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Silicon Laboratories 10-Q 2017

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

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 April 1, 2017

 

or

 

¨         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)

 

Delaware

 

74-2793174

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

400 West Cesar Chavez, Austin, Texas

 

78701

(Address of principal executive offices)

 

(Zip Code)

 

(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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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, 2017, 42,358,718 shares of common stock of Silicon Laboratories Inc. were outstanding.

 

 

 



Table of Contents

 

Table of Contents

 

 

 

Page
Number

Part I. Financial Information

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at April 1, 2017 and December 31, 2016

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three months ended April 1, 2017 and April 2, 2016

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended April 1, 2017 and April 2, 2016

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended April 1, 2017 and April 2, 2016

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

35

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

35

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

35

 

 

 

 

 

 

Item 1A.

Risk Factors

 

36

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

51

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

51

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

51

 

 

 

 

 

 

Item 5.

Other Information

 

51

 

 

 

 

 

 

Item 6.

Exhibits

 

52

 

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.

 

2



Table of Contents

 

Part I.  Financial Information

Item 1.  Financial Statements

 

Silicon Laboratories Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

 

 

 

April 1,
2017

 

December 31,
2016

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

225,399

 

$

141,106

 

Short-term investments

 

396,327

 

153,961

 

Accounts receivable, net

 

75,852

 

74,401

 

Inventories

 

61,308

 

59,578

 

Prepaid expenses and other current assets

 

54,360

 

61,805

 

Total current assets

 

813,246

 

490,851

 

Long-term investments

 

5,257

 

5,196

 

Property and equipment, net

 

130,635

 

129,559

 

Goodwill

 

288,629

 

276,130

 

Other intangible assets, net

 

103,638

 

103,565

 

Other assets, net

 

58,021

 

76,543

 

Total assets

 

$

1,399,426

 

$

1,081,844

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

43,781

 

$

39,577

 

Accrued expenses

 

47,416

 

50,100

 

Deferred income on shipments to distributors

 

49,700

 

45,568

 

Income taxes

 

4,396

 

4,450

 

Total current liabilities

 

145,293

 

139,695

 

Long-term debt

 

 

72,500

 

Convertible debt

 

332,502

 

 

Other non-current liabilities

 

42,797

 

42,691

 

Total liabilities

 

520,592

 

254,886

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock — $0.0001 par value; 10,000 shares authorized; no shares issued and outstanding

 

 

 

Common stock — $0.0001 par value; 250,000 shares authorized; 42,348 and 41,889 shares issued and outstanding at April 1, 2017 and December 31, 2016, respectively

 

4

 

4

 

Additional paid-in capital

 

59,714

 

24,463

 

Retained earnings

 

819,641

 

801,999

 

Accumulated other comprehensive income (loss)

 

(525

)

492

 

Total stockholders’ equity

 

878,834

 

826,958

 

Total liabilities and stockholders’ equity

 

$

1,399,426

 

$

1,081,844

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

April 1,
2017

 

April 2,
2016

 

Revenues

 

$

179,028

 

$

162,025

 

Cost of revenues

 

73,867

 

66,494

 

Gross margin

 

105,161

 

95,531

 

Operating expenses:

 

 

 

 

 

Research and development

 

52,324

 

49,046

 

Selling, general and administrative

 

40,155

 

39,637

 

Operating expenses

 

92,479

 

88,683

 

Operating income

 

12,682

 

6,848

 

Other income (expense):

 

 

 

 

 

Interest income

 

696

 

271

 

Interest expense

 

198

 

(655

)

Other, net

 

(120

)

(391

)

Income before income taxes

 

13,456

 

6,073

 

Provision (benefit) for income taxes

 

(1,970

)

265

 

 

 

 

 

 

 

Net income

 

$

15,426

 

$

5,808

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.37

 

$

0.14

 

Diluted

 

$

0.36

 

$

0.14

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

Basic

 

42,096

 

41,629

 

Diluted

 

43,030

 

42,199

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

April 1,
2017

 

April 2,
2016

 

Net income

 

$

15,426

 

$

5,808

 

 

 

 

 

 

 

Other comprehensive loss, before tax:

 

 

 

 

 

Net changes to available-for-sale securities:

 

 

 

 

 

Unrealized gain (losses) arising during the period

 

245

 

(251

)

 

 

 

 

 

 

Net changes to cash flow hedges:

 

 

 

 

 

Unrealized losses arising during the period

 

 

(286

)

Reclassification for (gains) losses included in net income

 

(1,808

)

66

 

 

 

 

 

 

 

