Silicon Laboratories Inc.
SILICON LABORATORIES INC (Form: 10-Q, Received: 04/29/2010 17:17:16)

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

 

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

 

 

 

For the quarterly period ended April 3, 2010

 

or

 

 

 

o

 

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

 

For the transition period from                  to                 

 

Commission file number:  000-29823

 

SILICON LABORATORIES INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

74-2793174

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

400 West Cesar Chavez, Austin, Texas

 

78701

(Address of principal executive offices)

 

(Zip Code)

 

(512) 416-8500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x  Yes   o  No

 

Indicate by check mark whether the registrant has submitted electronically 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   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 21, 2010, 46,006,801 shares of common stock of Silicon Laboratories Inc. were outstanding.

 

 

 



Table of Contents

 

 

 

Page
Number

 

 

 

Part I. Financial Information

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets at April 3, 2010 and January 2, 2010

3

 

 

 

 

Condensed Consolidated Statements of Income for the three months ended April 3, 2010 and April 4, 2009

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended April 3, 2010 and April 4, 2009

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

Part II. Other Information

 

 

 

 

Item 1.

Legal Proceedings

29

 

 

 

Item 1A.

Risk Factors

30

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

 

 

 

Item 3.

Defaults Upon Senior Securities

44

 

 

 

Item 5.

Other Information

44

 

 

 

Item 6.

Exhibits

44

 

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



Table of Contents

 

Part I.  Financial Information

Item 1.  Financial Statements

 

Silicon Laboratories Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

 

 

 

April 3,
2010

 

January 2,
2010

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

152,200

 

$

195,737

 

Short-term investments

 

268,332

 

214,486

 

Accounts receivable, net of allowance for doubtful accounts of $575 at April 3, 2010 and $567 at January 2, 2010

 

56,932

 

56,128

 

Inventories

 

27,652

 

31,512

 

Deferred income taxes

 

7,908

 

7,620

 

Prepaid expenses and other current assets

 

21,161

 

18,515

 

Total current assets

 

534,185

 

523,998

 

Long-term investments

 

25,991

 

24,676

 

Property and equipment, net

 

26,654

 

27,785

 

Goodwill

 

105,109

 

105,109

 

Other intangible assets, net

 

40,037

 

41,886

 

Other assets, net

 

20,397

 

19,384

 

Total assets

 

$

752,373

 

$

742,838

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

28,491

 

$

28,759

 

Accrued expenses

 

24,443

 

25,399

 

Deferred income on shipments to distributors

 

28,420

 

28,470

 

Income taxes

 

1,056

 

6,011

 

Total current liabilities

 

82,410

 

88,639

 

Long-term obligations and other liabilities

 

24,327

 

24,403

 

Total liabilities

 

106,737

 

113,042

 

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; 45,790 and 45,772 shares issued and outstanding at April 3, 2010 and January 2, 2010, respectively

 

5

 

5

 

Additional paid-in capital

 

122,052

 

128,262

 

Retained earnings

 

526,964

 

505,885

 

Accumulated other comprehensive loss

 

(3,385

)

(4,356

)

Total stockholders’ equity

 

645,636

 

629,796

 

Total liabilities and stockholders’ equity

 

$

752,373

 

$

742,838

 

 

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

 

3



Table of Contents

 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Income

 (In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

April 3,
2010

 

April 4,
2009

 

Revenues

 

$

126,719

 

$

83,701

 

Cost of revenues

 

43,129

 

33,023

 

Gross margin

 

83,590

 

50,678

 

Operating expenses:

 

 

 

 

 

Research and development

 

29,922

 

26,069

 

Selling, general and administrative

 

28,003

 

23,442

 

Operating expenses

 

57,925

 

49,511

 

Operating income

 

25,665

 

1,167

 

Other income (expense):

 

 

 

 

 

Interest income

 

666

 

882

 

Interest expense

 

(23

)

(52

)

Other income (expense), net

 

(297

)

(52

)

Income before income taxes

 

26,011

 

1,945

 

Provision for income taxes

 

4,932

 

1,274

 

 

 

 

 

 

 

Net income

 

$

21,079

 

$

671

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.46

 

$

0.02

 

Diluted

 

$

0.44

 

$

0.01

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

Basic

 

45,816

 

44,633

 

Diluted

 

47,926

 

45,083

 

 

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

 

4



Table of Contents

 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

April 3,
2010

 

April 4,
2009

 

Operating Activities

 

 

 

 

 

Net income

 

$

21,079

 

$

671

 

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

 

 

 

 

 

Depreciation of property and equipment

 

2,879

 

2,953

 

Loss (gain) on disposal of property and equipment

 

 

8

 

Amortization of other intangible assets and other assets

 

1,849

 

1,976

 

Stock compensation expense

 

10,256

 

10,149

 

Income tax benefit (detriment) from employee stock-based awards

 

1,286

 

(118

)

Excess income tax benefit from employee stock-based awards

 

(800

)

(50

)

Deferred income taxes

 

616

 

3,589

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(804

)

(8,168

)

Inventories

 

3,832

 

4,781

 

Prepaid expenses and other assets

 

(973

)

2,237

 

Accounts payable

 

1,046

 

(2,105

)

Accrued expenses

 

(1,110

)

(3,753

)

Deferred income on shipments to distributors

 

