Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 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

 

74-2793174

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

400 West Cesar Chavez, Austin, Texas

 

78701

(Address of principal executive offices)

 

(Zip Code)

 

(512) 416-8500

(Registrant’s telephone number, including area code)

 

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.  x 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). x Yes  o No

 

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

 

Large accelerated filer  x  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 x No

 

As of October 16, 2018, 43,148,394 shares of common stock of Silicon Laboratories Inc. were outstanding.

 

 

 



Table of Contents

 

 

Table of Contents

 

 

Page
Number

Part I. Financial Information

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

 

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

3

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended September 29, 2018 and September 30, 2017

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 29, 2018 and September 30, 2017

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 2018 and September 30, 2017

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

25

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

Part II. Other Information

 

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

Item 1A.

Risk Factors

35

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

 

 

 

Item 3.

Defaults Upon Senior Securities

50

 

 

 

Item 4.

Mine Safety Disclosures

50

 

 

 

Item 5.

Other Information

50

 

 

 

Item 6.

Exhibits

50

 

Cautionary Statement

 

Except for the historical financial information contained herein, the matters discussed in this report on Form 10-Q (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.

 

2



Table of Contents

 

Part I.  Financial Information

Item 1.  Financial Statements

 

Silicon Laboratories Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

 

 

 

September 29,
2018

 

December 30,
2017

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

225,326

 

$

269,366

 

Short-term investments

 

376,603

 

494,657

 

Accounts receivable, net

 

74,607

 

71,367

 

Inventories

 

77,563

 

73,132

 

Prepaid expenses and other current assets

 

46,952

 

39,120

 

Total current assets

 

801,051

 

947,642

 

Property and equipment, net

 

135,566

 

127,682

 

Goodwill

 

396,689

 

288,227

 

Other intangible assets, net

 

181,611

 

83,144

 

Other assets, net

 

89,372

 

88,387

 

Total assets

 

$

1,604,289

 

$

1,535,082

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

43,647

 

$

38,851

 

Deferred revenue and returns liability

 

25,880

 

 

Deferred income on shipments to distributors

 

 

50,115

 

Other current liabilities

 

77,821

 

73,359

 

Total current liabilities

 

147,348

 

162,325

 

Convertible debt

 

351,457

 

341,879

 

Other non-current liabilities

 

57,777

 

77,862

 

Total liabilities

 

556,582

 

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; 43,147 and 42,707 shares issued and outstanding at September 29, 2018 and December 30, 2017, respectively

 

4

 

4

 

Additional paid-in capital

 

103,169

 

102,862

 

Retained earnings

 

946,201

 

851,307

 

Accumulated other comprehensive loss

 

(1,667

)

(1,157

)

Total stockholders’ equity

 

1,047,707

 

953,016

 

Total liabilities and stockholders’ equity

 

$

1,604,289

 

$

1,535,082

 

 

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

 

3


Table of Contents

 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Revenues

 

$

230,243

 

$

198,723

 

$

652,733

 

$

567,849

 

Cost of revenues

 

94,616

 

82,149

 

261,577

 

232,922

 

Gross margin

 

135,627

 

116,574

 

391,156

 

334,927

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

61,091

 

52,000

 

175,414

 

156,756

 

Selling, general and administrative

 

49,406

 

39,606

 

148,896

 

119,587

 

Operating expenses

 

110,497

 

91,606

 

324,310

 

276,343

 

Operating income

 

25,130

 

24,968

 

66,846

 

58,584

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income and other, net

 

2,109

 

1,923

 

6,920

 

4,094

 

Interest expense

 

(4,932

)

(4,764

)

(14,703

)

(9,265

)

Income before income taxes

 

22,307

 

22,127

 

59,063

 

53,413

 

Provision (benefit) for income taxes

 

(5,454

)

2,178

 

(9,383

)

1,469

 

Net income

 

$

27,761

 

$

19,949

 

$

68,446

 

$

51,944

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.64

 

$

0.47

 

$

1.59

 

$

1.23

 

Diluted

 

$

0.63

 

$

0.46

 

$

1.55

 

$

1.20

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

43,256

 

42,553

 

43,177

 

42,376

 

Diluted

 

44,194

 

43,374

 

44,135

 

43,194

 

 

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

 

4


Table of Contents

 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Net income

 

$

27,761

 

$

19,949

 

$

68,446

 

$

51,944

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

 

 

 

 

 

 

 

Net changes to available-for-sale securities

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) arising during the period

 

237

 

129

 

(126

)

536

 

Reclassification for losses included in net income

 

 

 

49

 

 

 

 

 

 

 

 

 

 

 

 

Net changes to cash flow hedges

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) arising during the period

 

3

 

 

(418

)

 

Reclassification for (gains) losses included in net income

 

131

 

 

164

 

(1,808

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

371

 

129

 

(331

)

(1,272

)

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

78

 

45

 

(71

)

(445

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

293

 

84

 

(260

)

(827

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

28,054

 

$

20,033

 

$

68,186

 

$

51,117

 

 

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

 

5


Table of Contents

 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 29,
2018

 

September 30,
2017

 

Operating Activities

 

 

 

 

 

Net income

 

$

68,446

 

$

51,944

 

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

 

 

 

 

 

Depreciation of property and equipment

 

11,781

 

11,068

 

Amortization of other intangible assets and other assets

 

33,322

 

20,531

 

Amortization of debt discount and debt issuance costs

 

9,578

 

6,984

 

Stock-based compensation expense

 

36,893

 

33,007

 

Deferred income taxes

 

(2,994

)

(5,703

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

2,518

 