Other comprehensive loss, before tax

 

(1,563

)

(471

)

 

 

 

 

 

 

Benefit from income taxes

 

(546

)

(165

)

 

 

 

 

 

 

Other comprehensive loss

 

(1,017

)

(306

)

 

 

 

 

 

 

Comprehensive income

 

$

14,409

 

$

5,502

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

Silicon Laboratories Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

April 1,
2017

 

April 2,
2016

 

Operating Activities

 

 

 

 

 

Net income

 

$

15,426

 

$

5,808

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

Depreciation of property and equipment

 

3,596

 

3,310

 

Amortization of other intangible assets and other assets

 

6,752

 

7,980

 

Amortization of debt discount and debt issuance costs

 

869

 

 

Stock-based compensation expense

 

10,486

 

10,344

 

Income tax benefit (shortfall) from stock-based awards

 

 

(1,025

)

Excess income tax benefit from stock-based awards

 

 

(6

)

Deferred income taxes

 

(4,059

)

(38

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(1,252

)

(990

)

Inventories

 

(1,636

)

4,580

 

Prepaid expenses and other assets

 

6,708

 

9,159

 

Accounts payable

 

5,565

 

1,559

 

Accrued expenses

 

(3,889

)

6,260

 

Deferred income on shipments to distributors

 

4,038

 

5,558

 

Income taxes

 

945

 

494

 

Other non-current liabilities

 

(1,536

)

(10,584

)

Net cash provided by operating activities

 

42,013

 

42,409

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of available-for-sale investments

 

(267,777

)

(44,547

)

Sales and maturities of available-for-sale investments

 

25,595

 

46,654

 

Purchases of property and equipment

 

(4,543

)

(2,303

)

Purchases of other assets

 

(1,446

)

(1,107

)

Acquisition of business, net of cash acquired

 

(13,658

)

 

Net cash used in investing activities

 

(261,829

)

(1,303

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from issuance of long-term debt, net

 

390,000

 

 

Payments on debt

 

(72,500

)

(2,500

)

Repurchases of common stock

 

 

(18,484

)

Payment of taxes withheld for vested stock awards

 

(13,553

)

(7,517

)

Proceeds from the issuance of common stock

 

162

 

 

Net cash provided by (used in) financing activities

 

304,109

 

(28,501

)

 

 

 

 

 

 

Increase in cash and cash equivalents

 

84,293

 

12,605

 

Cash and cash equivalents at beginning of period

 

141,106

 

114,085

 

Cash and cash equivalents at end of period

 

$

225,399

 

$

126,690

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

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 April 1, 2017 and December 31, 2016, the condensed consolidated results of its operations for the three months ended April 1, 2017 and April 2, 2016, the Condensed Consolidated Statements of Comprehensive Income for the three months ended April 1, 2017 and April 2, 2016, and the Condensed Consolidated Statements of Cash Flows for the three months ended April 1, 2017 and April 2, 2016. All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated results of operations for the three months ended April 1, 2017 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, 2016, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on February 1, 2017.

 

The Company prepares financial statements on a 52- or 53-week fiscal year that ends on the Saturday closest to December 31. Fiscal 2017 will have 52 weeks and fiscal 2016 had 52 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Among the significant estimates affecting the financial statements are those related to inventories, stock-based compensation, investments in auction-rate securities, acquired intangible assets, goodwill, long-lived assets and income taxes. Actual results could differ from those estimates, and such differences could be material to the financial statements.

 

Reclassifications

 

Certain reclassifications have been made to prior year financial statements to conform to current year presentation.

 

Revenue Recognition

 

Revenues are generated predominately by sales of the Company’s products. 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.

 

7



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

A small portion of the Company’s revenues is derived from the sale of patents. The above revenue recognition criteria for patent sales are generally met upon the execution of the patent sale agreement.

 

Recent Accounting Pronouncements

 

In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323). This ASU amends the disclosure requirements for ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), ASU No. 2016-02, Leases (Topic 842) and ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU states that if a registrant does not know or cannot reasonably estimate the impact that the adoption of the above ASUs is expected to have on the financial statements, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. This ASU was effective upon issuance. The adoption did not have a material impact on the Company’s financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Instead, an entity should recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.

 

In August 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU requires the recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company early adopted this ASU on January 1, 2017. The adoption did not have a material impact on its financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU provides guidance on statement of cash flows presentation for eight specific cash flow issues where diversity in practice exists. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the effect of the adoption of this ASU, but anticipates that the adoption will not have a material impact on its financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments. This ASU requires instruments measured at amortized cost to be presented at the net amount expected to be collected. Entities are also required to record allowances for available-for-sale debt securities rather than reduce the carrying amount. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the effect of the adoption of this ASU, but anticipates that the adoption will not have a material impact on its financial statements.

