SILICON LABORATORIES INC. 10-Q

Item 1. Financial Statements Silicon Laboratories Inc. Condensed Consolidated Balance Sheets (In thousands, except per share data) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ April 1, ​ December 31, ​ 2023 2022 Assets ​ ​ ​ ​ ​ ​ Current assets: ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 716,377 ​ $ 499,915 Short-term investments ​ 435,699 ​ 692,024 Accounts receivable, net ​ 87,694 ​ 71,437 Inventories ​ 133,236 ​ 100,417 Prepaid expenses and other current assets ​ 87,734 ​ 97,570 Total current assets ​ 1,460,740 ​ 1,461,363 Property and equipment, net ​ 152,110 ​ 152,016 Goodwill ​ 376,389 ​ 376,389 Other intangible assets, net ​ 78,397 ​ 84,907 Other assets, net ​ 93,812 ​ 94,753 Total assets ​ $ 2,161,448 ​ $ 2,169,428 Liabilities and Stockholders’ Equity ​ ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 71,437 ​ $ 89,860 Current portion of convertible debt, net ​ ​ 530,096 ​ ​ — Deferred revenue and returns liability ​ ​ 11,258 ​ ​ 6,780 Other current liabilities ​ ​ 80,540 ​ 89,136 Total current liabilities ​ ​ 693,331 ​ 185,776 Convertible debt, net ​ ​ — ​ ​ 529,573 Other non-current liabilities ​ ​ 48,663 ​ 49,071 Total liabilities ​ ​ 741,994 ​ 764,420 Commitments and contingencies ​ ​ ​ ​ ​ ​ Stockholders’ equity: ​ ​ ​ ​ ​ ​ Preferred stock – $ 0.0001 par value; 10,000 shares authorized; no shares issued ​ ​ — ​ ​ — Common stock – $ 0.0001 par value; 250,000 shares authorized; 31,997 and 31,994 shares issued and outstanding at April 1, 2023 and December 31, 2022, respectively ​ ​ 3 ​ 3 Retained earnings ​ ​ 1,425,914 ​ 1,415,693 Accumulated other comprehensive loss ​ ​ ( 6,463 ) ​ ( 10,688 ) Total stockholders’ equity ​ ​ 1,419,454 ​ 1,405,008 Total liabilities and stockholders’ equity ​ $ 2,161,448 ​ $ 2,169,428 ​ 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, April 2, ​ ​ 2023 2022 Revenues ​ $ 246,787 ​ $ 233,814 Cost of revenues ​ ​ 92,927 ​ 78,042 Gross profit ​ ​ 153,860 ​ 155,772 Operating expenses: ​ ​ ​ ​ ​ ​ Research and development ​ ​ 89,396 ​ 77,542 Selling, general and administrative ​ ​ 44,891 ​ 44,647 Operating expenses ​ ​ 134,287 ​ 122,189 Operating income ​ ​ 19,573 ​ 33,583 Other income (expense): ​ ​ ​ ​ ​ ​ Interest income and other, net ​ ​ 4,836 ​ 1,499 Interest expense ​ ​ ( 1,656 ) ​ ( 1,680 ) Income before income taxes ​ ​ 22,753 ​ 33,402 Provision for income taxes ​ ​ 7,753 ​ ​ 11,689 Equity-method earnings (loss) ​ ​ ( 1,033 ) ​ ​ 1,194 Net income ​ $ 13,967 ​ $ 22,907 ​ ​ ​ ​ ​ ​ ​ Earnings per share: ​ ​ ​ ​ ​ ​ Basic ​ $ 0.44 ​ $ 0.60 Diluted ​ $ 0.41 ​ $ 0.58 ​ ​ ​ ​ ​ ​ ​ Weighted-average common shares outstanding: ​ ​ ​ ​ ​ ​ Basic ​ ​ 31,959 ​ ​ 38,003 Diluted ​ ​ 33,753 ​ ​ 39,523 ​ 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, April 2, ​ ​ 2023 2022 Net income ​ $ 13,967 ​ $ 22,907 Other comprehensive income (loss), before tax: ​ ​ ​ ​ ​ ​ Net changes to available-for-sale securities: ​ ​ ​ ​ ​ ​ Unrealized gains (losses) arising during the period ​ ​ 2,997 ​ ​ ( 9,692 ) Reclassification for losses included in net income ​ ​ 2,614 ​ ​ 49 ​ ​ ​ ​ ​ ​ ​ Net changes to cash flow hedges: ​ ​ ​ ​ ​ ​ Unrealized gains (losses) arising during the period ​ ​ 38 ​ ( 544 ) Reclassification for gains included in net income ​ ​ ( 30 ) ​ ​ — Other comprehensive income (loss), before tax ​ ​ 5,619 ​ ( 10,187 ) ​ ​ ​ ​ ​ ​ ​ Provision (benefit) for income taxes ​ ​ 1,394 ​ ( 2,140 ) ​ ​ ​ ​ ​ ​ ​ Other comprehensive income (loss) ​ ​ 4,225 ​ ( 8,047 ) ​ ​ ​ ​ ​ ​ ​ Comprehensive income ​ $ 18,192 ​ $ 14,860 ​ The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. ​ 5 Table of Contents Silicon Laboratories Inc. Condensed Consolidated