Silicon Image Announces Third Quarter Fiscal 2014 Earnings

Discussion of Non-GAAP Financial Measures

    (1)   Stock-Based Compensation Related Items: Stock-based compensation expense relates primarily to equity awards, such as stock options and restricted stock units. Stock-based compensation is a non-cash expense that varies in amount from period to period and is dependent on market forces that are often beyond our control. As such, management excludes this item from our internal operating forecasts and models. Management believes that non-GAAP measures adjusted for stock-based compensation expense provide investors with a basis to measure our core performance against the performance of other companies without the variability created by stock-based compensation expense as a result of the variety of equity awards used by companies and the varying methodologies and subjective assumptions used in determining such non-cash expense.
 
(2) Strategic Initiative and Acquisition Related Items: We exclude certain expense items resulting from our strategic initiative and acquisitions including the following, when applicable: (i) amortization of purchased intangible assets associated with our acquisitions; or relating to our unconsolidated affiliate, (ii) strategic initiative and acquisition-related charges, (iii) gain from business acquisition and (iv) gain from sale of a privately held company investment. The amortization of purchased intangible assets associated with our acquisitions results in our recording expenses in our GAAP financial statements that were already expensed by the acquired company before the acquisition and for which we have not expended cash. Moreover, had we internally developed the products acquired, the amortization of intangible assets, and the expenses of uncompleted research and development would have been expensed in prior periods. Accordingly, we analyze the performance of our operations in each period without regard to such expenses. In addition, our strategic initiatives and acquisitions result in non-continuing operating expenses, which would not otherwise have been incurred by us in the normal course of our business operations. In the second quarter of fiscal 2014, we finalized the acquisition of the remaining ownership interest in UpdateLogic, Inc., resulting in acquisition-related charges and gain from business acquisition. In the third quarter of fiscal 2014, we finalized the sale of our minority interest in a privately held company to another entity resulting in a gain. We do not expect expenses of similar nature to be paid or gain of similar nature to be received in our normal course of business and consider it infrequent and non-recurring. We believe that providing non-GAAP information for strategic initiatives and acquisition-related expense items, gain from business acquisition and gain from sale of a privately held company investment in addition to the corresponding GAAP information allows the users of our financial statements to better review and understand the historic and current results of our continuing operations, and also facilitates comparisons to less acquisitive peer companies.
 
(3) Other Items: We exclude certain other items that are the result of either unique or unplanned events including the following, when applicable: (i) other than temporary impairment of a privately held company investment, (ii) other income from prepaid royalty settlement, (iii) proceeds from a legal settlement, (iv) recovery related to previously written-down inventory, (v) restructuring and related costs and (vi) impairment of intangible assets. It is difficult to estimate the amount or timing of these items in advance. Other than temporary impairment of a privately held company investment was recorded due to the conclusion that the possibility is remote that we will exercise our warrants to purchase the entity’s preferred stock or that we will realize any other value from these investments. Other income from prepaid royalty settlement relates to the termination of an HDMI rebate agreement with one of the HDMI adopters. Proceeds from a legal settlement relates to our acquisition of SiBEAM, Inc. on May 16, 2011. We do not expect other income or proceeds of similar nature to be recognized or received in our normal course of business and consider it infrequent and non-recurring. We entered into a settlement with a vendor and received a recovery related to previously written-down inventory. Restructuring charges result from events which arise from unforeseen circumstances, which often occur outside of the ordinary course of continuing operations. We recognized impairment of an intangible asset because the sum of its estimated future undiscounted cash flows used to test for recoverability is less than its carrying value. Although these events are reflected in our GAAP financials, these unique transactions may limit the comparability of our on-going operations with prior and future periods. As such, we believe that these expenses do not accurately reflect the underlying performance of our continuing operations for the period in which they are incurred. We assess our operating performance both with these amounts included and excluded, and by providing this information, we believe the users of our financial statements are better able to understand the financial results of what we consider our continuing operations.
 
