Edgar Filing: SILICON LABORATORIES INC

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 4, 2015

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-29823

SILICON LABORATORIES INC.

(Exact name of registrant as specified in its charter)

Delaware		74-2793174
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

400 West Cesar Chavez, Austin, Texas		78701
(Address of principal executive offices)		(Zip Code)

(512) 416-8500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x		Accelerated filer ¨

Non-accelerated filer ¨		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of July 21, 2015, 42,968,204 shares of common stock of Silicon Laboratories Inc. were outstanding.

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		Page Number
Part I. Financial Information

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets at July 4, 2015 and January 3, 2015	3

	Condensed Consolidated Statements of Income for the three and six months ended July 4, 2015 and June 28, 2014	4

	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 4, 2015 and June 28, 2014	5

	Condensed Consolidated Statements of Cash Flows for the six months ended July 4, 2015 and June 28, 2014	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	37

Part II. Other Information

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3.	Defaults Upon Senior Securities	52

Item 4.	Mine Safety Disclosures	52

Item 5.	Other Information	52

Item 6.	Exhibits	52

Cautionary Statement

Except for the historical financial information contained herein, the matters discussed in this report on Form 10-Q (as well as documents incorporated herein by reference) may be considered “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include declarations regarding the intent, belief or current expectations of Silicon Laboratories Inc. and its management and may be signified by the words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “plan,” “project,” “will” or similar language. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Actual results could differ materially from those indicated by such forward-looking statements. Factors that could cause or contribute to such differences include those discussed under “Risk Factors” and elsewhere in this report. Silicon Laboratories disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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Part I. Financial Information

Item 1. Financial Statements

Silicon Laboratories Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

	July 4, 2015			January 3, 2015
Assets
Current assets:
Cash and cash equivalents	$	125,051		$	141,706
Short-term investments	147,556			193,489
Accounts receivable, net of allowances for doubtful accounts of $624 at July 4, 2015 and $786 at January 3, 2015	71,403			70,367
Inventories	60,746			52,631
Deferred income taxes	17,815			21,173
Prepaid expenses and other current assets	59,025			49,171
Total current assets	481,596			528,537
Long-term investments	7,179			7,419
Property and equipment, net	130,994			132,820
Goodwill	263,925			228,781
Other intangible assets, net	128,196			115,021
Other assets, net	24,041			29,983
Total assets	$	1,035,931		$	1,042,561

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	34,553		$	38,922
Current portion of long-term debt	10,000			10,000
Accrued expenses	49,327			73,646
Deferred income on shipments to distributors	38,573			38,662
Income taxes	942			2,084
Total current liabilities	133,395			163,314
Long-term debt	74,562			77,500
Other non-current liabilities	41,761			43,691
Total liabilities	249,718			284,505
Commitments and contingencies
Stockholders’ equity:
Preferred stock — $0.0001 par value; 10,000 shares authorized; no shares issued and outstanding	—			—
Common stock — $0.0001 par value; 250,000 shares authorized; 42,908 and 42,225 shares issued and outstanding at July 4, 2015 and January 3, 2015, respectively	4			4
Additional paid-in capital	44,152			29,501
Retained earnings	742,586			728,633
Accumulated other comprehensive loss	(529		)	(82		)
Total stockholders’ equity	786,213			758,056
Total liabilities and stockholders’ equity	$	1,035,931		$	1,042,561

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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Silicon Laboratories Inc.

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Six Months Ended
	July 4, 2015			June 28, 2014			July 4, 2015			June 28, 2014
Revenues	$	164,856		$	154,918		$	328,561		$	300,609
Cost of revenues	67,428			56,255			134,764			114,841
Gross margin	97,428			98,663			193,797			185,768
Operating expenses:
Research and development	47,465			41,844			94,322			84,329
Selling, general and administrative	40,960			36,017			83,260			70,628
Operating expenses	88,425			77,861			177,582			154,957
Operating income	9,003			20,802			16,215			30,811
Other income (expense):
Interest income	166			200			358			502
Interest expense	(728		)	(780		)	(1,473		)	(1,578		)
Other income (expense), net	90			(6		)	498			61
Income before income taxes	8,531			20,216			15,598			29,796
Provision for income taxes	956			5,937			1,645			7,407
Net income	$	7,575		$	14,279		$	13,953		$	22,389

Earnings per share:
Basic	$	0.18		$	0.33		$	0.33		$	0.52
Diluted	$	0.17		$	0.32		$	0.32		$	0.51

Weighted-average common shares outstanding:
Basic	42,823			43,462			42,617			43,271
Diluted	43,461			44,218			43,305			44,137

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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Silicon Laboratories Inc.

