Note 2—Summary of Significant Accounting Policies

Fiscal Year

Our fiscal year ends on the last Sunday in December. Our fiscal calendar, in which each quarter ends on a Sunday, contains 53 weeks every seven years. This additional week is included in the first quarter of the year. Our results for the years ended December 27, 2015, December 28, 2014, and December 29, 2013 all consist of 52 weeks.

Principles of Consolidation

The consolidated financial statements include the accounts and operations of the company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (U.S. GAAP) requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable, inventories, goodwill, investments, intangible assets and other long-lived assets, business combinations, loss contingencies, and assumptions used in the calculation of income taxes, valuation of deferred tax assets, and customer incentives, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, and foreign currency markets, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Revenue Recognition

Revenue is recognized when there is persuasive evidence of an arrangement, the price to the buyer is fixed or determinable, delivery has occurred and collectability of the sales price is reasonably assured. Revenue from the sale of semiconductor products is recognized when title and risk of loss transfers to the customer, which is generally when the product is received by the customer. Shipping costs billed to customers are included within revenue. Associated costs are classified in cost of goods sold.

In 2015, approximately 63% of our revenue was from distributors. Distributor payments are due under agreed terms and are not contingent upon resale or any other matter other than the passage of time. We have agreements with some distributors and customers for various programs, including prompt payment discounts, pricing protection, scrap allowances and stock rotation. Sales to these distributors and customers, as well as the existence of sales incentive programs, are in accordance with terms set forth in written agreements with these distributors and customers. In general, credits allowed under these programs are capped based upon individual distributor agreements. We record charges associated with these programs as a reduction of revenue at the time of sale based upon historical activity. Our policy is to use both a three to six month rolling historical experience rate as well as a prospective view of products in the distributor channel for distributors who participate in an incentive program in order to estimate the necessary allowance to be recorded. In addition, under our standard terms and conditions of sale, the products sold by us are subject to a limited product quality warranty. The standard limited warranty period is one year. We accrue for the estimated cost of incurred but unidentified quality issues based upon historical activity and known quality issues if a loss is probable and can be reasonably estimated. Quality returns are accounted for as a reduction of revenue.

In some cases, title and risk of loss do not pass to the customer when the product is received by them. In these cases, we recognize revenue at the time when title and risk of loss is transferred, assuming all other revenue recognition criteria have been satisfied. These cases include several inventory locations where we manage consigned inventory for our customers, including some for which the inventory is at customer facilities. In such cases, revenue is not recognized when products are received at these locations; rather, revenue is recognized when customers take the inventory from the location for their use.

Advertising

Advertising expenditures are charged to expense as incurred.

Research and Development Costs

Our research and development expenditures are charged to expense as incurred.

Fair Value Measurements

Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and derivative instruments. The carrying amounts of our financial instruments approximate fair value due to their short-term nature. The fair values of marketable securities are estimated based on quoted market price for these securities.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

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Level 1—Quoted prices in active markets for identical assets or liabilities.

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Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, we use quoted market prices to measure fair value. If market prices are not available, the fair value measurement is based on models that use primarily market based parameters including interest rate yield curves, option volatilities and currency rates. In certain cases where market rate assumptions are not available, we are required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows could significantly affect the results of current or future values. The results may not be realized in an actual sale or immediate settlement of an asset or liability. Please refer to Note 3 Fair Value Measurements for further discussion of the fair value of our financial instruments.

Cash, Cash Equivalents and Other Securities

We invest excess cash in marketable securities consisting primarily of money markets and U.S. government securities.

We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Highly liquid investments with maturities greater than three months and less than one year are classified as short-term marketable securities. All other investments with maturities that exceed one year are classified as long-term marketable securities. At December 27, 2015 and December 28, 2014, all of our securities are classified as available-for-sale. Available-for-sale securities are carried at fair value with unrealized gains and losses included as a component of other comprehensive income (OCI) within stockholders’ equity, net of any related tax effect, if such gains and losses are considered temporary. Realized gains and losses on these investments are included in other income (expense), net. Declines in value judged by management to be other-than-temporary and credit related are included in impairment of investments in the statement of operations. Unrealized losses are included in accumulated other comprehensive income (AOCI). For the purpose of computing realized gains and losses, cost is identified on a specific identification basis. For further discussion of our securities please refer to Note 4 Marketable Securities.

Derivatives

In 2015 and 2014, we utilized various derivative financial instruments to manage market risks associated with the fluctuations in foreign currency exchange rates. It is our policy to use derivative financial instruments to protect against market risk arising from transactions occurring in normal course of business. The criteria we use for designating an instrument as a hedge is the instrument’s effectiveness in risk reduction. To receive hedge accounting treatment, hedges must be highly effective at offsetting the impact of the hedged transaction.

We recognize all derivative instruments as either assets or liabilities at fair value in our consolidated balance sheets. Changes in the fair value of derivatives are recorded each period in current earnings or AOCI, depending on whether a derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. We classify the cash flows from these instruments in the same category as the underlying hedged items. We do not hold or issue derivative instruments for trading or speculative purposes.

