UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended July 4, 2009 |
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Or |
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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)
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Delaware |
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74-2793174 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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400 West Cesar Chavez, Austin, Texas |
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78701 |
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(Address of principal executive offices) |
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(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes ¨ 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).
o Yes x No
As of July 22, 2009, 44,857,063 shares of common stock of Silicon Laboratories Inc. were outstanding.
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Condensed Consolidated Balance Sheets at July 4, 2009 and January 3, 2009 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
18 |
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29 |
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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
Silicon Laboratories Inc.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
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July 4,
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January 3,
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$199,519 |
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$172,272 |
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Short-term investments |
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113,205 |
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101,267 |
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Accounts receivable, net of allowance for doubtful accounts of $680 at July 4, 2009 and $1,011 at January 3, 2009 |
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62,890 |
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36,144 |
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Inventories |
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26,672 |
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28,293 |
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Deferred income taxes |
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6,587 |
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6,439 |
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Prepaid expenses and other current assets |
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20,091 |
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18,297 |
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Total current assets |
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428,964 |
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362,712 |
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Long-term investments |
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23,138 |
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51,821 |
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Property, equipment and software, net |
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28,739 |
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30,496 |
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Goodwill |
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104,612 |
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105,515 |
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Other intangible assets, net |
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45,778 |
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49,728 |
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Other assets, net |
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19,831 |
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23,973 |
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Total assets |
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$651,062 |
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$624,245 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
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$ 25,416 |
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$ 22,274 |
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Accrued expenses |
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21,973 |
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29,119 |
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Deferred income on shipments to distributors |
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26,839 |
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21,599 |
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Income taxes |
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85 |
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4 |
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Total current liabilities |
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74,313 |
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72,996 |
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Long-term obligations and other liabilities |
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49,608 |
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48,789 |
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Total liabilities |
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123,921 |
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121,785 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock--$0.0001 par value; 10,000 shares authorized; no shares issued and outstanding |
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-- |
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-- |
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Common stock--$0.0001 par value; 250,000 shares authorized; 44,726 and 44,613 shares issued and outstanding at July 4, 2009 and January 3, 2009, respectively |
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4 |
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4 |
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Additional paid-in capital |
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89,731 |
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75,711 |
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Retained earnings |
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443,194 |
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432,793 |
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Accumulated other comprehensive loss |
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(5,788 |
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(6,048 |
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Total stockholders’ equity |
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527,141 |
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502,460 |
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Total liabilities and stockholders’ equity |
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$651,062 |
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$624,245 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
Silicon Laboratories Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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July 4,
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July 5,
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July 4,
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July 5,
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Revenues |
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$ |
104,216 |
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$ |
104,620 |
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$ |
187,917 |
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$ |
202,799 |
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Cost of revenues |
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39,435 |
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38,587 |
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72,458 |
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76,419 |
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Gross margin |
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64,781 |
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66,033 |
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115,459 |
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126,380 |
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Operating expenses: |
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Research and development |
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25,868 |
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23,378 |
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51,937 |
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48,051 |
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Selling, general and administrative |
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26,187 |
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24,486 |
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49,629 |
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49,095 |
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Operating expenses |
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52,055 |
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47,864 |
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101,566 |
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97,146 |
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Operating income |
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12,726 |
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18,169 |
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13,893 |
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29,234 |
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Other income (expense): |
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Interest income |
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655 |
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2,406 |
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1,537 |
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7,204 |
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Interest expense |
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(51 |
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(109 |
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(103 |
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(254 |
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Other income (expense), net |
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342 |
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(355 |
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290 |
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(497 |
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Income before income taxes |
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13,672 |
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20,111 |
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15,617 |
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35,687 |
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Provision for income taxes |
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3,942 |
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5,468 |
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5,216 |
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10,230 |
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Net income |
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$ |
9,730 |
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$ |
14,643 |
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$ |
10,401 |
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$ |
25,457 |
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Earnings per share: |
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Basic |
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$ |
0.22 |
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$ |
0.30 |
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$ |
0.23 |
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$ |
0.51 |
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Diluted |
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$ |
0.21 |
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$ |
0.29 |
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$ |
0.23 |
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$ |
0.50 |
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Weighted-average common shares outstanding: |
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Basic |
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44,640 |
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48,510 |
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44,336 |
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49,858 |
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Diluted |
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45,975 |
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49,705 |
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45,229 |
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50,901 |
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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)
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Six Months Ended |
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July 4,
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July 5,
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Operating Activities |
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Net income |
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$ 10,401 |
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$ 25,457 |
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Adjustments to reconcile net income to cash provided by operating activities: |
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Depreciation and amortization of property, equipment and software |
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5,963 |
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5,234 |
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Loss (gain) on disposal of property, equipment and software |
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32 |
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(15 |
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Amortization of other intangible assets and other assets |
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3,950 |
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2,073 |
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Stock compensation expense |
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21,000 |
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20,397 |
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Income tax benefit from employee stock-based awards |
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293 |
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828 |
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Excess income tax benefit from employee stock-based awards |
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(273 |
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(625 |
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Deferred income taxes |
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1,593 |
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(1,183 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(26,420 |
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(521 |
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Inventories |
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1,658 |
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(1,017 |
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Prepaid expenses and other assets |
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2,829 |
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5,093 |
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Accounts payable |
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3,896 |
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1,396 |
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Accrued expenses |
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(4,388 |
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(7,980 |
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Deferred income on shipments to distributors |
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5,240 |
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(3,652 |
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Income taxes |
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757 |
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(216 |
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Net cash provided by operating activities |
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26,531 |
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45,269 |
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Investing Activities |
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Purchases of available-for-sale investments |
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(45,537 |
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(140,439 |
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Proceeds from sales and maturities of available-for-sale investments |
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59,434 |
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268,823 |
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Proceeds from sales of trading securities |
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2,600 |
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-- |
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Purchases of property, equipment and software |
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(3,974 |
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(5,060 |
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Proceeds from the sale of assets |
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-- |
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14,265 |
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Purchases of other assets |
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(2,304 |
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(3,681 |
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Acquisitions of businesses, net of cash acquired |
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(2,800 |
) |
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-- |
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Net cash provided by investing activities |
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7,419 |
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133,908 |
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Financing Activities |
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Proceeds from issuance of common stock |
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7,341 |
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7,354 |
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Excess income tax benefit from employee stock-based awards |
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273 |
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625 |
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Repurchases of common stock |
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(12,140 |
) |
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(175,369 |
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Repurchases of stock to satisfy employee tax withholding |
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(2,177 |
) |
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(2,141 |
) |
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Net cash used in financing activities |
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(6,703 |
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(169,531 |
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Increase in cash and cash equivalents |
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27,247 |
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9,646 |
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Cash and cash equivalents at beginning of period |
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172,272 |
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264,408 |
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Cash and cash equivalents at end of period |
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$199,519 |
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$274,054 |
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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 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 July 4, 2009 and January 3, 2009, the condensed consolidated results of its operations for the three and six months ended July 4, 2009 and July 5, 2008, and the Condensed Consolidated Statements of Cash Flows for the six months ended July 4, 2009 and July 5, 2008. All intercompany balances and transactions have been eliminated. The condensed consolidated results of operations for the three and six months ended July 4, 2009 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 January 3, 2009, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on February 11, 2009.
