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Silicon Laboratories 10-Q 2012
UNITED STATES Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-29823
SILICON LABORATORIES INC. (Exact name of registrant as specified in its charter)
(512) 416-8500 (Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
As of April 18, 2012, 42,877,247 shares of common stock of Silicon Laboratories Inc. were outstanding.
Cautionary Statement
Except for the historical financial information contained herein, the matters discussed in this report on Form 10-Q (as well as documents incorporated herein by reference) may be considered “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include declarations regarding the intent, belief or current expectations of Silicon Laboratories Inc. and its management and may be signified by the words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan,” “project,” “will” or similar language. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Actual results could differ materially from those indicated by such forward-looking statements. Factors that could cause or contribute to such differences include those discussed under “Risk Factors” and elsewhere in this report. Silicon Laboratories disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Silicon Laboratories Inc. Condensed Consolidated Balance Sheets (In thousands, except per share data) (Unaudited)
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Silicon Laboratories Inc. Condensed Consolidated Statements of Operations (In thousands, except per share data) (Unaudited)
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Silicon Laboratories Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) (In thousands) (Unaudited)
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Silicon Laboratories Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The Condensed Consolidated Financial Statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments which, in the opinion of management, are necessary to present fairly the condensed consolidated financial position of Silicon Laboratories Inc. and its subsidiaries (collectively, the “Company”) at March 31, 2012 and December 31, 2011, the condensed consolidated results of its operations for the three months ended March 31, 2012 and April 2, 2011, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2012 and April 2, 2011, and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and April 2, 2011. All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year.
The accompanying unaudited Condensed Consolidated Financial Statements do not include certain footnotes and financial presentations normally required under U.S. generally accepted accounting principles (GAAP). Therefore, these Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2011, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on February 15, 2012.
The Company prepares financial statements on a 52-53 week year that ends on the Saturday closest to December 31. Fiscal 2012 will have 52 weeks and fiscal 2011 had 52 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks.
Revenue Recognition
Revenues are generated almost exclusively by sales of the Company’s integrated circuits (ICs). The Company recognizes revenue when all of the following criteria are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured. Generally, revenue from product sales to direct customers and contract manufacturers is recognized upon shipment.
A portion of the Company’s sales are made to distributors under agreements allowing certain rights of return and price protection related to the final selling price to the end customers. Accordingly, the Company defers revenue and cost of revenue on such sales until the distributors sell the product to the end customers. The net balance of deferred revenue less deferred cost of revenue associated with inventory shipped to a distributor but not yet sold to an end customer is recorded in the deferred income on shipments to distributors liability on the Consolidated Balance Sheet. Such net deferred income balance reflects the Company’s estimate of the impact of rights of return and price protection.
Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2011-11, Balance Sheet (Topic 210) — Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross and net information about these instruments. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this ASU is not expected to have a material impact on the Company’s financial statements.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share data):
For the three months ended March 31, 2012 and April 2, 2011, approximately 0.3 million and 0.3 million shares, respectively, were not included in the diluted earnings per share calculation since the shares were anti-dilutive. Further, shares used in calculating diluted net loss per share for the three months ended April 2, 2011 exclude 1.8 million shares due to the Company’s net loss for the period.
Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)
3. Cash, Cash Equivalents and Investments
The Company’s cash equivalents and short-term investments as of March 31, 2012 consisted of corporate bonds, municipal bonds, variable-rate demand notes, money market funds, U.S. Treasury bills, U.S. government bonds, asset-backed securities, U.S. government agency bonds and discount notes and international government bonds. The Company’s long-term investments consist of auction-rate securities. Early in fiscal 2008, auctions for many of the Company’s auction-rate securities failed because sell orders exceeded buy orders. As of March 31, 2012, the Company held $19.2 million par value auction-rate securities, all of which have experienced failed auctions. The underlying assets of the securities consisted of student loans and municipal bonds, of which $17.2 million were guaranteed by the U.S. government and the remaining $2.0 million were privately insured. As of March 31, 2012, $11.2 million of the auction-rate securities had credit ratings of AAA, $6.0 million of the auction-rate securities had credit ratings of AA and $2.0 million had a credit rating of A. These securities have contractual maturity dates ranging from 2029 to 2046 and with current yields of 0.28% to 3.58% per year at March 31, 2012. The Company is receiving the underlying cash flows on all of its auction-rate securities. The principal amounts associated with failed auctions are not expected to be accessible until a successful auction occurs, the issuer redeems the securities, a buyer is found outside of the auction process or the underlying securities mature. The Company is unable to predict if these funds will become available before their maturity dates.