We assess, both at inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of the hedged items. We also assess hedge ineffectiveness and record the gain or loss related to the ineffective portion to current earnings. If we determine that a forecasted transaction is no longer probable of occurring, we discontinue hedge accounting for the affected portion of the hedge instrument, and any related unrealized gain or loss on the contract is recognized in current earnings.

We used foreign currency forward contracts to hedge a portion of our forecasted foreign exchange denominated revenues and expenses in 2015 and 2014. These derivatives have twelve month terms and the initial fair value, if any, and the subsequent gains or losses on the change in fair value are reported in earnings within the same statement of operations line as the impact of the foreign currency translation. From time to time, we will also hedge the liability for an expected cash payment in foreign currency. These derivatives have terms that match the expected payment timing. The initial fair value, if any, and the subsequent gains or losses on the change in fair value are reported in earnings within the same statement of operations line as the change in value of the liability due to changes in currency value.

We net the fair value of all derivative financial instruments with counter-parties for which a master netting arrangement is utilized. The notional principal amounts for these instruments provide one measure of the transaction volume outstanding as of year end and do not represent the amount of our exposure to credit or market loss. The estimates of fair value are based on applicable and commonly used pricing models using prevailing financial market information as of the respective period end. Although we disclose the notional principal and fair value of amounts of derivative financial instruments, we do not disclose the gains or losses associated with the exposures and transactions that these financial instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures will depend on actual market conditions during the remaining life of the instruments. Please refer to Note 5 Derivatives for the gross amounts of our derivative financial instruments under master netting agreements.

Concentration of Credit Risk

We are subject to concentrations of credit risk in our cash equivalents, marketable securities, derivatives, and trade accounts receivable. We maintain cash, cash equivalents and marketable securities with high credit quality financial institutions based upon our analysis of that financial institution’s relative credit standing. Our investment policy is designed to limit exposure to any one institution. We also are exposed to credit-related losses in the event of non-performance by counter-parties to hedging instruments. The counter-parties to all derivative transactions are major financial institutions. However, this does not eliminate our exposure to credit risk with these institutions. This credit risk is generally limited to the unrealized gains in such contracts should any of these counter-parties fail to perform as contracted. We consider the risk of counter-party default to be minimal.

We sell our products to distributors and original equipment manufacturers involved in a variety of industries including computing, consumer, communications, automotive and industrial. We have adopted credit policies and standards to accommodate industry growth and inherent risk. We perform continuing credit evaluations of our customers’ financial condition and require collateral as deemed necessary. Reserves are provided for estimated amounts of accounts receivable that may not be collected. Amounts determined to be uncollectible are charged or written-off against the reserve.

Geographic Concentration Risk

In 2015, 2014 and 2013, we generated 43%, 39% and 36%, respectively, of our total revenues in China. Accordingly, our revenue and profitability is subject to prevailing regulatory, legal, economic, demographic, competitive and other conditions in this location. Changes in any of these conditions could make it less attractive for us to do business in this location and could have an adverse effect on our financial results.

Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and are generally depreciated based upon the following estimated useful lives: buildings and improvements, ten to thirty years, machinery and equipment and software, three to ten years. Depreciation is principally provided under the straight-line method.

Investments

We have certain strategic investments that are typically accounted for on a cost basis as they are less than 20% owned, and we do not exercise significant influence over the operating and financial policies of the investee. Under the cost method, investments are held at historical cost, less impairments. We periodically assess the need to record impairment losses on investments and record such losses when the impairment of an investment is determined to be other-than-temporary in nature. A variety of factors are considered when determining if a decline in fair value below book value is other-than-temporary, including, among others, the financial condition and prospects of the investee.

Other Assets

Other assets include mold and tooling costs. Molds and tools are amortized over their expected useful lives, generally three to five years.

Goodwill, Intangible Assets, and Long-Lived Assets

Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but reviewed for impairment. Goodwill is reviewed annually, as of the last day of the fourth fiscal quarter, and whenever events or changes in circumstances indicate that the carrying value of the goodwill might not be recoverable. We have the option to first assess qualitative factors to determine whether it is necessary to perform the two-step impairment test. If we elect this option and believe, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of each reporting unit is less than its carrying amount, the quantitative two-step impairment test is required; otherwise, no further testing is required. Alternatively, we may elect to not first assess qualitative factors and immediately perform the quantitative two-step impairment test. In the first step, we compare the fair value of each reporting unit to its carrying value. If the carrying value of the net assets assigned to each reporting unit exceeds the fair value of each reporting unit, then the second step of the impairment test is performed in order to determine the implied fair value of each reporting unit’s goodwill. If the carrying value of each reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.