The Company prepares financial statements on a 52-53 week year that ends on the Saturday closest to December 31. Fiscal 2009 will have 52 weeks and fiscal 2008 had 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. The extra week in fiscal 2008 was added to the first quarter, making such quarter consist of 14 weeks.
Reclassifications
Certain reclassifications have been made to prior year financial statements to conform to current year presentation.
Recent Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board (FASB) issued the following FASB Staff Positions (FSPs):
· FSP FAS No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly , provides additional guidance for estimating fair value in accordance with FASB Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements , when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly.
· FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments , amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements.
6
Silicon Laboratories Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
· FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments , amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments , to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting , to require those disclosures in summarized financial information at interim reporting periods.
These FSPs are effective for reporting periods ending after June 15, 2009 and were adopted by the Company on April 5, 2009. The adoption of the FSPs did not have a material impact on the Company’s financial statements.
In June 2008, the FASB issued FSP Emerging Issues Task Force (EITF) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities . FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method described in FASB SFAS No. 128, Earnings per Share . FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years on a retrospective basis. The Company adopted FSP EITF 03-6-1 at the beginning of fiscal 2009. The adoption did not have a material impact on the Company’s financial statements.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
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Three Months Ended |
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Six Months Ended |
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July 4,
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July 5,
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July 4,
|
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July 5,
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|
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Net income |
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$ 9,730 |
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|
$ 14,643 |
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|
$ 10,401 |
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|
$ 25,457 |
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Shares used in computing basic earnings per share |
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44,640 |
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48,510 |
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|
44,336 |
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49,858 |
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Effect of dilutive securities: |
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Stock options and awards |
|
1,335 |
|
|
1,195 |
|
|
893 |
|
|
1,043 |
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Shares used in computing diluted earnings per share |
|
45,975 |
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|
49,705 |
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45,229 |
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50,901 |
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Earnings per share: |
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|
|
|
|
|
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Basic |
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$ 0.22 |
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$ 0.30 |
|
|
$ 0.23 |
|
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$ 0.51 |
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Diluted |
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$ 0.21 |
|
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$ 0.29 |
|
|
$ 0.23 |
|
|
$ 0.50 |
|
|
Approximately 2.6 million, 3.3 million, 4.2 million and 3.7 million weighted-average dilutive potential shares of common stock have been excluded from the earnings per share calculation for the three months ended July 4, 2009 and July 5, 2008, and for the six months ended July 4, 2009 and July 5, 2008, respectively, as they were anti-dilutive.
7
Silicon Laboratories Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
3. Financial Instruments
Investments
The Company’s short-term investments consist primarily of municipal bonds, U.S. government agency notes, auction-rate securities purchased through UBS (“UBS auction-rate securities”) and corporate bonds. The Company’s long-term investments consist of non-UBS auction-rate securities. Early in fiscal 2008, auctions for many of the Company’s auction-rate securities failed because sell orders exceeded buy orders. As of July 4, 2009, the Company held $52.9 million par value auction-rate securities, all of which experienced failed auctions. The underlying assets of the securities consisted of student loans and municipal bonds, of which $48.5 million were guaranteed by the U.S. government and the remaining $4.4 million were privately insured. As of July 4, 2009, $43.5 million of the auction-rate securities had credit ratings of AAA, $2.4 million had credit ratings of AA and $7.0 million had a credit rating of BBB. These securities had contractual maturity dates ranging from 2025 to 2046 and with current yields of 0.32% to 2.95% per year at July 4, 2009. The Company is receiving the underlying cash flows on all of its auction-rate securities. The principal 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. The Company is unable to predict if these funds will become available before their maturity dates.
In November 2008, the Company entered into an agreement with UBS AG, which provides the Company certain rights to sell to UBS the auction-rate securities which were purchased through them. As of July 4, 2009, the Company held $25.4 million par value auction-rate securities purchased from UBS. The Company has the option to sell these securities to UBS at par value from June 30, 2010 through July 2, 2012. UBS, at its discretion, may purchase or sell these securities on the Company’s behalf at any time provided the Company receives par value for the securities sold. The issuers of the auction-rate securities continue to have the right to redeem the securities at their discretion. The agreement allows for the continuation of the accrual and payment of interest due on the securities. The agreement also provides the Company with access to loans of up to 75% of the market value of the unredeemed securities until June 30, 2010. These loans would carry interest rates which would be consistent with the interest income on the related auction-rate securities. As of July 4, 2009, the Company had no loans outstanding under this agreement.
The Company’s right to sell the auction-rate securities to UBS commencing June 30, 2010 represents a put option for a payment equal to the par value of the auction-rate securities. As the put option is non-transferable and cannot be attached to the auction-rate securities if they are sold to another entity other than UBS, it represents a freestanding instrument between the Company and UBS. The Company elected the fair value option under FASB SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115, to record the put option. The Company has classified the UBS auction-rate securities as trading securities and, accordingly, recognizes changes in fair value in earnings. Adjustments to the fair values of the put option and the trading securities generally offset each other and are recorded in “other income (expense), net”. The Company intends to exercise its option to sell its UBS auction-rate securities to UBS on June 30, 2010 and has therefore classified both the UBS auction-rate securities and the related put option as short-term investments as of July 4, 2009.