Statements of Changes in Stockholders’ Equity (In thousands) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ ​ Accumulated Other Total ​ ​ ​ ​ Common ​ Paid-In ​ Retained ​ Comprehensive ​ Stockholders’ Three Months Ended April 1, 2023 ​ Shares ​ Stock ​ Capital ​ Earnings ​ Loss ​ Equity Balance as of December 31, 2022 31,994 ​ $ 3 ​ $ — ​ $ 1,415,693 ​ $ ( 10,688 ) ​ $ 1,405,008 Net income ​ — ​ — ​ — ​ 13,967 ​ — ​ 13,967 Other comprehensive income ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 4,225 ​ ​ 4,225 Stock issuances, net of shares withheld for taxes ​ 98 ​ — ​ ( 6,931 ) ​ — ​ — ​ ( 6,931 ) Repurchases of common stock ​ ( 95 ) ​ ​ — ​ ​ ( 9,732 ) ​ ​ ( 3,746 ) ​ ​ — ​ ​ ( 13,478 ) Stock-based compensation ​ — ​ ​ — ​ ​ 16,663 ​ ​ — ​ ​ — ​ ​ 16,663 Balance as of April 1, 2023 ​ 31,997 ​ $ 3 ​ $ — ​ $ 1,425,914 ​ $ ( 6,463 ) ​ $ 1,419,454 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ ​ Accumulated Other Total ​ ​ ​ ​ Common ​ Paid-In ​ Retained ​ Comprehensive ​ Stockholders’ Three Months Ended April 2, 2022 ​ Shares ​ Stock ​ Capital ​ Earnings ​ Loss ​ Equity Balance as of January 1, 2022 ​ 38,481 ​ $ 4 ​ $ — ​ $ 2,214,839 ​ $ ( 2,419 ) ​ $ 2,212,424 Cumulative effect of adoption of accounting standard ​ — ​ ​ — ​ ​ — ​ ​ ( 59,963 ) ​ ​ — ​ ​ ( 59,963 ) Net income ​ — ​ — ​ — ​ 22,907 ​ — ​ 22,907 Other comprehensive loss ​ — ​ — ​ — ​ — ​ ( 8,047 ) ​ ( 8,047 ) Stock issuances, net of shares withheld for taxes ​ 142 ​ — ​ ( 8,755 ) ​ — ​ — ​ ( 8,755 ) Repurchases of common stock ​ ( 1,419 ) ​ ​ — ​ ​ ( 4,114 ) ​ ​ ( 159,666 ) ​ ​ — ​ ​ ( 163,780 ) Stock-based compensation ​ — ​ — ​ 12,869 ​ — ​ — ​ 12,869 Balance as of April 2, 2022 ​ 37,204 ​ $ 4 ​ $ — ​ $ 2,018,117 ​ $ ( 10,466 ) ​ $ 2,007,655 ​ The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 6 Table of Contents Silicon Laboratories Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ April 1, ​ April 2, ​ 2023 2022 Operating Activities ​ ​ ​ ​ ​ ​ Net income ​ $ 13,967 ​ $ 22,907 Adjustments to reconcile net income to net cash provided by (used in) operating activities of continuing operations: ​ ​ ​ ​ ​ ​ Depreciation of property and equipment ​ ​ 6,235 ​ 5,156 Amortization of other intangible assets ​ ​ 6,510 ​ 10,351 Amortization of debt issuance costs ​ ​ 523 ​ ​ 496 Stock-based compensation expense ​ ​ 16,638 ​ 12,875 Equity-method earnings (loss) ​ ​ 1,033 ​ ​ ( 1,194 ) Deferred income taxes ​ ​ ( 2,670 ) ​ ( 4,202 ) Changes in operating assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ ( 16,257 ) ​ 19,080 Inventories ​ ​ ( 32,794 ) ​ ( 6,215 ) Prepaid expenses and other assets ​ ​ 11,530 ​ 1,704 Accounts payable ​ ​ ( 12,966 ) ​ 8,932 Other current liabilities and income taxes ​ ​ ( 8,529 ) ​ 8,345 Deferred revenue and returns liability ​ ​ 4,478 ​ 7,791 Other non-current liabilities ​ ​ ( 978 ) ​ ​ ( 817 ) Net cash provided by (used in) operating activities of continuing operations ​ ​ ( 13,280 ) ​ 85,209 ​ ​ ​ ​ ​ ​ ​ Investing Activities ​ ​ ​ ​ ​ ​ Purchases of marketable securities ​ ​ ( 66,113 ) ​ ( 435,690 ) Sales of marketable securities ​ ​ 170,317 ​ 9,106 Maturities of marketable securities ​ ​ 157,734 ​ ​ 213,750 Purchases of property and equipment ​ ​ ( 7,657 ) ​ ( 4,554 ) Net cash provided by (used in) investing activities of continuing operations ​ ​ 254,281 ​ ( 217,388 ) ​ ​ ​ ​ ​ ​ ​ Financing Activities ​ ​ ​ ​ ​ ​ Repurchases of common stock ​ ​ ( 17,608 ) ​ ​ ( 157,778 ) Payment of taxes withheld for vested stock awards ​ ​ ( 6,931 ) ​ ​ ( 8,755 ) Net cash used in financing activities of continuing operations ​ ​ ( 24,539 ) ​ ( 166,533 ) ​ ​ ​ ​ ​ ​ ​ Discontinued Operations ​ ​ ​ ​ ​ ​ Operating activities ​ ​ — ​ ​ ( 10,000 ) Net cash used in discontinued operations ​ ​ — ​ ​ ( 10,000 ) ​ ​ ​ ​ ​ ​ ​ Increase (decrease) in cash and cash equivalents ​ ​ 216,462 ​ ( 308,712 ) Cash and cash equivalents at beginning of period ​ ​ 499,915 ​ 1,074,623 Cash and cash equivalents at end of period ​ $ 716,377 ​ $ 765,911 ​ The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. ​ ​ 7 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 accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The information included herein contains all normal recurring accruals and adjustments which, in the opinion of management, are necessary to present fairly Silicon Laboratories Inc.’s (the “Company”) financial position, results of its operations, comprehensive income, stockholders’ equity and cash flows. The Condensed Consolidated Balance Sheet as of December 31, 2022 was derived from the Company’s audited Consolidated Financial Statements. All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated results of operations for the three months ended April 1, 2023 are not necessarily indicative of the results to be expected for the full year. ​ 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, 2022, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on February 1, 2023. ​ The Company prepares financial statements on a 52 - or 53 -week fiscal year that ends on the Saturday closest to December 31. Fiscal 2023 will have 52 weeks and fiscal 2022 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 U.S. generally accepted accounting principles (GAAP) 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, goodwill, acquired intangible assets, other long-lived assets, revenue recognition, stock-based compensation and income taxes. Actual results could differ from those estimates, and such differences could be material to the financial statements. The Company periodically reviews the assumptions used in its financial statement estimates. ​ Revenue Recognition ​ Revenue is recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Substantially all of the Company’s contracts with customers contain a single performance obligation, the sale of mixed-signal integrated circuit (IC) products. This performance obligation is satisfied when control of the product is transferred to the customer, which typically occurs upon delivery. Unsatisfied performance obligations primarily represent contracts for products with future delivery dates. The Company has opted to not disclose the amount of unsatisfied performance obligations as these contracts have original expected durations of less than one year. ​ The transaction price reflects the Company’s expectations about the consideration it will be entitled to receive from the customer and may include fixed or variable amounts. Variable consideration primarily includes sales made to distributors under agreements allowing certain rights of return, referred to as stock rotation, and credits issued to the distributor due to price protection. The Company estimates variable consideration at the most likely amount to which it expects to be entitled. The estimate is based on information available to the Company, including recent sales activity and pricing data. The Company applies a constraint to its variable consideration estimate which considers both the likelihood of a return and the amount of a potential price concession. Variable consideration that does not meet revenue recognition criteria is deferred. The Company records a right of return asset in prepaid expenses and other current assets for the costs of distributor inventory not meeting revenue recognition criteria. A corresponding deferred revenue and returns liability amount is recorded for