Silicon Laboratories Inc.
SILICON LABORATORIES INC (Form: 10-Q, Received: 04/30/2008 12:20:11)

 

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 April 5, 2008

 

 

 

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)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x

Accelerated filer   o

Non-accelerated filer   o

Smaller reporting company   o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ¨ Yes   x No

 

As of April 23, 2008, 48,709,580 shares of common stock of Silicon Laboratories Inc. were outstanding.

 

 



 

 

Page
Number

 

 

Part I.   Financial Information

 

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at April 5, 2008 and December 29, 2007

3

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three months ended April 5, 2008 and March 31, 2007

4

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended April 5, 2008 and March 31, 2007

5

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

 

 

Item 2.

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

16

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

 

 

Item 4.

Controls and Procedures

27

 

 

 

Part II.   Other Information

 

 

 

 

Item 1.

Legal Proceedings

28

 

 

 

 

 

Item 1A.

Risk Factors

29

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

43

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Securities Holders

43

 

 

 

 

 

Item 5.

Other Information

43

 

 

 

 

 

Item 6.

Exhibits

43

 

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 “expects,” “anticipates,” “intends,” “believes” 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



 

Part I.  Financial Information

Item 1.  Financial Statements

 

Silicon Laboratories Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

 

 

April 5,
2008

 

December 29,
2007

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

330,871

 

$

264,408

 

Short-term investments

 

70,185

 

308,566

 

Accounts receivable, net of allowance for doubtful accounts of $515 at April 5, 2008 and $517 at December 29, 2007

 

46,355

 

51,211

 

Inventories

 

26,918

 

28,587

 

Deferred income taxes

 

6,261

 

6,025

 

Prepaid expenses and other current assets

 

20,026

 

33,895

 

Total current assets

 

500,616

 

692,692

 

Long-term investments

 

65,950

 

 

Property, equipment and software, net

 

26,814

 

28,157

 

Goodwill

 

73,096

 

73,199

 

Other intangible assets, net

 

17,045

 

18,077

 

Other assets, net

 

30,028

 

28,121

 

Total assets

 

$

713,549

 

$

840,246

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

23,583

 

$

33,321

 

Accrued expenses

 

21,846

 

26,397

 

Deferred income on shipments to distributors

 

27,606

 

28,448

 

Income taxes

 

5,302

 

5,226

 

Total current liabilities

 

78,337

 

93,392

 

Long-term obligations and other liabilities

 

46,264

 

43,309

 

Total liabilities

 

124,601

 

136,701

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock—$0.0001 par value; 250,000 shares authorized; 48,700 and 52,810 shares issued and outstanding at April 5, 2008 and December 29, 2007, respectively

 

5

 

5

 

Additional paid-in capital

 

180,124

 

303,682

 

Retained earnings

 

410,672

 

399,858

 

Accumulated other comprehensive loss

 

(1,853

)

 

Total stockholders’ equity

 

588,948

 

703,545

 

Total liabilities and stockholders’ equity

 

$

713,549

 

$

840,246

 

 

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

 

3



 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Income

 (In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

April 5,
2008

 

March 31,
2007

 

Revenues

 

$

98,179

 

$

73,814

 

Cost of revenues

 

37,832

 

28,439

 

Gross profit

 

60,347

 

45,375

 

Operating expenses:

 

 

 

 

 

Research and development

 

24,673

 

24,807

 

Selling, general and administrative

 

24,609

 

24,292

 

Operating expenses

 

49,282

 

49,099

 

Operating income (loss)

 

11,065

 

(3,724

)

Other income (expense):

 

 

 

 

 

Interest income

 

4,798

 

3,835

 

Interest expense

 

(145

)

(231

)

Other income (expense), net

 

(142

)

(119

)

Income (loss) from continuing operations before income taxes

 

15,576

 

(239

)

Provision for income taxes

 

4,762

 

507

 

Income (loss) from continuing operations

 

10,814

 

(746

)

Income from discontinued operations, net of income taxes

 

 

156,359

 

 

 

 

 

 

 

Net income

 

$

10,814

 

$

155,613

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.21

 

$

(0.01

)

Net income

 

$

0.21

 

$

2.84

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.21

 

$

(0.01

)

Net income

 

$

0.21

 

$

2.84

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

Basic

 

51,109

 

54,806

 

Diluted

 

52,000

 

54,806

 

 

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

 

4



 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

April 5,
2008

 

March 31,
2007

 

Operating Activities

 

 

 

 

 

Net income

 

$

10,814

 

$

155,613

 

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

 

 

 

 

 

Income from discontinued operations

 

 

(156,359

)

Depreciation and amortization of property, equipment and software

 

2,621

 

2,787

 

Loss (gain) on disposal of property, equipment and software

 

(15

)

153

 

Amortization of other intangible assets and other assets

 

1,032

 

1,234

 

Stock compensation expense

 

10,221

 

11,770

 

Additional income tax benefit from employee stock-based awards

 

602

 

756

 

Excess income tax benefit from employee stock-based awards

 

(411

)

(478

)

Deferred income taxes

 

(262

)

26

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

4,856

 

3,346

 

Inventories

 

1,666

 

734

 

Prepaid expenses and other assets

 

2,440

 

2,416

 

Accounts payable

 

(4,435

)

1,160

 

Accrued expenses

 

(4,989

)

(2,336

)

Deferred income on shipments to distributors

 

(842

)

3,257

 

Income taxes

 

351

 

1,038

 

Net cash provided by operating activities of continuing operations

 

23,649

 

25,117

 

Investing Activities

 

 

 

 

 

Purchases of available-for-sale investments

 

(79,237

)

(181,435

)

Sales and maturities of available-for-sale investments

 

248,818

 

46,853

 

Purchases of property, equipment and software

 

(1,278

)

(1,522

)

Proceeds from the sale of assets

 

14,265

 

270,750

 

Purchases of other assets

 

(183

)

 

Net cash provided by investing activities of continuing operations

 

182,385

 

134,646

 

Financing Activities

 

 

 

 

 

Proceeds from exercises of stock options

 

4,534

 

1,995

 

Excess income tax benefit from employee stock-based awards

 

411

 

478

 

Repurchases of common stock

 

(143,022

)

(13,149

)

Repurchases of stock to satisfy employee tax withholding

 

(1,494

)

(2,766

)

Net cash used in financing activities of continuing operations

 

(139,571

)

(13,442

)

Discontinued Operations

 

 

 

 

 

Operating activities

 

 

(833

)

Investing activities

 

 

(633

)

Financing activities

 

 

551

 

Net cash used in discontinued operations

 

 

(915

)

 

 

 

 

 

 

Increase in cash and cash equivalents

 

66,463

 

145,406

 

Cash and cash equivalents at beginning of period

 

264,408

 

68,188

 

Cash and cash equivalents at end of period

 

$

330,871

 

$

213,594

 

Supplemental Disclosure of Non-Cash Activity:

 

 

 

 

 

Proceeds from the sale of assets held in escrow

 

$

 

$

14,250

 

 

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

 

5



 

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, other than the condensed consolidated balance sheet as of December 29, 2007, 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 April 5, 2008 and December 29, 2007, the condensed consolidated results of its operations for the three months ended April 5, 2008 and March 31, 2007, and the condensed consolidated statements of cash flows for the three months ended April 5, 2008 and March 31, 2007.  All intercompany balances and transactions have been eliminated.  The condensed consolidated results of operations for the three months ended April 5, 2008 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.  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 29, 2007, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on February 7, 2008.

 

The Company prepares financial statements on a 52-53 week year that ends on the Saturday closest to December 31. Fiscal year 2008 will have 53 weeks with the extra week occurring in the first quarter of the year.  Fiscal 2007 had 52 weeks.

 

Reclassifications

 

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

 

Recent Accounting Pronouncements

 

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007), Business Combinations , (SFAS 141R).  SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree.  The Statement also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The impact of adopting SFAS 141R will be dependent on the future business combinations that the Company may pursue after its effective date.

 

6



 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements .  SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements.  In February 2008, the FASB amended SFAS 157 by issuing FASB Staff Position (FSP) FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, a nd FAS 157-2, Effective Date of FASB Statement No. 157 .  FSP FAS 157-1 amends SFAS 157 to exclude SFAS 13, Accounting for Leases, and certain other lease-related accounting pronouncements.  FSP FAS 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008.  The Company adopted certain provisions of SFAS 157 effective December 30, 2007 (see Note 4, Fair Value of Financial Instruments , to the Condensed Consolidated Financial Statements for additional information).  The Company is currently evaluating the effect that the adoption of the provisions deferred by FSP FAS 157-2 will have on its financial position and results of operations.

 

2. Discontinued Operation

 

On March 23, 2007, the Company sold its Aero® transceiver, AeroFONE™ single-chip phone and power amplifier product lines (the “Aero product lines”) to NXP B.V. and NXP Semiconductors France SAS (collectively “NXP”) for $285 million in cash, (including $14.3 million held in escrow recorded in the “prepaid expenses and other current assets” line of the consolidated balance sheet at December 29, 2007), plus additional earn-out potential of up to an aggregate of $65 million over the next three years.  In March 2008, the full amount previously held in escrow was distributed to the Company.

 

The financial results of the sold product lines have been presented as discontinued operations in the condensed consolidated financial statements.  The following summarizes results from the discontinued operations (in thousands, except per share data):

 

 

 

Three Months Ended
March 31, 2007

 

Revenues

 

$

37,988

 

Costs of revenues and operating expenses

 

36,691

 

 

 

1,297

 

Gain on sale of discontinued operations

 

222,338

 

Income from discontinued operations before income taxes

 

223,635

 

Provision for income taxes

 

67,276

 

Income from discontinued operations, net of income taxes

 

$

156,359

 

 

 

 

 

Income from discontinued operations per common share:

 

 

 

Basic

 

$

2.85

 

Diluted

 

$

2.85

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

Basic

 

54,806

 

Diluted

 

54,806

 

 

7



 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

3. Earnings Per Share

 

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

 

 

 

Three Months Ended

 

 

 

April 5,
2008

 

March 31,
2007

 

Income (loss) from continuing operations

 

$

10,814

 

$

(746

)

 

 

 

 

 

 

Shares used in computing basic earnings per share

 

51,109

 

54,806

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

Stock options and awards

 

891

 

 

Shares used in computing diluted earnings per share

 

52,000

 

54,806

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

 

 

 

Basic earnings per share

 

$

0.21

 

$

(0.01

)

Diluted earnings per share

 

$

0.21

 

$

(0.01

)

 

Approximately 4.6 million and 4.9 million weighted-average dilutive potential shares of common stock have been excluded from the earnings per share calculation for the three months ended April 5, 2008 and March 31, 2007, respectively, as they are anti-dilutive.  Further, shares used in calculating diluted earnings per share for the three months ended March 31, 2007 exclude 1.5 million shares due to the Company’s loss from continuing operations for the period.

 

4. Fair Value of Financial Instruments

 

The Company’s financial instruments are recorded at amounts that reflect the Company’s estimate of their fair values.  SFAS 157, Fair Value Measurement, provides a hierarchal disclosure framework associated with the level of subjectivity used in measuring assets and liabilities at fair value.  The three levels defined by the SFAS 157 hierarchy are as follows:

 

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.

