Silicon Laboratories Inc.
SILICON LABORATORIES INC (Form: 10-Q, Received: 04/26/2017 09:37:27)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended April 1, 2017

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  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 April 18, 2017, 42,358,718 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 April 1, 2017 and December 31, 2016

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three months ended April 1, 2017 and April 2, 2016

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended April 1, 2017 and April 2, 2016

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended April 1, 2017 and April 2, 2016

 

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

 

35

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

35

 

 

 

 

 

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

 

51

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

51

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

51

 

 

 

 

 

 

Item 5.

Other Information

 

51

 

 

 

 

 

 

Item 6.

Exhibits

 

52

 

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)

 

 

 

April 1,
2017

 

December 31,
2016

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

225,399

 

$

141,106

 

Short-term investments

 

396,327

 

153,961

 

Accounts receivable, net

 

75,852

 

74,401

 

Inventories

 

61,308

 

59,578

 

Prepaid expenses and other current assets

 

54,360

 

61,805

 

Total current assets

 

813,246

 

490,851

 

Long-term investments

 

5,257

 

5,196

 

Property and equipment, net

 

130,635

 

129,559

 

Goodwill

 

288,629

 

276,130

 

Other intangible assets, net

 

103,638

 

103,565

 

Other assets, net

 

58,021

 

76,543

 

Total assets

 

$

1,399,426

 

$

1,081,844

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

43,781

 

$

39,577

 

Accrued expenses

 

47,416

 

50,100

 

Deferred income on shipments to distributors

 

49,700

 

45,568

 

Income taxes

 

4,396

 

4,450

 

Total current liabilities

 

145,293

 

139,695

 

Long-term debt

 

 

72,500

 

Convertible debt

 

332,502

 

 

Other non-current liabilities

 

42,797

 

42,691

 

Total liabilities

 

520,592

 

254,886

 

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; 42,348 and 41,889 shares issued and outstanding at April 1, 2017 and December 31, 2016, respectively

 

4

 

4

 

Additional paid-in capital

 

59,714

 

24,463

 

Retained earnings

 

819,641

 

801,999

 

Accumulated other comprehensive income (loss)

 

(525

)

492

 

Total stockholders’ equity

 

878,834

 

826,958

 

Total liabilities and stockholders’ equity

 

$

1,399,426

 

$

1,081,844

 

 

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

 

3



Table of Contents

 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

April 1,
2017

 

April 2,
2016

 

Revenues

 

$

179,028

 

$

162,025

 

Cost of revenues

 

73,867

 

66,494

 

Gross margin

 

105,161

 

95,531

 

Operating expenses:

 

 

 

 

 

Research and development

 

52,324

 

49,046

 

Selling, general and administrative

 

40,155

 

39,637

 

Operating expenses

 

92,479

 

88,683

 

Operating income

 

12,682

 

6,848

 

Other income (expense):

 

 

 

 

 

Interest income

 

696

 

271

 

Interest expense

 

198

 

(655

)

Other, net

 

(120

)

(391

)

Income before income taxes

 

13,456

 

6,073

 

Provision (benefit) for income taxes

 

(1,970

)

265

 

 

 

 

 

 

 

Net income

 

$

15,426

 

$

5,808

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.37

 

$

0.14

 

Diluted

 

$

0.36

 

$

0.14

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

Basic

 

42,096

 

41,629

 

Diluted

 

43,030

 

42,199

 

 

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

 

 

 

April 1,
2017

 

April 2,
2016

 

Net income

 

$

15,426

 

$

5,808

 

 

 

 

 

 

 

Other comprehensive loss, before tax:

 

 

 

 

 

Net changes to available-for-sale securities:

 

 

 

 

 

Unrealized gain (losses) arising during the period

 

245

 

(251

)

 

 

 

 

 

 

Net changes to cash flow hedges:

 

 

 

 

 

Unrealized losses arising during the period

 

 

(286

)

Reclassification for (gains) losses included in net income

 

(1,808

)

66

 

 

 

 

 

 

 

Other comprehensive loss, before tax

 

(1,563

)

(471

)

 

 

 

 

 

 

Benefit from income taxes

 

(546

)

(165

)

 

 

 

 

 

 

Other comprehensive loss

 

(1,017

)

(306

)

 

 

 

 

 

 

Comprehensive income

 

$

14,409

 

$

5,502

 

 

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)

 

 

 

Three Months Ended

 

 

 

April 1,
2017

 

April 2,
2016

 

Operating Activities

 

 

 

 

 

Net income

 

$

15,426

 

$

5,808

 

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

 

 

 

 

 

Depreciation of property and equipment

 

3,596

 

3,310

 

Amortization of other intangible assets and other assets

 

6,752

 

7,980

 

Amortization of debt discount and debt issuance costs

 

869

 

 

Stock-based compensation expense

 

10,486

 

10,344

 

Income tax benefit (shortfall) from stock-based awards

 

 

(1,025

)

Excess income tax benefit from stock-based awards

 

 

(6

)

Deferred income taxes

 

(4,059

)

(38

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(1,252

)

(990

)

Inventories

 

(1,636

)

4,580

 

Prepaid expenses and other assets

 

6,708

 

9,159

 

Accounts payable

 

5,565

 

1,559

 

Accrued expenses

 

(3,889

)

6,260

 

Deferred income on shipments to distributors

 

4,038

 

5,558

 

Income taxes

 

945

 

494

 

Other non-current liabilities

 

(1,536

)

(10,584

)

Net cash provided by operating activities

 

42,013

 

42,409

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of available-for-sale investments

 

(267,777

)

(44,547

)

Sales and maturities of available-for-sale investments

 

25,595

 

46,654

 

Purchases of property and equipment

 

(4,543

)

(2,303

)

Purchases of other assets

 

(1,446

)

(1,107

)

Acquisition of business, net of cash acquired

 

(13,658

)

 

Net cash used in investing activities

 

(261,829

)

(1,303

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from issuance of long-term debt, net

 

390,000

 

 

Payments on debt

 

(72,500

)

(2,500

)

Repurchases of common stock

 

 

(18,484

)

Payment of taxes withheld for vested stock awards

 

(13,553

)

(7,517

)

Proceeds from the issuance of common stock

 

162

 

 

Net cash provided by (used in) financing activities

 

304,109

 

(28,501

)

 

 

 

 

 

 

Increase in cash and cash equivalents

 

84,293

 

12,605

 

Cash and cash equivalents at beginning of period

 

141,106

 

114,085

 

Cash and cash equivalents at end of period

 

$

225,399

 

$

126,690

 

 

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 April 1, 2017 and December 31, 2016, the condensed consolidated results of its operations for the three months ended April 1, 2017 and April 2, 2016, the Condensed Consolidated Statements of Comprehensive Income for the three months ended April 1, 2017 and April 2, 2016, and the Condensed Consolidated Statements of Cash Flows for the three months ended April 1, 2017 and April 2, 2016. All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated results of operations for the three months ended April 1, 2017 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 December 31, 2016, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on February 1, 2017.

