870 Directors’ remuneration report Annual statement from Mike Cannon, Chairman of the Remuneration Committee Dear shareholder, I am pleased to present the Directors’ remuneration report for 2018, which has been prepared by the Remuneration Committee and approved by the Board. Our last substantive review of executive remuneration policy was in 2014, and a new policy resulting from that review was approved by shareholders at the 2015 AGM. In 2016, shareholders approved some minor changes to our policy on Directors’ contracts, but the main features of the overall policy remained unchanged. This policy will expire at the 2019 AGM. As a result, a full review of the policy was undertaken in 2018, and a new policy has been designed as set out on pages 73 to 78 and will be presented to shareholders at the 2019 AGM. The report is in two parts: the Annual Report on remuneration which sets out the details of and basis for remuneration during 2018, and the Directors’ remuneration policy, which describes the policy for the remuneration of Executive and non- executive Directors. Context of the Committee’s decisions Dialog is building on its leadership position in power-efficient mixed- signal ICs to capitalise on new growth opportunities. Our custom, configurable and programmable design expertise, coupled with our ability to quickly and reliably ramp to high-volume production, enables us to serve an increasingly broad customer base. Our deep expertise and track record provide us with a strong foundation to drive the next phase of growth and create value for Dialog shareholders. The vast majority of Dialog’s peers, with which the Company competes both for business and for talent, continue to be US-listed companies operating a US-style executive compensation model. As a result, remuneration in Dialog’s sector is heavily influenced by US practice, and this is reflected in some aspects of Dialog’s remuneration policy. Dialog’s remuneration policy has been designed so that the majority of remuneration is delivered through performance-based, long-term variable remuneration with significant emphasis on equity. Variable remuneration is delivered through an annual bonus and long-term incentive, and performance measures are chosen to incentivise and reward the successful achievement of our strategic objectives in alignment with the interests of our shareholders. Performance and remuneration for 2018 Dialog has delivered robust performance over 2018. Revenue has grown by over 6% to an all time high, and both operating margin and gross margin have improved over 2017 levels. In addition, we have struck a landmark agreement with Apple Inc. which clarified our long-term business relationship and monetised our unique IP. This strong operational performance has been reflected in both the annual bonus for 2018. Further detail on the annual bonus outcomes and targets is provided on pages 79 and 80. Base salary The Committee reviewed the CEO’s base salary in the first half of 2018. Normally the review would reference his performance alongside the salary increase range for other employees of the Company, as well as the positioning of his package compared to Dialog’s peer group. However, due to the challenging economic climate and need for cost-cutting in 2018, the Committee agreed that the CEO would not receive an increase this year. His base salary therefore remains at £485,886 (US$620,379) which is below the market median for Dialog’s peer group, based on the Company’s size at the time of the July 2018 review. Annual Bonus As a result of the strong performance in 2018, an annual bonus award of 115.3% of target has been achieved by the CEO, compared with 128.9% for 2017 and 69.24% for 2016. Bonus performance outcomes are detailed in the Annual Report on Remuneration on pages 79 and 80. Long-term incentive The 2016 award made under the Long-Term Incentive Plan (“LTIP”) will vest in the first quarter of 2019. The LTIP is subject to a performance test over the period 2016-18 and 47.08% of the target number of shares are expected to vest (23.54% of the max number of shares). Introduction of new Remuneration Policy at 2019 AGM Following the announcement of our landmark agreement with Apple, at our Capital Markets Day on 1 November, Dialog’s management set out a strategic transformation plan to protect and create shareholder value over the long term. As Dialog enters an important period of strategic and transformational change, it is critical that remuneration incentivises and retains our senior executives as they lead, manage and oversee the successful implementation of our strategy. In this context, the current remuneration policy is not sustainable because: U CEO remuneration is not only below market median (and has been for a number of years), but significantly below market lower quartile; U A remuneration package positioned significantly below market lower quartile is extremely unlikely to incentivise and retain the CEO to lead the current executive team through this important period of strategic and transformational change; U In addition, when taking account of remuneration levels in our sector, the current policy is unlikely to be fit for purpose if the requirement to recruit a new CEO arises during the life of the policy; and U The current policy was approved in 2014 prior to significant growth in the business – in terms of revenue, employee numbers and extent of operations. As a result, the Committee believes that the remuneration policy must be amended so that remuneration for our CEO can be brought to appropriate competitive levels. While the Committee notes that remuneration levels will continue to be considerably below the median of our peers, it has determined to take a prudent approach to any increases in order to balance the risks to the business and the expectations of our shareholders. We recognise concerns of shareholders and proxy advisers that “chasing the median” through benchmarking has had the impact of increasing remuneration levels, which led the Committee to consider alignment with the lower quartile as being an appropriate and balanced approach. This would help “lock-in” the current CEO and provide increased flexibility in the case of any future recruitment. Dialog Semiconductor PlcAnnual report and accounts 201871 It is also important to note that, despite this proposed increase in target LTIP award levels, the Remuneration Committee is maintaining features of UK and European remuneration rather than following more generous US practices. 100% of the Dialog CEO’s LTIP award will be in performance shares, and the portion of his annual bonus above 100% of base salary will be deferred into shares rather than the US norm of paying bonuses entirely in cash. In addition, the increase in share ownership guidelines is significantly above the median level at the FTSE 250 (200% of base salary) and even the FTSE 100 (300% of base salary). Shareholder consultation As part of the comprehensive review of our remuneration policy, the Committee wrote to major shareholders representing approximately 50% of our issued share capital, as well as proxy advisers. The Committee is extremely grateful for the feedback provided by shareholders as part of engagement, and is pleased that overall, shareholders were supportive of the proposals. The feedback had an impact on our final proposals; specifically, the Committee decided to introduce a 2-year post-vesting holding period to LTIP awards granted under the new remuneration policy and to improve the level of detail of the disclosure of targets under the bonus scheme and our Long-Term Incentive Plan. If you have any feedback on our remuneration arrangements, please pass those comments for my attention to our Company Secretary, Tim Anderson at RPC, Tower Bridge House, St Katharine’s Way, London, E1W 1AA. We have been pleased at previous AGMs to receive a positive response from shareholders to our remuneration approach. We hope you find the contents of this report informative. The Committee would welcome your support at our AGM on 2 May 2019 for our advisory shareholder vote on the Annual report on remuneration and binding vote on the Directors’ remuneration policy. Finally, I would like to thank my fellow Committee members as well as the internal and external teams who supported us with their contributions over the past year. Mike Cannon Chairman, Remuneration Committee 6 March 2019 Dialog Semiconductor Plc Changes proposed for 2019 Central to the review of the remuneration policy is the Committee’s desire to ensure that our remuneration arrangements remain competitive against our most direct semiconductor peers over the next three-year period. Competition for talent in our industry is intense and, given the importance of the upcoming period of strategic change, such a large discrepancy between the remuneration at Dialog and those of our peers presents a risk to the Company and our shareholders, and could impact Dialog’s ability to recruit and retain external executive talent in the future. In order to create a sustainable remuneration policy over the next three- year period, the following changes to the Directors’ remuneration policy for the CEO are proposed: 1. Increase in target bonus from 100% of base salary to 125% of base salary; 2. Increase in target LTIP award from £2 million to £3 million; 3. Increase in the share ownership guideline from 3x to 4x base salary; and 4. Introduce a 2-year post-vesting holding period to LTIP awards in recognition of feedback received during our consultation on the proposed changes. Holding periods are an unusual feature of long-term incentive plans at our competitors. However, the Committee decided to introduce this feature after listening to the feedback received from shareholders and proxy agencies, and in order to take account of best practice at UK companies. No other material changes are proposed for Executive Directors, the Chairman or non-executive Directors. The approach to the selection of performance metrics and the measurement of performance will also remain unchanged for the annual bonus and LTIP. In light of the transformational level of change in the business and strategy, the Committee is satisfied that the ability of Executives to achieve maximum pay-outs under the revised policy will be challenging. It should be noted that the Committee has a clear track record of setting targets that require truly exceptional performance for high pay- outs to be made, evidence of which can be seen in the levels of vesting under the LTIP over the period since the introduction of our first binding remuneration policy. The proposals set out above would bring the CEO’s target bonus, target LTIP award level, and target total remuneration to around the lower quartile of our peer group. Base salary will be subject to the normal annual review process. Dialog Semiconductor PlcAnnual report and accounts 2018Remuneration at a glance 72 Summary of our current remuneration policy and structure for Financial Year 2018 Component Base Salary Features U Salary and benefits to facilitate recruitment and retention U Fixed pay is restrained to emphasise performance-based remuneration and further align the interests of the CEO and shareholders U Target potential 100% of base salary U Key financial, commercial and organisational goals U The portion of any award above 100% of salary is deferred into shares for three years How we implemented U 0% increase U Chief Executive Officer: £485,886 U 15% pension allowance U 115.3% of target bonus paid U CEO: £560,227 U Target award is capped at £2 million U 2x multiplier for excellent performance U Goals focused on KPIs and long-term shareholder returns U CEO 300% of salary U Awards granted to the CEO in 2018 had a target value of £2 million at grant U CEO exceeds requirement Annual Bonus – weightings: 15% Revenue 15% Underlying gross margin 15% EBIT 25% Diversification 30% Commercial goals LTIP – weightings: 33.3% Revenue 33.3% Underlying operating margin 33.3% Relative Total Shareholder Return Shareholding Requirements How we measure performance and link to strategy The table below links Dialog’s current performance measures to our strategy. The bonus metrics are reviewed annually and set appropriately for the strategy for the year. Measure Revenue Underlying operating margin Underlying gross margin Relative Total Shareholder Return (“TSR”) Commercial & organisational goals 2018 Annual Bonus ü ü ü ü LTIP ü ü ü Rationale and link to strategy Measures top-line business growth Measures profitability of our operating activity Provides a measure of ability to obtain profit margin from our products and manage our manufacturing costs Measures the delivery of long-term sustainable value growth for shareholders Focuses executives on the delivery of our strategic goals How we performed Revenue (US$m) 1,442 2018 2017 Operating margin, underlying (%) Gross margin, underlying (%) 19.5% 1,442 1,353 2018 2017 48.3% 19.5 19.2 2018 2017 48.3 47.9* * 2017 Gross margin is presented on a consistent basis. Further information is presented on page 99, note 1. 2018 Remuneration The chart below shows the 2018 potential opportunity and actual achievement compared to 2017 actual achievement. 2018 potential 2018 actual 2017 actual 0 1,000 2,000 3,000 £’000 4,000 5,000 6,000 Minimum Target Maximum Base salary Benefits Pension Annual Bonus LTIP Effect of share price movement on LTIP Maximum = Fixed pay, maximum annual bonus (200% of salary) and maximum value of the LTIP vesting. Target = Fixed pay and on-target award for Annual Bonus (100% of salary) and 1x target value of the LTIP vesting. Minimum = Fixed pay (base salary, benefits and pension). The split of the LTIP bar shows the value lost or gained due to the effect of the share price. The arrow on the “2017 actual” and “2018 actual” LTIP outcome shows the value loss of the vested shares due to the decrease in share price since grant. Dialog Semiconductor PlcAnnual report and accounts 201873 Directors’ remuneration policy Our policy on remuneration Dialog’s remuneration policy for Executive Directors is set by the Remuneration Committee. The Committee’s primary objective is to ensure that remuneration is structured so as to attract and retain Executive Directors of a high calibre, with the skills and experience necessary to develop and grow the Company successfully. Executives should be rewarded in a way that aligns with shareholder interests and promotes the creation of sustained value for the Company’s shareholders. The Committee believes that a simple approach is most effective. Dialog’s elements of executive remuneration are fixed pay (base salary, benefits and pensions), annual bonus and a long-term incentive. A significant portion of remuneration is linked to, and paid in, Company shares, which enables alignment with shareholder interests and reinforces our pay-for-performance philosophy. The Committee believes that executives should hold a meaningful number of shares personally. The individual remuneration elements operated for executives are described in more detail in the policy table below. Since there is currently only one Executive Director – the CEO – we refer to remuneration for the Executive Director, Executive Directors and the CEO interchangeably throughout this report. The Committee reviews the CEO’s remuneration package annually both in the context of Company performance and against a range of peer companies. In reviewing the CEO’s pay arrangements the Committee takes into account: U The history and growth profile of the Company; U The Company’s UK incorporation and associated corporate governance expectations; U The Company’s international focus, operations and talent market; U The general external environment and the market context for executive pay; U The competitive international market for senior executives in the semiconductor industry; and U The pay and employment practices of Dialog employees generally. Directors’ remuneration policy table The table below summarises Dialog’s remuneration policy for Executive Directors and, where indicated, for non-executive Directors. The policy will take formal effect when approved at the 2019 AGM. Base salary Purpose and link to strategy Maximum opportunity Operation Performance framework Changes in policy Retirement benefits Purpose and link to strategy Maximum opportunity Operation Performance framework Changes in policy Executive Directors Facilitate recruitment and retention of the best executive talent globally – executives with the experience and expertise to deliver our strategic objectives at an appropriate level of cost. Base salary increases will not ordinarily exceed the percentage increases awarded for other UK-based Dialog employees with comparable levels of individual performance and potential. In cases where an Executive Director’s base salary lies materially below the appropriate market competitive level and where such positioning is not sustainable in the view of the Remuneration Committee, annual increases may exceed those for other employees described above. The rationale for any such increase will be described in the Annual report on remuneration for the relevant year. Salary is reviewed annually, with any increases normally taking effect in July. A number of factors are considered including, but not limited to, market pay levels among international industry peers of comparable size, and base salary increases for other Dialog employees. n/a No change Executive Directors Provide market competitive retirement benefits which help foster loyalty and retention. Employer contribution of 15% of base salary. Executive Directors are provided with a defined contribution to pension or equivalent cash allowance arrangement. n/a No change Dialog Semiconductor PlcAnnual report and accounts 201874 Directors’ remuneration policy continued Other benefits Purpose and link to strategy Executive Directors Provide market competitive benefits at an appropriate cost which help foster loyalty and retention. Maximum opportunity Operation Performance framework Changes in policy Relocation benefits may also be provided based on business need, individual circumstances and location of employment. There is no maximum for benefits, but they represent a small percentage of remuneration. In the case of relocation, additional benefits may be provided including, but not limited to, the cost of relocation expenses, real estate fees, tax equalisation to home country and tax return filing assistance, temporary housing and schooling. The Remuneration Committee has discretion to determine the value of such benefits and details of any such benefits provided will be disclosed in the Annual report on remuneration covering the year in which they were provided. Executive Directors are eligible to receive benefits including, but not limited to, a cash allowance in lieu of a company car, medical insurance for the Executive Director and his/her immediate family members, life and disability insurance, holiday (25–30 days a year, based on length of service) and pay in lieu thereof where applicable, and services to assist with preparation of a tax return or returns where necessary due to the international nature of work completed. Any reasonable business-related expenses (including tax thereon) can be reimbursed if determined to be a taxable benefit. Executive Directors are eligible for other benefits and all-employee share plans which are introduced for the wider workforce on broadly similar terms. n/a No change Annual bonus plan Purpose and link to strategy Executive Directors Motivate Executive Directors to achieve stretching financial and commercial objectives consistent with and supportive of Dialog’s growth plans. Maximum opportunity Operation Performance framework Create a tangible link between annual performance and individual pay opportunity. Target award of 125% of base salary. Award value can range between 0 and 2x target award level based on the performance condition. The Committee retains discretion to adjust the overall bonus outcome to take account of performance outside the normal bounds. This discretion cannot be used to raise the bonus outcome above 2x target bonus. The portion of any award up to 100% of base salary is paid in cash, and the portion of any award above 100% of base salary is awarded in deferred shares. Deferred shares normally vest after three years, and are subject to the plan rules in the event of termination or change in control. Dividend equivalents may be paid on any shares which vest. The Committee may vary the performance measures and mix used to adapt to changing Company circumstances. Financial measures will be a significant portion of the total scorecard. Performance metrics include: U Financial goals (which determine a significant portion of bonus every year); U Commercial goals; and U Organisational and employee-related goals. Changes in policy For financial metrics, performance is set in line with the stretch annual budget. Increase in target bonus from 100% to 125% of salary. Dialog Semiconductor PlcAnnual report and accounts 201875 Long-Term Incentive Plan (“LTIP”) Purpose and link to strategy Maximum opportunity Operation Performance framework Changes in policy Executive Directors Motivate Executive Directors to deliver sustainable long-term shareholder value through long-term profitability and share price growth. Target award of £3 million. Maximum award at date of grant is 2x target award level based on the performance condition. Annual award of performance shares (which may also be in the form of nominal/nil-cost options). Performance is measured over three years, based on performance metrics selected by the Remuneration Committee to support the Company’s business strategy. Vesting is dependent on continued employment with the Company at the time of vesting. Dividend equivalents may be paid on any shares which vest. Certain “leaver” provisions apply and are described in the section headed “Termination arrangements” below. A holding period of two years will normally apply to any vesting awards. The Committee has the discretion in certain circumstances to settle an award in cash. In practice this will only be used either to cover the settlement of tax on vesting or in exceptional circumstances for Executive Directors. Performance metrics include suitable Company financial performance metrics and at least one third on a relative TSR condition measured versus a comparator group. The Committee reviews and selects appropriate measures and their weightings in advance of each award. 0.5x the target award vests for threshold performance, 1x the target award vests for target performance and 2x the target award vests for maximum performance as defined by the Remuneration Committee under the plan. For the relative TSR condition, Dialog Semiconductor TSR is measured over the three-year performance period and compared to the companies in the comparator group. If Dialog TSR is at the median of the comparator group then 0.5x the target award vests. If Dialog TSR is at the 60th percentile of the comparator group then 1x the target award will vest. If Dialog TSR is at or above the 75th percentile of the comparator group then 2x the target award will vest. For performance in between these levels, vesting is determined on a straight-line basis. If Dialog TSR is negative over the three-year performance period, then the maximum number of shares which can vest subject to the relative TSR condition will be capped at 1x the target award, even if relative TSR is above 60th percentile. For the Company financial performance component, targets are normally set annually over the three-year performance period. Increase in target award from £2 million to £3 million. Termination arrangements Purpose and link to strategy Maximum opportunity Executive Directors To limit the Company’s liability for payments in cases of termination, and to provide a fair and equitable settlement in line with market practice where appropriate. Notice periods from the Company do not exceed 12 months. Termination not in connection with a change in control In the case of the current CEO, the notice period is 12 months. The maximum termination payment due in the case of termination of employment by the Company without “cause” or termination by the Executive for a pre-defined good reason (see definition below) is: U 1x base salary; U 12 months’ continuation of pension and fringe benefits; and U Annual bonus pro-rated for the period worked only and subject to the normal performance test at year end. Termination in connection with a change in control In the case of the current CEO, the notice period from the employee or the Company is 12 months. The maximum payment due in the case of termination of employment by the Company without “cause” or termination by the Executive for a pre-defined good reason in connection with a change in control event is: U 1x base salary; U 12 months’ continuation of pension and fringe benefits; and U Annual bonus time pro-rated for the period worked, and subject to performance. Dialog Semiconductor PlcAnnual report and accounts 2018Directors’ remuneration policy continued 76 Additional points: The above termination payments (both in connection with and not in connection with a change in control) would be reduced by the amount of any other contractual payments made to the Executive. Such payments could include a payment in lieu of notice, garden leave payment, and/or a payment in lieu of holiday accrual. Any payment in lieu of notice will be limited to the pro-rata value of base salary and the other benefits described under the retirement benefits and other benefits sections above. An Executive can also be placed on garden leave. A pre-defined “good reason” includes: material salary reduction (other than across-the-board reductions of up to 10%) or any reduction on change of control; company required relocation by 30 miles; or material diminution in duties, responsibilities or authority (but a change in reporting line alone does not constitute a good reason). In addition to the above termination payments, the Committee may pay reasonable outplacement and legal fees where considered appropriate and may pay any statutory entitlements or settle any compromise claims in connection with a termination of employment, where considered in the best interests of the Company. Termination provisions for LTIP are as follows: Termination not in connection with a change in control If an Executive Director is not employed by the Company at the time of vesting, the award will lapse, except in certain circumstances as determined by the Board including death, disability, retirement and any other circumstance as decided by the Board. The portion of any award which vests will be determined by the Board based on a number of factors including performance against targets. Alternatively, the Board may decide that outstanding awards will vest in accordance with the normal vesting schedule. Unless the Board decides otherwise, in all cases the vesting level will be reduced in accordance with time proration. In the case that employment is terminated by the Company without cause or termination by the executive for a pre-defined good reason detailed above, then the outstanding awards will vest subject to time proration and performance against targets. Termination in connection with a change in control In the event of a change in control of the Company, any award will be rolled over into an award in the new entity but with the Company having discretion for time pro-rated vesting, subject to performance, with the balance rolled over. Performance-based awards, after application of any performance test, will roll over into time-based awards. Any awards rolled over will ordinarily vest at the nominal vesting date. However, in the case that employment is terminated by the Company without cause, or termination by the executive for a pre-defined good reason detailed above in connection with a change in control, then outstanding awards will vest immediately without time proration. No change Non-executive Directors Supports recruitment and retention of a non-executive Director with the experience and skills that will make a major contribution to the Dialog Board. Aggregate fees are subject to the limit set out in the Articles of Association or any such higher amount as determined by ordinary resolution. Fees are normally reviewed annually. Fees may be paid in a combination of cash and shares subject to any requirements of the Articles of Association of the Company or shareholder resolution. Non-executive Directors’ fees are not eligible for any incentive awards or share options. The Chairman’s fee and other non-executive Director fees are determined by the Board following a review and recommendation by the Remuneration Committee. Non-executive Directors may also receive tax advice. In addition to the fees referred to above, non-executive Directors are also reimbursed for the costs of travel relating to the performance of their duties, and these costs may be grossed-up if treated as a taxable benefit in the applicable jurisdiction. Fee reviews take account of individual performance and contribution, company size, growth and complexity, level of experience and market profile and time committed. No change Changes in policy Fees Purpose and link to strategy Maximum opportunity Operation Performance framework Changes in policy Dialog Semiconductor PlcAnnual report and accounts 201877 Remuneration of Directors on recruitment and appointment Dialog is an international company and competes for executive talent on a global basis. In order to recruit and retain Directors of the calibre needed to execute the Company’s growth objectives it may be necessary to provide remuneration and benefits taking account of practice among other global semiconductor companies. The following principles apply in the case of the external recruitment of Directors and the appointment of internal candidates who may be promoted to the Board: U As far as possible, the remuneration of new Directors will be set in accordance with the existing Directors’ remuneration policy described in this report; U The Remuneration Committee will seek to pay no more than is necessary while ensuring that it can attract the best candidates on a global basis; U The remuneration package provided will take account of a range of factors, including but not limited to, the calibre of a candidate, the level of existing remuneration, the jurisdiction the candidate is recruited from, and the individual’s skills and experience; U The remuneration package will take account of internal relativities and appropriate international market comparisons; U The Remuneration Committee has the discretion to determine the fixed elements of a remuneration package (comprising base salary, retirement and other benefits) as it deems necessary and in shareholders’ interests. Exercise of such discretion may be necessary, for example in the event of a new appointment to the Board following an acquisition or where commitments have been made as part of a transaction; and U The Remuneration Committee will in all cases be guided by reasonable market practice and will take appropriate advice where necessary. The table below outlines policy in respect of recruitment where it differs from that outlined above. Policy in respect of other components of pay is unchanged in recruitment situations from that outlined above. Note that only the references to fees apply to non-executive Directors. Pay component Annual base salary or fee Other benefits Long-term incentive Compensation for forfeited remuneration Service contracts Changes in policy Approach in application to recruitment situations The following factors will be taken into account when determining appropriate base salary/fee: U The candidate’s existing salary/fee, location of employment, skills and experience and expected contribution to the new role; U The previous incumbent’s salary/fee for the same role; U The current salaries/fees of other Dialog Directors; U Current relevant market pay data for the role; and U The value of other elements of remuneration to be provided and the combined value of the total package. The Company recruits executives on a global basis and recruitment is a case in which the Remuneration Committee may choose to exercise the discretion described in the policy table above to provide relocation benefits. In cases where the Committee believes that the Company and its shareholders’ interests will be served best by provision of relocation benefits, the Committee will seek to limit these benefits both in terms of their value and the period over which they are provided. Benefits provided may include relocation allowances and global mobility benefits such as housing or schooling as described in the policy table, which may be provided on consideration of family size and business need. The Committee has discretion to provide awards under the LTIP which exceed the maximum outlined in the policy table above in cases where it considers it necessary in order to facilitate recruitment of high-calibre executives. Such awards may be provided as compensation for remuneration foregone at a previous employer as described in the row below. The Committee also has discretion to provide such awards in other circumstances where it considers them necessary to secure an executive’s appointment. In cases other than compensation for or “buy-out” of previous awards, LTIP target awards in addition to normal policy levels will be limited to 100% of a target executive’s Dialog salary. The Committee may choose to compensate for forfeited remuneration when recruiting an external candidate by providing replacement awards. Where a replacement award is deemed to be necessary, the structure and level will be carefully designed in accordance with the recruitment principles above. Such awards would be designed to take account of the vesting period and where applicable, the performance conditions of the awards they replace. They may include “clawback” provisions. An explanation of the basis of any “buy-out” will be provided as soon as practicably possible after appointment. Notice periods offered to new Executive Directors will not normally exceed 12 months. However, if it is necessary to offer an Executive Director a longer notice period at recruitment, then the length of the notice period will reduce on a rolling basis until it is no greater than 12 months. No change Dialog Semiconductor PlcAnnual report and accounts 201878 Directors’ remuneration policy continued Clawback and malus policy Under the rules of the deferred bonus plan, the LTIP and the previous EIP, the Remuneration Committee is entitled to cancel or claw back some or all of a participant’s awards in the event that the Audit Committee of the Company determines that the financial accounts of the Company were misstated to a material extent (such determination must be made within two years of the award date or six years if in relation to fraud or reckless behaviour by an executive). Such clawback may be applied through direct repayment or a reduction in unvested awards or future grants, or a reduction in such other payments as might otherwise be due from the Company to the individual. Shareholding requirement The Committee will set a shareholding requirement for Executive Directors. The requirement for the current CEO will be increased from 300% to 400% of base salary with effect from 2019. The Committee reviews the level of shareholding requirement from time to time and has authority to amend it as necessary. Share options for non-executive Directors Until 2012, non-executive Directors received part of their fees in the form of options over Dialog shares. This practice was felt to align their interests with those of shareholders. Use of options was stopped ahead of the 2013 financial year and the last awards made (in 2012) vested in 2015. No further options have been awarded since 2012 and none will be awarded in future years. Provision of share options is not included in the policy table above as options are not part of the Company’s forward-looking remuneration policy. According to UK regulations however, reference to options must be made in the policy section of the Directors’ remuneration report, in order to permit payments under outstanding awards, hence the inclusion of this section here. Remuneration policy for Executive Directors compared to that for other employees The Company’s remuneration policy for Executive Directors is similar to that for all other Dialog employees. Differences in policy are outlined below: U Annual bonus – All Dialog employees participate in annual bonus plans. The nature of those plans varies somewhat by location and employee category. Most employees participate in a profit-sharing plan; a smaller group participates in a plan based on performance against individual objectives; U LTIP – Participation in the LTIP is limited to employees in senior roles and executives, which currently comprise around 50 Dialog employees. This number may increase over time as the business grows. Different conditions to those attaching to awards made to Executive Directors may apply; and U Notice periods – Other UK employees’ contracts of employment include three-month notice periods. Remuneration scenarios for the CEO The charts below illustrate for the 2019 year the pay mix between the different elements of remuneration for the CEO, assuming threshold, target and maximum performance. Amounts are shown in GBP (000s). Minimum Threshold Target Maximum 575 100% 575 24% 304 13% 607 15% 575 13% 575 7% 1,215 16% 1,500 63% 3,000 72% 6,000 77% 0 1,000 2,000 3,000 4,000 5,000 Remuneration (£000s) 6,000 7,000 8,000 9,000 Fixed Pay Annual Bonus LTIP The scenarios shown above are based on the following assumptions: U Minimum performance: fixed pay only (base salary, benefits and pension); U Threshold performance: fixed pay, annual bonus (62.5% of salary) and 0.5x target value of the LTIP award vesting; U Target performance: fixed pay, annual bonus (125% of salary) and 1x target value of the LTIP award vesting; and U Maximum performance: fixed pay, maximum annual bonus of 250% of salary and 2x target value of the LTIP award vesting. We have assumed a target LTIP grant of £3 million, which is the proposed limit for the policy for 2019. Dialog Semiconductor PlcAnnual report and accounts 2018Annual report on remuneration for the year ended 31 December 2018 1. Executive Director remuneration: Single Figure Table (audited) The table below sets out the single figure for the CEO: 79 Incumbent Dr Jalal Bagherli Dr Jalal Bagherli Total salary US$2 620,379 640,770 Year 20181 20171 Benefits US$ 20,464 15,923 Pension US$ 93,057 96,115 Total fixed pay US$3 733,900 752,809 Total variable pay US$6 Total excluding LTI US$7 Annual bonus US$4 Long-term Incentive US$5 Total US$8 715,298 1,068,025 1,783,323 1,449,198 2,517,223 846,098 1,399,163 2,245,261 1,598,907 2,998,070 Notes: 1 Exchange rates used are: 2017: GBP 1 = USD 1.35093 ; EUR 1 = USD 1.19875; 2018: GBP 1 = USD 1.2768; EUR 1 = USD 1.1451. 2 Base salary earned during the financial year. The base salary is shown in USD in this table, but set and paid in GBP. The CEO’s 2018 GBP base salary increase was 0%. 3 The sum of basic salary, benefits and pension. 4 Annual bonus cash element and deferred share element awarded in relation to the financial year ended 31 December. 5 For the 2017 performance year, 13,427 EIP options and 33,526 LTIP awards vested. Value is based on a price of €25.00 (the share price on the vesting date). For the 2018 performance year, 43,001 LTIP awards will vest. Value is based on a price of €21.84 (average share price over last three months in 2018). 6 The sum of annual bonus (cash and deferred share element) and long-term incentives. 7 The sum of basic salary, benefits, pension and annual bonus (cash and deferred share element). 8 The sum of basic salary, benefits, pension, annual bonus (cash and deferred share element) and long-term incentives which vested for performance to the end of the year. 2. Commentary on the Executive Director Single Figure Table 2.1 Base salary The Remuneration Committee reviewed the CEO’s base salary in July 2018 with reference to his performance, the scale of the Group, and the positioning of his package compared to Dialog’s peer group. Given the challenging economic climate and need for cost-cutting in 2018, the CEO was awarded a 0% increase in annual base salary with effect from 1 July 2018 which resulted in his base salary remaining at £485,886 (US$620,379). 