Silicon Laboratories Inc.
SILICON LABORATORIES INC (Form: 10-Q, Received: 07/29/2010 15:41:16)

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 July 3, 2010

 

or

 

¨          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   ¨  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).  x  Yes   ¨  No

 

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

 

Large accelerated filer x

 

Accelerated filer ¨

 

 

 

Non-accelerated filer ¨

 

Smaller reporting company ¨

 

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 July 21, 2010, 44,630,334 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 July 3, 2010 and January 2, 2010

3

 

 

 

 

 

 

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

4

 

 

 

 

 

 

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

5

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

 

 

Item 2.

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

21

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

 

Part II.  Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

 

 

Item 1A.

Risk Factors

33

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

47

 

 

 

 

 

Item 5.

Other Information

47

 

 

 

 

 

Item 6.

Exhibits

47

 

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)

 

 

 

July 3,
2010

 

January 2,
2010

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

80,969

 

$

195,737

 

Short-term investments

 

272,408

 

214,486

 

Accounts receivable, net of allowance for doubtful accounts of $771 at July 3, 2010 and $567 at January 2, 2010

 

76,318

 

56,128

 

Inventories

 

29,100

 

31,512

 

Deferred income taxes

 

9,068

 

7,620

 

Prepaid expenses and other current assets

 

20,448

 

18,515

 

Total current assets

 

488,311

 

523,998

 

Long-term investments

 

26,170

 

24,676

 

Property and equipment, net

 

25,365

 

27,785

 

Goodwill

 

109,222

 

105,109

 

Other intangible assets, net

 

47,965

 

41,886

 

Other assets, net

 

23,465

 

19,384

 

Total assets

 

$

720,498

 

$

742,838

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

29,475

 

$

28,759

 

Accrued expenses

 

23,531

 

25,399

 

Deferred income on shipments to distributors

 

28,953

 

28,470

 

Income taxes

 

1,230

 

6,011

 

Total current liabilities

 

83,189

 

88,639

 

Long-term obligations and other liabilities

 

23,832

 

24,403

 

Total liabilities

 

107,021

 

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; 44,621 and 45,772 shares issued and outstanding at July 3, 2010 and January 2, 2010, respectively

 

4

 

5

 

Additional paid-in capital

 

68,660

 

128,262

 

Retained earnings

 

548,011

 

505,885

 

Accumulated other comprehensive loss

 

(3,198

)

(4,356

)

Total stockholders’ equity

 

613,477

 

629,796

 

Total liabilities and stockholders’ equity

 

$

720,498

 

$

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

 

Six Months Ended

 

 

 

July 3,
2010

 

July 4,
2009

 

July 3,
2010

 

July 4,
2009

 

Revenues

 

$

134,577

 

$

104,216

 

$

261,296

 

$

187,917

 

Cost of revenues

 

43,684

 

39,435

 

86,813

 

72,458

 

Gross margin

 

90,893

 

64,781

 

174,483

 

115,459

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

30,509

 

25,868

 

60,431

 

51,937

 

Selling, general and administrative

 

29,737

 

26,187

 

57,740

 

49,629

 

Operating expenses

 

60,246

 

52,055

 

118,171

 

101,566

 

Operating income

 

30,647

 

12,726

 

56,312

 

13,893

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

633

 

655

 

1,299

 

1,537

 

Interest expense

 

(22

)

(51

)

(45

)

(103

)

Other income (expense), net

 

(586

)

342

 

(883

)

290

 

Income before income taxes

 

30,672

 

13,672

 

56,683

 

15,617

 

Provision for income taxes

 

9,625

 

3,942

 

14,557

 

5,216

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

21,047

 

$

9,730

 

$

42,126

 

$

10,401

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.46

 

$

0.22

 

$

0.92

 

$

0.23

 

Diluted

 

$

0.44

 

$

0.21

 

$

0.88

 

$

0.23

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

45,387

 

44,640

 

45,602

 

44,336

 

Diluted

 

47,371

 

45,975

 

47,649

 

45,229

 

 

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)

 

 

 

Six Months Ended

 

 

 

July 3,
2010

 

July 4,
2009

 

Operating Activities

 

 

 

 

 

Net income

 

$

42,126

 

$

10,401

 

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

 

 

 

 

 

Depreciation of property and equipment

 

5,821

 