The Company does not expect to need access to the capital represented by any of its auction-rate securities prior to their maturities. The Company does not intend to sell, and believes it is not more likely than not that it will be required to sell, its non-UBS auction-rate securities before their anticipated recovery in market value or final settlement at the underlying par value. The Company believes that the credit ratings and credit support of the security issuers indicate that they have the ability to settle the securities at par value. As such, the Company has determined that no other-than-temporary impairment losses existed as of July 4, 2009.
8
Silicon Laboratories Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The Company’s available-for-sale investments consist of the following (in thousands):
|
|
|
July 4, 2009 |
|
||||||||||
|
Debt Security |
|
Cost |
|
Gross
|
|
Gross
|
|
Fair Value |
|
||||
|
Municipal bonds |
|
$ 44,210 |
|
|
$ -- |
|
|
$345 |
|
|
$ 44,555 |
|
|
|
U.S. government agency |
|
36,399 |
|
|
-- |
|
|
51 |
|
|
36,450 |
|
|
|
Auction-rate securities |
|
27,575 |
|
|
(4,437 |
) |
|
-- |
|
|
23,138 |
|
|
|
Corporate bonds |
|
6,877 |
|
|
-- |
|
|
40 |
|
|
6,917 |
|
|
|
|
|
$115,061 |
|
|
$(4,437 |
) |
|
$436 |
|
|
$111,060 |
|
|
|
|
|
January 3, 2009 |
|
||||||||||||
|
Debt Security |
|
Cost |
|
Gross
|
|
Gross
|
|
Fair Value |
|
||||||
|
Auction-rate securities |
|
$ |
30,000 |
|
|
$(4,260 |
) |
|
$ -- |
|
|
$ |
25,740 |
|
|
|
Municipal bonds |
|
88,907 |
|
|
-- |
|
|
503 |
|
|
89,410 |
|
|
||
|
U.S. government agency |
|
10,001 |
|
|
-- |
|
|
56 |
|
|
10,057 |
|
|
||
|
|
|
$ |
128,908 |
|
|
$(4,260 |
) |
|
$559 |
|
|
$ |
125,207 |
|
|
The Company’s available-for-sale investments that were in a continuous unrealized loss position as of July 4, 2009, aggregated by length of time that individual securities have been in a continuous loss position, were as follows (in thousands) :
|
|
|
Less Than 12 Months |
|
12 Months or Longer |
|
Total |
|
||||||||||||
|
Debt Security |
|
Fair Value |
|
Gross
|
|
Fair Value |
|
Gross
|
|
Fair Value |
|
Gross
|
|
||||||
|
Auction-rate securities |
|
$1,767 |
|
|
$(233 |
) |
|
$21,371 |
|
|
$(4,204 |
) |
|
$23,138 |
|
|
$(4,437 |
) |
|
|
|
|
$1,767 |
|
|
$(233 |
) |
|
$21,371 |
|
|
$(4,204 |
) |
|
$23,138 |
|
|
$(4,437 |
) |
|
All of the Company’s available-for-sale investments with gross unrealized losses as of January 3, 2009 had been in a continuous loss position for less than 12 months. The gross unrealized losses as of July 4, 2009 and January 3, 2009 were due primarily to the illiquidity of the Company’s auction-rate securities.
The following summarizes the contractual underlying maturities of the Company’s available-for-sale investments at July 4, 2009 (in thousands):
|
|
|
Cost |
|
Fair Value |
|
||
|
Due in one year or less |
|
$ 80,609 |
|
|
$ 81,005 |
|
|
|
Due after one year through three years |
|
6,877 |
|
|
6,917 |
|
|
|
Due after ten years |
|
27,575 |
|
|
23,138 |
|
|
|
|
|
$115,061 |
|
|
$111,060 |
|
|
In addition, the Company has made equity investments in non-publicly traded companies that it accounts for under the cost method. The Company periodically reviews these investments for other-than-temporary declines in fair value based on the specific identification method and writes down investments to their fair values when it determines that an other-than-temporary decline has occurred.
9
Silicon Laboratories Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Derivative Financial Instruments
The Company is exposed to interest rate fluctuations in the normal course of its business, including through its corporate headquarters leases. The base rents for these leases are calculated using a variable interest rate based on the three-month LIBOR . The Company has entered into interest rate swap agreements with notional values of $44.3 million and $50.1 million and, effectively, fixed the rent payment amounts on these leases through March 2011 and March 2013, respectively. The Company’s objective is to offset gains and losses resulting from changes in interest rates with losses and gains on the derivative contracts, thereby reducing volatility of earnings. The Company does not use derivative contracts for speculative purposes.
The interest rate swap agreements are designated and qualify as cash flow hedges under FASB SFAS 133, Accounting for Derivative Instruments and Hedging Activities . The effective portion of the gain or loss on interest rate swaps is recorded in accumulated other comprehensive loss as a separate component of stockholders’ equity and is subsequently recognized in earnings when the hedged exposure affects earnings. Cash flows from derivatives are classified as cash flows from operating activities in the Consolidated Statement of Cash Flows.
The Company estimates the fair values of derivatives based on quoted prices and market observable data of similar instruments. If the lease agreements or the interest rate swap agreements are terminated prior to maturity, the fair value of the interest rate swaps recorded in accumulated other comprehensive loss may be recognized in the Consolidated Statement of Income based on an assessment of the agreements at the time of termination. During the six months ended July 4, 2009, the Company did not discontinue any cash flow hedges.
For interest rate swaps designated as cash flow hedges, the Company measures effectiveness by comparing the change in fair value of the hedged item with the change in fair value of the interest rate swap. The Company recognizes ineffective portions of the hedge, as well as amounts not included in the assessment of effectiveness, in the Consolidated Statement of Income. As of July 4, 2009, no portions of the gains or losses from the hedging instruments were excluded from the assessment of effectiveness. There was no hedge ineffectiveness for any of the periods presented.