(50

)

(445

)

Income taxes

 

(7,991

)

(2,568

)

Net cash provided by operating activities

 

31,115

 

9,157

 

Investing Activities

 

 

 

 

 

Purchases of available-for-sale investments

 

(121,357

)

(16,458

)

Proceeds from sales and maturities of marketable securities

 

67,697

 

24,695

 

Purchases of property and equipment

 

(1,747

)

(1,531

)

Purchases of other assets

 

(3,436

)

(499

)

Net cash provided by (used in) investing activities

 

(58,843

)

6,207

 

Financing Activities

 

 

 

 

 

Proceeds from issuance of common stock, net of shares withheld for taxes

 

7,483

 

(835

)

Excess income tax benefit from employee stock-based awards

 

800

 

50

 

Repurchases of common stock

 

(24,092

)

(5,023

)

Net cash used in financing activities

 

(15,809

)

(5,808

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(43,537

)

9,556

 

Cash and cash equivalents at beginning of period

 

195,737

 

172,272

 

Cash and cash equivalents at end of period

 

$

152,200

 

$

181,828

 

 

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

 

5



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.  Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The Condensed Consolidated Financial Statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments which, in the opinion of management, are necessary to present fairly the condensed consolidated financial position of Silicon Laboratories Inc. and its subsidiaries (collectively, the “Company”) at April 3, 2010 and January 2, 2010, the condensed consolidated results of its operations for the three months ended April 3, 2010 and April 4, 2009, and the Condensed Consolidated Statements of Cash Flows for the three months ended April 3, 2010 and April 4, 2009.  All intercompany balances and transactions have been eliminated.  The condensed consolidated results of operations for the three months ended April 3, 2010 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 2, 2010, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on February 10, 2010.

 

The Company prepares financial statements on a 52-53 week year that ends on the Saturday closest to December 31.  Fiscal 2010 will have 52 weeks and fiscal 2009 had 52 weeks.  In a 52-week year, each fiscal quarter consists of 13 weeks.

 

Reclassifications

 

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

 

Revenue Recognition

 

Revenues are generated almost exclusively by sales of the Company’s integrated circuits (ICs). The Company recognizes revenue 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, revenue from product sales to direct customers and contract manufacturers is recognized upon shipment.

 

A portion of the Company’s sales are made to distributors under agreements allowing certain rights of return and price protection related to the final selling price to the end customers. Accordingly, the Company defers revenue and cost of revenue on such sales until the distributors sell the product to the end customers. The net balance of deferred revenue less deferred cost of revenue associated with inventory shipped to a distributor but not yet sold to an end customer is recorded in the “deferred income on shipments to distributors” liability on the Consolidated Balance Sheet. Such net deferred income balance reflects the Company’s estimate of the impact of rights of return and price protection.

 

6



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Recent Accounting Pronouncements

 

In January 2010, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements . The ASU requires new disclosures about significant transfers in and out of Levels 1 and 2 fair value measurements and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value measurements. The ASU also clarifies existing disclosure requirements regarding inputs and valuation techniques, as well as the level of disaggregation for each class of assets and liabilities for which separate fair value measurements should be disclosed. The Company adopted ASU 2010-06 at the beginning of fiscal 2010, except for the separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements, which is effective for the Company at the beginning of fiscal 2011. The adoption of this ASU did not have a material impact, and the deferred provisions of this ASU are not expected to 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):

 

 

 

Three Months Ended

 

 

 

April 3,
2010

 

April 4,
2009

 

Net income

 

$

21,079

 

$

671

 

 

 

 

 

 

 

Shares used in computing basic earnings per share

 

45,816

 

44,633

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

Stock options and awards

 

2,110

 

450

 

Shares used in computing diluted earnings per share

 

47,926

 

45,083

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.46

 

$

0.02

 

Diluted

 

$

0.44

 

$

0.01

 

 

Approximately 0.6 million and 5.8 million weighted-average dilutive potential shares of common stock have been excluded from the earnings per share calculation for the three months ended April 3, 2010 and April 4, 2009, respectively, as they were anti-dilutive.

 

7



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

3. Cash, Cash Equivalents and Investments

 

The Company’s cash equivalents and short-term investments consist primarily of money market funds, U.S. government agency bonds and discount notes, corporate bonds, municipal bonds, U.S. Treasury bills, variable-rate demand notes, commercial paper, international government bonds and auction-rate securities purchased through UBS (“UBS auction-rate securities”). 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 April 3, 2010, the Company held $50.6 million par value auction-rate securities, all of which have experienced failed auctions. The underlying assets of the securities consisted of student loans and municipal bonds, of which $46.6 million were guaranteed by the U.S. government and the remaining $4.0 million were privately insured. As of April 3, 2010, $39.6 million of the auction-rate securities had credit ratings of AAA, $2.0 million had a credit rating of AA, $2.0 million had a credit rating of A 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 0.42% to 3.28% per year at April 3, 2010. The Company is receiving the underlying cash flows on all of its auction-rate securities. The principal amounts 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 April 3, 2010, the Company held $23.5 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 April 3, 2010, 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 to record the put option at fair value. 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 April 3, 2010.

 

8



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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 material other-than-temporary impairment losses existed as of April 3, 2010.

