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Table of Contents
Part IV

Table of Contents


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

FORM 10-K

(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   Name of exchange on which registered
Common Stock, $0.0001 par value   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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

         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.

   


Table of Contents


Table of Contents

 
   
   
  Page
Number
 

Part I

     

 

       

  Item 1.  

Business

    2  

  Item 1A.  

Risk Factors

    13  

  Item 1B.  

Unresolved Staff Comments

    28  

  Item 2.  

Properties

    28  

  Item 3.  

Legal Proceedings

    29  

  Item 4.  

Mine Safety Disclosures

    29  

Part II

     

 

       

  Item 5.  

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    30  

  Item 6.  

Selected Financial Data

    32  

  Item 7.  

Management's Discussion and Analysis of Financial Condition and Results of Operations

    33  

  Item 7A.  

Quantitative and Qualitative Disclosures about Market Risk

    45  

  Item 8.  

Financial Statements and Supplementary Data

    46  

  Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    46  

  Item 9A.  

Controls and Procedures

    46  

  Item 9B.  

Other Information

    47  

Part III

     

 

       

  Item 10.  

Directors, Executive Officers and Corporate Governance

    48  

  Item 11.  

Executive Compensation

    48  

  Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    48  

  Item 13.  

Certain Relationships and Related Transactions, and Director Independence

    48  

  Item 14.  

Principal Accounting Fees and Services

    48  

Part IV

     

 

       

  Item 15.  

Exhibits and Financial Statement Schedules

    49  

  Item 16.  

Form 10-K Summary

    51  


Cautionary Statement

        Except for the historical financial information contained herein, the matters discussed in this report on Form 10-K (as well as documents incorporated herein by reference) may be considered "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include declarations regarding the intent, belief or current expectations of Silicon Laboratories Inc. and its management and may be signified by the words "believe," "estimate," "expect," "intend," "anticipate," "plan," "project," "will" or similar language. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Actual results could differ materially from those indicated by such forward-looking statements. Factors that could cause or contribute to such differences include those discussed under "Risk Factors" and elsewhere in this report. Silicon Laboratories disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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Part I

Item 1.    Business

General

        Silicon Laboratories Inc. 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. Our world-class engineering team creates products focused on performance, energy savings, connectivity and simplicity.

        Our primary semiconductor products are mixed-signal integrated circuits (ICs), which are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process. Our mixed-signal ICs leverage standard complementary metal oxide semiconductor (CMOS), a low cost, widely available process technology. Use of CMOS technology enables smaller, more cost-effective and energy-efficient solutions. Our expertise in analog-intensive, mixed-signal IC design in CMOS allows us to develop new and innovative products that are highly integrated, simplifying our customers' designs and improving their time-to-market.

Industry Background

        The pervasiveness of connectivity and mobile devices is driving semiconductor consumption. Intelligence is being added to electronic systems to enable Internet connectivity, power efficiency and an improved user experience. This in turn is increasing the demand for bandwidth, requiring more infrastructure to support higher performance networks. The nearly ubiquitous availability of Internet access and the increasing intelligence of electronic devices and mobility are enabling what is called the Internet of Things, a term that describes the exponential increase in IP-enabled devices connected to the Internet.

        These trends require more and more interaction between the analog world we live in and the digital world of computing, which is driving the need for analog-intensive, mixed-signal circuits in a wide range of electronic products. Traditional mixed-signal designs relied upon solutions built with numerous, complex discrete analog and digital components. While these traditional designs provide the required functionality, they are often inefficient and inadequate for use in markets where size, cost, power consumption and performance are increasingly important product differentiators. To improve their competitive position, electronics manufacturers must reduce the cost and complexity of their systems and enable new features or functionality to differentiate themselves from their competitors.

        Simultaneously, these manufacturers face accelerating time-to-market demands and must rapidly adapt to evolving industry standards and new technologies. Because analog-intensive, mixed-signal design expertise is difficult to find, these manufacturers increasingly are turning to third parties, like us, to provide advanced mixed-signal solutions. Mixed-signal design requires specific expertise and relies on creative, experienced engineers to deliver solutions that optimize speed, power and performance, despite the noisy digital environment, and within the constraints of standard manufacturing processes. The development of this design expertise typically requires years of practical analog design experience under the guidance of a senior engineer, and engineers with the required level of skill and expertise are in short supply.

        Many IC solution providers lack sufficient analog expertise to develop compelling mixed-signal products. As a result, manufacturers of electronic devices value providers that can supply them with mixed-signal solutions offering greater functionality, smaller size and lower power requirements at a reduced cost and shorter time-to-market.

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Products

        We provide analog-intensive, mixed-signal solutions for use in a variety of electronic products in a broad range of applications for the IoT including connected home and security, industrial, smart energy, consumer, automotive and lighting applications. We are a supplier of wireless connectivity solutions for the IoT based on Zigbee®, sub-GHz proprietary technologies, Bluetooth®, Z-Wave®, Thread, and Wi-Fi®.

        We provide a wide range of timing and isolation products for infrastructure applications including high-performance clocks and oscillators for networking equipment, data centers and wireless base stations, as well as digital isolators and current sensors for industrial power supplies, motor control, solar inverters and hybrid-electric vehicles. We also provide broadcast products, such as TV tuners and demodulators and automotive radio tuners, and access products including subscriber line interface circuits for voice over IP (VoIP), embedded modems, and Power over Ethernet (PoE) power source equipment and powered device ICs.

        Our products integrate complex mixed-signal functions that are frequently performed by numerous discrete components in competing products into a single chip or chipset. By doing so, we create products that, when compared to many competing products, offer the following benefits:

    Require less printed circuit board (PCB) space;

    Reduce the use of external components lowering the system cost and simplifying design;

    Offer superior performance improving our customers' end products;

    Provide increased reliability and manufacturability, improving customer yields; and/or

    Reduce system power requirements enabling smaller form factors and/or longer battery life.

        We group our products into the following categories:

    Internet of Things products, which include our microcontroller (MCU), wireless and sensor products;

    Broadcast products, which include our broadcast consumer and automotive products;

    Infrastructure products, which include our timing products (clocks and oscillators), and isolation devices; and

    Access products, which include our Voice over IP (VoIP) products, embedded modems and Power over Ethernet (PoE) devices.

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        The following table summarizes the diverse product areas and applications for the various products that we have introduced to customers:

Product Areas and Description
  Applications

Internet of Things Products

   

Microcontrollers and Wireless Products

 

 

We offer a family of products ideal for embedded systems that include energy friendly 8-bit mixed-signal microcontrollers, 32-bit wireless MCUs and ultra-low-power 32-bit MCUs based on scalable ARM® Cortex-M0+/M3/M4 cores, as well as wireless connectivity devices such as our multiprotocol Wireless Gecko system-on-chip (SoC) devices. Our wireless modules provide flexible, highly integrated products that meet demanding requirements and can be used in many applications. Our wireless connectivity solutions for the IoT are based on Zigbee, sub-GHz proprietary technologies, Bluetooth, Z-Wave, Thread and Wi-Fi. Our EFM32™, EFM8™, 8051, wireless MCUs and wireless SoCs are supported by Simplicity Studio™, which provides one-click access to design tools, documentation, software and support resources. We also offer a Micrium® real-time operating system (RTOS) to help simplify software development for IoT applications by coordinating and prioritizing multiprotocol connectivity, SoC peripherals and other system-level activities. Our broad portfolio addresses a variety of target markets, including smart home, commercial (building automation and retail) and industrial (smart energy, factory automation, smart cities).

 

Home automation

Security systems

Smart lighting

Smart metering

Wearables

Industrial automation and control

Consumer electronics

Medical instrumentation

Automotive sensors and controls

Electronic test and measurement equipment

White goods

Remote controls

Sensors

 

 

Our sensor products include optical sensors (proximity, ambient light gestures and heart rate monitoring), as well as relative humidity (RH) / temperature sensors and Hall effect magnetic sensors. These devices leverage our mixed-signal capability to provide high accuracy, process technology to improve performance and lower power consumption than competing parts.

 

Consumer health & fitness (wearables)

Smart home sensing

Industrial controls

Toys and consumer electronics

Monitors and lavatory controls

Consumer medical

Infrastructure Products

 

 

   

Timing Devices

   

Robust demand for bandwidth is driving the deployment of next-generation Internet infrastructure equipment to deliver higher speed, higher capacity and more flexible networks. This transition puts unique requirements on the clocks and oscillators used to provide timing and synchronization for the equipment responsible for switching, transporting, processing and storing network traffic. To meet this need, we provide low-jitter, frequency-flexible, mass-customizable timing solutions that accelerate development time, minimize cost and improve system reliability. Our high-performance "clock-tree-on-a-chip" products offer highly integrated single-chip IC solutions for clock synthesis and jitter attenuation, offering superior jitter performance and frequency flexibility for high data rate applications.

 

Optical networking

Telecommunications

Data communications

Switches/routers

Industrial

Servers and storage

Mobile fronthaul and backhaul

Wireless base stations

Small cells

Broadcast video

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Product Areas and Description
  Applications

Isolation Products

 

 

Our digital isolation techniques enable customers to deploy more energy efficient power solutions that meet isolation safety standards and solve difficult electronic noise issues. Systems such as data center servers, cellular base stations, uninterruptable power supplies and electric vehicles require increasingly energy efficient power solutions. Electric motors used in electric vehicles, pumps, HVAC compressors, fans and automated machinery need more sophisticated and efficient digital controls. Our isolation technology enables customers to address these demanding requirements. Products include multi-channel isolators, isolated drivers, isolated power converters and mixed-signal devices that simplify design, improve reliability, minimize noise emissions and reduce system cost

 

Industrial control and automation systems

Cloud, datacenter and telecom power supplies

Electric vehicle charging stations

Solar inverters

Hybrid / Electric automotive drive trains

Motor control

High power audio

Test and measurement equipment

Broadcast Products

 

 

Broadcast Consumer

 

 

Our single-chip hybrid TV tuners and analog TV demodulators leverage our proven digital low-IF architecture and exceed the performance of traditional discrete TV tuners, enabling TV makers worldwide to deliver improved picture quality and better reception for both analog and digital broadcasts. Our small, low-power and high-performance single and dual digital video demodulators support DVB-T/T2, DVB-S/S2/S2X, DVB-C/C2, and/or ISDB-T in a single chip and are ideal for equipment receiving digital terrestrial, satellite and/or cable services. Our AM/FM, HD Radio™ and DAB/DAB+ receivers deliver a complete radio solution from antenna input to audio output in a single chip. The broadcast audio products are based on an innovative digital architecture that enables significant improvements in performance, which translates to a better consumer experience, while reducing system cost and board space for our customers.

