Silicon Laboratories
Annual Report 2015

Plain-text annual report

To Our Shareholders For the past 20 years, Silicon Labs has pioneered mixed- signal and RF technologies that enable a more connected world, delivering design simplicity to our customers while improving lives and transforming industries. During 2015, we made significant progress in laying the foundation for our continued success as a leading supplier of silicon, software and solutions for the Internet of Things (IoT) and Infrastructure markets. We are executing on our strategy as we target large, diversified growth markets and develop a well-positioned product portfolio. $105 million. Strong cash generation has enabled the company to repurchase more than $70 million of its stock during the year and to acquire two accretive companies, Bluegiga and Telegesis. The company ended the year with $250 million in cash, cash equivalents and investments. Our operating expenses reflect significant investment in R&D, primarily related to products, software and solutions to address the IoT market. Headcount increased by approximately eight percent from 2014 due to organic hiring and 2015 acquisitions. We ended 2015 with record revenue of $645 million, increasing four percent annually, and outperforming the semiconductor industry, which was flat to slightly down. We expanded our customer count by more than 20 percent to nearly 30,000, and added two new IoT customers to our top-10-customers list. Our IoT portfolio is our fastest-ramping product category, with 2015 revenues increasing 26 percent annually. The adoption of smart, connected devices across our target markets is gaining momentum, with particularly strong performance in connected home, smart metering, and wearable applications. From 2011 through 2015, our IoT and Infrastructure products have delivered compound annual growth rates of 20 percent and more than 10 percent, respectively. This robust performance is the result of organic investment and a targeted acquisition strategy that has enabled our world-class portfolio to address the needs of these diversified markets. Revenues from our IoT and Infrastructure products represented a combined 60 percent of 2015 sales, up from 42 percent in 2011. Conservative financial management has guided Silicon Labs’ success for 20 years. Cash flow from operations has been positive nearly every quarter since the company went public in 2000. In 2015, the company delivered operating cash flows of Success in the IoT market requires a combination of energy- efficient microcontrollers (MCUs), wireless connectivity, and a comprehensive set of tools and solutions that simplifies development. We offer all of these ingredients. Our mixed-signal and RF integration capabilities are hallmarks of Silicon Labs, enabling us to design leading-edge system-on- chip (SoC) solutions. As competition increases in the IoT, we believe our strength in integration will continue to be an important competitive advantage as we deliver robust, high-performance and cost-effective SoCs designed to support multiple wireless protocols. Our scalable platforms and product portfolios allow us to deliver differentiated solutions for a wide range of customers Non-GAAP Financials* In thousands, except per share data REVENUE % Y/Y GROWTH GROSS MARGIN % OF REVENUE R&D % OF REVENUE SG&A % OF REVENUE OPERATING EXPENSES % OF REVENUE OPERATING INCOME % OF REVENUE NET INCOME % OF REVENUE EARNINGS PER SHARE Q1 2015 Q2 2015 Q3 2015 Q4 2015 FY2015 $163,705 12.4% $98,146 60.0% $37,734 23.1% $32,914 20.1% $70,648 43.2% $27,498 16.8% $23,379 14.3% $0.54 $164,856 6.4% $99,371 60.3% $37,389 22.7% $32,714 19.8% $70,103 42.5% $29,268 17.8% $24,461 14.8% $0.56 $156,194 -1.2% $94,074 60.2% $36,610 23.4% $31,393 20.1% $68,003 43.5% $26,071 16.7% $21,827 14.0% $160,071 -1.2% $94,380 59.0% $36,395 22.7% $31,410 19.7% $67,805 42.4% $26,575 16.6% $26,548 16.6% $0.51 $0.63 $644,826 3.9% $385,971 59.9% $148,128 23.0% $128,431 19.9% $276,559 42.9% $109,412 17.0% $96,215 14.9% $2.24 *Please see the supplemental tables provided in this report for a reconciliation of GAAP to non-GAAP results in Appendix I. Past performance does not guarantee future results. This Annual Report to Shareholders contains forward-looking statements, and actual results could differ materially. Risk factors that could cause actual results to differ are set forth in the “Risk Factors” section and throughout our 2015 Form 10-K, which is included in this Annual Report. and applications, which we serve through our strong channel, supporting more than two-thirds of our revenue. Explosive growth in data-intensive communications, including cloud computing-based services, is fueling the need for faster, higher-performance data center and networking equipment, which relies on our high-precision timing products. Silicon Labs offers a comprehensive portfolio of timing products including low-jitter clocks, buffers, and oscillators that deliver industry-leading performance and frequency fl exibility. To help our customers get to market faster, we provide easy-to-use tools that simplify timing design, minimize jitter, and enable developers to order samples with short, two-week lead times. The growing importance of green energy around the world is driving demand for our isolation products. Our portfolio is ideal for applications such as motor drives, microinverters, power supplies, and battery management systems for hybrid and electric vehicles. Revenue from our Broadcast products declined in the year as weakness in consumer markets was partially offset by robust growth in automotive. Our automotive products continue to deliver record levels of design win activity and revenue based on performance, scalability, and integration. We are supplying tuners to a number of top-tier European, Asian and US car radio manufacturers, including OEMs and the aftermarket. We exited 2015 with about 10 percent market share and anticipate continued share gains in all regions to fuel revenue growth for these products. We appreciate your investment in Silicon Labs. This year, as we mark Silicon Labs’ 20th anniversary, we have never been more excited about the many innovations and opportunities that lie ahead. Nav Sooch Chairman Tyson Tuttle Tyson Tuttle Chief Executive Offi cer Revenue $492M ACCESS BROADCAST INFRASTRUCTURE INTERNET OF THINGS $563M $580M $621M $645M FY11 FY12 FY13 FY14 FY15 We believe the Internet of Things is about more than just “things.” It’s about connections. A more connected world is sustainable. From smart metering to alternative energy sources like solar and wind power, our silicon and software solutions help customers fully realize the benefi ts of green technology with the highest levels of reliability, accuracy and energy effi ciency. Green Energy Our isolation solutions are key enablers of energy-friendly technologies, such as solar inverters, motor controls, power supplies and battery management systems for hybrid-electric vehicles. Smart Home Our wireless and sensor technologies are fueling the rapid rise of connected devices in the home to help users monitor and minimize their energy use. Metering Our ZigBee® mesh networking SoCs connect millions of smart meters to the grid, helping to better manage scarce energy resources. A more connected world is healthy. Our IoT solutions are transforming healthcare and personal fi tness. Wireless connectivity and sensor technologies offer tremendous advantages in health maintenance, remote monitoring and diagnosis, and data management effi ciency. Health Monitoring Our MCU, sensor and wireless connectivity products are enabling a growing number of personal health monitoring devices. Pulse Oximeter Our MCU and sensor technologies simplify the measurement of blood oxygen levels in devices such as pulse oximeters. Fitness Tracker Wearable manufacturers choose our 32-bit MCUs, Bluetooth® Smart modules and sensor solutions to create feature-rich, energy-effi cient connected devices. A more connected world is transformative. The world is becoming smarter and more effi cient, powered by real-time, secure connections linking data to people, processes and knowledge bases. Our solutions enable intelligence and connectivity across many industries. Communications The explosion of Internet traffi c, streaming data and cloud computing drives the need for faster data center and networking equipment, which relies on our high-precision timing solutions. Retail The retail industry leverages our wireless technology to transform pricing and inventory management with electronic shelf labels. Agriculture Wireless sensor technology enables farmers to maximize agricultural production to feed the world’s growing population. A more connected world is interactive. News, music and videos broadcast over the airwaves or cabled into our homes keep us connected to the world with up-to-date information and entertainment. Automotive Infotainment Our latest family of automotive radio receivers sets leading performance benchmarks for AM/FM and digital radio reception. Home Entertainment More than half of televisions sold worldwide use Silicon Labs’ industry-leading digital TV tuners. Remote Control Devices Our MCU and wireless products bring industry leading power effi ciency, performance and cost savings to a number of remote control products. A more connected world is here. Our innovative products, software and tools empower our customers to work smarter and make the world a more connected and energy-friendly place. From MCUs, wireless SoCs and sensors for the IoT, to advanced timing and isolation products for Internet infrastructure and industrial automation, Silicon Labs’ solutions provide customers with signifi cant advantages in performance, energy effi ciency, connectivity and design simplicity. At Silicon Labs, we are relentless in our commitment to excellence. Through the continual development of breakthrough solutions, engineering excellence, design simplicity and global perspective, we provide our customers with the ability to develop leading- edge solutions for a connected world. We are passionate about enabling breakthrough innovation and accelerating our customers’ time-to-market. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) FORM 10-K � ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 � ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 2, 2016 or � TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE � TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 000-29823 SILICON LABORATORIES INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 400 West Cesar Chavez, Austin, Texas (Address of principal executive offices) 74-2793174 (I.R.S. Employer Identification No.) 78701 (Zip Code) (512) 416-8500 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered Title of each class Name of exchange on which registered Common Stock, $0.0001 par value The NASDAQ Stock Market LLC Common Stock, $0.0001 par value The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. � Yes � No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. � Yes � No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. � Yes � No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). � Yes � No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. � Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer’’ and ‘‘smaller reporting company’’ in Rule 12b-2 of the Exchange Act. Large accelerated filer � Accelerated filer � Non-accelerated filer � Smaller reporting company � Large accelerated filer � Accelerated filer � Non-accelerated filer � Smaller reporting company � Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). � Yes � No The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (July 2, 2015) was $2,239,112,519 (assuming, for this purpose, that only directors and officers are deemed affiliates). � Yes � No affiliates). The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (July 2, 2015) was $2,239,112,519 (assuming, for this purpose, that only directors and officers are deemed There were 41,554,116 shares of the registrant’s common stock issued and outstanding as of January 26, 2016. There were 41,554,116 shares of the registrant’s common stock issued and outstanding as of January 26, 2016. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the registrant’s 2015 Annual Meeting of Stockholders are incorporated by reference Portions of the Proxy Statement for the registrant’s 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. into Part III of this Form 10-K. SECURITIES AND EXCHANGE COMMISSION (Mark One) UNITED STATES Washington, D.C. 20549 FORM 10-K For the fiscal year ended January 2, 2016 or SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 000-29823 SILICON LABORATORIES INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 400 West Cesar Chavez, Austin, Texas (Address of principal executive offices) 74-2793174 (I.R.S. Employer Identification No.) 78701 (Zip Code) (Registrant’s telephone number, including area code) (512) 416-8500 Securities registered pursuant to Section 12(b) of the Act: Act. � Yes � No Act. � Yes � No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. � Yes � No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). � Yes � No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. � Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer’’ and ‘‘smaller reporting company’’ in Rule 12b-2 of the Exchange Act. Table of Contents Table of Contents Part I Part II Part III Part IV Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1. Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters Item 6. Item 7. and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . Item 8. Changes in and Disagreements with Accountants on Accounting and Item 9. Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11. Security Ownership of Certain Beneficial Owners and Management and Item 12. Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions, and Director Item 14. Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . Page Number 2 13 27 27 27 28 29 31 32 47 48 48 48 49 50 50 50 50 50 51 Cautionary Statement Cautionary Statement Except for the historical financial information contained herein, the matters discussed in this report on Form 10-K (as well as documents incorporated herein by reference) may be considered ‘‘forward-looking’’ statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include declarations regarding the intent, belief or current expectations of Silicon Laboratories Inc. and its management and may be signified by the words ‘‘believe,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘anticipate,’’ ‘‘plan,’’ ‘‘project,’’ ‘‘will’’ or similar language. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Actual results could differ materially from those indicated by such forward-looking statements. Factors that could cause or contribute to such differences include those discussed under ‘‘Risk Factors’’ and elsewhere in this report. Silicon Laboratories disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 1 1 Part I Part II Part III Part IV Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Item 3. Item 4. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters Item 6. Item 7. Item 8. Item 9. and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . Item 11. Item 12. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . Page Number 2 13 27 27 27 28 29 31 32 47 48 48 48 49 50 50 50 50 50 51 Except for the historical financial information contained herein, the matters discussed in this report on Form 10-K (as well as documents incorporated herein by reference) may be considered ‘‘forward-looking’’ statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include declarations regarding the intent, belief or current expectations of Silicon Laboratories Inc. and its management and may be signified by the words ‘‘believe,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘anticipate,’’ ‘‘plan,’’ ‘‘project,’’ ‘‘will’’ or similar language. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Actual results could differ materially from those indicated by such forward-looking statements. Factors that could cause or contribute to such differences include those discussed under ‘‘Risk Factors’’ and elsewhere in this report. Silicon Laboratories disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Part I Part I Item 1. Business General Silicon Laboratories Inc. is a provider of silicon, software and solutions for the Internet of Things (IoT), Internet infrastructure, industrial control, consumer and automotive markets. We solve some of the electronics industry’s toughest problems, providing customers with significant advantages in performance, energy savings, connectivity and design simplicity. Backed by our world-class engineering teams with strong software and mixed-signal design expertise, Silicon Laboratories empowers developers with the tools and technologies they need to advance quickly and easily from initial idea to final product. Mixed-signal integrated circuits (ICs) are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process. Therefore, mixed-signal ICs are critical components in products addressing a variety of markets, including industrial, communications, consumer and automotive. Our world-class, mixed-signal ICs leverage standard complementary metal oxide semiconductor (CMOS), a low cost, widely available process technology. This enables smaller, more cost effective and energy efficient solutions. Our expertise in analog-intensive, mixed-signal IC design in CMOS allows us to develop new and innovative products that are highly integrated, simplifying our customers’ designs and improving their time-to-market. Industry Background The pervasiveness of connectivity and the explosion in mobile computing is driving semiconductor The pervasiveness of connectivity and the explosion in mobile computing is driving semiconductor consumption. Intelligence is being added to electronic systems to enable remote monitoring, power efficiency and an improved user experience. This in turn is increasing the demand for bandwidth, requiring more infrastructure to support higher performance networks. The nearly ubiquitous availability of Internet access and the increasing intelligence of electronic devices and mobility are enabling what is called the Internet of Things, a term that describes the exponential increase in IP-enabled devices connected to the Internet. These trends require more and more interaction between the analog world we live in and the digital world of computing, and therefore require analog-intensive, mixed-signal circuits. Traditional mixed-signal designs relied upon solutions built with numerous, complex discrete analog and digital components. While these traditional designs provide the required functionality, they are often inefficient and inadequate for use in markets where size, cost, power consumption and performance are increasingly important product differentiators. In order to improve their competitive position, electronics manufacturers need to reduce the cost and complexity of their systems and enable new features or functionality to differentiate themselves from their competitors. Simultaneously, these manufacturers face accelerating time-to-market demands and must be able to rapidly adapt to evolving industry standards and new technologies. Because analog-intensive, mixed- signal design expertise is difficult to find, these manufacturers increasingly are turning to third parties, like us, to provide advanced mixed-signal solutions. Mixed-signal design requires specific expertise and relies on creative, experienced engineers to deliver solutions that optimize speed, power and performance, despite the noisy digital environment, and within the constraints of standard manufacturing processes. The development of this design expertise typically requires years of practical analog design experience under the guidance of a senior engineer, and engineers with the required level of skill and expertise are in short supply. Many mixed-signal IC solution providers lack sufficient analog expertise to develop compelling mixed-signal products. As a result, manufacturers of electronic devices value providers that can supply 2 2 Item 1. Business General Silicon Laboratories Inc. is a provider of silicon, software and solutions for the Internet of Things (IoT), Internet infrastructure, industrial control, consumer and automotive markets. We solve some of the electronics industry’s toughest problems, providing customers with significant advantages in performance, energy savings, connectivity and design simplicity. Backed by our world-class engineering teams with strong software and mixed-signal design expertise, Silicon Laboratories empowers developers with the tools and technologies they need to advance quickly and easily from initial idea to final product. Mixed-signal integrated circuits (ICs) are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process. Therefore, mixed-signal ICs are critical components in products addressing a variety of markets, including industrial, communications, consumer and automotive. Our world-class, mixed-signal ICs leverage standard complementary metal oxide semiconductor (CMOS), a low cost, widely available process technology. This enables smaller, more cost effective and energy efficient solutions. Our expertise in analog-intensive, mixed-signal IC design in CMOS allows us to develop new and innovative products that are highly integrated, simplifying our customers’ designs and improving their time-to-market. Industry Background consumption. Intelligence is being added to electronic systems to enable remote monitoring, power efficiency and an improved user experience. This in turn is increasing the demand for bandwidth, requiring more infrastructure to support higher performance networks. The nearly ubiquitous availability of Internet access and the increasing intelligence of electronic devices and mobility are enabling what is called the Internet of Things, a term that describes the exponential increase in IP-enabled devices connected to the Internet. These trends require more and more interaction between the analog world we live in and the digital world of computing, and therefore require analog-intensive, mixed-signal circuits. Traditional mixed-signal designs relied upon solutions built with numerous, complex discrete analog and digital components. While these traditional designs provide the required functionality, they are often inefficient and inadequate for use in markets where size, cost, power consumption and performance are increasingly important product differentiators. In order to improve their competitive position, electronics manufacturers need to reduce the cost and complexity of their systems and enable new features or functionality to differentiate themselves from their competitors. Simultaneously, these manufacturers face accelerating time-to-market demands and must be able to rapidly adapt to evolving industry standards and new technologies. Because analog-intensive, mixed- signal design expertise is difficult to find, these manufacturers increasingly are turning to third parties, like us, to provide advanced mixed-signal solutions. Mixed-signal design requires specific expertise and relies on creative, experienced engineers to deliver solutions that optimize speed, power and performance, despite the noisy digital environment, and within the constraints of standard manufacturing processes. The development of this design expertise typically requires years of practical analog design experience under the guidance of a senior engineer, and engineers with the required level of skill and expertise are in short supply. Many mixed-signal IC solution providers lack sufficient analog expertise to develop compelling mixed-signal products. As a result, manufacturers of electronic devices value providers that can supply them with mixed-signal solutions with greater functionality, smaller size and lower power requirements at a reduced cost and shorter time-to-market. them with mixed-signal solutions with greater functionality, smaller size and lower power requirements at a reduced cost and shorter time-to-market. Products Products We provide analog-intensive, mixed-signal solutions for use in a variety of electronic products in a broad range of applications for the IoT market including connected home, smart lighting, security, wearables and smart energy applications. We are a supplier of wireless connectivity solutions for the IoT based on Bluetooth�, ZigBee�, Thread, Wi-Fi� and sub-GHz technologies. We provide a wide range of timing and isolation products for infrastructure applications including high-performance clocks and oscillators for networking equipment, data centers and wireless base stations, as well as digital isolators and current sensors for industrial power supplies, motor control, solar inverters and hybrid-electric vehicles. We also provide broadcast products, such as TV tuners and demodulators and automotive radio tuners, and access products including subscriber line interface circuits for voice over IP (VoIP), embedded modems, and Power over Ethernet (PoE) power source equipment and powered device ICs. Our products integrate complex mixed-signal functions that are frequently performed by numerous discrete components in competing products into a single chip or chipset. By doing so, we are able to create products that, when compared to many competing products: We provide analog-intensive, mixed-signal solutions for use in a variety of electronic products in a broad range of applications for the IoT market including connected home, smart lighting, security, wearables and smart energy applications. We are a supplier of wireless connectivity solutions for the IoT based on Bluetooth�, ZigBee�, Thread, Wi-Fi� and sub-GHz technologies. We provide a wide range of timing and isolation products for infrastructure applications including high-performance clocks and oscillators for networking equipment, data centers and wireless base stations, as well as digital isolators and current sensors for industrial power supplies, motor control, solar inverters and hybrid-electric vehicles. We also provide broadcast products, such as TV tuners and demodulators and automotive radio tuners, and access products including subscriber line interface circuits for voice over IP (VoIP), embedded modems, and Power over Ethernet (PoE) power source equipment and powered device ICs. Our products integrate complex mixed-signal functions that are frequently performed by numerous discrete components in competing products into a single chip or chipset. By doing so, we are able to create products that, when compared to many competing products: • Require less printed circuit board (PCB) space; • Require less printed circuit board (PCB) space; • Reduce the use of external components lowering the system cost and simplifying design; • Reduce the use of external components lowering the system cost and simplifying design; • Offer superior performance improving our customers’ end products; • Offer superior performance improving our customers’ end products; • Provide increased reliability and manufacturability, improving customer yields; and/or • Provide increased reliability and manufacturability, improving customer yields; and/or • Reduce system power requirements enabling smaller form factors and/or longer battery life. • Reduce system power requirements enabling smaller form factors and/or longer battery life. We group our products into the following categories: We group our products into the following categories: • Internet of Things products, which include our microcontroller (MCU), wireless, sensor and • Internet of Things products, which include our microcontroller (MCU), wireless, sensor and analog products; • Broadcast products, which include our broadcast consumer and automotive products; • Broadcast products, which include our broadcast consumer and automotive products; • Infrastructure products, which include our timing products (clocks and oscillators), and isolation • Infrastructure products, which include our timing products (clocks and oscillators), and isolation devices; and analog products; devices; and • Access products, which include our VoIP products, embedded modems and our PoE devices. • Access products, which include our VoIP products, embedded modems and our PoE devices. We previously grouped IoT products and Infrastructure products under the Broad-based products We previously grouped IoT products and Infrastructure products under the Broad-based products heading. heading. 3 3 The following table summarizes the diverse product areas and applications for the various products The following table summarizes the diverse product areas and applications for the various products that we have introduced to customers: Product Areas and Description Internet of Things Products Microcontrollers and Wireless Products We offer a family of products ideal for embedded systems that include energy friendly 8-bit mixed-signal microcontrollers, 32-bit wireless MCUs and ultra low-power 32-bit MCUs based on scalable ARM� Cortex-M0+/M3/M4 cores, as well as wireless connectivity devices such as our EZRadio� family of fully integrated, low power transceivers. Our wireless modules provide flexible, highly integrated products that meet demanding requirements and can be used in a number of applications. Our wireless connectivity solutions for the IoT are based on Bluetooth, ZigBee, Thread, Wi-Fi and sub-GHz technologies. Our EFM32�, EFM8�, 8051, wireless MCUs and wireless SoCs are supported by Simplicity Studio�, a one-click access to design tools, documentation, software and support resources. These products generally integrate intelligent data capture, high performance processing, and communication interfaces in a single system on a chip. This family of products addresses a variety of end-markets, including the IoT (connected home, smart lighting, security, wearables and smart energy applications), automotive, communications, consumer, industrial, medical and power management markets. Sensors Our sensor products include optical sensors (proximity, ambient light gestures and heart rate), as well as relative humidity (RH) / temperature sensors. These devices leverage our mixed-signal capability to provide high accuracy, process technology to improve performance and lower power consumption than competing parts. Broadcast Products Broadcast Consumer Applications • Home automation • Security systems • Smart lighting • Smart metering • Wearables • Consumer electronics • Industrial automation and control • Medical instrumentation • Automotive sensors and controls • Electronic test and measurement equipment • White goods • Remote controls • Consumer health & fitness (wearables) • Smart home sensing • Industrial controls • Toys and consumer electronics • Monitors and lavatory controls • Consumer medical that we have introduced to customers: Product Areas and Description Internet of Things Products Microcontrollers and Wireless Products Applications We offer a family of products ideal for embedded systems that • Home automation include energy friendly 8-bit mixed-signal microcontrollers, 32-bit • Security systems wireless MCUs and ultra low-power 32-bit MCUs based on scalable ARM� Cortex-M0+/M3/M4 cores, as well as wireless connectivity devices such as our EZRadio� family of fully • Smart lighting • Smart metering • Wearables integrated, low power transceivers. Our wireless modules provide • Consumer electronics flexible, highly integrated products that meet demanding • Industrial automation and requirements and can be used in a number of applications. Our control wireless connectivity solutions for the IoT are based on Bluetooth, ZigBee, Thread, Wi-Fi and sub-GHz technologies. • Medical instrumentation • Automotive sensors and Our EFM32�, EFM8�, 8051, wireless MCUs and wireless SoCs controls are supported by Simplicity Studio�, a one-click access to design • Electronic test and tools, documentation, software and support resources. These measurement equipment products generally integrate intelligent data capture, high performance processing, and communication interfaces in a single system on a chip. This family of products addresses a variety of end-markets, including the IoT (connected home, smart lighting, security, wearables and smart energy applications), automotive, communications, consumer, industrial, medical and power management markets. • White goods • Remote controls Sensors Our sensor products include optical sensors (proximity, ambient • Consumer health & fitness light gestures and heart rate), as well as relative humidity (RH) / (wearables) temperature sensors. These devices leverage our mixed-signal capability to provide high accuracy, process technology to improve performance and lower power consumption than • Smart home sensing • Industrial controls • Toys and consumer electronics • Monitors and lavatory controls • Consumer medical competing parts. Broadcast Products Broadcast Consumer Our worldwide hybrid TV tuners with analog TV demodulator in • Integrated digital televisions a single CMOS IC leverage our proven digital low-IF architecture (iDTV) and exceed the performance of traditional discrete TV tuners, • Free-to-Air (FtA) or pay-TV enabling TV makers to deliver improved picture quality and set-top boxes better reception for both analog and digital broadcasts. Our small, • PVR/DVD/Blu-Ray/HDD low power and high performance single and dual digital video demodulators support DVB-T/T2, DVB-S/S2/S2X, DVB-C/C2, and/or ISDB-T in a single chip and are ideal for equipment video recorders • PC-TV applications • AM/FM clock radios receiving digital terrestrial, satellite and/or cable services. Our AM • Portable audio devices and FM receivers deliver a complete radio solution from antenna • MP3/digital media players • Home theater systems input to audio output in a single chip. The broadcast audio products are based on an innovative digital architecture that enables significant improvements in performance, which translates to a better consumer experience, while reducing system cost and board space for our customers. Our worldwide hybrid TV tuners with analog TV demodulator in a single CMOS IC leverage our proven digital low-IF architecture and exceed the performance of traditional discrete TV tuners, enabling TV makers to deliver improved picture quality and better reception for both analog and digital broadcasts. Our small, low power and high performance single and dual digital video demodulators support DVB-T/T2, DVB-S/S2/S2X, DVB-C/C2, and/or ISDB-T in a single chip and are ideal for equipment receiving digital terrestrial, satellite and/or cable services. Our AM • Portable audio devices and FM receivers deliver a complete radio solution from antenna input to audio output in a single chip. The broadcast audio products are based on an innovative digital architecture that enables significant improvements in performance, which translates to a better consumer experience, while reducing system cost and board space for our customers. video recorders • PC-TV applications • AM/FM clock radios • MP3/digital media players • Home theater systems • Free-to-Air (FtA) or pay-TV • Integrated digital televisions • PVR/DVD/Blu-Ray/HDD set-top boxes (iDTV) 4 4 Product Areas and Description Broadcast Automotive Our high-performance solutions for car sound systems include high fidelity radio ICs that improve the end user experience, reduce system cost and take advantage of the latest digital features. Our scalable architecture enables infotainment system suppliers to leverage their investments across multiple product lines ranging from entry-level car radios to cutting-edge multi- tuner, multi-antenna radios for premium vehicles. Infrastructure Products Timing Devices Applications • Automotive infotainment systems/radios • Navigation/GPS devices Robust demand for bandwidth is driving the deployment of next-generation Internet infrastructure equipment to deliver higher speed, higher capacity and more flexible networks. This transition puts unique requirements on the clocks and oscillators used to provide timing and synchronization for the equipment responsible for switching, transporting, processing and storing network traffic. To meet this need, we provide low jitter, frequency flexible, mass customizable timing solutions that accelerate development time, minimize cost and improve system reliability. Our high-performance ‘‘clock-tree-on-a-chip’’ products offer highly integrated single-chip IC solutions for clock synthesis and jitter attenuation, offering superior jitter performance and frequency flexibility for high data rate applications. • Networking equipment • Telecommunications • Optical networking • Wireless base stations • Small cells and mobile backhaul • Broadcast video • Servers and storage • Test and measurement equipment • Image processing • High-speed data acquisition Isolation Products Our isolation techniques enable customers to meet safety standards for isolation and solve difficult electronic noise issues. Products include multi-channel isolators, isolated drivers, isolated power converters and mixed-signal devices that simplify design, improve reliability, minimize noise emissions, and reduce system cost. • Switch mode power supplies • Industrial networking • Hybrid / Electric automotive drive trains • Solar inverters • Motor control • Isolated analog data acquisition Access Products ProSLIC� Subscriber Line Interface Circuits for VoIP Our ProSLIC provides the analog subscriber line interface on the source end of the telephone which generates dial tone, busy tone, caller ID and ring signal. Our offerings are well suited for the market for Voice over IP telephony applications deployed over cable, DSL, optical and wireless fixed terminal networks. • Voice functionality for cable, DSL and optical digital modems and terminal adapters • VoIP residential gateways • Wireless local loop remote access systems • PBXs Product Areas and Description Broadcast Automotive Applications Our high-performance solutions for car sound systems include • Automotive infotainment high fidelity radio ICs that improve the end user experience, systems/radios reduce system cost and take advantage of the latest digital • Navigation/GPS devices features. Our scalable architecture enables infotainment system suppliers to leverage their investments across multiple product lines ranging from entry-level car radios to cutting-edge multi- tuner, multi-antenna radios for premium vehicles. Infrastructure Products Timing Devices Robust demand for bandwidth is driving the deployment of • Networking equipment next-generation Internet infrastructure equipment to deliver higher speed, higher capacity and more flexible networks. This • Telecommunications • Optical networking transition puts unique requirements on the clocks and oscillators • Wireless base stations used to provide timing and synchronization for the equipment • Small cells and mobile responsible for switching, transporting, processing and storing backhaul network traffic. To meet this need, we provide low jitter, frequency flexible, mass customizable timing solutions that • Broadcast video • Servers and storage accelerate development time, minimize cost and improve system • Test and measurement reliability. Our high-performance ‘‘clock-tree-on-a-chip’’ products equipment offer highly integrated single-chip IC solutions for clock synthesis • Image processing and jitter attenuation, offering superior jitter performance and • High-speed data acquisition frequency flexibility for high data rate applications. Isolation Products Our isolation techniques enable customers to meet safety • Switch mode power supplies standards for isolation and solve difficult electronic noise issues. • Industrial networking Products include multi-channel isolators, isolated drivers, isolated • Hybrid / Electric automotive power converters and mixed-signal devices that simplify design, drive trains improve reliability, minimize noise emissions, and reduce system • Solar inverters • Motor control • Isolated analog data acquisition cost. Access Products ProSLIC� Subscriber Line Interface Circuits for VoIP Our ProSLIC provides the analog subscriber line interface on • Voice functionality for cable, the source end of the telephone which generates dial tone, busy DSL and optical digital tone, caller ID and ring signal. Our offerings are well suited for modems and terminal adapters the market for Voice over IP telephony applications deployed over cable, DSL, optical and wireless fixed terminal networks. • VoIP residential gateways • Wireless local loop remote access systems • PBXs 5 5 Product Areas and Description ISOmodem� Embedded Modems The ISOmodem embedded modems leverage innovative silicon direct access arrangement (DAA) technology and a digital signal processor to deliver a globally compliant, compact analog modem for embedded applications. Power over Ethernet Our Power over Ethernet power source equipment and powered device ICs offer highly differentiated solutions with a reduced total bill of materials (BOM) and improved performance and reliability. Our solutions offer a higher level of integration not available with competing solutions. Applications • Point of sale (POS) terminals • Fax machines and multi- function printers • Security systems • Industrial monitoring • Remote medical monitoring • Enterprise networking routers and switches • Wireless access points (WAP) • VoIP phones • POS terminals • Security cameras Product Areas and Description ISOmodem� Embedded Modems Applications The ISOmodem embedded modems leverage innovative silicon • Point of sale (POS) terminals direct access arrangement (DAA) technology and a digital signal • Fax machines and multi- processor to deliver a globally compliant, compact analog modem for embedded applications. function printers • Security systems • Industrial monitoring • Remote medical monitoring Power over Ethernet Our Power over Ethernet power source equipment and powered • Enterprise networking routers device ICs offer highly differentiated solutions with a reduced and switches total bill of materials (BOM) and improved performance and • Wireless access points (WAP) reliability. Our solutions offer a higher level of integration not available with competing solutions. • VoIP phones • POS terminals • Security cameras Revenues during fiscal 2015, 2014 and 2013 were generated predominately by sales of our mixed- signal products. The following summarizes our revenue by product category (in thousands): Revenues during fiscal 2015, 2014 and 2013 were generated predominately by sales of our mixed- signal products. The following summarizes our revenue by product category (in thousands): Fiscal Year 2015 2014 2013 Internet of Things . . . . . . . . . . . . . . . . . . . . . . . . Broadcast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $262,329 161,787 121,974 98,736 $209,005 204,256 108,123 99,320 $181,254 199,837 100,523 98,473 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $644,826 $620,704 $580,087 Fiscal Year 2015 2014 2013 Internet of Things . . . . . . . . . . . . . . . . . . . . . . . . $262,329 $209,005 $181,254 Broadcast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,787 121,974 98,736 204,256 108,123 99,320 199,837 100,523 98,473 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $644,826 $620,704 $580,087 Customers, Sales and Marketing Customers, Sales and Marketing We market our products through our direct sales force and through a network of independent sales representatives and distributors. Direct and distributor customers buy on an individual purchase order basis, rather than pursuant to long-term agreements. We consider our customer to be the end customer purchasing either directly from a distributor, a contract manufacturer or us. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer. Two of our distributors, Edom Technology and Avnet, represented 20% and 12% of our revenues during fiscal 2015, respectively. No other distributor accounted for 10% or more of revenues for fiscal 2015. During fiscal 2015, our ten largest end customers accounted for 29% of our revenues. We had no customer that represented more than 10% of our revenues during this period. Our major customers include Chamberlain, Cisco, Harman Becker, Huawei, LG Electronics, Samsung, Technicolor, Technisat, Varian Medical Systems and ZTE. We maintain numerous sales offices in North America, Europe and Asia. Revenue is attributed to a geographic area based on the shipped-to location. The percentage of our revenues derived from outside of the United States was 85% in fiscal 2015. For further information regarding our revenues and long-lived assets by geographic area, see Note 18, Segment Information, to the Consolidated Financial Statements. We market our products through our direct sales force and through a network of independent sales representatives and distributors. Direct and distributor customers buy on an individual purchase order basis, rather than pursuant to long-term agreements. We consider our customer to be the end customer purchasing either directly from a distributor, a contract manufacturer or us. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer. Two of our distributors, Edom Technology and Avnet, represented 20% and 12% of our revenues during fiscal 2015, respectively. No other distributor accounted for 10% or more of revenues for fiscal 2015. During fiscal 2015, our ten largest end customers accounted for 29% of our revenues. We had no customer that represented more than 10% of our revenues during this period. Our major customers include Chamberlain, Cisco, Harman Becker, Huawei, LG Electronics, Samsung, Technicolor, Technisat, Varian Medical Systems and ZTE. We maintain numerous sales offices in North America, Europe and Asia. Revenue is attributed to a geographic area based on the shipped-to location. The percentage of our revenues derived from outside of the United States was 85% in fiscal 2015. For further information regarding our revenues and long-lived assets by geographic area, see Note 18, Segment Information, to the Consolidated Financial Statements. 6 6 Our direct sales force is comprised of a number of sales professionals who possess varied levels of responsibility and experience, including directors, country managers, regional sales managers, district sales managers, strategic account managers, field sales engineers and sales representatives. We also utilize independent sales representatives and distributors to generate sales of our products. We have relationships with many independent sales representatives and distributors worldwide whom we have selected based on their understanding of the mixed-signal marketplace and their ability to provide effective field sales applications support for our products. Our marketing efforts are targeted at both identified industry leaders and emerging market participants. Direct marketing activities are supplemented by a focused marketing communications effort that seeks to raise awareness of our company and products. Our public relations efforts are focused on leading trade and business publications. Our external website is used to deliver corporate and product information. We also pursue targeted advertising in key trade publications and we have a cooperative marketing program that allows our distributors and representatives to promote our products to their local markets in conjunction with their own advertising activities. Finally, we maintain a presence at strategic trade shows and industry events. These activities, in combination with direct sales activities, help drive demand for our products. Due to the complex and innovative nature of our products, we employ experienced applications engineers who work closely with customers to support the design-win process, and can significantly accelerate the customer’s time to market. A design-win occurs when a customer has designed our ICs into its product architecture and ordered product from us. A considerable amount of effort to assist the customer in incorporating our ICs into its products is typically required prior to any sale. In many cases, our innovative ICs require significantly different implementations than existing approaches and, therefore, successful implementations may require extensive communication with potential customers. The amount of time required to achieve a design-win can vary substantially depending on a customer’s development cycle, which can be relatively short (such as three months) or very long (such as two years) based on a wide variety of customer factors. Not all design wins ultimately result in revenue. However, once a completed design architecture has been implemented and produced in high volumes, our customers are reluctant to significantly alter their designs due to this extensive design-win process. We believe this process, coupled with our intellectual property protection, promotes relatively longer product life cycles for our products and high barriers to entry for competitive products, even if such competing products are offered at lower prices. Our close collaboration with our customers provides us with knowledge of derivative product ideas or completely new product line offerings that may not otherwise arise in other new product discussions. Research and Development Research and Development Through our research and development efforts, we leverage experienced analog and mixed-signal engineering talent and expertise to create new ICs that integrate functions typically performed inefficiently by multiple discrete components. This integration generally results in lower costs, smaller die sizes, lower power demands and enhanced price/performance characteristics. We attempt to reuse successful techniques for integration in new applications where similar benefits can be realized. We believe that we have attracted many of the best engineers in our industry. We believe that reliable and precise analog and mixed-signal ICs can only be developed by teams of engineers who have significant analog experience and are familiar with the intricacies of designing these ICs for commercial volume production. The development of test methodologies is just one example of a critical activity requiring experience and know-how to enable the rapid release of a new product for commercial success. We have accumulated a vast set of trade secrets that allow us to pursue innovative approaches to mixed- signal problems that are difficult for competitors to duplicate. We highly value our engineering talent and strive to maintain a very high bar when bringing new recruits to the company. 7 7 Our direct sales force is comprised of a number of sales professionals who possess varied levels of responsibility and experience, including directors, country managers, regional sales managers, district sales managers, strategic account managers, field sales engineers and sales representatives. We also utilize independent sales representatives and distributors to generate sales of our products. We have relationships with many independent sales representatives and distributors worldwide whom we have selected based on their understanding of the mixed-signal marketplace and their ability to provide effective field sales applications support for our products. Our marketing efforts are targeted at both identified industry leaders and emerging market participants. Direct marketing activities are supplemented by a focused marketing communications effort that seeks to raise awareness of our company and products. Our public relations efforts are focused on leading trade and business publications. Our external website is used to deliver corporate and product information. We also pursue targeted advertising in key trade publications and we have a cooperative marketing program that allows our distributors and representatives to promote our products to their local markets in conjunction with their own advertising activities. Finally, we maintain a presence at strategic trade shows and industry events. These activities, in combination with direct sales activities, help drive demand for our products. Due to the complex and innovative nature of our products, we employ experienced applications engineers who work closely with customers to support the design-win process, and can significantly accelerate the customer’s time to market. A design-win occurs when a customer has designed our ICs into its product architecture and ordered product from us. A considerable amount of effort to assist the customer in incorporating our ICs into its products is typically required prior to any sale. In many cases, our innovative ICs require significantly different implementations than existing approaches and, therefore, successful implementations may require extensive communication with potential customers. The amount of time required to achieve a design-win can vary substantially depending on a customer’s development cycle, which can be relatively short (such as three months) or very long (such as two years) based on a wide variety of customer factors. Not all design wins ultimately result in revenue. However, once a completed design architecture has been implemented and produced in high volumes, our customers are reluctant to significantly alter their designs due to this extensive design-win process. We believe this process, coupled with our intellectual property protection, promotes relatively longer product life cycles for our products and high barriers to entry for competitive products, even if such competing products are offered at lower prices. Our close collaboration with our customers provides us with knowledge of derivative product ideas or completely new product line offerings that may not otherwise arise in other new product discussions. Through our research and development efforts, we leverage experienced analog and mixed-signal engineering talent and expertise to create new ICs that integrate functions typically performed inefficiently by multiple discrete components. This integration generally results in lower costs, smaller die sizes, lower power demands and enhanced price/performance characteristics. We attempt to reuse successful techniques for integration in new applications where similar benefits can be realized. We believe that we have attracted many of the best engineers in our industry. We believe that reliable and precise analog and mixed-signal ICs can only be developed by teams of engineers who have significant analog experience and are familiar with the intricacies of designing these ICs for commercial volume production. The development of test methodologies is just one example of a critical activity requiring experience and know-how to enable the rapid release of a new product for commercial success. We have accumulated a vast set of trade secrets that allow us to pursue innovative approaches to mixed- signal problems that are difficult for competitors to duplicate. We highly value our engineering talent and strive to maintain a very high bar when bringing new recruits to the company. Research and development expenses were $188.1 million, $173.0 million and $157.8 million in fiscal Research and development expenses were $188.1 million, $173.0 million and $157.8 million in fiscal 2015, 2014 and 2013, respectively. Technology Our product development process facilitates the design of highly-innovative, analog-intensive, mixed-signal ICs. Our engineers’ deep knowledge of existing and emerging standards and performance requirements helps us to assess the technical feasibility of a particular IC. We target areas where we can provide compelling product improvements. Once we have solved the primary challenges, our field application engineers continue to work closely with our customers’ design teams to maintain and develop an understanding of our customers’ needs, allowing us to formulate derivative products and refined features. 2015, 2014 and 2013, respectively. Technology Our product development process facilitates the design of highly-innovative, analog-intensive, mixed-signal ICs. Our engineers’ deep knowledge of existing and emerging standards and performance requirements helps us to assess the technical feasibility of a particular IC. We target areas where we can provide compelling product improvements. Once we have solved the primary challenges, our field application engineers continue to work closely with our customers’ design teams to maintain and develop an understanding of our customers’ needs, allowing us to formulate derivative products and refined features. In providing mixed-signal ICs for our customers, we believe our key competitive advantages are: In providing mixed-signal ICs for our customers, we believe our key competitive advantages are: • Analog and RF design expertise in CMOS; • Digital signal processing, firmware and system design expertise; • Microcontroller and system on a chip design expertise; • Software expertise; • Module integration and design expertise; and • Our broad understanding of systems technology and trends. • Analog and RF design expertise in CMOS; • Digital signal processing, firmware and system design expertise; • Microcontroller and system on a chip design expertise; • Software expertise; • Module integration and design expertise; and • Our broad understanding of systems technology and trends. To fully capitalize on these advantages, we have assembled a world-class development team with exceptional analog and mixed-signal design expertise led by accomplished senior engineers. To fully capitalize on these advantages, we have assembled a world-class development team with exceptional analog and mixed-signal design expertise led by accomplished senior engineers. Analog and RF Design Expertise in CMOS Analog and RF Design Expertise in CMOS We believe that our most significant core competency is world-class analog and RF design capability. Additionally, we strive to design substantially all of our ICs in standard CMOS processes. While it is often significantly more difficult to design analog ICs in CMOS, CMOS provides multiple benefits versus existing alternatives, including significantly reduced cost, reduced technology risk and greater worldwide foundry capacity. CMOS is the most commonly used process technology for manufacturing digital ICs and as a result is most likely to be used for the manufacturing of ICs with finer line geometries. These finer line geometries can enable smaller and faster ICs. By designing our ICs in CMOS, we enable our products to benefit from this trend towards finer line geometries, which allows us to integrate more digital functionality into our mixed-signal ICs. Designing analog and mixed-signal ICs is significantly more complicated than designing stand alone digital ICs. While advanced software tools exist to help automate digital IC design, there are far fewer tools for advanced analog and mixed-signal IC design. In many cases, our analog circuit design efforts begin at the fundamental transistor level. We believe that we have a demonstrated ability to design the most difficult analog and RF circuits using standard CMOS technologies. We believe that our most significant core competency is world-class analog and RF design capability. Additionally, we strive to design substantially all of our ICs in standard CMOS processes. While it is often significantly more difficult to design analog ICs in CMOS, CMOS provides multiple benefits versus existing alternatives, including significantly reduced cost, reduced technology risk and greater worldwide foundry capacity. CMOS is the most commonly used process technology for manufacturing digital ICs and as a result is most likely to be used for the manufacturing of ICs with finer line geometries. These finer line geometries can enable smaller and faster ICs. By designing our ICs in CMOS, we enable our products to benefit from this trend towards finer line geometries, which allows us to integrate more digital functionality into our mixed-signal ICs. Designing analog and mixed-signal ICs is significantly more complicated than designing stand alone digital ICs. While advanced software tools exist to help automate digital IC design, there are far fewer tools for advanced analog and mixed-signal IC design. In many cases, our analog circuit design efforts begin at the fundamental transistor level. We believe that we have a demonstrated ability to design the most difficult analog and RF circuits using standard CMOS technologies. Digital Signal Processing, Firmware and System Design Expertise Digital Signal Processing, Firmware and System Design Expertise We consider the partitioning of a circuit to be a proprietary and creative design technique. Deep systems knowledge allows us to use our digital signal processing (DSP) design expertise to maximize the price/performance characteristics of both the analog and digital functions and allow our ICs to work in an optimized manner to accomplish particular tasks. Generally, we attempt to move analog functions into the digital domain as quickly as possible, creating system efficiencies without compromising performance. These patented approaches require our advanced DSP and systems expertise. We then leverage our firmware know-how to change the ‘personality’ of our devices, optimizing features and We consider the partitioning of a circuit to be a proprietary and creative design technique. Deep systems knowledge allows us to use our digital signal processing (DSP) design expertise to maximize the price/performance characteristics of both the analog and digital functions and allow our ICs to work in an optimized manner to accomplish particular tasks. Generally, we attempt to move analog functions into the digital domain as quickly as possible, creating system efficiencies without compromising performance. These patented approaches require our advanced DSP and systems expertise. We then leverage our firmware know-how to change the ‘personality’ of our devices, optimizing features and 8 8 functions needed by various markets we serve. For example, our broadcast audio products use a proven digital low-IF receiver and transmitter architecture to deliver superior RF performance and interference rejection compared to traditional, analog-only approaches. Digital signal processing is utilized to optimize sound quality under varying signal conditions, enabling a better consumer experience. Firmware has enabled us to rapidly expand the portfolio to address multiple markets without substantial silicon changes, including shortwave, longwave, analog tuned, digital tuned and even high performance HD-capable automotive radios. functions needed by various markets we serve. For example, our broadcast audio products use a proven digital low-IF receiver and transmitter architecture to deliver superior RF performance and interference rejection compared to traditional, analog-only approaches. Digital signal processing is utilized to optimize sound quality under varying signal conditions, enabling a better consumer experience. Firmware has enabled us to rapidly expand the portfolio to address multiple markets without substantial silicon changes, including shortwave, longwave, analog tuned, digital tuned and even high performance HD-capable automotive radios. Microcontroller and System on a Chip Design Expertise Microcontroller and System on a Chip Design Expertise We have the talent and circuit integration methodologies required to combine precision analog, high-speed digital, flash memory and in-system programmability into a single, monolithic CMOS integrated circuit. Our microcontroller products are designed to capture an external analog signal, convert it to a digital signal, compute digital functions on the stream of data and then communicate the results through a standard digital interface. The ability to develop standard products with the broadest possible customer application base while being cost efficient with the silicon area of the monolithic CMOS integrated circuit requires a keen sense of customer value and engineering capabilities. Additionally, to manage the wide variety of signals on a monolithic piece of silicon including electrical noise, harmonics and other electronic distortions requires a fundamental knowledge of device physics and accumulated design expertise. Software Expertise Our software expertise allows us to develop products for markets where intelligent data capture, high-performance processing and communication are increasingly important product differentiators. The software we have developed to address these markets enable machine-to-machine communications, providing intelligence to electronic systems. Our products integrate high-performance, low-power wireless and microcontroller ICs with reliable and scalable software into a flexible and robust networking platform. The demand for low-power, small-footprint wireless technology is accelerating as more and more IP-enabled end points are being connected to the Internet of Things (IoT). Our software enables a broad range of power-sensitive applications for the IoT, including smart energy, home automation, security and other connected products. We believe that the combination of our software and IC design expertise differentiates us from many of our competitors. Module Integration and Design Expertise Module Integration and Design Expertise The market for wireless modules has grown as customers search for solutions that provide turnkey wireless connectivity to their products. The development of modules is difficult due to stringent requirements, including high levels of integration and programmability, performance, reliability, security and power efficiency. In addition, designs must meet numerous wireless standards deployed in various environments and serving diverse requirements. Our combined expertise in IC design and software allows us to engineer the development of our modules to create a robust, high-performance connection in challenging wireless environments. We have developed wireless modules based on numerous wireless standards, including Bluetooth, ZigBee, Thread, Wi-Fi and sub-GHz. We believe our demonstrated proficiency in the design of modules provides our customers with significant advantages. Understanding of Systems Technology and Trends Understanding of Systems Technology and Trends Our focused expertise in mixed-signal ICs is the result of the breadth of engineering talent we have assembled with experience working in analog-intensive CMOS design for a wide variety of Our focused expertise in mixed-signal ICs is the result of the breadth of engineering talent we have assembled with experience working in analog-intensive CMOS design for a wide variety of 9 9 We have the talent and circuit integration methodologies required to combine precision analog, high-speed digital, flash memory and in-system programmability into a single, monolithic CMOS integrated circuit. Our microcontroller products are designed to capture an external analog signal, convert it to a digital signal, compute digital functions on the stream of data and then communicate the results through a standard digital interface. The ability to develop standard products with the broadest possible customer application base while being cost efficient with the silicon area of the monolithic CMOS integrated circuit requires a keen sense of customer value and engineering capabilities. Additionally, to manage the wide variety of signals on a monolithic piece of silicon including electrical noise, harmonics and other electronic distortions requires a fundamental knowledge of device physics and accumulated design expertise. Software Expertise Our software expertise allows us to develop products for markets where intelligent data capture, high-performance processing and communication are increasingly important product differentiators. The software we have developed to address these markets enable machine-to-machine communications, providing intelligence to electronic systems. Our products integrate high-performance, low-power wireless and microcontroller ICs with reliable and scalable software into a flexible and robust networking platform. The demand for low-power, small-footprint wireless technology is accelerating as more and more IP-enabled end points are being connected to the Internet of Things (IoT). Our software enables a broad range of power-sensitive applications for the IoT, including smart energy, home automation, security and other connected products. We believe that the combination of our software and IC design expertise differentiates us from many of our competitors. The market for wireless modules has grown as customers search for solutions that provide turnkey wireless connectivity to their products. The development of modules is difficult due to stringent requirements, including high levels of integration and programmability, performance, reliability, security and power efficiency. In addition, designs must meet numerous wireless standards deployed in various environments and serving diverse requirements. Our combined expertise in IC design and software allows us to engineer the development of our modules to create a robust, high-performance connection in challenging wireless environments. We have developed wireless modules based on numerous wireless standards, including Bluetooth, ZigBee, Thread, Wi-Fi and sub-GHz. We believe our demonstrated proficiency in the design of modules provides our customers with significant advantages. applications. This expertise, which we consider a competitive advantage, is the foundation of our in-depth understanding of the technology and trends that impact electronic systems and markets. Our expertise includes: applications. This expertise, which we consider a competitive advantage, is the foundation of our in-depth understanding of the technology and trends that impact electronic systems and markets. Our • Isolation, which is critical for existing and emerging industrial applications and telecom • Isolation, which is critical for existing and emerging industrial applications and telecom networks; expertise includes: networks; • Frequency synthesis, which is core technology for wireless and clocking applications; • Frequency synthesis, which is core technology for wireless and clocking applications; • Integration, which enables the elimination of discrete components in a system; and • Integration, which enables the elimination of discrete components in a system; and • Signal processing and precision analog, which forms the heart of consumer, industrial, medical • Signal processing and precision analog, which forms the heart of consumer, industrial, medical and automotive electronics applications. and automotive electronics applications. Our understanding of the role of analog/digital interfaces within electronic systems, standards evolution, and end market drivers enables us to identify product development opportunities and capitalize on market trends. Manufacturing As a fabless semiconductor company, we conduct IC design and development in our facilities and electronically transfer our proprietary IC designs to third-party semiconductor fabricators who process silicon wafers to produce the ICs that we design. Our IC designs typically use industry-standard CMOS manufacturing process technology to achieve a level of performance normally associated with more expensive special-purpose IC fabrication technology. We believe the use of CMOS technology facilitates the rapid production of our ICs within a lower cost framework. Our IC production employs submicron process geometries which are readily available from leading foundry suppliers worldwide, thus increasing the likelihood that manufacturing capacity will be available throughout our products’ life cycles. We currently partner with Taiwan Semiconductor Manufacturing Co. (TSMC) or TSMC’s affiliates and Semiconductor Manufacturing International Corporation (SMIC) to manufacture the majority of our semiconductor wafers. We believe that our fabless manufacturing model significantly reduces our capital requirements and allows us to focus our resources on design, development and marketing of our ICs. Once the silicon wafers have been produced, they are shipped directly to our third-party assembly subcontractors. The assembled ICs are then moved to the final testing stage. This operation can be performed by the same contractor that assembled the IC, other third-party test subcontractors or within our internal facilities prior to shipping to our customers. During fiscal 2015, most of our units shipped were tested by offshore third-party test subcontractors. We expect that our utilization of offshore third- party test subcontractors will remain substantial during fiscal 2016. Backlog Backlog As of January 2, 2016, our backlog was approximately $136.9 million, compared to approximately $122.4 million as of January 3, 2015. We include in backlog accepted product purchase orders from customers and worldwide distributor stocking orders. We only include orders with an expected shipping date from us within six months. Product orders in our backlog are subject to changes in delivery schedules or cancellation at the option of the purchaser typically without penalty. Our backlog may fluctuate significantly depending upon customer order patterns which may, in turn, vary considerably based on rapidly changing business circumstances. Shipments to distributors are not recognized as revenue until the products are sold by the distributors. Additionally, our arrangements with distributors typically provide for price protection and stock rotation activities. Accordingly, we do not believe that our backlog at any time is necessarily representative of actual sales for any succeeding period. Our understanding of the role of analog/digital interfaces within electronic systems, standards evolution, and end market drivers enables us to identify product development opportunities and capitalize on market trends. Manufacturing As a fabless semiconductor company, we conduct IC design and development in our facilities and electronically transfer our proprietary IC designs to third-party semiconductor fabricators who process silicon wafers to produce the ICs that we design. Our IC designs typically use industry-standard CMOS manufacturing process technology to achieve a level of performance normally associated with more expensive special-purpose IC fabrication technology. We believe the use of CMOS technology facilitates the rapid production of our ICs within a lower cost framework. Our IC production employs submicron process geometries which are readily available from leading foundry suppliers worldwide, thus increasing the likelihood that manufacturing capacity will be available throughout our products’ life cycles. We currently partner with Taiwan Semiconductor Manufacturing Co. (TSMC) or TSMC’s affiliates and Semiconductor Manufacturing International Corporation (SMIC) to manufacture the majority of our semiconductor wafers. We believe that our fabless manufacturing model significantly reduces our capital requirements and allows us to focus our resources on design, development and marketing of our ICs. Once the silicon wafers have been produced, they are shipped directly to our third-party assembly subcontractors. The assembled ICs are then moved to the final testing stage. This operation can be performed by the same contractor that assembled the IC, other third-party test subcontractors or within our internal facilities prior to shipping to our customers. During fiscal 2015, most of our units shipped were tested by offshore third-party test subcontractors. We expect that our utilization of offshore third- party test subcontractors will remain substantial during fiscal 2016. As of January 2, 2016, our backlog was approximately $136.9 million, compared to approximately $122.4 million as of January 3, 2015. We include in backlog accepted product purchase orders from customers and worldwide distributor stocking orders. We only include orders with an expected shipping date from us within six months. Product orders in our backlog are subject to changes in delivery schedules or cancellation at the option of the purchaser typically without penalty. Our backlog may fluctuate significantly depending upon customer order patterns which may, in turn, vary considerably based on rapidly changing business circumstances. Shipments to distributors are not recognized as revenue until the products are sold by the distributors. Additionally, our arrangements with distributors typically provide for price protection and stock rotation activities. Accordingly, we do not believe that our backlog at any time is necessarily representative of actual sales for any succeeding period. 