 

The Company’s cash, cash equivalents and investments consist of the following (in thousands):

 

 

 

April 3, 2010

 

 

 

Cost

 

Gross
Unrealized
Losses

 

Gross
Unrealized
Gains

 

Fair Value

 

Cash and Cash Equivalents:

 

 

 

 

 

 

 

 

 

Cash on hand

 

$

18,711

 

 

 

 

 

$

18,711

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Money market funds

 

63,498

 

$

 

$

 

63,498

 

U.S. Treasury bills

 

49,998

 

 

 

49,998

 

Commercial paper

 

13,999

 

 

 

13,999

 

Municipal bonds

 

4,000

 

 

 

4,000

 

U.S. government agency

 

2,000

 

(6

)

 

1,994

 

Total available-for-sale securities

 

133,495

 

(6

)

 

133,489

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

152,206

 

$

(6

)

$

 

$

152,200

 

 

 

 

 

 

 

 

 

 

 

Short-term Investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

73,087

 

$

(42

)

$

312

 

$

73,357

 

U.S. government agency

 

68,371

 

(91

)

25

 

68,305

 

Municipal bonds

 

43,641

 

(27

)

43

 

43,657

 

Variable-rate demand notes

 

26,300

 

 

 

26,300

 

U.S. Treasury bills

 

21,496

 

 

2

 

21,498

 

International government bonds

 

9,044

 

 

28

 

9,072

 

Commercial paper

 

2,697

 

 

 

2,697

 

Total available-for-sale securities

 

$

244,636

 

$

(160

)

$

410

 

244,886

 

Trading securities:

 

 

 

 

 

 

 

 

 

Auction rate securities and put option

 

 

 

 

 

 

 

23,446

 

Total short-term investments

 

 

 

 

 

 

 

$

268,332

 

 

 

 

 

 

 

 

 

 

 

Long-term Investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

27,175

 

$

(1,184

)

$

 

$

25,991

 

Total long-term investments

 

$

27,175

 

$

(1,184

)

$

 

$

25,991

 

 

9



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

 

 

January 2, 2010

 

 

 

Cost

 

Gross
Unrealized
Losses

 

Gross
Unrealized
Gains

 

Fair
Value

 

Cash and Cash Equivalents:

 

 

 

 

 

 

 

 

 

Cash on hand

 

$

21,622

 

 

 

 

 

$

21,622

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Money market funds

 

167,139

 

$

 

$

 

167,139

 

U.S. Treasury bills

 

5,000

 

 

 

5,000

 

U.S. government agency

 

2,000

 

(24

)

 

1,976

 

Total available-for-sale securities

 

174,139

 

(24

)

 

174,115

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

195,761

 

$

(24

)

$

 

$

195,737

 

 

 

 

 

 

 

 

 

 

 

Short-term Investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

74,431

 

$

(133

)

$

188

 

$

74,486

 

U.S. government agency

 

41,790

 

(1

)

32

 

41,821

 

Municipal bonds

 

37,401

 

(3

)

132

 

37,530

 

U.S. Treasury bills

 

21,488

 

 

7

 

21,495

 

International government bonds

 

12,467

 

(10

)

6

 

12,463

 

Commercial paper

 

2,699

 

 

 

2,699

 

Total available-for-sale securities

 

$

190,276

 

$

(147

)

$

365

 

190,494

 

Trading securities:

 

 

 

 

 

 

 

 

 

Auction rate securities and put option

 

 

 

 

 

 

 

23,992

 

Total short-term investments

 

 

 

 

 

 

 

$

214,486

 

 

 

 

 

 

 

 

 

 

 

Long-term Investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

27,325

 

$

(2,649

)

$

 

$

24,676

 

Total long-term investments

 

$

27,325

 

$

(2,649

)

$

 

$

24,676

 

 

The available-for-sale investments that were in a continuous unrealized loss position, aggregated by length of time that individual securities have been in a continuous loss position, were as follows (in thousands):

 

 

 

Less Than 12 Months

 

12 Months or Greater

 

Total

 

As of April 3, 2010

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross Unrealized Losses

 

Fair
Value

 

Gross Unrealized Losses

 

U.S. government agency

 

$

31,084

 

$

(97

)

$

 

$

 

$

31,084

 

$

(97

)

Auction rate securities

 

 

 

25,991

 

(1,184

)

25,991

 

(1,184

)

Municipal bonds

 

18,552

 

(27

)

 

 

18,552

 

(27

)

Corporate bonds

 

14,850

 

(42

)

 

 

14,850

 

(42

)

 

 

$

64,486

 

$

(166

)

$

25,991

 

$

(1,184

)

$

90,477

 

$

(1,350

)

 

10



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

 

 

Less Than 12 Months

 

12 Months or Greater

 

Total

 

As of January 2, 2010

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Corporate bonds

 

$

39,513

 

$

(133

)

$

 

$

 

$

39,513

 

$

(133

)

Auction rate securities

 

 

 

24,676

 

(2,649

)

24,676

 

(2,649

)

International government bonds

 

5,213

 

(10

)

 

 

5,213

 

(10

)

U.S. government agency

 

4,978

 

(25

)

 

 

4,978

 

(25

)

Municipal bonds

 

1,643

 

(3

)

 

 

1,643

 

(3

)

 

 

$

51,347

 

$

(171

)

$

24,676

 

$

(2,649

)

$

76,023

 

$

(2,820

)

 

The gross unrealized losses as of April 3, 2010 and January 2, 2010 were due primarily to the illiquidity of the Company’s auction-rate securities and, to a lesser extent, to changes in market interest rates.