The Company does not expect to need access to the capital represented by any of its auction-rate securities prior to their maturities. The Company does not intend to sell, and believes it is not more likely than not that it will be required to sell, its auction-rate securities before their anticipated recovery in market value or final settlement at the underlying par value. The Company believes that the credit ratings and credit support of the security issuers indicate that they have the ability to settle the securities at par value. As such, the Company has determined that no other-than-temporary impairment losses existed as of March 31, 2012.
Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)
The Company’s cash, cash equivalents and investments consist of the following (in thousands):
Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)
The available-for-sale investments that were in a continuous unrealized loss position, aggregated by length of time that individual securities have been in a continuous loss position, were as follows (in thousands):
Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)
The gross unrealized losses as of March 31, 2012 and December 31, 2011 were due primarily to the illiquidity of the Company’s auction-rate securities and, to a lesser extent, to changes in market interest rates.
The following summarizes the contractual underlying maturities of the Company’s available-for-sale investments at March 31, 2012 (in thousands):
4. Derivative Financial Instruments
The Company is exposed to interest rate fluctuations in the normal course of its business, including through its corporate headquarters leases. The base rents for these leases are calculated using a variable interest rate based on the three-month LIBOR. The Company has entered into interest rate swap agreements with notional values of $44.3 million and $50.1 million and, effectively, fixed the rent payment amounts on these leases through March 2011 and March 2013, respectively. The Company’s swap agreement with a notional value of $44.3 million matured in March 2011 and was not renewed. The Company’s objective is to offset increases and decreases in expenses resulting from changes in interest rates with gains and losses on the derivative contracts, thereby reducing volatility of earnings. The Company does not use derivative contracts for speculative purposes.
The interest rate swap agreements are designated and qualify as cash flow hedges. The effective portion of the gain or loss on interest rate swaps is recorded in accumulated other comprehensive loss as a separate component of stockholders’ equity and is subsequently recognized in earnings when the hedged exposure affects earnings. Cash flows from derivatives are classified as cash flows from operating activities in the Consolidated Statement of Cash Flows.
Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)
The Company estimates the fair values of derivatives based on quoted prices and market observable data of similar instruments. If the lease agreements or the interest rate swap agreements are terminated prior to maturity, the fair value of the interest rate swaps recorded in accumulated other comprehensive loss may be recognized in the Consolidated Statement of Operations based on an assessment of the agreements at the time of termination. The Company did not discontinue any cash flow hedges in any of the periods presented.
The Company measures the effectiveness of its cash flow hedges by comparing the change in fair value of the hedged item with the change in fair value of the interest rate swap. The Company recognizes ineffective portions of the hedge, as well as amounts not included in the assessment of effectiveness, in the Consolidated Statement of Operations. As of March 31, 2012, no portion of the gains or losses from the Company’s hedging instrument was excluded from the assessment of effectiveness. There was no hedge ineffectiveness for any of the periods presented.
The Company’s derivative financial instrument consisted of the following (in thousands):
The before-tax effect of derivative instruments in cash flow hedging relationships was as follows (in thousands):
The Company expects to reclassify $1.7 million of its interest rate swap losses included in accumulated other comprehensive loss as of March 31, 2012 into earnings in the next 12 months, which is offset by lower rent payments.