 

Integrated digital televisions (iDTV)

Free-to-Air (FtA) or pay-TV set-top boxes

PVR/DVD/Blu-Ray/HDD video recorders

PC-TV applications

AM/FM clock radios

DAB digital radios

HD Radio digital radios

Home theater systems

Portable audio devices

MP3/digital media players

Broadcast Automotive

 

 

Our high-performance solutions for car audio systems include high-fidelity radio ICs that improve the end user experience, reduce system cost and offer the latest digital radio technologies like DAB/DAB+ and HD Radio. Our scalable architecture enables infotainment system suppliers to leverage their investments across multiple product lines ranging from entry-level car radios to cutting-edge multi-tuner, multi-antenna radios for premium vehicles.

 

Automotive OEM infotainment systems

Aftermarket car radios

Navigation/GPS devices

Access Products

 

 

   

ProSLIC® Subscriber Line Interface Circuits for VoIP

   

Our ProSLIC provides the analog subscriber line interface on the source end of the telephone which generates dial tone, busy tone, caller ID and ring signal. Our offerings are well suited for the market for Voice over IP telephony applications deployed over cable, DSL, optical and wireless fixed terminal networks.

 

Voice functionality for cable, DSL and optical digital modems and terminal adapters

VoIP residential gateways

Wireless local loop remote access systems

PBXs

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Product Areas and Description
  Applications

ISOmodem® Embedded Modems

 

 

Our ISOmodem embedded modems leverage innovative silicon direct access arrangement (DAA) technology and a digital signal processor (DSP) to deliver a globally compliant, compact analog modem for embedded applications.

 

Fax machines and multi-function printers

Point of sale (POS) terminals

Security systems

Industrial monitoring

Remote medical monitoring

Power over Ethernet

 

 

Our PoE power source equipment and powered device ICs offer highly differentiated solutions with a reduced total bill of materials (BOM) and improved performance and reliability. Our solutions offer a higher level of integration not available with competing solutions.

 

Enterprise networking routers and switches

Wireless access points (WAP)

VoIP phones

POS terminals

Security cameras

        Revenues during fiscal 2018, 2017 and 2016 were generated predominately by sales of our mixed-signal products. The following summarizes our revenue by product category (in thousands):

 
  Fiscal Year  
 
  2018   2017   2016  

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  

Revenues

  $ 868,267   $ 768,867   $ 697,626  

Customers, Sales and Marketing

        We market our products through our direct sales force and through a network of independent sales representatives and distributors. Direct and distributor customers buy on an individual purchase order basis, rather than pursuant to long-term agreements.

        We consider our customer to be the end customer purchasing either directly from a distributor, a contract manufacturer or us. During fiscal 2018, our ten largest end customers accounted for 20% of our revenues. We had no customer that represented more than 10% of our revenues during this period. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we sell the products to, and are paid by distributors and contract manufacturers, we refer to such end customer as our customer. Two of our distributors who sell directly to our customers, Arrow Electronics and Edom Technology, each represented 21% and 17% of our revenues during fiscal 2018, respectively. There were no contract manufacturers that accounted for 10% or more of revenues for fiscal 2018. During fiscal 2018, we consolidated our distribution relationships to a single global distributor, Arrow Electronics. We are maintaining our extensive network of regional distributor partners and etailers to complement our single global distributor partner.

        We maintain numerous sales offices in Asia, the Americas and Europe. Revenue is attributed to a geographic area based on the shipped-to location. The percentage of our revenues derived from outside of the United States was 83% in fiscal 2018. For further information regarding our revenues and long-lived assets by geographic area, see Note 18, Segment Information, to the Consolidated Financial Statements.

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        Our direct sales force is comprised of many sales professionals who possess varied levels of responsibility and experience, including directors, country managers, regional sales managers, district sales managers, strategic account managers, field sales engineers and sales representatives. We also utilize independent sales representatives and distributors to generate sales of our products. We have relationships with many independent sales representatives and distributors worldwide whom we have selected based on their understanding of the mixed-signal marketplace and their ability to provide effective field sales applications support for our products.

        Our marketing efforts are targeted at both identified industry leaders and emerging market participants. Direct marketing activities are supplemented by a focused marketing communications effort that seeks to raise awareness of our company and products. Our public relations efforts are focused on leading trade and business publications. Our external website is used to deliver corporate and product information. We also pursue targeted advertising in key trade publications and we have a cooperative marketing program that allows our distributors and representatives to promote our products to their local markets in conjunction with their own advertising activities. Finally, we maintain a presence at strategic trade shows and industry events. These activities, in combination with direct sales activities, help drive demand for our products.

        Due to the complex and innovative nature of our products, we employ experienced applications engineers who work closely with customers and distributors to support the design-win process, and can significantly accelerate the customer's time to market. A design win occurs when a customer has designed our ICs into its product architecture and ordered product from us. A considerable amount of effort to help a customer incorporate our ICs into its products is typically required prior to any sale. In many cases, our innovative ICs require significantly different implementations than existing approaches and, therefore, successful implementations may require extensive communication with potential customers. The amount of time required to achieve a design win can vary substantially depending on a customer's development cycle, which can be relatively short (such as three months) or very long (such as two years) based on a wide variety of customer factors. Not all design wins ultimately result in revenue, or may result in less revenue than expected. However, once a completed design architecture has been implemented and produced in high volumes, our customers are reluctant to significantly alter their designs due to this extensive design-win process. We believe this process, coupled with our intellectual property protection, promotes relatively longer product life cycles for our products and high barriers to entry for competitive products, even if such competing products are offered at lower prices. Our close collaboration with our customers provides us with knowledge of derivative product ideas or completely new product line offerings that may not otherwise arise in other new product discussions.

Research and Development

        Through our research and development efforts, we leverage experienced analog and mixed-signal engineering talent and expertise to create new ICs that integrate functions typically performed less efficiently by multiple discrete components. This integration generally results in lower costs, smaller die sizes, lower power demands and enhanced price/performance characteristics. We attempt to reuse successful techniques for integration in new applications where similar benefits can be realized. We believe that we have attracted many of the best engineers in our industry. We believe that reliable and precise analog and mixed-signal ICs can only be developed by teams of engineers who have significant analog experience and are familiar with the intricacies of designing these ICs for commercial volume production. The development of test methodologies is just one example of a critical activity requiring experience and know-how to enable the rapid release of a new product for commercial success. We have accumulated a vast set of trade secrets that allow us to pursue innovative approaches to mixed-signal problems that are difficult for competitors to duplicate. We highly value our engineering talent and strive to maintain a very high bar when bringing new recruits to the company.

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        Research and development expenses were $238.3 million, $209.5 million and $199.7 million in fiscal 2018, 2017 and 2016, respectively.

Technology

        Our product development process facilitates the design of highly-innovative, analog-intensive, mixed-signal ICs. Our engineers' deep knowledge of existing and emerging standards and performance requirements helps us to assess the technical feasibility of a particular IC. We target areas where we can provide compelling product improvements. Once we have solved the primary challenges, our field application engineers continue to work closely with our customers' design teams to maintain and develop an understanding of our customers' needs, allowing us to formulate derivative products and refined features.

        In providing mixed-signal ICs for our customers, we believe our key competitive advantages are:

    Analog and RF design expertise in CMOS;

    Mixed-signal, firmware and system design expertise;

    Microcontroller and system on a chip design expertise;

    Software expertise, including multiprotocol connectivity and real-time operating systems for the IoT;

    Module integration and wireless design expertise; and

    Our broad understanding of systems technology and trends.

        To fully capitalize on these advantages, we have assembled a world-class development team with exceptional analog and mixed-signal design expertise led by accomplished senior engineers.

    Analog and RF Design Expertise in CMOS

        We believe that our most significant core competency is world-class analog and RF design capability. Additionally, we strive to design substantially all our ICs in standard CMOS processes. Most of our product designs now incorporate some type of RF in CMOS technology. While it is often significantly more difficult to design analog ICs in CMOS, CMOS provides multiple benefits versus existing alternatives, including significantly reduced cost, reduced technology risk and greater worldwide foundry capacity. CMOS is the most commonly used process technology for manufacturing digital ICs and as a result is most likely to be used for the manufacturing of ICs with finer line geometries. These finer line geometries can enable smaller and faster ICs. By designing our ICs in CMOS, we enable our products to benefit from this trend towards finer line geometries, which allows us to integrate more digital functionality into our mixed-signal ICs.

        Designing analog and mixed-signal ICs is significantly more complicated than designing standalone digital ICs. While advanced software tools exist to help automate digital IC design, there are far fewer tools for advanced analog and mixed-signal IC design. In many cases, our analog circuit design efforts begin at the fundamental transistor level. We believe that we have a demonstrated ability to design the most difficult analog and RF circuits using standard CMOS technologies.

    Mixed-Signal, Firmware and System Design Expertise

        We consider the partitioning of a circuit to be a proprietary and creative design technique. Deep systems knowledge allows us to use our mixed-signal and RF in CMOS design expertise to maximize the price/performance characteristics of both the analog and digital functions and allow our ICs to work in an optimized manner to accomplish particular tasks. Generally, we attempt to move analog functions into the digital domain as quickly as possible, creating system efficiencies without compromising

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performance. These patented approaches require our advanced signal processing and systems expertise. We then leverage our firmware know-how to change the 'personality' of our devices, optimizing features and functions needed by various markets we serve. For example, our wireless SoC devices for IoT applications integrate both digital and analog domains in a single chip. The SoCs combine ARM Cortex-M processor cores, a variety of digital and analog peripherals, hardware cryptography accelerators, and analog-intensive multiprotocol radio transceivers. This system integration at the chip level leverages our deep expertise in mixed-signal and RF design, and low-power wireless MCU architectures pioneered for more than a decade.

