Silicon Laboratories Inc.
SILICON LABORATORIES INC (Form: 10-Q, Received: 10/26/2016 09:39:30)

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 October 1, 2016

 

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).  x  Yes  o  No

 

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

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

 

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

 

As of October 18, 2016, 41,747,783 shares of common stock of Silicon Laboratories Inc. were outstanding.

 

 

 



Table of Contents

 

Table of Contents

 

 

 

 

Page
Number

Part I. Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

Condensed Consolidated Balance Sheets at October 1, 2016 and January 2, 2016

3

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended October 1, 2016 and October 3, 2015

4

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 1, 2016 and October 3, 2015

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended October 1, 2016 and October 3, 2015

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

 

 

Item 2.

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

23

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

 

 

Item 4.

Controls and Procedures

34

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

 

 

Item 1A.

Risk Factors

36

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

50

 

 

 

 

 

Item 4.

Mine Safety Disclosures

50

 

 

 

 

 

Item 5.

Other Information

50

 

 

 

 

 

Item 6.

Exhibits

51

 

Cautionary Statement

 

Except for the historical financial information contained herein, the matters discussed in this report on Form 10-Q (as well as documents incorporated herein by reference) may be considered “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include declarations regarding the intent, belief or current expectations of Silicon Laboratories Inc. and its management and may be signified by the words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan,” “project,” “will” or similar language. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Actual results could differ materially from those indicated by such forward-looking statements. Factors that could cause or contribute to such differences include those discussed under “Risk Factors” and elsewhere in this report. Silicon Laboratories disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

2



Table of Contents

 

Part I.  Financial Information

 

Item 1.  Financial Statements

 

Silicon Laboratories Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

 

 

 

October 1,
2016

 

January 2,
2016

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

148,195

 

$

114,085

 

Short-term investments

 

131,139

 

128,901

 

Accounts receivable, net

 

84,923

 

73,601

 

Inventories

 

55,051

 

53,895

 

Prepaid expenses and other current assets

 

49,087

 

52,658

 

Total current assets

 

468,395

 

423,140

 

Long-term investments

 

6,980

 

7,126

 

Property and equipment, net

 

130,318

 

131,132

 

Goodwill

 

272,722

 

272,722

 

Other intangible assets, net

 

100,320

 

121,354

 

Other assets, net

 

51,481

 

55,989

 

Total assets

 

$

1,030,216

 

$

1,011,463

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

39,591

 

$

42,127

 

Current portion of long-term debt

 

 

10,000

 

Accrued expenses

 

51,561

 

52,131

 

Deferred income on shipments to distributors

 

47,057

 

35,448

 

Income taxes

 

5,638

 

2,615

 

Total current liabilities

 

143,847

 

142,321

 

Long-term debt

 

72,500

 

67,500

 

Other non-current liabilities

 

26,240

 

40,528

 

Total liabilities

 

242,587

 

250,349

 

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; 41,651 and 41,727 shares issued and outstanding at October 1, 2016 and January 2, 2016, respectively

 

4

 

4

 

Additional paid-in capital

 

6,344

 

13,868

 

Retained earnings

 

781,890

 

747,749

 

Accumulated other comprehensive loss

 

(609

)

(507

)

Total stockholders’ equity

 

787,629

 

761,114

 

Total liabilities and stockholders’ equity

 

$

1,030,216

 

$

1,011,463

 

 

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

 

3



Table of Contents

 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 1,
2016

 

October 3,
2015

 

October 1,
2016

 

October 3,
2015

 

Revenues

 

$

178,083

 

$

156,194

 

$

515,016

 

$

484,755

 

Cost of revenues

 

69,880

 

62,759

 

202,988

 

197,523

 

Gross margin

 

108,203

 

93,435

 

312,028

 

287,232

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

48,437

 

46,483

 

149,118

 

140,805

 

Selling, general and administrative

 

38,034

 

35,729

 

116,716

 

118,989

 

Operating expenses

 

86,471

 

82,212

 

265,834

 

259,794

 

Operating income

 

21,732

 

11,223

 

46,194

 

27,438

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

331

 

186

 

880

 

544

 

Interest expense

 

(643

)

(687

)

(1,939

)

(2,160

)

Other, net

 

(58

)

(280

)

(431

)

218

 

Income before income taxes

 

21,362

 

10,442

 

44,704

 

26,040

 

Provision for income taxes

 

1,344

 

467

 

3,319

 

2,112

 

Net income

 

$

20,018

 

$

9,975

 

$

41,385

 

$

23,928

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.48

 

$

0.24

 

$

0.99

 

$

0.56

 

Diluted

 

$

0.47

 

$

0.23

 

$

0.98

 

$

0.55

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

41,614

 

42,331

 

41,673

 

42,522

 

Diluted

 

42,307

 

42,795

 

42,263

 

43,135

 

 

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

 

4



Table of Contents

 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 1,
2016

 

October 3,
2015

 

October 1,
2016

 

October 3,
2015

 

Net income

 

$

20,018

 

$

9,975

 

$

41,385

 

$

23,928

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

 

 

 

 

 

 

 

Net changes to available-for-sale securities

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) arising during the period

 

(84

)

154

 

(137

)

(179

)

Reclassification for losses included in net income

 

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

Net changes to cash flow hedges

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) arising during the period

 

202

 

(459

)

(211

)

(1,035

)

Reclassification for losses included in net income

 

64

 

165

 

191

 

376

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

182

 

(140

)

(157

)

(828

)

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

63

 

(50

)

(55

)

(291

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

119

 

(90

)

(102

)

(537

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

20,137

 

$

9,885

 

$

41,283

 

$

23,391

 

 

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

 

5



Table of Contents

 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

October 1,
2016

 

October 3,
2015

 

Operating Activities

 

 

 

 

 

Net income

 

$

41,385

 

$

23,928

 

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

 

 

 

 

 

Depreciation of property and equipment

 

9,912

 

9,293

 

Amortization of other intangible assets and other assets

 

21,461

 

21,686

 

Stock-based compensation expense

 

30,057

 

30,798

 

Income tax benefit (shortfall) from stock-based awards

 

(1,238

)

1,727

 

Excess income tax benefit from stock-based awards

 

(373

)

(2,118

)

Deferred income taxes

 

(1,460

)

1,571

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(11,322

)

12,097

 

Inventories

 

(1,558

)

2,259

 

Prepaid expenses and other assets

 

7,404

 

8,409

 

Accounts payable

 

1,280

 

(5,686

)

Accrued expenses

 

8,930

 

(280

)

Deferred income on shipments to distributors

 

11,573

 

(2,825

)

Income taxes

 

1,459

 

(3,413

)

Other non-current liabilities

 

(10,891

)

(10,031

)

Net cash provided by operating activities

 

106,619

 