 

8



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Company adopted this ASU on January 1, 2017. Amendments related to the classification of excess tax benefits on the statement of cash flows were applied prospectively. Prior periods have not been adjusted. In connection with its adoption of ASU 2016-09, the Company recorded excess tax benefits of $3.3 million in the three months ended April 1, 2017. The adoption had no other material impact on the Company’s financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. For operating leases, a lessee is required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements. The Company currently expects that most of its operating lease commitments will be subject to the new standard and recognized as right-of-use assets and operating lease liabilities upon the adoption of ASU 2016-02, which will increase the total assets and total liabilities that it reports relative to such amounts prior to adoption.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the effect of the adoption of this ASU, but anticipates that the adoption will not have a material impact on its financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. In 2016, the FASB issued the following amendments to ASC 606: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies guidance on identification of performance obligations and licensing implementation; ASU No. 2016-12, Compensation—Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides clarifying guidance on assessing collectibility, presentation of sales taxes, noncash consideration, contract modifications and completed contracts; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which clarifies narrow aspects of ASC 606 or corrects unintended application of the guidance. The standard may be applied retrospectively to each prior period presented (full retrospective method) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective method). Under the new standard, the Company expects the timing of revenue recognition from sales to distributors to be accelerated. The Company will recognize revenue at the time of sale to the distributor, net of the impact of estimated price adjustments and rights of return. The Company currently anticipates adopting this standard using the modified retrospective method. Under this method, incremental disclosures will be provided to present each financial statement line item for fiscal 2018 under the prior standard. The Company has completed an initial assessment of the new standard and is continuing to evaluate the effect that the adoption will have on its financial statements.

 

9



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

2. Earnings Per Share

 

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

 

 

 

Three Months Ended

 

 

 

April 1,
2017

 

April 2,
2016

 

Net income

 

$

15,426

 

$

5,808

 

 

 

 

 

 

 

Shares used in computing basic earnings per share

 

42,096

 

41,629

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

Stock options and other stock-based awards

 

934

 

570

 

Shares used in computing diluted earnings per share

 

43,030

 

42,199

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.37

 

$

0.14

 

Diluted

 

$

0.36

 

$

0.14

 

 

For the three months ended April 1, 2017 and April 2, 2016, approximately 0.3 million and 0.8 million shares, respectively, consisting of restricted stock awards (RSUs), market stock awards (MSUs) and stock options, were not included in the diluted earnings per share calculation since the shares were anti-dilutive.

 

The Company intends to settle the principal amount of its convertible senior notes in cash and any excess value in shares in the event of a conversion. Accordingly, shares issuable upon conversion of the principal amount have been excluded from the calculation of diluted earnings per share. If the market value of the notes under certain prescribed conditions exceeds the conversion amount, the excess will be included in the denominator for the computation of diluted earnings per share using the treasury stock method. As of April 1, 2017, no such shares were included in the denominator for the calculation of diluted earnings per share.

 

3. Fair Value of Financial Instruments

 

The fair values of the Company’s financial instruments are recorded using a hierarchical 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.

 

10



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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.

 

 

 

Fair Value Measurements
at April 1, 2017 Using

 

 

 

Description

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

85,090

 

$

 

$

 

$

85,090

 

Certificates of deposit

 

 

32,183

 

 

32,183

 

Commercial paper

 

 

30,582

 

 

30,582

 

Municipal bonds

 

 

6,034

 

 

6,034

 

Corporate bonds

 

 

1,498

 

 

1,498

 

Total cash equivalents

 

$

85,090

 

$

70,297

 

$

 

$

155,387

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Variable-rate demand notes

 

$

 

$

117,770

 

$

 

$

117,770

 

Corporate bonds

 

 

108,828

 

 

108,828

 

Municipal bonds

 

 

78,555

 

 

78,555

 

U.S. government bonds

 

50,437

 

 

 

50,437

 

Asset-backed securities

 

 

25,519

 

 

25,519

 

Agency bonds

 

 

7,482

 

 

7,482

 

Commercial paper

 

 

6,239

 

 

6,239

 

International government bonds

 

 

1,497

 

 

1,497

 

Total short-term investments

 

$

50,437

 

$

345,890

 

$

 

$

396,327

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

 

$

5,257

 

$

5,257

 

Total long-term investments

 

$

 

$

 

$

5,257

 

