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SILICON LABORATORIES INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and related notes thereto included elsewhere in this report. This
discussion contains forward-looking statements. Please see the "Cautionary
Statement" and "Risk Factors" above 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, 2011 and 2010 were 52-week years and ended on
December 29, 2012, December 31, 2011 and January 1, 2011, respectively.
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 products addressing a
variety of markets, including communications, consumer, industrial and
automotive. 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:
º •
º Broad-based products, which include our microcontrollers, timing
products (clocks and oscillators), power and isolation devices, and
touch controllers;
º •
º Broadcast products, which include our broadcast audio and video
products;
º •
º Access products, which include our Voice over IP (VoIP) products,
embedded modems and our Power over Ethernet (PoE) devices; and
º •
º 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.
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. On July 3, 2012, we acquired Ember
Corporation, a privately held company. Ember's products integrate
high-performance, low-power 2.4 GHz wireless ICs with reliable and scalable
software into a flexible and robust networking platform. We believe that this
strategic acquisition provides us with the technology and software expertise
required to enable the low-power mesh sensor networks being deployed today in a
wide range of residential, commercial and industrial applications. See Note 9,
Acquisitions, for additional information.
In 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. We also introduced a digital
relative humidity (RH) and temperature "sensor-on-a-chip" solution, low-jitter
clock buffers with high integration of clock tree functions, a crystal-less
USB-to-I2S audio bridge
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designed to support a wide range of codecs and digital-to-analog converters
(DACs), a family of digital isolators that are drop-in replacements for
optocouplers, high-performance 8-bit microcontrollers featuring an integrated
temperature sensor with best-in-class accuracy, two next-generation EZRadio
wireless ICs designed to simplify the addition of high-performance wireless
connectivity to cost-sensitive embedded applications, advanced AM/FM receivers
tuned for the high-end consumer and professional audio equipment market, a
family of TV tuners offering both best-in-class RF performance and support for
all worldwide TV standards, a multimedia demodulator that merges all digital
video broadcast (DVB) standards into a single-chip solution, isolated
analog-to-digital (ADC) converters designed specifically for the demands of
mains line monitoring, a single-port PoE controller that brings "plug-and-play"
simplicity to embedded power sourcing equipment (PSE) designs, 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 fiscal 2012 and 2011, we had one customer, Samsung, whose purchases
across a variety of product areas represented 19% and 13% of our revenues,
respectively. We had no customers that accounted for more than 10% of our
revenues during fiscal 2010. 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 22% and 11% of our revenues during fiscal
2012, respectively. Edom, Avnet and Macnica, represented 24%, 12% and 10% of our
revenues during fiscal 2011, respectively. Edom and Avnet represented 28% and
14% of our revenues during fiscal 2010, respectively. There were no other
distributors or contract manufacturers that accounted for more than 10% of our
revenues in fiscal 2012, 2011 or 2010.
The percentage of our revenues derived from outside of the United States was
88% in fiscal 2012, 86% in fiscal 2011 and 86% in fiscal 2010. 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, radios 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.
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Results of Operations
The following describes the line items set forth in our Consolidated
Statements of Income:
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, as
well as new product masks, external consulting and services costs, equipment
tooling, equipment depreciation, amortization of intangible assets, and an
allocated portion of our occupancy costs. 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, as well as an allocated 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, including our Credit Facilities.
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.
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The following table sets forth our Consolidated Statements of Income data as
a percentage of revenues for the periods indicated:
Fiscal Year
2012 2011 2010
Revenues 100.0 % 100.0 % 100.0 %
Cost of revenues 40.0 39.3 34.3
Gross margin 60.0 60.7 65.7
Operating expenses:
Research and development 24.5 27.7 25.1
Selling, general and administrative 20.3 22.8 23.0
Operating expenses 44.8 50.5 48.1
Operating income 15.2 10.2 17.6
Other income (expense):
Interest income 0.2 0.3 0.4
Interest expense (0.2 ) 0.0 0.0
Other income (expense), net 0.1 0.1 (0.3 )
Income before income taxes 15.3 10.6 17.7
Provision for income taxes 4.0 3.4 2.9
Net income 11.3 % 7.2 % 14.8 %
Comparison of Fiscal 2012 to Fiscal 2011
Revenues
Fiscal Year %
(in millions) 2012 2011 Change Change
Revenues $ 563.3 $ 491.6 $ 71.7 14.6 %
The growth in revenues in fiscal 2012 was due primarily to market share
gains and the addition of product revenues from the acquisition of Ember in July
2012. Unit volumes of our products increased compared to fiscal 2011 by 18.0%.
Average selling prices decreased compared to the same period by 3.0%. The
average selling prices of our products may fluctuate significantly from period
to period. In general, as our products become more mature, we expect to
experience decreases in average selling prices. We anticipate that newly
announced, higher priced, next generation products and product derivatives will
offset some of these decreases.