2.2 Other benefits and Pension The CEO received a cash allowance in lieu of a company car (US$13,023), medical insurance for himself and his spouse and Group life and income protection insurance. The total value of taxable benefits provided was US$20,464 equivalent to 3.30% of his current salary. The CEO receives a pension allowance of 15% of base salary which is in line with policy. In 2018, the Company made pension allowance payments of £72,883 (US$93,057) to the CEO. 2.3 Annual bonus disclosure For 2018, the CEO was eligible for a target annual bonus of 100% of base salary, which could range up to 200% of base salary for maximum performance. The portion of any bonus awarded above target is deferred into shares which vest after three years. Performance measures used were: U Financial goals (70%) comprising revenue (15%), underlying gross margin (15%), EBIT (15%), diversified revenue (25%); and U Commercial & organisational goals (30%). The 2018 bonus was determined at 115.3% of target, reflecting performance as set out in the table below. Performance targets under these measures are considered by the Board to be commercially sensitive and will, where possible, be disclosed in a future Annual report when they are considered no longer to be commercially sensitive. Measure Financial Diversification Commercial goals Revenue Underlying gross margin EBIT Diversified Revenue Below Threshold Between Threshold and Target On Target Above Target Outcome $1,442m 48.3% 19.5% ü ü The outcomes of the goals in this category were between threshold and target overall. Exact figures are not shown as they are deemed commercially sensitive. See below ü ü The overall outcome for the commercial goals was above target. This reflects performance as set out in the table below: Performance Measure Carve-out/M&A Outcome Above-target performance on this measure in recognition of the landmark agreement with Apple Inc. which clarified our long-term business relationship and monetised our unique IP. Dialog Semiconductor PlcAnnual report and accounts 2018 Annual report on remuneration for the year ended 31 December 2018 continued 2. Commentary on the Executive Director Single Figure Table continued 2.3 Annual bonus disclosure continued Accordingly, the Committee determined that a bonus equivalent to 115.3% of base salary should be paid for the performance in the 2018 financial year. Of this, 15.3% (£74,341) will be deferred into shares for three years. The Committee also considered the disclosure of the performance targets relating to the 2018 annual bonus. Having reviewed the targets, the Committee decided that the targets continued to be commercially sensitive if disclosed at the same time as the bonus is paid. The targets for the 2017 annual bonus have been set out below: 80 Performance Measure Financial Revenue Underlying gross margin EBIT Diversification Commercial goals Total 2.4 LTIP disclosure Weighting Threshold 20% $1,209m $1,343m $1,478m $1,353m Target Maximum Outcome Threshold 10% Target Maximum 40% 20% Bonus payable (% of salary) Bonus payable 21.5% 45.5% 17.8% 44.0% 16.9% 47.0% 20% 19.6% 20% 20% The outcome of $321m was in between threshold and target. Successful completion and integration of Silego acquisition. Executed successfully on milestones for long-term partnerships. 46.7% 19.2% 20% 20% 10% 10% 20% 40% 36.0% 40% 35.6% 10.8% 25.0% 128.9% Awards granted under the 2016 Long-Term Incentive Plan (“LTIP”) are capable of vesting in 2019 subject to the achievement of revenue, underlying operating margin and relative Total Shareholder Return (“TSR”) performance targets. Following the completion of the final performance period in 2018, the Committee has assessed performance against the performance targets set over the performance period and has determined that 47.08% of the target number of share options awarded will vest to participants. In light of shareholder feedback obtained during our consultation with shareholders, we have enhanced disclosure of performance outcomes under the LTIP. Measure Revenue EBIT (underlying operating margin) Relative TSR vs. peer group Target award level (% of target award) 33.3% 33.3% Performance Needed for Maximum Vesting $4.89bn 21.7% Outcome $3.99bn 19.1% Actual vesting outcome (% of target award) 17.65% 29.43% 33.3% Dialog TSR over the 3-year performance period was below 0.00% the median of the peer group, i.e. the constituents of the S&P Select Semiconductor Index. For maximum payout, upper quartile performance would have been needed. Total 100.0% 47.08% The Chief Executive was awarded a target number of 91,324 LTIP share options in 2016 (which is equivalent to a maximum number of 182,648 share options if all the maximum performance targets are met). As a result of the actual vesting outcome, 43,001 of the target number of LTIP share options awarded to the Chief Executive in 2016 (i.e. 47.08% of target) will vest in 2019. As the share price at the date of vesting for the 43,001 share options was not known at the date of publication, they have been valued for the purpose of the single figure using Dialog’s average share price over October, November and December 2018 of Euro 21.84. This results in a value of US$1,068,025. This figure will be updated next year when the actual share price at the date of vesting is known. 2.5 Share awards made during the year In 2018 the CEO was granted an LTIP award with a target value of £2 million in line with the policy in force. As noted in the policy section, shares awarded are structured as nominal priced options, hence the reference to options throughout. Granted number Awarded during the year LTIP – performance shares Date of award 05/03/2018 Target 92,775 Max 185,550 Value of award 30-day average share price at date of grant in £ Max £21.5575 £1,999,997 £3,999,994 Target % of max award that will vest at threshold Performance period 25% 01/01/2018–31/12/2020 Note: The value is calculated as the number of shares, multiplied by the average closing Dialog Semiconductor share price over the 30 business days up to and including 5 March 2018 (€24.36). The sterling equivalent share price was £21.5575, resulting in a maximum LTIP award value of £3,999,994 which equates to a target LTIP award of £1,999,997. The LTIP performance shares set out in the table above will vest subject to performance against three performance metrics: U Dialog TSR performance over the three-year performance period relative to the constituents of the S&P 1500 Select Semiconductor index (one third); U Dialog revenue in each year of the three-year performance period (one third); and U Dialog underlying operating margin in each year of the three-year performance period (one third). Revenue and underlying operating margin targets are set annually over the three-year performance period of the award. For each annual period a third of this part of the award is assessed on actual Dialog performance against targets set at the beginning of each year. Relative Total Shareholder Return is measured at the third anniversary date of the award over the three-year performance period. Shares accrued during the performance period are released to Executive Directors as soon as practicable after the third anniversary of the award. 2.6 Dilution As disclosed in the 2012 Annual report, share dilution as a result of equity-based incentive awards to all Dialog employees is managed to an average 1% flow rate in order to ensure that it moves over time towards a rolling 10% in ten years. Dialog Semiconductor PlcAnnual report and accounts 201881 3. Non-executive Directors’ remuneration: Single Figure Table (audited) Incumbent Chris Burke2 Chris Burke2 Aidan Hughes Aidan Hughes Russ Shaw Russ Shaw Richard Beyer Richard Beyer Mike Cannon Mike Cannon Eamonn O’Hare Eamonn O’Hare Alan Campbell Alan Campbell Nick Jeffery Nick Jeffery Mary Chan Mary Chan Year 20181 20171 20181 20171 20181 20171 20181 20171 20181 20171 20181 20171 20181 20171 20181 20171 20181 20171 Fees US$3 67,460 196,942 195,350 206,693 – 59,993 255,360 270,186 203,650 215,473 195,350 201,268 205,565 217,500 199,181 210,918 195,989 207,954 Taxable Benefits US$ 2,171 2,048 11,092 5,976 – 1,067 10,528 4,653 5,831 1,494 2,404 1,698 10,095 4,424 2,866 4,324 8,187 3,870 Incentives (Annual) US$ – – – – – – – – – – – – – – – – – – Incentives (Long-term) US$ – – – – – – – – – – – – – – – – – – Other remuneration US$ – – – – – – – – – – – – – – – – – – Shares Vested US$ – – – – – – – – – – – – – – – – – – Total US$ 69,631 198,990 206,442 212,669 – 61,060 265,888 274,839 209,481 216,967 197,754 202,966 215,660 221,924 202,047 215,242 204,176 211,824 Notes: 1 Exchange rate used 2017: GBP 1 = USD 1.35093; EUR 1 = USD 1.19875; 2018: GBP 1 = USD 1.2768; EUR 1 = USD 1.1451. 2 Chris Burke retired from the Board on 3 May 2018. 3 Fees include fees paid in cash and shares. 4. Directors’ shareholdings at 31 December 2018 (audited) The CEO is expected to establish and hold a shareholding of at least 300% of salary. The CEO currently exceeds this requirement. Number at 31 December 2018 Dr Jalal Bagherli Chris Burke Aidan Hughes Russ Shaw Richard Beyer Mike Cannon Eamonn O’Hare Alan Campbell Nick Jeffery Mary Chan Share Awards with Performance Conditions Share Awards without Performance Conditions 10 pence ordinary shares 398,557 3,481 33,119 944 11,526 8,693 10,991 8,428 5,213 6,932 Performance shares (EIP & LTIP) 566,362 – – – – – – – – – EIP – invested shares 38,117 – – – – – – – – – Deferred shares 130,963 – – – – – – – – – Share options (unvested) – – – – – – – – – – Share options (vested & unexercised) – – 2,081 – – – – – – – Options exercised in year 114,373 – 2,293 – – – – – – – Total 1,248,372 3,481 37,493 944 11,526 8,693 10,991 8,428 5,213 6,932 Dialog Semiconductor PlcAnnual report and accounts 2018Annual report on remuneration for the year ended 31 December 2018 continued 4. Directors’ shareholdings at 31 December 2018 continued Further detail on the CEO’s EIP, LTIP and deferred bonus share awards, is set out below. Share plan Full Name Dr Jalal Bagherli Executive incentive plan Dr Jalal Bagherli Deferred bonus plan Dr Jalal Bagherli Executive incentive plan Dr Jalal Bagherli Executive incentive plan Dr Jalal Bagherli Deferred bonus plan Dr Jalal Bagherli Executive incentive plan Dr Jalal Bagherli Deferred bonus plan Dr Jalal Bagherli Executive incentive plan Dr Jalal Bagherli LTIP nominal cost option Dr Jalal Bagherli Deferred bonus plan Dr Jalal Bagherli LTIP nominal cost option Dr Jalal Bagherli LTIP nominal cost option Dr Jalal Bagherli Deferred bonus plan Dr Jalal Bagherli LTIP nominal cost option Final vesting date Grant date Lapse date 16/02/2013 16/02/2016 16/02/2019 18/02/2013 18/02/2016 18/02/2020 18/02/2013 18/02/2016 18/02/2019 16/02/2014 16/02/2017 16/02/2020 18/02/2014 18/02/2017 18/02/2021 18/02/2014 18/02/2017 18/02/2021 12/02/2015 12/02/2018 12/02/2022 12/02/2015 12/02/2018 12/02/2022 01/05/2015 01/03/2018 01/03/2021 03/03/2016 03/03/2019 03/03/2023 03/03/2016 01/03/2019 01/03/2022 01/03/2017 01/03/2020 01/03/2023 05/03/2018 05/03/2021 05/03/2025 05/03/2018 05/03/2021 05/03/2024 Further detail on the NEDs’ remaining share awards is set out below. Full Name Aidan Hughes Aidan Hughes Share plan NED 2011 share option NED 2011 share option Final vesting date Grant date Lapse date 21/07/2011 21/04/2014 01/05/2018 18/07/2012 21/04/2015 01/05/2019 Exercise price (EUR) 0.12 0.01 0.12 0.12 0.01 0.12 0.01 0.12 0.15 0.01 0.15 0.15 0.01 0.15 Holding at 31 Dec 2017 – 79,735 – 42,611 – 34,638 – 60,850 – 40,153 – 24,690 – 29,913 – 18,395 – 97,329 – 11,772 – 182,648 – 103,788 – 6,514 – 185,550 Lapsed Granted Exercised – 79,735 – – – 34,638 – – – – – – – – – 4,968 – 63,803 – – – – – – – – – Exercise price (EUR) 0.15 0.15 Holding at 31 Dec 2017 2,293 2,081 Granted Exercised 2,293 – – – Lapsed – – 82 Holding at 31 Dec 2018 – 42,611 – 60,850 40,153 24,690 29,913 13,427 33,526 11,772 182,648 103,788 6,514 185,550 Holding at 31 Dec 2018 0 2,081 The chart below shows the CEO shareholding as at 31 December 2018 against the shareholding requirement as a % of base salary. Requirement CEO 0 500 1,000 Actual Holding as a % of salary Deferred shares Shareholding requirement 5. Percentage change in CEO remuneration 1,657 1,500 544 2,000 2,500 The table below compares the average change in base salary, benefits (excluding pension) and bonus awards for the CEO and for an average UK employee over the period 2017 to 2018. Measure Base salary Taxable benefits Annual bonus Total1 Percentage change from 2017 to 2018 CEO 0.0% 36.0%2 –10.6% –5.5% Average UK employee 5.9% 20.9% –27.0%3 2.6% 1 Represents the sum of base salary, taxable benefits and bonus. 2 There was no change to the benefits provided to the CEO in 2018. However, there was an increase in the value of a portion of the benefits provided in 2018 due to timing of taxes. 3 At the time of preparation for this report, annual bonuses for the Group had yet to be finalised and the numbers presented reflect expected payouts. The annual bonus for the majority of employees is a plan based on EBIT (underlying operating margin) which was below-target for 2018. 6. Relative importance of spend on pay The chart below compares the amount spent on employee pay by Dialog to amounts spent by Dialog on research and development and distributions to shareholders. 2018 2017 0* 0 50 100 150 200 250 300 350 124.2 311.2 326.3 274.5 278.8 Employee remuneration for Group R&D Expenses Distributions to shareholders * Please refer back to “Share buyback programme” on page 50. (US$m) Dialog Semiconductor PlcAnnual report and accounts 201883 7. Review of past performance 7.1 TSR Chart The following graph compares Dialog Semiconductor’s TSR performance to that of the same investment in the German TecDAX Index. This comparison has been chosen because it reflects the local market and industry in which Dialog is listed. We also show a comparison to the Philadelphia SE Semiconductor Sector Index (Price return) as an additional industry comparator, recognising that Dialog competes with companies on an international basis. TSR is the measure of the returns that a company has provided for its shareholders, reflecting share price movements and – where relevant – assuming reinvestment of dividends. Data is averaged over 30 days at the end of each financial year. 6,000 5,000 4,000 3,000 ) d e s a b e r ( ) $ ( l e u a V 2,000 1,000 0 31 Dec 08 31 Dec 09 31 Dec 10 31 Dec 11 31 Dec 12 31 Dec 13 31 Dec 14 31 Dec 15 31 Dec 16 31 Dec 17 31 Dec 18 Dialog Semiconductor German TecDAX Index Philadelphia Semiconductor Index This graph shows the value, by 31 December 2018, of US$100 invested in Dialog Semiconductor Plc on 31 December 2008 compared with the value of US$100 invested in the German TecDAX Index on the same date. Also plotted is the price index for the Philadelphia Semiconductor Sector Index (rebased to 100). Data has been averaged over 30 days at the end of each financial year. Source: FactSet. 7.2 Ten-year Chief Executive single figure remuneration The table below sets out the annual change in the single figure total remuneration provided to the CEO over the previous ten-year period. Financial year ending Total remuneration including unrealised gains on options in $ (single figure basis)1 Annual bonus (% of maximum)2 Long-term variable pay (% of maximum)3 31 Dec 2009 31 Dec 2010 31 Dec 2011 31 Dec 2012 31 Dec 2013 31 Dec 2014 31 Dec 2015 31 Dec 2016 31 Dec 2017 31 Dec 2018 1,028,853 4,809,398 30,426,678 2,167,224 2,046,555 4,521,143 5,910,729 5,576,750 2,998,070 2,517,223 N/A N/A N/A 100% 91.94% 89.12% 79.25% 34.62% 64.45% 57.65% 95% 100% 100% 100% 100% 78% 81.3% 61.49% 34.44% 23.54% 1 The total remuneration for 2010 and 2011 includes awards made under the 2008 LTIP plan approved by shareholders at the 2008 AGM. The values vested to the CEO from this plan were US$3,593,299 (2010) and US$29,103,138 (2011), resulting from the exceptional performance and share price growth of the Company, as can be seen in the TSR performance chart above. There are no further awards under this plan. Total remuneration includes the value of long-term incentive awards at the time they vest, as required by UK reporting regulations. The actual value realised by the CEO is based on the market value on the date they are permitted (under Directors’ trading restrictions) and/or choose to exercise options or sell shares. The value presented does not therefore reflect exactly that received by the CEO. 2 No maximum bonus was defined prior to 2012. 3 The percentages shown for 2017 and 2018 long-term variable pay are for the LTIP. In 2017 there was a legacy EIP award with a vesting percentage of 44.88%. 8. Statement of implementation for the year ending 31 December 2019 8.1 Executive Director This section details how remuneration will be implemented for the CEO, following the new remuneration policy that is to be implemented in 2019. The rationale for the changes below can be found in the Remuneration Chairman’s Letter. Both this report and the Chairman’s Letter are subject to approval at the 2019 AGM. Base salary The CEO’s base salary will be subject to review in 2019 with any change being effective from 1 July 2019. Benefits & pension No change to benefits. Pension contribution remains at 15% of salary. Annual Bonus for the year ending 31 December 2019 The maximum bonus potential will continue to be 2x target bonus, however there will be an increase in target bonus from 100% to 125% of base salary. The annual bonus will be based on similar metrics to last year. Weightings will be in line with the performance framework set out in the remuneration policy and aligned to the key strategic priorities for 2019. There will be a significant weighting on financial metrics supported by appropriate measures of operational and commercial performance. Dialog Semiconductor PlcAnnual report and accounts 2018 84 Annual report on remuneration for the year ended 31 December 2018 continued 8. Statement of implementation for the year ending 31 December 2019 continued 8.1 Executive Director continued LTIP for the year ending 31 December 2019 Following approval of the policy at the 2019 AGM, target LTIP award will be increased from £2 million to £3 million. As in prior years, the LTIP award will vest after three years subject to the satisfaction of three performance metrics: U Dialog TSR performance over the three-year performance period relative to the constituents of the S&P 1500 Select Semiconductor index; U Dialog revenue in each year of the three-year performance period; and U Dialog underlying operating margin in each year of the three-year performance period. Financial targets will be disclosed retrospectively in the year of vesting. For the relative TSR condition of the 2019 LTIP award, Dialog Semiconductor TSR is measured over the three-year performance period and compared to the companies in the comparator group. If Dialog TSR is at the median of the comparator group then 0.5x the target award vests. If Dialog TSR is at the 60th percentile of the comparator group then 1x the target award will vest. If Dialog TSR is at or above the 75th percentile of the comparator group then 2x the target award will vest. For performance in between these levels, vesting is determined on a straight-line basis. Share Ownership Guidelines Share Ownership Guidelines are required to build and retain a shareholding in Dialog’s shares. Previously, the CEO has been required to hold the equivalent of 3x base salary in shares, this is to be increased to 4x base salary for 2019. Holding Period A post-vesting holding period of two years will normally apply to awards granted under the new policy which will be submitted for shareholder approval at the 2019 AGM. 8.2 Non-executive Directors The following table sets out the fee rates for non-executive Directors, which have applied from 2016. In thousands Chairman fee Base fee Committee Chair fee Audit Remuneration Nominations Committee membership fee Audit Remuneration Nominations 2019 2018 Cash £80 £58 £16 £12 £5 £8 £6 £2.5 Shares £120 £87 – – – – – – Cash £80 £58 £16 £12 £5 £8 £6 £2.5 Shares £120 £87 – – – – – – Dialog Semiconductor PlcAnnual report and accounts 201885 9. Governance 9.1 The Remuneration Committee The Board as a whole is responsible for setting the Company’s policy on Directors’ remuneration. The Board of Directors has established a Remuneration Committee (the “Committee”) and has delegated authority to this Committee to review and recommend to the Board: the salaries and incentive compensation of the Company’s officers and its subsidiaries; and provide recommendations for other employees and consultants as appropriate. The Committee comprises independent, non-executive Directors. The members are currently Mike Cannon (Chair), Mary Chan and Nick Jeffery. The Committee’s members have no financial interest in the Company other than as shareholders and through the remuneration paid to them by the Company. By invitation, other members of the Board may attend the Committee’s meetings. The CEO and the Senior Vice President, Human Resources may also attend by invitation but take no part in discussions or decisions on matters relating to their own remuneration. The Committee is free to seek its own independent advice free from management as it deems appropriate. During the year, the Committee sought and received general advice relating to remuneration from Aon plc. The Committee is satisfied that the advice received from Aon is objective and independent and is not subject to any material conflict of interest. Aon is a member of the Remuneration Consultants Group and is a signatory to its Code of Conduct; all advice received during the year was provided in accordance with this code. Fees charged by Aon for advice provided to the Committee for 2018 amounted to £240,342. The Committee also received advice from the Senior Vice President, Human Resources and the Company Secretary. During the year, the Committee met formally on four occasions; in addition, the Committee Chairman held a number of meetings with advisers. Responsibilities The Remuneration Committee’s main responsibilities are to: U Review and recommend to the Board the salaries and incentive compensation of the Company’s CEO and executive management; U Provide recommendations for other employees and consultants as appropriate; and U Administer the Company’s compensation, stock and benefits plan. The key activities of the Committee during the year were to: U Review, plan and recommend to the Board CEO and executive management remuneration; U Review and address Annual General Meeting outcomes; U Consider market trends; and U Review the long-term incentive and the structure of the CEO’s remuneration package. 9.2 Statement of Shareholder voting At the 2018 AGM 99.64% of shareholders supported the advisory resolution to approve the Annual report on remuneration. The table below summarises the number of votes for and against Annual report on remuneration at the 2018 AGM, and also includes the number of abstentions (referred to as votes withheld). Resolution Approval of Directors’ remuneration report No of shares 42,965,758 % 99.64% No of shares 153,125 % 0.36% No of shares 242,655 No of shares 43,118,883 Votes for1 Votes against1 Votes withheld2 Total votes cast % of voting capital instructed3 56.45% 1 Votes “For” and “Against” are expressed as a percentage of votes received. 2 A “Vote withheld” is not a vote in law and is not counted in the calculation of the votes “For” or “Against” a resolution. 3 Total number of shares in issue at 9am BST (10am CEST) on 1 May 2018 was 76,382,139 shares. 9.3 Stakeholder views Shareholder and proxy advisory groups are engaged when the Company is considering material changes to policy, including approval of any new share plans. There is no formal engagement with employees on matters of executive remuneration but employees are encouraged to provide their view on any aspect of the Company’s operations through the Company’s intranet-based feedback system SVP Blog and the annual Voice of Dialog employee survey. Mike Cannon Chairman, Remuneration Committee 6 March 2019 Dialog Semiconductor PlcAnnual report and accounts 201886 Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual report and the Group and parent company financial statements in accordance with the applicable law and regulations. UK company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under the law the Directors are required to prepare the Group financial statements in accordance with IFRS as adopted by the EU and Article 4 of the IAS Regulation and have chosen to prepare the parent company financial statements in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework. Under UK company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing the Group financial statements, International Accounting Standard 1 requires that the Directors: U Properly select and apply accounting policies; U Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; U Provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performances; and U Make an assessment of the Company’s ability to continue as a going concern. In preparing the parent company financial statements, the Directors are required to: U Select suitable accounting policies and apply them consistently; U Make judgements and estimates that are reasonable and prudent; U State whether Financial Reporting Standard 101 (Reduced Disclosure Framework) has been followed, subject to any material departures disclosed and explained in the financial statements; and U Prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic report, Directors’ report and Directors’ remuneration report that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislations in other jurisdictions. Responsibility statement We confirm that to the best of our knowledge: U the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; U the strategic report includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and U the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company’s position and performance, business model and strategy. This responsibility statement was approved by the board of directors on 6 March 2019 and is signed on its behalf by: Dr Jalal Bagherli Chief Executive Officer Dialog Semiconductor PlcAnnual report and accounts 201887 Independent auditor’s report to the members of Dialog Semiconductor Plc Report on the audit of the financial statements Opinion In our opinion: U the financial statements of Dialog Semiconductor Plc (the “Parent Company”) and its subsidiaries (the “Group”) give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2018 and of the Group’s profit for the year then ended; U the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and IFRSs as issued by the International Accounting Standards Board (IASB); U the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice including FRS 101 Reduced Disclosure Framework; and U the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We have audited the financial statements which comprise: U the Consolidated statement of income; U the Consolidated statement of comprehensive income; U the Consolidated and Parent Company balance sheets; U the Consolidated statement of cash flows; U the Consolidated and Parent Company statements of changes in equity; and U the related notes 1 to 35 to the Group financial statements and notes 1 to 10 to the Parent Company financial statements. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union and IFRSs as issued by the IASB. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards, including FRS 101 Reduced Disclosure Framework (United Kingdom Generally Accepted Accounting Practice). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s (the “FRC’s”) Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Dialog Semiconductor PlcAnnual report and accounts 201888 Independent auditor’s report to the members of Dialog Semiconductor Plc continued Summary of our audit approach Key audit matters Materiality Scoping The key audit matters that we identified in the current year were: U Carrying amount of goodwill – revenue growth forecasts of new products used for the Connectivity CGU U Capitalisation of development costs We determined materiality for the Group financial statements to be US$10.7 million, which represents 5.4% of pre-tax profit. We conducted full scope audit procedures on the Parent Company as well as the three largest components, which represent 94% of the Group’s revenue, 83% of the Group’s pre-tax profit and 99% of Group’s net assets. We performed specified audit procedures on two additional components. Significant changes in our approach Our audit approach was consistent with the previous year, except as explained below. Last year our report included two key audit matters which are not included in our report this year: Revenue growth assumptions used in the valuation of customer relationships acquired as part of the Silego acquisition: For 2018, no acquisitions took place and therefore the key audit matter is not applicable. Revenue recognition: Previously we identified a risk in relation to sales to distributors on “ship and debit” terms, which we pinpointed to the risk of manual adjustments at year end. With the implementation of IFRS 15 Revenue from Contracts with Customers, such revenue is recognised when the products are released for collection by the third party distributor rather than when the sale is made to the end customer, therefore the key audit matter is no longer applicable. We also identified a risk in relation to direct sales to end customers, which we pinpointed to cut-off based on contractual terms of sales. We evaluated the results of our previous audits and concluded that this was not a key audit matter for 2018. Conclusions relating to going concern We are required by ISAs (UK) to report in respect of the following matters where: U the Directors’ use of the going concern basis of accounting in preparation of the financial statements is not appropriate; or U the Directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group’s or the Parent Company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. We have nothing to report in respect of these matters. Dialog Semiconductor PlcAnnual report and accounts 201889 Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Carrying amount of goodwill – revenue growth forecasts of new products used for the Connectivity CGU Key audit matter description 1 Goodwill by CGU 3 2 1. Mobile Systems 2. Connectivity 3. Advanced Mixed Signal 24% 20% 56% How the scope of our audit responded to the key audit matter As detailed in Notes 14 and 15 to the financial statements, the Group held US$439.5 million of goodwill and US$217.4 million of other intangible assets at the balance sheet date. As detailed in Note 2, the Group is required to, at least annually, test goodwill for impairment, or when an impairment trigger is identified. The impairment test involves a number of significant judgements in assessing the recoverable amount of each cash generating unit (“CGU”), to which goodwill is allocated, most importantly growth assumptions made within the three-year cash flow forecasts contained in management’s Strategic Plan. We have identified the risk of impairment to principally relate to the Connectivity CGU. High revenue growth rates are assumed in the three-year cashflow forecasts for Connectivity, with the growth driven by new products in less mature end markets. The headroom of value in use over the carrying amount of the assets of the CGU is also lower than that of the other CGUs. We have reviewed management’s sensitivity analysis and performed our own analysis in concluding on the focus for our key audit matter. Given the impact on overall value in use of the high revenue growth rates for new products, this is considered to be the key judgement and a key audit matter. We evaluated the design and implementation (D&I) of the key controls that ensure consistency between the Strategic Plan and forecasts in the impairment test, and regarding the preparation and review of the impairment assessment. We reviewed and challenged management’s key assumptions used in the impairment test for the Connectivity CGU, focusing on the appropriateness of the revenue growth rates assumed in the three-year cash flow forecasts. Our procedures included: U Comparing prior year forecast revenue growth to actual performance to assess historical accuracy of forecasting, with particular focus on assessing the performance of products previously categorised as new products which have now launched; U Agreeing forecasts used to the latest Board approved forecasts as well as reviewing 2019 trading to date; U Enquiring of management, including individuals outside of finance, to understand and challenge the assumptions in the revenue growth forecasts with focus on products identified in our sensitivity analysis that have the most significant impact on future performance; U Obtaining evidence of post-year end order backlogs for new products launched in 2019; and U Comparing assumptions in the growth assumed to third party and other market data, where available, analyst and industry reports. Key observations Based on the audit procedures performed, we concur with management that an impairment was not required in the year ended 31 December 2018. Dialog Semiconductor PlcAnnual report and accounts 201890 Independent auditor’s report to the members of Dialog Semiconductor Plc continued Capitalisation of development costs Key audit matter description Analysis of R&D costs (US$m) 2018 2017 2016 326 25 303 21 241 16 0 100 200 300 400 R&D expensed R&D expenditure credits Development costs capitalised Research and development (“R&D”) activity is an important part of the Group’s business model to create value in the business, as detailed in the Strategic report on pages 30 to 31. During 2018, the Group incurred US$351.1 million of research and development costs, net of R&D expenditure credits of US$5.2 million. Of this amount, US$24.8 million was capitalised. In line with IAS 38 Intangible Assets, and as detailed in note 2, development expenditure is expensed until it can be demonstrated a new product is technically feasible, commercially viable and management intends to complete the development. The point of commencement of capitalisation of such costs is an area of management judgement and there is a risk that costs which should have been expensed are capitalised. Therefore, we consider this a method by which the profit for the year could be fraudulently misstated. How the scope of our audit responded to the key audit matter We assessed the D&I of controls in relation to the R&D process, in particular the tracking of the stage of completion of projects and the determination of the requirement to capitalise. We focused our substantive testing on the review of significant projects for indicators of potential manipulation. Where indicators were identified we challenged management regarding them, making inquiries with individuals in both finance and also the project management teams. Evidence was obtained for all projects with total budgeted costs in excess of a set threshold which commenced capitalisation during 2018 to support that the timing of the commencement of capitalisation was in accordance with the requirements of IAS 38. A review for contradictory evidence was performed in order to identify indicators that the stage of completion of a project differed from that reported. This included a review for inventory build-up or revenue in the period. Key observations Based on the audit procedures performed, we did not identify any material misstatements in relation to the capitalisation of development costs. Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group materiality We determined materiality for the Group to be US$10.7 million (2017: US$10.5 million). Basis for determining materiality Rationale for the benchmark applied The materiality for the audit of the Parent Company based on balance sheet measures would be in excess of Group materiality, therefore we capped the materiality for the Parent Company at US$10.6 million (2017: US$10.4 million). Our materiality for the Group represents 5.4% of pre-tax profit of US$196.2 million. In 2017 our materiality was based on 5.4% of pre-tax profit of US$194.8 million. Our base for determining materiality is in line with prior year. We consider pre-tax profit to be a key benchmark for users of the financial statements, including customers, suppliers and other parties such as tax authorities. Dialog Semiconductor PlcAnnual report and accounts 201891 Group materiality US$10.7m Component materiality range US$4.3m to US$8.6m Audit Committee reporting threshold US$0.5m Pre-tax profit US$196.2m Pre-tax profit Group materiality We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of $535,500 (2017: $525,200), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including an understanding of the geographical positioning of accounting processing, management decision making and the risk of material misstatement at the Group level. The Group is present in sixteen countries across Europe, North America and Asia; however, the majority of transactional accounting processing as well as the consolidation is performed in Germany, which co-ordinates closely with the UK head office finance team. In addition, 90% of the Group’s revenue is generated through its German component. Based on this assessment, we focused on the component located in Germany as well as three components located in the UK where we performed full scope audits, covering 94% (2017: 98%) of revenue, 83% (2017: 94%) of pre-tax profit and 99% (2017: 96%) of net assets. For the two other components, which include Silego, we performed specific audit procedures on defined balances and transactions, which increased our coverage to cover 100% of revenue, 90% of pre-tax profit and 100% net assets as detailed below: Revenue Profit before tax Net assets Full audit scope Specified audit procedures Review at Group level 94% 6% 0% Full audit scope Specified audit procedures Review at Group level 83% 7% 10% Full audit scope Specified audit procedures Review at Group level 99% 1% 0% Full audit scope Specified audit procedures Review at Group level Other information The Directors are responsible for the other information. The other information comprises the information included in the annual report other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in respect of these matters. Dialog Semiconductor PlcAnnual report and accounts 201892 Independent auditor’s report to the members of Dialog Semiconductor Plc continued Responsibilities of directors As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Details of the extent to which the audit was considered capable of detecting irregularities, including fraud are set out below. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website. This description forms part of our auditor’s report. Extent to which the audit was considered capable of detecting irregularities, including fraud We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and then design and perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion. Identifying and assessing potential risks related to irregularities In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, our procedures included the following: U enquiring of management, internal audit, internal legal counsel and the Audit Committee, including obtaining and reviewing supporting documentation, concerning the Group’s policies and procedures relating to: U identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance; U detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud; U the internal controls established to mitigate risks related to fraud or non-compliance with laws and regulations; U discussing among the engagement team including the component audit team and involving relevant internal specialists, including tax, valuations, and information technology regarding how and where fraud might occur in the financial statements and any potential indicators of fraud. As part of this discussion, we identified potential for fraud in the following areas: judgement regarding the point of commencement of capitalisation of development costs and the identification and interpretation of the contractual terms of new and/or updated revenue contracts; and U obtaining an understanding of the legal and regulatory frameworks that the Group operates in, focusing on those laws and regulations that had a direct effect on the financial statements or that had a fundamental effect on the Group’s operations. The key laws and regulations we considered in this context included among others, the UK Companies Act, German listing rules and tax legislations (UK, USA and Germany). Audit response to risks identified As a result of performing the above, we identified capitalisation of development costs as a key audit matter. The key audit matters section of our report explains that matter in more detail and also describes the specific procedures we performed in response to that key audit matter. In addition to the above, our procedures to respond to risks identified included the following: U reviewing the financial statement disclosures and testing supporting documentation to assess compliance with relevant laws and regulations discussed above; U enquiring of management, the Audit Committee and in-house and external legal counsel concerning actual and potential litigation and claims; U performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud; U reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing regulatory correspondence; U in addressing the risk of fraud in revenue recognition, assessing the appropriateness of the design and implementation of controls regarding capturing new contractual terms and reviewing significant new contracts for compliance with IFRS 15; and U in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business. We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists and the component audit team, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. Dialog Semiconductor PlcAnnual report and accounts 201893 Report on other legal and regulatory requirements Opinions on other matters prescribed by the Companies Act 2006 In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: U the information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and U the Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Group and of the Parent Company and their environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic report or the Directors’ report. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: U we have not received all the information and explanations we require for our audit; or U adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or U the Parent Company financial statements are not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors’ remuneration have not been made or the part of the Directors’ remuneration report to be audited is not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Other matters Auditor tenure Following the recommendation of the Audit Committee, we were appointed by Dialog Semiconductor Plc on 25 January 2016 to audit the financial statements for the year ending 31 December 2015 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is four years, covering the years ended 31 December 2015 to 31 December 2018. Consistency of the audit report with the additional report to the Audit Committee Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK). Use of our report This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Alexander Butterworth ACA (Senior statutory auditor) For and on behalf of Deloitte LLP Statutory Auditor Reading, UK 6 March 2019 Dialog Semiconductor PlcAnnual report and accounts 2018Consolidated statement of income Year ended 31 December Revenue Cost of sales Gross profit Selling and marketing expenses General and administrative expenses Research and development expenses Other operating income/(expense) Operating profit Interest income Interest expense Other finance (expense)/income Profit before income taxes Income tax expense Profit after income taxes Share of loss of associate Net income Attributable to: – Shareholders in the Company – Non-controlling interests Net income Earnings per share (US$) Basic Diluted Weighted average number of shares (in thousands) Basic Diluted 94 Note 5, 33 33 5 5, 33 8 8 8 9 27 10 10 2018 US$000 1,442,138 (751,070) 691,068 (83,877) (84,351) (326,309) 3,176 199,707 9,883 (3,134) (10,263) 196,193 (55,281) 140,912 (1,113) 139,799 139,799 – 139,799 1.89 1.80 73,959 77,655 2017* US$000 1,352,841 (707,971) 644,870 (70,412) (74,850) (303,013) (9,578) 187,017 5,995 (1,302) 3,093 194,803 (25,369) 169,434 – 169,434 173,916 (4,482) 169,434 2.34 2.21 74,472 78,611 2016* US$000 1,197,611 (630,963) 566,648 (62,331) (70,940) (261,278) 137,708 309,807 3,665 (3,447) (4,819) 305,206 (47,090) 258,116 – 258,116 260,940 (2,824) 258,116 3.43 3.25 76,047 80,398 * Certain product development costs have been reclassified from cost of sales to research and development expenses (see note 1). Dialog Semiconductor PlcAnnual report and accounts 2018Consolidated statement of comprehensive income Year ended 31 December 95 Net income Other comprehensive income Items that may be reclassified to profit or loss in subsequent periods Currency translation differences on foreign operations: – (Loss)/gain recognised in the year – Gain transferred to profit or loss on deconsolidation of Dyna Image Income tax relating to currency translation differences on foreign operations Fair value gain on available-for-sale investments Income tax relating to available-for-sale investments Cash flow hedges: – Fair value (loss)/gain recognised on effective hedges in the year – Fair value (gain)/loss transferred to profit or loss Income tax relating to cash flow hedges Items that will not be reclassified to profit or loss Fair value loss on equity investments Income tax relating to equity investments Other comprehensive (loss)/income for the year Total comprehensive income for the year Attributable to: – Shareholders in the Company – Non-controlling interests Total comprehensive income for the year 2018 US$000 139,799 2017 US$000 169,434 2016 US$000 258,116 (527) – (78) – – (10,075) (2,343) 2,376 (10,647) (23,764) 1,015 (22,749) (33,396) 106,403 106,403 – 106,403 1,658 (1,144) 180 5,971 (1,015) 16,433 (441) (3,149) 18,493 – – – 18,493 187,927 192,416 (4,489) 187,927 227 – (47) 2,866 – (13,264) 8,382 765 (1,071) – – – (1,071) 257,045 259,769 (2,724) 257,045 Dialog Semiconductor PlcAnnual report and accounts 2018Consolidated balance sheet As at 31 December Assets Cash and cash equivalents Trade and other receivables Other current financial assets Inventories Income tax receivables Other current assets Assets classified as held for sale Total current assets Goodwill Other intangible assets Property, plant and equipment Investment in associate Other investments Other non-current financial assets Other non-current assets Deferred tax assets Total non-current assets Total assets Liabilities and equity Trade and other payables Other current financial liabilities Provisions Income taxes payable Other current liabilities Liabilities directly associated with assets held for sale Total current liabilities Non-current financial liabilities Provisions Deferred tax liabilities Other non-current liabilities Total non-current liabilities Ordinary shares Share premium account Retained earnings Other reserves Dialog shares held by employee benefit trusts Total equity Total liabilities and equity 96 Note 2018 US$000 2017 US$000 11 12 18 13 19 20 14 15 16 17 17 18 19 9 21 22 23 24 20 22 23 9 24 25 677,848 114,514 202 149,736 2,146 18,306 962,752 11,295 974,047 439,508 217,445 66,359 – 11,538 1,807 398 6,034 743,089 1,717,136 122,140 196,890 5,253 8,193 58,237 390,713 3,167 393,880 841 3,078 7,958 8,872 20,749 14,204 403,660 930,576 (23,419) (22,514) 1,302,507 1,717,136 479,295 78,186 6,649 168,947 12,739 14,656 760,472 – 760,472 439,508 235,637 83,870 1,100 46,155 2,090 503 7,451 816,314 1,576,786 107,195 16,041 3,474 13,356 59,619 199,685 – 199,685 17,378 3,725 4,017 9,560 34,680 14,204 403,660 915,482 9,977 (902) 1,342,421 1,576,786 These financial statements were approved by the Board of Directors on 6 March 2019 and were signed on its behalf by: Dr Jalal Bagherli Director Dialog Semiconductor PlcAnnual report and accounts 2018Consolidated statement of cash flows Year ended 31 December 97 Cash flows from operating activities Net income Non-cash items within net income: – Depreciation of property, plant and equipment – Amortisation of intangible assets – Impairment of non-current assets – Addition to inventory reserve, net – Share-based compensation expense – Loss on deconsolidation of Dyna Image – Other non-cash items Interest income, net Income tax expense Cash generated from operations before changes in working capital Changes in working capital: – (Increase)/decrease in trade and other receivables – Decrease/(increase) in inventories – Decrease/(increase) in prepaid expenses – Increase/(decrease) in trade and other payables – Increase in provisions – Change in other assets and liabilities Cash generated from operations Interest paid Interest received Income taxes (paid)/received Cash flow from operating activities Cash flows from investing activities Purchase of property, plant and equipment Purchase of intangible assets Purchase of businesses, net of acquired cash Payment of contingent consideration Cash held by Dyna Image on deconsolidation Payments for capitalised development costs Purchase of other investments, net (Increase)/decrease in other long-term assets Cash flow used for investing activities Cash flows from financing activities Purchase of own shares into treasury Currency hedges on share buyback obligation Capital element of finance lease payments Purchase of shares by employee benefit trusts Sale of shares by employee benefit trusts Issue of shares by a subsidiary to non-controlling interests Facility arrangement costs Share issue costs Cash flow used for financing activities Net cash inflow/(outflow) during the year Cash and cash equivalents at beginning of year Currency translation differences Cash and cash equivalents at end of year An analysis of changes in liabilities arising from financing activities is presented in note 22. Note 2018 US$000 2017 US$000 2016 US$000 139,799 169,434 258,116 31,455 49,130 – 5,643 41,153 – 6,590 (6,749) 55,281 322,302 (36,310) 13,615 56 15,968 3,089 2,852 321,572 (530) 8,714 (41,107) 288,649 (26,145) (6,197) (3,480) (9,360) – (24,771) – – (69,953) – – (1,651) (21,786) 3,617 – – – (19,820) 198,876 479,295 (323) 677,848 30,807 41,969 4,327 1,288 35,320 5,597 (7,904) (4,693) 25,369 301,514 11,117 (54,377) 1,930 7,819 2,136 473 270,612 (425) 6,221 8,314 284,722 (47,938) (6,196) (267,940) – (420) (20,988) (13,738) (488) (357,708) (125,035) 1,227 (4,283) (24,301) 7,246 1,107 (988) (28) (145,055) (218,041) 697,167 169 479,295 27,219 35,954 – 4,375 28,167 – 2,118 (218) 47,090 402,821 (8,105) 21,609 (301) (44,206) 260 13,601 385,679 (3,434) 3,314 (136,799) 248,760 (25,553) (8,177) (647) – – (15,802) (10,000) 227 (59,952) (61,472) (1,186) (3,834) (3,127) 11,083 – – – (58,536) 130,272 566,809 86 697,167 4 8 9 3 3 4 17 26 11 Dialog Semiconductor PlcAnnual report and accounts 2018Consolidated statement of changes in equity Year ended 31 December 98 As at 31 December 2015 Net income Other comprehensive (loss)/income Total comprehensive income/(loss) Other changes in equity: – Purchase of own shares into treasury – Share buyback obligation – Purchase of shares by employee benefit trusts – Sale of shares by employee benefit trusts – Share-based compensation, net of tax As at 31 December 2016 Net income Other comprehensive income/(loss) Total comprehensive income/(loss) Other changes in equity: – Purchase of own shares into treasury – Share buyback obligation – Cancellation of treasury shares – Shares issued by Dyna Image – Deconsolidation of Dyna Image – Shares issued to employee benefit trust – Purchase of shares by employee benefit trusts – Sale of shares by employee benefit trusts – Share-based compensation, net of tax As at 31 December 2017 Adjustment on initial application of IFRS 15 (note 35) Adjusted balance as at 1 January 2018 Net income Other comprehensive loss Total comprehensive income/(loss) Other changes in equity: – Share buyback obligation – Purchase of shares by employee benefit trusts – Sale of shares by employee benefit trusts – Share-based compensation, net of tax As at 31 December 2018 Share premium Ordinary account shares US$000 US$000 14,402 403,687 – – – – – – – – – – – – – – – – 14,402 403,687 – – – – – – – – (571) – – 373 – – – – – – – – (27) – – – 14,204 403,660 – 14,204 403,660 – – – – – – – Retained earnings US$000 631,548 260,940 – 260,940 (1,643) (63,077) – 3,934 31,212 862,914 173,916 – 173,916 Other reserves (note 25) US$000 (7,923) – (1,171) (1,171) (61,472) – – – – (70,566) – 18,500 18,500 62,584 3,024 (125,050) – (186,522) 187,093 – – – – – – 9,977 – 9,977 – (33,396) (33,396) 361 – – – (37,134) 36,339 915,482 1,541 917,023 139,799 – 139,799 – – – – – – – – 14,204 403,660 (171,187) – 3,443 41,498 930,576 – – – – (23,419) Dialog shares held by employee benefit trusts US$000 (24,630) – – – Equity attributable to shareholders in the Company US$000 1,017,084 260,940 (1,171) 259,769 Non- controlling interests US$000 Total US$000 7,801 1,024,885 258,116 (2,824) (1,071) 100 257,045 (2,724) – – (3,127) 7,149 – (20,608) – – – – – – – – (373) (24,301) 44,380 – (902) – (902) – – – – (21,786) 174 – (22,514) (63,115) (63,077) (3,127) 11,083 31,212 1,189,829 173,916 18,500 192,416 (122,026) 62,584 – 361 – (27) (24,301) 7,246 36,339 1,342,421 1,541 1,343,962 139,799 (33,396) 106,403 (171,187) (21,786) 3,617 41,498 1,302,507 – – – – – (63,115) (63,077) (3,127) 11,083 31,212 5,077 1,194,906 169,434 (4,482) 18,493 (7) 187,927 (4,489) (122,026) – 62,584 – – – 1,107 746 (1,334) (1,334) (27) – (24,301) – 7,246 – 36,339 – – 1,342,421 – 1,541 – 1,343,962 139,799 – (33,396) – 106,403 – (171,187) – (21,786) – 3,617 – – 41,498 – 1,302,507 Dialog Semiconductor PlcAnnual report and accounts 201899 Notes to the consolidated financial statements For the year ended 31 December 2018 1. Background Description of business Dialog Semiconductor Plc (“the Company”) is a public limited company that is incorporated in England and Wales and domiciled in the United Kingdom. The Company’s ordinary shares are listed on the Frankfurt Stock Exchange. Dialog creates and markets highly-integrated, mixed-signal integrated circuits, optimised for personal, portable, hand-held devices, low energy short-range wireless, LED solid state lighting and automotive applications. Dialog has four operating segments: Mobile Systems; Connectivity; Automotive & Industrial; and Advanced Mixed Signal. Segment information is presented in note 33. Registered office The Company’s registered office is at Tower Bridge House, St Katharine’s Way, London E1W 1AA, United Kingdom. Statement of compliance The consolidated financial statements of the Company and its subsidiaries (together, “Dialog” or “the Group”) set out on pages 98 to 148 have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted for use in the European Union and those parts of the Companies Act 2006 that are applicable to companies reporting under IFRS and therefore comply with Article 4 of the IAS Regulation. The consolidated financial statements also comply with IFRS as issued by the International Accounting Standards Board (“IASB”). Basis of preparation The consolidated financial statements have been prepared on a going concern basis and in accordance with the historical cost convention, except that certain investments, derivative financial instruments and contingent consideration are stated at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Information about assets and liabilities that are measured at fair value is presented in note 29. The Group’s significant accounting policies are set out in note 2. Presentation currency The consolidated financial statements are presented in US dollars (“US$”), which is the functional currency of the Company. All US dollar amounts are rounded to the nearest thousand (“US$000”), except where stated otherwise. Approval of the consolidated financial statements The consolidated financial statements for the year ended 31 December 2018 were authorised for issue by the Board of Directors on 6 March 2019. Company financial statements Separate financial statements for the Company are set out on pages 149 to 155. Reclassification of certain product development costs With effect from 1 January 2018, we reclassified within the consolidated statement of income the amortisation of capitalised development costs, the amortisation of acquired technology-based intangible assets and royalties payable for the use of intellectual property in our product development activities. Previously, we included these costs within cost of sales. We now include them within research and development expenses. We have made this change in order that our results are more comparable with those of our industry peers. Comparative amounts for 2017 and 2016 have been re-presented on a consistent basis as follows: Revenue Cost of sales Gross profit Research and development expenses Operating profit 2017 2016 As previously reported US$000 Effect of reclassification US$000 As reclassified US$000 As previously reported US$000 Effect of reclassification US$000 As reclassified US$000 1,352,841 (732,188) 620,653 (278,796) 187,017 – 24,217 24,217 (24,217) – 1,352,841 (707,971) 644,870 (303,013) 187,017 1,197,611 (650,896) 546,715 (241,345) 309,807 – 19,933 19,933 (19,933) – 1,197,611 (630,963) 566,648 (261,278) 309,807 Dialog Semiconductor PlcAnnual report and accounts 2018100 Notes to the consolidated financial statements continued 1. Background continued Accounting standards adopted during the year IFRS 15 Revenue from Contracts with Customers IFRS 9 Financial Instruments We adopted IFRS 15 and IFRS 9 with effect from 1 January 2018. We adopted IFRS 15 and the classification and measurement (including impairment) requirements of IFRS 9 using the modified retrospective approach, whereby information presented for prior periods has not been restated. We applied the hedge accounting requirements of IFRS 9 prospectively with effect from 1 January 2018. An explanation of the changes introduced by IFRS 15 and IFRS 9 and their impact on the Group’s results and financial position are set out in note 35. On adoption of IFRS 15, the Group recognised a cumulative effect credit of US$1,541 to retained earnings. During 2018, the Group’s revenue was US$10,137 higher and its net income US$2,619 higher than it would have been under the predecessor accounting standard, IAS 18 Revenue. IFRS 9 had no impact on the Group’s results or financial position. Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2) With effect from 1 January 2018, we adopted amendments to IFRS 2 Share-based Payment which, among other things, clarified the classification of share-based payment transactions with net settlement features for withholding tax obligations. Adoption of the amendments had no impact on the Group’s results or financial position. Accounting standards issued but not adopted as at 31 December 2018 We outline below relevant accounting standards that have been issued by the IASB but not yet adopted by us as at 31 December 2018. IFRS 16 Leases IFRS 16 will change the way in which lessees recognise, measure, present and disclose leases. IFRS 16 provides a single lessee accounting model, requiring lessees to recognise a right-of-use asset and a lease liability for all leases, except those with a short lease term and/ or involving an underlying asset of low value. In summary, for lessees, the distinction between an operating lease and a finance lease will disappear and most operating leases will be accounted for similarly to the way in which finance leases were accounted for under the predecessor accounting standard, IAS 17 Leases. IFRS 16 is effective for annual periods beginning on or after 1 January 2019. We will adopt IFRS 16 using a modified retrospective approach whereby prior periods will not be restated but we will recognise cumulative effect adjustments to the opening consolidated balance sheet on 1 January 2019. We will recognise the following for each contract that is, or contains, a lease on the transition date: U a lease liability measured at the present value of the remaining lease payments discounted at the lessee’s incremental borrowing rate; and U a right-of-use asset measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments that was recognised as at 31 December 2018. We estimate that the related cumulative effect adjustments will be as follows: Right-of-use assets Lease liabilities Net accrued lease payments US$ million 66.4 (67.6) 1.2 Subsequent to the transition date, each right-of-use asset will be depreciated over the remaining lease term and will be adjusted for any remeasurement of the lease liability. Depreciation will be recognised in profit or loss (in arriving at operating profit). Going forward, we expect that IFRS 16 will be beneficial to operating profit to the extent that depreciation of the right-of-use assets will be lower than the rental expense that would have been recognised under IAS 17. We expect, however, that operating profit will be only slightly higher in 2019 than it would have been under IAS 17. Subsequent to the transition date, each lease liability will be measured by increasing the carrying amount to reflect interest on the lease liability and reducing the carrying amount to reflect lease payments made. Interest accrued on the lease liability will be recognised in profit or loss (within interest expense). Lease liabilities will be remeasured to reflect certain changes in the lease payments or lease modifications. After taking into account the interest expense on the lease liabilities, we expect that net income will be slightly lower in 2019 than it would have been under IAS 17. As we progress through 2019, we will show in the notes to our consolidated financial statements the effect of adopting IFRS 16 on our quarterly and year to date results. IFRIC 23 Uncertainty over Income Tax Treatments IFRIC 23 clarifies the application of the recognition and measurement requirements of IAS 12 Income Taxes where there is uncertainty over income tax treatments. IFRIC 23 specifically considers whether tax treatments should be considered collectively, assumptions with regard to the examinations by tax authorities, the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates and the effect of changes in facts and circumstances. IFRIC 23 is effective for annual periods beginning on or after 1 January 2019. We already account for income taxes on a basis consistent with IFRIC 23 and do not expect it to affect the Group’s results or financial position. Dialog Semiconductor PlcAnnual report and accounts 2018101 1. Background continued Definition of a Business (Amendments to IFRS 3) In October 2018, the IASB issued amendments to IFRS 3 Business Combinations aimed at resolving the difficulties that can arise when an entity determines whether it has acquired a business or a group of assets. In summary, the amendments clarify that to be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs and narrow the definition of outputs by focusing on goods and services provided to customers. We will apply the amendments in the future if there is ambiguity as to whether we have acquired a business or a group of assets. Subject to endorsement for use in the European Union, the amendments will be effective for business combinations with an acquisition date on or after 1 January 2020. Definition of Material (amendments to IAS 1 and IAS 8) In October 2018, the IASB published amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to clarify the definition of material in those standards and align with the definition used in the Conceptual Framework. We do not expect that the amendments will cause us to reach a different conclusion as to whether an item is or is not material. Subject to endorsement for use in the European Union, the amendments will be effective for annual periods beginning on or after 1 January 2020. 2. Significant accounting policies Basis of consolidation The consolidated financial statements incorporate the results, cash flows and assets and liabilities of the Company and its subsidiaries and sponsored employee benefit trusts. A subsidiary is an entity that is controlled, either directly or indirectly, by the Company. Control exists when the Company is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the relevant activities of the entity. Generally, such power exists where the Company holds a majority of the voting rights of an entity. When the Company holds less than a majority of the voting rights of an entity, it considers all relevant facts and circumstances in assessing whether or not its voting rights are sufficient to give it power to direct the activities that significantly affect its returns from the entity, including: the size of the Company’s holding of voting rights relative to the size and dispersion of the holdings of other vote holders; potential voting rights held by the Company, other vote holders or other parties; and rights arising from other contractual arrangements. Details of the Company’s subsidiaries as at 31 December 2018 are set out on page 167. Consolidation of a subsidiary commences when the Company obtains control over the subsidiary and ceases at such time as control over the subsidiary is lost. Transactions and balances between members of the Group, and any unrealised profits or losses on such transactions, are eliminated on consolidation. Non-controlling interests represent the equity in a subsidiary that is not attributable, directly or indirectly, to the Company. Where the equity in a subsidiary is not wholly-owned by the Company, the subsidiary’s profit or loss and each component of its other comprehensive income are attributed to the Company and to the non-controlling interests in proportion to their ownership interests. Changes in the Company’s ownership interest in a subsidiary that do not result in a loss of control are accounted for within equity. Business combinations A business combination is a transaction or other event in which the Company obtains control over a business. Business combinations are accounted for using the acquisition method. Goodwill acquired in a business combination is recognised as an intangible asset and represents the excess of the aggregate of the consideration transferred, including contingent consideration, and the amount of any non-controlling interests in the acquired business over the net total of the identifiable assets and liabilities of the acquired business at the acquisition date. Any shortfall, negative goodwill, is recognised immediately as a gain in profit or loss. Consideration transferred represents the sum of the fair values at the acquisition date of the assets given, liabilities incurred or assumed and equity instruments issued by the Group in exchange for control over the acquired business. Acquisition-related costs are charged to profit or loss in the period in which they are incurred. Identifiable assets and liabilities of the acquired business are measured at their fair value at the acquisition date, except for certain items that are measured in accordance with the relevant Group accounting policy, such as replacement equity-settled share-based compensation awards and deferred tax assets and liabilities. Non-controlling interests that entitle their holders to a proportionate share of the net assets of the acquired business in the event of a liquidation are measured either at fair value or at the non-controlling interest’s proportionate share of the identifiable assets and liabilities of the business. Other non-controlling interests are measured at fair value. Contingent consideration is subsequently measured at fair value unless it is classified as equity. Changes in the fair value of contingent consideration that result from events after the acquisition date are recognised in profit or loss. Contingent consideration that is classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Dialog Semiconductor PlcAnnual report and accounts 2018102 Notes to the consolidated financial statements continued 2. Significant accounting policies continued Investment in associate An associate is an entity over which the Company has significant influence. Significant influence is the power to participate in financial and operating policy decisions but not to control or jointly control them. Significant influence generally exists where the Company holds, directly or indirectly through one or more of its subsidiaries, more than 20% and less than 50% of the shareholders’ voting rights. Associates are accounted for using the equity method, whereby the Group’s investment is initially recognised at cost and the carrying amount is increased or decreased to reflect the Group’s share of the profit or loss of the associate. Losses of an associate in excess of the Group’s interest in the entity are not recognised, except to the extent that the Group has incurred obligations or made payments on behalf of the associate. Foreign currency translation Each entity within the Group has a functional currency, which is normally the currency in which the entity primarily generates and expends cash. The functional currency of the Company and its principal subsidiaries is the US dollar. At entity level, a foreign currency is a currency other than the entity’s functional currency. Sales, purchases and other transactions denominated in foreign currencies are recorded in the entity’s functional currency at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate ruling at the balance sheet date. Currency translation differences arising at entity level are recognised in profit or loss. The Group’s presentation currency is the US dollar. Foreign operations are therefore those of the Company’s subsidiaries and associates whose functional currency is not the US dollar. On consolidation, the results of foreign operations are translated into US dollars at the average exchange rate for the period and their assets and liabilities are translated into US dollars at the exchange rate ruling at the balance sheet date. Currency translation differences arising on consolidation are recognised in other comprehensive income and taken to the currency translation reserve. In the event that a foreign operation is sold, the related cumulative currency translation difference recognised in other comprehensive income is reclassified from equity to profit or loss and is included in calculating the gain or loss on disposal of the foreign operation. Revenue recognition We generate revenue principally through the sale of our products. Relatively small amounts of revenue are generated from royalties for the use of intellectual property assets and from research and development contracts. Sale of products Sales of products are mostly made direct to end customers but we also sell to distributors. Revenue from the sale of products is recognised when the customer obtains control of the products. We consider that control passes when the products are transferred to the customer. Accordingly, where products are sold on “ex-works” incoterms, revenue is recognised when the products are released for collection by the customer. Otherwise, revenue is recognised when the products are delivered to the customer. Where products are supplied on a consignment basis, delivery takes place and revenue is recognised when the products are taken out of the consignment by the customer. Revenue recognised on the sale of products is measured at the fair value of the consideration received or receivable, excluding sales taxes and after making allowance for rebates and product returns. Where we sell to a distributor on “ship and debit” terms, the distributor may be entitled to a rebate if the distributor sells the product to end customers at a price lower than the price at which the distributor purchased the products from us. Rebates are estimated using the expected value method based on actual rebates granted at the distributor and product level during the preceding quarter so as to reflect current pricing trends. Prior to adopting IFRS 15, we recognised revenue from sales to distributors on ship and debit terms when the products were sold by the distributor to end customers by which time the amount of the rebate due to the distributor was known. Most of our distributor customers are entitled to limited rights of return, referred to as stock rotation rights. Typically, returns are allowed twice-yearly for a credit of up to a percentage of the value of products shipped by us to the distributor during the preceding six-month period. Revenue on sales to distributors is recognised after making allowance for stock rotation claims that is estimated based on stock rotation credits granted at the distributor level during the preceding six-month period. As permitted by IFRS 15, we do not capitalise the incremental costs of obtaining contracts (such as sales representatives’ commissions) because the amortisation period of such costs would be one year or less. Royalties Revenue from royalties is recognised on an accruals basis in accordance with the terms of the relevant licensing agreements. Research and development contracts Revenue from research and development contracts is recognised by reference to the stage of completion of the contract, which is represented by the costs incurred for work performed to date as a percentage of the estimated total contract costs. If it is probable that a contract will be loss making, the expected loss is recognised immediately as an expense in profit or loss. Dialog Semiconductor PlcAnnual report and accounts 2018103 2. Significant accounting policies continued Research and development expenditure All research expenditure is expensed as it is incurred. Development expenditure is also expensed as it is incurred until such time as it can be demonstrated that the product is both technically feasible and commercially viable and that management intends to complete the development of the product and sell it to customers. Development expenditure incurred after that time and before the developed product is available to be put into full production is capitalised. Generally, development expenditure is expensed until relatively late in the development process when prototypes are available for quality and other tests. Government grants Government grants are not recognised until there is reasonable assurance that Dialog will comply with the conditions attaching to them and that the grants will be received. A grant that is receivable as compensation for expenses incurred is recognised in profit or loss in the period in which it becomes receivable and is deducted from the related expense. A grant whose primary condition is that Dialog should purchase, construct or otherwise acquire a non-current asset is recognised as deferred revenue and transferred to profit or loss on a straight-line basis over the useful life of the related asset. Goodwill Goodwill acquired in a business combination is carried at cost as established at the acquisition date, less impairment losses, if any. Internally generated goodwill is not recognised as an asset. Other intangible assets Other intangible assets comprise identifiable intangibles acquired in business combinations (principally customer-related assets and developed technology), licences, computer software, patents and product development costs. Other intangible assets held by the Group have finite useful lives and are therefore carried at cost less accumulated amortisation and impairment losses, if any. Cost comprises the purchase price of the asset (including non-refundable purchase taxes) and any costs directly attributable to preparing the asset for its intended use, or, in the case of an asset acquired in a business combination, is its fair value at the acquisition date. Other intangible assets are amortised on a straight-line basis so as to charge their cost to profit or loss over their estimated useful lives as follows: Customer-related assets Software, licences and other Patents Product development assets Useful life 1 to 15 years 3 to 10 years 10 years 1 to 10 years Patents are typically granted for a period of 20 years but they are amortised over the period during which the Group expects to benefit from them, which is typically ten years. Estimated useful lives are regularly reviewed and the effect of any change in estimate is accounted for on a prospective basis. Property, plant and equipment Property, plant and equipment is carried at cost less accumulated depreciation and impairment losses, if any. Cost comprises the purchase price of the asset (including non-refundable purchase taxes) and any costs directly attributable to bringing the asset to the location and condition necessary to enable its intended use, or, in the case of an asset acquired in a business combination, is its fair value at the acquisition date. Leasehold improvements include the estimated cost of any obligation to restore the leased property to its original condition at the end of the lease. Costs of replacing a significant part of an asset are included in the cost of the asset but routine repairs and maintenance costs are recognised in profit or loss when they are incurred. Items of property, plant and equipment are depreciated on a straight-line basis so as to charge their cost, less their estimated residual value, if any, to profit or loss over their estimated useful lives as follows: Test equipment Leasehold improvements Office and other equipment Office furniture and fittings Useful life 3 to 7 years Shorter of useful life or lease term 1.5 to 5 years 5 to 15 years Estimated residual values and useful lives are regularly reviewed and the effect of any change in estimate is accounted for on a prospective basis. Assets that are under construction and not ready for their intended use are not depreciated. Dialog Semiconductor PlcAnnual report and accounts 2018104 Notes to the consolidated financial statements continued 2. Significant accounting policies continued Impairment of tangible and intangible assets Goodwill, other intangible assets and property, plant and equipment are tested for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable. Additionally, goodwill and intangible assets still under development are subject to an annual impairment test. An asset is impaired to the extent that its carrying amount exceeds its recoverable amount. An asset’s recoverable amount represents the higher of the asset’s value in use and its fair value less costs to sell. An asset’s value in use represents the present value of the future cash flows expected to be derived from the asset in its current use and condition. Fair value less cost to sell is the amount expected to be obtainable from the sale of the asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal. Where it is not possible to estimate the recoverable amount of an individual asset, the recoverable amount is determined for the cash- generating unit (“CGU”) to which the asset belongs. An asset’s CGU is the smallest group of assets that includes the asset and generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill does not generate cash flows independently of other assets and is, therefore, tested for impairment at the level of the CGU or group of CGUs that are expected to benefit from the synergies of the related business combination. Value in use is based on estimates of pre-tax cash flows in the periods covered by budgets and/or plans that have been approved by the Board. Such cash flow estimates are discounted at a pre-tax discount rate that reflects the risks specific to the asset or the CGU or group of CGUs to which the asset belongs. Impairment losses are recognised in profit or loss. Impairment losses recognised in previous periods for assets other than goodwill are reversed if there has been a change in the estimates used to determine the asset’s recoverable amount, but only to the extent that the carrying amount of the asset does not exceed its carrying amount had no impairment been recognised in previous periods. Impairment losses in respect of goodwill are not reversed. Financial instruments (a) Trade and other receivables Trade receivables represent the invoiced amount of sales of goods to customers for which payment has not been received, less an allowance for doubtful accounts. As permitted by IFRS 9, we recognise an allowance for credit losses in respect of trade receivables from initial recognition measured as the amount of the lifetime expected credit losses. Prior to adopting IFRS 9, we recognised a credit loss allowance only when there was objective evidence that we may not be able to collect the amount due. When a trade receivable is determined to be uncollectable it is written off, firstly against any allowance made and then directly to profit or loss. Subsequent recoveries are credited to profit or loss. Trade receivables sold under receivables financing facilities are derecognised from the balance sheet because the financial institutions concerned assume the credit risk associated with them. Retentions held by the financial institutions are recognised as other receivables. (b) Cash and cash equivalents Cash and cash equivalents include cash at bank and in hand, cash available on demand from receivables financing facilities, investments in money market funds and short-term deposits with an original maturity of three months or less. Interest income on cash and cash equivalents is accrued on a time basis. We normally recognise an allowance for credit losses in respect of cash and cash equivalents that is measured as the amount of expected credit losses over the next 12 months. If, however, the risk of default has increased significantly since initial recognition, we measure the allowance as the amount of lifetime credit losses. Prior to adopting IFRS 9, we recognised a credit loss allowance only when there was objective evidence of default. (c) Equity investments Equity investments are initially measured at fair value plus transaction