 

8



 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The following summarizes the valuation of the Company’s financial instruments measured under the SFAS 157 hierarchy (in thousands):

 

 

 

Fair Value Measurements
at April 5, 2008 Using

 

 

 

Description

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

Cash equivalents

 

$

310,685

 

$

 

$

310,685

 

Short-term investments

 

70,185

 

 

70,185

 

Long-term investments

 

 

65,950

 

65,950

 

 

The Company’s cash equivalents and short-term investments are valued using quoted prices and other relevant information generated by market transactions involving identical assets.  The Company’s long-term investments 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 and expected holding periods of the securities.  See Note 5, Investments , to the Condensed Consolidated Financial Statements for additional information on the Company’s investments.

 

The following summarizes the activity in Level 3 financial instruments for the three months ended April 5, 2008 (in thousands):

 

 

 

Long-term

Investments

 

Balance at December 29, 2007

 

$

 

Net transfers into Level 3

 

68,800

 

Unrealized losses

 

(2,850

)

Balance at April 5, 2008

 

$

65,950

 

 

5. Investments

 

The Company’s short-term investments consist primarily of municipal bonds, U.S. government agency notes and certain auction-rate securities.  These securities typically have original maturities greater than ninety days as of the date of purchase and are classified as available-for-sale.  Investments in which the Company has the ability and intent, if necessary, to liquidate in order to support its current operations (including those with contractual maturities greater than one year from the date of purchase) are classified as short-term.  The Company’s long-term investments consist of auction-rate securities.

 

9



 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Prior to fiscal 2008, the Company classified all auction-rate securities as short-term investments.  Early in fiscal 2008, auctions for many of the Company’s auction-rate securities failed because sell orders exceeded buy orders.  As of April 5, 2008, the Company held $72.8 million of auction-rate securities, of which $70.8 million experienced failed auctions during the first quarter.  The underlying assets of the Company’s auction rate securities consisted of student loans and municipal bonds, had credit ratings of AAA or Aaa and were guaranteed by the U.S. government or were insured.  The funds associated with failed auctions are not expected to be accessible until a successful auction occurs, the issuer redeems the securities, a buyer is found outside of the auction process or the underlying securities mature.  Certain issuers have notified the Company that they expect to redeem their auction-rate securities within the next 12 months.  As such, the Company has classified $4.0 million of its auction-rate securities at April 5, 2008 as short-term.  The remainder of the Company’s auction-rate securities have been classified as long-term investments as of April 5, 2008.

 

The Company reviews its investments as of the end of each reporting period for other-than-temporary declines in fair value based on the specific identification method.  The Company considers various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, forecasted recovery and its ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. When the Company concludes that an other-than-temporary impairment has resulted, the difference between the fair value and the carrying value is written off and recorded as an impairment charge in the consolidated statement of income.  The Company has determined that no other-than-temporary impairment losses existed as of April 5, 2008.

 

The carrying value of the Company’s short-term investments approximates its fair value.  Long-term investments as of April 5, 2008 consist of the following (in thousands):

 

 

 

Cost

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

Auction-rate securities

 

$

68,800

 

$

(2,850

)

$

65,950

 

 

6. Balance Sheet Details

 

Balance sheet details consist of the following (in thousands):

 

Inventories

 

 

 

April 5,
2008

 

December 29,
2007

 

Work in progress

 

$

23,184

 

$

25,605

 

Finished goods

 

3,734

 

2,982

 

 

 

$

26,918

 

$

28,587

 

 

10



 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

7. Stockholders’ Equity and Stock-Based Compensation

 

Common Stock

 

The Company issued 0.4 million shares of common stock during the three months ended April 5, 2008.  Approximately 47,000 shares were withheld by the Company during the three months ended April 5, 2008 to satisfy employee tax obligations for the vesting of certain stock grants made under the Company’s 2000 Stock Incentive Plan.

 

Share Repurchase Program

 

In July 2007, the Company’s Board of Directors authorized a program to repurchase up to $400 million of the Company’s common stock from time to time over a 24-month period.  The program allows for repurchases to be made in the open market or in private transactions, including structured or accelerated transactions, subject to applicable legal requirements and market conditions.  During the three months ended April 5, 2008, the Company repurchased 4.5 million shares of its common stock for $137.1 million under its current repurchase program.  During the three months ended March 31, 2007, the Company repurchased 0.5 million shares for $14.6 million under its previous share repurchase program that expired in July 2007.  .

 

Comprehensive Income

 

The changes in the components of other comprehensive income, net of taxes, were as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

April 5, 
2008

 

March 31,  
2007

 

Net income

 

$

10,814

 

$

155,613

 

Change in net unrealized losses on available-for-sale securities

 

(1,853

)

 

Comprehensive income

 

$

8,961

 

$

155,613

 

 

The components of accumulated other comprehensive loss, net of taxes, were as follows (in thousands):

 

 

 

April 5,
2008

 

December 29,
2007

 

Net unrealized losses on available-for-sale securities

 

$

(1,853

)

$

 

Accumulated other comprehensive loss

 

$

(1,853

)

$

 

 

11



 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Stock-Based Compensation

 

The Company has two stock-based compensation plans, the 2000 Stock Incentive Plan and the Employee Stock Purchase Plan (the “Purchase Plan”).  Effective January 1, 2006, the Company adopted FASB SFAS No. 123 (revised 2004), Share-Based Payment , (SFAS 123R) using the modified-prospective-transition method.

 

Accounting for Stock Compensation

 

Stock-based compensation costs are generally based on the fair value calculated from the Black-Scholes option-pricing model on the date of grant for stock options and on the date of enrollment for the Purchase Plan.  The fair values of stock awards and restricted stock units (RSUs) generally equal their intrinsic value on the date of grant.  The weighted-average fair value of share-based payments was estimated using the Black-Scholes option-pricing model with the following assumptions:

 

 

 

Three Months Ended

 

 

 

April 5,
2008

 

March 31,
2007

 

2000 Stock Incentive Plan:

 

 

 

 

 

Expected volatility

 

44.0

%

53.5

%

Risk-free interest rate %

 

2.7

%

4.8

%

Expected term (in years)

 

5.0

 

5.0

 

Dividend yield

 

 

 

 

The following are the stock-based compensation costs recognized in the Company’s condensed consolidated statements of income (in thousands):

 

 

 

Three Months Ended

 

 

 

April 5,  
2008

 

March 31,  
2007

 

Cost of revenues

 

$

370

 

$

307

 

Research and development

 

3,942

 

5,371

 

Selling, general and administrative

 

5,909

 

6,092

 

 

 

10,221

 

11,770

 

Provision for income taxes

 

1,247

 

2,068

 

 

 

$

8,974

 

$

9,702

 

 

During the three months ended March 31, 2007, the Company recorded  $3.3 million of stock compensation expense in continuing operations for a one-time equity award to employees retained by the Company after the sale of the Aero product lines.

 

The Company had approximately $98.8 million of total unrecognized compensation costs related to stock options and RSUs at April 5, 2008 that are expected to be recognized over a weighted-average period of 2.1 years.

 

12



 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

8.  Commitments and Contingencies

 

Securities Litigation

 

On December 6, 2001, a class action complaint for violations of U.S. federal securities laws was filed in the United States District Court for the Southern District of New York against the Company, four officers individually and the three investment banking firms who served as representatives of the underwriters in connection with the Company’s initial public offering of common stock.  The Consolidated Amended Complaint alleges that the registration statement and prospectus for the Company’s initial public offering did not disclose that (1) the underwriters solicited and received additional, excessive and undisclosed commissions from certain investors, and (2) the underwriters had agreed to allocate shares of the offering in exchange for a commitment from the customers to purchase additional shares in the aftermarket at pre-determined higher prices.  The Complaint alleges violations of the Securities Act of 1933 and the Securities Exchange Act of 1934.  The action seeks damages in an unspecified amount and is being coordinated with approximately 300 other nearly identical actions filed against other companies.  A court order dated October 9, 2002 dismissed without prejudice the four officers of the Company who had been named individually.  On December 5, 2006, the Second Circuit vacated a decision by the District Court granting class certification in six “focus” cases, which are intended to serve as test cases.  The plaintiffs selected these six cases, which do not include the Company.  The Court has indicated that its decisions in the six focus cases are intended to provide strong guidance for the parties in the remaining cases.  On April 6, 2007, the Second Circuit denied a petition for rehearing filed by plaintiffs, but noted that plaintiffs could ask the District Court to certify more narrow classes than those that were rejected.

 

On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases.  On September 27, 2007, the plaintiffs moved to certify a class in the six focus cases.  On November 14, 2007, the issuers and the underwriters named as defendants in the six focus cases filed motions to dismiss the amended complaints against them.  On March 26, 2008, the District Court dismissed the Securities Act claims of those members of the putative classes in the focus cases who sold their securities for a price in excess of the initial offering price and those who purchased outside the previously certified class period.  With respect to all other claims, the motions to dismiss were denied.  The Company is awaiting a decision from the Court on the class certification motion.

 

The Company is unable to estimate or predict the potential damages that might be awarded as a result of this litigation, whether such damages would be greater than the Company’s insurance coverage, or whether the outcome would have a material impact on the Company’s results of operations or financial position.

 

13



 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Patent and Copyright Infringement Litigation

 

On December 14, 2006, Analog Devices, Inc. (Analog Devices), a Massachusetts corporation, filed a lawsuit against the Company, in the United States District Court in the District of Massachusetts, alleging infringement of United States Patents Nos. 7,075,329, 6,262,600, 6,525,566, 6,903,578 and 6,873,065, and copyright infringement of certain Analog Devices datasheets.  On September 17, 2007, the Company filed a lawsuit against  Analog Devices in the United States District Court for the Eastern District of Texas, Marshall Division, alleging infringement of United States Patent No. 7,171,542.  On March 7, 2008, the Company settled both lawsuits with Analog Devices.  In connection with the settlement, each company agreed to dismiss the lawsuits.

 

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 position or results of operations.

 

Operating Leases

 

400 W. Cesar Chavez Building

 

In March 2006, the Company entered into an operating lease agreement and a related participation agreement for a facility in Austin, Texas for its corporate headquarters.  During the term of the lease, the Company has an on-going option to purchase the building for a total purchase price of approximately $44.3 million. Alternatively, the Company can cause the property to be sold to third parties provided it is not in default under the lease. The Company is contingently liable on a first dollar loss basis for the guaranteed residual value associated with this property in the event that the net sale proceeds are less than the original financed cost of the facility up to approximately $35.3 million.

 

200 W. Cesar Chavez Building

 

In March 2008, the Company entered into an operating lease agreement and a related participation agreement for a facility in Austin, Texas for the expansion of its corporate headquarters.  The lease has a term of five years.  The base rent for the term of the lease is an amount equal to the interest accruing on $50.1 million at 155 basis points over the three-month LIBOR (which would be approximately $11.3 million over the five year term assuming LIBOR averages 2.97% during such term).