unrecognized revenue associated with such costs. The Company’s products carry a one-year replacement warranty. Payments are typically due within 30 days of invoicing and do not include a significant financing component. ​ 8 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, April 2, ​ ​ 2023 ​ 2022 Net income ​ $ 13,967 ​ $ 22,907 ​ ​ ​ ​ ​ ​ ​ Shares used in computing basic earnings per share ​ ​ 31,959 ​ 38,003 ​ ​ ​ ​ ​ ​ ​ Effect of dilutive securities: ​ ​ ​ ​ ​ ​ Convertible debt and stock-based awards ​ ​ 1,794 ​ 1,520 Shares used in computing diluted earnings per share ​ ​ 33,753 ​ 39,523 ​ ​ ​ ​ ​ ​ ​ Earnings per share: ​ ​ ​ ​ ​ ​ Basic ​ $ 0.44 ​ $ 0.60 Diluted ​ $ 0.41 ​ $ 0.58 ​ The Company has irrevocably elected to settle the principal amount of its convertible senior notes in cash and intends to settle any excess value in shares in the event of a conversion. For the three months ended April 1, 2023 and April 2, 2022, approximately 1.2 million and 1.0 million shares, respectively, were included in the denominator for the calculation of diluted earnings per share. See Note 6, Debt , to the Condensed Consolidated Financial Statements for additional information. ​ 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 other than Level 1 that are directly or indirectly observable, such as quoted prices for similar assets or liabilities and quoted prices in less active markets. 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. 9 Table of Contents Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) 3. Fair Value of Financial Instruments (Continued) 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, 2023 Using ​ ​ ​ ​ ​ Quoted Prices in ​ Significant Other ​ ​ ​ ​ ​ Active Markets for ​ Observable ​ ​ ​ ​ ​ Identical Assets ​ Inputs ​ ​ ​ Description (Level 1) (Level 2) Total Cash equivalents: ​ ​ ​ ​ ​ ​ ​ ​ ​ Money market funds ​ $ 563,856 ​ $ — ​ $ 563,856 Total cash equivalents ​ $ 563,856 ​ $ — ​ $ 563,856 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Short-term investments: ​ ​ ​ ​ ​ ​ ​ ​ ​ Corporate debt securities ​ $ — ​ $ 296,619 ​ $ 296,619 Government debt securities ​ ​ — ​ ​ 139,080 ​ ​ 139,080 Total short-term investments ​ $ — ​ $ 435,699 ​ $ 435,699 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ $ 563,856 ​ $ 435,699 ​ $ 999,555 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value Measurements ​ ​ ​ ​ at December 31, 2022 Using ​ ​ ​ ​ Quoted Prices in ​ Significant Other ​ ​ ​ ​ ​ Active Markets for ​ Observable ​ ​ ​ ​ ​ Identical Assets ​ Inputs ​ ​ ​ Description (Level 1) (Level 2) Total Cash equivalents: ​ ​ ​ ​ ​ ​ ​ ​ ​ Money market funds ​ $ 310,969 ​ $ — ​ $ 310,969 Corporate debt securities ​ ​ — ​ 3,249 ​ 3,249 Total cash equivalents ​ $ 310,969 ​ $ 3,249 ​ $ 314,218 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Short-term investments: ​ ​ ​ ​ ​ ​ ​ ​ ​ Corporate debt securities ​ $ — ​ $ 501,014 ​ $ 501,014 Government debt securities ​ ​ — ​ ​ 191,010 ​ ​ 191,010 Total short-term investments ​ $ — ​ $ 692,024 ​ $ 692,024 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ $ 310,969 ​ $ 695,273 ​ $ 1,006,242 ​ ​ 10 Table of Contents Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) 3. Fair Value of Financial Instruments (Continued) 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; quoted prices in less active markets; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. The Company’s foreign currency derivative instruments are valued using discounted cash flow models. The assumptions used in preparing the valuation models include foreign exchange rates, forward and spot prices for currencies and market observable data of similar instruments. Contractual