87,415

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of available-for-sale investments

 

(131,741

)

(55,433

)

Sales and maturities of available-for-sale investments

 

129,511

 

136,262

 

Purchases of property and equipment

 

(8,545

)

(7,281

)

Purchases of other assets

 

(4,994

)

(5,291

)

Acquisition of business, net of cash acquired

 

 

(76,899

)

Net cash used in investing activities

 

(15,769

)

(8,642

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from issuance of long-term debt, net

 

 

81,238

 

Payments on debt

 

(5,000

)

(92,206

)

Repurchases of common stock

 

(40,543

)

(71,448

)

Payment of taxes withheld for vested stock awards

 

(10,521

)

(12,652

)

Proceeds from the issuance of common stock

 

8,451

 

12,575

 

Excess income tax benefit from stock-based awards

 

373

 

2,118

 

Payment of acquisition-related contingent consideration

 

(9,500

)

(4,464

)

Net cash used in financing activities

 

(56,740

)

(84,839

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

34,110

 

(6,066

)

Cash and cash equivalents at beginning of period

 

114,085

 

141,706

 

Cash and cash equivalents at end of period

 

$

148,195

 

$

135,640

 

 

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

 

6



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.  Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The Condensed Consolidated Financial Statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments which, in the opinion of management, are necessary to present fairly the condensed consolidated financial position of Silicon Laboratories Inc. and its subsidiaries (collectively, the “Company”) at October 1, 2016 and January 2, 2016, the condensed consolidated results of its operations for the three and nine months ended October 1, 2016 and October 3, 2015, the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 1, 2016 and October 3, 2015, and the Condensed Consolidated Statements of Cash Flows for the nine months ended October 1, 2016 and October 3, 2015. All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated results of operations for the three and nine months ended October 1, 2016 are not necessarily indicative of the results to be expected for the full year.

 

The accompanying unaudited Condensed Consolidated Financial Statements do not include certain footnotes and financial presentations normally required under U.S. generally accepted accounting principles (GAAP). Therefore, these Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto for the year ended January 2, 2016, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on February 5, 2016.

 

The Company prepares financial statements on a 52- or 53-week fiscal year that ends on the Saturday closest to December 31. Fiscal 2016 will have 52 weeks and fiscal 2015 had 52 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Among the significant estimates affecting the financial statements are those related to inventories, stock-based compensation, investments in auction-rate securities, acquired intangible assets, goodwill, long-lived assets and income taxes. Actual results could differ from those estimates, and such differences could be material to the financial statements.

 

Reclassifications

 

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

 

Revenue Recognition

 

Revenues are generated predominately by sales of the Company’s products. 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.

 

7



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

A small portion of the Company’s revenues is derived from the sale of patents. The above revenue recognition criteria for patent sales are generally met upon the execution of the patent sale agreement.

 

Recent Accounting Pronouncements

 

In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments . This ASU provides guidance on statement of cash flows presentation for eight specific cash flow issues where diversity in practice exists. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires instruments measured at amortized cost to be presented at the net amount expected to be collected. Entities are also required to record allowances for available-for-sale debt securities rather than reduce the carrying amount. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. For operating leases, a lessee is required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11,  Inventory (Topic 330): Simplifying the Measurement of Inventory . This ASU requires inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company does not expect that the adoption of this ASU will have a material impact on its financial statements.

 

8



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

In May 2014, the FASB issued ASU No. 2014-09 , Revenue from Contracts with Customers (Topic 606) , which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition . The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. In 2016, the FASB issued the following amendments to ASC 606: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) , which clarifies the implementation guidance on principal versus agent considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies guidance on identification of performance obligations and licensing implementation; and ASU No. 2016-12, Compensation—Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients , which provides clarifying guidance on assessing collectibility, presentation of sales taxes, noncash consideration, contract modifications and completed contracts. The Company is currently evaluating the effect that the adoption of these ASUs will have on its 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

 

Nine Months Ended

 

 

 

October 1,
2016

 

October 3,
2015

 

October 1,
2016

 

October 3,
2015

 

Net income

 

$

20,018

 

$

9,975

 

$

41,385

 

$

23,928

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing basic earnings per share

 

41,614

 

42,331

 

41,673

 

42,522

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options and other stock-based awards

 

693

 

464

 

590

 

613

 

Shares used in computing diluted earnings per share

 

42,307

 

42,795

 

42,263

 

43,135

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.48

 

$

0.24

 

$

0.99

 

$

0.56

 

Diluted

 

$

0.47

 

$

0.23

 

$

0.98

 

$

0.55

 

 

For the three months ended October 1, 2016 and October 3, 2015 and the nine months ended October 1, 2016 and October 3, 2015, approximately 0.1 million, 0.1 million, 0.2 million and 0.1 million shares, respectively, consisting of restricted stock awards (RSUs), market stock awards (MSUs) and stock options, were not included in the diluted earnings per share calculation since the shares were anti-dilutive.

 

9



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

3. Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

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 October 1, 2016 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

 

$

36,200

 

$

 

$

 

$

36,200

 

Certificates of deposit

 

 

2,956

 

 

2,956

 

Municipal bonds

 

 

301

 

 

301

 

Total cash equivalents

 

$

36,200

 

$

3,257

 

$

 

$

39,457

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

 

$

60,682

 

$

 

$

60,682

 

Corporate bonds

 

 

22,306

 

 

22,306

 

Variable-rate demand notes

 

 

15,324

 

 

15,324

 

U.S. government bonds

 

14,392

 

 

 

14,392

 

Asset-backed securities

 

 

10,961

 

 

10,961

 

Commercial paper

 

 

6,466

 

 

6,466

 

International government bonds

 

 

1,008

 

 

1,008

 

Total short-term investments

 

$

14,392

 

$

116,747

 

$

 

$

131,139

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

 

$

6,980

 

$

6,980

 

Total long-term investments

 

$

 

$

 

$

6,980

 

$

6,980

 

 

 

 

 

 

 

 

 

 

 

Other assets, net:

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

 

$

72

 

$

 

$

72

 

Total

 

$

 

$

72

 

$

 

$

72

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

50,592

 

$

120,076

 

$

6,980

 

$

177,648

 

 

10



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

 

 

Fair Value Measurements
at January 2, 2016 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

 

$

37,721

 

$

 

$

 

$

37,721

 

Commercial paper

 

 

11,272

 

 

11,272

 

Certificates of deposit

 

 

2,845

 

 

2,845

 

U.S. government agency

 

 

1,599

 

 

1,599

 

Municipal bonds

 

 

1,577

 

 

1,577

 

Total cash equivalents

 

$

37,721

 

$

17,293

 

$

 

$

55,014

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

 

$

93,516

 

$

 

$

93,516

 

Commercial paper

 

 

11,176

 

 

11,176

 