costs, if any. Equity investments are subsequently measured at fair value with resulting gains and losses recognised in profit or loss unless we irrevocably elect for such gains and losses to be recognised in other comprehensive income. On adoption of IFRS 9, we made this election in respect of our strategic investment in the common shares of Energous Corporation. Consequently, fair value gains or losses arising subsequent to 1 January 2018 that may be realised on any future sale of all or part of this investment will not be reclassified to profit or loss. Prior to adopting IFRS 9, equity investments were classified as available-for-sale investments. (d) Trade and other payables Trade payables represent the amount of invoices received from suppliers for purchases of goods and services for which payment has not been made. Long-term payables are discounted where the effect is material. (e) Bank and other loans Bank and other loans are initially measured at fair value plus transaction costs, if any. Such loans are subsequently measured at amortised cost using the effective interest method. (f) Derivative financial instruments We use derivative financial instruments to reduce the Group’s exposure to currency exchange rate movements and hold equity options and warrants in relation to certain of its strategic investments. We do not hold or issue derivatives for speculative purposes. All derivative financial instruments are recognised as assets and liabilities measured at fair value. Unless a derivative is in a designated and effective cash flow hedging relationship, all fair value gains and losses are recognised in profit or loss. Where the fair value of a derivative on initial recognition differs from the transaction price, if any, the difference is recognised immediately in profit or loss only if the fair value is evidenced by a quoted price in an active market or is based on a valuation technique that uses only data from observable markets. Dialog Semiconductor PlcAnnual report and accounts 2018105 2. Significant accounting policies continued (g) Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount presented in the balance sheet where there is a currently enforceable legal right to offset the recognised amounts and management intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Inventories Inventories comprise raw materials, work in progress and finished goods. Inventories are stated at the lower of cost and net realisable value, with due allowance for any excess, defective or obsolete items. Cost is determined using the first-in, first-out (“FIFO”) method. Cost of finished goods and work in progress includes materials, direct labour, other direct costs and related production overheads. Net realisable value is the estimated selling price, less estimated costs of completion and estimated selling, marketing and distribution costs. Assets classified as held for sale An asset or group of assets is classified as held for sale if its carrying amount will be recovered by sale rather than by continuing use in the business, it is available for immediate sale in its present condition and management has committed to, and has initiated, a plan to sell the asset which, when initiated, was expected to result in a completed sale within 12 months. Assets that are classified as held for sale are measured at the lower of their carrying amount when classified as held for sale and fair value less costs to sell. Leases Leases that confer rights and obligations similar to those that attach to owned assets are classified as finance leases. All other leases are classified as operating leases. Assets held under finance leases are recognised as assets within property, plant and equipment, initially measured at the fair value of the leased asset or, if lower, the present value of the minimum lease payments, and a corresponding liability is recognised. Subsequently, the assets are depreciated over the shorter of the expected useful life of the asset or the term of the lease. At inception of the lease, the lease payments are apportioned between a capital element and an interest element so as to achieve a constant periodic rate of interest on the outstanding liability. Subsequently, the interest element is recognised as an expense in profit or loss while the capital element is applied to reduce the outstanding liability. Operating lease payments, net of any incentives receivable, are recognised in profit or loss on a straight-line basis over the term of the lease. Hedge accounting The Group uses forward currency contracts to hedge its exposure to exchange rate movements on forecast operating expenses denominated in foreign currencies, principally the Euro and the pound sterling. Where possible, these contracts are designated as hedging instruments in cash flow hedge relationships. Changes in the fair value of such hedging instruments are recognised in other comprehensive income to the extent that the hedges are effective. Ineffective portions are recognised in profit or loss immediately. Cumulative fair value gains and losses recognised in other comprehensive income are reclassified from equity to profit or loss when the forecast cash flow occurs. All hedging relationships designated under IAS 39 as at 31 December 2017 met the criteria for hedge accounting under IFRS 9 as at 1 January 2018 and were therefore regarded as continuing hedging relationships. Hedge accounting is discontinued if we revoke the hedge relationship, when the hedging instrument expires or is sold, terminated or exercised, or when it no longer qualifies for hedge accounting. If the hedging instrument expires or is sold, terminated or exercised, or if the hedge relationship no longer meets the conditions for hedge accounting, the cumulative fair value gain or loss remains in equity until the forecast cash flow occurs. If the hedged forecast cash flow is no longer expected to occur, the cumulative fair value gain or loss is reclassified from equity to profit or loss immediately. Income taxes Current tax is the amount of tax payable or recoverable in respect of the taxable profit or loss for the period. Taxable profit differs from accounting profit because it excludes income or expenses that are recognised in the period for accounting purposes but are either not taxable or not deductible for tax purposes or are taxable or deductible in earlier or subsequent periods. Current tax is calculated using tax rates and laws that have been enacted or substantively enacted at the balance sheet date. Deferred tax is tax expected to be payable or recoverable on temporary differences between the carrying amount of an asset or liability in the financial statements and its tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available in the future against which they can be utilised. Deferred tax assets and liabilities are not recognised in respect of temporary differences arising from the initial recognition of goodwill or from the initial recognition of other assets or liabilities in a transaction other than a business combination that affects neither accounting profit nor taxable profit. Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries, except where we are able to control the reversal of the temporary difference and it is probable that it will not reverse in the foreseeable future. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply when the asset is realised or the liability is settled, based on tax rates and laws that have been enacted or substantively enacted at the balance sheet date. Dialog Semiconductor PlcAnnual report and accounts 2018106 Notes to the consolidated financial statements continued 2. Significant accounting policies continued Income taxes continued Where there is uncertainty concerning the tax treatment of an item or group of items, the amount of current and deferred tax recognised is based on management’s expectation of the likely outcome of the examination of the uncertain tax treatment by the relevant tax authorities. Uncertain tax treatments are reviewed regularly and current and deferred tax amounts are adjusted to reflect changes in facts and circumstances, such as the expiry of limitation periods for assessing tax, administrative guidance given by the tax authorities and court decisions. Current tax assets and liabilities are offset when there is a legally enforceable right to set off the amounts and management intends to settle on a net basis. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on the same taxable entity. Current tax and deferred tax is recognised in profit or loss unless it relates to an item that is recognised in the same or a different period outside profit or loss, in which case the related tax is also recognised outside profit or loss, either in other comprehensive income or directly in equity. Provisions Provisions for product warranty claims are established based on historical trends of warranty costs as a percentage of sales. Dilapidation provisions are established for the cost of restoring leasehold property to its original condition at the end of the lease. Provisions are also established for surplus leasehold property or otherwise onerous property leases. Defined contribution pension plans Contributions to defined contribution and state-funded pension plans are recognised in profit or loss in the period to which the contributions relate. Share-based compensation As described in note 29, the Company operates share-based compensation plans under which it grants options and other awards over its ordinary shares to employees of its subsidiaries. Awards granted under the existing plans are classified as equity-settled awards. We recognise a compensation expense that is based on the fair value of the awards measured at the grant date using the Black-Scholes option pricing formula or a Monte Carlo valuation model. Fair value is not subsequently remeasured unless relevant conditions attaching to the awards are modified. Fair value reflects any market performance conditions and all non-vesting conditions. Adjustments are made to the compensation expense to reflect actual and expected forfeitures due to failure to satisfy service conditions or non-market performance conditions. We recognise the resulting compensation expense on a systematic basis over the vesting period and a corresponding credit is recognised in equity. In the event of the cancellation of an option or an award by the Company or by the participating employee, the compensation expense that would have been recognised over the remainder of the vesting period is recognised immediately in profit or loss. Payroll taxes are payable in the UK and in certain other jurisdictions on the exercise or vesting of awards. Provision is made for such taxes based on the intrinsic value of the relevant awards at the balance sheet date so as to accrue for the taxes payable over the vesting period of the awards. Shares held by employee benefit trusts The Group provides finance to two trusts to purchase the Company’s ordinary shares in order to meet its obligations under its share-based compensation plans. When the trusts purchase such shares, the cost of the shares is debited to equity and subsequent sales or transfers of the shares by the trusts are accounted for within equity. Treasury shares Treasury shares comprise the Company’s ordinary shares that have been purchased under the Company’s share buyback programme and have not been subsequently sold, transferred or cancelled. Purchases made under the programme are off market and are effected by way of contingent forward share purchase contracts with third-party brokers. On inception of each tranche, a liability is recognised for the maximum cost of the shares to be purchased under the tranche and there is a corresponding debit to retained earnings. On intermediate and final settlement of purchases with the broker, the cost of the shares purchased is credited to retained earnings and debited to treasury shares within equity. On final settlement, any remaining balance of the liability is credited back to retained earnings. Subsequent sales, transfers or cancellations of treasury shares by the Company are accounted for within equity. Dialog Semiconductor PlcAnnual report and accounts 2018107 2. Significant accounting policies continued Critical accounting judgements and key sources of estimation uncertainty The preparation of financial statements requires management to make judgements and estimates that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of income and expenses during the reporting period. (a) Critical judgements in applying accounting policies Critical judgements are the judgements, apart from those involving estimations, that management has made that have had the most significant effect on amounts included in the consolidated financial statements. Product development costs Product development costs are capitalised from the time when the technical feasibility and commercial viability of the product can be demonstrated. Management is therefore required to make judgements about the technical feasibility of the product based on engineering studies and the commercial viability of the product based on expectations concerning the marketability of the product, the product’s useful life and the extent of future demand from customers. Uncertain tax treatments Uncertainty may exist concerning the tax treatment of a specific item or group of items because of, for example, uncertainty as to the meaning of tax law or to the applicability of tax law to a particular transaction or circumstance, the determination of appropriate arm’s length pricing in accordance with OECD transfer pricing principles or because the amount of current and deferred tax depends on the results of an ongoing or future examination of previously filed tax returns by the tax authorities. Where such an uncertainty exists, management is required to exercise its judgement in forming its expectation as to the likely outcome of the examination of the uncertain tax treatment by the relevant tax authorities. Due to the complexity of tax laws and their interpretation, the amount ultimately agreed with the tax authorities may differ materially from the amount of current and deferred tax recognised in the consolidated financial statements. Accordingly, the resolution of uncertain tax treatments in future periods may give rise to adjustments to the amounts of current and deferred tax assets and liabilities that may have a material consequential effect on the income tax expense recognised in future periods. (b) Key sources of estimation uncertainty Key sources of estimation uncertainty are those that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial year. Management considers that there are no key sources of estimation uncertainty underlying the measurement of the carrying amount of assets and liabilities recognised as at 31 December 2018. 3. Business combinations Year ended 31 December 2018 Consideration payable for Silego Technology Inc. Purchase price adjustment During 2018, we paid a purchase price adjustment of US$692 following the agreement with the vendors of Silego’s cash, debt and working capital levels on completion. Deferred consideration On completion of the acquisition, unvested employee options were converted into deferred cash rights and the fair value of those rights was apportioned between a deferred consideration element and a future compensation element. During 2018, we paid US$2,788 in settlement of vested deferred consideration and recognised a credit of US$204 to profit or loss in respect of forfeitures. As at 31 December 2018, we recognised a liability of US$3,173 in relation to the remaining deferred consideration that is expected to be payable over the period to March 2021. Contingent consideration Contingent consideration of up to US$30,400 was payable for the acquisition of Silego in two instalments based on Silego’s revenue for 2017 and 2018. Silego’s actual revenue for 2017 confirmed that the first instalment of US$10,000 was payable in full. In February 2018, we paid US$9,360 in settlement of the amount attributable to the shares and vested options acquired and attributed the balance of the first instalment of US$640 to the deferred cash rights. Silego’s actual revenue for 2018 showed that US$17,874 was payable in settlement of the second instalment. Since Silego’s actual revenue for 2018 was lower than our initial estimate, we recognised a credit of US$878 to profit or loss on remeasurement of the fair value of the contingent consideration. As at 31 December 2018, we recognised a liability of US$16,414 (net of discounting of US$316) for the second instalment of the contingent consideration attributable to the shares and vested options acquired and attributed the balance of the second instalment of US$1,144 to the deferred cash rights. In February 2019, we paid US$16,730 in settlement of the amount of the second instalment attributable to the shares and vested options acquired. Dialog Semiconductor PlcAnnual report and accounts 2018108 Notes to the consolidated financial statements continued 3. Business combinations continued Year ended 31 December 2017 Acquisition of Silego Technology Inc. On 1 November 2017, we completed the acquisition of 100% of the voting equity interests in Silego Technology Inc. (“Silego”), the leading provider of Configurable Mixed-Signal ICs (“CMICs”). Silego’s CMICs integrate multiple analog, logic and discrete component functionalities into a single chip. Silego’s intuitive CMIC software interface allows customers to easily configure these functions and prototype a custom IC within hours and offers considerable flexibility in design. Silego’s technology enables manufacturers to reduce board space, simplify their supply chain and reduce time-to-market. Our acquisition of Silego will complement our business by increasing our content at existing customers and expanding our customer base. Silego’s broad product portfolio will strengthen our presence in a number of markets, including the IoT, computing, industrial and automotive markets. We acquired Silego for US$276,000 on a cash and debt-free basis, subject to adjustments for cash, debt and working capital. Additional consideration of up to US$30,400 was payable contingent on Silego’s revenues for 2017 and 2018. We acquired all of Silego’s outstanding common and preferred shares, all “in the money” vested, outstanding, unexercised employee options over common shares and all “in the money” outstanding preferred share warrants. On completion, we paid initial consideration of US$290,508 in cash, including US$22,527 in respect of Silego’s estimated cash, debt and working capital levels on completion. We estimated that we would pay a purchase price adjustment of US$692 reflecting Silego’s actual cash, debt and working capital levels on completion. We paid US$34,500 of the initial consideration into an escrow fund that was available to settle any valid claims that we may have made in relation to the representations, warranties and indemnities that were provided to us by the sellers. On completion, all “in the money” outstanding, unvested employee options over common shares were converted into and became the right to receive cash payments comprising a pro rata share of the initial purchase price less their respective exercise prices, purchase price adjustments and any payments of contingent consideration. Such rights are subject to the vesting schedule and other terms (including a service condition) that governed the options that they replaced. We estimated that the acquisition date fair value of the rights was US$11,545, of which US$6,655 was attributable to employee service rendered before the acquisition date and therefore represents deferred consideration. We are recognising the balance of US$4,890, less an allowance for expected and actual forfeitures, as compensation expense on a straight-line basis over the remaining vesting period of the rights. In November 2017, we paid US$371 in relation to the accelerated vesting of the deferred cash rights in accordance with employee change of control arrangements. Contingent consideration was payable in two instalments: the first instalment of up to US$10,000 was payable in March 2018 based on Silego’s revenue for 2017 and the second instalment of up to US$20,400 was payable in March 2019 based on Silego’s revenue for 2018. At the acquisition date, we expected that the first instalment would accrue in full and that the amount of the second instalment would be in the range US$11,652 to US$20,400. Using the expected value method, we estimated that the acquisition date fair value of the contingent consideration attributable to the shares and vested options acquired was US$23,273 (net of discounting of US$2,974). Dialog Semiconductor PlcAnnual report and accounts 20183. Business combinations continued Assets acquired and liabilities assumed We allocated the purchase consideration to the identifiable assets and liabilities of Silego and goodwill as follows: Assets acquired Cash and cash equivalents Trade and other receivables Inventories Intangible assets Property, plant and equipment Deferred tax assets Other assets Total assets acquired Liabilities assumed Trade and other payables Other current liabilities Provisions Deferred tax liabilities Other non-current liabilities Total liabilities Net identifiable assets acquired Goodwill arising on acquisition Consideration Purchase consideration was satisfied by: Cash paid on completion Purchase price adjustment Initial consideration Deferred consideration Contingent consideration Consideration 109 US$000 32,439 9,957 13,866 122,156 1,481 12,907 1,484 194,290 15,586 5,794 157 41,484 906 63,927 130,363 190,765 321,128 290,508 692 291,200 6,655 23,273 321,128 Trade and other receivables were expected to be collected at their gross contractual amounts. Identifiable intangible assets acquired comprised customer relationships, developed technology and know-how and the GreenPAK™ trade name. Deferred tax assets recognised mainly represented tax loss carryforwards. Goodwill recognised on the acquisition of Silego is attributable to the further development of technology and know-how by the business in the future, the assembled workforce and future sales to new customers for its products. None of the goodwill is deductible for tax purposes. During 2017, Silego contributed US$11,391 to the Group’s revenue and a loss after tax of US$3,575. If Silego had been acquired on 1 January 2017, the Group’s revenue would have been US$72,942 higher at US$1,425,783 but it is not practicable to estimate what the Group’s profit after tax would have been because Silego did not previously prepare financial information in accordance with IFRS. We incurred transaction costs of US$4,439 in relation to the acquisition of Silego (included within general and administrative expenses). Dialog Semiconductor PlcAnnual report and accounts 2018Notes to the consolidated financial statements continued 3. Business combinations continued LED backlight business On 15 November 2017, we purchased ams AG’s LED backlight technology and product portfolio for US$9,500 in cash. As part of the transaction, we also acquired related intellectual property rights. Assets acquired We allocated the purchase consideration to the identifiable assets of the business and goodwill as follows: Assets acquired Inventories Intangible assets Total identifiable assets acquired Goodwill arising on acquisition Consideration 110 US$000 234 5,400 5,634 3,866 9,500 Identifiable intangible assets acquired comprised customer relationships and developed technology. None of the goodwill is deductible for tax purposes. We incurred transaction costs of US$100 in relation to the acquisition of this business (included in general and administrative expenses). Year ended 31 December 2016 Aborted merger with Atmel Corporation In January 2016, Atmel Corporation (“Atmel”) terminated the merger agreement that existed with Dialog. Under the terms of the agreement, Atmel paid us a termination fee of US$137,300. We recognised the termination fee as other operating income during 2016. Also during 2016, we incurred residual transaction costs of US$3,485 (recognised within general and administrative expenses) and commitment fees of US$1,913 on the borrowing facility that was arranged to finance the transaction prior to the cancellation of the facility in January 2016 (recognised within interest expense). Dyna Image Corporation In June 2016, Dialog paid the equivalent of US$647 as deferred consideration in relation to its initial investment in Dyna Image Corporation (“Dyna Image”). Years ended 31 December 2018, 2017 and 2016 Net cash outflow on the purchase of businesses was as follows: Initial consideration Purchase price adjustment Deferred consideration Consideration paid Cash and cash equivalents acquired Cash outflow on purchase of businesses, net of cash acquired 2018 US$000 – 692 2,788 3,480 – 3,480 2017 US$000 300,008 – 371 300,379 (32,439) 267,940 2016 US$000 – – 647 647 – 647 Contingent consideration of US$9,360 paid during 2018 in relation to the acquisition of Silego was below our initial estimate and is shown separately within cash flows from investing activities. Dialog Semiconductor PlcAnnual report and accounts 2018111 4. Deconsolidation of Dyna Image Corporation We acquired a 45.7% interest in Dyna Image Corporation (“Dyna Image”) in June 2015. We accounted for the investment as a business combination because we were granted a call option to acquire the shares that we did not already own in Dyna Image that we considered gave us the power to direct the activities of the entity that will significantly affect its returns. Subsequent to our initial investment, Dyna Image suffered quality problems that resulted in the loss of a major customer and gave rise to sustained operating losses. By the end of 2016, Dyna Image was in need of additional funding to enable it to pursue its recovery plan. We agreed with our fellow shareholders to seek a new investor in the business and, in the meantime, that certain of the existing shareholders would inject new capital into the business. In January 2017, we participated in a new issue of shares by Dyna Image. We invested the equivalent of US$1,893. As a result of the share issue, our shareholding in Dyna Image increased from 45.7% to 48.5%. We reflected the increase in our shareholding as a transfer of US$361 within equity from non-controlling interests to retained earnings. During 2017, Dyna Image continued to seek new investment but its operating results fell considerably short of the level envisaged in its recovery plan. In December 2017, negotiations with a potential investor were terminated and the shareholders in Dyna Image decided that it should be gradually wound down in a way that will safeguard the interests of its creditors. As a consequence of this decision, we recognised impairment losses totalling US$4,327 in relation to the intangible assets and property, plant and equipment held by Dyna Image (within other operating expenses). We also derecognised deferred tax assets of US$543 that were no longer considered to be recoverable. We did not consider that the carrying amount of the goodwill attributable to Dyna Image was impaired because it was covered by the recoverable amounts of the operating segments to which it had been allocated on acquisition. We also reviewed the call option over the non-controlling interests in Dyna Image. We observed that the fair value of each share in Dyna Image has fallen significantly and irretrievably below the minimum exercise price of the option. We concluded that there existed an economic barrier to our exercising the option prior to its expiry in June 2018 that was so great that the option no longer gives us power over Dyna Image. We considered that this loss of control occurred during December 2017 and therefore we deconsolidated Dyna Image with effect from 31 December 2017. At the end of 2017, we recognised a loss of US$5,597 on the deconsolidation of Dyna Image that was determined as follows: Assets derecognised Cash and cash equivalents Trade and other receivables Inventories Other current assets Goodwill Total assets derecognised Liabilities derecognised Trade and other payables Other current liabilities Total liabilities derecognised Net assets derecognised Currency translation gain transferred from equity Non-controlling interests Fair value of remaining interest Loss on deconsolidation We included the loss on deconsolidation of Dyna Image within other operating expenses. US$000 420 1,428 3,542 426 6,907 12,723 2,958 590 3,548 9,175 (1,144) (1,334) (1,100) 5,597 Dialog Semiconductor PlcAnnual report and accounts 2018Notes to the consolidated financial statements continued 112 5. Operating profit a) Revenue Revenue may be analysed as follows: Sale of goods – Sales direct to end customers – Sales to distributors Royalties Total 2018 US$000 2017 US$000 2016 US$000 1,144,371 296,598 1,169 1,442,138 1,156,451 195,364 1,026 1,352,841 1,023,465 173,063 1,083 1,197,611 Revenue from research and development contracts is included in other operating income. b) Operating expenses Operating profit is stated after charging/(crediting): Cost of inventories included in cost of sales Write-down of inventories Research and development costs expensed as incurred Government incentives (deducted from research and development expenses) Depreciation of property, plant and equipment Loss on disposal of fixed assets Amortisation of intangible assets Operating lease rentals Integration costs Acquisition-related costs Corporate transaction costs Amortisation of intangible assets was allocated as follows: Cost of sales Selling and marketing expenses General and administrative expenses Research and development expenses Total 2018 US$000 702,078 5,643 331,550 (5,241) 31,455 923 49,130 12,450 2,765 – 11,346 2018 US$000 592 14,231 2,348 31,959 49,130 * Certain product development costs have been reclassified from cost of sales to research and development expenses (see note 1). c) Other operating income/(expense) Other operating income/(expense) comprised: Revenue from research and development contracts Change in estimate of contingent consideration Impairment of non-current assets held by Dyna Image (notes 15 & 16) Loss on deconsolidation of Dyna Image (note 4) Atmel termination fee (note 3) Total 2018 US$000 2,298 878 – – – 3,176 2017* US$000 663,216 1,288 310,201 (7,188) 30,807 591 41,969 10,153 2,305 4,539 – 2017* US$000 701 9,126 2,170 29,972 41,969 2017 US$000 346 – (4,327) (5,597) – (9,578) 2016* US$000 592,527 4,375 268,367 (7,089) 27,868 1,569 35,949 9,797 – – 3,485 2016* US$000 892 7,779 2,018 25,260 35,949 2016 US$000 408 – – – 137,300 137,708 Dialog Semiconductor PlcAnnual report and accounts 20186. Employee information Employment costs were as follows: Wages and salaries Social security costs Share-based compensation Compensation element of deferred cash rights Pension costs from defined contribution plans Total 113 2018 US$000 224,908 31,051 41,153 1,481 12,609 311,202 2017 US$000 200,222 26,457 35,319 1,409 11,058 274,465 2016 US$000 167,090 24,932 28,167 – 10,154 230,343 Pension costs from defined contribution plans include costs for the state funded pension plan in Germany of US$3,853 (2017: US$3,599; 2016: US$3,400). Compensation of key management personnel is set out in note 34. The average number of persons employed by the Group (including the Executive Director) during the year, analysed by category, was as follows: Research and development Production Sales and marketing Administration Information technology Total 7. Auditor’s remuneration Fees payable to the Company’s auditors, Deloitte LLP, were as follows: Assurance services Audit of the parent company and consolidated financial statements Audit of subsidiaries Other assurance services Other services Services related to corporate finance transactions Total 2018 1,371 184 272 200 59 2,086 2017 1,256 172 239 185 55 1,907 2016 1,130 176 235 167 46 1,753 2018 US$000 2017 US$000 2016 US$000 629 423 150 – 1,202 560 370 202 478 1,610 280 320 244 – 844 Dialog Semiconductor PlcAnnual report and accounts 2018Notes to the consolidated financial statements continued 114 8. Finance income/(expense) a) Interest income Interest on bank deposits Interest on money market funds Other interest income Total b) Interest expense Interest on receivables financing facilities Interest on finance leases and hire purchase contracts Facility commitment fees Amortisation of deferred facility arrangement costs Unwinding of discount on contingent consideration (note 3) Unwinding of discount on provisions (note 23) Other interest expense Total 2018 US$000 5,619 4,189 75 9,883 2018 US$000 – (50) (452) (315) (2,220) (70) (27) (3,134) 2017 US$000 3,556 2,423 16 5,995 2017 US$000 – (289) (194) (151) (436) (60) (172) (1,302) 2016 US$000 3,073 584 8 3,665 2016 US$000 (850) (560) (1,913) – – (110) (14) (3,447) During 2017, we incurred arrangement costs of US$988 in relation to the Group’s US$150 million revolving credit facility and are amortising those costs over the initial three-year period to maturity of the facility in July 2020. Facility commitment fees incurred during 2016 related to the borrowing facility that was arranged to finance the proposed merger with Atmel prior to the cancellation of the facility in January 2016. c) Other finance (expense)/income Currency translation (loss)/gain, net Fair value (loss)/gain on Energous warrants (note 17) Amortisation of gain on initial measurement of Energous warrants (note 17) Loss on sale of Arctic Sand shares Fair value loss on Dyna call option Total 2018 US$000 (994) (10,853) 1,584 – – (10,263) 2017 US$000 1,695 941 776 (177) (142) 3,093 2016 US$000 (6,017) 1,929 – – (731) (4,819) Dialog Semiconductor PlcAnnual report and accounts 2018115 9. Income taxes Income tax recognised in profit or loss The components of the Group’s income tax expense for the year were as follows: Current tax United Kingdom Foreign Deferred tax United Kingdom Foreign Income tax expense Current tax Current income tax charge Adjustments in respect of prior years Deferred tax Origination and reversal of temporary differences Recognition of previously unrecognised deferred tax assets Movement in deferred tax balances following intra-group reorganisation Movement in deferred tax balances following US tax rate change Adjustments in respect of prior years Income tax expense 2018 US$000 2017 US$000 2016 US$000 (15,896) (33,633) (321) (5,431) (55,281) 379 (33,884) 1,315 6,821 (25,369) (10,171) (36,127) (549) (243) (47,090) 2018 US$000 2017 US$000 2016 US$000 (45,587) (3,942) (38,643) 5,138 (46,993) 695 (4,663) – (1,920) – 831 (6,353) 9,655 1,977 6,658 (3,801) (3,922) – 808 – 2,322 (55,281) (25,369) (47,090) During 2014, we recognised a non-cash deferred tax credit of US$17,759 resulting from an intra-group reorganisation of certain Intellectual Property that was acquired with iWatt, Inc., which reduced the amount of the related deferred tax liabilities. We recognised further deferred tax credits of US$808 in 2016 and US$1,977 in 2017 and a deferred tax charge of US$1,920 in 2018 that related to the ongoing impact of the reorganisation on the deferred tax balances. Dialog Semiconductor PlcAnnual report and accounts 2018116 Notes to the consolidated financial statements continued 9. Income taxes continued Factors affecting the income tax expense for the year The Group’s income tax expense differed from the amount that would have resulted from applying the statutory rate of corporation tax in the UK to the Group’s profit before income taxes for the reasons shown in the following table: Profit before income taxes Income tax expense at UK corporation tax rate of 19.0% (2017: 19.25%; 2016: 20.0%) Effect of different foreign tax rates Non-taxable income: – Atmel termination fee – Other non-taxable income Non-deductible expenses: – Transaction costs – Non-deductible portion of share-based compensation – Other non-deductible expenses Tax benefit from share-based compensation Tax impact of deconsolidation of Dyna Image Corporation Tax benefit from Intellectual Property and research and development incentives Write-down of previously recognised deferred tax assets Benefit from previously unrecognised deferred tax assets Additional tax losses for which no deferred tax asset is recognised Movement in deferred tax balances following intra-group reorganisation Differences arising from different functional and tax currencies Tax benefit from US tax rate change Adjustments in respect of prior years Other items 2018 US$000 196,193 (37,277) (6,656) 2017 US$000 194,803 (37,500) (12,569) 2016 US$000 305,206 (61,041) (15,434) – 39 (1,131) (9,336) (3,232) 1,997 – 8,633 (1,015) 70 (117) (1,920) (2,065) – (3,111) (160) – – 27,460 240 – (9,396) (2,764) 3,658 (1,938) 6,576 (543) 9,655 (568) 1,977 9,576 6,658 1,337 472 (697) (7,614) (3,068) 4,871 – 8,728 – – (1,321) 808 (2,976) – 3,020 (66) Income tax expense (55,281) (25,369) (47,090) The Group’s income tax expense for 2018 was US$55,281 (2017: US$25,369; 2016: US$47,090), an effective tax rate for the year of 28.2% (2017: 13.0%; 2016: 15.4%). Our effective tax rate is sensitive to the geographic mix of the Group’s profits and reflects a combination of different tax rates in different countries, in particular higher tax rates in Germany and, in prior years, in the US. Our effective tax rate can also be affected by changes in tax legislation and tax rates, the impact of acquisitions, disposals and restructuring and currency exchange rate movements, which give rise to tax effects where an entity’s functional currency differs from the currency in which it is required to calculate and pay income taxes. Our effective tax rate is reduced because a large proportion of Dialog’s research and development activities are undertaken in the UK and the Netherlands and we are therefore able to benefit from the UK and Netherlands tax regimes that provide incentives for innovation. Our income tax expense for 2018 includes a charge of US$2,820 (2017: credit of US$1,465) resulting from the finalisation of prior year tax items with tax authorities. Our low effective tax rate for 2017 reflected a non-cash deferred tax credit of US$6,658 resulting from US tax reform and a credit of US$19,231 due to the tax effects of unpredictable currency exchange rate movements. Our low effective tax rate for 2016 reflected the tax treatment of the Atmel termination fee of US$137,300. We obtained tax advice that the termination fee should not be taxable in the UK. We therefore concluded that no tax liability should arise and did not recognise a tax expense in relation to the termination fee. Dialog Semiconductor PlcAnnual report and accounts 2018117 9. Income taxes continued Factors affecting the income tax expense in future years Factors that may affect the Group’s future tax expense include foreign exchange rate movements, changes in tax legislation and tax rates, the impact of acquisitions, disposals and restructuring and the resolution of open issues with tax authorities. From 2018, the application to Dialog of the UK tax regime that provides incentives for innovation has changed, resulting in a limit to the benefits available by reference to the location of Dialog’s research and development activities. Given the global nature of Dialog’s research and development activities, this may also affect the Group’s future tax expense. On 11 October 2018, we announced that we have entered into an agreement with Apple Inc, (“Apple”) to license our power management technologies and transfer to Apple certain assets and over 300 employees from our design centres in the UK, Germany and Italy. The transaction is expected to complete in the first half of 2019, subject to applicable regulatory approvals and other customary closing conditions. Completion of the transaction may affect the geographic mix of the Group’s profits and the location of its research and development activities, both of which may have an impact on the Group’s future tax expense. We continue to review and assess the potential impact of this transaction. The Group maintains provisions for potential tax liabilities where uncertainty exists concerning the amount of current or deferred tax recognised. Due to the complexity of tax laws and their interpretation, the amounts ultimately agreed with tax authorities in respect of these uncertainties may differ materially from the amounts provided and may therefore affect the Group’s income tax expense in future periods. International tax reform remains a key focus of attention, including the OECD’s Base Erosion & Profit Shifting project, the EU’s action plan for fair and efficient corporate taxation and US tax reform. We continually monitor developments and assess the potential impact for Dialog of such initiatives. We have concluded that current or announced future tax law changes as a result of such initiatives give rise to no changes