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Part IV

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A

AMENDMENT NO. 1

(Mark One)    

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 29, 2018

or

o

 

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)
  74-2793174
(I.R.S. Employer
Identification No.)

400 West Cesar Chavez, Austin, Texas
(Address of principal executive offices)

 

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   Trading Symbol(s)   Name of each exchange
on which registered
Common Stock, $0.0001 par value   SLAB   The NASDAQ Stock Market LLC

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 Act. ý Yes    o No

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes    ý 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. ý Yes    o No

         Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ý Yes    o No

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o

Emerging growth company o

         If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes    ý 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 (June 29, 2018) was approximately $4.2 billion (assuming, for this purpose, that only directors and officers are deemed affiliates).

         There were 43,088,623 shares of the registrant's common stock issued and outstanding as of January 21, 2019.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Proxy Statement for the registrant's 2018 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

   


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EXPLANATORY NOTE

        In April 2019, the Public Company Accounting Oversight Board conducted an inspection of our fiscal 2018 audit conducted by Ernst & Young LLP ("E&Y") which originally resulted in an unqualified opinion regarding our internal controls over financial reporting. Following the inspection, E&Y re-evaluated our internal controls over financial reporting as of December 29, 2018 and identified deficiencies in the area of internal controls over business combinations, primarily the maintenance of sufficient contemporaneous documentation of management review controls over assumptions used in the valuation of acquired intangible assets and related recording of goodwill. As a result, we have concluded that we have a material weakness related to such internal controls which we are in the process of addressing.

        The material weakness did not result in any misstatement of our consolidated financial statements for the year ended December 29, 2018.

        This Amendment No. 1 on Form 10-K/A (this "Amendment No. 1") amends Silicon Laboratories Inc.'s Annual Report on Form 10-K for the fiscal year ended December 29, 2018 (the "Original Filing"). The purpose of this Amendment No.1 is to (i) revise the Report of Independent Registered Public Accounting Firm of Ernst & Young LLP (the "Auditor's Internal Control Report") contained on page F-1 of Part IV, Item 15 of the Original Filing regarding the effectiveness of our internal control over financial reporting, (ii) amend Part II, Item 8 of the Original Filing relating to the Report of Independent Registered Public Accounting Firm of Ernst & Young LLP contained on page F-3 in Part IV, Item 15 of the Original Filing solely to reflect such revision of the Auditor's Internal Control Report, (iii) revise the disclosure on the effectiveness of our disclosure controls and procedures and the disclosure on our internal control over financial reporting in Part II, Item 9A of the Original Filing to reflect management's conclusion that our internal control over financial reporting and disclosure controls and procedures were not effective at December 29, 2018 due to the material weakness in our internal control over financial reporting identified subsequent to the issuance of the Original Filing as described above and (iv) add an additional risk factor regarding the internal controls in Part I, Item 1A.

        As required by Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended, we have included the entire text of the Items amended in this Amendment No. 1. However, there have been no changes to the text of such item other than the changes stated in the immediately preceding paragraph. Furthermore, there have been no changes to the XBRL data filed in Exhibit 101 of the Original Filing. Other than as described above and the inclusion with this Amendment No. 1 of new certifications by management, a new consent of Ernst & Young LLP, our independent registered public accounting firm, and related amendments to the List of Exhibits contained in Part IV, Item 15 of the Original Filing, this Amendment No. 1 speaks only as of the date of the Original Filing and does not amend, supplement or update any information contained in the Original Filing to give effect to any subsequent events. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Filing and our reports filed with the U.S. Securities and Exchange Commission ("SEC") subsequent to the Original Filing.


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Table of Contents

 
   
   
  Page
Number
 

Part I

     

 

       

  Item 1A.  

Risk Factors

    2  

Part II

     

 

       

  Item 8.  

Financial Statements and Supplementary Data

    18  

  Item 9A.  

Controls and Procedures

    18  

Part IV

     

 

       

  Item 15.  

Exhibits and Financial Statement Schedules

    20  

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Part I

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 contribute to fluctuations in our revenues and operating results, including:

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        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 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

        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:

        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 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.

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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 2018 was $238.3 million, or 27.5% of 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.

Significant litigation over intellectual property in our industry may cause us to become involved in costly and lengthy litigation which could adversely affect our business

        The semiconductor and software industries have experienced significant litigation involving patents and other intellectual property rights. From time to time, third parties, including non-practicing entities, allege intellectual property infringement by our products, our customers' products, or products using technologies or communications standards used in our industry. We also receive communications from customers or suppliers requesting indemnification for allegations brought against them by third parties. Some of these allegations have resulted, and may result in the future, in our involvement in litigation. We have certain contractual obligations to defend and indemnify our customers from certain infringement claims. We also 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.

        Given the unpredictable nature of litigation and the complexity of the technology, we may not prevail in any such litigation. Legal proceedings could subject us to significant liability, invalidate our proprietary rights, or harm our businesses and our ability to compete. 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 or merit, could be time-consuming and expensive to resolve and could divert our management's time and attention. Intellectual property litigation also could force us to take specific actions, including:

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

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offerings, expand the breadth of our markets or enhance our technical capabilities. On April 18, 2018, we acquired the Z-Wave business from Sigma Designs. This acquisition and other 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:

        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.

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

        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 2018, 71% 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

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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. Because we consolidated our distribution relationships to a single global distributor, Arrow Electronics, in fiscal 2018, termination of the relationship with Arrow Electronics, either by us or by Arrow Electronics, could result in a temporary or permanent loss of revenue. If Arrow Electronics fails to effectively market and sell our products in full compliance with applicable laws, or if we are unable to maintain our existing relationship with Arrow Electronics, we may not be able to find a distributor with the scale and resources of Arrow Electronics, maintain existing levels of international revenue or realize expected long-term international revenue growth. We may not be successful in finding suitable alternative global distributors on satisfactory terms, or at all, and this could adversely affect our ability to effectively sell our solutions in certain geographical locations or to certain end customers.

We depend on a limited number of customers for a significant 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 2018, our ten largest customers accounted for 20% 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:

        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.

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

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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, particularly when first introduced and/or when new versions are released. Our products are increasingly designed in more complex processes, including higher levels of software and hardware integration in modules and system-level solutions and/or include elements provided by third parties which further increase the risk of errors. 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 could also cause significant re-engineering costs, the diversion of our engineering personnel's attention from our product development efforts and cause significant customer relations and business reputation problems. Any defects could result in refunds, product replacement, product recall or other liability. 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. Many of our products focus on wireless connectivity and the IoT market and such connectivity may make these products particularly susceptible to cyber-attacks. 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, failure or vulnerability 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 end-products. There can be no assurance that any insurance we maintain will sufficiently protect us from 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.

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        There are significant risks associated with relying on these third-party foundries and 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 have sold were manufactured either by TSMC or 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.

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.

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We are a global company, 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 Asia, the Americas and Europe. 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 83% during fiscal 2018. We may not be able to maintain or increase global market demand for our products. Our international operations are subject to a number of risks, including:

        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 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 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.

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We have a material weakness in our internal control over financial reporting and if we are unable to implement and maintain effective internal control over financial reporting, or our independent registered public accounting firm is unable to provide an unqualified report thereon, we could be materially adversely effected

        We have identified a material weakness that existed as of the end of our fiscal 2018 regarding our internal controls over business combinations, primarily the maintenance of sufficient contemporaneous documentation of management review controls over assumptions used in the valuation of acquired intangible assets and related recording of goodwill. As a result of this material weakness, management concluded that our disclosure controls and procedures and internal control over financial reporting were not effective as of December 29, 2018.

        Unless and until this material weakness has been remediated, or should new material weaknesses arise or be discovered in the future, material misstatements could occur and go undetected in our interim or annual consolidated financial statements and we may be required to restate our financial statements. In addition, we may experience delays in satisfying our reporting obligations or to comply with Securities and Exchange Commission rules and regulations, which could result in investigations and sanctions by regulatory authorities. Any of these results could adversely affect our business and the value of our common stock.

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.

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:

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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 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 disposition of a product line would entail a number of risks that could materially and adversely affect our business and operating results, including:

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:

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        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.

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 recent geopolitical maneuverings, including nuclear weapons and long-range missile testing, 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.

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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.

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.

Our convertible senior notes could adversely affect our operating results and financial condition

        Upon conversion, our convertible senior notes may be settled in cash, shares of our common stock or a combination of cash and shares, at our election. We intend to settle the principal amount of the notes in cash. If we do not have adequate cash available, we may not be able to settle the principal amount in cash. In such case, we will be required to settle the principal amount in stock, which would result in immediate, and likely material, dilution to the ownership interests of our existing stockholders. Any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock.

        Following any conclusion that we no longer have the ability to settle the convertible senior notes in cash, we will be required on a going forward basis to change our accounting policy for earnings per share from the treasury stock method to the if-converted method. Earnings per share may be lower under the if-converted method as compared to the treasury stock method.

        The principal balance of the convertible senior notes was separated into liability and equity components, which were recorded initially at fair value. The excess of the principal amount of the liability component over its carrying amount represents the debt discount, which is accreted to interest expense over the term of the notes using the effective interest method. Accordingly, we will report higher interest expense because of the recognition of both the debt discount amortization and the notes' coupon interest.