Variable-rate demand notes

 

 

8,995

 

 

8,995

 

Certificates of deposit

 

 

8,000

 

 

8,000

 

U.S. government agency

 

 

3,998

 

 

3,998

 

International government bonds

 

 

2,220

 

 

2,220

 

Corporate bonds

 

 

996

 

 

996

 

Total short-term investments

 

$

 

$

128,901

 

$

 

$

128,901

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

 

$

7,126

 

$

7,126

 

Total long-term investments

 

$

 

$

 

$

7,126

 

$

7,126

 

 

 

 

 

 

 

 

 

 

 

Other assets, net:

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

 

$

92

 

$

 

$

92

 

Total

 

$

 

$

92

 

$

 

$

92

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

37,721

 

$

146,286

 

$

7,126

 

$

191,133

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Accrued expenses:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

$

 

$

4,749

 

$

4,749

 

 

 

 

 

 

 

 

 

 

 

Other non-current liabilities:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

$

 

$

9,324

 

$

9,324

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

 

$

 

$

14,073

 

$

14,073

 

 

11



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Valuation methodology

 

The Company’s cash equivalents and short-term investments that are classified as Level 2 are valued using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments in active markets; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Investments classified as Level 3 are valued using a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, amount of cash flows, expected holding periods of the securities and a discount to reflect the Company’s inability to liquidate the securities. The Company’s derivative instruments are valued using discounted cash flow models. The assumptions used in preparing the valuation models include quoted interest swap rates, foreign exchange rates, forward and spot prices for currencies, and market observable data of similar instruments.

 

The Company’s contingent consideration is valued using a Monte Carlo simulation model or a probability weighted discounted cash flow model. The assumptions used in preparing the Monte Carlo simulation model include estimates for revenue growth rates, revenue volatility, contractual terms and discount rates. The assumptions used in preparing the discounted cash flow model include estimates for outcomes if milestone goals are achieved, the probability of achieving each outcome and discount rates.

 

Available-for-sale investments

 

The Company’s investments typically have original maturities greater than ninety days as of the date of purchase. Investments are reported at fair value, with unrealized gains and losses, net of tax, recorded as a component of accumulated other comprehensive loss in the Consolidated Balance Sheet. The following summarizes the contractual underlying maturities of the Company’s available-for-sale investments at October 1, 2016 (in thousands):

 

 

 

Cost

 

Fair
Value

 

Due in one year or less

 

$

99,623

 

$

99,620

 

Due after one year through ten years

 

58,238

 

58,251

 

Due after ten years

 

20,725

 

19,705

 

 

 

$

178,586

 

$

177,576

 

 

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 October 1, 2016

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair 
Value

 

Gross
Unrealized
Losses

 

Municipal bonds

 

$

42,653

 

$

(39

)

$

 

$

 

$

42,653

 

$

(39

)

Corporate bonds

 

9,368

 

(16

)

 

 

9,368

 

(16

)

Auction rate securities

 

 

 

6,980

 

(1,020

)

6,980

 

(1,020

)

U.S. government bonds

 

5,307

 

(2

)

 

 

5,307

 

(2

)

 

 

$

57,328

 

$

(57

)

$

6,980

 

$

(1,020

)

$

64,308

 

$

(1,077

)

 

12



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, 2016

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Municipal bonds

 

$

29,271

 

$

(30

)

$

1,198

 

$

(2

)

$

30,469

 

$

(32

)

Auction rate securities

 

 

 

7,126

 

(874

)

7,126

 

(874

)

International government bonds

 

2,220

 

(7

)

 

 

2,220

 

(7

)

Corporate bonds

 

996

 

(3

)

 

 

996

 

(3

)

 

 

$

32,487

 

$

(40

)

$

8,324

 

$

(876

)

$

40,811

 

$

(916

)

 

The gross unrealized losses as of October 1, 2016 and January 2, 2016 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 Company’s auction-rate securities have been illiquid since 2008 when auctions for the securities failed because sell orders exceeded buy orders. These securities have contractual maturity dates ranging from 2033 to 2046 at October 1, 2016. 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 other-than-temporary impairment losses existed as of October 1, 2016.

 

At October 1, 2016 and January 2, 2016, there were no material unrealized gains associated with the Company’s available-for-sale investments.

 

Level 3 fair value measurements

 

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

 

Auction rate securities

 

Fair Value at
October 1, 2016
(000s)

 

Valuation Technique

 

Unobservable Input

 

Weighted Average

 

$

6,980

 

Discounted cash flow

 

Estimated yield

 

1.12%

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected holding period

 

10 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated discount rate

 

2.74%

 

 

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

 

13



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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

 

Contingent consideration

 

The Company has followed an established internal control procedure used in valuing contingent consideration. The valuation of contingent consideration for the Energy Micro acquisition was based on a Monte Carlo simulation model. The fair value of this valuation was estimated on a quarterly basis through a collaborative effort by the Company’s sales, marketing and finance departments.

 

The following summarizes the activity in Level 3 financial instruments for the three and nine months ended October 1, 2016 (in thousands):

 

Assets

 

Auction Rate Securities

 

Three Months
Ended

 

Nine Months
Ended

 

Beginning balance

 

$

6,921

 

$

7,126

 

Gain (loss) included in other comprehensive income (loss)

 

59

 

(146

)

Balance at October 1, 2016

 

$

6,980

 

$

6,980

 

 

Liabilities

 

Contingent Consideration (1)

 

Nine Months
Ended

 

Beginning balance

 

$

14,073

 

Settlements (2)

 

(11,375

)

Gain recognized in earnings (3)

 

(2,698

)

Balance at October 1, 2016

 

$

 

 


(1)          In connection with the acquisition of Energy Micro, the Company recorded contingent consideration based upon the expected achievement of certain milestone goals. Changes to the fair value of contingent consideration due to changes in assumptions used in preparing the valuation model were recorded in selling, general and administrative expenses in the Consolidated Statement of Income.

 

(2)          On March 11, 2016, the Company entered into an agreement which settled the total amount of contingent consideration related to the Energy Micro acquisition (including all amounts for fiscal 2015 through 2018). See Note 6, Acquisitions , for additional information.

 

(3)          The gain recognized in earnings was due to the settlement of the Energy Micro contingent consideration. This gain was offset in part by a charge of approximately $2.7 million recorded in the nine months ended October 1, 2016 for a portion of the contingent consideration accounted for as post-combination compensation expense.

 

Fair values of other financial instruments

 

The Company’s debt under the Credit Facilities bears interest at the Eurodollar rate plus an applicable margin. The Credit Facilities are recorded at cost, but are measured at fair value for disclosure purposes. Fair value is estimated based on Level 2 inputs, using a discounted cash flow analysis of future principal payments and projected interest based on current market rates. As of October 1, 2016 and January 2, 2016, the fair value of the Company’s debt under the Credit Facilities was approximately $72.2 million and $77.5 million, respectively.