 

The Company has granted certain rights and remedies to the lessor in the event of certain defaults, including the right to terminate the lease, to bring suit to collect damages, and to compel the Company to purchase the facility.  The lease contains other customary representations, warranties, obligations, conditions, indemnification provisions and termination provisions, including covenants that the Company shall maintain unencumbered cash and highly-rated short-term investments of at least $75 million.  If the Company’s unencumbered cash and highly-rated short-term investments is less than $150 million, it must also maintain a ratio of funded debt to earnings before interest expense, income taxes, depreciation, amortization, lease expense and other non-cash charges (EBITDAR) over the four prior fiscal quarters of no greater than 2 to 1.  As of April 5, 2008, the Company believes it was in compliance with all covenants of the lease.

 

14



 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

During the term of the lease, the Company has an on-going option to purchase the building for a total purchase price of approximately $50.1 million.  Alternatively, the Company can cause the property to be sold to third parties provided it is not in default under the lease.  The Company is contingently liable for up to $40.0 million to the extent that the sale proceeds are less than the $50.1 million purchase option.  To the extent that the net proceeds generated from the sale of the facility to a third party exceed the purchase option, the Company would have the right to receive substantially all of such excess proceeds if the sale occurs prior to the end of the term of the lease. If the property is sold after the term of the lease, the Company would have the right to recover its $40.0 million guarantee, to the extent such sale proceeds exceed $10.1 million.

 

In accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others , the Company determined that the fair value associated with the guaranteed residual value was $1.2 million.  The amount was recorded in “Other assets, net” and “Long-term obligations and other liabilities” in the condensed consolidated balance sheets and is being amortized over the term of the lease.

 

The Company is required to periodically evaluate the expected fair value of the facility at the end of the lease term.  If the Company determines that it is estimable and probable that the expected fair value will be less than $50.1 million, it will ratably accrue the loss up to a maximum of approximately $40.0 million over the remaining lease term.  As of April 5, 2008, the Company has determined that a loss contingency accrual is not required.

 

Discontinued Operations Indemnification

 

In connection with the sale of the Aero product lines, the Company agreed to indemnify NXP with respect to liabilities for certain tax matters.  There is no contractual limit on exposure with respect to such matters.  As of April 5, 2008, the Company had no material liabilities recorded with respect to this indemnification obligation.

 

9. Income Taxes

 

At April 5, 2008, the Company had unrecognized tax benefits of $28.4 million which would affect the effective tax rate if recognized.  During the three months ended April 5, 2008, the Company had gross increases of $1.1 million to its current year unrecognized tax benefits, primarily due to uncertainty related to intercompany transfer pricing.  During the three months ended March 31, 2007, the Company had gross increases of $16.7 million to its unrecognized tax benefits, primarily due to tax consequences associated with discontinued operations.  The Company believes it is reasonably possible that the unrecognized tax benefits will decrease in the amount of $6.6 million in the next twelve months due to the closing of an open tax year.  The nature of the uncertainty relates primarily to deductions taken on a prior year tax return.

 

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes.  The Company recognized approximately $0.2 million of interest, net of tax, in the provision for income taxes for each of the three months ended April 5, 2008 and March 31, 2007.  As of April 5, 2008, the Company had accrued approximately $2.4 million for the payment of interest related to unrecognized tax positions.

 

The tax years 2004 through 2008 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, but the Company is participating in the Advance Pricing Agreement program with the U.S. Internal Revenue Service.

 

15



 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

10 .  Headquarter Relocation Costs

 

In fiscal 2006, the Company relocated most of its Austin, Texas employees to a new corporate headquarters.  In fiscal 2007, the Company relocated the remainder of its Austin employees to its headquarters.   The following table summarizes the accrued relocation costs activity for the three months ended April 5, 2008 (in thousands):

 

Balance at
December 29,
2007

 

Additions
Charged to
Expenses

 

Deductions
(1)

 

Balance at
April 5,
2008

 

$

2,618

 

$

 

$

(882

)

$

1,736

 

 


(1) Deductions represent lease payments.

 

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 year ending on the Saturday closest to December 31st. Fiscal year 2008 will have 53 weeks with the extra week occurring in the first quarter of the year. Fiscal 2007 had 52 weeks. Our first quarter of fiscal 2008 ended April 5, 2008.  Our first quarter of fiscal 2007 ended March 31, 2007.  Except as noted, financial results are for continuing operations.  Our former Aero product lines are reported as discontinued operations.  The sale of these product lines closed on March 23, 2007.

 

Overview

 

We design and develop proprietary, analog-intensive, mixed-signal integrated circuits (ICs) for a broad range of applications.  Mixed-signal ICs are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process.  Therefore, mixed-signal ICs are critical components in a broad range of applications in a variety of markets, including communications, consumer, industrial, automotive, medical and power management.  Our major customers include 2Wire, Garmin, Global Navigation Systems, LG Electronics, Motorola, Panasonic, Philips, Sagem, Samsung and Thomson.

 

As a “fabless” semiconductor company, we rely on third-party semiconductor fabricators in Asia, and to a lesser extent the United States, 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 the substantial majority of cases, test these devices and ship these units to our customers.  We have increased the portion of testing performed by such third parties, which 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 product set addresses a variety of broad-based mixed-signal applications.  Our expertise in analog-intensive, high-performance, mixed-signal ICs enables us to develop highly differentiated solutions that address multiple markets.  We group our products into the following categories:

 

·                   Broadcast products, which include our broadcast radio receivers and transmitters, satellite set-top box receivers and satellite radio tuner;

 

·                   ISOmodem® embedded modems;

 

16



 

·                   Voice over IP (VoIP) products, which include our ProSLIC® subscriber line interface circuits and voice direct access arrangement (DAA);

 

·                   Microcontrollers;

 

·                   Timing products, which include our clocks, precision clock & data recovery ICs and oscillators;

 

·                   Power products, which include our isolators, current sensors and Power over Ethernet devices; and

 

·                   Mature products, which include our silicon DAA for PC modems, DSL analog front end ICs, optical physical layer transceivers and RF Synthesizers.

 

Through acquisitions and internal development efforts, we have continued to diversify our product portfolio and introduce next generation ICs with added functionality and further integration.  In the first three months of 2008, we introduced a single-chip digital video demodulator, a single input, single output jitter-attenuating clock multiplier IC, two high-performance radio data system (RDS) receivers for portable and in-car navigation devices, a family of fully-integrated AM/FM radio receivers with weather band coverage and expanded our microcontroller portfolio with the addition of low voltage microcontrollers capable of operating down to 0.9 volts and new small form factor microcontrollers with EPROM.  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 expanding our total available market opportunity.

 

We had no customers that accounted for more than 10% of our revenues during the three months ended April 5, 2008.  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.  One of our distributors, Edom Technology, represented 32% of our revenues during the three months ended April 5, 2008.  There were no other distributors or contract manufacturers that accounted for more than 10% of our revenues during the three months ended April 5, 2008.

 

The percentage of our revenues derived from customers located outside of the United States was 86% during the three months ended April 5, 2008, which reflects our product and customer diversification and market penetration for our products, as many of our customers manufacture and design their products in Asia.  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.

 

The sales cycle for the test and evaluation of 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 personal computers, personal video recorders, set-top boxes and mobile handsets, 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.

 

17



 

Discontinued Operation

 

On March 23, 2007, we sold our Aero transceiver, AeroFONE single-chip phone and power amplifier product lines to NXP for $285 million in cash, plus additional earn-out potential of up to an aggregate of $65 million over the following three years.  The results of operations of the sold product lines have been presented as discontinued operations.

 

Results of Operations

 

The following describes the line items set forth in our condensed consolidated statements of income:

 

Revenues.   Revenues are generated almost exclusively by sales of our ICs.  We recognize revenue on sales when all of the following criteria are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured.  Generally, we recognize revenue from product sales to direct customers and contract manufacturers upon shipment. Certain of our sales are made to distributors under agreements allowing certain rights of return and price protection on products unsold by distributors. Accordingly, we defer the revenue and cost of revenue on such sales until the distributors sell the product to the end customer.  Our products typically carry a one-year replacement warranty.  Replacements have been insignificant to date.  Our revenues are subject to variation from period to period due to the volume of shipments made within a period and the prices we charge for our products.  The vast majority of our revenues were negotiated at prices that reflect a discount from the list prices for our products.  These discounts are made for a variety of reasons, including: 1) to establish a relationship with a new customer, 2) as an incentive for customers to purchase products in larger volumes, 3) to provide profit margin to our distributors who resell our products or 4) in response to competition.  In addition, as a product matures, we expect that the average selling price for such product will decline due to the greater availability of competing products.  Our ability to increase revenues in the future is dependent on increased demand for our established products and our ability to ship larger volumes of those products in response to such demand, as well as our ability to develop or acquire new products and subsequently achieve customer acceptance of newly introduced 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 and amortization of purchased software, other intellectual property license costs, and certain acquired intangible assets; an allocated portion of our occupancy costs; allocable depreciation of testing equipment and leasehold improvements; and impairment charges related to certain manufacturing equipment held for sale or abandoned.  Generally, we depreciate equipment over four years on a straight-line basis and leasehold improvements over the shorter of the estimated useful life or the applicable lease term.  Recently introduced products tend to have higher cost of revenues per unit due to initially low production volumes required by our customers and higher costs associated with new package variations.  As production volumes for a product increase, unit production costs tend to decrease as our yields improve and our semiconductor fabricators, assemblers and test suppliers achieve greater economies of scale for that product.  Additionally, the cost of wafer procurement and assembly and test services, which are significant components of cost of goods sold, vary cyclically with overall demand for semiconductors and our suppliers’ available capacity of such products and services.

 

Research and development.   Research and development expense consists primarily of personnel-related expenses, including stock compensation, new product mask, wafer, packaging and test costs, external consulting and services costs, amortization of purchased software, equipment tooling, equipment depreciation, amortization of acquired intangible assets, acquired research and development resulting from acquisitions, as well as an allocated portion of our occupancy costs for such operations.  We generally depreciate our research and development equipment over four years and amortize our purchased software from computer-aided design tool vendors over the shorter of the estimated useful life or the license term.  Research and development activities include the design of new products and software, refinement of existing products and design of test methodologies to ensure compliance with required specifications.

 

18



 

Selling, general and administrative.   Selling, general and administrative expense consists primarily of personnel-related expenses, including stock compensation, related allocable portion of our occupancy costs, sales commissions to independent sales representatives, applications engineering support, professional fees, directors’ and officers’ liability insurance, patent litigation legal fees, costs related to relocating our headquarters and promotional and marketing expenses.

 

Interest income.   Interest income reflects interest earned on our cash, cash equivalents and investment balances.

 

Interest expense.   Interest expense consists of interest on our short and long-term obligations.

 

Other income (expense), net.   Other income (expense), net reflects foreign currency remeasurement adjustments and gains on the disposal of fixed assets.

 

Provision for Income Taxes.   We accrue a provision for domestic and foreign income tax at the applicable statutory rates adjusted for non-deductible expenses (including stock compensation), research and development tax credits and interest income from tax-exempt investments.  We recognize interest and penalties related to unrecognized tax benefits in the provision for income tax.

