XNAS:SLAB Silicon Laboratories Inc Quarterly Report 10-Q Filing - 9/29/2012

Effective Date 9/29/2012

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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 September 29, 2012

 

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

 

Large accelerated filer x

 

Accelerated filer ¨

 

 

 

Non-accelerated filer ¨

 

Smaller reporting company ¨

 

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

 

As of October 17, 2012, 41,599,066 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 September 29, 2012 and December 31, 2011

3

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended September 29, 2012 and October 1, 2011

4

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 29, 2012 and October 1, 2011

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 2012 and October 1, 2011

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

 

 

Item 2.

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

24

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

 

Part II.   Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

 

 

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

51

 

Cautionary Statement

 

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

 

2



Table of Contents

 

Part I.  Financial Information

Item 1.  Financial Statements

 

Silicon Laboratories Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

 

 

 

September 29,

2012

 

December 31,

2011

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

125,505

 

$

94,964

 

Short-term investments

 

148,573

 

212,526

 

Accounts receivable, net of allowances for doubtful accounts of $789 at September 29, 2012 and $725 at December 31, 2011

 

75,749

 

55,351

 

Inventories

 

42,523

 

34,778

 

Deferred income taxes

 

15,870

 

11,563

 

Prepaid expenses and other current assets

 

36,735

 

43,867

 

Total current assets

 

444,955

 

453,049

 

Long-term investments

 

11,418

 

17,477

 

Property and equipment, net

 

136,321

 

25,141

 

Goodwill

 

130,069

 

115,489

 

Other intangible assets, net

 

94,611

 

60,005

 

Other assets, net

 

37,669

 

34,830

 

Total assets

 

$

855,043

 

$

705,991

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

35,476

 

$

26,354

 

Current portion of long-term debt

 

5,000

 

 

Accrued expenses

 

41,441

 

30,857

 

Deferred income on shipments to distributors

 

30,903

 

24,962

 

Income taxes

 

3,339

 

665

 

Total current liabilities

 

116,159

 

82,838

 

Long-term debt

 

95,000

 

 

Other non-current liabilities

 

22,663

 

24,214

 

Total liabilities

 

233,822

 

107,052

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock—$0.0001 par value; 10,000 shares authorized; no shares issued and outstanding

 

 

 

Common stock—$0.0001 par value; 250,000 shares authorized; 41,706 and 42,068 shares issued and outstanding at September 29, 2012 and December 31, 2011, respectively

 

4

 

4

 

Additional paid-in capital

 

 

14,749

 

Retained earnings

 

622,098

 

586,653

 

Accumulated other comprehensive loss

 

(881

)

(2,467

)

Total stockholders’ equity

 

621,221

 

598,939

 

Total liabilities and stockholders’ equity

 

$

855,043

 

$

705,991

 

 

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

 

3



Table of Contents

 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,

2012

 

October 1,

2011

 

September 29,

2012

 

October 1,

2011

 

Revenues

 

$

149,461

 

$

119,100

 

$

410,833

 

$

364,933

 

Cost of revenues

 

62,968

 

46,203

 

166,442

 

143,666

 

Gross margin

 

86,493

 

72,897

 

244,391

 

221,267

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

34,768

 

31,715

 

101,943

 

101,248

 

Selling, general and administrative

 

24,495

 

27,254

 

82,075

 

85,168

 

Operating expenses

 

59,263

 

58,969

 

184,018

 

186,416

 

Operating income

 

27,230

 

13,928

 

60,373

 

34,851

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

243

 

388

 

1,103

 

1,432

 

Interest expense

 

(234

)

(4

)

(299

)

(14

)

Other income (expense), net

 

(161

)

(81

)

807

 

292

 

Income before income taxes

 

27,078

 

14,231

 

61,984

 

36,561

 

Provision for income taxes

 

17,054

 

2,976

 

17,131

 

13,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,024

 

$

11,255

 

$

44,853

 

$

22,667

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.24

 

$

0.26

 

$

1.06

 

$

0.52

 

Diluted

 

$

0.24

 

$

0.26

 

$

1.04

 

$

0.50

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

41,735

 

42,834

 

42,279

 

43,902

 

Diluted

 

42,520

 

43,919

 

43,261

 

45,305

 

 

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

 

4



Table of Contents

 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,

2012

 

October 1,

2011

 

September 29,

2012

 

October 1,

2011

 

Net income

 

$

10,024

 

$

11,255

 

$

44,853

 

$

22,667

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, before tax

 

 

 

 

 

 

 

 

 

Net changes to available-for-sale securities

 

 

 

 

 

 

 

 

 

Unrealized gains arising during the period

 

621

 

296

 

1,138

 

436

 

 

 

 

 

 

 

 

 

 

 

Net changes to cash flow hedges

 

 

 

 

 

 

 

 

 

Unrealized losses arising during the period

 

(760

)

(66

)

(898

)

(492

)

Reclassification for losses included in net income

 

1,317

 

481

 

2,197

 

1,777

 

Other comprehensive income, before tax

 

1,178

 

711

 

2,437

 

1,721

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

412

 

249

 

853

 

603

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

766

 

462

 

1,584

 

1,118

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

10,790

 

$

11,717

 

$

46,437

 

$

23,785

 

 

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

 

5



Table of Contents

 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 29,

2012

 

October 1,

2011

 

Operating Activities

 

 

 

 

 

Net income

 

$

44,853

 

$

22,667

 

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

 

 

 

 

 

Depreciation of property and equipment

 

10,247

 

10,119

 

Net gain on the purchase of property and equipment

 

(8,457

)

 

Amortization of other intangible assets and other assets

 

11,001

 

8,570

 

Stock-based compensation expense

 

23,796

 

27,224

 

Income tax benefit from employee stock-based awards

 

2,301

 

2,301

 

Excess income tax benefit from employee stock-based awards

 

(2,470

)

(2,111

)

Deferred income taxes

 

5,024

 

2,011

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(18,470

)