The Company’s derivative financial instruments consisted of the following (in thousands):
|
|
|
July 4, 2009 |
|
||
|
|
|
Balance
Sheet
|
|
Fair Value |
|
|
Cash flow hedges: |
|
|
|
|
|
|
Interest rate swaps |
|
Long-term obligations and
|
|
$4,904 |
|
10
Silicon Laboratories Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The effective portions of gains (losses) on derivative financial instruments consisted of the following (in thousands):
|
|
|
Recognized
in
|
|
Location
of Gain
|
|
Reclassified
into
|
|
||||
|
|
|
|
|
|
|
|
|
||||
|
|
|
Three Months Ended |
|
|
|
Three Months Ended |
|
||||
|
|
|
July 4,
|
|
July 5,
|
|
|
|
July 4,
|
|
July 5,
|
|
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$(113) |
|
$-- |
|
Rent expense |
|
$(622) |
|
$-- |
|
|
|
|
Six Months Ended |
|
|
|
Six Months Ended |
|
||||||||
|
|
|
July 4,
|
|
July 5,
|
|
|
|
July 4,
|
|
July 5,
|
|
||||
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$(476) |
|
$-- |
|
Rent expense |
|
$(1,175) |
|
$-- |
|
||||
The Company expects to reclassify $2.8 million of its interest rate swap losses included in accumulated other comprehensive loss as of July 4, 2009 into earnings in the next 12 months, which is offset by lower rent payments.
The Company’s interest rate swap agreements contain provisions that require it to maintain unencumbered cash and highly-rated short-term investments of at least $150 million. If the Company’s unencumbered cash and highly-rated short-term investments are less than $150 million, it would be required to post collateral with the counterparty in the amount of the fair value of the interest rate swap agreements in net liability positions. Both of the Company’s interest rate swaps were in a net liability position at July 4, 2009. No collateral has been posted with the counterparties as of July 4, 2009.
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. FASB SFAS No. 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.
11
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). The table does not include either cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value.
|
|
|
Fair
Value Measurements
|
|
|
|
||||||||||||
|
Description |
|
Quoted
Prices in
|
|
Significant
Other
|
|
Significant
|
|
Total |
|
||||||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash equivalents |
|
$ |
182,399 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
182,399 |
|
|
|
Short-term investments (1) |
|
|
87,922 |
|
|
|
-- |
|
|
|
25,283 |
|
|
|
113,205 |
|
|
|
Long-term investments (2) |
|
|
-- |
|
|
|
-- |
|
|
|
23,138 |
|
|
|
23,138 |
|
|
|
|
|
$ |
270,321 |
|
|
$ |
-- |
|
|
$ |
48,421 |
|
|
$ |
318,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
$ |
-- |
|
|
$ |
4,904 |
|
|
$ |
-- |
|
|
$ |
4,904 |
|
|
|
|
|
$ |
-- |
|
|
$ |
4,904 |
|
|
$ |
-- |
|
|
$ |
4,904 |
|
|
(1) Included in the Company’s short-term investments are $44.6 million of municipal debt securities, $6.9 million of corporate debt securities, $36.4 million of U.S. government agency debt securities, $20.4 million of UBS auction-rate securities classified as trading and $4.9 million for a put option.
(2) The Company’s long-term investments consist entirely of available-for-sale auction-rate securities.
The Company’s cash equivalents and short-term investments (other than its UBS auction-rate securities and put option) are valued using quoted prices and other relevant information generated by market transactions involving identical assets. The Company’s auction-rate securities and put option are valued using a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, amount of cash flows, expected holding periods of the securities, a discount to reflect the Company’s inability to liquidate the securities and counterparty risk. The Company’s derivative instruments are valued using quoted prices and market observable data of similar instruments.
12
Silicon Laboratories Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The following summarizes the activity in Level 3 financial instruments for the three and six months ended July 4, 2009 (in thousands):
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||||||||
|
|
|
Auction
|
|
Put
|
|
Total |
|
Auction
|
|
Put
|
|
Total |
|
||||||
|
Beginning balance |
|
$46,015 |
|
|
$4,784 |
|
|
$50,799 |
|
|
$46,859 |
|
|
$4,962 |
|
|
$51,821 |
|
|
|
Net purchases, sales, issuances and settlements |
|
(2,475 |
) |
|
-- |
|
|
(2,475 |
) |
|
(2,974 |
) |
|
(301 |
) |
|
(3,275 |
) |
|
|
Unrealized losses |
|
-- |
|
|
-- |
|
|
-- |
|
|
(177 |
) |
|
-- |
|
|
(177 |
) |
|
|
Net recognized gains (losses) |
|
-- |
|
|
97 |
|
|
97 |
|
|
(168 |
) |
|
220 |
|
|
52 |
|
|
|
Balance at July 4, 2009 |
|
$43,540 |
|
|
$4,881 |
|
|
$48,421 |
|
|
$43,540 |
|
|
$4,881 |
|
|
$48,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) for period included in earnings attributable to the Level 3 financial instruments still held at July 4, 2009 related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
$ -- |
|
|
$ -- |
|
|
$ -- |
|
|
$ (168 |
) |
|
$ -- |
|
|
$ (168 |
) |
|
|
F air value of the put option |
|
-- |
|
|
97 |
|
|
97 |
|
|
-- |
|
|
220 |
|
|
220 |
|
|
|
|
|
$ -- |
|
|
$ 97 |
|
|
$ 97 |
|
|
$ (168 |
) |
|
$ 220 |
|
|
$ 52 |
|
|
The Company’s other financial instruments, including cash, accounts receivable and accounts payable, are recorded at amounts that approximate their fair values due to their short maturities.
5. Balance Sheet Details
Balance sheet details consist of the following (in thousands):
Inventories
|
|
|
July 4,
|
|
January 3,
|
|
||
|
Work in progress |
|
$20,780 |
|
|
$23,474 |
|
|
|
Finished goods |
|
5,892 |
|
|
4,819 |
|
|
|
|
|
$26,672 |
|
|
$28,293 |
|
|
6. Stockholders’ Equity and Stock-Based Compensation
Common Stock
The Company issued 559.5 thousand shares of common stock during the six months ended July 4, 2009. Approximately 83.0 thousand shares were withheld by the Company during the six months ended July 4, 2009 to satisfy employee tax obligations for the vesting of certain stock grants made under the Company’s 2000 Stock Incentive Plan and 2009 Stock Incentive Plan.
13
Silicon Laboratories Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Share Repurchase Program
In October 2008, the Company’s Board of Directors authorized a program to repurchase up to $100 million of the Company’s common stock over a 12-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 six months ended July 4, 2009, the Company repurchased 446 thousand shares of its common stock for $12.1 million under its current repurchase program. During the six months ended July 5, 2008, the Company repurchased 5.5 million shares for $173.3 million under its previous share repurchase program that expired in November 2008.