10 10 Competition Competition The markets for semiconductors generally, and for analog and mixed-signal ICs in particular, are intensely competitive. We anticipate that the market for our products will continually evolve and will be subject to rapid technological change. We believe the principal competitive factors in our industry are: The markets for semiconductors generally, and for analog and mixed-signal ICs in particular, are intensely competitive. We anticipate that the market for our products will continually evolve and will be subject to rapid technological change. We believe the principal competitive factors in our industry are: • Product size; • Level of integration; • Product capabilities; • Reliability; • Price; • Performance; • Power requirement; • Customer support; • Reputation; • Ability to rapidly introduce new products to market; • Intellectual property; and • Software. We believe that we are competitive with respect to these factors, particularly because our ICs typically are smaller in size, are highly integrated, achieve high performance specifications at lower price points than competitive products and are manufactured in standard CMOS which generally enables us to supply them on a relatively rapid basis to customers to meet their product introduction schedules. However, disadvantages we face include our relatively short operating history in certain of our markets and the need for customers to redesign their products and modify their software to implement our ICs in their products. Due to our diversified product portfolio and the numerous markets and applications we serve, we target a relatively large number of competitors. We compete with Analog Devices, Atmel, Conexant, Cypress, IDT, Intel, Marvell Technology Group, Maxim Integrated Products, MaxLinear, Microchip, Microsemi, Nordic Semiconductor, NXP Semiconductors, Qualcomm, Renesas, STMicroelectronics, Texas Instruments, Vectron International and others. We expect to face competition in the future from our current competitors, other manufacturers and designers of semiconductors and start-up semiconductor design companies. Our competitors may also offer bundled solutions offering a more complete product, which may negatively impact our competitive position despite the technical merits or advantages of our products. In addition, our customers could develop products or technologies internally that would replace their need for our products and would become a source of competition. We could also face competition from module makers or other systems suppliers that may include mixed-signal components in their products that could eliminate the need for our ICs. Many of our competitors and potential competitors have longer operating histories, greater name recognition, access to larger customer bases, complementary product offerings, and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than us. Current and potential competitors have established or may establish financial and strategic relationships between themselves or with our existing or potential customers, resellers or other third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. Intellectual Property Our future success depends in part upon our proprietary technology. We seek to protect our technology through a combination of patents, copyrights, trade secrets, trademarks and confidentiality procedures. As of January 2, 2016, we had approximately 1,208 issued or pending United States patents. We also frequently file for patent protection in a variety of international jurisdictions with respect to the proprietary technology covered by our U.S. patents and patent applications. There can be no assurance that patents will ever be issued with respect to these applications. Furthermore, it is possible that any patents held by us may be invalidated, circumvented, challenged or licensed to others. In addition, there can be no assurance that such patents will provide us with competitive advantages or adequately safeguard our proprietary rights. While we continue to file new patent applications with • Product size; • Level of integration; • Product capabilities; • Reliability; • Price; • Performance; • Power requirement; • Customer support; • Reputation; • Intellectual property; and • Software. • Ability to rapidly introduce new products to market; We believe that we are competitive with respect to these factors, particularly because our ICs typically are smaller in size, are highly integrated, achieve high performance specifications at lower price points than competitive products and are manufactured in standard CMOS which generally enables us to supply them on a relatively rapid basis to customers to meet their product introduction schedules. However, disadvantages we face include our relatively short operating history in certain of our markets and the need for customers to redesign their products and modify their software to implement our ICs in their products. Due to our diversified product portfolio and the numerous markets and applications we serve, we target a relatively large number of competitors. We compete with Analog Devices, Atmel, Conexant, Cypress, IDT, Intel, Marvell Technology Group, Maxim Integrated Products, MaxLinear, Microchip, Microsemi, Nordic Semiconductor, NXP Semiconductors, Qualcomm, Renesas, STMicroelectronics, Texas Instruments, Vectron International and others. We expect to face competition in the future from our current competitors, other manufacturers and designers of semiconductors and start-up semiconductor design companies. Our competitors may also offer bundled solutions offering a more complete product, which may negatively impact our competitive position despite the technical merits or advantages of our products. In addition, our customers could develop products or technologies internally that would replace their need for our products and would become a source of competition. We could also face competition from module makers or other systems suppliers that may include mixed-signal components in their products that could eliminate the need for our ICs. Many of our competitors and potential competitors have longer operating histories, greater name recognition, access to larger customer bases, complementary product offerings, and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than us. Current and potential competitors have established or may establish financial and strategic relationships between themselves or with our existing or potential customers, resellers or other third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. Intellectual Property Our future success depends in part upon our proprietary technology. We seek to protect our technology through a combination of patents, copyrights, trade secrets, trademarks and confidentiality procedures. As of January 2, 2016, we had approximately 1,208 issued or pending United States patents. We also frequently file for patent protection in a variety of international jurisdictions with respect to the proprietary technology covered by our U.S. patents and patent applications. There can be no assurance that patents will ever be issued with respect to these applications. Furthermore, it is possible that any patents held by us may be invalidated, circumvented, challenged or licensed to others. In addition, there can be no assurance that such patents will provide us with competitive advantages or adequately safeguard our proprietary rights. While we continue to file new patent applications with 11 11 respect to our recent developments, existing patents are granted for prescribed time periods and will expire at various times in the future. We claim copyright protection for proprietary documentation for our products. We have filed for registration, or are in the process of filing for registration, the visual images of certain ICs with the U.S. Copyright Office. We have registered the ‘‘Silicon Labs’’ logo and a variety of other product and product family names as trademarks in the United States and selected foreign jurisdictions. All other trademarks, service marks or trade names appearing in this report are the property of their respective owners. We also attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers, employees and consultants, and through other customary security measures. We intend to protect our rights vigorously, but there can be no assurance that our efforts will be successful. In addition, the laws of other countries in which our products are sold may not protect our products and intellectual property rights to the same extent as the laws of the United States. While our ability to effectively compete depends in large part on our ability to protect our intellectual property, we believe that our technical expertise and ability to introduce new products in a timely manner will be an important factor in maintaining our competitive position. Many participants in the semiconductor and electronics industries have a significant number of patents and have frequently demonstrated a readiness to commence litigation based on allegations of patent and other intellectual property infringement. From time to time, third parties may assert infringement claims against us. We may not prevail in any such litigation or may not be able to license any valid and infringed patents from third parties on commercially reasonable terms, if at all. Litigation, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time. Any such litigation could materially adversely affect us. Our licenses include industry standard licenses with our vendors, such as wafer fabrication tool libraries, third-party core libraries, computer-aided design applications and business software applications. Employees As of January 2, 2016, we employed 1,199 people. Our success depends on the continued service of our key technical and senior management personnel and on our ability to continue to attract, retain and motivate highly skilled analog and mixed-signal engineers. The competition for such personnel is intense. We have never had a work stoppage and none of our U.S. employees are represented by a labor organization. We consider our employee relations to be good. Environmental Regulation Environmental Regulation Federal, state and local regulations impose various environmental controls on the storage, use, discharge and disposal of certain chemicals and gases used in the semiconductor industry. Our compliance with these laws and regulations has not had a material impact on our financial position or results of operations. Available Information Our website address is www.silabs.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the investor relations page of our website free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. 12 12 respect to our recent developments, existing patents are granted for prescribed time periods and will expire at various times in the future. We claim copyright protection for proprietary documentation for our products. We have filed for registration, or are in the process of filing for registration, the visual images of certain ICs with the U.S. Copyright Office. We have registered the ‘‘Silicon Labs’’ logo and a variety of other product and product family names as trademarks in the United States and selected foreign jurisdictions. All other trademarks, service marks or trade names appearing in this report are the property of their respective owners. We also attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers, employees and consultants, and through other customary security measures. We intend to protect our rights vigorously, but there can be no assurance that our efforts will be successful. In addition, the laws of other countries in which our products are sold may not protect our products and intellectual property rights to the same extent as the laws of the United States. While our ability to effectively compete depends in large part on our ability to protect our intellectual property, we believe that our technical expertise and ability to introduce new products in a timely manner will be an important factor in maintaining our competitive position. Many participants in the semiconductor and electronics industries have a significant number of patents and have frequently demonstrated a readiness to commence litigation based on allegations of patent and other intellectual property infringement. From time to time, third parties may assert infringement claims against us. We may not prevail in any such litigation or may not be able to license any valid and infringed patents from third parties on commercially reasonable terms, if at all. Litigation, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time. Any such litigation could materially adversely affect us. Our licenses include industry standard licenses with our vendors, such as wafer fabrication tool libraries, third-party core libraries, computer-aided design applications and business software applications. Employees As of January 2, 2016, we employed 1,199 people. Our success depends on the continued service of our key technical and senior management personnel and on our ability to continue to attract, retain and motivate highly skilled analog and mixed-signal engineers. The competition for such personnel is intense. We have never had a work stoppage and none of our U.S. employees are represented by a labor organization. We consider our employee relations to be good. Federal, state and local regulations impose various environmental controls on the storage, use, discharge and disposal of certain chemicals and gases used in the semiconductor industry. Our compliance with these laws and regulations has not had a material impact on our financial position or results of operations. Available Information Our website address is www.silabs.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the investor relations page of our website free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. Item 1A. Risk Factors Risks Related to our Business We may not be able to maintain our historical growth and may experience significant period-to-period fluctuations in our revenues and operating results, which may result in volatility in our stock price Although we have generally experienced revenue growth in our history, we may not be able to sustain this growth. We may also experience significant period-to-period fluctuations in our revenues and operating results in the future due to a number of factors, and any such variations may cause our stock price to fluctuate. In some future period our revenues or operating results may be below the expectations of public market analysts or investors. If this occurs, our stock price may drop, perhaps significantly. Item 1A. Risk Factors Risks Related to our Business We may not be able to maintain our historical growth and may experience significant period-to-period fluctuations in our revenues and operating results, which may result in volatility in our stock price Although we have generally experienced revenue growth in our history, we may not be able to sustain this growth. We may also experience significant period-to-period fluctuations in our revenues and operating results in the future due to a number of factors, and any such variations may cause our stock price to fluctuate. In some future period our revenues or operating results may be below the expectations of public market analysts or investors. If this occurs, our stock price may drop, perhaps significantly. A number of factors, in addition to those cited in other risk factors applicable to our business, may A number of factors, in addition to those cited in other risk factors applicable to our business, may contribute to fluctuations in our revenues and operating results, including: contribute to fluctuations in our revenues and operating results, including: • The timing and volume of orders received from our customers; • The timing and volume of orders received from our customers; • The timeliness of our new product introductions and the rate at which our new products may • The timeliness of our new product introductions and the rate at which our new products may cannibalize our older products; cannibalize our older products; • The rate of acceptance of our products by our customers, including the acceptance of new products we may develop for integration in the products manufactured by such customers, which we refer to as ‘‘design wins’’; • The rate of acceptance of our products by our customers, including the acceptance of new products we may develop for integration in the products manufactured by such customers, which we refer to as ‘‘design wins’’; • The time lag and realization rate between ‘‘design wins’’ and production orders; • The time lag and realization rate between ‘‘design wins’’ and production orders; • The demand for, and life cycles of, the products incorporating our mixed-signal solutions; • The demand for, and life cycles of, the products incorporating our mixed-signal solutions; • The rate of adoption of mixed-signal products in the markets we target; • The rate of adoption of mixed-signal products in the markets we target; • Deferrals or reductions of customer orders in anticipation of new products or product enhancements from us or our competitors or other providers of mixed-signal ICs; • Deferrals or reductions of customer orders in anticipation of new products or product enhancements from us or our competitors or other providers of mixed-signal ICs; • Changes in product mix; • The average selling prices for our products could drop suddenly due to competitive offerings or • The average selling prices for our products could drop suddenly due to competitive offerings or competitive predatory pricing; • The average selling prices for our products generally decline over time; • The average selling prices for our products generally decline over time; • Changes in market standards; • Impairment charges related to inventory, equipment or other long-lived assets; • Impairment charges related to inventory, equipment or other long-lived assets; • The software used in our products, including software provided by third parties, may not meet • The software used in our products, including software provided by third parties, may not meet the needs of our customers; • Significant legal costs to defend our intellectual property rights or respond to claims against us; • Significant legal costs to defend our intellectual property rights or respond to claims against us; and • The rate at which new markets emerge for products we are currently developing or for which our design expertise can be utilized to develop products for these new markets. The markets for consumer electronics, for example, are characterized by rapid fluctuations in demand and seasonality that result in corresponding fluctuations in the demand for our products that are incorporated in such devices. Additionally, the rate of technology acceptance by our customers results in fluctuating demand for our products as customers are reluctant to incorporate a new IC into their products until the new IC has achieved market acceptance. Once a new IC achieves market acceptance, demand for the new IC can quickly accelerate to a point and then level off such that rapid • The rate at which new markets emerge for products we are currently developing or for which our design expertise can be utilized to develop products for these new markets. The markets for consumer electronics, for example, are characterized by rapid fluctuations in demand and seasonality that result in corresponding fluctuations in the demand for our products that are incorporated in such devices. Additionally, the rate of technology acceptance by our customers results in fluctuating demand for our products as customers are reluctant to incorporate a new IC into their products until the new IC has achieved market acceptance. Once a new IC achieves market acceptance, demand for the new IC can quickly accelerate to a point and then level off such that rapid • Changes in product mix; competitive predatory pricing; • Changes in market standards; the needs of our customers; and 13 13 historical growth in sales of a product should not be viewed as indicative of continued future growth. In addition, demand can quickly decline for a product when a new IC product is introduced and receives market acceptance. Due to the various factors mentioned above, the results of any prior quarterly or annual periods should not be relied upon as an indication of our future operating performance. historical growth in sales of a product should not be viewed as indicative of continued future growth. In addition, demand can quickly decline for a product when a new IC product is introduced and receives market acceptance. Due to the various factors mentioned above, the results of any prior quarterly or annual periods should not be relied upon as an indication of our future operating performance. If we are unable to develop or acquire new and enhanced products that achieve market acceptance in a timely manner, our operating results and competitive position could be harmed If we are unable to develop or acquire new and enhanced products that achieve market acceptance in a timely manner, our operating results and competitive position could be harmed Our future success will depend on our ability to develop or acquire new products and product enhancements that achieve market acceptance in a timely and cost-effective manner. The development of mixed-signal ICs is highly complex, and we have at times experienced delays in completing the development and introduction of new products and product enhancements. Successful product development and market acceptance of our products depend on a number of factors, including: Our future success will depend on our ability to develop or acquire new products and product enhancements that achieve market acceptance in a timely and cost-effective manner. The development of mixed-signal ICs is highly complex, and we have at times experienced delays in completing the development and introduction of new products and product enhancements. Successful product development and market acceptance of our products depend on a number of factors, including: • Requirements of customers; • Accurate prediction of market and technical requirements; • Timely completion and introduction of new designs; incorporated; • Availability of foundry, assembly and test capacity; • Achievement of high manufacturing yields; • Requirements of customers; • Accurate prediction of market and technical requirements; • Timely completion and introduction of new designs; • Timely qualification and certification of our products for use in our customers’ products; • Timely qualification and certification of our products for use in our customers’ products; • Commercial acceptance and volume production of the products into which our ICs will be • Commercial acceptance and volume production of the products into which our ICs will be incorporated; • Availability of foundry, assembly and test capacity; • Achievement of high manufacturing yields; • Quality, price, performance, power use and size of our products; • Quality, price, performance, power use and size of our products; • Availability, quality, price and performance of competing products and technologies; • Availability, quality, price and performance of competing products and technologies; • Our customer service, application support capabilities and responsiveness; • Our customer service, application support capabilities and responsiveness; • Successful development of our relationships with existing and potential customers; • Successful development of our relationships with existing and potential customers; • Technology, industry standards or end-user preferences; and • Technology, industry standards or end-user preferences; and • Cooperation of third-party software providers and our semiconductor vendors to support our • Cooperation of third-party software providers and our semiconductor vendors to support our chips within a system. chips within a system. We cannot provide any assurance that products which we recently have developed or may develop in the future will achieve market acceptance. We have introduced to market or are in development of many products. If our products fail to achieve market acceptance, or if we fail to develop new products on a timely basis that achieve market acceptance, our growth prospects, operating results and competitive position could be adversely affected. The growth of the Internet of Things (IoT) market is dependent on the adoption of industry standards to permit devices to connect and communicate with each other. If the industry cannot agree on a common set of standards, then the growth of the IoT market may be slower than expected. Our research and development efforts are focused on a limited number of new technologies and products, and any delay in the development, or abandonment, of these technologies or products by industry participants, or their failure to achieve market acceptance, could compromise our competitive position Our products serve as components and solutions in electronic devices in various markets. As a result, we have devoted and expect to continue to devote a large amount of resources to develop products based on new and emerging technologies and standards that will be commercially introduced in the future. Research and development expense during fiscal 2015 was $188.1 million, or 29.2% of We cannot provide any assurance that products which we recently have developed or may develop in the future will achieve market acceptance. We have introduced to market or are in development of many products. If our products fail to achieve market acceptance, or if we fail to develop new products on a timely basis that achieve market acceptance, our growth prospects, operating results and competitive position could be adversely affected. The growth of the Internet of Things (IoT) market is dependent on the adoption of industry standards to permit devices to connect and communicate with each other. If the industry cannot agree on a common set of standards, then the growth of the IoT market may be slower than expected. Our research and development efforts are focused on a limited number of new technologies and products, and any delay in the development, or abandonment, of these technologies or products by industry participants, or their failure to achieve market acceptance, could compromise our competitive position Our products serve as components and solutions in electronic devices in various markets. As a result, we have devoted and expect to continue to devote a large amount of resources to develop products based on new and emerging technologies and standards that will be commercially introduced in the future. Research and development expense during fiscal 2015 was $188.1 million, or 29.2% of 14 14 revenues. A number of companies are actively involved in the development of these new technologies and standards. Should any of these companies delay or abandon their efforts to develop commercially available products based on new technologies and standards, our research and development efforts with respect to these technologies and standards likely would have no appreciable value. In addition, if we do not correctly anticipate new technologies and standards, or if the products that we develop based on these new technologies and standards fail to achieve market acceptance, our competitors may be better able to address market demand than we would. Furthermore, if markets for these new technologies and standards develop later than we anticipate, or do not develop at all, demand for our products that are currently in development would suffer, resulting in lower sales of these products than we currently anticipate. revenues. A number of companies are actively involved in the development of these new technologies and standards. Should any of these companies delay or abandon their efforts to develop commercially available products based on new technologies and standards, our research and development efforts with respect to these technologies and standards likely would have no appreciable value. In addition, if we do not correctly anticipate new technologies and standards, or if the products that we develop based on these new technologies and standards fail to achieve market acceptance, our competitors may be better able to address market demand than we would. Furthermore, if markets for these new technologies and standards develop later than we anticipate, or do not develop at all, demand for our products that are currently in development would suffer, resulting in lower sales of these products than we currently anticipate. We depend on a limited number of customers for a substantial portion of our revenues, and the loss of, or a significant reduction in orders from, any key customer could significantly reduce our revenues We depend on a limited number of customers for a substantial portion of our revenues, and the loss of, or a significant reduction in orders from, any key customer could significantly reduce our revenues The loss of any of our key customers, or a significant reduction in sales to any one of them, would significantly reduce our revenues and adversely affect our business. During fiscal 2015, our ten largest customers accounted for 29% of our revenues. Some of the markets for our products are dominated by a small number of potential customers. Therefore, our operating results in the foreseeable future will continue to depend on our ability to sell to these dominant customers, as well as the ability of these customers to sell products that incorporate our IC products. In the future, these customers may decide not to purchase our products at all, purchase fewer products than they did in the past or alter their purchasing patterns, particularly because: The loss of any of our key customers, or a significant reduction in sales to any one of them, would significantly reduce our revenues and adversely affect our business. During fiscal 2015, our ten largest customers accounted for 29% of our revenues. Some of the markets for our products are dominated by a small number of potential customers. Therefore, our operating results in the foreseeable future will continue to depend on our ability to sell to these dominant customers, as well as the ability of these customers to sell products that incorporate our IC products. In the future, these customers may decide not to purchase our products at all, purchase fewer products than they did in the past or alter their purchasing patterns, particularly because: • We do not have material long-term purchase contracts with our customers; • We do not have material long-term purchase contracts with our customers; • Substantially all of our sales to date have been made on a purchase order basis, which permits our customers to cancel, change or delay product purchase commitments with little or no notice to us and without penalty; • Substantially all of our sales to date have been made on a purchase order basis, which permits our customers to cancel, change or delay product purchase commitments with little or no notice to us and without penalty; • Some of our customers may have efforts underway to actively diversify their vendor base which • Some of our customers may have efforts underway to actively diversify their vendor base which could reduce purchases of our products; and could reduce purchases of our products; and • Some of our customers have developed or acquired products that compete directly with products these customers purchase from us, which could affect our customers’ purchasing decisions in the future. Our customers regularly evaluate alternative sources of supply in order to diversify their supplier base, which increases their negotiating leverage with us and protects their ability to secure these components. We believe that any expansion of our customers’ supplier bases could have an adverse effect on the prices we are able to charge and volume of product that we are able to sell to our customers, which would negatively affect our revenues and operating results. • Some of our customers have developed or acquired products that compete directly with products these customers purchase from us, which could affect our customers’ purchasing decisions in the future. Our customers regularly evaluate alternative sources of supply in order to diversify their supplier base, which increases their negotiating leverage with us and protects their ability to secure these components. We believe that any expansion of our customers’ supplier bases could have an adverse effect on the prices we are able to charge and volume of product that we are able to sell to our customers, which would negatively affect our revenues and operating results. Significant litigation over intellectual property in our industry may cause us to become involved in costly and lengthy litigation which could seriously harm our business Significant litigation over intellectual property in our industry may cause us to become involved in costly and lengthy litigation which could seriously harm our business In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. From time to time, we receive letters from various industry participants alleging infringement of patents, trademarks or misappropriation of trade secrets or from customers or suppliers requesting indemnification for claims brought against them by third parties. The exploratory nature of these inquiries has become relatively common in the semiconductor industry. We respond when we deem appropriate and as advised by legal counsel. We have been involved in litigation to protect our intellectual property rights in the past and may become involved in such litigation again in the future. We are currently involved in litigation with Cresta Technology in which we and certain of our customers have been accused of patent infringement related to our television tuner In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. From time to time, we receive letters from various industry participants alleging infringement of patents, trademarks or misappropriation of trade secrets or from customers or suppliers requesting indemnification for claims brought against them by third parties. The exploratory nature of these inquiries has become relatively common in the semiconductor industry. We respond when we deem appropriate and as advised by legal counsel. We have been involved in litigation to protect our intellectual property rights in the past and may become involved in such litigation again in the future. We are currently involved in litigation with Cresta Technology in which we and certain of our customers have been accused of patent infringement related to our television tuner 15 15 products. In the future, we may become involved in additional litigation to defend allegations of infringement asserted by others, both directly and indirectly as a result of certain industry-standard indemnities we may offer to our customers or suppliers. Legal proceedings could subject us to significant liability for damages or invalidate our proprietary rights. Legal proceedings initiated by us to protect our intellectual property rights could also result in counterclaims or countersuits against us. Any litigation, regardless of its outcome, would likely be time-consuming and expensive to resolve and would divert our management’s time and attention. Intellectual property litigation also could force us to take specific actions, including: products. In the future, we may become involved in additional litigation to defend allegations of infringement asserted by others, both directly and indirectly as a result of certain industry-standard indemnities we may offer to our customers or suppliers. Legal proceedings could subject us to significant liability for damages or invalidate our proprietary rights. Legal proceedings initiated by us to protect our intellectual property rights could also result in counterclaims or countersuits against us. Any litigation, regardless of its outcome, would likely be time-consuming and expensive to resolve and would divert our management’s time and attention. Intellectual property litigation also could force us to take specific actions, including: • Cease selling or manufacturing products that use the challenged intellectual property; • Cease selling or manufacturing products that use the challenged intellectual property; • Obtain from the owner of the infringed intellectual property a right to a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; • Obtain from the owner of the infringed intellectual property a right to a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; • Redesign those products that use infringing intellectual property; or • Redesign those products that use infringing intellectual property; or • Pursue legal remedies with third parties to enforce our indemnification rights, which may not • Pursue legal remedies with third parties to enforce our indemnification rights, which may not adequately protect our interests. adequately protect our interests. Any acquisitions we make could disrupt our business and harm our financial condition Any acquisitions we make could disrupt our business and harm our financial condition As part of our growth and product diversification strategy, we continue to evaluate opportunities to acquire other businesses, intellectual property or technologies that would complement our current offerings, expand the breadth of our markets or enhance our technical capabilities. The acquisitions that we have made and may make in the future entail a number of risks that could materially and adversely affect our business and operating results, including: As part of our growth and product diversification strategy, we continue to evaluate opportunities to acquire other businesses, intellectual property or technologies that would complement our current offerings, expand the breadth of our markets or enhance our technical capabilities. The acquisitions that we have made and may make in the future entail a number of risks that could materially and adversely affect our business and operating results, including: • Problems integrating the acquired operations, technologies or products with our existing business • Problems integrating the acquired operations, technologies or products with our existing business and products; • Diversion of management’s time and attention from our core business; • Need for financial resources above our planned investment levels; • Difficulties in retaining business relationships with suppliers and customers of the acquired • Difficulties in retaining business relationships with suppliers and customers of the acquired company; • Risks associated with entering markets in which we lack prior experience; • Risks associated with the transfer of licenses of intellectual property; • Increased operating costs due to acquired overhead; • Tax issues associated with acquisitions; • Diversion of management’s time and attention from our core business; • Need for financial resources above our planned investment levels; and products; company; • Risks associated with entering markets in which we lack prior experience; • Risks associated with the transfer of licenses of intellectual property; • Increased operating costs due to acquired overhead; • Tax issues associated with acquisitions; • Acquisition-related disputes, including disputes over earn-outs and escrows; • Acquisition-related disputes, including disputes over earn-outs and escrows; • Potential loss of key employees of the acquired company; and • Potential impairment of related goodwill and intangible assets. In contrast to the ICs that we have historically developed, our acquisition of Bluegiga and Telegesis will entail additional efforts to develop modules, which are products that incorporate ICs as well as additional software. We have limited experience with developing modules. Modules tend to have higher average selling prices but lower overall gross margins than ICs. Bluegiga’s modules currently incorporate products from some of our competitors. Any disruption in supply of those products would adversely affect our business. • Potential loss of key employees of the acquired company; and • Potential impairment of related goodwill and intangible assets. In contrast to the ICs that we have historically developed, our acquisition of Bluegiga and Telegesis will entail additional efforts to develop modules, which are products that incorporate ICs as well as additional software. We have limited experience with developing modules. Modules tend to have higher average selling prices but lower overall gross margins than ICs. Bluegiga’s modules currently incorporate products from some of our competitors. Any disruption in supply of those products would adversely affect our business. Future acquisitions also could cause us to incur debt or contingent liabilities or cause us to issue equity securities that could negatively impact the ownership percentages of existing shareholders. Future acquisitions also could cause us to incur debt or contingent liabilities or cause us to issue equity securities that could negatively impact the ownership percentages of existing shareholders. 16 16 We may be unable to protect our intellectual property, which would negatively affect our ability to compete We may be unable to protect our intellectual property, which would negatively affect our ability to compete Our products rely on our proprietary technology, and we expect that future technological advances made by us will be critical to sustain market acceptance of our products. Therefore, we believe that the protection of our intellectual property rights is and will continue to be important to the success of our business. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants, intellectual property providers and business partners, and control access to and distribution of our documentation and other proprietary information. Despite these efforts, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. We cannot be certain that patents will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit us or give us adequate protection from competing products. For example, issued patents may be circumvented or challenged and declared invalid or unenforceable. We also cannot be certain that others will not develop effective competing technologies on their own. Failure to manage our distribution channel relationships could impede our future growth Failure to manage our distribution channel relationships could impede our future growth The future growth of our business will depend in large part on our ability to manage our relationships with current and future distributors and sales representatives, develop additional channels for the distribution and sale of our products and manage these relationships. During fiscal 2015, 67% of our revenue was derived from distributors. As we execute our indirect sales strategy, we must manage the potential conflicts that may arise with our direct sales efforts. For example, conflicts with a distributor may arise when a customer begins purchasing directly from us rather than through the distributor. The inability to successfully execute or manage a multi-channel sales strategy could impede our future growth. In addition, relationships with our distributors often involve the use of price protection and inventory return rights. This often requires a significant amount of sales management’s time and system resources to manage properly. We are subject to increased inventory risks and costs because we build our products based on forecasts provided by customers before receiving purchase orders for the products In order to ensure availability of our products for some of our largest customers, we start the manufacturing of our products in advance of receiving purchase orders based on forecasts provided by these customers. However, these forecasts do not represent binding purchase commitments and we do not recognize sales for these products until they are shipped to the customer. As a result, we incur inventory and manufacturing costs in advance of anticipated sales. Because demand for our products may not materialize, manufacturing based on forecasts subjects us to increased risks of high inventory carrying costs, increased obsolescence and increased operating costs. These inventory risks are exacerbated when our customers purchase indirectly through contract manufacturers or hold component inventory levels greater than their consumption rate because this causes us to have less visibility regarding the accumulated levels of inventory for such customers. A resulting write-off of unusable or excess inventories would adversely affect our operating results. Our products rely on our proprietary technology, and we expect that future technological advances made by us will be critical to sustain market acceptance of our products. Therefore, we believe that the protection of our intellectual property rights is and will continue to be important to the success of our business. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants, intellectual property providers and business partners, and control access to and distribution of our documentation and other proprietary information. Despite these efforts, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. We cannot be certain that patents will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit us or give us adequate protection from competing products. For example, issued patents may be circumvented or challenged and declared invalid or unenforceable. We also cannot be certain that others will not develop effective competing technologies on their own. The future growth of our business will depend in large part on our ability to manage our relationships with current and future distributors and sales representatives, develop additional channels for the distribution and sale of our products and manage these relationships. During fiscal 2015, 67% of our revenue was derived from distributors. As we execute our indirect sales strategy, we must manage the potential conflicts that may arise with our direct sales efforts. For example, conflicts with a distributor may arise when a customer begins purchasing directly from us rather than through the distributor. The inability to successfully execute or manage a multi-channel sales strategy could impede our future growth. In addition, relationships with our distributors often involve the use of price protection and inventory return rights. This often requires a significant amount of sales management’s time and system resources to manage properly. We are subject to increased inventory risks and costs because we build our products based on forecasts provided by customers before receiving purchase orders for the products In order to ensure availability of our products for some of our largest customers, we start the manufacturing of our products in advance of receiving purchase orders based on forecasts provided by these customers. However, these forecasts do not represent binding purchase commitments and we do not recognize sales for these products until they are shipped to the customer. As a result, we incur inventory and manufacturing costs in advance of anticipated sales. Because demand for our products may not materialize, manufacturing based on forecasts subjects us to increased risks of high inventory carrying costs, increased obsolescence and increased operating costs. These inventory risks are exacerbated when our customers purchase indirectly through contract manufacturers or hold component inventory levels greater than their consumption rate because this causes us to have less visibility regarding the accumulated levels of inventory for such customers. A resulting write-off of unusable or excess inventories would adversely affect our operating results. Our products are complex and may contain errors which could lead to liability, an increase in our costs and/or a reduction in our revenues Our products are complex and may contain errors which could lead to liability, an increase in our costs and/or a reduction in our revenues Our products are complex and may contain errors, particularly when first introduced or as new versions are released. Our products are increasingly being designed in more complex processes, include higher levels of software and hardware integration in modules and system-level solutions and/or include Our products are complex and may contain errors, particularly when first introduced or as new versions are released. Our products are increasingly being designed in more complex processes, include higher levels of software and hardware integration in modules and system-level solutions and/or include 17 17 elements provided by third parties which further increase the risk of errors. Many of our products focus on wireless connectivity and the IoT market and such connectivity may make these products particularly susceptible to cyber-attacks. We rely primarily on our in-house testing personnel to design test operations and procedures to detect any errors or vulnerabilities prior to delivery of our products to our customers. Should problems occur in the operation or performance of our products, we may experience delays in meeting key introduction dates or scheduled delivery dates to our customers. These errors also could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations and business reputation problems. Any defects could result in refunds or other liability or require product replacement or recall. Any of the foregoing could impose substantial costs and harm our business. Product liability, data breach or cyber liability claims may be asserted with respect to our products. Our products are typically sold at prices that are significantly lower than the cost of the end-products into which they are incorporated. A defect or failure in our product could cause failure in our customer’s end-product, so we could face claims for damages that are disproportionately higher than the revenues and profits we receive from the products involved. Furthermore, product liability risks are particularly significant with respect to medical and automotive applications because of the risk of serious harm to users of these products. There can be no assurance that any insurance we maintain will sufficiently protect us from any such claims. We rely on third parties to manufacture, assemble and test our products and the failure to successfully manage our relationships with our manufacturers and subcontractors would negatively impact our ability to sell our products We do not have our own wafer fab manufacturing facilities. Therefore, we rely on third-party vendors to manufacture the products we design. We also currently rely on Asian third-party assembly subcontractors to assemble and package the silicon chips provided by the wafers for use in final products. Additionally, we rely on these offshore subcontractors for a substantial portion of the testing requirements of our products prior to shipping. We expect utilization of third-party subcontractors to continue in the future. The cyclical nature of the semiconductor industry drives wide fluctuations in available capacity at third-party vendors. On occasion, we have been unable to adequately respond to unexpected increases in customer demand due to capacity constraints and, therefore, were unable to benefit from this incremental demand. We may be unable to obtain adequate foundry, assembly or test capacity from our third-party subcontractors to meet our customers’ delivery requirements even if we adequately forecast customer demand. There are significant risks associated with relying on these third-party foundries and There are significant risks associated with relying on these third-party foundries and subcontractors, including: • Failure by us, our customers or their end customers to qualify a selected supplier; • Failure by us, our customers or their end customers to qualify a selected supplier; • Potential insolvency of the third-party subcontractors; • Reduced control over delivery schedules and quality; • Limited warranties on wafers or products supplied to us; • Potential insolvency of the third-party subcontractors; • Reduced control over delivery schedules and quality; • Limited warranties on wafers or products supplied to us; • Potential increases in prices or payments in advance for capacity; • Potential increases in prices or payments in advance for capacity; • Increased need for international-based supply, logistics and financial management; • Increased need for international-based supply, logistics and financial management; • Their inability to supply or support new or changing packaging technologies; and • Their inability to supply or support new or changing packaging technologies; and • Low test yields. • Low test yields. 18 18 elements provided by third parties which further increase the risk of errors. Many of our products focus on wireless connectivity and the IoT market and such connectivity may make these products particularly susceptible to cyber-attacks. We rely primarily on our in-house testing personnel to design test operations and procedures to detect any errors or vulnerabilities prior to delivery of our products to our customers. Should problems occur in the operation or performance of our products, we may experience delays in meeting key introduction dates or scheduled delivery dates to our customers. These errors also could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations and business reputation problems. Any defects could result in refunds or other liability or require product replacement or recall. Any of the foregoing could impose substantial costs and harm our business. Product liability, data breach or cyber liability claims may be asserted with respect to our products. Our products are typically sold at prices that are significantly lower than the cost of the end-products into which they are incorporated. A defect or failure in our product could cause failure in our customer’s end-product, so we could face claims for damages that are disproportionately higher than the revenues and profits we receive from the products involved. Furthermore, product liability risks are particularly significant with respect to medical and automotive applications because of the risk of serious harm to users of these products. There can be no assurance that any insurance we maintain will sufficiently protect us from any such claims. We rely on third parties to manufacture, assemble and test our products and the failure to successfully manage our relationships with our manufacturers and subcontractors would negatively impact our ability to sell our products We do not have our own wafer fab manufacturing facilities. Therefore, we rely on third-party vendors to manufacture the products we design. We also currently rely on Asian third-party assembly subcontractors to assemble and package the silicon chips provided by the wafers for use in final products. Additionally, we rely on these offshore subcontractors for a substantial portion of the testing requirements of our products prior to shipping. We expect utilization of third-party subcontractors to continue in the future. The cyclical nature of the semiconductor industry drives wide fluctuations in available capacity at third-party vendors. On occasion, we have been unable to adequately respond to unexpected increases in customer demand due to capacity constraints and, therefore, were unable to benefit from this incremental demand. We may be unable to obtain adequate foundry, assembly or test capacity from our third-party subcontractors to meet our customers’ delivery requirements even if we adequately forecast customer demand. subcontractors, including: We typically do not have long-term supply contracts with our third-party vendors which obligate the vendor to perform services and supply products to us for a specific period, in specific quantities, and at specific prices. Our third-party foundry, assembly and test subcontractors typically do not guarantee that adequate capacity will be available to us within the time required to meet demand for our products. In the event that these vendors fail to meet our demand for whatever reason, we expect that it would take up to 12 months to transition performance of these services to new providers. Such a transition may also require qualification of the new providers by our customers or their end customers. Most of the silicon wafers for the products that we sold during fiscal 2015 were manufactured either by Taiwan Semiconductor Manufacturing Co. (TSMC) or TSMC’s affiliates or by Semiconductor Manufacturing International Corporation (SMIC). Our customers typically complete their own qualification process. If we fail to properly balance customer demand across the existing semiconductor fabrication facilities that we utilize or are required by our foundry partners to increase, or otherwise change the number of fab lines that we utilize for our production, we might not be able to fulfill demand for our products and may need to divert our engineering resources away from new product development initiatives to support the fab line transition, which would adversely affect our operating results. We monitor the financial condition of our third-party foundries and subcontractor partners. In August 2014, we received notice that Telefunken Semiconductors GmbH & Co (TSG), a wafer supplier for our high-voltage products, filed an insolvency proceeding in Germany. To mitigate any potential impact on our customers, we purchased a number of additional wafers from TSG and we expedited our previously-planned transition of the manufacturing of certain high-voltage products to another of our foundry partners. TSG ceased production at the end of February 2015. Should unexpected demand exceed our inventory reserves and our transition plans take longer than expected to qualify our replacement products, we may experience a short term decline in revenue or a longer term decline in revenue if our customers shift their demand to alternative suppliers. Either of these conditions would adversely affect our operating results. Our customers require our products to undergo a lengthy and expensive qualification process without any assurance of product sales Our customers require our products to undergo a lengthy and expensive qualification process without any assurance of product sales Prior to purchasing our products, our customers require that our products undergo an extensive qualification process, which involves testing of the products in the customer’s system as well as rigorous reliability testing. This qualification process may continue for six months or longer. However, qualification of a product by a customer does not ensure any sales of the product to that customer. Even after successful qualification and sales of a product to a customer, a subsequent revision to the product or software, changes in the IC’s manufacturing process or the selection of a new supplier by us may require a new qualification process, which may result in delays and in us holding excess or obsolete inventory. After our products are qualified, it can take an additional six months or more before the customer commences volume production of components or devices that incorporate our products. Despite these uncertainties, we devote substantial resources, including design, engineering, sales, marketing and management efforts, toward qualifying our products with customers in anticipation of sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, such failure or delay would preclude or delay sales of such product to the customer, which may impede our growth and cause our business to suffer. We have substantial international activities, which subjects us to additional business risks including logistical and financial complexity, political instability and currency fluctuations We have established international subsidiaries and have opened offices in international markets to support our activities in Europe and Asia. This has included the establishment of a headquarters in 19 19 We typically do not have long-term supply contracts with our third-party vendors which obligate the vendor to perform services and supply products to us for a specific period, in specific quantities, and at specific prices. Our third-party foundry, assembly and test subcontractors typically do not guarantee that adequate capacity will be available to us within the time required to meet demand for our products. In the event that these vendors fail to meet our demand for whatever reason, we expect that it would take up to 12 months to transition performance of these services to new providers. Such a transition may also require qualification of the new providers by our customers or their end customers. Most of the silicon wafers for the products that we sold during fiscal 2015 were manufactured either by Taiwan Semiconductor Manufacturing Co. (TSMC) or TSMC’s affiliates or by Semiconductor Manufacturing International Corporation (SMIC). Our customers typically complete their own qualification process. If we fail to properly balance customer demand across the existing semiconductor fabrication facilities that we utilize or are required by our foundry partners to increase, or otherwise change the number of fab lines that we utilize for our production, we might not be able to fulfill demand for our products and may need to divert our engineering resources away from new product development initiatives to support the fab line transition, which would adversely affect our operating results. We monitor the financial condition of our third-party foundries and subcontractor partners. In August 2014, we received notice that Telefunken Semiconductors GmbH & Co (TSG), a wafer supplier for our high-voltage products, filed an insolvency proceeding in Germany. To mitigate any potential impact on our customers, we purchased a number of additional wafers from TSG and we expedited our previously-planned transition of the manufacturing of certain high-voltage products to another of our foundry partners. TSG ceased production at the end of February 2015. Should unexpected demand exceed our inventory reserves and our transition plans take longer than expected to qualify our replacement products, we may experience a short term decline in revenue or a longer term decline in revenue if our customers shift their demand to alternative suppliers. Either of these conditions would adversely affect our operating results. Prior to purchasing our products, our customers require that our products undergo an extensive qualification process, which involves testing of the products in the customer’s system as well as rigorous reliability testing. This qualification process may continue for six months or longer. However, qualification of a product by a customer does not ensure any sales of the product to that customer. Even after successful qualification and sales of a product to a customer, a subsequent revision to the product or software, changes in the IC’s manufacturing process or the selection of a new supplier by us may require a new qualification process, which may result in delays and in us holding excess or obsolete inventory. After our products are qualified, it can take an additional six months or more before the customer commences volume production of components or devices that incorporate our products. Despite these uncertainties, we devote substantial resources, including design, engineering, sales, marketing and management efforts, toward qualifying our products with customers in anticipation of sales. If we are unsuccessful or delayed in qualifying any of our products with a customer, such failure or delay would preclude or delay sales of such product to the customer, which may impede our growth and cause our business to suffer. We have substantial international activities, which subjects us to additional business risks including logistical and financial complexity, political instability and currency fluctuations We have established international subsidiaries and have opened offices in international markets to support our activities in Europe and Asia. This has included the establishment of a headquarters in Singapore for non-U.S. operations. The percentage of our revenues derived from outside of the United States was 85% during fiscal 2015. We may not be able to maintain or increase international market demand for our products. Our international operations are subject to a number of risks, including: Singapore for non-U.S. operations. The percentage of our revenues derived from outside of the United States was 85% during fiscal 2015. We may not be able to maintain or increase international market demand for our products. Our international operations are subject to a number of risks, including: • Complexity and costs of managing international operations and related tax obligations, including • Complexity and costs of managing international operations and related tax obligations, including our headquarters for non-U.S. operations in Singapore; our headquarters for non-U.S. operations in Singapore; • Protectionist laws and business practices that favor local competition in some countries; • Protectionist laws and business practices that favor local competition in some countries; • Difficulties related to the protection of our intellectual property rights in some countries; • Difficulties related to the protection of our intellectual property rights in some countries; • Multiple, conflicting and changing tax and other laws and regulations that may impact both our international and domestic tax and other liabilities and result in increased complexity and costs; • Multiple, conflicting and changing tax and other laws and regulations that may impact both our international and domestic tax and other liabilities and result in increased complexity and costs; • Longer sales cycles; • Longer sales cycles; • Greater difficulty in accounts receivable collection and longer collection periods; • Greater difficulty in accounts receivable collection and longer collection periods; • High levels of distributor inventory subject to price protection and rights of return to us; • High levels of distributor inventory subject to price protection and rights of return to us; • Political and economic instability; • Greater difficulty in hiring and retaining qualified technical sales and applications engineers and • Greater difficulty in hiring and retaining qualified technical sales and applications engineers and administrative personnel; and • The need to have business and operations systems that can meet the needs of our international • The need to have business and operations systems that can meet the needs of our international business and operating structure. To date, substantially all of our sales to international customers and purchases of components from international suppliers have been denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive for our international customers to purchase, thus rendering our products less competitive. Similarly, a decrease in the value of the U.S. dollar could reduce our buying power with respect to international suppliers. Our products incorporate technology licensed from third parties Our products incorporate technology licensed from third parties We incorporate technology (including software) licensed from third parties in our products. We could be subjected to claims of infringement regardless of our lack of involvement in the development of the licensed technology. Although a third-party licensor is typically obligated to indemnify us if the licensed technology infringes on another party’s intellectual property rights, such indemnification is typically limited in amount and may be worthless if the licensor becomes insolvent. See Significant