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SLAB > SEC Filings for SLAB > Form 10-K on 31-Jan-2014All Recent SEC Filings

Show all filings for SILICON LABORATORIES INC

Form 10-K for SILICON LABORATORIES INC


31-Jan-2014

Annual Report


Item 7. 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 Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the "Cautionary Statement" and "Risk Factors" above 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 2013, 2012 and 2011were 52-week years and ended on December 28, 2013, December 29, 2012 and December 31, 2011, respectively. Fiscal 2014 will have 53 weeks with the extra week occurring in the fourth quarter of the year.

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 products addressing a variety of markets, including communications, consumer, industrial and automotive. Our major customers include Alcatel, Cisco, Harman Becker, Huawei, LG Electronics, Pace, Samsung, 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, timing products (clocks and oscillators), power and isolation devices, and sensors;


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


Access products, which include our Voice over IP (VoIP) products, embedded modems and our Power over Ethernet (PoE) 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 1, 2013, we acquired Energy Micro AS. Energy Micro designed and developed energy-efficient 32-bit microcontrollers based on ARM Cortex-M architecture. Energy Micro's energy-friendly solutions are designed to enable a broad range of power-sensitive applications for the Internet of Things (IoT), including smart energy, home automation, security and portable electronics markets. See Note 9, Acquisitions, for additional information.

In fiscal 2013, we introduced a new family of sub-GHz wireless MCUs optimized for power-sensitive, battery-powered systems with RF connectivity; a high-performance bridge controller for USB connectivity applications; relative humidity (RH) and temperature sensors that simplify RH sensing designs while providing power efficiency and ease of use; the EFM32 Zero Gecko MCU family designed to achieve low system energy consumption for a wide range of battery-powered applications; a


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family of universal digital video broadcast (DVB) demodulators that support the latest worldwide DVB standards for cable, terrestrial and satellite reception; a low-jitter, low-power and frequency-flexible timing solution for high-speed networking equipment based on the Synchronous Ethernet (SyncE) standard; a new family of silicon TV tuners offering high performance, integration and low system cost while supporting all worldwide terrestrial and cable TV standards; highly integrated, feature-rich 8-bit MCUs optimized for cost-sensitive motor control applications; highly integrated microelectromechanical system (MEMS) oscillators based on our CMEMS (CMOS+MEMS) technology and designed to replace general-purpose crystal oscillators (XOs) in cost-sensitive, low-power and high-volume industrial, embedded and consumer electronics applications; ultra-small and low-power PCI Express (PCIe) clock generators; XOs that meet ultra-low jitter requirements for cloud computing and networking equipment; digital CMOS-based drop-in replacement solutions for opto-drivers; a single-chip digital radio receiver developed for the global portable and consumer electronics markets; next-generation analog-tuned, analog/digital-display (ATxD) multiband radio ICs; and a high-performance, ultra-low-power sub-GHz wireless transceiver optimized for China's smart metering market. 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 fiscal 2013, 2012 and 2011, we had one customer, Samsung, whose purchases across a variety of product areas represented 15%, 19% and 13% of our revenues, respectively. 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 21% and 11% of our revenues during fiscal 2013, respectively. Edom and Avnet, represented 22% and 11% of our revenues during fiscal 2012, respectively. Edom, Avnet and Macnica, represented 24%, 12% and 10% of our revenues during fiscal 2011, respectively. There were no other distributors or contract manufacturers that accounted for more than 10% of our revenues in fiscal 2013, 2012 or 2011.

The percentage of our revenues derived from outside of the United States was 88% in fiscal 2013, 88% in fiscal 2012 and 86% in fiscal 2011. 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 mobile handsets, we expect that the demand for our products will be typically subject to some degree of seasonal demand. However, rapid changes in our markets and across our product areas make it difficult for us to accurately estimate the impact of seasonal factors on our business.


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Results of Operations

The following describes the line items set forth in our 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 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 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.

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.


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

                                                         Fiscal Year
                                                  2013      2012      2011
           Revenues                                100.0 %   100.0 %   100.0 %
           Cost of revenues                         39.2      40.0      39.3


           Gross margin                             60.8      60.0      60.7
           Operating expenses:
           Research and development                 27.2      24.5      27.7
           Selling, general and administrative      22.5      20.3      22.8


           Operating expenses                       49.7      44.8      50.5


           Operating income                         11.1      15.2      10.2
           Other income (expense):
           Interest income                           0.2       0.2       0.3
           Interest expense                         (0.6 )    (0.2 )     0.0
           Other income (expense), net               0.0       0.1       0.1


           Income before income taxes               10.7      15.3      10.6
           Provision for income taxes                2.1       4.0       3.4


           Net income                                8.6 %    11.3 %     7.2 %

Comparison of Fiscal 2013 to Fiscal 2012

Revenues

                                    Fiscal Year
                 (in millions)    2013      2012     Change     % Change
                 Broad-based     $ 281.8   $ 270.1    $ 11.7          4.3 %
                 Broadcast         199.8     186.1      13.7          7.4 %
                 Access             98.5     107.1      (8.6 )       (8.1 )%


                 Revenues        $ 580.1   $ 563.3    $ 16.8          3.0 %

The change in revenues in fiscal 2013 was due primarily to:


Increased revenues of $11.7 million for our Broad-based ICs, due primarily to the addition of revenues from the acquisition of Energy Micro in July 2013 and Ember in July 2012 and market share gains for our timing ICs. Broad-based revenue growth was offset in part by declines in revenue for our touch controller ICs due to our planned exit from this market.