maturities of investments The Company’s available-for-sale investments are reported at fair value, with unrealized gains and losses, net of tax, recorded as a component of accumulated other comprehensive loss in the Condensed Consolidated Balance Sheet. The following summarizes the contractual underlying maturities of the Company’s available-for-sale investments at April 1, 2023 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair ​ ​ Cost ​ Value Due in one year or less ​ $ 188,907 ​ $ 186,023 Due after one year through five years ​ ​ 254,715 ​ ​ 249,676 ​ ​ $ 443,622 ​ $ 435,699 ​ Unrealized Gains and Losses ​ 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 ​ ​ ​ ​ Gross ​ ​ ​ ​ Gross ​ ​ ​ ​ Gross ​ ​ Fair ​ Unrealized ​ Fair ​ Unrealized ​ Fair ​ Unrealized As of April 1, 2023 Value Losses Value Losses Value Losses Corporate debt securities ​ $ 59,723 ​ $ ( 625 ) ​ $ 222,231 ​ $ ( 4,895 ) ​ $ 281,954 ​ $ ( 5,520 ) Government debt securities ​ 23,652 ​ ( 20 ) ​ 89,889 ​ ( 2,473 ) ​ 113,541 ​ ( 2,493 ) ​ ​ $ 83,375 ​ $ ( 645 ) ​ $ 312,120 ​ $ ( 7,368 ) ​ $ 395,495 ​ $ ( 8,013 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less Than 12 Months ​ 12 Months or Greater ​ Total ​ ​ ​ ​ ​ Gross ​ ​ ​ ​ Gross ​ ​ ​ ​ Gross ​ ​ Fair ​ Unrealized ​ Fair ​ Unrealized ​ Fair ​ Unrealized As of December 31, 2022 Value Losses Value Losses Value Losses Corporate debt securities ​ $ 307,085 ​ $ ( 5,297 ) ​ $ 185,467 ​ $ ( 4,090 ) ​ $ 492,552 ​ $ ( 9,387 ) Government debt securities ​ 76,651 ​ ​ ( 626 ) ​ ​ 100,209 ​ ​ ( 3,541 ) ​ ​ 176,860 ​ ​ ( 4,167 ) ​ ​ $ 383,736 ​ $ ( 5,923 ) ​ $ 285,676 ​ $ ( 7,631 ) ​ $ 669,412 ​ $ ( 13,554 ) ​ The gross unrealized losses as of April 1, 2023 and December 31, 2022 were due primarily to changes in market interest rates. At April 1, 2023 and December 31, 2022, there were no material unrealized gains associated with the Company’s available-for-sale investments. 11 Table of Contents Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) 3. Fair Value of Financial Instruments (Continued) The Company records an allowance for credit loss when a decline in investment market value is due to credit-related factors. When evaluating an investment for impairment, the Company reviews factors such as the severity of the impairment, changes in underlying credit ratings, forecasted recovery, the Company’s intent to sell or the likelihood that it 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. As of April 1, 2023, there were no material declines in the market value of available-for-sale investments due to credit-related factors. ​ Fair values of other financial instruments ​ The Company’s debt is recorded at cost, but is measured at fair value for disclosure purposes. The fair value of the Company’s convertible senior notes is determined using observable market prices. The notes are traded in less active markets and are therefore classified as a Level 2 fair value measurement. As of April 1, 2023 and December 31, 2022, the fair value of the notes was $ 803.4 million and $ 671.9 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 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 Condensed Consolidated Balance Sheet at fair value. Cash flows from derivatives are classified according to the nature of the cash receipt or payment in the Condensed Consolidated Statement of Cash Flows. Cash Flow Hedges Foreign Currency Forward Contracts The Company uses foreign currency forward contracts to reduce the earnings impact that exchange rate fluctuations have on operating expenses denominated in currencies other than the U.S. dollar. Changes in the fair value of the contracts are recorded in accumulated other comprehensive