(11,581

)

Inventories

 

(5,994

)

1,670

 

Prepaid expenses and other assets

 

13,283

 

227

 

Accounts payable

 

9,113

 

871

 

Accrued expenses

 

(797

)

819

 

Deferred income on shipments to distributors

 

5,267

 

1,495

 

Income taxes

 

(4,378

)

1,287

 

Net cash provided by operating activities

 

84,319

 

65,569

 

Investing Activities

 

 

 

 

 

Purchases of available-for-sale investments

 

(138,822

)

(113,784

)

Proceeds from sales and maturities of marketable securities

 

209,972

 

166,262

 

Purchases of property and equipment

 

(99,720

)

(7,472

)

Purchases of other assets

 

(6,146

)

(891

)

Acquisition of businesses, net of cash acquired

 

(71,852

)

(27,262

)

Net cash provided by (used in) investing activities

 

(106,568

)

16,853

 

Financing Activities

 

 

 

 

 

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

 

3,035

 

2,320

 

Excess income tax benefit from employee stock-based awards

 

2,470

 

2,111

 

Repurchases of common stock

 

(51,040

)

(110,063

)

Proceeds from issuance of long-term debt, net

 

98,325

 

 

Payments on debt

 

 

(7,174

)

Net cash provided by (used in) financing activities

 

52,790

 

(112,806

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

30,541

 

(30,384

)

Cash and cash equivalents at beginning of period

 

94,964

 

138,567

 

Cash and cash equivalents at end of period

 

$

125,505

 

$

108,183

 

 

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 September 29, 2012 and December 31, 2011, the condensed consolidated results of its operations for the three and nine months ended September 29, 2012 and October 1, 2011, the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 29, 2012 and October 1, 2011, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 2012 and October 1, 2011.  All intercompany balances and transactions have been eliminated in consolidation.  The condensed consolidated results of operations for the three and nine months ended September 29, 2012 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, 2011, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on February 15, 2012.

 

The Company prepares financial statements on a 52-53 week year that ends on the Saturday closest to December 31.  Fiscal 2012 will have 52 weeks and fiscal 2011 had 52 weeks.  In a 52-week year, each fiscal quarter consists of 13 weeks.

 

Revenue Recognition

 

Revenues are generated almost exclusively by sales of the Company’s integrated circuits (ICs). The Company recognizes revenue when all of the following criteria are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured. Generally, revenue from product sales to direct customers and contract manufacturers is recognized upon shipment.

 

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

 

7



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Recent Accounting Pronouncements

 

In July 2012, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2012-02, Intangibles—Goodwill and Other (Topic 350) — Testing Indefinite-Lived Intangible Assets for Impairment. ASU 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30. If an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then no further action is required. If an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

In December 2011, the FASB issued FASB ASU No. 2011-11, Balance Sheet (Topic 210) — Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross and net information about these instruments. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.

 

2. Earnings Per Share

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,

2012

 

October 1,

2011

 

September 29,

2012

 

October 1,

2011

 

Net income

 

$

10,024

 

$

11,255

 

$

44,853

 

$

22,667

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing basic earnings per share

 

41,735

 

42,834

 

42,279

 

43,902

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options and other stock-based awards

 

785

 

1,085

 

982

 

1,403

 

Shares used in computing diluted earnings per share

 

42,520

 

43,919

 

43,261

 

45,305

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.24

 

$

0.26

 

$

1.06

 

$

0.52

 

Diluted

 

$

0.24

 

$

0.26

 

$

1.04

 

$

0.50

 

 

For the three months ended September 29, 2012 and October 1, 2011 and the nine months ended September 29, 2012 and October 1, 2011, approximately 0.8 million, 1.4 million, 0.9 million and 0.5 million shares, respectively, were not included in the diluted earnings per share calculation since the shares were anti-dilutive.

 

8



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

3. Cash, Cash Equivalents and Investments

 

The Company’s cash equivalents and short-term investments as of September 29, 2012 consisted of corporate bonds, money market funds, municipal bonds, U.S. Treasury bills, variable-rate demand notes, U.S. government bonds, asset-backed securities and international government bonds. The Company’s long-term investments consist of auction-rate securities. Early in fiscal 2008, auctions for many of the Company’s auction-rate securities failed because sell orders exceeded buy orders. As of September 29, 2012, the Company held $12.5 million par value auction-rate securities, all of which have experienced failed auctions. The underlying assets of the securities consisted of student loans and municipal bonds, of which $10.5 million were guaranteed by the U.S. government and the remaining $2.0 million were privately insured. As of September 29, 2012, $4.5 million of the auction-rate securities had credit ratings of AAA, $6.0 million had credit ratings of AA and $2.0 million had a credit rating of A. These securities have contractual maturity dates ranging from 2033 to 2046 and with current yields of 0.3% to 1.7% per year at September 29, 2012. The Company is receiving the underlying cash flows on all of its auction-rate securities. The principal amounts associated with failed auctions are not expected to be accessible until a successful auction occurs, the issuer redeems the securities, a buyer is found outside of the auction process or the underlying securities mature. The Company is unable to predict if these funds will become available before their maturity dates.

 

The Company does not expect to need access to the capital represented by any of its auction-rate securities prior to their maturities. The Company does not intend to sell, and believes it is not more likely than not that it will be required to sell, its auction-rate securities before their anticipated recovery in market value or final settlement at the underlying par value. The Company believes that the credit ratings and credit support of the security issuers indicate that they have the ability to settle the securities at par value. As such, the Company has determined that no other-than-temporary impairment losses existed as of September 29, 2012.