$

5,257

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

135,527

 

$

416,187

 

$

5,257

 

$

556,971

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Other non-current liabilities:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

$

 

$

3,829

 

$

3,829

 

Total

 

$

 

$

 

$

3,829

 

$

3,829

 

 

11



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

 

 

Fair Value Measurements
at December 31, 2016 Using

 

 

 

Description

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

69,432

 

$

 

$

 

$

69,432

 

Certificates of deposit

 

 

7,153

 

 

7,153

 

Municipal bonds

 

 

3,904

 

 

3,904

 

Total cash equivalents

 

$

69,432

 

$

11,057

 

$

 

$

80,489

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

 

$

79,702

 

$

 

$

79,702

 

Corporate bonds

 

 

31,036

 

 

31,036

 

Variable-rate demand notes

 

 

16,400

 

 

16,400

 

U.S. government bonds

 

12,416

 

 

 

12,416

 

Asset-backed securities

 

 

8,173

 

 

8,173

 

Commercial paper

 

 

5,233

 

 

5,233

 

International government bonds

 

 

1,001

 

 

1,001

 

Total short-term investments

 

$

12,416

 

$

141,545

 

$

 

$

153,961

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Auction rate securities

 

$

 

$

 

$

5,196

 

$

5,196

 

Total long-term investments

 

$

 

$

 

$

5,196

 

$

5,196

 

 

 

 

 

 

 

 

 

 

 

Other assets, net:

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

 

$

1,808

 

$

 

$

1,808

 

Total

 

$

 

$

1,808

 

$

 

$

1,808

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

81,848

 

$

154,410

 

$

5,196

 

$

241,454

 

 

Valuation methodology

 

The Company’s cash equivalents and short-term investments that are 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. The Company’s derivative instruments are valued using discounted cash flow models. The assumptions used in preparing the valuation models include quoted interest swap rates, foreign exchange rates, forward and spot prices for currencies, 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 the outcome if the milestone goal is achieved, the probability of achieving each outcome and discount rates.

 

12



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Available-for-sale investments

 

The Company’s investments typically have original maturities greater than ninety days as of the date of purchase. Investments are reported at fair value, with unrealized gains and losses, net of tax, recorded as a component of accumulated other comprehensive income (loss) in the Consolidated Balance Sheet. The following summarizes the contractual underlying maturities of the Company’s available-for-sale investments at April 1, 2017 (in thousands):

 

 

 

Cost

 

Fair
Value

 

Due in one year or less

 

$

291,314

 

$

291,287

 

Due after one year through ten years

 

149,197

 

149,157

 

Due after ten years

 

117,270

 

116,527

 

 

 

$

557,781

 

$

556,971

 

 

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):

 

 

 

Less Than 12 Months

 

12 Months or Greater

 

Total

 

As of April 1, 2017

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Corporate bonds

 

$

45,299

 

$

(145

)

$

 

$

 

$

45,299

 

$

(145

)

Municipal bonds

 

38,781

 

(42

)

 

 

38,781

 

(42

)

U.S. government bonds

 

28,251

 

(23

)

 

 

28,251

 

(23

)

Asset-backed securities

 

17,478

 

(22

)

 

 

17,478

 

(22

)

Auction rate securities

 

 

 

5,257

 

(742

)

5,257

 

(742

)

Agency bonds

 

3,498

 

(1

)

 

 

3,498

 

(1

)

International government bonds

 

1,497

 

(2

)

 

 

1,497

 

(2

)

 

 

$

134,804

 

$

(235

)

$

5,257

 

$

(742

)

$

140,061

 

$

(977

)

 

 

 

Less Than 12 Months

 

12 Months or Greater

 

Total

 

As of December 31, 2016

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Municipal bonds

 

$

69,379

 

$

(140

)

$

 

$

 

$

69,379

 

$

(140

)

Corporate bonds

 

18,561

 

(128

)

 

 

18,561

 

(128

)

U.S. government bonds

 

10,364

 

(16

)

 

 

10,364

 

(16

)

Auction rate securities

 

 

 

5,196

 

(804

)

5,196

 

(804

)

Asset-backed securities

 

3,176

 

(4

)

 

 

3,176

 

(4

)

 

 

$

101,480

 

$

(288

)

$

5,196

 

$

(804

)

$

106,676

 

$

(1,092

)

 

The gross unrealized losses as of April 1, 2017 and December 31, 2016 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 Company’s auction-rate securities have been illiquid since 2008 when auctions for the securities failed because sell orders exceeded buy orders. These securities have a contractual maturity date of 2046 at April 1, 2017. The Company is unable to predict if these funds will become available before their maturity date.