litigation over intellectual property in our industry may cause us to become involved in costly and lengthy litigation which could seriously harm our business. Furthermore, any failure of third-party technology to perform properly would adversely affect sales of our products incorporating such technology. Our inability to manage growth could materially and adversely affect our business Our inability to manage growth could materially and adversely affect our business Our past growth has placed, and any future growth of our operations will continue to place, a significant strain on our management personnel, systems and resources. We anticipate that we will need to implement a variety of new and upgraded sales, operational and financial enterprise-wide systems, information technology infrastructure, procedures and controls, including the improvement of our accounting and other internal management systems to manage this growth and maintain compliance with regulatory guidelines, including Sarbanes-Oxley Act requirements. To the extent our business grows, our internal management systems and processes will need to improve to ensure that we remain in compliance. We also expect that we will need to continue to expand, train, manage and motivate our workforce. All of these endeavors will require substantial management effort, and we anticipate that we will require additional management personnel and internal processes to manage these efforts and to 20 20 • Political and economic instability; administrative personnel; and business and operating structure. To date, substantially all of our sales to international customers and purchases of components from international suppliers have been denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive for our international customers to purchase, thus rendering our products less competitive. Similarly, a decrease in the value of the U.S. dollar could reduce our buying power with respect to international suppliers. We incorporate technology (including software) licensed from third parties in our products. We could be subjected to claims of infringement regardless of our lack of involvement in the development of the licensed technology. Although a third-party licensor is typically obligated to indemnify us if the licensed technology infringes on another party’s intellectual property rights, such indemnification is typically limited in amount and may be worthless if the licensor becomes insolvent. See Significant litigation over intellectual property in our industry may cause us to become involved in costly and lengthy litigation which could seriously harm our business. Furthermore, any failure of third-party technology to perform properly would adversely affect sales of our products incorporating such technology. Our past growth has placed, and any future growth of our operations will continue to place, a significant strain on our management personnel, systems and resources. We anticipate that we will need to implement a variety of new and upgraded sales, operational and financial enterprise-wide systems, information technology infrastructure, procedures and controls, including the improvement of our accounting and other internal management systems to manage this growth and maintain compliance with regulatory guidelines, including Sarbanes-Oxley Act requirements. To the extent our business grows, our internal management systems and processes will need to improve to ensure that we remain in compliance. We also expect that we will need to continue to expand, train, manage and motivate our workforce. All of these endeavors will require substantial management effort, and we anticipate that we will require additional management personnel and internal processes to manage these efforts and to plan for the succession from time to time of certain persons who have been key management and technical personnel. If we are unable to effectively manage our expanding global operations, including our international headquarters in Singapore, our business could be materially and adversely affected. plan for the succession from time to time of certain persons who have been key management and technical personnel. If we are unable to effectively manage our expanding global operations, including our international headquarters in Singapore, our business could be materially and adversely affected. We are subject to risks relating to product concentration We are subject to risks relating to product concentration We derive a substantial portion of our revenues from a limited number of products, and we expect these products to continue to account for a large percentage of our revenues in the near term. Continued market acceptance of these products, is therefore, critical to our future success. In addition, substantially all of our products that we have sold include technology related to one or more of our issued U.S. patents. If these patents are found to be invalid or unenforceable, our competitors could introduce competitive products that could reduce both the volume and price per unit of our products. Our business, operating results, financial condition and cash flows could therefore be adversely affected by: • A decline in demand for any of our more significant products; • Failure of our products to achieve continued market acceptance; • Competitive products; • New technological standards or changes to existing standards that we are unable to address with • New technological standards or changes to existing standards that we are unable to address with our products; • A failure to release new products or enhanced versions of our existing products on a timely • A failure to release new products or enhanced versions of our existing products on a timely basis; and • The failure of our new products to achieve market acceptance. • The failure of our new products to achieve market acceptance. We are subject to credit risks related to our accounts receivable We are subject to credit risks related to our accounts receivable We do not generally obtain letters of credit or other security for payment from customers, distributors or contract manufacturers. Accordingly, we are not protected against accounts receivable default or bankruptcy by these entities. Our ten largest customers or distributors represent a substantial majority of our accounts receivable. If any such customer or distributor, or a material portion of our smaller customers or distributors, were to become insolvent or otherwise not satisfy their obligations to us, we could be materially harmed. We depend on our key personnel to manage our business effectively in a rapidly changing market, and if we are unable to retain our current personnel and hire additional personnel, our ability to develop and successfully market our products could be harmed We believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing personnel. We believe that our future success will be dependent on retaining the services of our key personnel, developing their successors and certain internal processes to reduce our reliance on specific individuals, and on properly managing the transition of key roles when they occur. There is currently a shortage of qualified personnel with significant experience in the design, development, manufacturing, marketing and sales of analog and mixed-signal products. In particular, there is a shortage of engineers who are familiar with the intricacies of the design and manufacturability of analog elements, and competition for such personnel is intense. Our key technical personnel represent a significant asset and serve as the primary source for our technological and product innovations. We may not be successful in attracting and retaining sufficient numbers of technical personnel to support our anticipated growth. The loss of any of our key employees or the inability to attract or retain qualified personnel both in the United States and 21 21 We derive a substantial portion of our revenues from a limited number of products, and we expect these products to continue to account for a large percentage of our revenues in the near term. Continued market acceptance of these products, is therefore, critical to our future success. In addition, substantially all of our products that we have sold include technology related to one or more of our issued U.S. patents. If these patents are found to be invalid or unenforceable, our competitors could introduce competitive products that could reduce both the volume and price per unit of our products. Our business, operating results, financial condition and cash flows could therefore be adversely affected by: • A decline in demand for any of our more significant products; • Failure of our products to achieve continued market acceptance; • Competitive products; our products; basis; and We do not generally obtain letters of credit or other security for payment from customers, distributors or contract manufacturers. Accordingly, we are not protected against accounts receivable default or bankruptcy by these entities. Our ten largest customers or distributors represent a substantial majority of our accounts receivable. If any such customer or distributor, or a material portion of our smaller customers or distributors, were to become insolvent or otherwise not satisfy their obligations to us, we could be materially harmed. We depend on our key personnel to manage our business effectively in a rapidly changing market, and if we are unable to retain our current personnel and hire additional personnel, our ability to develop and successfully market our products could be harmed We believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing personnel. We believe that our future success will be dependent on retaining the services of our key personnel, developing their successors and certain internal processes to reduce our reliance on specific individuals, and on properly managing the transition of key roles when they occur. There is currently a shortage of qualified personnel with significant experience in the design, development, manufacturing, marketing and sales of analog and mixed-signal products. In particular, there is a shortage of engineers who are familiar with the intricacies of the design and manufacturability of analog elements, and competition for such personnel is intense. Our key technical personnel represent a significant asset and serve as the primary source for our technological and product innovations. We may not be successful in attracting and retaining sufficient numbers of technical personnel to support our anticipated growth. The loss of any of our key employees or the inability to attract or retain qualified personnel both in the United States and internationally, including engineers, sales, applications and marketing personnel, could delay the development and introduction of, and negatively impact our ability to sell, our products. internationally, including engineers, sales, applications and marketing personnel, could delay the development and introduction of, and negatively impact our ability to sell, our products. Any dispositions could harm our financial condition Any dispositions could harm our financial condition Any disposition of a product line would entail a number of risks that could materially and Any disposition of a product line would entail a number of risks that could materially and adversely affect our business and operating results, including: adversely affect our business and operating results, including: • Diversion of management’s time and attention from our core business; • Diversion of management’s time and attention from our core business; • Difficulties separating the divested business; • Difficulties separating the divested business; • Risks to relations with customers who previously purchased products from our disposed product • Risks to relations with customers who previously purchased products from our disposed product line; line; • Reduced leverage with suppliers due to reduced aggregate volume; • Reduced leverage with suppliers due to reduced aggregate volume; • Risks related to employee relations; • Risks related to employee relations; • Risks associated with the transfer and licensing of intellectual property; • Risks associated with the transfer and licensing of intellectual property; • Security risks and other liabilities related to the transition services provided in connection with • Security risks and other liabilities related to the transition services provided in connection with the disposition; • Tax issues associated with dispositions; and the disposition; • Tax issues associated with dispositions; and • Disposition-related disputes, including disputes over earn-outs and escrows. • Disposition-related disputes, including disputes over earn-outs and escrows. Our stock price may be volatile Our stock price may be volatile The market price of our common stock has been volatile in the past and may be volatile in the future. The market price of our common stock may be significantly affected by the following factors: The market price of our common stock has been volatile in the past and may be volatile in the future. The market price of our common stock may be significantly affected by the following factors: • Actual or anticipated fluctuations in our operating results; • Actual or anticipated fluctuations in our operating results; • Changes in financial estimates by securities analysts or our failure to perform in line with such • Changes in financial estimates by securities analysts or our failure to perform in line with such estimates; • Changes in market valuations of other technology companies, particularly semiconductor • Changes in market valuations of other technology companies, particularly semiconductor companies; • Announcements by us or our competitors of significant technical innovations, acquisitions, • Announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments; strategic partnerships, joint ventures or capital commitments; • Introduction of technologies or product enhancements that reduce the need for our products; • Introduction of technologies or product enhancements that reduce the need for our products; estimates; companies; • The loss of, or decrease in sales to, one or more key customers; • A large sale of stock by a significant shareholder; • Dilution from the issuance of our stock in connection with acquisitions; • The addition or removal of our stock to or from a stock index fund; • Departures of key personnel; and • The required expensing of stock awards. • The loss of, or decrease in sales to, one or more key customers; • A large sale of stock by a significant shareholder; • Dilution from the issuance of our stock in connection with acquisitions; • The addition or removal of our stock to or from a stock index fund; • Departures of key personnel; and • The required expensing of stock awards. The stock market has experienced extreme volatility that often has been unrelated to the performance of particular companies. These market fluctuations may cause our stock price to fall regardless of our performance. The stock market has experienced extreme volatility that often has been unrelated to the performance of particular companies. These market fluctuations may cause our stock price to fall regardless of our performance. 22 22 Most of our current manufacturers, assemblers, test service providers, distributors and customers are concentrated in the same geographic region, which increases the risk that a natural disaster, epidemic, labor strike, war or political unrest could disrupt our operations or sales Most of our foundries and several of our assembly and test subcontractors’ sites are located in Taiwan and most of our other foundry, assembly and test subcontractors are located in the Pacific Rim region. In addition, many of our customers are located in the Pacific Rim region. The risk of earthquakes in Taiwan and the Pacific Rim region is significant due to the proximity of major earthquake fault lines in the area. Earthquakes, tsunamis, fire, flooding, lack of water or other natural disasters, an epidemic, political unrest, war, labor strikes or work stoppages in countries where our semiconductor manufacturers, assemblers and test subcontractors are located, likely would result in the disruption of our foundry, assembly or test capacity. There can be no assurance that alternate capacity could be obtained on favorable terms, if at all. A natural disaster, epidemic, labor strike, war or political unrest where our customers’ facilities are located would likely reduce our sales to such customers. North Korea’s geopolitical maneuverings have created unrest. Such unrest could create economic uncertainty or instability, could escalate to war or otherwise adversely affect South Korea and our South Korean customers and reduce our sales to such customers, which would materially and adversely affect our operating results. In addition, a significant portion of the assembly and testing of our products occurs in South Korea. Any disruption resulting from these events could also cause significant delays in shipments of our products until we are able to shift our manufacturing, assembling or testing from the affected subcontractor to another third-party vendor. The semiconductor manufacturing process is highly complex and, from time to time, manufacturing yields may fall below our expectations, which could result in our inability to satisfy demand for our products in a timely manner and may decrease our gross margins due to higher unit costs The manufacturing of our products is a highly complex and technologically demanding process. Although we work closely with our foundries and assemblers to minimize the likelihood of reduced manufacturing yields, we have from time to time experienced lower than anticipated manufacturing yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials could result in lower than anticipated manufacturing yields or unacceptable performance deficiencies, which could lower our gross margins. If our foundries fail to deliver fabricated silicon wafers of satisfactory quality in a timely manner, we will be unable to meet our customers’ demand for our products in a timely manner, which would adversely affect our operating results and damage our customer relationships. Additionally, we have utilized microelectromechanical systems (MEMS) in certain of our timing products rather than the pure CMOS manufacturing process that we have traditionally utilized. We have less operating history with MEMS IC design and MEMS IC manufacturing processes and have encountered lower yields and reduced manufacturing capacity. We depend on our customers to support our products, and some of our customers offer competing products We depend on our customers to support our products, and some of our customers offer competing products We rely on our customers to provide hardware, software, intellectual property indemnification and other technical support for the products supplied by our customers. If our customers do not provide the required functionality or if our customers do not provide satisfactory support for their products, the demand for these devices that incorporate our products may diminish or we may otherwise be materially adversely affected. Any reduction in the demand for these devices would significantly reduce our revenues. In certain products, some of our customers offer their own competitive products. These customers may find it advantageous to support their own offerings in the marketplace in lieu of promoting our products. 23 23 Most of our current manufacturers, assemblers, test service providers, distributors and customers are concentrated in the same geographic region, which increases the risk that a natural disaster, epidemic, labor strike, war or political unrest could disrupt our operations or sales Most of our foundries and several of our assembly and test subcontractors’ sites are located in Taiwan and most of our other foundry, assembly and test subcontractors are located in the Pacific Rim region. In addition, many of our customers are located in the Pacific Rim region. The risk of earthquakes in Taiwan and the Pacific Rim region is significant due to the proximity of major earthquake fault lines in the area. Earthquakes, tsunamis, fire, flooding, lack of water or other natural disasters, an epidemic, political unrest, war, labor strikes or work stoppages in countries where our semiconductor manufacturers, assemblers and test subcontractors are located, likely would result in the disruption of our foundry, assembly or test capacity. There can be no assurance that alternate capacity could be obtained on favorable terms, if at all. A natural disaster, epidemic, labor strike, war or political unrest where our customers’ facilities are located would likely reduce our sales to such customers. North Korea’s geopolitical maneuverings have created unrest. Such unrest could create economic uncertainty or instability, could escalate to war or otherwise adversely affect South Korea and our South Korean customers and reduce our sales to such customers, which would materially and adversely affect our operating results. In addition, a significant portion of the assembly and testing of our products occurs in South Korea. Any disruption resulting from these events could also cause significant delays in shipments of our products until we are able to shift our manufacturing, assembling or testing from the affected subcontractor to another third-party vendor. The semiconductor manufacturing process is highly complex and, from time to time, manufacturing yields may fall below our expectations, which could result in our inability to satisfy demand for our products in a timely manner and may decrease our gross margins due to higher unit costs The manufacturing of our products is a highly complex and technologically demanding process. Although we work closely with our foundries and assemblers to minimize the likelihood of reduced manufacturing yields, we have from time to time experienced lower than anticipated manufacturing yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials could result in lower than anticipated manufacturing yields or unacceptable performance deficiencies, which could lower our gross margins. If our foundries fail to deliver fabricated silicon wafers of satisfactory quality in a timely manner, we will be unable to meet our customers’ demand for our products in a timely manner, which would adversely affect our operating results and damage our customer relationships. Additionally, we have utilized microelectromechanical systems (MEMS) in certain of our timing products rather than the pure CMOS manufacturing process that we have traditionally utilized. We have less operating history with MEMS IC design and MEMS IC manufacturing processes and have encountered lower yields and reduced manufacturing capacity. We rely on our customers to provide hardware, software, intellectual property indemnification and other technical support for the products supplied by our customers. If our customers do not provide the required functionality or if our customers do not provide satisfactory support for their products, the demand for these devices that incorporate our products may diminish or we may otherwise be materially adversely affected. Any reduction in the demand for these devices would significantly reduce In certain products, some of our customers offer their own competitive products. These customers may find it advantageous to support their own offerings in the marketplace in lieu of promoting our our revenues. products. Our debt could adversely affect our operations and financial condition Our debt could adversely affect our operations and financial condition We believe we have the ability to service our debt under our credit facilities, but our ability to make the required payments thereunder when due depends upon our future performance, which will be subject to general economic conditions, industry cycles and other factors affecting our operations, including risk factors described under this Item 1A, many of which are beyond our control. Our credit facilities also contain covenants, including financial covenants. If we breach any of the covenants under our credit facilities and do not obtain appropriate waivers, then, subject to any applicable cure periods, our outstanding indebtedness thereunder could be declared immediately due and payable. We believe we have the ability to service our debt under our credit facilities, but our ability to make the required payments thereunder when due depends upon our future performance, which will be subject to general economic conditions, industry cycles and other factors affecting our operations, including risk factors described under this Item 1A, many of which are beyond our control. Our credit facilities also contain covenants, including financial covenants. If we breach any of the covenants under our credit facilities and do not obtain appropriate waivers, then, subject to any applicable cure periods, our outstanding indebtedness thereunder could be declared immediately due and payable. We could seek to raise additional debt or equity capital in the future, but additional capital may not be available on terms acceptable to us, or at all We could seek to raise additional debt or equity capital in the future, but additional capital may not be available on terms acceptable to us, or at all We believe that our existing cash, cash equivalents, investments and credit under our credit facilities will be sufficient to meet our working capital needs, capital expenditures, investment requirements and commitments for at least the next 12 months. However, our ability to borrow further under the credit facilities is dependent upon our ability to satisfy various conditions, covenants and representations. It is possible that we may need to raise additional funds to finance our activities or to facilitate acquisitions of other businesses, products, intellectual property or technologies. We believe we could raise these funds, if needed, by selling equity or debt securities to the public or to selected investors. In addition, even though we may not need additional funds, we may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons. However, we may not be able to obtain additional funds on favorable terms, or at all. If we decide to raise additional funds by issuing equity or convertible debt securities, the ownership percentages of existing shareholders would be reduced. We are a relatively small company with limited resources compared to some of our current and potential competitors and we may not be able to compete effectively and increase market share We are a relatively small company with limited resources compared to some of our current and potential competitors and we may not be able to compete effectively and increase market share Some of our current and potential competitors have longer operating histories, significantly greater resources and name recognition and a larger base of customers than we have. As a result, these competitors may have greater credibility with our existing and potential customers. They also may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion and sale of their products than we can to ours. In addition, some of our current and potential competitors have already established supplier or joint development relationships with the decision makers at our current or potential customers. These competitors may be able to leverage their existing relationships to discourage their customers from purchasing products from us or persuade them to replace our products with their products. Our competitors may also offer bundled solutions offering a more complete product despite the technical merits or advantages of our products. These competitors may elect not to support our products which could complicate our sales efforts. These and other competitive pressures may prevent us from competing successfully against current or future competitors, and may materially harm our business. Competition could decrease our prices, reduce our sales, lower our gross margins and/or decrease our market share. Provisions in our charter documents and Delaware law could prevent, delay or impede a change in control of us and may reduce the market price of our common stock Provisions of our certificate of incorporation and bylaws could have the effect of discouraging, delaying or preventing a merger or acquisition that a stockholder may consider favorable. For example, our certificate of incorporation and bylaws provide for: We believe that our existing cash, cash equivalents, investments and credit under our credit facilities will be sufficient to meet our working capital needs, capital expenditures, investment requirements and commitments for at least the next 12 months. However, our ability to borrow further under the credit facilities is dependent upon our ability to satisfy various conditions, covenants and representations. It is possible that we may need to raise additional funds to finance our activities or to facilitate acquisitions of other businesses, products, intellectual property or technologies. We believe we could raise these funds, if needed, by selling equity or debt securities to the public or to selected investors. In addition, even though we may not need additional funds, we may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons. However, we may not be able to obtain additional funds on favorable terms, or at all. If we decide to raise additional funds by issuing equity or convertible debt securities, the ownership percentages of existing shareholders would be reduced. Some of our current and potential competitors have longer operating histories, significantly greater resources and name recognition and a larger base of customers than we have. As a result, these competitors may have greater credibility with our existing and potential customers. They also may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion and sale of their products than we can to ours. In addition, some of our current and potential competitors have already established supplier or joint development relationships with the decision makers at our current or potential customers. These competitors may be able to leverage their existing relationships to discourage their customers from purchasing products from us or persuade them to replace our products with their products. Our competitors may also offer bundled solutions offering a more complete product despite the technical merits or advantages of our products. These competitors may elect not to support our products which could complicate our sales efforts. These and other competitive pressures may prevent us from competing successfully against current or future competitors, and may materially harm our business. Competition could decrease our prices, reduce our sales, lower our gross margins and/or decrease our market share. Provisions in our charter documents and Delaware law could prevent, delay or impede a change in control of us and may reduce the market price of our common stock Provisions of our certificate of incorporation and bylaws could have the effect of discouraging, delaying or preventing a merger or acquisition that a stockholder may consider favorable. For example, our certificate of incorporation and bylaws provide for: • The division of our Board of Directors into three classes to be elected on a staggered basis, one • The division of our Board of Directors into three classes to be elected on a staggered basis, one class each year; class each year; 24 24 • The ability of our Board of Directors to issue shares of our preferred stock in one or more • The ability of our Board of Directors to issue shares of our preferred stock in one or more series without further authorization of our stockholders; • A prohibition on stockholder action by written consent; series without further authorization of our stockholders; • A prohibition on stockholder action by written consent; • Elimination of the right of stockholders to call a special meeting of stockholders; • Elimination of the right of stockholders to call a special meeting of stockholders; • A requirement that stockholders provide advance notice of any stockholder nominations of directors or any proposal of new business to be considered at any meeting of stockholders; and • A requirement that stockholders provide advance notice of any stockholder nominations of directors or any proposal of new business to be considered at any meeting of stockholders; and • A requirement that a supermajority vote be obtained to amend or repeal certain provisions of • A requirement that a supermajority vote be obtained to amend or repeal certain provisions of our certificate of incorporation. our certificate of incorporation. We also are subject to the anti-takeover laws of Delaware which may discourage, delay or prevent someone from acquiring or merging with us, which may adversely affect the market price of our common stock. Risks related to our industry We are subject to the cyclical nature of the semiconductor industry, which has been subject to significant fluctuations The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry has experienced significant fluctuations, often connected with, or in anticipation of, maturing product cycles and new product introductions of both semiconductor companies’ and their customers’ products and fluctuations in general economic conditions. Deteriorating general worldwide economic conditions, including reduced economic activity, concerns about credit and inflation, increased energy costs, decreased consumer confidence, reduced corporate profits, decreased spending and similar adverse business conditions, would make it very difficult for our customers, our vendors, and us to accurately forecast and plan future business activities and could cause U.S. and foreign businesses to slow spending on our products. We cannot predict the timing, strength, or duration of any economic slowdown or economic recovery. If the economy or markets in which we operate deteriorate, our business, financial condition, and results of operations would likely be materially and adversely affected. Downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. In the recent past, we believe the semiconductor industry suffered a downturn due in large part to adverse conditions in the global credit and financial markets, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increased unemployment rates and general uncertainty regarding the economy. Such downturns may have a material adverse effect on our business and operating results. Upturns have been characterized by increased product demand and production capacity constraints created by increased competition for access to third-party foundry, assembly and test capacity. We are dependent on the availability of such capacity to manufacture, assemble and test our products. None of our third-party foundry, assembly or test subcontractors have provided assurances that adequate capacity will be available to us. The average selling prices of our products could decrease rapidly which may negatively impact our revenues and gross margins We may experience substantial period-to-period fluctuations in future operating results due to the erosion of our average selling prices. We have reduced the average unit price of our products in anticipation of or in response to competitive pricing pressures, new product introductions by us or our We also are subject to the anti-takeover laws of Delaware which may discourage, delay or prevent someone from acquiring or merging with us, which may adversely affect the market price of our common stock. Risks related to our industry fluctuations We are subject to the cyclical nature of the semiconductor industry, which has been subject to significant The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry has experienced significant fluctuations, often connected with, or in anticipation of, maturing product cycles and new product introductions of both semiconductor companies’ and their customers’ products and fluctuations in general economic conditions. Deteriorating general worldwide economic conditions, including reduced economic activity, concerns about credit and inflation, increased energy costs, decreased consumer confidence, reduced corporate profits, decreased spending and similar adverse business conditions, would make it very difficult for our customers, our vendors, and us to accurately forecast and plan future business activities and could cause U.S. and foreign businesses to slow spending on our products. We cannot predict the timing, strength, or duration of any economic slowdown or economic recovery. If the economy or markets in which we operate deteriorate, our business, financial condition, and results of operations would likely be materially and adversely affected. Downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. In the recent past, we believe the semiconductor industry suffered a downturn due in large part to adverse conditions in the global credit and financial markets, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increased unemployment rates and general uncertainty regarding the economy. Such downturns may have a material adverse effect on our business and operating results. Upturns have been characterized by increased product demand and production capacity constraints created by increased competition for access to third-party foundry, assembly and test capacity. We are dependent on the availability of such capacity to manufacture, assemble and test our products. None of our third-party foundry, assembly or test subcontractors have provided assurances that adequate capacity will be available to us. and gross margins The average selling prices of our products could decrease rapidly which may negatively impact our revenues We may experience substantial period-to-period fluctuations in future operating results due to the erosion of our average selling prices. We have reduced the average unit price of our products in anticipation of or in response to competitive pricing pressures, new product introductions by us or our 25 25 competitors and other factors. If we are unable to offset any such reductions in our average selling prices by increasing our sales volumes, increasing our sales content per application or reducing production costs, our gross margins and revenues will suffer. To maintain our gross margin percentage, we will need to develop and introduce new products and product enhancements on a timely basis and continually reduce our costs. Our failure to do so could cause our revenues and gross margin percentage to decline. Competition within the numerous markets we target may reduce sales of our products and reduce our market share The markets for semiconductors in general, and for mixed-signal products in particular, are intensely competitive. We expect that the market for our products will continually evolve and will be subject to rapid technological change. In addition, as we target and supply products to numerous markets and applications, we face competition from a relatively large number of competitors. We compete with Analog Devices, Atmel, Conexant, Cypress, IDT, Intel, Marvell Technology Group, Maxim Integrated Products, MaxLinear, Microchip, Microsemi, Nordic Semiconductor, NXP Semiconductors, Qualcomm, Renesas, STMicroelectronics, Texas Instruments, Vectron International and others. We expect to face competition in the future from our current competitors, other manufacturers and designers of semiconductors, and start-up semiconductor design companies. As the markets for communications products grow, we also may face competition from traditional communications device companies. These companies may enter the mixed-signal semiconductor market by introducing their own products or by entering into strategic relationships with or acquiring other existing providers of semiconductor products. In addition, large companies may restructure their operations to create separate companies or may acquire new businesses that are focused on providing the types of products we produce or acquire our customers. We may be subject to information technology failures that could damage our reputation, business operations and financial condition We rely on information technology for the effective operation of our business. Our systems are subject to damage or interruption from a number of potential sources, including natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, theft, physical or electronic break-ins, cyber-attacks, sabotage, vandalism, or similar events or disruptions. Our security measures may not detect or prevent such security breaches. Any such compromise of our information security could result in the theft or unauthorized publication or use of our confidential business or proprietary information, result in the unauthorized release of customer, supplier or employee data, result in a violation of privacy or other laws, expose us to a risk of litigation or damage our reputation. In addition, our inability to use or access information systems at critical points in time could unfavorably impact the timely and efficient operation of our business, which could negatively affect our business and operating results. Third parties with which we conduct business, such as foundries, assembly and test contractors, distributors and customers, have access to certain portions of our sensitive data. In the event that these third parties do not properly safeguard our data that they hold, security breaches could result and negatively impact our reputation, business operations and financial results. Our products must conform to industry standards and technology in order to be accepted by end users in our markets Generally, our products comprise only a part of a device. All components of such devices must uniformly comply with industry standards in order to operate efficiently together. We depend on companies that provide other components of the devices to support prevailing industry standards. Many of these companies are significantly larger and more influential in affecting industry standards than we competitors and other factors. If we are unable to offset any such reductions in our average selling prices by increasing our sales volumes, increasing our sales content per application or reducing production costs, our gross margins and revenues will suffer. To maintain our gross margin percentage, we will need to develop and introduce new products and product enhancements on a timely basis and continually reduce our costs. Our failure to do so could cause our revenues and gross margin percentage to decline. share Competition within the numerous markets we target may reduce sales of our products and reduce our market The markets for semiconductors in general, and for mixed-signal products in particular, are intensely competitive. We expect that the market for our products will continually evolve and will be subject to rapid technological change. In addition, as we target and supply products to numerous markets and applications, we face competition from a relatively large number of competitors. We compete with Analog Devices, Atmel, Conexant, Cypress, IDT, Intel, Marvell Technology Group, Maxim Integrated Products, MaxLinear, Microchip, Microsemi, Nordic Semiconductor, NXP Semiconductors, Qualcomm, Renesas, STMicroelectronics, Texas Instruments, Vectron International and others. We expect to face competition in the future from our current competitors, other manufacturers and designers of semiconductors, and start-up semiconductor design companies. As the markets for communications products grow, we also may face competition from traditional communications device companies. These companies may enter the mixed-signal semiconductor market by introducing their own products or by entering into strategic relationships with or acquiring other existing providers of semiconductor products. In addition, large companies may restructure their operations to create separate companies or may acquire new businesses that are focused on providing the types of products we produce or acquire our customers. We may be subject to information technology failures that could damage our reputation, business operations and financial condition We rely on information technology for the effective operation of our business. Our systems are subject to damage or interruption from a number of potential sources, including natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, theft, physical or electronic break-ins, cyber-attacks, sabotage, vandalism, or similar events or disruptions. Our security measures may not detect or prevent such security breaches. Any such compromise of our information security could result in the theft or unauthorized publication or use of our confidential business or proprietary information, result in the unauthorized release of customer, supplier or employee data, result in a violation of privacy or other laws, expose us to a risk of litigation or damage our reputation. In addition, our inability to use or access information systems at critical points in time could unfavorably impact the timely and efficient operation of our business, which could negatively affect our business and operating results. Third parties with which we conduct business, such as foundries, assembly and test contractors, distributors and customers, have access to certain portions of our sensitive data. In the event that these third parties do not properly safeguard our data that they hold, security breaches could result and negatively impact our reputation, business operations and financial results. Our products must conform to industry standards and technology in order to be accepted by end users in our markets Generally, our products comprise only a part of a device. All components of such devices must uniformly comply with industry standards in order to operate efficiently together. We depend on companies that provide other components of the devices to support prevailing industry standards. Many of these companies are significantly larger and more influential in affecting industry standards than we 26 26 are. Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers or end users. If larger companies do not support the same industry standards that we do, or if competing standards emerge, market acceptance of our products could be adversely affected which would harm our business. Products for certain applications are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products developed by other suppliers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins. Our pursuit of necessary technological advances may require substantial time and expense. We may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance. If our products fail to achieve market acceptance, our growth prospects, operating results and competitive position could be adversely affected. The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes new disclosure requirements regarding the use of ‘‘conflict’’ minerals mined from the Democratic Republic of Congo and adjoining countries in products, whether or not these products are manufactured by third parties. These new requirements could affect the pricing, sourcing and availability of minerals used in the manufacture of semiconductor devices (including our products). There will be additional costs associated with complying with the disclosure requirements, such as costs related to determining the source of any conflict minerals used in our products. Our supply chain is complex and we may be unable to verify the origins for all metals used in our products. We may also encounter challenges with our customers and stockholders if we are unable to certify that our products are conflict free. Item 1B. Unresolved Staff Comments None. Item 2. Properties are. Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers or end users. If larger companies do not support the same industry standards that we do, or if competing standards emerge, market acceptance of our products could be adversely affected which would harm our business. Products for certain applications are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products developed by other suppliers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins. Our pursuit of necessary technological advances may require substantial time and expense. We may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance. If our products fail to achieve market acceptance, our growth prospects, operating results and competitive position could be adversely affected. Customer demands and new regulations related to conflict-free minerals may adversely affect us Customer demands and new regulations related to conflict-free minerals may adversely affect us The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes new disclosure requirements regarding the use of ‘‘conflict’’ minerals mined from the Democratic Republic of Congo and adjoining countries in products, whether or not these products are manufactured by third parties. These new requirements could affect the pricing, sourcing and availability of minerals used in the manufacture of semiconductor devices (including our products). There will be additional costs associated with complying with the disclosure requirements, such as costs related to determining the source of any conflict minerals used in our products. Our supply chain is complex and we may be unable to verify the origins for all metals used in our products. We may also encounter challenges with our customers and stockholders if we are unable to certify that our products are conflict free. Item 1B. Unresolved Staff Comments None. Item 2. Properties Our corporate headquarters, housing engineering, sales and marketing, administration and test operations, is located in Austin, Texas. Our headquarters facilities consist of two buildings, which we purchased in 2012, that are located on land which we have leased through 2099. The buildings contain approximately 441,000 square feet of floor space, of which approximately 130,000 square feet were leased to other tenants. In addition to these properties, we lease smaller facilities in various locations in the United States, Brazil, Canada, China, Finland, France, Germany, Hungary, India, Italy, Japan, Norway, Singapore, South Korea, Taiwan and the United Kingdom for engineering, sales and marketing, administrative and manufacturing support activities. We believe that these facilities are suitable and adequate to meet our current operating needs. Our corporate headquarters, housing engineering, sales and marketing, administration and test operations, is located in Austin, Texas. Our headquarters facilities consist of two buildings, which we purchased in 2012, that are located on land which we have leased through 2099. The buildings contain approximately 441,000 square feet of floor space, of which approximately 130,000 square feet were leased to other tenants. In addition to these properties, we lease smaller facilities in various locations in the United States, Brazil, Canada, China, Finland, France, Germany, Hungary, India, Italy, Japan, Norway, Singapore, South Korea, Taiwan and the United Kingdom for engineering, sales and marketing, administrative and manufacturing support activities. We believe that these facilities are suitable and adequate to meet our current operating needs. Item 3. Legal Proceedings Patent Litigation Item 3. Legal Proceedings Patent Litigation On January 21, 2014, Cresta Technology Corporation (‘‘Cresta Technology’’), a Delaware corporation, filed a lawsuit against us, Samsung Electronics Co., Ltd., Samsung Electronics America, Inc., LG Electronics Inc. and LG Electronics U.S.A., Inc. in the United States District Court On January 21, 2014, Cresta Technology Corporation (‘‘Cresta Technology’’), a Delaware corporation, filed a lawsuit against us, Samsung Electronics Co., Ltd., Samsung Electronics America, Inc., LG Electronics Inc. and LG Electronics U.S.A., Inc. in the United States District Court 27 27 in the District of Delaware, alleging infringement of three United States Patents (the ‘‘Cresta Patents’’). The Delaware District Court action has been stayed. in the District of Delaware, alleging infringement of three United States Patents (the ‘‘Cresta Patents’’). The Delaware District Court action has been stayed. On January 28, 2014, Cresta Technology also filed a complaint with the United States International Trade Commission (‘‘ITC’’) alleging infringement of the same patents. During the course of the proceedings, Cresta Technology withdrew its allegations as to one of the three Cresta Patents. On September 29, 2015, the ITC issued its Final Determination, finding that all the patent claims asserted against our products were either invalid or not infringed and that Cresta Technology failed to establish the ITC’s domestic industry requirement. The ITC found no violation by us and terminated the investigation. On November 30, 2015, Cresta Technology filed an appeal of the ITC decision to the Federal Circuit, which is now pending. In a parallel process, we challenged the validity of the claims of the Cresta Patents asserted in the ITC investigation through a series of Inter-Parties Review (IPR) proceedings at the Patent Trial and Appeal Board (PTAB) of the United States Patent and Trademark Office (USPTO). On October 21, 2015, the USPTO issued final written decisions on a first set of reviewed claims finding all of the reviewed claims invalid. On December 18, 2015, Cresta Technology filed notices of appeal to the United States Court of Appeals for the Federal Circuit as to this first USPTO determination. The USPTO has instituted a second set of IPR proceedings against a second set of the remaining claims. On May 6, 2014, we filed a complaint with the ITC alleging infringement of United States Patent Nos. 6,137,372 and 6,233,441 against Cresta Technology, Hauppauge Digital, Inc., Hauppague Computer Works, Inc., PCTV Systems, S.a.r.l., Luxembourg and PCTV Systems S.a.r.l., seeking to prevent the importation and sale of allegedly infringing products in the United States. On July 1, 2014, the Administrative Law Judge accepted a consent order whereby Cresta Technology will not sell for importation, import or sell in the United States television tuners that infringe our United States Patent Nos. 6,137,372 and 6,233,441. Accordingly, this ITC investigation has been terminated in its entirety. On July 16, 2014, we filed a lawsuit against Cresta Technology in the United States District Court in the Northern District of California alleging infringement of United States Patent Nos. 6,308,055, 6,304,146, 6,137,372, 6,233,441, 6,965,761 and 7,353,011. We are seeking a permanent injunction stopping the sale of all allegedly infringing Cresta Technology products and an award of damages and attorney fees. This lawsuit is currently scheduled for trial in March 2016. As is customary in the semiconductor industry, we provide indemnification protection to our customers for intellectual property claims related to our products. We have not accrued any material liability on our consolidated balance sheet related to such indemnification obligations in connection with the Cresta Technology litigation. We intend to continue to vigorously defend against Cresta Technology’s allegations. At this time, we cannot predict the outcome of these matters or the resulting financial impact to us, if any. On January 28, 2014, Cresta Technology also filed a complaint with the United States International Trade Commission (‘‘ITC’’) alleging infringement of the same patents. During the course of the proceedings, Cresta Technology withdrew its allegations as to one of the three Cresta Patents. On September 29, 2015, the ITC issued its Final Determination, finding that all the patent claims asserted against our products were either invalid or not infringed and that Cresta Technology failed to establish the ITC’s domestic industry requirement. The ITC found no violation by us and terminated the investigation. On November 30, 2015, Cresta Technology filed an appeal of the ITC decision to the Federal Circuit, which is now pending. In a parallel process, we challenged the validity of the claims of the Cresta Patents asserted in the ITC investigation through a series of Inter-Parties Review (IPR) proceedings at the Patent Trial and Appeal Board (PTAB) of the United States Patent and Trademark Office (USPTO). On October 21, 2015, the USPTO issued final written decisions on a first set of reviewed claims finding all of the reviewed claims invalid. On December 18, 2015, Cresta Technology filed notices of appeal to the United States Court of Appeals for the Federal Circuit as to this first USPTO determination. The USPTO has instituted a second set of IPR proceedings against a second set of the remaining claims. On May 6, 2014, we filed a complaint with the ITC alleging infringement of United States Patent Nos. 6,137,372 and 6,233,441 against Cresta Technology, Hauppauge Digital, Inc., Hauppague Computer Works, Inc., PCTV Systems, S.a.r.l., Luxembourg and PCTV Systems S.a.r.l., seeking to prevent the importation and sale of allegedly infringing products in the United States. On July 1, 2014, the Administrative Law Judge accepted a consent order whereby Cresta Technology will not sell for importation, import or sell in the United States television tuners that infringe our United States Patent Nos. 6,137,372 and 6,233,441. Accordingly, this ITC investigation has been terminated in its entirety. On July 16, 2014, we filed a lawsuit against Cresta Technology in the United States District Court in the Northern District of California alleging infringement of United States Patent Nos. 6,308,055, 6,304,146, 6,137,372, 6,233,441, 6,965,761 and 7,353,011. We are seeking a permanent injunction stopping the sale of all allegedly infringing Cresta Technology products and an award of damages and attorney fees. This lawsuit is currently scheduled for trial in March 2016. As is customary in the semiconductor industry, we provide indemnification protection to our customers for intellectual property claims related to our products. We have not accrued any material liability on our consolidated balance sheet related to such indemnification obligations in connection with the Cresta Technology litigation. We intend to continue to vigorously defend against Cresta Technology’s allegations. At this time, we cannot predict the outcome of these matters or the resulting financial impact to us, if any. Other Other We are involved in various other legal proceedings that have arisen in the normal course of business. While the ultimate results of these matters cannot be predicted with certainty, we do not expect them to have a material adverse effect on our consolidated financial statements. We are involved in various other legal proceedings that have arisen in the normal course of business. While the ultimate results of these matters cannot be predicted with certainty, we do not expect them to have a material adverse effect on our consolidated financial statements. Item 4. Mine Safety Disclosures Not applicable. Item 4. Mine Safety Disclosures Not applicable. 28 28 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases Part II Part II of Equity Securities Market Information and Holders Our registration statement (Registration No. 333-94853) under the Securities Act of 1933, as amended, relating to our initial public offering of our common stock became effective on March 23, 2000. Our common stock is quoted on the NASDAQ National Market (NASDAQ) under the symbol ‘‘SLAB’’. The table below shows the high and low per-share sales prices of our common stock for the periods indicated, as reported by NASDAQ. As of January 26, 2016, there were 90 holders of record of our common stock. Fiscal Year 2014 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal Year 2015 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High Low $54.00 53.78 50.05 48.50 $52.83 58.54 53.84 54.72 $41.19 42.41 39.28 36.29 $42.61 49.85 39.33 42.06 of Equity Securities Market Information and Holders Our registration statement (Registration No. 333-94853) under the Securities Act of 1933, as amended, relating to our initial public offering of our common stock became effective on March 23, 2000. Our common stock is quoted on the NASDAQ National Market (NASDAQ) under the symbol ‘‘SLAB’’. The table below shows the high and low per-share sales prices of our common stock for the periods indicated, as reported by NASDAQ. As of January 26, 2016, there were 90 holders of record of our common stock. Fiscal Year 2014 High Low First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $54.00 $41.19 Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.78 50.05 48.50 42.41 39.28 36.29 Fiscal Year 2015 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52.83 $42.61 Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58.54 53.84 54.72 49.85 39.33 42.06 Dividend Policy Dividend Policy We have never declared or paid any cash dividends on our common stock and we do not intend to pay cash dividends in the foreseeable future. We currently expect to retain any future earnings to fund the operation and expansion of our business. We have never declared or paid any cash dividends on our common stock and we do not intend to pay cash dividends in the foreseeable future. We currently expect to retain any future earnings to fund the operation and expansion of our business. 29 29 Stock Performance Graph The graph depicted below shows a comparison of cumulative total stockholder returns for an investment in Silicon Laboratories Inc. common stock, the NASDAQ Composite Index and the PHLX Semiconductor Index. Stock Performance Graph Semiconductor Index. The graph depicted below shows a comparison of cumulative total stockholder returns for an investment in Silicon Laboratories Inc. common stock, the NASDAQ Composite Index and the PHLX 250 200 150 100 50 D O L L A R S 0 01/01/11 12/31/11 12/29/12 12/28/13 01/03/15 01/02/16 01/01/11 12/31/11 12/29/12 12/28/13 01/03/15 01/02/16 D O L L A R S 250 200 150 100 50 0 Silicon Laboratories Inc. NASDAQ Composite PHLX Semiconductor Index 29JAN201613293893 Silicon Laboratories Inc. NASDAQ Composite PHLX Semiconductor Index 29JAN201613293893 Company / Index 01/01/11 12/31/11 12/29/12 12/28/13 01/03/15 01/02/16 Company / Index 01/01/11 12/31/11 12/29/12 12/28/13 01/03/15 01/02/16 Silicon Laboratories Inc. . . . . . . . . . . . . . . NASDAQ Composite . . . . . . . . . . . . . . . . PHLX Semiconductor Index . . . . . . . . . . . $100.00 $100.00 $100.00 $94.35 $99.17 $89.70 $ 90.16 $114.20 $ 94.37 $ 92.03 $162.41 $135.11 $103.24 $186.93 $178.12 $105.48 $200.31 $175.32 Silicon Laboratories Inc. . . . . . . . . . . . . . . NASDAQ Composite . . . . . . . . . . . . . . . . PHLX Semiconductor Index . . . . . . . . . . . $100.00 $100.00 $100.00 $94.35 $99.17 $89.70 $ 90.16 $114.20 $ 94.37 $ 92.03 $162.41 $135.11 $103.24 $186.93 $178.12 $105.48 $200.31 $175.32 (1) The graph assumes that $100 was invested in our common stock and in each index at the market close on January 1, 2011, and that all dividends were reinvested. No cash dividends have been declared on our common stock. (1) The graph assumes that $100 was invested in our common stock and in each index at the market close on January 1, 2011, and that all dividends were reinvested. No cash dividends have been (2) Stockholder returns over the indicated period should not be considered indicative of future (2) Stockholder returns over the indicated period should not be considered indicative of future stockholder returns. Issuer Purchases of Equity Securities declared on our common stock. stockholder returns. Issuer Purchases of Equity Securities The following table summarizes repurchases of our common stock during the three months ended The following table summarizes repurchases of our common stock during the three months ended January 2, 2016 (in thousands, except per share amounts): January 2, 2016 (in thousands, except per share amounts): Period October 4, 2015 - October 31, 2015 . . . . . November 1, 2015 - November 28, 2015 . . November 29, 2015 - January 2, 2016 . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs $— $— $— $— — — — — $121,370 $121,370 $100,000 — — — — 30 Period October 4, 2015 - October 31, 2015 . . . . . November 1, 2015 - November 28, 2015 . . November 29, 2015 - January 2, 2016 . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Number Average Price of Shares Purchased Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs $— $— $— $— — — — — $121,370 $121,370 $100,000 — — — — 30 The program that was originally announced in October 2014 to repurchase up to $100 million of our common stock expired as scheduled in December 2015. In August 2015, the Board of Directors authorized a program to repurchase up to $100 million of our common stock through December 2016. The program allows for repurchases to be made in the open market or in private transactions, including structured or accelerated transactions, subject to applicable legal requirements and market conditions. Item 6. Selected Financial Data The program that was originally announced in October 2014 to repurchase up to $100 million of our common stock expired as scheduled in December 2015. In August 2015, the Board of Directors authorized a program to repurchase up to $100 million of our common stock through December 2016. The program allows for repurchases to be made in the open market or in private transactions, including structured or accelerated transactions, subject to applicable legal requirements and market conditions. Item 6. Selected Financial Data Please read this selected consolidated financial data in conjunction with ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations,’’ our Consolidated Financial Statements and the notes to those statements included in this Form 10-K. Please read this selected consolidated financial data in conjunction with ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations,’’ our Consolidated Financial Statements and the notes to those statements included in this Form 10-K. Fiscal Year 2015 2014 2013 2012 2011 (in thousands, except per share data) Fiscal Year 2015 2014 2013 2012 2011 (in thousands, except per share data) Consolidated Statements of Income Data Consolidated Statements of Income Data Revenues . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 644,826 32,234 $ 29,586 $ $ 620,704 51,421 $ 38,021 $ $580,087 $ 64,310 $ 49,819 $563,294 $ 85,675 $ 63,548 $491,625 $ 50,074 $ 35,472 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 644,826 $ 620,704 Operating income . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . 32,234 29,586 51,421 38,021 $580,087 $ 64,310 $ 49,819 $563,294 $ 85,675 $ 63,548 $491,625 $ 50,074 $ 35,472 Earnings per share: Earnings per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 0.70 0.69 $ $ 0.88 0.87 $ $ 1.17 1.14 $ $ 1.51 1.47 $ $ 0.82 0.79 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . 0.70 0.69 0.88 0.87 $ $ 1.17 1.14 $ $ 1.51 1.47 $ $ 0.82 0.79 Consolidated Balance Sheet Data Consolidated Balance Sheet Data Cash, cash equivalents and investments (1) . Working capital . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . Long-term obligations . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . $ 250,112 280,819 1,011,463 108,028 761,114 $ 342,614 365,223 1,042,561 121,191 758,056 $286,025 350,170 991,150 143,441 738,562 $293,360 361,304 871,966 115,615 649,973 $324,967 370,211 705,991 24,214 598,939 Cash, cash equivalents and investments (1) . $ 250,112 $ 342,614 $286,025 $293,360 $324,967 Working capital . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . Long-term obligations . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . 280,819 1,011,463 108,028 761,114 365,223 1,042,561 121,191 758,056 350,170 991,150 143,441 738,562 361,304 871,966 115,615 649,973 370,211 705,991 24,214 598,939 $ $ $ $ $ $ $ $ (1) Reflects repurchases of $71 million, $72 million, $26 million, $62 million and $110 million of our (1) Reflects repurchases of $71 million, $72 million, $26 million, $62 million and $110 million of our common stock in fiscal 2015, 2014, 2013, 2012 and 2011, respectively. common stock in fiscal 2015, 2014, 2013, 2012 and 2011, respectively. 