(1,587

)

Inventories

 

5,066

 

(13,196

)

Prepaid expenses and other assets

 

6,349

 

23,506

 

Accounts payable

 

8,675

 

1,746

 

Other current liabilities and income taxes

 

(23,814

)

9,296

 

Deferred income, deferred revenue and returns liability

 

(2,816

)

11,039

 

Other non-current liabilities

 

(7,878

)

(7,269

)

Net cash provided by operating activities

 

145,126

 

141,366

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of available-for-sale investments

 

(253,973

)

(471,938

)

Sales and maturities of available-for-sale investments

 

371,885

 

143,765

 

Purchases of property and equipment

 

(18,267

)

(10,494

)

Purchases of other assets

 

(9,088

)

(2,622

)

Acquisition of business, net of cash acquired

 

(239,729

)

(13,658

)

Net cash used in investing activities

 

(149,172

)

(354,947

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from issuance of long-term debt, net

 

 

389,468

 

Payments on debt

 

 

(72,500

)

Repurchases of common stock

 

(24,272

)

 

Payment of taxes withheld for vested stock awards

 

(18,927

)

(14,870

)

Proceeds from the issuance of common stock

 

6,585

 

6,836

 

Payment of acquisition-related contingent consideration

 

(3,380

)

 

Net cash provided by (used in) financing activities

 

(39,994

)

308,934

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(44,040

)

95,353

 

Cash and cash equivalents at beginning of period

 

269,366

 

141,106

 

Cash and cash equivalents at end of period

 

$

225,326

 

$

236,459

 

 

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

 

6



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.  Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The Condensed Consolidated Financial Statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments which, in the opinion of management, are necessary to present fairly the condensed consolidated financial position of Silicon Laboratories Inc. and its subsidiaries (collectively, the “Company”) at September 29, 2018 and December 30, 2017, the condensed consolidated results of its operations for the three and nine months ended September 29, 2018 and September 30, 2017, the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 29, 2018 and September 30, 2017, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 2018 and September 30, 2017. All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated results of operations for the three and nine months ended September 29, 2018 are not necessarily indicative of the results to be expected for the full year.

 

The accompanying unaudited Condensed Consolidated Financial Statements do not include certain footnotes and financial presentations normally required under U.S. generally accepted accounting principles (GAAP). Therefore, these Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto for the year ended December 30, 2017, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on January 31, 2018.

 

The Company prepares financial statements on a 52- or 53-week fiscal year that ends on the Saturday closest to December 31. Fiscal 2018 will have 52 weeks and fiscal 2017 had 52 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks.

 

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, investments in auction-rate securities, 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.

 

Reclassifications

 

Certain reclassifications have been made to prior year financial statements to conform to current year presentation.

 

7


Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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 ending 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 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)

 

Condensed Consolidated Statements of Income

 

Three Months Ended
September 29, 2018

 

Nine Months Ended
September 29, 2018

 

Revenues

 

$

10,312

 

$

18,475

 

Cost of revenues

 

$

3,483

 

$

5,466

 

Net income

 

$

5,858

 

$

10,755

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.14

 

$

0.25

 

Diluted

 

$

0.13

 

$

0.24

 

 

Condensed Consolidated Balance Sheet**

 

September 29,
2018

 

Prepaid expenses and other current assets

 

$

5,936

 

Goodwill

 

$

(2,842

)

Other assets, net

 

$

(4,385

)

Deferred revenue and returns liability

 

$

25,880

 

Deferred income on shipments to distributors

 

$

(66,584

)

Other current liabilities

 

$

2,710

 

Retained earnings

 

$

36,950

 

 


*   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 Condensed 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 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.

 

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Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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 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 Condensed Consolidated Balance Sheet in any of the periods presented.

 

9


Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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 and ASU 2018-11 (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. 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 evaluating the effect that the adoption of this ASU will have on its financial statements. The Company currently expects that most of its operating lease commitments will be subject to the new standard and recognized as right-of-use assets and operating lease liabilities upon the adoption of Topic 842, which will increase the total assets and total liabilities that it reports relative to such amounts prior to adoption.

 

10


Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

2. Earnings Per Share

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Net income

 

$

27,761

 

$

19,949

 

$

68,446

 

$

51,944

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing basic earnings per share

 

43,256

 

42,553

 

43,177

 

42,376

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options and other stock-based awards

 

938

 

821

 

958

 

818

 

Shares used in computing diluted earnings per share

 

44,194

 

43,374

 

44,135

 

43,194

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.64

 

$

0.47

 

$

1.59

 

$

1.23

 

Diluted

 

$

0.63

 

$

0.46

 

$

1.55

 

$

1.20

 

 

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 the three and nine months ended September 29, 2018, approximately 0.2 million shares were included in the denominator for the calculation of diluted earnings per share. See Note 7, Debt, to the Condensed Consolidated Financial Statements for additional information.

 

3. 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.