 

13



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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 April 1, 2017.

 

At April 1, 2017 and December 31, 2016, there were no material unrealized gains associated with the Company’s available-for-sale investments.

 

Level 3 fair value measurements

 

The following summarizes quantitative information about Level 3 fair value measurements.

 

Auction rate securities

 

Fair Value at
April 1, 2017
(000s)

 

Valuation Technique

 

Unobservable Input

 

Weighted Average

 

$

5,257

 

Discounted cash flow

 

Estimated yield

 

0.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected holding period

 

10 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated discount rate

 

3.56%

 

 

The Company has followed an established internal control procedure used in valuing auction rate securities. The procedure involves 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.

 

Contingent consideration

 

Fair Value at
April 1, 2017
(000s)

 

Valuation Technique

 

Unobservable Input

 

Weighted Average

 

$

3,829

 

Discounted cash flow

 

Expected term

 

9 months

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated discount rate

 

12.0%

 

 

The Company has followed an established internal control procedure used in valuing contingent consideration. The valuation of contingent consideration for the Zentri acquisition is based on a discounted cash flow model. The fair value of this valuation is estimated on a quarterly basis through a collaborative effort by the Company’s sales, marketing and finance departments.

 

14



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration in isolation could result in a significantly lower or higher fair value. A change in projected revenue would be accompanied by a directionally similar change in fair value.

 

The following summarizes the activity in Level 3 financial instruments for the three months ended April 1, 2017 (in thousands):

 

Assets

 

Auction Rate Securities

 

Three Months
Ended

 

Beginning balance

 

$

5,196

 

Gain included in other comprehensive loss

 

61

 

Balance at April 1, 2017

 

$

5,257

 

 

Liabilities

 

Contingent Consideration (1)

 

Three Months
Ended

 

Beginning balance

 

$

 

Issues

 

3,829

 

Balance at April 1, 2017

 

$

3,829

 

 


(1)         In connection with the acquisition of Zentri, the Company recorded contingent consideration based upon the expected achievement of a milestone goal. Changes to the fair value of contingent consideration due to changes in assumptions used in preparing the valuation model are recorded in selling, general and administrative expenses in the Consolidated Statement of Income.

 

Fair values of other financial instruments

 

The Company’s debt is recorded at cost, but is measured at fair value for disclosure purposes. The Company’s convertible senior notes are traded in less active markets and are therefore classified as a Level 2 fair value measurement. The fair value of the convertible senior notes at April 1, 2017 was $426.3 million. The Company’s prior debt under the Credit Facility bore interest at the Eurodollar rate plus an applicable margin. Fair value was estimated based on Level 2 inputs, using a discounted cash flow analysis of future principal payments and projected interest based on current market rates. As of April 1, 2017 and December 31, 2016, the fair value of the Company’s debt under the Credit Facility was approximately $0.0 and $72.5 million, respectively.

 

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.

 

4. Derivative Financial Instruments

 

The Company uses derivative financial instruments to manage certain exposures to the variability of interest rates and foreign currency exchange rates. The Company’s objective is to offset increases and decreases in expenses resulting from these exposures with gains and losses on the derivative contracts, thereby reducing volatility of earnings. The Company does not use derivative contracts for speculative or trading purposes. The Company recognizes derivatives, on a gross basis, in the Consolidated Balance Sheet at fair value. Cash flows from derivatives are classified according to the nature of the cash receipt or payment in the Consolidated Statement of Cash Flows.

 

15



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Interest Rate Swaps

 

The Company is exposed to interest rate fluctuations in the normal course of its business, including through its Credit Facility. The interest payments on the facility are calculated using a variable-rate of interest. The Company entered into an interest rate swap agreement with an original notional value of $72.5 million and, effectively, converted the Eurodollar portion of the variable-rate interest payments to fixed-rate interest payments through July 2020. The Company terminated the swap agreement on March 6, 2017 in connection with the payoff of its Credit Facility.

 

The Company’s interest rate swap agreement was designated and qualified as a cash flow hedge. The effective portion of the gain or loss on the interest rate swap was recorded in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity and was subsequently recognized as interest expense in the Consolidated Statement of Income when the hedged exposure affected earnings. The termination of the swap agreement resulted in the reclassification of $1.8 million of unrealized gains that were previously recorded in accumulated other comprehensive income (loss) into earnings during the three months ended April 1, 2017. The Company did not discontinue any other cash flow hedges in any of the periods presented.

