Silicon Image Announces Fourth Quarter and Fiscal Year 2013 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 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.

(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 affiliates and (ii) strategic initiative and acquisition-related charges. 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. During January 2012, we established a research and development center in Hyderabad, India, whereby we hired 75 employees from our subcontractor and had to incur a onetime fee of approximately $3 million towards acquiring these employees. In October 2012, we executed a warrant purchase agreement with a privately-held company which give us an option to purchase the privately-held company’s preferred stock. We also agreed to pay specific amounts to the privately-held company if certain conditions were met. In the fourth quarter of fiscal 2013, as a result of us executing an agreement with a specific customer, one of the earn-out conditions were met and we paid the privately-held company $1.0 million. We do not expect a fee of similar nature to be paid in our normal course of business and consider it infrequent and non-recurring. We believe that providing non-GAAP information for strategic initiative and acquisition-related expense items 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) proceeds from legal settlement, (iii) restructuring and related costs, (iv) impairment of intangible assets and (v) write-down (recovery) of certain unsalable inventory. 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. Proceeds from legal settlement relates to our acquisition of SiBEAM, Inc on May 16, 2011. We do not expect the payment of similar nature to be 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. 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. In the fourth quarter of 2012, we wrote-down certain unsalable inventory, for which we were seeking recovery from the vendor who supplied the inventory. In the third quarter of 2013, we entered into a settlement with a vendor and received recovery related to previously written-down inventory in the third and fourth quarter of 2013. The inventory write-down and subsequent recovery are unusual and one-time events, which we do not expect to recur. 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 twelve months ended December 31, 2013 and 2012 and the three months ended September 30, 2013, 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
       
 
December 31, 2013 December 31, 2012
ASSETS
Current Assets:
Cash and cash equivalents $ 82,220 $ 29,069
Short-term investments 56,003 78,398
Accounts receivable, net 34,729 37,936
Inventories 11,727 11,268
Prepaid expenses and other current assets 7,733 8,105
Deferred income taxes   191   841

Total current assets

192,603 165,617
Property and equipment, net 14,676 14,840
Deferred income taxes, non-current 4,368 4,144
Intangible assets, net 10,348 11,452
Goodwill 21,646 21,646
Other assets   8,498   9,043
Total assets $ 252,139 $ 226,742
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 12,894 $ 10,690
Accrued and other current liabilities 20,622 19,600
Deferred margin on sales to distributors 9,634 10,340
Deferred license revenue   2,742   2,185
Total current liabilities 45,892 42,815
Other long-term liabilities   16,522   16,827
Total liabilities 62,414 59,642
Stockholders’ equity   189,725   167,100
Total liabilities and stockholders’ equity $ 252,139 $ 226,742
 
SILICON IMAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
     
Year Ended December 31,
2013   2012
Cash flows from operating activities:
Net income (loss) $ 11,490 $ (11,192 )
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation 6,270 6,107
Stock-based compensation expense 10,515 9,204
Amortization of investment premium 1,048 1,995
Tax benefits from employee stock-based transactions 354 498
Amortization and impairment of intangible assets 3,124 1,331
Deferred income taxes 426 429
Excess tax benefits from employee stock-based transactions (354 ) (498 )
Non-operating proceeds from legal settlement (1,275 ) -
Other than temporary impairment of a privately-held company investment 1,500 7,467
Equity in net loss of unconsolidated affiliate 489 1,803
Others 152 201
Changes in assets and liabilities:
Accounts receivable 2,818 (10,503 )
Inventories (459 ) (1,206 )
Prepaid expenses and other assets 94 1,124
Accounts payable 2,208 (529 )
Accrued and other liabilities 941 (3,581 )
Deferred margin on sales to distributors 557 2,531
Deferred license revenue   (706 )     (505 )
Cash provided by operating activities   39,192       4,676  
Cash flows from investing activities:
Proceeds from sales of short-term investments 62,699 104,765
Purchases of short-term investments (41,053 ) (60,612 )
Purchases of property and equipment (5,761 ) (8,885 )
Proceeds from legal settlement 1,275 -
Investment in privately-held companies (1,500 ) (8,750 )
Cash paid for assets purchased from a privately-held company (300 ) (1,200 )
Advances for intellectual properties (2,031 ) (1,242 )
Other   103       -  
Cash provided by investing activities   13,432       24,076  
Cash flows from financing activities:
Proceeds from employee stock program 5,545 5,631
Excess tax benefits from employee stock-based transactions 354 498
Repurchase of restricted stock units for income tax withholding (1,981 ) (2,179 )
Payment to acquire treasure shares (3,005 ) (39,684 )
Cash paid to settle contingent consideration liabilities   (81 )     (1,054 )
Cash provided by (used in) financing activities   832       (36,788 )
Effect of exchange rate changes on cash and cash equivalents   (305 )     (20 )
Net increase (decrease) in cash and cash equivalents 53,151 (8,056 )
Cash and cash equivalents — beginning of year   29,069       37,125  
Cash and cash equivalents — end of year $ 82,220     $ 29,069  
Supplemental cash flow information:
Cash payment for income taxes $ (6,476 ) $ (6,389 )
Restricted stock units vested $ 5,617 $ 6,276
Property and equipment and other assets purchased but not paid for $ 668 $ 2,380
Unrealized gain (loss) on available-for-sale securities $ (223 ) $ 40

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