    Microcontroller and System on a Chip Design Expertise

        We have the talent and circuit integration methodologies required to combine precision analog, high-speed digital, flash memory and in-system programmability into a single, monolithic CMOS integrated circuit. Our microcontroller products are designed to capture an external analog signal, convert it to a digital signal, compute digital functions on the stream of data and then communicate the results through a standard digital interface. The ability to develop standard products with the broadest possible customer application base while being cost efficient with the silicon area of the monolithic CMOS integrated circuit requires a keen sense of customer value and engineering capabilities. Additionally, to manage the wide variety of signals on a monolithic piece of silicon including electrical noise, harmonics and other electronic distortions requires a fundamental knowledge of device physics and accumulated design expertise.

    Software Expertise

        Our software expertise allows us to develop products for markets where intelligent data capture, high-performance processing and communication are increasingly important product differentiators. The software we have developed to address these markets enables machine-to-machine communications, providing intelligence to electronic systems. Our products integrate high-performance, low-power wireless and microcontroller ICs with reliable and scalable software into a flexible and robust networking platform.

        The demand for low-power, small-footprint wireless technology is accelerating as more and more IP-enabled end points are being connected to the IoT. Our software enables a broad range of power-sensitive applications for the IoT, including smart energy, home automation, security and other connected products. We believe that the combination of our software and IC design expertise differentiates us from many of our competitors.

        As the IoT continues to mature, a new class of embedded applications is emerging, presenting feature-rich and task-intensive use cases. This growing complexity is driving the need for real-time operating systems to help simplify software development for IoT applications by coordinating and prioritizing multiprotocol connectivity, SoC peripherals and other system-level activities. In addition to being able to manage numerous application tasks, an RTOS enhances scalability, and makes complex applications predictable and reliable. To address these application needs, we acquired Micrium, an embedded RTOS provider. Micrium has established itself as a reliable, high performance and trusted RTOS software platform, with an installed base that has grown to millions of devices.

    Module Integration and Wireless Design Expertise

        The market for wireless modules has grown as customers search for solutions that provide turnkey wireless connectivity to their products. The development of modules is difficult due to stringent requirements, including high levels of integration, programmability, performance, reliability, security and power efficiency. In addition, designs must meet numerous wireless standards deployed in various environments and serving diverse requirements.

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        Our combined expertise in IC design and software development allows us to engineer modules that provide robust, high-performance connections in challenging wireless environments. We have developed wireless modules based on numerous wireless standards, including Z-Wave, Bluetooth, Zigbee, Thread, Wi-Fi and sub-GHz. We believe our demonstrated proficiency in the design of modules provides our customers with significant advantages such as fast time to market, reduced development cost, global wireless certifications and software reuse.

    Understanding of Systems Technology and Trends

        Our focused expertise in mixed-signal ICs is the result of the breadth of engineering talent we have assembled with experience working in analog-intensive CMOS design for a wide variety of applications. This expertise, which we consider a competitive advantage, is the foundation of our in-depth understanding of the technology and trends that impact electronic systems and markets. Our expertise includes:

    Isolation, which is critical for existing and emerging industrial applications and telecom networks;

    Frequency synthesis, which is core technology for wireless and clocking applications;

    Integration, which enables the elimination of discrete components in a system; and

    Signal processing and precision analog, which forms the heart of consumer, industrial, medical and automotive electronics applications.

        Our understanding of the role of analog/digital interfaces within electronic systems, standards evolution, and end market drivers enables us to identify product development opportunities and capitalize on market trends.

Manufacturing

        As a fabless semiconductor company, we conduct IC design and development in our facilities and electronically transfer our proprietary IC designs to third-party semiconductor fabricators who process silicon wafers to produce the ICs that we design. Our IC designs typically use industry-standard CMOS manufacturing process technology to achieve a level of performance normally associated with more expensive special-purpose IC fabrication technology. We believe the use of CMOS technology facilitates the rapid production of our ICs within a lower cost framework. Our IC production employs submicron process geometries which are readily available from leading foundry suppliers worldwide, thus increasing the likelihood that manufacturing capacity will be available throughout our products' life cycles. We currently partner with Taiwan Semiconductor Manufacturing Co. (TSMC) and Semiconductor Manufacturing International Corporation (SMIC) to manufacture the majority of our semiconductor wafers. We believe that our fabless manufacturing model significantly reduces our capital requirements and allows us to focus our resources on design, development and marketing of our ICs.

        Once the silicon wafers have been produced, they are shipped directly to our third-party assembly subcontractors. The assembled ICs are then moved to the final testing stage. This operation can be performed by the same contractor that assembled the IC, other third-party test subcontractors or within our internal facilities prior to shipping to our customers. During fiscal 2018, most of our units shipped were tested by offshore third-party test subcontractors. We expect that our utilization of offshore third-party test subcontractors will remain substantial during fiscal 2019.

Backlog

        We include in backlog accepted product purchase orders from customers and worldwide distributor stocking orders. Product orders in our backlog are subject to changes in delivery schedules or

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cancellation at the option of the purchaser typically without penalty. Our backlog may fluctuate significantly depending upon customer order patterns which may, in turn, vary considerably based on rapidly changing business circumstances. Accordingly, we do not believe that our backlog at any time is necessarily representative of actual sales for any succeeding period.

Competition

        The markets for semiconductors generally, and for analog and mixed-signal ICs in particular, are intensely competitive. We anticipate that the market for our products will continually evolve and will be subject to rapid technological change. We believe the principal competitive factors in our industry are:

 

Product size;

 

Power requirement;

 

Level of integration;

 

Customer support;

 

Product capabilities;

 

Reputation;

 

Reliability;

 

Ability to rapidly introduce new products to market;

 

Price;

 

Intellectual property; and

 

Performance;

 

Software.

        We believe that we are competitive with respect to these factors, particularly because our ICs typically are smaller in size, are highly integrated, achieve high performance specifications at lower price points than competitive products and are manufactured in standard CMOS which generally enables us to supply them on a relatively rapid basis to customers to meet their product introduction schedules. However, disadvantages we face include our relatively short operating history in certain of our markets and the need for customers to redesign their products and modify their software to implement our ICs in their products.

        Due to our diversified product portfolio and the numerous markets and applications we serve, we target a relatively large number of competitors. We compete with Analog Devices, 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. Our competitors may also offer bundled solutions offering a more complete product, which may negatively impact our competitive position despite the technical merits or advantages of our products. In addition, our customers could develop products or technologies internally that would replace their need for our products and would become a source of competition. We could also face competition from module makers or other systems suppliers that may include mixed-signal components in their products that could eliminate the need for our ICs.

        Many of our competitors and potential competitors have longer operating histories, greater name recognition, access to larger customer bases, complementary product offerings, and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than us. Current and potential competitors have established or may establish financial and strategic relationships between themselves or with our existing or potential customers, resellers or other third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share.

Intellectual Property

        Our future success depends in part upon our proprietary technology. We seek to protect our technology through a combination of patents, copyrights, trade secrets, trademarks and confidentiality procedures. As of December 29, 2018, we had approximately 1,730 issued or pending United States and foreign patents. There can be no assurance that patents will ever be issued with respect to our patent applications. Furthermore, it is possible that any patents held by us may be invalidated, circumvented,

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challenged or licensed to others. In addition, there can be no assurance that such patents will provide us with competitive advantages or adequately safeguard our proprietary rights. While we continue to file new patent applications with respect to our recent developments, existing patents are granted for prescribed time periods and will expire at various times in the future.

        We claim copyright protection for proprietary documentation for our products. We have filed for registration, or are in the process of filing for registration, the visual images of certain ICs with the U.S. Copyright Office. We have registered the "Silicon Labs" logo and a variety of other product and product family names as trademarks in the United States and selected foreign jurisdictions. All other trademarks, service marks or trade names appearing in this report are the property of their respective owners. We also attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers, employees and consultants, and through other customary security measures. We intend to protect our rights vigorously, but there can be no assurance that our efforts will be successful. In addition, the laws of other countries in which our products are sold may not protect our products and intellectual property rights to the same extent as the laws of the United States.

        While our ability to effectively compete depends in large part on our ability to protect our intellectual property, we believe that our technical expertise and ability to introduce new products in a timely manner will be an important factor in maintaining our competitive position.

        Many participants in the semiconductor and electronics industries have a significant number of patents and have frequently demonstrated a readiness to commence litigation based on allegations of patent and other intellectual property infringement. From time to time, third parties may assert infringement claims against us. We may not prevail in any such litigation or may not be able to license any valid and infringed patents from third parties on commercially reasonable terms, if at all. Litigation, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management's time. Any such litigation could materially adversely affect us.

        Our licenses include industry standard licenses with our vendors, such as wafer fabrication tool libraries, third-party core libraries, computer-aided design applications and business software applications.

Employees

        As of December 29, 2018, we employed 1,505 people. Our success depends on the continued service of our key technical and senior management personnel and on our ability to continue to attract, retain and motivate highly skilled analog and mixed-signal engineers. The competition for such personnel is intense. We have never had a work stoppage and none of our U.S. employees are represented by a labor organization. We consider our employee relations to be good.

Environmental Regulation

        Federal, state and local regulations impose various environmental controls on the storage, use, discharge and disposal of certain chemicals and gases used in the semiconductor industry. Our compliance with these laws and regulations has not had a material impact on our financial position or results of operations.

Available Information

        Our website address is www.silabs.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the investor relations page of our website free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

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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:

    The timing and volume of orders received from our customers;

    The timeliness of our new product introductions and the rate at which our new products may cannibalize our older products;

    The rate of acceptance of our products by our customers, including the acceptance of new products we may develop for integration in the products manufactured by such customers, which we refer to as "design wins";

    The time lag and realization rate between "design wins" and production orders;

    The demand for, and life cycles of, the products incorporating our mixed-signal solutions;

    The rate of adoption of mixed-signal products in the markets we target;

    Deferrals or reductions of customer orders in anticipation of new products or product enhancements from us or our competitors or other providers of mixed-signal ICs;

    Changes in product mix;

    The average selling prices for our products could drop suddenly due to competitive offerings or competitive predatory pricing;

    The average selling prices for our products generally decline over time;

    Changes in market standards;

    Impairment charges related to inventory, equipment or other long-lived assets;

    The software used in our products, including software provided by third parties, may not meet the needs of our customers;

    Our customers may not be able to obtain other components such as capacitors (which are currently in short supply) that they need to incorporate in conjunction with our products, leading to potential downturn in the demand for our products;

    Significant legal costs to defend our intellectual property rights or respond to claims against us; and

    The rate at which new markets emerge for products we are currently developing or for which our design expertise can be utilized to develop products for these new markets.