 

The Company’s derivative financial instrument in cash flow hedging relationships consisted of the following (in thousands):

 

 

 

 

 

Fair Value

 

 

 

Balance Sheet Location

 

April 1,
2017

 

December 31,
2016

 

Interest rate swap

 

Other assets, net

 

$

 

$

1,808

 

 

The before-tax effect of derivative instruments in cash flow hedging relationships was as follows (in thousands):

 

 

 

Gain (Loss) Recognized in
OCI on Derivatives
(Effective Portion)
during the:

 

 

 

Gain (Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)
during the:

 

 

 

Three Months Ended

 

Location of Loss

 

Three Months Ended

 

 

 

April 1,
2017

 

April 2,
2016

 

Reclassified into
Income

 

April 1,
2017

 

April 2,
2016

 

Interest rate swaps

 

$

 

$

(286

)

Interest expense

 

$

1,808

 

$

(66

)

 

Foreign Currency Forward Contracts

 

The Company uses foreign currency forward contracts to manage exposure to foreign exchange risk. These instruments are used to reduce the earnings impact that exchange rate fluctuations have on non-U.S. dollar balance sheet exposures. The Company recognizes gains and losses on the foreign currency forward contracts in other, net in the Consolidated Statement of Income in the same period as the remeasurement loss and gain of the related foreign currency denominated asset or liability. The Company does not apply hedge accounting to its foreign currency derivative instruments.

 

As of April 1, 2017 and April 2, 2016, the Company held one foreign currency forward contract denominated in Norwegian Krone with a notional value of $4.0 million and $4.8 million, respectively. The fair value of the contracts was not material as of April 1, 2017 or April 2, 2016. The contract held as of April 1, 2017 has a maturity date of June 28, 2017 and it was not designated as a hedging instrument.

 

16



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The before-tax effect of derivative instruments not designated as hedging instruments was as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

Gain (Loss) Recognized in Income

 

April 1,
2017

 

April 2,
2016

 

Location

 

Foreign currency forward contracts

 

$

(94

)

$

(300

)

Other, net

 

 

5. Balance Sheet Details

 

The following shows the details of selected Condensed Consolidated Balance Sheet items (in thousands):

 

Inventories

 

 

 

April 1,
2017

 

December 31,
2016

 

Work in progress

 

$

42,493

 

$

40,755

 

Finished goods

 

18,815

 

18,823

 

 

 

$

61,308

 

$

59,578

 

 

6. Acquisitions

 

Zentri

 

On January 20, 2017, the Company acquired Zentri, Inc., a private company. Zentri is an innovator in low-power, cloud-connected Wi-Fi® technologies for the Internet of Things (IoT). The Company acquired Zentri for approximately $18.1 million, including initial cash consideration of approximately $14.3 million, and potential additional consideration with an estimated fair value of approximately $3.8 million at the date of acquisition. The amount of potential additional consideration is up to approximately $10.0 million based on fiscal 2017 revenue from certain Zentri products.

 

The purchase price was allocated as follows: intangible assets—$6.7 million; goodwill—$12.5 million; and other net liabilities—$1.1 million. The goodwill is not deductible for tax purposes. The allocation of the purchase price is preliminary and subject to change, primarily for the valuation of certain assets and accruals and the finalization of income tax matters. Accordingly, adjustments may be made to the values of the assets acquired and liabilities assumed as additional information is obtained about the facts and circumstances that existed at the valuation date.

 

Pro forma information related to this acquisition has not been presented because it would not be materially different from amounts reported.

 

7.  Debt

 

1.375% Convertible Senior Notes

 

On March 6, 2017, the Company completed a private offering of $400 million principal amount convertible senior notes (the “Notes”). The Notes bear interest semi-annually at a rate of 1.375% per year and will mature on March 1, 2022, unless repurchased, redeemed or converted at an earlier date. The Company used $72.5 million of the proceeds to pay off the remaining balance of its Amended Credit Agreement.

 

17



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The Notes are convertible at an initial conversion rate of 10.7744 shares of common stock per $1,000 principal amount of the Notes, which is equivalent to a conversion price of approximately $92.81 per share. The conversion rate is subject to adjustment under certain circumstances. Holders may convert the Notes under the following circumstances: during any calendar quarter after the calendar quarter ending on June 30, 2017 if the closing price of the Company’s common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to 130% of the conversion price of the Notes; during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the closing sale price of our common stock and the conversion rate on each such trading day; if specified distributions or corporate events occur; if the Notes are called for redemption; or at any time after December 1, 2021. The Company may redeem all or any portion of the Notes, at its option, on or after March 6, 2020, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period. Upon conversion, the Notes may be settled in cash, shares of the Company’s common stock or a combination of cash and shares, at the Company’s election.