 

14



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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

 

4. Derivative Financial Instruments

 

The Company uses derivative financial instruments to manage certain exposures to the variability of interest rates and foreign currency exchange rates. The Company’s objective is to offset increases and decreases in expenses resulting from these exposures with gains and losses on the derivative contracts, thereby reducing volatility of earnings. The Company does not use derivative contracts for speculative or trading purposes. The Company recognizes derivatives, on a gross basis, in the Consolidated Balance Sheet at fair value. Cash flows from derivatives are classified according to the nature of the cash receipt or payment in the Consolidated Statement of Cash Flows.

 

Interest Rate Swaps

 

The Company is exposed to interest rate fluctuations in the normal course of its business, including through its Credit Facilities. The interest payments on the facility are calculated using a variable-rate of interest. The Company has entered into an interest rate swap agreement with an original notional value of $72.5 million (equal to the outstanding balance of the Credit Facilities at July 8, 2016) and, effectively, converted the Eurodollar portion of the variable-rate interest payments to fixed-rate interest payments through July 2020. The Company’s previous swap agreement with a remaining notional value of $72.5 million was terminated on July 8, 2016.

 

The Company’s interest rate swap agreement is designated and qualifies as a cash flow hedge. The effective portion of the gain or loss on the interest rate swap is recorded in accumulated other comprehensive loss as a separate component of stockholders’ equity and is subsequently recognized as interest expense in the Consolidated Statement of Income when the hedged exposure affects earnings.

 

The Company estimates the fair values of interest rate swaps based on quoted prices and market observable data of similar instruments. If the Credit Facilities or the interest rate swap agreement is terminated prior to maturity, the fair value of the interest rate swap 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 fair value of the interest rate swap terminated on July 8, 2016 was not material. The Company did not discontinue any other cash flow hedges in any of the periods presented.

 

The Company measures the effectiveness of its cash flow hedge by comparing the change in fair value of the hedged variable interest payments 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 October 1, 2016, no portion of the gains or losses from the Company’s hedging instrument was excluded from the assessment of effectiveness. Hedge ineffectiveness was not material for any of the periods presented.

 

The Company’s derivative financial instrument in cash flow hedging relationships consisted of the following (in thousands):

 

 

 

 

 

Fair Value

 

 

 

Balance Sheet Location

 

October 1,
2016

 

January 2,
2016

 

Interest rate swap

 

Other assets, net

 

$

72

 

$

92

 

 

15



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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

 

 

 

Gain (Loss) Recognized in
OCI on Derivatives
(Effective Portion)
during the:

 

Location of Loss
Reclassified into
Income

 

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

 

 

 

Three Months Ended

 

 

 

Three Months Ended

 

 

 

October 1,
2016

 

October 3,
2015

 

 

 

October 1,
2016

 

October 3,
2015

 

Interest rate swaps

 

$

202

 

$

(459

)

Interest expense

 

$

(64

)

$

(165

)

 

 

 

Nine Months Ended

 

 

 

Nine Months Ended

 

 

 

October 1,
2016

 

October 3,
2015

 

 

 

October 1,
2016

 

October 3,
2015

 

Interest rate swaps

 

$

(211

)

$

(1,035

)

Interest expense

 

$

(191

)

$

(376

)

 

The Company expects to reclassify $0.1 million of its interest rate swap losses included in accumulated other comprehensive loss as of October 1, 2016 into earnings in the next 12 months, which would be offset by lower interest payments.

 

Foreign Currency Forward Contracts

 

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

 

As of October 1, 2016 and October 3, 2015, the Company held one foreign currency forward contract denominated in Norwegian Krone with a notional value of $4.9 million and $5.3 million, respectively. The fair value of the contracts was not material as of October 1, 2016 or October 3, 2015. The contract held as of October 1, 2016 has a maturity date of December 28, 2016 and it was not designated as a hedging instrument.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Gain (Loss) Recognized in Income

 

October 1,
2016

 

October 3,
2015

 

October 1,
2016

 

October 3,
2015

 

Location

 

Foreign currency forward contracts

 

$

(219

)

$

379

 

$

(471

)

$

825

 

Other, net

 

 

16



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

5. Balance Sheet Details

 

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

 

Inventories

 

 

 

October 1,
2016

 

January 2,
2016

 

Work in progress

 

$

39,799

 

$

36,774

 

Finished goods

 

15,252

 

17,121

 

 

 

$

55,051

 

$

53,895

 

 

Notes Receivable

 

The Company holds a note receivable from a privately held company in which the Company has an equity investment. The note principal is $1.5 million and matures in January 2017. The amount of the equity investment is not material. In May 2016, the Company amended the note receivable, extending the maturity date to the earlier of December 31, 2018 or certain liquidity events. The Company also issued a second note receivable to the privately held company, providing up to $0.7 million in cash advances. The second note receivable has a maturity date of the earlier of December 31, 2018 or certain liquidity events. As of October 1, 2016, there have been no cash advances under the second note receivable.

 

6. Acquisitions

 

Energy Micro

 

On July 1, 2013, the Company acquired Energy Micro. In the first quarter of 2015, the Company made the following payments in connection with the Energy Micro acquisition: (a) approximately $20.0 million was paid for the release of the holdback; and (b) approximately $6.3 million was paid for the first annual period of the earn-out. Approximately $1.8 million of the earn-out payment was recorded as compensation expense during fiscal 2014. The remaining approximately $4.5 million of the earn-out payment represented additional consideration.

 

On March 11, 2016, the Company entered into an agreement with Energy AS, the former parent of Energy Micro. The agreement settled the amount of the earn-out to be paid for fiscal 2015 through 2018. The total settlement amount was approximately $16.0 million (in lieu of potential payments of up to $26.7 million) and was paid on May 11, 2016. The settlement amount represented approximately $11.4 million of additional consideration and approximately $4.6 million of compensation expense (of which approximately $2.7 million was recorded in the nine months ended October 1, 2016 and approximately $1.9 million was recorded in fiscal 2015). The compensation expense recorded in fiscal 2016 was offset in part by a gain of approximately $2.7 million to adjust the consideration portion of the earn-out to fair value due to the settlement.

 

7.  Debt

 

On July 31, 2012, the Company and certain of its domestic subsidiaries (the “Guarantors”) entered into a $230 million five-year Credit Agreement (the “Credit Agreement”), which consisted of a $100 million Term Loan Facility and a $130 million Revolving Credit Facility (collectively, the “Credit Facilities”). On July 24, 2015, the Company and the Guarantors amended the Credit Agreement (the “Amended Credit Agreement”) in order to, among other things, increase the borrowing capacity under the Revolving Credit Facility to $300 million, eliminate the Term Loan Facility and extend the maturity date to five years from the closing date. On July 24, 2015, the Company borrowed $82.5 million under the Amended Credit Agreement and paid off the remaining balance of its Term Loan Facility.