Our debt could adversely affect our operations and financial condition

        We believe we have the ability to service our debt, 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 herein, many of which are beyond our control. Our credit facility also contains covenants, including

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financial covenants. If we breach any of the covenants under our credit facility 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 believe that our existing cash, cash equivalents, investments and credit under our credit facility 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 facility 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 have 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:

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        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. We believe the semiconductor industry is currently suffering a downturn due in large part to adverse macroeconomic conditions, characterized by a slowdown in overall GDP performance and factory activity in certain regions, particularly in China , higher levels of customer inventory, the impact of tariffs on trade relations, and greater overall uncertainty regarding the economy. This downturn has had, and may continue to 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 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.

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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, Broadcom, Cypress, IDT, Infineon, Maxim Integrated Products, MaxLinear, Microchip, Nordic Semiconductor, NXP Semiconductors, Qualcomm, Renesas, STMicroelectronics, Synaptics, Texas Instruments 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 the victim of business disruptions and security breaches, including cyber-attacks, which could lead to liability or could damage our reputation and financial results

        Information technology system and/or network disruptions, regardless of the cause, but including acts of sabotage, error, or other actions, could harm the company's operations. Failure to effectively prevent, detect, and recover from security breaches, including cyber-attacks, could result in the misuse of company assets, disruption to the company, diversion of management resources, regulatory inquiries, legal claims or proceedings, reputational damage, loss of sales and other costs to the company. We routinely face attacks that attempt to breach our security protocols, gain access to or disrupt our computerized systems or steal proprietary company, customer, partner or employee information. These attacks are sometimes successful. These attacks may be due to security breaches, employee error, theft, malfeasance, phishing schemes, ransomware, faulty password or data security management, or other irregularities. The theft, loss, destruction, unavailability or misuse of personal or business data collected, used, stored or transferred by us to run our business could result in increased security costs or costs related to defending legal claims. Industrial espionage, theft or loss of our intellectual property data could lead to counterfeit products or harm the competitive position of our products and services. Costs to implement, test and maintain measures to promote compliance with applicable privacy and data security laws as well as to protect the overall security of our system could be significant. Attempted or successful attacks against our products and services could damage our reputation with customers or users and reduce demand for our products and services.

Changes in the Privacy and Data Security/Protection Laws Could Have an Adverse Effect on our Operations

        Federal, state and international privacy-related or data protection laws and regulations could have an adverse effect on our operations. Complying with these laws and the possibility of proceedings against us by governmental entities or others in relation to these laws could increase operational costs. In May 2018, the European Union's General Data Protection Regulation ("GDPR") went into effect, replacing the EU's 1995 Data Protection Directive. The costs of compliance with the GDPR and the potential for fines and penalties in the event of a breach of the GDPR may have an adverse effect on our operations.

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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 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

        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.

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Part II

Item 8.    Financial Statements and Supplementary Data

        The Financial Statements and supplementary data required by this item are included in Part IV, Item 15 of this Form 10-K/A and are presented beginning on page F-1.

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). In our Annual Report on Form 10-K for the year ended December 29, 2018 that was filed on January 30, 2019, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of December 29, 2018 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. Subsequent to that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of December 29, 2018 because of the material weakness in our internal control over financial reporting described below.

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 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 December 29, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 framework). In Management's Report on Internal Control Over Financial Reporting included in our original Annual Report on Form 10-K for the year ended December 29, 2018 that was filed on January 30, 2019, our management concluded that we maintained effective internal control over financial reporting as of December 29, 2018. Following the Public Company Accounting Oversight Board's inspection of Ernst & Young LLP's audit of our December 29, 2018 financial statements and internal controls over financial reporting, management conducted a reassessment and subsequently concluded that the material weakness described below existed as of December 29, 2018 and concluded that we did not maintain effective internal control over financial reporting as of December 29, 2018.

        We identified the following material weakness that existed as of December 29, 2018:

We did not maintain sufficient design and operating effectiveness of controls over the accounting for business combinations, primarily the maintenance of sufficient contemporaneous documentation of management review controls over certain assumptions used in the valuation of acquired intangible assets and related recording of goodwill.

        A material weakness is a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

        Notwithstanding the material weakness discussed above, our management, including our CEO and CFO, has concluded that the consolidated financial statements included in this report fairly present, in

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all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

        Our independent registered public accounting firm, Ernst & Young LLP, has issued a revised attestation report on our internal control over financial reporting. This report appears on page F-1.

Remediation Plan

        We have immediately commenced developing a plan to enhance the design and operating effectiveness of our internal controls over financial reporting, including maintaining sufficient contemporaneous documentation of management review controls over assumptions used in the valuation of acquired intangible assets and related recording of goodwill, which we believe will address the material weakness described above. Our remediation plan will include the implementation of procedures that will require enhanced documentation on the use of assumptions in business combinations and additional training. We expect our remediation will be complete prior to the end of the fourth quarter of fiscal 2019.

Changes in Internal Control over Financial Reporting

        There was no change in our internal controls over financial reporting during the fiscal quarter ended December 29, 2018 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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Part IV

Item 15.    Exhibits and Financial Statement Schedules

(a)
1.    Financial Statements


Index

 
  Page

Report of independent registered public accounting firm

  F-1

Report of independent registered public accounting firm

 
F-3

Consolidated Balance Sheets at December 29, 2018 and December 30, 2017

 
F-4

Consolidated Statements of Income for the fiscal years ended December 29, 2018, December 30, 2017 and December 31, 2016

 
F-5

Consolidated Statements of Comprehensive Income for the fiscal years ended December 29, 2018, December 30, 2017 and December 31, 2016

 
F-6

Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended December 29, 2018, December 30, 2017 and December 31, 2016

 
F-7

Consolidated Statements of Cash Flows for the fiscal years ended December 29, 2018, December 30, 2017 and December 31, 2016

 
F-8

Notes to Consolidated Financial Statements

 
F-9

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(b)
Exhibits
Exhibit Number           
  2.1 * Agreement and Plan of Merger, dated December 7, 2017, by and among Silicon Laboratories Inc., Seguin Merger Subsidiary, Inc. and Sigma Designs, Inc. (filed as Exhibit 2.1 to the Form 8-K filed on December 8, 2017).
        
  3.1 * Form of Fourth Amended and Restated Certificate of Incorporation of Silicon Laboratories Inc. (filed as Exhibit 3.1 to the Registration Statement on Form S-1 (Securities and Exchange Commission File No. 333-94853) (the "IPO Registration Statement")).
        
  3.2 * Fourth Amended and Restated Bylaws of Silicon Laboratories Inc. (filed as Exhibit 3.2 to the Form 8-K filed on January 27, 2017).
        
  4.1 * Specimen certificate for shares of common stock (filed as Exhibit 4.1 to the IPO Registration Statement).
        
  4.2 * Indenture between Silicon Laboratories Inc. and Wilmington Trust, National Association, as trustee, dated March 6, 2017 (filed as Exhibit 4.1 to the Form 8-K filed on March 6, 2017).
        
  4.3 * Form of 1.375% Convertible Senior Note due 2022 (filed as Exhibit 4.2 to the Form 8-K filed on March 6, 2017).
        
  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 * 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 Form 8-K filed on July 29, 2015).
        
  10.4 * Second Amendment to Credit Agreement, dated February 27, 2017, by and among Silicon Laboratories Inc., the subsidiaries of the borrower identified therein, Wells Fargo Bank, National Association and the lenders party thereto (filed as Exhibit 10.1 to the Form 8-K filed on February 27, 2017).
        
  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).
        
  10.6 *+ Silicon Laboratories Inc. 2009 Stock Incentive Plan, as amended and restated on April 20, 2017 (filed as Exhibit 10.1 to the Form 10-Q filed on July 26, 2017).
        
  10.7 *+ Silicon Laboratories Inc. 2009 Employee Stock Purchase Plan, as amended and restated on April 20, 2017 (filed as Exhibit 10.2 to the Form 10-Q filed on July 26, 2017).
        
  10.8 *+ 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 10.7 to the Form 10-K filed on February 1, 2017).

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Exhibit Number           
  10.9 *+ 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 10.8 to the Form 10-K filed on February 1, 2017).
        
  10.10 *+ 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 10.9 to the Form 10-K filed on February 1, 2017).
        
  10.11 *+ Form of Performance Stock Units Grant Notice and Global PSU Award Agreement under Registrant's 2009 Stock Incentive Plan, as amended and restated (filed as Exhibit 10.10 to the Form 10-K filed on February 1, 2017).
        
  10.12 * Purchase Agreement between Silicon Laboratories Inc. and Goldman, Sachs & Co. and Wells Fargo Securities,  LLC, as representatives of the several initial purchasers named therein, dated February 28, 2017 (filed as Exhibit 10.1 to the Form 8-K filed on March 6, 2017).
        
  10.13 *+ CEO Change in Control Agreement dated October 23, 2018 between Silicon Laboratories Inc. and G. Tyson Tuttle (filed as Exhibit 10.1 to the Form 8-K filed on October 24, 2018).
        
  10.14 *+ Silicon Laboratories Inc. Form of Change in Control Agreement (filed as Exhibit 10.2 to the Form 8-K filed on October 24, 2018).
        
  10.15 *+ Silicon Laboratories Inc. 2019 Bonus Plan (filed as Exhibit 10.1 to the Form 8-K filed on January 28, 2019).
        
  21 * Subsidiaries of the Registrant (filed as Exhibit 21 to the Form 10-K filed on January 30, 2019).
        