 

9



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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

 

 

 

September 29, 2012

 

 

 

Cost

 

Gross
Unrealized
Losses

 

Gross
Unrealized
Gains

 

Fair Value

 

Cash and Cash Equivalents:

 

 

 

 

 

 

 

 

 

Cash on hand

 

$

54,887

 

$

 

$

 

$

54,887

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Money market funds

 

54,619

 

 

 

54,619

 

U.S. Treasury bills

 

15,999

 

 

 

15,999

 

Total available-for-sale securities

 

70,618

 

 

 

70,618

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

125,505

 

$

 

$

 

$

125,505

 

 

 

 

 

 

 

 

 

 

 

Short-term Investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

62,824

 

$

(1

)

$

326

 

$

63,149

 

Municipal bonds

 

29,952

 

(2

)

60

 

30,010

 

Variable-rate demand notes

 

19,280

 

 

1

 

19,281

 

U.S. government bonds

 

12,642

 

 

28

 

12,670

 

Asset-backed securities

 

11,978

 

 

19

 

11,997

 

U.S. Treasury bills

 

8,499

 

 

 

8,499

 

International government bonds

 

2,950

 

 

17

 

2,967

 

Total short-term investments

 

$

148,125

 

$

(3

)

$

451

 

$

148,573

 

 

 

 

 

 

 

 

 

 

 

Long-term Investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

12,525

 

$

(1,107

)

$

 

$

11,418

 

Total long-term investments

 

$

12,525

 

$

(1,107

)

$

 

$

11,418

 

 

10



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

 

 

December 31, 2011

 

 

 

Cost

 

Gross
Unrealized
Losses

 

Gross
Unrealized
Gains

 

Fair Value

 

Cash and Cash Equivalents:

 

 

 

 

 

 

 

 

 

Cash on hand

 

$

44,113

 

$

 

$

 

$

44,113

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Money market funds

 

50,851

 

 

 

50,851

 

Total cash and cash equivalents

 

$

94,964

 

$

 

$

 

$

94,964

 

 

 

 

 

 

 

 

 

 

 

Short-term Investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

75,189

 

$

(363

)

$

234

 

$

75,060

 

Municipal bonds

 

56,915

 

(12

)

81

 

56,984

 

Variable-rate demand notes

 

41,280

 

 

 

41,280

 

U.S. government agency

 

19,820

 

(12

)

28

 

19,836

 

U.S. Treasury bills

 

8,600

 

 

 

8,600

 

Asset-backed securities

 

5,743

 

(5

)

1

 

5,739

 

U.S. government bonds

 

2,507

 

 

 

2,507

 

Certificates of deposit

 

1,570

 

 

 

1,570

 

International government bonds

 

950

 

 

 

950

 

Total short-term investments

 

$

212,574

 

$

(392

)

$

344

 

$

212,526

 

 

 

 

 

 

 

 

 

 

 

Long-term Investments:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

19,225

 

$

(1,748

)

$

 

$

17,477

 

Total long-term investments

 

$

19,225

 

$

(1,748

)

$

 

$

17,477

 

 

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 September 29, 2012

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Auction rate securities

 

$

 

$

 

$

11,418

 

$

(1,107

)

$

11,418

 

$

(1,107

)

Municipal bonds

 

5,217

 

(2

)

 

 

5,217

 

(2

)

Corporate bonds

 

1,119

 

(1

)

 

 

1,119

 

(1

)

 

 

$

6,336

 

$

(3

)

$

11,418

 

$

(1,107

)

$

17,754

 

$

(1,110

)

 

11



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

 

 

Less Than 12 Months

 

12 Months or Greater

 

Total

 

As of December 31, 2011

 

Fair

Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Corporate bonds

 

$

25,438

 

$

(363

)

$

 

$

 

$

25,438

 

$

(363

)

Auction rate securities

 

 

 

17,477

 

(1,748

)

17,477

 

(1,748

)

Municipal bonds

 

10,437

 

(12

)

 

 

10,437

 

(12

)

U.S. government agency

 

5,772

 

(12

)

 

 

5,772

 

(12

)

Asset-backed securities

 

4,539

 

(5

)

 

 

4,539

 

(5

)

 

 

$

46,186

 

$

(392

)

$

17,477

 

$

(1,748

)

$

63,663

 

$

(2,140

)

 

The gross unrealized losses as of September 29, 2012 and December 31, 2011 were due primarily to the illiquidity of the Company’s auction-rate securities and, to a lesser extent, to changes in market interest rates.

 

The following summarizes the contractual underlying maturities of the Company’s available-for-sale investments at September 29, 2012 (in thousands):

 

 

 

Cost

 

Fair
Value

 

Due in one year or less

 

$

115,773

 

$

115,842

 

Due after one year through ten years

 

85,140

 

85,519

 

Due after ten years

 

30,355

 

29,248

 

 

 

$

231,268

 

$

230,609

 

 

4. Derivative Financial Instruments

 

The Company is exposed to interest rate fluctuations in the normal course of its business, including through its Credit Facilities. The interest payments on the facility are calculated using a variable-rate of interest. The Company has entered into an interest rate swap agreement with a notional value of $100 million (equal to the full amount borrowed under the Term Loan Facility) and, effectively, converted the LIBOR portion of the variable-rate interest payments to fixed-rate interest payments through July 2017 (the maturity date of the Term Loan Facility). The Company’s objective is to offset increases and decreases in expenses resulting from changes in interest rates with gains and losses on the derivative contract, thereby reducing volatility of earnings. The Company does not use derivative contracts for speculative purposes.

 

The Company’s previous swap agreement with a notional value of $50.1 million was terminated on September 28, 2012 in connection with the Company’s purchase of its corporate headquarters facilities. See Note 8, Acquisitions, for additional information.

 

The Company’s interest rate swap agreement is designated and qualifies as a cash flow hedge. The effective portion of the gain or loss on the interest rate swap is recorded in accumulated other comprehensive loss as a separate component of stockholders’ equity and is subsequently recognized in earnings when the hedged exposure affects earnings. Cash flows from derivatives are classified according to the nature of the cash receipt or payment in the Consolidated Statement of Cash Flows.

