SILICON LABORATORIES INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 to December 31. Fiscal 2024 will have 52 weeks and fiscal 2023 had 52 weeks. Our third quarter of fiscal 2024 ended September 28, 2024. Our third quarter of fiscal 2023 ended September 30, 2023. Impact of Macroeconomic Conditions In recent years, the global economic environment has experienced inflationary pressure, high interest rates, and geopolitical tension, and we have experienced declines in revenues as our customers slowed purchases to reduce existing inventories in a softening market. While certain conditions have been improving during fiscal 2024, including deceleration of inflation and lowering of interest rates in certain geographies, there continues to be uncertainty regarding overall macroeconomic conditions, including increased geopolitical tensions, risk of recessions, and the effects of potential trade policies. Although we have seen sequential improvements in revenues over the course of fiscal 2024, the extent of the continued impact, or any new impact, of macroeconomic conditions on our operational and financial performance will depend on future developments, their impact to the business of our suppliers and/or customers, and other items identified under the section titled “Risk Factors” below, all of which are uncertain and cannot be predicted. Any 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 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. 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. 17 Table of Contents Current Period Highlights Revenues decreased $37.4 million in the recent quarter compared to the third quarter of fiscal 2023 due to decreased revenues from our Home & Life products and our Industrial & Commercial products. Gross profit decreased $28.7 million during the same period primarily as a result of a decrease in revenues. Gross margin decreased to 54.3% in the recent quarter compared to 58.4% in the third quarter of fiscal 2023, and increased compared to 52.7% in the second quarter of fiscal 2024, primarily due to variations in customer and product mix. Operating expenses increased by $13.2 million in the recent quarter compared to the third quarter of fiscal 2023 primarily due to higher personnel-related costs. Operating loss in the recent quarter was $29.7 million compared to operating income of $12.2 million in the third quarter of fiscal 2023. Refer to “Results of Operations” below for further discussion. We ended the third quarter of fiscal 2024 with $369.7 million in cash, cash equivalents, and short-term investments. Net cash used in operating activities was $24.0 million during the current year nine-month period. Accounts receivable were $48.9 million at September 28, 2024, representing 26 days sales outstanding (“DSO”). Inventory was $139.5 million at September 28, 2024, representing 165 days of inventory (“DOI”). During the nine months ended September 28, 2024, 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 nine months ended September 28, 2024. The percentage of our revenues derived from outside of the United States was 93% during the nine months ended September 28, 2024. 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. 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 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. 18 Table of Contents Interest Expense. Interest expense consists of interest on our short and long-term obligations, including our convertible senior notes that were previously outstanding and our credit facility. Interest expense on our convertible senior notes included contractual interest and amortization of debt issuance costs. 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, global intangible low-taxed income, Subpart F income inclusions, and other permanent differences. See Note 10, Income Taxes , to the Condensed Consolidated Financial Statements. Equity-method Loss. Equity-method loss represents income or loss on our equity-method investment. The following table sets forth our Condensed Consolidated Statements of Operations data as a percentage of revenues for the periods indicated: Three Months Ended Nine Months Ended September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Revenues 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenues 45.7 41.6 46.9 40.1 Gross profit 54.3 58.4 53.1 59.9 Operating expenses: Research and development 50.0 38.8 59.7 36.6 Selling, general and administrative 22.1 13.6 26.1 16.3 Operating expenses 72.1 52.4 85.8 52.9 Operating income (loss) (17.9) 6.0 (32.7) 7.0 Other income (expense): Interest income and other, net 2.1 1.4 2.2 2.2 Interest expense (0.2) (0.7) (0.3) (0.7) Income (loss) before income taxes (15.9) 6.8 (30.8) 8.6 Provision for income taxes 1.2 1.7 9.2 3.4 Equity-method loss 0.0 0.0 0.0 (0.2) Net income (loss) (17.1) % 5.1 % (40.0) % 5.1 % Revenues Three Months Ended Nine Months Ended (in millions) September 28, 2024 September 30, 2023 Change % Change September 28, 2024 September 30, 2023 Change % Change Industrial & Commercial $ 96.5 $ 121.0 $ (24.5) (20.3) % $ 249.8 $ 437.0 $ (187.2) (42.8) % Home & Life 69.9 82.8 (12.9) (15.6) % 168.3 258.4 (90.1) (34.9) % $ 166.4 $ 203.8 $ (37.4) (18.4) % $ 418.1 $ 695.4 $ (277.3) (39.9) % The decrease in revenues in the recent three-month period was due to decreased revenues of $24.5 million from our Industrial & Commercial products and decreased revenues of $12.9 million from our Home & Life products. The decrease in revenues in the recent nine-month period was due to decreased revenues of $187.2 million from our Industrial & Commercial products and decreased revenues of $90.1 million from our Home & Life products. Revenues decreased in the recent three and nine-month periods as a result of decreases in average selling prices of our products and unit volumes. 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. 