 

11



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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 September 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

 

$

89,262

 

$

 

$

 

$

89,262

 

Corporate debt securities

 

 

27,150

 

 

27,150

 

Government debt securities

 

 

7,200

 

 

7,200

 

Total cash equivalents

 

$

89,262

 

$

34,350

 

$

 

$

123,612

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Government debt securities

 

$

61,967

 

$

127,120

 

$

 

$

189,087

 

Corporate debt securities

 

 

187,516

 

 

187,516

 

Total short-term investments

 

$

61,967

 

$

314,636

 

$

 

$

376,603

 

 

 

 

 

 

 

 

 

 

 

Other assets, net:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

 

$

5,750

 

$

5,750

 

Total

 

$

 

$

 

$

5,750

 

$

5,750

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

151,229

 

$

348,986

 

$

5,750

 

$

505,965

 

 

 

 

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

 

 

12


Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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

 

 

 

Cost

 

Fair
Value

 

Due in one year or less

 

$

341,518

 

$

340,710

 

Due after one year through ten years

 

128,856

 

128,062

 

Due after ten years

 

37,446

 

37,193

 

 

 

$

507,820

 

$

505,965

 

 

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 September 29, 2018

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Government debt securities

 

$

123,102

 

$

(593

)

$

38,681

 

$

(369

)

$

161,783

 

$

(962

)

Corporate debt securities

 

129,315

 

(437

)

33,644

 

(218

)

162,959

 

(655

)

Auction rate securities

 

 

 

5,750

 

(250

)

5,750

 

(250

)

 

 

$

252,417

 

$

(1,030

)

$

78,075

 

$

(837

)

$

330,492

 

$

(1,867

)

 

 

 

Less Than 12 Months

 

12 Months or Greater

 

Total

 

As of December 30, 2017

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Government debt securities

 

$

244,880

 

$

(931

)

$

3,027

 

$

(15

)

$

247,907

 

$

(946

)

Corporate debt securities

 

151,149

 

(447

)

11,578

 

(73

)

162,727

 

(520

)

Auction rate securities

 

 

 

5,681

 

(319

)

5,681

 

(319

)

 

 

$

396,029

 

$

(1,378

)

$

20,286

 

$

(407

)

$

416,315

 

$

(1,785

)

 

13


Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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

 

The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the severity and duration of the impairment, changes in underlying credit ratings, forecasted recovery, the Company’s intent to sell or the likelihood that it would be required to sell the investment before its anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. As of September 29, 2018, the Company has determined that no other-than-temporary impairment losses existed.

 

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

 

Level 3 fair value measurements

 

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

 

Auction rate securities

 

Fair Value at
September 29, 2018
(000s)

 

Valuation Technique

 

Unobservable Input

 

Weighted Average

$

5,750

 

Discounted cash flow

 

Estimated yield

 

2.99%

 

 

 

 

 

 

 

 

 

 

 

Expected holding period

 

10 years

 

 

 

 

 

 

 

 

 

 

 

Estimated discount rate

 

3.97%

 

The Company has followed an established internal control procedure used in valuing auction rate securities. The procedure involves the analysis of valuation techniques and evaluation of unobservable inputs commonly used by market participants to price similar instruments, and which have been demonstrated to provide reasonable estimates of prices obtained in actual market transactions. Outputs from the valuation process are assessed against various market sources when they are available, including marketplace quotes, recent trades of similar illiquid securities, benchmark indices and independent pricing services. The technique and unobservable input parameters may be recalibrated periodically to achieve an appropriate estimation of the fair value of the securities.

 

Significant changes in any of the unobservable inputs used in the fair value measurement of auction rate securities in isolation could result in a significantly lower or higher fair value measurement. An increase in expected yield would result in a higher fair value measurement, whereas an increase in expected holding period or estimated discount rate would result in a lower fair value measurement. Generally, a change in the assumptions used for expected holding period is accompanied by a directionally similar change in the assumptions used for estimated yield and discount rate.

 

14


Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The following summarizes the activity in Level 3 financial instruments for the three and nine months ended September 29, 2018 (in thousands):

 

Assets

 

Auction Rate Securities

 

Three Months
Ended

 

Nine Months
Ended

 

Beginning balance

 

$

5,642

 

$

5,681

 

Gain (loss) included in other comprehensive loss

 

108

 

69

 

Balance at September 29, 2018

 

$

5,750

 

$

5,750

 

 

Fair values of other financial instruments

 

The Company’s debt is recorded at cost, but is measured at fair value for disclosure purposes. The fair value of the Company’s convertible senior notes is determined using observable market prices. The notes are traded in less active markets and are therefore classified as a Level 2 fair value measurement. As of September 29, 2018 and December 30, 2017, the fair value of the convertible senior notes was $456.3 million and $466.2 million, respectively.

 

The Company’s other financial instruments, including cash, accounts receivable and accounts payable, are recorded at amounts that approximate their fair values due to their short maturities.

 

4. Derivative Financial Instruments

 

The Company uses derivative financial instruments to manage certain exposures to the variability of interest rates and foreign currency exchange rates. The Company’s objective is to offset increases and decreases in expenses resulting from these exposures with gains and losses on the derivative contracts, thereby reducing volatility of earnings. The Company 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

 

Foreign Currency Forward Contracts

 

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

 

The Company entered into foreign currency forward contracts in March 2018 for a portion of its forecasted operating expenses denominated in the Norwegian Krone. As of September 29, 2018, the contracts had maturities of one to twelve months and an aggregate notional value of $9.0 million. Losses expected to be reclassified into earnings in the next 12 months were not material. The fair value of the contracts, contract losses recognized in other comprehensive income and amounts reclassified from accumulated other comprehensive loss into earnings were not material for any of the periods presented.

 

15


Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Interest Rate Swaps

 

The Company entered into an interest rate swap agreement with an original notional value of $72.5 million in connection with its Credit Facility in July 2016. The Company terminated the swap agreement on March 6, 2017, which resulted in the reclassification of $1.8 million of unrealized gains that were previously recorded in accumulated other comprehensive loss into earnings during the three months ended April 1, 2017.