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

	Three Months Ended						Six Months Ended
	July 4, 2015			June 28, 2014			July 4, 2015			June 28, 2014
Net income	$	7,575		$	14,279		$	13,953		$	22,389
Other comprehensive income (loss), before tax
Net changes to available-for-sale securities
Unrealized gains (losses) arising during the period	(312		)	59			(332		)	472
Reclassification for gains included in net income	—			—			10			—

Net changes to cash flow hedges
Unrealized gains (losses) arising during the period	50			(486		)	(576		)	(627		)
Reclassification for losses included in net income	81			143			211			286

Other comprehensive income (loss), before tax	(181		)	(284		)	(687		)	131

Provision (benefit) for income taxes	(63		)	(99		)	(240		)	46

Other comprehensive income (loss)	(118		)	(185		)	(447		)	85

Comprehensive income	$	7,457		$	14,094		$	13,506		$	22,474

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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Silicon Laboratories Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended
	July 4, 2015			June 28, 2014
Operating Activities
Net income	$	13,953		$	22,389
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation of property and equipment	6,029			6,427
Amortization of other intangible assets and other assets	14,697			8,839
Stock-based compensation expense	21,576			18,559
Income tax benefit from stock-based awards	2,781			377
Excess income tax benefit from stock-based awards	(2,056		)	(589		)
Deferred income taxes	3,892			4,665
Changes in operating assets and liabilities:
Accounts receivable	1,724			3,082
Inventories	(6,534		)	(123		)
Prepaid expenses and other assets	452			3,394
Accounts payable	(3,359		)	3,846
Accrued expenses	(1,027		)	19,697
Deferred income on shipments to distributors	(2,132		)	2,584
Income taxes	(7,171		)	(5,130		)
Other non-current liabilities	(5,622		)	(24,599		)
Net cash provided by operating activities	37,203			63,418

Investing Activities
Purchases of available-for-sale investments	(46,908		)	(117,744		)
Proceeds from sales and maturities of available-for-sale investments	92,759			61,803
Purchases of property and equipment	(4,714		)	(3,339		)
Purchases of other assets	(1,871		)	(2,726		)
Acquisition of business, net of cash acquired	(76,899		)	—
Net cash used in investing activities	(37,633		)	(62,006		)

Financing Activities
Proceeds from issuance of common stock, net of cash paid for withheld taxes	1,684			8,943
Excess income tax benefit from stock-based awards	2,056			589
Repurchases of common stock	(10,418		)	(10,954		)
Payment of acquisition-related contingent consideration	(4,464		)	—
Payments on debt	(5,083		)	(2,500		)
Net cash used in financing activities	(16,225		)	(3,922		)

Decrease in cash and cash equivalents	(16,655		)	(2,510		)
Cash and cash equivalents at beginning of period	141,706			95,800
Cash and cash equivalents at end of period	$	125,051		$	93,290

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The Condensed Consolidated Financial Statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments which, in the opinion of management, are necessary to present fairly the condensed consolidated financial position of Silicon Laboratories Inc. and its subsidiaries (collectively, the “Company”) at July 4, 2015 and January 3, 2015, the condensed consolidated results of its operations for the three and six months ended July 4, 2015 and June 28, 2014, the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 4, 2015 and June 28, 2014, and the Condensed Consolidated Statements of Cash Flows for the six months ended July 4, 2015 and June 28, 2014. All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated results of operations for the three and six months ended July 4, 2015 are not necessarily indicative of the results to be expected for the full year.

The accompanying unaudited Condensed Consolidated Financial Statements do not include certain footnotes and financial presentations normally required under U.S. generally accepted accounting principles (GAAP). Therefore, these Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto for the year ended January 3, 2015, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on February 6, 2015.

The Company prepares financial statements on a 52-53 week year that ends on the Saturday closest to December 31. Fiscal 2015 will have 52 weeks. Fiscal 2014 had 53 weeks with the extra week occurring in the fourth quarter of the year. In a 52-week year, each fiscal quarter consists of 13 weeks.

Reclassifications

Certain reclassifications have been made to prior year financial statements to conform to current year presentation.

Revenue Recognition

Revenues are generated predominately by sales of the Company’s integrated circuits (ICs). The Company recognizes revenue when all of the following criteria are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured. Generally, revenue from product sales to direct customers and contract manufacturers is recognized upon shipment.

A portion of the Company’s sales are made to distributors under agreements allowing certain rights of return and price protection related to the final selling price to the end customers. Accordingly, the Company defers revenue and cost of revenue on such sales until the distributors sell the product to the end customers. The net balance of deferred revenue less deferred cost of revenue associated with inventory shipped to a distributor but not yet sold to an end customer is recorded in the deferred income on shipments to distributors liability on the Consolidated Balance Sheet. Such net deferred income balance reflects the Company’s estimate of the impact of rights of return and price protection.

A small portion of the Company’s revenues is derived from the sale of patents. The above revenue recognition criteria for patent sales are generally met upon the execution of the patent sale agreement.

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is to be applied retrospectively and represents a change in accounting principle. This ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Earlier adoption is permitted for financial statements that have not been previously issued. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.

In May 2014, the FASB issued FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. ASU 2014-09 requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, using one of two retrospective application methods. Early application is not permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.