5,963

 

Loss on disposal of property and equipment

 

 

32

 

Amortization of other intangible assets and other assets

 

3,651

 

3,950

 

Stock compensation expense

 

20,931

 

21,000

 

Income tax benefit from employee stock-based awards

 

2,523

 

293

 

Excess income tax benefit from employee stock-based awards

 

(1,784

)

(273

)

Deferred income taxes

 

(319

)

1,593

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(19,946

)

(26,420

)

Inventories

 

2,537

 

1,658

 

Prepaid expenses and other assets

 

3,208

 

2,829

 

Accounts payable

 

3,015

 

3,896

 

Accrued expenses

 

(4,445

)

(4,388

)

Deferred income on shipments to distributors

 

483

 

5,240

 

Income taxes

 

(5,268

)

757

 

Net cash provided by operating activities

 

52,533

 

26,531

 

Investing Activities

 

 

 

 

 

Purchases of available-for-sale investments

 

(216,385

)

(45,537

)

Proceeds from sales and maturities of marketable securities

 

158,944

 

62,034

 

Purchases of property and equipment

 

(3,311

)

(3,974

)

Purchases of other assets

 

(6,917

)

(2,304

)

Acquisitions of businesses, net of cash acquired

 

(18,351

)

(2,800

)

Net cash provided by (used in) investing activities

 

(86,020

)

7,419

 

Financing Activities

 

 

 

 

 

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

 

17,244

 

5,164

 

Excess income tax benefit from employee stock-based awards

 

1,784

 

273

 

Repurchases of common stock

 

(100,309

)

(12,140

)

Net cash used in financing activities

 

(81,281

)

(6,703

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(114,768

)

27,247

 

Cash and cash equivalents at beginning of period

 

195,737

 

172,272

 

Cash and cash equivalents at end of period

 

$

80,969

 

$

199,519

 

 

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 July 3, 2010 and January 2, 2010, the condensed consolidated results of its operations for the three and six months ended July 3, 2010 and July 4, 2009, and the Condensed Consolidated Statements of Cash Flows for the six months ended July 3, 2010 and July 4, 2009.  All intercompany balances and transactions have been eliminated.  The condensed consolidated results of operations for the three and six months ended July 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

 

Six Months Ended

 

 

 

July 3,
2010

 

July 4,
2009

 

July 3,
2010

 

July 4,
2009

 

Net income

 

$

21,047

 

$

9,730

 

$

42,126

 

$

10,401

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing basic earnings per share

 

45,387

 

44,640

 

45,602

 

44,336

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options and awards

 

1,984

 

1,335

 

2,047

 

893

 

Shares used in computing diluted earnings per share

 

47,371

 

45,975

 

47,649

 

45,229

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.46

 

$

0.22

 

$

0.92

 

$

0.23

 

Diluted

 

$

0.44

 

$

0.21

 

$

0.88

 

$

0.23

 

 

Approximately 0.6 million, 2.6 million, 0.6 million and 4.2 million weighted-average dilutive potential shares of common stock have been excluded from the earnings per share calculation for the three months ended July 3, 2010 and July 4, 2009, and for the six months ended July 3, 2010 and July 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 as of July 3, 2010 consisted primarily of money market funds, U.S. government agency bonds and discount notes, corporate bonds, municipal bonds, U.S. Treasury bills and bonds, variable-rate demand notes, commercial paper and international government bonds. The Company’s long-term investments consist of auction-rate securities. Early in fiscal 2008, auctions for many of the Company’s auction-rate securities failed because sell orders exceeded buy orders. As of July 3, 2010, the Company held $27.0 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 $25.0 million were guaranteed by the U.S. government and the remaining $2.0 million were privately insured. As of July 3, 2010, $18.0 million of the auction-rate securities had credit ratings of AAA, $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 2029 to 2046 and with current yields of 0.4% to 3.3% per year at July 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.

 

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 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 July 3, 2010.