 

The following table sets forth our condensed consolidated statements of income data as a percentage of revenues for the periods indicated:

 

 

 

Three Months Ended

 

 

 

April 5,
2008

 

March 31,
2007

 

 

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

Cost of revenues

 

38.5

 

38.5

 

Gross profit

 

61.5

 

61.5

 

Operating expenses:

 

 

 

 

 

Research and development

 

25.1

 

33.6

 

Selling, general and administrative

 

25.1

 

32.9

 

Operating expenses

 

50.2

 

66.5

 

Operating income (loss)

 

11.3

 

(5.0

)

Other income (expense):

 

 

 

 

 

Interest income

 

4.9

 

5.2

 

Interest expense

 

(0.2

)

(0.3

)

Other income (expense), net

 

(0.1

)

(0.2

)

Income (loss) from continuing operations before income taxes

 

15.9

 

(0.3

)

Provision for income taxes

 

4.9

 

0.7

 

Income (loss) from continuing operations

 

11.0

 

(1.0

)

Income from discontinued operations, net of income taxes

 

 

211.8

 

Net income

 

11.0

%

210.8

%

 

19



 

Revenues

 

 

 

Three Months Ended

 

 

 

 

 

(in millions)

 

April 5,
2008

 

March 31,
2007

 

Change

 

%
Change

 

Revenues

 

$

98.2

 

$

73.8

 

$

24.4

 

33.0

%

 

The growth in the sales of our products for the recent three month period was primarily driven by increased revenues from our broadcast and microcontroller products.  Unit volumes of our products increased compared to fiscal 2007 by 52.7%.  Average selling prices decreased during the same period by 14.3%.  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 extensions will offset these decreases to some degree.

 

Gross Profit

 

 

 

Three Months Ended

 

 

 

 

 

(in millions)

 

April 5,
2008

 

March 31,
2007

 

Change

 

%
Change

 

Gross profit

 

$

60.3

 

$

45.4

 

$

14.9

 

33.0

%

Percent of revenue

 

61.5

%

61.5

%

 

 

 

 

 

In the recent three month period, gross profit did not change as a percent of revenues, but increased in absolute dollars as a result of our increased sales.

 

We may experience declines in the average selling prices of certain of our products.  This downward pressure on gross profit as a percentage of revenues may be offset to the extent we are able to: 1) introduce higher margin new products and gain market share with our ICs; or 2) achieve lower production costs from our wafer suppliers and third-party assembly and test subcontractors.

 

Research and Development

 

 

 

Three Months Ended

 

 

 

 

 

(in millions)

 

April 5,
2008

 

March 31,
2007

 

Change

 

%
Change

 

Research and development

 

$

24.7

 

$

24.8

 

$

(0.1

)

(0.5

)%

Percent of revenue

 

25.1

%

33.6

%

 

 

 

 

 

The decrease in research and development expense in absolute dollars for the recent three month period was principally due to decreased stock compensation and other personnel-related expenses of $1.3 million.  This impact was partially offset by increased product introduction costs of $1.0 million.

 

Significant recent development projects include a single-chip digital video demodulator, a single input, single output jitter-attenuating clock multiplier IC, two high-performance radio data system (RDS) receivers for portable and in-car navigation devices, a dual-function, single-port Power over Ethernet (PoE) controller with an integrated dc-dc controller for power sourcing equipment, fully-integrated AM/FM radio receivers with short-wave and long-wave band coverage, a family of single-chip AC current sensors, a dual ProSLIC for VoIP equipment, families of jitter-attenuating any-rate clock multipliers and oscillators and we further expanded our microcontroller portfolio.  We expect that research and development expense will increase with revenue in absolute dollars and may fluctuate as a percentage of revenues due to changes in sales and the timing of certain expensive items related to new product development initiatives, such as engineering mask and wafer costs.

 

20



 

Selling, General and Administrative

 

 

 

Three Months Ended

 

 

 

 

 

(in millions)

 

April 5,
2008

 

March 31,
2007

 

Change

 

%
Change

 

Selling, general and administrative

 

$

24.6

 

$

24.3

 

$

0.3

 

1.3

%

Percent of revenue

 

25.1

%

32.9

%

 

 

 

 

 

The increase in selling, general and administrative expense in absolute dollars for the recent three month period was principally due to (a) the $0.5 million increase in sales commissions, and (b) the $0.3 million increase in depreciation.  The increase was offset in part by a decrease of $0.5 million in legal fees primarily related to litigation.  We expect that selling, general and administrative expense will increase slightly in absolute dollars in future periods.  The decrease in selling, general and administrative expense as a percent of revenues is principally due to our increased sales.

 

Interest Income

 

 

 

Three Months Ended

 

 

 

 

 

(in millions)

 

April 5,
2008

 

March 31,
2007

 

Change

 

 

 

Interest income

 

$

4.8

 

$

3.8

 

$

1.0

 

 

 

 

The increase in interest income for the recent three month period was primarily due to greater cash and investments balances, and to a lesser extent, higher interest rates of the underlying instruments.

 

Interest Expense

 

Interest expense was $0.1 million for the three months ended April 5, 2008 compared to $0.2 million for the three months ended March 31, 2007.

 

Other Income (Expense), Net

 

Other income (expense), net was $(0.1) million for the three months ended April 5, 2008 and March 31, 2007.

 

Provision for Income Taxes

 

 

 

Three Months Ended

 

 

 

 

 

(in millions)

 

April 5,
2008

 

March 31,
2007

 

Change

 

 

 

Provision for income taxes

 

$

4.8

 

$

0.5

 

$

4.3

 

 

 

Effective tax rate

 

30.6

%

(211.7

)%

 

 

 

 

 

The effective tax rate for the three months ended April 5, 2008 was higher than the three months ended March 31, 2007 primarily due to the recognition of pre-tax book income as compared to the small pre-tax book loss realized during the three months ended March 31, 2007.  Additionally, the effective tax rate for the three months ended April 5, 2008 was higher due to the reduction in tax exempt interest income and the non-renewal of the federal research and development tax credit.

 

The effective tax rates for each of the periods presented differ from the federal statutory rate of 35% due to the amount of income earned in foreign jurisdictions where the tax rate may be lower than the federal statutory rate, tax exempt interest income, the limited deductibility of stock compensation expense and other permanent items.

 

21



 

Income from discontinued operations, net of income taxes

 

 

 

Three Months Ended

 

 

 

 

 

(in millions)

 

April 5,
2008

 

March 31,
2007

 

Change

 

 

 

Income from discontinued operations, net of income taxes

 

$

 

$

156.4

 

$

(156.4

)

 

 

 

Revenues from our discontinued operations were zero and $38.0 million for three months ended April 5, 2008 and March 31, 2007, respectively.  Income from our discontinued operations for the three months ended March 31, 2007 included a gain on the sale of our Aero product lines of $222.3 million and a provision for income taxes of $67.3 million.  We do not expect to recognize any additional revenue from our discontinued operations.  See Note 2, Discontinued Operation , to the Condensed Consolidated Financial Statements for additional information.

 

Business Outlook

 

We expect revenues in the second quarter of fiscal 2008 to be in the range of $98 to $101 million.  Furthermore, we expect our diluted net income per share to be in the range of $0.20 to $0.22.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity as of April 5, 2008 consisted of $401.1 million in cash, cash equivalents and short-term investments.  Our short-term investments consist primarily of municipal bonds and U.S government agency notes.

 

Our long-term investments consist of auction-rate securities.  Early in fiscal 2008, auctions for many of our auction-rate securities failed because sell orders exceeded buy orders.  As of April 5, 2008, we held $72.8 million of auction-rate securities, of which $70.8 million experienced failed auctions.  The funds associated with failed auctions are not expected to be accessible until a successful auction occurs, the issuer redeems the security, a buyer is found outside of the auction process or the underlying securities mature.  Certain issuers have notified us that they expect to redeem their auction-rate securities within the next 12 months.  As such, we have classified $4.0 million of our auction-rate securities at April 5, 2008 as short-term.  The remainder of our auction-rate securities have been classified as long-term investments as of April 5, 2008.  We do not expect to need access to the capital represented by any of these auction-rate securities for at least the next 12 months.  See Note 5, Investments , to the Condensed Consolidated Financial Statements for additional information.

 

Net cash provided by operating activities was $23.6 million during the three months ended April 5, 2008, compared to net cash provided of $25.1 million during the three months ended March 31, 2007.  Operating cash flows during the three months ended April 5, 2008 reflect our net income of $10.8 million, adjustments of $13.8 million for depreciation, amortization, deferred income taxes and stock compensation, and a net cash outflow of $1.0 million due to changes in our operating assets and liabilities.

 

Accounts receivable decreased to $46.4 million at April 5, 2008 from $51.2 million at December 29, 2007.  The decrease in accounts receivable resulted primarily due to a decrease in revenues during the three months ended April 5, 2008 compared to the three months ended December 29, 2007.  Our average days sales outstanding (DSO) decreased to 42 days at April 5, 2008 from 46 days at December 29, 2007.

 

Inventory decreased to $26.9 million at April 5, 2008 from $28.6 million at December 29, 2007.  Our inventory level is primarily impacted by our need to make purchase commitments to support forecasted demand and variations between forecasted and actual demand.  Our average days of inventory (DOI) was 64 days at April 5, 2008 and 70 days at December 29, 2007.

 

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Net cash provided by investing activities was $182.4 million during the three months ended April 5, 2008, compared to net cash provided of $134.6 million during the three months ended March 31, 2007.  The increase was principally due to an increase of $304.2 million in net maturities of available-for-sale investments offset by a decrease in cash proceeds of $256.5 million from the sale of our Aero product lines. Net cash provided by investing activities during the three months ended April 5, 2008 includes our receipt of the $14.3 million previously held in escrow in connection with the sale of the Aero product lines.

 

We anticipate capital expenditures of approximately $10 to $15 million for fiscal 2008.  Additionally, as part of our growth strategy, we expect to evaluate opportunities to invest in or acquire other businesses, intellectual property or technologies that would complement or expand our current offerings, expand the breadth of our markets or enhance our technical capabilities.

 

Net cash used in financing activities was $140.0 million during the three months ended April 5, 2008, compared to net cash used of $13.4 million during the three months ended March 31, 2007.  The increase was principally due to an increase of $129.9 million for repurchases of our common stock.  In July 2007, our Board of Directors authorized a program to repurchase up to $400 million of our common stock over a 24-month period, of which $281.7 million had been purchased through April 5, 2008.

 

Net cash provided by discontinued operations was zero during the three months ended April 5, 2008, compared to net cash used of $0.9 million during the three months ended March 31, 2007.

 

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

 

Off-Balance Sheet Arrangements

 

In March 2008, we entered into an operating lease agreement and a related participation agreement (collectively, the “lease”) for a facility in Austin, Texas for the expansion of our corporate headquarters.  The lease has a term of five years.  The base rent for the term of the lease is an amount equal to the interest accruing on $50.1 million at 155 basis points over the three-month LIBOR (which would be approximately $11.3 million over the five year term assuming LIBOR averages 2.97% during such term).  We entered into a lease for a similar building in Austin in March 2006.

 

We have granted certain rights and remedies to the lessor in the event of certain defaults, including the right to terminate the lease, to bring suit to collect damages, and to compel us to purchase the facility.  The lease contains other customary representations, warranties, obligations, conditions, indemnification provisions and termination provisions, including covenants that we shall maintain unencumbered cash and highly-rated short-term investments of at least $75 million.  If our unencumbered cash and highly-rated short-term investments is less than $150 million, we must also maintain a ratio of funded debt to earnings before interest expense, income taxes, depreciation, amortization, lease expense and other non-cash charges (EBITDAR) over the four prior fiscal quarters of no greater than 2 to 1.  As of April 5, 2008, we believe we were in compliance with all covenants of the lease.