19 Table of Contents Gross Profit Three Months Ended Nine Months Ended (in millions) September 28, 2024 September 30, 2023 Change September 28, 2024 September 30, 2023 Change Gross profit $ 90.3 $ 119.0 $ (28.7) $ 222.0 $ 416.7 $ (194.7) Gross margin 54.3 % 58.4 % (4.1) % 53.1 % 59.9 % (6.8) % Gross profit decreased during the recent three and nine-month periods primarily as a result of decreases in revenues in the periods. Gross margin decreased primarily due to variations in customer and product mix, with the percentage of revenues attributed to direct customers increasing as compared to revenue from distributors in the three and nine-month periods. 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 Nine Months Ended (in millions) September 28, 2024 September 30, 2023 Change % Change September 28, 2024 September 30, 2023 Change % Change Research and development $ 83.2 $ 79.0 $ 4.2 5.3 % $ 249.8 $ 254.3 $ (4.5) (1.8) % Percent of revenue 50.0 % 38.8 % 59.7 % 36.6 % Research and development expense in the recent three-month period increased, with an increase of $3.2 million for personnel-related costs as a result of lower expenses in the prior year period due to cost containment measures, and an increase of $2.0 million in software expense, partially offset by a decrease of $0.8 million for amortization of intangible assets. The decrease in research and development expense in the recent nine-month period was primarily due to decreases of $8.2 million for personnel-related expenses as a result of our restructuring activities and $2.1 million for technical services, partially offset by an increase of $6.2 million in software expense. Selling, General and Administrative Three Months Ended Nine Months Ended (in millions) September 28, 2024 September 30, 2023 Change % Change September 28, 2024 September 30, 2023 Change % Change Selling, general and administrative $ 36.8 $ 27.8 $ 9.0 32.4 % $ 109.0 $ 113.4 $ (4.4) (3.9) % Percent of revenue 22.1 % 13.6 % 26.1 % 16.3 % The increase in selling, general and administrative expense in the recent three-month period was primarily due to a $9.3 million increase in personnel-related costs due to lower costs in the prior year period as a result of reduced stock compensation costs driven by a decline in expected achievement for certain performance-based awards, and cost containment efforts, partially offset by a $0.4 million decrease in occupancy costs. The decrease in selling, general and administrative expense in the recent nine-month period was primarily due to a $2.8 million decrease in outside services, a $0.7 million decrease in occupancy costs, and a $0.4 million decrease in personnel-related costs. Interest Income and Other, Net Interest income and other, net for the three and nine months ended September 28, 2024 was $3.5 million and $9.0 million, respectively, compared to $2.9 million and $15.6 million for the three and nine months ended September 30, 2023, 20 Table of Contents respectively. The increase in interest income and other, net in the recent three-month period was primarily due to higher interest rates earned on the investments. The decrease in interest income and other, net in the recent nine-month period was primarily due to lower interest-bearing investment balances as a result of the sale of investments to fund the settlement of our 2025 convertible senior notes in the second quarter of fiscal 2023, stock repurchases in the first three quarters of fiscal 2023, and repayment of borrowing from our credit facility in the third quarter of fiscal 2023. Interest Expense Interest expense for the three and nine months ended September 28, 2024 was $0.3 million and $1.1 million, respectively, compared to $1.4 million and $4.6 million for the three and nine months ended September 30, 2023, respectively. The decrease was primarily due to the settlement of our 2025 convertible senior notes in the second quarter of fiscal 2023. Provision for Income Taxes Three Months Ended Nine Months Ended (in millions) September 28, 2024 September 30, 2023 Change September 28, 2024 September 30, 2023 Change Provision for income taxes $ 2.0 $ 3.4 $ (1.4) $ 38.3 $ 23.5 $ 14.8 Effective tax rate (7.6) % 24.7 % (29.7) % 40.0 % The change in the provision for income taxes for the three and nine months ended September 28, 2024 is primarily due to the establishment of a valuation allowance against certain of our U.S. and Singapore deferred tax assets during the three months ended June 29, 2024. Because of the valuation allowance, we are unable to recognize the full tax benefit of the pre-tax losses incurred in those jurisdictions in the current year. A valuation allowance is required to be established when it is more likely than not that some portion or all of a deferred tax asset will not be realized. There is a need for the valuation allowance due to a forecasted three-year cumulative pre-tax loss for the current and two preceding years in conjunction with the downturn in the semiconductor industry. We intend to maintain the valuation allowance until our ability to forecast sufficient future sources of taxable income is reestablished. Equity-method Loss Equity-method loss for the three and nine months ended September 30, 2023 was $0.1 million and $1.2 million, respectively. Our equity-method investment was sold in the fourth quarter of fiscal 2023. Liquidity and Capital Resources Our principal sources of liquidity as of September 28, 2024 consisted of $369.7 million in cash, cash equivalents and short-term investments, of which $183.8 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 government debt securities, which include municipal bonds and U.S. government securities; corporate debt securities, which include asset-backed securities, corporate bonds and Yankee bonds; and money market funds. Operating Activities Net cash used in operating activities was $24.0 million during the nine months ended