 

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Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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

 

 

 

July 3, 2010

 

 

 

Cost

 

Gross
Unrealized
Losses

 

Gross
Unrealized
Gains

 

Fair Value

 

Cash and Cash Equivalents:

 

 

 

 

 

 

 

 

 

Cash on hand

 

$

23,240

 

 

 

 

 

$

23,240

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Money market funds

 

41,230

 

$

 

$

 

41,230

 

Municipal bonds

 

9,000

 

 

 

9,000

 

U.S. Treasury bills

 

7,499

 

 

 

7,499

 

Total available-for-sale securities

 

57,729

 

 

 

57,729

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

80,969

 

$

 

$

 

$

80,969

 

 

 

 

 

 

 

 

 

 

 

Short-term Investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

69,665

 

$

(49

)

$

283

 

$

69,899

 

U.S. Treasury bills and bonds

 

63,726

 

 

8

 

63,734

 

U.S. government agency

 

57,250

 

(6

)

74

 

57,318

 

Variable-rate demand notes

 

44,500

 

 

 

44,500

 

Municipal bonds

 

26,658

 

(3

)

43

 

26,698

 

International government bonds

 

9,004

 

 

16

 

9,020

 

Commercial paper

 

1,239

 

 

 

1,239

 

Total short-term investments

 

$

272,042

 

$

(58

)

$

424

 

$

272,408

 

 

 

 

 

 

 

 

 

 

 

Long-term Investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

27,000

 

$

(830

)

$

 

$

26,170

 

Total long-term investments

 

$

27,000

 

$

(830

)

$

 

$

26,170

 

 

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 July 3, 2010

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Corporate bonds

 

$

14,755

 

$

(49

)

$

 

$

 

$

14,755

 

$

(49

)

U.S. government agency

 

10,012

 

(6

)

 

 

10,012

 

(6

)

Municipal bonds

 

6,936

 

(3

)

 

 

6,936

 

(3

)

Auction rate securities

 

 

 

26,170

 

(830

)

26,170

 

(830

)

 

 

$

31,703

 

$

(58

)

$

26,170

 

$

(830

)

$

57,873

 

$

(888

)

 

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 July 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 July 3, 2010 (in thousands):

 

 

 

Cost

 

Fair
Value

 

Due in one year or less

 

$

203,260

 

$

203,414

 

Due after one year through three years

 

82,011

 

82,223

 

Due after ten years

 

71,500

 

70,670

 

 

 

$

356,771

 

$

356,307

 

 

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.

 

11



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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.

 

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 July 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):

 

 

 

July 3, 2010

 

 

 

Balance Sheet
Location

 

Fair
Value

 

 

 

 

 

 

 

Interest rate swaps:

 

Accrued expenses

 

$

968

 

 

 

Long-term obligations and other liabilities

 

3,732

 

 

 

Total

 

$

4,700

 

 

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:

 

 

 

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

 

 

 

Three Months Ended

 

Location of Loss

 

Three Months Ended

 

 

 

July 3,
2010

 

July 4,
2009

 

Reclassified into
Income

 

July 3,
2010

 

July 4,
2009

 

Interest rate swaps

 

$

(1,035

)

$

(113

)

Rent expense

 

$

(850

)

$

(622

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

Six Months Ended

 

 

 

July 3,
2010

 

July 4,
2009

 

 

 

July 3,
2010

 

July 4,
2009

 

Interest rate swaps

 

$

(1,898

)

$

(476

)

Rent expense

 

$

(1,690

)

$

(1,175

)

 

The Company expects to reclassify $2.7 million of its interest rate swap losses included in accumulated other comprehensive loss as of July 3, 2010 into earnings in the next 12 months, which is offset by lower rent payments.

 

12



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The Company’s interest rate swap agreements contain provisions that require it to maintain unencumbered cash and highly-rated short-term investments of at least $150 million. If the Company’s unencumbered cash and highly-rated short-term investments are less than $150 million, it would be required to post collateral with the counterparty in the amount of the fair value of the interest rate swap agreements in net liability positions. Both of the Company’s interest rate swaps were in a net liability position at July 3, 2010. No collateral has been posted with the counterparties as of July 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.

 

13



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 table does not include either cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value.

