Business context and reporting period
Silicon Laboratories, Inc. (NASDAQ: SLAB) filed this Form 10-K for the fiscal year ended January 1, 2022. The request metadata says “2020 Q4,” but the filing is for fiscal 2021; fiscal 2020 is the principal comparison period. Silicon Labs is a fabless semiconductor company focused on mixed-signal and wireless connectivity products for the Internet of Things (IoT).
Following the July 26, 2021 sale of its infrastructure and automotive business to Skyworks Solutions, the company reports that business as discontinued operations. Results below distinguish continuing operations, which principally comprise IoT products.
Key financial metrics
| Metric | Fiscal 2021 | Fiscal 2020 |
|---|---|---|
| Revenue, continuing operations | $720.9 million | $510.9 million |
| Gross profit / margin | $425.4 million / 59.0% | $294.8 million / 57.7% |
| Operating loss | $(32.8) million | $(107.1) million |
| Loss from continuing operations | $(57.9) million | $(115.5) million |
| Income from discontinued operations, net of tax | $2,175.3 million | $128.0 million |
| Net income | $2,117.4 million | $12.5 million |
- Continuing-operations revenue grew 41.1%; unit shipments rose 37.1% and average selling prices increased 2.7%.
- Continuing-operations gross margin improved 1.3 percentage points. Operating expenses were $458.2 million, or 63.6% of revenue, including research and development of $273.2 million and selling, general and administrative expense of $185.0 million.
- Net income and diluted EPS of $47.78 were dominated by the divestiture gain. Continuing-operations diluted loss per share was $1.35.
- Continuing-operations cash from operations was $91.2 million, compared with cash used of $8.8 million in fiscal 2020. Continuing-operations investing cash outflow was $476.7 million and financing cash outflow was $1.299 billion. Discontinued operations provided net cash of $2.556 billion, principally reflecting sale proceeds.
- At year-end, cash and cash equivalents were $1.075 billion and short-term investments were $964.6 million, approximately $2.039 billion combined. Current assets were $2.239 billion and current liabilities were $668.8 million.
- Debt included $535 million principal amount of 2025 convertible notes; the net carrying amount was $450.6 million and classified as current after holders became eligible to convert. The $400 million revolving credit facility was undrawn. The company reported compliance with its credit facility covenants.
- Accounts receivable was $98.3 million (42 days sales outstanding); inventory was $49.3 million (55 days inventory).
Material changes versus the prior comparable period
- Revenue increased $210.0 million, chiefly from higher demand for IoT products. Gross profit rose $130.6 million, with margin improvement attributed primarily to product mix.
- Operating loss narrowed by $74.3 million as revenue growth outpaced expense growth. R&D increased 16.2% and SG&A increased 11.0% in dollars, while each declined as a percentage of revenue.
- Net income rose sharply from $12.5 million to $2.117 billion because of the sale of the infrastructure and automotive business. The sale generated a $2.423 billion pretax gain and $2.175 billion net income from discontinued operations; it should not be treated as recurring operating earnings.
- Cash and short-term investments increased substantially, while the company repurchased 6.5 million shares for $1.15 billion. The share count at year-end was 38.481 million, compared with 43.925 million a year earlier.
- Fiscal 2021 had 52 weeks; fiscal 2020 had 53 weeks, including an extra week in the first quarter, which affects comparisons.
Outlook, management commentary, and risks
For the first quarter of fiscal 2022, management forecast revenue of $220–$230 million, gross margin of 63%, operating expenses of approximately $128 million, an effective tax rate of 37%, and diluted EPS of $0.15–$0.25. Management expected R&D expense to increase and SG&A expense to decrease versus the fourth quarter of fiscal 2021.
- The company said it had sufficient cash, investments, available credit, and expected operating cash flows to meet capital requirements, while noting that future needs depend on growth, R&D, and potential acquisitions.
- Supply constraints were a significant risk: foundry, assembly, and test capacity was limited amid strong semiconductor demand, and the company relied heavily on third parties, particularly TSMC and SMIC. It generally lacked long-term supply commitments; transitioning suppliers could take up to 12 months.
- Sales and distribution are concentrated. Distributors represented 81% of fiscal 2021 revenue, and Arrow, Edom Technology, and Sekorm represented 28%, 18%, and 12%, respectively. No end customer exceeded 10% of revenue. China represented 43% of revenue by shipped-to location.
- Other cited risks include semiconductor cyclicality, price erosion, customer order cancellations, product qualification and adoption delays, intense competition, cyber incidents, and geographic concentration of suppliers and customers in the Pacific Rim. COVID-19 effects and supply-chain impacts remained uncertain.
- The $6.0 million par value of auction-rate securities remained illiquid after failed auctions; the company said it could not predict when the funds would become available.
- A Norwegian tax assessment relating to intercompany pricing could involve approximately $16.0 million of additional tax. The company disputed the assessment and stated an unfavorable outcome could materially affect its financial statements; it believed its position was more likely than not to be sustained.
- The 2025 notes could be converted during the quarter ending March 31, 2022. Silicon Labs elected cash settlement of principal and intended to settle any excess conversion value in shares, creating potential dilution.
- The auditor issued unqualified opinions on the financial statements and internal controls. The auditor identified revenue returns estimates and accounting for discontinued operations as critical audit matters. Management reported effective disclosure controls and internal control over financial reporting.
Most important facts for investors to verify
- Reconcile reported net income and EPS to continuing-operations performance and the one-time Skyworks divestiture gain; assess the post-sale business and revenue base.
- Confirm the cash and investment position after the large repurchases, taxes on the sale, and settlement or conversion of the 2025 notes.
- Monitor whether constrained foundry, assembly, and test capacity affects shipments, costs, and the first-quarter outlook.
- Track distributor concentration, distributor inventory and returns or price-protection estimates, and China-related revenue exposure.
- Review the status and potential financial impact of the Norwegian tax dispute, illiquid auction-rate securities, and any dilution from convertible notes.