Silicon Laboratories Inc. — Form 10-Q Summary
Reporting-period note: The request metadata says 2013 Q1, but the filing is for the quarter ended March 29, 2014, compared with the quarter ended March 30, 2013. Financial statements are unaudited; amounts below are in millions except per-share data.
Business context and reporting period
Silicon Laboratories designs and develops mixed-signal integrated circuits for communications, consumer, industrial and automotive applications. It operates as a fabless semiconductor company, relying on third parties for wafer fabrication, assembly and testing. Fiscal 2014 has 53 weeks, with the extra week in the fourth quarter.
In February 2014, the company acquired Touchstone Semiconductor’s product portfolio and intellectual property. The filing also discusses product additions and the ongoing integration of Energy Micro, acquired in 2013.
Key financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $145.7 | $145.4 |
| Gross margin | $87.1; 59.8% | $87.4; 60.1% |
| Operating expenses | $77.1 | $66.7 |
| Operating income | $10.0 | $20.6 |
| Net income | $8.1 | $20.0 |
| Diluted EPS | $0.18 | $0.46 |
| Cash from operations | $47.0 | $29.5 |
- Revenue was essentially flat year over year. Broad-based revenue rose 7.4% to $72.3 million, broadcast declined 1.0% to $50.7 million, and access declined 15.4% to $22.7 million.
- Unit volumes fell 9.0% year over year while average selling prices rose 10.4%.
- Gross margin decreased 0.3 percentage points. Operating expenses rose 15.5% to $77.1 million, including R&D of $42.5 million and SG&A of $34.6 million. SG&A included a $3.6 million increase related to acquisition contingent consideration.
- The effective tax rate was 15.3%, versus 0.2% in the prior-year quarter. The filing attributes the increase mainly to the prior period’s recognition of a federal R&D tax credit and the non-renewal of the fiscal 2014 credit.
Financial position, liquidity and debt
- At March 29, 2014, cash and cash equivalents were $128.3 million, short-term investments $194.8 million and long-term investments $11.0 million. Management reported $323.1 million of cash, cash equivalents and short-term investments.
- Total assets were $1,010.1 million; total liabilities were $248.9 million; stockholders’ equity was $761.2 million.
- Debt was $93.8 million: $8.8 million current and $85.0 million long-term. The company had not drawn on its $130 million revolving facility and reported compliance with credit-facility covenants.
- Operating cash flow was $47.0 million; investing activities used $18.9 million and financing activities provided $4.5 million. Cash and cash equivalents increased $32.5 million during the quarter.
- Accounts receivable was $64.7 million and inventory $44.3 million. DSO improved to 40 days from 44 days at fiscal year-end; DOI improved to 68 days from 71 days.
- The $100 million term loan’s LIBOR component is fixed at 0.764% through July 2017 under an interest-rate swap; the combined rate reported at quarter-end was 2.514%.
Material changes, outlook and risks
- Operating income fell 51.5% and net income fell 59.5% year over year, despite nearly flat revenue. The principal pressure was higher R&D and SG&A spending. R&D expense increased 13.0%, partly from added personnel, Energy Micro-related costs and new-product introductions.
- Management forecast Q2 fiscal 2014 revenue of $147–$151 million and diluted EPS of $0.15–$0.19. It expected R&D expense to remain relatively stable in absolute dollars and SG&A to rise, primarily because of litigation expenses. Fiscal 2014 capital expenditures were estimated at $10–$14 million.
- Management said existing cash, investments and available credit were sufficient for requirements through at least the next 12 months. The filing cautions that results are subject to demand, product mix, pricing, seasonality and the semiconductor cycle.
- Cresta Technology sued the company and certain customers over alleged patent infringement involving television tuner products and sought damages and an injunction; an ITC investigation was instituted, and the Delaware case was stayed pending that proceeding. Silicon Laboratories said it would vigorously defend the claims and separately sued Cresta, seeking an injunction and damages. The company could not predict the outcome or financial impact.
- All $12.4 million par value of auction-rate securities had experienced failed auctions, with contractual maturities from 2033 to 2046. The company was receiving underlying cash flows but could not predict when principal would become accessible; it reported no other-than-temporary impairment.
- Other key exposures include customer concentration (Samsung exceeded 10% of revenue; the ten largest customers represented 40%), distributor dependence (61% of revenue), third-party manufacturing concentration, foreign-market exposure (84% of revenue outside the U.S.) and potential pricing pressure. A $100 million share-repurchase authorization was approved in January 2014; no shares were repurchased in the quarter.
Important facts for investors to verify
- Whether Q2 revenue and diluted EPS fall within management’s stated ranges, and whether revenue growth is accompanied by recovery in unit volumes.
- Whether operating-expense growth moderates and margins stabilize, including the effect of acquisition costs, contingent consideration and litigation spending.
- Developments in the Cresta litigation and any resulting legal expenses, injunction risk or financial exposure.
- Customer and distributor concentration, access to third-party manufacturing capacity, and the trend in average selling prices and gross margin.
- Liquidity and debt covenant compliance, and the timing and recoverability of principal on failed-auction securities.