 

 

 

Fair Value Measurements
at July 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

 

$

41,230

 

$

 

$

 

$

41,230

 

Municipal bonds

 

9,000

 

 

 

9,000

 

U.S. Treasury bills

 

7,499

 

 

 

7,499

 

Total cash equivalents

 

$

57,729

 

$

 

$

 

$

57,729

 

 

 

 

 

 

 

 

 

 

 

Short-term Investments:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

69,899

 

$

 

$

 

$

69,899

 

U.S. Treasury bills and bonds

 

63,734

 

 

 

63,734

 

U.S. government agency

 

57,318

 

 

 

57,318

 

Variable-rate demand notes

 

44,500

 

 

 

44,500

 

Municipal bonds

 

26,698

 

 

 

26,698

 

International government bonds

 

9,020

 

 

 

9,020

 

Commercial paper

 

1,239

 

 

 

1,239

 

Total short-term investments

 

$

272,408

 

$

 

$

 

$

272,408

 

 

 

 

 

 

 

 

 

 

 

Long-term Investments:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

 

$

26,170

 

$

26,170

 

Total long-term investments

 

$

 

$

 

$

26,170

 

$

26,170

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

330,137

 

$

 

$

26,170

 

$

356,307

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

 

$

4,700

 

$

 

$

4,700

 

Total

 

$

 

$

4,700

 

$

 

$

4,700

 

 

14



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The Company’s cash equivalents and short-term investments are valued using quoted prices and other relevant information generated by market transactions involving identical assets. The Company’s auction-rate securities 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 and six months ended July 3, 2010 (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

Auction
Rate
Securities

 

Put
Option

 

Total

 

Auction
Rate
Securities

 

Put
Option

 

Total

 

Beginning balance

 

$

47,214

 

$

2,223

 

$

49,437

 

$

45,575

 

$

3,093

 

$

48,668

 

Net purchases, sales, issuances and settlements (1)

 

(23,625

)

(2,226

)

(25,851

)

(24,325

)

(2,226

)

(26,551

)

Unrealized gains

 

354

 

 

354

 

1,819

 

 

1,819

 

Net recognized gains (losses)

 

2,227

 

3

 

2,230

 

3,101

 

(867

)

2,234

 

Balance at July 3, 2010

 

$

26,170

 

$

 

$

26,170

 

$

26,170

 

$

 

$

26,170

 

 


(1)

 

The Company previously held $23.5 million par value auction-rate securities purchased through UBS AG. During the three months ended July 3, 2010, the Company sold these securities to UBS at par value under an agreement which provided the Company with certain rights to sell to UBS the auction-rate securities that were purchased through them.

 

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

 

 

 

July 3,
2010

 

January 2,
2010

 

Work in process

 

$

24,881

 

$

24,642

 

Finished goods

 

4,219

 

6,870

 

 

 

$

29,100

 

$

31,512

 

 

15



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

7.  Acquisition

 

On April 23, 2010, the Company acquired Silicon Clocks, Inc., a privately held company that designs and develops microelectromechanical system (MEMS) technology to enable the manufacture of silicon resonators and sensors directly on standard CMOS wafers. The Company acquired Silicon Clocks for approximately $21.0 million in cash. Of such consideration, $2.0 million was deposited in escrow as security for breaches of representations and warranties and certain other expressly enumerated matters.

 

The Company recorded the purchase of Silicon Clocks using the acquisition method of accounting and accordingly, recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The results of Silicon Clocks’ operations are included in the Company’s consolidated results of operations beginning with the date of the acquisition. Revenues and earnings of Silicon Clocks and pro forma financial information have not been presented because the results of Silicon Clocks’ operations were not material. Acquisition-related costs were not significant.

 

The Company believes that the acquisition will enable the Company to accelerate its entry into the low end timing market while further scaling the Company’s engineering team. These factors contributed to a purchase price that was in excess of the fair value of the net assets acquired and, as a result, the Company recorded goodwill. The goodwill was allocated to the Company’s one operating segment and is not expected to be deductible for tax purposes. The purchase price was allocated as follows (in thousands):

 

 

 

Amount

 

Weighted-Average
Amortization Period
(Years)

 

Intangible assets:

 

 

 

 

 

In-process research and development

 

$

9,470

 

9.8

 

Developed technology

 

230

 

3.0

 

Customer relationships

 

30

 

2.0

 

 

 

9,730

 

 

 

Cash and cash equivalents

 

514

 

 

 

Other current assets

 

473

 

 

 

Deferred tax assets – non-current

 

10,617

 

 

 

Other non-current assets

 

322

 

 

 

Goodwill

 

4,113

 

 

 

Current liabilities

 

(1,338

)

 

 

Deferred tax liabilities – non-current

 

(3,406

)

 

 

Total purchase price

 

$

21,025

 

 

 

 

The purchase price allocation is preliminary and subject to revision as more detailed analysis is completed and additional information about the fair value of assets and liabilities becomes available. Adjustments in the fair value of the net assets acquired may affect the calculation of goodwill.