 

Non-designated Hedges

 

Foreign Currency Forward Contracts

 

The Company uses foreign currency forward contracts to reduce the earnings impact that exchange rate fluctuations have on non-U.S. dollar balance sheet exposures. The Company recognizes gains and losses on the foreign currency forward contracts in interest income and other, net in the Consolidated Statement of Income in the same period as the remeasurement loss and gain of the related foreign currency denominated asset or liability. The Company does not apply hedge accounting to these foreign currency forward contracts.

 

As of September 29, 2018 and September 30, 2017, the Company held one foreign currency forward contract denominated in the Norwegian Krone with a notional value of $1.6 million and $3.2 million, respectively. The fair value of the contracts was not material as of September 29, 2018 or September 30, 2017. The contract held as of September 29, 2018 has a maturity date of December 27, 2018 and it was not designated as a hedging instrument.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Loss Recognized in Income

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Location

 

Foreign currency forward contracts

 

$

(6

)

$

(203

)

$

(13

)

$

(332

)

Interest income and other, net

 

 

5. Balance Sheet Details

 

The following shows the details of selected Condensed Consolidated Balance Sheet items (in thousands):

 

Inventories

 

 

 

September 29,
2018

 

December 30,
2017

 

Work in progress

 

$

51,004

 

$

46,698

 

Finished goods

 

26,559

 

26,434

 

 

 

$

77,563

 

$

73,132

 

 

16



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

6. Acquisitions

 

Z-Wave

 

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

 

This strategic acquisition expands the Company’s IoT connectivity portfolio in the connected home market, while further scaling the Company’s engineering team. These factors contributed to a purchase price that was in excess of the fair value of the net assets acquired and, as a result, the Company recorded goodwill. A portion of the goodwill is deductible for tax purposes. The purchase price was allocated as follows (in thousands):

 

 

 

Amount

 

Weighted-Average
Amortization Period
(Years)

 

Intangible assets:

 

 

 

 

 

In-process research and development

 

$

20,900

 

Not amortized

 

Developed technology

 

69,875

 

7

 

Customer relationships

 

25,000

 

4

 

Trademarks

 

9,900

 

7

 

 

 

125,675

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

2,841

 

 

 

Accounts receivable

 

5,311

 

 

 

Inventory

 

15,581

 

 

 

Other current assets

 

329

 

 

 

Goodwill

 

108,461

 

 

 

Other non-current assets

 

2,587

 

 

 

Accounts payable

 

(3,306

)

 

 

Other current liabilities

 

(8,917

)

 

 

Other non-current liabilities

 

(5,993

)

 

 

Total purchase price

 

$

242,569

 

 

 

 

In-process research and development (IPR&D) represents acquired smart home technology that had not achieved technological feasibility as of the acquisition date. The fair value of IPR&D was determined using the income approach. The discount rate applied to the projected cash flows was 15.0%, which reflects the risks related to the projects. The allocation of the purchase price is preliminary and subject to change, primarily for the valuation of intangible assets and product warranty accruals and the finalization of income tax matters.

 

Revenues attributable to the Z-Wave business from the date of acquisition to September 29, 2018 were $20.5 million. The Company recorded approximately $4.9 million of acquisition-related costs in selling, general and administrative expenses during the nine months ended September 29, 2018.

 

17


Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Revenues

 

$

230,243

 

$

212,572

 

$

666,575

 

$

609,482

 

Net income

 

$

31,528

 

$

16,944

 

$

72,722

 

$

37,037

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.73

 

$

0.40

 

$

1.68

 

$

0.87

 

Diluted

 

$

0.71

 

$

0.39

 

$

1.65

 

$

0.86

 

 

7.  Debt

 

1.375% Convertible Senior Notes

 

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

 

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

 

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

 

18


Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The Company incurred debt issuance costs of approximately $10.6 million, which was allocated to the liability and equity components in proportion to the allocation of the proceeds. The costs allocated to the liability component are being amortized as interest expense over the term of the Notes using the effective interest method.

 

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

 

 

 

September 29,
2018

 

December 30,
2017

 

Liability component

 

 

 

 

 

Principal

 

$

400,000

 

$

400,000

 

Unamortized debt discount

 

(42,178

)

(50,499

)

Unamortized debt issuance costs

 

(6,365

)

(7,622

)

Net carrying amount

 

$

351,457

 

$

341,879

 

 

 

 

 

 

 

Equity component

 

 

 

 

 

Net carrying amount

 

$

57,735

 

$

57,735

 

 

The liability component of the Notes is recorded in convertible debt on the Consolidated Balance Sheet. The equity component of the Notes is recorded in additional paid-in capital. The effective interest rate for the liability component was 4.75%. As of September 29, 2018, the remaining period over which the debt discount and debt issuance costs will be amortized was 3.4 years.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Contractual interest expense

 

$

1,360

 

$

1,360

 

$

4,125

 

$

3,117

 

Amortization of debt discount

 

2,801

 

2,674

 

8,322

 

6,068

 

Amortization of debt issuance costs

 

423

 

404

 

1,256

 

916

 

 

 

$

4,584

 

$

4,438

 

$

13,703

 

$

10,101

 

 

Amended Credit Agreement

 

On July 31, 2012, the Company and certain of its domestic subsidiaries (the “Guarantors”) entered into a $230 million five-year Credit Agreement (the “Credit Agreement”), which consisted of a $100 million Term Loan Facility and a $130 million Revolving Credit Facility. On July 24, 2015, the Company and the Guarantors amended the Credit Agreement (the “Amended Credit Agreement”) in order to, among other things, increase the borrowing capacity under the Revolving Credit Facility to $300 million (the “Credit Facility”), eliminate the Term Loan Facility and extend the maturity date to five years from the closing date. On July 24, 2015, the Company borrowed $82.5 million under the Amended Credit Agreement and paid off the remaining balance of its Term Loan Facility. In connection with the Company’s offering of the Notes, it entered into a second amendment to the Credit Agreement (the “Second Amended Credit Agreement”) on February 27, 2017 and paid off the remaining balance of $72.5 million.