The Company’s interest rate swap agreement contains provisions that require it to maintain unencumbered cash and highly-rated short-term investments of at least $150 million. If the Company’s unencumbered cash and highly-rated short-term investments are less than $150 million, it would be required to post collateral with the counterparty in the amount of the fair value of the interest rate swap agreements in net liability positions. The Company’s interest rate swap was in a net liability position at March 31, 2012. No collateral has been required to be posted with the counterparty as of March 31, 2012.
Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)
5. Fair Value of Financial Instruments
The fair values of the Company’s financial instruments are recorded using a hierarchal disclosure framework based upon the level of subjectivity of the inputs used in measuring assets and liabilities. The three levels are described below:
Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 - Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Inputs are unobservable for the asset or liability and are developed based on the best information available in the circumstances, which might include the Company’s own data.
The following summarizes the valuation of the Company’s financial instruments (in thousands). The tables do not include either cash on hand or assets and liabilities that are measured at historical cost or any basis other than fair value.
Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)
The Company’s cash equivalents and short-term investments that are classified as Level 1 are valued using quoted prices and other relevant information generated by market transactions involving identical assets. Cash equivalents and short-term investments classified as Level 2 are valued using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments in active markets; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Investments classified as Level 3 are valued using a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, amount of cash flows, expected holding periods of the securities and a discount to reflect the Company’s inability to liquidate the securities.
Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)
The Company’s derivative instruments are valued using a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include quoted interest swap rates and market observable data of similar instruments. The Company’s contingent consideration is valued using a probability weighted discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for possible outcomes if certain milestone goals are achieved, the probability of achieving each outcome and discount rates.
The following summarizes quantitative information about Level 3 fair value measurements.
The Company has followed an established internal control procedure used in valuing auction rate securities. The procedure involves several layers of the Company’s finance management in the analysis of valuation techniques and evaluation of unobservable inputs commonly used by market participants to price similar instruments, and which have been demonstrated to provide reasonable estimates of prices obtained in actual market transactions. Outputs from the valuation process are assessed against various market sources when they are available, including marketplace quotes, recent trades of similar illiquid securities, benchmark indices and independent pricing services. The technique and unobservable input parameters may be recalibrated periodically to achieve an appropriate estimation of the fair value of the securities.
Significant changes in any of the unobservable inputs used in the fair value measurement of auction rate securities in isolation could result in a significantly lower or higher fair value measurement. An increase in expected yield would result in a higher fair value measurement, whereas an increase in expected holding period or estimated discount rate would result in a lower fair value measurement. Generally, a change in the assumptions used for expected holding period is accompanied by a directionally similar change in the assumptions used for estimated yield and discount rate.
The following summarizes the activity in Level 3 financial instruments for the three months ended March 31, 2012 (in thousands):
Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)
The Company’s other financial instruments, including cash, accounts receivable and accounts payable, are recorded at amounts that approximate their fair values due to their short maturities.
6. Balance Sheet Details
The following shows the details of selected Condensed Consolidated Balance Sheet items (in thousands):
Inventories
Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)
7. Separation Agreement
On March 1, 2012, the Company entered into a separation agreement with its former Chief Executive Officer (CEO), Necip Sayiner. Pursuant to the agreement, Mr. Sayiner agreed to continue to serve as CEO through April 18, 2012 and as a non-executive advisor through July 19, 2012. Upon his separation from the Company and execution of a release of claims, Mr. Sayiner will receive a severance package consisting of (a) accelerated vesting of certain restricted stock units (RSUs) and market stock units (MSUs) and the extension of the exercise period of certain stock options, (b) cash payments and (c) other benefits. The separation agreement resulted in a total expense of approximately $3.2 million, which will be recognized over the service period in selling, general and administrative expenses.
8. Stockholders’ Equity
Common Stock
The Company issued 0.8 million shares of common stock during the three months ended March 31, 2012, net of 0.2 million shares withheld to satisfy employee tax obligations for the vesting of certain stock grants made under the Company’s stock incentive plans.