  23.1   Consent of Independent Registered Public Accounting Firm.
        
  24 * Power of Attorney (filed as Exhibit 24 to the Form 10-K filed on January 30, 2019).
        
  31.1   Certification of the Principal Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
        
  31.2   Certification of the Principal Financial Officer, as required by Section 302 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 (filed as Exhibit 101.INS to the Form 10-K filed on January 30, 2019).
        
  101.SCH * XBRL Taxonomy Extension Schema Document (filed as Exhibit 101.SCH to the Form 10-K filed on January 30, 2019).
        
  101.CAL * XBRL Taxonomy Extension Calculation Linkbase Document (filed as Exhibit 101.CAL to the Form 10-K filed on January 30, 2019).
        
  101.LAB * XBRL Taxonomy Extension Label Linkbase Document (filed as Exhibit 101.LAB to the Form 10-K filed on January 30, 2019).

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Exhibit Number           
  101.PRE * XBRL Taxonomy Extension Presentation Linkbase Document (filed as Exhibit 101.PRE to the Form 10-K filed on January 30, 2019).
        
  101.DEF * XBRL Taxonomy Extension Definition Linkbase Document (filed as Exhibit 101.DEF to the Form 10-K filed on January 30, 2019).

*
Incorporated herein by reference to the indicated filing.

+
Management contract or compensatory plan or arrangement

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SCHEDULE II

SILICON LABORATORIES INC.
VALUATION AND QUALIFYING ACCOUNTS

Valuation Allowance for
Deferred Tax Assets
  Balance at
Beginning of
Period
  Additions
Charged to
Expenses
  Additions
Charged to
Other
Accounts
  Deductions   Balance at
End of Period
 
 
   
  (in thousands)
   
 

Year ended December 29, 2018

  $ 6,518   $ 435   $   $ (1,978 ) $ 4,975  

Year ended December 30, 2017

  $ 12,361   $ 2,110   $ 1,732   $ (9,685 ) $ 6,518  

Year ended December 31, 2016

  $ 10,264   $ 2,715   $   $ (618 ) $ 12,361  

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SIGNATURES

        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 May 3, 2019.

  SILICON LABORATORIES INC.

 

By:

 

/s/ G. TYSON TUTTLE


G. Tyson Tuttle
President and Chief Executive Officer

        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

 

 

 

 

 

 

 
/s/ NAVDEEP S. SOOCH*

Navdeep S. Sooch
  Chairman of the Board   May 3, 2019

/s/ G. TYSON TUTTLE

G. Tyson Tuttle

 

President, Chief Executive Officer and Director
(Principal Executive Officer)

 

May 3, 2019

/s/ JOHN C. HOLLISTER

John C. Hollister

 

Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

 

May 3, 2019

/s/ WILLIAM G. BOCK*

William G. Bock

 

Director

 

May 3, 2019

/s/ JACK R. LAZAR*

Jack R. Lazar

 

Director

 

May 3, 2019

/s/ GREGG LOWE*

Gregg Lowe

 

Director

 

May 3, 2019

/s/ NINA RICHARDSON*

Nina Richardson

 

Director

 

May 3, 2019

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/s/ SUMIT SADANA*

Sumit Sadana
  Director   May 3, 2019

/s/ WILLIAM P. WOOD*

William P. Wood

 

Director

 

May 3, 2019

/s/ CHRISTY WYATT*

Christy Wyatt

 

Director

 

May 3, 2019

*By

 

/s/ JOHN C. HOLLISTER

John C. Hollister
ATTORNEY-IN-FACT

 

 

 

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Silicon Laboratories Inc.

Opinion on Internal Control over Financial Reporting

        We have audited Silicon Laboratories Inc.'s internal control over financial reporting as of December 29, 2018, 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). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, Silicon Laboratories Inc. (the Company) has not maintained effective internal control over financial reporting as of December 29, 2018, based on the COSO criteria.

        In our report dated January 30, 2019, we expressed an unqualified opinion that the Company maintained, in all material respects, effective internal control over financial reporting as of December 29, 2018, based on the COSO criteria. Management has subsequently identified a deficiency in controls related to the accounting for acquisitions, and has further concluded that such deficiency represented a material weakness as of December 29, 2018. As a result, management has revised its assessment, as presented in the accompanying Management's Report on Internal Control over Financial Reporting, to conclude that the Company's internal control over financial reporting was not effective as of December 29, 2018. Accordingly, our present opinion on the effectiveness of Silicon Laboratories Inc.'s internal control over financial reporting as of December 29, 2018, as expressed herein, is different from that expressed in our previous report.

        A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment: Management has identified a material weakness in the design and operating effectiveness of controls over the accounting for business combinations, primarily the maintenance of sufficient contemporaneous documentation of management review controls over certain assumptions used in the valuation of acquired intangible assets and related recording of goodwill.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Silicon Laboratories Inc. as of December 29, 2018 and December 30, 2017, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 29, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated January 30, 2019 expressed an unqualified opinion thereon. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2018 consolidated financial statements, and this report does not affect our report dated January 30, 2019 which expressed an unqualified opinion thereon.

Basis for Opinion

        The Company'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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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        We conducted our audit in accordance with the standards of the PCAOB. 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.

Definition and Limitations of Internal Control Over Financial Reporting

        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.

    /s/ Ernst & Young LLP

Austin, Texas
January 30, 2019, except for the effect of the material weakness described in the second and third paragraphs above, as to which the date is May 3, 2019

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Silicon Laboratories Inc.

Opinion on the Financial Statements

        We have audited the accompanying consolidated balance sheets of Silicon Laboratories Inc. (the Company) as of December 29, 2018 and December 30, 2017, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 29, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 29, 2018 and December 30, 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2018, in conformity with U.S. generally accepted accounting principles.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 29, 2018, 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 January 30, 2019, except for the effect of the material weakness described in the second and third paragraphs of that report, as to which the date is May 3, 2019, expressed an adverse opinion thereon.

Adoption of ASU No. 2014-09

        As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for revenue from sales to distributors in 2018 due to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).

Basis for Opinion

        These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

        We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

    /s/ Ernst & Young LLP

We have served as the Company's auditor since 1996.
Austin, Texas
January 30, 2019

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Silicon Laboratories Inc.
Consolidated Balance Sheets
(In thousands, except per share data)

 
  December 29,
2018
  December 30,
2017
 

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 197,043   $ 269,366  

Short-term investments

    416,779     494,657  

Accounts receivable, net

    73,194     71,367  

Inventories

    74,972     73,132  

Prepaid expenses and other current assets

    64,650     39,120  

Total current assets

    826,638     947,642  

Property and equipment, net

    139,049     127,682  

Goodwill

    397,344     288,227  

Other intangible assets, net

    170,832     83,144  

Other assets, net

    90,491     88,387  

Total assets

  $ 1,624,354   $ 1,535,082  

Liabilities and Stockholders' Equity

             

Current liabilities:

             

Accounts payable

  $ 41,171   $ 38,851  

Deferred revenue and returns liability

    22,494      

Deferred income on shipments to distributors

        50,115  

Other current liabilities

    81,180     73,359  

Total current liabilities

    144,845     162,325  

Convertible debt

    354,771     341,879  

Other non-current liabilities

    57,448     77,862  

Total liabilities

    557,064     582,066  

Commitments and contingencies

             

Stockholders' equity:

             

Preferred stock—$0.0001 par value; 10,000 shares authorized; no shares issued

         

Common stock—$0.0001 par value; 250,000 shares authorized; 43,088 and 42,707 shares issued and outstanding at December 29, 2018 and December 30, 2017, respectively

    4     4  

Additional paid-in capital

    107,517     102,862  

Retained earnings

    961,343     851,307  

Accumulated other comprehensive loss

    (1,574 )   (1,157 )

Total stockholders' equity

    1,067,290     953,016  

Total liabilities and stockholders' equity

  $ 1,624,354   $ 1,535,082  

   

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Silicon Laboratories Inc.
Consolidated Statements of Income
(In thousands, except per share data)

 
  Year Ended  
 
  December 29,
2018
  December 30,
2017
  December 31,
2016
 

Revenues

  $ 868,267   $ 768,867   $ 697,626  

Cost of revenues

    346,868     314,676     276,122  

Gross margin

    521,399     454,191     421,504  

Operating expenses:

                   

Research and development

    238,347     209,491     199,744  

Selling, general and administrative

    197,844     159,726     155,483  

Operating expenses

    436,191     369,217     355,227  

Operating income

    85,208     84,974     66,277  

Other income (expense):

                   

Interest income and other, net

    6,647     6,057     806  

Interest expense

    (19,694 )   (14,128 )   (2,587 )

Income before income taxes

    72,161     76,903     64,496  

Provision (benefit) for income taxes

    (11,430 )   29,811     3,002  

Net income

  $ 83,591   $ 47,092   $ 61,494  

Earnings per share:

                   

Basic

  $ 1.94   $ 1.11   $ 1.47  

Diluted

  $ 1.90   $ 1.09   $ 1.45  

Weighted-average common shares outstanding:

   
 
   
 
   
 
 

Basic

    43,159     42,446     41,713  

Diluted

    44,044     43,332     42,376  

   

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Silicon Laboratories Inc.
Consolidated Statements of Comprehensive Income
(In thousands)

 
  Year Ended  
 
  December 29,
2018
  December 30,
2017
  December 31,
2016
 

Net income

  $ 83,591   $ 47,092   $ 61,494  

Other comprehensive income (loss), before tax:

   
 
   
 
   
 
 

Net changes to available-for-sale securities:

                   

Unrealized gains (losses) arising during the period

    376     (729 )   (179 )

Reclassification for losses included in net income

    49          

Net changes to cash flow hedges:

   
 
   
 
   
 
 

Unrealized gains (losses) arising during the period

    (953 )       1,466  

Reclassification for (gains) losses included in net income              

    316     (1,808 )   249  

Other comprehensive income (loss), before tax

    (212 )   (2,537 )   1,536  

Provision (benefit) for income taxes

   
(45

)
 
(888

)
 
537
 

Other comprehensive income (loss)

   
(167

)
 
(1,649

)
 
999
 

Comprehensive income

 
$

83,424
 
$

45,443
 
$

62,493
 

   

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Silicon Laboratories Inc.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)

 
  Common Stock    
   
   
 
 
   
  Accumulated
Other
Comprehensive
Income (Loss)
   
 
 
  Number
of Shares
  Par
Value
  Additional
Paid-In
Capital
  Retained
Earnings
  Total
Stockholders'
Equity
 

Balance as of January 2, 2016

    41,727   $ 4   $ 13,868   $ 747,749   $ (507 ) $ 761,114  

Net income

   
   
   
   
61,494
   
   
61,494
 

Other comprehensive income (loss)

                    999     999  

Stock issuances, net of shares withheld for taxes          

    1,055         6,346             6,346  

Income tax benefit (shortfall) from stock-based awards

            (2,061 )           (2,061 )

Repurchases of common stock

    (893 )       (33,299 )   (7,244 )       (40,543 )

Stock-based compensation

            39,609             39,609  

Balance as of December 31, 2016

    41,889     4     24,463     801,999     492     826,958  

Cumulative effect of adoption of accounting standard

   
   
   
   
2,216
   
   
2,216
 

Net income

                47,092         47,092  

Other comprehensive income (loss)

                    (1,649 )   (1,649 )

Stock issuances, net of shares withheld for taxes          

    818         (3,938 )           (3,938 )

Stock-based compensation

            44,809             44,809  

Convertible debt issuance

            37,528             37,528  

Balance as of December 30, 2017

    42,707     4     102,862     851,307     (1,157 )   953,016  

Cumulative effect of adoption of accounting standard

   
   
   
   
26,445
   
(250

)
 
26,195
 

Net income

                83,591         83,591  

Other comprehensive income (loss)

                    (167 )   (167 )

Stock issuances, net of shares withheld for taxes          

    815         (6,180 )           (6,180 )

Repurchases of common stock

    (434 )       (39,276 )           (39,276 )

Stock-based compensation

            50,111             50,111  

Balance as of December 29, 2018

    43,088   $ 4   $ 107,517   $ 961,343   $ (1,574 ) $ 1,067,290  

   

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Silicon Laboratories Inc.
Consolidated Statements of Cash Flows
(In thousands)

 
  Year Ended  
 
  December 29,
2018
  December 30,
2017
  December 31,
2016
 

Operating Activities

                   

Net income

  $ 83,591   $ 47,092   $ 61,494  

Adjustments to reconcile net income to cash provided by operating activities:

                   

Depreciation of property and equipment

    15,912     14,766     13,216  

Amortization of other intangible assets and other assets

    44,102     27,246     27,715  

Amortization of debt discount and debt issuance costs

    12,892     10,146      

Stock-based compensation expense

    50,077     44,752     39,628  

Income tax shortfall from stock-based awards

            (1,671 )

Deferred income taxes

    (8,210 )   (26,452 )   (4,087 )

Changes in operating assets and liabilities:

                   

Accounts receivable

    3,931     3,234     46  

Inventories

    7,660     (13,416 )   (6,093 )

Prepaid expenses and other assets

    (4,960 )   25,266     (3,568 )

Accounts payable

    5,952     (468 )   263  

Other current liabilities and income taxes

    (21,828 )   61,924     2,879  

Deferred income, deferred revenue and returns liability

    (6,202 )   4,453     9,713  

Other non-current liabilities

    (9,375 )   (9,022 )   (10,625 )

Net cash provided by operating activities

    173,542     189,521     128,910  

Investing Activities

   
 
   
 
   
 
 

Purchases of available-for-sale investments

    (395,904 )   (636,363 )   (185,231 )

Sales and maturities of available-for-sale investments

    474,129     294,452     161,921  

Purchases of property and equipment

    (24,462 )   (12,252 )   (10,927 )

Purchases of other assets

    (11,063 )   (4,960 )   (8,801 )

Acquisitions of businesses, net of cash acquired

    (239,729 )   (15,168 )   (6,546 )

Net cash used in investing activities

    (197,029 )   (374,291 )   (49,584 )

Financing Activities

   
 
   
 
   
 
 

Proceeds from issuance of long-term debt, net

        389,468      

Payments on debt

        (72,500 )   (5,000 )

Repurchases of common stock

    (39,276 )       (40,543 )

Payment of taxes withheld for vested stock awards

    (19,483 )   (15,753 )   (10,561 )

Proceeds from the issuance of common stock

    13,303     11,815     13,299  

Payment of acquisition-related contingent consideration

    (3,380 )       (9,500 )

Net cash provided by (used in) financing activities

    (48,836 )   313,030     (52,305 )

Increase (decrease) in cash and cash equivalents

   
(72,323

)
 
128,260
   
27,021
 

Cash and cash equivalents at beginning of period

    269,366     141,106     114,085  

Cash and cash equivalents at end of period

  $ 197,043   $ 269,366   $ 141,106  

Supplemental Disclosure of Cash Flow Information:

                   

Interest paid

  $ 6,227   $ 3,859   $ 2,222  

Income taxes paid

  $ 20,599   $ 8,929   $ 11,185  

Supplemental Disclosure of Non-Cash Activity:

                   

Stock issued in business combination

  $   $   $ 4,181  

   

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018

1. Description of Business

        Silicon Laboratories Inc. (the "Company"), a Delaware corporation, is a leading provider of silicon, software and solutions for a smarter, more connected world. Our award-winning technologies are shaping the future of the Internet of Things (IoT), Internet infrastructure, industrial automation, 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 2018, 2017 and 2016 had 52 weeks and ended on December 29, 2018, December 30, 2017 and December 31, 2016, respectively. 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

        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 interest income and other, net in the Consolidated Statements of Income.

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, goodwill, acquired intangible assets, other long-lived assets, revenue recognition, stock-based compensation and income taxes. Actual results could differ from those estimates, and such differences could be material to the financial statements.

Adoption of New Revenue Accounting Standard

        The Company adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, on December 31, 2017, the first day of its fiscal year ended December 29, 2018. The Company elected the modified retrospective method of adoption which only applies to those contracts which were not completed as of December 31, 2017. Prior periods have not been adjusted. In connection with its adoption of ASC 606, the Company recorded a cumulative-effect adjustment to

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

2. Significant Accounting Policies (Continued)

retained earnings of $26.2 million on December 31, 2017. The following reflects the material changes recorded in connection with the cumulative-effect adjustment (in thousands):

Financial Statement Line Item   Increase
(Decrease)
 

Accounts receivable, net

  $ 230  

Prepaid expenses and other current assets

  $ 7,579  

Other assets, net

  $ (2,282 )

Deferred revenue and returns liability

  $ 27,806  

Deferred income on shipments to distributors

  $ (50,115 )

Other current liabilities

  $ 1,641  

Retained earnings

  $ 26,195  

        The following presents the amounts by which financial statement line items were affected in the current period due to the adoption of ASC 606 (in thousands):

Financial Statement Line Item*   Increase
(Decrease)
 
Consolidated Statements of Income   Year Ended
December 29,
2018
 

Revenues

  $ 12,943  

Cost of revenues

  $ 4,234  

Net income

  $ 6,610  

Earnings per share:

       

Basic

  $ 0.15  

Diluted

  $ 0.15  

 

Consolidated Balance Sheet**   December 29,
2018
 

Prepaid expenses and other current assets

  $ 5,953  

Goodwill

  $ (2,842 )

Other assets, net

  $ (4,464 )

Deferred revenue and returns liability

  $ 22,494  

Deferred income on shipments to distributors

  $ (60,789 )

Other current liabilities

  $ 4,282  

Retained earnings

  $ 32,805  

*
Excludes line items that were not materially affected by the Company's adoption of ASC 606. The adoption had no impact to cash provided by or used in net operating, investing or financing activities in the Consolidated Statements of Cash Flows.

**
Balance sheet line item amounts include the cumulative-effect adjustment recorded on December 31, 2017.

        The primary impact of the Company's adoption of ASC 606 resulted from the acceleration of the timing of revenue recognition on sales to distributors. The Company previously deferred revenue and

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

2. Significant Accounting Policies (Continued)

cost of revenue on such sales until the distributors sold the product to the end customers. The Company now recognizes revenue at the time of sale to the distributor provided all other revenue recognition criteria have been met. The Company records a right of return asset and a returns liability in place of the deferred income on shipments to distributors previously recorded under ASC 605.

Fair Value of Financial Instruments

        The fair values of the Company's financial instruments are recorded using a hierarchical disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities. The three levels are described below:

Cash and Cash Equivalents

        Cash and cash equivalents consist of cash deposits, certificates of deposit, money market funds and investments in debt securities with original maturities of ninety days or less when purchased.