 

12



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The Company estimates the fair values of derivatives based on quoted prices and market observable data of similar instruments. If the Term Loan Facility or the interest rate swap agreements is terminated prior to maturity, the fair value of the interest rate swap recorded in accumulated other comprehensive loss may be recognized in the Consolidated Statement of Income based on an assessment of the agreements at the time of termination. The termination of the Company’s swap agreement with a notional value of $50.1 million resulted in its remaining fair value of $0.9 million that was previously recorded in accumulated other comprehensive loss to be reclassified into earnings during the three months ended September 29, 2012.

 

The Company measures the effectiveness of its cash flow hedge by comparing the change in fair value of the hedged item with the change in fair value of the interest rate swap. The Company recognizes ineffective portions of the hedge, as well as amounts not included in the assessment of effectiveness, in the Consolidated Statement of Income. As of September 29, 2012, no portion of the gains or losses from the Company’s hedging instrument was excluded from the assessment of effectiveness. There was no hedge ineffectiveness for any of the periods presented.

 

The Company’s derivative financial instruments consisted of the following (in thousands):

 

 

 

 

 

Fair Value

 

 

 

Balance Sheet Location

 

September 29,
2012

 

December 31,
2011

 

Interest rate swaps

 

Other non-current liabilities

 

$

699

 

$

1,998

 

 

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

 

 

 

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

 

Location of Loss

Reclassified into

Income

 

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

 

 

 

Three Months Ended

 

 

 

Three Months Ended

 

 

 

September 29,
2012

 

October 1,
2011

 

 

 

September 29,
2012

 

October 1,
2011

 

Interest rate swaps

 

$

(760

)

$

(66

)

Rent expense

 

$

(1,317

)

$

(481

)

 

 

 

Nine Months Ended

 

 

 

Nine Months Ended

 

 

 

September 29,
2012

 

October 1,
2011

 

 

 

September 29,
2012

 

October 1,
2011

 

Interest rate swaps

 

$

(898

)

$

(492

)

Rent expense

 

$

(2,197

)

$

(1,777

)

 

The Company expects to reclassify $0.5 million of its interest rate swap losses included in accumulated other comprehensive loss as of September 29, 2012 into earnings in the next 12 months, which is offset by lower interest payments.

 

13



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

5. Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

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 September 29, 2012 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

 

$

54,619

 

$

 

$

 

$

54,619

 

U.S. Treasury bills

 

15,999

 

 

 

15,999

 

Total cash equivalents

 

$

70,618

 

$

 

$

 

$

70,618

 

 

 

 

 

 

 

 

 

 

 

Short-term Investments:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

 

$

63,149

 

$

 

$

63,149

 

Municipal bonds

 

 

30,010

 

 

30,010

 

U.S. government bonds

 

12,670

 

 

 

12,670

 

Asset-backed securities

 

 

11,997

 

 

11,997

 

Variable-rate demand notes

 

 

19,281

 

 

19,281

 

U.S. Treasury bills

 

8,499

 

 

 

8,499

 

International government bonds

 

 

2,967

 

 

2,967

 

Total short-term investments

 

$

21,169

 

$

127,404

 

$

 

$

148,573

 

 

 

 

 

 

 

 

 

 

 

Long-term Investments:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

 

$

11,418

 

$

11,418

 

Total long-term investments

 

$

 

$

 

$

11,418

 

$

11,418

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

91,787

 

$

127,404

 

$

11,418

 

$

230,609

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

 

$

699

 

$

 

$

699

 

Contingent consideration

 

 

 

4,004

 

4,004

 

Total

 

$

 

$

699

 

$

4,004

 

$

4,703

 

 

14



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

 

 

Fair Value Measurements

at December 31, 2011 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

 

$

50,851

 

$

 

$

 

$

50,851

 

Total cash equivalents

 

$

50,851

 

$

 

$

 

$

50,851

 

 

 

 

 

 

 

 

 

 

 

Short-term Investments:

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

 

$

75,060

 

$

 

$

75,060

 

Municipal bonds

 

 

56,984

 

 

56,984

 

Variable-rate demand notes

 

 

41,280

 

 

41,280

 

U.S. government agency

 

 

19,836

 

 

19,836

 

U.S. Treasury bills

 

8,600

 

 

 

8,600

 

Asset-backed securities

 

 

5,739

 

 

5,739

 

U.S. government bonds

 

2,507

 

 

 

2,507

 

Certificates of deposit

 

 

1,570

 

 

1,570

 

International government bonds

 

 

950

 

 

950

 

Total short-term investments

 

$

11,107

 

$

201,419

 

$

 

$

212,526

 

 

 

 

 

 

 

 

 

 

 

Long-term Investments:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

 

$

17,477

 

$

17,477

 

Total long-term investments

 

$

 

$

 

$

17,477

 

$

17,477

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

61,958

 

$

201,419

 

$

17,477

 

$

280,854

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

 

$

1,998

 

$

 

$

1,998

 

Contingent consideration

 

 

 

876

 

876

 

Total

 

$

 

$

1,998

 

$

876

 

$

2,874

 

 

The Company’s cash equivalents and short-term investments that are classified as Level 1 are valued using quoted prices and other relevant information generated by market transactions involving identical assets. Cash equivalents and short-term investments 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.

 

15



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The Company’s derivative instruments are valued using a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include quoted interest swap rates and market observable data of similar instruments. The 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 outcomes if milestone goals are achieved, the probability of achieving each outcome and discount rates.

 

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

 

Auction rate securities

 

Fair Value at
September 29, 2012
(000s)

 

Valuation Technique

 

Unobservable Input

 

Weighted
Average

 

$

11,418

 

Discounted cash flow

 

Estimated yield

 

1.25%

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected holding period

 

10 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated discount rate

 

2.74%

 

 

The Company has followed an established internal control procedure used in valuing auction rate securities. The procedure involves several layers of the Company’s finance management in 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

September 29, 2012

(000s)

 

Valuation Technique

 

Unobservable Input

 

Weighted-
Average

 

Range

 

$

4,004

 

Probability weighted discounted cash flow

 

Estimated outcomes if milestone goals are achieved

 

$4.2 million

 

$0.1 million - $7.6 million

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated probability of achieving each outcome

 

15%

 

3% - 33%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated discount rate

 

5.15%

 

n/a

 

 

16



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The Company has followed an established internal control procedure used in valuing contingent consideration. The valuation of contingent consideration is based on a weighted-average discounted cash flows model. The model relies primarily on estimates of outcomes if milestones are achieved, the probability of achieving each outcome and discount rates. 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.

