SILICON LABORATORIES INC. (SLAB) FY 2024 MD&A

Item 7.     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 Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the “Cautionary Statement” and “Risk Factors” above 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, 2023, and 2022 had 52 weeks. Fiscal 2024, 2023, and 2022 ended on December 28, 2024, December 30, 2023 and December 31, 2022, respectively.

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 improved 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 including tariffs. Although we saw 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 “Risk Factors” above, 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 integrated chip (“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.

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Current Period Highlights

Revenues decreased $197.9 million in fiscal 2024 compared to fiscal 2023 due to decreased revenues from both our Industrial & Commercial products and Home & Life products. Gross margin decreased to 53.4% in fiscal 2024 compared to 58.9% in fiscal 2023 primarily due to variations in customer and product mix. Operating expenses decreased $7.1 million in fiscal 2024 compared to fiscal 2023 due primarily to continued efforts to contain costs. Operating loss in fiscal 2024 was $165.5 million compared to operating loss of $24.2 million in fiscal 2023. Refer to “Results of Operations” below for further discussion.

We ended fiscal 2024 with $382.2 million in cash, cash equivalents and short-term investments. Net cash used in operating activities was $13.9 million during fiscal 2024. Accounts receivable were $54.5 million at December 28, 2024, representing 29 days sales outstanding (“DSO”). Inventory was $105.6 million at December 28, 2024, representing 125 days of inventory (“DOI”).

During fiscal 2024, 2023, and 2022, we had no customer that represented more than 10% of our revenues. In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to the end customer as our customer. Two of our distributors who sell to our customers, Arrow Electronics and Edom Technology, represented 27% and 16% of our revenues during fiscal 2024, 34% and 15% during fiscal 2023, and 33% and 17% during fiscal 2022, respectively.

The percentage of our revenues derived from outside of the United States was 90% in fiscal 2024, 88% in fiscal 2023 and 83% in fiscal 2022. 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 Consolidated Statements of Operations:

Revenues. Revenues are generated predominately by sales of our products. Our revenues are subject to variation from period to period due to the volume of shipments made within a period, the mix of products we sell and the prices we charge for our products.

Cost of Revenues. Cost of revenues includes the cost of purchasing finished silicon wafers processed by independent foundries; costs associated with assembly, test and shipping of those products; costs of personnel and equipment associated with manufacturing support, logistics and quality assurance; costs of software royalties, other intellectual property license costs and certain acquired intangible assets; and an allocated portion of our occupancy costs. Our gross margin fluctuates depending on product mix, manufacturing yields, inventory valuation adjustments, average selling prices and other factors.

Research and Development. Research and development expense consists primarily of personnel-related expenses, including stock-based compensation, as well as new product masks, external consulting and services costs, equipment tooling, equipment depreciation, amortization of intangible assets and an allocated portion of our occupancy costs. Research and development activities include the design of new products, refinement of existing products and design of test methodologies to ensure compliance with required specifications.

Selling, General and Administrative. Selling, general and administrative expense consists primarily of personnel-related expenses, including stock-based compensation, as well as an allocated portion of our occupancy costs, sales commissions to independent sales representatives, amortization of intangible assets, professional fees, legal fees, and promotional and marketing expenses.

Interest Income and Other, Net. Interest income and other, net reflects interest earned on our cash, cash equivalents and investment balances, foreign currency remeasurement adjustments, and other non-operating income and expenses.

Interest Expense. Interest expense consists of interest on our short and long-term obligations, including our convertible senior notes that were previously outstanding and our credit facility. Interest expense on our convertible senior notes included contractual interest and amortization of debt issuance costs.

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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.

Equity-method Earnings (Loss). Equity-method earnings (loss) represents income or loss on our equity-method investment.

