Silicon Laboratories Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 28, 2013, not 2012 Q3. It compares Q3 and the first nine months of 2013 with the corresponding 2012 periods. Financial statements are unaudited; amounts below are in millions of dollars unless noted.
Business context and reporting period
Silicon Laboratories designs analog-intensive, mixed-signal integrated circuits for communications, consumer, industrial and automotive applications. It is a fabless semiconductor company relying on third parties, primarily in Asia, for manufacturing, assembly and testing. In July 2013 it acquired Energy Micro, adding energy-efficient microcontrollers aimed in part at Internet of Things applications.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $146.9 | $149.5 | $433.9 | $410.8 |
| Gross margin | $88.2; 60.0% | $86.5; 57.9% | $264.3; 60.9% | $244.4; 59.5% |
| Operating income | $10.5 | $27.2 | $50.2 | $60.4 |
| Net income | $6.5 | $10.0 | $39.2 | $44.9 |
| Diluted EPS | $0.15 | $0.24 | $0.90 | $1.04 |
Q3 revenue decreased 1.7% year over year; nine-month revenue increased 5.6%. Nine-month growth was led by Broad-based products (+7.8%) and Broadcast products (+8.9%), partly offset by Access products (-5.6%). Q3 Access revenue fell 16.2%, primarily due to lost VoIP market share. Product unit volumes declined 10.5% in Q3 and 4.4% for the nine-month period, while average selling prices rose 9.8% and 10.4%, respectively.
Gross margin improved in both comparisons, which management attributed primarily to lower acquisition-related inventory fair-value charges. Profitability nevertheless weakened: Q3 operating income fell to $10.5 million from $27.2 million, and nine-month net income declined to $39.2 million from $44.9 million. Operating expenses rose, including higher R&D and SG&A; the prior-year period included an $8.5 million gain on the headquarters purchase. Nine-month effective tax rate was 18.9%, versus 27.6% in 2012, primarily reflecting prior-period tax charges and recognition of federal R&D credits.
For the nine months, operating cash flow was $95.2 million, compared with $84.3 million in 2012. Investing activities used $76.3 million, including the Energy Micro acquisition; financing activities used $7.8 million. Cash and cash equivalents were $116.5 million at quarter-end. Cash, cash equivalents and short-term investments totaled $270.4 million; the company also held $10.7 million of long-term auction-rate securities.
At September 28, 2013, total debt was $96.25 million, including $5.0 million current and $91.25 million long-term. The $130 million revolving facility was undrawn. The company reported compliance with debt covenants and said existing liquidity and credit availability were expected to cover requirements for at least 12 months. Current assets were $452.2 million and current liabilities $103.9 million.
Material changes, outlook and commentary
- Energy Micro was acquired for approximately $140.6 million, including initial, deferred and contingent consideration. The preliminary allocation included $97.0 million of goodwill and $55.4 million of intangible assets. The acquisition’s results are included from July 1; the company said pro forma information would not be materially different.
- Management forecast Q4 fiscal 2013 revenue of $140–$145 million and diluted EPS of $0.12–$0.17. It expected R&D expense to increase and SG&A expense to decrease in Q4, and projected fiscal 2013 capital expenditures of $12–$14 million.
- MaxLinear litigation was settled on October 3, 2013, after quarter-end. The parties exchanged patent licenses, agreed to dismiss pending cases and entered a three-year covenant not to sue; MaxLinear was to pay Silicon Laboratories $1.25 million.
- All of the company’s $12.4 million par value auction-rate securities had failed auctions and may not be accessible before redemption or maturity (contractual maturities range from 2033 to 2046). The company reported no other-than-temporary impairment but acknowledged that access timing is uncertain.
- A wafer supplier, Telefunken Semiconductors, was in insolvency proceedings. The company was building inventory for affected products; a disruption could constrain supply and sales. Other key exposures include dependence on third-party manufacturing, customer concentration and semiconductor demand cycles. Samsung represented more than 10% of nine-month revenue; two distributors also each exceeded 10%.
- Gross unrecognized tax benefits were $4.8 million; approximately $4.7 million would affect the effective tax rate if recognized. Management believed about $1.4 million could reverse within 12 months as a statute of limitations expires. Other ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether Q4 revenue and diluted EPS guidance was achieved, and whether Access and VoIP market-share losses continued.
- How Energy Micro contributes to revenue and product development, and whether earn-out and integration costs affect margins or cash needs.
- Whether margin improvement persists as pricing, product mix and manufacturing costs change, while operating expenses remain elevated.
- Liquidity availability and valuation of failed-auction securities, and the status of the Telefunken wafer supply and any replacement capacity.
- Debt amortization, covenant headroom and the impact of acquisition-related obligations and contingent consideration.