0001178913-18-000834.txt : 20180315 0001178913-18-000834.hdr.sgml : 20180315 20180315084841 ACCESSION NUMBER: 0001178913-18-000834 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 82 CONFORMED PERIOD OF REPORT: 20180315 FILED AS OF DATE: 20180315 DATE AS OF CHANGE: 20180315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SILICOM LTD. CENTRAL INDEX KEY: 0000916793 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23288 FILM NUMBER: 18691152 BUSINESS ADDRESS: STREET 1: 14 ATIR YEDA ST. CITY: KFAR-SAVA STATE: L3 ZIP: 4464323 BUSINESS PHONE: 97297644555 MAIL ADDRESS: STREET 1: 14 ATIR YEDA ST. CITY: KFAR-SAVA STATE: L3 ZIP: 4464323 FORMER COMPANY: FORMER CONFORMED NAME: SILICOM LTD DATE OF NAME CHANGE: 19940103 6-K 1 zk1821324.htm 6-K

 
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
Form 6-K
 
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16
OR 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the month of March, 2018
 
Commission File Number 000-23288
 
SILICOM LTD.
(Translation of Registrant’s name into English)
 
14 Atir Yeda St., P.O.Box 2164, Kfar-Sava 4464323, Israel
(Address of Principal Executive Offices)
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
 
Form 20-F ☒          Form 40-F 
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):___
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):___

 
On March 15, 2018, the Registrant released its Consolidated Financial Statements and registrant's review of its results of operations and financial condition as of and for the year ended December 31, 2017.

Attached hereto as Exhibit 99.1 are Consolidated Financial Statements as of and for the year ended December 31, 2017 (including the notes thereto).

Attached hereto as Exhibit 99.2 is the registrant’s review of its results of operations and financial condition as of and the year ended December 31, 2017.
 
Attached hereto as Exhibit 99.3 is Consent of Somekh Chaikin, Independent Registered Public Accounting Firm, a member firm of KPMG International.

This Form 6-K, including all exhibits hereto, is hereby incorporated by reference into all effective registration statements filed by the registrant under the Securities Act of 1933.

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
SILICOM LTD.
(Registrant)
 
 
 
 
 
Date: March 15, 2018
By
/s/ Eran Gilad
 
 
Eran Gilad
 
 
Chief Financial Officer
 
 

 
 

 
EX-99.1 2 exhibit_99-1.htm EXHIBIT 99.1

Exhibit 99.1
 
Item 1
Silicom Ltd.
 
and its Subsidiaries
 
Consolidated
Financial Statements
 
As of and for the year ended
December 31, 2017
 

 
Silicom Ltd. and its Subsidiaries
Consolidated Financial Statements as of December 31, 2017


Contents
 

F-2

 
Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of
Silicom Ltd.:

Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
 
We have audited the accompanying consolidated balance sheets of Silicom Ltd. and subsidiaries (the Company) as of December 31, 2016 and 2017, the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on “criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission”.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on “criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission”.

Basis for Opinions
 
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Form 6-K. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

F-3

 
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
/s/ Somekh Chaikin

Certified Public Accountants (Isr.)
Member Firm of KPMG International

We have served as the Company’s auditor since 1997.

Tel Aviv, Israel
March 15, 2018
 
F-4

 
Silicom Ltd. and its Subsidiaries
Consolidated Balance Sheets as of December 31
 
         
2016
   
2017
 
   
Note
   
US$ thousands
   
US$ thousands
 
                   
Assets
                 
                   
Current assets
                 
Cash and cash equivalents
   
4
     
11,917
     
17,021
 
Marketable securities
   
2F, 5
     
16,263
     
7,752
 
Accounts receivable:
                       