 

During the term of the lease, we have an on-going option to purchase the building for a total purchase price of approximately $50.1 million.  Alternatively, we can cause the property to be sold to third parties provided we are not in default under the lease.  We are contingently liable for up to $40.0 million to the extent that the sale proceeds are less than the $50.1 million purchase option.  To the extent that the net proceeds generated from the sale of the facility to a third party exceed the purchase option, we would have the right to receive substantially all of such excess proceeds if the sale occurs prior to the end of the term of the lease. If the property is sold after the term of the lease, we would have the right to recover our $40.0 million guarantee, to the extent such sale proceeds exceed $10.1 million.

 

23



 

In accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others , we determined that the fair value associated with the guaranteed residual value was $1.2 million.  The amount was recorded in “Other assets, net” and “Long-term obligations and other liabilities” in the condensed consolidated balance sheets and is being amortized over the term of the lease.

 

We are required to periodically evaluate the expected fair value of the facility at the end of the lease term.  If we determine that it is estimable and probable that the expected fair value will be less than $50.1 million, we will ratably accrue the loss up to a maximum of approximately $40.0 million over the remaining lease term.  As of April 5, 2008, we have determined that a loss contingency accrual is not required.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles requires that we make estimates and assumptions that affect the amounts reported.  Changes in facts and circumstances could have a significant impact on the resulting estimated amounts included in the financial statements.  We believe the following critical accounting policies affect our more complex judgments and estimates.  We also have other policies that we consider to be key accounting policies, such as our policies for revenue recognition, including the deferral of revenues and cost of revenues on sales to distributors; however, these policies do not meet the definition of critical accounting estimates because they do not generally require us to make estimates or judgments that are difficult or subjective.

 

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

 

Stock compensation – We recognize the fair-value of stock-based compensation transactions in the statement of income in accordance with SFAS 123R.  We adopted the provisions of SFAS 123R using the modified-prospective-transition method effective January 1, 2006. The fair value of our stock-based awards is estimated at the date of grant using the Black-Scholes option pricing model.  The Black-Scholes valuation calculation requires us to estimate key assumptions such as future stock price volatility, expected terms, risk-free rates and dividend yield.  Expected stock price volatility is based on implied volatility from traded options on our stock in the marketplace and historical volatility of our stock.  The expected term of options granted is derived from an analysis of historical exercises and remaining contractual life of stock options, and represents the period of time that options granted are expected to be outstanding.  The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.  We have never paid cash dividends, and do not currently intend to pay cash dividends, and thus have assumed a 0% dividend yield.  In addition, we are required to estimate the expected forfeiture rate of our stock grants and only recognize the expense for those shares expected to vest.  If our actual experience differs significantly from the assumptions used to compute our stock-based compensation cost, or if different assumptions had been used, we may have recorded too much or too little stock-based compensation cost.  See Note 7, Stockholders’ Equity and Stock-Based Compensation , to the Condensed Consolidated Financial Statements for a further discussion on stock-based compensation.

 

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Long-term investments – Our long-term investments consist of auction-rate securities.  We determine the fair value of our long-term auction-rate securities 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 and expected holding periods of the securities.  If the calculated value is below the carrying amount of the securities, we then determine if the decline in value is other-than-temporary.  We consider various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, forecasted recovery and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.  When we conclude that an other-than-temporary impairment has resulted, the difference between the fair value and the carrying value is recorded as an impairment charge in the consolidated statement of income.  Impairments that we conclude are temporary are recorded in accumulated other comprehensive income.  See Note 5, Investments , to the Condensed Consolidated Financial Statements for additional information.

 

Impairment of goodwill and other long-lived assets – We review long-lived assets which are held and used, including fixed assets and purchased intangible assets, for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable.  Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors which are inherently difficult to forecast.  If the asset is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.  Occasionally, we may hold certain assets for sale.  In those cases, the assets are reclassified on our balance sheet from long-term to current, and the carrying value of such assets are reviewed and adjusted each period thereafter to the fair value less expected cost to sell.

 

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

 

Income taxes – We are required to estimate income taxes in each of the jurisdictions in which we operate.  This process involves estimating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet.  We then assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance against the deferred tax asset.  Further, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions.  These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax.  We believe adequate provisions for income taxes have been made for all periods.

 

25



 

We adopted FASB Financial Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes , at the beginning of fiscal 2007.  As a result of the adoption of FIN 48, we recognize liabilities for uncertain tax positions based on the two-step process prescribed by the interpretation.  The first step requires us to determine if the weight of available evidence indicates that the tax position has met the threshold for recognition; therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes.  The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement.  This measurement step is inherently difficult and requires subjective estimations of such amounts to determine the probability of various possible outcomes.  We reevaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity.  Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

 

Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals.  If additional taxes are assessed as a result of an audit or litigation, it could have a material effect on our income tax provision and net income in the period or periods for which that determination is made.

 

Recent Accounting Pronouncements

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations , (SFAS 141R).  SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree.  The Statement also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The impact of adopting SFAS 141R will be dependent on the future business combinations that we may pursue after its effective date.

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements .  SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements.  In February 2008, the FASB amended SFAS 157 by issuing FASB Staff Position (FSP) FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, a nd FAS 157-2, Effective Date of FASB Statement No. 157 .  FSP FAS 157-1 amends SFAS 157 to exclude SFAS 13, Accounting for Leases, and certain other lease-related accounting pronouncements.  FSP FAS 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008.  We adopted certain provisions of SFAS 157 effective December 30, 2007 (see Note 4, Fair Value of Financial Instruments , to the Condensed Consolidated Financial Statements for additional information).  We are currently evaluating the effect that the adoption of the provisions deferred by FSP FAS 157-2 will have on our financial position and results of operations.

 

Qualitative and Quantitative Disclosures about Market Risk

 

Our investment portfolio includes cash, cash equivalents, short-term investments and long-term investments.  Our main investment objectives are the preservation of investment capital and the maximization of after-tax returns on our investment portfolio.  Our interest income is sensitive to changes in the general level of U.S. interest rates.  Based on our investment portfolio holdings as of April 5, 2008, an immediate 100 basis point decline in the yield for such instruments would decrease our annual interest income by approximately $4.7 million.  We believe that our investment policy is conservative, both in the duration of our investments and the credit quality of the investments we hold.

 

26



 

Our long-term investments consist of auction-rate securities.  Beginning in fiscal 2008, auctions for many of our auction-rate securities failed because sell orders exceeded buy orders .  As of April 5, 2008, we held  $72.8 million of auction-rate securities, of which $70.8 million experienced failed auctions.  The funds associated with failed auctions are not expected to be accessible until a successful auction occurs, the issuer redeems the securities, a buyer is found outside of the auction process or the underlying securities mature.  Additionally, if we determine that an other-than-temporary decline in the fair value of any of our auction-rate securities has occurred, we may be required to adjust the carrying value of the investments through an impairment charge.  See Note 5, Investments , to the Condensed Consolidated Financial Statements for additional information.

 

In March 2006 and March 2008, we entered into operating lease agreements for facilities in Austin, Texas for our corporate headquarters.  The leases have terms of seven and five years.  The base rents for the terms of the leases are amounts equal to the interest accruing on $44.3 million at 110 basis points over the three-month LIBOR and $50.1 million at 155 basis points over the three-month LIBOR.  LIBOR is sensitive to changes in the general level of U.S. interest rates.  An immediate 100 basis point increase in the three-month LIBOR would increase our annual base rent by approximately $0.9 million.

 

Available Information

 

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

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Information related to quantitative and qualitative disclosures regarding market risk is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 2 above.  Such information is incorporated by reference herein.

 

Item 4.  Controls and Procedures

 

We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act).  Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of April 5, 2008 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  There was no change in our internal controls during the fiscal quarter ended April 5, 2008 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

27



 

Part II.  Other Information

 

Item 1.  Legal Proceedings

 

Securities Litigation

 

On December 6, 2001, a class action complaint for violations of U.S. federal securities laws was filed in the United States District Court for the Southern District of New York against us, four of our officers individually and the three investment banking firms who served as representatives of the underwriters in connection with our initial public offering of common stock.  The Consolidated Amended Complaint alleges that the registration statement and prospectus for our initial public offering did not disclose that (1) the underwriters solicited and received additional, excessive and undisclosed commissions from certain investors, and (2) the underwriters had agreed to allocate shares of the offering in exchange for a commitment from the customers to purchase additional shares in the aftermarket at pre-determined higher prices.  The Complaint alleges violations of the Securities Act of 1933 and the Securities Exchange Act of 1934.  The action seeks damages in an unspecified amount and is being coordinated with approximately 300 other nearly identical actions filed against other companies.  A court order dated October 9, 2002 dismissed without prejudice our four officers who had been named individually.  On December 5, 2006, the Second Circuit vacated a decision by the District Court granting class certification in six “focus” cases, which are intended to serve as test cases.  The plaintiffs selected these six cases, which do not include us.  The Court has indicated that its decisions in the six focus cases are intended to provide strong guidance for the parties in the remaining cases.  On April 6, 2007, the Second Circuit denied a petition for rehearing filed by plaintiffs, but noted that plaintiffs could ask the District Court to certify more narrow classes than those that were rejected.

 

On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases.  On September 27, 2007, the plaintiffs moved to certify a class in the six focus cases.  On November 14, 2007, the issuers and the underwriters named as defendants in the six focus cases filed motions to dismiss the amended complaints against them.  On March 26, 2008, the District Court dismissed the Securities Act claims of those members of the putative classes in the focus cases who sold their securities for a price in excess of the initial offering price and those who purchased outside the previously certified class period.  With respect to all other claims, the motions to dismiss were denied.  We are awaiting a decision from the Court on the class certification motion.

 

We are unable to estimate or predict the potential damages that might be awarded as a result of this litigation, whether such damages would be greater than our insurance coverage, or whether the outcome would have a material impact on our results of operations or financial position.

 

Patent and Copyright Infringement Litigation

 

On December 14, 2006, Analog Devices, Inc. (Analog Devices), a Massachusetts corporation, filed a lawsuit against us, in the United States District Court in the District of Massachusetts, alleging infringement of United States Patents Nos. 7,075,329, 6,262,600, 6,525,566, 6,903,578 and 6,873,065, and copyright infringement of certain Analog Devices datasheets.  On September 17, 2007, we filed a lawsuit against  Analog Devices in the United States District Court for the Eastern District of Texas, Marshall Division, alleging infringement of United States Patent No. 7,171,542.  On March 7, 2008, we settled both lawsuits with Analog Devices.  In connection with the settlement, each company agreed to dismiss the lawsuits.

 

Other

 

We are 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, we do not expect them to have a material adverse effect on the consolidated financial position or results of operations.

