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-week fiscal year that ends on the Saturday closest toDecember 31 . Fiscal 2021 will have 52 weeks. Fiscal 2020 had 53 weeks with the extra week occurring in the first quarter of the year. Our second quarter of fiscal 2021 endedJuly 3, 2021 . Our second quarter of fiscal 2020 endedJuly 4, 2020 . Impact of COVID-19
A new strain of novel coronavirus which causes a severe respiratory disease
("COVID-19") was identified in 2019, and subsequently declared a worldwide
pandemic by the World Health Organization . We implemented a response plan and
continued operations while largely transitioning our global workforce to a
remote work model. 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 leading provider of silicon, software and solutions for a smarter, more connected world. Our award-winning technologies are shaping the future of the Internet of Things (IoT), industrial automation and consumer markets. Our world-class engineering team creates products focused on performance, energy savings, connectivity and simplicity. Our primary semiconductor products are mixed-signal integrated circuits (ICs), which are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process. 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.
Our expertise in analog-intensive, high-performance, mixed-signal ICs and software enables us to develop highly differentiated solutions that address multiple markets. Our Internet of Things products include wireless connectivity, microcontroller (MCU) and sensor products.
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.
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Discontinued Operation
OnApril 22, 2021 , we entered into an Asset Purchase Agreement pursuant to which Skyworks Solutions agreed to acquire certain assets, rights, and properties, and assume certain liabilities, comprising our infrastructure and automotive business for$2.75 billion in cash. The sale was completed pursuant to the terms of the Agreement onJuly 26, 2021 . The results of operations of the sold component have been presented in the accompanying condensed consolidated financial statements as discontinued operations.
Current Period Highlights of Continuing Operations
Revenues increased$55.1 million in the recent quarter compared to the second quarter of fiscal 2020 primarily due to increased demand for our products. Gross profit increased$29.7 million during the same period due primarily to increased product sales. Gross margin decreased to 56.8% in the recent quarter compared to 58.2% in the second quarter of fiscal 2020 due primarily to variations in product mix. Operating expenses increased by$9.4 million in the recent quarter compared to the second quarter of fiscal 2020 due primarily to increased personnel-related expenses, new product introduction costs and amortization of intangible assets. Operating loss in the recent quarter was$11.5 million compared to$31.8 million in the second quarter of fiscal 2020. We ended the second quarter with$617.3 million in cash, cash equivalents and short-term investments. Net cash provided by operating activities was$5.7 million during the recent six-month period. Accounts receivable was$99.5 million atJuly 3, 2021 , representing 53 days sales outstanding (DSO). Inventory was$52.3 million atJuly 3, 2021 , representing 64 days of inventory (DOI). In the recent six-month period, we repurchased 0.1 million shares of our common stock for$19.0 million .
Through acquisitions and internal development efforts, we have continued to diversify our portfolio and introduce new products and solutions with added functionality and integration. In the first six months of fiscal 2021, we introduced a fully integrated, certified Wi-SUN® solution simplifyingLow Power Wide Area Network (LPWAN) deployment for smart cities; wireless solutions for development of Matter end products that support Thread, Wi-Fi, and Bluetooth protocols; and a new 32-bit MCU on our award-winning xG22 platform for IoT edge applications. 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 3, 2021 , 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. Three of our distributorswho sell to our customers, Arrow Electronics, Edom Technology andSekorm , each represented more than 10% of our revenues during the six months ended July
3, 2021. The percentage of our revenues derived from outside ofthe United States was 89% during the six months endedJuly 3, 2021 . 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 . Results of Operations
The following describes the line items set forth in our Condensed Consolidated Statements of Operations:
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.
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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, income or loss on equity method investments, 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 the debt discount and amortization of debt issuance
costs.
Provision (Benefit) for Income Taxes. Provision (benefit) 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.