Gross Margin
Fiscal Year %
(in millions) 2012 2011 Change Change
Gross margin $ 338.0 $ 298.4 $ 39.6 13.3 %
Percent of revenue 60.0 % 60.7 %
The increase in the dollar amount of gross margin in fiscal 2012 was
primarily due to our increased sales, offset in part by an increase in
acquisition-related charges. The decrease in gross margin as a percent of
revenue was primarily due to changes in product mix.
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We may experience declines in the average selling prices of certain of our
products. This creates downward pressure on gross margin as a percentage of
revenues and may be offset to the extent we are able to: 1) introduce higher
margin new products and gain market share with our ICs; 2) achieve lower
production costs from our wafer suppliers and third-party assembly and test
subcontractors; 3) achieve lower production costs per unit as a result of
improved yields throughout the manufacturing process; or 4) reduce logistics
costs.
Research and Development
Fiscal Year %
(in millions) 2012 2011 Change Change
Research and development $ 138.0 $ 136.0 $ 2.0 1.5 %
Percent of revenue 24.5 % 27.7 %
The increase in research and development expense in fiscal 2012 was
principally due to an increase of $2.8 million for personnel-related expenses,
including personnel costs associated with the acquisition of Ember. The decrease
in research and development expense as a percent of revenues in fiscal 2012 is
due to our increased revenues. We expect that research and development expense
will increase modestly in absolute dollars in the first quarter of 2013.
Recent development projects include a digital RH and temperature
"sensor-on-a-chip" solution, low-jitter clock buffers with high integration of
clock tree functions, a crystal-less USB-to-I2S audio bridge designed to support
a wide range of codecs and DACs, a family of digital isolators that are drop-in
replacements for optocouplers, high-performance 8-bit microcontrollers featuring
an integrated temperature sensor with best-in-class accuracy, two
next-generation EZRadio wireless ICs designed to simplify the addition of
high-performance wireless connectivity to cost-sensitive embedded applications,
advanced AM/FM receivers tuned for the high-end consumer and professional audio
equipment market, a family of TV tuners offering both best-in-class RF
performance and support for all worldwide TV standards, a multimedia demodulator
that merges all DVB standards into a single-chip solution, isolated ADC
converters designed specifically for the demands of mains line monitoring, a
single-port PoE controller that brings "plug-and-play" simplicity to embedded
PSE designs, the Precision32 32-bit mixed-signal microcontroller family, 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 PCIe Generation 1/2/3 standards.
Selling, General and Administrative
Fiscal Year %
(in millions) 2012 2011 Change Change
Selling, general and administrative $ 114.4 $ 112.4 $ 2.0 1.8 %
Percent of revenue 20.3 % 22.8 %
The increase in selling, general and administrative expense in fiscal 2012
was principally due to increases of (a) $6.5 million for personnel-related
expenses, including severance related to a separation agreement between us and
our former CEO, (b) $1.5 million for legal fees, primarily related to litigation
and acquisition-related costs, and (c) $0.8 million for product marketing costs.
The increase in fiscal 2012 was offset in part by a net gain of $8.5 million
from the purchase of our headquarters in fiscal 2012. The decrease in selling,
general and administrative expense as a percent of revenues in fiscal 2012 is
due to our increased revenues. We expect that selling, general and
administrative expense will remain relatively stable in absolute dollars in the
first quarter of 2013.
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Interest Income
Interest income in fiscal 2012 was $1.3 million compared to $1.9 million in
fiscal 2011.
Interest Expense
Interest expense in fiscal 2012 was $1.1 million compared to $37 thousand in
fiscal 2011. The increase in fiscal 2012 is principally due to interest on our
Term Loan Facility under our Credit Agreement.