 

28



 

Item 1A.  Risk Factors

 

Risks Related to our Business

 

We may not be able to maintain our historical growth and may experience significant period-to-period fluctuations in our revenues and operating results, which may result in volatility in our stock price

 

Although we have generally experienced revenue growth in our history, we may not be able to sustain this growth.  We may also experience significant period-to-period fluctuations in our revenues and operating results in the future due to a number of factors, and any such variations may cause our stock price to fluctuate.  In some future period our revenues or operating results may be below the expectations of public market analysts or investors.  If this occurs, our stock price may drop, perhaps significantly.

 

A number of factors, in addition to those cited in other risk factors applicable to our business, may contribute to fluctuations in our revenues and operating results, including:

 

·                   The timing and volume of orders received from our customers;

 

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

 

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

 

·                   The time lag and realization rate between “design wins” and production orders;

 

·                   The demand for, and life cycles of, the products incorporating our ICs;

 

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

 

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

 

·                   Changes in product mix;

 

·                   The average selling prices for our products could drop suddenly due to competitive offerings or competitive predatory pricing, especially with respect to our mobile handset and modem products;

 

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

 

·                   Changes in market standards;

 

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

 

·                   The software used in our products and provided by third-party software providers may not meet the needs of our customers;

 

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

 

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

 

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The markets for mobile handsets, personal computers, satellite set-top boxes and VoIP applications are characterized by rapid fluctuations in demand and seasonality that result in corresponding fluctuations in the demand for our products that are incorporated in such devices.  Additionally, the rate of technology acceptance by our customers results in fluctuating demand for our products as customers are reluctant to incorporate a new IC into their products until the new IC has achieved market acceptance.  Once a new IC achieves market acceptance, demand for the new IC can quickly accelerate to a point and then level off such that rapid historical growth in sales of a product should not be viewed as indicative of continued future growth.  In addition, demand can quickly decline for a product when a new IC product is introduced and receives market acceptance.  Due to the various factors mentioned above, the results of any prior quarterly or annual periods should not be relied upon as an indication of our future operating performance.

 

If we are unable to develop or acquire new and enhanced products that achieve market acceptance in a timely manner, our operating results and competitive position could be harmed

 

Our future success will depend on our ability to reduce our dependence on a few products by developing or acquiring new ICs and product enhancements that achieve market acceptance in a timely and cost-effective manner.  The development of mixed-signal ICs is highly complex, and we have at times experienced delays in completing the development and introduction of new products and product enhancements.  Successful product development and market acceptance of our products depend on a number of factors, including:

 

·                   Changing requirements of customers;

 

·                   Accurate prediction of market and technical requirements;

 

·                   Timely completion and introduction of new designs;

 

·                   Timely qualification and certification of our ICs for use in our customers’ products;

 

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

 

·                   Availability of foundry, assembly and test capacity;

 

·                   Achievement of high manufacturing yields;

 

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

 

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

 

·                   Our customer service, application support capabilities and responsiveness;

 

·                   Successful development of our relationships with existing and potential customers;

 

·                   Changes in technology, industry standards or end-user preferences; and

 

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

 

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

 

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Our research and development efforts are focused on a limited number of new technologies and products, and any delay in the development, or abandonment, of these technologies or products by industry participants, or their failure to achieve market acceptance, could compromise our competitive position

 

Our ICs are used as components in electronic devices in various markets.  As a result, we have devoted and expect to continue to devote a large amount of resources to develop products based on new and emerging technologies and standards that will be commercially introduced in the future.  Research and development expense during the three months ended April 5, 2008 was $24.7 million, or 25.1% of revenues.  A number of large companies are actively involved in the development of these new technologies and standards.  Should any of these companies delay or abandon their efforts to develop commercially available products based on new technologies and standards, our research and development efforts with respect to these technologies and standards likely would have no appreciable value.  In addition, if we do not correctly anticipate new technologies and standards, or if the products that we develop based on these new technologies and standards fail to achieve market acceptance, our competitors may be better able to address market demand than we would.  Furthermore, if markets for these new technologies and standards develop later than we anticipate, or do not develop at all, demand for our products that are currently in development would suffer, resulting in lower sales of these products than we currently anticipate.

 

We depend on a limited number of customers for a substantial portion of our revenues, and the loss of, or a significant reduction in orders from, any key customer could significantly reduce our revenues

 

The loss of any of our key customers, or a significant reduction in sales to any one of them, would significantly reduce our revenues and adversely affect our business.  During the three months ended April 5, 2008, our ten largest customers accounted for 40% of our revenues.  Some of the markets for our products are dominated by a small number of potential customers.  Therefore, our operating results in the foreseeable future will continue to depend on our ability to sell to these dominant customers, as well as the ability of these customers to sell products that incorporate our IC products.  In the future, these customers may decide not to purchase our ICs at all, purchase fewer ICs than they did in the past or alter their purchasing patterns, particularly because:

 

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

 

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

 

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

 

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

 

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

 

31



 

We have increased our international activities significantly and plan to continue such efforts, which subjects us to additional business risks including increased logistical and financial complexity, political instability and currency fluctuations

 

We have established additional international subsidiaries and have opened additional offices in international markets to expand our international activities in Europe and the Pacific Rim region.  This has included the establishment of a headquarters in Singapore for non-U.S. operations.  The percentage of our revenues derived from customers located outside of the United States was 86% during the three months ended April 5, 2008.  We may not be able to maintain or increase international market demand for our products.  Our international operations are subject to a number of risks, including:

 

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

 

·                   Protectionist laws and business practices that favor local competition in some countries;

 

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

 

·                   Multiple, conflicting and changing tax and other laws and regulations that may impact both our international and domestic tax and other liabilities and result in increased complexity and costs;

 

·                   Longer sales cycles;

 

·                   Greater difficulty in accounts receivable collection and longer collection periods;

 

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

 

·                   Political and economic instability;

 

·                   Greater difficulty in hiring and retaining qualified technical sales and applications engineers and administrative personnel; and

 

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

 

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

 

Failure to manage our distribution channel relationships could impede our future growth

 

The future growth of our business will depend in large part on our ability to manage our relationships with current and future distributors and sales representatives, develop additional channels for the distribution and sale of our products and manage these relationships.  As we execute our indirect sales strategy, we must manage the potential conflicts that may arise with our direct sales efforts.  For example, conflicts with a distributor may arise when a customer begins purchasing directly from us rather than through the distributor.  The inability to successfully execute or manage a multi-channel sales strategy could impede our future growth.  In addition, relationships with our distributors often involve the use of price protection and inventory return rights.  This often requires a significant amount of sales management’s time and system resources to manage properly.

 

32



 

We are subject to increased inventory risks and costs because we build our products based on forecasts provided by customers before receiving purchase orders for the products

 

In order to ensure availability of our products for some of our largest customers, we start the manufacturing of our products in advance of receiving purchase orders based on forecasts provided by these customers.  However, these forecasts do not represent binding purchase commitments and we do not recognize sales for these products until they are shipped to the customer.  As a result, we incur inventory and manufacturing costs in advance of anticipated sales.  Because demand for our products may not materialize, manufacturing based on forecasts subjects us to increased risks of high inventory carrying costs, increased obsolescence and increased operating costs.  These inventory risks are exacerbated when our customers purchase indirectly through contract manufacturers or hold component inventory levels greater than their consumption rate because this causes us to have less visibility regarding the accumulated levels of inventory for such customers.  A resulting write-off of unusable or excess inventories would adversely affect our operating results.

 

We are subject to credit risks related to our accounts receivable

 

We do not generally obtain letters of credit or other security for payment from customers, distributors or contract manufacturers.  Accordingly, we are not protected against accounts receivable default or bankruptcy by these entities.  Our ten largest customers or distributors represent a substantial majority of our accounts receivable.  If any such customer or distributor were to become insolvent or otherwise not satisfy their obligations to us, we could be materially harmed.

 

Our products are complex and may contain errors which could lead to product liability, an increase in our costs and/or a reduction in our revenues

 

Our products are complex and may contain errors, particularly when first introduced or as new versions are released.  Our new products are increasingly being designed in more complex processes which further increases the risk of errors.  We rely primarily on our in-house testing personnel to design test operations and procedures to detect any errors prior to delivery of our products to our customers.  Because our products are manufactured by third parties, should problems occur in the operation or performance of our ICs, we may experience delays in meeting key introduction dates or scheduled delivery dates to our customers.  These errors also could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations and business reputation problems.  Any defects could require product replacement or recall or we could be obligated to accept product returns.  Any of the foregoing could impose substantial costs and harm our business.

 

Product liability claims may be asserted with respect to our products.  Our products are typically sold at prices that are significantly lower than the cost of the end-products into which they are incorporated.  A defect or failure in our product could cause failure in our customer’s end-product, so we could face claims for damages that are disproportionately higher than the revenues and profits we receive from the products involved.  Furthermore, product liability risks are particularly significant with respect to medical and automotive applications because of the risk of serious harm to users of these products.  There can be no assurance that any insurance we maintain will sufficiently protect us from any such claims.

 

33



 

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

 

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights.  From time to time, we receive letters from various industry participants alleging infringement of patents, trademarks or misappropriation of trade secrets or from customers requesting indemnification for claims brought against them by third parties.  The exploratory nature of these inquiries has become relatively common in the semiconductor industry.  We respond when we deem appropriate and as advised by legal counsel.  We have been involved in litigation to protect our intellectual property rights in the past and may become involved in such litigation again in the future.  In the future, we may become involved in additional litigation to defend allegations of infringement asserted by others, both directly and indirectly as a result of certain industry-standard indemnities we may offer to our customers.  Legal proceedings could subject us to significant liability for damages or invalidate our proprietary rights.  Legal proceedings initiated by us to protect our intellectual property rights could also result in counterclaims or countersuits against us.  Any litigation, regardless of its outcome, would likely be time-consuming and expensive to resolve and would divert our management’s time and attention.  Most intellectual property litigation also could force us to take specific actions, including:

 

·                   Cease selling products that use the challenged intellectual property;

 

·                   Obtain from the owner of the infringed intellectual property a right to a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all;

 

·                   Redesign those products that use infringing intellectual property; or

 

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

 

Our customers require our products to undergo a lengthy and expensive qualification process without any assurance of product sales

 

Prior to purchasing our products, our customers require that our products undergo an extensive qualification process, which involves testing of the products in the customer’s system as well as rigorous reliability testing.  This qualification process may continue for six months or longer.  However, qualification of a product by a customer does not ensure any sales of the product to that customer.  Even after successful qualification and sales of a product to a customer, a subsequent revision to the IC or software, changes in the IC’s manufacturing process or the selection of a new supplier by us may require a new qualification process, which may result in delays and in us holding excess or obsolete inventory.  After our products are qualified, it can take an additional six months or more before the customer commences volume production of components or devices that incorporate our products.  Despite these uncertainties, we devote substantial resources, including design, engineering, sales, marketing and management efforts, toward qualifying our products with customers in anticipation of sales.  If we are unsuccessful or delayed in qualifying any of our products with a customer, such failure or delay would preclude or delay sales of such product to the customer, which may impede our growth and cause our business to suffer.