 

17



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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

 

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

 

The Amended Credit Agreement contains various conditions, covenants and representations with which the Company must be in compliance in order to borrow funds and to avoid an event of default, including financial covenants that the Company must maintain a leverage ratio (funded debt/EBITDA) of no more than 3.00 to 1 and a minimum fixed charge coverage ratio (EBITDA/interest payments, income taxes and capital expenditures) of no less than 1.25 to 1. As of October 1, 2016, the Company was in compliance with all covenants of the Amended Credit Agreement . The Company’s obligations under the Amended Credit Agreement are guaranteed by the Guarantors and are secured by a security interest in substantially all assets of the Company and the Guarantors.

 

Interest Rate Swap Agreement

 

In connection with the outstanding balance of the Credit Facilities at July 8, 2016, the Company entered into an interest rate swap agreement as a hedge against the Eurodollar portion of such variable interest payments. Under the terms of the swap agreement, the Company effectively converted the Eurodollar portion of the interest on the Credit Facilities to a fixed interest rate of 0.875% through July 2020. As of October 1, 2016, the combined interest rate of the Credit Facilities (which includes an applicable margin) and the interest rate swap was 2.375%. See Note 4, Derivative Financial Instruments , for additional information.

 

8. Stockholders’ Equity

 

Common Stock

 

The Company issued 0.8 million shares of common stock during the nine months ended October 1, 2016.

 

Share Repurchase Programs

 

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

 

Program
Authorization Date

 

Program
Termination Date

 

Program
Amount

 

August 2015

 

December 2016

 

$

100,000

 

October 2014

 

December 2015

 

$

100,000

 

 

These programs allow for repurchases to be made in the open market or in private transactions, including structured or accelerated transactions, subject to applicable legal requirements and market conditions. The Company repurchased 0.9 million shares of its common stock for $40.5 million during the nine months ended October 1, 2016.  The Company repurchased 1.6 million shares of its common stock for $71.4 million during the nine months ended October 3, 2015.  These shares were retired upon repurchase.

 

18



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Accumulated Other Comprehensive Loss

 

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

 

 

 

Unrealized Gain 
(Loss) on Cash 
Flow Hedge

 

Net Unrealized Losses 
on Available-For-Sale 
Securities

 

Total

 

Balance at January 2, 2016

 

$

 60

 

$

 (567

)

$

 (507

)

 

 

 

 

 

 

 

 

Other comprehensive loss before reclassifications

 

(137

)

(89

)

(226

)

Amount reclassified from accumulated other comprehensive loss

 

124

 

 

124

 

Net change for the period

 

(13

)

(89

)

(102

)

 

 

 

 

 

 

 

 

Balance at October 1, 2016

 

$

 47

 

$

 (656

)

$

 (609

)

 

Reclassifications From Accumulated Other Comprehensive Loss

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

Reclassification

 

October 1, 
2016

 

October 3,
2015

 

October 1, 
2016

 

October 3,
2015

 

Losses on cash flow hedges to:

 

 

 

 

 

 

 

 

 

Interest expense

 

$

(64

)

$

(165

)

$

(191

)

$

(376

)

 

 

 

 

 

 

 

 

 

 

Losses on available-for-sale securities to:

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

(10

)

 

 

(64

)

(165

)

(191

)

(386

)

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

22

 

58

 

67

 

135

 

 

 

 

 

 

 

 

 

 

 

Total reclassifications

 

$

(42

)

$

(107

)

$

(124

)

$

(251

)

 

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”). In fiscal 2014, the stockholders of the Company approved amendments to both the 2009 Plan and the 2009 Purchase Plan. The amendments authorized additional shares of common stock for issuance, to comply with changes in applicable law, improve the Company’s corporate governance and to implement other best practices. The amended plans are currently effective.

 

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

 

19



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 1, 
2016

 

October 3,
2015

 

October 1, 
2016

 

October 3,
2015

 

Cost of revenues

 

$

272

 

$

249

 

$

807

 

$

708

 

Research and development

 

4,580

 

4,623

 

14,695

 

14,378

 

Selling, general and administrative

 

4,343

 

4,350

 

14,555

 

15,712

 

 

 

9,195

 

9,222

 

30,057

 

30,798

 

Income tax benefit

 

2,124

 

1,089

 

6,630

 

3,575

 

 

 

$

7,071

 

$

8,133

 

$

23,427

 

$

27,223

 

 

The Company had approximately $59.4 million of total unrecognized compensation costs related to granted stock options and awards as of October 1, 2016 that are expected to be recognized over a weighted-average period of approximately 2.2 years. There were no significant stock-based compensation costs capitalized into assets in any of the periods presented.

 

10.  Commitments and Contingencies

 

Patent Litigation

 

On January 21, 2014, Cresta Technology Corporation (“Cresta Technology”), a Delaware corporation, filed a lawsuit against the Company, Samsung Electronics Co., Ltd., Samsung Electronics America, Inc., LG Electronics Inc. and LG Electronics U.S.A., Inc. in the United States District Court in the District of Delaware, alleging infringement of three United States Patents (the “Cresta Patents”). The Delaware District Court action has been stayed.

 

On January 28, 2014, Cresta Technology also filed a complaint with the United States International Trade Commission (“ITC”) alleging infringement of the same patents. On September 29, 2015, the ITC issued its Final Determination, finding that all the patent claims asserted against the Company’s products were either invalid or not infringed and that Cresta Technology failed to establish the ITC’s domestic industry requirement. The ITC found no violation by the Company and terminated the investigation. On November 30, 2015, Cresta Technology filed an appeal of the ITC decision to the Federal Circuit. On March 8, 2016, pursuant to a stipulated dismissal, the Federal Circuit dismissed Cresta Technology’s appeal in its entirety.

 

In a parallel process, the Company challenged the validity of the claims of the Cresta Patents asserted in the ITC investigation through a series of Inter-Partes Review (IPR) proceedings at the Patent Trial and Appeal Board (PTAB) of the United States Patent and Trademark Office (USPTO). On October 21, 2015, the USPTO issued final written decisions on a first set of reviewed claims finding all of the reviewed claims invalid. On December 18, 2015, Cresta Technology appealed those adverse decisions to the United States Court of Appeals for the Federal Circuit as to this first USPTO determination. Those appeals are now fully briefed and awaiting oral argument. The USPTO has instituted a second set of IPR proceedings against a second set of the remaining claims. On August 11, 2016, the PTAB issued its final written decisions in these proceedings and found all of these remaining claims unpatentable. The PTAB decision is appealable.