        The markets for consumer electronics, for example, are characterized by rapid fluctuations in demand and seasonality that result in corresponding fluctuations in the demand for our products that

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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:

    Requirements of customers;

    Accurate prediction of market and technical requirements;

    Timely completion and introduction of new designs;

    Timely qualification and certification of our products for use in our customers' products;

    Commercial acceptance and volume production of the products into which our ICs will be incorporated;

    Availability of foundry, assembly and test capacity;

    Achievement of high manufacturing yields;

    Quality, price, performance, power use and size of our products;

    Availability, quality, price and performance of competing products and technologies;

    Our customer service, application support capabilities and responsiveness;

    Successful development of our relationships with existing and potential customers;

    Technology, industry standards or end-user preferences; and

    Cooperation of third-party software providers and our semiconductor vendors to support our chips within a system.

        We cannot provide any assurance that products which we recently have developed or may develop in the future will achieve market acceptance. We have introduced to market or are in development of many products. If our products fail to achieve market acceptance, or if we fail to develop new products on a timely basis that achieve market acceptance, our growth prospects, operating results and competitive position could be adversely affected. The growth of the 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:

    Cease using, selling or manufacturing certain products, services or processes;

    Attempt to obtain a license, which license may require the payment of substantial royalties or may not be available on reasonable terms or at all;

    Incur significant costs, time delays and lost business opportunities to develop alternative technologies or redesign products; or

    Pursue legal remedies with third parties to enforce our indemnification rights, which may not adequately protect our interests.

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:

    Problems integrating the acquired operations, technologies or products with our existing business and products;

    Diversion of management's time and attention from our core business;

    Need for financial resources above our planned investment levels;

    Difficulties in retaining business relationships with suppliers and customers of the acquired company;

    Risks associated with entering markets in which we lack prior experience;

    Risks associated with the transfer of licenses of intellectual property;

    Increased operating costs due to acquired overhead;

    Tax issues associated with acquisitions;

    Acquisition-related disputes, including disputes over earn-outs and escrows;

    Potential loss of key employees of the acquired company; and

    Potential impairment of related goodwill and intangible assets.

        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:

    We do not have material long-term purchase contracts with our customers;

    Substantially all of our sales to date have been made on a purchase order basis, which permits our customers to cancel, change or delay product purchase commitments with little or no notice to us and without penalty;

    Some of our customers may have efforts underway to actively diversify their vendor base which could reduce purchases of our products; and

    Some of our customers have developed or acquired products that compete directly with products these customers purchase from us, which could affect our customers' purchasing decisions in the future.

        Our customers regularly evaluate alternative sources of supply in order to diversify their supplier base, which increases their negotiating leverage with us and protects their ability to secure these components. We believe that any expansion of our customers' supplier bases could have an adverse effect on the prices we are able to charge and volume of product that we are able to sell to our customers, which would negatively affect our revenues and operating results.

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:

    Failure by us, our customers or their end customers to qualify a selected supplier;

    Potential insolvency of the third-party subcontractors;

    Reduced control over delivery schedules and quality;

    Limited warranties on wafers or products supplied to us;

    Potential increases in prices or payments in advance for capacity;

    Increased need for international-based supply, logistics and financial management;

    Their inability to supply or support new or changing packaging technologies; and

    Low test yields.

        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:

    Complexity and costs of managing international operations and related tax obligations, including our headquarters for non-U.S. operations in Singapore;

    Protectionist laws and business practices, including trade restrictions, tariffs, quotas and other trade barriers, particularly with respect to China-U.S. trade policies;

    Difficulties related to the protection of our intellectual property rights in some countries;

    Multiple, conflicting and changing tax and other laws and regulations that may impact both our international and domestic tax and other liabilities and result in increased complexity and costs, including the impact of the Tax Cuts and Jobs Act;

    Longer sales cycles;

    Greater difficulty in accounts receivable collection and longer collection periods;

    High levels of distributor inventory subject to price protection and rights of return to us;

    Political and economic instability;

    Greater difficulty in hiring and retaining qualified personnel; and

    The need to have business and operations systems that can meet the needs of our international business and operating structure.

        To date, substantially all of our sales to international customers and purchases of components from international suppliers have been denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive for our international customers to purchase, thus rendering our products less competitive. Similarly, a decrease in the value of the U.S. dollar could reduce our buying power with respect to international suppliers.

Our 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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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:

    A decline in demand for any of our more significant products;

    Failure of our products to achieve continued market acceptance;

    Competitive products;

    New technological standards or changes to existing standards that we are unable to address with our products;

    A failure to release new products or enhanced versions of our existing products on a timely basis; and

    The failure of our new products to achieve market acceptance.

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

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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:

    Diversion of management's time and attention from our core business;

    Difficulties separating the divested business;

    Risks to relations with customers who previously purchased products from our disposed product line;

    Reduced leverage with suppliers due to reduced aggregate volume;

    Risks related to employee relations;

    Risks associated with the transfer and licensing of intellectual property;

    Security risks and other liabilities related to the transition services provided in connection with the disposition;

    Tax issues associated with dispositions; and

    Disposition-related disputes, including disputes over earn-outs and escrows.

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:

    Actual or anticipated fluctuations in our operating results;

    Changes in financial estimates by securities analysts or our failure to perform in line with such estimates;

    Changes in market valuations of other technology companies, particularly semiconductor companies;

    Announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

    Introduction of technologies or product enhancements that reduce the need for our products;

    The loss of, or decrease in sales to, one or more key customers;

    A large sale of stock by a significant shareholder;

    Dilution from the issuance of our stock in connection with acquisitions;

    The addition or removal of our stock to or from a stock index fund;

    Departures of key personnel;

    The required expensing of stock awards; and

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    The required changes in our reported revenue and revenue recognition accounting policy under ASC Topic 606, Revenue from Contracts with Customers.

        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.

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.

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        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 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.

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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:

    The division of our Board of Directors into three classes to be elected on a staggered basis, one class each year;

    The ability of our Board of Directors to issue shares of our preferred stock in one or more series without further authorization of our stockholders;

    A prohibition on stockholder action by written consent;

    Elimination of the right of stockholders to call a special meeting of stockholders;

    A requirement that stockholders provide advance notice of any stockholder nominations of directors or any proposal of new business to be considered at any meeting of stockholders; and

    A requirement that a supermajority vote be obtained to amend or repeal certain provisions of our certificate of incorporation.

        We also are subject to the anti-takeover laws of Delaware which may discourage, delay or prevent someone from acquiring or merging with us, which may adversely affect the market price of our common stock.

Risks related to our industry

We are subject to the cyclical nature of the semiconductor industry, which has been subject to significant fluctuations

        The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry has experienced significant fluctuations, often connected with, or in anticipation of, maturing product cycles and new product introductions of both semiconductor companies' and their customers' products and fluctuations in general economic conditions. Deteriorating general worldwide economic conditions, including

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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.

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.

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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.

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.

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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.

Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        Our corporate headquarters, housing engineering, sales and marketing, administration and test operations, is located in Austin, Texas. Our headquarters facilities consist of two buildings, which we own, that are located on land which we have leased through 2099. The buildings contain approximately 441,000 square feet of floor space, of which approximately 129,000 square feet were leased to other tenants. In addition to these properties, we lease smaller facilities in various locations in the United States, Australia, Canada, China, Denmark, Finland, France, Germany, Hungary, India, Italy, Japan, Norway, Singapore, South Korea, Taiwan and the United Kingdom for engineering, sales and marketing, administrative and manufacturing support activities. We believe that these facilities are suitable and adequate to meet our current operating needs.

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Item 3.    Legal Proceedings

        Information regarding legal proceedings is provided in Note 11, Commitments and Contingencies, to the Consolidated Financial Statements. Such information is incorporated by reference herein.

Item 4.    Mine Safety Disclosures

        Not applicable.

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Part II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information and Holders

        Our registration statement (Registration No. 333-94853) under the Securities Act of 1933, as amended, relating to our initial public offering of our common stock became effective on March 23, 2000. Our common stock is quoted on the NASDAQ National Market (NASDAQ) under the symbol "SLAB". The table below shows the high and low per-share sales prices of our common stock for the periods indicated, as reported by NASDAQ. As of January 21, 2019, there were 67 holders of record of our common stock.

 
  High   Low  

Fiscal Year 2017

             

First Quarter

  $ 75.60   $ 63.15  

Second Quarter

    78.45     66.85  

Third Quarter

    81.95     66.35  

Fourth Quarter

    96.93     80.17  

Fiscal Year 2018

   
 
   
 
 

First Quarter

  $ 101.20   $ 84.48  

Second Quarter

    110.70     85.96  

Third Quarter

    108.15     90.50  

Fourth Quarter

    93.73     73.13  

Dividend Policy

        We have never declared or paid any cash dividends on our common stock and we currently do not intend to pay cash dividends. We currently expect to retain any future earnings to fund the operation and expansion of our business.

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Stock Performance Graph

        The graph depicted below shows a comparison of cumulative total stockholder returns for an investment in Silicon Laboratories Inc. common stock, the NASDAQ Composite Index and the PHLX Semiconductor Index.

GRAPHIC

Company / Index
  12/28/13   01/03/15   01/02/16   12/31/16   12/30/17   12/29/18  

Silicon Laboratories Inc. 

  $ 100.00   $ 112.18   $ 114.62   $ 153.48   $ 208.50   $ 185.36  

NASDAQ Composite

  $ 100.00   $ 115.10   $ 123.34   $ 134.27   $ 174.07   $ 167.82  

PHLX Semiconductor Sector Total Return Index

  $ 100.00   $ 131.84   $ 129.76   $ 180.79   $ 254.08   $ 237.11  

(1)
The graph assumes that $100 was invested in our common stock and in each index at the market close on December 28, 2013, and that all dividends were reinvested. No cash dividends have been declared on our common stock.

(2)
Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.