 

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 outcomes if milestone goals are achieved would be accompanied by a directionally similar change in fair value. A change in discount rate would be accompanied by a directionally opposite change in fair value.

 

The following summarizes the activity in Level 3 financial instruments for the three and nine months ended September 29, 2012 (in thousands):

 

Assets

 

Auction Rate Securities

 

Three Months

Ended

 

Nine Months

Ended

 

Beginning balance

 

$

11,028

 

$

17,477

 

Settlements

 

 

(6,700

)

Gains included in other comprehensive income

 

390

 

641

 

Balance at September 29, 2012

 

$

11,418

 

$

11,418

 

 

Liabilities

 

Contingent Consideration (1)

 

Three Months

Ended

 

Nine Months

Ended

 

Beginning balance

 

$

 

$

876

 

Issuances

 

4,004

 

4,004

 

Gain recognized in earnings (2)

 

 

(876

)

Balance at September 29, 2012

 

$

4,004

 

$

4,004

 

 


(1)          In connection with the acquisition of Ember and ChipSensors, the Company recorded contingent consideration based upon the achievement of certain milestone goals. Changes to the fair value of contingent consideration due to changes in assumptions used in preparing the discounted cash flow model are recorded in selling, general and administrative expenses in the Consolidated Statement of Income.

 

(2)          The Company reduced the estimated fair value of contingent consideration because certain milestone goals were not achieved.

 

17



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Fair values of other financial instruments

 

The fair value of the Company’s Term Loan Facility approximates its carrying values due to the variable interest rate feature of this instrument. The Company’s other financial instruments, including cash, accounts receivable and accounts payable, are recorded at amounts that approximate their fair values due to their short maturities.

 

6. Balance Sheet Details

 

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

 

Inventories

 

 

 

September 29,
2012

 

December 31,
2011

 

Work in progress

 

$

35,986

 

$

28,023

 

Finished goods

 

6,537

 

6,755

 

 

 

$

42,523

 

$

34,778

 

 

7. Separation Agreement

 

On March 1, 2012, the Company entered into a separation agreement with its former Chief Executive Officer (CEO), Necip Sayiner. Pursuant to the agreement, Mr. Sayiner agreed to continue to serve as CEO through April 18, 2012 and as a non-executive advisor through July 19, 2012. Upon his separation from the Company and execution of a release of claims, Mr. Sayiner received a severance package consisting of (a) accelerated vesting of certain restricted stock units (RSUs) and market stock units (MSUs) and the extension of the exercise period of certain stock options, (b) cash payments and (c) other benefits. The separation agreement resulted in a total expense of approximately $3.2 million, which was recognized over the service period in selling, general and administrative expenses.

 

8. Acquisitions

 

Ember

 

On July 3, 2012, the Company acquired Ember Corporation, a privately held company. Ember’s products integrate high-performance, low-power 2.4 GHz wireless ICs with reliable and scalable software into a flexible and robust networking platform.

 

The Company acquired Ember for approximately $79.0 million, including contingent consideration with an estimated fair value of $4.0 million at the date of acquisition. The contingent consideration is payable on a dollar for dollar basis to the extent that revenue of the acquired products exceeds $27.0 million over a one-year period from the beginning of the third fiscal quarter of 2012 through the end of the second fiscal quarter of 2013.

 

The Company recorded the purchase of Ember using the acquisition method of accounting and accordingly, recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The results of Ember’s operations will be included in the Company’s consolidated results of operations beginning on the date of the acquisition. Pro forma information related to this acquisition has not been presented because it would not be materially different from amounts reported.

 

18



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The Company believes that this strategic acquisition provides it with the technology and software expertise required to enable the low-power mesh sensor networks being deployed today in a wide range of residential, commercial and industrial applications. These factors contributed to a purchase price that was in excess of the fair value of the net assets acquired and, as a result, the Company recorded goodwill. The goodwill was allocated to the Company’s operating segment and is not deductible for tax purposes. The purchase price was allocated as follows (in thousands):

 

 

 

Amount

 

Weighted-Average
Amortization Period
(Years)

 

Intangible assets:

 

 

 

 

 

In-process research and development

 

$

14,810

 

Not amortized

 

Developed technology

 

17,800

 

11

 

Customer relationships

 

5,620

 

9

 

Trademarks

 

910

 

12

 

 

 

39,140

 

 

 

Cash and cash equivalents

 

3,115

 

 

 

Accounts receivable

 

1,928

 

 

 

Inventories

 

4,749

 

 

 

Other current assets

 

324

 

 

 

Goodwill

 

14,580

 

 

 

Non-current deferred tax assets, net

 

16,530

 

 

 

Other non-current assets

 

1,776

 

 

 

Current liabilities

 

(3,171

)

 

 

Total purchase price

 

$

78,971

 

 

 

 

The allocation of the purchase price is preliminary and subject to change, primarily for 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.

 

In-process research and development (IPR&D) represents acquired technology that had not achieved technological feasibility as of the acquisition date and had no alternative future use. The IPR&D recorded in connection with the acquisition of Ember consisted of a low-power RF transceiver. The fair value of this technology was determined using the income approach. The discount rate applicable to the cash flows was 12.5%. The remaining research and development efforts include additional design, integration and testing. The estimated cost to complete the IPR&D as of the acquisition date was approximately $11.2 million. Such costs have been consistent with the Company’s assumptions at the time of the acquisition. The Company does not expect the products derived from this technology to begin to contribute to revenues prior to fiscal 2013.