 

16



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

8. Stockholders’ Equity

 

Common Stock

 

The Company issued 1.1 million shares of common stock during the six months ended July 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. In July 2010, the Board of Directors adopted a new share repurchase program to repurchase up to $150 million of the Company’s common stock through 2011. The new program became effective immediately and terminated the remaining share repurchase authorization of the prior program. These programs allow for repurchases to be made in the open market or in private transactions, including structured or accelerated transactions, subject to applicable legal requirements and market conditions. During the six months ended July 3, 2010, the Company repurchased 2.2 million shares of its common stock for $100.3 million under its repurchase program.  During the six months ended July 4, 2009, the Company repurchased 0.4 million shares for $12.1 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

 

 

 

July 3,
2010

 

July 4,
2009

 

Net income

 

$

21,047

 

$

9,730

 

Net unrealized gains (losses) on available-for-sale securities, net of tax provision of $(166) and $46, respectively

 

308

 

(85

)

Net unrealized gains (losses) on cash flow hedges, net of tax provision of $65 and $(178), respectively

 

(120

)

331

 

Comprehensive income

 

$

21,235

 

$

9,976

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

July 3,
2010

 

July 4,
2009

 

Net income

 

$

42,126

 

$

10,401

 

Net unrealized gains (losses)on available-for-sale securities, net of tax provision of $(697) and $105, respectively

 

1,294

 

(195

)

Net unrealized gains (losses) on cash flow hedges, net of tax provision of $73 and $(245), respectively

 

(136

)

455

 

Comprehensive income

 

$

43,284

 

$

10,661

 

 

17



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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

 

(1,234

)

1,294

 

60

 

Amount reclassified into earnings, net of tax

 

1,098

 

 

1,098

 

Balance at July 3, 2010

 

$

(3,055

)

$

(143

)

$

(3,198

)

 

9. 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 became effective upon the termination of the previous 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. The fair values estimated from the Black-Scholes option-pricing model were calculated using the following assumptions:

 

 

 

Six Months Ended

 

Employee Stock Purchase Plan

 

July 3,
2010

 

July 4,
2009

 

Expected volatility

 

34.2

%

47.8

%

Risk-free interest rate %

 

0.6

%

0.4

%

Expected term (in months)

 

15

 

9

 

Dividend yield

 

 

 

 

There were no stock options granted during the six months ended July 3, 2010 or July 4, 2009.

 

The following are the stock-based compensation costs recognized in the Company’s Condensed Consolidated Statements of Income (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 3,
2010

 

July 4,
2009

 

July 3,
2010

 

July 4,
2009

 

Cost of revenues

 

$

351

 

$

372

 

$

706

 

$

767

 

Research and development

 

4,386

 

3,794

 

8,550

 

7,672

 

Selling, general and administrative

 

5,938

 

6,685

 

11,675

 

12,561

 

 

 

10,675

 

10,851

 

20,931

 

21,000

 

Provision for income taxes

 

1,519

 

1,457

 

3,007

 

2,965

 

 

 

$

9,156

 

$

9,394

 

$

17,924

 

$

18,035

 

 

18



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The Company had approximately $60.5 million of total unrecognized compensation costs related to stock options and RSUs at July 3, 2010 that are expected to be recognized over a weighted-average period of 1.7 years. There were no significant stock compensation costs capitalized into assets in any of the periods presented.

 

10.  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.

 

19



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

 

11. 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 $9.6 million and $3.9 million for the three months ended July 3, 2010 and July 4, 2009, respectively, resulting in effective tax rates of 31.4% and 28.8%, respectively. Income tax expense was $14.6 million and $5.2 million for the six months ended July 3, 2010 and July 4, 2009, respectively, resulting in effective tax rates of 25.7% and 33.4%, respectively. The effective tax rate for the three months ended July 3, 2010 increased from the prior period, primarily due to the current period tax charge related to the intercompany license of certain technology obtained in the acquisition of Silicon Clocks and the non-renewal of the federal research and development tax credit, partially offset by an increase in the foreign tax rate benefit.  The effective tax rate for the six months ended July 3, 2010 decreased from the prior period, primarily due to an increase in the foreign tax rate benefit, partially offset by the intercompany license of certain technology obtained in the acquisition of Silicon Clocks and the non-renewal of the federal research and development tax credit.