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				Six Months Ended
	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014
Net income	$	7,575	$	14,279	$	13,953	$	22,389

Shares used in computing basic earnings per share	42,823		43,462		42,617		43,271

Effect of dilutive securities:
Stock options and other stock-based awards	638		756		688		866
Shares used in computing diluted earnings per share	43,461		44,218		43,305		44,137

Earnings per share:
Basic	$	0.18	$	0.33	$	0.33	$	0.52
Diluted	$	0.17	$	0.32	$	0.32	$	0.51

For the three months ended July 4, 2015 and June 28, 2014 and the six months ended July 4, 2015 and June 28, 2014, approximately 0.1 million, 0.1 million, 0.1 million and 0.2 million shares, respectively, were not included in the diluted earnings per share calculation since the shares were anti-dilutive.

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

3. Cash, Cash Equivalents and Investments

The Company’s cash equivalents and short-term investments as of July 4, 2015 consisted of municipal bonds, money market funds, variable-rate demand notes, commercial paper, corporate bonds, certificates of deposit and international government bonds. The Company’s long-term investments consisted of auction-rate securities. In fiscal 2008, auctions for many of the Company’s auction-rate securities failed because sell orders exceeded buy orders. As of July 4, 2015, the Company held $8.0 million par value auction-rate securities, all of which have experienced failed auctions. The underlying assets of the securities consisted of student loans and municipal bonds, of which $6.0 million were guaranteed by the U.S. government and the remaining $2.0 million were privately insured. As of July 4, 2015, $6.0 million of the auction-rate securities had credit ratings of AA and $2.0 million had a credit rating of A. These securities have contractual maturity dates ranging from 2033 to 2046 at July 4, 2015. The Company is receiving the underlying cash flows on all of its auction-rate securities. The principal amounts associated with failed auctions are not expected to be accessible until a successful auction occurs, the issuer redeems the securities, a buyer is found outside of the auction process or the underlying securities mature. The Company is unable to predict if these funds will become available before their maturity dates.

The Company does not expect to need access to the capital represented by any of its auction-rate securities prior to their maturities. The Company does not intend to sell, and believes it is not more likely than not that it will be required to sell, its auction-rate securities before their anticipated recovery in market value or final settlement at the underlying par value. The Company believes that the credit ratings and credit support of the security issuers indicate that they have the ability to settle the securities at par value. As such, the Company has determined that no other-than-temporary impairment losses existed as of July 4, 2015.

The Company’s cash, cash equivalents and investments consisted of the following (in thousands):

	July 4, 2015
	Cost		Gross Unrealized Losses			Gross Unrealized Gains		Fair Value
Cash and Cash Equivalents:
Cash on hand	$	65,449	$	—		$	—	$	65,449
Available-for-sale securities:
Money market funds	43,689		—			—		43,689
Commercial paper	9,823		—			—		9,823
Certificates of deposit	5,547		—			—		5,547
Municipal bonds	543		—			—		543
Total available-for-sale securities	59,602		—			—		59,602

Total cash and cash equivalents	$	125,051	$	—		$	—	$	125,051

Short-term Investments:
Available-for-sale securities:
Municipal bonds	$	122,148	$	(45	)	$	96	$	122,199
Variable-rate demand notes	14,495		—			—		14,495
Corporate bonds	7,431		(6		)	1		7,426
International government bonds	2,240		(3		)	—		2,237
Commercial paper	1,199		—			—		1,199
Total short-term investments	$	147,513	$	(54	)	$	97	$	147,556

Long-term Investments:
Available-for-sale securities:
Auction rate securities	$	8,000	$	(821	)	$	—	$	7,179
Total long-term investments	$	8,000	$	(821	)	$	—	$	7,179

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

	January 3, 2015
	Cost		Gross Unrealized Losses			Gross Unrealized Gains		Fair Value
Cash and Cash Equivalents:
Cash on hand	$	52,144	$	—		$	—	$	52,144
Available-for-sale securities:
Money market funds	71,415		—			—		71,415
Certificates of deposit	7,739		—			—		7,739
Commercial paper	5,348		—			—		5,348
Municipal bonds	1,756		—			1		1,757
U.S. government agency	1,202		—			—		1,202
Corporate bonds	1,101		—			—		1,101
U.S. government bonds	1,000		—			—		1,000
Total available-for-sale securities	89,561		—			1		89,562

Total cash and cash equivalents	$	141,705	$	—		$	1	$	141,706

Short-term Investments:
Available-for-sale securities:
Municipal bonds	$	129,005	$	(25	)	$	172	$	129,152
Corporate bonds	33,043		(35		)	25		33,033
Variable-rate demand notes	12,915		—			—		12,915
Commercial paper	8,995		—			—		8,995
Asset-backed securities	5,380		(3		)	—		5,377
International government bonds	2,526		(10		)	—		2,516
U.S. government bonds	650		—			—		650
U.S. government agency	601		—			—		601
Certificates of deposit	250		—			—		250
Total short-term investments	$	193,365	$	(73	)	$	197	$	193,489