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 interest income and other, 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

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

2. Significant Accounting Policies (Continued)

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. Equity investments in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. The Company's proportionate share of income or loss is recorded in interest income and other, net in the Consolidated Statement of Income. All other non-marketable equity investments are recorded at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. Prior to fiscal 2018, all other non-marketable equity investments were accounted for using the cost method. The Company periodically reviews its equity 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

        The Company uses derivative financial instruments to manage certain exposures to the variability of foreign currency exchange rates and interest 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 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.

        Cash flow hedges used by the Company include foreign currency forward contracts and interest rate swap agreements. Foreign currency forward contracts are used to reduce the earnings impact that exchange rate fluctuations have on operating expenses denominated in currencies other than the U.S. dollar. Interest rate swap agreements are used to manage exposure to interest rate risks.

        The Company also uses foreign currency forward contracts to reduce the earnings impact that exchange rate fluctuations have on non-U.S. dollar balance sheet exposures. The Company does not apply hedge accounting to these foreign currency forward contracts.

Inventories

        Inventories are stated at the lower of cost, determined using the first-in, first-out method, or net realizable value. 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 ten

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

2. Significant Accounting Policies (Continued)

years. Leasehold improvements are depreciated over the lease term or their useful life, whichever is shorter.

        The Company owns 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

        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 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

        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 three 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.

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

2. Significant Accounting Policies (Continued)

Revenue Recognition

        Revenue is recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

Performance Obligations

        Substantially all of the Company's contracts with customers contain a single performance obligation, the sale of mixed-signal integrated circuit (IC) products. Such sales represent a single performance obligation because the sale is one type of good (e.g., an IC) or includes multiple goods that are neither capable of being distinct nor separable from the other promises in the contract (e.g., an IC embedded with software). This performance obligation is satisfied when control of the product is transferred to the customer, which typically occurs upon delivery. Unsatisfied performance obligations primarily represent contracts for products with future delivery dates and with an original expected duration of one year or less. As allowed under ASC 606, the Company has opted to not disclose the amount of unsatisfied performance obligations as these contracts have original expected durations of less than one year.

        The Company's products carry a one-year replacement warranty. The replacement warranty promises customers that delivered products are as specified in the contract (an "assurance-type warranty"). Therefore, the Company accounts for such warranties under ASC 460, Guarantees, and not as a separate performance obligation.

Transaction Price

        The transaction price reflects the Company's expectations about the consideration it will be entitled to receive from the customer and may include fixed or variable amounts. Fixed consideration primarily includes sales to direct customers and sales to distributors in which both the sale to the distributor and the sale to the end customer occur within the same reporting period. Variable consideration includes sales in which the amount of consideration that the Company will receive is unknown as of the end of a reporting period. Such consideration primarily includes sales made to distributors under agreements allowing certain rights of return, referred to as stock rotation, and credits issued to the distributor due to price protection. Stock rotation allows distributors limited levels of returns and is based on the distributor's prior purchases. Price protection represents price discounts granted to certain distributors and is based on negotiations on sales to end customers.

        The Company estimates variable consideration at the most likely amount to which it expects to be entitled. Included in the transaction price estimate are amounts in which it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The estimate is based on information available to the Company, including recent sales activity and pricing data. The Company applies a constraint to its variable consideration estimate which considers both the likelihood of a return and the amount of a potential price concession.

        Variable consideration that does not meet revenue recognition criteria is deferred. The Company records a right of return asset in prepaid expenses and other current assets for the costs of distributor

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Table of Contents


Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

2. Significant Accounting Policies (Continued)

inventory not meeting revenue recognition criteria. A corresponding deferred revenue and returns liability amount is recorded for unrecognized revenue associated with such costs.

Contract Balances

        Accounts receivable represents the Company's unconditional right to receive consideration from its customer. Payments are typically due within 30 days of invoicing and do not include a significant financing component. To date, there have been no material impairment losses on accounts receivable. There were no material contract assets or contract liabilities recorded on the Consolidated Balance Sheet in any of the periods presented.

Shipping and Handling

        Shipping and handling costs are classified as a component of cost of revenues in the Consolidated Statements of Income.

Stock-Based Compensation

        The Company has stock-based compensation plans, which are more fully described in Note 14, 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 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

        Advertising costs are expensed as incurred. Advertising expenses were $1.9 million, $1.4 million and $1.6 million in fiscal 2018, 2017 and 2016, 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

F-15


Table of Contents


Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

2. Significant Accounting Policies (Continued)

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 February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company early adopted this ASU on December 31, 2017. The adoption did not have a material impact on its financial statements.

        In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The objectives of this ASU are to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and to make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company early adopted this ASU on December 31, 2017. The adoption did not have a material impact on its financial statements.

        In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test, which previously measured an impairment loss by comparing the implied fair value of goodwill with its carrying amount. Instead, an entity should recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently evaluating the effect of the adoption of this ASU, but anticipates that the adoption will not have a material impact on its financial statements.

        In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires instruments measured at amortized cost to be presented at the net amount expected to be collected. Entities are also required to record allowances for available-for-sale debt securities rather than reduce the carrying amount. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company expects that the adoption will not have a material impact on its financial statements.

        In February 2016, the FASB issued ASU No. 2016-02, Leases, which was subsequently amended in 2018 by ASU 2018-10, ASU 2018-11 and ASU 2018-20 (collectively, Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. For operating

F-16


Table of Contents


Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

2. Significant Accounting Policies (Continued)

leases, a lessee is required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position. Topic 842 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will elect an optional transition method to account for the impact of the adoption with a cumulative-effect adjustment in the period of adoption and will not restate prior periods. The Company expects to elect certain practical expedients permitted under the transition guidance. The Company is substantially complete with its evaluation of the effect that the adoption of this ASU will have on its financial statements. The Company believes that most of its operating lease commitments will be subject to the new standard. In connection with the adoption of ASC 842, the Company expects to recognize additional right-of-use assets and operating lease liabilities of $20.8 million on December 30, 2018.

3. Earnings Per Share

        The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

 
  Year Ended  
 
  December 29,
2018
  December 30,
2017
  December 31,
2016
 

Net income

  $ 83,591   $ 47,092   $ 61,494  

Shares used in computing basic earnings per share

    43,159     42,446     41,713  

Effect of dilutive securities:

   
 
   
 
   
 
 

Stock-based awards

    885     886     663  

Shares used in computing diluted earnings per share

    44,044     43,332     42,376  

Earnings per share:

                   

Basic

  $ 1.94   $ 1.11   $ 1.47  

Diluted

  $ 1.90   $ 1.09   $ 1.45  

        The Company intends to settle the principal amount of its convertible senior notes in cash and any excess value in shares in the event of a conversion. Accordingly, shares issuable upon conversion of the principal amount have been excluded from the calculation of diluted earnings per share. If the market value of the notes under certain prescribed conditions exceeds the conversion amount, the excess is included in the denominator for the computation of diluted earnings per share using the treasury stock method. For fiscal 2018, approximately 0.1 million shares were included in the denominator for the calculation of diluted earnings per share. For fiscal 2017, no such shares were included in the denominator for the calculation of diluted earnings per share. See Note 10, Debt, to the Consolidated Financial Statements for additional information.

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Table of Contents


Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

4. 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.

 
  Fair Value Measurements
at December 29, 2018 Using
   
 
Description
  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Total  

Assets:

                         

Cash equivalents:

                         

Money market funds

  $ 74,990   $   $   $ 74,990  

Corporate debt securities

        18,820         18,820  

Government debt securities

    9,338             9,338  

Total cash equivalents

  $ 84,328   $ 18,820   $   $ 103,148  

Short-term investments:

   
 
   
 
   
 
   
 
 

Government debt securities

  $ 48,141   $ 99,211   $   $ 147,352  

Corporate debt securities

        269,427         269,427  

Total short-term investments

  $ 48,141   $ 368,638   $   $ 416,779  

Other assets, net:

   
 
   
 
   
 
   
 
 

Auction rate securities

  $   $   $ 5,759   $ 5,759  

Total

  $   $   $ 5,759   $ 5,759  

Total

 
$

132,469
 
$

387,458
 
$

5,759
 
$

525,686
 

F-18


Table of Contents


Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

4. Fair Value of Financial Instruments (Continued)


 
  Fair Value Measurements
at December 30, 2017 Using
   
 
Description
  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Total  

Assets:

                         

Cash equivalents:

                         

Money market funds

  $ 106,047   $   $   $ 106,047  

Corporate debt securities

        11,231         11,231  

Government debt securities

    53,615     1,453         55,068  

Total cash equivalents

  $ 159,662   $ 12,684   $   $ 172,346  

Short-term investments:

   
 
   
 
   
 
   
 
 

Government debt securities

  $ 94,575   $ 228,247   $   $ 322,822  

Corporate debt securities

        171,835         171,835  

Total short-term investments

  $ 94,575   $ 400,082   $   $ 494,657  

Other assets, net:

   
 
   
 
   
 
   
 
 

Auction rate securities

  $   $   $ 5,681   $ 5,681  

Total

  $   $   $ 5,681   $ 5,681  

Total

 
$

254,237
 
$

412,766
 
$

5,681
 
$

672,684
 

Valuation methodology

        The Company's cash equivalents and short-term investments that are 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 foreign exchange rates, forward and spot prices for currencies, and market observable data of similar instruments.

Available-for-sale investments

        The Company's investments 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.