Comprehensive Income
The changes in the components of comprehensive income, net of taxes, were as follows (in thousands):
|
|
|
Three Months Ended |
|
|
|
|||||
|
|
|
July 4,
|
|
July 5,
|
|
|
|
|
||
|
Net income |
|
$9,730 |
|
|
$14,643 |
|
|
|
|
|
|
Net unrealized losses on available-for-sale securities, net of tax benefit of $46 and $347, respectively |
|
(85 |
) |
|
(643 |
) |
|
|
|
|
|
Net unrealized gains on cash flow hedges, net of tax provision of $178 and $0, respectively |
|
331 |
|
|
– |
|
|
|
|
|
|
Comprehensive income |
|
$9,976 |
|
|
$14,000 |
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|||||
|
|
|
July 4,
|
|
July 5,
|
|
|
|
|
||
|
Net income |
|
$10,401 |
|
|
$25,457 |
|
|
|
|
|
|
Net unrealized losses on available-for-sale securities, net of tax benefit of $105 and $1,344, respectively |
|
(195 |
) |
|
(2,496 |
) |
|
|
|
|
|
Net unrealized gains on cash flow hedges, net of tax provision of $245 and $0, respectively |
|
455 |
|
|
-- |
|
|
|
|
|
|
Comprehensive income |
|
$10,661 |
|
|
$22,961 |
|
|
|
|
|
The components of accumulated other comprehensive loss, net of taxes, were as follows (in thousands):
|
|
|
Unrealized
|
|
Net
Unrealized Losses
|
|
Total |
|
|||
|
Balance at January 3, 2009 |
|
$(3,642 |
) |
|
$(2,406 |
) |
|
$(6,048 |
) |
|
|
Change associated with current period transactions, net of tax |
|
(309 |
) |
|
(195 |
) |
|
(504 |
) |
|
|
Amount reclassified into earnings, net of tax |
|
764 |
|
|
-- |
|
|
764 |
|
|
|
Balance at July 4, 2009 |
|
$(3,187 |
) |
|
$(2,601 |
) |
|
$(5,788 |
) |
|
14
Silicon Laboratories Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Stock-Based Compensation
In April 2009, the stockholders of the Company approved the 2009 Stock Incentive Plan (the “2009 Incentive Plan”) and the 2009 Employee Stock Purchase Plan (the “2009 Purchase Plan”). The 2009 Incentive Plan is currently effective, and no further grants will be issued under the Company’s 2000 Stock Incentive Plan. The 2009 Purchase Plan will take effect upon the termination of the existing Employee Stock Purchase Plan, on or before April 30, 2010.
The Company accounts for its stock-based compensation plans under the recognition and measurement provisions of FASB SFAS No. 123 (revised 2004), Share-Based Payment , (SFAS 123R). Stock-based compensation costs are generally based on the fair values on the date of grant for stock options and on the date of enrollment for the employee stock purchase plans, estimated by using the Black-Scholes option-pricing model. The fair values of stock awards and restricted stock units (RSUs) generally equal their intrinsic value on the date of grant. The fair values estimated from the Black-Scholes option-pricing model were calculated using the following assumptions:
|
|
|
Six Months Ended |
|
||||
|
|
|
July 4,
|
|
July 5,
|
|
||
|
Stock Incentive Plan: |
|
|
|
|
|
|
|
|
Expected volatility |
|
n/a |
|
|
43.7 |
% |
|
|
Risk-free interest rate % |
|
n/a |
|
|
2.8 |
% |
|
|
Expected term (in years) |
|
n/a |
|
|
5.0 |
|
|
|
Dividend yield |
|
n/a |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan: |
|
|
|
|
|
|
|
|
Expected volatility |
|
47.8 |
% |
|
37.1 |
% |
|
|
Risk-free interest rate % |
|
0.4 |
% |
|
1.8 |
% |
|
|
Expected term (in months) |
|
9 |
|
|
9 |
|
|
|
Dividend yield |
|
-- |
|
|
-- |
|
|
There were no stock options granted during the six months ended July 4, 2009.
The following are the stock-based compensation costs recognized in the Company’s Condensed Consolidated Statements of Income (in thousands):
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||
|
|
|
July 4,
|
|
July 5,
|
|
July 4,
|
|
July 5,
|
|
|
Cost of revenues |
|
$ 372 |
|
$ 380 |
|
$ 767 |
|
$ 750 |
|
|
Research and development |
|
3,794 |
|
3,976 |
|
7,672 |
|
7,918 |
|
|
Selling, general and administrative |
|
6,685 |
|
5,820 |
|
12,561 |
|
11,729 |
|
|
|
|
10,851 |
|
10,176 |
|
21,000 |
|
20,397 |
|
|
Provision for income taxes |
|
1,457 |
|
1,465 |
|
2,965 |
|
2,712 |
|
|
|
|
$ 9,394 |
|
$ 8,711 |
|
$18,035 |
|
$17,685 |
|
15
Silicon Laboratories Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The Company had approximately $77.9 million of total unrecognized compensation costs related to stock options, stock and RSUs at July 4, 2009 that are expected to be recognized over a weighted-average period of 2.1 years.
7. 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. Plaintiffs selected six “focus” cases, which do not include the Company, which are intended to serve as test cases. The Court indicated that its decisions in the six focus cases are intended to provide strong guidance for the parties in the remaining cases.
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 these six cases. On November 14, 2007, the defendants in the six focus cases filed motions to dismiss the amended complaints. 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. On October 10, 2008, at the request of plaintiffs, plaintiffs’ motion for class certification was withdrawn, without prejudice. On April 3, 2009, the plaintiffs submitted to the Court a motion for preliminary approval of a settlement of the approximately 300 coordinated cases, which includes the Company, the underwriter defendants in its class action lawsuit, and the plaintiff class in its class action lawsuit. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including the Company. On June 11, 2009, the Court issued an order preliminarily approving the proposed stipulation and agreement of settlement among the parties and certifying settlement classes. The settlement is subject to termination by the parties under certain circumstances and final approval by the Court. The hearing on final approval is currently scheduled for September 10, 2009. There is no assurance that the Court will grant final approval.
As the litigation process is inherently uncertain, the Company is unable to predict the outcome of the above described matter. While the Company does maintain liability insurance, it could incur losses that are not covered by its liability insurance or that exceed the limits of its liability insurance. Such losses could have a material impact on the Company’s business and its results of operations or financial position.
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.