income (loss) in the Condensed Consolidated Balance Sheet and subsequently reclassified into earnings in the period during which the hedged transaction is recognized. The reclassified amount is reported in the same financial statement line item as the hedged item. If the foreign currency forward contracts are terminated or can no longer qualify as hedging instruments prior to maturity, the fair value of the contracts recorded in accumulated other comprehensive income (loss) may be recognized in the Condensed Consolidated Statement of Income based on an assessment of the contracts at the time of termination. The Company has entered into foreign currency forward contracts for a portion of its forecasted operating expenses denominated in the Euro, Norwegian Krone and Hungarian Forint. As of April 1, 2023, the contracts had maturities of three to nine months and an aggregate notional value of $ 15.5 million. Gains and losses expected to be reclassified into earnings in the next twelve months were not material. The fair value of the contracts, contract gains or losses recognized in other comprehensive income (loss) and amounts reclassified from accumulated other comprehensive income (loss) into earnings were not material for any of the periods presented. ​ ​ 12 Table of Contents Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) 5. Supplemental Information The following table shows the details of selected Condensed Consolidated Balance Sheet items (in thousands): Inventories ​ ​ ​ ​ ​ ​ ​ ​ ​ April 1, December 31, ​ ​ 2023 ​ 2022 Work in progress ​ $ 104,549 ​ $ 75,112 Finished goods ​ 28,687 ​ 25,305 ​ ​ $ 133,236 ​ $ 100,417 ​ Lease income ​ The Company leases a portion of its headquarter facilities to other tenants. Lease income from operating leases was $ 0.7 million and $ 1.9 million during the three months ended April 1, 2023 and April 2, 2022, respectively. ​ 6. Debt 0.625 % Convertible Senior Notes On June 1, 2020, the Company completed a private placement of $ 535 million principal amount convertible senior notes (the “2025 Notes”). The 2025 Notes bear interest semi-annually at a rate of 0.625 % per year and were scheduled to mature on June 15, 2025. On March 22, 2023, the Company issued a notice of redemption for the 2025 Notes. The redemption will occur on June 20, 2023 for any of the 2025 Notes outstanding that have not been previously converted. Prior to the consummation of the redemption, the noteholders are entitled to convert their notes into shares of our common stock at a rate of 8.1980 shares per $1,000 principal amount of the 2025 Notes, which is equivalent to a conversion price of $ 121.98 per share. Such conversion right will expire on June 16, 2023. Noteholders that convert their 2025 Notes will also receive an additional 0.4101 shares per $1,000 principal amount of 2025 Notes. The Company irrevocably elected cash settlement for the principal amount of the 2025 Notes and intends to settle any excess value with a combination of shares of the Company’s common stock and cash for fractional shares, if any. The excess value will be determined pursuant to the settlement upon conversion procedure as described in the 2025 Notes indenture. The 2025 Notes were classified as current liabilities at April 1, 2023 due to the pending redemption. The carrying amount of the 2025 Notes consisted of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ April 1, December 31, ​ ​ 2023 ​ 2022 Principal ​ $ 534,980 ​ $ 534,980 Unamortized debt issuance costs ​ ( 4,884 ) ​ ( 5,407 ) Net carrying amount ​ $ 530,096 ​ $ 529,573 ​ ​ 13 Table of Contents Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) 6. Debt (Continued) The 2025 Notes are