Increased revenues of $13.7 million for our Broadcast ICs, due primarily to market share gains for our video ICs. Broadcast revenue growth was offset in part by declines in revenue for our audio ICs, which decreased primarily due to declines in market share.


Decreased revenues of $8.6 million for our Access ICs. The decrease in Access revenues resulted primarily due to declines in market share for our VoIP ICs.

Unit volumes of our products decreased compared to fiscal 2012 by 8.1%. Average selling prices increased compared to the same period by 12.1%. 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.


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Gross Margin

                                            Fiscal Year
                    (in millions)         2013      2012     Change
                    Gross margin         $ 352.9   $ 338.0    $ 14.9
                    Percent of revenue      60.8 %    60.0 %     0.8 %

The increased dollar amount of gross margin in fiscal 2013 was due primarily to $14.4 million of increased gross margin from higher market demand for our video and timing ICs and the addition of ICs acquired from Energy Micro and Ember, offset in part by a decline in demand for our touch controller, audio and VoIP ICs.

We may experience declines in the average selling prices of certain of our products. This creates downward pressure on gross margin as a percentage of revenues and may be offset to the extent we are able to: 1) introduce higher margin new products and gain market share with our ICs; 2) achieve lower production costs from our wafer suppliers and third-party assembly and test subcontractors; 3) achieve lower production costs per unit as a result of improved yields throughout the manufacturing process; or 4) reduce logistics costs.

Research and Development


                                           Fiscal Year                   %
             (in millions)               2013      2012     Change    Change
             Research and development   $ 157.8   $ 138.0    $ 19.8      14.4 %
             Percent of revenue            27.2 %    24.5 %

The increase in research and development expense in fiscal 2013 was principally due to increases of (a) $11.4 million for personnel-related expenses, including personnel costs associated with (i) increased headcount, and
(ii) the acquisition of Energy Micro and Ember, and (b) $4.0 million for the amortization of intangible assets primarily related to our acquisition of Energy Micro. We expect that research and development expense will remain relatively stable in absolute dollars in the first quarter of 2014.

Recent development projects include a new family of sub-GHz wireless MCUs optimized for power-sensitive, battery-powered systems with RF connectivity; a high-performance bridge controller for USB connectivity applications; RH and temperature sensors that simplify RH sensing designs while providing power efficiency and ease of use; the EFM32 Zero Gecko MCU family designed to achieve low system energy consumption for a wide range of battery-powered applications; a family of universal DVB demodulators that support the latest worldwide DVB standards for cable, terrestrial and satellite reception; a low-jitter, low-power and frequency-flexible timing solution for high-speed networking equipment based on the SyncE standard; a new family of silicon TV tuners offering high performance, integration and low system cost while supporting all worldwide terrestrial and cable TV standards; highly integrated, feature-rich 8-bit MCUs optimized for cost-sensitive motor control applications; highly integrated MEMS oscillators based on our CMEMS technology and designed to replace general-purpose XOs in cost-sensitive, low-power and high-volume industrial, embedded and consumer electronics applications; ultra-small and low-power PCIe clock generators; XOs that meet ultra-low jitter requirements for cloud computing and networking equipment; digital CMOS-based drop-in replacement solutions for opto-drivers; a single-chip digital radio receiver developed for the global portable and consumer electronics markets; next-generation analog-tuned, analog/digital-display (ATxD) multiband radio ICs; and a high-performance, ultra-low-power sub-GHz wireless transceiver optimized for China's smart metering market.


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Selling, General and Administrative


                                                 Fiscal Year                   %
        (in millions)                          2013      2012     Change    Change
        Selling, general and administrative   $ 130.8   $ 114.4    $ 16.4      14.3 %
        Percent of revenue                       22.5 %    20.3 %

The increase in selling, general and administrative expense in fiscal 2013 was principally due to a net gain of $8.5 million in fiscal 2012 from the purchase of our headquarters. Furthermore, the increase in selling, general and administrative expense in fiscal 2013 was also due to increases of
(a) $2.5 million for sales commissions, (b) $2.1 million for personnel-related expenses, primarily associated with (i) increased headcount, and (ii) the acquisition of Energy Micro and Ember, and (c) $1.5 million for legal fees, primarily related to litigation and acquisition-related costs. We expect that selling, general and administrative expense will increase in absolute dollars in the first quarter of 2014.

Interest Income

Interest income in fiscal 2013 was $0.9 million compared to $1.3 million in fiscal 2012.