Long-term Investments:
Available-for-sale securities:
Auction rate securities	$	8,000	$	(581	)	$	—	$	7,419
Total long-term investments	$	8,000	$	(581	)	$	—	$	7,419

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
As of July 4, 2015	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Municipal bonds	$	26,686	$	(45	)	$	—	$	—		$	26,686	$	(45	)
Auction rate securities	—		—			7,179		(821		)	7,179		(821		)
Corporate bonds	6,315		(6		)	—		—			6,315		(6		)
International government bonds	2,237		(3		)	—		—			2,237		(3		)
	$	35,238	$	(54	)	$	7,179	$	(821	)	$	42,417	$	(875	)

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

	Less Than 12 Months					12 Months or Greater					Total
As of January 3, 2015	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Municipal bonds	$	23,735	$	(25	)	$	—	$	—		$	23,735	$	(25	)
Corporate bonds	20,327		(35		)	—		—			20,327		(35		)
Auction rate securities	—		—			7,419		(581		)	7,419		(581		)
Asset-backed securities	5,080		(3		)	—		—			5,080		(3		)
International government bond	2,516		(10		)	—		—			2,516		(10		)
	$	51,658	$	(73	)	$	7,419	$	(581	)	$	59,077	$	(654	)

The gross unrealized losses as of July 4, 2015 and January 3, 2015 were due primarily to the illiquidity of the Company’s auction-rate securities and, to a lesser extent, to changes in market interest rates.

The following summarizes the contractual underlying maturities of the Company’s available-for-sale investments at July 4, 2015 (in thousands):

	Cost		Fair Value
Due in one year or less	$	157,646	$	157,704
Due after one year through ten years	37,754		37,739
Due after ten years	19,715		18,894
	$	215,115	$	214,337

4. Derivative Financial Instruments

The Company uses derivative financial instruments to manage certain exposures to the variability of interest rates and 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 Consolidated Balance Sheet at fair value. Cash flows from derivatives are classified according to the nature of the cash receipt or payment in the Consolidated Statement of Cash Flows.

Interest Rate Swaps

The Company is exposed to interest rate fluctuations in the normal course of its business, including through its Credit Facilities. The interest payments on the facility are calculated using a variable-rate of interest. The Company has entered into an interest rate swap agreement with an original notional value of $100 million (equal to the full amount borrowed under the Term Loan Facility) and, effectively, converted the LIBOR portion of the variable-rate interest payments to fixed-rate interest payments through July 2017 (the maturity date of the Term Loan Facility).

The Company’s interest rate swap agreement is designated and qualifies as a cash flow hedge. The effective portion of the gain or loss on the interest rate swap is recorded in accumulated other comprehensive loss as a separate component of stockholders’ equity and is subsequently recognized as interest expense in the Consolidated Statement of Income when the hedged exposure affects earnings.

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

The Company estimates the fair values of interest rate swaps based on quoted prices and market observable data of similar instruments. If the Term Loan Facility or the interest rate swap agreement is terminated prior to maturity, the fair value of the interest rate swap recorded in accumulated other comprehensive loss may be recognized in the Consolidated Statement of Income based on an assessment of the agreements at the time of termination. The Company did not discontinue any cash flow hedges in any of the periods presented.

The Company measures the effectiveness of its cash flow hedge by comparing the change in fair value of the hedged variable interest payments with the change in fair value of the interest rate swap. The Company recognizes ineffective portions of the hedge, as well as amounts not included in the assessment of effectiveness, in the Consolidated Statement of Income. As of July 4, 2015, no portion of the gains or losses from the Company’s hedging instrument was excluded from the assessment of effectiveness. Hedge ineffectiveness was not material for any of the periods presented.

The Company’s derivative financial instrument in cash flow hedging relationships consisted of the following (in thousands):

		Fair Value
	Balance Sheet Location	July 4, 2015		January 3, 2015
Interest rate swap	Other assets, net	$	—	$	331
	Other non-current liabilities	35		—

The before-tax effect of derivative instruments in cash flow hedging relationships was as follows (in thousands):

	Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) during the:					Location of Loss Reclassified into Income	Loss Reclassified from Accumulated OCI into Income (Effective Portion) during the:
	Three Months Ended						Three Months Ended
	July 4, 2015		June 28, 2014				July 4, 2015			June 28, 2014
Interest rate swaps	$	50	$	(486	)	Interest expense	$	(81	)	$	(143	)

	Six Months Ended							Six Months Ended
	July 4, 2015			June 28, 2014				July 4, 2015			June 28, 2014
Interest rate swaps	$	(576	)	$	(627	)	Interest expense	$	(211	)	$	(286	)

The Company expects to reclassify $0.3 million of its interest rate swap losses included in accumulated other comprehensive loss as of July 4, 2015 into earnings in the next 12 months, which would be offset by lower interest payments.