 

The following summarizes the contractual underlying maturities of the Company’s available-for-sale investments at April 3, 2010 (in thousands):

 

 

 

Cost

 

Fair
Value

 

Due in one year or less

 

$

236,000

 

$

236,155

 

Due after one year through three years

 

115,831

 

115,920

 

Due after ten years

 

53,475

 

52,291

 

 

 

$

405,306

 

$

404,366

 

 

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.

 

4. 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 increases and decreases in expenses 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. 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. The Company did not discontinue any cash flow hedges in any of the periods presented.

 

11



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The Company measures the effectiveness of its cash flow hedges 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 April 3, 2010, 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):

 

 

 

April 3, 2010

 

 

 

Balance Sheet 
Location

 

Fair 
Value

 

Interest rate swaps

 

Long-term obligations and other liabilities

 

$

4,515

 

 

The before-tax effect of derivative instruments in cash flow hedging relationships was as follows (in thousands):

 

 

 

Loss Recognized in
OCI on Derivatives
(Effective Portion)
during the Three Months

 

Location of Loss Reclassified into Income

 

Loss Reclassified
from Accumulated
OCI into Income
(Effective Portion)
during the Three Months

 

 

 

April 3,
2010

 

April 4,
2009

 

 

 

April 3,
2010

 

April 4,
2009

 

Interest rate swaps

 

$

(864

)

$

(363

)

Rent expense

 

$

(840

)

$

(553

)

 

The Company expects to reclassify $3.1 million of its interest rate swap losses included in accumulated other comprehensive loss as of April 3, 2010 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 April 3, 2010. No collateral has been posted with the counterparties as of April 3, 2010.

 

5. Fair Value of Financial Instruments

 

The fair values of the Company’s financial instruments are recorded using a hierarchal disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities. The three levels are described below:

 

Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

 

Level 2 - Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

Level 3 - Inputs are unobservable for the asset or liability and are developed based on the best information available in the circumstances, which might include the Company’s own data.

 

12



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The following summarizes the valuation of the Company’s financial instruments (in thousands). The tables do not include either cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value.

 

 

 

Fair Value Measurements
at April 3, 2010 Using

 

Description

 

Quoted Prices in
Active Markets for
Identical Assets

(Level 1)

 

Significant Other Observable
Inputs

(Level 2)

 

Significant
Unobservable
Inputs

(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash Equivalents:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

63,498

 

$

 

$

 

$

63,498

 

U.S. Treasury bills

 

49,998

 

 

 

49,998

 

Commercial paper

 

13,999

 

 

 

13,999

 

Municipal bonds

 

4,000

 

 

 

4,000

 

U.S. government agency

 

1,994

 

 

 

1,994

 

Total cash equivalents

 

$

133,489

 

$

 

$

 

$

133,489

 

 

 

 

 

 

 

 

 

 

 

Short-term Investments:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

73,357

 

$

 

$

 

$

73,357

 

U.S. government agency

 

68,305

 

 

 

68,305

 

Municipal bonds

 

43,657

 

 

 

43,657

 

Variable-rate demand notes

 

26,300

 

 

 

26,300

 

U.S. Treasury bills

 

21,498

 

 

 

21,498

 

International government bonds

 

9,072

 

 

 

9,072

 

Commercial paper

 

2,697

 

 

 

2,697

 

Auction rate securities and put option

 

 

 

23,446

 

23,446

 

Total short-term investments

 

$

244,886

 

$

 

$

23,446

 

$

268,332

 

 

 

 

 

 

 

 

 

 

 

Long-term Investments:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

 

$

25,991

 

$

25,991

 

Total long-term investments

 

$

 

$

 

$

25,991

 

$

25,991

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

378,375

 

$

 

$

49,437

 

$

427,812

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

 

$

4,515

 

$

 

$

4,515

 

Total

 

$

 

$

4,515

 

$

 

$

4,515

 

 

13



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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 a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include quoted interest swap rates and market observable data of similar instruments.

 

The following summarizes the activity in Level 3 financial instruments for the three months ended April 3, 2010 (in thousands):

 

 

 

Auction
Rate
Securities

 

Put
Option

 

Total

 

Balance at January 2, 2010

 

$

45,575

 

$

3,093

 

$

48,668

 

Net purchases, sales, issuances and settlements

 

(700

)

 

(700

)

Unrealized gains

 

1,465

 

 

1,465

 

Net recognized gains (losses)

 

874

 

(870

)

4

 

Balance at April 3, 2010

 

$

47,214

 

$

2,223

 

$

49,437

 

 

 

 

 

 

 

 

 

Gain (loss) for period included in earnings attributable to the Level 3 financial instruments still held at April 3, 2010 related to:

 

 

 

 

 

 

 

Trading securities

 

$

874

 

$

 

$

874

 

Fair value of the put option

 

 

(870

)

(870

)

 

 

$

874

 

$

(870

)

$

4

 

 

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.