 

The Company prepares financial statements on a 52- or 53-week fiscal year that ends on the Saturday closest to December 31. Fiscal 2017 will have 52 weeks and fiscal 2016 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 January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-03 , Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323). This ASU amends the disclosure requirements for ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) , ASU No. 2016-02, Leases (Topic 842) and ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . This ASU states that if a registrant does not know or cannot reasonably estimate the impact that the adoption of the above ASUs is expected to have on the financial statements, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. This ASU was effective upon issuance. The adoption did not have a material impact on the Company’s financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04 , Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Instead, an entity should recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01 , Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.

 

In August 2016, the FASB issued ASU No. 2016-16,  Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU requires the recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company early adopted this ASU on January 1, 2017. The adoption did not have a material impact on its financial statements.

 

In August 2016, the FASB issued 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 of the adoption of this ASU, but anticipates that the adoption will not have a material impact on its financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic326): 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 of the adoption of this ASU, but anticipates that the adoption will not have a material impact on its financial statements.

 

8



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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. The Company adopted this ASU on January 1, 2017. Amendments related to the classification of excess tax benefits on the statement of cash flows were applied prospectively. Prior periods have not been adjusted. In connection with its adoption of ASU 2016-09, the Company recorded excess tax benefits of $3.3 million in the three months ended April 1, 2017. The adoption had no other material impact on the Company’s 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. The Company currently expects that most of its operating lease commitments will be subject to the new standard and recognized as right-of-use assets and operating lease liabilities upon the adoption of ASU 2016-02, which will increase the total assets and total liabilities that it reports relative to such amounts prior to adoption.

 

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 of the adoption of this ASU, but anticipates that the adoption will not have a material impact on its financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09 , Revenue from Contracts with Customers (Topic 606) , which supersedes the revenue recognition requirements in Accounting Standards Codification (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; 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; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers , which clarifies narrow aspects of ASC 606 or corrects unintended application of the guidance. The standard may be applied retrospectively to each prior period presented (full retrospective method) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective method). Under the new standard, the Company expects the timing of revenue recognition from sales to distributors to be accelerated. The Company will recognize revenue at the time of sale to the distributor, net of the impact of estimated price adjustments and rights of return. The Company currently anticipates adopting this standard using the modified retrospective method. Under this method, incremental disclosures will be provided to present each financial statement line item for fiscal 2018 under the prior standard. The Company has completed an initial assessment of the new standard and is continuing to evaluate the effect that the adoption will have on its financial statements.

 

9



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

2. Earnings Per Share

 

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

 

 

 

Three Months Ended

 

 

 

April 1,
2017

 

April 2,
2016

 

Net income

 

$

15,426

 

$

5,808

 

 

 

 

 

 

 

Shares used in computing basic earnings per share

 

42,096

 

41,629

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

Stock options and other stock-based awards

 

934

 

570

 

Shares used in computing diluted earnings per share

 

43,030

 

42,199

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.37

 

$

0.14

 

Diluted

 

$

0.36

 

$

0.14

 

 

For the three months ended April 1, 2017 and April 2, 2016, approximately 0.3 million and 0.8 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.

 

The Company intends to settle the principal amount of its convertible senior notes in cash and any excess value in shares in the event of a conversion. Accordingly, shares issuable upon conversion of the principal amount have been excluded from the calculation of diluted earnings per share. If the market value of the notes under certain prescribed conditions exceeds the conversion amount, the excess will be included in the denominator for the computation of diluted earnings per share using the treasury stock method. As of April 1, 2017, no such shares were included in the denominator for the calculation of diluted earnings per share.

 

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.

 

10



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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

 

 

 

Fair Value Measurements
at April 1, 2017 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

 

$

85,090

 

$

 

$

 

$

85,090

 

Certificates of deposit

 

 

32,183

 

 

32,183

 

Commercial paper

 

 

30,582

 

 

30,582

 

Municipal bonds

 

 

6,034

 

 

6,034

 

Corporate bonds

 

 

1,498

 

 

1,498

 

Total cash equivalents

 

$

85,090

 

$

70,297

 

$

 

$

155,387

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Variable-rate demand notes

 

$

 

$

117,770

 

$

 

$

117,770

 

Corporate bonds

 

 

108,828

 

 

108,828

 

Municipal bonds

 

 

78,555

 

 

78,555

 

U.S. government bonds

 

50,437

 

 

 

50,437

 

Asset-backed securities

 

 

25,519

 

 

25,519

 

Agency bonds

 

 

7,482

 

 

7,482

 

Commercial paper

 

 

6,239

 

 

6,239

 

International government bonds

 

 

1,497

 

 

1,497

 

Total short-term investments

 

$

50,437

 

$

345,890

 

$

 

$

396,327

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

 

$

5,257

 

$

5,257

 

Total long-term investments

 

$

 

$

 

$

5,257

 

$

5,257

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

135,527

 

$

416,187

 

$

5,257

 

$

556,971

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Other non-current liabilities:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

$

 

$

3,829

 

$

3,829

 

Total

 

$

 

$

 

$

3,829

 

$

3,829

 

 

11



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

 

 

Fair Value Measurements
at December 31, 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

 

$

69,432

 

$

 

$

 

$

69,432

 

Certificates of deposit

 

 

7,153

 

 

7,153

 

Municipal bonds

 

 

3,904

 

 

3,904

 

Total cash equivalents

 

$

69,432

 

$

11,057

 

$

 

$

80,489

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

 

$

79,702

 

$

 

$

79,702

 

Corporate bonds

 

 

31,036

 

 

31,036

 

Variable-rate demand notes

 

 

16,400

 

 

16,400

 

U.S. government bonds

 

12,416

 

 

 

12,416

 

Asset-backed securities

 

 

8,173

 

 

8,173

 

Commercial paper

 

 

5,233

 

 

5,233

 

International government bonds

 

 

1,001

 

 

1,001

 

Total short-term investments

 

$

12,416

 

$

141,545

 

$

 

$

153,961

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

 

$

5,196

 

$

5,196

 

Total long-term investments

 

$

 

$

 

$

5,196

 

$

5,196

 

 

 

 

 

 

 

 

 

 

 

Other assets, net:

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

 

$

1,808

 

$

 

$

1,808

 

Total

 

$

 

$

1,808

 

$

 

$

1,808

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

81,848

 

$

154,410

 

$

5,196

 

$

241,454

 

 

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 probability weighted discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for the outcome if the milestone goal is achieved, the probability of achieving each outcome and discount rates.