Share Repurchase Programs
In April 2012, the Board of Directors authorized a share repurchase program to repurchase up to $100 million of the Company’s common stock through January 2013. In October 2011, the Board of Directors adopted a share repurchase program to repurchase up to $50 million of the Company’s common stock through April 2012. The Company’s repurchase program announced in July 2010, authorized the repurchase of up to $150 million of the Company’s common stock through 2011, and was completed in August 2011. These programs allow for repurchases to be made in the open market or in private transactions, including structured or accelerated transactions, subject to applicable legal requirements and market conditions. The Company did not repurchase any shares of its common stock during the three months ended March 31, 2012. The Company repurchased 14 thousand shares of its common stock for $0.6 million during the three months ended April 2, 2011.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of taxes, were as follows (in thousands):
Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)
9. Stock-Based Compensation
In fiscal 2009, the stockholders of the Company approved the 2009 Stock Incentive Plan (the “2009 Plan”) and the 2009 Employee Stock Purchase Plan (the “2009 Purchase Plan”). The 2009 Plan is currently effective, and has a term of 10 years from the shareholders’ approval date. The 2009 Purchase Plan became effective upon the termination of the previous Employee Stock Purchase Plan, on April 30, 2010.
Stock-based compensation costs are based on the fair values on the date of grant for stock options and on the date of enrollment for the employee stock purchase plans, estimated by using the Black-Scholes option-pricing model. The fair values of stock awards and RSUs equal their intrinsic value on the date of grant. The fair values of market-based performance awards generally are estimated using a Monte Carlo simulation based on the date of grant.
The following table presents details of stock-based compensation costs recognized in the Condensed Consolidated Statements of Operations (in thousands):
The Company recorded a net reduction of $1.2 million in selling, general and administrative expense during the three months ended March 31, 2012 in connection with modifications to certain stock awards. The Company accelerated the vesting of certain RSUs and MSUs and extended the exercise period of stock options pursuant to a separation agreement between the Company and its former CEO. Stock compensation for the three months ended March 31, 2012 includes the reversal of previously recognized stock compensation for the modified awards.
The Company had approximately $50.9 million of total unrecognized compensation costs related to stock options and stock awards at March 31, 2012 that are expected to be recognized over a weighted-average period of 1.9 years. There were no significant stock-based compensation costs capitalized into assets in any of the periods presented.
Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)
10. Commitments and Contingencies
Legal Proceedings
The Company is involved in various legal proceedings that have arisen in the normal course of business. While the ultimate results of these matters cannot be predicted with certainty, the Company does not expect them to have a material adverse effect on its consolidated financial position or results of operations.
Operating Leases
In March 2006, the Company entered into an operating lease agreement and a related participation agreement for a facility at 400 W. Cesar Chavez (“400 WCC”) in Austin, Texas for its corporate headquarters. In March 2008, the Company entered into an operating lease agreement and a related participation agreement for a facility at 200 W. Cesar Chavez (“200 WCC”) in Austin, Texas for the expansion of its corporate headquarters. During the terms of the leases, the Company has on-going options to purchase the buildings for purchase prices of approximately $44.3 million for 400 WCC and $50.1 million for 200 WCC. Alternatively, the Company can cause each such property to be sold to third parties provided it is not in default under that property’s lease. The Company is contingently liable on a first dollar loss basis for up to $35.3 million to the extent that the 400 WCC sale proceeds are less than the $44.3 million purchase option and up to $40.0 million to the extent that the 200 WCC sale proceeds are less than the $50.1 million purchase option.
11. Income Taxes
Provision for income taxes includes both domestic and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences. Income tax expense was $2.8 million and $7.7 million for the three months ended March 31, 2012 and April 2, 2011, respectively, resulting in effective tax rates of 16.3% and 134.3%, respectively. The effective tax rate for the three months ended March 31, 2012 decreased from the prior period, primarily due to the prior period tax charge related to the intercompany license of certain technology and other one-time nondeductible costs associated with the acquisition of Spectra Linear in 2011, along with a one-time increase in the deductibility of stock based compensation expense in connection with the former CEO’s separation from the Company in 2012. The impact of these items was partially offset by an increase in state income taxes and the non-renewal of the federal research and development tax credit.