 Trade, net
   
2G
 
   
27,305
     
40,742
 
 Other
           
3,113
     
5,823
 
 Related parties
           
417
     
625
 
Inventories
   
6
     
44,280
     
51,487
 
                         
Total current assets
           
103,295
     
123,450
 
                         
Marketable securities
   
2F, 5
     
7,769
     
5,945
 
                         
Assets held for employees' severance benefits
   
9
     
1,436
     
1,591
 
                         
Deferred tax assets
   
14G
 
   
1,537
     
899
 
                         
Property, plant and equipment ("PPE"), net
   
7
     
3,915
     
4,121
 
                         
Intangible assets, net
   
8
     
2,924
     
1,047
 
                         
Goodwill
           
25,561
     
25,561
 
                         
Total assets
           
146,437
     
162,614
 
 
         
Avi Eizenman
 
Shaike Orbach
 
Eran Gilad
Chairman of the Board of Directors
 
Chief Executive Officer
 
Chief Financial Officer
 
Kfar-Saba, Israel
March 15, 2018
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F-5

Silicom Ltd. and its Subsidiaries
Consolidated Balance Sheets as of December 31 (Continued)
 
         
2016
   
2017
 
   
Note
   
US$ thousands
   
US$ thousands
 
                   
Liabilities and shareholders' equity
                 
                   
Current liabilities
                 
Trade accounts payable
         
10,476
     
12,619
 
Other accounts payable and accrued expenses
         
7,484
     
6,420
 
Related parties
         
4
     
10
 
                       
Total current liabilities
         
17,964
     
19,049
 
                       
Long-term liabilities
                     
Contingent consideration
   
3
     
4,642
     
-
 
Liability for employees' severance benefits
   
9
     
2,439
     
2,765
 
                         
Total liabilities
           
25,045
     
21,814
 
                         
Commitments and contingencies
   
10
                 
                         
Shareholders' equity
   
11
                 
Ordinary shares, ILS 0.01 par value; 10,000,000 shares authorized; 7,396,584 and 7,564,502 issued as at December 31, 2016 and 2017, respectively; 7,381,613 and 7,549,531 outstanding as at December 31, 2016 and 2017, respectively
           
22
     
22
 
Additional paid-in capital
           
46,833
     
51,909
 
Treasury shares (at cost) - 14,971 ordinary shares as at December 31, 2016 and 2017
           
(38
)
   
(38
)
Retained earnings
           
74,575
     
88,907
 
                         
Total shareholders' equity
           
121,392
     
140,800
 
                         
Total liabilities and shareholders’ equity
           
146,437
     
162,614
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F-6


Silicom Ltd. and its Subsidiaries
Consolidated Statements of Operations for the Year Ended December 31
 
         
2015
   
2016
   
2017
 
         
US$ thousands
 
   
Note
   
Except for share and per share data
 
                         
Sales*
   
12
     
82,738
     
100,347
     
125,690
 
Cost of sales
           
48,659
     
61,796
     
79,762
 
                                 
Gross profit
           
34,079
     
38,551
     
45,928
 
                                 
Operating expenses
                               
Research and development**
           
9,702
     
12,663
     
13,915
 
Sales and marketing
           
5,651
     
6,423
     
6,722
 
General and administrative
           
3,611
     
3,969
     
4,507
 
Contingent consideration benefit
   
3
     
(3,090
)
   
(334
)
   
(4,642
)
                                 
Total operating expenses
           
15,874
     
22,721
     
20,502
 
                                 
Operating income
           
18,205
     
15,830
     
25,426
 
Financial income, net
   
13
     
220
     
35
     
156
 
                                 
Income before income taxes
           
18,425
     
15,865
     
25,582
 
                                 
Income taxes
   
14
     
1,905
     
2,728
     
3,868
 
                                 
Net income
           
16,520
     
13,137
     
21,714
 
                                 
Income per share:
                               
Basic income per ordinary share (US$)
   
2S
 
   
2.273
     
1.789
     
2.912
 
                                 
Diluted income per ordinary share (US$)
           
2.242
     
1.767
     
2.856
 
                                 
Weighted average number of ordinary shares used to compute basic income per share (in thousands)
           
7,269
     
7,344
     
7,456
 
                                 
Weighted average number of ordinary shares used to compute diluted income per share (in thousands)
           
7,368
     
7,435
     
7,602
 
 
* Including sales to related parties in the amount of US$ 1,154 thousand, US$ 762 thousand and US$ 1,275 thousand in 2015, 2016 and 2017, respectively.
 