recorded in convertible debt, net on the Condensed Consolidated Balance Sheet. The effective interest rate for the liability component was 5.336 %. The remaining balance of the debt issuance costs will be recognized in stockholders’ equity for 2025 Notes that are converted or as debt extinguishment loss for 2025 Notes that are redeemed prior to conversion in the second quarter of fiscal 2023. Interest expense related to the 2025 Notes was comprised of the following (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ April 1, April 2, ​ 2023 2022 Contractual interest expense ​ $ 845 ​ $ 845 Amortization of debt issuance costs ​ ​ 523 ​ 496 ​ ​ $ 1,368 ​ $ 1,341 ​ Credit Facility ​ The Company and certain of its domestic subsidiaries (the “Guarantors”) have a $ 400 million revolving credit facility with a maturity date of August 7, 2024. The credit facility includes 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 the greater of an aggregate of $ 250 million and 100 % of EBITDA of the last four fiscal quarters, plus an amount that would not cause a secured leverage ratio (funded debt secured by assets/EBITDA) to exceed 3.25 to 1.00, subject to certain conditions. The 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 1.00 % to 1.75 % and for base rate loans range from 0.00 % to 0.75 %, depending in each case, on the leverage ratio as defined in the credit facility. The credit facility 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 net leverage ratio (funded indebtedness/EBITDA) of no more than 4.25 to 1, a secured leverage ratio of no more than 3.50 to 1, and a minimum interest coverage ratio (EBITDA/interest payments) of no less than 2.50 to 1. As of April 1, 2023, the Company was in compliance with all covenants of the credit facility. The Company’s obligations under the credit facility are guaranteed by the Guarantors and are secured by a security interest in substantially all assets of the Company and the Guarantors. As of April 1, 2023, no amounts were outstanding on the credit facility. ​ 14 Table of Contents Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) 7. Commitments and Contingencies Litigation The Company is involved in various legal proceedings that have arisen in the normal course of business. While the ultimate results cannot be predicted with certainty, the Company does not expect them to have a material adverse effect on its Condensed Consolidated Financial Statements. ​ ​ 8. Revenues The Company groups its products as Industrial & Commercial or Home & Life based on the target markets they address. The following represents revenue by product category (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ April 1, ​ April 2, ​ 2023 2022 Industrial & Commercial ​ $ 150,713 ​ $ 126,669 Home & Life ​ 96,074 ​ 107,145 ​ ​ $ 246,787 ​ $ 233,814 ​ A portion of the Company’s sales are made to distributors under agreements allowing certain rights of return and/or price protection related to the final selling price to the end customers. These factors impact the timing and uncertainty of revenues and cash flows. During the three months ended April 1, 2023 and April 2, 2022, the Company recognized revenue of $ 4.9 million and $ 21.5 million, respectively, from performance obligations that were satisfied in previous reporting periods. The following disaggregates the Company’s revenue by sales channel (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ April 1, April 2, ​ 2023 2022 Distributors ​ $ 204,872 ​ $ 192,265 Direct customers ​ ​ 41,915 ​ 41,549 ​ ​ $ 246,787 ​ $ 233,814 ​ ​ 15 Table of Contents Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) 9. Stock-Based Compensation 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 restricted stock units (“RSUs”), performance stock units (“PSUs”) and restricted stock awards (“RSAs”)) are estimated based on their intrinsic values. The fair values of market stock awards (“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. 