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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