 

12



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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 income (loss) in the Consolidated Balance Sheet. The following summarizes the contractual underlying maturities of the Company’s available-for-sale investments at April 1, 2017 (in thousands):

 

 

 

Cost

 

Fair
Value

 

Due in one year or less

 

$

291,314

 

$

291,287

 

Due after one year through ten years

 

149,197

 

149,157

 

Due after ten years

 

117,270

 

116,527

 

 

 

$

557,781

 

$

556,971

 

 

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

 

 

 

Less Than 12 Months

 

12 Months or Greater

 

Total

 

As of April 1, 2017

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Corporate bonds

 

$

45,299

 

$

(145

)

$

 

$

 

$

45,299

 

$

(145

)

Municipal bonds

 

38,781

 

(42

)

 

 

38,781

 

(42

)

U.S. government bonds

 

28,251

 

(23

)

 

 

28,251

 

(23

)

Asset-backed securities

 

17,478

 

(22

)

 

 

17,478

 

(22

)

Auction rate securities

 

 

 

5,257

 

(742

)

5,257

 

(742

)

Agency bonds

 

3,498

 

(1

)

 

 

3,498

 

(1

)

International government bonds

 

1,497

 

(2

)

 

 

1,497

 

(2

)

 

 

$

134,804

 

$

(235

)

$

5,257

 

$

(742

)

$

140,061

 

$

(977

)

 

 

 

Less Than 12 Months

 

12 Months or Greater

 

Total

 

As of December 31, 2016

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Municipal bonds

 

$

69,379

 

$

(140

)

$

 

$

 

$

69,379

 

$

(140

)

Corporate bonds

 

18,561

 

(128

)

 

 

18,561

 

(128

)

U.S. government bonds

 

10,364

 

(16

)

 

 

10,364

 

(16

)

Auction rate securities

 

 

 

5,196

 

(804

)

5,196

 

(804

)

Asset-backed securities

 

3,176

 

(4

)

 

 

3,176

 

(4

)

 

 

$

101,480

 

$

(288

)

$

5,196

 

$

(804

)

$

106,676

 

$

(1,092

)

 

The gross unrealized losses as of April 1, 2017 and December 31, 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 a contractual maturity date of 2046 at April 1, 2017. The Company is unable to predict if these funds will become available before their maturity date.

 

13



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The Company does not expect to need access to the capital represented by any of its auction-rate securities prior to their maturities. The Company does not intend to sell, and believes it is not more likely than not that it will be required to sell, its 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 April 1, 2017.

 

At April 1, 2017 and December 31, 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
April 1, 2017
(000s)

 

Valuation Technique

 

Unobservable Input

 

Weighted Average

 

$

5,257

 

Discounted cash flow

 

Estimated yield

 

0.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected holding period

 

10 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated discount rate

 

3.56%

 

 

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.

 

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

 

Fair Value at
April 1, 2017
(000s)

 

Valuation Technique

 

Unobservable Input

 

Weighted Average

 

$

3,829

 

Discounted cash flow

 

Expected term

 

9 months

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated discount rate

 

12.0%

 

 

The Company has followed an established internal control procedure used in valuing contingent consideration. The valuation of contingent consideration for the Zentri acquisition is based on a discounted cash flow model. The fair value of this valuation is estimated on a quarterly basis through a collaborative effort by the Company’s sales, marketing and finance departments.

 

14



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 contingent consideration in isolation could result in a significantly lower or higher fair value. A change in projected revenue would be accompanied by a directionally similar change in fair value.

 

The following summarizes the activity in Level 3 financial instruments for the three months ended April 1, 2017 (in thousands):

 

Assets

 

Auction Rate Securities

 

Three Months
Ended

 

Beginning balance

 

$

5,196

 

Gain included in other comprehensive loss

 

61

 

Balance at April 1, 2017

 

$

5,257

 

 

Liabilities

 

Contingent Consideration (1)

 

Three Months
Ended

 

Beginning balance

 

$

 

Issues

 

3,829

 

Balance at April 1, 2017

 

$

3,829

 

 


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

 

Fair values of other financial instruments

 

The Company’s debt is recorded at cost, but is measured at fair value for disclosure purposes. The Company’s convertible senior notes are traded in less active markets and are therefore classified as a Level 2 fair value measurement. The fair value of the convertible senior notes at April 1, 2017 was $426.3 million. The Company’s prior debt under the Credit Facility bore interest at the Eurodollar rate plus an applicable margin. Fair value was 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 April 1, 2017 and December 31, 2016, the fair value of the Company’s debt under the Credit Facility was approximately $0.0 and $72.5 million, respectively.

 

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.

 

15



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Interest Rate Swaps

 

The Company is exposed to interest rate fluctuations in the normal course of its business, including through its Credit Facility. The interest payments on the facility are calculated using a variable-rate of interest. The Company entered into an interest rate swap agreement with an original notional value of $72.5 million and, effectively, converted the Eurodollar portion of the variable-rate interest payments to fixed-rate interest payments through July 2020. The Company terminated the swap agreement on March 6, 2017 in connection with the payoff of its Credit Facility.

 

The Company’s interest rate swap agreement was designated and qualified as a cash flow hedge. The effective portion of the gain or loss on the interest rate swap was recorded in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity and was subsequently recognized as interest expense in the Consolidated Statement of Income when the hedged exposure affected earnings. The termination of the swap agreement resulted in the reclassification of $1.8 million of unrealized gains that were previously recorded in accumulated other comprehensive income (loss) into earnings during the three months ended April 1, 2017. The Company did not discontinue any other cash flow hedges in 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

 

April 1,
2017

 

December 31,
2016

 

Interest rate swap

 

Other assets, net

 

$

 

$

1,808

 

 

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:

 

 

 

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

 

 

 

Three Months Ended

 

Location of Loss

 

Three Months Ended

 

 

 

April 1,
2017

 

April 2,
2016

 

Reclassified into
Income

 

April 1,
2017

 

April 2,
2016

 

Interest rate swaps

 

$

 

$

(286

)

Interest expense

 

$

1,808

 

$

(66

)

 

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 April 1, 2017 and April 2, 2016, the Company held one foreign currency forward contract denominated in Norwegian Krone with a notional value of $4.0 million and $4.8 million, respectively. The fair value of the contracts was not material as of April 1, 2017 or April 2, 2016. The contract held as of April 1, 2017 has a maturity date of June 28, 2017 and it was not designated as a hedging instrument.

 

16



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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

 

 

 

Three Months Ended

 

 

 

Gain (Loss) Recognized in Income

 

April 1,
2017

 

April 2,
2016

 

Location

 

Foreign currency forward contracts

 

$

(94

)

$

(300

)

Other, net

 

 

5. Balance Sheet Details

 

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

 

Inventories

 

 

 

April 1,
2017

 

December 31,
2016

 

Work in progress

 

$

42,493

 

$

40,755

 

Finished goods

 

18,815

 

18,823

 

 

 

$

61,308

 

$

59,578

 

 

6. Acquisitions

 

Zentri

 

On January 20, 2017, the Company acquired Zentri, Inc., a private company. Zentri is an innovator in low-power, cloud-connected Wi-Fi ®  technologies for the Internet of Things (IoT). The Company acquired Zentri for approximately $18.1 million, including initial cash consideration of approximately $14.3 million, and potential additional consideration with an estimated fair value of approximately $3.8 million at the date of acquisition. The amount of potential additional consideration is up to approximately $10.0 million based on fiscal 2017 revenue from certain Zentri products.