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Issuer Purchases of Equity Securities

        The following table summarizes repurchases of our common stock during the three months ended December 29, 2018 (in thousands, except per share amounts):

Period
  Total Number
of Shares
Purchased
  Average Price
Paid per
Share
  Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
  Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs
 

September 30, 2018 - October 27, 2018

   
 
$

   
 
$

175,733
 

October 28, 2018 - November 24, 2018

   
177
 
$

84.78
   
177
 
$

160,733
 

November 25, 2018 - December 29, 2018

   
 
$

   
 
$

160,733
 

Total

    177   $ 84.78     177        

        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. The program allows for repurchases to be made in the open market or in private transactions, including structured or accelerated transactions, subject to applicable legal requirements and market conditions.

Item 6.    Selected Financial Data

        Please read this selected consolidated financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," our Consolidated Financial Statements and the notes to those statements included in this Form 10-K.

 
  Fiscal Year  
 
  2018 (1)   2017   2016   2015   2014  
 
  (in thousands, except per share data)
 

Consolidated Statements of Income Data

                               

Revenues

 
$

868,267
 
$

768,867
 
$

697,626
 
$

644,826
 
$

620,704
 

Operating income

  $ 85,208   $ 84,974   $ 66,277   $ 32,234   $ 51,421  

Net income

  $ 83,591   $ 47,092   $ 61,494   $ 29,586   $ 38,021  

Earnings per share:

   
 
   
 
   
 
   
 
   
 
 

Basic

 
$

1.94
 
$

1.11
 
$

1.47
 
$

0.70
 
$

0.88
 

Diluted

  $ 1.90   $ 1.09   $ 1.45   $ 0.69   $ 0.87  

Consolidated Balance Sheet Data

   
 
   
 
   
 
   
 
   
 
 

Cash, cash equivalents and investments

 
$

619,581
 
$

769,704
 
$

300,263
 
$

250,112
 
$

342,614
 

Working capital

    681,793     785,317     351,156     280,819     365,223  

Total assets

    1,624,354     1,535,082     1,081,844     1,011,463     1,042,561  

Long-term obligations

    412,219     419,741     115,191     108,028     121,191  

Total stockholders' equity

    1,067,290     953,016     826,958     761,114     758,056  

(1)
In fiscal 2018, we adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. We elected the modified retrospective method of adoption. Prior periods have not been adjusted. See Note 2, Significant Accounting Policies, to the Consolidated Financial Statements for additional information.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the "Cautionary Statement" and "Risk Factors" above for discussions of the uncertainties, risks and assumptions associated with these statements. Our fiscal year-end financial reporting periods are a 52- or 53-week fiscal year that ends on the Saturday closest to December 31. Fiscal 2018, 2017 and 2016 were 52-week years and ended on December 29, 2018, December 30, 2017 and December 31, 2016, respectively.

Overview

        We are 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. Our world-class engineering team creates products focused on performance, energy savings, connectivity and simplicity. Our primary semiconductor products are mixed-signal integrated circuits (ICs), which are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process.

        As a fabless semiconductor company, we rely on third-party semiconductor fabricators in Asia, and to a lesser extent the United States and Europe, to manufacture the silicon wafers that reflect our IC designs. Each wafer contains numerous die, which are cut from the wafer to create a chip for an IC. We rely on third parties in Asia to assemble, package, and, in most cases, test these devices and ship these units to our customers. Testing performed by such third parties facilitates faster delivery of products to our customers (particularly those located in Asia), shorter production cycle times, lower inventory requirements, lower costs and increased flexibility of test capacity.

        Our expertise in analog-intensive, high-performance, mixed-signal ICs and software enables us to develop highly differentiated solutions that address multiple markets. We group our products into the following categories:

    Internet of Things products, which include our microcontroller (MCU), wireless and sensor products;

    Broadcast products, which include our broadcast consumer and automotive products;

    Infrastructure products, which include our timing products (clocks and oscillators), and isolation devices; and

    Access products, which include our Voice over IP (VoIP) products, embedded modems and Power over Ethernet (PoE) devices.

        The sales cycle for our ICs can be as long as 12 months or more. An additional three to six months or more are usually required before a customer ships a significant volume of devices that incorporate our ICs. Due to this lengthy sales cycle, we typically experience a significant delay between incurring research and development and selling, general and administrative expenses, and the corresponding sales. Consequently, if sales in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our operating results for that quarter and, potentially, future quarters would be adversely affected. Moreover, the amount of time between initial research and development and commercialization of a product, if ever, can be substantially longer than the sales cycle for the product. Accordingly, if we incur substantial research and development costs without developing a commercially successful product, our operating results, as well as our growth prospects, could be adversely affected.

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        Because many of our ICs are designed for use in consumer products such as televisions, set-top boxes, radios and wearables, we expect that the demand for our products will be typically subject to some degree of seasonal demand. However, rapid changes in our markets and across our product areas make it difficult for us to accurately estimate the impact of seasonal factors on our business.

Current Period Highlights

        Revenues increased $99.4 million in fiscal 2018 compared to fiscal 2017, primarily due to increased revenues from our IoT and Infrastructure products offset by decreased revenues from our Access and Broadcast products. Gross margin increased $67.2 million during the same period due primarily to increased product sales. Gross margin as a percent of revenues increased to 60.1% in fiscal 2018 compared to 59.1% in fiscal 2017 primarily due to variations in product mix. Operating expenses increased $67.0 million in fiscal 2018 compared to fiscal 2017 due primarily to increased personnel-related expenses, amortization of intangible assets and acquisition-related costs. Operating income in fiscal 2018 was $85.2 million compared to $85.0 million in fiscal 2017.

        We ended fiscal 2018 with $613.8 million in cash, cash equivalents and short-term investments. Net cash provided by operating activities was $173.5 million during fiscal 2018. Accounts receivable was $73.2 million at December 29, 2018, representing 31 days sales outstanding (DSO). Inventory was $75.0 million at December 29, 2018, representing 79 days of inventory (DOI). In fiscal 2018, we repurchased 0.4 million shares of our common stock for $39.3 million.

        Through acquisitions and internal development efforts, we have continued to diversify our product portfolio and introduce new products and solutions with added functionality and further integration. On April 18, 2018, we acquired the Z-Wave business of Sigma Designs, Inc. Z-Wave is an IoT technology for smart home solutions. See Note 8, Acquisitions, to the Consolidated Financial Statements for additional information.

        In fiscal 2018, we introduced the next-generation Z-Wave® 700 on the Wireless Gecko platform, a comprehensive hardware and software connectivity solution for the smart home; a jointly developed LTE-M expansion kit featuring the Digi International Digi XBee3™ pre-certified cellular modem and a Silicon Labs Gecko microcontroller; Wireless Xpress modules that deliver Bluetooth and Wi-Fi connectivity with no software development necessary; new any-frequency clocks combining the clock IC and a quartz crystal reference inside the same package; timing solutions to meet the high-performance requirements of 56G/112G SerDes clocking applications; new multiprotocol software for our Wireless Gecko portfolio, enabling Bluetooth Low Energy (LE) connectivity with sub-GHz IoT devices; a proven reference design for ITU-T G.8262-compliant Synchronous Ethernet (SyncE) applications; a multiprotocol mesh networking solution for the IoT jointly created with Wirepas; low-power PCI Express® (PCIe®) Gen 4 clock buffers for 1.5 V and 1.8 V applications; two new Power over Ethernet (PoE) Powered Device (PD) families for a wide range of IoT applications; new Tiny Gecko MCUs that extend battery life for IoT connected devices; and a new Wi-Fi portfolio to simplify the design of power-sensitive, battery-operated Wi-Fi products. We plan to continue to introduce products that increase the content we provide for existing applications, thereby enabling us to serve markets we do not currently address and expand our total available market opportunity.

        During fiscal 2018, 2017 and 2016, we had no customer that represented more than 10% of our revenues. In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer. Two of our distributors who sell to our customers, Arrow Electronics and Edom Technology, each represented 21% and 17% of our revenues

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during fiscal 2018. Edom, Avnet and Arrow, each represented 19%, 14% and 12% of our revenues during fiscal 2017, and 17%, 13% and 11% of our revenues during fiscal 2016, respectively. There were no contract manufacturers that accounted for more than 10% of our revenues in fiscal 2018, 2017 or 2016. During fiscal 2018, we consolidated our distribution relationships to a single global distributor, Arrow Electronics. We are maintaining our extensive network of regional distributor partners and etailers to complement our single global distributor partner.

        The percentage of our revenues derived from outside of the United States was 83% in fiscal 2018, 85% in fiscal 2017 and 86% in fiscal 2016. All of our revenues to date have been denominated in U.S. dollars. We believe that a majority of our revenues will continue to be derived from customers outside of the United States.

Results of Operations

        The following describes the line items set forth in our Consolidated Statements of Income:

        Revenues.    Revenues are generated predominately by sales of our products. Our revenues are subject to variation from period to period due to the volume of shipments made within a period, the mix of products we sell and the prices we charge for our products.

        Cost of Revenues.    Cost of revenues includes the cost of purchasing finished silicon wafers processed by independent foundries; costs associated with assembly, test and shipping of those products; costs of personnel and equipment associated with manufacturing support, logistics and quality assurance; costs of software royalties, other intellectual property license costs and certain acquired intangible assets; and an allocated portion of our occupancy costs. Our gross margin as a percentage of revenue fluctuates depending on product mix, manufacturing yields, inventory valuation adjustments, average selling prices and other factors.

        Research and Development.    Research and development expense consists primarily of personnel-related expenses, including stock-based compensation, as well as new product masks, external consulting and services costs, equipment tooling, equipment depreciation, amortization of intangible assets, and an allocated portion of our occupancy costs. Research and development activities include the design of new products, refinement of existing products and design of test methodologies to ensure compliance with required specifications.

        Selling, General and Administrative.    Selling, general and administrative expense consists primarily of personnel-related expenses, including stock-based compensation, as well as an allocated portion of our occupancy costs, sales commissions to independent sales representatives, applications engineering support, professional fees, legal fees and promotional and marketing expenses.

        Interest Income and Other, Net.    Interest income and other, net reflects interest earned on our cash, cash equivalents and investment balances, foreign currency remeasurement adjustments and other non-operating income and expenses.