Other Income (Expense), Net
Other income (expense), net in fiscal 2012 was $0.5 million compared to
$0.4 million in fiscal 2011.
Provision for Income Taxes
Fiscal Year
(in millions) 2012 2011 Change
Provision for income taxes $ 22.8 $ 16.9 $ 5.9
Effective tax rate 26.4 % 32.2 %
The effective tax rate for fiscal 2012 decreased from the prior period,
primarily due to the release of prior year unrecognized tax benefits that were
determined to be effectively settled during the current period, along with
one-time nondeductible costs associated with the acquisition of Spectra Linear
in fiscal 2011. The impact of these items was partially offset by the
non-renewal of the federal research and development tax credit in the current
period.
The American Taxpayer Relief Act of 2012 (the "Act") was enacted on
January 2, 2013. The Act retroactively reinstates the federal research and
development credit from January 1, 2012, through December 31, 2013. The effect
of the change in the tax law related to fiscal 2012 is estimated to be between
$3.5 million and $4.0 million, which will be recognized as a benefit to income
tax expense in the first quarter of fiscal 2013, the quarter in which the law
was enacted.
The effective tax rates for each of the periods presented differ from the
federal statutory rate of 35% due to the amount of income earned in foreign
jurisdictions where the tax rate may be lower than the federal statutory rate,
research and development tax credits and other permanent items including changes
to the liability for unrecognized tax benefits.
Comparison of Fiscal 2011 to Fiscal 2010
Revenues
Fiscal Year %
(in millions) 2011 2010 Change Change
Revenues $ 491.6 $ 493.3 $ (1.7 ) (0.3 )%
Unit volumes of our products decreased compared to fiscal 2010 by 1.0%.
Average selling prices increased during the same period by 1.2%.
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Gross Margin
Fiscal Year %
(in millions) 2011 2010 Change Change
Gross margin $ 298.4 $ 324.2 $ (25.8 ) (8.0 )%
Percent of revenue 60.7 % 65.7 %
The decrease in gross margin in fiscal 2011 was primarily due to changes in
product mix and charges related to the acquisition of Spectra Linear.
Research and Development
Fiscal Year %
(in millions) 2011 2010 Change Change
Research and development $ 136.0 $ 123.8 $ 12.2 9.8 %
Percent of revenue 27.7 % 25.1 %
The increase in research and development expense in fiscal 2011 was
primarily due to (a) an increase of $8.6 million for personnel-related expenses,
including $1.6 million for one-time personnel costs associated with the
acquisition of Spectra Linear, (b) an increase of $2.3 million for amortization
of intangible assets, and (c) $1.0 million for the impairment of intangible
assets.
Selling, General and Administrative
Fiscal Year %
(in millions) 2011 2010 Change Change
Selling, general and administrative $ 112.4 $ 113.8 $ (1.4 ) (1.2 )%
Percent of revenue 22.8 % 23.0 %
The decrease in selling, general and administrative expense in fiscal 2011
was principally due to a) a decrease of $2.0 million for legal fees, and (b) a
decline of $1.9 million in the fair value of acquisition-related contingent
consideration. The decrease was offset in part by an increase of $2.2 million
for personnel-related expenses, including $3.0 million for one-time personnel
costs associated with the acquisition of Spectra Linear.
Interest Income
Interest income in fiscal 2011 was $1.9 million compared to $2.3 million in
fiscal 2010.
Interest Expense
Interest expense in fiscal 2011 was $37 thousand compared to $77 thousand in
fiscal 2010.
Other Income (Expense), Net
Other income (expense), net in fiscal 2011 was $0.4 million compared to
$(1.3) million in fiscal 2010. The change was primarily due to foreign currency
remeasurement adjustments.
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Provision for Income Taxes
Fiscal Year
(in millions) 2011 2010 Change
Provision for income taxes $ 16.9 $ 14.4 $ 2.5
Effective tax rate 32.2 % 16.4 %
The effective tax rate for fiscal 2011 increased from the prior period,
primarily due to the tax charge related to the intercompany license of certain
technology obtained in the acquisition of Spectra Linear and other one-time
nondeductible costs associated with the acquisition of Spectra Linear, a
decrease in the foreign tax rate benefit, and a release of prior year
unrecognized tax benefits in fiscal 2010 with none in fiscal 2011. These changes
were partially offset by an increase in the research and development tax credit.