 

On March 18, 2016, Cresta Technology filed for chapter 7 bankruptcy in the United States Bankruptcy Court for the Northern District of California.

 

20



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

On May 13, 2016, the Bankruptcy Court approved an agreement for DBD Credit Funding LLC (“DBD”) to buy Cresta Technology’s entire IP portfolio and certain related litigation.  Following that sale, DBD (through an apparent assignee, CF Crespe LLC) has substituted in the Delaware District Court action, the appeal proceedings at the U.S. Court of Appeals for the Federal Circuit for the first set of IPR proceedings and the USPTO PTAB proceedings for the second set of IPRs replacing Cresta Technology.

 

On July 16, 2014, the Company filed a lawsuit against Cresta Technology in the United States District Court in the Northern District of California alleging infringement of six United States Patents. The Company is seeking a permanent injunction and an award of damages and attorney fees. As a result of the chapter 7 bankruptcy filing by Cresta Technology, these proceedings were stayed. However, as a result of the May 13, 2016 sale order by the Bankruptcy Court, DBD and CF Crespe LLC were ordered to substitute in as Defendant for Cresta Technology.  DBD and Crespe LLC have appealed the Bankruptcy Court’s order in that regard.

 

As is customary in the semiconductor industry, the Company provides indemnification protection to its customers for intellectual property claims related to the Company’s products. The Company has not accrued any material liability on its Condensed Consolidated Balance Sheet related to such indemnification obligations in connection with the Cresta Technology litigation.

 

The Company intends to continue to vigorously defend against Cresta Technology’s (now DBD and CF Crespe LLC’s) allegations and to continue to pursue its claims against Cresta and their patents. At this time, the Company cannot predict the outcome of these matters or the resulting financial impact to it, if any.

 

Other

 

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

 

11. Related Party Transactions

 

In August 2016, Bill Bock, a member of the Company’s board of directors, joined the board of directors of Spredfast. Spredfast has been a tenant in one of the buildings at the Company’s headquarters in Austin, Texas since May 2013. During the nine months ended October 1, 2016 and October 3, 2015, the Company received payments from Spredfast of $2.4 million and $1.8 million, respectively, in connection with the leased facilities.

 

On July 1, 2013, Geir Førre joined the Company as senior vice president. Mr. Førre was chief executive officer of Energy Micro, until it was acquired by the Company. Mr. Førre was the beneficial owner of approximately 30% of the Energy Micro equity and accordingly received approximately $35 million at closing. In the first quarter of 2015, Mr. Førre received approximately $6.1 million of the $20.0 million paid for the holdback related to potential indemnification claims and approximately $1.9 million of the $6.3 million paid for the fiscal 2014 earn-out. On March 11, 2016, the Company entered into an agreement which settled the amount of the earn-out to be paid for fiscal 2015 through 2018. Under this agreement, Mr. Førre received approximately $4.8 million of the $16.0 million that was paid.

 

21



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Alf-Egil Bogen served on the Company’s board of directors from October 17, 2013 to April 21, 2016. Mr. Bogen was chief marketing officer of Energy Micro, until it was acquired by the Company. Mr. Bogen was the beneficial owner of approximately 2% of the Energy Micro equity and accordingly received approximately $0.9 million at closing. In the first quarter of 2015, Mr. Bogen received approximately $0.4 million of the $20.0 million paid for the holdback related to potential indemnification claims and approximately $0.1 million of the $6.3 million paid for the fiscal 2014 earn-out. Under the settlement agreement, Mr. Bogen received approximately $0.3 million of the $16.0 million that was paid for fiscal 2015 through 2018 earn-out. Mr. Bogen had invested approximately $0.8 million in Energy Micro prior to the acquisition.

 

12. Income Taxes

 

Provision for income taxes includes both domestic and foreign income taxes at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences. Income tax expense was $1.3 million and $0.5 million for the three months ended October 1, 2016 and October 3, 2015, resulting in effective tax rates of 6.3% and 4.5%, respectively. Income tax expense was $3.3 million and $2.1 million for the nine months ended October 1, 2016 and October 3, 2015, resulting in effective tax rates of 7.4% and 8.1%, respectively. The effective tax rate for the three months ended October 1, 2016 increased from the prior period primarily due to a decrease in the foreign tax rate benefit resulting from a net decrease in earnings indefinitely reinvested in lower tax jurisdictions, partially offset by an increase in the realization of the U.S. federal research and development tax credit in the current year. The effective tax rate for the nine months ended October 1, 2016 decreased from the prior period primarily due to an increase in the realization of the U. S. federal research and development tax credit in the current year.

 

On December 1, 2015, the U.S. Tax Court issued its final decision with respect to Altera Corporation’s litigation with the Internal Revenue Service (“IRS”). The litigation relates to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. In its final decision, the Court accepted Altera’s position of excluding stock-based compensation from its cost-sharing arrangement and concluded that the related IRS Regulations were invalid. In February 2016, the IRS appealed the decision to the U.S Court of Appeals for the Ninth Circuit. Although the IRS has appealed the decision, based on the facts and circumstances of the Tax Court Case, the Company believes that it is more likely than not that the Tax Court decision will be upheld. Therefore, the Company continues to reflect the effects of the decision in its Condensed Consolidated Financial Statements. This change to cost-sharing is expected to increase the Company’s cumulative foreign earnings at the time of final resolution of the case. As such, the Company continues to accrue a deferred tax liability for the U.S. tax cost of potential repatriation of the associated foreign earnings because at this time, the Company cannot reasonably conclude that it will have the ability and intent to indefinitely reinvest these contingent earnings. The overall net impact on the Company’s Condensed Consolidated Financial Statements is not material. The Company will continue to monitor ongoing developments and potential impacts to its Condensed Consolidated Financial Statements.

 

At October 1, 2016, the Company had gross unrecognized tax benefits of $3.9 million, of which $3.0 million 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 Company recognized less than $0.1 million of interest, net of tax, in the provision for income taxes for the nine months ended October 1, 2016. The Company also recognized less than $0.1 million of interest, net of tax, in the provision for income taxes for the nine months ended October 3, 2015. As of October 1, 2016, the Company had accrued $0.1 million for the payment of interest related to unrecognized tax positions.

 

The Company believes it is reasonably possible that the gross unrecognized tax benefits will decrease by approximately $1.2 million in the next 12 months due to the lapse of the statute of limitations applicable to tax deductions and tax credits claimed on prior year tax returns.

 

The tax years 2011 through 2016 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company is not currently under audit in any major taxing jurisdiction.

 

22



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

13. Subsequent Event

 

Acquisition

 

On October 3, 2016, the Company acquired Micrium, LLC, a private company. Micrium is a supplier of real-time operating system (RTOS) software for the Internet of Things (IoT). The Company acquired Micrium for approximately $14.2 million, consisting of cash and stock consideration.