 

The purchase price was allocated as follows: intangible assets—$6.7 million; goodwill—$12.5 million; and other net liabilities—$1.1 million. T he goodwill is not deductible for tax purposes. The allocation of the purchase price is preliminary and subject to change, primarily for the valuation of certain assets and accruals and the finalization of income tax matters. Accordingly, adjustments may be made to the values of the assets acquired and liabilities assumed as additional information is obtained about the facts and circumstances that existed at the valuation date.

 

Pro forma information related to this acquisition has not been presented because it would not be materially different from amounts reported.

 

7.  Debt

 

1.375% Convertible Senior Notes

 

On March 6, 2017, the Company completed a private offering of $400 million principal amount convertible senior notes (the “Notes”). The Notes bear interest semi-annually at a rate of 1.375% per year and will mature on March 1, 2022, unless repurchased, redeemed or converted at an earlier date. The Company used $72.5 million of the proceeds to pay off the remaining balance of its Amended Credit Agreement.

 

17



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The Notes are convertible at an initial conversion rate of 10.7744 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to a conversion price of approximately $92.81 per share. The conversion rate is subject to adjustment under certain circumstances. Holders may convert the Notes under the following circumstances: during any calendar quarter after the calendar quarter ending on June 30, 2017 if the closing price of the Company’s common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to 130% of the conversion price of the Notes; during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the closing sale price of our common stock and the conversion rate on each such trading day; if specified distributions or corporate events occur; if the Notes are called for redemption; or at any time after December 1, 2021. The Company may redeem all or any portion of the Notes, at its option, on or after March 6, 2020, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period. Upon conversion, the Notes may be settled in cash, shares of the Company’s common stock or a combination of cash and shares, at the Company’s election.

 

The principal balance of the Notes was separated into liability and equity components, and was recorded initially at fair value. The excess of the principal amount of the liability component over its carrying amount represents the debt discount, which is amortized to interest expense over the term of the Notes using the effective interest method. The carrying amount of the liability component was estimated by discounting the contractual cash flows of similar non-convertible debt at an appropriate market rate at the date of issuance.

 

The Company incurred debt issuance costs of approximately $10.6 million, which was allocated to the liability and equity components in proportion to the allocation of the proceeds. The costs allocated to the liability component are being amortized as interest expense over the term of the Notes using the effective interest method.

 

The carrying amount of the Notes consisted of the following (in thousands):

 

 

 

April 1,
2017

 

Liability component

 

 

 

Principal

 

$

400,000

 

Unamortized debt discount

 

(58,561

)

Unamortized debt issuance costs

 

(8,937

)

Net carrying amount

 

$

332,502

 

 

 

 

 

Equity component

 

 

 

Net carrying amount

 

$

57,718

 

 

The liability component of the Notes is recorded in long-term debt on the Consolidated Balance Sheet. The equity component of the Notes is recorded in additional paid-in capital. The effective interest rate for the liability component was 4.75%. As of April 1, 2017, the remaining period over which the debt discount and debt issuance costs will be amortized was 4.9 years.

 

Interest expense related to the Notes was comprised of the following (in thousands):

 

 

 

Three Months
Ended

 

 

 

April 1,
2017

 

Contractual interest expense

 

$

382

 

Amortization of debt discount

 

754

 

Amortization of debt issuance costs

 

115

 

 

 

$

1,251

 

 

18



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Amended Credit Agreement

 

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. 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 (the “Credit Facility”), 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. In connection with the Company’s offering of the Notes, it entered into a second amendment to the Credit Agreement (the “Second Amended Credit Agreement”) and paid off the remaining balance of $72.5 million.

 

The Second Amended Credit Agreement retained the key terms and provisions of the first Amended Credit Agreement, including 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 Second 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 April 1, 2017, the Company was in compliance with all covenants of the Second Amended Credit Agreement . The Company’s obligations under the Second 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.

 

8. Stockholders’ Equity

 

Common Stock

 

The Company issued 0.5 million shares of common stock during the three months ended April 1, 2017.

 

Share Repurchase Programs

 

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

 

Program
Authorization Date

 

Program
Termination Date

 

Program
Amount

 

January 2017

 

December 2017

 

$

100,000

 

August 2015

 

December 2016

 

$

100,000

 

 

19



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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 did not repurchase any shares of its common stock during the three months ended April 1, 2017. The Company repurchased 0.4 million shares of its common stock for $18.5 million during the three months ended April 2, 2016. These shares were retired upon repurchase.

 

Accumulated Other Comprehensive Income (Loss)

 

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

 

 

 

Unrealized Gain
on Cash Flow
Hedge

 

Net Unrealized Losses
on Available-For-Sale
Securities

 

Total

 

Balance at December 31, 2016

 

$

1,175

 

$

(683

)

$

492

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before reclassifications

 

 

158

 

158

 

Amount reclassified from accumulated other comprehensive income (loss)

 

(1,175

)

 

(1,175

)

Net change for the period

 

(1,175

)

158

 

(1,017

)

 

 

 

 

 

 

 

 

Balance at April 1, 2017

 

$

 

$

(525

)

$

(525

)

 

Reclassifications From Accumulated Other Comprehensive Income (Loss)

 

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

 

 

 

Three Months Ended

 

Reclassification 

 

April 1,
2017

 

April 2,
2016

 

Gains (losses) on cash flow hedges to:

 

 

 

 

 

Interest expense

 

$

1,808

 

$

(66

)

 

 

 

 

 

 

Income tax benefit

 

(633

)

23

 

 

 

 

 

 

 

Total reclassifications

 

$

1,175

 

$

(43

)

 

 

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 RSUs, performance stock units (PSUs) and restricted stock awards (RSAs)) are estimated based on their intrinsic values. The fair values of 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.

 

20



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

 

 

 

April 1,
2017

 

April 2,
2016

 

Cost of revenues

 

$

258

 

$

266

 

Research and development

 

5,246

 

4,910

 

Selling, general and administrative

 

4,982

 

5,168

 

 

 

10,486

 

10,344

 

Income tax benefit

 

5,282

 

2,236

 

 

 

$

5,204

 

$

8,108

 

 

The increase in income tax benefit in the three months ended April 1, 2017 was primarily due to the recognition of excess tax benefits in connection with the Company’s adoption of ASU 2016-09. The Company had approximately $88.8 million of total unrecognized compensation costs related to granted stock options and awards as of April 1, 2017 that are expected to be recognized over a weighted-average period of approximately 2.5 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.

 

The Company challenged the validity of the claims of the Cresta Patents 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. The Federal Circuit summarily affirmed the USPTO’s first determination on November 8, 2016 and the mandate issued on December 16, 2016, rendering the USPTO’s determination final.

 

On August 11, 2016, the PTAB issued its final written decisions in proceedings against a second set of claims in the Cresta Patents and found these claims unpatentable. On October 13, 2016, the patent owner, now known as CF Crespe LLC, filed a notice of appeal with the Federal Circuit. That appeal is currently pending. No hearing date has been set.

 

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

 

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 and the appeal proceedings at the U.S. Court of Appeals for the Federal Circuit for the second set of IPRs.

