SILICON LABORATORIES INC. The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the "Cautionary Statement" above and "Risk Factors" below for discussions of the uncertainties, risks and assumptions associated with these statements. Our fiscal year-end financial reporting periods are a 52- or 53-
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week fiscal year that ends on the Saturday closest toDecember 31 . Fiscal 2022 will have 52 weeks and fiscal 2021 had 52 weeks. Our second quarter of fiscal 2022 endedJuly 2, 2022 . Our second quarter of fiscal 2021 endedJuly 3, 2021 .
Impact of COVID-19
The COVID-19 pandemic has impacted the global economy, disrupting our operations, global supply chains and the operations of our customers. We implemented a response plan and continued operations while largely transitioning our global workforce to a remote work model. We have recently reopened offices in all of our locations, subject to local regulations. The third parties that perform our semiconductor manufacturing, assembly, packaging and testing have generally remained operational. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration, severity and spread of the pandemic, related restrictions on travel and transportation and other actions that may be taken by governmental authorities, the impact to the business of our suppliers or customers, and other items identified under "Risk Factors" below, all of which are uncertain and cannot be predicted. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition.
Overview
We are a leader in secure, intelligent wireless technology for a more connected world. Our integrated hardware and software platform, intuitive development tools, industry leading ecosystem and robust support enable customers in building advanced industrial, commercial, home and life applications. We make it easy for developers to solve complex wireless challenges throughout the product lifecycle and get to market quickly with innovative solutions that transform industries, grow economies and improve lives. We provide analog-intensive, mixed-signal solutions for use in a variety of electronic products in a broad range of applications for the Internet of Things (IoT) including connected home and security, industrial automation and control, smart metering, smart lighting, commercial building automation, consumer electronics, asset tracking and medical instrumentation. We group our products as Industrial & Commercial or Home & Life based on the target markets they address. As a fabless semiconductor company, we rely on third-party semiconductor fabricators inAsia , and to a lesser extentthe United States andEurope , 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 inAsia 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 inAsia ), shorter production cycle times, lower inventory requirements, lower costs and increased flexibility of test capacity. 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 some of our ICs are designed for use in consumer products, 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.
Discontinued Operations
OnJuly 26, 2021 , we sold our infrastructure and automotive business to Skyworks Solutions, Inc. for$2.75 billion in cash. The prior year comparable period results of operations of the sold component have been presented in the accompanying condensed consolidated financial statements as discontinued operations and, therefore, are excluded from the following discussion of the results of our continuing operations. 19
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Current Period Highlights of Continuing Operations
Revenues increased$93.7 million in the recent quarter compared to the second quarter of fiscal 2021 due to increased revenues from both our Industrial & Commercial products and our Home & Life products. Gross profit increased$67.6 million during the same period due primarily to increased product sales. Gross margin increased to 62.3% in the recent quarter compared to 56.8% in the second quarter of fiscal 2021 due to variations in product mix and increases in the price of our products. Operating expenses increased by$24.7 million in the recent quarter compared to the second quarter of fiscal 2021 due primarily to increased personnel-related expenses, new product introduction costs and sales commissions. Operating income (loss) in the recent quarter was$31.4 million compared to$(11.5) million in the second quarter of fiscal 2021. We ended the second quarter with$1.5 billion in cash, cash equivalents and short-term investments. Net cash provided by operating activities was$83.4 million during the recent six-month period. Accounts receivable were$72.1 million atJuly 2, 2022 , representing 25 days sales outstanding (DSO). Inventory was$74.0 million atJuly 2, 2022 , representing 67 days of inventory (DOI). In the second quarter, we acquired 3.1 million shares of our common stock for$436.4 million . Through acquisitions and internal development efforts, we have continued to diversify our product portfolio and introduce new products and solutions with added functionality and integration. In the first six months of fiscal 2022, we introduced a Bluetooth® Location Services solution using accurate, low-power Bluetooth devices to simplify Angle of Arrival (AoA) and Angle of Departure (AoD) location services; and a family of 2.4 GHz wireless SoCs for Bluetooth and multi-protocol operations with a built-in AI and Machine Learning (ML) accelerator, improving performance for AI and ML applications on battery-powered edge devices. We plan to continue introducing products that increase the content we provide for existing applications, thereby enabling us to serve markets we do not currently address and expand our total available market opportunity. During the six months endedJuly 2, 2022 , we had no customer that represented more than 10% of our revenues. In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer. Two of our distributors who sell to our customers, Arrow Electronics and Edom Technology, each represented more than 10% of our revenues during the six months endedJuly 2, 2022 . The percentage of our revenues derived from outside ofthe United States was 85% during the six months endedJuly 2, 2022 . All of our revenues to date have been denominated inU.S. dollars. We believe that a majority of our revenues will continue to be derived from customers outside ofthe United States . 20 Table of Contents Results of Operations
The following describes the line items set forth in our Condensed Consolidated Statements of Income:
Revenues. Revenues are generated predominately by sales of our products. 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. 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. Our gross margin fluctuates depending on product mix, manufacturing yields, inventory valuation adjustments, average selling prices and other factors. 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, amortization of intangible assets, professional fees, legal fees, and promotional and marketing expenses. Interest Income and Other, Net. Interest income and other, net reflects interest earned on our cash, cash equivalents and investment balances, foreign currency remeasurement adjustments, and other non-operating income and expenses. Interest Expense. Interest expense consists of interest on our short and long-term obligations, including our convertible senior notes and credit facility. Interest expense on our convertible senior notes includes contractual interest, amortization of debt issuance costs, and for periods prior to fiscal 2022, amortization of the debt discount. Provision for Income Taxes. Provision for income taxes includes both domestic and foreign income taxes at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences.