        Interest Expense.    Interest expense consists of interest on our short and long-term obligations, including our convertible senior notes and credit facility. Interest expense on our convertible senior notes includes contractual interest, amortization of the debt discount and amortization of debt issuance costs.

        Provision (Benefit) for Income Taxes.    Provision (benefit) for income taxes includes both domestic and foreign income taxes at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences.

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        The following table sets forth our Consolidated Statements of Income data as a percentage of revenues for the periods indicated:

 
  Fiscal Year  
 
  2018   2017   2016  

Revenues

    100.0 %   100.0 %   100.0 %

Cost of revenues

    39.9     40.9     39.6  

Gross margin

    60.1     59.1     60.4  

Operating expenses:

                   

Research and development

    27.5     27.2     28.6  

Selling, general and administrative

    22.8     20.8     22.3  

Operating expenses

    50.3     48.0     50.9  

Operating income

    9.8     11.1     9.5  

Other income (expense):

                   

Interest income and other, net

    0.8     0.8     0.1  

Interest expense

    (2.3 )   (1.9 )   (0.4 )

Income before income taxes

    8.3     10.0     9.2  

Provision (benefit) for income taxes

    (1.3 )   3.9     0.4  

Net income

    9.6 %   6.1 %   8.8 %

Comparison of Fiscal 2018 to Fiscal 2017

Revenues

 
  Fiscal Year    
   
 
 
   
  %
Change
 
(in millions)
  2018   2017   Change  

Internet of Things

  $ 463.8   $ 395.0   $ 68.8     17.4 %

Infrastructure

    199.5     152.2     47.3     31.1 %

Broadcast

    141.4     153.0     (11.6 )   (7.6 )%

Access

    63.6     68.7     (5.1 )   (7.5 )%

Total

  $ 868.3   $ 768.9   $ 99.4     12.9 %

        The change in revenues in fiscal 2018 was due primarily to:

    Increased revenues of $68.8 million for our IoT products, due primarily to increased demand for our wireless products and the addition of revenues from an acquisition.

    Increased revenues of $47.3 million for our Infrastructure products, due primarily to increased demand for our isolation and timing products.

    Decreased revenues of $11.6 million for Broadcast products, due primarily to decreases in the market for our consumer products.

    Decreased revenues of $5.1 million for our Access products, due primarily to decreased demand for our VoIP products and decreases in the market for such products.

        Unit volumes of our products increased by 11.5% and average selling prices increased by 1.1% compared to fiscal 2017. The average selling prices of our products may fluctuate significantly from period to period due to changes in product mix and other factors. In general, as our products become more mature, we expect to experience decreases in average selling prices. We anticipate that newly announced, higher priced, next generation products and product derivatives will offset some of these decreases.

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Gross Margin

 
  Fiscal Year    
 
(in millions)
  2018   2017   Change  

Gross margin

  $ 521.4   $ 454.2   $ 67.2  

Percent of revenue

    60.1 %   59.1 %   1.0 %

        The increased dollar amount of gross margin in fiscal 2018 was due to increases in gross margin of $42.8 million for our Internet of Things products and $34.6 million for our Infrastructure products, offset by decreases in gross margin of $8.5 million for our Broadcast products and $1.7 million for our Access products. Gross margin increased in fiscal 2018 due primarily to increased product sales. Gross margin in fiscal 2018 included $6.1 million in acquisition-related charges for the fair value write-up associated with acquired inventory. Gross margin as a percent of revenues increased in fiscal 2018 primarily due to a higher mix of Infrastructure products sold.

        We may experience declines in the average selling prices of certain of our products. This creates downward pressure on gross margin as a percentage of revenues and may be offset to the extent we are able to introduce higher margin new products and gain market share with our products; reduce costs of existing products through improved design; achieve lower production costs from our wafer suppliers and third-party assembly and test subcontractors; achieve lower production costs per unit as a result of improved yields throughout the manufacturing process; or reduce logistics costs.

Research and Development

 
  Fiscal Year    
   
 
 
   
  %
Change
 
(in millions)
  2018   2017   Change  

Research and development

  $ 238.3   $ 209.5   $ 28.8     13.8 %

Percent of revenue

    27.5 %   27.2 %            

        The increase in research and development expense in fiscal 2018 was primarily due to increases of $16.5 million for personnel-related expenses, including costs associated with increased headcount and an acquisition, and $7.2 million for the amortization of intangible assets. We expect that research and development expense will increase in absolute dollars in the first quarter of 2019 compared to the fourth quarter of 2018.

Selling, General and Administrative

 
  Fiscal Year    
   
 
 
   
  %
Change
 
(in millions)
  2018   2017   Change  

Selling, general and administrative

  $ 197.8   $ 159.7   $ 38.1     23.9 %

Percent of revenue

    22.8 %   20.8 %            

        The increase in selling, general and administrative expense in fiscal 2018 was primarily due to increases of $23.6 million for personnel-related expenses, including costs associated with increased headcount and an acquisition, $3.6 million for the amortization of intangible assets and $3.4 million for acquisition-related costs. We expect that selling, general and administrative expense will increase in absolute dollars in the first quarter of 2019 compared to the fourth quarter of 2018.

Interest Income and Other, Net

        Interest income and other, net in fiscal 2018 was $6.6 million compared to $6.1 million in fiscal 2017. The increase in interest income and other, net in fiscal 2018 was primarily due to increased

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interest income earned as a result of higher market interest rates and higher investment balances, offset by a net loss of $1.8 million recorded in connection with fair value adjustments to an equity investment.

Interest Expense

        Interest expense in fiscal 2018 was $19.7 million compared to $14.1 million in fiscal 2017. The increase in interest expense in fiscal 2018 was primarily due to increased interest expense of $3.8 million on our convertible debt, including amortization of the debt discount and debt issuance costs, as a result of recording a full year of interest expense in fiscal 2018 versus a partial year in fiscal 2017. In addition, interest expense in fiscal 2017 was lower than fiscal 2018 due to a $2.0 million gain recorded in fiscal 2017 in connection with the termination of our interest rate swap agreement.

Provision (Benefit) for Income Taxes

 
  Fiscal Year    
 
(in millions)
  2018   2017   Change  

Provision (benefit) for income taxes

  $ (11.4 ) $ 29.8   $ (41.2 )

Effective tax rate

    (15.8 )%   38.8 %      

        The effective tax rate for fiscal 2018 decreased from fiscal 2017 primarily due to a reduction in the U.S. federal statutory rate as well as the inclusion of one-time tax impacts recorded in 2017 from the enactment of the Tax Cuts and Jobs Act. The effective tax rate in 2018 further decreased from fiscal 2017 primarily as a result two discrete 2018 items: the SAB 118 (defined below) discrete benefit related to the transition tax calculation as well as the impact of a change of U.S. method of tax accounting for recognizing revenue. This overall decrease in the effective tax rate was offset by a decrease in the Company's foreign tax rate benefit.

        The effective tax rates for each of the periods presented differ from the U.S. federal statutory tax rates of 21% and 35%, respectively, due to the amount of income earned in foreign jurisdictions where the tax rate may be higher or lower than the federal statutory tax rate, as well as other permanent items including research and development tax credits, and the tax effects of stock-based compensation.

Comparison of Fiscal 2017 to Fiscal 2016

Revenues

 
  Fiscal Year    
   
 
 
   
  %
Change
 
(in millions)
  2017   2016   Change  

Internet of Things

  $ 395.0   $ 314.6   $ 80.4     25.6 %

Broadcast

    153.0     157.7     (4.7 )   (3.0 )%

Infrastructure

    152.2     147.7     4.5     3.0 %

Access

    68.7     77.6     (8.9 )   (11.4 )%

Total

  $ 768.9   $ 697.6   $ 71.3     10.2 %

        The change in revenues in fiscal 2017 was due primarily to:

    Increased revenues of $80.4 million for our IoT products, due primarily to increased demand for our wireless products.

    Decreased revenues of $4.7 million for Broadcast products, due primarily to decreases in the market for our consumer products offset by increased demand for our automotive products.

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    Increased revenues of $4.5 million for our Infrastructure products, due primarily to increased demand for our isolation products offset by decreased demand for our timing products and decreased patent sale revenue of $5.0 million in fiscal 2016 with no patents sales in fiscal 2017.

    Decreased revenues of $8.9 million for our Access products, due primarily to decreased demand for our VoIP products and decreases in the market for such products.

        Unit volumes of our products increased by 21.0% and average selling prices decreased by 8.5% compared to fiscal 2016.

Gross Margin

 
  Fiscal Year    
 
(in millions)
  2017   2016   Change  

Gross margin

  $ 454.2   $ 421.5   $ 32.7  

Percent of revenue

    59.1 %   60.4 %   (1.3 )%

        The increased dollar amount of gross margin in fiscal 2017 was due to increases in gross margin of $45.0 million for our IoT products and $1.4 million for our Infrastructure products, offset by decreases in gross margin of $7.0 million for our Broadcast products and $6.7 million for our Access products. Gross margin increased in fiscal 2017 due primarily to increased product sales. Gross margin as a percent of revenues decreased in fiscal 2017 primarily due to variations in product mix. Gross margin in fiscal 2016 included $5.0 million from the sale of patents, which had no associated cost of revenues.

Research and Development

 
  Fiscal Year    
   
 
 
   
  %
Change
 
(in millions)
  2017   2016   Change  

Research and development

  $ 209.5   $ 199.7   $ 9.8     4.9 %

Percent of revenue

    27.2 %   28.6 %            

        The increase in research and development expense in fiscal 2017 was primarily due to increases of $12.6 million for personnel-related expenses, including costs associated with increased headcount and acquisitions. The increase in research and development expense in fiscal 2017 was offset in part by a decrease of $2.3 million for new product introduction costs. The decrease in research and development expense as a percent of revenues in fiscal 2017 was due to our increased revenues.

Selling, General and Administrative

 
  Fiscal Year    
   
 
 
   
  %
Change
 
(in millions)
  2017   2016   Change  

Selling, general and administrative

  $ 159.7   $ 155.5   $ 4.2     2.7 %

Percent of revenue

    20.8 %   22.3 %            

        The increase in selling, general and administrative expense in fiscal 2017 was primarily due to an increase of $6.1 million for personnel-related expenses, including costs associated with increased headcount and acquisitions. The increase in selling, general and administrative in fiscal 2017 was offset in part by a decrease of $1.4 million for legal fees, primarily related to litigation. The decrease in selling, general and administrative expense as a percent of revenues in fiscal 2017 was due to our increased revenues.