 

The Company will record the purchase of Micrium 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 Micrium’s operations will be included in the Company’s consolidated results of operations beginning on the date of the acquisition.

 

The Company is currently evaluating the fair values of the consideration transferred, assets acquired and liabilities assumed. The Company expects to complete its initial purchase price allocation in the fourth quarter of fiscal 2016.

 

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

 

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the “Cautionary Statement” above and “Risk Factors” below for discussions of the uncertainties, risks and assumptions associated with these statements. Our fiscal year-end financial reporting periods are a 52- or 53-week fiscal year that ends on the Saturday closest to December 31. Fiscal 2016 will have 52 weeks and fiscal 2015 had 52 weeks. Our third quarter of fiscal 2016 ended October 1, 2016. Our third quarter of fiscal 2015 ended October 3, 2015.

 

Overview

 

We are a provider of silicon, software and solutions for the Internet of Things (IoT), Internet infrastructure, industrial control, consumer and automotive markets. We solve some of the electronics industry’s toughest problems, providing customers with significant advantages in performance, energy savings, connectivity and design simplicity. Mixed-signal integrated circuits (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 products addressing a variety of markets, including industrial, communications, consumer and automotive. Our major customers include Chamberlain, Cisco, Fitbit, Harman Becker, Huawei, LG Electronics, Samsung, Technisat, Varian Medical Systems and ZTE.

 

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:

 

·                   Internet of Things (IoT) products, which include our microcontroller (MCU), wireless, sensor and analog products;

 

·                   Broadcast products, which include our broadcast consumer and automotive products;

 

·                   Infrastructure products, which include our timing products (clocks and oscillators), and isolation devices; and

 

·                   Access products, which include our Voice over IP (VoIP) products, embedded modems and our Power over Ethernet (PoE) devices.

 

23



Table of Contents

 

Current Period Highlights

 

Revenues increased $21.9 million in the recent quarter compared to the third quarter of fiscal 2015, primarily due to increased revenues from our IoT, Infrastructure and Broadcast products offset by decreases in revenues from our Access products. Gross margin increased $14.8 million during the same period due primarily to increased product sales. Operating expenses increased $4.3 million in the recent quarter compared to the third quarter of fiscal 2015 due primarily to increased personnel-related expenses, new product introduction costs and adjustments to the fair value of acquisition-related contingent consideration, offset by decreased amortization of intangible assets.

 

We ended the third quarter with $279.3 million in cash, cash equivalents and short-term investments. Net cash provided by operating activities was $106.6 million during the recent nine-month period. Accounts receivable increased to $84.9 million at October 1, 2016 compared to January 2, 2016, representing 43 days sales outstanding (DSO). Inventory increased to $55.1 million at October 1, 2016 compared to January 2, 2016, representing 71 days of inventory (DOI). In the first nine months of 2016, we repurchased 0.9 million shares of our common stock for $40.5 million.

 

Through acquisitions and internal development efforts, we have continued to diversify our product portfolio and introduce new products and solutions with added functionality and further integration. In the first nine months of fiscal 2016, we introduced Wireless Gecko modules focused on mesh networking applications; a major update to our Simplicity Studio™ software development tools for IoT connected device applications; a CMOS-based family of isolated field effect transistor (FET) drivers; isolated gate drivers designed to protect power inverter and motor drive applications; high-speed, multi-channel programmable logic controller (PLC) isolators; a small, low-power USBXpress™ bridge device; multiband Wireless Gecko system-on-chip (SoC) devices enabling both 2.4 GHz and sub-GHz multiprotocol connectivity for the IoT market;  a comprehensive reference design for cables and adapters based on the USB Type-C™ specification; jitter-attenuating clocks that simplify 100G/400G coherent optical line card and module design; a fully integrated, pre-certified Bluetooth® module for low-energy applications; a family of isolated gate drivers for high-speed power supply designs; a plug-and-play Wi-Fi® module solution for IoT applications; the scalable Blue Gecko wireless SoC family for the Bluetooth low-energy market; the Wireless Gecko portfolio of multiprotocol SoC devices for IoT applications; next-generation optical sensors that enable enhanced measurement of ultraviolet (UV) radiation and gesture recognition; and an optical heart rate sensing solution for wrist-based heart rate monitoring (HRM) applications. We plan to continue to introduce products that increase the content we provide for existing applications, thereby enabling us to serve markets we do not currently address and expand our total available market opportunity.

 

During the nine months ended October 1, 2016, we had no customer that represented more than 10% of our revenues. In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer. Three of our distributors, Edom Technology, Avnet and Arrow Electronics, each represented more than 10% of our revenues during the nine months ended October 1, 2016. There were no other distributors or contract manufacturers that accounted for more than 10% of our revenues during the nine months ended October 1, 2016.

 

The percentage of our revenues derived from outside of the United States was 87% during the nine months ended October 1, 2016.  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.

 

24



Table of Contents

 

The sales cycle for our ICs can be as long as 12 months or more. An additional three to six months or more are usually required before a customer ships a significant volume of devices that incorporate our ICs. Due to this lengthy sales cycle, we typically experience a significant delay between incurring research and development and selling, general and administrative expenses, and the corresponding sales. Consequently, if sales in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our operating results for that quarter and, potentially, future quarters would be adversely affected. Moreover, the amount of time between initial research and development and commercialization of a product, if ever, can be substantially longer than the sales cycle for the product. Accordingly, if we incur substantial research and development costs without developing a commercially successful product, our operating results, as well as our growth prospects, could be adversely affected.

 

Because many of our ICs are designed for use in consumer products such as televisions, set-top boxes, radios and wearables, we expect that the demand for our products will be typically subject to some degree of seasonal demand. However, rapid changes in our markets and across our product areas make it difficult for us to accurately estimate the impact of seasonal factors on our business.

 

Results of Operations

 

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

 

Revenues.   Revenues are generated predominately by sales of our products. 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. A small portion of our revenues is derived from the sale of patents. The above revenue recognition criteria for patent sales are generally met upon the execution of the patent sale agreement. 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, other intellectual property license costs and certain acquired intangible assets; and an allocated portion of our occupancy costs. Our gross margin as a percentage of revenue fluctuates depending on product mix, manufacturing yields, inventory valuation adjustments, average selling prices and other factors.

 

Research and Development.   Research and development expense consists primarily of personnel-related expenses, including stock-based compensation, as well as new product masks, external consulting and services costs, equipment tooling, equipment depreciation, amortization of intangible assets, and an allocated portion of our occupancy costs. Research and development activities include the design of new products, refinement of existing products and design of test methodologies to ensure compliance with required specifications.

 

Selling, General and Administrative.   Selling, general and administrative expense consists primarily of personnel-related expenses, including stock-based compensation, as well as an allocated portion of our occupancy costs, sales commissions to independent sales representatives, applications engineering support, professional fees, legal fees and promotional and marketing expenses.