The following table sets forth our Consolidated Statements of Operations data as a percentage of revenues for the periods indicated:

Comparison of Fiscal 2024 to Fiscal 2023

Revenues

The decrease in revenues in fiscal 2024 was due to decreased revenues of $158.1 million from our Industrial & Commercial products and $39.8 million from our Home & Life products. Unit volumes and average selling prices of our products decreased compared to fiscal 2023. The weakness in the overall demand environment for our customers’ products we experienced in the second half of fiscal 2023 continued into fiscal 2024 as customers sought to reduce inventory levels that had become elevated as a result of the supply chain disruptions during fiscal 2021 and 2022. The average selling prices of our products may fluctuate significantly from period to period due to changes in product mix, customer mix, pricing decisions, and other factors. In general, as our products become more mature, we expect to experience decreases in average selling prices.

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Gross Profit

Gross profit decreased in fiscal 2024 due primarily as a result of a decrease in revenues in the period. 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 fiscal 2024.

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

The decrease in research and development expense in fiscal 2024 was primarily due to a decrease of $7.2 million for personnel-related expenses as a result of our workforce reductions implemented in the fourth quarter of fiscal 2023. Other decreases to research and development expense in fiscal 2024 were $2.3 million for the amortization of intangible assets, $2.0 million for technical services, and $1.4 million for IT-related costs, partially offset by an increase of $7.8 million in software expense. The increase in research and development expense as a percent of revenues in fiscal 2024 was due to our decreased revenues.

Selling, General and Administrative

The decrease in selling, general and administrative expense in fiscal 2024 was primarily due to a $2.0 million decrease in outside services, a $1.4 million decrease in IT-related costs, and a $0.8 million decrease in occupancy costs, partially offset by a $2.9 million increase in personnel-related costs. The increase in selling, general and administrative expense as a percent of revenues in fiscal 2024 was due to our decreased revenues.

Interest Income and Other, Net

Interest income and other, net in fiscal 2024 was $12.0 million compared to $19.2 million in fiscal 2023. The decrease in interest income and other, net in fiscal 2024 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.

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Interest Expense

Interest expense in fiscal 2024 was $1.3 million compared to $5.6 million in fiscal 2023. 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

The increase in the provision for income taxes for fiscal 2024 as compared to fiscal 2023 was primarily due to the establishment of a valuation allowance against the majority of our U.S. and Singapore deferred tax assets during the second quarter of fiscal 2024. There is a need for a valuation allowance in the U.S. and Singapore due to a forecasted three-year cumulative pre-tax loss for the current and two preceding years in conjunction with the recent downturn in the semiconductor industry. We intend to maintain the valuation allowance until sufficient future sources of taxable income are forecasted to realize the benefit of the deferred tax assets.

Equity-method Loss

Equity-method loss in fiscal 2023 was $16.0 million. Our equity-method investment was sold in the fourth quarter of fiscal 2023.

Liquidity and Capital Resources

Our principal sources of liquidity as of December 28, 2024 consisted of $382.2 million in cash, cash equivalents and short-term investments, of which $194.1 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 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 $13.9 million during fiscal 2024, compared to net cash used in operating activities of $30.3 million during fiscal 2023. Operating cash flows during fiscal 2024 reflect our net loss of $191.0 million, adjustments of $139.6 million for depreciation, amortization, stock-based compensation, and deferred income taxes, and a net cash inflow of $37.5 million due to changes in our operating assets and liabilities.

Accounts receivable increased to $54.5 million at December 28, 2024 from $29.3 million at December 30, 2023. The increase in accounts receivable resulted primarily from an increase in shipments during the last quarter of fiscal 2024 compared to the last quarter of fiscal 2023. Our DSO was 29 days at December 28, 2024 and 30 days at December 30, 2023.

Inventory decreased to $105.6 million at December 28, 2024 from $194.3 million at December 30, 2023, due to an intentional reduction of inventory holding levels in response to reduced demand. Our inventory levels will vary based on the availability of supply and the impact of variations between forecasted demand used for purchasing inventory and actual demand. Our DOI was 125 days at December 28, 2024 and 407 days at December 30, 2023.