September 28, 2024, compared to $48.9 million during the nine months ended September 30, 2023. Operating cash flows during the nine months ended September 28, 2024 reflect our net loss of $167.2 million, adjustments of $111.4 million for depreciation, amortization, stock-based compensation, and deferred income taxes, and a net cash inflow of $31.8 million due to changes in our operating assets and liabilities. Accounts receivable increased to $48.9 million at September 28, 2024 from $29.3 million at December 30, 2023. The increase in accounts receivable resulted primarily from normal variations in the timing of collections and billings. Our DSO decreased to 26 days at September 28, 2024 from 30 days at December 30, 2023. Inventory decreased to $139.5 million at September 28, 2024 from $194.3 million at December 30, 2023. Our inventory levels will vary based on the availability of supply and the impact of variations between forecasted demand used 21 Table of Contents for purchasing inventory and actual demand. Our DOI was 165 days at September 28, 2024 and 407 days at December 30, 2023. Investing Activities Net cash provided by investing activities was $151.3 million during the nine months ended September 28, 2024, compared to $426.4 million during the nine months ended September 30, 2023. The decrease in cash inflows was principally due to a decrease in cash provided by net purchases, sales, and maturities of marketable securities of $298.6 million in the current period. Financing Activities Net cash used in financing activities was $51.7 million during the nine months ended September 28, 2024, compared to net cash used of $717.5 million during the nine months ended September 30, 2023. The decrease in cash outflows was principally due to $571.2 million in payments on debt and $217.1 million for repurchases of common stock, partially offset by $80.0 million in proceeds from our revolving line of credit in the prior year period. Debt As of September 28, 2024, we had a $400 million revolving credit facility. We have an option to increase the size of the borrowing capacity of the revolving credit facility by up to the greater of an aggregate of $250 million and 100% of EBITDA, plus an amount that would not cause a secured net leverage ratio to exceed 3.50 to 1.00, subject to certain conditions. As of September 28, 2024, no amounts were outstanding on the revolving credit facility. We were granted a waiver of compliance for the minimum interest coverage ratio through March 29, 2025. In the event we are not able to achieve compliance by the end of the waiver period, we may need to obtain an additional waiver in order to access the revolving credit facility. Capital Requirements 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, credit under our credit facility, and cash generated from operations are sufficient to meet our short-term (i.e., over at least the next twelve months) and long-term capital requirements, 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. Critical Accounting Estimates Our critical accounting estimates are described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Form 10-K for the fiscal year ended December 30, 2023. There have been no material subsequent changes to our critical accounting estimates. Quantitative and Qualitative Disclosures about Market Risk Interest Income Our investment portfolio includes cash, cash equivalents and short-term investments. Our main investment objectives are the preservation of investment capital and the maximization of after-tax returns on our investment portfolio. Our interest income is sensitive to changes in the general level of U.S. interest rates. A 100 basis point decline in yield on our investment portfolio holdings as of September 28, 2024 would decrease our future annual interest income by approximately $2.9 million. We believe that our investment policy, which defines the duration, concentration, and minimum credit quality of the allowable investments, meets our investment objectives. Interest Expense We are exposed to interest rate fluctuations in the normal course of our business, including through our credit facility. The interest rate on the credit facility consists of a variable-rate of interest and an applicable margin. While we have drawn 22 Table of Contents from the credit facility in the past, we have no borrowings as of September 28, 2024. If we borrow from the credit facility in the future, we will again be exposed to interest rate fluctuations. Foreign currency exchange rate risk We are exposed to foreign currency exchange rate risk primarily through assets, liabilities and operating expenses of our subsidiaries denominated in currencies other than the U.S. dollar. Our foreign subsidiaries are considered to be extensions of the U.S. parent. The functional currency of the foreign subsidiaries is the U.S. dollar. Accordingly, gains and losses resulting from remeasuring transactions denominated in currencies other than U.S. dollars are recorded in the Condensed Consolidated Statements of Operations. We use foreign currency forward contracts to manage exposure to foreign exchange risk. Gains and losses on foreign currency forward contracts are recognized in earnings in the same period during which the hedged transaction is recognized. Available Information Our website address is www.silabs.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the investor relations page of our website free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Our website and the information contained therein or connected thereto are not intended to be incorporated into this Quarterly Report on Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk Information related to quantitative and qualitative disclosures regarding market risk is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 2 above. Such information is incorporated by reference herein.