Our intangible assets are recorded at fair value at the time of their acquisition and are stated within our consolidated balance sheets, net of accumulated amortization and impairments, if applicable. Intangible assets with estimated useful lives are amortized over their estimated useful lives using the economic consumption method if anticipated future revenues can be reasonably estimated; the straight-line method is used when revenues cannot be reasonably estimated. Amortization is recorded as amortization of acquisition-related intangibles within our consolidated statements of operations. Intangible assets with indefinite lives are not amortized, however, they are subject to review for impairment. We review our intangible assets with indefinite lives for impairment annually, as of the last day of the fourth fiscal quarter, and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Intangible assets such as trademarks and trade names are generally recorded in connection with a business acquisition. Values assigned to intangible assets are based on our estimates and judgments regarding expectations of the success and life cycle of products and technology acquired.

Long-lived assets to be held and used, including property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their fair values. We determine the discount rate for this analysis based on the expected internal rate of return for the related business and do not allocate interest charges to the asset or asset group being measured. Considerable judgment is required to estimate discounted future operating cash flows. Long-lived assets to be disposed of are carried at fair value less costs to sell.

Currencies

Our functional currency for the majority of operations worldwide is the U.S. dollar, with the exception of certain foreign subsidiaries, whose respective local currencies are designated as the functional currency. Accordingly, entities with U.S. dollar functional currencies record gains and losses from translation of foreign currency financial statements in current results. In addition, conversion of foreign currency cash and foreign currency transactions are included in current results. For entities with local currencies designated as the functional currency, translation adjustments that arise due to changes in the exchange rate between the functional currency and the reporting currency over the period are presented as a component of OCI in stockholders’ equity.

Realized foreign currency losses were $3.4 million, $1.9 million and $2.2 million for the years ended December 27, 2015, December 28, 2014 and December 29, 2013, respectively.

Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The realizability of deferred tax assets must also be assessed. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become deductible. A valuation allowance must be established for deferred tax assets which the company does not believe will more likely than not be realized in the future. Deferred taxes are not provided for the undistributed earnings of the company’s foreign subsidiaries that are considered to be indefinitely reinvested outside of the U.S. in accordance with applicable authoritative accounting guidance. We plan to repatriate certain non-U.S. earnings which have been taxed in the U.S. but earned offshore as well as any non-U.S. earnings which are not considered to be indefinitely reinvested outside the U.S.

Authoritative accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This guidance also provides guidance on derecognition, classification, interest and penalties, accounting in the interim periods, disclosure, and transition. Penalties and interest relating to uncertain tax positions are recognized as a component of income tax expense. To the extent penalties and interest are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

Computation of Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of potential future issuances of common stock relating to potentially dilutive securities using the treasury stock method. Potentially dilutive common equivalent securities consist of stock options, deferred stock units (DSUs), restricted stock units (RSUs) and performance units (PUs). In calculating diluted earnings per share, the dilutive effect of stock options is computed using the average market price for the respective period. Certain potential shares of our outstanding stock options are excluded because they are anti-dilutive in the period, but could be dilutive in the future.

Restructuring Charges

We have made estimates and judgments regarding the amount and timing of our restructuring expense and liability, including current and future period termination benefits, lease termination costs, and other exit costs to be incurred when related actions take place. We have also assessed the recoverability of certain long-lived assets employed in the business and, in certain instances shortened the expected useful life of the assets based on changes in their expected use. When we determine that the useful lives of assets are shorter than we had originally estimated, we record additional depreciation to reflect the assets’ new shorter useful lives. Severance and other related costs and asset-related charges are reflected within our consolidated statements of operations as a component of restructuring, impairments and other costs. Actual results may differ from these estimates.

Accounting for Stock-Based Compensation

Our stock-based compensation programs grant awards which include stock options, RSUs, PUs and DSUs. We charge the estimated fair value of awards against income over the requisite service period, which is generally the vesting period. The fair values of our stock option grants are estimated as of the date of grant using a Black-Scholes option valuation model. The estimated fair values of the stock options are then expensed over the options’ vesting periods. The fair values of our RSUs, PUs, and DSUs are based on the market value of our stock on the date of grant. The fair values of our PUs with market-based performance metrics are estimated as of the date of grant using a Monte-Carlo simulation model. Compensation expense, net of forfeitures, for RSUs is recognized over the applicable vesting period. We apply an accelerated attribution method to recognize stock-based compensation expense when accounting for our PUs. The number of units reflected as granted represents the target number of shares that are eligible to vest in full or in part and are earned subject to the attainment of certain performance criteria established at the beginning of the performance period. Compensation expense associated with these units is initially based upon the number of shares expected to vest after assessing the probability that certain performance criteria will be met and the associated targeted payout level that is forecasted will be achieved, net of estimated forfeitures. Cumulative adjustments are recorded quarterly to reflect subsequent changes in the estimated outcome of performance-related conditions until the date results are determined. For PUs with performance metrics that provide for vesting only at the end of the measurement period, related stock-compensation cost is amortized over the performance period on a straight-line basis.

Contingencies

We are currently involved in various claims and legal proceedings. Loss contingency provisions are recorded if the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount can be reasonably estimated or a range of loss can be determined. These accruals represent management’s best estimate of probable loss. Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. On a quarterly basis, we review the status of each significant matter and assess its potential financial exposure. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation and may revise our estimates. These revisions in the estimates of the potential liabilities could have a material impact on our consolidated results of operations and financial position.