 

6. Balance Sheet Details

 

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

 

Inventories

 

 

 

April 3,
2010

 

January 2,
2010

 

Work in progress

 

$

21,458

 

$

24,642

 

Finished goods

 

6,194

 

6,870

 

 

 

$

27,652

 

$

31,512

 

 

14



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

7. Stockholders’ Equity

 

Common Stock

 

The Company issued 0.6 million shares of common stock during the three months ended April 3, 2010, net of 0.1 million shares withheld to satisfy employee tax obligations for the vesting of certain stock grants made under the Company’s stock incentive plans.

 

Share Repurchase Program

 

In October 2009, the Company’s Board of Directors authorized a program to repurchase up to $150 million of the Company’s common stock through 2010. 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 3, 2010, the Company repurchased 0.6 million shares of its common stock for $25.3 million under its repurchase program.  During the three months ended April 4, 2009, the Company repurchased 0.2 million shares for $5.3 million under its previous share repurchase program that was completed in November 2009.

 

Comprehensive Income

 

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

 

 

 

Three Months Ended

 

 

 

April 3,
2010

 

April 4,
2009

 

Net income

 

$

21,079

 

$

671

 

Net unrealized gains (losses) on available-for-sale securities, net of tax provision of $(531) and $59, respectively

 

986

 

(110

)

Net unrealized gains (losses) on cash flow hedges, net of tax provision of $8 and $(66), respectively

 

(15

)

123

 

Comprehensive income

 

$

22,050

 

$

684

 

 

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

 

 

 

Unrealized
Losses on Cash
Flow Hedges

 

Net Unrealized
Losses on
Available-For-Sale
Securities

 

Total

 

Balance at January 2, 2010

 

$

(2,919

)

$

(1,437

)

$

(4,356

)

Change associated with current period transactions, net of tax

 

(562

)

986

 

424

 

Amount reclassified into earnings, net of tax

 

547

 

 

547

 

Balance at April 3, 2010

 

$

(2,934

)

$

(451

)

$

(3,385

)

 

15



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

8. Stock-Based Compensation

 

In fiscal 2009, the stockholders of the Company approved the 2009 Stock Incentive Plan (the “2009 Plan”) and the 2009 Employee Stock Purchase Plan (the “2009 Purchase Plan”). The 2009 Plan is currently effective, and no further grants will be issued under the Company’s 2000 Stock Incentive Plan (the “2000 Plan”) as of the effective date of the 2009 Plan. The 2009 Purchase Plan will become effective upon the termination of the existing Employee Stock Purchase Plan (the “Purchase Plan”), on April 30, 2010.

 

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. There were no stock options granted during the three months ended April 3, 2010 or April 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

 

 

 

April 3,
2010

 

April 4,
2009

 

Cost of revenues

 

$

356

 

$

395

 

Research and development

 

4,164

 

3,878

 

Selling, general and administrative

 

5,736

 

5,876

 

 

 

10,256

 

10,149

 

Provision for income taxes

 

1,487

 

1,508

 

 

 

$

8,769

 

$

8,641

 

 

The Company had approximately $65.6 million of total unrecognized compensation costs related to stock options and RSUs at April 3, 2010 that are expected to be recognized over a weighted-average period of 1.8 years. There were no significant stock compensation costs capitalized into assets in any of the periods presented.

 

16



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

9.  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 of the coordinated cases, which are intended to serve as test, or “focus” cases. The plaintiffs selected these six cases, which do not include the Company. On April 6, 2007, the Second Circuit denied a petition for rehearing filed by the plaintiffs, but noted that the plaintiffs could ask the District Court to certify more narrow classes than those that were rejected.

 

The parties in the approximately 300 coordinated cases, including the parties in the case against the Company, reached a settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including the Company. On October 5, 2009, the Court granted final approval of the settlement. Six notices of appeal have been filed. Judgment was entered on January 13, 2010.  The time to file additional notices of appeal has expired. A group of three objectors, who filed a notice of appeal, also filed a petition to the Second Circuit seeking permission to appeal the District Court’s final approval of the settlement on the basis that the settlement class is broader than the class previously rejected by the Second Circuit in its December 5, 2006 order vacating the District Court’s order certifying classes in the focus cases. Plaintiffs filed an opposition to the petition.

 

As the litigation process is inherently uncertain, the Company is unable to predict the outcome of the above described matter if the settlement does not survive the appeal. 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.

 

17



Table of Contents

 

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 fiscal 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 April 3, 2010, the Company had no material liabilities recorded with respect to this indemnification obligation.

 

10. 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 stock compensation), research and development tax credits and other permanent differences.  Income tax expense was $4.9 million and $1.3 million for the three months ended April 3, 2010 and April 4, 2009, respectively, resulting in effective tax rates of 19.0% and 65.5%, respectively. The effective tax rate for the three months ended April 3, 2010 decreased from the prior period, primarily due to a reduced accrual of unrecognized tax benefits and related interest, partially offset by the non-renewal of the federal research and development tax credit.

 

At April 3, 2010, the Company had gross unrecognized tax benefits of $12.1 million, $11.9 million of which would affect the effective tax rate if recognized. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes.

 

The tax years 2004 through 2010 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company’s 2005 through 2008 federal income tax returns are under examination by the U.S. Internal Revenue Service. 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.