The effective tax rates for each of the periods presented differ from the
federal statutory rate of 35% due to the amount of income earned in foreign
jurisdictions where the tax rate may be lower than the federal statutory rate,
research and development tax credits and other permanent items including changes
to the liability for unrecognized tax benefits.
Business Outlook
We expect revenues in the first quarter of fiscal 2013 to be down
sequentially four to eight percent. Furthermore, we expect our diluted earnings
per share to be in the range of $0.34 to $0.40.
Liquidity and Capital Resources
Our principal sources of liquidity as of December 29, 2012 consisted of
$282.0 million in cash, cash equivalents and short-term investments, of which
approximately $119.4 million was held by our U.S. entities. The remaining
balance was held by our foreign subsidiaries. Our cash equivalents and
short-term investments consisted of corporate bonds, money market funds,
municipal bonds, U.S. Treasury bills, variable-rate demand notes, U.S.
government bonds, asset-backed securities and international government bonds.
Our long-term investments consisted of auction-rate securities. Early in
fiscal 2008, auctions for many of our auction-rate securities failed because
sell orders exceeded buy orders. As of December 29, 2012, we held $12.5 million
par value auction-rate securities, all of which have experienced failed
auctions. These securities have contractual maturity dates ranging from 2033 to
2046. We are receiving the underlying cash flows on all of our 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 security, a buyer is found outside of the auction process or the underlying
securities mature. We are unable to predict if these funds will become available
before their maturity dates. We do not expect to need access to the capital
represented by any of our auction-rate securities prior to their maturities.
Net cash provided by operating activities was $97.1 million during fiscal
2012, compared to net cash provided of $88.7 million during fiscal 2011.
Operating cash flows during fiscal 2012 reflect our net income of $63.5 million,
adjustments of $56.5 million for depreciation, gains on the purchase of property
and equipment, amortization, stock-based compensation and deferred income taxes,
and a net cash outflow of $22.9 million due to changes in our operating assets
and liabilities.
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Accounts receivable increased to $78.0 million at December 29, 2012 from
$55.4 million at December 31, 2011. The increase in accounts receivable resulted
primarily from an increase in shipments during the last quarter of fiscal 2012
compared to the last quarter of fiscal 2011. Our average days sales outstanding
(DSO) was 46 days at December 29, 2012 and 39 days at December 31, 2011.
Inventory increased to $49.6 million at December 29, 2012 from $34.8 million
at December 31, 2011. Our inventory level is primarily impacted by our need to
make purchase commitments to support forecasted demand and variations between
forecasted and actual demand. Our average days of inventory (DOI) was 76 days at
December 29, 2012 and 63 days at December 31, 2011.
Net cash used in investing activities was $139.3 million during fiscal 2012,
compared to net cash used of $25.2 million during fiscal 2011. The increase in
cash outflows was principally due to increases of $93.4 million for purchases of
property and equipment and $44.6 million in net payments for the acquisition of
businesses, offset by an increase of $28.3 million from net proceeds from sales
and maturities of marketable securities. On July 3, 2012, we acquired Ember, a
privately held company, for approximately $79.0 million, including contingent
consideration with an estimated fair value of $4.0 million at the date of
acquisition. On September 28, 2012, we purchased our corporate headquarters
facilities. See Note 9, Acquisitions, for additional information.
We anticipate capital expenditures of approximately $14 to $18 million for
fiscal 2013. Additionally, as part of our growth strategy, we expect to evaluate
opportunities to invest in or acquire other businesses, intellectual property or
technologies that would complement or expand our current offerings, expand the
breadth of our markets or enhance our technical capabilities.
Net cash provided by financing activities was $52.7 million during fiscal
2012, compared to net cash used of $107.2 million during fiscal 2011. The
increase in cash inflows was principally due from net proceeds of $98.3 million
from the issuance of long-term debt and outflows declining $48.0 million for
repurchases of our common stock. In April 2012, our Board of Directors
authorized a program to repurchase up to $100 million of our common stock
through January 2013.