to the principal risks for Dialog. Income tax recognised outside profit or loss Income tax recognised in other comprehensive income was as follows: Items that may be reclassified to profit or loss Currency translation differences on foreign operations: – Current tax (expense)/credit – Deferred tax expense Equity investments: – Deferred tax credit/(expense) Cash flow hedges: – Current tax credit/(expense) – Deferred tax expense Income tax credited/(charged) to other comprehensive income Income tax recognised directly in equity was as follows: Share-based compensation: – Current tax credit – Deferred tax credit/(expense) Total tax credited directly to equity Deferred tax Analysis of movement in the net deferred tax balance during the year: As at 31 December 2016 Exchange movements Recognised in income Recognised in other comprehensive income Recognised in equity Acquisitions As at 31 December 2017 Exchange movements Recognised in income Recognised in other comprehensive income Recognised in equity Transfer to current tax As at 31 December 2018 2018 US$000 2017 US$000 2016 US$000 (78) – 180 – 1,015 (1,015) 2,376 – 3,313 (3,149) – (3,984) – (47) – 1,890 (1,125) 718 2018 US$000 2017 US$000 2016 US$000 281 64 345 1,859 (839) 1,020 2,544 522 3,066 US$000 25,409 319 8,136 (1,015) (839) (28,576) 3,434 (77) (5,752) 1,015 64 (608) (1,924) Dialog Semiconductor PlcAnnual report and accounts 2018118 Notes to the consolidated financial statements continued 9. Income taxes continued Deferred income tax assets and liabilities, before offset of balances within countries, are as follows: Temporary differences relating to intangible assets Temporary differences relating to share-based compensation Temporary differences relating to licence royalties Other temporary differences Deferred taxes in relation to tax credits Net operating loss carryforwards Total Amount (charged)/credited to profit or loss Net recognised deferred tax (liability)/asset 2018 US$000 3,388 (580) – (1,077) 1,899 (9,382) (5,752) As at 31 December 2018 US$000 (23,526) 6,369 – (473) 11,622 4,084 As at 31 December 2017 US$000 (26,585) 6,885 – (662) 10,331 13,465 (1,924) 3,434 2017 US$000 21,102 (4,539) 3,312 4,583 1,733 (18,055) 8,136 Deferred tax assets and liabilities are analysed in the consolidated balance sheet, after offset of balances within countries, as follows: Deferred tax assets Deferred tax liabilities Recognised net deferred tax (liabilities)/assets Tax loss carryforwards, temporary differences and net deferred tax assets are summarised as follows: As at 31 December 2018 US$000 6,034 (7,958) As at 31 December 2017 US$000 7,451 (4,017) (1,924) 3,434 Germany United Kingdom Netherlands USA Other Total As at 31 December 2018 As at 31 December 2017 Tax loss carryforwards US$000 – 10,016 7,269 15,459 12,649 Temporary differences US$000 (1,015) 13,048 960 (76,739) 4,466 Net deferred tax (liabilities)/assets US$000 (288) 2,173 2,014 (2,227) (3,596) Tax loss carryforwards US$000 – 10,638 13,208 48,229 13,394 45,393 (59,280) (1,924) 85,469 Temporary differences US$000 4,768 7,160 (272) (108,755) 3,574 (93,525) Net deferred tax assets/(liabilities) US$000 1,353 2,125 3,234 673 (3,951) 3,434 In assessing whether the deferred tax assets can be used, management considers the probability that some, or all, of the deferred tax assets will not be realised. The utilisation of deferred tax assets depends upon generating taxable profit during the periods in which those temporary differences become deductible or tax-loss carryforwards can be utilised. Management considers the reversal of deferred tax liabilities, projected future taxable income, benefits that could be realised from available tax planning strategies and other positive and negative factors in making this assessment. As at 31 December 2018, deferred tax assets were not recognised for tax loss carryforwards of US$27,330 (2017: US$22,726), temporary differences of US$53 (2017: US$849) and tax credits of US$5,781 (2017: US$4,859) in respect of which there is expected to be insufficient future taxable profit and therefore utilisation is not probable. Unrecognised tax loss carryforwards and temporary differences of US$10,069 (2017: US$5,516) have no expiration date. Tax loss carryforwards in the US of US$4,665 (2017: US$4,665) expire between 2018 and 2025. Tax losses in Taiwan of US$12,649 (2017: US$13,394) expire between 2023 and 2026. The tax credits expire between 2021 and 2038. Deferred tax liabilities have not been recognised in respect of undistributed earnings of subsidiaries because no liability is expected to arise on distribution under applicable tax legislation or because the Group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future. Dialog Semiconductor PlcAnnual report and accounts 2018119 10. Earnings per share Basic earnings per share amounts are calculated by dividing the profit for the year attributable to holders of ordinary shares in the Company by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the profit attributable to holders of ordinary shares in the Company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued if all the securities or other contracts to issue ordinary shares were exercised. Profit attributable to shareholders in the Company and the weighted average number of ordinary shares for calculating basic and diluted earnings per share were calculated as follows: Profit attributable to shareholders in the Company For calculating basic and diluted earnings per share Weighted average number of ordinary shares Shares in issue at the beginning of the period Effect on average number of shares during the period: – Shares issued to employee benefit trust – Cancellation of treasury shares Average number of shares in issue during the period Deduct: – Average number of shares held by employee benefit trusts – Average number of treasury shares For calculating basic earnings per share Add: – Average number of dilutive share options and awards For calculating diluted earnings per share Earnings per share (US$) Basic Diluted 2018 US$000 2017 US$000 2016 US$000 a 139,799 173,916 260,940 76,382,139 77,865,955 77,865,955 – – 76,382,139 2,350,000 (2,329,093) 77,886,862 – – 77,865,955 (2,422,787) – 73,959,352 (2,061,901) (1,352,891) 74,472,070 (1,296,216) (523,135) 76,046,604 3,695,214 77,654,566 4,139,123 78,611,193 4,351,328 80,397,932 1.89 1.80 2.34 2.21 3.43 3.25 b c a/b a/c During 2018, the average number of anti-dilutive share options outstanding was 830,300 (2017: 375,041; 2016: 423,760). 11. Cash and cash equivalents Cash and cash equivalents were as follows: Cash at bank Cash held by employee benefit trusts Cash available from receivables financing facilities Bank deposits Money market funds Total As at 31 December 2018 US$000 3,920 2,829 96,099 325,000 250,000 677,848 As at 31 December 2017 US$000 7,794 1,151 145,100 100,000 225,250 479,295 Short-term deposits are made for varying periods of up to three months. As at 31 December 2018 and 2017, no amounts had been drawn from the cash available from receivables financing facilities. Dialog Semiconductor PlcAnnual report and accounts 2018Notes to the consolidated financial statements continued 120 12. Trade and other receivables Trade and other receivables were as follows: Trade accounts receivable Retentions under receivables financing facilities Total As at 31 December 2018 US$000 98,234 16,280 As at 31 December 2017 US$000 51,959 26,227 114,514 78,186 Trade accounts receivable are generally on 30 to 60-day credit terms. Trade accounts receivable are regularly reviewed for collectability and an allowance is established for doubtful accounts against which receivables are written-off when they are no longer considered to be collectable. Movements on the allowance for doubtful accounts were as follows: At the beginning of the year Allowances charged to profit or loss Utilised for write-offs Releases credited to profit or loss At the end of the year 13. Inventories Inventories were as follows: Raw materials Work in progress Finished goods Total 2018 US$000 101 – (68) (12) 21 2017 US$000 118 33 (11) (39) 101 As at 31 December 2018 US$000 36,579 48,416 64,741 149,736 As at 31 December 2017 US$000 12,301 59,704 96,942 168,947 Dialog Semiconductor PlcAnnual report and accounts 201814. Goodwill Movements on goodwill during the years ended 31 December 2018 and 2017 were as follows: At the beginning of the year Acquisition of Silego (note 3) Acquisition of ams’s LED backlight business (note 3) Deconsolidation of Dyna Image (note 4) Effect of movements in foreign currency At the end of the year 2018 US$000 439,508 – – – – 439,508 Goodwill is monitored by management at the level of the Group’s operating segments and is therefore allocated at that level. As at 31 December 2018 and 2017, goodwill was allocated to operating segments as follows: Mobile Systems Connectivity Advanced Mixed Signal Total 121 2017 US$000 251,208 190,765 3,866 (6,907) 576 439,508 US$000 107,163 88,198 244,147 439,508 Impairment tests carried out during the year Goodwill is tested for impairment annually and whenever there is an indication that it may be impaired. Goodwill is tested for impairment at the level of the operating segments to which it is allocated. Goodwill is impaired if the carrying amount of the operating segment to which it is allocated exceeds its recoverable amount. In conducting impairment tests of goodwill during 2018, we measured the recoverable amount of each operating segment to which goodwill is allocated on a value in use basis. Value in use represents the present value of the future cash flows that we estimate will be generated by the assets allocated to each operating segment in their current use and condition. Expected future cash flows in the first three years were forecast based on the Group’s Strategic Plan. Cash flows beyond the third year were estimated by applying a perpetuity growth factor to the forecast cash flow in the third year. We consider that the key assumptions used in determining value in use are the expected compound annual growth of revenue during the forecast period, the perpetuity growth rate and the discount rate. Expected future revenue of each operating segment is based on external forecasts of the future volume of the end-markets for the operating segment’s products adjusted to reflect factors specific to the operating segment such as its customer base and available distribution channels, the possibility of new entrants to the market and future technological developments. Cash flows during the forecast period also reflect the cost of materials and other direct costs, research and development expenditure and selling, general and administrative expenses. We estimated the cost of materials and other direct and indirect costs based on current prices and market expectations of future price changes. We applied a perpetuity growth rate of 2% per annum in estimating the future cash flows of each operating segment in both 2018 and 2017, which we consider to be the long-term growth rate in the demand for the products of each operating segment in its end-markets. Discount rates applied to the cash flow projections were determined using a capital asset pricing model and reflected current market interest rates, relevant equity and size risk premiums and the risks specific to the operating segment concerned. Pre-tax discount rates used were as follows: Mobile Systems 12.7% (2017: 12.2%); Connectivity 14.2% (2017: 13.6%); and Advanced Mixed Signal 13.5% (2017: 11.0%). We did not recognise any goodwill impairment during 2018 and the recoverable amount of each operating segment to which goodwill is allocated was comfortably in excess of its carrying amount. Dialog Semiconductor PlcAnnual report and accounts 2018122 Notes to the consolidated financial statements continued 15. Other intangible assets Movements on other intangible assets for the years ended 31 December 2018 and 2017 were as follows: Cost As at 31 December 2016 Acquisition of businesses Additions Reclassifications Disposals Deconsolidation of assets held by Dyna Image (note 4) Effect of movements in foreign currency As at 31 December 2017 Additions Reclassifications Transfer to assets held for sale Disposals Effect of movements in foreign currency As at 31 December 2018 Amortisation and impairment losses As at 31 December 2016 Amortisation charge for the period Disposals Impairment of assets held by Dyna Image (note 4) Deconsolidation of Dyna Image (note 4) Effect of movements in foreign currency As at 31 December 2017 Amortisation charge for the period Transfer to assets held for sale Disposals Effect of movements in foreign currency As at 31 December 2018 Net book value As at 31 December 2017 As at 31 December 2018 Acquired customer-related intangible assets US$000 Purchased software, licences and other US$000 77,075 95,800 – – – – – 172,875 – – – – – 172,875 (40,596) (8,856) – – – – (49,452) (13,647) – – – (63,099) 123,423 109,776 72,679 4,028 3,506 (34) (182) (243) 35 79,789 3,642 (105) (3) (693) (13) 82,617 (56,706) (8,410) 22 (100) 243 (15) (64,966) (6,015) 3 680 8 (70,290) 14,823 12,327 Product development assets US$000 138,726 27,473 21,027 – – (5,819) 486 181,893 24,771 – – (123) – 206,541 (75,078) (22,884) – (2,690) 5,819 (307) (95,140) (27,328) – 103 – (122,365) Total US$000 305,990 127,556 27,187 – (194) (6,062) 521 454,998 31,216 – (296) (874) (13) 485,031 (180,371) (41,969) 29 (2,790) 6,062 (322) (219,361) (49,130) 81 816 8 (267,586) 86,753 84,176 235,637 217,445 Patents US$000 17,510 255 2,654 34 (12) – – 20,441 2,803 105 (293) (58) – 22,998 (7,991) (1,819) 7 – – – (9,803) (2,140) 78 33 – (11,832) 10,638 11,166 Impairment of assets held by Dyna Image As explained in note 4, in December 2017, it was decided to wind down the operations of Dyna Image. As a consequence of this decision, the carrying amount of the intangible assets held by Dyna Image ceased to be recoverable. We therefore reduced the carrying amount of those assets to nil and recognised a corresponding impairment loss of US$2,790. Assets held under hire purchase contracts As at 31 December 2018, the carrying amount of intangible assets held under hire purchase contracts was US$ nil (2017: US$1,840). Dialog Semiconductor PlcAnnual report and accounts 2018123 Total US$000 252,643 1,481 45,167 – (4,333) (2,982) 1,173 293,149 26,145 – (19,566) (3,191) (748) 295,789 (182,975) (30,807) 3,626 (1,537) 2,982 (568) (209,279) (31,455) 8,797 2,052 455 (229,430) 16. Property, plant and equipment Movements on property, plant and equipment for the years ended 31 December 2018 and 2017 were as follows: Test equipment US$000 Leasehold improvements US$000 Office and other equipment US$000 Construction in progress US$000 Cost As at 31 December 2016 Acquisition of businesses Additions Reclassifications Disposals Deconsolidation of assets held by Dyna Image (note 4) Effect of movements in foreign currency As at 31 December 2017 Additions Reclassifications Transfer to assets held for sale Disposals Effect of movements in foreign currency As at 31 December 2018 Depreciation and impairment losses As at 31 December 2016 Depreciation charge for the period Disposals Impairment of assets held by Dyna Image (note 4) Deconsolidation of Dyna Image (note 4) Effect of movements in foreign currency As at 31 December 2017 Depreciation charge for the period Transfer to assets held for sale Disposals Effect of movements in foreign currency As at 31 December 2018 Net book value As at 31 December 2017 As at 31 December 2018 149,999 367 25,915 63 (1,566) (2,709) 417 172,486 8,250 187 (3,080) (699) (109) 177,035 (118,918) (14,614) 1,560 (1,347) 2,709 (209) (130,819) (14,989) 1,023 577 127 (144,081) 41,667 32,954 21,901 118 2,605 172 (1,343) – 174 23,627 4,050 2,008 (6,371) (405) (115) 22,794 (11,612) (4,064) 1,198 – – (93) (14,571) (3,363) 1,202 400 42 (16,290) 9,056 6,504 79,439 651 12,881 393 (1,365) (113) 571 92,457 12,107 1,335 (10,085) (1,401) (524) 93,889 (52,445) (12,129) 868 (30) 113 (266) (63,889) (13,103) 6,572 1,075 286 (69,059) 28,568 24,830 1,304 345 3,766 (628) (59) (160) 11 4,579 1,738 (3,530) (30) (686) – 2,071 – – – (160) 160 – – – – – – – Impairment of assets held by Dyna Image As explained in note 4, in December 2017, it was decided to wind down the operations of Dyna Image. As a consequence of this decision, the carrying amount of the property, plant and equipment held by Dyna Image ceased to be recoverable. We therefore reduced the carrying amount of those assets to nil and recognised a corresponding impairment loss of US$1,537. 4,579 2,071 83,870 66,359 Dialog Semiconductor PlcAnnual report and accounts 2018Notes to the consolidated financial statements continued 124 17. Investments Investments were as follows: Investment in associate Other investments Equity investments: – Energous shares Derivative financial instruments: – Energous warrants Total other investments Total investments Investment in associate As at 31 December 2018 US$000 – As at 31 December 2017 US$000 1,100 10,073 33,837 1,465 11,538 11,538 12,318 46,155 47,255 As at 31 December 2018, the Group held a 48.5% ownership interest in Dyna Image Corporation (“Dyna Image”), which is an entity whose principal place of business and country of incorporation is Taiwan. As explained in note 4, Dyna Image was formerly accounted for as a subsidiary but the Company lost the power to direct its relevant activities in December 2017 and it was deconsolidated with effect from 31 December 2017. On deconsolidation, the Group’s investment in Dyna Image was measured at its fair value of US$1,100, which equated to the Group’s share of the carrying amount of Dyna Image’s net assets. Dyna Image is now accounted for as an associate using the equity method. During 2018, Dyna Image continued to make losses. We recognised our share of those losses in profit or loss until the carrying amount of our investment was reduced to nil during the fourth quarter of 2018. During early 2018, the shareholders in Dyna Image were approached by a potential acquirer of the business. On 7 December 2018, each of the shareholders in Dyna Image entered into an agreement to dispose of their respective interests in a transaction that is expected to complete in the first half of 2019, subject to applicable regulatory approvals. Accordingly, we have reclassified the Group’s investment in Dyna Image as an asset held for sale at its carrying amount of nil. We expect to receive consideration of between US$2.4 million and US$5.0 million in exchange for our shareholding in Dyna Image. Other investments Energous shares and warrants Energous Corporation (“Energous”) is the developer of WattUp®, a wire-free charging technology. In November 2016, we entered into a strategic alliance with Energous. At that time, we subscribed for 763,552 common shares in Energous and were granted warrants to purchase up to 763,552 common shares that are exercisable in full or in part on a cashless basis at any time between May 2017 and November 2019. We initially recognised the warrants at their grant date fair value of US$4,695 and an equivalent deferred credit within non-current liabilities. We will amortise the deferred credit to profit or loss in relation to the royalties that may be payable for the use of Energous’ Intellectual Property over the initial seven-year term of the strategic alliance. Amortisation of the deferred credit has not yet commenced. On 5 July 2017, we subscribed for a further 976,139 common shares in Energous at a cost of US$15,000 and were granted a second tranche of warrants to purchase up to 654,013 common shares that are exercisable in full or in part on a cashless basis at any time between January 2018 and July 2020. We initially recognised the second tranche of the warrants at their grant date fair value of US$4,753 and an equivalent deferred credit within non-current liabilities. We are amortising the deferred credit to profit or loss over the three-year period from the grant date to the expiry of the warrants. During 2018, we recognised a fair value loss on the shares of US$23,764 (2017: gain of US$5,971) in other comprehensive income and recognised a fair value loss of US$10,853 (2017: gain of US$941) on the warrants in profit or loss (as other finance (expense)/income). Also during 2018, we recognised a credit of US$1,584 (2017: credit of US$776) in profit or loss on the amortisation of the fair value on initial recognition of the second tranche of the warrants (as other finance income). 18. Other financial assets Other financial assets were as follows: Current Currency derivatives in designated hedging relationships Non-current Rental and other deposits Total As at 31 December 2018 US$000 As at 31 December 2017 US$000 202 6,649 1,807 2,009 2,090 8,739 Dialog Semiconductor PlcAnnual report and accounts 201819. Other assets Other assets were as follows: Current Prepaid expenses Other tax receivables Deferred facility arrangement costs Other assets Total current Non-current Deferred facility arrangement costs Total 125 As at 31 December 2018 US$000 As at 31 December 2017 US$000 6,720 1,787 250 9,549 18,306 398 18,704 6,810 3,904 319 3,623 14,656 503 15,159 20. Assets classified as held for sale Transfer of design centre assets to Apple Inc. On 11 October 2018, we entered into an agreement with Apple Inc. (“Apple”) to license our power management technologies and transfer to Apple certain assets and over 300 employees from our design centres in the UK, Germany and Italy. Apple will pay US$300 million for the licence and asset transfers. The transaction is expected to complete in the first half of 2019, subject to applicable regulatory approvals and other customary closing conditions. Accordingly, we have reclassified as held for sale the design centre assets that will be transferred to Apple and the liabilities that are directly associated with them. Design centre assets that will be transferred to Apple are included in the Mobile Systems operating segment. We expect that the carrying amount of the assets will be recovered in full by the transfer proceeds. Assets held for sale and directly associated liabilities were as follows: Assets held for sale Other current assets Other intangible assets Property, plant and equipment Liabilities directly associated with assets held for sale Trade and other payables Income taxes payable Other current liabilities Provisions Investment in associate As at 31 December 2018 US$000 311 215 10,769 11,295 100 63 1,721 1,283 3,167 As explained in note 17, the Group’s investment in Dyna Image Corporation was also classified as held for sale as at 31 December 2018 but had a carrying amount of nil. 21. Trade and other payables Trade and other payables were as follows: Trade accounts payable Other payables Total As at 31 December 2018 US$000 105,039 17,101 122,140 As at 31 December 2017 US$000 90,025 17,170 107,195 Trade accounts payable are non-interest bearing and are normally settled on 30 to 70-day terms. Other payables are non-interest bearing and have a term of less than three months. Dialog Semiconductor PlcAnnual report and accounts 2018Notes to the consolidated financial statements continued 126 22. Other financial liabilities Other financial liabilities were as follows: Current Finance lease and hire purchase obligations Currency derivatives in designated hedging relationships Currency derivatives hedging share buyback obligation Deferred consideration Contingent consideration Share buyback obligation Total current Non-current Deferred consideration Contingent consideration Total non-current Total Future minimum payments under finance leases and hire purchase obligations are as follows: Within one year Between one and two years Total minimum payments Less: future finance charges Present value of minimum payments Changes in liabilities arising from financing activities were as follows: As at 31 December 2015 Additions Releases Changes in fair value Changes in currency exchange rates Changes from financing cash flows As at 31 December 2016 Additions Releases Changes in fair value Changes in currency exchange rates Changes from financing cash flows As at 31 December 2017 Additions Changes in fair value Changes in currency exchange rates Changes from financing cash flows As at 31 December 2018 2018 US$000 – – – – – Derivatives hedging share buyback obligation US$000 – – – 4,250 – (1,186) 3,064 – – (4,291) – 1,227 – – 301 – – 301 Finance lease and hire purchase obligations US$000 8,596 1,172 – – – (3,834) 5,934 – – – – (4,283) 1,651 – – – (1,651) – Share buyback obligation US$000 – 139,501 (15,313) – (1,643) (61,472) 61,073 79,407 (18,469) – 3,024 (125,035) – 171,173 – 590 – 171,763 As at 31 December 2018 US$000 As at 31 December 2017 US$000 – 6,080 301 2,332 16,414 171,763 196,890 841 – 841 197,731 Minimum payments 1,651 97 – 5,456 8,837 – 16,041 2,506 14,872 17,378 33,419 2017 US$000 1,701 – 1,701 (50) 1,651 Total US$000 8,596 140,673 (15,313) 4,250 (1,643) (66,492) 70,071 79,407 (18,469) (4,291) 3,024 (128,091) 1,651 171,173 301 590 (1,651) 172,064 Dialog Semiconductor PlcAnnual report and accounts 2018127 23. Provisions Movements on provisions were as follows: As at 31 December 2016 Acquisition of businesses Additions charged to profit or loss Utilised during the year Releases credited to profit or loss Unwinding of discount Currency translation differences As at 31 December 2017 Additions charged to profit or loss Utilised during the year Releases credited to profit or loss Unwinding of discount Transfer to held for sale Currency translation differences As at 31 December 2018 Product warranties US$000 1,104 76 1,285 (1,011) (9) – – 1,445 2,629 (1,361) – – – – 2,713 Leasehold property US$000 2,618 – 985 (159) (59) 60 180 3,625 462 (808) (121) 70 – (106) 3,122 Legal claims US$000 – – 750 – – – – 750 394 (220) (30) – – – 894 Contractual severance US$000 753 – 202 – – – 99 1,054 1,985 (107) – – (1,283) (47) 1,602 Other provisions US$000 372 100 95 (220) (23) – 1 325 – (308) – – – (17) – Total US$000 4,847 176 3,317 (1,390) (91) 60 280 7,199 5,470 (2,804) (151) 70 (1,283) (170) 8,331 Provisions are presented in the Group’s balance sheet as follows: Current liabilities Non-current liabilities Total As at 31 December 2018 US$000 5,253 3,078 8,331 As at 31 December 2017 US$000 3,474 3,725 7,199 Product warranties Dialog provides contractual product warranties under which it guarantees the performance of its products. Product warranty provisions are based on historical warranty data and are expected to be utilised within one year of the balance sheet date. Leasehold property Leasehold property provisions include dilapidation provisions for the costs of restoring leasehold properties to their original condition at the end of the lease and provisions for onerous leases. Leasehold property provisions will be utilised over the remaining terms of the relevant leases, which expire up to five years from the balance sheet date. Contractual severance Provision is made for contractual severance payments that are payable to employees in certain countries when they leave the Group’s employment. 24. Other liabilities Other liabilities were as follows: Current Obligations for personnel and social expenses Advances received in relation to research and development contracts Deferred income Other liabilities Total current Non-current Deferred royalty credits (note 17) Deferred gain on initial measurement of warrants (note 17) Accrued expenses Other liabilities Total non-current Total As at 31 December 2018 US$000 As at 31 December 2017 US$000 33,291 2,801 17,124 5,021 58,237 4,695 2,392 207 1,578 8,872 67,109 41,462 3,801 5,840 8,516 59,619 4,695 3,976 410 479 9,560 69,179 Dialog Semiconductor PlcAnnual report and accounts 2018128 Notes to the consolidated financial statements continued 25. Share capital and reserves a) Ordinary shares As at 31 December 2018, 2017 and 2016, the authorised share capital of the Company comprised 104,311,860 ordinary shares with a nominal value of £0.10 per share. The number of allotted and fully paid ordinary shares was as follows: As at 31 December 2015 and 2016 Shares issued to employee benefit trust Cancellation of treasury shares As at 31 December 2017 and 2018 Number of shares 77,865,955 3,000,000 (4,483,816) 76,382,139 Nominal value US$000 14,402 373 (571) 14,204 Ordinary shareholders have no entitlement to share in the profits of the Company except for dividends that may be declared and in the event of the Company’s liquidation. Ordinary shareholders have the right to attend, and vote at, general meetings of the Company or to appoint a proxy to attend and vote at such meetings on their behalf. Ordinary shareholders have one vote for every share held. b) Share premium account The share premium account represents the difference between the nominal value of shares issued and the fair value of the consideration received. The share premium account is not distributable but may be used for certain purposes specified by United Kingdom law, including to write off expenses on any issue of shares and to pay up fully paid bonus shares. c) Other reserves Currency translation reserve The currency translation reserve represents the cumulative gains and losses recognised on the translation into US dollars of the Group’s net investments in foreign operations. Fair value reserve The fair value reserve represents the unrealised gains and losses recognised on equity investments that are measured at fair value through other comprehensive income. Cash flow hedge reserve The cash flow hedge reserve represents the cumulative gains and losses on effective cash flow hedging instruments that will be recycled to profit or loss on the occurrence of the hedged cash flows. Treasury shares Treasury shares were shares purchased under the Company’s share buyback programme. Details of the purchases made under the programme are set out in note 26. Capital redemption reserve On 23 June 2017, the Company cancelled all of the treasury shares that it held following completion of the third tranche of the share buyback programme. On cancellation, the total cost of the treasury shares was transferred from treasury shares and set against retained earnings and the nominal value of the shares cancelled of US$571 was transferred from share capital to a non-distributable capital redemption reserve. Dialog Semiconductor PlcAnnual report and accounts 201825. Share capital and reserves continued Movements on other reserves were as follows: As at 31 December 2015 Other comprehensive income/(loss): – Currency translation differences on foreign operations – Fair value loss on available-for-sale investments – Cash flow hedges: Fair value loss recognised on effective hedges Fair value loss transferred to profit or loss – Income tax credit/(expense) Other changes in equity: – Purchase of own shares into treasury As at 31 December 2016 Other comprehensive income/(loss): – Currency translation differences on foreign operations – Gain transferred to profit or loss on deconsolidation of Dyna Image – Fair value loss on available-for-sale investments – Cash flow hedges: Fair value gain recognised on effective hedges Fair value loss transferred to profit or loss – Income tax credit/(expense) Other changes in equity: – Purchase of own shares into treasury – Cancellation of treasury shares As at 31 December 2017 Other comprehensive loss: – Currency translation differences on foreign operations – Fair value loss on equity investments – Cash flow hedges: Fair value loss recognised on effective hedges Fair value gain transferred to profit or loss – Income tax (expense)/credit As at 31 December 2018 129 Total US$000 (7,923) 127 2,866 (13,264) 8,382 718 Capital redemption reserve US$000 – Currency translation reserve US$000 (4,480) Fair value reserve US$000 – Hedging reserve US$000 (3,443) Treasury shares US$000 – – – – – – – – – – – – – – – 571 571 – – – – – 571 127 – – – (47) – (4,400) 1,665 (1,144) – – – 180 – – (3,699) – 2,866 – – – – – (13,264) 8,382 765 – – – – – – 2,866 – – 5,971 – – (1,015) – – 7,822 – (7,560) (61,472) (61,472) (61,472) (70,566) – – – 16,433 (441) (3,149) – – – – – – 1,665 (1,144) 5,971 16,433 (441) (3,984) – – 5,283 (125,050) 186,522 – (125,050) 187,093 9,977 (527) – – (23,764) – – – – (78) (4,304) – – 1,015 (14,927) (10,075) (2,343) 2,376 (4,759) – – – – – – (527) (23,764) (10,075) (2,343) 3,313 (23,419) Dialog Semiconductor PlcAnnual report and accounts 2018130 Notes to the consolidated financial statements continued 26. Share buyback programme Share buyback authority At the Company’s 2016 AGM, the Directors were granted an authority to purchase up to 7,786,595 ordinary shares in the capital of the Company. During 2016 and 2017, 4,483,816 ordinary shares were purchased under the 2016 AGM authority at a total cost of US$186,522 (including transaction costs of US$1,866). The 2016 AGM authority expired on 3 May 2017. At the Company’s 2017 AGM, the Directors were granted a new authority to purchase up to 7,808,280 of our ordinary shares in further tranches. We did not announce any purchases under the 2017 AGM authority and it expired on 2 May 2018. At the Company’s 2018 AGM, the Directors were granted the authority to purchase up to 7,638,214 of our ordinary shares, representing approximately 10% of the issued ordinary share capital of the Company as at 21 March 2018. Such authority shall (unless previously renewed, varied or revoked) expire on the day before the next AGM of the Company or on 30 June 2019, whichever is the earlier. Purchases made under the share buyback programme are off-market and are effected by way of contingent forward purchase contracts entered into with brokers. Barclays, Goldman Sachs, HSBC or Merrill Lynch may be appointed as brokers for purchases under the 2018 AGM authority. Shares purchased during 2016 On 9 May 2016, the Company announced details of the first tranche of the share buyback programme pursuant to the 2016 AGM authority under which it committed to purchase shares with a minimum cost of €37.5 million and a maximum cost of €50 million. Final settlement and conclusion of the first tranche took place on 28 September 2016. We purchased a total of 1,332,158 shares under the first tranche at a cost of €37.5 million (US$42,024). On 8 November 2016, the Company announced details of the second tranche of the share buyback programme pursuant to the 2016 AGM authority under which it committed to purchase shares with a minimum cost of €56.25 million and a maximum cost of €75.0 million. We completed the first intermediate settlement of the second tranche on 30 December 2016 purchasing 473,592 shares at an initial cost of €17.45 million (US$18,383). As at 31 December 2016, we held 1,805,750 shares purchased under the first and second tranches in treasury at a total cost of US$61,472 (including transaction costs of US$1,063). As at 31 December 2016, we recognised a debit to equity amounting to US$63,077 in relation to the maximum remaining obligation to purchase shares under the second tranche of €57.55 million (US$62,759) and related transaction costs. Shares purchased during 2017 We made a further intermediate settlement of the second tranche on 9 February 2017 and final settlement and conclusion of the tranche took place on 17 February 2017. In these further settlements, we purchased 977,456 shares at a cost of €38.8 million (US$41,385) and incurred transaction costs of US$270. On conclusion of the second tranche, we credited back to retained earnings the remainder of the obligation to purchase shares initially recognised of US$19,961 and related transaction costs. On 27 February 2017, the Company announced details of the third tranche of the share buyback programme pursuant to the 2016 AGM authority under which it committed to purchase shares with a minimum cost of €56.25 million and a maximum cost of €75.0 million. We initially recognised a debit to retained earnings amounting to US$79,407, which comprised the maximum obligation to purchase shares of €75.0 million (US$79,012) and related transaction costs. We made intermediate settlements of the third tranche on 25 April 2017 and 2 June 2017 and final settlement and conclusion of the tranche took place on 23 June 2017. We purchased 1,700,610 shares under the third tranche at a cost of €74.9 million (US$82,862) and incurred transaction costs amounting to US$533. On conclusion of the third tranche, we credited back to earnings the remainder of the obligation to purchase shares initially recognised of US$71 and related transaction costs. During 2017, we showed a credit to retained earnings of US$3,024, which mirrored the loss recognised in profit or loss on the translation into US dollars of the Euro-denominated liability that existed in relation to shares that were purchased during the period. We hedge the currency translation exposure on outstanding liabilities to purchase shares using currency forwards and swaps. After taking into account hedging, we recognised a net currency translation loss of US$237 in profit or loss in relation to liabilities to purchase shares under the second and third tranches during 2017. Dialog Semiconductor PlcAnnual report and accounts 2018131 26. Share buyback programme continued First tranche pursuant to the 2018 AGM authority On 6 November 2018, the Company announced details of a tranche of the share buyback programme pursuant to the 2018 AGM authority under which it committed to purchase shares with a minimum cost of €100.0 million and a maximum cost of €150.0 million. On initiation of this tranche, we recognised a liability and a corresponding debit to retained earnings of €150.0 million (US$171,173) in respect of the maximum obligation to purchase shares. We also debited transaction costs incurred of US$14 to retained earnings. During the remainder of 2018, we recognised a currency translation loss of US$576 on the retranslation of the Euro-denominated liability into US dollars. As at 31 December 2018, the carrying amount of the liability was €150.0 million (US$171,763). We have not yet been required by the appointed broker to make any intermediate settlements in relation to this tranche, under which the broker may continue to purchase shares until 21 May 2019. 27. Non-controlling interests We hold a 48.5% ownership interest in Dyna Image Corporation (“Dyna Image”). As explained in note 4, Dyna Image was formerly accounted for as a subsidiary but the Company lost the power to direct its relevant activities in December 2017 and it was deconsolidated with effect from 31 December 2017. In January 2017, the Group’s ownership interest in Dyna Image increased from 45.7% to 48.5% and there was a corresponding decrease from 54.7% to 51.5% in the ownership interests held by non-controlling interests. Summarised financial information about Dyna Image for periods before it ceased to be a subsidiary is presented below: Summary comprehensive (loss)/income Revenue Expenses Loss for the year Loss attributable to owners of the Company Loss attributable to the non-controlling interests Loss for the year Other comprehensive (loss)/income attributable to owners of the Company Other comprehensive (loss)/income attributable to the non-controlling interests Other comprehensive (loss)/income for the year Total comprehensive loss attributable to owners of the Company Total comprehensive loss attributable to the non-controlling interests Total comprehensive loss for the year Summary of cash flows Cash flow used for operating activities Cash flow used for investing activities Cash flow from financing activities Net decrease in cash and cash equivalents All other subsidiaries of the Company are wholly-owned. 2018 US$000 2017 US$000 2016 US$000 – – – – – – – – – – – – – – – – 5,474 (17,870) (12,396) (7,914) (4,482) (12,396) (7) (7) (14) (7,921) (4,489) (12,410) (4,769) (47) 3,000 (1,816) 9,409 (14,195) (4,786) (1,962) (2,824) (4,786) 69 100 169 (1,893) (2,724) (4,617) (1,025) (29) – (1,054) Dialog Semiconductor PlcAnnual report and accounts 2018132 Notes to the consolidated financial statements continued 28. Pension schemes The Group operates defined contribution pension schemes in most of the countries in which it operates. Contributions payable by the Group to the plans amounted to US$8,756 (2017: US$7,458; 2016: US$6,754). As at 31 December 2018, the Group had not paid over to the plans contributions due amounting to US$1,596 (2017: US$2,408; 2016: US$1,802). All contributions due for the period were paid over subsequent to the balance sheet date. Pension costs also include payments to the state funded pension plan in Germany in the amount of US$3,853 (2017: US$3,599; 2016: US$3,400). 