 

11.  Subsequent Events

 

On April 23, 2010, the Company acquired Silicon Clocks, Inc., a privately held company, for approximately $22.0 million in cash.  Silicon Clocks designs and develops microelectromechanical system (MEMS) technology to enable the manufacture of a wide range of silicon resonators and sensors directly on standard CMOS wafers.

 

The Company will record the purchase of Silicon Clocks using the acquisition method of accounting and will recognize the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The results of Silicon Clocks’ operations will be included in the Company’s consolidated results of operations beginning with the date of the acquisition. The Company is currently in the process of evaluating the fair values of the assets acquired and liabilities assumed.

 

18



Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operation s

 

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 2010 will have 52 weeks and fiscal 2009 had 52 weeks. Our first quarter of fiscal 2010 ended April 3, 2010. Our first quarter of fiscal 2009 ended April 4, 2009.

 

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, Apple, Huawei, LG Electronics, Nokia, Pace (formerly 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:

 

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

 

·                   Access products, which include our ISOmodem® embedded modems, Voice over IP (VoIP) products, such as our ProSLIC® subscriber line interface circuits and voice direct access arrangement (DAA), and our Power over Ethernet devices;

 

·                   Broad-based products, which include 8-bit microcontroller products, timing products (including clocks, precision clock & data recovery ICs and oscillators), short-range wireless transceivers, isolators, current sensors and our QuickSense™ portfolio of touch, proximity and ambient light sensing 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 fiscal 2010, we introduced a family of ultra-low-power wireless microcontrollers ideal for battery-powered systems and a highly integrated AM/FM receiver for analog tuned radios that reduces radio design and manufacturing costs. 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



Table of Contents

 

During the three months ended April 3, 2010, we had one customer, Samsung, whose purchases across a variety of product areas represented more than 10% of our revenues.  No other single end customer accounted for more than 10% of our revenues during the three months ended April 3, 2010. 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 29% and 13% of our revenues during the three months ended April 3, 2010, respectively. There were no other distributors or contract manufacturers that accounted for more than 10% of our revenues during the three months ended April 3, 2010.

 

The percentage of our revenues derived from customers located outside of the United States was 87% during the three months ended April 3, 2010.  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



Table of Contents

 

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, 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, 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, patent litigation legal fees 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 and losses 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 and other permanent differences.

 

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 3,
2010

 

April 4,
2009

 

 

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

Cost of revenues

 

34.0

 

39.5

 

Gross margin

 

66.0

 

60.5

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Research and development

 

23.6

 

31.1

 

Selling, general and administrative

 

22.1

 

28.0

 

Operating expenses

 

45.7

 

59.1

 

 

 

 

 

 

 

Operating income

 

20.3

 

1.4

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

0.5

 

1.1

 

Interest expense

 

0.0

 

(0.1

)

Other income (expense), net

 

(0.3

)

(0.1

)

Income before income taxes

 

20.5

 

2.3

 

Provision for income taxes

 

3.9

 

1.5

 

Net income

 

16.6

%

0.8

%

 

21



Table of Contents

 

Revenues

 

 

 

Three Months Ended

 

 

 

 

 

(in millions)

 

April 3,
2010

 

April 4,
2009

 

Change

 

%
Change

 

Revenues

 

$

126.7

 

$

83.7

 

$

43.0

 

51.4

%

 

The growth in revenue in the recent three month period was due primarily to improvements in the health of our products’ end markets and increases in market share. Increased unit volumes outpaced declines in average selling prices. Unit volumes of our products increased compared to the three months ended April 4, 2009 by 62.2%. Average selling prices decreased during the same period by 6.1%. 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

 

 

 

 

 

(in millions)

 

April 3,
2010

 

April 4,
2009

 

Change

 

%
Change

 

Gross margin

 

$

83.6

 

$

50.7

 

$

32.9

 

64.9

%

Percent of revenue

 

66.0

%

60.5

%

 

 

 

 

 

The increase in the dollar amount of gross margin in the recent three month period was primarily due to our increased sales. The increase in gross margin as a percent of revenue in the recent three month period was primarily due to changes in product mix, improvements in our inventory management and manufacturing cost reductions. 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; 2) achieve lower production costs from our wafer suppliers and third-party assembly and test subcontractors; 3) achieve lower production costs per unit as a result of improved yields throughout the manufacturing process; or 4) reduce logistics costs.

 

Research and Development

 

 

 

Three Months Ended

 

 

 

 

 

(in millions)

 

April 3,
2010

 

April 4,
2009

 

Change

 

%
Change

 

Research and development

 

$

29.9

 

$

26.1

 

$

3.8

 

14.8

%

Percent of revenue

 

23.6

%

31.1

%

 

 

 

 

 

The increase in research and development expense in the recent three month period was principally due to an increase of $2.6 million for personnel-related expenses and $0.6 million for product introduction costs. The decrease in research and development expense as a percent of revenues is due to our increased sales. We expect that research and development expense will increase in absolute dollars, commensurate with our revenue growth, but remain relatively stable as a percentage of revenues.