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Interest Income and Other, Net

        Interest income and other, net in fiscal 2017 was $6.1 million compared to $0.8 million in fiscal 2016. The increase in interest income and other, net in fiscal 2017 was primarily due to increased interest income earned as a result of higher market interest rates and higher cash, cash equivalents and short-term investments balances.

Interest Expense

        Interest expense in fiscal 2017 was $14.1 million compared to $2.6 million in fiscal 2016. The increase in interest expense in fiscal 2017 was primarily due to increased interest expense of $14.6 million on our convertible debt, including amortization of the debt discount and debt issuance costs. The increase in interest expense was offset in part by a $2.0 million gain recorded in connection with the termination of our interest rate swap agreement.

Provision (Benefit) for Income Taxes

 
  Fiscal Year    
 
(in millions)
  2017   2016   Change  

Provision (benefit) for income taxes

  $ 29.8   $ 3.0   $ 26.8  

Effective tax rate

    38.8 %   4.7 %      

        On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The effective tax rate for fiscal 2017 increased from fiscal 2016 primarily due to the impacts from the Tax Act including a one-time transition tax of $54.4 million on unrepatriated earnings of foreign subsidiaries as well as tax expense of $21.8 million related to the revaluation of our deferred tax assets and liabilities due to the reduction of the U.S. corporate tax rate from 35% to 21% under the Tax Act. These increases in tax expense were partially offset by the release of a deferred tax liability related to future foreign earnings expected under our intercompany cost-sharing arrangement of $39.4 million, as well as a decrease in the valuation allowance established on federal research and development tax credits of $10.5 million.

        The effective tax rates for each of the periods presented differ from the U.S. federal statutory tax rate of 35% due to the amount of income earned in foreign jurisdictions where the tax rate may be lower than the federal statutory rate, and other permanent items including research and development tax credits and nondeductible compensation expenses. In addition, the effective tax rate for fiscal 2017 was also impacted by certain one-time effects as a result of the enactment of U.S. tax reform.

Business Outlook

        The following represents our business outlook for the first quarter of fiscal 2019.

Income Statement Item
  Estimate

Revenues

  $183 million to $193 million

Gross margin

 

60.0%

Operating expenses

 

$114.0 million

Effective tax rate

 

10.0%

Diluted loss per share

 

$(0.11) to $(0.01)

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Liquidity and Capital Resources

        Our principal sources of liquidity as of December 29, 2018 consisted of $613.8 million in cash, cash equivalents and short-term investments, of which approximately $487.0 million was held by our U.S. entities. The remaining balance was held by our foreign subsidiaries. Our cash equivalents and short-term investments consisted of government debt securities, which include agency bonds, municipal bonds, U.S. government securities and variable-rate demand notes; corporate debt securities, which include asset-backed securities, corporate bonds and commercial paper; and money market funds. Our long-term investments consisted of auction-rate securities.

Operating Activities

        Net cash provided by operating activities was $173.5 million during fiscal 2018, compared to net cash provided of $189.5 million during fiscal 2017. Operating cash flows during fiscal 2018 reflect our net income of $83.6 million, adjustments of $114.7 million for depreciation, amortization, stock-based compensation and deferred income taxes, and a net cash outflow of $24.8 million due to changes in our operating assets and liabilities.

        Net cash provided by operating activities was $189.5 million during fiscal 2017, compared to net cash provided of $128.9 million during fiscal 2016. Operating cash flows during fiscal 2017 reflect our net income of $47.1 million, adjustments of $70.4 million for depreciation, amortization, stock-based compensation and deferred income taxes, and a net cash inflow of $72.0 million due to changes in our operating assets and liabilities.

        Accounts receivable increased to $73.2 million at December 29, 2018 from $71.4 million at December 30, 2017. The increase in accounts receivable resulted primarily from normal variations in the timing of collections and billings. Our average DSO was 31 days at December 29, 2018 and 32 days at December 30, 2017.

        Inventory increased to $75.0 million at December 29, 2018 from $73.1 million at December 30, 2017. A portion of the increase was due to inventory acquired from the Z-Wave business acquisition. Our inventory level is primarily impacted by our need to make purchase commitments to support forecasted demand and variations between forecasted and actual demand. Our DOI was 79 days at December 29, 2018 and 81 days at December 30, 2017.

Investing Activities

        Net cash used in investing activities was $197.0 million during fiscal 2018, compared to net cash used of $374.3 million during fiscal 2017. The decrease in cash outflows was principally due to an increase of $420.1 million in net sales and maturities of marketable securities, offset by an increase of $224.6 million in net payments for the acquisition of businesses. See Note 8, Acquisitions, to the Consolidated Financial Statements for additional information.

        Net cash used in investing activities was $374.3 million during fiscal 2017, compared to net cash used of $49.6 million during fiscal 2016. The increase in cash outflows was principally due to an increase of $318.6 million in net purchases of marketable securities and an increase of $8.6 million in net payments for the acquisition of businesses.

        We anticipate capital expenditures of approximately $22 to $24 million for fiscal 2019. Additionally, as part of our growth strategy, we expect to evaluate opportunities to invest in or acquire other businesses, intellectual property or technologies that would complement or expand our current offerings, expand the breadth of our markets or enhance our technical capabilities.

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Financing Activities

        Net cash used in financing activities was $48.8 million during fiscal 2018, compared to net cash provided of $313.0 million during fiscal 2017. The decrease in cash inflows was principally due to $389.5 million in net proceeds from the issuance of long-term debt during fiscal 2017 and an increase of $39.3 million for repurchases of our common stock during fiscal 2018, offset by a decrease of $72.5 million in payments on debt. 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.

        Net cash provided by financing activities was $313.0 million during fiscal 2017, compared to net cash used of $52.3 million during fiscal 2016. The increase in cash inflows was principally due to $389.5 million in net proceeds from the issuance of long-term debt and a decrease of $40.5 million for repurchases of our common stock, offset by an increase of $67.5 million in payments on debt.

        Our debt facilities include $400 million principal amount convertible senior notes (the "Notes") and a $300 million revolving credit facility. On March 6, 2017, we completed a private offering of 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. In connection with our offering of the Notes, we entered into an amendment to our credit agreement and paid off the then remaining balance of $72.5 million. We have an option to increase the size of the borrowing capacity of the revolving credit facility by up to an aggregate of $200 million in additional commitments, subject to certain conditions. See Note 10, Debt, to the Consolidated Financial Statements for additional information.

        Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, the timing and extent of research and development projects, potential acquisitions of companies or technologies and the expansion of our sales and marketing activities. We believe our existing cash, cash equivalents, investments and credit under our Credit Facility are sufficient to meet our capital requirements through at least the next 12 months, although we could be required, or could elect, to seek additional funding prior to that time. We may enter into acquisitions or strategic arrangements in the future which also could require us to seek additional equity or debt financing.

Contractual Obligations

        The following table summarizes our contractual obligations as of December 29, 2018 (in thousands):

 
  Payments due by period  
 
  Total   2019   2020   2021   2022   2023   Thereafter  

Long-term debt obligations (1)

  $ 400,000   $   $   $   $ 400,000   $   $  

Interest on long-term debt obligations (2)

  $ 20,427   $ 6,250   $ 5,927   $ 5,500   $ 2,750   $   $  

Operating lease obligations (3)

  $ 24,221   $ 5,287   $ 4,746   $ 4,051   $ 3,485   $ 2,810   $ 3,842  

Purchase obligations (4)

  $ 49,326   $ 49,256   $ 70   $   $   $   $  

Other long-term obligations (5)

  $ 26,755   $   $ 4,679   $   $ 2,884   $ 4,789   $ 14,403  

(1)
Long-term debt obligations represent the principal portion of our convertible senior notes (the "Notes"). The Notes mature on March 1, 2022, unless repurchased, redeemed or converted at an earlier date.

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(2)
Interest on our long-term debt obligations primarily represents contractual interest on the Notes, which bear interest semi-annually at a rate of 1.375% per year. Interest excludes non-cash amortization of the debt discount and debt issuance costs.

(3)
Operating lease obligations include amounts for leased facilities.

(4)
Purchase obligations include contractual arrangements in the form of purchase orders with suppliers where there is a fixed non-cancelable payment schedule or minimum payments due with a reduced delivery schedule.

(5)
Other long-term obligations primarily represent non-current income taxes and software license obligations.

We are unable to make a reasonably reliable estimate as to when or if cash settlement with taxing authorities will occur for our unrecognized tax benefits. Therefore, our liability of $2.1 million for unrecognized tax benefits is not included in the table above. See Note 17, Income Taxes, to the Consolidated Financial Statements for additional information.

Off-Balance Sheet Arrangements

        As of December 29, 2018, we had no significant off-balance sheet arrangements.

Critical Accounting Policies and Estimates

        The preparation of financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles requires that we make estimates and assumptions that affect the amounts reported. Changes in facts and circumstances could have a significant impact on the resulting estimated amounts included in the financial statements. We believe the following critical accounting policies affect our more complex judgments and estimates.

        Inventory valuation—We assess the recoverability of inventories through the application of a set of methods, assumptions and estimates. In determining net realizable value, we write down inventory that may be slow moving or have some form of obsolescence, including inventory that has aged more than 12 months. We also adjust the valuation of inventory when its manufacturing cost exceeds the estimated selling price less costs of completion, disposal and transportation. We assess the potential for any unusual customer returns based on known quality or business issues and write-off inventory losses for scrap or non-saleable material. Inventory not otherwise identified to be written down is compared to an assessment of our 12-month forecasted demand. The result of this methodology is compared against the product life cycle and competitive situations in the marketplace to determine the appropriateness of the resulting inventory levels. Demand for our products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those that we project. In the event that actual demand is lower or market conditions are worse than originally projected, additional inventory write-downs may be required.

        Impairment of goodwill and other long-lived assets—We review long-lived assets which are held and used, including fixed assets and purchased intangible assets, for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors which are inherently difficult to forecast. If the asset is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.

