Organization and Summary of Significant Accounting Policies | 1. Organization and Summary of Significant Accounting Policies Organization and Basis of Presentation We are a leading worldwide developer and supplier of custom-designed human interface semiconductor product solutions that enable people to interact more easily and intuitively with a wide variety of mobile computing, communications, entertainment, and other electronic devices. We currently generate revenue from the markets for smartphones, tablets, personal computer, or PC, products, primarily notebook computers; and other select electronic devices, including devices in automobiles. Every solution we deliver either contains or consists of our touch- or fingerprint-based semiconductor solutions, which includes our capacitive sensing ASIC, customer-specific firmware, and software, or a driver-based semiconductor solution which includes our capacitive sensing ASIC. Our original equipment manufacturer, or OEM, customers include many of the world’s largest OEMs for smartphones and most of the largest PC OEMs. The consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and include our financial statements and those of our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated upon consolidation. Our fiscal year is the 52- or 53-week period ending on the last Saturday in June. The fiscal years presented in this report were 52-week periods ended June 25, 2016, June 27, 2015 and June 28, 2014. For simplicity, the accompanying consolidated financial statements have been shown as fiscal year periods and as of the end of our fiscal year ending in June. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue, allowance for doubtful accounts, cost of revenue, inventories, loss on purchase commitments, product warranty, accrued liabilities, share-based compensation costs, provision for income taxes, deferred income tax asset valuation allowances, uncertain tax positions, goodwill, intangible assets, investments, contingent consideration liability and loss contingencies. We base our estimates on historical experience, applicable laws and regulations, and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Cash Equivalents and Investments Cash equivalents consist of highly liquid investments with original maturities of three months or less. Our non-current investments, which are included in non-current other assets in the consolidated balance sheets, consist of ARS investments and are reported at fair value, with unrealized gains and losses excluded from earnings and shown separately as a component of accumulated other comprehensive income within stockholders’ equity. We charge other-than-temporary declines in the fair value of a debt security to earnings if the decline is due to a credit loss or if we intend to or need to sell at a loss, resulting in the establishment of a new cost basis in the debt security. We charge other-than-temporary declines in the fair value of a debt security to other comprehensive income if the decline is due to a noncredit loss. We charge other-than-temporary declines in the fair value of an equity security to earnings. We include interest earned and accretion on securities in interest income. We determine realized gains and losses on the sale of securities using the specific identification method. Our cash equivalents and investments classified as available-for-sale securities as of the end of fiscal 2016 and 2015 were as follows (in millions): 2016 Gross Amortized Unrealized Fair Cost Gains Value Reported as cash equivalents: Money market funds $ 319.1 $ — $ 319.1 Reported as non-current assets: Auction rate securities 5.3 3.3 8.6 Total available-for-sale securities $ 324.4 $ 3.3 $ 327.7 2015 Gross Amortized Unrealized Fair Cost Gains Value Reported as cash equivalents: Money market funds $ 376.3 $ — $ 376.3 Reported as current assets: Auction rate securities 0.6 — 0.6 Reported as non-current assets: Auction rate securities 7.3 7.9 15.2 Total available-for-sale securities $ 384.2 $ 7.9 $ 392.1 Fair Value We measure certain financial assets and liabilities at fair value. When we measure fair value on either a recurring or nonrecurring basis, inputs used in valuation techniques are assigned a hierarchical level as follows: · Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets. · Level 2 inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. · Level 3 inputs are unobservable inputs reflecting our assumptions, which are incorporated into valuation techniques and models used to determine fair value. The assumptions are consistent with market participant assumptions that are reasonably available. Financial assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of the end of fiscal 2016 and 2015 were as follows (in millions): 2016 2015 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Assets: Money market $ 319.1 $ — $ — $ 376.3 $ — $ — Auction rate securities — — 8.6 — — 15.8 Total available-for-sale securities $ 319.1 $ — $ 8.6 $ 376.3 $ — $ 15.8 Liabilities: Contingent consideration liabilities recorded for business combination $ — $ — $ — $ — $ — $ 44.2 Foreign currency contract liabilities $ — $ — $ — $ — $ 1.3 $ — The valuation of our auction rate securities is discussed in Note 3. We utilized Level 2 inputs to value the foreign currency forward contracts. Specifically, we utilized quoted prices for similar assets and liabilities in markets that are not active. Key inputs for valuing the foreign currency forward contracts include spot rates and yield curves for the respective currencies. The foreign currency contracts were included in other accrued liabilities as of June 30, 2015, and there were no foreign currency contracts outstanding as of June 30, 2016. In connection with the acquisition of Validity Sensors, Inc., or Validity, we entered into a contingent consideration arrangement. As of June 30, 2016, the balance represents a contractual liability which is no longer subject to valuation as the carrying amount approximates the fair value. The balance represents amounts we have not paid and have retained, subject to resolution of the Amkor Technology legal dispute (see legal proceedings under Note 8). We have classified the contingent consideration liabilities recorded for business