 

22



Table of Contents

 

Significant recent development projects include a family of ultra-low-power wireless microcontrollers ideal for battery-powered systems, a highly integrated AM/FM receiver for analog tuned radios that reduces radio design and manufacturing costs, a family of ultra-efficient microcontrollers for power-sensitive and battery-powered embedded systems, a family of highly integrated, energy-efficient quad PoE PSE controllers, a new line of automotive-qualified microcontrollers that enable a dramatic reduction in system cost and footprint in body electronics applications, our QuickSense portfolio of highly accurate and fast-response touch, proximity and ambient light sensing devices, the expansion of our Any-Rate Precision Clock family with both a low jitter clock generator for broadcast video applications and web-customizable 8-output CMOS clock generators, 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 and a family of ISOpro™ high-performance, digital isolators.

 

Selling, General and Administrative

 

 

 

Three Months Ended

 

 

 

 

 

(in millions)

 

April 3,
2010

 

April 4,
2009

 

Change

 

%
Change

 

Selling, general and administrative

 

$

28.0

 

$

23.4

 

$

4.6

 

19.5

%

Percent of revenue

 

22.1

%

28.0

%

 

 

 

 

 

The increase in selling, general and administrative expense in the recent three month period was principally due to an increase of $3.2 million for personnel-related expenses. The decrease in selling, general and administrative expense as a percent of revenues is due to our increased sales. We expect that selling, general and administrative expense will increase in absolute dollars and decline slightly as a percentage of revenues.

 

Interest Income

 

 

 

Three Months Ended

 

 

 

 

 

(in millions)

 

April 3,
2010

 

April 4,
2009

 

Change

 

 

 

Interest income

 

$

0.7

 

$

0.9

 

$

(0.2

 

 

 

 

The decrease in interest income for the recent three month period was largely due to lower interest rates on the underlying instruments, and partially offset by a higher average investment balance.

 

Interest Expense

 

Interest expense for the three months ended April 3, 2010 was $23 thousand compared to $52 thousand for the three months ended April 4, 2009.

 

Other Income (Expense), Net

 

Other income (expense), net for the three months ended April 3, 2010 was $(0.3) million compared to $(0.1) million for the three months ended April 4, 2009.

 

23



Table of Contents

 

Provision for Income Taxes

 

 

 

Three Months Ended

 

 

 

(in millions)

 

April 3,
2010

 

April 4,
2009

 

Change

 

Provision for income taxes

 

$

4.9

 

$

1.3

 

$

3.6

 

Effective tax rate

 

19.0

%

65.5

%

 

 

 

The effective tax rate for the three months ended April 3, 2010 decreased from the prior period, primarily due to a reduced accrual of unrecognized tax benefits and related interest, partially offset by 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, the limited deductibility of stock compensation expense, research and development tax credits and other permanent items including changes to the liability for unrecognized tax benefits.

 

Business Outlook

 

We expect revenues in the second quarter of fiscal 2010 to be in the range of $131 to $135 million. Furthermore, we expect our diluted earnings per share to be in the range of $0.43 to $0.46.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity as of April 3, 2010 consisted of $420.5 million in cash, cash equivalents and short-term investments. Our short-term investments consist primarily of U.S. government agency bonds and discount notes, corporate bonds, municipal bonds, U.S. Treasury bills, commercial paper, international government bonds, variable-rate demand notes and auction-rate securities purchased through UBS (“UBS auction-rate securities”).

 

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 April 3, 2010, we held $50.6 million par value auction-rate securities, all of which have 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 $46.6 million were guaranteed by the U.S. government and the remaining $4.0 million were privately insured. As of April 3, 2010, $39.6 million of the auction-rate securities had credit ratings of AAA, $2.0 million had credit ratings of AA, $2.0 million had credit ratings of A and $7.0 million had a credit rating of BBB. These securities had contractual maturity dates ranging from 2025 to 2046 and were yielding 0.42% to 3.28% per year at April 3, 2010. We are receiving the underlying cash flows on all of our auction-rate securities. The principal amounts 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.

 

24



Table of Contents

 

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 April 3, 2010, we held $23.5 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 April 3, 2010, 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, Cash, Cash Equivalents and Investments , to the Condensed Consolidated Financial Statements for additional information.

 

Net cash provided by operating activities was $31.1 million during the three months ended April 3, 2010, compared to net cash provided of $9.2 million during the three months ended April 4, 2009. Operating cash flows during the three months ended April 3, 2010 reflect our net income of $21.1 million, adjustments of $16.1 million for depreciation, amortization, stock compensation and deferred income taxes, and a net cash outflow of $6.1 million due to changes in our operating assets and liabilities.

 

Accounts receivable increased to $56.9 million at April 3, 2010 from $56.1 million at January 2, 2010. Our average days sales outstanding (DSO) was 40 days at April 3, 2010 and January 2, 2010.

 

Inventory decreased to $27.7 million at April 3, 2010 from $31.5 million at January 2, 2010. 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 58 days at April 3, 2010 and 65 days at January 2, 2010.

 

Net cash used in investing activities was $58.8 million during the three months ended April 3, 2010, compared to net cash provided of $6.2 million during the three months ended April 4, 2009. The decrease was principally due to an increase of $61.9 million in net outflows for purchases of investments.

 

We anticipate capital expenditures of approximately $12 to $16 million for fiscal 2010. 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. On April 23, 2010, we acquired Silicon Clocks, Inc., a privately held company, for approximately $22.0 million in cash.