 

At July 3, 2010, the Company had gross unrecognized tax benefits of $12.7 million, all 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.

 

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

 

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the “Cautionary Statement” above and “Risk Factors” below for discussions of the uncertainties, risks and assumptions associated with these statements. Our fiscal year-end financial reporting periods are a 52- or 53- week year ending on the Saturday closest to December 31st. Fiscal 2010 will have 52 weeks and fiscal 2009 had 52 weeks. Our second quarter of fiscal 2010 ended July 3, 2010. Our second quarter of fiscal 2009 ended July 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), Panasonic, Samsung, 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 April 2010, we acquired Silicon Clocks, Inc., a privately held company that designs and develops microelectromechanical system (MEMS) technology to enable the manufacture of silicon resonators and sensors directly on standard CMOS wafers. The acquired technology is aligned with our efforts to leverage our CMOS-based timing products into high-volume applications such as consumer electronics.

 

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Table of Contents

 

In the first six months of fiscal 2010, we introduced low power capacitive touch-sense microcontrollers, a line of digital isolators and isolated gate drivers designed to replace traditional optocouplers, a digital TV demodulator that combines satellite, terrestrial and cable digital video broadcast (DVB) functions in one highly integrated device, a frequency-flexible timing IC solution for networking and telecommunications applications, 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.

 

During the six months ended July 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 six months ended July 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 six months ended July 3, 2010, respectively. There were no other distributors or contract manufacturers that accounted for more than 10% of our revenues during the six months ended July 3, 2010.

 

The percentage of our revenues derived from customers located outside of the United States was 86% during the six months ended July 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.

 

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Table of Contents

 

Results of Operations

 

The following describes the line items set forth in our Condensed Consolidated Statements of Income:

 

Revenues.   Revenues are generated 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.

 

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.

 

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Table of Contents

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 3,
2010

 

July 4,
2009

 

July 3,
2010

 

July 4,
2009

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of revenues

 

32.5

 

37.8

 

33.2

 

38.6

 

Gross margin

 

67.5

 

62.2

 

66.8

 

61.4

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

22.7

 

24.8

 

23.1

 

27.6

 

Selling, general and administrative

 

22.0

 

25.1

 

22.1

 

26.4

 

Operating expenses

 

44.7

 

49.9

 

45.2

 

54.0

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

22.8

 

12.3

 

21.6

 

7.4

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

0.5

 

0.5

 

0.5

 

0.8

 

Interest expense

 

0.0

 

0.0

 

0.0

 

(0.1

)

Other income (expense), net

 

(0.5

)

0.3

 

(0.4

)

0.2

 

Income before income taxes

 

22.8

 

13.1

 

21.7

 

8.3

 

Provision for income taxes

 

7.2

 

3.8

 

5.6

 

2.8

 

Net income

 

15.6

%

9.3

%

16.1

%

5.5

%

 

Revenues

 

 

 

Three Months Ended

 

Six Months Ended

 

(in millions)

 

July 3,
2010

 

July 4,
 2009

 

Change

 

%
Change

 

July 3,
2010

 

July 4,
2009

 

Change

 

%
Change

 

Revenues

 

$

134.6

 

$

104.2

 

$

30.4

 

29.1

%

$

261.3

 

$

187.9

 

$

73.4

 

39.0

%

 

The growth in revenue in the recent three and six month periods was due primarily to improvements in the health of our products’ end markets and increases in market share. Unit volumes of our products increased compared to the three and six months ended July 4, 2009 by 21.0% and 38.2%, respectively. Average selling prices increased during the same periods by 7.2% and 1.1%, respectively. In general, as our products become more mature, we expect to experience decreases in average selling prices. We anticipate that newly announced, higher priced, next generation products and product derivatives will offset these decreases to some degree.