16
Silicon Laboratories Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Operating Leases
In March 2006, the Company entered into an operating lease agreement and a related participation agreement for a facility at 400 W. Cesar Chavez (“400 WCC”) in Austin, Texas for its corporate headquarters. In March 2008, the Company entered into an operating lease agreement and a related participation agreement for a facility at 200 W. Cesar Chavez (“200 WCC”) in Austin, Texas for the expansion of its corporate headquarters. During the terms of the leases, the Company has on-going options to purchase the buildings for purchase prices of approximately $44.3 million for 400 WCC and $50.1 million for 200 WCC. Alternatively, the Company can cause each such property to be sold to third parties provided it is not in default under that property’s lease. The Company is contingently liable on a first dollar loss basis for up to $35.3 million to the extent that the 400 WCC sale proceeds are less than the $44.3 million purchase option and up to $40.0 million to the extent that the 200 WCC sale proceeds are less than the $50.1 million purchase option.
Discontinued Operations Indemnification
In March 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”). 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 July 4, 2009, the Company had no material liabilities recorded with respect to this indemnification obligation.
8. Income Taxes
Provision for income taxes includes both domestic and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses (including a portion of our stock compensation), research and development tax credits, interest income from tax-exempt investments and interest and penalties related to unrecognized tax benefits. Income tax expense was $3.9 million and $5.5 million for the three months ended July 4, 2009 and July 5, 2008, respectively, resulting in effective tax rates of 28.8% and 27.2%, respectively. Income tax expense was $5.2 million and $10.2 million for the six months ended July 4, 2009 and July 5, 2008, respectively, resulting in effective tax rates of 33.4% and 28.7%, respectively. The increase in the effective rate for the three months ended July 4, 2009 was primarily attributable to a decrease in the deductibility of stock compensation expense, which was partially offset by increases in the foreign tax rate benefit and the federal research and development credit. The increase in the effective rate for the six months ended July 4, 2009 was primarily attributable to a decrease in the deductibility of stock compensation expense and a reduction in tax exempt interest income. The increase was partially offset by an increase in the federal research and development credit.
At July 4, 2009, the Company had gross unrecognized tax benefits of $34.4 million, $34.2 million of which would affect the effective tax rate if recognized. During the six months ended July 4, 2009, the Company had gross increases of $1.7 million to its current year unrecognized tax benefits, primarily due to uncertainty related to intercompany transfer pricing. During the six months ended July 5, 2008, the Company had gross increases of $2.1 million to its unrecognized tax benefits, primarily due to uncertainty related to intercompany transfer pricing.
The Company believes it is reasonably possible that the unrecognized tax benefits will decrease in the amount of $1.2 million in the next 12 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.
17
Silicon Laboratories Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Additionally, the Company believes it is reasonably possible that the gross unrecognized tax benefits will change in the next 12 months due to the Company’s participation in the Advance Pricing Agreement program with the U.S. Internal Revenue Service. The Company is unable to estimate the range of the possible change to the unrecognized tax benefits at this time.
The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company recognized $0.4 million of interest, net of tax, in the provision for income taxes for the six months ended July 4, 2009. The Company recognized $0.5 million of interest, net of tax, in the provision for income taxes for the six months ended July 5, 2008. As of July 4, 2009, the Company had accrued $2.3 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 has been notified by the U.S. Internal Revenue Service that its federal income tax returns for 2005 through 2008 will be examined. Although the outcome of tax audits is always uncertain, the Company believes that the results of the examination will not materially affect its financial position or results of operations.
9. Headquarter Relocation Costs
In fiscal 2006 and 2007, the Company relocated its Austin, Texas employees to a new corporate headquarters. The following table summarizes the accrued relocation costs activity for the six months ended July 4, 2009 (in thousands):
|
Balance
at
|
|
Deductions |
|
Balance
at
|
|
|
$986 |
|
$573 |
|
$413 |
|
Deductions represent lease payments.
10. Subsequent Events
The Company evaluates events and transactions that occur after the balance sheet date as potential subsequent events. This evaluation was performed through July 29, 2009, the date on which the Company’s financial statements were issued.
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 2009 will have 52 weeks and fiscal 2008 had 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. The extra week in fiscal 2008 was added to the first quarter, making such quarter consist of 14 weeks. Our second quarter of fiscal 2009 ended July 4, 2009. Our second quarter of fiscal 2008 ended July 5, 2008.
18
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, Huawei, LG Electronics, Motorola, Panasonic, Philips, Samsung, Sony Ericsson, Thomson and Varian Medical Systems.
As a “fabless” semiconductor company, we rely on third-party semiconductor fabricators in Asia, and to a lesser extent the United States and Europe, to manufacture the silicon wafers that reflect our IC designs. Each wafer contains numerous die, which are cut from the wafer to create a chip for an IC. We rely on third-parties in Asia to assemble, package, and, in most cases, test these devices and ship these units to our customers. Testing performed by such third parties facilitates faster delivery of products to our customers (particularly those located in Asia), shorter production cycle times, lower inventory requirements, lower costs and increased flexibility of test capacity.
Our expertise in analog-intensive, high-performance, mixed-signal ICs enables us to develop highly differentiated solutions that address multiple markets. We group our products into the following categories:
· RF products, which include our broadcast radio receivers and transmitters, short-range wireless transceivers, video tuners and demodulators, satellite set-top box receivers and satellite radio tuners;
· Access products, which include our ISOmodem® embedded modems and Voice over IP (VoIP) products, such as our ProSLIC® subscriber line interface circuits and voice direct access arrangement (DAA);
· Broad-based products, which include 8-bit microcontroller products, timing products (including clocks, precision clock & data recovery ICs and oscillators) and power products (including our isolators, current sensors, AC-DC converters 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 six months of 2009, we introduced a silicon hybrid TV tuner that supports both analog and digital broadcasts in a single device, a family of ProSLIC single channel telephony ICs for broadband networking equipment, the expansion of our small form factor microcontrollers in a tiny 2x2 mm footprint, a family of ISOpro high-performance, digital isolators, a family of high pin-count capacitive touch-sense microcontrollers for cost-sensitive embedded systems and the EZRadioPRO™ embedded wireless radio family. 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.
19
During the six months ended July 4, 2009, one customer, Samsung, represented more than 10% of our revenues. No other single end customer accounted for more than 10% of our revenues during the six months ended July 4, 2009. In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer. Two of our distributors, Edom Technology and Avnet, represented 23% and 11% of our revenues during the six months ended July 4, 2009, respectively. There were no other distributors or contract manufacturers that accounted for more than 10% of our revenues during the six months ended July 4, 2009.