31 31 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the ‘‘Cautionary Statement’’ and ‘‘Risk Factors’’ above for discussions of the uncertainties, risks and assumptions associated with these statements. Our fiscal year-end financial reporting periods are a 52- or 53-week year ending on the Saturday closest to December 31st. Fiscal 2015 was a 52-week year and ended on January 2, 2016. Fiscal 2014 was a 53-week year with the extra week occurring in the fourth quarter of the year and ended on January 3, 2015. Fiscal 2013 was a 52-week year and ended on December 28, 2013. Overview We are a provider of silicon, software and solutions for the Internet of Things (IoT), Internet infrastructure, industrial control, consumer and automotive markets. We solve some of the electronics industry’s toughest problems, providing customers with significant advantages in performance, energy savings, connectivity and design simplicity. Mixed-signal integrated circuits (ICs) are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process. Therefore, mixed-signal ICs are critical components in products addressing a variety of markets, including industrial, communications, consumer and automotive. Our major customers include Chamberlain, Cisco, Harman Becker, Huawei, LG Electronics, Samsung, Technicolor, Technisat, Varian Medical Systems and ZTE. As a fabless semiconductor company, we rely on third-party semiconductor fabricators in Asia, and to a lesser extent the United States and Europe, to manufacture the silicon wafers that reflect our IC designs. Each wafer contains numerous die, which are cut from the wafer to create a chip for an IC. We rely on third parties in Asia to assemble, package, and, in most cases, test these devices and ship these units to our customers. Testing performed by such third parties facilitates faster delivery of products to our customers (particularly those located in Asia), shorter production cycle times, lower inventory requirements, lower costs and increased flexibility of test capacity. Our expertise in analog-intensive, high-performance, mixed-signal ICs enables us to develop highly differentiated solutions that address multiple markets. We group our products into the following categories: • Internet of Things products, which include our microcontroller (MCU), wireless, sensor and • Internet of Things products, which include our microcontroller (MCU), wireless, sensor and analog products; • Broadcast products, which include our broadcast consumer and automotive products; • Broadcast products, which include our broadcast consumer and automotive products; • Infrastructure products, which include our timing products (clocks and oscillators), and isolation • Infrastructure products, which include our timing products (clocks and oscillators), and isolation devices; and • Access products, which include our Voice over IP (VoIP) products, embedded modems and our • Access products, which include our Voice over IP (VoIP) products, embedded modems and our Power over Ethernet (PoE) devices. We previously grouped IoT products and Infrastructure products under the Broad-based products We previously grouped IoT products and Infrastructure products under the Broad-based products heading. heading. Through acquisitions and internal development efforts, we have continued to diversify our product portfolio and introduce new products and solutions with added functionality and further integration. In fiscal 2015, we acquired Bluegiga Technologies Oy and Telegesis (UK) Limited. Bluegiga is a provider of Bluetooth Smart, Bluetooth Classic and Wi-Fi modules and software stacks for a multitude of applications in the IoT, industrial automation, consumer electronics, automotive, retail, residential, and health and fitness markets. Telegesis is a supplier of wireless mesh networking modules based on our Through acquisitions and internal development efforts, we have continued to diversify our product portfolio and introduce new products and solutions with added functionality and further integration. In fiscal 2015, we acquired Bluegiga Technologies Oy and Telegesis (UK) Limited. Bluegiga is a provider of Bluetooth Smart, Bluetooth Classic and Wi-Fi modules and software stacks for a multitude of applications in the IoT, industrial automation, consumer electronics, automotive, retail, residential, and health and fitness markets. Telegesis is a supplier of wireless mesh networking modules based on our 32 32 The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the ‘‘Cautionary Statement’’ and ‘‘Risk Factors’’ above for discussions of the uncertainties, risks and assumptions associated with these statements. Our fiscal year-end financial reporting periods are a 52- or 53-week year ending on the Saturday closest to December 31st. Fiscal 2015 was a 52-week year and ended on January 2, 2016. Fiscal 2014 was a 53-week year with the extra week occurring in the fourth quarter of the year and ended on January 3, 2015. Fiscal 2013 was a 52-week year and ended on December 28, 2013. Overview We are a provider of silicon, software and solutions for the Internet of Things (IoT), Internet infrastructure, industrial control, consumer and automotive markets. We solve some of the electronics industry’s toughest problems, providing customers with significant advantages in performance, energy savings, connectivity and design simplicity. Mixed-signal integrated circuits (ICs) are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process. Therefore, mixed-signal ICs are critical components in products addressing a variety of markets, including industrial, communications, consumer and automotive. Our major customers include Chamberlain, Cisco, Harman Becker, Huawei, LG Electronics, Samsung, Technicolor, Technisat, Varian Medical Systems and ZTE. As a fabless semiconductor company, we rely on third-party semiconductor fabricators in Asia, and to a lesser extent the United States and Europe, to manufacture the silicon wafers that reflect our IC designs. Each wafer contains numerous die, which are cut from the wafer to create a chip for an IC. We rely on third parties in Asia to assemble, package, and, in most cases, test these devices and ship these units to our customers. Testing performed by such third parties facilitates faster delivery of products to our customers (particularly those located in Asia), shorter production cycle times, lower inventory requirements, lower costs and increased flexibility of test capacity. Our expertise in analog-intensive, high-performance, mixed-signal ICs enables us to develop highly differentiated solutions that address multiple markets. We group our products into the following categories: analog products; devices; and Power over Ethernet (PoE) devices. ZigBee and Thread technology, targeting applications in the smart energy, home automation and industrial automation markets. See Note 9, Acquisitions, for additional information. ZigBee and Thread technology, targeting applications in the smart energy, home automation and industrial automation markets. See Note 9, Acquisitions, for additional information. In fiscal 2015, we introduced two new EFM32 Gecko MCU families that provide advancements in security and energy management technologies; the TouchXpress� family of fixed-function controllers, which speeds development of capacitive sensing applications; a new EFM8 MCU family that delivers high analog performance and peripheral integration in the 8-bit market; comprehensive reference designs that reduce time to market and simplify the development of ZigBee-based home automation, connected lighting and smart gateway products; a new family of multi-channel digital isolators featuring a high-voltage isolation barrier designed to withstand 10 kV surge hits; a new family of subscriber line interface circuits (SLICs) offering low power consumption, small footprint, and high levels of integration and programmability for the VoIP gateway market; a comprehensive reference design solution that streamlines the development of voice-enabled ZigBee remote controls; a sixth-generation version of the iWRAP� Bluetooth software stack for the Bluetooth 3.0 wireless audio accessory market; an isolated current sense amplifier delivering high bandwidth and low signal delay; a fully integrated, pre-certified Blue Gecko wireless module providing a plug-and-play solution for Bluetooth Smart connectivity; a low-jitter, small-footprint and low-power network synchronizer clock; a new release of the Simplicity Studio development platform featuring an enhanced real-time Energy Profiler tool; the release of the Thread protocol stack providing IP-based mesh networking technology for the Connected Home market; a highly integrated clock IC for wireless infrastructure applications including base stations; a dual-mode Bluetooth module solution that supports both Bluetooth Smart and Bluetooth Classic wireless technologies; energy-friendly USB-enabled MCUs for power-sensitive IoT applications; a complete Wireless M-Bus platform solution for wirelessly connected smart meters in the European market; high-speed, multi-channel digital isolators targeting industrial applications; a digital audio bridge chip and evaluation kit designed to simplify the development of accessories for iOS devices; a portfolio of receivers/audio processors and multi-standard digital radio ICs for the global car radio market; a family of high-performance digital set-top box tuner ICs designed to reduce system cost and power consumption; the Blue Gecko product portfolio featuring Bluetooth Smart modules and wireless SoC devices for a wide range of wireless IoT designs; the next generation of Simplicity Studio enabling concurrent MCU and RF design; next-generation 8-bit MCUs designed for ultra-low-power, small-footprint IoT applications; 32-bit sub-GHz wireless MCUs designed to simplify a wide range of IoT connectivity applications; and high-precision temperature sensors offering exceptional power efficiency. We plan to continue to introduce products that increase the content we provide for existing applications, thereby enabling us to serve markets we do not currently address and expand our total available market opportunity. During fiscal 2015, we had no customer that represented more than 10% of our revenues. During fiscal 2014 and 2013, we had one customer, Samsung, whose purchases across a variety of product areas represented 12% and 15% of our revenues, respectively. In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer. Two of our distributors, Edom Technology and Avnet, represented 20% and 12% of our revenues during fiscal 2015, 20% and 12% of our revenues during fiscal 2014, and 21% and 11% of our revenues during fiscal 2013, respectively. There were no other distributors or contract manufacturers that accounted for more than 10% of our revenues in fiscal 2015, 2014 or 2013. In fiscal 2015, we introduced two new EFM32 Gecko MCU families that provide advancements in security and energy management technologies; the TouchXpress� family of fixed-function controllers, which speeds development of capacitive sensing applications; a new EFM8 MCU family that delivers high analog performance and peripheral integration in the 8-bit market; comprehensive reference designs that reduce time to market and simplify the development of ZigBee-based home automation, connected lighting and smart gateway products; a new family of multi-channel digital isolators featuring a high-voltage isolation barrier designed to withstand 10 kV surge hits; a new family of subscriber line interface circuits (SLICs) offering low power consumption, small footprint, and high levels of integration and programmability for the VoIP gateway market; a comprehensive reference design solution that streamlines the development of voice-enabled ZigBee remote controls; a sixth-generation version of the iWRAP� Bluetooth software stack for the Bluetooth 3.0 wireless audio accessory market; an isolated current sense amplifier delivering high bandwidth and low signal delay; a fully integrated, pre-certified Blue Gecko wireless module providing a plug-and-play solution for Bluetooth Smart connectivity; a low-jitter, small-footprint and low-power network synchronizer clock; a new release of the Simplicity Studio development platform featuring an enhanced real-time Energy Profiler tool; the release of the Thread protocol stack providing IP-based mesh networking technology for the Connected Home market; a highly integrated clock IC for wireless infrastructure applications including base stations; a dual-mode Bluetooth module solution that supports both Bluetooth Smart and Bluetooth Classic wireless technologies; energy-friendly USB-enabled MCUs for power-sensitive IoT applications; a complete Wireless M-Bus platform solution for wirelessly connected smart meters in the European market; high-speed, multi-channel digital isolators targeting industrial applications; a digital audio bridge chip and evaluation kit designed to simplify the development of accessories for iOS devices; a portfolio of receivers/audio processors and multi-standard digital radio ICs for the global car radio market; a family of high-performance digital set-top box tuner ICs designed to reduce system cost and power consumption; the Blue Gecko product portfolio featuring Bluetooth Smart modules and wireless SoC devices for a wide range of wireless IoT designs; the next generation of Simplicity Studio enabling concurrent MCU and RF design; next-generation 8-bit MCUs designed for ultra-low-power, small-footprint IoT applications; 32-bit sub-GHz wireless MCUs designed to simplify a wide range of IoT connectivity applications; and high-precision temperature sensors offering exceptional power efficiency. We plan to continue to introduce products that increase the content we provide for existing applications, thereby enabling us to serve markets we do not currently address and expand our total available market opportunity. During fiscal 2015, we had no customer that represented more than 10% of our revenues. During fiscal 2014 and 2013, we had one customer, Samsung, whose purchases across a variety of product areas represented 12% and 15% of our revenues, respectively. In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer. Two of our distributors, Edom Technology and Avnet, represented 20% and 12% of our revenues during fiscal 2015, 20% and 12% of our revenues during fiscal 2014, and 21% and 11% of our revenues during fiscal 2013, respectively. There were no other distributors or contract manufacturers that accounted for more than 10% of our revenues in fiscal 2015, 2014 or 2013. The percentage of our revenues derived from outside of the United States was 85% in fiscal 2015, 86% in fiscal 2014 and 88% in fiscal 2013. Substantially all of our revenues to date have been The percentage of our revenues derived from outside of the United States was 85% in fiscal 2015, 86% in fiscal 2014 and 88% in fiscal 2013. Substantially all of our revenues to date have been 33 33 denominated in U.S. dollars. We believe that a majority of our revenues will continue to be derived from customers outside of the United States. The sales cycle for our ICs can be as long as 12 months or more. An additional three to six months or more are usually required before a customer ships a significant volume of devices that incorporate our ICs. Due to this lengthy sales cycle, we typically experience a significant delay between incurring research and development and selling, general and administrative expenses, and the corresponding sales. Consequently, if sales in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our operating results for that quarter and, potentially, future quarters would be adversely affected. Moreover, the amount of time between initial research and development and commercialization of a product, if ever, can be substantially longer than the sales cycle for the product. Accordingly, if we incur substantial research and development costs without developing a commercially successful product, our operating results, as well as our growth prospects, could be adversely affected. Because many of our ICs are designed for use in consumer products such as televisions, set-top boxes, radios and wearables, we expect that the demand for our products will be typically subject to some degree of seasonal demand. However, rapid changes in our markets and across our product areas make it difficult for us to accurately estimate the impact of seasonal factors on our business. Results of Operations Results of Operations The following describes the line items set forth in our Consolidated Statements of Income: The following describes the line items set forth in our Consolidated Statements of Income: Revenues. Revenues are generated predominately by sales of our products. We recognize revenue on sales when all of the following criteria are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured. Generally, we recognize revenue from product sales to direct customers and contract manufacturers upon shipment. Certain of our sales are made to distributors under agreements allowing certain rights of return and price protection on products unsold by distributors. Accordingly, we defer the revenue and cost of revenue on such sales until the distributors sell the product to the end customer. A small portion of our revenues is derived from the sale of patents. The above revenue recognition criteria for patent sales are generally met upon the execution of the patent sale agreement. Our products typically carry a one-year replacement warranty. Replacements have been insignificant to date. Our revenues are subject to variation from period to period due to the volume of shipments made within a period, the mix of products we sell and the prices we charge for our products. The vast majority of our revenues were negotiated at prices that reflect a discount from the list prices for our products. These discounts are made for a variety of reasons, including: 1) to establish a relationship with a new customer, 2) as an incentive for customers to purchase products in larger volumes, 3) to provide profit margin to our distributors who resell our products or 4) in response to competition. In addition, as a product matures, we expect that the average selling price for such product will decline due to the greater availability of competing products. Our ability to increase revenues in the future is dependent on increased demand for our established products and our ability to ship larger volumes of those products in response to such demand, as well as our ability to develop or acquire new products and subsequently achieve customer acceptance of newly introduced products. Cost of Revenues. Cost of revenues includes the cost of purchasing finished silicon wafers processed by independent foundries; costs associated with assembly, test and shipping of those products; costs of personnel and equipment associated with manufacturing support, logistics and quality assurance; costs of software royalties, other intellectual property license costs and certain acquired intangible assets; and an allocated portion of our occupancy costs. 34 34 denominated in U.S. dollars. We believe that a majority of our revenues will continue to be derived from customers outside of the United States. The sales cycle for our ICs can be as long as 12 months or more. An additional three to six months or more are usually required before a customer ships a significant volume of devices that incorporate our ICs. Due to this lengthy sales cycle, we typically experience a significant delay between incurring research and development and selling, general and administrative expenses, and the corresponding sales. Consequently, if sales in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our operating results for that quarter and, potentially, future quarters would be adversely affected. Moreover, the amount of time between initial research and development and commercialization of a product, if ever, can be substantially longer than the sales cycle for the product. Accordingly, if we incur substantial research and development costs without developing a commercially successful product, our operating results, as well as our growth prospects, could be adversely affected. Because many of our ICs are designed for use in consumer products such as televisions, set-top boxes, radios and wearables, we expect that the demand for our products will be typically subject to some degree of seasonal demand. However, rapid changes in our markets and across our product areas make it difficult for us to accurately estimate the impact of seasonal factors on our business. Revenues. Revenues are generated predominately by sales of our products. We recognize revenue on sales when all of the following criteria are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured. Generally, we recognize revenue from product sales to direct customers and contract manufacturers upon shipment. Certain of our sales are made to distributors under agreements allowing certain rights of return and price protection on products unsold by distributors. Accordingly, we defer the revenue and cost of revenue on such sales until the distributors sell the product to the end customer. A small portion of our revenues is derived from the sale of patents. The above revenue recognition criteria for patent sales are generally met upon the execution of the patent sale agreement. Our products typically carry a one-year replacement warranty. Replacements have been insignificant to date. Our revenues are subject to variation from period to period due to the volume of shipments made within a period, the mix of products we sell and the prices we charge for our products. The vast majority of our revenues were negotiated at prices that reflect a discount from the list prices for our products. These discounts are made for a variety of reasons, including: 1) to establish a relationship with a new customer, 2) as an incentive for customers to purchase products in larger volumes, 3) to provide profit margin to our distributors who resell our products or 4) in response to competition. In addition, as a product matures, we expect that the average selling price for such product will decline due to the greater availability of competing products. Our ability to increase revenues in the future is dependent on increased demand for our established products and our ability to ship larger volumes of those products in response to such demand, as well as our ability to develop or acquire new products and subsequently achieve customer acceptance of newly introduced products. Cost of Revenues. Cost of revenues includes the cost of purchasing finished silicon wafers processed by independent foundries; costs associated with assembly, test and shipping of those products; costs of personnel and equipment associated with manufacturing support, logistics and quality assurance; costs of software royalties, other intellectual property license costs and certain acquired intangible assets; and an allocated portion of our occupancy costs. Research and Development. Research and development expense consists primarily of personnel- related expenses, including stock-based compensation, as well as new product masks, external consulting and services costs, equipment tooling, equipment depreciation, amortization of intangible assets, and an allocated portion of our occupancy costs. Research and development activities include the design of new products, refinement of existing products and design of test methodologies to ensure compliance with required specifications. Selling, General and Administrative. Selling, general and administrative expense consists primarily of personnel-related expenses, including stock-based compensation, as well as an allocated portion of our occupancy costs, sales commissions to independent sales representatives, applications engineering support, professional fees, legal fees and promotional and marketing expenses. Research and Development. Research and development expense consists primarily of personnel- related expenses, including stock-based compensation, as well as new product masks, external consulting and services costs, equipment tooling, equipment depreciation, amortization of intangible assets, and an allocated portion of our occupancy costs. Research and development activities include the design of new products, refinement of existing products and design of test methodologies to ensure compliance with required specifications. Selling, General and Administrative. Selling, general and administrative expense consists primarily of personnel-related expenses, including stock-based compensation, as well as an allocated portion of our occupancy costs, sales commissions to independent sales representatives, applications engineering support, professional fees, legal fees and promotional and marketing expenses. Interest Income. investment balances. Interest income reflects interest earned on our cash, cash equivalents and Interest Income. Interest income reflects interest earned on our cash, cash equivalents and Interest Expense. Interest expense consists of interest on our short and long-term obligations, Interest Expense. Interest expense consists of interest on our short and long-term obligations, including our credit facilities. investment balances. including our credit facilities. Other Income (Expense), Net. Other income (expense), net consists primarily of foreign currency Other Income (Expense), Net. Other income (expense), net consists primarily of foreign currency remeasurement adjustments as well as other non-operating income and expenses. remeasurement adjustments as well as other non-operating income and expenses. Provision for Income Taxes. Provision for income taxes includes both domestic and foreign income taxes at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences. Provision for Income Taxes. Provision for income taxes includes both domestic and foreign income taxes at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences. The following table sets forth our Consolidated Statements of Income data as a percentage of The following table sets forth our Consolidated Statements of Income data as a percentage of revenues for the periods indicated: revenues for the periods indicated: Fiscal Year 2015 2014 2013 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 39.0 40.9 39.2 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59.1 61.0 60.8 Operating expenses: Research and development . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense): Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 29.2 24.9 54.1 5.0 0.1 (0.4) 0.0 4.7 0.1 27.9 24.8 52.7 8.3 0.2 (0.6) 0.0 7.9 1.8 27.2 22.5 49.7 11.1 0.2 (0.6) 0.0 10.7 2.1 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: Research and development . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense): Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal Year 2015 2014 2013 40.9 59.1 29.2 24.9 54.1 5.0 39.0 61.0 27.9 24.8 52.7 8.3 0.1 (0.4) 0.2 (0.6) 0.0 4.7 0.1 0.0 7.9 1.8 39.2 60.8 27.2 22.5 49.7 11.1 0.2 (0.6) 0.0 10.7 2.1 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6% 6.1% 8.6% Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6% 6.1% 8.6% 35 35 • Increased revenues of $53.3 million for our Internet of Things products, due primarily to market share gains for our products, increases in the market and the addition of revenues from • Decreased revenues of $42.5 million for Broadcast products, due primarily to decreases in our market share and the market for our consumer products and the sale of patents for $7.1 million in the fiscal 2014. The decrease in Broadcast revenues was offset by increased revenues for our automotive products due to increases in market share. acquisitions. share gains. Comparison of Fiscal 2015 to Fiscal 2014 Comparison of Fiscal 2015 to Fiscal 2014 Revenues (in millions) Fiscal Year 2015 2014 Change % Change Fiscal Year 2015 2014 Change % Change Revenues (in millions) Internet of Things . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Broadcast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $262.3 161.8 122.0 98.7 $209.0 204.3 108.1 99.3 $ 53.3 (42.5) 13.9 (0.6) 25.5% (20.8)% 12.8% (0.6)% Internet of Things . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $262.3 $209.0 $ 53.3 Broadcast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161.8 122.0 98.7 204.3 108.1 99.3 (42.5) 13.9 (0.6) 25.5% (20.8)% 12.8% (0.6)% Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $644.8 $620.7 $ 24.1 3.9% Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $644.8 $620.7 $ 24.1 3.9% The change in revenues in fiscal 2015 was due primarily to: The change in revenues in fiscal 2015 was due primarily to: • Increased revenues of $53.3 million for our Internet of Things products, due primarily to market share gains for our products, increases in the market and the addition of revenues from acquisitions. • Decreased revenues of $42.5 million for Broadcast products, due primarily to decreases in our market share and the market for our consumer products and the sale of patents for $7.1 million in the fiscal 2014. The decrease in Broadcast revenues was offset by increased revenues for our automotive products due to increases in market share. • Increased revenues of $13.9 million for our Infrastructure products, due primarily to market • Increased revenues of $13.9 million for our Infrastructure products, due primarily to market share gains. • Decreased revenues of $0.6 million for our Access products. • Decreased revenues of $0.6 million for our Access products. Unit volumes of our products increased by 3.4% and average selling prices increased by 1.7% compared to fiscal 2014. The average selling prices of our products may fluctuate significantly from period to period. In general, as our products become more mature, we expect to experience decreases in average selling prices. We anticipate that newly announced, higher priced, next generation products and product derivatives will offset some of these decreases. Unit volumes of our products increased by 3.4% and average selling prices increased by 1.7% compared to fiscal 2014. The average selling prices of our products may fluctuate significantly from period to period. In general, as our products become more mature, we expect to experience decreases in average selling prices. We anticipate that newly announced, higher priced, next generation products and product derivatives will offset some of these decreases. Gross Margin (in millions) Fiscal Year 2015 2014 Change Gross Margin (in millions) Fiscal Year 2015 2014 Change Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $380.8 $378.6 $ 2.2 59.1% 61.0% (1.9)% Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $380.8 $378.6 $ 2.2 Percent of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59.1% 61.0% (1.9)% The increased dollar amount of gross margin in fiscal 2015 was due to increases in gross margin of $18.8 million for our Internet of Things products, $8.1 million for our Infrastructure products and $0.6 million for our Access products, offset by a decrease in gross margin of $25.3 million for our Broadcast products. Gross margin in fiscal 2015 included $2.6 million in acquisition-related charges for the fair value write-up associated with inventory acquired from Bluegiga and Telegesis. Gross margin in fiscal 2014 included $7.1 million from the sale of patents, which had no associated cost of revenues. We may experience declines in the average selling prices of certain of our products. This creates downward pressure on gross margin as a percentage of revenues and may be offset to the extent we are able to: 1) introduce higher margin new products and gain market share with our products; 2) reduce costs of existing products through improved design; 3) achieve lower production costs from our wafer suppliers and third-party assembly and test subcontractors; 4) achieve lower production costs per unit as a result of improved yields throughout the manufacturing process; or 5) reduce logistics costs. The increased dollar amount of gross margin in fiscal 2015 was due to increases in gross margin of $18.8 million for our Internet of Things products, $8.1 million for our Infrastructure products and $0.6 million for our Access products, offset by a decrease in gross margin of $25.3 million for our Broadcast products. Gross margin in fiscal 2015 included $2.6 million in acquisition-related charges for the fair value write-up associated with inventory acquired from Bluegiga and Telegesis. Gross margin in fiscal 2014 included $7.1 million from the sale of patents, which had no associated cost of revenues. We may experience declines in the average selling prices of certain of our products. This creates downward pressure on gross margin as a percentage of revenues and may be offset to the extent we are able to: 1) introduce higher margin new products and gain market share with our products; 2) reduce costs of existing products through improved design; 3) achieve lower production costs from our wafer suppliers and third-party assembly and test subcontractors; 4) achieve lower production costs per unit as a result of improved yields throughout the manufacturing process; or 5) reduce logistics costs. 36 36 Research and Development (in millions) Fiscal Year 2015 2014 Change % Change Fiscal Year 2015 2014 Change Change % Research and Development (in millions) Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $188.1 $173.0 $15.1 8.7% 29.2% 27.9% Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $188.1 $173.0 $15.1 8.7% Percent of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.2% 27.9% The increase in research and development expense in fiscal 2015 was principally due to increases of (a) $9.7 million for personnel-related expenses, including costs associated with increased headcount, and (b) $6.7 million for the amortization of intangible assets. We expect that research and development expense will increase in absolute dollars in the first quarter of 2016. Recent development projects include two new EFM32 Gecko MCU families that provide advancements in security and energy management technologies; the TouchXpress family of fixed- function controllers, which speeds development of capacitive sensing applications; a new EFM8 MCU family that delivers high analog performance and peripheral integration in the 8-bit market; comprehensive reference designs that reduce time to market and simplify the development of ZigBee- based home automation, connected lighting and smart gateway products; a new family of multi-channel digital isolators featuring a high-voltage isolation barrier designed to withstand 10 kV surge hits; a new family of SLICs offering low power consumption, small footprint, and high levels of integration and programmability for the VoIP gateway market; a comprehensive reference design solution that streamlines the development of voice-enabled ZigBee remote controls; a sixth-generation version of the iWRAP Bluetooth software stack for the Bluetooth 3.0 wireless audio accessory market; an isolated current sense amplifier delivering high bandwidth and low signal delay; a fully integrated, pre-certified Blue Gecko wireless module providing a plug-and-play solution for Bluetooth Smart connectivity; a low-jitter, small-footprint and low-power network synchronizer clock; a new release of the Simplicity Studio development platform featuring an enhanced real-time Energy Profiler tool; the release of the Thread protocol stack providing IP-based mesh networking technology for the Connected Home market; a highly integrated clock IC for wireless infrastructure applications including base stations; a dual-mode Bluetooth module solution that supports both Bluetooth Smart and Bluetooth Classic wireless technologies; energy-friendly USB-enabled MCUs for power-sensitive IoT applications; a complete Wireless M-Bus platform solution for wirelessly connected smart meters in the European market; high-speed, multi-channel digital isolators targeting industrial applications; a digital audio bridge chip and evaluation kit designed to simplify the development of accessories for iOS devices; a portfolio of receivers/audio processors and multi-standard digital radio ICs for the global car radio market; a family of high-performance digital set-top box tuner ICs designed to reduce system cost and power consumption; the Blue Gecko product portfolio featuring Bluetooth Smart modules and wireless SoC devices for a wide range of wireless IoT designs; the next generation of Simplicity Studio enabling concurrent MCU and RF design; next-generation 8-bit MCUs designed for ultra-low-power, small- footprint IoT applications; 32-bit sub-GHz wireless MCUs designed to simplify a wide range of IoT connectivity applications; and high-precision temperature sensors offering exceptional power efficiency. Selling, General and Administrative (in millions) Fiscal Year 2015 2014 Change % Change (in millions) Fiscal Year 2015 2014 Change Change % Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . Percent of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160.5 $154.1 $6.4 4.1% 24.9% 24.8% Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . $160.5 $154.1 $6.4 4.1% Percent of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.9% 24.8% The increase in selling, general and administrative expense in fiscal 2015 was principally due to increases of (a) $10.8 million for personnel-related expenses, including costs associated with increased headcount, (b) $1.9 million for the amortization of intangible assets, (c) $1.6 million for acquisition- The increase in selling, general and administrative expense in fiscal 2015 was principally due to increases of (a) $10.8 million for personnel-related expenses, including costs associated with increased headcount, (b) $1.9 million for the amortization of intangible assets, (c) $1.6 million for acquisition- 37 37 The increase in research and development expense in fiscal 2015 was principally due to increases of (a) $9.7 million for personnel-related expenses, including costs associated with increased headcount, and (b) $6.7 million for the amortization of intangible assets. We expect that research and development expense will increase in absolute dollars in the first quarter of 2016. Recent development projects include two new EFM32 Gecko MCU families that provide advancements in security and energy management technologies; the TouchXpress family of fixed- function controllers, which speeds development of capacitive sensing applications; a new EFM8 MCU family that delivers high analog performance and peripheral integration in the 8-bit market; comprehensive reference designs that reduce time to market and simplify the development of ZigBee- based home automation, connected lighting and smart gateway products; a new family of multi-channel digital isolators featuring a high-voltage isolation barrier designed to withstand 10 kV surge hits; a new family of SLICs offering low power consumption, small footprint, and high levels of integration and programmability for the VoIP gateway market; a comprehensive reference design solution that streamlines the development of voice-enabled ZigBee remote controls; a sixth-generation version of the iWRAP Bluetooth software stack for the Bluetooth 3.0 wireless audio accessory market; an isolated current sense amplifier delivering high bandwidth and low signal delay; a fully integrated, pre-certified Blue Gecko wireless module providing a plug-and-play solution for Bluetooth Smart connectivity; a low-jitter, small-footprint and low-power network synchronizer clock; a new release of the Simplicity Studio development platform featuring an enhanced real-time Energy Profiler tool; the release of the Thread protocol stack providing IP-based mesh networking technology for the Connected Home market; a highly integrated clock IC for wireless infrastructure applications including base stations; a dual-mode Bluetooth module solution that supports both Bluetooth Smart and Bluetooth Classic wireless technologies; energy-friendly USB-enabled MCUs for power-sensitive IoT applications; a complete Wireless M-Bus platform solution for wirelessly connected smart meters in the European market; high-speed, multi-channel digital isolators targeting industrial applications; a digital audio bridge chip and evaluation kit designed to simplify the development of accessories for iOS devices; a portfolio of receivers/audio processors and multi-standard digital radio ICs for the global car radio market; a family of high-performance digital set-top box tuner ICs designed to reduce system cost and power consumption; the Blue Gecko product portfolio featuring Bluetooth Smart modules and wireless SoC devices for a wide range of wireless IoT designs; the next generation of Simplicity Studio enabling concurrent MCU and RF design; next-generation 8-bit MCUs designed for ultra-low-power, small- footprint IoT applications; 32-bit sub-GHz wireless MCUs designed to simplify a wide range of IoT connectivity applications; and high-precision temperature sensors offering exceptional power efficiency. Selling, General and Administrative related costs, and (d) $1.0 million for product marketing costs. The increase in selling, general and administrative expense was offset in part by decreases of (a) $6.3 million for legal fees, primarily related to litigation, and (b) $5.2 million for adjustments to the fair value of acquisition-related contingent consideration. We expect that selling, general and administrative expense will increase in absolute dollars in the first quarter of 2016. Interest Income related costs, and (d) $1.0 million for product marketing costs. The increase in selling, general and administrative expense was offset in part by decreases of (a) $6.3 million for legal fees, primarily related to litigation, and (b) $5.2 million for adjustments to the fair value of acquisition-related contingent consideration. We expect that selling, general and administrative expense will increase in absolute dollars in the first quarter of 2016. Interest income in fiscal 2015 was $0.7 million compared to $1.0 million in fiscal 2014. Interest income in fiscal 2015 was $0.7 million compared to $1.0 million in fiscal 2014. Interest Expense Interest expense in fiscal 2015 was $2.8 million compared $3.2 million in fiscal 2014. Interest expense in fiscal 2015 was $2.8 million compared $3.2 million in fiscal 2014. Other Income (Expense), Net Other income (expense), net in fiscal 2015 was $0.1 million compared to $(0.2) million in fiscal Other income (expense), net in fiscal 2015 was $0.1 million compared to $(0.2) million in fiscal 2014. Provision for Income Taxes (in millions) Fiscal Year 2015 2014 Change Fiscal Year 2015 2014 Change Interest Income Interest Expense Other Income (Expense), Net Provision for Income Taxes 2014. (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.7 $11.0 $(10.3) 2.2% 22.5% Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.7 $11.0 $(10.3) Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2% 22.5% The effective tax rate for fiscal 2015 decreased from fiscal 2014, primarily due to the completion of The effective tax rate for fiscal 2015 decreased from fiscal 2014, primarily due to the completion of payments related to a prior year intercompany licensing arrangement resulting in an increase to the foreign tax rate benefit as well as the recognition of a net benefit resulting from a change in the tax accounting treatment of stock-based compensation in a cost-sharing arrangement following a recent U.S. Tax Court case (Altera). See Note 17, Income Taxes, for additional information. The decrease in the effective tax rate from the completion of payments related to a prior year intercompany licensing arrangement and the recognition of a net benefit from the Altera case, was partially offset by an increase in the prior year valuation allowance related to lower expectations of profitability in jurisdictions where tax attributes exist. Additionally, the Company expects a lower realization of the recently re-enacted U.S. federal research and development tax credit as compared to the realization of the U.S. federal research and development tax credit in the prior year. The effective tax rates for each of the periods presented differ from the federal statutory rate of 35% due to the amount of income earned in foreign jurisdictions where the tax rate may be lower than the federal statutory rate and other permanent items including nondeductible compensation expenses and research and development tax credits. payments related to a prior year intercompany licensing arrangement resulting in an increase to the foreign tax rate benefit as well as the recognition of a net benefit resulting from a change in the tax accounting treatment of stock-based compensation in a cost-sharing arrangement following a recent U.S. Tax Court case (Altera). See Note 17, Income Taxes, for additional information. The decrease in the effective tax rate from the completion of payments related to a prior year intercompany licensing arrangement and the recognition of a net benefit from the Altera case, was partially offset by an increase in the prior year valuation allowance related to lower expectations of profitability in jurisdictions where tax attributes exist. Additionally, the Company expects a lower realization of the recently re-enacted U.S. federal research and development tax credit as compared to the realization of the U.S. federal research and development tax credit in the prior year. The effective tax rates for each of the periods presented differ from the federal statutory rate of 35% due to the amount of income earned in foreign jurisdictions where the tax rate may be lower than the federal statutory rate and other permanent items including nondeductible compensation expenses and research and development tax credits. 38 38 Revenues (in millions) Internet of Things . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $209.0 $181.3 $27.7 15.3% Broadcast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204.3 108.1 99.3 199.8 100.5 98.5 4.5 7.6 0.8 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $620.7 $580.1 $40.6 Fiscal Year 2014 2013 Change Change % 2.2% 7.6% 0.9% 7.0% • Increased revenues of $27.7 million for our Internet of Things products, due primarily to market share gains for our MCU, wireless and sensor products, including products acquired from Energy Micro in July 2013. Internet of Things revenue growth was offset in part by a decline in revenue for our touch controller products due to our exit from this market. • Increased revenues of $4.5 million for Broadcast, due primarily to an increase in market share for our automotive products and the sale of patents of $7.1 million. The increase in Broadcast revenues was offset by decreased revenues for our consumer products due to declines in market share. gains. compared to fiscal 2013. Gross Margin (in millions) Comparison of Fiscal 2014 to Fiscal 2013 Comparison of Fiscal 2014 to Fiscal 2013 Revenues (in millions) Fiscal Year 2014 2013 Change Internet of Things . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Broadcast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $209.0 204.3 108.1 99.3 $181.3 199.8 100.5 98.5 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $620.7 $580.1 $27.7 4.5 7.6 0.8 $40.6 % Change 15.3% 2.2% 7.6% 0.9% 7.0% The change in revenues in fiscal 2014 was due primarily to: The change in revenues in fiscal 2014 was due primarily to: • Increased revenues of $27.7 million for our Internet of Things products, due primarily to market share gains for our MCU, wireless and sensor products, including products acquired from Energy Micro in July 2013. Internet of Things revenue growth was offset in part by a decline in revenue for our touch controller products due to our exit from this market. • Increased revenues of $4.5 million for Broadcast, due primarily to an increase in market share for our automotive products and the sale of patents of $7.1 million. The increase in Broadcast revenues was offset by decreased revenues for our consumer products due to declines in market share. • Increased revenues of $7.6 million for our Infrastructure products, due primarily to market share • Increased revenues of $7.6 million for our Infrastructure products, due primarily to market share gains. Unit volumes of our products increased by 5.2% and average selling prices increased by 0.7% Unit volumes of our products increased by 5.2% and average selling prices increased by 0.7% compared to fiscal 2013. Gross Margin (in millions) Fiscal Year 2014 2013 Change Fiscal Year 2014 2013 Change Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $378.6 $352.9 $25.7 61.0% 60.8% 0.2% Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $378.6 $352.9 $25.7 Percent of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61.0% 60.8% 0.2% The increased dollar amount of gross margin in fiscal 2014 was due to increases in gross margin of $18.0 million for our Internet of Things products, $7.4 million for our Infrastructure products and $2.2 million for our Broadcast products, offset by a decrease in gross margin of $1.9 million for our Access products. Fiscal 2014 includes gross margin from the sale of patents of $7.1 million, which had no associated cost of revenues. Research and Development (in millions) Fiscal Year 2014 2013 Change % Change (in millions) Fiscal Year 2014 2013 Change Change % Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $173.0 $157.8 $15.2 9.6% 27.9% 27.2% Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $173.0 $157.8 $15.2 9.6% Percent of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.9% 27.2% The increase in research and development expense in fiscal 2014 was principally due to increases The increase in research and development expense in fiscal 2014 was principally due to increases of (a) $11.0 million for personnel-related expenses, including personnel costs associated with (i) increased headcount, and (ii) the acquisition of Energy Micro, and (b) $2.9 million for the amortization of intangible assets primarily related to our acquisition of Energy Micro. of (a) $11.0 million for personnel-related expenses, including personnel costs associated with (i) increased headcount, and (ii) the acquisition of Energy Micro, and (b) $2.9 million for the amortization of intangible assets primarily related to our acquisition of Energy Micro. The increased dollar amount of gross margin in fiscal 2014 was due to increases in gross margin of $18.0 million for our Internet of Things products, $7.4 million for our Infrastructure products and $2.2 million for our Broadcast products, offset by a decrease in gross margin of $1.9 million for our Access products. Fiscal 2014 includes gross margin from the sale of patents of $7.1 million, which had no associated cost of revenues. Research and Development 39 39 Selling, General and Administrative (in millions) Fiscal Year 2014 2013 Change % Change (in millions) Fiscal Year 2014 2013 Change Change % Selling, General and Administrative Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . Percent of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $154.1 $130.8 $23.3 17.9% 24.8% 22.5% Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . $154.1 $130.8 $23.3 17.9% Percent of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.8% 22.5% The increase in selling, general and administrative expense in fiscal 2014 was principally due to increases of (a) $11.0 million for adjustments to the fair value of acquisition-related contingent consideration, (b) $7.5 million for legal fees, primarily related to litigation, and (c) $7.5 million for personnel-related expenses, primarily associated with (i) increased headcount, and (ii) the acquisition of Energy Micro. The increase in selling, general and administrative expense in fiscal 2014 was offset in part by acquisition-related costs of $1.5 million in fiscal 2013. Interest Income The increase in selling, general and administrative expense in fiscal 2014 was principally due to increases of (a) $11.0 million for adjustments to the fair value of acquisition-related contingent consideration, (b) $7.5 million for legal fees, primarily related to litigation, and (c) $7.5 million for personnel-related expenses, primarily associated with (i) increased headcount, and (ii) the acquisition of Energy Micro. The increase in selling, general and administrative expense in fiscal 2014 was offset in part by acquisition-related costs of $1.5 million in fiscal 2013. Interest income in fiscal 2014 was $1.0 million compared to $0.9 million in fiscal 2013. Interest income in fiscal 2014 was $1.0 million compared to $0.9 million in fiscal 2013. Interest Expense Interest expense in fiscal 2014 was $3.2 million compared $3.3 million in fiscal 2013. Interest expense in fiscal 2014 was $3.2 million compared $3.3 million in fiscal 2013. Other Income (Expense), Net Other income (expense), net in fiscal 2014 was $(0.2) million compared to $0.2 million in fiscal Other income (expense), net in fiscal 2014 was $(0.2) million compared to $0.2 million in fiscal 2013. Provision for Income Taxes (in millions) Fiscal Year 2014 2013 Change Fiscal Year 2014 2013 Change Interest Income Interest Expense Other Income (Expense), Net Provision for Income Taxes 2013. (in millions) Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.2 $11.0 22.5% 19.7% $(1.2) Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.0 $12.2 $(1.2) Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.5% 19.7% The effective tax rate for fiscal 2014 increased from fiscal 2013, primarily due to the recognition of the fiscal 2012 federal research and development tax credit in fiscal 2013 due to the enactment of the American Taxpayer Relief Act of 2012 on January 2, 2013, as well as a decrease in the foreign tax rate benefit in fiscal 2014. This increase in the effective tax rate was partially offset by the reduction to a valuation allowance recorded in a prior year related to certain state loss and research and development tax credit carryforwards and the release in fiscal 2014 of prior year unrecognized tax benefits due to the lapse of the statute of limitations applicable to a tax deduction claimed on a prior year foreign tax return. The effective tax rates for each of the periods presented differ from the federal statutory rate of 35% due to the amount of income earned in foreign jurisdictions where the tax rate may be lower than the federal statutory rate, research and development tax credits and other permanent items including changes to the liability for unrecognized tax benefits. The effective tax rate for fiscal 2014 increased from fiscal 2013, primarily due to the recognition of the fiscal 2012 federal research and development tax credit in fiscal 2013 due to the enactment of the American Taxpayer Relief Act of 2012 on January 2, 2013, as well as a decrease in the foreign tax rate benefit in fiscal 2014. This increase in the effective tax rate was partially offset by the reduction to a valuation allowance recorded in a prior year related to certain state loss and research and development tax credit carryforwards and the release in fiscal 2014 of prior year unrecognized tax benefits due to the lapse of the statute of limitations applicable to a tax deduction claimed on a prior year foreign tax return. The effective tax rates for each of the periods presented differ from the federal statutory rate of 35% due to the amount of income earned in foreign jurisdictions where the tax rate may be lower than the federal statutory rate, research and development tax credits and other permanent items including changes to the liability for unrecognized tax benefits. Business Outlook Business Outlook We expect revenues in the first quarter of fiscal 2016 to be in the range of $157 to $162 million. Furthermore, we expect our diluted earnings (loss) per share to be in the range of $(0.08) to $(0.02). We expect revenues in the first quarter of fiscal 2016 to be in the range of $157 to $162 million. Furthermore, we expect our diluted earnings (loss) per share to be in the range of $(0.08) to $(0.02). 40 40 Liquidity and Capital Resources Liquidity and Capital Resources Our principal sources of liquidity as of January 2, 2016 consisted of $243.0 million in cash, cash equivalents and short-term investments, of which approximately $164.5 million was held by our U.S. entities. The remaining balance was held by our foreign subsidiaries. Our cash equivalents and short-term investments consisted of municipal bonds, money market funds, commercial paper, certificates of deposit, variable-rate demand notes, U.S. government agency, international government bonds and corporate bonds. Our long-term investments consisted of auction-rate securities. In fiscal 2008, auctions for many of our auction-rate securities failed because sell orders exceeded buy orders. As of January 2, 2016, we held $8.0 million par value auction-rate securities, all of which have experienced failed auctions. These securities have contractual maturity dates ranging from 2033 to 2046. We are receiving the underlying cash flows on all of our auction-rate securities. The principal amounts associated with failed auctions are not expected to be accessible until a successful auction occurs, the issuer redeems the security, a buyer is found outside of the auction process or the underlying securities mature. We are unable to predict if these funds will become available before their maturity dates. We do not expect to need access to the capital represented by any of our auction-rate securities prior to their maturities. Operating Activities Operating Activities Net cash provided by operating activities was $105.4 million during fiscal 2015, compared to net cash provided of $137.4 million during fiscal 2014. Operating cash flows during fiscal 2015 reflect our net income of $29.6 million, adjustments of $80.2 million for depreciation, amortization, stock-based compensation and deferred income taxes, and a net cash outflow of $4.4 million due to changes in our operating assets and liabilities. Net cash provided by operating activities was $137.4 million during fiscal 2014, compared to net cash provided of $120.2 million during fiscal 2013. Operating cash flows during fiscal 2014 reflect our net income of $38.0 million, adjustments of $72.4 million for depreciation, amortization, stock-based compensation and deferred income taxes, and a net cash inflow of $27.0 million due to changes in our operating assets and liabilities. Accounts receivable increased to $73.6 million at January 2, 2016 from $70.4 million at January 3, 2015. The increase in accounts receivable resulted primarily from normal variations in the timing of collections and billings. Our average days sales outstanding (DSO) was 41 days at January 2, 2016 and 39 days at January 3, 2015. Inventory increased to $53.9 million at January 2, 2016 from $52.6 million at January 3, 2015. Our inventory level is primarily impacted by our need to make purchase commitments to support forecasted demand and variations between forecasted and actual demand. Our average days of inventory (DOI) was 73 days at January 2, 2016 and January 3, 2015. Investing Activities Investing Activities Net cash used in investing activities was $49.3 million during fiscal 2015, compared to net cash used of $26.3 million during fiscal 2014. The increase in cash outflows was principally due to $96.1 million in net payments for the acquisition of businesses, including $76.1 million for the purchase of Bluegiga and Telegesis and $20.0 million for consideration previously withheld in connection with our purchase of Energy Micro, offset by an increase of $74.0 million from net proceeds from the sales and maturities of marketable securities. See Note 9, Acquisitions, for additional information. Net cash used in investing activities was $26.3 million during fiscal 2014, compared to net cash used of $105.9 million during fiscal 2013. The decrease in cash outflows was principally due to a net 41 41 Our principal sources of liquidity as of January 2, 2016 consisted of $243.0 million in cash, cash equivalents and short-term investments, of which approximately $164.5 million was held by our U.S. entities. The remaining balance was held by our foreign subsidiaries. Our cash equivalents and short-term investments consisted of municipal bonds, money market funds, commercial paper, certificates of deposit, variable-rate demand notes, U.S. government agency, international government bonds and corporate bonds. Our long-term investments consisted of auction-rate securities. In fiscal 2008, auctions for many of our auction-rate securities failed because sell orders exceeded buy orders. As of January 2, 2016, we held $8.0 million par value auction-rate securities, all of which have experienced failed auctions. These securities have contractual maturity dates ranging from 2033 to 2046. We are receiving the underlying cash flows on all of our auction-rate securities. The principal amounts associated with failed auctions are not expected to be accessible until a successful auction occurs, the issuer redeems the security, a buyer is found outside of the auction process or the underlying securities mature. We are unable to predict if these funds will become available before their maturity dates. We do not expect to need access to the capital represented by any of our auction-rate securities prior to their maturities. Net cash provided by operating activities was $105.4 million during fiscal 2015, compared to net cash provided of $137.4 million during fiscal 2014. Operating cash flows during fiscal 2015 reflect our net income of $29.6 million, adjustments of $80.2 million for depreciation, amortization, stock-based compensation and deferred income taxes, and a net cash outflow of $4.4 million due to changes in our operating assets and liabilities. Net cash provided by operating activities was $137.4 million during fiscal 2014, compared to net cash provided of $120.2 million during fiscal 2013. Operating cash flows during fiscal 2014 reflect our net income of $38.0 million, adjustments of $72.4 million for depreciation, amortization, stock-based compensation and deferred income taxes, and a net cash inflow of $27.0 million due to changes in our operating assets and liabilities. Accounts receivable increased to $73.6 million at January 2, 2016 from $70.4 million at January 3, 2015. The increase in accounts receivable resulted primarily from normal variations in the timing of collections and billings. Our average days sales outstanding (DSO) was 41 days at January 2, 2016 and 39 days at January 3, 2015. Inventory increased to $53.9 million at January 2, 2016 from $52.6 million at January 3, 2015. Our inventory level is primarily impacted by our need to make purchase commitments to support forecasted demand and variations between forecasted and actual demand. Our average days of inventory (DOI) was 73 days at January 2, 2016 and January 3, 2015. Net cash used in investing activities was $49.3 million during fiscal 2015, compared to net cash used of $26.3 million during fiscal 2014. The increase in cash outflows was principally due to $96.1 million in net payments for the acquisition of businesses, including $76.1 million for the purchase of Bluegiga and Telegesis and $20.0 million for consideration previously withheld in connection with our purchase of Energy Micro, offset by an increase of $74.0 million from net proceeds from the sales and maturities of marketable securities. See Note 9, Acquisitions, for additional information. Net cash used in investing activities was $26.3 million during fiscal 2014, compared to net cash used of $105.9 million during fiscal 2013. The decrease in cash outflows was principally due to a net payment of $86.4 million for the acquisition of Energy Micro during fiscal 2013, offset by a decrease of $6.5 million of net proceeds from sales and maturities of marketable securities. payment of $86.4 million for the acquisition of Energy Micro during fiscal 2013, offset by a decrease of $6.5 million of net proceeds from sales and maturities of marketable securities. We anticipate capital expenditures of approximately $14 to $16 million for fiscal 2016. Additionally, We anticipate capital expenditures of approximately $14 to $16 million for fiscal 2016. Additionally, as part of our growth strategy, we expect to evaluate opportunities to invest in or acquire other businesses, intellectual property or technologies that would complement or expand our current offerings, expand the breadth of our markets or enhance our technical capabilities. as part of our growth strategy, we expect to evaluate opportunities to invest in or acquire other businesses, intellectual property or technologies that would complement or expand our current offerings, expand the breadth of our markets or enhance our technical capabilities. Financing Activities Financing Activities Net cash used in financing activities was $83.8 million during fiscal 2015, compared to net cash used of $65.2 million during fiscal 2014. The increase in cash outflows was principally due to an increase of $87.2 million in payments on debt and a decrease of $10.2 million from proceeds from the issuance of common stock, net of cash paid for withheld taxes, offset by net proceeds of $81.2 million from the issuance of long-term debt. In July 2015, we amended our Credit Agreement. In August 2015, the Board of Directors authorized a program to repurchase up to $100 million of our common stock through December 2016. Net cash used in financing activities was $65.2 million during fiscal 2014, compared to net cash used of $23.9 million during fiscal 2013. The increase in cash outflows was principally due to an increase of $45.7 million for repurchases of our common stock. Debt Debt On July 31, 2012, we entered into a $230 million five-year Credit Agreement (the ‘‘Credit Agreement’’), which consisted of a $100 million Term Loan Facility and a $130 million Revolving Credit Facility (collectively, the ‘‘Credit Facilities’’). On July 24, 2015, we amended the Credit Agreement (the ‘‘Amended Credit Agreement’’) in order to, among other things, increase the borrowing capacity under the Revolving Credit Facility to $300 million, eliminate the Term Loan Facility and extend the maturity date to five years from the closing date. On July 24, 2015, we borrowed $82.5 million under the Amended Credit Agreement and paid off the remaining balance of our Term Loan Facility. The Amended Credit Agreement includes a $25 million letter of credit sublimit and a $10 million swingline loan sublimit. We also have an option to increase the size of the borrowing capacity by up to an aggregate of $200 million in additional commitments, subject to certain conditions. The Revolving Credit Facility, other than swingline loans, will bear interest at the Eurodollar rate plus an applicable margin or, at our option, a base rate (defined as the highest of the Wells Fargo prime rate, the Federal Funds rate plus 0.50% and the Eurodollar Base Rate plus 1.00%) plus an applicable margin. Swingline loans accrue interest at the base rate plus the applicable margin for base rate loans. The applicable margins for the Eurodollar rate loans range from 1.25% to 2.00% and for base rate loans range from 0.25% to 1.00%, depending in each case, on the leverage ratio as defined in the Agreement. The Amended Credit Agreement contains various conditions, covenants and representations with which we must be in compliance in order to borrow funds and to avoid an event of default, including financial covenants that we must maintain a leverage ratio (funded debt/EBITDA) of no more than 3.00 to 1 and a minimum fixed charge coverage ratio (EBITDA/interest payments, income taxes and capital expenditures) of no less than 1.25 to 1. As of January 2, 2016, we were in compliance with all covenants of the Amended Credit Agreement. Our obligations under the Amended Credit Agreement are secured by a security interest in substantially all of our assets. We have entered into an interest rate swap agreement as a hedge against the Eurodollar portion of the variable interest payments under the Credit Facilities and effectively converted the Eurodollar Net cash used in financing activities was $83.8 million during fiscal 2015, compared to net cash used of $65.2 million during fiscal 2014. The increase in cash outflows was principally due to an increase of $87.2 million in payments on debt and a decrease of $10.2 million from proceeds from the issuance of common stock, net of cash paid for withheld taxes, offset by net proceeds of $81.2 million from the issuance of long-term debt. In July 2015, we amended our Credit Agreement. In August 2015, the Board of Directors authorized a program to repurchase up to $100 million of our common stock through December 2016. Net cash used in financing activities was $65.2 million during fiscal 2014, compared to net cash used of $23.9 million during fiscal 2013. The increase in cash outflows was principally due to an increase of $45.7 million for repurchases of our common stock. On July 31, 2012, we entered into a $230 million five-year Credit Agreement (the ‘‘Credit Agreement’’), which consisted of a $100 million Term Loan Facility and a $130 million Revolving Credit Facility (collectively, the ‘‘Credit Facilities’’). On July 24, 2015, we amended the Credit Agreement (the ‘‘Amended Credit Agreement’’) in order to, among other things, increase the borrowing capacity under the Revolving Credit Facility to $300 million, eliminate the Term Loan Facility and extend the maturity date to five years from the closing date. On July 24, 2015, we borrowed $82.5 million under the Amended Credit Agreement and paid off the remaining balance of our Term Loan Facility. The Amended Credit Agreement includes a $25 million letter of credit sublimit and a $10 million swingline loan sublimit. We also have an option to increase the size of the borrowing capacity by up to an aggregate of $200 million in additional commitments, subject to certain conditions. The Revolving Credit Facility, other than swingline loans, will bear interest at the Eurodollar rate plus an applicable margin or, at our option, a base rate (defined as the highest of the Wells Fargo prime rate, the Federal Funds rate plus 0.50% and the Eurodollar Base Rate plus 1.00%) plus an applicable margin. Swingline loans accrue interest at the base rate plus the applicable margin for base rate loans. The applicable margins for the Eurodollar rate loans range from 1.25% to 2.00% and for base rate loans range from 0.25% to 1.00%, depending in each case, on the leverage ratio as defined in the Agreement. The Amended Credit Agreement contains various conditions, covenants and representations with which we must be in compliance in order to borrow funds and to avoid an event of default, including financial covenants that we must maintain a leverage ratio (funded debt/EBITDA) of no more than 3.00 to 1 and a minimum fixed charge coverage ratio (EBITDA/interest payments, income taxes and capital expenditures) of no less than 1.25 to 1. As of January 2, 2016, we were in compliance with all covenants of the Amended Credit Agreement. Our obligations under the Amended Credit Agreement are secured by a security interest in substantially all of our assets. We have entered into an interest rate swap agreement as a hedge against the Eurodollar portion of the variable interest payments under the Credit Facilities and effectively converted the Eurodollar 42 42 portion of the interest on the Credit Facilities to a fixed interest rate through July 2017. See Note 5, Derivative Financial Instruments, to the Consolidated Financial Statements for additional information. Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, the timing and extent of research and development projects, potential acquisitions of companies or technologies and the expansion of our sales and marketing activities. We believe our existing cash, cash equivalents, investments and credit under our Credit Facilities are sufficient to meet our capital requirements through at least the next 12 months, although we could be required, or could elect, to seek additional funding prior to that time. We may enter into acquisitions or strategic arrangements in the future which also could require us to seek additional equity or debt financing. Contractual Obligations portion of the interest on the Credit Facilities to a fixed interest rate through July 2017. See Note 5, Derivative Financial Instruments, to the Consolidated Financial Statements for additional information. Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, the timing and extent of research and development projects, potential acquisitions of companies or technologies and the expansion of our sales and marketing activities. We believe our existing cash, cash equivalents, investments and credit under our Credit Facilities are sufficient to meet our capital requirements through at least the next 12 months, although we could be required, or could elect, to seek additional funding prior to that time. We may enter into acquisitions or strategic arrangements in the future which also could require us to seek additional equity or debt financing. Contractual Obligations The following table summarizes our contractual obligations as of January 2, 2016 (in thousands): The following table summarizes our contractual obligations as of January 2, 2016 (in thousands): Total 2016 2017 2018 2019 2020 Thereafter Payments due by period Total 2016 2017 2018 2019 2020 Thereafter Payments due by period Long-term debt obligations (1) . . . . . . . . . . $77,500 $ — $ — $ — $ — $77,500 1,803 Interest on long-term debt obligations (2) . . 1,514 Operating lease obligations (3) . . . . . . . . . . — Purchase obligations (4) . . . . . . . . . . . . . . . — Other long-term obligations (5) . . . . . . . . . . 2,453 4,394 — — 2,942 12,573 21,415 32,735 10,707 3,013 2,917 — 4,117 3,074 1,812 — 3,648 2,230 5,438 32,735 $ — — 5,340 — — Long-term debt obligations (1) . . . . . . . . . . $77,500 $ — $ — $ — $ — $77,500 $ — Interest on long-term debt obligations (2) . . Operating lease obligations (3) . . . . . . . . . . Purchase obligations (4) . . . . . . . . . . . . . . . Other long-term obligations (5) . . . . . . . . . . 12,573 21,415 32,735 10,707 2,230 5,438 32,735 2,453 4,394 — 3,013 2,917 — 3,074 1,812 — — 2,942 4,117 3,648 1,803 1,514 — — 5,340 — — — (1) Long-term debt obligations represent the principal portion of our Credit Facilities and include (1) Long-term debt obligations represent the principal portion of our Credit Facilities and include amounts classified as current portion of long-term debt. amounts classified as current portion of long-term debt. (2) Interest on our long-term debt obligations is based on the Eurodollar Base Rate plus an applicable (2) Interest on our long-term debt obligations is based on the Eurodollar Base Rate plus an applicable margin. We have entered into an interest rate swap agreement as a hedge against the Eurodollar portion of such variable interest payments and effectively converted the Eurodollar portion of the interest on the Credit Facilities to a fixed interest rate through July 2017. As of January 2, 2016, the combined interest rate on the Credit Facilities and the interest rate swap was 2.264%. The impact of the interest rate swap was factored into the calculation of the future interest payments on our long-term debt obligations through July 2017. (3) Operating lease obligations include amounts for leased facilities. (3) Operating lease obligations include amounts for leased facilities. (4) Purchase obligations include contractual arrangements in the form of purchase orders with suppliers where there is a fixed non-cancelable payment schedule or minimum payments due with a reduced delivery schedule. (5) Other long-term obligations represent estimated contingent consideration payments due in connection with the acquisition of Energy Micro and software license obligations. We are unable to make a reasonably reliable estimate as to when or if cash settlement with taxing authorities will occur for our unrecognized tax benefits. Therefore, our liability of $3.6 million for unrecognized tax benefits is not included in the table above. See Note 17, Income Taxes, to the Consolidated Financial Statements for additional information. Off-Balance Sheet Arrangements Off-Balance Sheet Arrangements As of January 2, 2016, we had no significant off-balance sheet arrangements. As of January 2, 2016, we had no significant off-balance sheet arrangements. 