 

19



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Corporate Headquarters Buildings

 

The Company leased facilities at 400 W. Cesar Chavez (“400 WCC”) and 200 W. Cesar Chavez (“200 WCC”) in Austin, Texas for its corporate headquarters. During the terms of the leases, the Company had options to purchase the buildings for approximately $44.3 million for 400 WCC and $50.1 million for 200 WCC. On September 28, 2012, the Company exercised such options and purchased the facilities.

 

The buildings are located on land which is leased through 2099 from a third party. The rents for these ground leases were prepaid for the term of the leases by the previous lessee. The first floor of each building was leased to the same third party for the term of the ground leases. The base rents for the first floor leases were prepaid to the previous owner of the buildings. Portions of the remaining floors were also leased to other tenants.

 

The Company determined that the purchase of the facilities represented a business combination. Under the acquisition method of accounting, the assets acquired and liabilities assumed were recorded at their fair values as of the date of the acquisition. The purchase price was allocated as follows (in thousands):

 

 

 

Amount

 

Buildings

 

$

90,900

 

Leasehold interest in ground leases

 

23,840

 

Acquired unfavorable leases

 

(11,925

)

Lease-related charges

 

(8

)

Net gain on purchase

 

(8,457

)

Total purchase price

 

$

94,350

 

 

The buildings and leasehold interest in ground leases will be depreciated on a straight-line basis over their estimated useful lives of 40 years and 86 years, respectively. Acquired unfavorable leases represent the difference between contractual minimum rental payments due under previously-existing leases in each building and the market rates of those same leases. This amount was recorded in other non-current liabilities in the Condensed Consolidated Balance Sheet and will be amortized to rental income over the estimated terms of the leases.

 

The purchase of the facilities resulted in a net gain of approximately $8.5 million, which was recorded in selling, general and administrative expenses in the Condensed Consolidated Statement of Income. The gain resulted primarily because the assets acquired and liabilities assumed were recorded at their fair values as of the date of the acquisition, which was substantially higher than the purchase prices of the facilities. The purchase prices were fixed at the beginning of the two leases in March 2006 and March 2008. While market prices for such facilities increased over the terms of the leases, the purchase prices remained the same.

 

9. Stockholders’ Equity

 

Common Stock

 

The Company issued 1.1 million shares of common stock during the nine months ended September 29, 2012, net of 0.3 million shares withheld to satisfy employee tax obligations for the vesting of certain stock grants made under the Company’s stock incentive plans.

 

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Share Repurchase Programs

 

In April 2012, the Board of Directors authorized a share repurchase program to repurchase up to $100 million of the Company’s common stock through January 2013. In October 2011, the Board of Directors adopted a share repurchase program to repurchase up to $50 million of the Company’s common stock through April 2012. The Company’s repurchase program announced in July 2010, authorized the repurchase of up to $150 million of the Company’s common stock through 2011, and was completed in August 2011. These programs allow for repurchases to be made in the open market or in private transactions, including structured or accelerated transactions, subject to applicable legal requirements and market conditions. The Company repurchased 1.5 million shares of its common stock for $53.1 million during the nine months ended September 29, 2012. The Company repurchased 3.2 million shares of its common stock for $110.0 million during the nine months ended October 1, 2011.

 

10. Stock-Based Compensation

 

In fiscal 2009, the stockholders of the Company approved the 2009 Stock Incentive Plan (the “2009 Plan”) and the 2009 Employee Stock Purchase Plan (the “2009 Purchase Plan”). The 2009 Plan is currently effective, and has a term of 10 years from the shareholders’ approval date. The 2009 Purchase Plan became effective upon the termination of the previous Employee Stock Purchase Plan, on April 30, 2010.

 

Stock-based compensation costs are based on the fair values on the date of grant for stock options and on the date of enrollment for the employee stock purchase plans, estimated by using the Black-Scholes option-pricing model. The fair values of stock awards and RSUs equal their intrinsic value on the date of grant. The fair values of market-based performance awards generally are estimated using a Monte Carlo simulation based on the date of grant.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,
2012

 

October 1,
2011

 

September 29,
2012

 

October 1,
2011

 

Cost of revenues

 

$

261

 

$

335

 

$

938

 

$

1,015

 

Research and development

 

3,039

 

3,581

 

9,595

 

11,284

 

Selling, general and administrative

 

4,631

 

5,234

 

13,263

 

14,925

 

 

 

7,931

 

9,150

 

23,796

 

27,224

 

Income tax benefit

 

988

 

880

 

4,199

 

2,695

 

 

 

$

6,943

 

$

8,270

 

$

19,597

 

$

24,529

 

 

The Company recorded $0.5 million and $1.9 million in selling, general and administrative expense during the three and nine months ended September 29, 2012, respectively, in connection with modifications to certain stock awards. The Company accelerated the vesting of certain RSUs and MSUs and extended the exercise period of stock options pursuant to a separation agreement between the Company and its former CEO. Stock compensation for the nine months ended September 29, 2012 included the reversal of previously recognized stock compensation for the modified awards.

 

The Company had approximately $47.6 million of total unrecognized compensation costs related to stock options and stock awards at September 29, 2012 that are expected to be recognized over a weighted-average period of 2.1 years. There were no significant stock-based compensation costs capitalized into assets in any of the periods presented.

 

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

11.  Debt

 

On July 31, 2012, the Company and certain of its domestic subsidiaries (the “Guarantors”) entered into a $230 million five-year Credit Agreement (the “Agreement”). The Agreement consists of a $100 million Term Loan Facility and a $130 million Revolving Credit Facility (collectively, the “Credit Facilities”).