 

The Second Amended Credit Agreement retained the key terms and provisions of the first Amended Credit Agreement, including a $25 million letter of credit sublimit and a $10 million swingline loan sublimit. The Company also has an option to increase the size of the borrowing capacity by up to an aggregate of $200 million in additional commitments, subject to certain conditions.

 

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Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The Revolving Credit Facility, other than swingline loans, will bear interest at the Eurodollar rate plus an applicable margin or, at the option of the Company, a base rate (defined as the highest of the Wells Fargo prime rate, the Federal Funds rate plus 0.50% and the Eurodollar Base Rate plus 1.00%) plus an applicable margin. Swingline loans accrue interest at the base rate plus the applicable margin for base rate loans. The applicable margins for the Eurodollar rate loans range from 1.25% to 2.00% and for base rate loans range from 0.25% to 1.00%, depending in each case, on the leverage ratio as defined in the Agreement.

 

The Second Amended Credit Agreement contains various conditions, covenants and representations with which the Company must be in compliance in order to borrow funds and to avoid an event of default, including financial covenants that the Company must maintain a leverage ratio (funded debt/EBITDA) of no more than 3.00 to 1 and a minimum fixed charge coverage ratio (EBITDA/interest payments, income taxes and capital expenditures) of no less than 1.25 to 1. As of September 29, 2018, the Company was in compliance with all covenants of the Second Amended Credit Agreement. The Company’s obligations under the Second Amended Credit Agreement are guaranteed by the Guarantors and are secured by a security interest in substantially all assets of the Company and the Guarantors.

 

8.  Commitments and Contingencies

 

Patent LitigationCresta Technology

 

On January 28, 2014, Cresta Technology Corporation (“Cresta Technology”), a Delaware corporation, filed a lawsuit against the Company (among others) in the United States District Court in the District of Delaware, alleging infringement of three United States Patents (the “Cresta Patents”). On July 16, 2014, the Company filed a lawsuit against Cresta Technology in the United States District Court in the Northern District of California alleging infringement of six United States Patents.

 

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

 

The U.S. District Court approved the plaintiff’s voluntary dismissal of the Delaware lawsuit on April 3, 2018. On September 17, 2018, the Company and Crespe LLC reached a settlement of all matters with the Company receiving a non-material payment from Crespe LLC. There was no payment from the Company and the Company received a full license to the Cresta Patents and dismissal of all claims.

 

Patent LitigationBandspeed

 

On June 21, 2018, Bandspeed, LLC (“Bandspeed”), a Texas limited liability company, filed a lawsuit against the Company in the United States District Court of the Western District of Texas, Austin Division, alleging infringement of eight United States Patents.  The Company is continuing to review the Bandspeed complaint and intends to defend the matter vigorously. At this time, the Company cannot predict the outcome of the Bandspeed matter or the resulting financial impact to it, if any.

 

Other

 

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

 

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

9. Stockholders’ Equity

 

Common Stock

 

The Company issued 0.7 million shares of common stock during the nine months ended September 29, 2018.

 

Share Repurchase Programs

 

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

 

Program
Authorization Date

 

Program
Termination Date

 

Program
Amount

 

October 2017

 

December 2019

 

$

200,000

*

January 2017

 

December 2017

 

$

100,000

 

 


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

 

These programs allow for repurchases to be made in the open market or in private transactions, including structured or accelerated transactions, subject to applicable legal requirements and market conditions. The Company repurchased 0.3 million shares of its common stock for $24.3 million during the nine months ended September 29, 2018. These shares were retired upon repurchase. The Company did not repurchase any shares of its common stock during the nine months ended September 30, 2017.

 

Reclassifications From Accumulated Other Comprehensive Loss

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

Reclassification

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Losses on available-for-sales securities to:

 

 

 

 

 

 

 

 

 

Interest income and other, net

 

$

 

$

 

$

(49

)

$

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) on cash flow hedges to:

 

 

 

 

 

 

 

 

 

Interest expense

 

(131

)

 

(164

)

1,808

 

 

 

(131

)

 

(213

)

1,808

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

28

 

 

45

 

(633

)

 

 

 

 

 

 

 

 

 

 

Total gains (losses) reclassified

 

$

(103

)

$

 

$

(168

)

$

1,175

 

 

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Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

10. Revenues

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,
2018

 

September 30,
2017(1)

 

September 29,
2018

 

September 30,
2017(1)

 

Internet of Things

 

$

125,390

 

$

99,947

 

$

344,504

 

$

285,522

 

Infrastructure

 

52,554

 

38,881

 

153,494

 

113,082

 

Broadcast

 

36,081

 

42,977

 

106,318

 

116,959

 

Access

 

16,218

 

16,918

 

48,417

 

52,286

 

 

 

$

230,243

 

$

198,723

 

$

652,733

 

$

567,849

 

 


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

 

A portion of the Company’s sales are made to distributors under agreements allowing certain rights of return and/or price protection related to the final selling price to the end customers. These factors impact the timing and uncertainty of revenues and cash flows. The Company recognized revenue of $15.5 million and $23.9 million during the three and nine months ended September 29, 2018, respectively, from performance obligations that were satisfied in previous reporting periods. The following disaggregates the Company’s revenue by sales channel (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,
2018

