SILICON LABORATORIES INC. annual report, FY2010

Silicon Laboratories Inc. — Form 10-K Summary

Reporting period: Fiscal 2010, the 52 weeks ended January 1, 2011. This is an annual report, not a fiscal 2009 fourth-quarter filing; quarterly figures are included below for context. The company designs analog-intensive mixed-signal integrated circuits and operates as a fabless semiconductor business.

Financial performance and position

MetricFiscal 2010Fiscal 2009
Revenue$493.3 million$441.0 million
Gross margin$324.2 million; 65.7%$279.8 million; 63.4%
Operating income$86.7 million; 17.6% of revenue$66.5 million; 15.0%
Net income$73.2 million; diluted EPS $1.57$73.1 million; diluted EPS $1.57
Operating cash flow$117.9 million$120.9 million
  • Fiscal 2010 revenue increased 11.9%; unit volume rose 2.8% and average selling prices rose 9.3% year over year.
  • Gross margin improved 2.3 percentage points, attributed mainly to product mix, inventory management and manufacturing cost reductions. R&D rose 18.6% to $123.8 million; SG&A rose 4.5% to $113.8 million.
  • Net income was nearly unchanged despite higher operating income. The prior-year tax benefit of $4.1 million (effective rate of negative 6.0%) did not recur; fiscal 2010 tax expense was $14.4 million (16.4% effective rate).
  • Cash, cash equivalents and short-term investments totaled $365.9 million; including $17.5 million of long-term auction-rate securities, cash and investments were $383.4 million. Working capital was $414.1 million.
  • Total liabilities were $102.2 million, including $22.4 million of long-term obligations and other liabilities. The filing does not identify significant conventional funded debt; reported interest expense was $0.1 million.
  • Cash flow from investing was a $55.2 million outflow, including business acquisitions; financing was a $119.9 million outflow, principally reflecting $140.3 million of share repurchases. Cash and cash equivalents declined $57.2 million to $138.6 million.
  • Accounts receivable fell to $45.0 million from $56.1 million; inventory increased to $39.5 million from $31.5 million. Days of inventory rose to 87 from 65, partly because actual demand was below forecasts.

Fourth-quarter context

Fiscal 2010 fourth-quarter revenue was $111.9 million, versus $127.2 million in fiscal 2009’s fourth quarter and $120.2 million in fiscal 2010’s third quarter. Fourth-quarter operating income was $11.0 million and net income was $12.9 million, compared with $26.1 million and $40.3 million, respectively, in the prior-year quarter. The prior-year quarter included a benefit from resolving uncertain tax positions.

Changes, outlook and material matters

  • Management attributed annual revenue growth to healthier end markets and market-share gains. Fiscal 2009 revenue had grown 6.1% year over year, led by 19.6% higher unit volume despite a 10.8% decline in average selling prices.
  • Fiscal 2011 first-quarter guidance was revenue of $116 million to $122 million and diluted EPS of $0.14 to $0.20, excluding expected charges related to the January 2011 Spectra Linear acquisition. Management expected R&D and SG&A expenses to rise in absolute dollars in the first quarter.
  • Fiscal 2011 capital expenditures were projected at approximately $15 million to $20 million. The company said existing cash and investments should cover requirements for at least 12 months.
  • After year-end, Silicon Labs acquired Spectra Linear for approximately $40 million in cash, subject to working-capital adjustments, plus up to $10 million contingent on acquired-product revenue exceeding $16 million in 2011. During fiscal 2010 it acquired Silicon Clocks and ChipSensors.
  • Two distributors, Edom Technology and Avnet, represented 28% and 14% of fiscal 2010 revenue, respectively. The ten largest end customers accounted for 36%; no single end customer exceeded 10%. 86% of revenue was attributed to customers outside the United States.
  • All $19.7 million par value of auction-rate securities had experienced failed auctions; their recorded fair value was $17.5 million. Management did not expect to need the funds before maturity and reported no other-than-temporary impairment, but access to principal remains uncertain.
  • Headquarters leases include contingent first-dollar loss exposure of up to $35.3 million and $40.0 million if specified building sale proceeds fall short of purchase-option values. No loss accrual was considered necessary at year-end; a prolonged downturn could change that assessment.
  • The IPO securities class action settlement was approved, but appeals remained pending. The company could not predict the outcome if the settlement does not survive appeal. Other ordinary-course litigation was not expected to have a material adverse effect.
  • Key risks include semiconductor cyclicality and price erosion, customer order cancellations and forecast-related inventory exposure, product concentration, dependence on third-party manufacturing (principally TSMC and Asian assembly/test providers), supply disruption, customer and distributor concentration, and lengthy product qualification and design-win cycles.

Most important facts for investors to verify

  • Whether subsequent quarters sustain revenue and margin performance, given the fiscal 2010 fourth-quarter decline and inventory build.
  • How much growth and earnings the acquired businesses contribute, including Spectra Linear’s contingent consideration and integration costs.
  • Liquidity and valuation developments for failed-auction securities, and any change in the company’s view of recoverability.
  • Whether customer/distributor concentration, forecast accuracy and third-party supply capacity affect sales, inventory or gross margins.
  • Resolution of the pending securities-litigation appeals and any material change in tax contingencies or headquarters-lease exposure.
  • The filing reports effective disclosure controls and internal control over financial reporting, and an unqualified audit opinion from Ernst & Young LLP.