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        We test our goodwill for impairment annually as of the first day of our fourth fiscal quarter and in interim periods if certain events occur indicating that the carrying value of goodwill may be impaired. The goodwill impairment test is a two-step process. The first step of the impairment analysis compares our fair value to our net book value. In determining fair value, the accounting guidance allows for the use of several valuation methodologies, although it states quoted market prices are the best evidence of fair value. If the fair value is less than the net book value, the second step of the analysis compares the implied fair value of our goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, we recognize an impairment loss equal to that excess amount.

        Acquired intangible assets—When we acquire a business, a portion of the purchase price is typically allocated to identifiable intangible assets, such as acquired technology and customer relationships. Fair value of these assets is determined primarily using the income approach, which requires us to project future cash flows and apply an appropriate discount rate. We amortize intangible assets with finite lives over their expected useful lives. Our estimates are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Incorrect estimates could result in future impairment charges, and those charges could be material to our results of operations.

        Revenue recognition—We recognize revenue when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. In order to achieve this core principle, we apply a five-step process. As part of this process, we analyze the performance obligations in a customer contract and estimate the consideration we expect to receive. The evaluation of performance obligations requires that we identify the promised goods and services in the contract. For contracts that contain more than one promised good and service, we then must determine whether the promises are capable of being distinct and if they are separately identifiable from other promises in the contract. Additionally, for our sales to distributors, we must estimate the impact that price adjustments and rights of return will have on consideration. We make these estimates based on available information, including recent sales activity and pricing data. If our evaluation of performance obligations is incorrect, we may recognize revenue sooner or later than is appropriate. If our estimates of consideration are inaccurate, we may recognize too much or too little revenue in a period.

        Stock-based compensation—We recognize the fair-value of stock-based compensation transactions in the Consolidated Statements of Income. The fair value of our full-value stock awards (with the exception of market-based performance awards) equals the fair market value of our stock on the date of grant. The fair value of our market-based performance awards is estimated at the date of grant using a Monte-Carlo simulation. The fair value of our stock option and employee stock purchase plan grants is estimated at the date of grant using the Black-Scholes option pricing model. In addition, we are required to estimate the expected forfeiture rate of our stock grants and only recognize the expense for those shares expected to vest. If our actual experience differs significantly from the assumptions used to compute our stock-based compensation cost, or if different assumptions had been used, we may have recorded too much or too little stock-based compensation cost. See Note 14, Stock-Based Compensation, to the Consolidated Financial Statements for additional information.

        Income taxes—We are required to calculate income taxes in each of the jurisdictions in which we operate. This process involves calculating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheet. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, we are required to estimate the amount of expected future taxable income. Judgment is inherent in this process and differences between the estimated and actual taxable income could result in a material impact on our Consolidated Financial Statements.

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        We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine whether the weight of available evidence indicates that the tax position has met the threshold for recognition. Therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

        Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, they could have a material effect on our income tax provision and net income in the period or periods for which that determination is made. We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax. We believe adequate provisions for income taxes have been made for all periods.

Recent Accounting Pronouncements

        Recent accounting pronouncements which we believe may materially impact the judgments and uncertainties in the application of our accounting policies are described below. See Note 2, Significant Accounting Policies, to the Consolidated Financial Statements for additional information.

        In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 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. We 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. We expect to elect certain practical expedients permitted under the transition guidance. We are substantially complete with our evaluation of the effect that the adoption of this ASU will have on our financial statements. We believe that most of our operating lease commitments will be subject to the new standard. In connection with the adoption of ASC 842, we expect to recognize additional right-of-use assets and operating lease liabilities of $20.8 million on December 30, 2018.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

Interest Income

        Our investment portfolio includes cash, cash equivalents, short-term investments and long-term investments. Our main investment objectives are the preservation of investment capital and the maximization of after-tax returns on our investment portfolio. Our interest income is sensitive to changes in the general level of U.S. interest rates. A 100 basis point decline in yield on our investment portfolio holdings as of December 29, 2018 and December 30, 2017 would decrease our future annual interest income by approximately $5.6 million and $7.1 million, respectively. We believe that our

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investment policy, which defines the duration, concentration, and minimum credit quality of the allowable investments, meets our investment objectives.

Interest Expense

        We are exposed to interest rate fluctuations in the normal course of our business, including through our Credit Facility. The interest rate on the Credit Facility consists of a variable-rate of interest and an applicable margin. While we have drawn from the Credit Facility in the past, we have no borrowings as of December 29, 2018. If we borrow from the Credit Facility in the future, we will again be exposed to interest rate fluctuations.

Foreign currency exchange rate risk

        We are exposed to foreign currency exchange rate risk primarily through assets, liabilities and operating expenses of our subsidiaries denominated in currencies other than the U.S. dollar. Our foreign subsidiaries are considered to be extensions of the U.S. parent. The functional currency of the foreign subsidiaries is the U.S. dollar. Accordingly, gains and losses resulting from remeasuring transactions denominated in currencies other than U.S. dollars are recorded in the Consolidated Statements of Income. We use foreign currency forward contracts to manage exposure to foreign exchange risk. Gains and losses on foreign currency forward contracts are recognized in earnings in the same period during which the hedged transaction is recognized.

Investments in Auction-rate Securities

        As of December 29, 2018, we held $6.0 million par value auction-rate securities, all of which have experienced failed auctions because sell orders exceeded buy orders. We are unable to predict if these funds will become available before their maturity dates. Additionally, if we determine that an other-than-temporary decline in the fair value of any of our available-for-sale auction-rate securities has occurred, we may be required to adjust the carrying value of the investments through an impairment charge.

Item 8.    Financial Statements and Supplementary Data

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

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        None.

Item 9A.    Controls and Procedures

        We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act). Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of 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. Such disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosures. There was no change in our internal controls

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during the fiscal quarter ended December 29, 2018 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Management's Report on Internal Control over Financial Reporting

        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, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 framework). Based on our assessment we concluded that, as of December 29, 2018, our internal control over financial reporting is effective based on those criteria.

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

Item 9B.    Other Information

        None.

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Part III

        Certain information required by Part III is omitted from this report because we intend to file a definitive Proxy Statement pursuant to Regulation 14A (the "Proxy Statement") no later than 120 days after the end of the fiscal year covered by this report, and certain information to be included therein is incorporated herein by reference.

Item 10.    Directors, Executive Officers and Corporate Governance

        The information required by this Item is incorporated by reference to the Proxy Statement under the sections captioned "Proposal One: Election of Directors," "Executive Compensation," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Code of Ethics."

Item 11.    Executive Compensation

        The information under the caption "Executive Compensation" and "Proposal One: Election of Directors" appearing in the Proxy Statement, is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        The information under the caption "Ownership of Securities" and "Equity Compensation Plan Information" appearing in the Proxy Statement is incorporated herein by reference.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

        The information under the caption "Certain Relationships and Related Transactions, and Director Independence" appearing in the Proxy Statement is incorporated herein by reference.

Item 14.    Principal Accounting Fees and Services

        The information under the caption "Proposal Two: Ratification of Appointment of Independent Registered Public Accounting Firm" appearing in the Proxy Statement is incorporated herein by reference.

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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-2

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

 
F-3

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

 
F-4

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

 
F-5

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

 
F-6

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

 
F-7

Notes to Consolidated Financial Statements

 
F-8
    2.
    Schedules

            Schedule II—Valuation and Qualifying Accounts

            All other schedules have been omitted since the information required by the schedule is not applicable, or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and notes thereto.

    3.
    Exhibits

            The exhibits listed on the accompanying index to exhibits immediately following the Consolidated Financial Statements are filed as part of, or hereby incorporated by reference into, this Form 10-K.

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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.
        
  23.1   Consent of Independent Registered Public Accounting Firm.
        
  24   Power of Attorney (included on signature page to this Form 10-K).
        
  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
        
  101.SCH   XBRL Taxonomy Extension Schema Document
        
  101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
        
  101.LAB   XBRL Taxonomy Extension Label Linkbase Document
        
  101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
        
  101.DEF   XBRL Taxonomy Extension Definition Linkbase Document

*
Incorporated herein by reference to the indicated filing.

+
Management contract or compensatory plan or arrangement

Item 16.    Form 10-K Summary

        None.

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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 January 30, 2019.

  SILICON LABORATORIES INC.

 

By:

 

/s/ G. TYSON TUTTLE


G. Tyson Tuttle
President and Chief Executive Officer

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints G. Tyson Tuttle and John C. Hollister and each of them, acting individually, as his or her attorney-in-fact, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K and other documents in connection herewith and therewith, and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection herewith and therewith and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Name
 
Title
 
Date

 

 

 

 

 
/s/ NAVDEEP S. SOOCH

Navdeep S. Sooch
  Chairman of the Board   January 30, 2019

/s/ G. TYSON TUTTLE

G. Tyson Tuttle

 

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

 

January 30, 2019

/s/ JOHN C. HOLLISTER

John C. Hollister

 

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

 

January 30, 2019

/s/ WILLIAM G. BOCK

William G. Bock

 

Director

 

January 30, 2019

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Name
 
Title
 
Date

 

 

 

 

 
/s/ JACK R. LAZAR

Jack R. Lazar
  Director   January 30, 2019

/s/ GREGG LOWE

Gregg Lowe

 

Director

 

January 30, 2019

/s/ NINA RICHARDSON

Nina Richardson

 

Director

 

January 30, 2019

/s/ SUMIT SADANA

Sumit Sadana

 

Director

 

January 30, 2019

/s/ WILLIAM P. WOOD

William P. Wood

 

Director

 

January 30, 2019

/s/ CHRISTY WYATT

Christy Wyatt

 

Director

 

January 30, 2019

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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, Silicon Laboratories Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 29, 2018, based on the COSO criteria.

        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.

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.

        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

F-1


Table of Contents

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 expressed an unqualified 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

F-2


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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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Table of Contents


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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Table of Contents


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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Table of Contents


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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Table of Contents


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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Table of Contents


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:

    Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

    Level 2—Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

    Level 3—Inputs are unobservable for the asset or liability and are developed based on the best information available in the circumstances, which might include the Company's own data.

Cash and Cash Equivalents

        Cash and cash equivalents 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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Table of Contents


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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Table of Contents


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.

F-12


Table of Contents


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

F-13


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

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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

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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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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
 

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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.

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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 )