At March 31, 2012, the Company had gross unrecognized tax benefits of $11.3 million, all of which would affect the effective tax rate if recognized. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes.
The Company believes it is reasonably possible that the gross unrecognized tax benefits will decrease by approximately $3.5 million in the next 12 months due to the lapse of the statute of limitations applicable to a tax deduction claimed on a prior year foreign tax return.
The tax years 2005 through 2012 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company is not currently under audit in any major taxing jurisdiction.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the “Cautionary Statement” above and “Risk Factors” below for discussions of the uncertainties, risks and assumptions associated with these statements. Our fiscal year-end financial reporting periods are a 52- or 53- week year ending on the Saturday closest to December 31st. Fiscal 2012 will have 52 weeks and fiscal 2011 had 52 weeks. Our first quarter of fiscal 2012 ended March 31, 2012. Our first quarter of fiscal 2011 ended April 2, 2011.
Overview
We design and develop proprietary, analog-intensive, mixed-signal integrated circuits (ICs) for a broad range of applications. Mixed-signal ICs are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process. Therefore, mixed-signal ICs are critical components in a broad range of applications in a variety of markets, including communications, consumer, industrial, automotive, medical and power management. Our major customers include Cisco, Huawei, LG Electronics, Pace, Panasonic, Sagem, Samsung, Technicolor, Varian Medical Systems and ZTE.
As a fabless semiconductor company, we rely on third-party semiconductor fabricators in Asia, and to a lesser extent the United States and Europe, to manufacture the silicon wafers that reflect our IC designs. Each wafer contains numerous die, which are cut from the wafer to create a chip for an IC. We rely on third parties in Asia to assemble, package, and, in most cases, test these devices and ship these units to our customers. Testing performed by such third parties facilitates faster delivery of products to our customers (particularly those located in Asia), shorter production cycle times, lower inventory requirements, lower costs and increased flexibility of test capacity.
Our expertise in analog-intensive, high-performance, mixed-signal ICs enables us to develop highly differentiated solutions that address multiple markets. We group our products into the following categories:
· Broad-based products, which include our microcontrollers, timing products (clocks and oscillators), wireless receivers, isolation devices and human interface sensors and controllers;
· Broadcast products, which include our broadcast audio and video products;
· Access products, which include our Voice over IP (VoIP) products, embedded modems and our Power over Ethernet devices; and
· Mature products, which include certain devices that are at the end of their respective life cycles and therefore receive minimal or no continued research and development investment, including our DSL analog front end ICs and IRDA devices.
Through acquisitions and internal development efforts, we have continued to diversify our product portfolio and introduce next generation ICs with added functionality and further integration. In the first three months of fiscal 2012, we introduced the Precision32™ 32-bit mixed-signal microcontroller family, based on a patented architecture that provides customers with flexibility, performance and low power. The Company also introduced high performance, low power sub-GHz transceivers designed to maximize range and battery life for wireless systems, ultra-small and low power customizable clock generators ideal for space-limited, cost-sensitive embedded and consumer electronics and the expansion of our clocking solutions to address the stringent specifications of the PCI Express (PCIe) Generation 1/2/3 standards. We plan to continue to introduce products that increase the content we provide for existing applications, thereby enabling us to serve markets we do not currently address and expanding our total available market opportunity.
During the three months ended March 31, 2012, we had one customer, Samsung, whose purchases across a variety of product areas represented more than 10% of our revenues. In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer. Two of our distributors, Edom Technology and Avnet, represented more than 10% of our revenues during the three months ended March 31, 2012. There were no other distributors or contract manufacturers that accounted for more than 10% of our revenues during the three months ended March 31, 2012.