acquisitions as a Level 3 liability, of which zero and $0.5 million is included in the non-current portion of acquisition-related liabilities as of the end of fiscal 2016 and 2015, respectively, and zero and $43.7 million has been included in current acquisition-related liabilities as of the end of fiscal 2016 and 2015, respectively. These fair value measurements are based on significant inputs not observable in the market. Changes in fair value of our Level 3 financial assets for fiscal 2016 and 2015 were as follows (in millions): 2016 2015 Beginning balance $ 15.8 $ 19.8 Net unrealized gain/(loss) (2.7 ) 0.9 Impairment recovery on redeemed investments 2.1 — Redemptions (6.6 ) (4.9 ) Ending balance $ 8.6 $ 15.8 Changes in fair value of our Level 3 financial liabilities for fiscal 2016 and 2015 were as follows (in millions): 2016 2015 Beginning balance $ 44.2 $ 110.1 Cash settlement of contingent consideration liability (18.2 ) (25.6 ) Issuance of common stock in settlement of liability — (21.5 ) Accretion and remeasurement (0.5 ) (18.8 ) Transfer out (25.5 ) — Ending balance $ — $ 44.2 There were no transfers in or out of our Level 1 or 2 assets or liabilities during fiscal 2016 or 2015. During fiscal 2016 we transferred $25.5 million of contingent consideration liability out of our Level 3 liabilities, as the underlying contingencies were resolved and it became a contractual liability as of the end of fiscal 2016. The carrying value of $25.5 million approximates fair value, and has been included in current acquisition-related liabilities as of the end of fiscal 2016. The fair values of our accounts receivable and accounts payable approximate their carrying values because of the short-term nature of those instruments. Intangible assets, property and equipment, and goodwill are measured at fair value on a non-recurring basis if impairment is indicated. The interest rate on our bank debt is variable, which is subject to change from time to time to reflect a market interest rate; accordingly, the carrying value of our bank debt approximates fair value. Concentration of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, investments, and accounts receivable. Our investment policy, which is predicated on capital preservation and liquidity, limits investments to U.S. government treasuries and agency issues, taxable securities, and municipal issued securities with a minimum rating of A1 (Moody’s) or P1 (Standard and Poor’s) or equivalent. Included within our investment portfolio are investments in ARS investments, which met our investment guidelines at the time of our investment. Our ARS investments are currently not liquid as a result of continued auction failures. We sell our products to contract manufacturers that provide manufacturing services for OEMs, and to some OEMs directly. We extend credit based on an evaluation of a customer’s financial condition, and we generally do not require collateral. The following customers accounted for more than 10% of our accounts receivable balance as of the end of fiscal 2016 and 2015: 2016 2015 Customer A 14% 13% Customer B 13% 13% Customer C 12% 20% Customer D 11% * Customer E 10% 13% * Less than 10% Other Concentrations Our products include certain components that are currently single sourced. We believe other vendors would be able to provide similar components, however, the qualification of such vendors may require extra lead time. In order to mitigate any adverse impacts from a disruption of supply, we strive to maintain an adequate supply of critical single-sourced components. Revenue Recognition We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred and title has transferred, the price is fixed or determinable, and collection is reasonably assured. We accrue for estimated sales returns, incentives and other allowances at the time we recognize revenue. Our products contain embedded firmware and software, which together with, or consisting of, our ASIC chip, deliver the essential functionality of our products and, as such, software revenue recognition guidance is not applicable. Our sales to distributors are made under agreements that generally do not provide for price adjustments after purchase and provide for only limited return rights under product warranty. Revenue on these sales is recognized in the same manner as sales to our non-distributor customers. When sales rebates and price allowances are applicable they are estimated and recorded in the period the related revenue is recognized. Advertising Costs Advertising costs, if any, are expensed when incurred. Allowance for Doubtful Accounts We maintain allowances for doubtful accounts for estimated losses resulting from the inability of customers to meet their financial obligations. On an ongoing basis, we evaluate the collectability of accounts receivable based on a combination of factors. In circumstances in which we are aware of a specific customer’s potential inability to meet its financial obligation, we record a specific reserve of the bad debt against amounts due. In addition, we make judgments and estimates on the collectability of accounts receivable based on our historical bad debt experience, customers’ creditworthiness, current economic trends, recent changes in customers’ payment trends, and deterioration in customers’ operating results or financial position. If circumstances change adversely, additional bad debt allowances may be required. For all periods presented, credit losses on our accounts receivable have been insignificant, and we believe that an adequate allowance for doubtful accounts has been provided. Cost of Revenue Our cost of revenue includes the cost of products shipped to our customers, which primarily includes the cost of products built to our specifications by our contract manufacturers, the cost of silicon wafers supplied by independent semiconductor wafer manufacturers, and the related assembly, package, and test costs of our products. Also included in our cost of revenue are personnel and related costs, including share-based compensation, for quality assurance and manufacturing support personnel; logistics costs; depreciation of equipment supporting manufacturing; acquired intangibles amortization; inventory write-downs and losses on purchase obligations; and warranty costs. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market (estimated net realizable value) as of the end of fiscal 2016 and 2015 and consisted of the following (in millions): 2016 2015 Raw materials $ 59.2 $ 75.5 Finished goods 87.2 64.7 $ 146.4 $ 140.2 We record a write-down, if necessary, to reduce the carrying value of inventory to its net realizable value. The effect of these write-downs is to establish a new cost basis in the related inventory, which we do not subsequently write up. We also record a liability and charge to cost of revenue for estimated losses on inventory we are obligated to purchase from our contract manufacturers when such losses become probable from customer delays, order cancellations, or other factors. Property and Equipment We state property and equipment at cost less accumulated depreciation and amortization. We compute depreciation using the straight-line method over the estimated useful lives of the assets. We amortize leasehold improvements over the shorter of the lease term or the useful life of the asset. Foreign Currency The U.S. dollar is our functional and reporting currency. We remeasure our monetary assets and liabilities not denominated in the functional currency into U.S. dollar equivalents at the rate of exchange in effect on the balance sheet date. We measure and record non-monetary balance sheet accounts at the historical rate in effect at the date of transaction. We remeasure foreign currency expenses at the weighted average exchange rate in the month that the transaction occurred. These foreign currency transactions and remeasurement gains and losses, resulted in a net loss of $5.8 million in fiscal 2016, a net gain of $14.7 million in 2015, and were immaterial in fiscal 2014. Gains and losses resulting from foreign currency transactions are included in selling, general, and administrative expenses in the consolidated statements of income. We also enter into foreign currency contracts to manage exposure related to certain foreign currency obligations. The foreign currency contracts are not designated as hedging instruments and, accordingly, are not subject to hedge accounting. In fiscal year 2015, we entered into foreign currency forward contracts to purchase Japanese yen, using U.S. dollars. As of June 30, 2016, we had no outstanding foreign currency forward contracts. In fiscal 2016, we recognized net realized gains of $4.8 million and in fiscal 2015, we recognized net unrealized losses of $1.3 million on the foreign currency forward contracts, which are recorded in selling, general, and administrative expenses in the condensed consolidated statements of income. Goodwill Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired. Changes in our goodwill balance for fiscal 2016 and 2015 were as follows (in millions): 2016 2015 Beginning balance $ 206.8 $ 61.0 Acquisition activity - 153.4 Post acquisition adjustments - (7.6 ) Ending balance $ 206.8 $ 206.8 We have allocated our goodwill to a single company-wide reporting unit. We perform a qualitative assessment of the goodwill in the fourth quarter of each fiscal year. In assessing the qualitative factors, we considered the impact of key factors including change in industry and competitive environment, market capitalization, stock price, gross margin and cash flow from operating activities. We concluded that the fair value of the single company-wide reporting unit exceeded its carrying amount. As such, it was not necessary to perform the two-step quantitative goodwill impairment test. The first step requires comparing the fair value of our one reporting unit to its net book value, including goodwill. The second step of the process is only performed if a potential impairment exists, and it involves determining the difference between the fair value of the reporting unit's net assets other than goodwill to the fair value of the reporting unit and if the difference is less than the net book value of goodwill, an impairment exists and is recorded. No goodwill impairment was recognized for fiscal 2016, 2015, and 2014. Impairment of Long-Lived Assets We evaluate long-lived assets, such as property and equipment and intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We measure recoverability of assets to be held and used by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. We review the carrying value of indefinite-lived intangible assets for impairment at least annually during the last quarter of our fiscal year, or more frequently if we believe indicators of impairment exist. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, we recognize an impairment charge in an amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheets. During fiscal 2016, we recorded a $6.7 million impairment charge for an acquired intangible asset related to ThinTouch developed technology, which we determined is probable not to be recoverable, based on revenue forecasts. This intangible asset has been written down to zero. Other Accrued Liabilities As of the end of fiscal 2016 and 2015, other accrued liabilities consisted of the following (in millions): 2016 2015 Customer obligations $ 34.8 $ 36.9 Inventory obligations 24.0 17.2 Warranty 3.5 2.8 Other 20.0 17.2 $ 82.3 $ 74.1 Segment Information We operate in one segment: the development, marketing, and sale of intuitive human interface solutions for electronic devices and products. The chief operating decision maker is the chief executive officer who evaluates financial performance and allocates resources using financial information reported on a company-wide basis. Share-Based Compensation We utilize the Black-Scholes option pricing model to estimate the grant date fair value of stock options granted to employees, which requires the input of highly subjective assumptions, including expected volatility and expected life. Historical and implied volatilities were used in estimating the fair value of our stock option awards. The expected life for our options was previously estimated based on historical trends since our initial public offering. In fiscal 2011, we began to grant options with a contractual life of seven years rather than 10 years, and we began using the simplified method to establish the expected life as we did not have any history of options with seven-year lives. In fiscal 2013, we began to grant options that vest over a three-year period rather than a four-year period and in fiscal 2016, we began to grant some options that vest over a four-year period. We continue to use the simplified method to establish the expected life as we have limited history of options which vest over a three year period. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. Further, we estimate forfeitures for share-based awards that are not expected to vest. We charge estimated fair value less estimated forfeitures to earnings on a straight-line basis over the vesting period of the entire underlying award, which is generally three to four years for our stock option and deferred stock unit, or DSU, awards, three years for our market stock unit, or MSU, awards, and up to two years for our employee stock purchase plan. Income Taxes We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities 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. We recognize the effect of a change in tax rates in income on deferred tax assets and liabilities in the period that includes the enactment date. We establish valuation allowances when necessary to reduce deferred tax assets to the amounts that are more likely than not to be realized. We consider the operating earnings of our foreign subsidiaries to be indefinitely invested outside the United States. Accordingly, no provision has been made for the U.S. federal, state, or foreign taxes that may result from future remittances of undistributed earnings of our foreign subsidiaries. We use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement with a taxing authority. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of highly complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our consolidated financial position, results of operations, and cash flows. We believe we have adequately provided for reasonably foreseeable outcomes in connection with the resolution of income tax uncertainties. However, our results have in the past, and could in the future, include favorable and unfavorable adjustments to our estimated tax liabilities in the period a determination of such estimated tax liability is made or resolved, upon the filing of an amended return, upon a change in facts, circumstances, or interpretation, or upon the expiration of a statute of limitation. Accordingly, our effective tax rate could fluctuate materially from period to period. In November 2015, the Financial Accounting Standards Board, or FASB, issued an accounting standards update, or ASU, which eliminates the current requirement to present deferred tax liabilities and assets as current and non-current in a classified balance sheet. We early adopted the ASU, effective for our disclosures at the end of fiscal 2016, on a prospective basis. Adoption of this ASU resulted in a reclassification of our net current deferred tax assets and liabilities to net non-current deferred tax assets and liabilities in our consolidated balance sheet as of the end of fiscal 2016. No prior periods were retrospectively adjusted. Research and Development Research and development costs are expensed as incurred. Recently Issued Accounting Pronouncements Not Yet Effective In May 2014, the Financial Accounting Standards Board, or FASB, issued an accounting standards update, or ASU, on Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue it expects to be entitled to for the transfer of promised goods or services to customers. The new standard will replace most existing revenue recognition guidance in U.S. GAAP when the new standard becomes effective. In March 2016, the FASB issued an ASU on Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This ASU amends the principal-versus-agent implementation guidance and illustrations in the Board’s new revenue standard. The FASB issued the ASU in response to concerns identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance, and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. In April 2016, the FASB issued an ASU for revenue from contracts with customers identifying performance obligations and licensing. The ASU provides further guidance in identifying performance obligations and determining the appropriate accounting for licensing arrangements. The new standard is effective for us in our fiscal year 2019, with early adoption permitted in the first quarter of fiscal 2018. We are evaluating the effect this new standard will have on our consolidated financial statements and related disclosures. The new standard permits the use of either the retrospective or cumulative effect transition method. We have not yet selected a transition method or determined the effect of the standard on our ongoing financial reporting. In March 2016, the FASB issued an ASU for stock compensation. This update simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU will be effective for us beginning in the first quarter of fiscal 2018, with early adoption permitted. We are evaluating the timing of our adoption of this ASU as well as the effects of adoption of this ASU on our financial statements. In February 2016, the FASB issued an ASU on leases. This update requires organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. It also requires new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard will be effective for us beginning in the first quarter of our fiscal year 2020, with early adoption permitted. We are evaluating the effects of adoption of this ASU on our financial statements. In January 2016, the FASB issued an ASU on Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. This ASU will be effective for us beginning in our first quarter of fiscal 2019, with early adoption permitted. We are evaluating the effects of the adoption of this ASU on our financial statements. In July 2015, the FASB issued an ASU that requires an entity to measure inventory at the lower of cost and net realizable value when the FIFO or average cost method is used. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance will become effective for us in our first quarter of fiscal 2018, with early adoption permitted. We are evaluating the effects of the adoption of this ASU on our financial statements. |