29. Share-based compensation The Company operates a number of share-based compensation plans under which it grants options and awards over its ordinary shares to certain of the Group’s employees. a) Plans without performance conditions Stock Option Plan Shareholders approved the Stock Option Plan (“SOP”) at the Company’s 1998 AGM. Options granted under the SOP before 31 October 2006 vested over periods of one or five years from the grant date provided the participant remained in employment by the Group at the vesting date and, if unexercised, expired on the tenth anniversary of the grant date. Options granted after 31 October 2006 vest monthly over four years provided the participant remains in employment by the Group at the vesting date but may not be exercised until the first anniversary of the grant date and, if unexercised, expire on the seventh anniversary of the grant date. Unless otherwise determined by the Remuneration Committee, options granted under the SOP have an exercise price not less than the market price of the Company’s ordinary shares on the grant date. Employee Share Plan Shareholders approved the Employee Share Plan (“ESP”) at the Company’s 2013 AGM. The ESP operates alongside the SOP. Options granted under the ESP vest over a three-year period with one third of each award vesting on the first, second and third anniversary of the grant date provided the participant remains in employment by the Group at the vesting date and, if unexercised, expire on the seventh anniversary of the grant date. Options granted under the ESP have a nominal exercise price. Fair value of awards The fair value of options granted under the ESP was measured using the Black-Scholes option pricing model. The weighted average fair value of options granted during the years ended 31 December 2018, 2017 and 2016 and the principal assumptions made in measuring those fair values were as follows: Weighted average fair value Principal assumptions: – Share price on grant date – Exercise price – Expected volatility of the Company's shares – Expected option life – Dividend yield on the Company's shares – Risk-free interest rate Grant in 2018 €21.95 Grant in 2017 €33.31 Grant in 2016 €34.86 €22.06 €0.11 44% 3 – 6 years 0% (0.3)% €33.40 €0.10 42% 3 – 6 years 0% (0.3)% €34.96 €0.10 41% 3 – 6 years 0% (0.3)% Expected volatility was determined based on the historical volatility of the market price of the Company’s ordinary shares over the expected life of the options. Dialog Semiconductor PlcAnnual report and accounts 2018133 29. Share-based compensation continued b) Performance-based plans Executive Incentive Plan Shareholders approved the Executive Incentive Plan (“EIP”) at the Company’s 2010 AGM. Awards under the EIP vested three years from the grant date provided certain performance conditions were satisfied and the participant remained in employment by the Group at the end of the vesting period. a) Share price increase One quarter of each award accrued in equal annual instalments on the anniversary of grant date provided the market price of the Company’s ordinary shares on the relevant anniversary date exceeded the higher of the market price of the shares on the grant date and on any preceding anniversary date. Awards that had accrued vested and became exercisable on the third anniversary of the grant date. b) Group performance conditions Up to three-eighths of each award vested depending upon the compound annual growth of the Group’s revenue over the three-year performance period. Up to three-eighths of each award vested depending on the compound annual growth of the Group’s EBIT (operating profit) over the three-year performance period. Even if the revenue and EBIT targets were met, however, the number of awards that vested were reduced by up to 20% if customer diversification targets were not also met. The EIP expired for the purpose of new awards in May 2015. Long-Term Incentive Plan Shareholders approved the Long-Term Incentive Plan (“LTIP”) at the Company’s 2015 AGM. The LTIP replaced the EIP. All employees are eligible to participate in the plan but in practice awards will be targeted at the Executive Director level and others in senior roles. Awards granted under the LTIP take the form of either a nil or nominal cost share option, a conditional share award, a market price share option or, in jurisdictions where it is not feasible to deliver shares to employees, a cash-settled award linked to the market value of the Company’s shares. Awards under the LTIP generally vest three years from the grant date provided certain performance conditions are satisfied and the participant remains in employment by the Group at the end of the vesting period. a) Total shareholder return (“TSR”) Up to one third of each award vests depending on the TSR on the Company’s ordinary shares relative to the TSR of the constituents of the S&P 1500 Select Semiconductor Index over the three-year performance period. If the TSR on the Company’s ordinary shares is negative over the vesting period, vesting is capped at one half of this element of the award irrespective of the whether the TSR on the Company’s ordinary shares has exceeded the TSR of the constituents of the S&P 1500 Select Semiconductor Index. b) Group Performance Conditions Up to one half of each award vests depending upon the Group’s revenue in each year of the three-year performance period. Up to one half of each award vests depending on the Group’s underlying operating margin in each year of the three-year performance period. Notwithstanding the performance conditions, the Remuneration Committee may apply a downward adjustment to the number of awards that vest if it considers this to be necessary taking into account the Group’s financial performance and overall financial health. Fair value of awards The fair value of awards made under the EIP and the LTIP was measured using a variant of the Monte Carlo valuation model. The weighted average fair value of options granted during the years ended 31 December 2018, 2017 and 2016 and the principal assumptions made in measuring those fair values were as follows: Weighted average fair value Principal assumptions: – Share price on grant date – Exercise price – Expected volatility of the Company's shares – Expected option life – Dividend yield on the Company's shares – Risk-free interest rate Grant in 2018 €23.23 Grant in 2017 €44.86 Grant in 2016 €29.26 €25.25 €0.09 44% 6 years 0% (0.3)% €50.32 €0.10 42% 6 years 0% (0.3)% €33.41 €0.10 41% 6 years 0% (0.3)% Expected volatility was determined based on the historical volatility of the market price of the Company’s ordinary shares over the expected life of the awards. Dialog Semiconductor PlcAnnual report and accounts 2018134 Notes to the consolidated financial statements continued 29. Share-based compensation continued c) Share options Movements in the total number of share options outstanding during the years ended 31 December 2018 and 2017 were as follows: Outstanding at the beginning of the year Granted Exercised Forfeited Outstanding at the end of the year Options exercisable at the end of the year 2018 2017 Weighted average exercise price € 1.50 0.10 3.05 0.19 0.65 2.71 Options 4,303,195 2,536,355 (1,010,647) (356,268) 5,472,635 1,155,481 Options 4,469,977 1,345,455 (1,240,297) (271,940) 4,303,195 1,302,600 Weighted average exercise price € 2.90 0.10 5.30 0.29 1.50 4.71 When share options were exercised during 2018, the weighted average of the Company’s share price was €22.71 (2017: €45.50). The weighted average contractual life and exercise price of share options outstanding as at 31 December 2018 and 2017 were as follows: Range of exercise prices €0.0 – 1.00 €1.00 – 8.00 €8.00 – 16.85 €0.00 – 16.85 2018 2017 Number outstanding 5,270,419 – 202,216 5,472,635 Weighted average remaining contractual life (in years) 4.73 n/a 0.97 4.59 Number outstanding 3,883,067 – 420,128 4,303,195 Weighted average remaining contractual life (in years) 4.58 n/a 1.60 4.29 d) Dialog shares held by employee benefit trusts The Company provides finance to two trusts to purchase its ordinary shares in order to meet its obligations under its share-based compensation plans. As at 31 December 2018, the trusts held 2,607,259 ordinary shares (2017: 2,791,027 ordinary shares). Movements in the number of shares held by the trusts during the years ended 31 December 2018 and 2017 were as follows: At the beginning of the year Purchase of shares in the market Subscription for newly-issued shares Sale or transfer of shares At the end of the year 2018 2017 Number of shares 2,791,027 826,879 – (1,010,647) 2,607,259 Cost US$000 902 21,786 – (174) 22,514 Number of shares 574,600 456,724 3,000,000 (1,240,297) 2,791,027 Cost US$000 20,608 24,301 373 (44,380) 902 Dialog Semiconductor PlcAnnual report and accounts 2018135 30. Commitments Operating lease and software licence commitments The Group rents all of its office and development facilities and some production, office and test equipment under operating leases. Future minimum lease payments under non-cancellable operating leases and software licences are as follows: Within one year Between one and two years Between two and three years Between three and four years Between four and five years Thereafter Total minimum payments Operating leases 2018 US$000 15,505 14,749 14,056 13,042 8,078 13,202 78,632 Software licences 2018 US$000 25,616 15,158 3,900 2,552 75 – 47,301 Operating leases 2017 US$000 12,600 11,261 9,711 6,605 4,902 10,247 55,326 Software licences 2017 US$000 15,286 7,420 5,669 2,300 2,385 – 33,060 During 2018, the Group recognised in profit or loss an operating lease expense of US$12,450 (2017: US$10,153; 2016: US$9,797) and software licence fees of US$13,854 (2017: US$9,944; 2016: US$7,384). Capital commitments As at 31 December 2018, the Group has contractual commitments for the acquisition of property, plant and equipment of US$5,874 (2017: US$7,022) and for the acquisition of intangible assets of US$4,391 (2017: US$5,311). 31. Additional disclosures on financial instruments Analysis by class and category In the following tables, the carrying amounts of the financial assets and financial liabilities held by the Group as at 31 December 2018 and 2017 are analysed by class and category: Financial assets Cash and cash equivalents Trade and other receivables Energous shares Energous warrants Other investments Currency derivatives Rental and other deposits Other financial assets Total financial assets Financial liabilities Trade and other payables Currency derivatives Share buyback obligation Deferred consideration Contingent consideration Other financial liabilities Total financial liabilities As at 31 December 2018 Amortised cost US$000 At fair value through profit or loss US$000 At fair value in designated hedges US$000 At fair value through other comprehensive income US$000 Net book value US$000 Fair value US$000 677,848 114,514 – – – – 1,807 1,807 794,169 (122,140) – (171,763) (3,173) – (174,936) (297,076) – – – 1,465 1,465 – – – 1,465 – (301) – – (16,414) (16,715) (16,715) – – – – – 202 – 202 202 – (6,080) – – – (6,080) (6,080) – – 10,073 – 10,073 – – – 10,073 – – – – – – – 677,848 114,514 10,073 1,465 11,538 202 1,807 2,009 805,909 (122,140) (6,381) (171,763) (3,173) (16,414) (197,731) (319,871) 677,848 114,514 10,073 1,465 202 1,807 (122,140) (6,381) (171,763) (3,173) (16,414) Currency derivatives that are not in designated hedging relationships are held to hedge the currency translation exposure on the Euro-denominated share buyback liability (note 26). Dialog Semiconductor PlcAnnual report and accounts 2018Notes to the consolidated financial statements continued 31. Additional disclosures on financial instruments continued 136 As at 31 December 2017 Amortised cost US$000 At fair value through profit or loss US$000 At fair value in designated hedges US$000 At fair value through other comprehensive income US$000 479,295 78,186 – – – – 2,090 2,090 559,571 (107,195) (1,651) – (7,962) – (9,613) (116,808) – – – 12,318 12,318 – – – 12,318 – – – – (23,709) (23,709) (23,709) – – – – – 6,649 – 6,649 6,649 – – (97) – – (97) (97) – – 33,837 – 33,837 – – – 33,837 – – – – – – – Fair value US$000 479,295 78,186 33,837 12,318 6,649 2,090 (107,195) (1,651) (97) (7,962) (23,709) Net book value US$000 479,295 78,186 33,837 12,318 46,155 6,649 2,090 8,739 612,375 (107,195) (1,651) (97) (7,962) (23,709) (33,419) (140,614) Financial assets Cash and cash equivalents Trade and other receivables Energous shares Energous warrants Other investments Currency derivatives Rental and other deposits Other financial assets Total financial assets Financial liabilities Trade and other payables Hire purchase and finance lease obligations Currency derivatives Deferred consideration Contingent consideration Other financial liabilities Total financial liabilities Fair value measurement a) Financial instruments carried at fair value All financial instruments that are carried at fair value are revalued on a recurring basis. We have not chosen to designate any financial instruments at fair value through profit or loss on initial recognition. Details of our investment in the Energous shares and warrants are set out in note 17. We measured the fair value of these financial assets using the following methods and assumptions: U Energous shares (listed on NASDAQ) – measured at the quoted bid price at the close of business on the balance sheet date; and U Energous warrants – measured using a Black Scholes valuation model based on the quoted bid price of Energous’ common shares and other inputs such as implied share price volatility that is modelled based on historical price data for Energous’ common shares. Fair value of currency derivatives represents the present value of the future contractual cash flows, which is estimated using observable spot exchange rates and by applying a discount rate that is based on the yield curves of the respective currencies and reflects the credit risk of the counterparties. Contingent consideration in respect of the acquisition of Silego was payable in two tranches based on Silego’s revenue for 2017 and 2018. As at 31 December 2017, the fair value of the contingent consideration was measured based on the expected value of a range of possible outcomes of Silego’s revenue for 2017 and 2018. As at 31 December 2018, the fair value of the contingent consideration is based on Silego’s actual revenue for 2017 and 2018. In the following table, the financial instruments that are carried at fair value are categorised into one of three levels in a fair value hierarchy according to the nature of the significant inputs to the valuation techniques that are used to determine their fair value as follows: U Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities. U Level 2 – Inputs other than Level 1 that are observable either directly (as market prices) or indirectly (derived from market prices). U Level 3 – Unobservable inputs, such as those derived from internal models or using other valuation methods. Dialog Semiconductor PlcAnnual report and accounts 2018137 31. Additional disclosures on financial instruments continued Financial assets carried at fair value Investments: – Energous shares Derivative financial instruments: – Currency derivatives – Energous warrants Total financial assets carried at fair value Financial liabilities carried at fair value Derivative financial instruments: – Currency derivatives Contingent consideration Total financial liabilities carried at fair value As at 31 December 2018 As at 31 December 2017 Level 1 US$000 Level 2 US$000 Level 3 US$000 Total US$000 Level 1 US$000 Level 2 US$000 Level 3 US$000 Total US$000 10,073 – – 10,073 33,837 – – 33,837 – – 10,073 202 – 202 – 1,465 1,465 202 1,465 11,740 – – 33,837 6,649 – 6,649 – 12,318 12,318 6,649 12,318 52,804 – – – (6,381) – (6,381) – (16,414) (16,414) (6,381) (16,414) (22,795) – – – (97) – (97) – (23,709) (23,709) (97) (23,709) (23,806) During 2018, there were no transfers between Level 1 and Level 2. In the following table, we present a reconciliation of the changes in the Level 3 fair values: Financial assets carried at fair value At the beginning of the year Additions: – Energous warrants Unrealised fair value (loss)/gain recognised in profit or loss (other finance (expense)/income): – Energous warrants – Dyna Image call option At the end of the year Financial liabilities carried at fair value At the beginning of the year Contingent consideration: – Additions – Change in estimate (other operating income) – Unwinding of discount recognised in profit or loss (interest expense) – Settlements At the end of the year 2018 US$000 2017 US$000 2016 US$000 12,318 6,766 873 – 4,753 4,695 (10,853) – 1,465 941 (142) 12,318 1,929 (731) 6,766 (23,709) – (653) 808 (2,220) 9,360 (16,414) (23,273) – (436) – (23,709) – – – – – – We estimate that if the implied volatility of 118.5% incorporated in the valuation of the first tranche of Energous warrants and that of 109.8% incorporated in the second tranche as at 31 December 2018 had been ten percentage points higher or lower, the fair value of the warrants would have been US$333 higher at US$1,798 or US$318 lower at US$1,147, respectively. In each case, the effect of the increase/(decrease) in fair value would have been recognised in profit or loss as other finance income/(expense). b) Financial instruments not carried at fair value Finance lease and hire purchase obligations attract fixed interest rates that are implicit in the lease rentals. For disclosure purposes, the fair value of these obligations has been calculated as the present value of the future contractual cash flows using observable yield curves (Level 2). Other financial assets and financial liabilities that are not carried at fair value are of short maturity and/or bear floating rate interest. We therefore consider that their carrying amounts approximate to their fair values (Level 2). Dialog Semiconductor PlcAnnual report and accounts 2018138 Notes to the consolidated financial statements continued 32. Financial risk management Background The Group’s central treasury function is responsible for ensuring that adequate funding is available to meet the Group’s requirements and for maintaining an efficient capital structure, together with managing the Group’s counterparty credit risk, foreign currency and interest rate exposures. All treasury operations are conducted within strict policies and guidelines that are approved by the Board. We use currency derivatives to manage currency risk and we hold certain equity options and warrants for strategic reasons. We do not hold or issue derivative financial instruments for speculative purposes. Credit risk Credit risk is the risk that a customer or a counterparty financial institution fails to meet its contractual obligations as they fall due causing the Group to incur a financial loss. The Group is exposed to credit risk in relation to receivables from its customers and cash and cash equivalents and other financial assets held with financial institutions. Before accepting a new customer, we assess the potential customer’s credit quality and establish a credit limit. Credit quality is assessed using data maintained by reputable credit agencies, by checking references included in credit applications, and, where they are available, by reviewing the customer’s recent financial statements. Credit limits are subject to multiple levels of authorisation and are reviewed on a regular basis. The Group depends on a relatively small number of customers for a substantial part of its revenue. As at 31 December 2018, trade accounts receivable amounted to US$98,234 (2017: US$51,959), including US$62,207 (2017: US$34,038) due from our largest customer. We utilise uncommitted non-recourse receivables financing facilities provided by two financial institutions in an aggregate amount of US$240 million. The principal facility is for US$220 million and matures on 31 October 2019. Receivables sold under these facilities are derecognised from the Group’s balance sheet because the financial institutions concerned assume all credit risk associated with them. When a receivable is sold, the Group is credited with the majority of the invoice amount with the balance credited on the earlier of the date on which the customer pays the amount due or 120 days after the receivable becomes due for payment. As at 31 December 2018, cash and cash equivalents included a benefit of US$96,099 (2017: US$145,100) in relation to receivables sold under these facilities and trade and other receivables included US$16,280 (2017: US$26,227) retained by the financial institutions. Cash deposits and cash equivalent investments are placed only with reputable financial institutions that satisfy the criteria set out in our Board approved treasury policy, including a requirement that each has a median credit rating of not less than A- (Standard & Poor’s), A3 (Moody’s) or A- (Fitch). Credit risk is further limited by investing only in liquid instruments. Market risk Market risk is the risk that the fair value of, or cash flows associated with, a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: currency risk (due to changes in currency exchange rates), interest rate risk (due to changes in market interest rates) and other price risk. a) Currency risk The US dollar is the functional currency of the Company and its principal subsidiaries. Currency risk arises on transactions that are denominated in a currency other than the functional currency of the entity that enters into them. Nearly all of the Group’s sales and cost of materials are denominated in US dollars but certain operating expenses and tax cash flows are denominated in currencies other than the US dollar, in particular the Euro and the pound sterling. It is the Group’s policy to hedge a proportion of the currency risk associated with highly probable forecast cash flows on a rolling 12-month basis. As the timing of the forecast cash flows draws nearer, the proportion of the currency risk that is hedged increases within set parameters. Where possible, forward currency contracts that are entered into to hedge forecast cash flows are designated as hedging instruments in cash flow hedge relationships. During 2018, a loss of US$10,075 (2017: gain of US$16,433; 2016: loss of US$13,264), was recognised in other comprehensive income representing the change in the fair value of currency derivatives in effective hedging relationships and a cumulative gain of US$2,343 (2017: gain of US$441; 2016: loss of US$8,382) was reclassified to profit or loss on the occurrence of the hedged cash flows. Dialog Semiconductor PlcAnnual report and accounts 201832. Financial risk management continued Currency derivatives held to hedge forecast cash outflows were as follows: Maturity 0 – 3 months 4 – 6 months 7 – 9 months 10 – 12 months Total Weighted average exchange rate US$ = Maturity 0 – 3 months 4 – 6 months 7 – 9 months 10 – 12 months Total Weighted average exchange rate US$ = 139 As at 31 December 2018 Net notional amount Euro 000 Pound sterling 000 Japanese Yen 000 26,750 21,500 18,000 8,000 74,250 0.82 11,000 9,250 3,750 1,750 25,750 0.74 207,500 115,000 140,000 50,000 512,500 107.99 As at 31 December 2017 Net notional amount Euro 000 Pound sterling 000 Japanese Yen 000 33,500 27,500 20,000 11,000 92,000 0.86 11,650 10,000 6,500 4,000 32,150 0.77 185,000 120,000 135,000 60,000 500,000 109.97 Chinese Renminbi 000 19,000 10,000 10,500 4,000 43,500 6.71 Chinese Renminbi 000 16,000 9,000 13,000 6,000 44,000 6.83 During the year, the following amounts were recognised in profit or loss in relation to forward currency contracts in cash flow hedge relationships: Gain/(loss) reclassified from hedging reserve Hedged item affected profit or loss: – Cost of sales – Selling and marketing expenses – General and administrative expenses – Research and development expenses – Income tax expense Cash flow no longer expected to occur: – Other finance expense Hedge ineffectiveness – Other finance (expense)/income Hedge ineffectiveness was determined as follows: Change in fair value of designated hedging instruments Change in value of hedged item used to determine hedge ineffectiveness Hedge ineffectiveness recognised in profit or loss 2018 US$000 2017 US$000 2016 US$000 436 47 96 1,422 342 – 2,343 (13) 2018 US$000 (12,431) 12,418 (13) (77) (3) (69) (124) 743 (29) 441 14 2017 US$000 16,006 (15,992) 14 (1,196) (328) (1,023) (5,543) (292) – (8,382) (3) 2016 US$000 (4,885) 4,882 (3) If the US dollar was to depreciate or appreciate by 10% against each of the foreign currencies in respect of which there were effective cash flow hedges in place as at 31 December 2018, there would be an incremental fair value gain of US$33,497 (2017: US$18,367) or an incremental fair value loss of US$27,407 (2017: US$15,027), respectively, recognised in other comprehensive income that would be reclassified to profit or loss on the occurrence of the hedged cash flows. Currency translation risk arises on financial assets and liabilities that are denominated in a currency other than the functional currency of the entity that holds them. The Group’s policy allows for such exposures to be hedged using currency derivatives. During 2018 and 2017, we used forward currency contracts and currency swaps to hedge the translation exposure on the Euro-denominated liabilities that arose in relation to successive tranches of the Company’s share buyback programme. At the end of 2018, we held outstanding contracts to purchase €150.0 million at an average rate of US$1 = €0.86 as a hedge of the maximum obligation outstanding in relation to the uncompleted tranche of share purchases. Dialog Semiconductor PlcAnnual report and accounts 2018Notes to the consolidated financial statements continued 32. Financial risk management continued After taking into account currency hedging activities, the currency profile of the Group’s net financial assets/(liabilities) was as follows: 140 US dollar Euro Pound sterling Taiwanese dollar Other Total As at 31 December 2018 US$000 482,967 (6,434) 7,420 768 1,752 486,473 As at 31 December 2017 US$000 484,493 (10,637) (4,104) 186 1,823 471,761 If the US dollar was to appreciate or depreciate by 10% against each of the foreign currencies in which financial assets and financial liabilities were denominated as at 31 December 2018, there would be an exchange loss of US$351 (2017: gain of US$1,273) or an exchange gain of US$351 (2017: loss of US$1,273), respectively, recognised in arriving at the Group’s profit before tax. Currency translation risk also arises on consolidation in relation to the translation into US dollars of net investments in foreign operations but the exposure is not significant because the US dollar is the functional currency of the Company and each of its principal subsidiaries. b) Interest risk The interest rate profile of the Group’s financial assets and liabilities was as follows: Financial assets Cash and cash equivalents Trade and other receivables Investments Other financial assets Total financial assets Financial liabilities Trade and other payables Other financial liabilities Total financial liabilities Financial assets Cash and cash equivalents Trade and other receivables Investments Other financial assets Total financial assets Financial liabilities Trade and other payables Other financial liabilities Total financial liabilities As at 31 December 2018 Interest-bearing Floating rate US$000 Fixed rate US$000 Non-interest bearing US$000 581,749 – – – 581,749 – – – – – – – – – – – 96,099 114,514 11,538 2,009 224,160 (122,140) (197,731) (319,871) As at 31 December 2017 Interest-bearing Floating rate US$000 Fixed rate US$000 Non-interest bearing US$000 334,195 – – – 334,195 – – – – – – – – – (1,651) (1,651) 145,100 78,186 46,155 8,739 278,180 (107,195) (31,768) (138,963) Total US$000 677,848 114,514 11,538 2,009 805,909 (122,140) (197,731) (319,871) Total US$000 479,295 78,186 46,155 8,739 612,375 (107,195) (33,419) (140,614) The Group’s principal exposure to interest rate risk is in relation to interest income on investments in money market funds and short-term deposits, which attract US dollar interest rates. When applied to the Group’s floating interest rate exposures as at 31 December 2018, an increase or decrease of 50 basis points in market interest rates would increase or decrease the Group’s profit before tax by US$2,875 (2017: US$1,645), respectively. Dialog Semiconductor PlcAnnual report and accounts 2018141 32. Financial risk management continued c) Other price risk In November 2016 and July 2017, the Company subscribed for common shares and was granted warrants to purchase common shares in Energous Corporation (“Energous”). Energous’ common shares are listed on NASDAQ. At the end of 2018, the fair value of the shares held was US$10,073 and the fair value of the warrants was US$1,465. Changes in the fair value of the shares are recognised in other comprehensive income and changes in the fair value of the warrants are recognised in profit or loss. Assuming all other factors remain constant, the effect of a 10% increase in Energous’ share price as at 31 December 2018 would be to increase the Group’s profit before tax by US$314 (2017: US$2,079) and to increase other comprehensive income by US$1,007 (2017: US$3,384) and the effect of a 10% decrease in the share price would be to reduce the Group’s profit before tax by US$289 (2017: US$1,998) and to reduce other comprehensive income by US$1,007 (2017: US$3,384). Liquidity risk Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with its financial liabilities. We regularly monitor cash flows at both Group and entity level. As at 31 December 2018, cash and cash equivalents amounted to US$677,848 (2017: US$479,295). In July 2017, the Company and certain of its subsidiaries, as guarantors, entered into a US$150 million three-year revolving credit facility provided by four financial institutions. The facility is committed and available for general corporate purposes. In June 2018, the facility was extended by a year at a reduced amount of US$112.5 million from July 2020 until it matures in July 2021. On the second anniversary of the facility, we have the option to extend the facility for a further year subject to the consent of the lenders. We also have the option to increase the amount of the facility by US$75 million subject to certain conditions. The credit agreement contains various provisions, covenants and representations that are customary for such a facility. The facility remained undrawn as at 31 December 2018. Contractual undiscounted future cash flows related to the Group’s financial liabilities were as follows: Trade and other payables Finance lease and hire purchase obligations Deferred consideration Contingent consideration Share buyback obligation Other non-derivative liabilities Cash flows on non-derivative liabilities Cash flows on derivative liabilities – Payments – Receipts Cash flows on financial liabilities Capital management As at 31 December 2018 As at 31 December 2017 Within 3 months US$000 122,140 – 712 16,730 171,763 189,205 311,345 3 to 12 months US$000 – – 1,620 – – 1,620 1,620 1 to 5 years US$000 – – 841 – – 841 841 Within 3 months US$000 107,195 834 3,144 9,343 – 13,321 120,516 3 to 12 months US$000 – 817 2,312 – – 3,129 3,129 1 to 5 years US$000 – – 2,506 17,626 – 20,132 20,132 49,875 (46,018) 315,202 253,620 (248,172) 7,068 – – 841 4,618 (4,552) 120,582 45,256 (44,882) 3,503 – – 20,132 The Group’s capital is represented by its total equity. As at 31 December 2018, the Group’s total equity was US$1,302,507 (2017: US$1,342,421). We seek to maintain a capital structure that supports the ongoing activities of our business and its strategic objectives in order to deliver long-term returns to shareholders. We allocate capital to support organic and inorganic growth, investing to support research and development and our product pipeline. We will fund our growth strategy using a mix of equity and debt after giving consideration to prevailing market conditions. In May 2016, we initiated a share buyback programme as part of our strategy to deliver shareholder returns. Between May 2016 and June 2017, we returned €168.65 million (US$184,656) to shareholders under the first three tranches of the programme. In November 2018, we announced details of a further tranche of the programme under which we have committed to purchase shares with a minimum cost of €100.0 million and a maximum cost of €150.0 million. We will seek renewal of the share buyback authority at the Company’s 2019 AGM. We will consider initiating further tranches of share purchases in the context of our regular assessment of the Group’s future growth opportunities and its strategic objectives. Dialog Semiconductor PlcAnnual report and accounts 2018142 Notes to the consolidated financial statements continued 33. Segment and geographic information a) Analysis by operating segment Segment information is presented in the financial statements on a basis consistent with the information presented to the Management Team (the “chief operating decision-maker”) for the purposes of allocating resources within the Group and assessing the performance of the Group’s businesses. Members of the Management Team are identified on pages 60 and 61. The Group’s reportable segments are determined based on the nature of the products that they provide to our customers and are as follows: Mobile Systems; Automotive & Industrial; Connectivity; and Advanced Mixed Signal. U Mobile Systems provides power management and audio chips designed to meet the needs of the wireless systems markets and a range of advanced driver technologies for low power display applications – from PMOLEDs to electronic paper and MEMS displays. U Automotive & Industrial’s products address the safety, management and control of electronic systems in cars and for industrial applications. U Connectivity’s products include short-range wireless, digital cordless, Bluetooth® and VoIP technology. U Advanced Mixed Signal’s products include CMICs, AC/DC converter solutions for smaller, fast charging power adaptors for portable devices as well as LED drivers for solid state lighting products. No operating segments have been aggregated in determining our reportable segments. Each operating segment has a manager who is responsible for its performance and is accountable to the Chief Executive Officer. The Management Team uses operating profit as the principal measure of the profitability of each of the Group’s operating segments. Operating profit is, therefore, the measure of segment profit presented in the Group’s segment disclosures. Whilst the Management Team also uses underlying operating profit to measure segment profitability, this is used as a supplement to operating profit. In addition to our reportable segments, we present information for Corporate activities. Corporate activities do not meet the definition of an operating segment. Corporate activities principally comprise the costs of operating central corporate functions, the Group’s share-based compensation expense and certain other unallocated costs. In 2016, Corporate activities also included the termination fee of US$137,300 that was paid to us by Atmel. Revenue and operating profit by segments are as follows: Mobile Systems Connectivity Automotive & Industrial Advanced Mixed Signal Total segments Corporate activities Total Group Interest income Interest expense Other finance (expense)/income Profit before income taxes 2018 US$000 1,029,561 148,772 32,686 229,840 1,440,859 1,279 1,442,138 Revenue⁽¹⁾ 2017 US$000 1,042,908 136,443 32,975 132,714 1,345,040 7,801 1,352,841 2016 US$000 922,946 118,334 30,014 116,808 1,188,102 9,509 1,197,611 Operating profit/(loss) 2018 US$000 248,440 16,924 11,706 1,822 278,892 (79,185) 199,707 9,883 (3,134) (10,263) 196,193 2017 US$000 271,716 14,276 12,575 (15,127) 283,440 (96,423) 187,017 5,995 (1,302) 3,093 194,803 2016 US$000 239,859 5,342 10,126 (7,535) 247,792 62,015 309,807 3,665 (3,447) (4,819) 305,206 1 Revenue is from sales to external customers (there were no inter-segment sales). Dialog Semiconductor PlcAnnual report and accounts 2018143 33. Segment and geographic information continued Other segment information is as follows: Year ended 31 December 2018 Research and development expenses Write-down of inventories Fixed assets⁽¹⁾: – Additions⁽²⁾ – Depreciation/amortisation – Loss on disposal Integration costs Corporate transaction costs Year ended 31 December 2017 Research and development expenses⁽³⁾ Write-down of inventories Fixed assets⁽¹⁾: – Additions⁽²⁾ – Depreciation/amortisation – Loss on disposal Impairment of non-current assets held by Dyna Image (notes 15 & 16) Loss on deconsolidation of Dyna Image (note 4) Acquisition-related costs Integration costs Year ended 31 December 2016 Research and development expenses⁽³⁾ Write-down of inventories Fixed assets⁽¹⁾: – Additions⁽²⁾ – Depreciation/amortisation – Loss on disposal Atmel termination fee (note 3) Corporate transaction costs Mobile Systems US$000 Connectivity US$000 Automotive & Industrial US$000 Advanced Mixed Signal US$000 Total segments US$000 Corporate activities US$000 Total Group US$000 193,672 4,336 36,051 41,844 788 – – 40,114 225 9,558 10,261 4 – – 179,990 39 36,230 327 43,939 41,609 414 9,198 9,193 2 – – – – – – – – 1,583 (59) 55,154 1,073 290,523 5,575 35,786 68 326,309 5,643 262 694 – – – 1,217 60 163 620 3 – – – – 9,703 27,262 27 1,385 – 55,574 80,061 819 1,385 – 1,787 524 104 1,380 11,346 57,361 80,585 923 2,765 11,346 35,796 944 253,233 1,370 49,780 (82) 303,013 1,288 11,467 19,092 – 64,767 70,514 419 – – – – – – – – 7,587 2,262 172 (4,327) (5,597) 4,539 2,305 72,354 72,776 591 (4,327) (5,597) 4,539 2,305 160,113 2,236 33,260 238 1,236 165 29,274 1,652 223,883 4,291 37,395 84 261,278 4,375 33,915 36,695 305 – – 7,137 6,892 – – – 192 702 – – – 4,647 17,294 145 – – 45,891 61,583 450 – – 8,047 2,234 1,119 137,300 3,485 53,938 63,817 1,569 137,300 3,485 1 Non-current assets excluding investments and deferred tax assets. 2 Additions to fixed assets comprise the cost of items acquired separately and the fair value of items acquired in business combinations. 3 Certain product development costs have been reclassified from cost of sales to research and development expenses (see note 1). b) Geographic information Revenue by shipment destination United Kingdom Other European countries Mainland China Hong Kong Other Asian countries Rest of the world Total 2018 US$000 2017 US$000 2016 US$000 647 40,816 1,027,976 288,838 72,642 11,219 1,442,138 529 46,432 1,034,847 196,722 61,111 13,200 1,352,841 421 48,063 884,187 212,261 41,013 11,666 1,197,611 Dialog Semiconductor PlcAnnual report and accounts 2018Notes to the consolidated financial statements continued 33. Segment and geographic information continued 144 Non-current assets⁽¹⁾ by location United Kingdom Germany Netherlands USA Taiwan Rest of the world Total 1 Non-current assets excluding investments and deferred tax assets. c) Information about major customers As at 31 December 2018 US$000 As at 31 December 2017 US$000 As at 31 December 2016 US$000 47,909 43,511 56,501 568,755 1,507 7,334 725,517 48,761 58,782 52,791 589,753 2,222 9,299 761,608 96,890 44,992 49,982 236,245 13,196 6,444 447,749 During each of the years ended 31 December 2018, 2017 and 2016, there was only one customer, Apple Inc. (“Apple”), that accounted for more than 10% of the Group’s revenue. In 2018, revenue from Apple was US$1,081,532, of which US$1,015,630 was recognised in the Mobile Systems segment and US$65,902 was recognised in the Advanced Mixed Signal segment. In 2017, revenue from Apple was US$1,042,669, of which US$1,035,412 was recognised in the Mobile Systems segment and US$7,257 was recognised in the Advanced Mixed Signal segment. In 2016, revenue from Apple was US$889,904, which was recognised wholly in the Mobile Systems segment. 