The percentage of our revenues derived from customers located outside of the United States was 88% during the six months ended July 4, 2009, which reflects 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 our ICs can be as long as 12 months or more. An additional three to six months or more are usually required before a customer ships a significant volume of devices that incorporate our ICs. Due to this lengthy sales cycle, we typically experience a significant delay between incurring research and development and selling, general and administrative expenses, and the corresponding sales. Consequently, if sales in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our operating results for that quarter and, potentially, future quarters would be adversely affected. Moreover, the amount of time between initial research and development and commercialization of a product, if ever, can be substantially longer than the sales cycle for the product. Accordingly, if we incur substantial research and development costs without developing a commercially successful product, our operating results, as well as our growth prospects, could be adversely affected.
Because many of our ICs are designed for use in consumer products such as televisions, personal video recorders, set-top boxes, portable navigation devices 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.
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, the mix of products we sell 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.
20
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; and allocable depreciation of testing equipment and leasehold improvements.
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, as well as an allocated portion of our occupancy costs for such operations. 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.
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. Provision for income taxes includes both domestic and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses (including a portion of our stock compensation), research and development tax credits, interest income from tax-exempt investments and interest and penalties related to unrecognized tax benefits.
The following table sets forth our Condensed Consolidated Statements of Income data as a percentage of revenues for the periods indicated:
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||
|
|
|
July 4,
|
|
July 5,
|
|
July 4,
|
|
July 5,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
100.0% |
|
100.0% |
|
100.0% |
|
100.0% |
|
|
Cost of revenues |
|
37.8 |
|
36.9 |
|
38.6 |
|
37.7 |
|
|
Gross margin |
|
62.2 |
|
63.1 |
|
61.4 |
|
62.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
Research and development |
|
24.8 |
|
22.3 |
|
27.6 |
|
23.7 |
|
|
Selling, general and administrative |
|
25.1 |
|
23.4 |
|
26.4 |
|
24.2 |
|
|
Operating expenses |
|
49.9 |
|
45.7 |
|
54.0 |
|
47.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
12.3 |
|
17.4 |
|
7.4 |
|
14.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
0.5 |
|
2.2 |
|
0.8 |
|
3.5 |
|
|
Interest expense |
|
(0.0) |
|
(0.1) |
|
(0.1) |
|
(0.1) |
|
|
Other income (expense), net |
|
0.3 |
|
(0.3) |
|
0.2 |
|
(0.2) |
|
|
Income before income taxes |
|
13.1 |
|
19.2 |
|
8.3 |
|
17.6 |
|
|
Provision for income taxes |
|
3.8 |
|
5.2 |
|
2.8 |
|
5.0 |
|
|
Net income |
|
9.3% |
|
14.0% |
|
5.5% |
|
12.6% |
|
21
Revenues
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||||||
|
(in millions) |
|
July 4,
|
|
July 5,
|
|
Change |
|
%
|
|
July 4,
|
|
July 5,
|
|
Change |
|
%
|
|
|
Revenues |
|
$104.2 |
|
$104.6 |
|
$(0.4) |
|
(0.4)% |
|
$187.9 |
|
$202.8 |
|
$(14.9) |
|
(7.3)% |
|
The decline in the sales of our products in the recent six month period was driven primarily by decreased revenues from our mature product group. Unit volumes of our products increased compared to the three and six months ended July 5, 2008 by 27.8% and 14.8%, respectively. Average selling prices decreased during the same periods by 22.1% and 19.2%, respectively. Unit volumes and average selling prices were substantially affected by the addition of certain high volume, low average selling price products through the Integration Associates acquisition. Excluding the Integration Associates products, during the same periods, unit volumes increased (decreased) by 3.2% and (4.5)%, respectively, and average selling prices decreased by only 8.7% and 8.4%, respectively. In general, as our products become more mature, we expect to experience decreases in average selling prices. We anticipate that newly announced, higher priced, next generation products and product derivatives will offset these decreases to some degree.
Gross Margin
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||||||
|
(in millions) |
|
July 4,
|
|
July 5,
|
|
Change |
|
%
|
|
July 4,
|
|
July 5,
|
|
Change |
|
%
|
|
|
Gross margin |
|
$64.8 |
|
$66.0 |
|
$(1.2) |
|
(1.9)% |
|
$115.5 |
|
$126.4 |
|
$(10.9) |
|
(8.6)% |
|
|
Percent of revenue |
|
62.2% |
|
63.1% |
|
|
|
|
|
61.4% |
|
62.3% |
|
|
|
|
|
The decrease in the dollar amount of gross margin in the recent six month period was primarily due to our decreased sales. We may continue to experience declines in the average selling prices of certain of our products. This downward pressure on gross margin 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 |
|
Six Months Ended |
|
||||||||||||||||
|
(in millions) |
|
July 4,
|
|
July 5,
|
|
Change |
|
%
|
|
July 4,
|
|
July 5,
|
|
Change |
|
%
|
|
||||
|
Research and development |
|
$25.9 |
|
|
$23.4 |
|
|
$2.5 |
|
10.7% |
|
$51.9 |
|
|
$48.1 |
|
|
$3.8 |
|
8.1% |
|
|
Percent of revenue |
|
24.8 |
% |
|
22.3 |
% |
|
|
|
|
|
27.6 |
% |
|
23.7 |
% |
|
|
|
|
|
The increase in research and development expense in the recent three and six month periods was principally due to increases of $1.8 million and $3.4 million for personnel-related expenses, including personnel costs associated with the acquisition of Integration Associates, respectively. We expect that research and development expense will remain relatively stable in absolute dollars, but may fluctuate somewhat due to the timing of certain items related to new product development initiatives, such as mask and wafer costs. In addition, research and development expense will fluctuate as a percentage of revenues due to changes in sales.
Significant recent development projects include a silicon hybrid TV tuner that supports both analog and digital broadcasts in a single device, a family of ProSLIC single channel telephony ICs for broadband networking equipment, a family of ISOpro high-performance, digital isolators, a family of high pin-count capacitive touch-sense microcontrollers for cost-sensitive embedded systems, the EZRadioPRO embedded wireless radio family, the expansion of our Any-Rate Precision Clock family, a new family of clock generators and buffers, an integrated automotive AM/FM radio receiver IC, a 100% complementary metal oxide semiconductor (CMOS) oscillator and a highly integrated automotive communications controller. We also further expanded our microcontroller portfolio.