 

The principal balance of the Notes was separated into liability and equity components, and was recorded initially at fair value. The excess of the principal amount of the liability component over its carrying amount represents the debt discount, which is amortized to interest expense over the term of the Notes using the effective interest method. The carrying amount of the liability component was estimated by discounting the contractual cash flows of similar non-convertible debt at an appropriate market rate at the date of issuance.

 

The Company incurred debt issuance costs of approximately $10.6 million, which was allocated to the liability and equity components in proportion to the allocation of the proceeds. The costs allocated to the liability component are being amortized as interest expense over the term of the Notes using the effective interest method.

 

The carrying amount of the Notes consisted of the following (in thousands):

 

 

 

April 1,
2017

 

Liability component

 

 

 

Principal

 

$

400,000

 

Unamortized debt discount

 

(58,561

)

Unamortized debt issuance costs

 

(8,937

)

Net carrying amount

 

$

332,502

 

 

 

 

 

Equity component

 

 

 

Net carrying amount

 

$

57,718

 

 

The liability component of the Notes is recorded in long-term debt on the Consolidated Balance Sheet. The equity component of the Notes is recorded in additional paid-in capital. The effective interest rate for the liability component was 4.75%. As of April 1, 2017, the remaining period over which the debt discount and debt issuance costs will be amortized was 4.9 years.

 

Interest expense related to the Notes was comprised of the following (in thousands):

 

 

 

Three Months
Ended

 

 

 

April 1,
2017

 

Contractual interest expense

 

$

382

 

Amortization of debt discount

 

754

 

Amortization of debt issuance costs

 

115

 

 

 

$

1,251

 

 

18



Table of Contents

 

Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

Amended Credit Agreement

 

On July 31, 2012, the Company and certain of its domestic subsidiaries (the “Guarantors”) entered into a $230 million five-year Credit Agreement (the “Credit Agreement”), which consisted of a $100 million Term Loan Facility and a $130 million Revolving Credit Facility. On July 24, 2015, the Company and the Guarantors amended the Credit Agreement (the “Amended Credit Agreement”) in order to, among other things, increase the borrowing capacity under the Revolving Credit Facility to $300 million (the “Credit Facility”), eliminate the Term Loan Facility and extend the maturity date to five years from the closing date. On July 24, 2015, the Company borrowed $82.5 million under the Amended Credit Agreement and paid off the remaining balance of its Term Loan Facility. In connection with the Company’s offering of the Notes, it entered into a second amendment to the Credit Agreement (the “Second Amended Credit Agreement”) and paid off the remaining balance of $72.5 million.

 

The Second Amended Credit Agreement retained the key terms and provisions of the first Amended Credit Agreement, including a $25 million letter of credit sublimit and a $10 million swingline loan sublimit. The Company also has an option to increase the size of the borrowing capacity by up to an aggregate of $200 million in additional commitments, subject to certain conditions.

 

The Revolving Credit Facility, other than swingline loans, will bear interest at the Eurodollar rate plus an applicable margin or, at the option of the Company, a base rate (defined as the highest of the Wells Fargo prime rate, the Federal Funds rate plus 0.50% and the Eurodollar Base Rate plus 1.00%) plus an applicable margin. Swingline loans accrue interest at the base rate plus the applicable margin for base rate loans. The applicable margins for the Eurodollar rate loans range from 1.25% to 2.00% and for base rate loans range from 0.25% to 1.00%, depending in each case, on the leverage ratio as defined in the Agreement.

 

The Second Amended Credit Agreement contains various conditions, covenants and representations with which the Company must be in compliance in order to borrow funds and to avoid an event of default, including financial covenants that the Company must maintain a leverage ratio (funded debt/EBITDA) of no more than 3.00 to 1 and a minimum fixed charge coverage ratio (EBITDA/interest payments, income taxes and capital expenditures) of no less than 1.25 to 1. As of April 1, 2017, the Company was in compliance with all covenants of the Second Amended Credit Agreement. The Company’s obligations under the Second Amended Credit Agreement are guaranteed by the Guarantors and are secured by a security interest in substantially all assets of the Company and the Guarantors.

 

8. Stockholders’ Equity

 

Common Stock

 

The Company issued 0.5 million shares of common stock during the three months ended April 1, 2017.