The percentage of our revenues derived from outside of the United States was 87% during the three months ended March 31, 2012. All of our revenues to date have been denominated in U.S. dollars. We believe that a majority of our revenues will continue to be derived from customers outside of the United States.
The sales cycle for our ICs can be as long as 12 months or more. An additional three to six months or more are usually required before a customer ships a significant volume of devices that incorporate our ICs. Due to this lengthy sales cycle, we typically experience a significant delay between incurring research and development and selling, general and administrative expenses, and the corresponding sales. Consequently, if sales in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our operating results for that quarter and, potentially, future quarters would be adversely affected. Moreover, the amount of time between initial research and development and commercialization of a product, if ever, can be substantially longer than the sales cycle for the product. Accordingly, if we incur substantial research and development costs without developing a commercially successful product, our operating results, as well as our growth prospects, could be adversely affected.
Because many of our ICs are designed for use in consumer products such as televisions, set-top boxes, portable navigation devices and mobile handsets, we expect that the demand for our products will be typically subject to some degree of seasonal demand. However, rapid changes in our markets and across our product areas make it difficult for us to accurately estimate the impact of seasonal factors on our business.
Results of Operations
The following describes the line items set forth in our Condensed Consolidated Statements of Operations:
Revenues. Revenues are generated almost exclusively by sales of our ICs. We recognize revenue on sales when all of the following criteria are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured. Generally, we recognize revenue from product sales to direct customers and contract manufacturers upon shipment. Certain of our sales are made to distributors under agreements allowing certain rights of return and price protection on products unsold by distributors. Accordingly, we defer the revenue and cost of revenue on such sales until the distributors sell the product to the end customer. Our products typically carry a one-year replacement warranty. Replacements have been insignificant to date. Our revenues are subject to variation from period to period due to the volume of shipments made within a period, the mix of products we sell and the prices we charge for our products. The vast majority of our revenues were negotiated at prices that reflect a discount from the list prices for our products. These discounts are made for a variety of reasons, including: 1) to establish a relationship with a new customer, 2) as an incentive for customers to purchase products in larger volumes, 3) to provide profit margin to our distributors who resell our products or 4) in response to competition. In addition, as a product matures, we expect that the average selling price for such product will decline due to the greater availability of competing products. Our ability to increase revenues in the future is dependent on increased demand for our established products and our ability to ship larger volumes of those products in response to such demand, as well as our ability to develop or acquire new products and subsequently achieve customer acceptance of newly introduced products.
Cost of Revenues. Cost of revenues includes the cost of purchasing finished silicon wafers processed by independent foundries; costs associated with assembly, test and shipping of those products; costs of personnel and equipment associated with manufacturing support, logistics and quality assurance; costs of software royalties, other intellectual property license costs and certain acquired intangible assets; and an allocated portion of our occupancy costs.
Research and Development. Research and development expense consists primarily of personnel-related expenses, including stock-based compensation, new product mask, external consulting and services costs, equipment tooling, equipment depreciation, amortization of intangible assets, as well as an allocated portion of our occupancy costs for such operations. Research and development activities include the design of new products, refinement of existing products and design of test methodologies to ensure compliance with required specifications.
Selling, General and Administrative. Selling, general and administrative expense consists primarily of personnel-related expenses, including stock-based compensation, related allocable portion of our occupancy costs, sales commissions to independent sales representatives, applications engineering support, professional fees, legal fees and promotional and marketing expenses.
Interest Income. Interest income reflects interest earned on our cash, cash equivalents and investment balances.
Interest Expense. Interest expense consists of interest on our short and long-term obligations.
Other Income (Expense), Net. Other income (expense), net consists primarily of foreign currency remeasurement adjustments as well as other non-operating income and expenses.
Provision for Income Taxes. Provision for income taxes includes both domestic and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences.
The following table sets forth our Condensed Consolidated Statements of Operations data as a percentage of revenues for the periods indicated:
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