Debt
On July 31, 2012, we entered into a $230 million five-year Credit Agreement
(the "Agreement"). The Agreement consists of a $100 million Term Loan Facility
and a $130 million Revolving Credit Facility.
The Term Loan Facility provides for quarterly principal amortization (equal
to 5% of the principal in each of the first two years and 10% of the principal
in each of the next three years) with the remaining balance payable upon the
maturity date. The Revolving Credit Facility includes a $25 million letter of
credit sublimit and a $10 million swingline loan sublimit. We have an option to
increase the size of the Revolving Credit Facility by up to an aggregate of
$50 million in additional commitments, subject to certain conditions. On
September 27, 2012, we borrowed $100 million under the Term Loan Facility. To
date, we have not borrowed under the Revolving Credit Facility.
The Term Loan Facility and Revolving Credit Facility, other than swingline
loans, will bear interest at LIBOR plus an applicable margin or, at our option,
a base rate (defined as the highest of the Bank of America prime rate, the
Federal Funds rate plus 0.50% and a daily rate equal to one-month LIBOR plus
1.00%) plus an applicable margin. Swingline loans accrue interest at a per annum
rate based on the base rate plus the applicable margin for base rate loans. The
applicable margins for the LIBOR rate loans range from 1.50% to 2.50% and for
base rate loans range from 0.50% to 1.50%, depending in each case, on the
leverage ratio as defined in the Agreement. We also pay a commitment fee on the
unused amount of the Revolving Credit Facility.
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In connection with the closing of the Credit Agreement, we entered into a
security and pledge agreement. Under the security and pledge agreement, we
pledged equity securities of certain of our subsidiaries, subject to exceptions
and limitations. The Credit Facilities contain various conditions, covenants and
representations with which we must be in compliance in order to borrow funds and
to avoid an event of default, including financial covenants that we must
maintain a leverage ratio (funded debt/EBITDA) of no more than 2.5 to 1 and a
minimum fixed charge coverage ratio (EBITDA/debt payments, income taxes and
capital expenditures) of no less than 1.50 to 1. As of December 29, 2012, the
Company was in compliance with all covenants of the Credit Facilities. See
Note 11, Debt, to the Consolidated Financial Statements for additional
information.
Our future capital requirements will depend on many factors, including the
rate of sales growth, market acceptance of our products, the timing and extent
of research and development projects, potential acquisitions of companies or
technologies and the expansion of our sales and marketing activities. We believe
our existing cash, cash equivalents, investments and credit under our Credit
Facilities are sufficient to meet our capital requirements through at least the
next 12 months, although we could be required, or could elect, to seek
additional funding prior to that time. We may enter into acquisitions or
strategic arrangements in the future which also could require us to seek
additional equity or debt financing.
Contractual Obligations
The following table summarizes our contractual obligations as of
December 29, 2012 (in thousands):
Payments due by period
Total 2013 2014 2015 2016 2017 Thereafter
Long-term debt
obligations (1) $ 100,000 $ 5,000 $ 7,500 $ 10,000 $ 10,000 $ 67,500 $ -
Interest on
long-term debt
obligations (2) 11,771 2,837 2,708 2,530 2,507 1,189 -
Operating lease
obligations (3) 13,478 3,523 2,521 1,868 1,866 1,665 2,035
Purchase
obligations (4) 36,001 35,992 9 - - - -
Other long-term
obligations (5) 2,255 - 1,991 - - - 264
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º (1)
º Long-term debt obligations represent the principal due under our Term Loan
Facility and include amounts classified as current portion of long-term
debt.
º (2)
º Interest on our long-term debt obligations is based on LIBOR plus an
applicable margin. We have entered into an interest rate swap agreement as
a hedge against the LIBOR portion of such variable interest payments and
effectively converted the LIBOR portion of the interest on the Term Loan
Facility to a fixed interest rate through the maturity date. As of
December 29, 2012, the combined interest rate on the Term Loan Facility was
2.514%. The impact of the interest rate swap was factored into the
calculation of the future interest payments on our long-term debt
obligations.
º (3)
º Operating lease obligations include amounts for leased facilities.
º (4)
º Purchase obligations include contractual arrangements in the form of
purchase orders with suppliers where there is a fixed non-cancelable
payment schedule or minimum payments due with a reduced delivery schedule.