The following table sets forth our Condensed Consolidated Statements of Operations data as a percentage of revenues for the periods indicated:
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
2021 2020 2021 2020
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues 43.2 41.8 42.6 41.7
Gross margin 56.8 58.2 57.4 58.3
Operating expenses:
Research and development 38.3 50.7 39.4 49.8Selling, general and administrative 25.3 35.3
26.0 36.5 Operating expenses 63.6 86.0 65.4 86.3 Operating loss (6.8) (27.8) (8.0) (28.0) Other income (expense):
Interest income and other, net 0.4 2.9 1.1 2.9
Interest expense (3.8) (10.3) (5.4) (7.5)
Loss from continuing operations before income
taxes (10.2) (35.2) (12.3) (32.6)
Provision (benefit) for income taxes 0.7 (3.7) 1.0 (3.6)
Loss from continuing operations (10.9) (31.5) (13.3) (29.0)
Income from discontinued operations, net of
income taxes 22.7 29.9 23.5 29.2
Net income (loss) 11.8 % (1.6) % 10.2 % 0.2 %
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Revenues
Three Months Ended Six Months Ended
July 3, July 4, % July 3, July 4, %
(in millions) 2021 2020 Change Change 2021 2020 Change Change
Revenues $ 169.5 $ 114.4 $ 55.1 48.2 % $ 327.3 $ 232.4 $ 94.9 40.9 %
The change in revenues in the recent three and six month periods was due to increased demand for our IoT products. Unit volumes of our products increased by 50.7% while average selling prices decreased by 1.1% compared to the three months endedJuly 4, 2020 . Unit volumes of our products increased by 46.1% while average selling prices decreased by 2.9% compared to the six months endedJuly 4, 2020 . 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 3, July 4, July 3, July 4, (in millions) 2021 2020 Change 2021 2020 Change Gross profit$ 96.3 $ 66.6 $ 29.7 $ 188.1 $ 135.4 $ 52.7 Gross margin 56.8 % 58.2 % (1.4) % 57.4 % 58.3 % (0.9) %
Gross profit increased during the recent three and six month periods due primarily to increased product sales. Gross margin decreased during the recent three and six month periods primarily due to variations in product mix.
We may experience declines in the average selling prices of certain of our
products. This creates 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 3, July 4, % July 3, July 4, %(in millions) 2021 2020 Change Change 2021 2020 Change Change Research and development$ 64.8 $ 58.0 $ 6.8 11.8 %$ 128.8 $ 115.7 $ 13.1 11.4 % Percent of revenue 38.3 % 50.7 % - - 39.4 % 49.8 % - - The increase in research and development expense in the recent three and six month periods was primarily due to increases of$3.4 million and$5.6 million , respectively, for personnel-related expenses,$2.2 million and$4.0 million , respectively, for new product development costs, and$0.2 million and$1.7 million , respectively, for the amortization of intangible assets. We expect that research and development expense will increase in absolute dollars in the third quarter of fiscal 2021.
Selling, General and Administrative
Three Months Ended Six Months Ended
July 3, July 4, % July 3, July 4, %
(in millions) 2021 2020 Change Change 2021 2020 Change Change
Selling, general and
administrative $ 43.0 $ 40.4 $ 2.6 6.5 % $ 85.4 $ 84.8 $ 0.6 0.7 %
Percent of revenue 25.3 % 35.3 % - - 26.0 % 36.5 % - -
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The increase in selling, general and administrative expense in the recent
three-month period was primarily due to an increase of $2.5 million for
personnel-related expenses. The increase in selling, general and administrative
expense in the recent six-month period was primarily due to an increase of $2.4
million for personnel-related expenses offset in part by a decrease of $1.6
million in acquisition-related costs. We expect that selling, general and
administrative expense will increase in absolute dollars in the third quarter of
fiscal 2021.
Interest Income and Other, Net
Interest income and other, net for the three and six months endedJuly 3, 2021 was$0.6 million and$3.5 million , respectively, compared to$3.3 million and$6.5 million for the three and six months endedJuly 4, 2020 , respectively. The decrease in interest income and other, net in the recent three and six month periods was primarily due to lower interest rates on the underlying investment instruments. Interest Expense Interest expense for the three and six months endedJuly 3, 2021 was$6.5 million and$17.8 million , respectively, compared to$11.8 million and$17.3 million for the three and six months endedJuly 4, 2020 , respectively. The decrease in interest expense in the recent three-month period was primarily due to a loss recorded on the early extinguishment of a portion of the 2022 notes recorded in the prior three-month period.
Provision (Benefit) for Income Taxes
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(in millions) 2021 2020 Change 2021 2020 Change
Provision (benefit) for income taxes $ 1.2 $ (4.2) $ 5.4 $ 3.2 $ (8.4) $ 11.6 Effective tax rate (6.7) % 10.5 % - (7.8) % 11.1 % -
The increase in the provision for income taxes for the three and six months endedJuly 3, 2021 as compared to the prior periods was primarily due to the adoption of ASU 2019-12, Simplifying the Accounting for Income Taxes, during the six months endedJuly 3, 2021 and the required allocation of$9.6 million of tax benefits from continuing operations to discontinued operations in the fiscal 2021 periods.
Income from discontinued operations, net of income taxes
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(in millions) 2021 2020 Change 2021 2020 Change
Income from discontinuedoperations, net of income taxes$ 38.4 $ 34.2 $ 4.2
$ 77.1 $ 67.9 $ 9.2
The increase in income from discontinued operations, net of income taxes in the
recent three and six month periods was primarily due to decreases in the
provision for income taxes in the current periods. See Note 2, Discontinued
Operations, to the Condensed Consolidated Financial Statements for additional
information.
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