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Foreign Currency Forward Contracts

The Company uses foreign currency forward contracts to manage exposure to foreign exchange risk. These instruments are used to reduce the earnings impact that exchange rate fluctuations have on non-U.S. dollar balance sheet exposures. The Company recognizes gains and losses on the foreign currency forward contracts in other income (expense), net in the Consolidated Statement of Income in the same period as the remeasurement loss and gain of the related foreign currency denominated asset or liability. The Company does not apply hedge accounting to its foreign currency derivative instruments.

As of July 4, 2015, the Company held one foreign currency forward contract denominated in Norwegian Krone with a notional value of $5.7 million. The fair value of the contract was not material as of July 4, 2015. The contract has a maturity date of September 30, 2015 and it was not designated as a hedging instrument. The Company held no foreign currency forward contracts during the three and six months ended June 28, 2014.

The before-tax effect of derivative instruments not designated as hedging instruments was as follows (in thousands):

	Three Months Ended					Six Months Ended
Gain (Loss) Recognized in Income	July 4, 2015			June 28, 2014		July 4, 2015		June 28, 2014		Location
Foreign currency forward contracts	$	(104	)	$	—	$	446	$	—	Other income (expense), net

5. Fair Value of Financial Instruments

The fair values of the Company’s financial instruments are recorded using a hierarchal 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 are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

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.

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

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 July 4, 2015 Using
Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Cash Equivalents:
Money market funds	$	43,689	$	—	$	—	$	43,689
Corporate bonds	—		9,823		—		9,823
Certificates of deposit	—		5,547		—		5,547
Municipal bonds	—		543		—		543
Total cash equivalents	$	43,689	$	15,913	$	—	$	59,602

Short-term Investments:
Municipal bonds	$	—	$	122,199	$	—	$	122,199
Variable-rate demand notes	—		14,495		—		14,495
Corporate bonds	—		7,426		—		7,426
International government bonds	—		2,237		—		2,237
Commercial paper	—		1,199		—		1,199
Total short-term investments	$	—	$	147,556	$	—	$	147,556

Long-term Investments:
Auction rate securities	$	—	$	—	$	7,179	$	7,179
Total long-term investments	$	—	$	—	$	7,179	$	7,179

Total	$	43,689	$	163,469	$	7,179	$	214,337

Liabilities:
Accrued expenses:
Contingent consideration	$	—	$	—	$	3,965	$	3,965

Other non-current liabilities:
Contingent consideration	$	—	$	—	$	11,127	$	11,127
Derivative instruments	—		35		—		35
	$	—	$	35	$	11,127	$	11,162

Total	$	—	$	35	$	15,092	$	15,127

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

	Fair Value Measurements at January 3, 2015 Using
Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Cash Equivalents:
Money market funds	$	71,415	$	—	$	—	$	71,415
Certificates of deposit	—		7,739		—		7,739
Commercial paper	—		5,348		—		5,348
Municipal bonds	—		1,757		—		1,757
U.S. government agency	—		1,202		—		1,202
Corporate bonds	—		1,101		—		1,101
U.S. government bonds	1,000		—		—		1,000
Total cash equivalents	$	72,415	$	17,147	$	—	$	89,562

Short-term Investments:
Municipal bonds	$	—	$	129,152	$	—	$	129,152
Corporate bonds	—		33,033		—		33,033
Variable-rate demand notes	—		12,915		—		12,915
Commercial paper	—		8,995		—		8,995
Asset-backed securities	—		5,377		—		5,377
International government bonds	—		2,516		—		2,516
U.S. government bond	650		—		—		650
U.S. government agency	—		601		—		601
Certificates of deposit	—		250		—		250
Total short-term investments	$	650	$	192,839	$	—	$	193,489

Long-term Investments:
Auction rate securities	$	—	$	—	$	7,419	$	7,419
Total long-term investments	$	—	$	—	$	7,419	$	7,419

Other assets, net:
Derivative instruments	$	—	$	331	$	—	$	331
Total	$	—	$	331	$	—	$	331

Total	$	73,065	$	210,317	$	7,419	$	290,801

Liabilities:
Accrued expenses:
Contingent consideration	$	—	$	—	$	4,288	$	4,288

Other non-current liabilities:
Contingent consideration	$	—	$	—	$	14,150	$	14,150

Total	$	—	$	—	$	18,438	$	18,438

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

The Company’s cash equivalents and short-term investments that are classified as Level 1 are valued using quoted prices and other relevant information generated by market transactions involving identical assets. Cash equivalents and short-term investments 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; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Investments classified as Level 3 are valued using a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, amount of cash flows, expected holding periods of the securities and a discount to reflect the Company’s inability to liquidate the securities. The Company’s derivative instruments are valued using discounted cash flow models. The assumptions used in preparing the valuation models include quoted interest swap rates, foreign exchange rates, forward and spot prices for currencies, and market observable data of similar instruments.