 

Gross Margin

 

 

 

Three Months Ended

 

Six Months Ended

 

(in millions)

 

July 3,
2010

 

July 4,
2009

 

Change

 

%
Change

 

July 3,
2010

 

July 4,
2009

 

Change

 

%
Change

 

Gross margin

 

$

90.9

 

$

64.8

 

$

26.1

 

40.3

%

$

174.5

 

$

115.5

 

$

59.0

 

51.1

%

Percent of revenue

 

67.5

%

62.2

%

 

 

 

 

66.8

%

61.4

%

 

 

 

 

 

The increase in the dollar amount of gross margin in the recent three and six month periods was primarily due to our increased sales. The increase in gross margin as a percent of revenue in the recent three and six month periods was primarily due to changes in product mix, improvements in our inventory management and manufacturing cost reductions. We may experience declines in the average selling prices of certain of our products. This creates downward pressure on gross margin as a percentage of revenues and may be offset to the extent we are able to: 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.

 

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Table of Contents

 

Research and Development

 

 

 

Three Months Ended

 

Six Months Ended

 

(in millions)

 

July 3,
2010

 

July 4,
2009

 

Change

 

%
Change

 

July 3,
2010

 

July 4,
2009

 

Change

 

%
Change

 

Research and development

 

$

30.5

 

$

25.9

 

$

4.6

 

17.9

%

$

60.4

 

$

51.9

 

$

8.5

 

16.4

%

Percent of revenue

 

22.7

%

24.8

%

 

 

 

 

23.1

%

27.6

%

 

 

 

 

 

The increase in research and development expense in the recent three and six month periods was principally due to increases of $4.3 million and $7.5 million for personnel-related expenses, respectively. 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.

 

Significant recent development projects include low power capacitive touch-sense microcontrollers, a line of digital isolators and isolated gate drivers designed to replace traditional optocouplers, a digital TV demodulator that combines satellite, terrestrial and cable digital video broadcast (DVB) functions in one highly integrated device, a frequency-flexible timing IC solution for networking and telecommunications applications, 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 and 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.

 

In-Process Research and Development

 

In connection with the purchase of Silicon Clocks, we acquired certain in-process research and development (IPR&D) assets. IPR&D represents acquired technology that had not achieved technological feasibility as of the acquisition closing date and had no alternative future use. These costs were recorded as indefinite-lived intangible assets at fair value. The assets are tested for impairment through their completion and then amortized to research and development expense over their useful lives. The fair value of each project was determined using the income approach. The discount rate applicable to the cash flows was 19.0%. This rate reflects the weighted-average cost of capital and the risks inherent in the development process. The IPR&D recorded in connection with the acquisition consisted of the following (in thousands):

 

Project

 

Fair
Value

 

Resonator

 

$

5,200

 

Clocks

 

4,270

 

 

 

$

9,470

 

 

We are developing the IPR&D projects using MEMS technology. The remaining research and development efforts include additional design, integration and testing. As of the acquisition date, we projected the costs to complete the projects to be $8.1 million. The significant risks associated with the successful completion of these projects include our potential inability to finish the product designs, produce working models and gain customer acceptance. Failure to complete these projects in a timely manner could result in lost revenues. We do not expect the products in design derived from these technologies to begin to contribute to revenues prior to fiscal 2011.

 

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Table of Contents

 

Selling, General and Administrative

 

 

 

Three Months Ended

 

Six Months Ended

 

(in millions)

 

July 3,
2010

 

July 4,
2009

 

Change

 

%
Change

 

July 3,
2010

 

July 4,
2009

 

Change

 

%
Change

 

Selling, general and administrative

 

$

29.7

 

$

26.2

 

$

3.5

 

13.6

%

$

57.7

 

$

49.6

 

$

8.1

 

16.3

%

Percent of revenue

 

22.0

%

25.1

%

 

 

 

 

22.1

%

26.4

%

 

 

 

 

 

The increase in selling, general and administrative expense in the recent three and six month periods was principally due to increases of (a) $1.9 million and $5.7 million for personnel-related expenses, respectively, and (b) $0.6 million and $0.8 million for legal fees, primarily related to litigation, respectively. 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 remain stable in absolute dollars and decline slightly as a percentage of revenues.

 

Interest Income

 

 

 

Three Months Ended

 

Six Months Ended

 

(in millions)

 

July 3,
2010

 

July 4,
2009

 

Change

 

July 3,
2010

 

July 4,
2009

 

Change

 

Interest income

 

$

0.6

 

$

0.7

 

$

(0.1

)

$

1.3

 

$

1.5

 

$

(0.2

)