Equity-method Earnings. Equity-method earnings represents income or loss on our equity-method investment.
Income from discontinued operations, net of income taxes. Income from discontinued operations, net of income taxes includes the results of operations of our former infrastructure and automotive business.
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The following table sets forth our Condensed Consolidated Statements of Income data as a percentage of revenues for the periods indicated:
Three Months Ended Six Months Ended
July 2, July 3, July 2, July 3,
2022 2021 2022 2021
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues 37.7 43.2 35.7 42.6
Gross margin 62.3 56.8 64.3 57.4
Operating expenses:
Research and development 31.7 38.3 32.4 39.4Selling, general and administrative 18.7 25.3
18.8 26.0 Operating expenses 50.4 63.6 51.2 65.4 Operating income (loss) 11.9 (6.8) 13.1 (8.0) Other income (expense):
Interest income and other, net 1.3 0.3 1.0 0.5 Interest expense (0.6) (3.8) (0.6) (5.4) Income (loss) from continuing operations before 12.6 (10.3)
13.5 (12.9) income taxes Provision for income taxes 4.2 0.7 4.6 1.0 Equity-method earnings 0.0 0.1 0.2 0.6
Income (loss) from continuing operations 8.4 (10.9) 9.1 (13.3) Income from discontinued operations, net of 22.7
23.5
income taxes - -
Net income 8.4 % 11.8 % 9.1 % 10.2 %
Revenues
Three Months Ended Six Months Ended
July 2, July 3, % July 2, July 3, %
(in millions) 2022 2021 Change Change 2022 2021 Change Change
Industrial & Commercial $ 144.2 $ 89.4 $ 54.8 61.2 % $ 270.8 $ 168.1 $ 102.7 61.1 % Home & Life 119.0 80.1 38.9 48.6 % 226.2 159.2 67.0 42.0 %$ 263.2 $ 169.5 $ 93.7 55.3 %$ 497.0 $ 327.3 $ 169.7 51.8 % The increase in revenues in the recent three-month period was due to increased revenues of$54.8 million from our Industrial & Commercial products and$38.9 million from our Home & Life products. The increase in revenues in the recent six-month period was due to increased revenues of$102.7 million from our Industrial & Commercial products and$67.0 million from our Home & Life products. Unit volumes of our products increased during the three and six months endedJuly 2, 2022 while average selling prices increased substantially compared to the three and six months endedJuly 3, 2021 . See Note 9, Revenues, to the Condensed Consolidated Financial Statements for additional information. The average selling prices of our products may fluctuate significantly from period to period due to changes in product mix, pricing decisions and other factors. In general, as our products become more mature, we expect to experience decreases in average selling prices. Gross Profit Three Months Ended Six Months Ended July 2, July 3, July 2, July 3, (in millions) 2022 2021 Change 2022 2021 Change Gross profit$ 163.9 $ 96.3 $ 67.6 $ 319.7 $ 188.1 $ 131.6 Gross margin 62.3 % 56.8 % 5.5 % 64.3 % 57.4 % 6.9 % Gross profit increased during the recent three and six month periods due primarily to increased product sales. The change in gross profit in the recent period was due to increases in gross profit for our Industrial & Commercial products and our Home & Life products. Gross margin increased primarily due to variations in product mix and increases in the price of our products. Increased product demand and production capacity constraints have increased the selling price and costs of our products, and has resulted in period-to-period fluctuations in our gross margin. We expect the prices we pay for inventory to continue to increase in future periods and that this will reduce our gross
margins.