 

We rely on third parties to manufacture, assemble and test our products and the failure to successfully manage our relationships with our manufacturers and subcontractors would negatively impact our ability to sell our products

 

We do not have our own wafer fab manufacturing facilities.  Therefore, we rely principally on one third-party vendor, Taiwan Semiconductor Manufacturing Co. (TSMC), to manufacture the ICs we design.  We also currently rely on Asian third-party assembly subcontractors, principally Advanced Semiconductor Engineering (ASE), to assemble and package the silicon chips provided by the wafers for use in final products.  Additionally, we rely on these offshore subcontractors for a substantial portion of the testing requirements of our products prior to shipping.  We expect utilization of third-party subcontractors to continue in the future.

 

34



 

The cyclical nature of the semiconductor industry drives wide fluctuations in available capacity at third-party vendors.  On occasion, we have been unable to adequately respond to unexpected increases in customer demand due to capacity constraints and, therefore, were unable to benefit from this incremental demand.  We may be unable to obtain adequate foundry, assembly or test capacity from our third-party subcontractors to meet our customers’ delivery requirements even if we adequately forecast customer demand.

 

There are significant risks associated with relying on these third-party foundries and subcontractors, including:

 

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

 

·                   Potential insolvency of the third-party subcontractors;

 

·                   Reduced control over delivery schedules and quality;

 

·                   Limited warranties on wafers or products supplied to us;

 

·                   Potential increases in prices or payments in advance for capacity;

 

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

 

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

 

·                   Low test yields.

 

We typically do not have long-term supply contracts with our third-party vendors which obligate the vendor to perform services and supply products to us for a specific period, in specific quantities, and at specific prices.  Our third-party foundry, assembly and test subcontractors typically do not guarantee that adequate capacity will be available to us within the time required to meet demand for our products.  In the event that these vendors fail to meet our demand for whatever reason, we expect that it would take up to twelve months to transition performance of these services to new providers.  Such a transition may also require qualification of the new providers by our customers or their end customers.

 

Since our inception, most of the silicon wafers for the products that we have shipped were manufactured either by TSMC or its affiliates.  Our customers typically complete their own qualification process.  If we fail to properly balance customer demand across the existing semiconductor fabrication facilities that we utilize or are required by our foundry partners to increase, or otherwise change the number of fab lines that we utilize for our production, we might not be able to fulfill demand for our products and may need to divert our engineering resources away from new product development initiatives to support the fab line transition, which would adversely affect our operating results.

 

Our products incorporate technology licensed from third parties

 

We incorporate technology (including software) licensed from third parties in our products.  We could be subjected to claims of infringement regardless of our lack of involvement in the development of the licensed technology.  Although a third party licensor is typically obligated to indemnify us if the licensed technology infringes on another party’s intellectual property rights, such indemnification is typically limited in amount and may be worthless if the licensor becomes insolvent. See “Significant litigation over intellectual property in our industry may cause us to become involved in costly and lengthy litigation which could seriously harm our business.”  Furthermore, any failure of third party technology to perform properly would adversely affect sales of our products incorporating such technology.

 

35



 

Our inability to manage growth could materially and adversely affect our business

 

Our past growth has placed, and any future growth of our operations will continue to place, a significant strain on our management personnel, systems and resources.  We anticipate that we will need to implement a variety of new and upgraded sales, operational and financial enterprise-wide systems, information technology infrastructure, procedures and controls, including the improvement of our accounting and other internal management systems to manage this growth and maintain compliance with regulatory guidelines, including Sarbanes-Oxley Act requirements.  In April 2007, we implemented a global enterprise resource planning (ERP) system to help us improve our planning and management processes.  We have experienced, and may continue to experience, challenges in implementing the new ERP system and other related systems that could adversely affect our business by disrupting our ability to timely and accurately process and report key components of our financial position, affecting our ability to complete the evaluation of our internal control over financial reporting and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 or disrupting our ability to process certain transactions necessary for our operations.  To the extent our business grows, our internal management systems and processes will need to improve to ensure that we remain in compliance.  We also expect that we will need to continue to expand, train, manage and motivate our workforce.  All of these endeavors will require substantial management effort, and we anticipate that we will require additional management personnel and internal processes to manage these efforts and to plan for the succession from time to time of certain persons who have been key management and technical personnel.  If we are unable to effectively manage our expanding global operations, including our international headquarters in Singapore, our business could be materially and adversely affected.

 

We are subject to risks relating to product concentration and lack of revenue diversification

 

We derive a substantial portion of our revenues from a limited number of products, and we expect these products to continue to account for a large percentage of our revenues in the near term.  Continued market acceptance of these products, is therefore, critical to our future success.  In addition, substantially all of our products that we have sold include technology related to one or more of our issued U.S. patents.  If these patents are found to be invalid or unenforceable, our competitors could introduce competitive products that could reduce both the volume and price per unit of our products.  Our business, operating results, financial condition and cash flows could therefore be adversely affected by:

 

·                   A decline in demand for any of our more significant products, including our modem products, FM tuners or ProSLIC;

 

·                   Failure of our products to achieve continued market acceptance;

 

·                   An improved version of our products being offered by a competitor;

 

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

 

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

 

·                   The failure of our new products to achieve market acceptance.

 

36



 

We depend on our key personnel to manage our business effectively in a rapidly changing market, and if we are unable to retain our current personnel and hire additional personnel, our ability to develop and successfully market our products could be harmed

 

We believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing personnel.  We believe that our future success will be dependent on retaining the services of our key personnel, developing their successors and certain internal processes to reduce our reliance on specific individuals, and on properly managing the transition of key roles when they occur.  There is currently a shortage of qualified personnel with significant experience in the design, development, manufacturing, marketing and sales of analog and mixed-signal ICs.  In particular, there is a shortage of engineers who are familiar with the intricacies of the design and manufacturability of analog elements, and competition for such personnel is intense.  Our key technical personnel represent a significant asset and serve as the primary source for our technological and product innovations.  We may not be successful in attracting and retaining sufficient numbers of technical personnel to support our anticipated growth.  The loss of any of our key employees or the inability to attract or retain qualified personnel both in the United States and internationally, including engineers, sales, applications and marketing personnel, could delay the development and introduction of, and negatively impact our ability to sell, our products.

 

Any acquisitions we make could disrupt our business and harm our financial condition

 

As part of our growth and product diversification strategy, we continue to evaluate opportunities to acquire other businesses, intellectual property or technologies that would complement our current offerings, expand the breadth of our markets or enhance our technical capabilities.  The acquisitions that we have made and may make in the future entail a number of risks that could materially and adversely affect our business and operating results, including:

 

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

 

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

 

·                   Need for financial resources above our planned investment levels;

 

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

 

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

 

·                   Risks associated with the transfer of licenses of intellectual property;

 

·                   Tax issues associated with acquisitions;

 

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

 

·                   Potential loss of key employees of the acquired company; and

 

·                   Potential impairment of related goodwill and intangible assets.

 

Future acquisitions also could cause us to incur debt or contingent liabilities or cause us to issue equity securities that could negatively impact the ownership percentages of existing shareholders.

 

37



 

Any dispositions we make could harm our financial condition

 

In connection with our sale of the Aero product lines, we incurred various risks.  This disposition and any disposition that we may make in the future entail a number of risks that could materially and adversely affect our business and operating results, including:

 

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

 

·                   Difficulties separating the divested business;

 

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

 

·                   Reduced leverage with suppliers due to reduced aggregate volume;

 

·                   Risks related to employee relations;

 

·                   Risks associated with the transfer and licensing of intellectual property;

 

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

 

·                   Tax issues associated with dispositions; and

 

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

 

Our stock price may be volatile

 

The market price of our common stock has been volatile in the past and may be volatile in the future.  The market price of our common stock may be significantly affected by the following factors:

 

·                   Actual or anticipated fluctuations in our operating results;

 

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

 

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

 

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

 

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

 

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

 

·                   A large sale of stock by a significant shareholder;

 

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

 

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

 

·                   Departures of key personnel; and

 

·                   The required expensing of stock options.

 

38



 

The stock market has experienced extreme volatility that often has been unrelated to the performance of particular companies.  These market fluctuations may cause our stock price to fall regardless of our performance.

 

Most of our current manufacturers, assemblers, test service providers, distributors and customers are concentrated in the same geographic region, which increases the risk that a natural disaster, epidemic, labor strike, war or political unrest could disrupt our operations or sales

 

Most of TSMC’s foundries and several of our assembly and test subcontractors’ sites are located in Taiwan and our other assembly and test subcontractors are located in the Pacific Rim region.  In addition, many of our customers are located in the Pacific Rim region.  The risk of earthquakes in Taiwan and the Pacific Rim region is significant due to the proximity of major earthquake fault lines in the area.  We are not currently covered by insurance against business disruption caused by earthquakes as such insurance is not currently available on terms that we believe are commercially reasonable.  Earthquakes, fire, flooding, lack of water or other natural disasters, an epidemic, political unrest, war, labor strikes or work stoppages in countries where our semiconductor manufacturers, assemblers and test subcontractors are located, likely would result in the disruption of our foundry, assembly or test capacity.  There can be no assurance that such alternate capacity could be obtained on favorable terms, if at all.

 

A natural disaster, epidemic, labor strike, war or political unrest where our customers’ facilities are located would likely reduce our sales to such customers.  North Korea’s geopolitical maneuverings have created unrest.  Such unrest could create economic uncertainty or instability, could escalate to war or otherwise adversely affect South Korea and our South Korean customers and reduce our sales to such customers, which would materially and adversely affect our operating results.  In addition, a significant portion of the assembly and testing of our products occurs in South Korea.  Any disruption resulting from these events could also cause significant delays in shipments of our products until we are able to shift our manufacturing, assembling or testing from the affected subcontractor to another third-party vendor.

 

We may be unable to protect our intellectual property, which would negatively affect our ability to compete

 

Our products rely on our proprietary technology, and we expect that future technological advances made by us will be critical to sustain market acceptance of our products.  Therefore, we believe that the protection of our intellectual property rights is and will continue to be important to the success of our business.  We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights.  We also enter into confidentiality or license agreements with our employees, consultants, intellectual property providers and business partners, and control access to and distribution of our documentation and other proprietary information.  Despite these efforts, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology.  Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.  We cannot be certain that patents will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit us or give us adequate protection from competing products.  For example, issued patents may be circumvented or challenged and declared invalid or unenforceable.  We also cannot be certain that others will not develop effective competing technologies on their own.

 

39



 

The semiconductor manufacturing process is highly complex and, from time to time, manufacturing yields may fall below our expectations, which could result in our inability to satisfy demand for our products in a timely manner and may decrease our gross margins due to higher unit costs

 

The manufacturing of our products is a highly complex and technologically demanding process.  Although we work closely with our foundries to minimize the likelihood of reduced manufacturing yields, our foundries from time to time have experienced lower than anticipated manufacturing yields.  Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundries could result in lower than anticipated manufacturing yields or unacceptable performance deficiencies, which could lower our gross profits.  If our foundries fail to deliver fabricated silicon wafers of satisfactory quality in a timely manner, we will be unable to meet our customers’ demand for our products in a timely manner, which would adversely affect our operating results and damage our customer relationships.

 

We depend on our customers to support our products, and some of our customers offer competing products

 

Our products are currently used by our customers to produce modems, telephony equipment, mobile handsets, networking equipment and a broad range of other devices.  We rely on our customers to provide hardware, software, intellectual property indemnification and other technical support for the products supplied by our customers.  If our customers do not provide the required functionality or if our customers do not provide satisfactory support for their products, the demand for these devices that incorporate our products may diminish or we may otherwise be materially adversely affected.  Any reduction in the demand for these devices would significantly reduce our revenues.

