Silicon Laboratories Inc. — Form 10-Q Summary
Period clarification: The request identifies 2018 Q3, but the supplied filing is for the quarter ended September 28, 2019 (fiscal Q3 2019), with comparable results for the quarter ended September 29, 2018. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
Silicon Laboratories designs mixed-signal integrated circuits and software for IoT, infrastructure, broadcast and access markets. It is a fabless semiconductor company, relying on third parties, primarily in Asia, to manufacture, assemble and test products. The filing covers the three and nine months ended September 28, 2019.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $223.3 | $230.2 | $618.1 | $652.7 |
| Gross profit / margin | $134.1 / 60.1% | $135.6 / 58.9% | $377.0 / 61.0% | $391.2 / 59.9% |
| Operating income | $23.8 | $25.1 | $43.5 | $66.8 |
| Net income | $20.2 | $27.8 | $9.6 | $68.4 |
| Diluted EPS | $0.45 | $0.63 | $0.22 | $1.55 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $134.9 | $145.1 |
At September 28, 2019, cash and cash equivalents were $237.1 and short-term investments were $457.9, totaling $694.9 in cash, cash equivalents and short-term investments. Current assets were $895.2 and current liabilities $132.0. Inventory was $71.5; accounts receivable was $76.2. Year-to-date investing cash outflow was $58.4 and financing cash outflow was $36.4; cash increased $40.0 over the nine-month period.
Convertible notes had $400.0 principal outstanding and a $364.8 net carrying amount, mature March 1, 2022, and bear a 1.375% coupon. The amended $400.0 revolving credit facility matures August 2024; there were no borrowings at quarter-end. The company reported compliance with facility covenants. Total liabilities were $553.4 and stockholders’ equity $1,083.8.
Material changes versus comparable periods
- Q3 revenue declined 3.0% year over year. IoT revenue rose 3.2% to $129.4, while Infrastructure fell 14.1% to $45.2, Broadcast fell 5.5% to $34.1, and Access fell 9.7% to $14.6.
- For the first nine months, revenue declined 5.3%. IoT grew 4.6%, partly reflecting acquisition-related revenue; Infrastructure, Broadcast and Access declined 12.2%, 18.5% and 25.4%, respectively.
- Q3 gross margin increased 1.2 percentage points, primarily because the prior-year period included a $4.0 acquisition-related acquired-inventory fair-value charge; product mix partly offset the improvement. Year-to-date gross margin rose 1.1 points, while gross profit declined with lower sales.
- Year-to-date operating expenses increased to $333.5 from $324.3, including higher R&D, while operating income fell to $43.5 from $66.8.
- Nine-month net income fell to $9.6 from $68.4, chiefly affected by a $28.1 discrete tax expense in Q2 2019 following the Ninth Circuit’s reversal in the Altera tax case. The prior-year comparison included tax benefits, including a transition-tax adjustment.
- Operating cash flow decreased to $134.9 from $145.1. Investing cash outflow was substantially lower than in 2018, which included $239.7 for the Z-Wave acquisition.
Outlook, commentary and risks
Management’s Q4 fiscal 2019 outlook was revenue of $217–$227 million, gross margin of 60.3%, operating expenses of approximately $113 million, an effective tax rate of 8.0%, and diluted EPS of $0.33–$0.43. Management expected R&D expense to rise in absolute dollars and SG&A to remain relatively stable in Q4. Fiscal 2019 capital expenditures were expected to be approximately $15–$17 million. Management stated existing liquidity and available credit should meet capital requirements for at least 12 months.
Management cited a semiconductor downturn, including weaker macroeconomic conditions, elevated customer inventories, China-related weakness and trade-tariff uncertainty. Other material risks include pricing and product-mix pressure, dependence on external manufacturing and Asian supply chains, long customer qualification and design-win cycles, distributor concentration and return/price-protection terms, and exposure to product defects, IP litigation and cyber risk. 87% of nine-month revenue was derived outside the United States; China represented 23% by end-customer location and 42% by shipped-to location.
The company is appealing a Norwegian tax assessment involving approximately $15.6 million of additional tax related to intercompany pricing. Management believes its position is more likely than not to be sustained, but an unfavorable outcome could materially affect the financial statements. Legal proceedings in the ordinary course were not expected by management to have a material adverse effect. Approximately $6 million par value of auction-rate securities remained illiquid, with contractual maturity in 2046; availability before maturity is uncertain. The share repurchase authorization was extended in October 2019 to December 2020; $26.7 million of shares were repurchased during the first nine months of 2019.
Important facts for investors to verify
- Confirm the intended period: the supplied filing is Q3 2019, not Q3 2018.
- Assess whether IoT growth can offset continued declines in Infrastructure, Broadcast and Access, and track unit volumes, pricing and product mix.
- Review the tax-rate and earnings impact of the Altera-related $28.1 million discrete charge and the outcome of the Norwegian tax appeal.
- Monitor liquidity and debt obligations, including the 2022 convertible notes, credit-facility covenants and any future revolver borrowing.
- Evaluate distributor reliance, customer and geographic concentration, third-party manufacturing exposure, and the continuing illiquidity and valuation assumptions for auction-rate securities.