 

25



Table of Contents

 

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, including our credit facilities.

 

Other, Net.   Other, net consists primarily of foreign currency remeasurement adjustments as well as other non-operating income and expenses.

 

Provision for Income Taxes.   Provision for income taxes includes both domestic and foreign income taxes at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 1, 
2016

 

October 3, 
2015

 

October 1, 
2016

 

October 3, 
2015

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of revenues

 

39.2

 

40.2

 

39.4

 

40.7

 

Gross margin

 

60.8

 

59.8

 

60.6

 

59.3

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

27.2

 

29.8

 

29.0

 

29.0

 

Selling, general and administrative

 

21.4

 

22.8

 

22.6

 

24.6

 

Operating expenses

 

48.6

 

52.6

 

51.6

 

53.6

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

12.2

 

7.2

 

9.0

 

5.7

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

0.2

 

0.1

 

0.1

 

0.1

 

Interest expense

 

(0.4

)

(0.4

)

(0.4

)

(0.5

)

Other, net

 

0.0

 

(0.2

)

(0.1

)

0.0

 

Income before income taxes

 

12.0

 

6.7

 

8.6

 

5.3

 

Provision for income taxes

 

0.8

 

0.3

 

0.6

 

0.4

 

Net income

 

11.2

%

6.4

%

8.0

%

4.9

%

 

Revenues

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in millions)

 

October 1,
2016

 

October 3, 
2015

 

Change

 

%
Change

 

October 1, 
2016

 

October 3, 
2015

 

Change

 

%
Change

 

Internet of Things

 

$

81.5

 

$

65.3

 

$

16.2

 

24.8

%

$

229.1

 

$

195.2

 

$

33.9

 

17.4

%

Broadcast

 

40.7

 

36.5

 

4.2

 

11.5

%

117.2

 

122.1

 

(4.9

)

(4.0

)%

Infrastructure

 

38.4

 

31.1

 

7.3

 

23.5

%

110.6

 

91.4

 

19.2

 

21.0

%

Access

 

17.5

 

23.3

 

(5.8

)

(24.9

)%

58.1

 

76.1

 

(18.0

)

(23.7

)%

 

 

$

178.1

 

$

156.2

 

$

21.9

 

14.0

%

$

515.0

 

$

484.8

 

$

30.2

 

6.2

%

 

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

 

·                   Increased revenues of $16.2 million for our Internet of Things products, due primarily to market share gains for our products, increases in the market and the addition of revenues from acquisitions.

 

·                   Increased revenues of $4.2 million for Broadcast products, due primarily to increases in the market for our consumer products.

 

·                   Increased revenues of $7.3 million for our Infrastructure products, due primarily to market share gains.

 

·                   Decreased revenues of $5.8 million for our Access products, due primarily to decreases in our market share and the market for such products.

 

26



Table of Contents

 

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

 

·                   Increased revenues of $33.9 million for our Internet of Things products, due primarily to market share gains for our products, increases in the market and the addition of revenues from acquisitions.

 

·                   Decreased revenues of $4.9 million for Broadcast products, due primarily to decreases in the market for our consumer products.

 

·                   Increased revenues of $19.2 million for our Infrastructure products, due primarily to market share gains and the sale of patents for $5.0 million.

 

·                   Decreased revenues of $18.0 million for our Access products, due primarily to decreases in our market share and the market for such products.

 

Unit volumes of our products increased by 24.8% and average selling prices decreased by 8.6% compared to the three months ended October 3, 2015. Unit volumes of our products increased by 12.7% and average selling prices decreased by 6.6% compared to the nine months ended October 3, 2015. The average selling prices of our products may fluctuate significantly from period to period. In general, as our products become more mature, we expect to experience decreases in average selling prices. We anticipate that newly announced, higher priced, next generation products and product derivatives will offset some of these decreases.

 

Gross Margin

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in millions)

 

October 1, 
2016

 

October 3, 
2015

 

Change

 

October 1, 
2016

 

October 3, 
2015

 

Change

 

Gross margin

 

$

108.2

 

$

93.4

 

$

14.8

 

$

312.0

 

$

287.2

 

$

24.8

 

Percent of revenue

 

60.8

%

59.8

%

 

 

60.6

%

59.3

%

 

 

 

The increased dollar amount of gross margin in the recent three month period was due to increases in gross margin of $8.8 million for our Internet of Things products, $5.7 million for our Infrastructure products and $2.4 million for our Broadcast products offset by a decrease in gross margin of $2.2 million for our Access products. The increased dollar amount of gross margin in the recent nine month period was due to increases in gross margin of $16.5 million for our Infrastructure products and $16.0 million for our Internet of Things products offset by decreases in gross margin of $5.2 million for our Access products and $2.5 million for our Broadcast products. Gross margin in the recent nine month period included $5.0 million from the sale of patents, which had no associated cost of revenues. Gross margin in the prior year nine month period included $2.4 million in acquisition-related charges for the fair value write-up associated with inventory acquired from Bluegiga.

 

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 products; 2) reduce costs of existing products through improved design; 3) achieve lower production costs from our wafer suppliers and third-party assembly and test subcontractors; 4) achieve lower production costs per unit as a result of improved yields throughout the manufacturing process; or 5) reduce logistics costs.

 

Research and Development

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in millions)

 

October 1, 
2016

 

October 3, 
2015

 

Change

 

%
Change

 

October 1, 
2016

 

October 3, 
2015

 

Change

 

%
Change

 

Research and development

 

$

48.4

 

$

46.5

 

$

1.9

 

4.2

%

$

149.1

 

$

140.8

 

$

8.3

 

5.9

%

Percent of revenue

 

27.2

%

29.8

%

 

 

 

 

29.0

%

29.0

%

 

 

 

 

 

27



Table of Contents

 

The increase in research and development expense in the recent three month period was primarily due to increases of (a) $1.8 million for personnel-related expenses, including costs associated with increased headcount, and (b) $0.8 million for new product introduction costs. The increase in research and development expense was offset in part by a decrease of $1.0 million for the amortization of intangible assets. The decrease in research and development expense as a percent of revenues in the recent three month period was due to our increased revenues. The increase in research and development expense in the recent nine month period was primarily due to increases of (a) $4.6 million for personnel-related expenses, (b) $1.2 million for the amortization of intangible assets and (c) $0.9 million for new product introduction costs. We expect that research and development expense will increase in absolute dollars in the fourth quarter of 2016.

 

Selling, General and Administrative

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in millions)

 

October 1, 
2016

 

October 3, 
2015

 

Change

 

%
Change

 

October 1, 
2016

 

October 3, 
2015

 

Change

 

%
Change

 

Selling, general and administrative

 

$

38.0

 

$

35.7