The Company’s contingent consideration is valued using a Monte Carlo simulation model or a probability weighted discounted cash flow model. The assumptions used in preparing the Monte Carlo simulation model include estimates for revenue growth rates, revenue volatility, contractual terms and discount rates. The assumptions used in preparing the discounted cash flow model include estimates for outcomes if milestone goals are achieved, the probability of achieving each outcome and discount rates.

The following summarizes quantitative information about Level 3 fair value measurements.

Auction rate securities

Fair Value at July 4, 2015 (000s)		Valuation Technique	Unobservable Input	Weighted Average
$	7,179	Discounted cash flow	Estimated yield	0.86%

			Expected holding period	10 years

			Estimated discount rate	3.64%

The Company has followed an established internal control procedure used in valuing auction rate securities. The procedure involves the analysis of valuation techniques and evaluation of unobservable inputs commonly used by market participants to price similar instruments, and which have been demonstrated to provide reasonable estimates of prices obtained in actual market transactions. Outputs from the valuation process are assessed against various market sources when they are available, including marketplace quotes, recent trades of similar illiquid securities, benchmark indices and independent pricing services. The technique and unobservable input parameters may be recalibrated periodically to achieve an appropriate estimation of the fair value of the securities.

Significant changes in any of the unobservable inputs used in the fair value measurement of auction rate securities in isolation could result in a significantly lower or higher fair value measurement. An increase in expected yield would result in a higher fair value measurement, whereas an increase in expected holding period or estimated discount rate would result in a lower fair value measurement. Generally, a change in the assumptions used for expected holding period is accompanied by a directionally similar change in the assumptions used for estimated yield and discount rate.

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Contingent consideration

Fair Value at July 4, 2015 (000s)		Valuation Technique	Unobservable Input	Range
$	15,092	Monte Carlo simulation	Expected revenue growth rate	40.8% – 71.9%

			Expected revenue volatility	20.0%

			Expected term	0.5 years – 3.5 years

			Estimated discount rate	0.22% – 1.57%

The Company has followed an established internal control procedure used in valuing contingent consideration. The valuation of contingent consideration for the Energy Micro acquisition is based on a Monte Carlo simulation model. The fair value of this valuation is estimated on a quarterly basis through a collaborative effort by the Company’s sales, marketing and finance departments.

Significant changes in any of the unobservable inputs used in the fair value measurement of contingent consideration in isolation could result in a significantly lower or higher fair value. A change in projected revenue growth rates would be accompanied by a directionally similar change in fair value.

The following summarizes the activity in Level 3 financial instruments for the three and six months ended July 4, 2015 (in thousands):

Assets

Auction Rate Securities	Three Months Ended			Six Months Ended
Beginning balance	$	7,401		$	7,419
Loss included in other comprehensive income (loss)	(222		)	(240		)
Balance at July 4, 2015	$	7,179		$	7,179

Liabilities

Contingent Consideration (1)	Three Months Ended			Six Months Ended
Beginning balance	$	14,804		$	18,438
Settlements	—			(4,464		)
Loss recognized in earnings (2)	288			1,118
Balance at July 4, 2015	$	15,092		$	15,092

Net loss for the period included in earnings attributable to contingent consideration held at the end of the period:	$	(288	)	$	(1,118	)

(1) In connection with the acquisition of Energy Micro, the Company recorded contingent consideration based upon the expected achievement of certain milestone goals. Changes to the fair value of contingent consideration due to changes in assumptions used in preparing the valuation model are recorded in selling, general and administrative expenses in the Consolidated Statement of Income.

(2) Changes to the estimated fair value of contingent consideration were primarily due to revisions to the Company’s expectations of earn-out achievement.

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Fair values of other financial instruments

The Company’s Term Loan Facility bears interest at LIBOR plus an applicable margin. The Term Loan Facility is recorded at cost, but is measured at fair value for disclosure purposes. Fair value is estimated based on Level 2 inputs, using a discounted cash flow analysis of future principal payments and projected interest based on current market rates. As of July 4, 2015 and January 3, 2015, the fair value of the Company’s debt under the Term Loan Facility was approximately $82.5 million and $87.4 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.

6. Balance Sheet Details

The following shows the details of selected Condensed Consolidated Balance Sheet items (in thousands):

Inventories

	July 4, 2015		January 3, 2015
Work in progress	$	46,137	$	40,640
Finished goods	14,609		11,991
	$	60,746	$	52,631

7. Acquisitions

Bluegiga

On January 30, 2015, the Company acquired Bluegiga Technologies Oy, a private company based in Finland. Bluegiga is a provider of Bluetooth® Smart, Bluetooth Classic and Wi-Fi® modules and software stacks for a multitude of applications in the Internet of Things (IoT), industrial automation, consumer electronics, automotive, retail, residential, and health and fitness markets.

The Company acquired Bluegiga for cash consideration of approximately $58.0 million. Approximately $9.4 million of the initial consideration was held in escrow as security for breaches of representations and warranties and certain other expressly enumerated matters. The Company recorded the purchase of Bluegiga using the acquisition method of accounting and accordingly, recognized the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The results of Bluegiga’s operations are included in the Company’s consolidated results of operations beginning on the date of the acquisition.