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, ​ April 2, ​ 2023 2022 Cost of revenues ​ $ 298 ​ $ 272 Research and development ​ ​ 9,491 ​ 6,991 Selling, general and administrative ​ ​ 6,849 ​ 5,612 ​ ​ ​ 16,638 ​ 12,875 Income tax benefit ​ ​ 1,786 ​ ​ 1,845 Total ​ $ 14,852 ​ $ 11,030 ​ The Company had approximately $ 110.9 million of total unrecognized compensation cost related to equity grants as of April 1, 2023 that is expected to be recognized over a weighted-average period of approximately 2.1 years. There were no significant stock-based compensation costs capitalized into assets in any of the periods presented. 10. 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, global intangible low-taxed income and Subpart F income inclusions and other permanent differences. Income tax expense was $ 7.8 million and $ 11.7 million for the three months ended April 1, 2023 and April 2, 2022, resulting in effective tax rates of 35.7 % and 33.8 %, respectively. The increase in the effective tax rate for the three months ended April 1, 2023 is primarily due to a decrease in the Company’s foreign tax rate benefit and an increase to nondeductible stock-based compensation, partially offset by an increase in the Company’s Federal research and development credit benefit year over year, further impacted by these items’ relation to pre-tax book income. Uncertain Tax Positions As of April 1, 2023, the Company had gross unrecognized tax benefits, inclusive of interest, of $ 4.6 million, all of which would affect the effective tax rate if recognized. During the three months ended April 1, 2023, the Company did not release any unrecognized tax benefits. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. These amounts were not material for any of the periods presented. ​ 16 Table of Contents Silicon Laboratories Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) 10. Income Taxes (Continued) Following the completion of the Norwegian Tax Administration (“NTA”) examination of the Company’s Norwegian subsidiary for income tax matters relating to fiscal years 2013 - 2016, the Company received an assessment from the NTA in December 2017 concerning an adjustment to its 2013 taxable income related to the pricing of an intercompany transaction. The Company is currently appealing the assessment. The adjustment to the pricing of the intercompany transaction results in approximately 141.3 million Norwegian kroner, or $ 13.5 million, additional Norwegian income tax. The Company disagrees with the NTA’s assessment and believes the Company’s position on this matter is more likely than not to be sustained. The Company plans to exhaust all available administrative remedies, and if unable to resolve this matter through administrative remedies with the NTA, the Company plans to pursue judicial remedies. The Company believes that it has accrued adequate reserves related to all matters contained in tax periods open to examination. Should the Company experience an unfavorable outcome in the NTA matter, however, such an outcome could have a material impact on its financial statements. Tax years 2015 through 2023 remain open to examination by the major taxing jurisdictions in which the Company operates. The Company is not currently under audit in any major taxing jurisdiction. The Company does not expect material changes to its gross unrecognized tax benefits in the next 12 months. ​ ​ ​ 17 Table of Contents