 

September 30,
2017(1)

 

September 29,
2018

 

September 30,
2017(1)

 

Distributors

 

$

166,082

 

$

139,716

 

$

470,385

 

$

401,255

 

Direct customers

 

64,161

 

59,007

 

182,348

 

166,594

 

 

 

$

230,243

 

$

198,723

 

$

652,733

 

$

567,849

 

 


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

 

11. Stock-Based Compensation

 

In fiscal 2009, the stockholders of the Company approved the 2009 Stock Incentive Plan (the “2009 Plan”) and the 2009 Employee Stock Purchase Plan (the “2009 Purchase Plan”). In fiscal 2017, the stockholders of the Company approved amendments to both the 2009 Plan and the 2009 Purchase Plan. These amendments authorized additional shares of common stock for issuance, to comply with changes in applicable law, improve the Company’s corporate governance and to implement other best practices.

 

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

 

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Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The following table presents details of stock-based compensation costs recognized in the Condensed Consolidated Statements of Income (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

Cost of revenues

 

$

324

 

$

281

 

$

914

 

$

803

 

Research and development

 

6,016

 

5,411

 

17,454

 

16,161

 

Selling, general and administrative

 

6,242

 

5,663

 

18,525

 

16,043

 

 

 

12,582

 

11,355

 

36,893

 

33,007

 

Income tax benefit

 

619

 

2,674

 

7,515

 

11,131

 

 

 

$

11,963

 

$

8,681

 

$

29,378

 

$

21,876

 

 

The decrease in income tax benefit during the three months ended September 29, 2018 was due to the reduced current and future deductibility of executive stock compensation as a result of the Tax Cuts and Jobs Act. The Company had approximately $77.4 million of total unrecognized compensation costs related to granted stock options and awards as of September 29, 2018 that are expected to be recognized over a weighted-average period of approximately 2.1 years. There were no significant stock-based compensation costs capitalized into assets in any of the periods presented.

 

12. 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. Income tax expense (benefit) was $(5.5) million and $2.2 million for the three months ended September 29, 2018 and September 30, 2017, resulting in effective tax rates of -24.4% and 9.8%, respectively. Income tax expense (benefit) was $(9.4) million and $1.5 million for the nine months ended September 29, 2018 and September 30, 2017, resulting in effective tax rates of -15.9% and 2.8%, respectively. The effective tax rate for the three and nine months ended September 29, 2018 decreased from the prior periods primarily due to a decrease in the U.S. statutory tax rate from 35% to 21%, the impact of a change of U.S. method of tax accounting for recognizing revenue and the SAB 118 (defined below) discrete benefit related to the transition tax calculation. This decrease was partially offset by a decrease in the foreign tax rate benefit.

 

U.S. Tax Reform

 

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries previously deferred from tax and creates a new provision designed to tax global intangible low-taxed income (“GILTI”).  Also on December 22, 2017, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides for a measurement period of up to one year from the enactment for companies to complete their accounting for the Act. The Company is applying the guidance in SAB 118 when accounting for the enactment-date effects of the Act.

 

At September 29, 2018, the Company has not completed its accounting for the tax effects of the Act but has made reasonable estimates of the effects on the re-measurement of its deferred tax assets and liabilities as well as its transition tax liability. During the three-month period ended September 29, 2018, the Company recorded adjustments to the provisional amounts recorded at December 30, 2017 and included these adjustments as a component of tax expense from continuing operations. The Company recorded a decrease of $6.1 million to the transition tax liability and a net increase of $0.9 million related to the revaluation of deferred tax assets and liabilities. The Company has not yet fully collected all necessary data to complete its analysis of the effect of the Act on its deferred tax assets and liabilities and is also awaiting additional guidance to complete its analysis. Therefore, the Company has not yet completed its accounting of the re-measurement of its deferred tax assets and liabilities. Additionally, the Company has not yet collected and analyzed all necessary tax and earnings data of its foreign operations and therefore, the Company has also not yet completed its accounting for the income tax effects of the transition tax. The Company will continue to refine its calculations as additional analysis is completed.

 

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Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

In other cases, the Company has not been able to make a reasonable estimate and therefore continues to account for those items based in its existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment of the Act.

 

The Act subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity of the GILTI provisions, the Company is still evaluating the effects of the GILTI provisions and has not yet made its accounting policy election. At September 29, 2018, because the Company is still evaluating the GILTI provisions, the Company has included tax expense related to GILTI for the current year in its estimated annual effective tax rate and has not provided additional GILTI on deferred items.

 

Additionally, while the Act has applied a tax on accumulated foreign earnings as of the end of fiscal 2017, the Company is still evaluating whether to continue to apply the exception under ASC 740-30-25-18 to the presumption of repatriation of foreign earnings. As a result, the Company has not provided an estimate of the taxes associated with the reversal of this exception. The Company is analyzing the impact of a change in this presumption but until completing its analysis, the Company continues to apply the exception under ASC 740-30-25-18.

 

Uncertain Tax Positions

 

As of September 29, 2018, the Company had gross unrecognized tax benefits of $2.2 million, of which $2.2 million would affect the effective tax rate if recognized. During the nine months ended September 29, 2018, the Company released $1.9 million of unrecognized tax benefits as a result of a lapse in the statute of limitations.

 

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision (benefit) for income taxes. These amounts were not material for any of the periods presented.