º (5)
º We are unable to make a reasonably reliable estimate as to when or if cash
settlement with taxing authorities will occur for our unrecognized tax
benefits. Therefore, our liability of $4.4 million for unrecognized tax
benefits is not included in the table above. See Note 17, Income Taxes, to
the Consolidated Financial Statements for additional information.
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Off-Balance Sheet Arrangements
As of December 29, 2012, we had no significant off-balance sheet
arrangements.
Critical Accounting Policies and Estimates
The preparation of financial statements and accompanying notes in conformity
with U.S. generally accepted accounting principles requires that we make
estimates and assumptions that affect the amounts reported. Changes in facts and
circumstances could have a significant impact on the resulting estimated amounts
included in the financial statements. We believe the following critical
accounting policies affect our more complex judgments and estimates. We also
have other policies that we consider to be key accounting policies, such as our
policies for revenue recognition, including the deferral of revenues and cost of
revenues on sales to distributors; however, these policies do not meet the
definition of critical accounting estimates because they do not generally
require us to make estimates or judgments that are difficult or subjective.
Inventory valuation-We assess the recoverability of inventories through the
application of a set of methods, assumptions and estimates. In determining net
realizable value, we write down inventory that may be slow moving or have some
form of obsolescence, including inventory that has aged more than 12 months. We
also adjust the valuation of inventory when its standard cost exceeds the
estimated market value less selling costs. We assess the potential for any
unusual customer returns based on known quality or business issues and write-off
inventory losses for scrap or non-saleable material. Inventory not otherwise
identified to be written down is compared to an assessment of our 12-month
forecasted demand. The result of this methodology is compared against the
product life cycle and competitive situations in the marketplace to determine
the appropriateness of the resulting inventory levels. Demand for our products
may fluctuate significantly over time, and actual demand and market conditions
may be more or less favorable than those that we project. In the event that
actual demand is lower or market conditions are worse than originally projected,
additional inventory write-downs may be required.
Stock-based compensation-We recognize the fair-value of stock-based
compensation transactions in the Consolidated Statements of Income. The fair
value of our full-value stock awards (with the exception of market-based
performance awards) equals the fair market value of our stock on the date of
grant. The fair value of our market-based performance award grants is estimated
at the date of grant using a Monte-Carlo simulation. The fair value of our stock
option and employee stock purchase plan grants is estimated at the date of grant
using the Black-Scholes option pricing model. In addition, we are required to
estimate the expected forfeiture rate of our stock grants and only recognize the
expense for those shares expected to vest. If our actual experience differs
significantly from the assumptions used to compute our stock-based compensation
cost, or if different assumptions had been used, we may have recorded too much
or too little stock-based compensation cost. See Note 13, Stock-Based
Compensation, to the Consolidated Financial Statements for additional
information.
Investments in auction-rate securities-We determine the fair value of our
investments in auction-rate securities 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 our inability to liquidate the securities.
For available-for-sale auction-rate securities, if the calculated value is below
the carrying amount of the securities, we then determine if the decline in value
is other-than-temporary. We consider various factors in determining whether an
impairment is other-than-temporary, including the severity and duration of the
impairment, changes in underlying credit ratings, forecasted recovery, our
intent to sell or the likelihood that we would be required to sell the
investment before its anticipated recovery in market value and the probability
that the scheduled cash payments will continue to be made. When we conclude that
an other-than-temporary impairment has occurred, we assess whether we intend to
sell the security or if it
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is more likely than not that we will be required to sell the security before
recovery. If either of these two conditions is met, we recognize a charge in
earnings equal to the entire difference between the security's amortized cost
basis and its fair value. If we do not intend to sell a security and it is not
more likely than not that we will be required to sell the security before
recovery, the unrealized loss is separated into an amount representing the
credit loss, which is recognized in earnings, and the amount related to all
other factors, which is recorded in accumulated other comprehensive loss.
Acquired intangible assets-When we acquire a business, a portion of the
purchase price is typically allocated to identifiable intangible assets, such as
acquired technology and customer relationships. Fair value of these assets is
determined primarily using the income approach, which requires us to project
future cash flows and apply an appropriate discount rate. We amortize intangible
assets with finite lives over their expected useful lives. Our estimates are
based upon assumptions believed to be reasonable but which are inherently
uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and
unanticipated events and circumstances may occur. Incorrect estimates could
result in future impairment charges, and those charges could be material to our
results of operations.