 

The Term Loan Facility provides for quarterly principal amortization (equal to 5% of the principal in each of the first two years and 10% of the principal in each of the next three years) with the remaining balance payable upon the maturity date. The Revolving Credit Facility includes a $25 million letter of credit sublimit and a $10 million swingline loan sublimit. The Company has an option to increase the size of the Revolving Credit Facility by up to an aggregate of $50 million in additional commitments, subject to certain conditions. On September 27, 2012, the Company borrowed $100 million under the Term Loan Facility. To date, the Company has not borrowed under the Revolving Credit Facility.

 

The Term Loan Facility and Revolving Credit Facility, other than swingline loans, will bear interest at LIBOR plus an applicable margin or, at the option of the Company, a base rate (defined as the highest of the Bank of America prime rate, the Federal Funds rate plus 0.50% and a daily rate equal to one-month LIBOR plus 1.00%) plus an applicable margin. Swingline loans accrue interest at a per annum rate based on the base rate plus the applicable margin for base rate loans. The applicable margins for the LIBOR rate loans range from 1.50% to 2.50% and for base rate loans range from 0.50% to 1.50%, depending in each case, on the leverage ratio as defined in the Agreement. The Company also pays a commitment fee on the unused amount of commitments.

 

In connection with the closing of the Credit Agreement, the Company entered into a security and pledge agreement. Under the security and pledge agreement, the Company pledged equity securities of certain of its subsidiaries, subject to exceptions and limitations. The Credit Facilities contain 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 2.5 to 1 and a minimum fixed charge coverage ratio (EBITDA/debt payments, income taxes and capital expenditures) of no less than 1.50 to 1. As of September 29, 2012, the Company was in compliance with all covenants of the Credit Facilities.

 

The contractual fiscal year maturities of the Term Loan Facility are as follows (in thousands):

 

Fiscal Year

 

 

 

2013

 

$

5,000

 

2014

 

7,500

 

2015

 

10,000

 

2016

 

10,000

 

2017

 

67,500

 

Total

 

$

100,000

 

 

Interest Rate Swap Agreement

 

In connection with the $100 million borrowed under the Term Loan Facility, the Company entered into an interest rate swap agreement as a hedge against the LIBOR portion of such variable interest payments. Under the terms of the swap agreement, the Company effectively converted the LIBOR portion of the interest on the Term Loan Facility to a fixed interest rate of 0.764% through the maturity date. As of September 29, 2012, the combined interest rate on the Term Loan Facility (which includes an applicable margin) was 2.514%. See Note 4, Derivative Financial Instruments, for additional information.

 

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

12.  Commitments and Contingencies

 

Patent Litigation

 

On May 13, 2012, MaxLinear, Inc., a Delaware corporation, filed a lawsuit against the Company in the United States District Court in the Southern District of California, San Diego Division, seeking a declaratory judgment that MaxLinear products do not infringe 19 Silicon Laboratories’ patents and that such patents are invalid. The Company responded and filed claims accusing MaxLinear of infringing 6 Silicon Laboratories’ patents, including 5 of the named 19 Company patents and an additional patent.  On September 14, 2012, a preliminary injunction motion was filed by the Company seeking to enjoin MaxLinear from infringing U.S. Patent 7,200,364 by making, using, offering to sell, selling or importing the MxL601 Hybrid Tuner in the U.S. or inducing others to make, use, offer to sell, sell, or import the MxL601 or devices incorporating the MxL601 in the U.S.  The Company also has asked the Court for a permanent injunction stopping the sale of all allegedly infringing MaxLinear products.

 

On July 30, 2012, the Company further filed a complaint for declaratory judgment against MaxLinear in United States District Court for the Western District of Texas, Austin Division. The Company is seeking an order that MaxLinear’s United States Patent Nos. 7,362,178, 7,778,613 and 8,198,940 are invalid, and that the Company’s products do not infringe such patents.

 

On July 17, 2012, the Company additionally filed a lawsuit against MaxLinear in the United States District Court in the Southern District of California, San Diego Division, alleging infringement of an additional Company patent, U.S. Patent 7,035,607 related to RF design.  On August 6, 2012, MaxLinear counterclaimed alleging infringement of the three patents in the Texas litigation by a variety of the Company’s RF and mixed signal products.

 

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.

 

13. Income Taxes

 

Provision for income taxes includes both domestic and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences. Income tax expense was $17.1 million and $3.0 million for the three months ended September 29, 2012 and October 1, 2011, respectively, resulting in effective tax rates of 63.0% and 20.9%, respectively. Income tax expense was $17.1 million and $13.9 million for the nine months ended September 29, 2012 and October 1, 2011, respectively, resulting in effective tax rates of 27.6% and 38.0%, respectively. The effective tax rate for the three months ended September 29, 2012 increased from the prior period, primarily due to the current period tax charge related to the intercompany license of certain technology associated with the acquisition of Ember, as well as the non-renewal of the federal research and development tax credit.  The effective tax rate for the nine months ended September 29, 2012 decreased from the prior period, primarily due to the release of prior year unrecognized tax benefits that were determined to be effectively settled during the current period along with one-time nondeductible costs associated with the acquisition of Spectra Linear in 2011.  The impact of these items was partially offset by the non-renewal of the federal research and development tax credit.

 

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

At September 29, 2012, the Company had gross unrecognized tax benefits of $4.3 million, $4.1 million of which would affect the effective tax rate if recognized. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company had a net decrease of $6.9 million during the nine months ended September 29, 2012, which was comprised of (a) a gross decrease of $8.4 million to its prior year unrecognized tax benefits related to an uncertain tax position that was determined to be effectively settled, a portion of which represented a foreign currency remeasurement adjustment and was recognized in other income (expense), net, and (b) a gross increase of $1.5 million to its current year unrecognized tax benefits.

 

The tax years 2005 through 2012 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company’s 2010 federal income tax return is under examination by the U.S. Internal Revenue Service. Although the outcome of tax audits is always uncertain, the Company believes that the results of the examination will not materially affect its financial position or results of operations.  The Company is not currently under audit in any other major taxing jurisdiction.