 

The Norwegian Tax Administration (“NTA”) has completed its examination of the Company’s Norwegian subsidiary for income tax matters relating to fiscal years 2013, 2014, 2015 and 2016. The Company received a final assessment from the NTA in December 2017 concerning an adjustment to its 2013 taxable income related to the pricing of an intercompany transaction. The Company is currently appealing the assessment. Since the original assessment was issued, the NTA has reduced its assessment. The revised adjustment to the pricing of the intercompany transaction would now result in approximately $17.6 million additional Norwegian income tax.  The Company disagrees with the NTA’s assessment and believes the Company’s position on this matter is more likely than not to be sustained. The Company plans to exhaust all available administrative remedies, and if unable to resolve this matter through administrative remedies with the NTA, the Company plans to pursue judicial remedies. The Company believes that it is likely that the NTA will request a payment of approximately $9.5 million during the appeal process.

 

The Company believes that it has accrued adequate reserves related to all matters contained in tax periods open to examination. Should the Company experience an unfavorable outcome in the NTA matter, however, such an outcome could have a material impact on its financial statements.

 

Tax years 2013 through 2018 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company is not currently under audit in any major taxing jurisdiction.

 

The Company believes it is reasonably possible that the gross unrecognized tax benefits will not decrease in the next 12 months.

 

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Table of Contents

 

Item 2.  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 Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the “Cautionary Statement” above and “Risk Factors” below 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 will have 52 weeks and fiscal 2017 had 52 weeks. Our third quarter of fiscal 2018 ended September 29, 2018. Our third quarter of fiscal 2017 ended September 30, 2017.

 

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.

 

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.

 

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Table of Contents

 

Current Period Highlights

 

Revenues increased $31.5 million in the recent quarter compared to the third quarter of fiscal 2017, primarily due to increased revenues from our IoT and Infrastructure products offset by decreased revenues from our Broadcast and Access products. Gross margin increased $19.1 million during the same period due primarily to increased product sales. Gross margin as a percent of revenues increased to 58.9% in the recent quarter compared to 58.7% in the third quarter of fiscal 2017 primarily due to variations in product mix. Operating expenses increased by $18.9 million in the recent quarter compared to the third quarter of fiscal 2017 due primarily to increased personnel-related expenses, amortization of intangible assets and acquisition-related costs. Operating income in the recent quarter was $25.1 million compared to $25.0 million in the third quarter of fiscal 2017.

 

We ended the third quarter with $601.9 million in cash, cash equivalents and short-term investments. Net cash provided by operating activities was $145.1 million during the recent nine-month period. Accounts receivable was $74.6 million at September 29, 2018, representing 29 days sales outstanding (DSO). Inventory was $77.6 million at September 29, 2018, representing 74 days of inventory (DOI). In the first nine months of 2018, we repurchased 0.3 million shares of our common stock for $24.3 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 6, Acquisitions, to the Condensed Consolidated Financial Statements for additional information.

 

In the first nine months of fiscal 2018, we introduced Wireless Xpress modules that deliver Bluetooth® and Wi-Fi® connectivity with no firmware 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 the nine months ended September 29, 2018, 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 more than 10% of our revenues during the nine months ended September 29, 2018. There were no contract manufacturers that accounted for more than 10% of our revenues during the nine months ended September 29, 2018.

 

During the first quarter of 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 anticipate this change to our distributor network will create greater efficiencies and contribute to both near and long-term revenue growth. We have also undertaken an initiative to increase our direct sales force in anticipation that this change will also drive future revenue growth.

 

The percentage of our revenues derived from outside of the United States was 82% during the nine months ended September 29, 2018.  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.

 

26


Table of Contents

 

Results of Operations

 

The following describes the line items set forth in our Condensed 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.

 

27



Table of Contents

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,
2018

 

September 30,
2017

 

September 29,
2018

 

September 30,
2017

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of revenues

 

41.1

 

41.3

 

40.1

 

41.0

 

Gross margin

 

58.9

 

58.7

 

59.9

 

59.0

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

26.5

 

26.2

 

26.9

 

27.6

 

Selling, general and administrative

 

21.5

 

19.9

 

22.8

 

21.1

 

Operating expenses

 

48.0

 

46.1

 

49.7

 

48.7

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

10.9

 

12.6

 

10.2

 

10.3

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income and other, net

 

0.9

 

0.9

 

1.1

 

0.7

 

Interest expense

 

(2.1

)

(2.4

)

(2.2

)

(1.6

)

Income before income taxes

 

9.7

 

11.1

 

9.1

 

9.4

 

Provision (benefit) for income taxes

 

(2.4

)

1.1

 

(1.4

)

0.3

 

Net income

 

12.1

%

10.0

%

10.5

%

9.1

%

 

Revenues

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in millions)

 

September 29,
2018

 

September 30,
2017

 

Change

 

%
Change

 

September 29,
2018

 

September 30,
2017

 

Change

 

%
Change

 

Internet of Things

 

$

125.3

 

$

99.9

 

$

25.4

 

25.5

%

$

344.5

 

$

285.5

 

$

59.0

 

20.7

%

Infrastructure

 

52.6

 

38.9

 

13.7

 

35.2

%

153.5

 

113.1

 

40.4

 

35.7

%

Broadcast

 

36.1

 

43.0

 

(6.9

)

(16.0

)%

106.3

 

116.9

 

(10.6

)

(9.1

)%

Access

 

16.2

 

16.9

 

(0.7

)

(4.1

)%

48.4

 

52.3

 

(3.9

)

(7.4

)%

 

 

$

230.2

 

$

198.7

 

$

31.5

 

15.9

%

$

652.7

 

$

567.8

 

$

84.9

 

14.9

%

 

The change in revenues in the recent three month period was due primarily to:

 

·                  Increased revenues of $25.4 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 $13.7 million for our Infrastructure products, due primarily to increased demand for our isolation products and timing products.