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We may experience variations in the average selling prices of certain of our
products. Increases in average selling prices may occur during periods of
increased demand, but such demand may be short-lived and could be accompanied by
higher product costs. Declines in average selling prices create downward
pressure on gross margin and may be offset to the extent we are able to
introduce higher margin new products and gain market share with our products;
reduce costs of existing products through improved design; achieve lower
production costs from our wafer suppliers and third-party assembly and test
subcontractors; achieve lower production costs per unit as a result of improved
yields throughout the manufacturing process; or reduce logistics costs.
Research and Development
Three Months Ended Six Months Ended
July 2, July 3, % July 2, July 3, %
(in millions) 2022 2021 Change Change 2022 2021 Change Change
Research and development $ 83.5 $ 64.8 $ 18.7 28.8 % $ 161.1 $ 128.8 $ 32.3 25.0 %
Percent of revenue 31.7 % 38.3 % 32.4 % 39.4 %
The increase in research and development expense in the three and six month periods was primarily due to increases of$13.6 million and$26.3 million , respectively, for personnel-related expenses, and$3.8 million and$2.9 million , respectively, for new product introduction costs. The decrease in research and development expense as a percent of revenues in the current periods was due to our increased revenues. We expect that research and development expense will increase in absolute dollars in the third quarter of fiscal 2022.
Selling, General and Administrative
Three Months Ended Six Months Ended
July 2, July 3, % July 2, July 3, %
(in millions) 2022 2021 Change Change 2022 2021 Change Change
Selling, general and
administrative $ 49.0 $ 43.0 $ 6.0 14.1 % $ 93.7 $ 85.4 $ 8.3 9.7 %
Percent of revenue 18.7 % 25.3 % 18.8 % 26.0 %
The increase in selling, general and administrative expense in the three and six
month periods was primarily due to increases of $4.3 million and $6.4 million ,
respectively, for personnel-related expenses, and $0.6 million and $1.2 million ,
respectively, for sales commissions. The decrease in selling, general and
administrative expense as a percent of revenues in the current periods was due
to our increased revenues. We expect that selling, general and administrative
expense will increase in absolute dollars in the third quarter of fiscal 2022.
Interest Income and Other, Net
Interest income and other, net for the three and six months endedJuly 2, 2022 was$3.4 million and$4.9 million , respectively, compared to$0.5 million and$1.6 million for the three and six months endedJuly 3, 2021 , respectively. The increase in interest income and other, net in the recent periods was primarily due to increased interest income earned as a result of higher investment balances and higher market interest rates.
Interest Expense
Interest expense for the three and six months endedJuly 2, 2022 was$1.7 million and$3.3 million , respectively, compared to$6.5 million and$17.8 million for the three and six months endedJuly 3, 2021 , respectively. The decrease in interest expense in the recent three-month period was primarily due to a decrease of$5.0 million in amortization of debt discount as a result of our adoption of ASU 2020-06 in fiscal 2022. The decrease in interest expense in the recent six-month period was primarily due to a decrease of$10.9 million in amortization of debt discount in the current period and a loss of$3.4 million recorded on the early extinguishment of the remaining 2022 Notes in the prior period. See Note 7, Debt, to the Condensed Consolidated Financial Statements for additional information. 23 Table of Contents Provision for Income Taxes Three Months Ended Six Months Ended July 2, July 3, July 2, July 3, (in millions) 2022 2021 Change 2022 2021 Change Provision for income taxes$ 11.0 $ 1.2 $ 9.8 $ 22.7 $ 3.2 $ 19.5 Effective tax rate 33.2 % (6.7) % 33.5 % (7.8) % The increase in the effective tax rate for the three and six months endedJuly 2, 2022 was primarily due to the recognition of certain tax benefits for the three and six months endedJuly 3, 2021 in discontinued operations under the ASU 2019-12 and the required adoption of newU.S. tax rules regarding expensing of research and experimental costs in the current fiscal year.
Equity-method Earnings
Equity-method earnings for the three and six months ended
Income from discontinued operations, net of income taxes
Three Months Ended Six Months Ended
July 2, July 3, July 2, July 3,
(in millions) 2022 2021 Change 2022 2021 Change
Income from discontinuedoperations, net of income taxes $ -$ 38.4 $ (38.4)
$ -
There was no income from prior year discontinued operations in the current periods. Income from discontinued operations for the three and six months endedJuly 3, 2021 included revenues of$108.1 million and$205.7 million , income before income taxes of$37.9 million and$74.8 million , and income tax benefits of$0.5 million and$2.3 million , respectively.
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