22
Selling, General and Administrative
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||||||
|
(in millions) |
|
July 4,
|
|
July 5,
|
|
Change |
|
%
|
|
July 4,
|
|
July 5,
|
|
Change |
|
%
|
|
|
Selling, general and administrative |
|
$26.2 |
|
$24.5 |
|
$1.7 |
|
6.9% |
|
$49.6 |
|
$49.1 |
|
$0.5 |
|
1.1% |
|
|
Percent of revenue |
|
25.1% |
|
23.4% |
|
|
|
|
|
26.4% |
|
24.2% |
|
|
|
|
|
The increase in selling, general and administrative expense in the recent three and six month periods was principally due to increases of $1.6 million and $0.8 million for personnel-related expenses, including personnel costs associated with the acquisition of Integration Associates, respectively. We expect that selling, general and administrative expense will remain relatively stable in absolute dollars in future periods and may fluctuate with changes in revenues.
Interest Income
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
|
|
||||||||
|
(in millions) |
|
July 4,
|
|
July 5,
|
|
Change |
|
July 4,
|
|
July 5,
|
|
Change |
|
|
|
|
|
|
Interest income |
|
$0.7 |
|
$2.4 |
|
$(1.7) |
|
$1.5 |
|
$7.2 |
|
$(5.7) |
|
|
|
|
|
The decrease in interest income for the recent three and six month periods was due to lower interest rates on the underlying instruments and lower average cash and investment balances.
Interest Expense
Interest expense was $0.1 million for the three and six months ended July 4, 2009, as compared to $0.1 million and $0.3 million for the three and six months ended July 5, 2008, respectively.
Other Income (Expense), Net
Other income (expense), net was $0.3 million for the three and six months ended July 4, 2009, as compared $(0.4) million and $(0.5) million for the three and six months ended July 5, 2008, respectively.
Provision for Income Taxes
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
|
|
||||||||||||
|
(in millions) |
|
July 4,
|
|
July 5,
|
|
Change |
|
July 4,
|
|
July 5,
|
|
Change |
|
|
|
|
|
||||
|
Provision for income taxes |
|
$ 3.9 |
|
|
$ 5.5 |
|
|
$(1.6) |
|
$ 5.2 |
|
|
$ 10.2 |
|
|
$(5.0) |
|
|
|
|
|
|
Effective tax rate |
|
28.8 |
% |
|
27.2 |
% |
|
|
|
33.4 |
% |
|
28.7 |
% |
|
|
|
|
|
|
|
The increase in the effective rate for the three months ended July 4, 2009 was primarily attributable to a decrease in the deductibility of stock compensation expense, which was partially offset by increases in the foreign tax rate benefit and the federal research and development credit. The increase in the effective rate for the six months ended July 4, 2009 was primarily attributable to a decrease in the deductibility of stock compensation expense and a reduction in tax exempt interest income, partially offset by an increase in the federal research and development 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 including increases to the liability for unrecognized tax benefits.
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Business Outlook
We expect revenues in the third quarter of fiscal 2009 to be in the range of $114 to $119 million. Furthermore, we expect our diluted earnings per share to be in the range of $0.27 to $0.32.
Liquidity and Capital Resources
Our principal sources of liquidity as of July 4, 2009 consisted of $312.7 million in cash, cash equivalents and short-term investments. Our short-term investments consist primarily of municipal bonds, U.S government agency notes, UBS auction-rate securities and corporate bonds.
Our long-term investments consist of non-UBS auction-rate securities. Early in fiscal 2008, auctions for many of our auction-rate securities failed because sell orders exceeded buy orders. As of July 4, 2009, we held $52.9 million par value auction-rate securities, all of which experienced failed auctions. The securities had previously been valued using quoted prices in active markets. When the auctions began to fail, quoted prices for the securities were no longer observable. As such, we changed our fair value measurement methodology for all auction-rate securities from quoted prices in active markets to a cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, amount of cash flows, expected holding periods of the securities and a discount to reflect our inability to liquidate the securities.
The underlying assets of our auction-rate securities consisted of student loans and municipal bonds, of which $48.5 million were guaranteed by the U.S. government and the remaining $4.4 million were privately insured. As of July 4, 2009, $43.5 million of the auction-rate securities had credit ratings of AAA, $2.4 million had credit ratings of AA and $7.0 million had a credit rating of BBB. These securities had contractual maturity dates ranging from 2025 to 2046 and were yielding 0.32% to 2.95% per year at July 4, 2009. We are receiving the underlying cash flows on all of our auction-rate securities. The principal 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. We are unable to predict if these funds will become available before their maturity dates.
In November 2008, we entered into an agreement with UBS AG, which provides us certain rights to sell to UBS the auction-rate securities which were purchased through them. As of July 4, 2009, we held $25.4 million par value auction-rate securities purchased from UBS. We have the option to sell these securities to UBS at par value from June 30, 2010 through July 2, 2012. UBS, at its discretion, may purchase or sell these securities on our behalf at any time provided we receive par value for the securities sold. The issuers of the auction-rate securities continue to have the right to redeem the securities at their discretion. The agreement allows for the continuation of the accrual and payment of interest due on the securities. The agreement also provides us with access to loans of up to 75% of the market value of the unredeemed securities until June 30, 2010. These loans would carry interest rates which would be consistent with the interest income on the related auction-rate securities. As of July 4, 2009, we had no loans outstanding under this agreement.
We do not expect to need access to the capital represented by any of our auction-rate securities prior to their maturities. We do not intend to sell, and we believe that it is not more likely than not that we will be required to sell, our non-UBS investments before their anticipated recovery in market value or final settlement at the underlying par value. See Note 3, Financial Instruments , to the Condensed Consolidated Financial Statements for additional information.
Net cash provided by operating activities was $26.5 million during the six months ended July 4, 2009, compared to net cash provided of $45.3 million during the six months ended July 5, 2008. Operating cash flows during the six months ended July 4, 2009 reflect our net income of $10.4 million, adjustments of $32.5 million for depreciation, amortization, deferred income taxes, and stock compensation, and a net cash outflow of $16.4 million due to changes in our operating assets and liabilities.
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