·                  Decreased revenues of $6.9 million for Broadcast products, due primarily to decreases in the market for our consumer products and decreased demand for our automotive products.

·                  Decreased revenues of $0.7 million for our Access products, due primarily to decreased demand for our VoIP products and decreases in the market for such products.

 

The change in revenues in the recent nine month period was due primarily to:

 

·                  Increased revenues of $59.0 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 $40.4 million for our Infrastructure products, due primarily to increased demand for our isolation products and timing products.

·                  Decreased revenues of $10.6 million for Broadcast products, due primarily to decreases in the market for our consumer products.

·                  Decreased revenues of $3.9 million for our Access products, due primarily to decreased demand for our VoIP products and decreases in the market for such products.

 

28


Table of Contents

 

Unit volumes of our products increased by 9.7% and average selling prices increased by 5.6% compared to the three months ended September 30, 2017. Unit volumes of our products increased by 14.3% and average selling prices increased by 0.5% compared to the nine months ended September 30, 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.

 

Gross Margin

                                               

 

 

Three Months Ended

 

Nine Months Ended

 

(in millions)

 

September 29,
2018

 

September 30,
2017

 

Change

 

September 29,
2018

 

September 30,
2017

 

Change

 

Gross margin

 

$

135.6

 

$

116.6

 

$

19.0

 

$

391.2

 

$

334.9

 

$

56.3

 

Percent of revenue

 

58.9

%

58.7

%

0.2

%

59.9

%

59.0

%

0.9

%

 

The increased dollar amount of gross margin in the recent three month period was due to increases in gross margin of $13.1 million for our Internet of Things products and $9.7 million for our Infrastructure products, offset by decreases in gross margin of $3.6 million for our Broadcast products and $0.2 million for our Access products. The increased dollar amount of gross margin in the recent nine month period was due to increases in gross margin of $34.0 million for our Internet of Things products and $30.2 million for our Infrastructure products, offset by decreases in gross margin of $7.0 million for our Broadcast products and $0.9 million for our Access products. Gross margin increased during the recent three and nine month periods due primarily to increased product sales. Gross margin in the recent three and nine month periods included $4.0 million and $6.1 million, respectively, in acquisition-related charges for the fair value write-up associated with acquired inventory. Gross margin as a percent of revenues increased during the recent three and nine month periods primarily due to a higher mix of Infrastructure products sold in the recent periods.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in millions)

 

September 29,
2018

 

September 30,
2017

 

Change

 

%
Change

 

September 29,
2018

 

September 30,
2017

 

Change

 

%
Change

 

Research and development

 

$

61.1

 

$

52.0

 

$

9.1

 

17.5

%

$

175.4

 

$

156.8

 

$

18.6

 

11.9

%

Percent of revenue

 

26.5

%

26.2

%

 

 

 

 

26.9

%

27.6

%

 

 

 

 

 

The increase in research and development expense in the recent three and nine month periods was primarily due to increases of $5.4 million and $11.6 million, respectively, for personnel-related expenses, including costs associated with increased headcount and an acquisition, and $2.6 million and $4.4 million, respectively, for the amortization of intangible assets. The decrease in research and development expense as a percent of revenues in the recent nine month period was due to our increased revenues. We expect that research and development expense will increase in absolute dollars in the fourth quarter of fiscal 2018.

 

29


Table of Contents

 

Selling, General and Administrative

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in millions)

 

September 29,
2018

 

September 30,
2017

 

Change

 

%
Change

 

September 29,
2018

 

September 30,
2017

 

Change

 

%
Change

 

Selling, general and administrative

 

$

49.4

 

$

39.6

 

$

9.8

 

24.7

%

$

148.9

 

$

119.6

 

$

29.3

 

24.5

%

Percent of revenue

 

21.5

%

19.9

%

 

 

 

 

22.8

%

21.1

%

 

 

 

 

 

The increase in selling, general and administrative expense in the recent three month period was primarily due to increases of $6.5 million for personnel-related expenses, including costs associated with increased headcount and an acquisition, and $1.4 million for the amortization of intangible assets. The increase in selling, general and administrative expense in the recent nine month period was primarily due to increases of $18.6 million for personnel-related expenses, $4.0 million for acquisition-related costs, and $2.4 million for the amortization of intangible assets. We expect that selling, general and administrative expense will remain relatively stable in absolute dollars in the fourth quarter of fiscal 2018.

 

Interest Income and Other, Net

 

Interest income and other, net for the three and nine months ended September 29, 2018 was $2.1 million and $6.9 million, respectively, compared to $1.9 million and $4.1 million for the three and nine months ended September 30, 2017, respectively. The increase in interest income and other, net in the recent nine month period was primarily due to increased interest income earned as a result of higher market interest rates and a gain of $1.0 million recorded in connection with a fair value adjustment to an equity investment.

 

Interest Expense

 

Interest expense for the three and nine months ended September 29, 2018 was $4.9 million and $14.7 million, respectively, compared to $4.8 million and $9.3 million for the three and nine months ended September 30, 2017, respectively. The increase in interest expense in the recent nine month period was primarily due to increased interest expense of $3.6 million on our convertible debt, including amortization of the debt discount and debt issuance costs, and a $2.0 million gain recorded in the prior nine month period in connection with the termination of our interest rate swap agreement.

 

Provision (Benefit) for Income Taxes

 

 

 

Three Months Ended

 

Nine Months Ended