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

The Company believes that this strategic acquisition will accelerate its entry into the wireless module market. This factor contributed to a purchase price that was in excess of the fair value of the net assets acquired and, as a result, the Company recorded goodwill. The goodwill is not deductible for tax purposes. The purchase price was allocated as follows (in thousands):

	Amount			Weighted-Average Amortization Period (Years)
Intangible assets:
In-process research and development	$	5,710		Not amortized
Developed technology	12,190			8
Customer relationships	6,670			4
Trademarks	880			3
	25,450
Cash and cash equivalents	1,132
Other current assets	6,156
Goodwill	35,145
Other non-current assets	208
Current liabilities	(3,289		)
Non-current deferred tax liabilities, net	(4,328		)
Long-term debt	(2,232		)
Other non-current liabilities	(220		)
Total purchase price	$	58,022

The allocation of the purchase price is preliminary and subject to change, based on the finalization of income tax matters. Accordingly, adjustments may be made to the values of the assets acquired and liabilities assumed as additional information is obtained about the facts and circumstances that existed at the valuation date.

In-process research and development (IPR&D) represents acquired technology that had not achieved technological feasibility as of the acquisition date and had no alternative future use. The IPR&D recorded in connection with the acquisition of Bluegiga consisted primarily of Bluetooth Smart Ready and Bluetooth Smart modules and software stacks. The fair value of these technologies was determined using the income approach. The discount rate applicable to the cash flows was 16.1%. The significant risks associated with the projects include the Company’s potential inability to produce working models and the final products gaining customer acceptance.

Pro forma information related to this acquisition has not been presented because it would not be materially different from amounts reported. The Company recorded approximately $1.2 million of acquisition-related costs in selling, general and administrative expenses during the six months ended July 4, 2015.

Energy Micro

On July 1, 2013, the Company acquired Energy Micro AS for approximately $140.6 million, including: 1) Initial consideration of $107.4 million; 2) Deferred consideration with an estimated fair value of $19.2 million at the date of acquisition; and 3) Contingent consideration (the “Earn-Out”) with an estimated fair value of $14.0 million at the date of acquisition. The Earn-Out is payable on an annual basis over a five-year period from fiscal 2014 through 2018 (the “Earn-Out Period”) and in no event shall exceed $6,666,666 per year, unless revenue from the Earn-Out Products exceeds $400 million in a single fiscal year during the Earn-Out Period (in which case, the entire Earn-Out amount less any amounts previously paid will become payable). Approximately $20.3 million of the initial consideration was withheld by the Company as security for breaches of representations and warranties and certain other expressly enumerated matters (the “Holdback”).

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

A portion of the Earn-Out (28.76%) is contingent on the continued employment of certain key employees for the three years following the acquisition date (the “Departure Percentage”). The Departure Percentage was accounted for as a transaction separate from the business combination based on its economic substance and will be recorded as post-combination compensation expense in the Company’s financial statements during the Earn-Out period.

In the first quarter of 2015, the Company made the following payments in connection with the acquisition: (a) approximately $20.0 million was paid for the release of the Holdback; and (b) approximately $6.3 million was paid for the first annual period of the Earn-out. Approximately $1.8 million of the Earn-out payment represented the Departure Percentage portion and was recorded as compensation expense during fiscal 2014. The remaining approximately $4.5 million of the Earn-out payment represented additional consideration.

8. Debt

On July 31, 2012, the Company and certain of its domestic subsidiaries (the “Guarantors”) entered into a $230 million five-year Credit Agreement (the “Agreement”). The Agreement consists of a $100 million Term Loan Facility and a $130 million Revolving Credit Facility (collectively, the “Credit Facilities”).

The Term Loan Facility provides for quarterly principal amortization (equal to 5% of the principal in each of the first two years and 10% of the principal in each of the next three years) with the remaining balance payable upon the maturity date. The Revolving Credit Facility includes a $25 million letter of credit sublimit and a $10 million swingline loan sublimit. The Company has an option to increase the size of the Revolving Credit Facility by up to an aggregate of $50 million in additional commitments, subject to certain conditions. On September 27, 2012, the Company borrowed $100 million under the Term Loan Facility. To date, the Company has not borrowed under the Revolving Credit Facility.

The Term Loan Facility and Revolving Credit Facility, other than swingline loans, will bear interest at LIBOR plus an applicable margin or, at the option of the Company, a base rate (defined as the highest of the Bank of America prime rate, the Federal Funds rate plus 0.50% and a daily rate equal to one-month LIBOR plus 1.00%) plus an applicable margin. Swingline loans accrue interest at the base rate plus the applicable margin for base rate loans. The applicable margins for the LIBOR rate loans range from 1.50% to 2.50% and for base rate loans range from 0.50% to 1.50%, depending in each case, on the leverage ratio as defined in the Agreement. The Company also pays a commitment fee on the unused amount of the Revolving Credit Facility.