 

Share Repurchase Programs

 

The Board of Directors authorized the following share repurchase programs (in thousands):

 

Program
Authorization Date

 

Program
Termination Date

 

Program
Amount

 

January 2017

 

December 2017

 

$

100,000

 

August 2015

 

December 2016

 

$

100,000

 

 

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

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 April 1, 2017. The Company repurchased 0.4 million shares of its common stock for $18.5 million during the three months ended April 2, 2016. These shares were retired upon repurchase.

 

Accumulated Other Comprehensive Income (Loss)

 

The components of accumulated other comprehensive income (loss), net of taxes, were as follows (in thousands):

 

 

 

Unrealized Gain
on Cash Flow
Hedge

 

Net Unrealized Losses
on Available-For-Sale
Securities

 

Total

 

Balance at December 31, 2016

 

$

1,175

 

$

(683

)

$

492

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before reclassifications

 

 

158

 

158

 

Amount reclassified from accumulated other comprehensive income (loss)

 

(1,175

)

 

(1,175

)

Net change for the period

 

(1,175

)

158

 

(1,017

)

 

 

 

 

 

 

 

 

Balance at April 1, 2017

 

$

 

$

(525

)

$

(525

)

 

Reclassifications From Accumulated Other Comprehensive Income (Loss)

 

The following table summarizes the effect on net income from reclassifications out of accumulated other comprehensive income (loss) (in thousands):

 

 

 

Three Months Ended

 

Reclassification 

 

April 1,
2017

 

April 2,
2016

 

Gains (losses) on cash flow hedges to:

 

 

 

 

 

Interest expense

 

$

1,808

 

$

(66

)

 

 

 

 

 

 

Income tax benefit

 

(633

)

23

 

 

 

 

 

 

 

Total reclassifications

 

$

1,175

 

$

(43

)

 

 

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”). In fiscal 2014, the stockholders of the Company approved amendments to both the 2009 Plan and the 2009 Purchase Plan. The amendments authorized additional shares of common stock for issuance, to comply with changes in applicable law, improve the Company’s corporate governance and to implement other best practices. The amended plans are currently effective.

 

Stock-based compensation costs are based on the fair values on the date of grant for stock awards and stock options and on the date of enrollment for the employee stock purchase plans. The fair values of stock awards (such as RSUs, performance stock units (PSUs) and restricted stock awards (RSAs)) are estimated based on their intrinsic values. The fair values of MSUs are estimated using a Monte Carlo simulation. The fair values of stock options and employee stock purchase plans are estimated using the Black-Scholes option-pricing model.

 

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

 

The following table presents details of stock-based compensation costs recognized in the Condensed Consolidated Statements of Income (in thousands):

 

 

 

Three Months Ended

 

 

 

April 1,
2017

 

April 2,
2016

 

Cost of revenues

 

$

258

 

$

266

 

Research and development

 

5,246

 

4,910

 

Selling, general and administrative

 

4,982

 

5,168

 

 

 

10,486

 

10,344

 

Income tax benefit

 

5,282

 

2,236

 

 

 

$

5,204

 

$

8,108

 

 

The increase in income tax benefit in the three months ended April 1, 2017 was primarily due to the recognition of excess tax benefits in connection with the Company’s adoption of ASU 2016-09. The Company had approximately $88.8 million of total unrecognized compensation costs related to granted stock options and awards as of April 1, 2017 that are expected to be recognized over a weighted-average period of approximately 2.5 years. There were no significant stock-based compensation costs capitalized into assets in any of the periods presented.

 

10.  Commitments and Contingencies

 

Patent Litigation

 

On January 21, 2014, Cresta Technology Corporation (“Cresta Technology”), a Delaware corporation, filed a lawsuit against the Company, Samsung Electronics Co., Ltd., Samsung Electronics America, Inc., LG Electronics Inc. and LG Electronics U.S.A., Inc. in the United States District Court in the District of Delaware, alleging infringement of three United States Patents (the “Cresta Patents”). The Delaware District Court action has been stayed.

 

The Company challenged the validity of the claims of the Cresta Patents through a series of Inter-Partes Review (IPR) proceedings at the Patent Trial and Appeal Board (PTAB) of the United States Patent and Trademark Office (USPTO). On October 21, 2015, the USPTO issued final written decisions on a first set of reviewed claims finding all of the reviewed claims invalid. The Federal Circuit summarily affirmed the USPTO’s first determination on November 8, 2016 and the mandate issued on December 16, 2016, rendering the USPTO’s determination final.

 

On August 11, 2016, the PTAB issued its final written decisions in proceedings against a second set of claims in the Cresta Patents and found these claims unpatentable. On October 13, 2016, the patent owner, now known as CF Crespe LL