F-19


Table of Contents


Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

4. Fair Value of Financial Instruments (Continued)

The following summarizes the contractual underlying maturities of the Company's available-for-sale investments at December 29, 2018 (in thousands):

 
  Cost   Fair Value  

Due in one year or less

  $ 338,623   $ 337,910  

Due after one year through ten years

    169,058     168,657  

Due after ten years

    19,360     19,119  

  $ 527,041   $ 525,686  

        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):

 
  Less Than 12 Months   12 Months or Greater   Total  
As of December 29, 2018
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
 

Government debt securities

  $ 13,278   $ (10 ) $ 88,696   $ (583 ) $ 101,974   $ (593 )

Corporate debt securities

    112,699     (273 )   76,310     (448 )   189,009     (721 )

Auction rate securities

            5,759     (241 )   5,759     (241 )

  $ 125,977   $ (283 ) $ 170,765   $ (1,272 ) $ 296,742   $ (1,555 )

 

 
  Less Than 12 Months   12 Months or Greater   Total  
As of December 30, 2017
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
 

Government debt securities

  $ 244,880   $ (931 ) $ 3,027   $ (15 ) $ 247,907   $ (946 )

Corporate debt securities

    151,149     (447 )   11,578     (73 )   162,727     (520 )

Auction rate securities

            5,681     (319 )   5,681     (319 )

  $ 396,029   $ (1,378 ) $ 20,286   $ (407 ) $ 416,315   $ (1,785 )

        The gross unrealized losses as of December 29, 2018 and December 30, 2017 were due primarily to changes in market interest rates and the illiquidity of the Company's auction-rate securities. The Company's auction-rate securities have been illiquid since 2008 when auctions for the securities failed because sell orders exceeded buy orders. These securities have a contractual maturity date of 2046. The Company is unable to predict if these funds will become available before their maturity date.

        The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the severity and duration of the impairment, changes in underlying credit ratings, forecasted recovery, the Company's 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. As of December 29, 2018, the Company has determined that no other-than-temporary impairment losses existed.

F-20


Table of Contents


Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

4. Fair Value of Financial Instruments (Continued)

        At December 29, 2018 and December 30, 2017, there were no material unrealized gains associated with the Company's available-for-sale investments.

Level 3 fair value measurements

        The following summarizes quantitative information about Level 3 fair value measurements.

Auction rate securities

Fair Value at
December 29, 2018
(000s)
  Valuation Technique   Unobservable Input   Weighted
Average
$5,759   Discounted cash flow   Estimated yield   3.23%

 

 

 

 

Expected holding period

 

10 years

 

 

 

 

Estimated discount rate

 

3.76%

        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.

        The following summarizes the activity in Level 3 financial instruments for the years ended December 29, 2018 and December 30, 2017 (in thousands):

Assets

 
  Year Ended  
Auction Rate Securities
  December 29,
2018
  December 30,
2017
 

Beginning balance

  $ 5,681   $ 5,196  

Gain included in other comprehensive income (loss)

    78     485  

Ending balance

  $ 5,759   $ 5,681  

F-21


Table of Contents


Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

4. Fair Value of Financial Instruments (Continued)

Liabilities

 
  Year Ended  
Contingent Consideration (1)
  December 30,
2017
 

Beginning balance

  $  

Issues

    3,829  

Reclassification to acquisition-related liabilities

    (3,380 )

Gain recognized in selling, general and administrative expenses

    (449 )

Ending balance

  $  

(1)
In connection with the acquisition of Zentri, the Company recorded contingent consideration based on fiscal 2017 revenue from certain Zentri products.

Fair values of other financial instruments

        The Company's debt is recorded at cost, but is measured at fair value for disclosure purposes. The fair value of the Company's convertible senior notes is determined using observable market prices. The notes are traded in less active markets and are therefore classified as a Level 2 fair value measurement. As of December 29, 2018 and December 30, 2017, the fair value of the convertible senior notes was $419.0 million and $466.2 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.

5. Derivative Financial Instruments

        The Company uses derivative financial instruments to manage certain exposures to the variability of foreign currency exchange rates and interest 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.

Cash Flow Hedges

Foreign Currency Forward Contracts

        The Company uses foreign currency forward contracts to reduce the earnings impact that exchange rate fluctuations have on operating expenses denominated in currencies other than the U.S. dollar. Changes in the fair value of the contracts are recorded in accumulated other comprehensive loss in the Consolidated Balance Sheet and subsequently reclassified into earnings in the period during which the hedged transaction is recognized. The reclassified amount is reported in the same financial statement line item as the hedged item. If the foreign currency forward contracts are terminated or can no longer qualify as hedging instruments prior to maturity, the fair value of the contracts recorded in accumulated other comprehensive loss may be recognized in the Consolidated Statement of Income based on an assessment of the contracts at the time of termination.

F-22


Table of Contents


Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

5. Derivative Financial Instruments (Continued)

        The Company entered into foreign currency forward contracts in March 2018 for a portion of its forecasted operating expenses denominated in the Norwegian Krone. As of December 29, 2018, the contracts had maturities of one to twelve months and an aggregate notional value of $8.8 million. Losses expected to be reclassified into earnings in the next 12 months were not material. The fair value of the contracts, contract losses recognized in other comprehensive income and amounts reclassified from accumulated other comprehensive loss into earnings were not material for any of the periods presented.

Interest Rate Swaps

        The Company entered into an interest rate swap agreement with an original notional value of $72.5 million in connection with its Credit Facility in July 2016. The Company terminated the swap agreement on March 6, 2017, which resulted in the reclassification of $1.8 million of unrealized gains that were previously recorded in accumulated other comprehensive loss into earnings during fiscal 2017.

Non-designated Hedges

Foreign Currency Forward Contracts

        The Company uses foreign currency forward contracts 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 interest income and other, 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 these foreign currency forward contracts.

        As of December 30, 2017, the Company held one foreign currency forward contract denominated in the Norwegian Krone with a notional value of $2.4 million. The fair value of the contract was not material as of December 30, 2017.

        The before-tax effect of derivative instruments not designated as hedging instruments was as follows (in thousands):

 
  Year Ended    
Gain (Loss) Recognized in Income
  December 29,
2018
  December 30,
2017
  December 31,
2016
  Location

Foreign currency forward contracts

  $ 105   $ (207 ) $ (92 ) Interest income and other, net

F-23


Table of Contents


Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

6. Balance Sheet Details

        The following tables show the details of selected Consolidated Balance Sheet items (in thousands):

Accounts Receivable, Net

 
  December 29,
2018
  December 30,
2017
 

Accounts receivable

  $ 73,832   $ 72,005  

Allowance for doubtful accounts

    (638 )   (638 )

  $ 73,194   $ 71,367  

Inventories

 
  December 29,
2018
  December 30,
2017
 

Work in progress

  $ 50,983   $ 46,698  

Finished goods

    23,989     26,434  

  $ 74,972   $ 73,132  

Property and Equipment

 
  December 29,
2018
  December 30,
2017
 

Buildings and improvements

  $ 109,025   $ 96,196  

Equipment

    62,895     59,836  

Computers and purchased software

    42,487     37,598  

Leasehold interest in ground leases

    23,840     23,840  

Leasehold improvements

    12,006     10,483  

Furniture and fixtures

    7,794     5,691  

    258,047     233,644  

Accumulated depreciation

    (118,998 )   (105,962 )

  $ 139,049   $ 127,682  

Other Current Liabilities

 
  December 29,
2018
  December 30,
2017
 

Accrued compensation and benefits

  $ 37,113   $ 33,631  

Accrued price protection credits

    12,033     8,239  

Other

    32,034     31,489  

  $ 81,180   $ 73,359  

F-24


Table of Contents


Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

6. Balance Sheet Details (Continued)

Other Non-current Liabilities

 
  December 29,
2018
  December 30,
2017
 

Non-current tax liabilities

  $ 21,576   $ 39,196  

Other

    35,872     38,666  

  $ 57,448   $ 77,862  

7. 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, corporate bonds, variable-rate demand notes, U.S. government securities, agency securities, asset-back securities, certificates of deposit, commercial paper, auction-rate securities and international government 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:

 
  December 29,
2018
  December 30,
2017
 

Arrow Electronics

    12 %   14 %

Edom Technology

    10 %   *  

Avnet

        16 %

*
Less than 10% of accounts receivable

        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 three notes receivable from two privately held companies. The total carrying value of the notes was $2.4 million as of December 29, 2018, which was recorded in other assets, net in the Consolidated Balance Sheet.

        The Company holds two equity investments in privately held companies. One investment is accounted for using the equity method and had a carrying value of $4.1 million as of December 29, 2018. The second investment is recorded at cost minus impairment and had a carrying value of $2.0 million as of December 29, 2018. In fiscal 2018, the Company reduced the carrying value of the second investment by $1.8 million, which was recorded in interest income and other, net in the Consolidated Statements of Income. Both investments were recorded in other assets, net in the Consolidated Balance Sheet.

F-25


Table of Contents


Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

7. Risks and Uncertainties (Continued)

        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 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 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, results of operations and cash flows.