 

21



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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 CF Crespe LLC have appealed the Bankruptcy Court’s order in that regard. Subject to that appeal, the Company’s patent infringement trial against DBD and CF Crespe LLC is set to begin October 2, 2017.

 

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 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 DBD and CF Crespe LLC 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 three months ended April 1, 2017 and April 2, 2016, the Company received payments from Spredfast of $0.9 million and $0.8 million, respectively, in connection with the leased facilities.

 

12. Income Taxes

 

Provision (benefit) 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 $(2.0) million and $0.3 million for the three months ended April 1, 2017 and April 2, 2016, resulting in effective tax rates of (14.6)% and 4.4%, respectively. The effective tax rate for the three months ended April 1, 2017 decreased from the prior period primarily due to excess tax benefits from stock-based compensation from the adoption of ASU 2016-09 offset by a decrease in the foreign tax rate benefit.

 

On July 27, 2015, the U.S. Tax Court (the “Court”) issued an opinion in Altera Corp. v. Commissioner related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement.  A final decision was entered by the Court on December 1, 2015.  In its opinion, the Court accepted Altera’s position of excluding stock-based compensation from its cost-sharing arrangement and concluded that the related U.S. Treasury Regulations were invalid. In February 2016, the U.S. Internal Revenue Service (the “IRS”) appealed the decision to the U.S Court of Appeals for the Ninth Circuit. Although the IRS has appealed the decision, and the U.S. Treasury has not withdrawn the requirement to include stock-based compensation from its regulations, 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 Consolidated Financial Statements.

 

22



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

As of April 1, 2017, the Company had gross unrecognized tax benefits of $3.6 million, of which $2.2 million would affect the effective tax rate if recognized.

 

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision (benefit) for income taxes.  These amounts were not material for any of the periods presented.

 

Tax years 2012 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.

 

The Company believes it is reasonably possible that the gross unrecognized tax benefits will decrease by approximately $1.9 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.

 

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 2017 will have 52 weeks and fiscal 2016 had 52 weeks. Our first quarter of fiscal 2017 ended April 1, 2017. Our first quarter of fiscal 2016 ended April 2, 2016.

 

Overview

 

We are a provider of silicon, software and solutions for the Internet of Things (IoT), Internet infrastructure, industrial, 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.

 

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 and software 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 $17.0 million in the recent quarter compared to the first quarter of fiscal 2016, primarily due to increased revenues from our IoT and Infrastructure products offset by decreases in revenues from our Access and Broadcast products. Gross margin increased $9.7 million during the same period due primarily to increased product sales. Gross margin as a percent of revenues decreased to 58.7% in the recent quarter compared to 59.0% in the first quarter of fiscal 2016 primarily due to variation in product mix. Operating expenses increased $3.8 million in the recent quarter compared to the first quarter of fiscal 2016 due primarily to increased personnel-related expenses.

 

We ended the first quarter with $621.7 million in cash, cash equivalents and short-term investments. Net cash provided by operating activities was $42.0 million during the recent three-month period. Accounts receivable increased to $75.9 million at April 1, 2017 compared to December 31, 2016, representing 38 days sales outstanding (DSO). Inventory increased to $61.3 million at April 1, 2017 compared to December 31, 2016, representing 75 days of inventory (DOI). On March 6, 2017, we completed a private offering of $400 million principal amount convertible senior notes, and used $72.5 million of the proceeds to pay off the remaining balance of our Amended Credit Agreement.

 

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. On January 20, 2017, we acquired Zentri, Inc., an innovator in low-power, cloud-connected Wi-Fi technologies for the IoT. See Note 6, Acquisitions , to the Condensed Consolidated Financial Statements for additional information.

 

In the first three months of fiscal 2017, we introduced new EFR32 Wireless Gecko SoCs supporting a broad range of multiprotocol, multiband use cases; EFM32 ®  Gecko MCUs offering new security features, large memory options, higher peripheral integration and ultra-low power consumption; and an enhanced Micrium ®  real-time operating system (RTOS) and new Platform Builder software to accelerate embedded design. 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 three months ended April 1, 2017, 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 three months ended April 1, 2017. There were no other distributors or contract manufacturers that accounted for more than 10% of our revenues during the three months ended April 1, 2017.

 

The percentage of our revenues derived from outside of the United States was 86% during the three months ended April 1, 2017.  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, 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.

 

24



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 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.

 

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 convertible senior notes and credit facility. Interest expense on our convertible senior notes includes contractual interest, amortization of the debt discount and amortization of debt issuance costs.

 

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

 

Provision (Benefit) for Income Taxes.   Provision (benefit) 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.

 

25



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

 

 

 

April 1,
2017

 

April 2,
2016

 

 

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

Cost of revenues

 

41.3

 

41.0

 

Gross margin

 

58.7

 

59.0

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Research and development

 

29.2

 

30.3

 

Selling, general and administrative

 

22.4

 

24.5

 

Operating expenses

 

51.6

 

54.8

 

 

 

 

 

 

 

Operating income

 

7.1

 

4.2

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

0.4

 

0.2

 

Interest expense

 

0.1

 

(0.4

)

Other, net

 

(0.1

)

(0.2

)

Income before income taxes

 

7.5

 

3.8

 

Provision (benefit) for income taxes

 

(1.1

)

0.2

 

Net income

 

8.6

%

3.6

%

 

Revenues

 

 

 

Three Months Ended

 

(in millions)

 

April 1,
2017

 

April 2,
2016

 

Change

 

%
Change

 

Internet of Things

 

$

87.8

 

$

70.9

 

$

16.9

 

24.0

%

Broadcast

 

37.3

 

38.4

 

(1.1

)

(3.0

)%

Infrastructure

 

36.0

 

31.6

 

4.4

 

13.9

%

Access

 

17.9

 

21.1

 

(3.2

)

(15.3

)%

Revenues

 

$

179.0

 

$

162.0

 

$

17.0

 

10.5

%

 

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

 

·                   Increased revenues of $16.9 million for our Internet of Things products, due primarily to increases in the market.

·                   Decreased revenues of $1.1 million for Broadcast products, due primarily to decreases in the market for our consumer products.

·                   Increased revenues of $4.4 million for our Infrastructure products, due primarily to increased demand for our products.

·                   Decreased revenues of $3.2 million for our Access products, due primarily to decreased demand for our products and decreases in the market for such products.

 

Unit volumes of our products increased by 18.7% and average selling prices decreased by 7.2% compared to the three months ended April 2, 2016. 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.

 

26



Table of Contents

 

Gross Margin

 

 

 

Three Months Ended

 

(in millions)

 

April 1,
2017

 

April 2,
2016

 

Change

 

Gross margin

 

$

105.2

 

$

95.5

 

$

9.7

 

Percent of revenue

 

58.7

%

59.0

%

(0.3

)%

 

The increased dollar amount of gross margin in the recent three month period was due to increases in gross margin of $10.0 million for our Internet of Things products and $3.2 million for our Infrastructure products, offset by decreases in gross margin of $2.4 million for our Access products and $1.1 million for our Broadcast products. Gross margin increased during the recent period due primarily to increased product sales. Gross margin as a percent of revenues decreased primarily due to variation in product mix.