 

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

 

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the “Cautionary Statement” above and “Risk Factors” below for discussions of the uncertainties, risks and assumptions associated with these statements. Our fiscal year-end financial reporting periods are a 52- or 53- week year ending on the Saturday closest to December 31st. Fiscal 2012 will have 52 weeks and fiscal 2011 had 52 weeks. Our third quarter of fiscal 2012 ended September 29, 2012. Our third quarter of fiscal 2011 ended October 1, 2011.

 

Overview

 

We design and develop proprietary, analog-intensive, mixed-signal integrated circuits (ICs) for a broad range of applications. Mixed-signal ICs are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process. Therefore, mixed-signal ICs are critical components in a broad range of applications in a variety of markets, including communications, consumer, industrial and automotive. Our major customers include Cisco, Huawei, LG Electronics, Pace, Panasonic, Samsung, Sony, Technicolor, Varian Medical Systems and ZTE.

 

As a fabless semiconductor company, we rely on third-party semiconductor fabricators in Asia, and to a lesser extent the United States and Europe, to manufacture the silicon wafers that reflect our IC designs. Each wafer contains numerous die, which are cut from the wafer to create a chip for an IC. We rely on third parties in Asia to assemble, package, and, in most cases, test these devices and ship these units to our customers. Testing performed by such third parties facilitates faster delivery of products to our customers (particularly those located in Asia), shorter production cycle times, lower inventory requirements, lower costs and increased flexibility of test capacity.

 

Our expertise in analog-intensive, high-performance, mixed-signal ICs enables us to develop highly differentiated solutions that address multiple markets. We group our products into the following categories:

 

·                  Broad-based products, which include our microcontrollers, wireless transceivers and System-on-Chips (SoCs), timing products (clocks and oscillators), power and isolation devices, and touch controllers;

 

·                  Broadcast products, which include our broadcast audio and video products;

 

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

 

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·                  Mature products, which include certain devices that are at the end of their respective life cycles and therefore receive minimal or no continued research and development investment, including our DSL analog front end ICs and IRDA devices.

 

Through acquisitions and internal development efforts, we have continued to diversify our product portfolio and introduce next generation ICs with added functionality and further integration. On July 3, 2012, we acquired Ember Corporation, a privately held company. Ember’s products integrate high-performance, low-power 2.4 GHz wireless ICs with reliable and scalable software into a flexible and robust networking platform. We believe that this strategic acquisition provides us with the technology and software expertise required to enable the low-power mesh sensor networks being deployed today in a wide range of residential, commercial and industrial applications.

 

In the first nine months of fiscal 2012, we introduced the Precision32™ 32-bit mixed-signal microcontroller family, based on a patented architecture that provides customers with flexibility, performance and low power. We also introduced a family of digital isolators that are drop-in replacements for optocouplers, high-performance 8-bit microcontrollers featuring an integrated temperature sensor with best-in-class accuracy, two next-generation EZRadio® wireless ICs designed to simplify the addition of high-performance wireless connectivity to cost-sensitive embedded applications, advanced AM/FM receivers tuned for the high-end consumer and professional audio equipment market, a family of TV tuners offering both best-in-class RF performance and support for all worldwide TV standards, a multimedia demodulator that merges all digital video broadcast (DVB) standards into a single-chip solution, isolated analog-to-digital (ADC) converters designed specifically for the demands of mains line monitoring, a single-port PoE controller that brings “plug-and-play” simplicity to embedded power sourcing equipment (PSE) designs, high performance, low power sub-GHz transceivers designed to maximize range and battery life for wireless systems, ultra-small and low power customizable clock generators ideal for space-limited, cost-sensitive embedded and consumer electronics and the expansion of our clocking solutions to address the stringent specifications of the PCI Express (PCIe) Generation 1/2/3 standards. We plan to continue to introduce products that increase the content we provide for existing applications, thereby enabling us to serve markets we do not currently address and expanding our total available market opportunity.

 

During the nine months ended September 29, 2012, we had one customer, Samsung, whose purchases across a variety of product areas 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. Two of our distributors, Edom Technology and Avnet, represented more than 10% of our revenues during the nine months ended September 29, 2012. There were no other distributors or contract manufacturers that accounted for more than 10% of our revenues during the nine months ended September 29, 2012.

 

The percentage of our revenues derived from outside of the United States was 89% during the nine months ended September 29, 2012.  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.

 

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Table of Contents

 

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

 

Results of Operations

 

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

 

Revenues.  Revenues are generated almost exclusively by sales of our ICs. We recognize revenue on sales when all of the following criteria are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured. Generally, we recognize revenue from product sales to direct customers and contract manufacturers upon shipment. Certain of our sales are made to distributors under agreements allowing certain rights of return and price protection on products unsold by distributors. Accordingly, we defer the revenue and cost of revenue on such sales until the distributors sell the product to the end customer. Our products typically carry a one-year replacement warranty. Replacements have been insignificant to date. Our revenues are subject to variation from period to period due to the volume of shipments made within a period, the mix of products we sell and the prices we charge for our products. The vast majority of our revenues were negotiated at prices that reflect a discount from the list prices for our products. These discounts are made for a variety of reasons, including: 1) to establish a relationship with a new customer, 2) as an incentive for customers to purchase products in larger volumes, 3) to provide profit margin to our distributors who resell our products or 4) in response to competition. In addition, as a product matures, we expect that the average selling price for such product will decline due to the greater availability of competing products. Our ability to increase revenues in the future is dependent on increased demand for our established products and our ability to ship larger volumes of those products in response to such demand, as well as our ability to develop or acquire new products and subsequently achieve customer acceptance of newly introduced products.

 

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.

 

Research and Development.  Research and development expense consists primarily of personnel-related expenses, including stock-based compensation, as well as new product mask, 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 Credit Facilities.

 

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

 

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

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,
2012

 

October 1,
2011

 

September 29,
2012

 

October 1,
2011

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of revenues

 

42.1

 

38.8

 

40.5

 

39.4

 

Gross margin

 

57.9