43 43 margin. We have entered into an interest rate swap agreement as a hedge against the Eurodollar portion of such variable interest payments and effectively converted the Eurodollar portion of the interest on the Credit Facilities to a fixed interest rate through July 2017. As of January 2, 2016, the combined interest rate on the Credit Facilities and the interest rate swap was 2.264%. The impact of the interest rate swap was factored into the calculation of the future interest payments on our long-term debt obligations through July 2017. (4) Purchase obligations include contractual arrangements in the form of purchase orders with suppliers where there is a fixed non-cancelable payment schedule or minimum payments due with a reduced delivery schedule. (5) Other long-term obligations represent estimated contingent consideration payments due in connection with the acquisition of Energy Micro and software license obligations. We are unable to make a reasonably reliable estimate as to when or if cash settlement with taxing authorities will occur for our unrecognized tax benefits. Therefore, our liability of $3.6 million for unrecognized tax benefits is not included in the table above. See Note 17, Income Taxes, to the Consolidated Financial Statements for additional information. Critical Accounting Policies and Estimates Critical Accounting Policies and Estimates The preparation of financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles requires that we make estimates and assumptions that affect the amounts reported. Changes in facts and circumstances could have a significant impact on the resulting estimated amounts included in the financial statements. We believe the following critical accounting policies affect our more complex judgments and estimates. We also have other policies that we consider to be key accounting policies, such as our policies for revenue recognition, including the deferral of revenues and cost of revenues on sales to distributors; however, these policies do not meet the definition of critical accounting estimates because they do not generally require us to make estimates or judgments that are difficult or subjective. Inventory valuation—We assess the recoverability of inventories through the application of a set of methods, assumptions and estimates. In determining net realizable value, we write down inventory that may be slow moving or have some form of obsolescence, including inventory that has aged more than 12 months. We also adjust the valuation of inventory when its manufacturing cost exceeds the estimated market value less selling costs. We assess the potential for any unusual customer returns based on known quality or business issues and write-off inventory losses for scrap or non-saleable material. Inventory not otherwise identified to be written down is compared to an assessment of our 12-month forecasted demand. The result of this methodology is compared against the product life cycle and competitive situations in the marketplace to determine the appropriateness of the resulting inventory levels. Demand for our products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those that we project. In the event that actual demand is lower or market conditions are worse than originally projected, additional inventory write-downs may be required. Stock-based compensation—We recognize the fair-value of stock-based compensation transactions in the Consolidated Statements of Income. The fair value of our full-value stock awards (with the exception of market-based performance awards) equals the fair market value of our stock on the date of grant. The fair value of our market-based performance awards is estimated at the date of grant using a Monte-Carlo simulation. The fair value of our stock option and employee stock purchase plan grants is estimated at the date of grant using the Black-Scholes option pricing model. In addition, we are required to estimate the expected forfeiture rate of our stock grants and only recognize the expense for those shares expected to vest. If our actual experience differs significantly from the assumptions used to compute our stock-based compensation cost, or if different assumptions had been used, we may have recorded too much or too little stock-based compensation cost. See Note 13, Stock-Based Compensation, to the Consolidated Financial Statements for additional information. Investments in auction-rate securities—We determine the fair value of our investments in auction-rate securities using a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, amount of cash flows, expected holding periods of the securities and a discount to reflect our inability to liquidate the securities. For available-for-sale auction-rate securities, if the calculated value is below the carrying amount of the securities, we then determine if the decline in value is other-than-temporary. We consider various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, changes in underlying credit ratings, forecasted recovery, our intent to sell or the likelihood that we would be required to sell the investment before its anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. When we conclude that an other-than-temporary impairment has occurred, we assess whether we intend to sell the security or if it is more likely than not that we will be required to sell the security before recovery. If either of these two conditions is met, we recognize a charge in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If we do not intend to sell a The preparation of financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles requires that we make estimates and assumptions that affect the amounts reported. Changes in facts and circumstances could have a significant impact on the resulting estimated amounts included in the financial statements. We believe the following critical accounting policies affect our more complex judgments and estimates. We also have other policies that we consider to be key accounting policies, such as our policies for revenue recognition, including the deferral of revenues and cost of revenues on sales to distributors; however, these policies do not meet the definition of critical accounting estimates because they do not generally require us to make estimates or judgments that are difficult or subjective. Inventory valuation—We assess the recoverability of inventories through the application of a set of methods, assumptions and estimates. In determining net realizable value, we write down inventory that may be slow moving or have some form of obsolescence, including inventory that has aged more than 12 months. We also adjust the valuation of inventory when its manufacturing cost exceeds the estimated market value less selling costs. We assess the potential for any unusual customer returns based on known quality or business issues and write-off inventory losses for scrap or non-saleable material. Inventory not otherwise identified to be written down is compared to an assessment of our 12-month forecasted demand. The result of this methodology is compared against the product life cycle and competitive situations in the marketplace to determine the appropriateness of the resulting inventory levels. Demand for our products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those that we project. In the event that actual demand is lower or market conditions are worse than originally projected, additional inventory write-downs may be required. Stock-based compensation—We recognize the fair-value of stock-based compensation transactions in the Consolidated Statements of Income. The fair value of our full-value stock awards (with the exception of market-based performance awards) equals the fair market value of our stock on the date of grant. The fair value of our market-based performance awards is estimated at the date of grant using a Monte-Carlo simulation. The fair value of our stock option and employee stock purchase plan grants is estimated at the date of grant using the Black-Scholes option pricing model. In addition, we are required to estimate the expected forfeiture rate of our stock grants and only recognize the expense for those shares expected to vest. If our actual experience differs significantly from the assumptions used to compute our stock-based compensation cost, or if different assumptions had been used, we may have recorded too much or too little stock-based compensation cost. See Note 13, Stock-Based Compensation, to the Consolidated Financial Statements for additional information. Investments in auction-rate securities—We determine the fair value of our investments in auction-rate securities using a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, amount of cash flows, expected holding periods of the securities and a discount to reflect our inability to liquidate the securities. For available-for-sale auction-rate securities, if the calculated value is below the carrying amount of the securities, we then determine if the decline in value is other-than-temporary. We consider various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, changes in underlying credit ratings, forecasted recovery, our intent to sell or the likelihood that we would be required to sell the investment before its anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. When we conclude that an other-than-temporary impairment has occurred, we assess whether we intend to sell the security or if it is more likely than not that we will be required to sell the security before recovery. If either of these two conditions is met, we recognize a charge in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If we do not intend to sell a 44 44 security and it is not more likely than not that we will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recorded in accumulated other comprehensive loss. Acquired intangible assets—When we acquire a business, a portion of the purchase price is typically allocated to identifiable intangible assets, such as acquired technology and customer relationships. Fair value of these assets is determined primarily using the income approach, which requires us to project future cash flows and apply an appropriate discount rate. We amortize intangible assets with finite lives over their expected useful lives. Our estimates are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Incorrect estimates could result in future impairment charges, and those charges could be material to our results of operations. Impairment of goodwill and other long-lived assets—We review long-lived assets which are held and used, including fixed assets and purchased intangible assets, for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors which are inherently difficult to forecast. If the asset is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. We test our goodwill for impairment annually as of the first day of our fourth fiscal quarter and in interim periods if certain events occur indicating that the carrying value of goodwill may be impaired. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares our fair value to our net book value. In determining fair value, the accounting guidance allows for the use of several valuation methodologies, although it states quoted market prices are the best evidence of fair value. If the fair value is less than the net book value, the second step of the analysis compares the implied fair value of our goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, we recognize an impairment loss equal to that excess amount. Income taxes—We are required to calculate income taxes in each of the jurisdictions in which we operate. This process involves calculating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheet. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, we are required to estimate the amount of expected future taxable income. Judgment is inherent in this process and differences between the estimated and actual taxable income could result in a material impact on our Consolidated Financial Statements. We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine whether the weight of available evidence indicates that the tax position has met the threshold for recognition. Therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts security and it is not more likely than not that we will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recorded in accumulated other comprehensive loss. Acquired intangible assets—When we acquire a business, a portion of the purchase price is typically allocated to identifiable intangible assets, such as acquired technology and customer relationships. Fair value of these assets is determined primarily using the income approach, which requires us to project future cash flows and apply an appropriate discount rate. We amortize intangible assets with finite lives over their expected useful lives. Our estimates are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Incorrect estimates could result in future impairment charges, and those charges could be material to our results of operations. Impairment of goodwill and other long-lived assets—We review long-lived assets which are held and used, including fixed assets and purchased intangible assets, for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors which are inherently difficult to forecast. If the asset is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. We test our goodwill for impairment annually as of the first day of our fourth fiscal quarter and in interim periods if certain events occur indicating that the carrying value of goodwill may be impaired. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares our fair value to our net book value. In determining fair value, the accounting guidance allows for the use of several valuation methodologies, although it states quoted market prices are the best evidence of fair value. If the fair value is less than the net book value, the second step of the analysis compares the implied fair value of our goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, we recognize an impairment loss equal to that excess amount. Income taxes—We are required to calculate income taxes in each of the jurisdictions in which we operate. This process involves calculating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheet. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, we are required to estimate the amount of expected future taxable income. Judgment is inherent in this process and differences between the estimated and actual taxable income could result in a material impact on our Consolidated Financial Statements. We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine whether the weight of available evidence indicates that the tax position has met the threshold for recognition. Therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts 45 45 or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period. Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, it could have a material effect on our income tax provision and net income in the period or periods for which that determination is made. We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax. We believe adequate provisions for income taxes have been made for all periods. Recent Accounting Pronouncements Recent Accounting Pronouncements In November 2015, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual reporting period. We early adopted this ASU on a prospective basis in the fourth quarter of fiscal 2015. Prior periods were not retrospectively adjusted. In September 2015, the FASB issued FASB ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period with a corresponding adjustment to goodwill in the reporting period in which the adjustment amounts are determined. The effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts will be recorded in the same period’s financial statements, calculated as if the accounting had been completed at the acquisition date. This ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. We early adopted this ASU in the fourth quarter of fiscal 2015. The adoption did not have a material impact on our financial statements. In July 2015, the FASB issued FASB ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this update require inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with earlier application permitted. We do not expect that the adoption of this ASU will have a material impact on our financial statements. In April 2015, the FASB issued FASB ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is to be applied retrospectively and represents a change in accounting principle. In August 2015, the FASB issued FASB ASU No. 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period. Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, it could have a material effect on our income tax provision and net income in the period or periods for which that determination is made. We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax. We believe adequate provisions for income taxes have been made for all periods. In November 2015, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual reporting period. We early adopted this ASU on a prospective basis in the fourth quarter of fiscal 2015. Prior periods were not retrospectively adjusted. In September 2015, the FASB issued FASB ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period with a corresponding adjustment to goodwill in the reporting period in which the adjustment amounts are determined. The effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts will be recorded in the same period’s financial statements, calculated as if the accounting had been completed at the acquisition date. This ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. We early adopted this ASU in the fourth quarter of fiscal 2015. The adoption did not have a material impact on our financial statements. In July 2015, the FASB issued FASB ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this update require inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with earlier application permitted. We do not expect that the adoption of this ASU will have a material impact on our financial statements. In April 2015, the FASB issued FASB ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is to be applied retrospectively and represents a change in accounting principle. In August 2015, the FASB issued FASB ASU No. 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent 46 46 Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 clarified the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Such costs may be presented in the balance sheet as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 and ASU 2015-15 are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Earlier adoption is permitted for financial statements that have not been previously issued. We do not expect that the adoption of ASU 2015-03 and ASU 2015-15 will have a material impact on our financial statements. In May 2014, the FASB issued FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. ASU 2014-09 requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In August 2015, the FASB issued FASB ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, using one of two retrospective application methods. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are currently evaluating the effect that the adoption of ASU 2014-09 and ASU 2015-14 will have on our financial statements. Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 clarified the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Such costs may be presented in the balance sheet as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 and ASU 2015-15 are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Earlier adoption is permitted for financial statements that have not been previously issued. We do not expect that the adoption of ASU 2015-03 and ASU 2015-15 will have a material impact on our financial statements. In May 2014, the FASB issued FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. ASU 2014-09 requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In August 2015, the FASB issued FASB ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, using one of two retrospective application methods. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are currently evaluating the effect that the adoption of ASU 2014-09 and ASU 2015-14 will have on our financial statements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Item 7A. Quantitative and Qualitative Disclosures about Market Risk Interest Income Interest Income Our investment portfolio includes cash, cash equivalents, short-term investments and long-term investments. Our main investment objectives are the preservation of investment capital and the maximization of after-tax returns on our investment portfolio. Our interest income is sensitive to changes in the general level of U.S. interest rates. Our investment portfolio holdings as of January 2, 2016 and January 3, 2015 yielded less than 100 basis points. A decline in yield to zero basis points on our investment portfolio holdings as of January 2, 2016 and January 3, 2015 would decrease our annual interest income by approximately $0.9 million and $1.0 million, respectively. We believe that our investment policy, which defines the duration, concentration, and minimum credit quality of the allowable investments, meets our investment objectives. Our investment portfolio includes cash, cash equivalents, short-term investments and long-term investments. Our main investment objectives are the preservation of investment capital and the maximization of after-tax returns on our investment portfolio. Our interest income is sensitive to changes in the general level of U.S. interest rates. Our investment portfolio holdings as of January 2, 2016 and January 3, 2015 yielded less than 100 basis points. A decline in yield to zero basis points on our investment portfolio holdings as of January 2, 2016 and January 3, 2015 would decrease our annual interest income by approximately $0.9 million and $1.0 million, respectively. We believe that our investment policy, which defines the duration, concentration, and minimum credit quality of the allowable investments, meets our investment objectives. Interest Expense Interest Expense We are exposed to interest rate fluctuations in the normal course of our business, including through our Credit Facilities. The interest payments on the Credit Facilities consist of a variable-rate of interest and an applicable margin. We have entered into an interest rate swap agreement with an original notional value of $100 million that, effectively, converted the variable-rate interest payments to fixed-rate interest payments through July 2017. We are exposed to interest rate fluctuations in the normal course of our business, including through our Credit Facilities. The interest payments on the Credit Facilities consist of a variable-rate of interest and an applicable margin. We have entered into an interest rate swap agreement with an original notional value of $100 million that, effectively, converted the variable-rate interest payments to fixed-rate interest payments through July 2017. 47 47 Foreign currency exchange rate risk Foreign currency exchange rate risk We are exposed to foreign currency exchange rate risk primarily through assets and liabilities of our subsidiaries denominated in currencies other than the U.S. dollar. Our foreign subsidiaries are considered to be extensions of the U.S. parent. The functional currency of the foreign subsidiaries is the U.S. dollar. Accordingly, gains and losses resulting from remeasuring transactions denominated in currencies other than U.S. dollars are recorded in other income (expense), net in the Consolidated Statements of Income. We use foreign currency forward contracts to manage exposure to foreign exchange risk. Gains and losses on foreign currency forward contracts are recognized in earnings in the same period as the remeasurement loss and gain of the related foreign currency denominated asset or liability. Investments in Auction-rate Securities In fiscal 2008, auctions for many of our auction-rate securities failed because sell orders exceeded buy orders. As of January 2, 2016, we held $8.0 million par value auction-rate securities, all of which have experienced failed auctions. The principal amounts associated with failed auctions are not expected to be accessible until a successful auction occurs, the issuer redeems the securities, a buyer is found outside of the auction process or the underlying securities mature. We are unable to predict if these funds will become available before their maturity dates. Additionally, if we determine that an other-than-temporary decline in the fair value of any of our available-for-sale auction-rate securities has occurred, we may be required to adjust the carrying value of the investments through an impairment charge. We are exposed to foreign currency exchange rate risk primarily through assets and liabilities of our subsidiaries denominated in currencies other than the U.S. dollar. Our foreign subsidiaries are considered to be extensions of the U.S. parent. The functional currency of the foreign subsidiaries is the U.S. dollar. Accordingly, gains and losses resulting from remeasuring transactions denominated in currencies other than U.S. dollars are recorded in other income (expense), net in the Consolidated Statements of Income. We use foreign currency forward contracts to manage exposure to foreign exchange risk. Gains and losses on foreign currency forward contracts are recognized in earnings in the same period as the remeasurement loss and gain of the related foreign currency denominated asset or liability. Investments in Auction-rate Securities In fiscal 2008, auctions for many of our auction-rate securities failed because sell orders exceeded buy orders. As of January 2, 2016, we held $8.0 million par value auction-rate securities, all of which have experienced failed auctions. The principal amounts associated with failed auctions are not expected to be accessible until a successful auction occurs, the issuer redeems the securities, a buyer is found outside of the auction process or the underlying securities mature. We are unable to predict if these funds will become available before their maturity dates. Additionally, if we determine that an other-than-temporary decline in the fair value of any of our available-for-sale auction-rate securities has occurred, we may be required to adjust the carrying value of the investments through an impairment charge. Item 8. Financial Statements and Supplementary Data Item 8. Financial Statements and Supplementary Data The Financial Statements and supplementary data required by this item are included in Part IV, The Financial Statements and supplementary data required by this item are included in Part IV, Item 15 of this Form 10-K and are presented beginning on page F-1. Item 15 of this Form 10-K and are presented beginning on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act). Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of January 2, 2016 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Such disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosures. There was no change in our internal controls during the fiscal quarter ended January 2, 2016 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. None. Item 9A. Controls and Procedures We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act). Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of January 2, 2016 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Such disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosures. There was no change in our internal controls during the fiscal quarter ended January 2, 2016 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. Management’s Report on Internal Control over Financial Reporting Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our 48 48 management and Board of Directors regarding the preparation and fair presentation of published financial statements. Our management assessed the effectiveness of our internal control over financial reporting as of January 2, 2016. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 framework). Based on our assessment we concluded that, as of January 2, 2016, our internal control over financial reporting is effective based on those criteria. Our independent registered public accounting firm, Ernst & Young LLP, issued an attestation report on our internal control over financial reporting. This report appears on page F-1. management and Board of Directors regarding the preparation and fair presentation of published financial statements. Our management assessed the effectiveness of our internal control over financial reporting as of January 2, 2016. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 framework). Based on our assessment we concluded that, as of January 2, 2016, our internal control over financial reporting is effective based on those criteria. Our independent registered public accounting firm, Ernst & Young LLP, issued an attestation report on our internal control over financial reporting. This report appears on page F-1. Item 9B. Other Information None. Item 9B. Other Information None. 49 49 Part III Part III Certain information required by Part III is omitted from this report because we intend to file a definitive Proxy Statement pursuant to Regulation 14A (the ‘‘Proxy Statement’’) no later than 120 days after the end of the fiscal year covered by this report, and certain information to be included therein is incorporated herein by reference. Certain information required by Part III is omitted from this report because we intend to file a definitive Proxy Statement pursuant to Regulation 14A (the ‘‘Proxy Statement’’) no later than 120 days after the end of the fiscal year covered by this report, and certain information to be included therein is incorporated herein by reference. Item 10. Directors, Executive Officers and Corporate Governance Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item is incorporated by reference to the Proxy Statement under The information required by this Item is incorporated by reference to the Proxy Statement under the sections captioned ‘‘Proposal One: Election of Directors,’’ ‘‘Executive Compensation,’’ ‘‘Section 16(a) Beneficial Ownership Reporting Compliance’’ and ‘‘Code of Ethics.’’ the sections captioned ‘‘Proposal One: Election of Directors,’’ ‘‘Executive Compensation,’’ ‘‘Section 16(a) Beneficial Ownership Reporting Compliance’’ and ‘‘Code of Ethics.’’ Item 11. Executive Compensation Item 11. Executive Compensation The information under the caption ‘‘Executive Compensation’’ and ‘‘Proposal One: Election of Directors’’ appearing in the Proxy Statement, is incorporated herein by reference. The information under the caption ‘‘Executive Compensation’’ and ‘‘Proposal One: Election of Directors’’ appearing in the Proxy Statement, is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Matters The information under the caption ‘‘Ownership of Securities’’ and ‘‘Equity Compensation Plan Information’’ appearing in the Proxy Statement is incorporated herein by reference. The information under the caption ‘‘Ownership of Securities’’ and ‘‘Equity Compensation Plan Information’’ appearing in the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence Item 13. Certain Relationships and Related Transactions, and Director Independence The information under the caption ‘‘Certain Relationships and Related Transactions, and Director Independence’’ appearing in the Proxy Statement is incorporated herein by reference. The information under the caption ‘‘Certain Relationships and Related Transactions, and Director Independence’’ appearing in the Proxy Statement is incorporated herein by reference. Item 14. Principal Accounting Fees and Services Item 14. Principal Accounting Fees and Services The information under the caption ‘‘Proposal Two: Ratification of Appointment of Independent Registered Public Accounting Firm’’ appearing in the Proxy Statement is incorporated herein by reference. The information under the caption ‘‘Proposal Two: Ratification of Appointment of Independent Registered Public Accounting Firm’’ appearing in the Proxy Statement is incorporated herein by reference. 50 50 Item 15. Exhibits and Financial Statement Schedules (a) 1. Financial Statements Part IV Index Item 15. Exhibits and Financial Statement Schedules (a) 1. Financial Statements Part IV Index Report of independent registered public accounting firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Report of independent registered public accounting firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets at January 2, 2016 and January 3, 2015 . . . . . . . . . . . . . . . . . . . . . Page F-1 F-2 F-3 Report of independent registered public accounting firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Report of independent registered public accounting firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets at January 2, 2016 and January 3, 2015 . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Income for the fiscal years ended January 2, 2016, January 3, 2015 and December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4 Consolidated Statements of Income for the fiscal years ended January 2, 2016, January 3, 2015 and December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4 Consolidated Statements of Comprehensive Income for the fiscal years ended January 2, 2016, January 3, 2015 and December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Comprehensive Income for the fiscal years ended January 2, 2016, January 3, 2015 and December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years ended January 2, 2016, January 3, 2015 and December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows for the fiscal years ended January 2, 2016, January 3, 2015 and December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6 F-7 F-8 2. Schedules Schedule II—Valuation and Qualifying Accounts All other schedules have been omitted since the information required by the schedule is not applicable, or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and notes thereto. 3. Exhibits The exhibits listed on the accompanying index to exhibits immediately following the Consolidated Financial Statements are filed as part of, or hereby incorporated by reference into, this Form 10-K. Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years ended January 2, 2016, January 3, 2015 and December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6 Consolidated Statements of Cash Flows for the fiscal years ended January 2, 2016, January 3, 2015 and December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Schedules Schedule II—Valuation and Qualifying Accounts All other schedules have been omitted since the information required by the schedule is not applicable, or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and notes thereto. 3. Exhibits this Form 10-K. The exhibits listed on the accompanying index to exhibits immediately following the Consolidated Financial Statements are filed as part of, or hereby incorporated by reference into, Page F-1 F-2 F-3 F-7 F-8 51 51 (b) Exhibits Exhibit Number (b) Exhibits Exhibit Number 2.1* 2.2* Share Purchase Agreement, dated June 6, 2013, by and between Silicon Laboratories International Pte. Ltd. and Energy AS and Silicon Laboratories Inc. (filed as Exhibit 2.1 to the Form 8-K filed on June 7, 2013). Sale and Purchase Agreement dated January 30, 2015, by and between Silicon Laboratories International Pte. Ltd. and the holders of shares, options and capital loans in Bluegiga Technologies Oy (filed as Exhibit 2.1 to the Form 8-K filed on February 4, 2015). 2.3* Agreement dated November 20, 2015, by and between the shareholders of Telegesis (UK) Limited and Silicon Laboratories UK Limited (filed as Exhibit 2.1 to the Form 8-K filed on November 23, 2015). 3.1* Form of Fourth Amended and Restated Certificate of Incorporation of Silicon Laboratories Inc. (filed as Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 (Securities and Exchange Commission File No. 333-94853) (the ‘‘IPO Registration Statement’’)). 3.2* Third Amended and Restated Bylaws of Silicon Laboratories Inc. (filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on July 29, 2015). 4.1* Specimen certificate for shares of common stock (filed as Exhibit 4.1 to the IPO Registration Statement). 10.1* Form of Indemnification Agreement between Silicon Laboratories Inc. and each of its directors and executive officers (filed as Exhibit 10.1 to the IPO Registration Statement). 10.2* Credit Agreement, dated July 31, 2012, by and among Silicon Laboratories Inc., the subsidiaries of the borrower identified therein, Bank of America, N.A., Wells Fargo Bank, National Association, and Regions Bank (filed as Exhibit 10.1 to the Form 8-K filed August 1, 2012). 10.3* 10.4* 10.5* Security and Pledge Agreement, dated July 31, 2012, by and among Silicon Laboratories Inc., with the other parties identified as ‘‘Obligors’’ (as defined therein) and such other parties that may become Obligors thereunder after the date thereof, and Bank of America, N.A (filed as Exhibit 10.2 to the Form 8-K filed August 1, 2012). Silicon Laboratories Inc. 2009 Stock Incentive Plan, as amended and restated on April 15, 2014 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 16, 2014). Silicon Laboratories Inc. 2009 Employee Stock Purchase Plan, as amended and restated on April 15, 2014 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on April 16, 2014). 10.6* Form of Restricted Stock Units Grant Notice and Global Restricted Stock Units Award Agreement under Registrant’s 2009 Stock Incentive Plan, as amended and restated (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on April 16, 2014). 10.7* Form of Market Stock Units Grant Notice and Global Market Stock Units Award Agreement under Registrant’s 2009 Stock Incentive Plan, as amended and restated (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on April 16, 2014). 2.1* Share Purchase Agreement, dated June 6, 2013, by and between Silicon Laboratories International Pte. Ltd. and Energy AS and Silicon Laboratories Inc. (filed as Exhibit 2.1 to the Form 8-K filed on June 7, 2013). 2.2* Sale and Purchase Agreement dated January 30, 2015, by and between Silicon Laboratories International Pte. Ltd. and the holders of shares, options and capital loans in Bluegiga Technologies Oy (filed as Exhibit 2.1 to the Form 8-K filed on February 4, 2015). 2.3* Agreement dated November 20, 2015, by and between the shareholders of Telegesis (UK) Limited and Silicon Laboratories UK Limited (filed as Exhibit 2.1 to the Form 8-K filed on November 23, 2015). 3.1* Form of Fourth Amended and Restated Certificate of Incorporation of Silicon Laboratories Inc. (filed as Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 (Securities and Exchange Commission File No. 333-94853) (the ‘‘IPO Registration Statement’’)). 3.2* Third Amended and Restated Bylaws of Silicon Laboratories Inc. (filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on July 29, 2015). 4.1* Specimen certificate for shares of common stock (filed as Exhibit 4.1 to the IPO Registration Statement). 10.1* Form of Indemnification Agreement between Silicon Laboratories Inc. and each of its directors and executive officers (filed as Exhibit 10.1 to the IPO Registration Statement). 10.2* Credit Agreement, dated July 31, 2012, by and among Silicon Laboratories Inc., the subsidiaries of the borrower identified therein, Bank of America, N.A., Wells Fargo Bank, National Association, and Regions Bank (filed as Exhibit 10.1 to the Form 8-K filed August 1, 2012). 10.3* Security and Pledge Agreement, dated July 31, 2012, by and among Silicon Laboratories Inc., with the other parties identified as ‘‘Obligors’’ (as defined therein) and such other parties that may become Obligors thereunder after the date thereof, and Bank of America, N.A (filed as Exhibit 10.2 to the Form 8-K filed August 1, 2012). 10.4* Silicon Laboratories Inc. 2009 Stock Incentive Plan, as amended and restated on April 15, 2014 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on 10.5* Silicon Laboratories Inc. 2009 Employee Stock Purchase Plan, as amended and restated on April 15, 2014 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed April 16, 2014). on April 16, 2014). 10.6* Form of Restricted Stock Units Grant Notice and Global Restricted Stock Units Award Agreement under Registrant’s 2009 Stock Incentive Plan, as amended and restated (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on April 16, 2014). 10.7* Form of Market Stock Units Grant Notice and Global Market Stock Units Award Agreement under Registrant’s 2009 Stock Incentive Plan, as amended and restated (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on April 16, 2014). 52 52 Exhibit Number Exhibit Number 10.8* Form of Stock Option Grant Notice and Global Stock Option Award Agreement under Registrant’s 2009 Stock Incentive Plan, as amended and restated (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on April 16, 2014). 10.9 Form of Performance Stock Units Grant Notice and Global PSU Award Agreement under Registrant’s 2009 Stock Incentive Plan, as amended and restated. 10.10* First Amendment to Credit Agreement, dated July 24, 2015, by and among Silicon 10.10* First Amendment to Credit Agreement, dated July 24, 2015, by and among Silicon Laboratories Inc., the subsidiaries of the borrower identified therein, Wells Fargo Bank, National Association, Citibank, N.A., Regions Bank, Bank of America, N.A. and the lenders party thereto (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 29, 2015). 10.11*+ Transition Agreement between Kurt Hoff and Silicon Laboratories Inc. dated August 24, 2015 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 30, 2015). 10.12*+ Silicon Laboratories Inc. 2016 Bonus Plan (filed as Exhibit 10.1 to the Registrant’s Current 10.12*+ Silicon Laboratories Inc. 2016 Bonus Plan (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 28, 2016). 21 Subsidiaries of the Registrant. 23.1 Consent of Independent Registered Public Accounting Firm. 24 Power of Attorney (included on signature page to this Form 10-K). 31.1 31.2 Certification of the Principal Executive Officer, as required by Section 302 of the Sarbanes- Oxley Act of 2002. Certification of the Principal Financial Officer, as required by Section 302 of the Sarbanes- Oxley Act of 2002. 31.1 Certification of the Principal Executive Officer, as required by Section 302 of the Sarbanes- 31.2 Certification of the Principal Financial Officer, as required by Section 302 of the Sarbanes- Oxley Act of 2002. Oxley Act of 2002. 32.1 Certification as required by Section 906 of the Sarbanes-Oxley Act of 2002. 32.1 Certification as required by Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document * Incorporated herein by reference to the indicated filing. + Management contract or compensatory plan or arrangement 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document * Incorporated herein by reference to the indicated filing. + Management contract or compensatory plan or arrangement 10.8* Form of Stock Option Grant Notice and Global Stock Option Award Agreement under Registrant’s 2009 Stock Incentive Plan, as amended and restated (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on April 16, 2014). 10.9 Form of Performance Stock Units Grant Notice and Global PSU Award Agreement under Registrant’s 2009 Stock Incentive Plan, as amended and restated. Laboratories Inc., the subsidiaries of the borrower identified therein, Wells Fargo Bank, National Association, Citibank, N.A., Regions Bank, Bank of America, N.A. and the lenders party thereto (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K 10.11*+ Transition Agreement between Kurt Hoff and Silicon Laboratories Inc. dated August 24, 2015 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on filed on July 29, 2015). October 30, 2015). Report on Form 8-K filed on January 28, 2016). 21 Subsidiaries of the Registrant. 23.1 Consent of Independent Registered Public Accounting Firm. 24 Power of Attorney (included on signature page to this Form 10-K). 53 53 SILICON LABORATORIES INC. VALUATION AND QUALIFYING ACCOUNTS SILICON LABORATORIES INC. VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II SCHEDULE II Valuation Allowance for Deferred Tax Assets Balance at Beginning of Period Additions Charged to Expenses Deductions Balance at End of Period (in thousands) Valuation Allowance for Deferred Tax Assets Balance at Beginning of Period Additions Charged to Expenses Deductions Balance at End of Period (in thousands) Year ended January 2, 2016 . . . . . . . . . . . . . . . . . . . Year ended January 3, 2015 . . . . . . . . . . . . . . . . . . . Year ended December 28, 2013 . . . . . . . . . . . . . . . . $3,455 $3,775 $2,114 $6,895 $ — $2,335 $ (86) $(320) $(674) $10,264 $ 3,455 $ 3,775 Year ended January 2, 2016 . . . . . . . . . . . . . . . . . . . Year ended January 3, 2015 . . . . . . . . . . . . . . . . . . . Year ended December 28, 2013 . . . . . . . . . . . . . . . . $3,455 $3,775 $2,114 $6,895 $ — $2,335 $ (86) $(320) $(674) $10,264 $ 3,455 $ 3,775 54 54 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Austin, Texas, on February 5, 2016. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Austin, Texas, on February 5, 2016. SIGNATURES SIGNATURES SILICON LABORATORIES INC. SILICON LABORATORIES INC. By: /s/ G. TYSON TUTTLE G. Tyson Tuttle Chief Executive Officer By: /s/ G. TYSON TUTTLE G. Tyson Tuttle Chief Executive Officer POWER OF ATTORNEY POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints G. Tyson Tuttle and John C. Hollister and each of them, acting individually, as his or her attorney-in-fact, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K and other documents in connection herewith and therewith, and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection herewith and therewith and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints G. Tyson Tuttle and John C. Hollister and each of them, acting individually, as his or her attorney-in-fact, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K and other documents in connection herewith and therewith, and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection herewith and therewith and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Name Title Date Name Title Date /s/ NAVDEEP S. SOOCH Navdeep S. Sooch /s/ G. TYSON TUTTLE G. Tyson Tuttle /s/ WILLIAM G. BOCK William G. Bock /s/ JOHN C. HOLLISTER John C. Hollister Chairman of the Board February 5, 2016 Chairman of the Board February 5, 2016 Chief Executive Officer and Director (Principal Executive Officer) February 5, 2016 Chief Executive Officer and Director (Principal Executive Officer) February 5, 2016 President and Director February 5, 2016 President and Director February 5, 2016 Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) February 5, 2016 Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) February 5, 2016 /s/ NAVDEEP S. SOOCH Navdeep S. Sooch /s/ G. TYSON TUTTLE G. Tyson Tuttle /s/ WILLIAM G. BOCK William G. Bock /s/ JOHN C. HOLLISTER John C. Hollister 55 55 Name Title Date Name Title Date /s/ ALF-EGIL BOGEN Alf-Egil Bogen /s/ ROBERT TED ENLOE, III Robert Ted Enloe, III /s/ JACK R. LAZAR Jack R. Lazar /s/ NINA RICHARDSON Nina Richardson /s/ SUMIT SADANA Sumit Sadana /s/ WILLIAM P. WOOD William P. Wood Director Director Director Director Director Director February 5, 2016 February 5, 2016 February 5, 2016 February 5, 2016 February 5, 2016 February 5, 2016 /s/ ALF-EGIL BOGEN Alf-Egil Bogen /s/ ROBERT TED ENLOE, III Robert Ted Enloe, III /s/ JACK R. LAZAR Jack R. Lazar /s/ NINA RICHARDSON Nina Richardson /s/ SUMIT SADANA Sumit Sadana /s/ WILLIAM P. WOOD William P. Wood Director Director Director Director Director Director February 5, 2016 February 5, 2016 February 5, 2016 February 5, 2016 February 5, 2016 February 5, 2016 56 56 Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of Silicon Laboratories Inc. The Board of Directors and Stockholders of Silicon Laboratories Inc. We have audited Silicon Laboratories Inc.’s internal control over financial reporting as of January 2, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Silicon Laboratories Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Silicon Laboratories Inc. maintained, in all material respects, effective internal control over financial reporting as of January 2, 2016, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Silicon Laboratories Inc. as of January 2, 2016 and January 3, 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three fiscal years in the period ended January 2, 2016 of Silicon Laboratories Inc. and our report dated February 5, 2016 expressed an unqualified opinion thereon. We have audited Silicon Laboratories Inc.’s internal control over financial reporting as of January 2, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Silicon Laboratories Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Silicon Laboratories Inc. maintained, in all material respects, effective internal control over financial reporting as of January 2, 2016, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Silicon Laboratories Inc. as of January 2, 2016 and January 3, 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three fiscal years in the period ended January 2, 2016 of Silicon Laboratories Inc. and our report dated February 5, 2016 expressed an unqualified opinion thereon. Austin, Texas February 5, 2016 Austin, Texas February 5, 2016 /s/ ERNST & YOUNG LLP /s/ ERNST & YOUNG LLP F-1 F-1 Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of Silicon Laboratories Inc. The Board of Directors and Stockholders of Silicon Laboratories Inc. We have audited the accompanying consolidated balance sheets of Silicon Laboratories Inc. as of January 2, 2016 and January 3, 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three fiscal years in the period ended January 2, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Silicon Laboratories Inc. at January 2, 2016 and January 3, 2015, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended January 2, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We have audited the accompanying consolidated balance sheets of Silicon Laboratories Inc. as of January 2, 2016 and January 3, 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three fiscal years in the period ended January 2, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Silicon Laboratories Inc. at January 2, 2016 and January 3, 2015, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended January 2, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 2 to the consolidated financial statements, the Company changed its method As discussed in Note 2 to the consolidated financial statements, the Company changed its method for classifying deferred tax assets and liabilities effective January 2, 2016. for classifying deferred tax assets and liabilities effective January 2, 2016. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Silicon Laboratories Inc.’s internal control over financial reporting as of January 2, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 5, 2016 expressed an unqualified opinion thereon. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Silicon Laboratories Inc.’s internal control over financial reporting as of January 2, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 5, 2016 expressed an unqualified opinion thereon. Austin, Texas February 5, 2016 Austin, Texas February 5, 2016 /s/ ERNST & YOUNG LLP /s/ ERNST & YOUNG LLP F-2 F-2 Silicon Laboratories Inc. Consolidated Balance Sheets (In thousands, except per share data) Silicon Laboratories Inc. Consolidated Balance Sheets (In thousands, except per share data) January 2, 2016 January 3, 2015 January 2, January 3, 2016 2015 Current assets: Assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net of allowances for doubtful accounts of $671 at January 2, 2016 and $786 at January 3, 2015 . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 114,085 128,901 $ 141,706 193,489 73,601 53,895 — 52,658 423,140 7,126 131,132 272,722 121,354 55,989 70,367 52,631 21,173 49,171 528,537 7,419 132,820 228,781 115,021 29,983 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,011,463 $1,042,561 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,011,463 $1,042,561 Current liabilities: Liabilities and Stockholders’ Equity Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income on shipments to distributors . . . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies Stockholders’ equity: Preferred stock—$0.0001 par value; 10,000 shares authorized; no shares 42,127 10,000 52,131 35,448 2,615 142,321 67,500 40,528 250,349 $ 38,922 10,000 73,646 38,662 2,084 163,314 77,500 43,691 284,505 issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — Common stock—$0.0001 par value; 250,000 shares authorized; 41,727 and 42,225 shares issued and outstanding at January 2, 2016 and January 3, 2015, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 13,868 747,749 (507) 4 29,501 728,633 (82) Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 761,114 758,056 Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 761,114 758,056 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,011,463 $1,042,561 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,011,463 $1,042,561 The accompanying notes are an integral part of these Consolidated Financial Statements. The accompanying notes are an integral part of these Consolidated Financial Statements. F-3 F-3 Current assets: Assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 114,085 $ 141,706 Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,901 193,489 Accounts receivable, net of allowances for doubtful accounts of $671 at January 2, 2016 and $786 at January 3, 2015 . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current liabilities: Liabilities and Stockholders’ Equity Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income on shipments to distributors . . . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies Stockholders’ equity: Preferred stock—$0.0001 par value; 10,000 shares authorized; no shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock—$0.0001 par value; 250,000 shares authorized; 41,727 and 42,225 shares issued and outstanding at January 2, 2016 and January 3, 2015, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 4 — 4 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,868 747,749 (507) 29,501 728,633 (82) 73,601 53,895 — 52,658 423,140 7,126 131,132 272,722 121,354 55,989 42,127 10,000 52,131 35,448 2,615 142,321 67,500 40,528 250,349 70,367 52,631 21,173 49,171 528,537 7,419 132,820 228,781 115,021 29,983 38,922 10,000 73,646 38,662 2,084 163,314 77,500 43,691 284,505 Silicon Laboratories Inc. Consolidated Statements of Income (In thousands, except per share data) Silicon Laboratories Inc. Consolidated Statements of Income (In thousands, except per share data) Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $644,826 264,056 $620,704 242,153 $580,087 227,183 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $644,826 $620,704 Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264,056 242,153 $580,087 227,183 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: 380,770 378,551 352,904 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380,770 378,551 352,904 Year Ended January 2, 2016 January 3, 2015 December 28, 2013 Year Ended January 2, January 3, December 28, 2016 2015 2013 Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . 188,050 160,486 172,985 154,145 Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348,536 327,130 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense): Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,234 51,421 730 (2,828) 127 30,263 677 1,007 (3,154) (234) 49,040 11,019 157,799 130,795 288,594 64,310 853 (3,293) 157 62,027 12,208 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,586 $ 38,021 $ 49,819 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,586 $ 38,021 $ 49,819 Earnings per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 0.70 0.69 $ $ 0.88 0.87 $ $ 1.17 1.14 Weighted-average common shares outstanding: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,309 42,945 42,970 43,793 42,715 43,537 Operating expenses: Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . 188,050 160,486 172,985 154,145 Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348,536 327,130 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,234 51,421 Other income (expense): Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,828) 730 127 30,263 677 1,007 (3,154) (234) 49,040 11,019 157,799 130,795 288,594 64,310 (3,293) 853 157 62,027 12,208 Earnings per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 0.70 0.69 $ $ 0.88 0.87 $ $ 1.17 1.14 Weighted-average common shares outstanding: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,309 42,945 42,970 43,793 42,715 43,537 The accompanying notes are an integral part of these Consolidated Financial Statements. The accompanying notes are an integral part of these Consolidated Financial Statements. F-4 F-4 Silicon Laboratories Inc. Consolidated Statements of Comprehensive Income (In thousands) Silicon Laboratories Inc. Consolidated Statements of Comprehensive Income (In thousands) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,586 $38,021 $49,819 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,586 $38,021 $49,819 Year Ended January 2, 2016 January 3, 2015 December 28, 2013 Other comprehensive income (loss), before tax: Net changes to available-for-sale securities: Unrealized gains (losses) arising during the period . . . . . . . . . . Reclassification for (gains) losses included in net income . . . . . Net changes to cash flow hedges: Unrealized gains (losses) arising during the period . . . . . . . . . . Reclassification for losses included in net income . . . . . . . . . . Other comprehensive income (loss), before tax . . . . . . . . . . . . . . . Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . (425) 10 (728) 489 (654) (229) (425) 1,107 — (535) (232) (799) 618 926 324 602 611 560 404 142 262 Other comprehensive income (loss), before tax: Net changes to available-for-sale securities: Unrealized gains (losses) arising during the period . . . . . . . . . . Reclassification for (gains) losses included in net income . . . . . 1,107 — (535) (232) Net changes to cash flow hedges: Unrealized gains (losses) arising during the period . . . . . . . . . . Reclassification for losses included in net income . . . . . . . . . . Other comprehensive income (loss), before tax . . . . . . . . . . . . . . . Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . Year Ended January 2, January 3, December 28, 2016 2015 2013 (425) 10 (728) 489 (654) (229) (425) (799) 618 926 324 602 611 560 404 142 262 Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,161 $38,623 $50,081 Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,161 $38,623 $50,081 The accompanying notes are an integral part of these Consolidated Financial Statements. The accompanying notes are an integral part of these Consolidated Financial Statements. F-5 F-5 Silicon Laboratories Inc. Consolidated Statements of Changes in Stockholders’ Equity (In thousands) Consolidated Statements of Changes in Stockholders’ Equity Silicon Laboratories Inc. (In thousands) Common Stock Number of Shares Par Value Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders’ Equity Common Stock Number of Shares Par Value Additional Paid-In Capital Retained Earnings Accumulated Other Loss Comprehensive Stockholders’ Balance as of December 29, 2012 . . 41,879 $ 4 $ 10,122 $640,793 $(946) $649,973 Balance as of December 29, 2012 . . 41,879 $ 4 $ 10,122 $640,793 $(946) $649,973 Net income . . . . . . . . . . . . . . . . Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . Stock issuances under employee plans, net of shares withheld for taxes . . . . . . . . . . . . . . . . . Income tax benefit (shortfall) from stock-based awards . . . . . Repurchases of common stock . . Stock-based compensation . . . . . Stock issued in business — — — — — — 1,057 — 15,301 — — (772) (661) — (26,022) 30,753 — — combination . . . . . . . . . . . . . . 504 Balance as of December 28, 2013 . . 42,779 Net income . . . . . . . . . . . . . . . . Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . Stock issuances under employee plans, net of shares withheld for taxes . . . . . . . . . . . . . . . . . Income tax benefit (shortfall) from stock-based awards . . . . . Repurchases of common stock . . Stock-based compensation . . . . . Net income . . . . . . . . . . . . . . . . Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . Stock issuances under employee plans, net of shares withheld for taxes . . . . . . . . . . . . . . . . . Income tax benefit (shortfall) from stock-based awards . . . . . Repurchases of common stock . . Stock-based compensation . . . . . — 4 — — 19,248 48,630 — — — — — — 1,124 — 13,320 — — 120 (1,678) — (71,676) 39,107 — — 4 — — — — 1,152 — 3,128 — — (613) (1,650) — (60,978) 42,830 — — 49,819 — — — — — — 690,612 38,021 — — — — — 29,586 — — — (10,470) — Balance as of January 3, 2015 . . . . 42,225 29,501 728,633 — 262 — — — — — (684) — 602 — — — — (82) — (425) — — — — 49,819 262 15,301 (772) (26,022) 30,753 19,248 738,562 38,021 602 13,320 120 (71,676) 39,107 758,056 29,586 (425) 3,128 (613) (71,448) 42,830 Balance as of January 2, 2016 . . . . 41,727 $ 4 $ 13,868 $747,749 $(507) $761,114 Balance as of January 2, 2016 . . . . 41,727 $ 4 $ 13,868 $747,749 $(507) $761,114 The accompanying notes are an integral part of these Consolidated Financial Statements. The accompanying notes are an integral part of these Consolidated Financial Statements. F-6 Net income . . . . . . . . . . . . . . . . Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . Stock issuances under employee plans, net of shares withheld Income tax benefit (shortfall) from stock-based awards . . . . . for taxes . . . . . . . . . . . . . . . . . 1,057 15,301 Repurchases of common stock . . (661) — (26,022) 49,819 — — — 262 Total Equity 49,819 262 15,301 (772) (26,022) 30,753 19,248 738,562 38,021 13,320 120 (71,676) 39,107 758,056 29,586 (425) 3,128 (613) (71,448) 42,830 690,612 38,021 (684) 602 602 — — — — — — — — — — — — — — — (772) 30,753 19,248 48,630 — — 13,320 120 39,107 29,501 — — 3,128 (613) 42,830 — — — — — — — — — — — — — — 728,633 29,586 (82) — (425) Stock-based compensation . . . . . Stock issued in business combination . . . . . . . . . . . . . . 504 Balance as of December 28, 2013 . . 42,779 Net income . . . . . . . . . . . . . . . . Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . Stock issuances under employee plans, net of shares withheld for taxes . . . . . . . . . . . . . . . . . 1,124 Income tax benefit (shortfall) from stock-based awards . . . . . Stock-based compensation . . . . . Balance as of January 3, 2015 . . . . 42,225 Net income . . . . . . . . . . . . . . . . Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . Stock issuances under employee plans, net of shares withheld for taxes . . . . . . . . . . . . . . . . . 1,152 Income tax benefit (shortfall) from stock-based awards . . . . . Repurchases of common stock . . (1,678) — (71,676) Repurchases of common stock . . (1,650) — (60,978) (10,470) Stock-based compensation . . . . . — — — — — — — — — — — — — — — — — — 4 — — — — — 4 — — — — — F-6 Silicon Laboratories Inc. Consolidated Statements of Cash Flows (In thousands) Silicon Laboratories Inc. Consolidated Statements of Cash Flows (In thousands) Operating Activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to cash provided by operating activities: Depreciation of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of other intangible assets and other assets . . . . . . . . . . . . . . . Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit (shortfall) from stock-based awards . . . . . . . . . . . . . . . Excess income tax benefit from stock-based awards . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in operating assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other assets Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income on shipments to distributors . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities Year Ended January 2, 2016 January 3, 2015 December 28, 2013 Year Ended January 2, January 3, December 28, 2016 2015 2013 $ 29,586 $ 38,021 $ 49,819 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,586 $ 38,021 $ 49,819 Operating Activities 12,517 29,131 42,791 469 (2,497) (2,136) 1,702 2,093 (870) 6,662 1,682 (5,298) 776 (11,161) 12,561 17,923 39,067 489 (632) 3,054 1,757 (7,170) 9,332 11,475 27,671 7,809 (3,371) (20,543) 13,491 15,911 30,800 (606) (290) 3,319 8,972 5,588 (2,514) (3,979) 463 (2,381) 5,189 (3,632) Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . 105,447 137,443 120,150 Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . 105,447 137,443 120,150 Investing Activities Purchases of available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales and maturities of available-for-sale investments . . . . . . . . Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . (107,366) 171,831 (11,268) (6,399) (96,112) (166,094) 156,520 (11,225) (5,514) — (213,883) 210,824 (10,472) (5,939) (86,441) Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (49,314) (26,313) (105,911) Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (49,314) (26,313) (105,911) Financing Activities Proceeds from issuance of common stock, net of cash paid for withheld taxes . . Excess income tax benefit from stock-based awards . . . . . . . . . . . . . . . . . . . Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of acquisition-related contingent consideration . . . . . . . . . . . . . . . . Proceeds from issuance of long-term debt, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on debt Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . 3,129 2,497 (71,448) (4,464) 81,238 (94,706) (83,754) (27,621) 141,706 13,320 632 (71,676) — — (7,500) (65,224) 45,906 95,800 15,301 290 (26,022) — — (13,434) (23,865) (9,626) 105,426 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 114,085 $ 141,706 $ 95,800 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 114,085 $ 141,706 $ 95,800 Supplemental Disclosure of Cash Flow Information: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplemental Disclosure of Non-Cash Activity: Stock issued in business combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ 2,470 $ 2,950 2,157 $ 11,587 $ $ 2,925 3,838 — $ — $ 19,248 Stock issued in business combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ — $ 19,248 The accompanying notes are an integral part of these Consolidated Financial Statements. The accompanying notes are an integral part of these Consolidated Financial Statements. F-7 F-7 Adjustments to reconcile net income to cash provided by operating activities: Depreciation of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of other intangible assets and other assets . . . . . . . . . . . . . . . Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit (shortfall) from stock-based awards . . . . . . . . . . . . . . . Excess income tax benefit from stock-based awards . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in operating assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income on shipments to distributors . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,517 29,131 42,791 469 (2,497) (2,136) 1,702 2,093 (870) 6,662 1,682 (5,298) 776 (11,161) 12,561 17,923 39,067 489 (632) 3,054 1,757 (7,170) 9,332 11,475 27,671 7,809 (3,371) (20,543) 13,491 15,911 30,800 (606) (290) 3,319 8,972 5,588 (2,514) (3,979) 463 (2,381) 5,189 (3,632) Investing Activities Purchases of available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . (107,366) (166,094) Proceeds from sales and maturities of available-for-sale investments . . . . . . . . Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . 171,831 (11,268) (6,399) (96,112) 156,520 (11,225) (5,514) — (213,883) 210,824 (10,472) (5,939) (86,441) Financing Activities Proceeds from issuance of common stock, net of cash paid for withheld taxes . . Excess income tax benefit from stock-based awards . . . . . . . . . . . . . . . . . . . Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of acquisition-related contingent consideration . . . . . . . . . . . . . . . . Proceeds from issuance of long-term debt, net . . . . . . . . . . . . . . . . . . . . . . Payments on debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . 3,129 2,497 (71,448) (4,464) 81,238 (94,706) (83,754) (27,621) 141,706 13,320 632 (71,676) — — (7,500) (65,224) 45,906 95,800 Supplemental Disclosure of Cash Flow Information: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,470 $ 2,950 Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,157 $ 11,587 Supplemental Disclosure of Non-Cash Activity: $ $ $ 15,301 290 (26,022) — — (13,434) (23,865) (9,626) 105,426 $ $ 2,925 3,838 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 1. Description of Business 1. Description of Business Silicon Laboratories Inc. (the ‘‘Company’’), a Delaware corporation, is a provider of silicon, software and solutions for the Internet of Things (IoT), Internet infrastructure, industrial control, consumer and automotive markets. Within the semiconductor industry, the Company is known as a ‘‘fabless’’ company meaning that the integrated circuits (ICs) incorporated in its products are manufactured by third-party foundry semiconductor companies. 2. Significant Accounting Policies Basis of Presentation and Principles of Consolidation The Company prepares financial statements on a 52- or 53-week fiscal year that ends on the Saturday closest to December 31. Fiscal 2015 had 52 weeks and ended on January 2, 2016. Fiscal 2014 had 53 weeks with the extra week occurring in the fourth quarter of the year and ended on January 3, 2015. Fiscal 2013 had 52-weeks and ended on December 28, 2013. The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Silicon Laboratories Inc. (the ‘‘Company’’), a Delaware corporation, is a provider of silicon, software and solutions for the Internet of Things (IoT), Internet infrastructure, industrial control, consumer and automotive markets. Within the semiconductor industry, the Company is known as a ‘‘fabless’’ company meaning that the integrated circuits (ICs) incorporated in its products are manufactured by third-party foundry semiconductor companies. 