34. Transactions with related parties Key management personnel For the purpose of these disclosures, the Group’s key management personnel comprise the Management Team (which includes the Company’s Executive Director) and the Company’s non-executive Directors. Compensation of the Group’s key management personnel was as follows: Short-term employee benefits Post-employment benefits Share-based compensation Total 2018 US$000 9,196 237 11,952 21,385 2017 US$000 6,712 267 10,895 17,874 2016 US$000 7,278 224 10,751 18,253 Current members of the Company’s Board are identified on pages 58 and 59 and current members of the Management Team are identified on pages 60 and 61. Statutory information about Directors’ remuneration is presented in the Directors’ remuneration report on pages 70 to 85. During 2018, the aggregate emoluments payable to Directors in respect of qualifying services to the Company amounted to US$2,947 (2017: US$3,370; 2016: US$2,262). Share options and awards granted to the Executive Director under long-term incentive plans that have vested or will vest based on the Group’s and/or the Executive Director’s performance over a period ending during the year had an estimated value on vesting of US$1,068 (2017: US$1,399; 2016: US$4,529). Other related party transactions During the years ended 31 December 2018, 2017 and 2016, there were no other related party transactions that are required to be reported in these consolidated financial statements. Dialog Semiconductor PlcAnnual report and accounts 2018145 35. Adoption of IFRS 15 and IFRS 9 Introduction We adopted IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments with effect from 1 January 2018. We explain below the changes that were made to the Group’s significant accounting policies as a consequence of the adoption of these standards and their effect on the Group’s results and financial position. IFRS 15 Revenue from Contracts with Customers Background IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaced IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. IFRS 15 provides a single, principles-based five-step model to be applied to all contracts with customers. The five steps in the model are as follows: identify the contract with the customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognise revenue when (or as) the performance obligations are satisfied. Changes in revenue recognition policy We generate revenue principally through the sale of our products. Relatively small amounts of revenue are generated from royalties for the use of intellectual property assets and from research and development contracts. Sale of products Prior to adopting IFRS 15, revenue from the sale of products was recognised when the significant risks and rewards of ownership had been transferred to the customer, the amount of revenue could be measured reliably and it was probable that payment would be received. We considered that these conditions were met when the products were transferred to the customer, except in the case of sales to distributors on “ship and debit” terms. Where we sell to a distributor on ship and debit terms, the distributor may be entitled to a rebate if the distributor sells the product to end customers at a price lower than the price at which the distributor purchased the products from us. We therefore consider that we retain significant risks of ownership and therefore did not recognise revenue until the distributor had sold the products to end customers. Under IFRS 15, revenue from the sale of products is recognised when the customer obtains control of the products. We consider that control passes when the products are transferred to the customer. Accordingly, where products are sold on “ex-works” incoterms, revenue is recognised when the products are released for collection by the customer. Otherwise, revenue is recognised when the products are delivered to the customer. Where products are supplied on a consignment basis, delivery takes place and revenue is recognised when the products are taken out of the consignment by the customer. IFRS 15 had no effect on the recognition and measurement of revenue from the sale of products, except in relation to sales to distributors on ship and debit terms. Revenue on sales to distributors on ship and debit terms is now recognised when the products are transferred to the distributor rather than when the products are sold by the distributor to end customers. Revenue from sales to distributors on ship and debit terms is therefore now recognised earlier than it would have been prior to the adoption of IFRS 15. Revenue recognised on the sale of products is measured at the fair value of the consideration received or receivable, excluding sales taxes and after making allowance for rebates and product returns. Rebates are estimated using the expected value method based on actual rebates granted at the distributor and product level during the preceding quarter so as to reflect current pricing trends. As a consequence of our pricing policy, allowances for rebates on sales to distributors on ship and debit terms typically represent a significant proportion of the list price of the products. Most of our distributor customers are entitled to limited rights of return, referred to as stock rotation rights. Typically, returns are allowed twice-yearly for a credit of up to a percentage of the value of products shipped by us to the distributor during the preceding six-month period. Revenue on sales to distributors is recognised after making allowance for stock rotation claims that is estimated based on stock rotation credits granted at the distributor level during the preceding six-month period. Historically, stock rotation claims have not been significant. As permitted by IFRS 15, we do not capitalise the incremental costs of obtaining contracts (such as sales representatives’ commissions) because the amortisation period of such costs would be one year or less. Other revenue IFRS 15 did not affect the recognition and measurement of royalty income and income from research and development contracts. Revenue from royalties is recognised on an accruals basis in accordance with the terms of the relevant licensing agreements. Revenue from research and development contracts is recognised by reference to the stage of completion of the contract, which is represented by the costs incurred for work performed to date as a percentage of the estimated total contract costs. If it is probable that a contract will be loss making, the expected loss is recognised immediately as an expense in profit or loss. Dialog Semiconductor PlcAnnual report and accounts 2018Notes to the consolidated financial statements continued 35. Adoption of IFRS 15 and IFRS 9 continued Financial effect of adopting IFRS 15 We adopted IFRS 15 with effect from 1 January 2018 using the modified retrospective approach, whereby information for prior periods has not been restated but a cumulative effect adjustment was made to the opening balance of retained earnings which represented the cumulative effect of the earlier recognition of revenue sales to distributors on ship and debit terms. As at 1 January 2018, we recognised a credit to equity of US$1,541 on adoption of IFRS 15, which may be analysed as follows: 146 Deferred revenue Sales rebate allowance Returns liability Revenue recognised in equity Deferred cost of sales Returns asset Royalty allowance Cost of sales recognised in equity Credit to equity before income taxes Income tax expense Credit to equity after income taxes In the following tables, we summarise the effect of adopting IFRS 15 on the consolidated statement of income for the year ended 31 December 2018 and on the consolidated balance sheet as at 31 December 2018. The adoption of IFRS 15 had no effect on other comprehensive income or on the statement of cash flows. Consolidated statement of income for the year ended 31 December 2018 US$000 8,578 (3,367) (1,156) 4,055 (2,738) 659 (24) (2,103) 1,952 (411) 1,541 Revenue Cost of sales Gross profit Operating profit Profit before income taxes Income tax expense Profit after income taxes Net income Earnings per share (US$) Basic Diluted Consolidated balance sheet as at 31 December 2018 Assets Other current assets Total current assets Total non-current assets Total assets Liabilities and equity Income taxes payable Other current liabilities Total current liabilities Total non-current liabilities Retained earnings Total equity Total liabilities and equity As reported under IFRS 15 US$000 1,442,138 (751,070) 691,068 199,707 196,193 (55,281) 140,912 139,799 Adjustment for effect of IFRS 15 US$000 (10,137) 6,896 (3,241) (3,241) (3,241) 622 (2,619) (2,619) Amounts under IAS 18 US$000 1,432,001 (744,174) 687,827 196,466 192,952 (54,659) 138,293 137,180 1.89 1.80 (0.04) (0.03) 1.85 1.77 As reported under IFRS 15 US$000 Adjustment for effect of IFRS 15 US$000 Amounts under IAS 18 US$000 18,306 974,047 743,089 1,717,136 8,193 58,237 393,880 20,749 930,576 1,302,507 1,717,136 (637) (637) – (637) (1,032) 4,555 3,523 – (4,160) (4,160) (637) 17,669 973,410 743,089 1,716,499 7,161 62,792 397,403 20,749 926,416 1,298,347 1,716,499 Dialog Semiconductor PlcAnnual report and accounts 2018147 35. Adoption of IFRS 15 and IFRS 9 continued IFRS 9 Financial Instruments Background IFRS 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. It replaced IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 introduced a new model for classification and measurement of financial assets and financial liabilities, a single, forward-looking “expected loss” model for measuring impairment of financial assets (including trade receivables) and a new approach to hedge accounting that is more closely aligned with risk management activities. Classification and measurement of financial assets and liabilities IFRS 9 largely retained the requirements of IAS 39 for the classification of financial liabilities but changed the classification of financial assets. Under IFRS 9, a financial asset must be classified on initial recognition as measured at amortised cost, fair value through other comprehensive income (“FVOCI”) or fair value through profit or loss (“FVTPL”). IFRS 9 eliminated the IAS 39 categories for financial assets of held to maturity, loans and receivables and available-for-sale. Classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. A financial asset is measured at amortised cost if it is held with the objective of collecting the contractual cash flows and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. All other financial assets are measured at fair value. We have a strategic investment in the common shares of Energous Corporation that we intend to hold for the long term. As permitted by IFRS 9, we have irrevocably elected to present changes in the fair value of this equity investment in other comprehensive income rather than in profit or loss. Consequently, fair value gains or losses arising subsequent to 1 January 2018 that may be realised on any future sale of all or part of this investment will not be reclassified to profit or loss. We have not chosen to designate any financial assets or financial liabilities at FVTPL that would otherwise be classified as measured at amortised cost or FVOCI. In the following table, we present the previous classification under IAS 39 of financial assets and financial liabilities held by the Group as at 1 January 2018 and their new classification under IFRS 9. It can be seen that there was no change in the basis of measurement of the financial assets or financial liabilities held by the Group as a result of their reclassification in accordance with IFRS 9. Financial assets Cash and cash equivalents Trade and other receivables Investments: – Energous shares – Energous warrants Other financial assets: – Currency derivatives – Rental and other deposits Financial liabilities Trade and other payables Other financial liabilities: – Hire purchase and finance lease obligations – Currency derivatives – Deferred consideration – Contingent consideration Classification under IAS 39 Classification under IFRS 9 Loans and receivables (amortised cost) Amortised cost Loans and receivables (amortised cost) Amortised cost Available-for-sale FVTPL FVOCI – equity instrument FVTPL Fair value – hedging instruments Loans and receivables (amortised cost) Amortised cost Fair value – hedging instruments Amortised cost Amortised cost Amortised cost Fair value – hedging instruments Amortised cost FVTPL Amortised cost Fair value – hedging instruments Amortised cost FVTPL Impairment of financial assets Where appropriate, financial assets that are measured at amortised cost are stated net of an allowance for credit losses. IFRS 9 replaced the “incurred loss” model in IAS 39 with an “expected credit loss” model. Trade receivables As permitted by IFRS 9, we recognise an allowance for credit losses in respect of trade receivables from initial recognition measured as the amount of the lifetime expected credit losses. We previously recognised a credit loss allowance only when there was objective evidence that we may not be able to collect the amount due. Dialog is a business-to-business supplier with many established customers, several of which are large multi-national businesses, and has a record of insignificant credit losses. Before accepting a new customer, we assess the potential customer’s credit quality and establish a credit limit. Credit quality is assessed using data maintained by reputable credit rating agencies, by checking references included in credit applications and, where they are available, by reviewing the customer’s recent financial statements. Credit limits are subject to multiple levels of authorisation and are reviewed on a regular basis. Against this background, we determined that there was no appreciable difference between the credit loss allowance that we recognised against trade receivables using the incurred loss model under IAS 39 and that recognised using the expected credit loss model on adoption of IFRS 9. Dialog Semiconductor PlcAnnual report and accounts 2018148 Notes to the consolidated financial statements continued 35. Adoption of IFRS 15 and IFRS 9 continued Cash and cash equivalents Under IFRS 9, we normally recognise an allowance for credit losses in respect of cash and cash equivalents that is measured as the amount of expected credit losses over the next 12 months. If, however, the risk of default has increased significantly since initial recognition, we measure the allowance as the amount of lifetime credit losses. We previously recognised a credit loss allowance only when there was objective evidence of default. Cash deposits and cash equivalent investments are placed only with reputable financial institutions that satisfy the criteria set out in our Board approved treasury policy, including a requirement that each has a median credit rating of not less than A- (Standard & Poor’s), A3 (Moody’s) or A- (Fitch). Credit risk is further limited by investing only in liquid instruments. Historically, we have not recognised any significant credit losses in respect of cash deposits and cash equivalent investments. Hedge accounting We use forward currency contracts principally to hedge our exposure to exchange rate movements on forecast operating expenses and tax cash flows denominated in foreign currencies, principally the Euro and the pound sterling. Where possible, these contracts are designated as hedging instruments in cash flow hedge relationships. We have elected to adopt the new general hedge accounting model in IFRS 9, which requires us to ensure that hedge accounting relationships are aligned with our risk management objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness than was the case under IAS 39. Whilst hedges must still be expected to be highly effective on inception and in subsequent periods, the requirement of IAS 39 for the actual effectiveness of the hedge to be within a specified range in order for hedge accounting to continue has been removed under IFRS 9. We applied the hedge accounting requirements of IFRS 9 prospectively with effect from 1 January 2018. All hedging relationships designated under IAS 39 as at 31 December 2017 met the criteria for hedge accounting under IFRS 9 as at 1 January 2018 and were therefore regarded as continuing hedging relationships. Financial effect of adopting IFRS 9 We adopted the classification and measurement (including impairment) requirements of IFRS 9 with effect from 1 January 2018 using the modified retrospective approach, whereby information for prior periods has not been restated to reflect these requirements. We recognised no changes in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 and, therefore, there was no cumulative effect adjustment to the opening balance of equity as at 1 January 2018. Dialog Semiconductor PlcAnnual report and accounts 2018Company balance sheet As at 31 December Assets Cash and cash equivalents Other financial assets Income tax receivable Amounts owed by group undertakings Other current assets Assets classified as held for sale Total current assets Investments in subsidiaries Other investments Intangible assets Other non-current assets Total non-current assets Total assets Liabilities and equity Amounts owed to group undertakings Trade and other payables Other financial liabilities Income tax payable Other payables Total current liabilities Non-current liabilities Ordinary shares Share premium account Retained earnings Other reserves Dialog shares held by employee benefit trusts Total equity Total liabilities and equity 149 Note 2018 US$000 2017 US$000 577,945 202 612 32,593 2,618 613,970 1,944 615,914 855,299 11,538 190 398 867,425 1,483,339 377,757 3,158 178,146 – 89 559,150 7,087 14,204 403,660 536,108 (14,356) (22,514) 917,102 1,483,339 326,543 6,649 – 179,618 723 513,533 – 513,533 840,109 47,034 318 503 887,964 1,401,497 363,923 3,119 97 4,938 124 372,201 8,671 14,204 403,660 595,270 8,393 (902) 1,020,625 1,401,497 7 6 4 5 7 8 These financial statements were approved by the Board of Directors on 6 March 2019 and were signed on its behalf by: Dr Jalal Bagherli Director Dialog Semiconductor PlcAnnual report and accounts 2018Company statement of changes in equity Year ended 31 December 150 As at 31 December 2016 Net income Other comprehensive income Total comprehensive income Other changes in equity: – Shares issued to employee benefit trust – Purchase of own shares into treasury – Share buyback obligation – Cancellation of treasury shares – Purchase of shares by employee benefit trusts – Sale of shares by employee benefit trusts As at 31 December 2017 Net income Other comprehensive loss Total comprehensive income/(loss) Other changes in equity: – Share buyback obligation – Purchase of shares by employee benefit trusts – Sale of shares by employee benefit trusts As at 31 December 2018 Ordinary shares US$000 14,402 – – – 373 – – (571) – – 14,204 – – – – – – 14,204 Share premium account US$000 403,687 – – – (27) – – – – – 403,660 – – – – – – 403,660 Retained earnings US$000 456,350 296,968 – 296,968 – 3,024 62,584 (186,522) – (37,134) 595,270 108,582 – 108,582 (171,187) – 3,443 536,108 Other reserves (note 8) US$000 (58,606) – 4,956 4,956 – (125,050) – 187,093 – – 8,393 – (22,749) (22,749) – – – (14,356) Dialog shares held by employee benefit trusts US$000 (20,608) – – – (373) – – – (24,301) 44,380 (902) – – – – (21,786) 174 (22,514) Total US$000 795,225 296,968 4,956 301,924 (27) (122,026) 62,584 – (24,301) 7,246 1,020,625 108,582 (22,749) 85,833 (171,187) (21,786) 3,617 917,102 Dialog Semiconductor PlcAnnual report and accounts 2018151 Notes to the Company financial statements For the year ended 31 December 2018 1. Background Description of business Dialog Semiconductor Plc (“the Company”) is a public limited company that is incorporated and domiciled in the United Kingdom. The Company’s ordinary shares are listed on the Frankfurt Stock Exchange. The Company is the ultimate parent of a group of companies that creates and markets highly-integrated, mixed-signal integrated circuits, optimised for personal, portable, hand-held devices, low energy short-range wireless, LED solid state lighting and automotive applications. Statement of compliance The Company’s separate financial statements on pages 149 to 155 have been prepared in accordance with FRS 101 Reduced Disclosure Framework and those parts of the Companies Act 2006 that are applicable to companies reporting under FRS 101. Accordingly, the Company’s separate financial statements comply with the recognition and measurement requirements of IFRS as adopted for use in the European Union but they exclude certain disclosures that would otherwise be required under that body of accounting standards. Basis of preparation The Company’s separate financial statements have been prepared on a going concern basis and in accordance with the historical cost convention, except that certain investments and derivative financial instruments are stated at their fair value. The Company’s significant accounting policies are set out in note 2. Presentation currency The Company’s separate financial statements are presented in US dollars (“US$”), which is the Company’s functional currency. All US dollar amounts are rounded to the nearest thousand (“US$000”), except where otherwise stated. Disclosure exemptions utilised under FRS 101 In preparing the Company’s separate financial statements, the Directors utilised the following exemptions from the disclosure requirements of IFRS adopted for use in the European Union that are available to them under FRS 101: U Paragraphs 45(b) (number and weighted average exercise prices of share options) and 46 to 52 (determination of fair value of options and awards granted and financial effect of share-based compensation) of IFRS 2 Share-based Payment. U IFRS 7 Financial Instruments – Disclosures. U Paragraphs 91 to 99 (disclosure requirements) of IFRS 13 Fair Value Measurement. U Paragraph 38 of IAS 1 Presentation of Financial Statements with regard to comparative information requirements in respect of paragraph 79(a)(iv) of IAS 1 (reconciliation of the number of the Company’s shares outstanding at the beginning and end of the period). U Paragraphs 10(d) (statement of cash flows), 16 (statement of compliance with IFRS), 38(A to D) (comparative information), 111 (statement of cash flows) and 134 to 136 (disclosures about capital) of IAS 1 Presentation of Financial Statements. U IAS 7 Statement of Cash Flows. U Paragraphs 30 and 31 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (discussion of IFRSs issued by the IASB but not yet adopted by the Company). U Paragraph 17 of IAS 24 Related Party Disclosures (compensation of key management personnel) and the further requirement in IAS 24 to disclose related party transactions entered into with a subsidiary, provided the subsidiary is wholly-owned by the Company. Approval of the financial statements The Company’s separate financial statements for the year ended 31 December 2018 were authorised for issue by the Board of Directors on 6 March 2019. Accounting standards adopted during the year IFRS 9 Financial Instruments The Company adopted IFRS 9 with effect from 1 January 2018. The Company adopted the classification and measurement (including impairment) requirements of IFRS 9 using the modified retrospective approach, whereby information presented for prior periods has not been restated. An explanation of the changes introduced by IFRS 9 is provided in note 35 to the consolidated financial statements. The Company also adopted the hedge accounting requirements of IFRS 9 but does not currently apply hedge accounting to any of its economic hedges. Adoption of IFRS 9 had no impact on the Company’s results or financial position. Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2) With effect from 1 January 2018, the Company adopted amendments to IFRS 2 Share-based Payments which, among other things, clarified the classification of share-based payment transactions with net settlement features for withholding tax obligations. Adoption of the amendments had no impact on the Company’s results or financial position. IFRS 15 Revenue from Contracts with Customers The Company adopted IFRS 15 with effect from 1 January 2018. Since the Company does not currently enter into contracts that fall within the scope of IFRS 15, its adoption had no impact on the Company’s results or financial position. Dialog Semiconductor PlcAnnual report and accounts 2018152 Notes to the Company financial statements continued 2. Significant accounting policies Investments in subsidiaries A subsidiary is an entity that is controlled, either directly or indirectly, by the Company. Control exists when the Company is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity that significantly affect its returns. Investments in subsidiaries represent interests in the Company’s subsidiaries that are directly owned by the Company. Unless classified as held for sale, investments in subsidiaries are stated at cost less provision for impairment. Investment in associate An associate is an entity over which the Company has significant influence. Significant influence is the power to participate in financial and operating policy decisions but not to control or jointly control them. Significant influence generally exists where the Company holds, directly or indirectly through one or more of its subsidiaries, more than 20% and less than 50% of the shareholders’ voting rights. Prior to its reclassification as held for sale, the Company’s investment in its associate was stated at cost less provision for impairment. Foreign currency translation Transactions denominated in foreign currencies are recorded in US dollars at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate ruling at the balance sheet date. Currency translation differences are recognised in profit or loss. Financial instruments (a) Amounts owed by/to group undertakings Amounts owed by/to group undertakings are initially measured at fair value and are subsequently measured at amortised cost using the effective interest method. (b) Cash and cash equivalents Cash and cash equivalents include cash at bank and in hand, investments in money market funds and short-term deposits with an original maturity of three months or less. (c) Equity investments Equity investments are initially measured at fair value plus transaction costs, if any. Equity investments are subsequently measured at fair value with resulting gains and losses recognised in profit or loss unless the Company irrevocably elects on initial recognition for such gains and losses to be recognised in other comprehensive income. The Company has made this election in respect of its investment in the common shares of Energous Corporation. (d) Derivative financial instruments The Company holds derivative financial instruments that are used to reduce its exposure or that of its subsidiaries to currency exchange rate movements. The Company also holds equity options and warrants in relation to certain of its strategic investments. The Company does not hold or issue derivatives for speculative purposes. All derivative financial instruments held by the Company are measured at fair value. All fair value gains and losses are recognised in profit or loss. Where the fair value of a derivative on initial recognition differs from the transaction price, if any, the difference is recognised immediately in profit or loss only if the fair value is evidenced by a quoted price in an active market or is based on a valuation technique that uses only data from observable markets. Assets classified as held for sale An asset is classified as held for sale if its carrying amount will be recovered by sale, it is available for immediate sale in its present condition and management has committed to, and has initiated, a plan to sell the asset which, when initiated, was expected to result in a completed sale within 12 months. Assets that are classified as held for sale are measured at the lower of their carrying amount when classified as held for sale and fair value less costs to sell. Dialog Semiconductor PlcAnnual report and accounts 2018153 2. Significant accounting policies continued Income taxes Current tax is the amount of tax payable or recoverable in respect of the taxable profit or loss for the period. Deferred tax is tax expected to be payable or recoverable on temporary differences between the carrying amount of an asset or liability in the financial statements and its tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available in the future against which they can be utilised. Current tax and deferred tax is recognised in profit or loss unless it relates to an item that is recognised in the same or a different period outside profit or loss, in which case the related tax is also recognised outside profit or loss, either in other comprehensive income or directly in equity. Share-based compensation The Company operates share-based compensation plans under which it grants options and other awards over its ordinary shares to employees of its subsidiaries. Awards granted under the existing plans are classified as equity-settled awards. The Company recognises a compensation expense that is based on the fair value of the awards measured at the grant date using the Black-Scholes option pricing formula or a Monte Carlo valuation model. Shares held by employee benefit trusts The Company provides finance to two trusts to purchase the Company’s ordinary shares in order to meet its obligations under its share-based compensation plans. When the trusts purchase such shares, the cost of the shares is debited to equity and subsequent sales or transfers of the shares by the trusts are accounted for within equity. Treasury shares Treasury shares comprise the Company’s ordinary shares that have been purchased under the Company’s share buyback programme. Purchases made under the programme are off market and are effected by way of contingent forward share purchase contracts with third- party brokers. Subsequent sales, transfers or cancellations of treasury shares held by the Company are accounted for within equity. 3. Income statement As permitted by section 408 of the Companies Act 2006, the Company’s income statement has not been included in these financial statements. The Company’s profit after tax was US$108,582 (2017: US$296,968). During 2018, the Company had no employees (2017: none). Directors’ remuneration is set out in the Directors’ remuneration report on pages 70 to 85. Fees payable to the Company’s auditors, Deloitte LLP, are set out in note 7 to the consolidated financial statements. 4. Investments in subsidiaries Movements in the carrying amount of subsidiaries owned directly by the Company were as follows: As at 31 December 2017 Additions Reclassification as asset held for sale (note 6) As at 31 December 2018 Details of the Company’s subsidiaries as at 31 December 2018 are set out on page 167. US$000 840,109 15,203 (13) 855,299 Dialog Semiconductor PlcAnnual report and accounts 2018Notes to the Company financial statements continued 5. Other investments Other investments were as follows: Investment in associate (note 6) Strategic investments Equity investments: – Energous shares Derivative financial instruments: – Energous warrants Total strategic investments Total other investments Energous shares and warrants 154 2018 US$000 – 2017 US$000 879 10,073 33,837 1,465 11,538 11,538 12,318 46,155 47,034 In November 2016, the Company entered into a strategic alliance with Energous Corporation (“Energous”), the developer of WattUp®, a wire-free charging technology. At that time, the Company subscribed for 763,552 common shares in Energous and was granted warrants to purchase up to 763,552 common shares that are exercisable in full or in part on a cashless basis at any time between May 2017 and November 2019. The Company initially recognised the warrants at their grant date fair value of US$4,695 and an equivalent deferred credit within non-current liabilities. The Company will amortise the deferred credit to profit or loss in relation to the royalties that may be payable for the use of Energous’ Intellectual Property over the initial seven-year term of the strategic alliance. Amortisation of the deferred credit has not yet commenced. On 5 July 2017, the Company subscribed for a further 976,139 common shares in Energous at a cost of US$15,000 and was granted a second tranche of warrants to purchase up to 654,013 common shares that are exercisable in full or in part on a cashless basis at any time between January 2018 and July 2020. The Company initially recognised the second tranche of the warrants at their grant date fair value of US$4,753 and an equivalent deferred credit within non-current liabilities. The Company is amortising the deferred credit to profit or loss over the three-year period from the grant date to the expiry of the warrants. During 2018, the Company recognised a fair value loss on the shares of US$23,764 (2017: gain of US$5,971) in other comprehensive income and a fair value loss of US$10,853 (2017: gain of US$941) on the warrants in profit or loss. Also during 2018, the Company recognised a credit of US$1,584 (2017: credit of US$776) in profit or loss on the amortisation of the fair value on initial recognition of the second tranche of the warrants. 6. Assets classified as held for sale Investment in subsidiary On 11 October 2018, the Company entered into an asset transfer agreement into with Apple Inc. (“Apple”), pursuant to which it will sell to Apple its shareholding in its wholly-owned subsidiary, Dialog Semiconductor (Italy) S.R.L. The transaction is expected to complete in the first half of 2019, subject to regulatory approvals and other customary closing conditions. Accordingly, the Company has reclassified its investment as an asset held for sale at its carrying amount of US$13. Investment in associate As at 31 December 2018, the Company held a 38.7% ownership interest in Dyna Image Corporation (“Dyna Image”). Details of the associate are set out on page 167. On 7 December 2018, the Company entered into an agreement to dispose of its shareholding in Dyna Image for which it expects to receive consideration of between US$1.9 million and US$4.2 million. On entering into the sale agreement, the carrying amount of the investment was remeasured with the effect that US$1,052 of the impairment loss recognised on the investment in previous years was reversed as a credit to profit or loss. The transaction is expected to complete in the first half of 2019, subject to applicable regulatory approvals. Accordingly, the Company has reclassified its investment in Dyna Image as an asset held for sale at its carrying amount of US$1,931. 7. Income tax As at 31 December 2018, there was current tax receivable of US$612 representing tax overpaid. As at 31 December 2017, there was current tax payable of US$4,938, which arose because UK tax laws restricted the utilisation of available tax loss carryforwards to offset the Company’s taxable profit. As at 31 December 2017, deferred tax assets were recognised for tax loss carryforwards of US$5,971 to offset deferred tax liabilities recognised in relation to remeasurement gains on equity investments. During 2018, the remeasurement gains were eliminated due to a significant decline in the fair value of the investments and the related deferred tax liabilities and deferred tax assets were derecognised. As at 31 December 2018, no deferred tax assets were recognised. As at 31 December 2018, deferred tax assets were not recognised for tax loss carryforwards of US$10,016 (2017: US$3,783) and deductible temporary differences of US$53 (2017: US$135) because it is not considered probable that taxable profits will be available in the future against which they can be utilised. Dialog Semiconductor PlcAnnual report and accounts 2018155 8. Share capital and reserves a) Share capital and share premium account Details of the Company’s share capital are set out in note 25 to the consolidated financial statements. The share premium account represents the difference between the nominal value of shares issued and the fair value of the consideration received. The share premium account is not distributable but may be used for certain purposes specified by United Kingdom law, including to write off expenses on any issue of shares and to pay up fully paid bonus shares. b) Other reserves Movements on other reserves were as follows: As at 31 December 2016 Other comprehensive income/(loss): – Fair value loss on available-for-sale investments – Income tax expense Other changes in equity: – Purchase of own shares into treasury – Cancellation of treasury shares As at 31 December 2017 Other comprehensive loss: – Fair value loss on equity investments – Income tax credit As at 31 December 2018 Capital redemption reserve US$000 – – – – 571 571 – – 571 Fair value reserve US$000 2,866 5,971 (1,015) – – 7,822 (23,764) 1,015 (14,927) Treasury shares US$000 (61,472) – – (125,050) 186,522 – – – – Total US$000 (58,606) 5,971 (1,015) (125,050) 187,093 8,393 (23,764) 1,015 (14,356) Treasury shares were shares purchased under the Company’s share buyback programme. On 23 June 2017, the Company cancelled all of the treasury shares that it held following completion of the third tranche of the share buyback programme. On cancellation, the total cost of the treasury shares was transferred from treasury shares and set against retained earnings and the nominal value of the shares cancelled of US$571 was transferred from share capital to a non-distributable capital redemption reserve. c) Distributable profits Profits available for distribution by the Company comprise its accumulated realised profits less its accumulated realised losses, subject to the restriction that a distribution may not reduce the Company’s net assets below the aggregate of its called up share capital and its undistributable reserves. The Directors consider that the Company’s distributable profits as at 31 December 2018 amounted to US$670,430 (2017: US$582,780). d) Share buyback programme Details of tranches initiated under the Company’s share buyback programme are set out in note 26 to the consolidated financial statements. On 6 November 2018, the Company announced details of the latest tranche of the share buyback programme. On initiation of this tranche, the Company recognised a liability and a corresponding debit to retained earnings of €150.0 million (US$171,173) in respect of the maximum obligation to purchase shares. We also debited transaction costs incurred of US$14 to retained earnings. We have not yet been required by the appointed broker to make any intermediate settlements in relation to this tranche, under which the broker may continue to purchase shares until 21 May 2019. e) Dialog shares held by employee benefit trusts The Company provides finance to two trusts to purchase its ordinary shares in order to meet its obligations under its share-based compensation plans. As at 31 December 2018, the trusts held 2,607,259 ordinary shares (2017: 2,791,027 ordinary shares). An analysis of movements in the number of shares held by the trusts is presented in note 29 to the consolidated financial statements. 9. Share-based compensation A description of the share-based compensation plans operated by the Company, together with information about share options exercised and outstanding is presented in note 29 to the consolidated financial statements. 