Investing Activities

Net cash provided by investing activities was $113.1 million during fiscal 2024, compared to $469.8 million during fiscal 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 $380.1 million in fiscal 2024.

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Financing Activities

Net cash used in financing activities was $45.1 million during fiscal 2024, compared to $711.9 million during fiscal 2023. The decrease in cash outflows was principally due to $571.2 million in debt repayments and $217.1 million for repurchases of common stock, partially offset by $80.0 million in proceeds from our revolving line of credit, in fiscal 2023.

Debt

As of December 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 December 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 amend the covenant or 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.

Contractual Obligations

Our purchase obligations primarily include contractual arrangements in the form of purchase orders and purchase commitments with suppliers. As of December 28, 2024, such purchase obligations were $39.5 million. For a description of other contractual obligations, see Note 9, Debt, and Note 10, Leases, to the Consolidated Financial Statements.

Comparison of Fiscal 2023 to Fiscal 2022

A discussion of changes in our results of operations and liquidity and capital resources from fiscal 2022 to fiscal 2023 has been omitted from this Form 10-K, but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K filed with the Securities and Exchange Commission on February 20, 2024.

Critical Accounting Estimates

The preparation of financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles requires that we make estimates and assumptions that affect the amounts reported. Changes in facts and circumstances could have a significant impact on the resulting estimated amounts included in the financial statements. We believe the following critical accounting policies affect our more complex judgments and estimates.

Inventory valuation – We assess the recoverability of inventories through the application of a set of methods, assumptions and estimates. In determining net realizable value, we write down inventory that may be slow moving or have some form of obsolescence, including inventory that has aged more than 24 months. We also adjust the valuation of inventory when its manufacturing cost exceeds the estimated selling price less costs of completion, disposal and transportation. We assess the potential for any unusual customer returns based on known quality or business issues and write-off inventory losses for scrap or non-saleable material. Inventory not otherwise identified to be written down is compared to an assessment of our 18-month forecasted demand. The result of this methodology is compared against the product life cycle and competitive situations in the marketplace to determine the appropriateness of the resulting inventory levels. Demand for our products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those that we project. In the event that actual demand is lower, or market conditions are worse than originally projected, additional inventory write-downs may be required.

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Revenue recognition – We recognize revenue when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. In order to achieve this core principle, we apply a five-step process. As part of this process, we analyze the performance obligations in a customer contract and estimate the variable consideration we expect to receive. The evaluation of performance obligations requires that we identify the promised goods and services in the contract. For contracts that contain more than one promised good and service, we then must determine whether the promises are capable of being distinct and if they are separately identifiable from other promises in the contract. 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. We estimate variable consideration at the most likely amount to which we expect to be entitled. We make these estimates based on available information, including recent sales activity and pricing data. We apply a constraint to our variable consideration estimate which considers both the likelihood of a return and the amount of a potential price concession. If our evaluation of performance obligations is incorrect, we may recognize revenue sooner or later than is appropriate. If our estimates of variable consideration are inaccurate, we may recognize too much or too little revenue in a period. We may adjust assumptions used to estimate consideration periodically based on analysis of prior estimates.

Income taxes – We are required to calculate income taxes in each of the jurisdictions in which we operate. This process involves calculating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets. Evaluating the need for a valuation allowance for deferred tax assets requires analysis of all positive and negative evidence available, including recent earnings history and taxable income in recent years, reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies to determine whether all or some portion of the deferred tax assets will not be realized. We record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Judgment is inherent in this process, and differences between the estimated and actual taxable income could result in a material impact on our Consolidated Financial Statements.

We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine whether the weight of available evidence indicates that the tax position has met the threshold for recognition. Therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, they could have a material effect on our income tax provision and net income in the period or periods for which that determination is made. We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax. We believe adequate provisions for income taxes have been made for all periods.

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is provided in Note 2, Significant Accounting Policies, to the Consolidated Financial Statements. Such information is incorporated by reference herein.