2. Significant Accounting Policies Basis of Presentation and Principles of Consolidation The Company prepares financial statements on a 52- or 53-week fiscal year that ends on the Saturday closest to December 31. Fiscal 2015 had 52 weeks and ended on January 2, 2016. Fiscal 2014 had 53 weeks with the extra week occurring in the fourth quarter of the year and ended on January 3, 2015. Fiscal 2013 had 52-weeks and ended on December 28, 2013. The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Foreign Currency Transactions Foreign Currency Transactions The Company’s foreign subsidiaries are considered to be extensions of the U.S. Company. The functional currency of the foreign subsidiaries is the U.S. dollar. Accordingly, gains and losses resulting from remeasuring transactions denominated in currencies other than U.S. dollars are included in other income (expense), net in the Consolidated Statements of Income. The Company’s foreign subsidiaries are considered to be extensions of the U.S. Company. The functional currency of the foreign subsidiaries is the U.S. dollar. Accordingly, gains and losses resulting from remeasuring transactions denominated in currencies other than U.S. dollars are included in other income (expense), net in the Consolidated Statements of Income. Use of Estimates Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Among the significant estimates affecting the financial statements are those related to inventories, stock-based compensation, investments in auction-rate securities, acquired intangible assets, goodwill, long-lived assets and income taxes. Actual results could differ from those estimates, and such differences could be material to the financial statements. Reclassifications Certain reclassifications have been made to prior year financial statements to conform to current Certain reclassifications have been made to prior year financial statements to conform to current year presentation. Fair Value of Financial Instruments The fair values of the Company’s financial instruments are recorded using a hierarchal disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities. The three levels are described below: Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The fair values of the Company’s financial instruments are recorded using a hierarchal disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities. The three levels are described below: Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. F-8 F-8 The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Among the significant estimates affecting the financial statements are those related to inventories, stock-based compensation, investments in auction-rate securities, acquired intangible assets, goodwill, long-lived assets and income taxes. Actual results could differ from those estimates, and such differences could be material to the financial statements. Reclassifications year presentation. Fair Value of Financial Instruments Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 2. Significant Accounting Policies (Continued) 2. Significant Accounting Policies (Continued) Level 2—Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3—Inputs are unobservable for the asset or liability and are developed based on the best information available in the circumstances, which might include the Company’s own data. Level 2—Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3—Inputs are unobservable for the asset or liability and are developed based on the best information available in the circumstances, which might include the Company’s own data. Cash and Cash Equivalents Cash and Cash Equivalents Cash and cash equivalents consist of cash deposits, money market funds and investments in debt Cash and cash equivalents consist of cash deposits, money market funds and investments in debt securities with original maturities of ninety days or less when purchased. securities with original maturities of ninety days or less when purchased. Investments Investments The Company’s investments typically have original maturities greater than ninety days as of the date of purchase and are classified as either available-for-sale or trading securities. Investments in available-for-sale securities are reported at fair value, with unrealized gains and losses, net of tax, recorded as a component of accumulated other comprehensive loss in the Consolidated Balance Sheet. Investments in trading securities are reported at fair value, with both realized and unrealized gains and losses recorded in other income (expense), net in the Consolidated Statement of Income. Investments in which the Company has the ability and intent, if necessary, to liquidate in order to support its current operations (including those with contractual maturities greater than one year from the date of purchase) are classified as short-term. The Company reviews its available-for-sale investments as of the end of each reporting period for other-than-temporary declines in fair value based on the specific identification method. The Company considers various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, changes in underlying credit ratings, forecasted recovery, its intent to sell or the likelihood that it would be required to sell the investment before its anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. When the Company concludes that an other-than-temporary impairment has occurred, the Company assesses whether it intends to sell the security or if it is more likely than not that it will be required to sell the security before recovery. If either of these two conditions is met, the Company recognizes a charge in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If the Company does not intend to sell a security and it is not more likely than not that it will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recorded in accumulated other comprehensive loss. In addition, the Company has made equity investments in non-publicly traded companies that it accounts for under the cost method. The Company periodically reviews these investments for other-than-temporary declines in fair value based on the specific identification method and writes down investments to their fair values when it determines that an other-than-temporary decline has occurred. The Company’s investments typically have original maturities greater than ninety days as of the date of purchase and are classified as either available-for-sale or trading securities. Investments in available-for-sale securities are reported at fair value, with unrealized gains and losses, net of tax, recorded as a component of accumulated other comprehensive loss in the Consolidated Balance Sheet. Investments in trading securities are reported at fair value, with both realized and unrealized gains and losses recorded in other income (expense), net in the Consolidated Statement of Income. Investments in which the Company has the ability and intent, if necessary, to liquidate in order to support its current operations (including those with contractual maturities greater than one year from the date of purchase) are classified as short-term. The Company reviews its available-for-sale investments as of the end of each reporting period for other-than-temporary declines in fair value based on the specific identification method. The Company considers various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, changes in underlying credit ratings, forecasted recovery, its intent to sell or the likelihood that it would be required to sell the investment before its anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. When the Company concludes that an other-than-temporary impairment has occurred, the Company assesses whether it intends to sell the security or if it is more likely than not that it will be required to sell the security before recovery. If either of these two conditions is met, the Company recognizes a charge in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If the Company does not intend to sell a security and it is not more likely than not that it will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recorded in accumulated other comprehensive loss. In addition, the Company has made equity investments in non-publicly traded companies that it accounts for under the cost method. The Company periodically reviews these investments for other-than-temporary declines in fair value based on the specific identification method and writes down investments to their fair values when it determines that an other-than-temporary decline has occurred. Derivative Financial Instruments Derivative Financial Instruments The Company uses derivative financial instruments to manage certain exposures to the variability of interest rates and foreign currency exchange rates. The Company’s objective is to offset increases The Company uses derivative financial instruments to manage certain exposures to the variability of interest rates and foreign currency exchange rates. The Company’s objective is to offset increases F-9 F-9 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 2. Significant Accounting Policies (Continued) 2. Significant Accounting Policies (Continued) and decreases in expenses resulting from these exposures with gains and losses on the derivative contracts, thereby reducing volatility of earnings. The Company does not use derivative contracts for speculative or trading purposes. The Company recognizes derivatives, on a gross basis, in the Consolidated Balance Sheet at fair value. Cash flows from derivatives are classified according to the nature of the cash receipt or payment in the Consolidated Statement of Cash Flows. The Company uses interest rate swap agreements to manage exposure to interest rate risks. The swap agreements are designated and qualify as cash flow hedges. The effective portion of the gain or loss on the interest rate swaps is recorded in accumulated other comprehensive loss as a separate component of stockholders’ equity and is subsequently recognized as interest expense in the Consolidated Statement of Income when the hedged exposure affects earnings. The Company uses foreign currency forward contracts to manage exposure to foreign exchange risk. These instruments are used to reduce the earnings impact that exchange rate fluctuations have on non-U.S. dollar balance sheet exposures. The Company recognizes gains and losses on the foreign currency forward contracts in other income (expense), net in the Consolidated Statement of Income in the same period as the remeasurement loss and gain of the related foreign currency denominated asset or liability. The Company does not apply hedge accounting to its foreign currency derivative instruments. Inventories Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. The Company writes down the carrying value of inventory to net realizable value for estimated obsolescence or unmarketable inventory based upon assumptions about the age of inventory, future demand and market conditions. Inventory impairment charges establish a new cost basis for inventory and charges are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are recoverable. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the useful lives of the assets ranging from three to seven years. Leasehold improvements are depreciated over the contractual lease period or their useful life, whichever is shorter. In fiscal 2012, the Company purchased the facilities it had previously leased for its headquarters in Austin, Texas. The buildings are located on land which is leased through 2099 from a third party. The rents for these ground leases were prepaid for the term of the leases by the previous lessee. The buildings and leasehold interest in ground leases are being depreciated on a straight-line basis over their estimated useful lives of 40 years and 86 years, respectively. and decreases in expenses resulting from these exposures with gains and losses on the derivative contracts, thereby reducing volatility of earnings. The Company does not use derivative contracts for speculative or trading purposes. The Company recognizes derivatives, on a gross basis, in the Consolidated Balance Sheet at fair value. Cash flows from derivatives are classified according to the nature of the cash receipt or payment in the Consolidated Statement of Cash Flows. The Company uses interest rate swap agreements to manage exposure to interest rate risks. The swap agreements are designated and qualify as cash flow hedges. The effective portion of the gain or loss on the interest rate swaps is recorded in accumulated other comprehensive loss as a separate component of stockholders’ equity and is subsequently recognized as interest expense in the Consolidated Statement of Income when the hedged exposure affects earnings. The Company uses foreign currency forward contracts to manage exposure to foreign exchange risk. These instruments are used to reduce the earnings impact that exchange rate fluctuations have on non-U.S. dollar balance sheet exposures. The Company recognizes gains and losses on the foreign currency forward contracts in other income (expense), net in the Consolidated Statement of Income in the same period as the remeasurement loss and gain of the related foreign currency denominated asset or liability. The Company does not apply hedge accounting to its foreign currency derivative instruments. Inventories Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. The Company writes down the carrying value of inventory to net realizable value for estimated obsolescence or unmarketable inventory based upon assumptions about the age of inventory, future demand and market conditions. Inventory impairment charges establish a new cost basis for inventory and charges are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are recoverable. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the useful lives of the assets ranging from three to seven years. Leasehold improvements are depreciated over the contractual lease period or their useful life, whichever is shorter. In fiscal 2012, the Company purchased the facilities it had previously leased for its headquarters in Austin, Texas. The buildings are located on land which is leased through 2099 from a third party. The rents for these ground leases were prepaid for the term of the leases by the previous lessee. The buildings and leasehold interest in ground leases are being depreciated on a straight-line basis over their estimated useful lives of 40 years and 86 years, respectively. Business Combinations Business Combinations The Company records business combinations using the acquisition method of accounting and, accordingly, allocates the fair value of purchase consideration to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The excess of the fair value of purchase The Company records business combinations using the acquisition method of accounting and, accordingly, allocates the fair value of purchase consideration to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The excess of the fair value of purchase F-10 F-10 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 2. Significant Accounting Policies (Continued) 2. Significant Accounting Policies (Continued) consideration over the fair value of the assets acquired and liabilities assumed is recorded as goodwill. The results of operations of the businesses acquired are included in the Company’s consolidated results of operations beginning on the date of the acquisition. consideration over the fair value of the assets acquired and liabilities assumed is recorded as goodwill. The results of operations of the businesses acquired are included in the Company’s consolidated results of operations beginning on the date of the acquisition. Long-Lived Assets Long-Lived Assets Purchased intangible assets are stated at cost, net of accumulated amortization, and are amortized using the straight-line method over their estimated useful lives, ranging from one to twelve years. Fair values are determined primarily using the income approach, in which the Company projects future expected cash flows and applies an appropriate discount rate. Long-lived assets ‘‘held and used’’ by the Company are reviewed for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets and is recorded in the period in which the determination was made. The carrying value of goodwill is reviewed at least annually by the Company for possible impairment. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares the fair value of the reporting unit to the net book value of the reporting unit. In determining fair value, several valuation methodologies are allowed, although quoted market prices are the best evidence of fair value. If the results of the first step demonstrate that the net book value is greater than the fair value, the Company must proceed to step two of the analysis. Step two of the analysis compares the implied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. The Company tests goodwill for impairment annually as of the first day of its fourth fiscal quarter and in interim periods if events occur that would indicate that the carrying value of goodwill may be impaired. Revenue Recognition Revenue Recognition Revenues are generated predominately by sales of the Company’s products. The Company recognizes revenue when all of the following criteria are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured. Generally, revenue from product sales to direct customers and contract manufacturers is recognized upon shipment. A portion of the Company’s sales are made to distributors under agreements allowing certain rights of return and price protection related to the final selling price to the end customers. Accordingly, the Company defers revenue and cost of revenue on such sales until the distributors sell the product to the end customers. The net balance of deferred revenue less deferred cost of revenue associated with inventory shipped to a distributor but not yet sold to an end customer is recorded in the deferred income on shipments to distributors liability on the Consolidated Balance Sheet. Such net deferred income balance reflects the Company’s estimate of the impact of rights of return and price protection. A small portion of the Company’s revenues is derived from the sale of patents. The above revenue recognition criteria for patent sales are generally met upon the execution of the patent sale agreement. F-11 F-11 Purchased intangible assets are stated at cost, net of accumulated amortization, and are amortized using the straight-line method over their estimated useful lives, ranging from one to twelve years. Fair values are determined primarily using the income approach, in which the Company projects future expected cash flows and applies an appropriate discount rate. Long-lived assets ‘‘held and used’’ by the Company are reviewed for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets and is recorded in the period in which the determination was made. The carrying value of goodwill is reviewed at least annually by the Company for possible impairment. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares the fair value of the reporting unit to the net book value of the reporting unit. In determining fair value, several valuation methodologies are allowed, although quoted market prices are the best evidence of fair value. If the results of the first step demonstrate that the net book value is greater than the fair value, the Company must proceed to step two of the analysis. Step two of the analysis compares the implied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. The Company tests goodwill for impairment annually as of the first day of its fourth fiscal quarter and in interim periods if events occur that would indicate that the carrying value of goodwill may be impaired. Revenues are generated predominately by sales of the Company’s products. The Company recognizes revenue when all of the following criteria are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured. Generally, revenue from product sales to direct customers and contract manufacturers is recognized upon shipment. A portion of the Company’s sales are made to distributors under agreements allowing certain rights of return and price protection related to the final selling price to the end customers. Accordingly, the Company defers revenue and cost of revenue on such sales until the distributors sell the product to the end customers. The net balance of deferred revenue less deferred cost of revenue associated with inventory shipped to a distributor but not yet sold to an end customer is recorded in the deferred income on shipments to distributors liability on the Consolidated Balance Sheet. Such net deferred income balance reflects the Company’s estimate of the impact of rights of return and price protection. A small portion of the Company’s revenues is derived from the sale of patents. The above revenue recognition criteria for patent sales are generally met upon the execution of the patent sale agreement. Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 2. Significant Accounting Policies (Continued) Shipping and Handling Shipping and handling costs are classified as a component of cost of revenues in the Consolidated Shipping and handling costs are classified as a component of cost of revenues in the Consolidated Statements of Income. Stock-Based Compensation 2. Significant Accounting Policies (Continued) Shipping and Handling Statements of Income. Stock-Based Compensation The Company has stock-based compensation plans, which are more fully described in Note 13, Stock-Based Compensation. The Company accounts for those plans using a fair-value method and recognizes the expense in its Consolidated Statement of Income. The Company has stock-based compensation plans, which are more fully described in Note 13, Stock-Based Compensation. The Company accounts for those plans using a fair-value method and recognizes the expense in its Consolidated Statement of Income. Research and Development Research and Development Research and development costs are expensed as incurred. Research and development expense consists primarily of personnel-related expenses, including stock-based compensation, as well as new product masks, external consulting and services costs, equipment tooling, equipment depreciation, amortization of intangible assets, and an allocated portion of our occupancy costs. Assets purchased to support the Company’s ongoing research and development activities are capitalized when related to products which have achieved technological feasibility or have an alternative future use, and are amortized over their estimated useful lives. Advertising Research and development costs are expensed as incurred. Research and development expense consists primarily of personnel-related expenses, including stock-based compensation, as well as new product masks, external consulting and services costs, equipment tooling, equipment depreciation, amortization of intangible assets, and an allocated portion of our occupancy costs. Assets purchased to support the Company’s ongoing research and development activities are capitalized when related to products which have achieved technological feasibility or have an alternative future use, and are amortized over their estimated useful lives. Advertising costs are expensed as incurred. Advertising expenses were $1.8 million, $1.7 million Advertising costs are expensed as incurred. Advertising expenses were $1.8 million, $1.7 million and $2.0 million in fiscal 2015, 2014 and 2013, respectively. and $2.0 million in fiscal 2015, 2014 and 2013, respectively. Income Taxes The Company accounts for income taxes using the asset and liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax laws and related rates that will be in effect when the differences are expected to reverse. These differences result in deferred tax assets and liabilities, which are included in the Company’s Consolidated Balance Sheet. The Company then assesses the likelihood that the deferred tax assets will be realized. A valuation allowance is established against deferred tax assets to the extent the Company believes that it is more likely than not that the deferred tax assets will not be realized, taking into consideration the level of historical taxable income and projections for future taxable income over the periods in which the temporary differences are deductible. Uncertain tax positions must meet a more-likely-than-not threshold to be recognized in the financial statements and the tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon final settlement. See Note 17, Income Taxes, for additional information. Recent Accounting Pronouncements In November 2015, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of In November 2015, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of F-12 F-12 Advertising Income Taxes The Company accounts for income taxes using the asset and liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax laws and related rates that will be in effect when the differences are expected to reverse. These differences result in deferred tax assets and liabilities, which are included in the Company’s Consolidated Balance Sheet. The Company then assesses the likelihood that the deferred tax assets will be realized. A valuation allowance is established against deferred tax assets to the extent the Company believes that it is more likely than not that the deferred tax assets will not be realized, taking into consideration the level of historical taxable income and projections for future taxable income over the periods in which the temporary differences are deductible. Uncertain tax positions must meet a more-likely-than-not threshold to be recognized in the financial statements and the tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon final settlement. See Note 17, Income Taxes, for additional information. Recent Accounting Pronouncements Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 2. Significant Accounting Policies (Continued) 2. Significant Accounting Policies (Continued) Deferred Taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual reporting period. The Company early adopted this ASU on a prospective basis in the fourth quarter of fiscal 2015. Prior periods were not retrospectively adjusted. In September 2015, the FASB issued FASB ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period with a corresponding adjustment to goodwill in the reporting period in which the adjustment amounts are determined. The effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts will be recorded in the same period’s financial statements, calculated as if the accounting had been completed at the acquisition date. This ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. The Company early adopted this ASU in the fourth quarter of fiscal 2015. The adoption did not have a material impact on its financial statements. In July 2015, the FASB issued FASB ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this update require inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with earlier application permitted. The Company does not expect that the adoption of this ASU will have a material impact on its financial statements. In April 2015, the FASB issued FASB ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is to be applied retrospectively and represents a change in accounting principle. In August 2015, the FASB issued FASB ASU No. 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 clarified the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Such costs may be presented in the balance sheet as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 and ASU 2015-15 are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Earlier adoption is permitted for financial statements that have not been previously issued. The Company does not expect that the adoption of ASU 2015-03 and ASU 2015-15 will have a material impact on its financial statements. Deferred Taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual reporting period. The Company early adopted this ASU on a prospective basis in the fourth quarter of fiscal 2015. Prior periods were not retrospectively adjusted. In September 2015, the FASB issued FASB ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period with a corresponding adjustment to goodwill in the reporting period in which the adjustment amounts are determined. The effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts will be recorded in the same period’s financial statements, calculated as if the accounting had been completed at the acquisition date. This ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. The Company early adopted this ASU in the fourth quarter of fiscal 2015. The adoption did not have a material impact on its financial statements. In July 2015, the FASB issued FASB ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this update require inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this update should be applied prospectively with earlier application permitted. The Company does not expect that the adoption of this ASU will have a material impact on its financial statements. In April 2015, the FASB issued FASB ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is to be applied retrospectively and represents a change in accounting principle. In August 2015, the FASB issued FASB ASU No. 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 clarified the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Such costs may be presented in the balance sheet as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 and ASU 2015-15 are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Earlier adoption is permitted for financial statements that have not been previously issued. The Company does not expect that the adoption of ASU 2015-03 and ASU 2015-15 will have a material impact on its financial statements. F-13 F-13 In May 2014, the FASB issued FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. ASU 2014-09 requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In August 2015, the FASB issued FASB ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, using one of two retrospective application methods. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the effect that the adoption of ASU 2014-09 and ASU 2015-14 will have on its financial statements. 3. Earnings Per Share thousands, except per share data): Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 2. Significant Accounting Policies (Continued) 2. Significant Accounting Policies (Continued) In May 2014, the FASB issued FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. ASU 2014-09 requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In August 2015, the FASB issued FASB ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, using one of two retrospective application methods. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the effect that the adoption of ASU 2014-09 and ASU 2015-14 will have on its financial statements. 3. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): Year Ended January 2, 2016 January 3, 2015 December 28, 2013 Year Ended January 2, January 3, December 28, 2016 2015 2013 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,586 $38,021 $49,819 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,586 $38,021 $49,819 Shares used in computing basic earnings per share . . . . . . . . . . . . . 42,309 42,970 42,715 Shares used in computing basic earnings per share . . . . . . . . . . . . . 42,309 42,970 42,715 Effect of dilutive securities: Stock options and other stock-based awards . . . . . . . . . . . . . . . . 636 823 822 Stock options and other stock-based awards . . . . . . . . . . . . . . . . 636 823 822 Shares used in computing diluted earnings per share . . . . . . . . . . . 42,945 43,793 43,537 Shares used in computing diluted earnings per share . . . . . . . . . . . 42,945 43,793 43,537 Earnings per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 0.70 0.69 $ $ 0.88 0.87 $ 1.17 $ 1.14 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 0.70 0.69 $ $ 0.88 0.87 $ $ 1.17 1.14 For fiscal years ended January 2, 2016, January 3, 2015 and December 28, 2013, approximately 0.1 million, 0.1 million and 0.4 million shares, respectively, were not included in the diluted earnings per share calculation since the shares were anti-dilutive. For fiscal years ended January 2, 2016, January 3, 2015 and December 28, 2013, approximately 0.1 million, 0.1 million and 0.4 million shares, respectively, were not included in the diluted earnings per share calculation since the shares were anti-dilutive. Effect of dilutive securities: Earnings per share: F-14 F-14 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 4. Cash, Cash Equivalents and Investments 4. Cash, Cash Equivalents and Investments The Company’s cash equivalents and short-term investments as of January 2, 2016 consisted of municipal bonds, money market funds, commercial paper, certificates of deposit, variable-rate demand notes, U.S. government agency, international government bonds and corporate bonds. The Company’s long-term investments consisted of auction-rate securities. In fiscal 2008, auctions for many of the Company’s auction-rate securities failed because sell orders exceeded buy orders. As of January 2, 2016, the Company held $8.0 million par value auction-rate securities, all of which have experienced failed auctions. The underlying assets of the securities consisted of student loans and municipal bonds, of which $6.0 million were guaranteed by the U.S. government and the remaining $2.0 million were privately insured. As of January 2, 2016, $6.0 million of the auction-rate securities had credit ratings of AA and $2.0 million had a credit rating of A. These securities have contractual maturity dates ranging from 2033 to 2046 at January 2, 2016. The Company is receiving the underlying cash flows on all of its auction-rate securities. The principal amounts associated with failed auctions are not expected to be accessible until a successful auction occurs, the issuer redeems the securities, a buyer is found outside of the auction process or the underlying securities mature. The Company is unable to predict if these funds will become available before their maturity dates. The Company does not expect to need access to the capital represented by any of its auction-rate securities prior to their maturities. The Company does not intend to sell, and believes it is not more likely than not that it will be required to sell, its auction-rate securities before their anticipated recovery in market value or final settlement at the underlying par value. The Company believes that the credit ratings and credit support of the security issuers indicate that they have the ability to settle the securities at par value. As such, the Company has determined that no other-than-temporary impairment losses existed as of January 2, 2016. The Company’s cash equivalents and short-term investments as of January 2, 2016 consisted of municipal bonds, money market funds, commercial paper, certificates of deposit, variable-rate demand notes, U.S. government agency, international government bonds and corporate bonds. The Company’s long-term investments consisted of auction-rate securities. In fiscal 2008, auctions for many of the Company’s auction-rate securities failed because sell orders exceeded buy orders. As of January 2, 2016, the Company held $8.0 million par value auction-rate securities, all of which have experienced failed auctions. The underlying assets of the securities consisted of student loans and municipal bonds, of which $6.0 million were guaranteed by the U.S. government and the remaining $2.0 million were privately insured. As of January 2, 2016, $6.0 million of the auction-rate securities had credit ratings of AA and $2.0 million had a credit rating of A. These securities have contractual maturity dates ranging from 2033 to 2046 at January 2, 2016. The Company is receiving the underlying cash flows on all of its auction-rate securities. The principal amounts associated with failed auctions are not expected to be accessible until a successful auction occurs, the issuer redeems the securities, a buyer is found outside of the auction process or the underlying securities mature. The Company is unable to predict if these funds will become available before their maturity dates. The Company does not expect to need access to the capital represented by any of its auction-rate securities prior to their maturities. The Company does not intend to sell, and believes it is not more likely than not that it will be required to sell, its auction-rate securities before their anticipated recovery in market value or final settlement at the underlying par value. The Company believes that the credit ratings and credit support of the security issuers indicate that they have the ability to settle the securities at par value. As such, the Company has determined that no other-than-temporary impairment losses existed as of January 2, 2016. F-15 F-15 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 4. Cash, Cash Equivalents and Investments (Continued) 4. Cash, Cash Equivalents and Investments (Continued) The Company’s cash, cash equivalents and investments consisted of the following (in thousands): The Company’s cash, cash equivalents and investments consisted of the following (in thousands): January 2, 2016 Gross Unrealized Losses Gross Unrealized Gains Cost Cash and Cash Equivalents: Cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Available-for-sale securities: Money market funds . . . . . . . . . . . . . . . . . . . . . . . . Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit U.S. government agency . . . . . . . . . . . . . . . . . . . . . . Municipal bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total available-for-sale securities . . . . . . . . . . . . . . . . . $ 59,071 $ — 37,721 11,272 2,845 1,599 1,576 55,013 — — — — — — Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $114,084 $ — Short-term Investments: Available-for-sale securities: Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . . . . Variable-rate demand notes . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . U.S. government agency . . . . . . . . . . . . . . . . . . . . . . International government bonds . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93,506 11,176 8,995 8,000 3,997 2,227 999 Total short-term investments . . . . . . . . . . . . . . . . . . . . . . $128,900 $ (32) — — — — (7) (3) $ (42) Long-term Investments: Available-for-sale securities: Auction rate securities . . . . . . . . . . . . . . . . . . . . . . . Total long-term investments . . . . . . . . . . . . . . . . . . . . . . . $ $ 8,000 8,000 $(874) $(874) $— — — — — — 1 1 $ 1 $42 — — — 1 — — $43 $— $— Fair Value $ 59,071 37,721 11,272 2,845 1,599 1,577 55,014 $114,085 $ 93,516 11,176 8,995 8,000 3,998 2,220 996 $128,901 $ $ 7,126 7,126 January 2, 2016 Unrealized Unrealized Gross Losses Gross Gains Cost Fair Value Cash and Cash Equivalents: Available-for-sale securities: Cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,071 $ — $— $ 59,071 Money market funds . . . . . . . . . . . . . . . . . . . . . . . . Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . U.S. government agency . . . . . . . . . . . . . . . . . . . . . . Municipal bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,721 11,272 2,845 1,599 1,576 Total available-for-sale securities . . . . . . . . . . . . . . . . . 55,013 Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $114,084 $ — $ 1 $114,085 Short-term Investments: Available-for-sale securities: Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93,506 $ (32) $42 — — — — — — — — — — (7) (3) — — — — — 1 1 — — — 1 — — 37,721 11,272 2,845 1,599 1,577 55,014 $ 93,516 11,176 8,995 8,000 3,998 2,220 996 Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . . . . 11,176 Variable-rate demand notes . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . U.S. government agency . . . . . . . . . . . . . . . . . . . . . . International government bonds . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,995 8,000 3,997 2,227 999 Total short-term investments . . . . . . . . . . . . . . . . . . . . . . $128,900 $ (42) $43 $128,901 Long-term Investments: Available-for-sale securities: Auction rate securities . . . . . . . . . . . . . . . . . . . . . . . Total long-term investments . . . . . . . . . . . . . . . . . . . . . . . $ $ 8,000 8,000 $(874) $(874) $— $— $ $ 7,126 7,126 F-16 F-16 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 4. Cash, Cash Equivalents and Investments (Continued) 4. Cash, Cash Equivalents and Investments (Continued) January 3, 2015 Gross Unrealized Losses Gross Unrealized Gains Cost Fair Value January 3, 2015 Unrealized Unrealized Gross Losses Gross Gains Cost Fair Value $ 52,144 $ — $ — $ 52,144 Cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,144 $ — $ — $ 52,144 Cash and Cash Equivalents: Cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Available-for-sale securities: Money market funds . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. government agency . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. government bonds . . . . . . . . . . . . . . . . . . . . . . Total available-for-sale securities . . . . . . . . . . . . . . . . . 71,415 7,739 5,348 1,756 1,202 1,101 1,000 89,561 — — — — — — — — Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $141,705 $ — $ Short-term Investments: Available-for-sale securities: Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . Variable-rate demand notes . . . . . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . International government bonds . . . . . . . . . . . . . . . . U.S. government bonds . . . . . . . . . . . . . . . . . . . . . . U.S. government agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit $129,005 33,043 12,915 8,995 5,380 2,526 650 601 250 Total short-term investments . . . . . . . . . . . . . . . . . . . . . . $193,365 $ (25) (35) — — (3) (10) — — — $ (73) $172 25 — — — — — — — $197 — — — 1 — — — 1 1 71,415 7,739 5,348 1,757 1,202 1,101 1,000 89,562 $141,706 $129,152 33,033 12,915 8,995 5,377 2,516 650 601 250 $193,489 Cash and Cash Equivalents: Available-for-sale securities: Money market funds . . . . . . . . . . . . . . . . . . . . . . . . 71,415 Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. government agency . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. government bonds . . . . . . . . . . . . . . . . . . . . . . 7,739 5,348 1,756 1,202 1,101 1,000 Total available-for-sale securities . . . . . . . . . . . . . . . . . 89,561 — — — — — — — — Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $141,705 $ — $ $141,706 Short-term Investments: Available-for-sale securities: Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . $129,005 $172 $129,152 Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . Variable-rate demand notes . . . . . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . International government bonds . . . . . . . . . . . . . . . . U.S. government bonds . . . . . . . . . . . . . . . . . . . . . . U.S. government agency . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . 33,043 12,915 8,995 5,380 2,526 650 601 250 $ (25) (35) — — (3) (10) — — — Total short-term investments . . . . . . . . . . . . . . . . . . . . . . $193,365 $ (73) $197 $193,489 — — — 1 — — — 1 1 25 — — — — — — — 71,415 7,739 5,348 1,757 1,202 1,101 1,000 89,562 33,033 12,915 8,995 5,377 2,516 650 601 250 Long-term Investments: Available-for-sale securities: Long-term Investments: Available-for-sale securities: Auction rate securities . . . . . . . . . . . . . . . . . . . . . . . Total long-term investments . . . . . . . . . . . . . . . . . . . . . . . $ $ 8,000 8,000 $(581) $(581) $ — $ — $ $ 7,419 7,419 Auction rate securities . . . . . . . . . . . . . . . . . . . . . . . Total long-term investments . . . . . . . . . . . . . . . . . . . . . . . $ $ 8,000 8,000 $(581) $(581) $ — $ — $ $ 7,419 7,419 F-17 F-17 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 4. Cash, Cash Equivalents and Investments (Continued) 4. Cash, Cash Equivalents and Investments (Continued) The available-for-sale investments that were in a continuous unrealized loss position, aggregated by length of time that individual securities have been in a continuous loss position, were as follows (in thousands): As of January 2, 2016 Municipal bonds . . . . . . . . . . . . . . . . . Auction rate securities . . . . . . . . . . . . . International government bonds . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . As of January 3, 2015 Municipal bonds . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . Auction rate securities . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . International government bond . . . . . . . Less Than 12 Months 12 Months or Greater Total Fair Value $29,271 — 2,220 996 $32,487 Gross Unrealized Losses $(30) — (7) (3) $(40) Fair Value $1,198 7,126 — — $8,324 Gross Unrealized Losses $ (2) (874) — — Fair Value $30,469 7,126 2,220 996 $(876) $40,811 Gross Unrealized Losses $ (32) (874) (7) (3) $(916) Less Than 12 Months 12 Months or Greater Total Fair Value $23,735 20,327 — 5,080 2,516 $51,658 Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses $(25) (35) — (3) (10) $(73) $ — $ — $23,735 20,327 — 7,419 (581) 5,080 — 2,516 — — 7,419 — — $7,419 $(581) $59,077 $ (25) (35) (581) (3) (10) $(654) The available-for-sale investments that were in a continuous unrealized loss position, aggregated by length of time that individual securities have been in a continuous loss position, were as follows (in thousands): As of January 2, 2016 Municipal bonds . . . . . . . . . . . . . . . . . $29,271 $(30) Auction rate securities . . . . . . . . . . . . . International government bonds . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . — 2,220 996 — (7) (3) Less Than 12 Months 12 Months or Greater Total Fair Value Gross Unrealized Losses Fair Value $1,198 7,126 — — Gross Unrealized Losses $ (2) (874) — — Fair Value $30,469 7,126 2,220 996 Gross Unrealized Losses $ (32) (874) (7) (3) $32,487 $(40) $8,324 $(876) $40,811 $(916) Less Than 12 Months 12 Months or Greater Total Fair Value $23,735 20,327 — 5,080 2,516 Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses $(25) (35) — (3) (10) $ — $ — $23,735 $ (25) 7,419 (581) — — — — — — 20,327 7,419 5,080 2,516 (35) (581) (3) (10) $51,658 $(73) $7,419 $(581) $59,077 $(654) As of January 3, 2015 Municipal bonds . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . Auction rate securities . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . International government bond . . . . . . . The gross unrealized losses as of January 2, 2016 and January 3, 2015 were due primarily to the illiquidity of the Company’s auction-rate securities and, to a lesser extent, to changes in market interest rates. The gross unrealized losses as of January 2, 2016 and January 3, 2015 were due primarily to the illiquidity of the Company’s auction-rate securities and, to a lesser extent, to changes in market interest rates. The following summarizes the contractual underlying maturities of the Company’s available-for-sale The following summarizes the contractual underlying maturities of the Company’s available-for-sale investments at January 2, 2016 (in thousands): investments at January 2, 2016 (in thousands): Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after one year through ten years . . . . . . . . . . . . . . . . . . . Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,455 26,113 15,345 $150,477 26,093 14,471 $191,913 $191,041 Cost Fair Value Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,455 $150,477 Due after one year through ten years . . . . . . . . . . . . . . . . . . . Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,113 15,345 26,093 14,471 Cost Fair Value $191,913 $191,041 F-18 F-18 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 5. Derivative Financial Instruments 5. Derivative Financial Instruments The Company uses derivative financial instruments to manage certain exposures to the variability of interest rates and foreign currency exchange rates. The Company’s objective is to offset increases and decreases in expenses resulting from these exposures with gains and losses on the derivative contracts, thereby reducing volatility of earnings. The Company uses derivative financial instruments to manage certain exposures to the variability of interest rates and foreign currency exchange rates. The Company’s objective is to offset increases and decreases in expenses resulting from these exposures with gains and losses on the derivative contracts, thereby reducing volatility of earnings. Interest Rate Swaps Interest Rate Swaps The Company is exposed to interest rate fluctuations in the normal course of its business, including through its Credit Facilities. The interest payments on the facility are calculated using a variable-rate of interest. The Company has entered into an interest rate swap agreement with an original notional value of $100 million (equal to the full amount borrowed under the Credit Facilities) and, effectively, converted the Eurodollar portion of the variable-rate interest payments to fixed-rate interest payments through July 2017. The Company estimates the fair values of interest rate swaps based on quoted prices and market observable data of similar instruments. If the Credit Facilities or the interest rate swap agreement is terminated prior to maturity, the fair value of the interest rate swap recorded in accumulated other comprehensive loss may be recognized in the Consolidated Statement of Income based on an assessment of the agreements at the time of termination. The Company did not discontinue any cash flow hedges in any of the periods presented. The Company measures the effectiveness of its cash flow hedge by comparing the change in fair value of the hedged variable interest payments with the change in fair value of the interest rate swap. The Company recognizes ineffective portions of the hedge, as well as amounts not included in the assessment of effectiveness, in the Consolidated Statement of Income. As of January 2, 2016, no portion of the gains or losses from the Company’s hedging instrument was excluded from the assessment of effectiveness. Hedge ineffectiveness was not material for any of the periods presented. The Company’s derivative financial instrument in cash flow hedging relationships consisted of the The Company’s derivative financial instrument in cash flow hedging relationships consisted of the following (in thousands): following (in thousands): Balance Sheet Location Fair Value January 2, 2016 January 3, 2015 Interest rate swap . . . . . . . . . . . . . . Other assets, net $92 $331 Interest rate swap . . . . . . . . . . . . . . Other assets, net The before-tax effect of derivative instruments in cash flow hedging relationships was as follows (in The before-tax effect of derivative instruments in cash flow hedging relationships was as follows (in thousands): thousands): Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) during the Year Ended Location of Loss Reclassified into Income Loss Reclassified from Accumulated OCI into Income (Effective Portion) during the Year Ended January 2, January 3, December 28, January 2, January 3, December 28, Interest rate swaps . . . . . . . . $(728) $(799) 2016 2015 2016 2015 Interest expense $(489) $(618) 2013 $(560) 2013 $611 F-19 Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) during the Year Ended Location of Loss Reclassified into Income Loss Reclassified from Accumulated OCI into Income (Effective Portion) during the Year Ended January 2, January 3, December 28, January 2, January 3, December 28, 2016 2015 2016 2015 2013 $(560) Interest rate swaps . . . . . . . . $(728) $(799) Interest expense $(489) $(618) 2013 $611 F-19 The Company is exposed to interest rate fluctuations in the normal course of its business, including through its Credit Facilities. The interest payments on the facility are calculated using a variable-rate of interest. The Company has entered into an interest rate swap agreement with an original notional value of $100 million (equal to the full amount borrowed under the Credit Facilities) and, effectively, converted the Eurodollar portion of the variable-rate interest payments to fixed-rate interest payments through July 2017. The Company estimates the fair values of interest rate swaps based on quoted prices and market observable data of similar instruments. If the Credit Facilities or the interest rate swap agreement is terminated prior to maturity, the fair value of the interest rate swap recorded in accumulated other comprehensive loss may be recognized in the Consolidated Statement of Income based on an assessment of the agreements at the time of termination. The Company did not discontinue any cash flow hedges in any of the periods presented. The Company measures the effectiveness of its cash flow hedge by comparing the change in fair value of the hedged variable interest payments with the change in fair value of the interest rate swap. The Company recognizes ineffective portions of the hedge, as well as amounts not included in the assessment of effectiveness, in the Consolidated Statement of Income. As of January 2, 2016, no portion of the gains or losses from the Company’s hedging instrument was excluded from the assessment of effectiveness. Hedge ineffectiveness was not material for any of the periods presented. Balance Sheet Location Fair Value January 2, January 3, 2016 $92 2015 $331 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 5. Derivative Financial Instruments (Continued) 5. Derivative Financial Instruments (Continued) The Company expects to reclassify $0.1 million of its interest rate swap losses included in accumulated other comprehensive loss as of January 2, 2016 into earnings in the next 12 months, which would be offset by lower interest payments. Foreign Currency Forward Contracts The Company uses foreign currency forward contracts to manage exposure to foreign exchange risk. As of January 2, 2016 and January 3, 2015, the Company held one foreign currency forward contract denominated in Norwegian Krone with a notional value of $5.1 million and $7.7 million, respectively. The fair value of the contracts was not material as of January 2, 2016 or January 3, 2015. The contract held as of January 2, 2016 has a maturity date of March 30, 2016 and it was not designated as a hedging instrument. The Company held no foreign currency forward contracts prior to fiscal 2014. The before-tax effect of derivative instruments not designated as hedging instruments was as The before-tax effect of derivative instruments not designated as hedging instruments was as follows (in thousands): Gain Recognized in Income Year Ended January 2, 2016 January 3, 2015 Location Gain Recognized in Income Location Foreign currency forward contracts . . . . . . . . . . . $935 $1,075 Other income (expense), net Foreign currency forward contracts . . . . . . . . . . . $1,075 Other income (expense), net The Company expects to reclassify $0.1 million of its interest rate swap losses included in accumulated other comprehensive loss as of January 2, 2016 into earnings in the next 12 months, which would be offset by lower interest payments. Foreign Currency Forward Contracts The Company uses foreign currency forward contracts to manage exposure to foreign exchange risk. As of January 2, 2016 and January 3, 2015, the Company held one foreign currency forward contract denominated in Norwegian Krone with a notional value of $5.1 million and $7.7 million, respectively. The fair value of the contracts was not material as of January 2, 2016 or January 3, 2015. The contract held as of January 2, 2016 has a maturity date of March 30, 2016 and it was not designated as a hedging instrument. The Company held no foreign currency forward contracts prior to fiscal 2014. follows (in thousands): Year Ended January 2, January 3, 2015 2016 $935 F-20 F-20 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 6. Fair Value of Financial Instruments 6. Fair Value of Financial Instruments The following summarizes the valuation of the Company’s financial instruments (in thousands). The tables do not include either cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value. The following summarizes the valuation of the Company’s financial instruments (in thousands). The tables do not include either cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value. Description Assets: Cash Equivalents: Money market funds . . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . U.S. government agency . . . . . . . . . . . . . Municipal bonds . . . . . . . . . . . . . . . . . . . Total cash equivalents . . . . . . . . . . . . . . . . . Short-term Investments: Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial paper Variable-rate demand notes . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . U.S. government agency . . . . . . . . . . . . . International government bonds . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . Total short-term investments . . . . . . . . . . . . Long-term Investments: Auction rate securities . . . . . . . . . . . . . . . Total long-term investments . . . . . . . . . . . . Other assets, net: Derivative instruments . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair Value Measurements at January 2, 2016 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total $37,721 — — — — $37,721 $ — — — — — — — $ — $ — $ — $ — $ — $ — 11,272 2,845 1,599 1,577 $ — $ 37,721 11,272 2,845 1,599 1,577 — — — — $ 17,293 $ — $ 55,014 Total cash equivalents . . . . . . . . . . . . . . . . . $37,721 $ 17,293 $ — $ 55,014 $ 93,516 11,176 8,995 8,000 3,998 2,220 996 $128,901 $ $ $ $ — — 92 92 $ — $ 93,516 11,176 8,995 8,000 3,998 2,220 996 — — — — — — $ — $128,901 $ 7,126 $ 7,126 $ $ 7,126 7,126 $ — $ $ — $ 92 92 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,721 $146,286 $ 7,126 $191,133 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,721 $146,286 $ 7,126 $191,133 Liabilities: Accrued expenses: Contingent consideration . . . . . . . . . . . . . $ — Other non-current liabilities: Contingent consideration . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ $ $ — — — $ 4,749 $ 9,324 $14,073 $ $ 4,749 9,324 $ 14,073 F-21 F-21 Description Assets: Cash Equivalents: Money market funds . . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . U.S. government agency . . . . . . . . . . . . . Municipal bonds . . . . . . . . . . . . . . . . . . . Short-term Investments: Municipal bonds . . . . . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . Variable-rate demand notes . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . U.S. government agency . . . . . . . . . . . . . International government bonds . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . — — — — — — — — — — Long-term Investments: Auction rate securities . . . . . . . . . . . . . . . Total long-term investments . . . . . . . . . . . . Other assets, net: Derivative instruments . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ — $ — Liabilities: Accrued expenses: Other non-current liabilities: Contingent consideration . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — Fair Value Measurements at January 2, 2016 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total $37,721 $ $ — $ 37,721 $ — $ — $ 93,516 — 11,272 2,845 1,599 1,577 $ 93,516 11,176 8,995 8,000 3,998 2,220 996 $ $ $ $ $ $ $ — — 92 92 — — — — — — — — — — — — — 11,272 2,845 1,599 1,577 11,176 8,995 8,000 3,998 2,220 996 $ 7,126 $ 7,126 $ $ 7,126 7,126 $ — $ $ — $ 92 92 $ $ $ 9,324 $14,073 9,324 $ 14,073 Total short-term investments . . . . . . . . . . . . $ — $128,901 $ — $128,901 Contingent consideration . . . . . . . . . . . . . $ — $ 4,749 4,749 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 6. Fair Value of Financial Instruments (Continued) 6. Fair Value of Financial Instruments (Continued) Description Assets: Cash Equivalents: Money market funds . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . Municipal bonds . . . . . . . . . . . . . . . . . . . U.S. government agency . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . U.S. government bonds . . . . . . . . . . . . . . Total cash equivalents . . . . . . . . . . . . . . . . . Short-term Investments: Municipal bonds . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . Variable-rate demand notes . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . International government bonds . . . . . . . . U.S. government bond . . . . . . . . . . . . . . . U.S. government agency . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . Total short-term investments . . . . . . . . . . . . Long-term Investments: Auction rate securities . . . . . . . . . . . . . . . Total long-term investments . . . . . . . . . . . . Other assets, net: Derivative instruments . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair Value Measurements at January 3, 2015 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total $71,415 — — — — — 1,000 $72,415 $ — — — — — — 650 — — $ 650 $ — $ — $ — $ — $ — 7,739 5,348 1,757 1,202 1,101 — $ — $ 71,415 7,739 5,348 1,757 1,202 1,101 1,000 — — — — — — $ 17,147 $ — $ 89,562 Total cash equivalents . . . . . . . . . . . . . . . . . $ 17,147 $ — $ 89,562 $129,152 33,033 12,915 8,995 5,377 2,516 — 601 250 $192,839 $ $ $ $ — — 331 331 $ — $129,152 33,033 12,915 8,995 5,377 2,516 650 601 250 — — — — — — — — $ — $193,489 $ 7,419 $ 7,419 $ $ 7,419 7,419 $ — $ $ — $ 331 331 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $73,065 $210,317 $ 7,419 $290,801 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $73,065 $210,317 $ 7,419 $290,801 Liabilities: Accrued expenses: Contingent consideration . . . . . . . . . . . . . $ — Other non-current liabilities: Contingent consideration . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ $ $ — — — $ 4,288 $ 4,288 $14,150 $18,438 $ 14,150 $ 18,438 Contingent consideration . . . . . . . . . . . . . $ — $ 4,288 $ 4,288 Other non-current liabilities: Contingent consideration . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $14,150 $18,438 $ 14,150 $ 18,438 The Company’s cash equivalents and short-term investments that are classified as Level 1 are valued using quoted prices and other relevant information generated by market transactions involving The Company’s cash equivalents and short-term investments that are classified as Level 1 are valued using quoted prices and other relevant information generated by market transactions involving F-22 F-22 Description Assets: Cash Equivalents: Money market funds . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . Municipal bonds . . . . . . . . . . . . . . . . . . . U.S. government agency . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . U.S. government bonds . . . . . . . . . . . . . . Short-term Investments: Municipal bonds . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . Variable-rate demand notes . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . International government bonds . . . . . . . . U.S. government bond . . . . . . . . . . . . . . . U.S. government agency . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . Long-term Investments: Auction rate securities . . . . . . . . . . . . . . . Total long-term investments . . . . . . . . . . . . Other assets, net: Derivative instruments . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities: Accrued expenses: 1,000 $72,415 — — — — — — — — — — — — 650 $ — $ — $ — $ — Fair Value Measurements at January 3, 2015 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total $71,415 $ $ — $ 71,415 $ — $129,152 $ — $129,152 — — — — — — — — — — — — — — 7,739 5,348 1,757 1,202 1,101 1,000 33,033 12,915 8,995 5,377 2,516 650 601 250 $ 7,419 $ 7,419 $ $ 7,419 7,419 $ — $ $ — $ 331 331 — 7,739 5,348 1,757 1,202 1,101 — 33,033 12,915 8,995 5,377 2,516 — 601 250 $ $ $ $ $ $ $ — — 331 331 — — — Total short-term investments . . . . . . . . . . . . $ 650 $192,839 $ — $193,489 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 6. Fair Value of Financial Instruments (Continued) 6. Fair Value of Financial Instruments (Continued) identical assets. Cash equivalents and short-term investments classified as Level 2 are valued using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments in active markets; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Investments classified as Level 3 are valued using a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, amount of cash flows, expected holding periods of the securities and a discount to reflect the Company’s inability to liquidate the securities. The Company’s derivative instruments are valued using discounted cash flow models. The assumptions used in preparing the valuation models include quoted interest swap rates, foreign exchange rates, forward and spot prices for currencies, and market observable data of similar instruments. The Company’s contingent consideration is valued using a Monte Carlo simulation model or a probability weighted discounted cash flow model. The assumptions used in preparing the Monte Carlo simulation model include estimates for revenue growth rates, revenue volatility, contractual terms and discount rates. The assumptions used in preparing the discounted cash flow model include estimates for outcomes if milestone goals are achieved, the probability of achieving each outcome and discount rates. The following summarizes quantitative information about Level 3 fair value measurements. The following summarizes quantitative information about Level 3 fair value measurements. Auction rate securities Fair Value at January 2, 2016 (000s) Valuation Technique Unobservable Input $7,126 Discounted cash flow Estimated yield Weighted Average 1.06% Expected holding period 10 years Estimated discount rate 3.69% The Company has followed an established internal control procedure used in valuing auction rate securities. The procedure involves the analysis of valuation techniques and evaluation of unobservable inputs commonly used by market participants to price similar instruments, and which have been demonstrated to provide reasonable estimates of prices obtained in actual market transactions. Outputs from the valuation process are assessed against various market sources when they are available, including marketplace quotes, recent trades of similar illiquid securities, benchmark indices and independent pricing services. The technique and unobservable input parameters may be recalibrated periodically to achieve an appropriate estimation of the fair value of the securities. Significant changes in any of the unobservable inputs used in the fair value measurement of auction rate securities in isolation could result in a significantly lower or higher fair value measurement. An increase in expected yield would result in a higher fair value measurement, whereas an increase in expected holding period or estimated discount rate would result in a lower fair value measurement. Generally, a change in the assumptions used for expected holding period is accompanied by a directionally similar change in the assumptions used for estimated yield and discount rate. F-23 F-23 identical assets. Cash equivalents and short-term investments classified as Level 2 are valued using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments in active markets; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Investments classified as Level 3 are valued using a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, amount of cash flows, expected holding periods of the securities and a discount to reflect the Company’s inability to liquidate the securities. The Company’s derivative instruments are valued using discounted cash flow models. The assumptions used in preparing the valuation models include quoted interest swap rates, foreign exchange rates, forward and spot prices for currencies, and market observable data of similar instruments. The Company’s contingent consideration is valued using a Monte Carlo simulation model or a probability weighted discounted cash flow model. The assumptions used in preparing the Monte Carlo simulation model include estimates for revenue growth rates, revenue volatility, contractual terms and discount rates. The assumptions used in preparing the discounted cash flow model include estimates for outcomes if milestone goals are achieved, the probability of achieving each outcome and discount rates. Auction rate securities Fair Value at January 2, 2016 (000s) $7,126 Valuation Technique Unobservable Input Discounted cash flow Estimated yield Weighted Average 1.06% Expected holding period 10 years Estimated discount rate 3.69% The Company has followed an established internal control procedure used in valuing auction rate securities. The procedure involves the analysis of valuation techniques and evaluation of unobservable inputs commonly used by market participants to price similar instruments, and which have been demonstrated to provide reasonable estimates of prices obtained in actual market transactions. Outputs from the valuation process are assessed against various market sources when they are available, including marketplace quotes, recent trades of similar illiquid securities, benchmark indices and independent pricing services. The technique and unobservable input parameters may be recalibrated periodically to achieve an appropriate estimation of the fair value of the securities. Significant changes in any of the unobservable inputs used in the fair value measurement of auction rate securities in isolation could result in a significantly lower or higher fair value measurement. An increase in expected yield would result in a higher fair value measurement, whereas an increase in expected holding period or estimated discount rate would result in a lower fair value measurement. Generally, a change in the assumptions used for expected holding period is accompanied by a directionally similar change in the assumptions used for estimated yield and discount rate. Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 6. Fair Value of Financial Instruments (Continued) 6. Fair Value of Financial Instruments (Continued) Contingent consideration Fair Value at January 2, 2016 (000s) Valuation Technique Unobservable Input Range Valuation Technique Unobservable Input Range Contingent consideration Fair Value at January 2, 2016 (000s) $14,073 Monte Carlo simulation Expected revenue growth rate 29.8% - 55.8% $14,073 Monte Carlo simulation Expected revenue growth rate 29.8% - 55.8% Expected revenue volatility 20.0% Expected term 0.0 years - 3.0 years Estimated discount rate 0.34% - 0.98% The Company has followed an established internal control procedure used in valuing contingent consideration. The valuation of contingent consideration for the Energy Micro acquisition is based on the Company’s revenue data for fiscal 2015 and a Monte Carlo simulation model for fiscal 2016 to 2018. The fair value of this valuation is estimated on a quarterly basis through a collaborative effort by the Company’s sales, marketing and finance departments. Significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration in isolation could result in a significantly lower or higher fair value. A change in projected revenue growth rates would be accompanied by a directionally similar change in fair value. Expected revenue volatility 20.0% Expected term 0.0 years - 3.0 years Estimated discount rate 0.34% - 0.98% The Company has followed an established internal control procedure used in valuing contingent consideration. The valuation of contingent consideration for the Energy Micro acquisition is based on the Company’s revenue data for fiscal 2015 and a Monte Carlo simulation model for fiscal 2016 to 2018. The fair value of this valuation is estimated on a quarterly basis through a collaborative effort by the Company’s sales, marketing and finance departments. Significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration in isolation could result in a significantly lower or higher fair value. A change in projected revenue growth rates would be accompanied by a directionally similar change in fair value. The following summarizes the activity in Level 3 financial instruments for the years ended The following summarizes the activity in Level 3 financial instruments for the years ended January 2, 2016 and January 3, 2015 (in thousands): January 2, 2016 and January 3, 2015 (in thousands): Assets Auction Rate Securities Year Ended January 2, 2016 January 3, 2015 Assets Auction Rate Securities Year Ended January 2, January 3, 2016 2015 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain (loss) included in other comprehensive income (loss) . . . . . . . . . . . . . . . . . $7,419 — (293) $10,632 (4,425) 1,212 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,419 $10,632 Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain (loss) included in other comprehensive income (loss) . . . . . . . . . . . . . . . . . — (293) (4,425) 1,212 Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,126 $ 7,419 Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,126 $ 7,419 F-24 F-24 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 6. Fair Value of Financial Instruments (Continued) Liabilities Contingent Consideration (1) Year Ended January 2, 2016 January 3, 2015 Contingent Consideration (1) Year Ended January 2, January 3, 2016 2015 6. Fair Value of Financial Instruments (Continued) Liabilities Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss recognized in earnings (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,438 (4,464) 99 $12,919 — 5,519 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,438 $12,919 Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,464) Loss recognized in earnings (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 — 5,519 Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,073 $18,438 Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,073 $18,438 Net loss for the period included in earnings attributable to contingent Net loss for the period included in earnings attributable to contingent consideration held at the end of the period: . . . . . . . . . . . . . . . . . . . . . . . . . . $ (99) $ (5,519) consideration held at the end of the period: . . . . . . . . . . . . . . . . . . . . . . . . . . $ (99) $ (5,519) (1) In connection with the acquisition of Energy Micro, the Company recorded contingent consideration based upon the expected achievement of certain milestone goals. Changes to the fair value of contingent consideration due to changes in assumptions used in preparing the valuation model are recorded in selling, general and administrative expenses in the Consolidated Statement of Income. (1) In connection with the acquisition of Energy Micro, the Company recorded contingent consideration based upon the expected achievement of certain milestone goals. Changes to the fair value of contingent consideration due to changes in assumptions used in preparing the valuation model are recorded in selling, general and administrative expenses in the Consolidated Statement of Income. (2) Changes to the estimated fair value of contingent consideration were primarily due to revisions to (2) Changes to the estimated fair value of contingent consideration were primarily due to revisions to the Company’s expectations of earn-out achievement. the Company’s expectations of earn-out achievement. Fair values of other financial instruments Fair values of other financial instruments The Company’s debt under the Credit Facilities bears interest at the Eurodollar rate plus an applicable margin. The Credit Facilities are recorded at cost, but are measured at fair value for disclosure purposes. Fair value is estimated based on Level 2 inputs, using a discounted cash flow analysis of future principal payments and projected interest based on current market rates. As of January 2, 2016 and January 3, 2015, the fair value of the Company’s debt under the Credit Facilities was approximately $77.5 million and $87.4 million, respectively. The Company’s other financial instruments, including cash, accounts receivable and accounts payable, are recorded at amounts that approximate their fair values due to their short maturities. 