In connection with the closing of the Credit Agreement, the Company entered into a security and pledge agreement. Under the security and pledge agreement, the Company pledged equity securities of certain of its subsidiaries, subject to exceptions and limitations. The Credit Facilities contain 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 leverage ratio (funded debt/EBITDA) of no more than 2.5 to 1 and a minimum fixed charge coverage ratio (EBITDA/debt payments, income taxes and capital expenditures) of no less than 1.50 to 1. As of July 4, 2015, the Company was in compliance with all covenants of the Credit Facilities.

As of July 4, 2015, the remaining contractual maturities of the Term Loan Facility were as follows (in thousands):

Fiscal Year
2015	$	5,000
2016	10,000
2017	67,500
Total	$	82,500

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

The Company assumed $2.2 million of debt in connection with its acquisition of Bluegiga. The debt instruments bear interest at rates between 1.0% and 3.0%. The contractual maturities of a portion of the debt are based on certain financial metrics of the acquired company. The Company estimates that the debt will mature between March 2016 and August 2020.

On July 24, 2015, the Company amended its Credit Agreement. The amended Credit Agreement consists of a $300 million five-year Revolving Credit Facility. See Note 14, Subsequent Event, for additional information.

Interest Rate Swap Agreement

In connection with the $100 million borrowed under the Term Loan Facility, the Company entered into an interest rate swap agreement as a hedge against the LIBOR portion of such variable interest payments. Under the terms of the swap agreement, the Company effectively converted the LIBOR portion of the interest on the Term Loan Facility to a fixed interest rate of 0.764% through the maturity date. As of July 4, 2015, the combined interest rate on the Term Loan Facility (which includes an applicable margin) was 2.514%. See Note 4, Derivative Financial Instruments, for additional information.

9. Stockholders’ Equity

Common Stock

The Company issued 0.9 million shares of common stock during the six months ended July 4, 2015.

Share Repurchase Programs

The Board of Directors authorized the following share repurchase programs (in thousands):

Program Authorization Date	Program Termination Date	Program Amount
October 2014	December 2015	$	100,000
January 2014	January 2015	$	100,000
January 2013	January 2014	$	50,000

These programs allow for repurchases to be made in the open market or in private transactions, including structured or accelerated transactions, subject to applicable legal requirements and market conditions. The Company repurchased 0.2 million shares of its common stock for $10.4 million during the six months ended July 4, 2015. The Company repurchased 0.2 million shares of its common stock for $11.0 million during the six months ended June 28, 2014. These shares were retired upon repurchase.

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, net of taxes, were as follows (in thousands):

	Unrealized Gain (Loss) on Cash Flow Hedge			Net Unrealized Losses on Available-For-Sale Securities			Total
Balance at January 3, 2015	$	215		$	(297	)	$	(82	)

Other comprehensive loss before reclassifications	(374		)	(216		)	(590		)
Amount reclassified from accumulated other comprehensive loss	137			6			143
Net change for the period	(237		)	(210		)	(447		)

Balance at July 4, 2015	$	(22	)	$	(507	)	$	(529	)

Reclassifications From Accumulated Other Comprehensive Loss

	Three Months Ended						Six Months Ended
Reclassification (in thousands)	July 4, 2015			June 28, 2014			July 4, 2015			June 28, 2014
Losses on cash flow hedges to:
Interest expense	$	(81	)	$	(143	)	$	(211	)	$	(286	)

Losses on available-for-sale securities to:
Interest income	—			—			(10		)	—
	(81		)	(143		)	(221		)	(286		)

Income tax benefit	28			50			78			100

Total reclassifications	$	(53	)	$	(93	)	$	(143	)	$	(186	)

10. Stock-Based Compensation

In fiscal 2009, the stockholders of the Company approved the 2009 Stock Incentive Plan (the “2009 Plan”) and the 2009 Employee Stock Purchase Plan (the “2009 Purchase Plan”). In fiscal 2014, the stockholders of the Company approved amendments to both the 2009 Plan and the 2009 Purchase Plan. The amendments authorized additional shares of common stock for issuance, to comply with changes in applicable law, improve the Company’s corporate governance and to implement other best practices. The amended plans are currently effective.

Stock-based compensation costs are based on the fair values on the date of grant for stock options and on the date of enrollment for the employee stock purchase plans, estimated by using the Black-Scholes option-pricing model. The fair values of stock awards and restricted stock units (RSUs) equal their intrinsic value on the date of grant. The fair values of market stock units (MSUs) generally are estimated using a Monte Carlo simulation based on the date of grant.

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Silicon Laboratories Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

The following table presents details of stock-based compensation costs recognized in the Condensed Consolidated Statements of Income (in thousands):

	Three Months Ended				Six Months Ended
	July 4, 2015		June 28, 2014		July 4, 2015		June 28, 2014
Cost of revenues	$	229	$	178	$	459