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 end customers or

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

7. Risks and Uncertainties (Continued)

contract manufacturers accounted for greater than 10% of revenue during fiscal 2018, 2017 or 2016. The Company's distributors that accounted for greater than 10% of revenue consisted of the following:

 
  Year Ended  
 
  December 29,
2018
  December 30,
2017
  December 31,
2016
 

Arrow Electronics

    21 %   12 %   11 %

Edom Technology

    17 %   19 %   17 %

Avnet

    *     14 %   13 %

*
Less than 10% of revenue

8. Acquisitions

Z-Wave

        On April 18, 2018, the Company completed the acquisition of the Z-Wave business from Sigma Designs, Inc. for $243 million in cash. Z-Wave is an Internet of Things (IoT) technology for smart home solutions.

        This strategic acquisition expands the Company's IoT connectivity portfolio in the connected home market, 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. A portion of the goodwill is deductible for tax purposes. The purchase price was allocated as follows (in thousands):

 
  Amount   Weighted-Average
Amortization Period
(Years)

Intangible assets:

         

In-process research and development

  $ 20,900   Not amortized

Developed technology

    69,875   7

Customer relationships

    25,000   4

Trademarks

    9,900   7

    125,675    

Cash and cash equivalents

    2,841    

Accounts receivable

    5,311    

Inventory

    15,581    

Other current assets

    329    

Goodwill

    109,117    

Other non-current assets

    2,587    

Accounts payable

    (3,306 )  

Other current liabilities

    (8,918 )  

Other non-current liabilities

    (6,648 )  

Total purchase price

  $ 242,569    

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

8. Acquisitions (Continued)

        In-process research and development (IPR&D) represents acquired smart home technology that had not been completed as of the acquisition date. The fair value of IPR&D was determined using the income approach. The discount rate applied to the projected cash flows was 15.0%, which reflects the engineering and technical risks related to the projects. The allocation of the purchase price is preliminary and subject to change, based on the finalization of income tax matters.

        Revenues attributable to the Z-Wave business from the date of acquisition to December 29, 2018 were $37.0 million. The Company recorded approximately $4.9 million of acquisition-related costs in selling, general and administrative expenses during fiscal 2018.

        The following unaudited pro forma financial information presents combined results of operations for each of the periods presented, giving effect to the acquisition as if it had been completed on January 1, 2017. The pro forma financial information includes charges for the fair value write-up associated with acquired inventory, adjustments for amortization expense of acquired intangible assets and tax-related expenses. The pro forma results of operations are presented for informational purposes only and are not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2017 or of results that may occur in the future (in thousands, except per share data):

 
  Year Ended  
 
  December 29,
2018
  December 30,
2017
 
 
  (Unaudited)
 

Revenues

  $ 882,109   $ 824,009  

Net income

  $ 87,874   $ 27,958  

Earnings per share:

   
 
   
 
 

Basic

  $ 2.04   $ 0.66  

Diluted

  $ 2.00   $ 0.65  

Zentri

        On January 20, 2017, the Company acquired Zentri, Inc., a private company. Zentri is an innovator in low-power, cloud-connected Wi-Fi technologies for the IoT. The Company acquired Zentri for approximately $18.1 million, including initial cash consideration of approximately $14.3 million, and potential additional consideration with an estimated fair value of approximately $3.8 million at the date of acquisition.

        The purchase price was allocated as follows: intangible assets—$6.7 million; goodwill—$12.1 million; and other net liabilities—$0.7 million. The goodwill is not deductible for tax purposes. Pro forma information related to this acquisition has not been presented because it would not be materially different from amounts reported.

Micrium

        On October 3, 2016, the Company acquired Micrium, a private company. Micrium is a supplier of real-time operating system (RTOS) software for the IoT. The Company acquired Micrium for approximately $12.4 million, consisting of approximately $8.2 million in cash and $4.2 million in stock consideration. An additional approximately $1.0 million in stock consideration 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 over four years.

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

8. Acquisitions (Continued)

        The purchase price was allocated as follows: intangible assets—$9.5 million; goodwill—$3.4 million; and other net liabilities—$0.5 million. A portion of the goodwill is deductible for tax purposes. Pro forma information related to this acquisition has not been presented because it would not be materially different from amounts reported.

Energy Micro

        On July 1, 2013, the Company acquired Energy Micro. In fiscal 2016, the Company entered into an agreement which settled the amount of the earn-out to be paid for fiscal 2015 through 2018. The total settlement amount was approximately $16.0 million (in lieu of potential payments of up to $26.7 million) and was paid on May 11, 2016.

9. Goodwill and Other Intangible Assets

Goodwill

        The following summarizes the activity in goodwill for the years ended December 29, 2018 and December 30, 2017 (in thousands):

 
  Year Ended  
 
  December 29,
2018
  December 30,
2017
 

Beginning balance

  $ 288,227   $ 276,130  

Additions due to business combinations

    109,117     12,097  

Ending balance

  $ 397,344   $ 288,227  

Other Intangible Assets

        The gross carrying amount and accumulated amortization of other intangible assets are as follows (in thousands):

 
   
  December 29, 2018   December 30, 2017  
 
  Weighted-Average
Amortization
Period
(Years)
 
 
  Gross
Amount
  Accumulated
Amortization
  Gross
Amount
  Accumulated
Amortization
 

Core and developed technology

  8   $ 237,265   $ (102,116 ) $ 161,700   $ (89,442 )

Customer relationships

  5     46,890     (21,075 )   25,470     (16,180 )

Patents

              3,000     (2,750 )

Trademarks

  7     12,310     (2,442 )   3,690     (2,344 )

Total

  8   $ 296,465   $ (125,633 ) $ 193,860   $ (110,716 )

        Gross intangible assets increased $125.7 million in fiscal 2018 for assets added due to the acquisition of Z-Wave business. This increase was offset by $23.1 million due to the removal of fully amortized assets.

        Amortization expense related to intangible assets for fiscal 2018, 2017 and 2016 was $38.0 million, $27.1 million and $27.3 million, respectively. The estimated aggregate amortization expense for

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

9. Goodwill and Other Intangible Assets (Continued)

intangible assets subject to amortization for each of the five succeeding fiscal years is as follows (in thousands):

Fiscal Year
   
 

2019

  $ 39,222  

2020

    36,727  

2021

    32,337  

2022

    24,206  

2023

    18,286  

10. Debt

1.375% Convertible Senior Notes

        On March 6, 2017, the Company completed a private offering of $400 million principal amount convertible senior notes (the "Notes"). The Notes bear interest semi-annually at a rate of 1.375% per year and will mature on March 1, 2022, unless repurchased, redeemed or converted at an earlier date. The Company used $72.5 million of the proceeds to pay off the then remaining balance under its credit agreement.

        The Notes are convertible at an initial conversion rate of 10.7744 shares of common stock per $1,000 principal amount of the Notes, or approximately 4.3 million shares of common stock, which is equivalent to a conversion price of approximately $92.81 per share. The conversion rate is subject to adjustment under certain circumstances. Holders may convert the Notes under the following circumstances: during any calendar quarter after the calendar quarter ended on June 30, 2017 if the closing price of the Company's common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to 130% of the conversion price of the Notes; during the five business day period after any ten consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the closing sale price of our common stock and the conversion rate on each such trading day; if specified distributions or corporate events occur; if the Notes are called for redemption; or at any time after December 1, 2021. The Company may redeem all or any portion of the Notes, at its option, on or after March 6, 2020, if the last reported sale price of the Company's common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period. Upon conversion, the Notes may be settled in cash, shares of the Company's common stock or a combination of cash and shares, at the Company's election.

        The principal balance of the Notes was separated into liability and equity components, and was recorded initially at fair value. The excess of the principal amount of the liability component over its carrying amount represents the debt discount, which is amortized to interest expense over the term of the Notes using the effective interest method. The carrying amount of the liability component was estimated by discounting the contractual cash flows of similar non-convertible debt at an appropriate market rate at the date of issuance.

        The Company incurred debt issuance costs of approximately $10.6 million, which was allocated to the liability and equity components in proportion to the allocation of the proceeds. The costs allocated

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

10. Debt (Continued)

to the liability component are being amortized as interest expense over the term of the Notes using the effective interest method.

        The carrying amount of the Notes consisted of the following (in thousands):

 
  December 29,
2018
  December 30,
2017
 

Liability component

             

Principal

  $ 400,000   $ 400,000  

Unamortized debt discount

    (39,298 )   (50,499 )

Unamortized debt issuance costs

    (5,931 )   (7,622 )

Net carrying amount

  $ 354,771   $ 341,879  

Equity component

             

Net carrying amount

  $ 57,735   $ 57,735  

        The liability component of the Notes is recorded in convertible debt on the Consolidated Balance Sheet. The equity component of the Notes is recorded in additional paid-in capital. The effective interest rate for the liability component was 4.75%. As of December 29, 2018, the remaining period over which the debt discount and debt issuance costs will be amortized was 3.2 years.

        Interest expense related to the Notes was comprised of the following (in thousands):

 
  Year Ended  
 
  December 29,
2018
  December 30,
2017
 

Contractual interest expense

  $ 5,500   $ 4,492  

Amortization of debt discount

    11,202     8,816  

Amortization of debt issuance costs

    1,690     1,330  

  $ 18,392   $ 14,638  

Credit Facility

        In connection with the Company's offering of the Notes, it and certain of its domestic subsidiaries (the "Guarantors") amended its existing credit agreement and paid off the then remaining balance of $72.5 million. The amended agreement (the "Credit Facility") consists of a $300 million revolving credit facility with a maturity date of July 24, 2020. The Credit Facility 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%

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

10. Debt (Continued)

and for base rate loans range from 0.25% to 1.00%, depending in each case, on the leverage ratio as defined in the Credit Facility.