 

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

 

(in millions)

 

April 1,
2017

 

April 2,
2016

 

Change

 

%
Change

 

Research and development

 

$

52.3

 

$

49.0

 

$

3.3

 

6.7

%

Percent of revenue

 

29.2

%

30.3

%

 

 

 

 

 

The increase in research and development expense in the recent three month period was primarily due to increases of $3.7 million for personnel-related expenses, including costs associated with increased headcount and acquisitions. The decrease in research and development expense as a percent of revenues in the recent three month period was due to our increased revenues. We expect that research and development expense will remain relatively stable in absolute dollars in the second quarter of fiscal 2017.

 

Selling, General and Administrative

 

 

 

Three Months Ended

 

(in millions)

 

April 1,
2017

 

April 2,
2016

 

Change

 

%
Change

 

Selling, general and administrative

 

$

40.2

 

$

39.7

 

$

0.5

 

1.3

%

Percent of revenue

 

22.4

%

24.5

%

 

 

 

 

 

The increase in selling, general and administrative expense in the recent three month period was primarily due to increases of $0.4 million for personnel-related expenses, including costs associated with increased headcount and acquisitions. The decrease in selling, general and administrative expense as a percent of revenues in the recent three month period was due to our increased revenues. We expect that selling, general and administrative expense will decrease in absolute dollars in the second quarter of fiscal 2017.

 

Interest Income

 

Interest income for the three months ended April 1, 2017 was $0.7 million compared to $0.3 million for the three months ended April 2, 2016.

 

27



Table of Contents

 

Interest Expense

 

Interest expense for the three months ended April 1, 2017 was $(0.2) million compared to $0.7 million for the three months ended April 2, 2016. The decrease in interest expense in the recent three month period was primarily due to a $2.0 million gain recorded in connection with the termination of our interest rate swap agreement. This decrease was offset in part by increased interest expense of $1.3 million on our convertible debt, including amortization of the debt discount and amortization of the debt issuance costs.

 

Other, Net

 

Other, net for the three months ended April 1, 2017 was $(0.1) million compared to $(0.4) million for the three months ended April 2, 2016.

 

Provision (Benefit) for Income Taxes

 

 

 

Three Months Ended

 

(in millions)

 

April 1,
2017

 

April 2,
2016

 

Change

 

Provision (benefit) for income taxes

 

$

(2.0

)

$

0.3

 

$

(2.3

)

Effective tax rate

 

(14.6

)%

4.4

%

 

 

 

The effective tax rate for the three months ended April 1, 2017 decreased from the prior period primarily due to excess tax benefits from stock-based compensation from the adoption of ASU 2016-09 offset by a decrease in the foreign tax rate benefit. See Note 12,  Income Taxes , to the Condensed Consolidated Financial Statements for additional information.

 

The effective tax rates for each of the periods presented differ from the federal statutory tax rate of 35% due to the amount of income earned in foreign jurisdictions where the tax rate may be lower than the federal statutory rate and other permanent items including nondeductible compensation expenses and research and development tax credits.  Additionally, the effective tax rate for the three month period ended April 1, 2017 differs from the federal statutory tax rate of 35% due to excess tax benefits from stock-based compensation from the adoption of ASU 2016-09.

 

Business Outlook

 

The following represents our business outlook for the second quarter of fiscal 2017.

 

Income Statement Item

 

Estimate

 

 

 

Revenues

 

$184 million to $189 million

 

 

 

Gross margin

 

58.8%

 

 

 

Operating expenses

 

$92 million

 

 

 

Effective tax rate

 

11%

 

 

 

Diluted earnings per share

 

$0.27 to $0.33

 

 

28



Table of Contents

 

Liquidity and Capital Resources

 

Our principal sources of liquidity as of April 1, 2017 consisted of $621.7 million in cash, cash equivalents and short-term investments, of which approximately $499.8 million was held by our U.S. entities. The remaining balance was held by our foreign subsidiaries. Our cash equivalents and short-term investments consisted of variable-rate demand notes, corporate bonds, money market funds, municipal bonds, U.S. government bonds, commercial paper, certificates of deposit, asset-backed securities, agency bonds and international government bonds. Our long-term investments consisted of auction-rate securities. As of April 1, 2017, we held $6.0 million par value auction-rate securities, all of which have experienced failed auctions because sell orders exceeded buy orders. See Note 3, Fair Value of Financial Instruments , to the Condensed Consolidated Financial Statements for additional information.

 

Operating Activities

 

Net cash provided by operating activities was $42.0 million during the three months ended April 1, 2017, compared to net cash provided of $42.4 million during the three months ended April 2, 2016. Operating cash flows during the three months ended April 1, 2017 reflect our net income of $15.4 million, adjustments of $17.7 million for depreciation, amortization, stock-based compensation and deferred income taxes, and a net cash inflow of $8.9 million due to changes in our operating assets and liabilities.

 

Accounts receivable increased to $75.9 million at April 1, 2017 from $74.4 million at December 31, 2016. The increase in accounts receivable resulted primarily from normal variations in the timing of collections and billings. Our average DSO was 38 days at April 1, 2017 and 37 days at December 31, 2016.

 

Inventory increased to $61.3 million at April 1, 2017 from $59.6 million at December 31, 2016. Our inventory level is primarily impacted by our need to make purchase commitments to support forecasted demand and variations between forecasted and actual demand. Our DOI was 75 days at April 1, 2017 and 73 days at December 31, 2016.

 

Investing Activities

 

Net cash used in investing activities was $261.8 million during the three months ended April 1, 2017, compared to net cash used of $1.3 million during the three months ended April 2, 2016. The increase in cash outflows was principally due to an increase of $244.3 million in net purchases of marketable securities and a net payment of $13.7 million for the acquisition of Zentri. See Note 6, Acquisitions , to the Condensed Consolidated Financial Statements for additional information.

 

We anticipate capital expenditures of approximately $18 to $22 million for fiscal 2017. Additionally, as part of our growth strategy, we expect to evaluate opportunities to invest in or acquire other businesses, intellectual property or technologies that would complement or expand our current offerings, expand the breadth of our markets or enhance our technical capabilities.

 

Financing Activities

 

Net cash provided by financing activities was $304.1 million during the three months ended April 1, 2017, compared to net cash used of $28.5 million during the three months ended April 2, 2016. The increase in cash inflows was principally due to $390.0 million in net proceeds from the issuance of long-term debt and a decrease of $18.5 million for repurchases of our common stock, offset by an increase of $70.0 million in payments on debt. See Note 7, Debt , to the Condensed Consolidated Financial Statements for additional information. In January 2017, the Board of Directors authorized a program to repurchase up to $100 million of our common stock through December 2017.

 

29



Table of Contents

 

Debt

 

1.375% Convertible Senior Notes

 

On March 6, 2017, we completed a private offering of $400 million principal amount convertible senior notes (the “Notes”). The Notes bear interest semi-annually at a rate of 1.375% per year and will mature on March 1, 2022, unless repurchased, redeemed or converted at an earlier date. We used $72.5 million of the proceeds to pay off the remaining balance of our Amended Credit Agreement.