7. Balance Sheet Details The following tables show the details of selected Consolidated Balance Sheet items (in thousands): The following tables show the details of selected Consolidated Balance Sheet items (in thousands): Inventories Work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,774 17,121 $40,640 11,991 $53,895 $52,631 January 2, 2016 January 3, 2015 F-25 F-25 The Company’s debt under the Credit Facilities bears interest at the Eurodollar rate plus an applicable margin. The Credit Facilities are recorded at cost, but are measured at fair value for disclosure purposes. Fair value is estimated based on Level 2 inputs, using a discounted cash flow analysis of future principal payments and projected interest based on current market rates. As of January 2, 2016 and January 3, 2015, the fair value of the Company’s debt under the Credit Facilities was approximately $77.5 million and $87.4 million, respectively. The Company’s other financial instruments, including cash, accounts receivable and accounts payable, are recorded at amounts that approximate their fair values due to their short maturities. 7. Balance Sheet Details Inventories Work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 2, January 3, 2016 2015 $36,774 17,121 $40,640 11,991 $53,895 $52,631 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 7. Balance Sheet Details (Continued) Prepaid Expenses and Other Current Assets 7. Balance Sheet Details (Continued) Prepaid Expenses and Other Current Assets Distributor advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,743 15,915 $32,932 16,239 Distributor advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 2, 2016 January 3, 2015 Property and Equipment $52,658 $49,171 January 2, 2016 January 3, 2015 Property and Equipment Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computers and purchased software . . . . . . . . . . . . . . . . . . . . Leasehold interest in ground leases . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 94,607 55,072 29,663 23,840 4,777 9,204 $ 94,453 51,654 27,282 23,840 4,008 8,901 Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued Expenses 217,163 (86,031) 210,138 (77,318) $131,132 $132,820 January 2, 2016 January 3, 2015 Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . Acquisition-related holdback . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,304 — 24,827 $28,443 20,010 25,193 Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . $27,304 $28,443 Acquisition-related holdback . . . . . . . . . . . . . . . . . . . . . . . . . — Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,827 20,010 25,193 Other Non-current Liabilities $52,131 $73,646 January 2, 2016 January 3, 2015 Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,741 26,787 $ 5,261 38,430 $40,528 $43,691 Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-26 F-26 Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . $ 94,607 $ 94,453 Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computers and purchased software . . . . . . . . . . . . . . . . . . . . Leasehold interest in ground leases . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,072 29,663 23,840 4,777 9,204 51,654 27,282 23,840 4,008 8,901 Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued Expenses Other Non-current Liabilities January 2, January 3, 2016 2015 $36,743 15,915 $32,932 16,239 $52,658 $49,171 January 2, January 3, 2016 2015 217,163 (86,031) 210,138 (77,318) $131,132 $132,820 January 2, January 3, 2016 2015 $52,131 $73,646 January 2, January 3, 2016 2015 $13,741 26,787 $ 5,261 38,430 $40,528 $43,691 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 8. Risks and Uncertainties Financial Instruments Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash equivalents, investments, accounts receivable, notes receivable and derivatives. The Company places its cash equivalents and investments primarily in municipal bonds, money market funds, commercial paper, certificates of deposit, variable-rate demand notes, U.S. government agency, international government bonds and corporate bonds. Concentrations of credit risk with respect to accounts receivable are primarily due to customers with large outstanding balances. The Company’s customers that accounted for greater than 10% of accounts receivable consisted of the following: January 2, 2016 January 3, 2015 January 2, January 3, 2016 2015 Edom Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arrow Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Avnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17% 17% 14% 25% 11% 11% The Company performs periodic credit evaluations of its customers’ financial condition and generally requires no collateral from its customers. The Company provides an allowance for potential credit losses based upon the expected collectibility of such receivables. Losses have not been significant for any of the periods presented. The Company holds a note receivable from a privately held company in which the Company has an equity investment. The note principal is $1.5 million and matures in January 2017. As a result of its use of derivative instruments, the Company is exposed to the risk that its counterparties will fail to meet their contractual obligations. To mitigate this counterparty credit risk, the Company has a policy to enter into contracts with only selected major financial institutions. The Company periodically reviews and re-assesses the creditworthiness of such counterparties based on a variety of factors. Distributor Advances On sales to distributors, the Company’s payment terms often require the distributor to initially pay amounts owed to the Company for an amount in excess of their ultimate cost. The Company’s sales price to its distributors may be higher than the amount that the distributors will ultimately owe the Company because distributors often negotiate price reductions after purchasing the product from the Company and such reductions are often significant. These negotiated price discounts are not granted until the distributor sells the product to the end customer, which may occur after the distributor has paid the original invoice amount to the Company. Payment of invoices prior to receiving an associated discount can have an adverse impact on the working capital of the Company’s distributors. Accordingly, the Company has entered into agreements with certain distributors whereby it advances cash to the distributors to reduce the distributor’s working capital requirements. The advance amounts are based on the distributor’s inventory balance, and are adjusted quarterly. Such amounts are recorded in prepaid expenses and other current assets in the Consolidated Balance Sheet. The terms of these advances are set forth in binding legal agreements and are unsecured, bear no interest on unsettled F-27 F-27 8. Risks and Uncertainties Financial Instruments Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash equivalents, investments, accounts receivable, notes receivable and derivatives. The Company places its cash equivalents and investments primarily in municipal bonds, money market funds, commercial paper, certificates of deposit, variable-rate demand notes, U.S. government agency, international government bonds and corporate bonds. Concentrations of credit risk with respect to accounts receivable are primarily due to customers with large outstanding balances. The Company’s customers that accounted for greater than 10% of accounts receivable consisted of the following: Edom Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arrow Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Avnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17% 17% 14% 25% 11% 11% The Company performs periodic credit evaluations of its customers’ financial condition and generally requires no collateral from its customers. The Company provides an allowance for potential credit losses based upon the expected collectibility of such receivables. Losses have not been significant for any of the periods presented. The Company holds a note receivable from a privately held company in which the Company has an equity investment. The note principal is $1.5 million and matures in January 2017. As a result of its use of derivative instruments, the Company is exposed to the risk that its counterparties will fail to meet their contractual obligations. To mitigate this counterparty credit risk, the Company has a policy to enter into contracts with only selected major financial institutions. The Company periodically reviews and re-assesses the creditworthiness of such counterparties based on a variety of factors. Distributor Advances On sales to distributors, the Company’s payment terms often require the distributor to initially pay amounts owed to the Company for an amount in excess of their ultimate cost. The Company’s sales price to its distributors may be higher than the amount that the distributors will ultimately owe the Company because distributors often negotiate price reductions after purchasing the product from the Company and such reductions are often significant. These negotiated price discounts are not granted until the distributor sells the product to the end customer, which may occur after the distributor has paid the original invoice amount to the Company. Payment of invoices prior to receiving an associated discount can have an adverse impact on the working capital of the Company’s distributors. Accordingly, the Company has entered into agreements with certain distributors whereby it advances cash to the distributors to reduce the distributor’s working capital requirements. The advance amounts are based on the distributor’s inventory balance, and are adjusted quarterly. Such amounts are recorded in prepaid expenses and other current assets in the Consolidated Balance Sheet. The terms of these advances are set forth in binding legal agreements and are unsecured, bear no interest on unsettled Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 8. Risks and Uncertainties (Continued) 8. Risks and Uncertainties (Continued) balances and are due upon demand. The agreements governing these advances can be cancelled by the Company at any time. Suppliers A significant portion of the Company’s products are fabricated by Taiwan Semiconductor Manufacturing Co. (TSMC) or TSMC’s affiliates and Semiconductor Manufacturing International Corporation (SMIC). The inability of TSMC or SMIC to deliver wafers to the Company on a timely basis could impact the production of the Company’s products for a substantial period of time, which could have a material adverse effect on the Company’s business, financial condition and results of operations. Customers The Company sells directly to end customers, distributors and contract manufacturers. Although the Company actually sells the products to, and is paid by, distributors and contract manufacturers, the Company refers to the end customer as its customer. None of the Company’s contract manufacturers accounted for greater than 10% of revenue during fiscal 2015, 2014 or 2013. The Company’s end customers and distributors that accounted for greater than 10% of revenue consisted of the following: End Customers Samsung* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distributors Edom Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Avnet Year Ended January 2, 2016 January 3, 2015 December 28, 2013 Year Ended January 2, January 3, December 28, 2016 2015 2013 ** 12% 15% Samsung* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ** 12% 15% 20% 12% 20% 12% 21% 11% Edom Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Avnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20% 12% 20% 12% 21% 11% * Samsung’s purchases were across a variety of product areas. * Samsung’s purchases were across a variety of product areas. ** Less than 10% of revenue 9. Acquisitions Telegesis On November 20, 2015, the Company acquired Telegesis (UK) Limited, a limited liability company incorporated in England and Wales. Telegesis is a supplier of wireless mesh networking modules based on the Company’s ZigBee and Thread technology, targeting applications in the smart energy, home automation and industrial automation markets. The Company acquired Telegesis for cash consideration of $19.9 million. Approximately $2.9 million of the consideration was held in escrow as security for breaches of warranties and certain other expressly enumerated matters. The Company believes that this strategic acquisition accelerates its roadmap for ZigBee and Thread modules. This factor contributed to a purchase price that was in excess of the fair value of the On November 20, 2015, the Company acquired Telegesis (UK) Limited, a limited liability company incorporated in England and Wales. Telegesis is a supplier of wireless mesh networking modules based on the Company’s ZigBee and Thread technology, targeting applications in the smart energy, home automation and industrial automation markets. The Company acquired Telegesis for cash consideration of $19.9 million. Approximately $2.9 million of the consideration was held in escrow as security for breaches of warranties and certain other expressly enumerated matters. The Company believes that this strategic acquisition accelerates its roadmap for ZigBee and Thread modules. This factor contributed to a purchase price that was in excess of the fair value of the F-28 F-28 balances and are due upon demand. The agreements governing these advances can be cancelled by the A significant portion of the Company’s products are fabricated by Taiwan Semiconductor Manufacturing Co. (TSMC) or TSMC’s affiliates and Semiconductor Manufacturing International Corporation (SMIC). The inability of TSMC or SMIC to deliver wafers to the Company on a timely basis could impact the production of the Company’s products for a substantial period of time, which could have a material adverse effect on the Company’s business, financial condition and results of The Company sells directly to end customers, distributors and contract manufacturers. Although the Company actually sells the products to, and is paid by, distributors and contract manufacturers, the Company refers to the end customer as its customer. None of the Company’s contract manufacturers accounted for greater than 10% of revenue during fiscal 2015, 2014 or 2013. The Company’s end customers and distributors that accounted for greater than 10% of revenue consisted of the following: Company at any time. Suppliers operations. Customers End Customers Distributors ** Less than 10% of revenue 9. Acquisitions Telegesis Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 9. Acquisitions (Continued) 9. Acquisitions (Continued) net assets acquired and, as a result, the Company recorded goodwill. The goodwill is not deductible for tax purposes. The purchase price was allocated as follows (in thousands): net assets acquired and, as a result, the Company recorded goodwill. The goodwill is not deductible for tax purposes. The purchase price was allocated as follows (in thousands): Weighted-Average Amortization Period (Years) Amount Intangible assets: In-process research and development . . . . . . . . . . . . . Developed technology . . . . . . . . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . . . . . Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10 4,980 2,000 400 Not amortized 7 3 3 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current deferred tax liabilities . . . . . . . . . . . . . . . . 7,390 717 4,545 9,344 131 (689) (1,508) Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,930 Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,930 The allocation of the purchase price is preliminary and subject to change, primarily for the valuation of certain assets and accruals and the finalization of income tax matters. Accordingly, adjustments may be made to the values of the assets acquired and liabilities assumed as additional information is obtained about the facts and circumstances that existed at the valuation date. Pro forma information related to this acquisition has not been presented because it would not be materially different from amounts reported. The Company recorded approximately $0.5 million of acquisition-related costs in selling, general and administrative expenses during fiscal 2015. Bluegiga Bluegiga On January 30, 2015, the Company acquired Bluegiga Technologies Oy, a private company based in Finland. Bluegiga is a provider of Bluetooth Smart, Bluetooth Classic and Wi-Fi modules and software stacks for a multitude of applications in the Internet of Things (IoT), industrial automation, consumer electronics, automotive, retail, residential, and health and fitness markets. The Company acquired Bluegiga for cash consideration of approximately $58.0 million. Approximately $9.4 million of the initial consideration was held in escrow as security for breaches of representations and warranties and certain other expressly enumerated matters. The Company believes that this strategic acquisition will accelerate its entry into the wireless module market. This factor contributed to a purchase price that was in excess of the fair value of the F-29 F-29 Weighted-Average Amortization Period Amount (Years) Intangible assets: In-process research and development . . . . . . . . . . . . . $ 10 Not amortized Developed technology . . . . . . . . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . . . . . Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3 3 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current deferred tax liabilities . . . . . . . . . . . . . . . . 4,980 2,000 400 7,390 717 4,545 9,344 131 (689) (1,508) The allocation of the purchase price is preliminary and subject to change, primarily for the valuation of certain assets and accruals and the finalization of income tax matters. Accordingly, adjustments may be made to the values of the assets acquired and liabilities assumed as additional information is obtained about the facts and circumstances that existed at the valuation date. Pro forma information related to this acquisition has not been presented because it would not be materially different from amounts reported. The Company recorded approximately $0.5 million of acquisition-related costs in selling, general and administrative expenses during fiscal 2015. On January 30, 2015, the Company acquired Bluegiga Technologies Oy, a private company based in Finland. Bluegiga is a provider of Bluetooth Smart, Bluetooth Classic and Wi-Fi modules and software stacks for a multitude of applications in the Internet of Things (IoT), industrial automation, consumer electronics, automotive, retail, residential, and health and fitness markets. The Company acquired Bluegiga for cash consideration of approximately $58.0 million. Approximately $9.4 million of the initial consideration was held in escrow as security for breaches of representations and warranties and certain other expressly enumerated matters. The Company believes that this strategic acquisition will accelerate its entry into the wireless module market. This factor contributed to a purchase price that was in excess of the fair value of the Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 9. Acquisitions (Continued) 9. Acquisitions (Continued) net assets acquired and, as a result, the Company recorded goodwill. The goodwill is not deductible for tax purposes. The purchase price was allocated as follows (in thousands): net assets acquired and, as a result, the Company recorded goodwill. The goodwill is not deductible for tax purposes. The purchase price was allocated as follows (in thousands): Weighted-Average Amortization Period (Years) Amount Intangible assets: In-process research and development . . . . . . . . . . . . . Developed technology . . . . . . . . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . . . . . Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,710 12,190 6,670 880 Not amortized 8 4 3 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current deferred tax liabilities . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . 25,450 1,132 6,156 34,597 208 (3,289) (3,780) (2,232) (220) Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,022 Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,022 In-process research and development (IPR&D) represents acquired technology that had not achieved technological feasibility as of the acquisition date and had no alternative future use. The IPR&D recorded in connection with the acquisition of Bluegiga consisted primarily of Bluetooth Smart Ready and Bluetooth Smart modules and software stacks. The fair value of these technologies was determined using the income approach. The discount rate applicable to the cash flows was 16.1%. The significant risks associated with the projects include the Company’s potential inability to produce working models and the final products gaining customer acceptance. Pro forma information related to this acquisition has not been presented because it would not be materially different from amounts reported. The Company recorded approximately $1.2 million of acquisition-related costs in selling, general and administrative expenses during fiscal 2015. Energy Micro Energy Micro On July 1, 2013, the Company acquired Energy Micro AS, a late-stage private company. Energy Micro designed and developed energy-efficient 32-bit microcontrollers based on ARM Cortex-M architecture. Energy Micro’s energy-friendly solutions are designed to enable a broad range of power- sensitive applications for the Internet of Things (IoT), including smart energy, home automation, security and portable electronics markets. The Company acquired Energy Micro for approximately $140.6 million, including: 1) Initial consideration of $107.4 million; 2) Deferred consideration in the form of a promissory note with an estimated fair value of $19.2 million at the date of acquisition (the promissory note was subsequently exchanged for approximately 0.5 million shares of the Company’s restricted stock after a mandatory F-30 F-30 Weighted-Average Amortization Period Amount (Years) Intangible assets: In-process research and development . . . . . . . . . . . . . $ 5,710 Not amortized Developed technology . . . . . . . . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . . . . . Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4 3 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current deferred tax liabilities . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . 12,190 6,670 880 25,450 1,132 6,156 34,597 208 (3,289) (3,780) (2,232) (220) In-process research and development (IPR&D) represents acquired technology that had not achieved technological feasibility as of the acquisition date and had no alternative future use. The IPR&D recorded in connection with the acquisition of Bluegiga consisted primarily of Bluetooth Smart Ready and Bluetooth Smart modules and software stacks. The fair value of these technologies was determined using the income approach. The discount rate applicable to the cash flows was 16.1%. The significant risks associated with the projects include the Company’s potential inability to produce working models and the final products gaining customer acceptance. Pro forma information related to this acquisition has not been presented because it would not be materially different from amounts reported. The Company recorded approximately $1.2 million of acquisition-related costs in selling, general and administrative expenses during fiscal 2015. On July 1, 2013, the Company acquired Energy Micro AS, a late-stage private company. Energy Micro designed and developed energy-efficient 32-bit microcontrollers based on ARM Cortex-M architecture. Energy Micro’s energy-friendly solutions are designed to enable a broad range of power- sensitive applications for the Internet of Things (IoT), including smart energy, home automation, security and portable electronics markets. The Company acquired Energy Micro for approximately $140.6 million, including: 1) Initial consideration of $107.4 million; 2) Deferred consideration in the form of a promissory note with an estimated fair value of $19.2 million at the date of acquisition (the promissory note was subsequently exchanged for approximately 0.5 million shares of the Company’s restricted stock after a mandatory Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 9. Acquisitions (Continued) 9. Acquisitions (Continued) two-month creditor notice.); and 3) Contingent consideration (the ‘‘Earn-Out’’) with an estimated fair value of $14.0 million at the date of acquisition. The Earn-Out is payable up to approximately $33.3 million based on the extent to which the annual revenue growth rate from certain Energy Micro and Silicon Laboratories products (the ‘‘Earn-Out Products’’) exceeds 25% per year, on an annual basis over a five-year period from fiscal 2014 through 2018 (the ‘‘Earn-Out Period’’). The Earn-Out is payable on an annual basis and in no event shall exceed $6,666,666 per year, unless revenue from the Earn-Out Products exceeds $400 million in a single fiscal year during the Earn-Out Period (in which case, the entire Earn-Out amount less any amounts previously paid will become payable). Approximately $20.3 million of the initial consideration was withheld by the Company as security for breaches of representations and warranties and certain other expressly enumerated matters (the ‘‘Holdback’’). The Holdback was recorded in other non-current liabilities in the Consolidated Balance Sheet. A portion of the Earn-Out (28.76%) is contingent on the continued employment of certain key employees for the three years following the acquisition date (the ‘‘Departure Percentage’’). The Departure Percentage was accounted for as a transaction separate from the business combination based on its economic substance and will be recorded as post-combination compensation expense in the Company’s financial statements during the Earn-Out period. The Company believes that this strategic acquisition will accelerate its deployment of energy- friendly solutions across the IoT industries, while further scaling the Company’s engineering team. These factors contributed to a purchase price that was in excess of the fair value of the net assets acquired and, as a result, the Company recorded goodwill. The goodwill is not deductible for tax purposes. The purchase price was allocated as follows (in thousands): Weighted-Average Amortization Period (Years) Amount Intangible assets: In-process research and development . . . . . . . . . . . . Core and developed technology . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . . . . Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,600 29,100 6,400 1,300 Not amortized 7 8 8 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current assets . . . . . . . . . . . . . . . . . . . . . . Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current deferred tax liabilities, net . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities . . . . . . . . . . . . . . . . . . . . 55,400 919 6,486 98,515 3,117 (8,000) (6,288) (8,434) (1,133) two-month creditor notice.); and 3) Contingent consideration (the ‘‘Earn-Out’’) with an estimated fair value of $14.0 million at the date of acquisition. The Earn-Out is payable up to approximately $33.3 million based on the extent to which the annual revenue growth rate from certain Energy Micro and Silicon Laboratories products (the ‘‘Earn-Out Products’’) exceeds 25% per year, on an annual basis over a five-year period from fiscal 2014 through 2018 (the ‘‘Earn-Out Period’’). The Earn-Out is payable on an annual basis and in no event shall exceed $6,666,666 per year, unless revenue from the Earn-Out Products exceeds $400 million in a single fiscal year during the Earn-Out Period (in which case, the entire Earn-Out amount less any amounts previously paid will become payable). Approximately $20.3 million of the initial consideration was withheld by the Company as security for breaches of representations and warranties and certain other expressly enumerated matters (the ‘‘Holdback’’). The Holdback was recorded in other non-current liabilities in the Consolidated Balance Sheet. A portion of the Earn-Out (28.76%) is contingent on the continued employment of certain key employees for the three years following the acquisition date (the ‘‘Departure Percentage’’). The Departure Percentage was accounted for as a transaction separate from the business combination based on its economic substance and will be recorded as post-combination compensation expense in the Company’s financial statements during the Earn-Out period. The Company believes that this strategic acquisition will accelerate its deployment of energy- friendly solutions across the IoT industries, while further scaling the Company’s engineering team. These factors contributed to a purchase price that was in excess of the fair value of the net assets acquired and, as a result, the Company recorded goodwill. The goodwill is not deductible for tax purposes. The purchase price was allocated as follows (in thousands): Weighted-Average Amortization Period Amount (Years) Intangible assets: In-process research and development . . . . . . . . . . . . $ 18,600 Not amortized Core and developed technology . . . . . . . . . . . . . . . . Customer relationships . . . . . . . . . . . . . . . . . . . . . . Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 8 8 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current assets . . . . . . . . . . . . . . . . . . . . . . Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current deferred tax liabilities, net . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities . . . . . . . . . . . . . . . . . . . . 29,100 6,400 1,300 55,400 919 6,486 98,515 3,117 (8,000) (6,288) (8,434) (1,133) Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . $140,582 Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . $140,582 F-31 F-31 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 9. Acquisitions (Continued) 9. Acquisitions (Continued) The IPR&D recorded in connection with the acquisition of Energy Micro consisted of a multi- protocol wireless RF solution. The fair value of this technology was determined using the income approach. The discount rate applicable to the cash flows was 13.0%. Pro forma information related to this acquisition has not been presented because it would not be materially different from amounts reported. The Company recorded approximately $2.4 million of acquisition-related costs in selling, general and administrative expenses during fiscal 2013. During fiscal 2015, the Company made the following payments in connection with the Energy Micro acquisition: (a) approximately $20.0 million was paid for the release of the Holdback; and (b) approximately $6.3 million was paid for the first annual period of the Earn-out. Approximately $1.8 million of the Earn-out payment represented the Departure Percentage portion and was recorded as compensation expense during fiscal 2014. The remaining approximately $4.5 million of the Earn-out payment represented additional consideration. 10. Goodwill and Other Intangible Assets Goodwill The following summarizes the activity in goodwill for the years ended January 2, 2016 and The following summarizes the activity in goodwill for the years ended January 2, 2016 and January 3, 2015 (in thousands): Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions due to business combinations . . . . . . . . . . . . . . . . . $228,781 43,941 $228,781 — Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $272,722 $228,781 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $228,781 $228,781 Additions due to business combinations . . . . . . . . . . . . . . . . . 43,941 — Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $272,722 $228,781 Year Ended January 2, 2016 January 3, 2015 Year Ended January 2, January 3, 2016 2015 The IPR&D recorded in connection with the acquisition of Energy Micro consisted of a multi- protocol wireless RF solution. The fair value of this technology was determined using the income approach. The discount rate applicable to the cash flows was 13.0%. Pro forma information related to this acquisition has not been presented because it would not be materially different from amounts reported. The Company recorded approximately $2.4 million of acquisition-related costs in selling, general and administrative expenses during fiscal 2013. During fiscal 2015, the Company made the following payments in connection with the Energy Micro acquisition: (a) approximately $20.0 million was paid for the release of the Holdback; and (b) approximately $6.3 million was paid for the first annual period of the Earn-out. Approximately $1.8 million of the Earn-out payment represented the Departure Percentage portion and was recorded as compensation expense during fiscal 2014. The remaining approximately $4.5 million of the Earn-out payment represented additional consideration. 10. Goodwill and Other Intangible Assets Goodwill January 3, 2015 (in thousands): F-32 F-32 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 10. Goodwill and Other Intangible Assets (Continued) Other Intangible Assets The gross carrying amount and accumulated amortization of other intangible assets are as follows The gross carrying amount and accumulated amortization of other intangible assets are as follows (in thousands): Intangible assets: Subject to amortization: Core and developed technology . Customer relationships . . . . . . . . Patents . . . . . . . . . . . . . . . . . . . Trademarks . . . . . . . . . . . . . . . . Not subject to amortization: In-process research and Weighted-Average Amortization Period (Years) January 2, 2016 January 3, 2015 Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization 9 7 6 7 9 $170,541 23,170 3,022 3,490 $(70,135) (7,259) (1,763) (952) $148,891 14,500 3,000 2,210 $(47,894) (4,003) (1,250) (433) 200,223 (80,109) 168,601 (53,580) development . . . . . . . . . . . . . Not amortized 1,240 — — — development . . . . . . . . . . . . . Not amortized 1,240 — — — Total intangible assets . . . . . . . . . . . . $201,463 $(80,109) $168,601 $(53,580) Total intangible assets . . . . . . . . . . . . $201,463 $(80,109) $168,601 $(53,580) Gross intangible assets increased $32.9 million in fiscal 2015 due to the acquisition of Bluegiga and Gross intangible assets increased $32.9 million in fiscal 2015 due to the acquisition of Bluegiga and Telegesis. Amortization expense related to intangible assets for fiscal 2015, 2014 and 2013 was $26.5 million, $17.9 million and $14.6 million, respectively. The estimated aggregate amortization expense for intangible assets subject to amortization for each of the five succeeding fiscal years is as follows (in thousands): Fiscal Year 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,677 23,012 20,995 15,530 13,298 11. Debt 11. Debt On July 31, 2012, the Company and certain of its domestic subsidiaries (the ‘‘Guarantors’’) entered into a $230 million five-year Credit Agreement (the ‘‘Credit Agreement’’), which consisted of a $100 million Term Loan Facility and a $130 million Revolving Credit Facility (collectively, the ‘‘Credit Facilities’’). On July 24, 2015, the Company and the Guarantors amended the Credit Agreement (the ‘‘Amended Credit Agreement’’) in order to, among other things, increase the borrowing capacity under the Revolving Credit Facility to $300 million, eliminate the Term Loan Facility and extend the maturity On July 31, 2012, the Company and certain of its domestic subsidiaries (the ‘‘Guarantors’’) entered into a $230 million five-year Credit Agreement (the ‘‘Credit Agreement’’), which consisted of a $100 million Term Loan Facility and a $130 million Revolving Credit Facility (collectively, the ‘‘Credit Facilities’’). On July 24, 2015, the Company and the Guarantors amended the Credit Agreement (the ‘‘Amended Credit Agreement’’) in order to, among other things, increase the borrowing capacity under the Revolving Credit Facility to $300 million, eliminate the Term Loan Facility and extend the maturity F-33 F-33 10. Goodwill and Other Intangible Assets (Continued) Other Intangible Assets (in thousands): Weighted-Average Amortization January 2, 2016 January 3, 2015 Period (Years) Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization 9 7 6 7 9 $170,541 $(70,135) $148,891 $(47,894) 23,170 3,022 3,490 (7,259) (1,763) (952) 14,500 3,000 2,210 (4,003) (1,250) (433) 200,223 (80,109) 168,601 (53,580) Intangible assets: Subject to amortization: Core and developed technology . Customer relationships . . . . . . . . Patents . . . . . . . . . . . . . . . . . . . Trademarks . . . . . . . . . . . . . . . . Not subject to amortization: In-process research and Amortization expense related to intangible assets for fiscal 2015, 2014 and 2013 was $26.5 million, $17.9 million and $14.6 million, respectively. The estimated aggregate amortization expense for intangible assets subject to amortization for each of the five succeeding fiscal years is as follows (in Telegesis. thousands): Fiscal Year 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,677 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,012 20,995 15,530 13,298 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 11. Debt (Continued) 11. Debt (Continued) date to five years from the closing date. On July 24, 2015, the Company borrowed $82.5 million under the Amended Credit Agreement and paid off the remaining balance of its Term Loan Facility. The Amended Credit Agreement includes a $25 million letter of credit sublimit and a $10 million swingline loan sublimit. The Company also has an option to increase the size of the borrowing capacity by up to an aggregate of $200 million in additional commitments, subject to certain conditions. The Revolving Credit Facility, other than swingline loans, will bear interest at the Eurodollar rate plus an applicable margin or, at the option of the Company, a base rate (defined as the highest of the Wells Fargo prime rate, the Federal Funds rate plus 0.50% and the Eurodollar Base Rate plus 1.00%) plus an applicable margin. Swingline loans accrue interest at the base rate plus the applicable margin for base rate loans. The applicable margins for the Eurodollar rate loans range from 1.25% to 2.00% and for base rate loans range from 0.25% to 1.00%, depending in each case, on the leverage ratio as defined in the Agreement. The Amended Credit Agreement contains various conditions, covenants and representations with which the Company must be in compliance in order to borrow funds and to avoid an event of default, including financial covenants that the Company must maintain a leverage ratio (funded debt/EBITDA) of no more than 3.00 to 1 and a minimum fixed charge coverage ratio (EBITDA/interest payments, income taxes and capital expenditures) of no less than 1.25 to 1. As of January 2, 2016, the Company was in compliance with all covenants of the Amended Credit Agreement. The Company’s obligations under the Amended Credit Agreement are guaranteed by the Guarantors and are secured by a security interest in substantially all assets of the Company and the Guarantors. The Company assumed $2.2 million of debt in connection with its acquisition of Bluegiga. On September 25, 2015, the Company paid off the remaining balance of the acquired debt. date to five years from the closing date. On July 24, 2015, the Company borrowed $82.5 million under the Amended Credit Agreement and paid off the remaining balance of its Term Loan Facility. The Amended Credit Agreement includes a $25 million letter of credit sublimit and a $10 million swingline loan sublimit. The Company also has an option to increase the size of the borrowing capacity by up to an aggregate of $200 million in additional commitments, subject to certain conditions. The Revolving Credit Facility, other than swingline loans, will bear interest at the Eurodollar rate plus an applicable margin or, at the option of the Company, a base rate (defined as the highest of the Wells Fargo prime rate, the Federal Funds rate plus 0.50% and the Eurodollar Base Rate plus 1.00%) plus an applicable margin. Swingline loans accrue interest at the base rate plus the applicable margin for base rate loans. The applicable margins for the Eurodollar rate loans range from 1.25% to 2.00% and for base rate loans range from 0.25% to 1.00%, depending in each case, on the leverage ratio as defined in the Agreement. The Amended Credit Agreement contains various conditions, covenants and representations with which the Company must be in compliance in order to borrow funds and to avoid an event of default, including financial covenants that the Company must maintain a leverage ratio (funded debt/EBITDA) of no more than 3.00 to 1 and a minimum fixed charge coverage ratio (EBITDA/interest payments, income taxes and capital expenditures) of no less than 1.25 to 1. As of January 2, 2016, the Company was in compliance with all covenants of the Amended Credit Agreement. The Company’s obligations under the Amended Credit Agreement are guaranteed by the Guarantors and are secured by a security interest in substantially all assets of the Company and the Guarantors. The Company assumed $2.2 million of debt in connection with its acquisition of Bluegiga. On September 25, 2015, the Company paid off the remaining balance of the acquired debt. Interest Rate Swap Agreement Interest Rate Swap Agreement In connection with the $100 million borrowed under the Credit Facilities, the Company entered into an interest rate swap agreement as a hedge against the Eurodollar portion of such variable interest payments. Under the terms of the swap agreement, the Company effectively converted the Eurodollar portion of the interest on the Credit Facilities to a fixed interest rate of 0.764% through July 2017. As of January 2, 2016, the combined interest rate of the Credit Facilities (which includes an applicable margin) and the interest rate swap was 2.264%. See Note 5, Derivative Financial Instruments, for additional information. In connection with the $100 million borrowed under the Credit Facilities, the Company entered into an interest rate swap agreement as a hedge against the Eurodollar portion of such variable interest payments. Under the terms of the swap agreement, the Company effectively converted the Eurodollar portion of the interest on the Credit Facilities to a fixed interest rate of 0.764% through July 2017. As of January 2, 2016, the combined interest rate of the Credit Facilities (which includes an applicable margin) and the interest rate swap was 2.264%. See Note 5, Derivative Financial Instruments, for additional information. F-34 F-34 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 12. Stockholders’ Equity Common Stock The Company issued 1.2 million shares of common stock during fiscal 2015. The Company issued 1.2 million shares of common stock during fiscal 2015. Share Repurchase Programs The Board of Directors authorized the following share repurchase programs (in thousands): The Board of Directors authorized the following share repurchase programs (in thousands): Program Authorization Date Program Termination Date August 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2016 October 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2015 January 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 2015 January 2014 January 2013 Program Amount $100,000 $100,000 $100,000 $ 50,000 $100,000 Program Authorization Date August 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2016 October 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2015 January 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 2015 January 2014 January 2013 Program Amount $100,000 $100,000 $100,000 $ 50,000 $100,000 Program Termination Date These programs allow for repurchases to be made in the open market or in private transactions, including structured or accelerated transactions, subject to applicable legal requirements and market conditions. The Company repurchased 1.7 million shares, 1.7 million shares and 0.7 million shares of its common stock for $71.4 million, $71.7 million and $26.0 million during fiscal 2015, 2014 and 2013, respectively. These shares were retired upon repurchase. These programs allow for repurchases to be made in the open market or in private transactions, including structured or accelerated transactions, subject to applicable legal requirements and market conditions. The Company repurchased 1.7 million shares, 1.7 million shares and 0.7 million shares of its common stock for $71.4 million, $71.7 million and $26.0 million during fiscal 2015, 2014 and 2013, respectively. These shares were retired upon repurchase. 12. Stockholders’ Equity Common Stock Share Repurchase Programs F-35 F-35 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 12. Stockholders’ Equity (Continued) Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss, net of taxes, were as follows (in The components of accumulated other comprehensive loss, net of taxes, were as follows (in thousands): Balance at December 29, 2012 . . . . . . . . . . . . . . . . . . . . . . . $(428) $ (518) $(946) Balance at December 29, 2012 . . . . . . . . . . . . . . . . . . . . . . . $(428) $ (518) $(946) Unrealized Gain (Loss) on Cash Flow Hedge Net Unrealized Losses on Available- For-Sale Securities Total Unrealized Gain (Loss) on Cash Flow Hedge Net Unrealized Losses on Available- For-Sale Securities Total 12. Stockholders’ Equity (Continued) Accumulated Other Comprehensive Loss thousands): Other comprehensive income (loss) before reclassifications . . Amount reclassified from accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change for the period . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss) before reclassifications . . Amount reclassified from accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change for the period . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at January 3, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss) before reclassifications . . Amount reclassified from accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change for the period . . . . . . . . . . . . . . . . . . . . . . . . . . 397 364 761 333 (520) 402 (118) 215 (473) 318 (155) (348) (151) (499) 49 213 262 (1,017) (684) Balance at December 28, 2013 . . . . . . . . . . . . . . . . . . . . . . . (1,017) (684) 720 — 720 (297) (276) 6 (270) 200 402 602 (82) (749) 324 (425) Other comprehensive income (loss) before reclassifications . . Amount reclassified from accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change for the period . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss) before reclassifications . . Amount reclassified from accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change for the period . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at January 3, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss) before reclassifications . . Amount reclassified from accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change for the period . . . . . . . . . . . . . . . . . . . . . . . . . . 397 364 761 333 (520) 402 (118) 215 (473) 318 (155) (348) (151) (499) 720 — 720 (297) (276) 6 (270) 49 213 262 200 402 602 (82) (749) 324 (425) Balance at January 2, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60 $ (567) $(507) Balance at January 2, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60 $ (567) $(507) Reclassifications From Accumulated Other Comprehensive Loss Reclassifications From Accumulated Other Comprehensive Loss Reclassification (in thousands) Losses on cash flow hedges to: Year ended January 2, 2016 January 3, 2015 December 28, 2013 Reclassification (in thousands) Losses on cash flow hedges to: Year ended January 2, January 3, December 28, 2016 2015 2013 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(489) $(618) $(560) Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(489) $(618) $(560) Gains (losses) on available-for-sales securities to: Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) (499) 175 — (618) 216 232 (328) 115 Gains (losses) on available-for-sales securities to: Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) (499) 175 — (618) 216 232 (328) 115 Total reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(324) $(402) $(213) Total reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(324) $(402) $(213) F-36 F-36 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 12. Stockholders’ Equity (Continued) 12. Stockholders’ Equity (Continued) Income Tax Allocated to the Components of Other Comprehensive Income (Loss) Income Tax Allocated to the Components of Other Comprehensive Income (Loss) The income tax effects of the components of other comprehensive income (loss) were as follows The income tax effects of the components of other comprehensive income (loss) were as follows (in thousands): (in thousands): Income tax (expense) benefit on: Net changes to available-for-sale securities: Year ended January 2, 2016 January 3, 2015 December 28, 2013 Income tax (expense) benefit on: Net changes to available-for-sale securities: Unrealized gains (losses) arising during the period . . . . . . . . . . . Reclassification for gains (losses) included in net income . . . . . . . $149 (4) $(387) — $ 187 81 Unrealized gains (losses) arising during the period . . . . . . . . . . . Reclassification for gains (losses) included in net income . . . . . . . $(387) — $ 187 81 Net changes to cash flow hedges: Unrealized gains (losses) arising during the period . . . . . . . . . . . Reclassification for losses included in net income . . . . . . . . . . . . 255 (171) $229 279 (216) (214) (196) $(324) $(142) Net changes to cash flow hedges: Unrealized gains (losses) arising during the period . . . . . . . . . . . Reclassification for losses included in net income . . . . . . . . . . . . Year ended January 2, January 3, December 28, 2016 2015 2013 $149 (4) 255 (171) $229 279 (216) (214) (196) $(324) $(142) 13. Stock-Based Compensation 13. Stock-Based Compensation In fiscal 2009, the stockholders of the Company approved the 2009 Stock Incentive Plan (the ‘‘2009 Plan’’) and the 2009 Employee Stock Purchase Plan (the ‘‘2009 Purchase Plan’’). In fiscal 2014, the stockholders of the Company approved amendments to both the 2009 Plan and the 2009 Purchase Plan. The amendments authorized additional shares of common stock for issuance, to comply with changes in applicable law, improve the Company’s corporate governance and to implement other best practices. The amended plans are currently effective. 2009 Stock Incentive Plan Under the 2009 Plan, the following may be granted: stock options, stock appreciation rights, performance shares, performance stock units, restricted stock units (RSUs), restricted stock awards (RSAs), performance-based awards and other awards (collectively, all such grants are referred to as ‘‘awards’’). The amendment of the shares of common stock reserved for issuance in the 2009 Plan created two share pools—Prior Pool and New Pool. Awards of stock options and stock appreciation rights each deduct one share from the 2009 Plan shares available for issuance for each share granted, and full value awards (awards other than for which the participant is required to pay at least the fair market value of the underlying shares on the date of grant) deduct 1.55 shares from the 2009 Plan shares available for issuance for each share granted under the Prior Pool. Awards of stock options, stock appreciation rights, and full value awards each deduct one (1) share from the 2009 Plan shares available for issuance for each share granted under the New Pool. Awards granted under the 2009 Plan generally contain vesting provisions ranging from three to four years. The exercise price of stock options offered under the 2009 Plan may not be less than 100% of the fair market value of a share of our common stock on the date of grant. To the extent awards granted under the 2009 Plan terminate, expire or lapse for any reason, or are settled in cash, shares subject to such awards will again be available for grant. In fiscal 2009, the stockholders of the Company approved the 2009 Stock Incentive Plan (the ‘‘2009 Plan’’) and the 2009 Employee Stock Purchase Plan (the ‘‘2009 Purchase Plan’’). In fiscal 2014, the stockholders of the Company approved amendments to both the 2009 Plan and the 2009 Purchase Plan. The amendments authorized additional shares of common stock for issuance, to comply with changes in applicable law, improve the Company’s corporate governance and to implement other best practices. The amended plans are currently effective. 2009 Stock Incentive Plan Under the 2009 Plan, the following may be granted: stock options, stock appreciation rights, performance shares, performance stock units, restricted stock units (RSUs), restricted stock awards (RSAs), performance-based awards and other awards (collectively, all such grants are referred to as ‘‘awards’’). The amendment of the shares of common stock reserved for issuance in the 2009 Plan created two share pools—Prior Pool and New Pool. Awards of stock options and stock appreciation rights each deduct one share from the 2009 Plan shares available for issuance for each share granted, and full value awards (awards other than for which the participant is required to pay at least the fair market value of the underlying shares on the date of grant) deduct 1.55 shares from the 2009 Plan shares available for issuance for each share granted under the Prior Pool. Awards of stock options, stock appreciation rights, and full value awards each deduct one (1) share from the 2009 Plan shares available for issuance for each share granted under the New Pool. Awards granted under the 2009 Plan generally contain vesting provisions ranging from three to four years. The exercise price of stock options offered under the 2009 Plan may not be less than 100% of the fair market value of a share of our common stock on the date of grant. To the extent awards granted under the 2009 Plan terminate, expire or lapse for any reason, or are settled in cash, shares subject to such awards will again be available for grant. F-37 F-37 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 13. Stock-Based Compensation (Continued) 2000 Stock Incentive Plan In fiscal 2000, the Company’s Board of Directors and stockholders approved the 2000 Plan. The 2000 Plan contains programs for (i) the discretionary granting of stock options to employees, non-employee board members and consultants for the purchase of shares of the Company’s common stock, (ii) the discretionary issuance of common stock directly (as granted under direct issuance shares in RSAs and RSUs), (iii) the granting of special below-market stock options to executive officers and other highly compensated employees of the Company for which the exercise price can be paid using payroll deductions and (iv) the automatic issuance of stock options to non-employee board members. The discretionary issuance of common stock, RSUs and stock options generally contain vesting provisions ranging from three to eight years. If permitted by the Company, stock options can be exercised immediately and, similar to the direct issuance shares, are subject to repurchase rights which generally lapse in accordance with the vesting schedule. The repurchase rights provide that upon certain defined events, the Company can repurchase unvested shares at the price paid per share. The term of each stock option is no more than ten years from the date of grant. Stock Grants and Modifications Stock Grants and Modifications The Company granted to its employees 0.9 million, 0.8 million and 1.1 million shares of full value awards and no stock options from the 2009 Plan during fiscal 2015, 2014 and 2013, respectively. The Company recorded $2.3 million in selling, general and administrative expense during fiscal 2015 in connection with the modifications of certain equity awards pursuant to two employee terminations. There were no other significant modifications made to any stock grants during fiscal 2015, 2014 or 2013. Included in the full value awards granted under the 2009 Plan in fiscal 2015, 2014 and 2013 were a total of 89 thousand, 76 thousand and 132 thousand market-based stock awards, respectively. The awards, also known as MSUs, provide the rights to acquire a number of shares of common stock for no cash consideration based upon achievement of specified levels of market conditions. The requisite service period for these MSUs is also the vesting period, which is generally three years. The performance criteria of the MSUs measure the difference between the total stockholders’ return of the Company against that of the Philadelphia Semiconductor Sector Total Return Index. 2009 Employee Stock Purchase Plan 2009 Employee Stock Purchase Plan The rights to purchase common stock granted under the 2009 Purchase Plan are intended to be treated as either (i) purchase rights granted under an ‘‘employee stock purchase plan,’’ as that term is defined in Section 423(b) of the Internal Revenue Code (the ‘‘423(b) Plan’’), or (ii) purchase rights granted under an employee stock purchase plan that is not subject to the terms and conditions of Section 423(b) of the Internal Revenue Code (the ‘‘Non-423(b) Plan’’). The Company will retain the discretion to grant purchase rights under either the 423(b) Plan or the Non-423(b) Plan. Eligible employees may purchase a limited number of shares of the Company’s common stock at no less than 85% of the fair market value of a share of common stock at prescribed purchase intervals during an offering period. Each offering period will be comprised of a series of one or more successive and/or overlapping purchase intervals and has a maximum term of 24 months. During fiscal 2015, 2014 and 2013, the Company issued 210 thousand, 204 thousand and 190 thousand shares, respectively, under the F-38 F-38 13. Stock-Based Compensation (Continued) 2000 Stock Incentive Plan In fiscal 2000, the Company’s Board of Directors and stockholders approved the 2000 Plan. The 2000 Plan contains programs for (i) the discretionary granting of stock options to employees, non-employee board members and consultants for the purchase of shares of the Company’s common stock, (ii) the discretionary issuance of common stock directly (as granted under direct issuance shares in RSAs and RSUs), (iii) the granting of special below-market stock options to executive officers and other highly compensated employees of the Company for which the exercise price can be paid using payroll deductions and (iv) the automatic issuance of stock options to non-employee board members. The discretionary issuance of common stock, RSUs and stock options generally contain vesting provisions ranging from three to eight years. If permitted by the Company, stock options can be exercised immediately and, similar to the direct issuance shares, are subject to repurchase rights which generally lapse in accordance with the vesting schedule. The repurchase rights provide that upon certain defined events, the Company can repurchase unvested shares at the price paid per share. The term of each stock option is no more than ten years from the date of grant. The Company granted to its employees 0.9 million, 0.8 million and 1.1 million shares of full value awards and no stock options from the 2009 Plan during fiscal 2015, 2014 and 2013, respectively. The Company recorded $2.3 million in selling, general and administrative expense during fiscal 2015 in connection with the modifications of certain equity awards pursuant to two employee terminations. There were no other significant modifications made to any stock grants during fiscal 2015, 2014 or 2013. Included in the full value awards granted under the 2009 Plan in fiscal 2015, 2014 and 2013 were a total of 89 thousand, 76 thousand and 132 thousand market-based stock awards, respectively. The awards, also known as MSUs, provide the rights to acquire a number of shares of common stock for no cash consideration based upon achievement of specified levels of market conditions. The requisite service period for these MSUs is also the vesting period, which is generally three years. The performance criteria of the MSUs measure the difference between the total stockholders’ return of the Company against that of the Philadelphia Semiconductor Sector Total Return Index. The rights to purchase common stock granted under the 2009 Purchase Plan are intended to be treated as either (i) purchase rights granted under an ‘‘employee stock purchase plan,’’ as that term is defined in Section 423(b) of the Internal Revenue Code (the ‘‘423(b) Plan’’), or (ii) purchase rights granted under an employee stock purchase plan that is not subject to the terms and conditions of Section 423(b) of the Internal Revenue Code (the ‘‘Non-423(b) Plan’’). The Company will retain the discretion to grant purchase rights under either the 423(b) Plan or the Non-423(b) Plan. Eligible employees may purchase a limited number of shares of the Company’s common stock at no less than 85% of the fair market value of a share of common stock at prescribed purchase intervals during an offering period. Each offering period will be comprised of a series of one or more successive and/or overlapping purchase intervals and has a maximum term of 24 months. During fiscal 2015, 2014 and 2013, the Company issued 210 thousand, 204 thousand and 190 thousand shares, respectively, under the Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 13. Stock-Based Compensation (Continued) 13. Stock-Based Compensation (Continued) 2009 Purchase Plan to its employees. The weighted-average fair value for purchase rights granted in fiscal 2015 under the 2009 Purchase Plan was $12.70 per share. 2009 Purchase Plan to its employees. The weighted-average fair value for purchase rights granted in fiscal 2015 under the 2009 Purchase Plan was $12.70 per share. Accounting for Stock-Based Compensation Accounting for Stock-Based Compensation Stock-based compensation costs are based on the fair values on the date of grant for stock options and on the date of enrollment for the employee stock purchase plans, estimated by using the Black- Scholes option-pricing model. The fair values of stock awards (such as RSUs and RSAs) equal their intrinsic value on the date of grant. The fair values of MSUs generally are estimated using a Monte Carlo simulation based on the date of grant. The Black-Scholes valuation calculation requires the Company to estimate key assumptions such as future stock price volatility, expected terms, risk-free rates and dividend yield. Expected stock price volatility is based upon a combination of both historical volatility and implied volatility derived from traded options on the Company’s stock in the marketplace. Expected term is derived from an analysis of historical exercises and remaining contractual life of options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company has never paid cash dividends and does not currently intend to pay cash dividends, thus it has assumed a 0% dividend yield. The Monte Carlo simulation used to calculate the fair value of the MSUs simulates the present value of the potential outcomes of future stock prices of the Company and the Philadelphia Semiconductor Sector Total Return Index over the requisite service period. The projection of stock prices are based on the risk-free rate of return, the volatilities of the stock price of the Company and the Index, and the correlation of the stock price of the Company with the Index. The Company must estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock-based compensation expense to be recognized in future periods. The fair values of stock options and RSUs are amortized as compensation expense on a straight-line basis over the vesting period of the grants. The fair values of RSAs are fully expensed in the period of grant, when shares are immediately issued with no vesting restrictions. The fair values of MSUs are amortized as compensation expense on a straight-line basis over the performance and service periods of the grants. Compensation expense recognized is shown in the operating activities section of the Consolidated Statements of Cash Flows. Stock-based compensation costs are based on the fair values on the date of grant for stock options and on the date of enrollment for the employee stock purchase plans, estimated by using the Black- Scholes option-pricing model. The fair values of stock awards (such as RSUs and RSAs) equal their intrinsic value on the date of grant. The fair values of MSUs generally are estimated using a Monte Carlo simulation based on the date of grant. The Black-Scholes valuation calculation requires the Company to estimate key assumptions such as future stock price volatility, expected terms, risk-free rates and dividend yield. Expected stock price volatility is based upon a combination of both historical volatility and implied volatility derived from traded options on the Company’s stock in the marketplace. Expected term is derived from an analysis of historical exercises and remaining contractual life of options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company has never paid cash dividends and does not currently intend to pay cash dividends, thus it has assumed a 0% dividend yield. The Monte Carlo simulation used to calculate the fair value of the MSUs simulates the present value of the potential outcomes of future stock prices of the Company and the Philadelphia Semiconductor Sector Total Return Index over the requisite service period. The projection of stock prices are based on the risk-free rate of return, the volatilities of the stock price of the Company and the Index, and the correlation of the stock price of the Company with the Index. The Company must estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock-based compensation expense to be recognized in future periods. The fair values of stock options and RSUs are amortized as compensation expense on a straight-line basis over the vesting period of the grants. The fair values of RSAs are fully expensed in the period of grant, when shares are immediately issued with no vesting restrictions. The fair values of MSUs are amortized as compensation expense on a straight-line basis over the performance and service periods of the grants. Compensation expense recognized is shown in the operating activities section of the Consolidated Statements of Cash Flows. F-39 F-39 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 13. Stock-Based Compensation (Continued) 13. Stock-Based Compensation (Continued) The fair values estimated from the Black-Scholes option-pricing model were calculated using the The fair values estimated from the Black-Scholes option-pricing model were calculated using the following assumptions: following assumptions: 2009 Employee Stock Purchase Plan Year Ended January 2, 2016 January 3, 2015 December 28, 2013 Expected volatility . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate % . . . . . . . . . . . . . . . . . . Expected term (in months) . . . . . . . . . . . . . . . . . Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . 31% 0.2% 8 — 28% 0.2% 15 — 27% 0.1% 7 — The fair values estimated from Monte Carlo simulation were calculated using the following The fair values estimated from Monte Carlo simulation were calculated using the following assumptions: 2009 Stock Incentive Plan Year Ended January 2, 2016 January 3, 2015 December 28, 2013 Expected volatility . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate % . . . . . . . . . . . . . . . . . . Expected term (in years) . . . . . . . . . . . . . . . . . . Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . 31% 1.0% 2.9 — 33% 0.7% 2.8 — 32% 0.5% 2.9 — A summary of stock-based compensation activity with respect to fiscal 2015 follows: A summary of stock-based compensation activity with respect to fiscal 2015 follows: Stock Options Outstanding at January 3, 2015 . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancelled or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at January 2, 2016 . . . . . . . . . . . . . . . . . . . Vested at January 2, 2016 and expected to vest . . . . . . . . Exercisable at January 2, 2016 . . . . . . . . . . . . . . . . . . . . Shares (000s) 529 (306) (11) 212 212 212 Weighted- Average Exercise Price Weighted-Average Remaining Contractual Term (In Years) Aggregate Intrinsic Value (000s) $31.50 $29.14 $36.91 $34.64 $34.64 $34.64 1.19 1.19 1.19 $3,119 $3,119 $3,119 Year Ended January 2, January 3, December 28, 2009 Employee Stock Purchase Plan Expected volatility . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate % . . . . . . . . . . . . . . . . . . Expected term (in months) . . . . . . . . . . . . . . . . . Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 31% 0.2% 8 — 2015 28% 0.2% 15 — assumptions: 2009 Stock Incentive Plan Expected volatility . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate % . . . . . . . . . . . . . . . . . . Expected term (in years) . . . . . . . . . . . . . . . . . . Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . 31% 1.0% 2.9 — 33% 0.7% 2.8 — Year Ended January 2, January 3, December 28, 2016 2015 2013 27% 0.1% 7 — 2013 32% 0.5% 2.9 — Weighted- Average Exercise Price Weighted-Average Remaining Contractual Term (In Years) Aggregate Intrinsic Value (000s) Stock Options Outstanding at January 3, 2015 . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancelled or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at January 2, 2016 . . . . . . . . . . . . . . . . . . . Vested at January 2, 2016 and expected to vest . . . . . . . . Exercisable at January 2, 2016 . . . . . . . . . . . . . . . . . . . . Shares (000s) 529 (306) (11) 212 212 212 $31.50 $29.14 $36.91 $34.64 $34.64 $34.64 1.19 1.19 1.19 $3,119 $3,119 $3,119 F-40 F-40 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 13. Stock-Based Compensation (Continued) 13. Stock-Based Compensation (Continued) RSAs and RSUs Outstanding at January 3, 2015 . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested or issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancelled or forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . Shares (000s) 1,781 806 (905) (128) Outstanding at January 2, 2016 . . . . . . . . . . . . . . . . . . . 1,554 Outstanding at January 2, 2016 and expected to vest . . . . 1,450 MSUs Outstanding at January 3, 2015 . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earned or issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancelled or forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at January 2, 2016 . . . . . . . . . . . . . . . . . . . Outstanding at January 2, 2016 and expected to vest . . . . Shares (000s) 298 89 (7) (130) 250 231 Weighted- Weighted-Average Average Purchase Price Remaining Vesting Term (In Years) Aggregate Intrinsic Value (000s) $— $— $— $— $— $— 0.91 0.91 Weighted- Weighted-Average Average Purchase Price Remaining Vesting Term (In Years) $75,417 $70,365 Aggregate Intrinsic Value (000s) $— $— $— $— $— $— 1.09 1.09 $12,122 $11,215 RSAs and RSUs Outstanding at January 3, 2015 . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested or issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancelled or forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . Shares (000s) 1,781 806 (905) (128) Weighted- Weighted-Average Average Purchase Price Remaining Vesting Term (In Years) Aggregate Intrinsic Value (000s) Outstanding at January 2, 2016 . . . . . . . . . . . . . . . . . . . 1,554 Outstanding at January 2, 2016 and expected to vest . . . . 1,450 0.91 0.91 Weighted- Weighted-Average Shares (000s) Average Purchase Price Remaining Vesting Term (In Years) $75,417 $70,365 Aggregate Intrinsic Value (000s) MSUs Outstanding at January 3, 2015 . . . . . . . . . . . . . . . . . . . 298 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earned or issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 (7) Cancelled or forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . (130) Outstanding at January 2, 2016 . . . . . . . . . . . . . . . . . . . Outstanding at January 2, 2016 and expected to vest . . . . 250 231 1.09 1.09 $12,122 $11,215 $— $— $— $— $— $— $— $— $— $— $— $— The following summarizes the Company’s weighted average fair value at the date of grant: The following summarizes the Company’s weighted average fair value at the date of grant: Year Ended January 2, 2016 January 3, 2015 December 28, 2013 Per grant of RSAs and RSUs . . . . . . . . . . . . . . . Per grant of MSUs . . . . . . . . . . . . . . . . . . . . . . $49.14 $48.36 $47.93 $60.08 $43.01 $31.94 Per grant of RSAs and RSUs . . . . . . . . . . . . . . . Per grant of MSUs . . . . . . . . . . . . . . . . . . . . . . $49.14 $48.36 $47.93 $60.08 The following summarizes the Company’s stock-based payment and stock option values (in The following summarizes the Company’s stock-based payment and stock option values (in thousands): thousands): Intrinsic value of stock options exercised . . . . . . . Intrinsic value of RSAs and RSUs that vested . . . Grant date fair value of RSAs and RSUs that January 2, 2016 $ 6,612 $45,298 Year Ended January 3, 2015 December 28, 2013 $ 5,674 $32,138 $ 4,198 $23,649 vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,072 $29,668 $24,026 The Company received cash of $3.1 million for the issuance of common stock, net of shares withheld for taxes, during fiscal 2015. The Company issues shares from the shares reserved under its stock plans upon the exercise of stock options, issuance of RSAs, vesting of RSUs and MSUs, and purchases through employee stock purchase plans. The Company does not currently expect to repurchase shares from any source to satisfy such obligation. F-41 F-41 Year Ended January 2, January 3, December 28, 2016 2015 2013 $43.01 $31.94 Year Ended January 2, January 3, December 28, 2016 2015 2013 Intrinsic value of stock options exercised . . . . . . . Intrinsic value of RSAs and RSUs that vested . . . $ 6,612 $45,298 $ 5,674 $32,138 $ 4,198 $23,649 Grant date fair value of RSAs and RSUs that vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,072 $29,668 $24,026 The Company received cash of $3.1 million for the issuance of common stock, net of shares withheld for taxes, during fiscal 2015. The Company issues shares from the shares reserved under its stock plans upon the exercise of stock options, issuance of RSAs, vesting of RSUs and MSUs, and purchases through employee stock purchase plans. The Company does not currently expect to repurchase shares from any source to satisfy such obligation. Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 13. Stock-Based Compensation (Continued) 13. Stock-Based Compensation (Continued) The following table presents details of stock-based compensation costs recognized in the The following table presents details of stock-based compensation costs recognized in the Consolidated Statements of Income (in thousands): Consolidated Statements of Income (in thousands): Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . Selling, general and administrative . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . Year Ended January 2, 2016 January 3, 2015 December 28, 2013 $ 960 19,451 22,380 42,791 9,264 $ 775 18,521 19,771 39,067 4,024 $ 952 14,530 15,318 30,800 2,633 $33,527 $35,043 $28,167 Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 960 $ 775 $ 952 Research and development . . . . . . . . . . . . . . . . . Selling, general and administrative . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . Year Ended January 2, January 3, December 28, 2016 2015 2013 19,451 22,380 42,791 9,264 18,521 19,771 39,067 4,024 14,530 15,318 30,800 2,633 $33,527 $35,043 $28,167 The increase in stock-based compensation costs in fiscal 2014 was principally due to increased headcount. The Company had approximately $47.5 million of total unrecognized compensation costs related to granted stock awards as of January 2, 2016 that are expected to be recognized over a weighted-average period of approximately 2.0 years. There were no significant stock-based compensation costs capitalized into assets in any of the periods presented. The increase in stock-based compensation costs in fiscal 2014 was principally due to increased headcount. The Company had approximately $47.5 million of total unrecognized compensation costs related to granted stock awards as of January 2, 2016 that are expected to be recognized over a weighted-average period of approximately 2.0 years. There were no significant stock-based compensation costs capitalized into assets in any of the periods presented. As of January 2, 2016, the Company had reserved shares of common stock for future issuance as As of January 2, 2016, the Company had reserved shares of common stock for future issuance as follows (in thousands): follows (in thousands): 2000 Stock Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 Stock Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 Employee Stock Purchase Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 2,991 671 Total shares reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,874 2000 Stock Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 2009 Stock Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,991 2009 Employee Stock Purchase Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 671 Total shares reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,874 14. Employee Benefit Plan 14. Employee Benefit Plan The Company maintains a defined contribution or 401(k) Plan for its qualified U.S. employees. Participants may contribute a percentage of their compensation on a pre-tax basis, subject to a maximum annual contribution imposed by the Internal Revenue Code. The Company may make discretionary matching contributions as well as discretionary profit-sharing contributions to the 401(k) Plan. The Company contributed $3.3 million, $3.2 million and $3.0 million to the 401(k) Plan during fiscal 2015, 2014 and 2013, respectively. The Company maintains a defined contribution or 401(k) Plan for its qualified U.S. employees. Participants may contribute a percentage of their compensation on a pre-tax basis, subject to a maximum annual contribution imposed by the Internal Revenue Code. The Company may make discretionary matching contributions as well as discretionary profit-sharing contributions to the 401(k) Plan. The Company contributed $3.3 million, $3.2 million and $3.0 million to the 401(k) Plan during fiscal 2015, 2014 and 2013, respectively. 15. Commitments and Contingencies Operating Leases 15. Commitments and Contingencies Operating Leases The Company leases certain facilities under operating lease agreements that expire at various dates through 2025. Some of these arrangements contain renewal options and require the Company to pay taxes, insurance and maintenance costs. The Company leases certain facilities under operating lease agreements that expire at various dates through 2025. Some of these arrangements contain renewal options and require the Company to pay taxes, insurance and maintenance costs. F-42 F-42 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 15. Commitments and Contingencies (Continued) 15. Commitments and Contingencies (Continued) Rent expense under operating leases was $4.6 million, $4.2 million and $4.2 million for fiscal 2015, 2014 and 2013, respectively. The minimum annual future rentals under the terms of these leases as of January 2, 2016 are as follows (in thousands): Rent expense under operating leases was $4.6 million, $4.2 million and $4.2 million for fiscal 2015, 2014 and 2013, respectively. The minimum annual future rentals under the terms of these leases as of January 2, 2016 are as follows (in thousands): Fiscal Year Fiscal Year 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,438 4,394 2,917 1,812 1,514 5,340 Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,415 Litigation Patent Litigation On January 21, 2014, Cresta Technology Corporation (‘‘Cresta Technology’’), a Delaware corporation, filed a lawsuit against the Company, Samsung Electronics Co., Ltd., Samsung Electronics America, Inc., LG Electronics Inc. and LG Electronics U.S.A., Inc. in the United States District Court in the District of Delaware, alleging infringement of three United States Patents (the ‘‘Cresta Patents’’). The Delaware District Court action has been stayed. On January 28, 2014, Cresta Technology also filed a complaint with the United States International Trade Commission (‘‘ITC’’) alleging infringement of the same patents. During the course of the proceedings, Cresta Technology withdrew its allegations as to one of the three Cresta Patents. On September 29, 2015, the ITC issued its Final Determination, finding that all the patent claims asserted against the Company’s products were either invalid or not infringed and that Cresta Technology failed to establish the ITC’s domestic industry requirement. The ITC found no violation by the Company and terminated the investigation. On November 30, 2015, Cresta Technology filed an appeal of the ITC decision to the Federal Circuit, which is now pending. In a parallel process, the Company challenged the validity of the claims of the Cresta Patents asserted in the ITC investigation through a series of Inter-Parties Review (IPR) proceedings at the Patent Trial and Appeal Board (PTAB) of the United States Patent and Trademark Office (USPTO). On October 21, 2015, the USPTO issued final written decisions on a first set of reviewed claims finding all of the reviewed claims invalid. On December 18, 2015, Cresta Technology filed notices of appeal to the United States Court of Appeals for the Federal Circuit as to this first USPTO determination. The USPTO has instituted a second set of IPR proceedings against a second set of the remaining claims. On May 6, 2014, the Company filed a complaint with the ITC alleging infringement of United States Patent Nos. 6,137,372 and 6,233,441 against Cresta Technology, Hauppauge Digital, Inc., Hauppague Computer Works, Inc., PCTV Systems, S.a.r.l., Luxembourg and PCTV Systems S.a.r.l., seeking to prevent the importation and sale of allegedly infringing products in the United States. On July 1, 2014, the Administrative Law Judge accepted a consent order whereby Cresta Technology will not sell for importation, import or sell in the United States television tuners that infringe the 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,438 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,394 2,917 1,812 1,514 5,340 Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,415 Litigation Patent Litigation On January 21, 2014, Cresta Technology Corporation (‘‘Cresta Technology’’), a Delaware corporation, filed a lawsuit against the Company, Samsung Electronics Co., Ltd., Samsung Electronics America, Inc., LG Electronics Inc. and LG Electronics U.S.A., Inc. in the United States District Court in the District of Delaware, alleging infringement of three United States Patents (the ‘‘Cresta Patents’’). The Delaware District Court action has been stayed. On January 28, 2014, Cresta Technology also filed a complaint with the United States International Trade Commission (‘‘ITC’’) alleging infringement of the same patents. During the course of the proceedings, Cresta Technology withdrew its allegations as to one of the three Cresta Patents. On September 29, 2015, the ITC issued its Final Determination, finding that all the patent claims asserted against the Company’s products were either invalid or not infringed and that Cresta Technology failed to establish the ITC’s domestic industry requirement. The ITC found no violation by the Company and terminated the investigation. On November 30, 2015, Cresta Technology filed an appeal of the ITC decision to the Federal Circuit, which is now pending. In a parallel process, the Company challenged the validity of the claims of the Cresta Patents asserted in the ITC investigation through a series of Inter-Parties Review (IPR) proceedings at the Patent Trial and Appeal Board (PTAB) of the United States Patent and Trademark Office (USPTO). On October 21, 2015, the USPTO issued final written decisions on a first set of reviewed claims finding all of the reviewed claims invalid. On December 18, 2015, Cresta Technology filed notices of appeal to the United States Court of Appeals for the Federal Circuit as to this first USPTO determination. The USPTO has instituted a second set of IPR proceedings against a second set of the remaining claims. On May 6, 2014, the Company filed a complaint with the ITC alleging infringement of United States Patent Nos. 6,137,372 and 6,233,441 against Cresta Technology, Hauppauge Digital, Inc., Hauppague Computer Works, Inc., PCTV Systems, S.a.r.l., Luxembourg and PCTV Systems S.a.r.l., seeking to prevent the importation and sale of allegedly infringing products in the United States. On July 1, 2014, the Administrative Law Judge accepted a consent order whereby Cresta Technology will not sell for importation, import or sell in the United States television tuners that infringe the F-43 F-43 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 15. Commitments and Contingencies (Continued) 15. Commitments and Contingencies (Continued) Company’s United States Patent Nos. 6,137,372 and 6,233,441. Accordingly, this ITC investigation has been terminated in its entirety. On July 16, 2014, the Company filed a lawsuit against Cresta Technology in the United States District Court in the Northern District of California alleging infringement of United States Patent Nos. 6,308,055, 6,304,146, 6,137,372, 6,233,441, 6,965,761 and 7,353,011. The Company is seeking a permanent injunction stopping the sale of all allegedly infringing Cresta Technology products and an award of damages and attorney fees. This lawsuit is currently scheduled for trial in March 2016. As is customary in the semiconductor industry, the Company provides indemnification protection to its customers for intellectual property claims related to the Company’s products. The Company has not accrued any material liability on its consolidated balance sheet related to such indemnification obligations in connection with the Cresta Technology litigation. The Company intends to continue to vigorously defend against Cresta Technology’s allegations. At this time, the Company cannot predict the outcome of these matters or the resulting financial impact to it, if any. Other The Company is involved in various other legal proceedings that have arisen in the normal course of business. While the ultimate results of these matters cannot be predicted with certainty, the Company does not expect them to have a material adverse effect on its consolidated financial statements. 16. Related Party Transactions 16. Related Party Transactions On July 1, 2013, Geir Førre joined the Company as senior vice president. Mr. Førre was chief executive officer of Energy Micro until it was acquired by the Company. Mr. Førre was the beneficial owner of approximately 30% of the Energy Micro equity and, accordingly, received approximately $35 million at closing. In fiscal 2015, Mr. Førre received approximately $6.1 million of the $20.0 million paid for the holdback related to potential indemnification claims and approximately $1.9 million of the $6.3 million paid for the fiscal 2014 earn-out. Mr. Førre may receive up to approximately $8.1 million of the remaining potential $26.7 million earn-out for fiscal 2015 through 2018. On October 17, 2013, the Company appointed Alf-Egil Bogen to its board of directors. Mr. Bogen was chief marketing officer of Energy Micro until it was acquired by the Company. Mr. Bogen was the beneficial owner of approximately 2% of the Energy Micro equity and, accordingly, received approximately $0.9 million at closing. In fiscal 2015, Mr. Bogen received approximately $0.4 million of the $20.0 million paid for the holdback related to potential indemnification claims and approximately $0.1 million of the $6.3 million paid for the fiscal 2014 earn-out. Mr. Bogen may receive up to approximately $0.5 million of the remaining potential $26.7 million earn-out for fiscal 2015 through 2018. Mr. Bogen had invested approximately $0.8 million in Energy Micro prior to the acquisition. Company’s United States Patent Nos. 6,137,372 and 6,233,441. Accordingly, this ITC investigation has been terminated in its entirety. On July 16, 2014, the Company filed a lawsuit against Cresta Technology in the United States District Court in the Northern District of California alleging infringement of United States Patent Nos. 6,308,055, 6,304,146, 6,137,372, 6,233,441, 6,965,761 and 7,353,011. The Company is seeking a permanent injunction stopping the sale of all allegedly infringing Cresta Technology products and an award of damages and attorney fees. This lawsuit is currently scheduled for trial in March 2016. As is customary in the semiconductor industry, the Company provides indemnification protection to its customers for intellectual property claims related to the Company’s products. The Company has not accrued any material liability on its consolidated balance sheet related to such indemnification obligations in connection with the Cresta Technology litigation. The Company intends to continue to vigorously defend against Cresta Technology’s allegations. At this time, the Company cannot predict the outcome of these matters or the resulting financial impact to it, if any. Other statements. The Company is involved in various other legal proceedings that have arisen in the normal course of business. While the ultimate results of these matters cannot be predicted with certainty, the Company does not expect them to have a material adverse effect on its consolidated financial On July 1, 2013, Geir Førre joined the Company as senior vice president. Mr. Førre was chief executive officer of Energy Micro until it was acquired by the Company. Mr. Førre was the beneficial owner of approximately 30% of the Energy Micro equity and, accordingly, received approximately $35 million at closing. In fiscal 2015, Mr. Førre received approximately $6.1 million of the $20.0 million paid for the holdback related to potential indemnification claims and approximately $1.9 million of the $6.3 million paid for the fiscal 2014 earn-out. Mr. Førre may receive up to approximately $8.1 million of the remaining potential $26.7 million earn-out for fiscal 2015 through 2018. On October 17, 2013, the Company appointed Alf-Egil Bogen to its board of directors. Mr. Bogen was chief marketing officer of Energy Micro until it was acquired by the Company. Mr. Bogen was the beneficial owner of approximately 2% of the Energy Micro equity and, accordingly, received approximately $0.9 million at closing. In fiscal 2015, Mr. Bogen received approximately $0.4 million of the $20.0 million paid for the holdback related to potential indemnification claims and approximately $0.1 million of the $6.3 million paid for the fiscal 2014 earn-out. Mr. Bogen may receive up to approximately $0.5 million of the remaining potential $26.7 million earn-out for fiscal 2015 through 2018. Mr. Bogen had invested approximately $0.8 million in Energy Micro prior to the acquisition. F-44 F-44 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 17. Income Taxes 17. Income Taxes Significant components of the provision for income taxes are as follows (in thousands): Significant components of the provision for income taxes are as follows (in thousands): Year Ended January 2, 2016 January 3, 2015 December 28, 2013 Current: Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International Total Current . . . . . . . . . . . . . . . . . . . . . . . . . $ 951 3,015 3,966 $ 7,083 882 7,965 $ 4,796 4,093 8,889 Deferred: Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International Total Deferred . . . . . . . . . . . . . . . . . . . . . . . . (5,825) 2,536 (3,289) 2,352 702 3,054 5,591 (2,272) 3,319 $ 677 $11,019 $12,208 The Company’s provision for income taxes differs from the expected tax expense amount computed by applying the statutory federal income tax rate to income before income taxes as a result of the following: The Company’s provision for income taxes differs from the expected tax expense amount computed by applying the statutory federal income tax rate to income before income taxes as a result of the following: Year Ended January 2, 2016 January 3, 2015 December 28, 2013 Federal statutory rate . . . . . . . . . . . . . . . . . . . . . Foreign tax rate benefit . . . . . . . . . . . . . . . . . . . Research and development tax credits . . . . . . . . . Release of prior year unrecognized tax benefits . . Excess officer compensation . . . . . . . . . . . . . . . . Change in cost-sharing treatment of stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . Change in prior period valuation allowance . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% (30.7) (5.6) (1.9) 3.2 (7.1) 8.8 0.5 35.0% (3.5) (8.6) (2.6) 2.3 — (1.4) 1.3 35.0% (8.2) (12.8) — 1.9 — 3.1 0.7 2.2% 22.5% 19.7% Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 951 $ 7,083 $ 4,796 Current: Deferred: International . . . . . . . . . . . . . . . . . . . . . . . . . Total Current . . . . . . . . . . . . . . . . . . . . . . . . . Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . . . . . . Total Deferred . . . . . . . . . . . . . . . . . . . . . . . . Year Ended January 2, January 3, December 28, 2016 2015 2013 3,015 3,966 (5,825) 2,536 (3,289) 882 7,965 2,352 702 3,054 4,093 8,889 5,591 (2,272) 3,319 $ 677 $11,019 $12,208 Year Ended January 2, January 3, December 28, 2016 2015 2013 Federal statutory rate . . . . . . . . . . . . . . . . . . . . . Foreign tax rate benefit . . . . . . . . . . . . . . . . . . . 35.0% (30.7) Research and development tax credits . . . . . . . . . Release of prior year unrecognized tax benefits . . Excess officer compensation . . . . . . . . . . . . . . . . Change in cost-sharing treatment of stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . Change in prior period valuation allowance . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5.6) (1.9) 3.2 (7.1) 8.8 0.5 35.0% (3.5) (8.6) (2.6) 2.3 — (1.4) 1.3 35.0% (8.2) (12.8) — 1.9 — 3.1 0.7 2.2% 22.5% 19.7% The effective tax rate for fiscal 2015 decreased from fiscal 2014, primarily due to the completion of payments related to a prior year intercompany licensing arrangement resulting in an increase to the foreign tax rate benefit as well as the recognition of a net benefit resulting from a change in the tax accounting treatment of stock-based compensation in a cost-sharing arrangement following a recent U.S. Tax Court case. The effective tax rate for fiscal 2015 decreased from fiscal 2014, primarily due to the completion of payments related to a prior year intercompany licensing arrangement resulting in an increase to the foreign tax rate benefit as well as the recognition of a net benefit resulting from a change in the tax accounting treatment of stock-based compensation in a cost-sharing arrangement following a recent U.S. Tax Court case. F-45 F-45 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 17. Income Taxes (Continued) 17. Income Taxes (Continued) On July 27, 2015, the U.S. Tax Court (the ‘‘Court’’) issued an opinion in Altera Corp. v. Commissioner related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the Court on December 1, 2015. In its opinion, the Court accepted Altera’s position of excluding stock-based compensation from its intercompany cost-sharing arrangement. The U.S. Internal Revenue Service has the right to appeal the Court decision, and although the U.S. Department of the Treasury has not withdrawn the requirement from its regulations to include stock-based compensation in intercompany cost-sharing arrangements, the Company has evaluated the Court case and has concluded that the Court’s opinion is more likely than not to be sustained upon final appeal of the decision. The Company has analyzed the impact of the Court case and has recorded a tax benefit of $29.6 million in its consolidated statement of income for fiscal 2015. Of the total $29.6 million tax benefit, $25.9 million represents the benefit of a future intercompany transaction that will result from the reversal of the inclusion of stock-based compensation in the Company’s cost-sharing arrangement as a result of stock-based awards that have already vested. The remainder of the $29.6 million benefit, or $3.7 million, represents the additional benefit reflected in the ending deferred tax asset for stock-based compensation as a result of the Altera decision. Because this change to cost-sharing is expected to increase the Company’s cumulative foreign earnings at the time of final resolution of the case, in fiscal 2015, the Company accrued a deferred tax liability of $27.5 million as a result of management’s intent to repatriate the foreign earnings generated when the inclusion of stock-based compensation in its cost-sharing arrangement is reversed. The decrease in the effective tax rate during fiscal 2015 from the completion of payments related to a prior year intercompany licensing arrangement and the recognition of a net benefit from the Altera case was partially offset by an increase in the prior year valuation allowance related to lower expectations of profitability in jurisdictions where tax attributes exist. Additionally, the Company expects a lower realization of the recently re-enacted U.S. federal research and development tax credit as compared to the realization of the U.S. federal research and development tax credit in fiscal 2014. The effective tax rate for fiscal 2014 increased from fiscal 2013, primarily due to the recognition of the fiscal 2012 federal research and development tax credit in fiscal 2013 due to the enactment of the American Taxpayer Relief Act of 2012 on January 2, 2013, as well as a decrease in the foreign tax rate benefit in fiscal 2014. This increase in the effective tax rate was partially offset by the reduction to a valuation allowance recorded in a prior year related to certain state loss and research and development tax credit carryforwards and the release in fiscal 2014 of prior year unrecognized tax benefits due to the lapse of the statute of limitations applicable to a tax deduction claimed on a prior year foreign tax return. On July 27, 2015, the U.S. Tax Court (the ‘‘Court’’) issued an opinion in Altera Corp. v. Commissioner related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the Court on December 1, 2015. In its opinion, the Court accepted Altera’s position of excluding stock-based compensation from its intercompany cost-sharing arrangement. The U.S. Internal Revenue Service has the right to appeal the Court decision, and although the U.S. Department of the Treasury has not withdrawn the requirement from its regulations to include stock-based compensation in intercompany cost-sharing arrangements, the Company has evaluated the Court case and has concluded that the Court’s opinion is more likely than not to be sustained upon final appeal of the decision. The Company has analyzed the impact of the Court case and has recorded a tax benefit of $29.6 million in its consolidated statement of income for fiscal 2015. Of the total $29.6 million tax benefit, $25.9 million represents the benefit of a future intercompany transaction that will result from the reversal of the inclusion of stock-based compensation in the Company’s cost-sharing arrangement as a result of stock-based awards that have already vested. The remainder of the $29.6 million benefit, or $3.7 million, represents the additional benefit reflected in the ending deferred tax asset for stock-based compensation as a result of the Altera decision. Because this change to cost-sharing is expected to increase the Company’s cumulative foreign earnings at the time of final resolution of the case, in fiscal 2015, the Company accrued a deferred tax liability of $27.5 million as a result of management’s intent to repatriate the foreign earnings generated when the inclusion of stock-based compensation in its cost-sharing arrangement is reversed. The decrease in the effective tax rate during fiscal 2015 from the completion of payments related to a prior year intercompany licensing arrangement and the recognition of a net benefit from the Altera case was partially offset by an increase in the prior year valuation allowance related to lower expectations of profitability in jurisdictions where tax attributes exist. Additionally, the Company expects a lower realization of the recently re-enacted U.S. federal research and development tax credit as compared to the realization of the U.S. federal research and development tax credit in fiscal 2014. The effective tax rate for fiscal 2014 increased from fiscal 2013, primarily due to the recognition of the fiscal 2012 federal research and development tax credit in fiscal 2013 due to the enactment of the American Taxpayer Relief Act of 2012 on January 2, 2013, as well as a decrease in the foreign tax rate benefit in fiscal 2014. This increase in the effective tax rate was partially offset by the reduction to a valuation allowance recorded in a prior year related to certain state loss and research and development tax credit carryforwards and the release in fiscal 2014 of prior year unrecognized tax benefits due to the lapse of the statute of limitations applicable to a tax deduction claimed on a prior year foreign tax return. Income before income taxes included the following components (in thousands): Income before income taxes included the following components (in thousands): Year Ended January 2, 2016 January 3, 2015 December 28, 2013 Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,249 28,014 $38,174 10,866 $30,263 $49,040 $41,849 20,178 $62,027 Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,249 28,014 $38,174 10,866 Year Ended January 2, January 3, December 28, 2016 2015 2013 $30,263 $49,040 $41,849 20,178 $62,027 F-46 F-46 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 17. Income Taxes (Continued) 17. Income Taxes (Continued) Foreign income before taxes increased from fiscal 2014 to fiscal 2015 primarily due to the completion of payments related to a prior year intercompany licensing arrangement. The impact of this change was partially offset by lower profitability for fiscal 2015 as compared to fiscal 2014, predominately resulting from higher amortization of acquired intangibles. Foreign income before taxes decreased from fiscal 2013 to fiscal 2014 primarily due to an increase in fiscal 2014 of the fair value of the Company’s acquisition-related contingent consideration liability. Deferred tax assets and liabilities are recorded for the estimated tax impact of temporary differences between the tax basis and book basis of assets and liabilities. A valuation allowance is established against a deferred tax asset when it is more likely than not that the deferred tax asset will not be realized. The Company recorded a new valuation allowance of $0.5 million in fiscal 2015 related to certain state research and development tax credit carryforwards generated in fiscal 2015 as well as recording a new valuation allowance of $3.2 million related to a carryforward of the recently enacted U.S. federal research and development tax credit generated in fiscal 2015. The Company also recorded a new valuation allowance of $0.6 million in fiscal 2015 related to the state tax impact of the change in tax accounting treatment of stock-based compensation in a cost-sharing arrangement. In addition, the Company recorded additional valuation allowances of $2.0 million for previously acquired federal research and development credit carryforwards, $0.4 million for prior year state research and development credit carryforwards and $0.2 million for prior year state net operating loss carryforwards. The Company does not expect to recognize sufficient income in the jurisdictions in which the carryforwards were created and therefore, the Company has concluded that it is more likely than not that a portion of these carryforwards will expire or go unutilized. In addition, in fiscal 2015, the Company recorded a reduction of $0.1 million to the prior year valuation allowance related to the expiration of certain acquired state net operating loss carryforwards which were fully valued. Since this change was due to the expiration of the losses, the reduction to the valuation allowance was offset by a reduction in deferred tax assets rather than a charge to income tax expense. No valuation allowance was recorded against other deferred tax assets in fiscal 2015. Management believes that the Company’s results of future operations will generate sufficient taxable income such that it is more likely than not that the remaining deferred tax assets will be realized. Foreign income before taxes increased from fiscal 2014 to fiscal 2015 primarily due to the completion of payments related to a prior year intercompany licensing arrangement. The impact of this change was partially offset by lower profitability for fiscal 2015 as compared to fiscal 2014, predominately resulting from higher amortization of acquired intangibles. Foreign income before taxes decreased from fiscal 2013 to fiscal 2014 primarily due to an increase in fiscal 2014 of the fair value of the Company’s acquisition-related contingent consideration liability. Deferred tax assets and liabilities are recorded for the estimated tax impact of temporary differences between the tax basis and book basis of assets and liabilities. A valuation allowance is established against a deferred tax asset when it is more likely than not that the deferred tax asset will not be realized. The Company recorded a new valuation allowance of $0.5 million in fiscal 2015 related to certain state research and development tax credit carryforwards generated in fiscal 2015 as well as recording a new valuation allowance of $3.2 million related to a carryforward of the recently enacted U.S. federal research and development tax credit generated in fiscal 2015. The Company also recorded a new valuation allowance of $0.6 million in fiscal 2015 related to the state tax impact of the change in tax accounting treatment of stock-based compensation in a cost-sharing arrangement. In addition, the Company recorded additional valuation allowances of $2.0 million for previously acquired federal research and development credit carryforwards, $0.4 million for prior year state research and development credit carryforwards and $0.2 million for prior year state net operating loss carryforwards. The Company does not expect to recognize sufficient income in the jurisdictions in which the carryforwards were created and therefore, the Company has concluded that it is more likely than not that a portion of these carryforwards will expire or go unutilized. In addition, in fiscal 2015, the Company recorded a reduction of $0.1 million to the prior year valuation allowance related to the expiration of certain acquired state net operating loss carryforwards which were fully valued. Since this change was due to the expiration of the losses, the reduction to the valuation allowance was offset by a reduction in deferred tax assets rather than a charge to income tax expense. No valuation allowance was recorded against other deferred tax assets in fiscal 2015. Management believes that the Company’s results of future operations will generate sufficient taxable income such that it is more likely than not that the remaining deferred tax assets will be realized. F-47 F-47 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 17. Income Taxes (Continued) Significant components of the Company’s deferred taxes as of January 2, 2016 and January 3, 2015 Significant components of the Company’s deferred taxes as of January 2, 2016 and January 3, 2015 are as follows (in thousands): 17. Income Taxes (Continued) are as follows (in thousands): January 2, 2016 January 3, 2015 Deferred tax assets: Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . Research and development tax credit carryforwards . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized research and development . . . . . . . . . . . . . . . . . Deferred income on shipments to distributors . . . . . . . . . . . Expected future cost-sharing adjustment . . . . . . . . . . . . . . . Accrued liabilities and other . . . . . . . . . . . . . . . . . . . . . . . . $ 25,869 13,335 8,757 8,741 7,413 25,896 8,619 $31,518 9,740 6,353 7,371 8,117 — 6,481 Less: Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities: Acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . Unremitted foreign earnings for expected future cost-sharing adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . 98,630 (10,264) 69,580 (3,455) 88,366 66,125 33,020 2,349 27,495 1,991 64,855 33,630 3,388 — 1,517 38,535 January 2, January 3, 2016 2015 Deferred tax assets: Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . $ 25,869 $31,518 Research and development tax credit carryforwards . . . . . . . 13,335 Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized research and development . . . . . . . . . . . . . . . . . Deferred income on shipments to distributors . . . . . . . . . . . Expected future cost-sharing adjustment . . . . . . . . . . . . . . . Accrued liabilities and other . . . . . . . . . . . . . . . . . . . . . . . . 8,757 8,741 7,413 25,896 8,619 9,740 6,353 7,371 8,117 — 6,481 Less: Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities: Acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . Unremitted foreign earnings for expected future cost-sharing adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . 98,630 (10,264) 69,580 (3,455) 88,366 66,125 33,020 2,349 27,495 1,991 64,855 33,630 3,388 — 1,517 38,535 Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,511 $27,590 Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,511 $27,590 As of January 2, 2016, the Company had federal net operating loss and research and development tax credit carryforwards of approximately $53.8 million and $2.0 million, respectively, as a result of the Cygnal Integrated Products, Silicon Clocks, Spectra Linear and Ember acquisitions. These carryforwards expire in fiscal years 2020 through 2032. Recognition of these loss and credit carryforwards is subject to an annual limit, which may cause them to expire before they are used. Additionally, as of January 2, 2016, the Company had $5.1 million of federal research and development tax credit carryforward. This carryforward will expire in 2036. As of January 2, 2016, the Company had foreign net operating loss carryforwards of approximately $15.8 million as a result of the Energy Micro acquisition. These loss carryforwards do not expire and recognition is not subject to an annual limit. Additionally, as of January 2, 2016, the Company had foreign net operating loss carryforwards of approximately $0.2 million as a result of the Bluegiga acquisition. These loss carryforwards will expire in fiscal year 2025. The Company also had state loss and research and development tax credit carryforwards of approximately $54.0 million and $12.5 million, respectively. A portion of these loss and credit carryforwards was generated by the Company and a portion was acquired through the Integration Associates, Silicon Clocks, Spectra Linear and Ember acquisitions. Certain of these carryforwards As of January 2, 2016, the Company had federal net operating loss and research and development tax credit carryforwards of approximately $53.8 million and $2.0 million, respectively, as a result of the Cygnal Integrated Products, Silicon Clocks, Spectra Linear and Ember acquisitions. These carryforwards expire in fiscal years 2020 through 2032. Recognition of these loss and credit carryforwards is subject to an annual limit, which may cause them to expire before they are used. Additionally, as of January 2, 2016, the Company had $5.1 million of federal research and development tax credit carryforward. This carryforward will expire in 2036. As of January 2, 2016, the Company had foreign net operating loss carryforwards of approximately $15.8 million as a result of the Energy Micro acquisition. These loss carryforwards do not expire and recognition is not subject to an annual limit. Additionally, as of January 2, 2016, the Company had foreign net operating loss carryforwards of approximately $0.2 million as a result of the Bluegiga acquisition. These loss carryforwards will expire in fiscal year 2025. The Company also had state loss and research and development tax credit carryforwards of approximately $54.0 million and $12.5 million, respectively. A portion of these loss and credit carryforwards was generated by the Company and a portion was acquired through the Integration Associates, Silicon Clocks, Spectra Linear and Ember acquisitions. Certain of these carryforwards F-48 F-48 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 17. Income Taxes (Continued) 17. Income Taxes (Continued) expire in fiscal years 2016 through 2033, and others do not expire. Recognition of some of these loss and credit carryforwards is subject to an annual limit, which may cause them to expire before they are used. At the end of fiscal 2015, undistributed earnings of the Company’s foreign subsidiaries of approximately $312.4 million are intended to be permanently reinvested outside the U.S. Accordingly, no provision for U.S. federal and state income taxes associated with a distribution of these earnings has been made. Determination of the amount of the unrecognized deferred tax liability on these unremitted earnings is not practicable. Other than the previously described future earnings of its Singapore subsidiary as a result of the reversal of the inclusion of stock-based compensation in its cost-sharing arrangement, the Company intends to continue to permanently reinvest the actual earnings of each of its foreign subsidiaries. The Company’s operations in Singapore are subject to reduced tax rates through June 30, 2019, as long as certain conditions are met. The income tax benefit from the reduced Singapore tax rate reflected in earnings was approximately $14.4 million (representing $0.34 per diluted share) in fiscal 2015, approximately $2.0 million (representing $0.05 per diluted share) in fiscal 2014, and approximately $2.2 million (representing $0.05 per diluted share) in fiscal 2013. The significant increase in the impact of the reduced Singapore tax rate from fiscal 2014 to fiscal 2015 is due to the recognition of additional profit in Singapore for tax accounting purposes as a result of the Altera case as well as the completion of payments related to a prior year intercompany licensing agreement. The following table reflects changes in the unrecognized tax benefits (in thousands): The following table reflects changes in the unrecognized tax benefits (in thousands): Beginning balance . . . . . . . . . . . . . . . . . . . . . . . Additions based on tax positions related to Year Ended January 2, 2016 January 3, 2015 December 28, 2013 $3,929 $ 4,998 $4,364 current year . . . . . . . . . . . . . . . . . . . . . . . . . . 432 465 Additions based on tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions for tax positions related to prior years — (751) 58 (1,592) 316 318 — Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . $3,610 $ 3,929 $4,998 As of January 2, 2016, January 3, 2015 and December 28, 2013, the Company had gross unrecognized tax benefits of $3.6 million, $3.9 million, and $5.0 million, respectively, of which $3.2 million, $4.0 million, and $4.8 million, respectively, would affect the effective tax rate if recognized. During fiscal 2015, the Company had gross increases of $0.4 million to its current year unrecognized tax benefits, as well as gross decreases of $0.6 million related to an uncertain tax position that was closed by statute. In addition, there was a reduction of $0.2 million due to foreign currency remeasurement adjustments related to prior year unrecognized tax benefits which were recognized in other income (expense), net. During fiscal 2014, the Company had gross increases of $0.5 million to its current and prior year unrecognized tax benefits, as well as gross decreases of $1.3 million to its prior year unrecognized tax benefits related to an uncertain tax position that was closed by statute. In addition, there was a reduction of $0.3 million due to foreign currency remeasurement adjustments F-49 F-49 expire in fiscal years 2016 through 2033, and others do not expire. Recognition of some of these loss and credit carryforwards is subject to an annual limit, which may cause them to expire before they are used. At the end of fiscal 2015, undistributed earnings of the Company’s foreign subsidiaries of approximately $312.4 million are intended to be permanently reinvested outside the U.S. Accordingly, no provision for U.S. federal and state income taxes associated with a distribution of these earnings has been made. Determination of the amount of the unrecognized deferred tax liability on these unremitted earnings is not practicable. Other than the previously described future earnings of its Singapore subsidiary as a result of the reversal of the inclusion of stock-based compensation in its cost-sharing arrangement, the Company intends to continue to permanently reinvest the actual earnings of each of its foreign subsidiaries. The Company’s operations in Singapore are subject to reduced tax rates through June 30, 2019, as long as certain conditions are met. The income tax benefit from the reduced Singapore tax rate reflected in earnings was approximately $14.4 million (representing $0.34 per diluted share) in fiscal 2015, approximately $2.0 million (representing $0.05 per diluted share) in fiscal 2014, and approximately $2.2 million (representing $0.05 per diluted share) in fiscal 2013. The significant increase in the impact of the reduced Singapore tax rate from fiscal 2014 to fiscal 2015 is due to the recognition of additional profit in Singapore for tax accounting purposes as a result of the Altera case as well as the completion of payments related to a prior year intercompany licensing agreement. Year Ended January 2, January 3, December 28, 2016 2015 2013 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . $3,929 $ 4,998 $4,364 Additions based on tax positions related to current year . . . . . . . . . . . . . . . . . . . . . . . . . . 432 Additions based on tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions for tax positions related to prior years — (751) 465 58 (1,592) 316 318 — Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . $3,610 $ 3,929 $4,998 As of January 2, 2016, January 3, 2015 and December 28, 2013, the Company had gross unrecognized tax benefits of $3.6 million, $3.9 million, and $5.0 million, respectively, of which $3.2 million, $4.0 million, and $4.8 million, respectively, would affect the effective tax rate if recognized. During fiscal 2015, the Company had gross increases of $0.4 million to its current year unrecognized tax benefits, as well as gross decreases of $0.6 million related to an uncertain tax position that was closed by statute. In addition, there was a reduction of $0.2 million due to foreign currency remeasurement adjustments related to prior year unrecognized tax benefits which were recognized in other income (expense), net. During fiscal 2014, the Company had gross increases of $0.5 million to its current and prior year unrecognized tax benefits, as well as gross decreases of $1.3 million to its prior year unrecognized tax benefits related to an uncertain tax position that was closed by statute. In addition, there was a reduction of $0.3 million due to foreign currency remeasurement adjustments Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 17. Income Taxes (Continued) 17. Income Taxes (Continued) related to prior year unrecognized tax benefits which were recognized in other income (expense), net. During fiscal 2013, the Company had gross increases of $0.6 million to its current and prior year unrecognized tax benefits. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company recognized less than $0.1 million of interest in the provision for income taxes in fiscal 2015, 2014 and 2013. The Company had an accrual of less than $0.1 million for the payment of interest related to unrecognized tax positions at the end of fiscal 2015, 2014 and 2013. The Company believes it is reasonably possible that the gross unrecognized tax benefits will decrease by approximately $1.1 million in the next 12 months due to the lapse of the statute of limitations applicable to tax deductions and tax credits claimed on prior year tax returns. The tax years 2011 through 2015 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company is not currently under audit in any major taxing jurisdiction. 18. Segment Information The Company has one operating segment, mixed-signal analog intensive products, consisting of numerous product areas. The Company’s chief operating decision maker is considered to be its Chief Executive Officer. The chief operating decision maker allocates resources and assesses performance of the business and other activities at the operating segment level. The Company groups its products into four categories, based on the markets and applications in which its ICs may be used. The following summarizes the Company’s revenue by product category (in thousands): Year Ended January 2, 2016 January 3, 2015 December 28, 2013 Internet of Things . . . . . . . . . . . . . . . . . . . . . . . Broadcast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $262,329 161,787 121,974 98,736 $209,005 204,256 108,123 99,320 $181,254 199,837 100,523 98,473 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $644,826 $620,704 $580,087 related to prior year unrecognized tax benefits which were recognized in other income (expense), net. During fiscal 2013, the Company had gross increases of $0.6 million to its current and prior year unrecognized tax benefits. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company recognized less than $0.1 million of interest in the provision for income taxes in fiscal 2015, 2014 and 2013. The Company had an accrual of less than $0.1 million for the payment of interest related to unrecognized tax positions at the end of fiscal 2015, 2014 and 2013. The Company believes it is reasonably possible that the gross unrecognized tax benefits will decrease by approximately $1.1 million in the next 12 months due to the lapse of the statute of limitations applicable to tax deductions and tax credits claimed on prior year tax returns. The tax years 2011 through 2015 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company is not currently under audit in any major taxing jurisdiction. 18. Segment Information The Company has one operating segment, mixed-signal analog intensive products, consisting of numerous product areas. The Company’s chief operating decision maker is considered to be its Chief Executive Officer. The chief operating decision maker allocates resources and assesses performance of the business and other activities at the operating segment level. The Company groups its products into four categories, based on the markets and applications in which its ICs may be used. The following summarizes the Company’s revenue by product category (in thousands): Year Ended January 2, January 3, December 28, 2016 2015 2013 Internet of Things . . . . . . . . . . . . . . . . . . . . . . . $262,329 $209,005 $181,254 Broadcast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,787 121,974 98,736 204,256 108,123 99,320 199,837 100,523 98,473 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $644,826 $620,704 $580,087 The Company previously grouped IoT products and Infrastructure products under the Broad-based The Company previously grouped IoT products and Infrastructure products under the Broad-based products heading. products heading. F-50 F-50 Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) Silicon Laboratories Inc. Notes to Consolidated Financial Statements January 2, 2016 (Continued) 18. Segment Information (Continued) 18. Segment Information (Continued) Revenue is attributed to a geographic area based on the shipped-to location. The following summarizes the Company’s revenue by geographic area (in thousands): Revenue is attributed to a geographic area based on the shipped-to location. The following summarizes the Company’s revenue by geographic area (in thousands): Year Ended January 2, 2016 January 3, 2015 December 28, 2013 United States . . . . . . . . . . . . . . . . . . . . . . . . . . China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rest of world . . . . . . . . . . . . . . . . . . . . . . . . . . $ 96,959 281,306 266,561 $ 89,935 271,818 258,951 $ 68,566 253,261 258,260 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $644,826 $620,704 $580,087 Year Ended January 2, January 3, December 28, 2016 2015 2013 United States . . . . . . . . . . . . . . . . . . . . . . . . . . $ 96,959 $ 89,935 $ 68,566 China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rest of world . . . . . . . . . . . . . . . . . . . . . . . . . . 281,306 266,561 271,818 258,951 253,261 258,260 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $644,826 $620,704 $580,087 The following summarizes the Company’s property and equipment, net by geographic area (in The following summarizes the Company’s property and equipment, net by geographic area (in thousands): thousands): United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rest of world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $126,404 4,728 $127,928 4,892 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $131,132 $132,820 January 2, 2016 January 3, 2015 United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $126,404 $127,928 Rest of world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,728 4,892 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $131,132 $132,820 January 2, January 3, 2016 2015 F-51 F-51 Supplementary Financial Information (Unaudited) Supplementary Financial Information (Unaudited) Quarterly financial information for fiscal 2015 and 2014 is as follows. The fourth quarter of fiscal 2014 had 14 weeks. All other quarterly periods reported here had 13 weeks (in thousands, except per share amounts): Quarterly financial information for fiscal 2015 and 2014 is as follows. The fourth quarter of fiscal 2014 had 14 weeks. All other quarterly periods reported here had 13 weeks (in thousands, except per share amounts): Fiscal 2015 Fourth Quarter Third Quarter Second Quarter First Quarter Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,071 93,538 4,796 5,658 $ $156,194 93,435 11,223 9,975 $ $164,856 97,428 9,003 7,575 $ $163,705 96,369 7,212 6,378 $ Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,071 $156,194 $164,856 $163,705 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,538 4,796 5,658 93,435 11,223 9,975 97,428 9,003 7,575 96,369 7,212 6,378 Earnings per share: Earnings per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 0.14 0.13 $ $ 0.24 0.23 $ $ 0.18 0.17 $ $ 0.15 0.15 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.14 0.13 0.24 0.23 0.18 0.17 0.15 0.15 Fiscal 2014 Fourth Quarter Third Quarter Second Quarter First Quarter Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $161,951 96,672 11,006 $ 10,024 $158,144 96,111 9,604 5,608 $ $154,918 98,663 20,802 $ 14,279 $145,691 87,105 10,009 8,110 $ Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $161,951 $158,144 $154,918 $145,691 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,672 11,006 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,024 96,111 9,604 5,608 98,663 20,802 $ 14,279 87,105 10,009 8,110 Earnings per share: Earnings per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 0.24 0.23 $ $ 0.13 0.13 $ $ 0.33 0.32 $ $ 0.19 0.18 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 0.24 0.23 0.13 0.13 $ $ 0.33 0.32 0.19 0.18 Fiscal 2015 Fourth Quarter Third Quarter Second Quarter First Quarter $ $ $ $ $ $ Fiscal 2014 Fourth Quarter Third Quarter Second Quarter First Quarter $ $ $ $ $ $ $ $ $ $ $ $ Supplementary Financial Information to the Annual Report Supplementary Financial Information to the Annual Report Appendix I. Reconciliation of GAAP to Non-GAAP Financial Measures Appendix I. Reconciliation of GAAP to Non-GAAP Financial Measures Appendix I: Supplemental Financial Information (Unaudited) Appendix I: Supplemental Financial Information (Unaudited) The non-GAAP financial measurements provided below do not replace the presentation of Silicon Laboratories’ GAAP financial results. These measurements merely provide supplemental information to assist investors in analyzing Silicon Laboratories’ financial position and results of operations; however, these measures are not in accordance with, or an alternative to, GAAP and may be different from non-GAAP measures used by other companies. We are providing this information because it may enable investors to perform meaningful comparisons of operating results, and more clearly highlight the results of core ongoing operations. The non-GAAP financial measurements provided below do not replace the presentation of Silicon Laboratories’ GAAP financial results. These measurements merely provide supplemental information to assist investors in analyzing Silicon Laboratories’ financial position and results of operations; however, these measures are not in accordance with, or an alternative to, GAAP and may be different from non-GAAP measures used by other companies. We are providing this information because it may enable investors to perform meaningful comparisons of operating results, and more clearly highlight the results of core ongoing operations. Unaudited Reconciliation of GAAP to Non-GAAP Financial Measures (In thousands, except per share data) Unaudited Reconciliation of GAAP to Non-GAAP Financial Measures (In thousands, except per share data) Non-GAAP Income Statement Items GAAP Percent of Compensation Measure Revenue Expense* GAAP Stock Intangible Asset Amortization* Acquisition Related Items* Termination Costs* Non-GAAP Income Tax Non-GAAP Percent of Revenue Adjustments* Measure Non-GAAP Income Statement Items GAAP Percent of Compensation Asset Measure Revenue Expense* Amortization* Related Items* Termination Income Tax Non-GAAP Percent of Costs* Adjustments* Measure Revenue GAAP Stock Intangible Acquisition Non-GAAP Year Ended January 2, 2016 Year Ended January 2, 2016 Revenues . . . . . . . . $644,826 Gross margin . . . . . 380,770 59.1% $ 960 $ 1,559 $2,658 $ 24 $ Research and development . . . . 188,050 29.2% 19,451 19,677 — 794 Selling, general and administrative . . . 160,486 24.9% Operating expenses . 348,536 54.1% Operating income . . 32,234 Net income . . . . . . 29,586 5.0% 4.6% 22,380 41,831 42,791 42,791 Diluted shares 4,781 24,458 26,017 26,017 4,004 4,004 6,662 6,662 890 1,684 1,708 1,708 — — — — — $385,971 59.9% Gross margin . . . . . 380,770 59.1% $ 960 $ 1,559 $2,658 $ 24 $ $385,971 59.9% 148,128 23.0% development . . . . 188,050 29.2% 19,451 19,677 — 794 148,128 23.0% 128,431 276,559 109,412 19.9% 42.9% 17.0% 14.9% Selling, general and administrative . . . 160,486 24.9% Operating expenses . 348,536 54.1% Operating income . . 32,234 Net income . . . . . . 29,586 5.0% 4.6% 22,380 41,831 42,791 42,791 4,781 24,458 26,017 26,017 4,004 4,004 6,662 6,662 890 1,684 1,708 1,708 128,431 276,559 109,412 19.9% 42.9% 17.0% 14.9% (10,549) 96,215 (10,549) 96,215 outstanding . . . . . 42,945 — — — — — 42,945 outstanding . . . . . 42,945 — — — — — 42,945 Diluted earnings per share . . . . . . . . . $ 0.69 * Represent pre-tax amounts $ 2.24 $ 2.24 Revenues . . . . . . . . $644,826 Research and Diluted shares Diluted earnings per share . . . . . . . . . $ 0.69 * Represent pre-tax amounts — — — — — Unaudited Reconciliation of GAAP to Non-GAAP Financial Measures (In thousands, except per share data) (Continued) Three Months Ended January 2, 2016 Non-GAAP Income Statement Items GAAP Percent of Compensation Measure Revenue Expense* GAAP Stock Intangible Asset Amortization* Acquisition Related Items* Termination Costs* Non-GAAP Income Tax Non-GAAP Percent of Revenue Adjustments* Measure Non-GAAP Income Statement Items GAAP Percent of Compensation Asset Measure Revenue Expense* Amortization* Related Items* Termination Income Tax Non-GAAP Percent of Costs* Adjustments* Measure Revenue GAAP Stock Intangible Acquisition Non-GAAP Revenues . . . . . . $160,071 Gross margin . . . . 93,538 58.4% $ 251 $ 390 $ 201 $ — $ — $94,380 59.0% Gross margin . . . . 93,538 58.4% $ 251 $ 390 $ 201 $ — $ — $94,380 59.0% Research and development . . . 47,245 29.5% 5,073 5,441 — Selling, general and administrative . . 41,497 25.9% Operating expenses 88,742 55.4% Operating income . Net income . . . . . 4,796 5,658 3.0% 3.5% 6,669 11,742 11,993 11,993 1,286 6,727 7,117 7,117 1,752 1,752 1,953 1,953 Diluted shares outstanding . . . 42,374 Diluted earnings per share . . . . . $ 0.13 * Represent pre-tax amounts — — — Three Months Ended October 3, 2015 336 380 716 716 716 — — — — — (889) 36,395 22.7% 31,410 67,805 26,575 26,548 19.7% 42.4% 16.6% 16.6% — 42,374 $ 0.63 Non-GAAP Income Statement Items GAAP Percent of Compensation Measure Revenue Expense* GAAP Stock Intangible Asset Amortization* Acquisition Related Items* Termination Costs* Non-GAAP Income Tax Non-GAAP Percent of Revenue Adjustments* Measure Non-GAAP Income Statement Items GAAP Percent of Compensation Asset Measure Revenue Expense* Amortization* Related Items* Termination Income Tax Non-GAAP Percent of Costs* Adjustments* Measure Revenue GAAP Stock Intangible Acquisition Non-GAAP Revenues . . . . . . $156,194 Revenues . . . . . . $156,194 Gross margin . . . . 93,435 59.8% $ 249 $ 390 $ — $ — $ — $94,074 60.2% Gross margin . . . . 93,435 59.8% $ 249 $ 390 $ — $ — $ — $94,074 60.2% Research and development . . . 46,483 29.8% 4,623 Selling, general and administrative . . 35,729 22.8% Operating expenses 82,212 52.6% 7.2% 6.4% Operating income . 11,223 Net income . . . . . 9,975 Diluted shares outstanding . . . 42,795 Diluted earnings per share . . . . . $ 0.23 * Represent pre-tax amounts 4,350 8,973 9,222 9,222 — 5,250 1,219 6,469 6,859 6,859 — (1,351) (1,351) (1,351) (1,351) — — — 118 118 118 118 — — — — — (2,996) 36,610 23.4% 31,393 68,003 26,071 21,827 20.1% 43.5% 16.7% 14.0% — 42,795 $ 0.51 Research and development . . . 46,483 29.8% 4,623 Selling, general and administrative . . 35,729 22.8% Operating expenses 82,212 52.6% 7.2% 6.4% Operating income . 11,223 Net income . . . . . 9,975 Diluted shares outstanding . . . 42,795 Diluted earnings per share . . . . . $ 0.23 * Represent pre-tax amounts 4,350 8,973 9,222 9,222 — Unaudited Reconciliation of GAAP to Non-GAAP Financial Measures (In thousands, except per share data) (Continued) Three Months Ended January 2, 2016 Selling, general and administrative . . 41,497 25.9% Operating expenses 88,742 55.4% Operating income . Net income . . . . . 4,796 5,658 3.0% 3.5% 6,669 11,742 11,993 11,993 1,286 6,727 7,117 7,117 1,752 1,752 1,953 1,953 Revenues . . . . . . $160,071 Research and Diluted shares outstanding . . . 42,374 Diluted earnings per share . . . . . $ 0.13 * Represent pre-tax amounts development . . . 47,245 29.5% 5,073 5,441 — 36,395 22.7% — — — — 42,374 336 380 716 716 716 — — 118 118 118 118 — — — — — (889) 19.7% 42.4% 16.6% 16.6% 31,410 67,805 26,575 26,548 $ 0.63 — — — — (2,996) 36,610 23.4% 20.1% 43.5% 16.7% 14.0% 31,393 68,003 26,071 21,827 $ 0.51 Three Months Ended October 3, 2015 5,250 1,219 6,469 6,859 6,859 — (1,351) (1,351) (1,351) (1,351) — — — 42,795 Unaudited Reconciliation of GAAP to Non-GAAP Financial Measures (In thousands, except per share data) (Continued) Three Months Ended July 4, 2015 Non-GAAP Income Statement Items GAAP Percent of Compensation Measure Revenue Expense* GAAP Stock Intangible Asset Amortization* Acquisition Related Items* Termination Costs* Non-GAAP Income Tax Non-GAAP Percent of Revenue Adjustments* Measure Non-GAAP Income Statement Items GAAP Percent of Compensation Asset Measure Revenue Expense* Amortization* Related Items* Termination Income Tax Non-GAAP Percent of Costs* Adjustments* Measure Revenue GAAP Stock Intangible Acquisition Non-GAAP Revenues . . . . . . $164,856 Gross margin . . . . 97,428 59.1% $ 229 $ 390 $1,324 $ — $ — $99,371 60.3% Gross margin . . . . 97,428 59.1% $ 229 $ 390 $1,324 $ — $ — $99,371 60.3% Research and development . . . 47,465 28.8% 4,960 5,116 Selling, general and administrative . . 40,960 24.8% Operating expenses 88,425 53.6% Operating income . Net income . . . . . 9,003 7,575 5.5% 4.6% 5,868 10,828 11,057 11,057 1,219 6,335 6,725 6,725 — 767 767 2,091 2,091 Diluted shares outstanding . . . 43,461 Diluted earnings per share . . . . . $ 0.17 * Represent pre-tax amounts — — — Three Months Ended April 4, 2015 — 392 392 392 392 — — — — — (3,379) 37,389 22.7% 32,714 70,103 29,268 24,461 19.8% 42.5% 17.8% 14.8% — 43,461 $ 0.56 Non-GAAP Income Statement Items GAAP Percent of Compensation Measure Revenue Expense* GAAP Stock Intangible Asset Amortization* Acquisition Related Items* Termination Costs* Non-GAAP Income Tax Non-GAAP Percent of Revenue Adjustments* Measure Non-GAAP Income Statement Items GAAP Percent of Compensation Asset Measure Revenue Expense* Amortization* Related Items* Termination Income Tax Non-GAAP Percent of Costs* Adjustments* Measure Revenue GAAP Stock Intangible Acquisition Non-GAAP Revenues . . . . . . $163,705 Gross margin . . . . 96,369 58.9% $ 230 $ 390 $1,133 $ 24 $ — $98,146 60.0% Gross margin . . . . 96,369 58.9% $ 230 $ 390 $1,133 $ 24 $ — $98,146 60.0% Research and development . . . 46,857 28.6% 4,795 3,870 — Selling, general and administrative . . 42,300 25.9% Operating expenses 89,157 54.5% Operating income . Net income . . . . . 7,212 6,378 4.4% 3.9% 5,494 10,289 10,519 10,519 1,056 4,926 5,316 5,316 2,836 2,836 3,969 3,969 Diluted shares outstanding . . . 43,149 Diluted earnings per share . . . . . $ 0.15 * Represent pre-tax amounts — — — 458 — 458 482 482 — — — — — (3,285) 37,734 23.1% 32,914 70,648 27,498 23,379 20.1% 43.2% 16.8% 14.3% — 43,149 $ 0.54 Unaudited Reconciliation of GAAP to Non-GAAP Financial Measures (In thousands, except per share data) (Continued) Three Months Ended July 4, 2015 Revenues . . . . . . $164,856 Research and Selling, general and administrative . . 40,960 24.8% Operating expenses 88,425 53.6% Operating income . Net income . . . . . 9,003 7,575 5.5% 4.6% 5,868 10,828 11,057 11,057 1,219 6,335 6,725 6,725 — 767 767 2,091 2,091 development . . . 47,465 28.8% 4,960 5,116 37,389 22.7% — — — — 43,461 Three Months Ended April 4, 2015 development . . . 46,857 28.6% 4,795 3,870 — 37,734 23.1% Selling, general and administrative . . 42,300 25.9% Operating expenses 89,157 54.5% Operating income . Net income . . . . . 7,212 6,378 4.4% 3.9% 5,494 10,289 10,519 10,519 1,056 4,926 5,316 5,316 2,836 2,836 3,969 3,969 — — — — 43,149 — 392 392 392 392 — 458 — 458 482 482 — — — — — (3,379) — — — — (3,285) 19.8% 42.5% 17.8% 14.8% 32,714 70,103 29,268 24,461 $ 0.56 20.1% 43.2% 16.8% 14.3% 32,914 70,648 27,498 23,379 $ 0.54 Diluted shares outstanding . . . 43,461 Diluted earnings per share . . . . . $ 0.17 * Represent pre-tax amounts Revenues . . . . . . $163,705 Research and Diluted shares outstanding . . . 43,149 Diluted earnings per share . . . . . $ 0.15 * Represent pre-tax amounts Silicon Labs makes silicon, software and solutions for a more connected world. Founded in 1996 and headquartered in Austin, Texas, Silicon Labs has more than 1,500 patents issued or pending. The company’s common stock is traded on the NASDAQ® exchange under the ticker symbol “SLAB.” Board of Directors Executive Offi cers Corporate Information Tyson Tuttle Chief Executive Offi cer William G. Bock President John Hollister Senior Vice President and Chief Financial Offi cer Brandon Tolany Senior Vice President of Worldwide Sales Sandeep Kumar, PhD Senior Vice President of Worldwide Operations Nav S. Sooch Chief Executive Offi cer, Ketra Tyson Tuttle Chief Executive Offi cer, Silicon Labs William G. Bock President, Silicon Labs Alf-Egil Bogen Chief Executive Offi cer, Novelda AS Robert Ted Enloe, III Managing General Partner, Balquita Partners, Ltd. Jack Lazar Chief Financial Offi cer, GoPro Nina Richardson Managing Director, Three Rivers Energy Sumit Sadana Executive Vice President, Chief Strategy Offi cer and General Manager of Enterprise Solutions, Sandisk Bill Wood General Partner, Silverton Partners Stock Listing Common stock traded on NASDAQ, symbol SLAB Options The Company’s options are traded on the Chicago Board Option Exchange and the American Stock Exchange. Legal Counsel DLA Piper US LLP 401 Congress Avenue, Suite 2500 Austin, Texas, USA 78701 Independent Registered Public Accounting Firm Ernst & Young LLP 401 Congress Avenue, Suite 1800 Austin, Texas, USA 78701 Transfer Agent and Registrar American Stock Transfer & Trust Company 59 Maiden Lane Plaza Level New York, New York, USA 10038 +1 800-937-5449 Stock Data As of January 26, 2016, there were 41,554,116 shares issued and outstanding, and 90 holders of record. The table below shows the high and low per-share sales prices of our common stock for the periods indicated, as reported by NASDAQ High Low $52.83 $42.61 $58.54 $49.85 $53.84 $39.33 $54.72 $42.06 Q1 Q2 Q3 Q4 Annual Meeting The Silicon Laboratories Inc. annual meeting will be held on Thursday, April 21, 2016 at 9:30 am Central Time at the Lady Bird Johnson Wildfl ower Center, 4801 La Crosse Avenue, Austin, Texas, USA 78739 Investor Relations For more information about Silicon Labs, please visit our website at www.silabs.com, or contact: Investor Relations Silicon Labs 400 West Cesar Chavez Street Austin, Texas, USA 78701 +1 512-416-8500 investor.relations@silabs.com Designed by Make It So Design, Austin, Texas www.silabs.com | Energy-friendly solutions for a smarter, more connected world. 

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