Impairment of goodwill and other long-lived assets-We review long-lived
assets which are held and used, including fixed assets and purchased intangible
assets, for impairment whenever changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. Such evaluations compare
the carrying amount of an asset to future undiscounted net cash flows expected
to be generated by the asset over its expected useful life and are significantly
impacted by estimates of future prices and volumes for our products, capital
needs, economic trends and other factors which are inherently difficult to
forecast. If the asset is considered to be impaired, we record an impairment
charge equal to the amount by which the carrying value of the asset exceeds its
fair value determined by either a quoted market price, if any, or a value
determined by utilizing a discounted cash flow technique.
We test our goodwill for impairment annually as of the first day of our
fourth fiscal quarter and in interim periods if certain events occur indicating
that the carrying value of goodwill may be impaired. The goodwill impairment
test is a two-step process. The first step of the impairment analysis compares
our fair value to our net book value. In determining fair value, the accounting
guidance allows for the use of several valuation methodologies, although it
states quoted market prices are the best evidence of fair value. If the fair
value is less than the net book value, the second step of the analysis compares
the implied fair value of our goodwill to its carrying amount. If the carrying
amount of goodwill exceeds its implied fair value, we recognize an impairment
loss equal to that excess amount.
Income taxes-We are required to calculate income taxes in each of the
jurisdictions in which we operate. This process involves calculating the actual
current tax liability together with assessing temporary differences in
recognition of income (loss) for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included in our
Consolidated Balance Sheet. We record a valuation allowance when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. In assessing the need for a valuation allowance, we are required to
estimate the amount of expected future taxable income. Judgment is inherent in
this process and differences between the estimated and actual taxable income
could result in a material impact on our Consolidated Financial Statements.
We recognize liabilities for uncertain tax positions based on a two-step
process. The first step requires us to determine if the weight of available
evidence indicates that the tax position has met the threshold for recognition;
therefore, we must evaluate whether it is more likely than not that the position
will be sustained on audit, including resolution of any related appeals or
litigation processes. The second step requires us to measure the tax benefit of
the tax position taken, or expected to be taken, in an income tax return as the
largest amount that is more than 50% likely of being realized upon ultimate
settlement. This measurement step is inherently complex and requires subjective
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estimations of such amounts to determine the probability of various possible
outcomes. We re-evaluate the uncertain tax positions each quarter based on
factors including, but not limited to, changes in facts or circumstances,
changes in tax law, expirations of statutes of limitation, effectively settled
issues under audit, and new audit activity. Such a change in recognition or
measurement would result in the recognition of a tax benefit or an additional
charge to the tax provision in the period.
Although we believe the measurement of our liabilities for uncertain tax
positions is reasonable, no assurance can be given that the final outcome of
these matters will not be different than what is reflected in the historical
income tax provisions and accruals. If additional taxes are assessed as a result
of an audit or litigation, it could have a material effect on our income tax
provision and net income in the period or periods for which that determination
is made. We operate within multiple taxing jurisdictions and are subject to
audit in these jurisdictions. These audits can involve complex issues which may
require an extended period of time to resolve and could result in additional
assessments of income tax. We believe adequate provisions for income taxes have
been made for all periods.
Recent Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board (FASB) issued FASB
Accounting Standards Update (ASU) No. 2012-02, Intangibles-Goodwill and Other
(Topic 350)-Testing Indefinite-Lived Intangible Assets for Impairment. ASU
2012-02 permits an entity to first assess qualitative factors to determine
whether it is more likely than not that an indefinite-lived intangible asset is
impaired as a basis for determining whether it is necessary to perform the
quantitative impairment test in accordance with Subtopic 350-30. If an entity
concludes that it is not more likely than not that the indefinite-lived
intangible asset is impaired, then no further action is required. If an entity
concludes otherwise, then it is required to determine the fair value of the
indefinite-lived intangible asset and perform the quantitative impairment test.
ASU 2012-02 is effective for annual and interim impairment tests performed for
fiscal years beginning after September 15, 2012, with early adoption permitted.
The adoption of this ASU is not expected to have a material impact on our
financial statements.
In December 2011, the FASB issued FASB 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 our financial statements.
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