10. Guarantees General guarantees have been issued by the Company under Article 403, Book 2 of the Dutch Civil Code in respect of its Dutch subsidiaries, in order that they do not have to file annual accounts in the Netherlands. Dialog Semiconductor PlcAnnual report and accounts 2018156 Financial performance measures Use of non-IFRS measures We use a number of measures to assess our financial performance, to ensure our performance is aligned to strategy and continued alignment with shareholders’ interests. We consider certain of these measures to be particularly important and identify them as “key performance indicators” (KPIs). We have identified the following financial measures as KPIs: revenue growth; gross margin, operating expenses as a percentage of revenue; operating profit margin; diluted EPS and free cash flow. We monitor the profit or loss measures that are KPIs on both an IFRS basis and an underlying basis. Underlying measures of performance and free cash flow are non-IFRS measures because they exclude amounts that are included in, or include amounts that are excluded from, the most directly comparable measure calculated and presented in accordance with IFRS or are calculated using financial measures that are not calculated in accordance with IFRS. We do not regard non-IFRS measures as a substitute for, or superior to, the equivalent IFRS measures. Non-IFRS measures presented by Dialog may not be directly comparable with similarly-titled measures used by other companies. Underlying measures of performance We report underlying measures of performance because we believe they provide both management and investors with useful additional information about the financial performance of our businesses. Underlying measures of performance represent the equivalent IFRS measures adjusted for specific items that are considered by us to hinder comparison of the financial performance of our businesses either from one period to another or with other similar businesses. Underlying measures of performance exclude items that can have a significant effect on the Group’s profit or loss. We compensate for these limitations by monitoring separately the items that are excluded from the equivalent IFRS measures in calculating the underlying measures. We outline below the specific items of income and expense that are recognised in profit or loss in accordance with IFRS but are excluded from our underlying results and their related tax effects. Share-based compensation We exclude the share-based compensation expense recognised in relation to options and awards granted under the Company’s share-based compensation plans because the awards are equity-settled and therefore have no immediate effect on shareholders’ returns. We additionally exclude the effect on profit or loss of changes in the accrual for payroll taxes payable on the exercise or vesting of such options and awards because the accrual fluctuates with the Company’s share price and the effect on profit or loss is therefore not necessarily indicative of our trading performance. Business combinations We exclude those effects of applying the acquisition method of accounting under IFRS that we consider are not indicative of the Group’s trading performance, including the accounting for transaction costs; the fair value adjustment to inventories of acquired businesses; the recognition of certain elements of the purchase price as compensation expense; and the recognition of remeasurements of contingent consideration in profit or loss. In 2018 and 2017, we excluded from our underlying results the following in relation to the accounting for the acquisitions of Silego and ams AG’s LED backlight business: U acquisition-related costs; U the recognition in cost of sales of the consumption of the fair value uplift to inventory held by the acquired businesses at the acquisition date; U the element of deferred amounts payable for Silego that is recognised as compensation expense; U the credit recognised on the forfeiture of deferred consideration payable for Silego; and U the credit arising from the change in estimate of the liabilities for the contingent consideration payable for Silego and the interest expense recognised on the unwinding of the discount on the liabilities. We also exclude from our underlying results the amortisation of identifiable intangible assets that are recognised in business combinations in order that the performance of those businesses that we have acquired may be compared fairly with those businesses that we have developed on an organic basis. Integration costs We exclude the costs of integrating acquired businesses that are considered by us to hinder the assessment of the financial performance of those businesses. In 2018 and 2017, we excluded the costs that we incurred in relation to the integration of Silego. Corporate transaction costs We exclude significant transaction costs and other non-recurring items recognised in relation to corporate transactions other than business combinations. In 2018, we excluded from our underlying results the costs that we incurred in relation to the acquisition discussions with Synaptics Incorporated and the licence and asset transfer agreements that we entered into with Apple Inc. In 2016, we excluded the fee that we received from Atmel Corporation on their termination of the merger agreement that existed between us and residual transaction costs and facility commitment fees that we incurred prior to termination. Dialog Semiconductor PlcAnnual report and accounts 2018157 Underlying measures of performance continued Effective interest on financial liabilities We adjusted our interest expense to exclude the non-cash element of the interest expense recognised in relation to a patent licensing agreement that was accounted for as a hire purchase contract within other intangible assets. We considered that the cash interest payments are more indicative of the effect of this arrangement on shareholders’ returns. Strategic investments We exclude the effect on profit or loss of the measurement at fair value of our strategic investments (comprising the shares and the warrants that we hold in Energous, the call option that we held over the shares that we do not own in Dyna Image prior to its expiry in June 2018 and, until they were sold in May 2017, the shares that we held in Arctic Sand). We hold these instruments for strategic reasons linked to our commercial partnerships with these companies. Since we do not hold these instruments for trading purposes, we exclude fluctuations in their fair values when assessing our trading performance. In December 2017, we recognised impairment losses totalling US$4,327 in relation to the intangible assets and property, plant and equipment held by Dyna Image and ceased to account for it as a subsidiary, recognising a loss of US$5,597 on deconsolidation. Since these were discrete non-recurring losses, we excluded them from our underlying results. Income tax effect of underlying adjustments We calculate the income tax effect of underlying adjustments by considering the specific tax treatment of each item and by applying the relevant statutory tax rate to those items that are taxable or deductible for tax purposes. US tax reform In December 2017, the US President signed into law significant reforms of the US tax system, including a reduction of the Federal corporate income tax rate from 35% to 21%. Our income tax expense for 2017 reflected a non-cash deferred tax credit of US$6,658 resulting from the remeasurement of US deferred tax balances at the lower tax rate. Since this was a discrete non-recurring benefit, we excluded it from our underlying results. Reconciliation of underlying measures to equivalent IFRS measures Reconciliations of the underlying measures of performance to the equivalent IFRS measures for the years ended 31 December 2018, 2017 and 2016 are presented in the following tables: Year ended 31 December 2018 US$000 unless stated otherwise Revenue Cost of sales Gross profit Gross margin % SG&A expenses R&D expenses Other operating income Operating profit Operating margin % Net finance (expense)/income Profit before income taxes Income tax expense Profit after income taxes Share of loss of associate Net income EBITDA EBITDA margin % IFRS basis 1,442,138 (751,070) 691,068 47.9% (168,228) (326,309) 3,176 199,707 13.8% (3,514) 196,193 (55,281) 140,912 (1,113) 139,799 n/a n/a Share-based compensation and related payroll taxes – 1,791 1,791 Accounting for business combinations – 3,129 3,129 Integration costs – 13 13 Corporate transaction costs – – – Effective interest – – – Strategic investments – – – 17,163 22,699 – 41,653 – 41,653 (2,108) 39,545 – 39,545 14,757 9,148 (877) 26,157 2,220 28,377 (3,448) 24,929 – 24,929 2,524 228 – 2,765 – 2,765 (555) 2,210 – 2,210 11,346 – – 11,346 – 11,346 (1,024) 10,322 – 10,322 – – – – 50 50 (9) 41 – 41 – – – – 9,269 9,269 (746) 8,523 – 8,523 Underlying basis 1,442,138 (746,137) 696,001 48.3% (122,438) (294,234) 2,299 281,628 19.5% 8,025 289,653 (63,171) 226,482 (1,113) 225,369 339,584 23.5% Dialog Semiconductor PlcAnnual report and accounts 2018158 Financial performance measures continued Reconciliation of underlying measures to equivalent IFRS measures continued Year ended 31 December 2017 US$000 unless stated otherwise Revenue Cost of sales* Gross profit Gross margin % SG&A expenses R&D expenses* Other operating (expense)/income Operating profit Operating margin % Net finance income Profit before income taxes Income tax expense Net income EBITDA EBITDA margin % Year ended 31 December 2016 US$000 unless stated otherwise Revenue Cost of sales* Gross profit Gross margin % SG&A expenses R&D expenses* Other operating income Operating profit Operating margin % Net finance expense Profit before income taxes Income tax expense Net income EBITDA EBITDA margin % Share-based compensation and related payroll taxes – 1,219 1,219 Accounting for business combinations – 2,306 2,306 Integration costs – – – Effective interest – – – Strategic investments – – – 16,285 17,994 – 35,498 – 35,498 (3,476) 32,022 14,358 8,050 – 24,714 436 25,150 (4,187) 20,963 1,121 1,184 – 2,305 – 2,305 (701) 1,604 – – – – 289 289 (56) 233 – – 9,924 9,924 (1,398) 8,526 1,889 10,415 IFRS basis 1,352,841 (707,971) 644,870 47.7% (145,262) (303,013) (9,578) 187,017 13.8% 7,786 194,803 (25,369) 169,434 n/a n/a US tax reform – – – – – – – – – (6,658) (6,658) Underlying basis 1,352,841 (704,446) 648,395 47.9% (113,498) (275,785) 346 259,458 19.2% 7,113 266,571 (38,558) 228,013 315,773 23.3% Share-based compensation and related payroll taxes – 1,120 1,120 Accounting for business combinations – – – Aborted merger with Atmel – – – Effective interest – – – Strategic investments – – – 15,826 13,570 – 30,516 – 30,516 (4,686) 25,830 7,473 7,029 – 14,502 – 14,502 (351) 14,151 3,485 – (137,300) (133,815) 1,913 (131,902) (383) (132,285) – – – – 526 526 (105) 421 – – – – (1,199) (1,199) 386 (813) IFRS basis 1,197,611 (630,963) 566,648 47.3% (133,271) (261,278) 137,708 309,807 25.9% (4,601) 305,206 (47,090) 258,116 n/a n/a Underlying basis 1,197,611 (629,843) 567,768 47.4% (106,487) (240,679) 408 221,010 18.5% (3,361) 217,649 (52,229) 165,420 269,681 22.5% * Certain product development costs have been reclassified from cost of sales to research and development expenses (see note 1 to the consolidated financial statements). Accounting for business combinations We excluded from the underlying measures of performance the following specific items arising from business combinations accounting under IFRS: US$000 Acquisition-related costs Amortisation of acquired intangible assets Consumption of the fair value uplift of acquired inventory Consideration accounted for as compensation expense Forfeiture of deferred consideration Remeasurement of contingent consideration Increase in operating profit Unwinding of discount on contingent consideration Increase in profit before income taxes Income tax credit Increase in net income 2018 – 22,629 3,129 1,481 (204) (878) 26,157 2,220 28,377 (3,448) 24,929 2017 4,539 16,461 2,305 1,409 – – 24,714 436 25,150 (4,187) 20,963 2016 – 14,502 – – – – 14,502 – 14,502 (351) 14,151 Dialog Semiconductor PlcAnnual report and accounts 2018159 Explanation of financial performance measures Change in revenue We monitor the change in revenue from one period to another and the trend in revenue over time because they are important measures of the growth in our business. During the periods presented, there were no differences between revenue determined in accordance with IFRS and on an underlying basis. During each period, the change in revenue was as follows: US$000 unless stated otherwise IFRS and underlying measures Revenue in the period Revenue in the comparative period Increase/(decrease) in revenue Gross margin 2018 2017 2016 1,442,138 1,352,841 6.6% 1,352,841 1,197,611 13.0% 1,197,611 1,355,312 (11.6)% Gross margin is gross profit expressed as a percentage of revenue. We monitor gross margin because we believe it provides a measure of the value that we add to our products. Gross margin determined in accordance with IFRS and on an underlying basis was as follows: US$000 unless stated otherwise IFRS measures Revenue Gross profit Gross margin Underlying measures Revenue Gross profit Gross margin 2018 2017 2016 1,442,138 691,068 47.9% 1,442,138 696,001 48.3% 1,352,841 644,870 47.7% 1,352,841 648,395 47.9% 1,197,611 566,648 47.3% 1,197,611 567,768 47.4% Operating expenses as a percentage of revenue We monitor operating expenses as a percentage of revenue because we believe it provides a measure of our effort in innovation and the efficiency of our operating structure. Operating expenses comprise selling, general and administrative (“SG&A”) expenses and research and development (“R&D”) expenses. Operating expenses as a percentage of revenue determined in accordance with IFRS and on an underlying basis was as follows: US$000 unless stated otherwise IFRS measures Revenue Operating expenses Operating expenses as a percentage of revenue Underlying measures Revenue Operating expenses Operating expenses as a percentage of revenue Change in operating profit 2018 2017 2016 1,442,138 (494,537) 34.3% 1,442,138 (416,672) 28.9% 1,352,841 (448,275) 33.1% 1,352,841 (389,283) 28.8% 1,197,611 (394,549) 32.9% 1,197,611 (347,166) 29.0% We monitor the change in operating profit from one period to another and the trend in operating profit over time because we believe they are important measures of the performance of our operations. Operating profit growth determined in accordance with IFRS and on an underlying basis was as follows: US$000 unless stated otherwise IFRS measures Operating profit in the period Operating profit in the comparative period Increase/(decrease) in operating profit Underlying measures Operating profit in the period Operating profit in the comparative period Increase/(decrease) in operating profit 2018 2017 2016 199,707 187,017 6.8% 281,628 259,458 8.5% 187,017 309,807 (39.6)% 259,458 221,010 17.4% 309,807 259,746 19.3% 221,010 317,656 (30.4)% Dialog Semiconductor PlcAnnual report and accounts 2018Financial performance measures continued Explanation of financial performance measures continued Operating profit margin Operating profit margin is operating profit expressed as a percentage of revenue. We monitor operating profit margin because we believe it provides a measure of the overall profitability of our operations. Operating profit margin determined in accordance with IFRS and on an underlying basis was as follows: 160 US$000 unless stated otherwise IFRS measures Revenue Operating profit Operating profit margin Underlying measures Revenue Operating profit Operating profit margin 2018 2017 2016 1,442,138 199,707 13.8% 1,442,138 281,628 19.5% 1,352,841 187,017 13.8% 1,352,841 259,458 19.2% 1,197,611 309,807 25.9% 1,197,611 221,010 18.5% Underlying EBITDA and EBITDA margin Underlying EBITDA is a non-IFRS measure that we define as underlying net income before net finance expense, income tax expense and depreciation and amortisation expenses. Underlying EBITDA margin is a non-IFRS measure that represents underlying EBITDA expressed as a percentage of revenue. We present underlying EBITDA and underlying EBITDA margin because we believe these measures are useful to investors and other users of our financial information in evaluating the sensitivity of our underlying trading performance to changes in variable operating expenses. Underlying EBITDA may be reconciled to net income determined in accordance with IFRS as follows: US$000 Net income Net finance expense/(income) Income tax expense Depreciation expense Amortisation expense EBITDA Share-based compensation and related payroll taxes Acquisition-related costs Consumption of the fair value uplift of acquired inventory Consideration accounted for as compensation expense Forfeiture of deferred consideration Remeasurement of contingent consideration Corporate transaction costs Integration costs Share of loss of associate Impairment of intangible assets Impairment of property, plant and equipment Loss on deconsolidation of Dyna Image Merger termination fee Underlying EBITDA Underlying EBITDA margin was as follows: US$000 unless stated otherwise Underlying measures Revenue EBITDA EBITDA margin 2018 139,799 3,514 55,281 31,455 49,130 279,179 41,653 – 3,129 1,481 (204) (878) 11,346 2,765 1,113 – – – – 339,584 2017 169,434 (7,786) 25,369 30,807 41,969 259,793 35,498 4,539 2,305 1,409 – – – 2,305 – 2,790 1,537 5,597 – 315,773 2016 258,116 4,601 47,090 27,219 35,954 372,980 30,516 – – – – – 3,485 – – – – – (137,300) 269,681 2018 2017 2016 1,442,138 339,584 23.5% 1,352,841 315,773 23.3% 1,197,611 269,681 22.5% Dialog Semiconductor PlcAnnual report and accounts 2018161 Explanation of financial performance measures continued Earnings per share We monitor basic and diluted earnings per share (“EPS”) on an IFRS basis and on an underlying basis. We believe that underlying EPS measures are useful to investors in assessing our ability to generate earnings and provide a basis for assessing the value of the Company’s shares (for example, by way of price earnings multiples). Earnings for calculating IFRS and underlying EPS measures were calculated as follows: US$000 IFRS measures Net income Loss attributable to non-controlling interests Earnings for calculating basic and diluted EPS Underlying measures Net income* Loss attributable to non-controlling interests Earnings for calculating basic and diluted EPS 2018 2017 2016 139,799 – 139,799 225,369 – 225,369 169,434 4,482 173,916 228,013 1,425 229,438 258,116 2,824 260,940 165,420 2,299 167,719 * Underlying net income is reconciled to net income determined in accordance with IFRS basis in the tables set out under the heading “Reconciliation of underlying measures to equivalent IFRS measures”. Underlying and diluted EPS measures are calculated using the weighted average number of shares that are used in calculating the equivalent measures under IFRS as presented in note 10 to the consolidated financial statements. Basic and diluted EPS on an IFRS basis and on an underlying basis were as follows: US$ IFRS earnings per share Basic Diluted Underlying earnings per share Basic Diluted Free cash flow 2018 1.89 1.80 3.05 2.90 2017 2.34 2.21 3.08 2.92 2016 3.43 3.25 2.20 2.09 Free cash flow is a non-IFRS measure that represents cash flow from operating activities, less capital expenditure. We believe that free cash flow is useful to investors because it provides a measure of the cash generated by our business that is available for expansion, to make strategic investments in, or acquire, other businesses, to repay borrowings and to fund distributions to shareholders. Free cash flow was calculated as follows: US$000 Cash flow from operating activities Purchase of property, plant and equipment Purchase of intangible assets Payments for capitalised development costs Capital element of finance lease payments Free cash flow 2018 288,649 (26,145) (6,197) (24,771) (1,651) 229,885 2017 284,722 (47,938) (6,196) (20,988) (4,283) 205,317 2016 248,760 (25,553) (8,177) (15,802) (3,834) 195,394 Dialog Semiconductor PlcAnnual report and accounts 2018162 Glossary of Terms – Technical Technical glossary Analog A type of signal in an electronic circuit that takes on a continuous range of values rather than only a few discrete values. Appcessories A physical device and counterpart application for a mobile device typically controlled via Bluetooth®. ASIC An Application Specific Integrated Circuit is an integrated chip, custom- designed for a specific application. ASSP An Application Specific Standard Product is a semiconductor device integrated circuit (“IC”) dedicated to a specific application and sold to more than one user. Audio CODEC The interface between analog signals (such as the human voice) and the digital data processing inside a mobile phone, determining voice quality. BCD process platform The incorporation of analog components (“Bipolar”), digital components (“CMOS”) and high-voltage transistors (“DMOS”) on the same die to reduce the number of components required in the bill of materials, minimise board space, costs and the parasitic losses in comparison to a non-integrated solution. BOM Bill of materials. Bluetooth® Smart Bluetooth® Smart is a wireless personal area network technology designed and marketed by the Bluetooth Special Interest Group aimed at novel applications in the healthcare, fitness, beacons, security, and home entertainment industries. Buck converter A DC-to-DC buck converter accepts a direct current input voltage and produces a direct current output voltage to a plurality of channels. CAD Computer Aided Design usually refers to a software tool used for designing electronics hardware or software systems. CDMA Code Division Multiple Access is an alternative to GSM technology for mobile wireless networks. Chips Electronic integrated circuits. CMOS Complementary Metal Oxide Semiconductor: the most popular class of semiconductor manufacturing technology. CMIC Configurable Mixed-Signal IC A category of ICs comprising a matrix of analog and digital blocks which are configurable through a programmable (“OTP”) non-volatile memory. Digital A type of signal used to transmit information that has only discrete levels of some parameter (“usually voltage”). Digital Enhanced Cordless Telecommunications (“DECT”) is a wireless connectivity standard technology originated in Europe for cordless telephony. Fabless A company that designs and delivers semiconductors by outsourcing the fabrication (“manufacturing”) process. FET A Field Effect Transistor uses an electric field to control the shape and hence the conductivity of a channel of one type of charge carrier in a semiconductor material. Foundry A manufacturing plant where silicon wafers are produced. Hi-Fi High-Fidelity is the reproduction of sound with little or no distortion. High power density In the context of travel adapters, chargers and power supplies, high power density is the ability to put higher power AC/DC conversion capability inside smaller form-factor adapter cases and power supply housings while avoiding thermal issues that can occur when operating high power electronics in confined, small spaces. High power density is achieved by enabling the use of smaller components that are also more highly efficient. GaN Gallium Nitride. IC Integrated Circuit An electronic device with numerous components on a single chip. FPGA A Field-programmable gate array is an integrated circuit designed to be configured by a customer or a designer after manufacturing. Imaging The capture and processing of images via an image sensor for use by an electronic device to send to a display for viewing by a user. Internet of Things (“IoT”) The Internet of Things is an environment where everyday items, such as smartphones, wearable health meters, light bulbs, and lighting, security and HVAC systems, are all connected via the Internet, allowing them to send and receive data and be controlled wirelessly. Internet of My Things It refers to the consumer segment of the Internet of Things. LDO Low dropout voltage regulators are used in battery operated systems, where the output voltage is typically lower than the input voltage. LED A Light Emitting Diode is a semiconductor device that emits light when charged with electricity, often used for LCD display backlights. Liquid Crystal Display (“LCD”) A display technology found in many portable electronics products, including personal organisers, cellular handsets and notebook computers. LTE Long-Term Evolution is a standard for wireless communication of high-speed data for mobile phones and data terminals. Mixed-signal A combination of analog and digital signals being generated, controlled or modified on the same chip. OEM An Original Equipment Manufacturer that builds products or components that are used in products sold by another company. Original Design Manufacturer (“ODM”) An original design manufacturer designs and produces products that are specified and then rebranded by OEMs. PMIC Power Management IC. Power Management The management of the power requirements of various subsystems, important in hand-held and portable electronics equipment. PrimAccurate™ Dialog’s patented control technology that uses digital algorithms on the primary side of an isolated power supply eliminating the need for a secondary side regulator and optical feedback isolator to lower the total BOM cost, reduce the overall solution size and improve reliability. Rapid Charge™ A Dialog product which enables substantially faster battery charging of portable devices via USB AC/DC power adapters. Semiconductor A base material halfway between a conductor and an insulator, which can be physically altered by mixing in certain atoms. Semiconductors form the basis for present-day electronics. Silicon A semi-metallic element used to create a wafer – and the most common semiconductor material – in about 95% of all manufactured chips. SmartBond™ Dialog’s SmartBond™ family is the simplest route to delivering the most power-friendly and flexible Bluetooth® Smart connected products to the market. Highly-integrated, SmartBond™ delivers the smallest, most power-efficient Bluetooth® Smart solutions available – and enables the lowest system costs. SmartDefender™ Dialog’s advanced cycle-by-cycle, hiccup mode technology that addresses soft short circuits in adapter cables and connectors helping to prevent excessive heat build-up and damage. Dialog Semiconductor PlcAnnual report and accounts 2018163 USB Universal Serial Bus: a universal interface standard to connect different electronics devices. USB Power Delivery (“USB PD”) A communication protocol developed by the USB Implementers Forum. The USB PD protocol is added on top of the USB Type-C™ connector specification to enable a single USB cable/connector solution that can be used ubiquitously for power or charging across mobile devices, tablets, laptops, and even power tools, networking devices, and USB wall receptacles. The specification supports scalable power and performance for new and emerging electronic products. The USB PD specification provides flexible power delivery and data transfer up to 100W. USB Type-C™ cable and connector specification A universal cable and connector specification developed by the USB Implementers Forum that addresses new, smaller, thinner, lighter form factor computing platforms and devices. It provides for a slim, sleek and standard connector form-factor and high-power cable. Combined with the USB Power Delivery specification, USB Type-C enables a single USB cable/connector solution that can be used ubiquitously for power or charging across mobile devices, tablets, laptops, and even power tools, networking devices, and USB wall receptacles. The specification supports scalable power and performance for new and emerging electronic products. Voice Over IP Our energy-efficient multicore VoIP processors interact with Bluetooth®, Wi-Fi and DECT to enable headset and handset connectivity while combining industry-leading power consumption with the flexibility and processing capacity to handle a wealth of enterprise VoIP applications. Wafer A slice of silicon from a 4, 5, 6 or 8 inch diameter silicon bar and used as the foundation on which to build semiconductor products. 4G Wireless broadband standard. SmartMirror™ A technology patented by Dialog Semiconductor which simplifies circuit design and provides very low current consumption in Power Management circuits. Smartphone A mobile phone offering advanced capabilities, often with pc- like functionality (“PC-mobile handset convergence”). A smartphone runs complete operating system software providing a standardised interface and platform for application developers. SmartPulse™ A series of wireless sensors, actuators and base station devices enables the easy creation of wireless sensor networks for the home automation, security, healthcare and energy monitoring consumer markets. SmarteXite™ Dialog’s brand name for its intelligent LED lighting technology platform. SmartXtend™ A technology patented by Dialog Semiconductor that extends the life and reduces power consumption of high- resolution, passive matrix OLED displays. Solid State Lighting A type of lighting in which light-emitting diodes (“LEDs”) replaces conventional incandescent and fluorescent lamp for general lighting purposes. Subcontractor A business that signs a contract to perform part or all of the obligations of another’s contract. Synchronous Rectifier An integrated circuit that can replace diodes to improve efficiency and power density in power conversion applications, such as power supplies. SoC System on Chip An integrated circuit with all the necessary electronic circuits and parts for a given system. System-on-Chip An IC that integrates all components of a computer or other electronic system into a single chip. It may contain digital, analog, mixed-signal, and often radio-frequency functions – all on a single chip substrate. Tablet PC A tablet PC refers to a slate- or tablet-shaped mobile computer device, equipped with a touchscreen or stylus. TAM Total addressable market, TAM measures the potential market for your product – and your product only – assuming you could reach 100% of your customers. Ultrabook™ A higher-end, compact sub- notebook that is designed to be compact, thin and light without compromising performance and battery life. Ultrabooks™ typically feature low power processors and solid-state drives. Dialog Semiconductor PlcAnnual report and accounts 2018164 Glossary of Terms – Financial Financial glossary AGM Annual General Meeting of the Company’s shareholders. BaFin the Federal Financial Supervisory Authority in Germany (Bundesanstalt für Finanzdiensleistungsaufsicht). Basis point or bp one hundredth of one percentage point. CAGR Compound Annual Growth Rate, a method of assessing the average growth of a value over time. CEO Chief Executive Officer. CFO Chief Financial Officer. the Companies Act 2006 the Companies Act 2006 of England and Wales, as amended. the Company Dialog Semiconductor Plc. COSO Committee of Sponsoring Organizations, whose mission is to provide thought leadership on risk management, internal control and fraud deterrence to improve organisational performance and governance. Cost of sales consists of material costs, the costs of outsourced production and assembly, related personnel costs (including share-based compensation), applicable overhead and depreciation of test and other equipment. Dialog used for convenience to refer to the Company and its subsidiaries, unless the context requires otherwise. the DTRs the Disclosure & Transparency Rules of the UKLA. EBIT Earnings before interest and taxes (also known as operating profit). EBITDA Earnings before depreciation, amortisation, interest and taxes. the EU the European Union. Euro (€) the common currency used in the majority of member countries of the EU. the Frankfurt Stock Exchange the largest of the seven regional securities exchanges in Germany. Free-float The proportion of an issuer’s share capital that is available for purchase in the public equity markets by investors. General and administrative expenses consist primarily of personnel costs (including share-based compensation) and costs for our finance, human resources and other business support functions. IFRS International Financial Reporting Standards, comprising accounting standards issued by the IASB. KPIs Key Performance Indicators, a range of indicators to assess performance, to ensure performance is aligned to strategy, and to ensure continued alignment with shareholder interests. LTIP Long-Term Incentive Plan. NASDAQ the National Association of Securities Dealers and Automated Quotations. OECD Organisation for Economic Co-operation and Development. Other operating income consists of income from customer-specific R&D contracts and other income that is not classified as revenue, less other operating expenses. Pound sterling (£) the currency of the UK. Prime Standard a market segment of the Frankfurt Stock Exchange that lists companies which comply with international transparency standards, including periodic reporting in German and English, application of international accounting standards, publication of a financial calendar, staging of at least one analyst conference a year and ad hoc disclosure also in German and English. R&D research and development. R&D expenses consist principally of personnel costs (including share-based compensation) and other design and engineering-related costs associated with the development of new ASICs and ASSPs. Selling and marketing expenses consist primarily of personnel costs (including share- based compensation), travel expenses, sales commissions, advertising and other marketing costs, together with amortisation expenses in relation to identifiable intangible assets such as customer relationships, key customers and order backlog acquired in business combinations. SG&A selling, general and administrative. the TecDAX stock index that tracks the performance of the 30 largest companies by market capitalisation from the technology sector that are listed on the Frankfurt Stock Exchange. UK the United Kingdom of Great Britain and Northern Ireland. the UKLA the UK Listing Authority. US the United States of America. the Group the Company and its subsidiaries. US dollar (US$) the currency of the US. the IASB the International Accounting Standards Board. Dialog Semiconductor PlcAnnual report and accounts 2018Advisers and corporate information 165 Registered office Dialog Semiconductor Plc Tower Bridge House St Katharine’s Way London E1W 1AA UK Website: www.dialog-semiconductor.com Registered number 3505161 Financial calendar Annual General Meeting Q1 2019 Results Q2 2019 Results Q3 2019 Results Preliminary results for 2019 2 May 2019 9 May 2019 1 August 2019 6 November 2019 February 2020 Company Registrar Link Market Services (Frankfurt) GmbH Mergenthalerallee 15-21 65760 Eschborn Germany Advisers and corporate information Public relations FTI Consulting 200 Aldersgate Aldersgate Street London EC1A 4HD UK FTI Consulting Park Tower Bockenheimer Anlage 44 60322 Frankfurt am Main Germany Legal adviser Reynolds Porter Chamberlain LLP Tower Bridge House St Katharine’s Way London E1W 1AA UK Auditors Deloitte LLP Abbotts House Abbey Street Reading RG1 3BD UK Principal bankers HSBC Bank Plc Large Corporates, South Region Thames Tower Station Road Reading Berkshire RG1 1LX UK Designated sponsors Oddo Seydler Schillerstrasse 27-29 60313 Frankfurt am Main Germany Kepler Cheuvreux Taunusanlage 19 60325 Frankfurt am Main Germany Shares Information on the Company’s shares and on significant shareholdings can be found on page 67. Dialog Semiconductor PlcAnnual report and accounts 2018166 Group directory Germany Japan Dialog Semiconductor GmbH Dialog Semiconductor K.K. Neue Strasse 95 73230 Kirchheim/Teck-Nabern Germany Phone: (+49) 7021 805-0 Fax: (+49) 7021 805-100 Email: dialog.nabern@diasemi.com United Kingdom Dialog Semiconductor (UK) Ltd Delta 200 Delta Business Park Welton Road Swindon Wiltshire SN5 7XB United Kingdom Phone: (+44) 1793 757700 Fax: (+44) 1793 757800 Email: dialog.swindon@diasemi.com 100 Longwater Avenue Green Park Reading RG2 6GP United Kingdom Phone: +44 1793 757700 Fax: +44 1189 450219 Email: info@diasemi.com The Netherlands Dialog Semiconductor B.V. Het Zuiderkruis 53 5215 MV ‘s-Hertogenbosch The Netherlands Phone: (+31) 73 640 88 22 Fax: (+31) 73 640 88 23 Email: dialog.nl@diasemi.com North America Dialog North America 2560 Mission College Boulevard Santa Clara California 95054 USA Phone: (+1) 408 845 8500 Fax: (+1) 408 727 3205 Email: NA_sales_enquiries@diasemi.com Dialog Semiconductor Inc. 675 Campbell Technology Parkway Suite 150 Campbell California 95008 USA 8F, W-Building 1-8-15 Konan Minato-ku Tokyo 108-0075 Japan Phone: (+81) 3 5769-5100 Fax: (+81) 3 5769-5101 Email: dialog.tokyo@diasemi.com China Dialog Semiconductor Trading (Shanghai) Ltd Room 703, 7F, Kehui Building No.1188 North Quinzhou Road Shanghai 200233 China Phone: (+86) 215 4249 058 Dialog Semiconductor (Shenzhen) Ltd 25F, Lifetech Scientific Building South 12 Road, Southern District in  High-tech Zone Nanshan District Shenzhen 518057 China Phone: (+86) 755 2981 3669 Taiwan Dialog Semiconductor GmbH Taiwan Branch 7F, 392 Ruiguang Road Neihu District Taipei City 11493 Taiwan, R.O.C. Phone: (+886) 281 786 222 Fax: (+886) 281 786 220 Email: dialog.taiwan@diasemi.com Korea Dialog Semiconductor Operations Services Limited Korea Branch 6 FL, Deokmyeong Building Teheran-ro 625 Gangnam-gu Seoul, 06173 Korea Phone: (+82) 2 3469 8200 Fax: (+82) 2 3469 8291 Email: dialog.korea@diasemi.com Dialog Semiconductor PlcAnnual report and accounts 2018Related undertakings The Company’s related undertakings as at 31 December 2018 were as follows: 167 Country Name Dialog Argo Holdings, Inc. Dialog Integrated Circuits (Tianjin) Limited1 Dialog Semiconductor (Italy) S.R.L. Dialog Semiconductor (Shenzhen) Limited1 Registered Address Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle, DE 19801 United States Rooms 2701-2, No. 2 Building, TEDA Service Outsourcing Industrial Park, No. 19 XinHuanxi West Road, TEDA, Tianjin, 300457 Via Gaetano D’Alesio No.2, 57126, Livorno 25F, Lifetech Scientific Building, South 12 Road, Southern District in High-tech Zone, Nan Shan District, Shenzhen, 518057 Tower Bridge House, St Katharine’s Way, London E1W 1AA Istanbul Technical University, Ayazaga Campus, ARI 6 Building, Maslak, Istanbul, 34469 Het Zuiderkruis 53, 5215 MV’s-Hertogenbosch Het Zuiderkruis 53, 5215 MV’s-Hertogenbosch Neue Strasse 95, 73230 Kirchheim unter Teck-Nabern Megaro Xenia, Achilleos 8 & Lambrou Katsoni, Kallithea, Athens, 17674 Dialog Semiconductor (UK) Limited Dialog Semiconductor Arastırma Gelistirme ve Ticaret Anonim Sirketi Dialog Semiconductor B.V. Dialog Semiconductor Finance B.V. Dialog Semiconductor GmbH Dialog Semiconductor Hellas Societe Anonyme of Integrated Circuits1 Dialog Semiconductor Holdings 1 Limited Dialog Semiconductor Hong Kong Limited1 Units 515-517, 5/F., Building 12W, No.12, Science Park West Avenue, Phase Netherlands Netherlands Germany Greece Tower Bridge House, St Katharine’s Way, London E1W 1AA Italy China China United Kingdom Turkey Three, Hong Kong Science Park, Pak Shek Kok, N.T. Corporation Trust Centre, 1209 Orange Street, Wilmington, New Castle, DE 19801 8F W-Building 1-8-15, Minato-ku, Tokyo 108-0075 Tower Bridge House, St Katharine’s Way, London E1W 1AA United Kingdom Hong Kong United States Japan United Kingdom Dialog Semiconductor Inc.1 Dialog Semiconductor K.K. Dialog Semiconductor Operations Services Limited1 Dialog Semiconductor Trading (Shanghai) Limited1 Dyna Image Corporation2 iWatt B.V.1 iWatt Cayman1 iWatt Coöperatief U.A.1 iWatt HK Limited1 iWatt L.L.C.1 Powerventure Semiconductor Limited Silego Korea Inc.1 Silego (Hefei) Technology, Inc.1 Silego Technology Japan, Inc.1 Limited Liability Company Silego Technology (Ukraine)1 Silego Technology Inc.1 China Room 703, 7F Kehui Building, No.1188 North Quinzhou Road, Xuhui District, Shanghai 200231 8F., No.233-2, Baoqiao Rd., Xindian Dist., New Taipei City, 23145 Het Zuiderkruis 53, 5215 MV’s-Hertogenbosch PO Box 309, Ugland House, Grand Cayman, KY1-1104 Het Zuiderkruis 53, 5215 MV’s-Hertogenbosch Units 515-517, 5/F., Building 12W, No.12, Science Park West Avenue, Phase Three, Hong Kong Science Park, Pak Shek Kok, N.T. Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle, DE 19801 United States Tower Bridge House, St Katharine’s Way, London E1W 1AA 6FL, Deokmyeong Building, Teheran-ro 625, Gangnam-gu, Seoul, 06173 Room 303, Building 2, No. 3 Tian Yuan Road, High-Tech Zone, Hefei, 230088 8F W-Building 1-8-15 Konan, Minato-ku, Tokyo, 108-0075 Kamyanetska Str. 33, Lviv 79034 Taiwan Netherlands Cayman Islands Netherlands Hong Kong United Kingdom Korea China Japan Ukraine Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle, DE 19801 United States 1 Held indirectly. 2 Dyna Image Corporation is an associate in which the Company has a direct ownership interest of 38.7% and an indirect ownership interest of 9.8% that is held by a wholly-owned subsidiary. All subsidiaries are wholly-owned. Dialog Semiconductor PlcAnnual report and accounts 2018168 Branches and representative offices Name Dialog Integrated Circuits (Tianjin) Limited Beijing Branch Dialog Semiconductor (UK) Limited, Korea Branch Dialog Semiconductor GmbH Austria Branch Dialog Semiconductor GmbH Singapore Branch Dialog Semiconductor GmbH Taiwan Branch Dialog Semiconductor Operations Services Limited Korea Branch Dialog Semiconductor Operations Services Limited Thailand Representative Office Dialog Semiconductor Operations Services Limited Taiwan Branch Powerventure Semiconductor Limited, Taiwan Branch Silego Technology Inc., Shanghai Representative Office Silego Technology Inc., Taiwan Branch Entity Type Branch Office Branch Office Branch Office Registered Address Room 902-904, Zhong Guan Cun Crowne Plaza Office Building, No. 106 ZhiChun Road, Haidian District, Beijing, 100086 6 FL, Deokmyeong Building, Teheran-ro 625, Gangnam-gu, Seoul, 06173 Kärntner Strasse 518, 8054 Graz-Seiersberg Country China Korea Austria Branch Office 51 Anson Road, #12-51 Anson Centre, Singapore 079904 Singapore Branch Office 7F., No.392, Ruiguang Rd., Neihu Dist., Taipei City 114 Branch Office Representative Office 6 FL, Deokmyeong Building, Teheran-ro 625, Gangnam-gu, Seoul, 06173 26th Floor, Sathorn City Tower, 175 South Sathorn Road, Thungmahamek, Sathorn,10120 Bangkok Taiwan Korea Thailand Branch Office 7F., No.392, Ruiguang Rd., Neihu Dist., Taipei City 114 Taiwan Branch Office 7F., No. 1, Taiyuan 1st St., Zhubei City, Hsinchu County 302 Taiwan Representative Office Branch Office Room 2102 J, LT Square, 500 North Chengdu Rd., Juangdu District, Shanghai 7F., No. 392, Ruiguang Rd., Neihu Dist., Taipei City 114 China Taiwan Dialog Semiconductor PlcAnnual report and accounts 2018169 Designed and produced by: Radley Yeldar | www.ry.com Financial statements partially created in-house with firesys. This report has been printed on Revive 100 Offset a paper which is certified by the Forest Stewardship Council® and contains 100% recycled waste. The paper is Process Chlorine Free (PCF) made at a mill with ISO 14001 environmental management system accreditation. This report was produced using the pureprint® environmental print technology, a guaranteed, low carbon, low waste, independently audited process that reduces the environmental impact of the printing process. Printed using vegetable oil based inks by a CarbonNeutral® printer certified to ISO 14001 environmental management system and registered to EMAS the Eco Management Audit Scheme. Dialog Semiconductor PlcAnnual report and accounts 2018Registered office Dialog Semiconductor Plc Tower Bridge House St Katharine’s Way London E1W 1AA UK www.dialog-semiconductor.com www.dialog-semiconductor.com 

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