Silicon Image Announces Second Quarter Fiscal 2014 Earnings

Discussion of Non-GAAP Financial Measures


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 provide investors with a basis to measure our core performance against the performance of other companies without the variability created by stock-based compensation 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.


Strategic Initiatives and Acquisition Related Items: We exclude certain expense items resulting from our strategic initiatives and acquisitions including the following, when applicable: (i) amortization of purchased intangible assets associated with our acquisitions or relating to our unconsolidated affiliates, (ii) strategic initiatives and acquisition-related charges, and (iii) gain from business acquisition. 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. 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 and gain from business acquisition 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.


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 legal settlement and (iv) restructuring and related costs. 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 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. Restructuring charges result from events which arise from unforeseen circumstances, which often occur outside of the ordinary course of continuing operations. 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.


Tax adjustments: For the three and six months ended June 30, 2014 and June 30, 2013 and the three months ended March 31, 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.

(In thousands)
June 30, 2014 December 31, 2013
Current Assets:
Cash and cash equivalents $ 93,348 $ 82,220
Short-term investments 47,367 56,003
Accounts receivable, net 25,963 34,729
Inventories 23,710 11,727
Prepaid expenses and other current assets 5,775 7,733
Deferred income taxes   631   191
Total current assets 196,794 192,603
Property and equipment, net 14,369 14,676
Deferred income taxes, non-current - 4,368
Intangible assets, net 18,250 10,348
Goodwill 30,458 21,646
Other assets   6,354   8,498
Total assets $ 266,225 $ 252,139
Current Liabilities:
Accounts payable $ 16,580 $ 12,894
Accrued and other current liabilities 26,828 20,622
Deferred margin on sales to distributors 11,086 9,634
Deferred license revenue   1,889   2,742
Total current liabilities 56,383 45,892
Other long-term liabilities   13,650   16,522
Total liabilities 70,033 62,414
Stockholders’ equity   196,192   189,725
Total liabilities and stockholders’ equity $ 266,225 $ 252,139
(In thousands)
Six Months Ended June 30,
2014       2013
Cash flows from operating activities:
Net income $ 974 $ 3,489

Adjustments to reconcile net income to cash provided by operating activities:

Depreciation 3,106 3,127
Stock-based compensation expense 5,395 5,342
Amortization of investment premium 487 578
Tax benefits from employee stock-based transactions 76 182
Other than temporary impairment of a privately held company investment - 1,500
Amortization of intangible assets 1,798 1,384
Non-operating proceeds from legal settlement - (1,275 )
Gain from business acquisition (361 ) -
Deferred income taxes (440 ) -
Excess tax benefits from employee stock-based transactions (76 ) (182 )
Realized gain on sale of short-term investments - (143 )
Equity in net loss of unconsolidated affiliate 150 259
Others (21 ) 283
Changes in assets and liabilities:
Accounts receivable 9,108 10,421
Inventories (11,983 ) (4,734 )
Prepaid expenses and other assets 1,927 1,418
Accounts payable 3,823 4,536
Accrued and other liabilities 5,673 (2,316 )
Deferred margin on sales to distributors 1,452 3,067
Deferred license revenue   (1,958 )         41  
Cash provided by operating activities   19,130           26,977  
Cash flows from investing activities:
Proceeds from sales of short-term investments 13,796 48,330
Purchases of short-term investments (5,798 ) (26,588 )
Cash used in business acquisition, net of cash acquired (13,464 ) -
Purchases of property and equipment (2,797 ) (2,466 )
Proceeds from legal settlement - 1,275
Investment in privately-held companies - (500 )
Cash paid for assets purchased from a privately-held company - (300 )
Purchase of intellectual properties   -           (1,513 )
Cash provided by (used in) investing activities   (8,263 )         18,238  
Cash flows from financing activities:
Proceeds from employee stock program 3,453 3,090
Excess tax benefits from employee stock-based transactions 76 182
Repurchase of restricted stock units for income tax withholding (974 ) (1,332 )
Payment to acquire treasure shares (2,377 ) -
Cash paid to settle contingent consideration liabilities   (18 )         (45 )
Cash provided by financing activities   160           1,895  
Effect of exchange rate changes on cash and cash equivalents   101           (233 )
Net increase in cash and cash equivalents 11,128 46,877
Cash and cash equivalents — beginning of period   82,220           29,069  
Cash and cash equivalents — end of period $ 93,348         $ 75,946  
Supplemental cash flow information:
Cash payment for income taxes $ (3,710 ) $ (2,705 )
Restricted stock units vested $ 2,936 $ 3,902
Property and equipment and other assets purchased but not paid for $ 603 $ 688
Unrealized gain (loss) on short-term investments $ 13 $ (435 )

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