 

Net cash used in financing activities was $15.8 million during the three months ended April 3, 2010, compared to net cash used of $5.8 million during the three months ended April 4, 2009.  The increase was principally due to an increase of $19.1 million for repurchases of our common stock, offset by an increase of $8.3 million from proceeds from the issuance of common stock, net of shares withheld for taxes.  In October 2009, our Board of Directors authorized a program to repurchase up to $150 million of our common stock prior to the end of 2010.

 

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.

 

25



Table of Contents

 

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 12 months. 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 write-off 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 Consolidated Statement of Income. 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. S ee Note 8, Stock-Based Compensation , to the Condensed Consolidated Financial Statements for additional information.

 

Investments in auction-rate securities — We determine the fair value of our investments in 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, expected holding periods of the securities and a discount to reflect our inability to liquidate the securities. For available-for-sale auction-rate 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, changes in underlying credit ratings, forecasted recovery, our intent to sell or the likelihood that we would be required to sell the investment before its anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made. When we conclude that an other-than-temporary impairment has occurred, we assess whether we intend to sell the security or if it is more likely than not that we will be required to sell the security before recovery. If either of these two conditions is met, we recognize a charge in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If we do not intend to sell a security or it is not more likely than not that we will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recorded in accumulated other comprehensive loss.

 

26



Table of Contents

 

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.

 

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.

 

We recognize liabilities for uncertain tax positions based on a two-step process. 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 complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, 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. 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.

 

27



Table of Contents

 

Recent Accounting Pronouncements

 

In January 2010, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements . The ASU requires new disclosures about significant transfers in and out of Levels 1 and 2 fair value measurements and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value measurements. The ASU also clarifies existing disclosure requirements regarding inputs and valuation techniques, as well as the level of disaggregation for each class of assets and liabilities for which separate fair value measurements should be disclosed. We adopted ASU 2010-06 at the beginning of fiscal 2010, except for the separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements, which is effective for us at the beginning of fiscal 2011. The adoption of this ASU did not have a material impact, and the deferred provisions of this ASU are not expected to have a material impact, on our financial statements.

 

Quantitative and Qualitative Disclosures about Market Risk

 

Interest Income

 

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. Our investment portfolio holdings as of April 3, 2010 yielded less than 100 basis points.  A decline in yield to zero basis points on our investment portfolio holdings as of April 3, 2010 would decrease our annual interest income by approximately $2.6 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.

 

Headquarters Lease Rent

 

We are exposed to interest rate fluctuations in the normal course of our business, including through our corporate headquarters leases. The base rents for these leases are calculated using a variable interest rate based on the three-month LIBOR. We have 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 fair value of the interest rate swap agreements at April 3, 2010 was a $4.5 million obligation.

 

Investments in 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 3, 2010, we held $50.6 million par value auction-rate securities, all of which have experienced failed auctions. The principal amounts 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. We are unable to predict if these funds will become available before their maturity dates. Additionally, if we determine that an other-than-temporary decline in the fair value of any of our available-for-sale auction-rate securities has occurred, we may be required to adjust the carrying value of the investments through an impairment charge. In November 2008, we entered into an agreement with UBS, which provides us certain rights to sell to UBS the auction-rate securities which were purchased through them. As of April 3, 2010, we held $23.5 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.

 

28



Table of Contents

 

Available Information

 

Our website address is 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 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 3, 2010 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. Such disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosures. There was no change in our internal controls during the fiscal quarter ended April 3, 2010 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

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 of the coordinated cases, which are intended to serve as test, or “focus” cases. The plaintiffs selected these six cases, which do not include us. On April 6, 2007, the Second Circuit denied a petition for rehearing filed by the plaintiffs, but noted that the plaintiffs could ask the District Court to certify more narrow classes than those that were rejected.

 

29



Table of Contents

 

The parties in the approximately 300 coordinated cases, including the parties in the case against us, reached a settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including us. On October 5, 2009, the Court granted final approval of the settlement. Six notices of appeal have been filed. Judgment was entered on January 13, 2010.  The time to file additional notices of appeal has expired. A group of three objectors, who filed a notice of appeal, also filed a petition to the Second Circuit seeking permission to appeal the District Court’s final approval of the settlement on the basis that the settlement class is broader than the class previously rejected by the Second Circuit in its December 5, 2006 order vacating the District Court’s order certifying classes in the focus cases. Plaintiffs filed an opposition to the petition.

 

As the litigation process is inherently uncertain, we are unable to predict the outcome of the above described matter if the settlement does not survive the appeal. While we do maintain liability insurance, we could incur losses that are not covered by our liability insurance or that exceed the limits of our liability insurance. Such losses could have a material impact on our business and our results of operations or financial position.

 

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 our consolidated financial position or results of operations.

 

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;

 

30



Table of Contents

 

·                   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, including software provided by third-parties, 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.

 

The markets for mobile handsets, consumer electronics, 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:

 

·                   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;

 

31



Table of Contents

 

·                   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;

 

·                   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.

 

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 3, 2010 was $29.9 million, or 23.6% 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 3, 2010, our ten largest customers accounted for 39% 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

 

32



Table of Contents

 

·                   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.

 

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.

 

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.

 

33



Table of Contents

 

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.

 

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.

 

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.

 

34



Table of Contents

 

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;

 

·                   Increased operating costs due to acquired overhead;

 

·                   Tax issues associated with acquisitions;

 

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

 

·