 

Amended Credit Agreement

 

On July 31, 2012, we 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. On July 24, 2015, we 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 (the “Credit Facility”), eliminate the Term Loan Facility and extend the maturity date to five years from the closing date. On July 24, 2015, we borrowed $82.5 million under the Amended Credit Agreement and paid off the remaining balance of our Term Loan Facility. In connection with our offering of the Notes, we entered into a second amendment to the Credit Agreement (the “Second Amended Credit Agreement”) and paid off the remaining balance of $72.5 million.

 

The Second Amended Credit Agreement retains the key terms and provisions of the first Amended Credit Agreement, including a $25 million letter of credit sublimit and a $10 million swingline loan sublimit. We also have 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 See Note 7, Debt , to the Condensed Consolidated Financial Statements for additional information.

 

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

 

Critical Accounting Policies and Estimates

 

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

 

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

 

30



Table of Contents

 

Stock-based compensation — We recognize the fair-value of stock-based compensation transactions in the Consolidated Statements of Income. The fair value of our full-value stock awards (with the exception of market-based performance awards) equals the fair market value of our stock on the date of grant. The fair value of our market-based performance awards is estimated at the date of grant using a Monte-Carlo simulation. The fair value of our stock option and employee stock purchase plan grants is estimated at the date of grant using the Black-Scholes option pricing model. In addition, we are required to estimate the expected forfeiture rate of our stock grants and only recognize the expense for those shares expected to vest. If our actual experience differs significantly from the assumptions used to compute our stock-based compensation cost, or if different assumptions had been used, we may have recorded too much or too little stock-based compensation cost. See Note 9, Stock-Based Compensation , to the Condensed Consolidated Financial Statements for additional information.

 

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

 

Acquired intangible assets — When we acquire a business, a portion of the purchase price is typically allocated to identifiable intangible assets, such as acquired technology and customer relationships. Fair value of these assets is determined primarily using the income approach, which requires us to project future cash flows and apply an appropriate discount rate. We amortize intangible assets with finite lives over their expected useful lives. Our estimates are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Incorrect estimates could result in future impairment charges, and those charges could be material to our results of operations.

 

Impairment of goodwill and other long-lived assets — We review long-lived assets which are held and used, including fixed assets and purchased intangible assets, for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset over its expected useful life and are significantly impacted by estimates of future prices and volumes for our products, capital needs, economic trends and other factors which are inherently difficult to forecast. If the asset is considered to be impaired, we record an impairment charge equal to the amount by which the carrying value of the asset exceeds its fair value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique.

 

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

 

31



Table of Contents

 

Income taxes — We are required to calculate income taxes in each of the jurisdictions in which we operate. This process involves calculating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheet. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, we are required to estimate the amount of expected future taxable income. Judgment is inherent in this process and differences between the estimated and actual taxable income could result in a material impact on our Consolidated Financial Statements.

 

We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine whether the weight of available evidence indicates that the tax position has met the threshold for recognition. Therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

 

Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, they could have a material effect on our income tax provision and net income in the period or periods for which that determination is made. We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax. We believe adequate provisions for income taxes have been made for all periods.

 

Recent Accounting Pronouncements

 

In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-03 , Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323). This ASU amends the disclosure requirements for ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) , ASU No. 2016-02, Leases (Topic 842) and ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . This ASU states that if a registrant does not know or cannot reasonably estimate the impact that the adoption of the above ASUs is expected to have on the financial statements, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. This ASU was effective upon issuance. The adoption did not have a material impact on our financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04 , Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Instead, an entity should recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are currently evaluating the effect that the adoption of this ASU will have on our financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01 , Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. We are currently evaluating the effect that the adoption of this ASU will have on our financial statements.

 

32



Table of Contents

 

In August 2016, the FASB issued ASU No. 2016-16,  Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU requires the recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We early adopted this ASU on January 1, 2017. The adoption did not have a material impact on our financial statements.

 

In August 2016, the FASB issued 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. We are currently evaluating the effect of the adoption of this ASU, but anticipate that the adoption will not have a material impact on our 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. We are currently evaluating the effect of the adoption of this ASU, but anticipate that the adoption will not have a material impact on our 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. We adopted this ASU on January 1, 2017. Amendments related to the classification of excess tax benefits on the statement of cash flows were applied prospectively. Prior periods have not been adjusted. In connection with our adoption of ASU 2016-09, we recorded excess tax benefits of $3.3 million in the three months ended April 1, 2017. The adoption had no other material impact on our 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. We are currently evaluating the effect that the adoption of this ASU will have on our financial statements. We currently expect that most of our operating lease commitments will be subject to the new standard and recognized as right-of-use assets and operating lease liabilities upon our adoption of ASU 2016-02, which will increase our total assets and total liabilities that we report relative to such amounts prior to adoption.

 

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. We are currently evaluating the effect of the adoption of this ASU, but anticipate that the adoption will not have a material impact on our financial statements.

 

33



Table of Contents

 

In May 2014, the FASB issued ASU No. 2014-09 , Revenue from Contracts with Customers (Topic 606) , which supersedes the revenue recognition requirements in Accounting Standards Codification (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; 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; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers , which clarifies narrow aspects of ASC 606 or corrects unintended application of the guidance. The standard may be applied retrospectively to each prior period presented (full retrospective method) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective method). Under the new standard, we expect the timing of revenue recognition from sales to distributors to be accelerated. We will recognize revenue at the time of sale to the distributor, net of the impact of estimated price adjustments and rights of return. We currently anticipate adopting this standard using the modified retrospective method. Under this method, incremental disclosures will be provided to present each financial statement line item for fiscal 2018 under the prior standard. We have completed an initial assessment of the new standard and are continuing to evaluate the effect that the adoption will have on our financial statements.

 

Quantitative and Qualitative Disclosures about Market Risk

 

Interest Income

 

Our investment portfolio includes cash, cash equivalents, short-term investments and long-term investments. Our main investment objectives are the preservation of investment capital and the maximization of after-tax returns on our investment portfolio. Our interest income is sensitive to changes in the general level of U.S. interest rates. Our investment portfolio holdings as of April 1, 2017 yielded less than 100 basis points. A decline in yield to zero basis points on our investment portfolio holdings as of April 1, 2017 would decrease our future annual interest income by approximately $5.6 million. We believe that our investment policy, which defines the duration, concentration, and minimum credit quality of the allowable investments, meets our investment objectives.

 

Interest Expense

 

We are exposed to interest rate fluctuations in the normal course of our business, including through our Credit Facility. The interest rate on the Credit Facility consists of a variable-rate of interest and an applicable margin. While we have drawn from the Credit Facility in the past, we have no borrowings as of April 1, 2017. If we borrow from the Credit Facility in the future, we will again be exposed to interest rate fluctuations.