Interest Expense

Interest expense in fiscal 2013 was $3.3 million compared $1.1 million in fiscal 2012. The increase in fiscal 2013 was principally due to higher average debt balances in the period on our Term Loan Facility under our Credit Agreement.

Other Income (Expense), Net

Other income (expense), net in fiscal 2013 was $0.2 million compared to $0.5 million in fiscal 2012.

Provision for Income Taxes

                                              Fiscal Year
               (in millions)                 2013     2012    Change
               Provision for income taxes   $ 12.2   $ 22.8   $ (10.6 )
               Effective tax rate             19.7 %   26.4 %

The effective tax rate for fiscal 2013 decreased from the prior period, primarily due to the prior period tax charge related to the intercompany license of certain technology associated with the acquisition of Ember during 2012 and the recognition of the fiscal 2012 and fiscal 2013 federal research and development tax credits in fiscal 2013 as a result of the enactment of the American Taxpayer Relief Act of 2012 (the "Act") on January 2, 2013. The decrease in the effective tax rate for fiscal 2013 was partially offset by the release during the prior period of unrecognized tax benefits that were determined to be effectively settled during 2012. We expect our effective tax rate for fiscal 2014 to increase primarily due to the expiration of the federal research and development tax credit on December 31, 2013.

The effective tax rates for each of the periods presented differ from the federal statutory rate of 35% due to the amount of income earned in foreign jurisdictions where the tax rate may be lower than the federal statutory rate, research and development tax credits and other permanent items including changes to the liability for unrecognized tax benefits.


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Comparison of Fiscal 2012 to Fiscal 2011

Revenues


                                     Fiscal Year                   %
                  (in millions)    2012      2011     Change    Change
                  Broad-based     $ 270.1   $ 208.7    $ 61.4      29.4 %
                  Broadcast         186.1     169.5      16.6       9.7 %
                  Access            107.1     113.4      (6.3 )    (5.5 )%


                  Revenues        $ 563.3   $ 491.6    $ 71.7      14.6 %

The change in revenues in fiscal 2012 was due primarily to:


Increased revenues of $61.4 million for our broad-based ICs due primarily to (a) increased unit volumes of our microcontroller ICs, and (b) the introduction of our touch controller ICs. The increased unit volumes of our microcontroller ICs resulted from higher market demand as customers continued to adopt these ICs over ICs from competitors as well as increased IC revenues resulting from the acquisition of Ember in July 2012.


Increased revenues of $16.6 million for our broadcast ICs due primarily to increased unit volumes of our video ICs, which resulted from higher market demand as customers continued to adopt these ICs over ICs from competitors. The increase in broadcast revenues was offset in part by a decline in revenues for our audio ICs, resulting primarily from decreased unit volumes. The decrease in unit volumes was due to a decline in our market share for audio ICs, primarily due to increased competition.

Unit volumes of our products increased compared to fiscal 2011 by 18.0%. Average selling prices decreased compared to the same period by 3.0%.

Gross Margin

                                          Fiscal Year
                  (in millions)         2012      2011     Change
                  Gross margin         $ 338.0   $ 298.4    $ 39.6
                  Percent of revenue      60.0 %    60.7 %    (0.7 )%

The increased dollar amount of gross margin in fiscal 2012 was due primarily to $51.3 million of increased gross margin from higher market demand for our video and microcontroller ICs and the introduction of our touch controller ICs, offset in part by an increase in acquisition-related charges. Gross margin as a percentage of revenue decreased 0.5 percent due primarily to the increased sales of video ICs, which had a lower gross margin percentage than the Company average.

Research and Development


                                          Fiscal Year                    %
            (in millions)               2012      2011      Change     Change
            Research and development   $ 138.0   $ 136.0    $   2.0        1.5 %
            Percent of revenue            24.5 %    27.7 %

The increase in research and development expense in fiscal 2012 was principally due to an increase of $2.8 million for personnel-related expenses, including personnel costs associated with the acquisition of Ember. The decrease in research and development expense as a percent of revenues in fiscal 2012 is due to our increased revenues.


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Selling, General and Administrative


                                                Fiscal Year                    %
       (in millions)                          2012      2011      Change     Change
       Selling, general and administrative   $ 114.4   $ 112.4    $   2.0        1.8 %
       Percent of revenue                       20.3 %    22.8 %

The increase in selling, general and administrative expense in fiscal 2012 was principally due to increases of (a) $6.5 million for personnel-related expenses, including severance related to a separation agreement between us and our former CEO, (b) $1.5 million for legal fees, primarily related to litigation and acquisition-related costs, and (c) $0.8 million for product marketing costs. The increase in fiscal 2012 was offset in part by a net gain of $8.5 million from the purchase of our headquarters in fiscal 2012. The decrease in selling, general and administrative expense as a percent of revenues in fiscal 2012 is due to our increased revenues.

Interest Income

Interest income in fiscal 2012 was $1.3 million compared to $1.9 million in fiscal 2011.

Interest Expense

Interest expense in fiscal 2012 was $1.1 million compared to $37 thousand in . . .

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