(4) Tax adjustments: For the three and nine months ended September 30, 2014 and September 30, 2013 and the three months ended June 30, 2014, our non-GAAP tax rate was approximately 30% of non-GAAP pre-tax income. Non-GAAP tax rate is primarily based on net expected cash flow for income taxes.
 
SILICON IMAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Unaudited
 
 
  September 30, 2014   December 31, 2013
ASSETS
Current Assets:
Cash and cash equivalents $ 102,542 $ 82,220
Short-term investments 45,938 56,003
Accounts receivable, net 34,016 34,729
Inventories 18,912 11,727
Prepaid expenses and other current assets 4,703 7,733
Deferred income taxes   459   191
Total current assets 206,570 192,603
Property and equipment, net 15,257 14,676
Deferred income taxes, non-current - 4,368
Intangible assets, net 16,543 10,348
Goodwill 30,333 21,646
Other assets   3,026   8,498
Total assets $ 271,729 $ 252,139
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,282 $ 12,894
Accrued and other current liabilities 27,823 20,622
Deferred margin on sales to distributors 10,099 9,634
Deferred license revenue   2,716   2,742

Total current liabilities

49,920 45,892
Other long-term liabilities   14,740   16,522
Total liabilities 64,660 62,414
Stockholders’ equity   207,069   189,725
Total liabilities and stockholders’ equity $ 271,729 $ 252,139
 
 
SILICON IMAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
 
  Nine Months Ended September 30,
2014   2013
Cash flows from operating activities:  
Net income $ 11,272 $ 12,454
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 4,592 4,699
Stock-based compensation expense 7,801 7,824
Amortization of investment premium 678 805
Tax benefits from employee stock-based transactions 148 345
Other than temporary impairment of a privately held company investment - 1,500
Amortization and impairment of intangible assets 3,506 2,354
Non-operating proceeds from a legal settlement - (1,275 )
Gain from business acquisition (361 ) -
Deferred income taxes (268 ) -
Excess tax benefits from employee stock-based transactions (148 ) (345 )
Realized gain on sale of short-term investments - (144 )
Equity in net loss of unconsolidated affiliate 150 375
Others 115 553
Changes in assets and liabilities, net of effect of an acquisition:
Accounts receivable 1,025 (4,126 )
Inventories (7,185 ) (2,733 )
Prepaid expenses and other assets (964 ) (189 )
Accounts payable (3,292 ) 8,168
Accrued and other liabilities 7,708 853
Deferred margin on sales to distributors 465 436
Deferred license revenue   (1,006 )     (95 )

Cash provided by operating activities

  24,236       31,459  
Cash flows from investing activities:
Proceeds from sales of short-term investments 20,767 56,829
Purchases of short-term investments (11,420 ) (33,770 )
Cash used in business acquisition, net of cash acquired (13,464 ) -
Purchases of property and equipment (5,564 ) (4,075 )
Proceeds from sale of a privately held company investment 7,571 -
Proceeds from a legal settlement - 1,275
Investment in a privately held company - (1,500 )
Cash paid for assets purchased from a privately held company - (300 )
Purchase of intellectual properties (115 ) (1,891 )
Other   -       103  
Cash provided by (used in) investing activities   (2,225 )     16,671  
Cash flows from financing activities:
Proceeds from employee stock program 5,546 5,375
Excess tax benefits from employee stock-based transactions 148 345
Repurchase of restricted stock units for income tax withholding (1,568 ) (1,905 )
Payment to acquire treasure shares (5,793 ) (1,383 )
Cash paid to settle contingent consideration liabilities   (27 )     (81 )
Cash provided by (used in) financing activities   (1,694 )     2,351  
Effect of exchange rate changes on cash and cash equivalents   5       (267 )
Net increase in cash and cash equivalents 20,322 50,214
Cash and cash equivalents — beginning of period   82,220       29,069  
Cash and cash equivalents — end of period $ 102,542     $ 79,283  
Supplemental cash flow information:
Cash payment for income taxes $ (5,105 ) $ (4,681 )
Restricted stock units vested $ 4,563 $ 5,401
Property and equipment and other assets purchased but not paid for $ 478 $ 416
Unrealized loss on short-term investments $ (4 ) $ (413 )

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