 

In certain products, some of our customers offer their own competitive products.  These customers may find it advantageous to support their own offerings in the marketplace in lieu of promoting our products.

 

We could seek to raise additional capital in the future through the issuance of equity or debt securities, but additional capital may not be available on terms acceptable to us, or at all

 

We believe that our existing cash, cash equivalents and investments will be sufficient to meet our working capital needs, capital expenditures, investment requirements and commitments for at least the next 12 months.  However, it is possible that we may need to raise additional funds to finance our activities or to facilitate acquisitions of other businesses, products, intellectual property or technologies.  We believe we could raise these funds, if needed, by selling equity or debt securities to the public or to selected investors.  In addition, even though we may not need additional funds, we may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons.  However, we may not be able to obtain additional funds on favorable terms, or at all.  If we decide to raise additional funds by issuing equity or convertible debt securities, the ownership percentages of existing shareholders would be reduced.

 

We are a relatively small company with limited resources compared to some of our current and potential competitors and we may not be able to compete effectively and increase market share

 

Some of our current and potential competitors have longer operating histories, significantly greater resources and name recognition and a larger base of customers than we have.  As a result, these competitors may have greater credibility with our existing and potential customers.  They also may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion and sale of their products than we can to ours.  In addition, some of our current and potential competitors have already established supplier or joint development relationships with the decision makers at our current or potential customers.  These competitors may be able to leverage their existing relationships to discourage their customers from purchasing products from us or persuade them to replace our products with their products.  Our competitors may also offer bundled chipset kit arrangements offering a more complete product despite the technical merits or advantages of our products.  These competitors may elect not to support our products which could complicate our sales efforts.  These and other competitive pressures may prevent us from competing successfully against current or future competitors, and may materially harm our business.  Competition could decrease our prices, reduce our sales, lower our gross profits and/or decrease our market share.

 

40



 

Provisions in our charter documents and Delaware law could prevent, delay or impede a change in control of us and may reduce the market price of our common stock

 

Provisions of our certificate of incorporation and bylaws could have the effect of discouraging, delaying or preventing a merger or acquisition that a stockholder may consider favorable.  For example, our certificate of incorporation and bylaws provide for:

 

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

 

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

 

·                   A prohibition on stockholder action by written consent;

 

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

 

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

 

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

 

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

 

Risks related to our industry

 

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

 

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

 

Downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices.  For example, in fiscal 2001, the semiconductor industry suffered a downturn due to reductions in the actual unit sales of personal computers and wireless phones as compared to previous robust forecasts.  This downturn resulted in a material adverse effect on our business and operating results in fiscal 2001.

 

Upturns have been characterized by increased product demand and production capacity constraints created by increased competition for access to third-party foundry, assembly and test capacity.  We are dependent on the availability of such capacity to manufacture, assemble and test our ICs.  None of our third-party foundry, assembly or test subcontractors have provided assurances that adequate capacity will be available to us.

 

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The average selling prices of our products could decrease rapidly which may negatively impact our revenues and gross profits

 

We may experience substantial period-to-period fluctuations in future operating results due to the erosion of our average selling prices.  We have reduced the average unit price of our products in anticipation of or in response to competitive pricing pressures, new product introductions by us or our competitors and other factors.  If we are unable to offset any such reductions in our average selling prices by increasing our sales volumes, increasing our sales content per application or reducing production costs, our gross profits and revenues will suffer.  To maintain our gross profit percentage, we will need to develop and introduce new products and product enhancements on a timely basis and continually reduce our costs.  Our failure to do so could cause our revenues and gross profit percentage to decline.

 

Competition within the numerous markets we target may reduce sales of our products and reduce our market share

 

The markets for semiconductors in general, and for mixed-signal ICs in particular, are intensely competitive.  We expect that the market for our products will continually evolve and will be subject to rapid technological change.  In addition, as we target and supply products to numerous markets and applications, we face competition from a relatively large number of competitors.  We compete with Analog Devices, Atmel, Broadcom, Conexant, Cypress, Epson, Freescale, Fujitsu, Infineon Technologies, Zarlink Semiconductor, LSI, Maxim Integrated Products, Microchip, National Semiconductor, NXP Semiconductors, Renesas, Texas Instruments, Vectron International and others.  We expect to face competition in the future from our current competitors, other manufacturers and designers of semiconductors, and start-up semiconductor design companies.  As the markets for communications products grow, we also may face competition from traditional communications device companies.  These companies may enter the mixed-signal semiconductor market by introducing their own ICs or by entering into strategic relationships with or acquiring other existing providers of semiconductor products.  In addition, large companies may restructure their operations to create separate companies or may acquire new businesses that are focused on providing the types of products we produce or acquire our customers.

 

Our products must conform to industry standards and technology in order to be accepted by end users in our markets

 

Generally, our products comprise only a part of a device.  All components of such devices must uniformly comply with industry standards in order to operate efficiently together.  We depend on companies that provide other components of the devices to support prevailing industry standards.  Many of these companies are significantly larger and more influential in affecting industry standards than we are.  Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers or end users.  If larger companies do not support the same industry standards that we do, or if competing standards emerge, market acceptance of our products could be adversely affected which would harm our business.

 

Products for certain applications are based on industry standards that are continually evolving.  Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards.  The emergence of new industry standards could render our products incompatible with products developed by other suppliers.  As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards.  If our products are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins.

 

Our pursuit of necessary technological advances may require substantial time and expense.  We may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance.  If our ICs fail to achieve market acceptance, our growth prospects, operating results and competitive position could be adversely affected.

 

42



 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

Our registration statement (Registration No. 333-94853) under the Securities Act of 1933, as amended, relating to our initial public offering of our common stock became effective on March 23, 2000.

 

The following table summarizes repurchases of our common stock during the three months ended April 5, 2008:

 

Period

 

Total Number of
Shares Purchased (1)

 

Average Price
Paid per Share

 

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs

 

Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs

 

December 30, 2007 – January 26, 2008

 

147,592

 

$

36.82

 

143,953

 

$

250,030,790

 

 

 

 

 

 

 

 

 

 

 

January 27, 2008 – February 23, 2008

 

1,841,297

 

$

31.18

 

1,798,789

 

$

193,979,158

 

 

 

 

 

 

 

 

 

 

 

February 24, 2008 – April 5, 2008

 

2,518,017

 

$

30.08

 

2,516,776

 

$

118,285,981

 

Total

 

4,506,906

 

$

30.75

 

4,459,518

 

 

 

 


(1) Includes 47,000 shares of our common stock withheld by us to satisfy employee tax obligations upon vesting of certain stock grants made under our 2000 Stock Incentive Plan.

 

On July 25, 2007, we announced that our Board of Directors authorized a program to repurchase up to $400 million of our common stock.  Such repurchases may occur over a 24-month period ending July 31, 2009.  The program allows for repurchases to be made in the open market or in private transactions, including structured or accelerated transactions, subject to applicable legal requirements and market conditions.

 

Item 3.  Defaults Upon Senior Securities

 

Not applicable

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

Not applicable

 

Item 5.  Other Information

 

Not applicable

 

Item 6.  Exhibits

 

The following exhibits are filed as part of this report:

 

Exhibit
Number

 

 

 

 

 

2.1*

 

Agreement and Plan of Merger, dated August 19, 2005, by and among Silicon Laboratories Inc., Sabine Merger Sub, Inc., and Silicon MAGIKE, Inc. (filed as Exhibit 2.1 to the Form 8-K filed August 22, 2005).

 

 

 

3.1*

 

Form of Fourth Amended and Restated Certificate of Incorporation of Silicon Laboratories Inc. (filed as Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 (Securities and Exchange Commission File No. 333-94853) (the “IPO Registration Statement”)).

 

43



 

3.2*

 

Second Amended and Restated Bylaws of Silicon Laboratories Inc (filed as Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004).

 

 

 

4.1*

 

Specimen certificate for shares of common stock (filed as Exhibit 4.1 to the IPO Registration Statement).

 

 

 

 

 

10.1*

 

Silicon Laboratories Inc. 2008 Bonus Plan (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 26, 2008).

 

 

 

10.2*

 

Lease, Deed of Trust and Security Agreement dated March 14, 2008 among Silicon Laboratories Inc., BA Leasing BSC, LLC and Gary S. Farmer (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 19, 2008).

 

 

 

10.3*

 

Participation Agreement dated March 14, 2008 among Silicon Laboratories Inc., BA Leasing BSC, LLC, Wells Fargo Bank Northwest, National Association and various other financial institutions named therein (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 19, 2008).

 

 

 

31.1  

 

Certification of the Principal Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2  

 

Certification of the Principal Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1  

 

Certification as required by Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 


            * Incorporated herein by reference to the indicated filing.

 

 

 

44



 

SIGNATURES

 

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

                  SILICON LABORATORIES INC.

 

 

 

 

 

 

April 30, 2008

 

/s/ Necip Sayiner

 

 

 

Date

 

Necip Sayiner
President and
Chief Executive Officer
(Principal Executive Officer)

 

 

 

 

 

 

April 30, 2008

 

/s/ William G. Bock

 

 

 

Date

 

William G. Bock
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)

 

45


Exhibit 31.1

 

Certification to the Securities and Exchange Commission

by Registrant’s Chief Executive Officer, as required by Section 302

of the Sarbanes-Oxley Act of 2002

 

I, Necip Sayiner, certify that:

 

1.      I have reviewed this report on Form 10-Q of Silicon Laboratories Inc.;

 

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.      The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

 

a)      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.      The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons fulfilling the equivalent functions):

 

a)      All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

 

Date: April 30, 2008

 

/s/ Necip Sayiner

 

 

 

Necip Sayiner

 

President and

 

Chief Executive Officer

 

(Principal Executive Officer)

 

 


Exhibit 31.2

 

Certification to the Securities and Exchange Commission

by Registrant’s Chief Financial Officer, as required by Section 302

of the Sarbanes-Oxley Act of 2002

 

I, William G. Bock, certify that:

 

1.      I have reviewed this report on Form 10-Q of Silicon Laboratories Inc.;

 

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.      The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

 

a)      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.      The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons fulfilling the equivalent functions):

 

a)      All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

 

Date: April 30, 2008

 

/s/ William G. Bock

 

 

 

William G. Bock

 

Senior Vice President and

 

Chief Financial Officer

 

(Principal Financial Officer)

 

 


Exhibit 32.1

 

Certification of Chief Executive Officer and Chief Financial Officer

 

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Silicon Laboratories Inc. (the “Company”) hereby certify that:

 

(i)   the accompanying Quarterly Report on Form 10-Q of the Company for the fiscal quarter ended April 5, 2008 as filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934; and

 

(ii)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities Exchange Commission or its staff upon request.

 

Date: April 30, 2008

 

/s/ Necip Sayiner

 

 

 

Necip Sayiner

 

President and

 

Chief Executive Officer

 

 

 

/s/ William G. Bock

 

 

 

William G. Bock

 

Senior Vice President and

 

Chief Financial Officer