 

Foreign currency exchange rate risk

 

We are exposed to foreign currency exchange rate risk primarily through assets and liabilities of our subsidiaries denominated in currencies other than the U.S. dollar. Our foreign subsidiaries are considered to be extensions of the U.S. parent. The functional currency of the foreign subsidiaries is the U.S. dollar. Accordingly, gains and losses resulting from remeasuring transactions denominated in currencies other than U.S. dollars are recorded in other, net in the Consolidated Statements of Income. We use foreign currency forward contracts to manage exposure to foreign exchange risk. Gains and losses on foreign currency forward contracts are recognized in earnings in the same period as the remeasurement loss and gain of the related foreign currency denominated asset or liability.

 

34



Table of Contents

 

Investments in Auction-rate Securities

 

As of April 1, 2017, we held $6.0 million par value auction-rate securities, all of which have experienced failed auctions because sell orders exceeded buy orders. We are unable to predict if these funds will become available before their maturity dates. Additionally, if we determine that an other-than-temporary decline in the fair value of any of our available-for-sale auction-rate securities has occurred, we may be required to adjust the carrying value of the investments through an impairment charge.

 

Available Information

 

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

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 4.  Controls and Procedures

 

We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act). Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of April 1, 2017 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Such disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosures. There was no change in our internal controls during the fiscal quarter ended April 1, 2017 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

Part II.  Other Information

 

Item 1.  Legal Proceedings

 

Patent Litigation

 

On January 21, 2014, Cresta Technology Corporation (“Cresta Technology”), a Delaware corporation, filed a lawsuit against us, 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.

 

We challenged the validity of the claims of the Cresta Patents 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. The Federal Circuit summarily affirmed the USPTO’s first determination on November 8, 2016 and the mandate issued on December 16, 2016, rendering the USPTO’s determination final.

 

35



Table of Contents

 

On August 11, 2016, the PTAB issued its final written decisions in proceedings against a second set of claims in the Cresta Patents and found these claims unpatentable. On October 13, 2016, the patent owner, now known as CF Crespe LLC, filed a notice of appeal with the Federal Circuit. That appeal is currently pending. No hearing date has been set.

 

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

 

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 and the appeal proceedings at the U.S. Court of Appeals for the Federal Circuit for the second set of IPRs.

 

On July 16, 2014, we 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. We are 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 CF Crespe LLC have appealed the Bankruptcy Court’s order in that regard. Subject to that appeal, our patent infringement trial against DBD and CF Crespe LLC is set to begin October 2, 2017.

 

As is customary in the semiconductor industry, we provide indemnification protection to our customers for intellectual property claims related to our products. We have not accrued any material liability on our Consolidated Balance Sheet related to such indemnification obligations in connection with the Cresta Technology litigation.

 

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

 

Other

 

We are involved in various other legal proceedings that have arisen in the normal course of business. While the ultimate results of these matters cannot be predicted with certainty, we do not expect them to have a material adverse effect on our Consolidated Financial Statements.

 

Item 1A. Risk Factors

 

Risks Related to our Business

 

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

 

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

 

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

 

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

 

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

 

36



Table of Contents

 

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

 

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

 

·                   The demand for, and life cycles of, the products incorporating our mixed-signal solutions;

 

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

 

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

 

·                   Changes in product mix;

 

·                   The average selling prices for our products could drop suddenly due to competitive offerings or competitive predatory pricing;

 

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

 

·                   Changes in market standards;

 

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

 

·                   The software used in our products, including software provided by third parties, may not meet the needs of our customers;

 

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

 

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

 

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

 

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

 

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

 

·                   Requirements of customers;

 

·                   Accurate prediction of market and technical requirements;

 

·                   Timely completion and introduction of new designs;

 

37



Table of Contents

 

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

 

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

 

·                   Availability of foundry, assembly and test capacity;

 

·                   Achievement of high manufacturing yields;

 

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

 

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

 

·                   Our customer service, application support capabilities and responsiveness;

 

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

 

·                   Technology, industry standards or end-user preferences; and

 

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

 

We cannot provide any assurance that products which we recently have developed or may develop in the future will achieve market acceptance. We have introduced to market or are in development of many products. If our products fail to achieve market acceptance, or if we fail to develop new products on a timely basis that achieve market acceptance, our growth prospects, operating results and competitive position could be adversely affected. The growth of the IoT market is dependent on the adoption of industry standards to permit devices to connect and communicate with each other. If the industry cannot agree on a common set of standards, then the growth of the IoT market may be slower than expected.

 

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

 

Our products serve as components and solutions in electronic devices in various markets. As a result, we have devoted and expect to continue to devote a large amount of resources to develop products based on new and emerging technologies and standards that will be commercially introduced in the future. Research and development expense during the three months ended April 1, 2017 was $52.3 million, or 29.2% of revenues. A number of companies are actively involved in the development of these new technologies and standards. Should any of these companies delay or abandon their efforts to develop commercially available products based on new technologies and standards, our research and development efforts with respect to these technologies and standards likely would have no appreciable value. In addition, if we do not correctly anticipate new technologies and standards, or if the products that we develop based on these new technologies and standards fail to achieve market acceptance, our competitors may be better able to address market demand than we would. Furthermore, if markets for these new technologies and standards develop later than we anticipate, or do not develop at all, demand for our products that are currently in development would suffer, resulting in lower sales of these products than we currently anticipate.

 

38



Table of Contents

 

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

 

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

 

·                   Cease selling or manufacturing products that use the challenged intellectual property;

 

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

 

·                   Redesign those products that use infringing intellectual property; or

 

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

 

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

 

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

 

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

 

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

 

·                   Need for financial resources above our planned investment levels;

 

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

 

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

 

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

 

·                   Increased operating costs due to acquired overhead;

 

·                   Tax issues associated with acquisitions;

 

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

 

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

 

39



Table of Contents

 

·                   Potential impairment of related goodwill and intangible assets.

 

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

 

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

 

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

 

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

 

The future growth of our business will depend in large part on our ability to manage our relationships with current and future distributors and sales representatives, develop additional channels for the distribution and sale of our products and manage these relationships. During the three months ended April 1, 2017, 70% of our revenue was derived from distributors. As we execute our indirect sales strategy, we must manage the potential conflicts that may arise with our direct sales efforts. For example, conflicts with a distributor may arise when a customer begins purchasing directly from us rather than through the distributor. The inability to successfully execute or manage a multi-channel sales strategy could impede our future growth. In addition, relationships with our distributors often involve the use of price protection and inventory return rights. This often requires a significant amount of sales management’s time and system resources to manage properly.

 

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

 

The loss of any of our key customers, or a significant reduction in sales to any one of them, would significantly reduce our revenues and adversely affect our business. During the three months ended April 1, 2017, our ten largest customers accounted for 23% of our revenues. Some of the markets for our products are dominated by a small number of potential customers. Therefore, our operating results in the foreseeable future will continue to depend on our ability to sell to these dominant customers, as well as the ability of these customers to sell products that incorporate our IC products. In the future, these customers may decide not to purchase our products at all, purchase fewer products than they did in the past or alter their purchasing patterns, particularly because:

 

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

 

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

 

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

 

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

 

40



Table of Contents

 

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

 

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

 

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

 

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