        The Credit Facility 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 December 29, 2018, the Company was in compliance with all covenants of the Credit Facility. The Company's obligations under the Credit Facility are guaranteed by the Guarantors and are secured by a security interest in substantially all assets of the Company and the Guarantors.

11. Commitments and Contingencies

Operating Leases

        The Company leases certain facilities under operating lease agreements that expire at various dates through 2027. Some of these arrangements contain renewal options and require the Company to pay taxes, insurance and maintenance costs.

        Rent expense under operating leases was $6.0 million, $5.5 million and $4.7 million for fiscal 2018, 2017 and 2016, respectively. The minimum annual future rentals under the terms of these leases as of December 29, 2018 are as follows (in thousands):

Fiscal Year
   
 

2019

  $ 5,287  

2020

    4,746  

2021

    4,051  

2022

    3,485  

2023

    2,810  

Thereafter

    3,842  

Total minimum lease payments

  $ 24,221  

Investment Commitment

        The Company has committed to invest up to $10.0 million in a limited partnership, of which approximately $4.3 million was funded through December 29, 2018.

Patent Litigation—Cresta Technology

        On January 28, 2014, Cresta Technology Corporation ("Cresta Technology"), a Delaware corporation, filed a lawsuit against the Company in the United States District Court in the District of Delaware, alleging infringement of three United States Patents (the "Cresta Patents"). 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 six United States Patents.

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

11. Commitments and Contingencies (Continued)

        Cresta Technology declared bankruptcy in 2016 and the Cresta patents and the Delaware lawsuit were acquired by Crespe LLC.

        On September 17, 2018, the Company and Crespe LLC settled all matters. The Company received a non-material payment from Crespe LLC. There was no payment from the Company and the Company received a full license to the Cresta Patents and dismissal of all claims.

Patent Litigation—Bandspeed

        On June 21, 2018, Bandspeed, LLC ("Bandspeed"), a Texas limited liability company, filed a lawsuit against the Company in the United States District Court of the Western District of Texas, Austin Division, alleging infringement of eight United States Patents. On November 9, 2018, the Company and Bandspeed settled all matters, and the Court ordered a dismissal on November 19, 2018. The Company made a non-material payment to Bandspeed and received a full license to the alleged patents and dismissal of all claims.

Other

        The Company is involved in various other legal proceedings that have arisen in the normal course of business. While the ultimate results cannot be predicted with certainty, the Company does not expect them to have a material adverse effect on its Consolidated Financial Statements.

12. Stockholders' Equity

Common Stock

        The Company issued 0.8 million shares of common stock during fiscal 2018.

Share Repurchase Programs

        The Board of Directors authorized the following share repurchase programs (in thousands):

Program Authorization Date
  Program
Termination
Date
  Program
Amount
 

October 2017

  December 2019   $ 200,000 *

January 2017

  December 2017   $ 100,000  

August 2015

  December 2016   $ 100,000  

*
In October 2018, the Board of Directors increased the share repurchase amount for the October 2017 program from $100 million to $200 million and extended the termination date from December 2018 to December 2019.

        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 0.4 million shares of its common stock for $39.3 million during fiscal 2018. The Company did not repurchase any shares of its common stock during fiscal 2017. The

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

12. Stockholders' Equity (Continued)

Company repurchased 0.9 million shares of its common stock for $40.5 million during fiscal 2016. These shares were retired upon repurchase.

Reclassifications From Accumulated Other Comprehensive Loss

        The following table summarizes the effect on net income from reclassifications out of accumulated other comprehensive loss (in thousands):

 
  Year ended  
Reclassification
  December 29,
2018
  December 30,
2017
  December 31,
2016
 

Losses on available-for-sales securities to:

                   

Interest income and other, net

  $ (49 ) $   $  

Gains (losses) on cash flow hedges to:

   
 
   
 
   
 
 

Interest income and other, net

    (316 )        

Interest expense

        1,808     (249 )

    (365 )   1,808     (249 )

Income tax (expense) benefit

   
77
   
(633

)
 
87
 

Total gains (losses) reclassified

  $ (288 ) $ 1,175   $ (162 )

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 (in thousands):

 
  Year ended  
Income tax (expense) benefit on:
  December 29,
2018
  December 30,
2017
  December 31,
2016
 

Net changes to available-for-sale securities:

                   

Unrealized gains (losses) arising during the period

  $ (79 ) $ 255   $ 63  

Reclassification for losses included in net income

    (10 )        

Net changes to cash flow hedges:

   
 
   
 
   
 
 

Unrealized gains (losses) arising during the period

    200         (513 )

Reclassification for gains (losses) included in net income          

    (66 )   633     (87 )

  $ 45   $ 888   $ (537 )

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

13. Revenues

        The Company groups its revenues into four categories, based on the markets and applications in which its products may be used. The following disaggregates the Company's revenue by product category (in thousands):

 
  Year Ended  
 
  December 29,
2018
  December 30,
2017 (1)
  December 31,
2016 (1)
 

Internet of Things

  $ 463,838   $ 395,012   $ 314,614  

Infrastructure

    199,478     152,158     147,677  

Broadcast

    141,412     152,980     157,746  

Access

    63,539     68,717     77,589  

  $ 868,267   $ 768,867   $ 697,626  

(1)
Under the modified retrospective method, prior period amounts have not been adjusted.

        A portion of the Company's sales are made to distributors under agreements allowing certain rights of return and/or price protection related to the final selling price to the end customers. These factors impact the timing and uncertainty of revenues and cash flows. The Company recognized revenue of $24.3 million during fiscal 2018 from performance obligations that were satisfied in previous reporting periods. The following disaggregates the Company's revenue by sales channel (in thousands):

 
  Year Ended  
 
  December 29,
2018
  December 30,
2017 (1)
  December 31,
2016 (1)
 

Distributors

  $ 618,989   $ 547,419   $ 471,622  

Direct customers

    249,278     221,448     226,004  

  $ 868,267   $ 768,867   $ 697,626  

(1)
Under the modified retrospective method, prior period amounts have not been adjusted.

14. 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 2017, the stockholders of the Company approved amendments to both the 2009 Plan and the 2009 Purchase Plan. These 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.

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 fiscal 2017 amendments to the 2009 Plan created a single share pool. All awards now deduct one share from the 2009 Plan shares available for issuance for each share granted. Awards

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

14. Stock-Based Compensation (Continued)

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.

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

        The Company granted to its employees 0.6 million, 0.7 million and 1.3 million shares of full value awards and 0.0 million, 0.0 million, and 0.2 million stock options from the 2009 Plan during fiscal 2018, 2017 and 2016, respectively.

        The Company recorded $0.9 million in selling, general and administrative expense during fiscal 2016 in connection with the modifications of certain equity awards. The modifications were pursuant to three employee terminations in fiscal 2016. There were no other significant modifications made to any stock grants during fiscal 2018, 2017 or 2016.

        Included in the full value awards granted under the 2009 Plan in fiscal 2018, 2017 and 2016 were a total of 41 thousand, 54 thousand and 65 thousand market-based stock awards, respectively. The awards, also known as market stock units (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 PHLX Semiconductor Sector Total Return Index.

        Also included in the full value awards granted under the 2009 Plan during fiscal 2018, 2017 and 2016 were 41 thousand, 54 thousand and 65 thousand performance-based stock awards, respectively. The awards, also known as PSUs, provide for the rights to acquire a number of shares of common stock for no cash consideration based upon the achievement of specified revenue objectives during the year. The requisite service period for these PSUs is approximately three years from the date of grant.

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

14. Stock-Based Compensation (Continued)

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 2018, 2017 and 2016, the Company issued 223 thousand, 239 thousand and 224 thousand shares, respectively, under the 2009 Purchase Plan to its employees. The weighted-average fair value for purchase rights granted in fiscal 2018 under the 2009 Purchase Plan was $22.59 per share.

Accounting for Stock-Based Compensation

        Stock-based compensation costs are based on the fair values on the date of grant for stock awards and stock options and on the date of enrollment for the employee stock purchase plans. The fair values of stock awards (such as RSUs, PSUs and RSAs) are estimated based on their intrinsic values. The fair values of MSUs are estimated using a Monte Carlo simulation. The fair values of stock options and employee stock purchase plans are estimated using the Black-Scholes option-pricing model.

        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 estimates potential forfeitures of stock grants and adjusts 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

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Silicon Laboratories Inc.
Notes to Consolidated Financial Statements
December 29, 2018 (Continued)

14. Stock-Based Compensation (Continued)

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. The fair values of PSUs are amortized as compensation expense on a straight-line basis over the performance period when the performance is probable of achievement, and over the remaining service periods thereafter. Compensation expense recognized is shown in the operating activities section of the Consolidated Statements of Cash Flows.

        The fair values estimated from the Black-Scholes option-pricing model for ESPP and stock options granted were calculated using the following assumptions:

 
  Year Ended  
Employee Stock Purchase Plan
  December 29,
2018
  December 30,
2017
  December 31,
2016
 

Expected volatility

    30 %   28 %   30 %

Risk-free interest rate %

    2.4 %   1.1 %   0.6 %

Expected term (in months)

    9     8     15  

Dividend yield

             

 

 
  Year Ended  
Stock Options
  December 29,
2018
  December 30,
2017
  December 31,
2016
 

Expected volatility