** Including services from related parties in the amount of US$ 285 thousand, US$ 351 thousand and US$ 170 thousand in 2015, 2016 and 2017, respectively.
 
The accompanying notes are an integral part of these consolidated financial statements.

F-7

 
Silicom Ltd. and its Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
 
   
Ordinary shares
   
Additional
paid-in
capital
   
Treasury
shares
   
Retained
earnings
   
Total
shareholders’
equity
 
   
Number
of shares(1)
   
US$ thousands
 
                                     
Balance at January 1, 2015
   
7,218,633
     
21
     
41,245
     
(38
)
   
59,504
     
100,732
 
                                                 
Exercise of options and RSUs(2)
   
65,711
     
*-
     
943
     
-
     
-
     
943
 
Share-based compensation
   
-
     
-
     
1,913
     
-
     
-
     
1,913
 
Dividend (US $1.00  per share)
   
-
     
-
     
-
     
-
     
(7,274
)
   
(7,274
)
Net income
   
-
     
-
     
-
     
-
     
16,520
     
16,520
 
                                                 
Balance at December 31, 2015
   
7,284,344
     
21
     
44,101
     
(38
)
   
68,750
     
112,834
 
                                                 
Exercise of options and RSUs(2)
   
97,269
     
1
     
951
     
-
     
-
     
952
 
Share-based compensation
   
-
     
-
     
1,781
     
-
     
-
     
1,781
 
Dividend (US $1.00  per share)
   
-
     
-
     
-
     
-
     
(7,312
)
   
(7,312
)
Net income
   
-
     
-
     
-
     
-
     
13,137
     
13,137
 
                                                 
Balance at December 31, 2016
   
7,381,613
     
22
     
46,833
     
(38
)
   
74,575
     
121,392
 
                                                 
Exercise of options and RSUs(2)
   
167,918
     
*-
     
2,651
     
-
     
-
     
2,651
 
Share-based compensation
   
-
     
-
     
2,425
     
-
     
-
     
2,425
 
Dividend (US $1.00  per share)
   
-
     
-
     
-
     
-
     
(7,382
)
   
(7,382
)
Net income
   
-
     
-
     
-
     
-
     
21,714
     
21,714
 
                                                 
Balance at December 31, 2017
   
7,549,531
     
22
     
51,909
     
(38
)
   
88,907
     
140,800
 
 
(1)
Net of 14,971 shares held by Silicom Inc.
         
(2)
Restricted share units (hereinafter - "RSUs")
         
*
Less than 1 thousand.
         
 
The accompanying notes are an integral part of these consolidated financial statements.
F-8

 
Silicom Ltd. and its Subsidiaries
Consolidated Statements of Cash Flows for the Year Ended December 31
 
   
2015
   
2016
   
2017
 
   
US$ thousands
 
Cash flows from operating activities
                 
Net income
   
16,520
     
13,137
     
21,714
 
                         
Adjustments required to reconcile net income to net cash provided by (used in) operating activities:
                       
Depreciation and amortization
   
2,767
     
3,856
     
3,799
 
Write-down of obsolete inventory
   
219
     
3,170
     
2,918
 
Change in liability for employees' severance benefits, net
   
(112
)
   
126
     
171
 
Discount on marketable securities, net
   
561
     
358
     
217
 
Share-based compensation expense
   
1,998
     
1,550
     
2,425
 
Deferred taxes income
   
(907
)
   
(260
)
   
453
 
Capital gain
   
(3
)
   
-
     
-
 
Changes in assets and liabilities:
                       
Accounts receivable - trade
   
(4,850
)
   
(4,007
)
   
(13,237
)
Accounts receivable - other
   
127
     
(1,832
)
   
(2,475
)
Accounts receivable - related parties
   
(83
)
   
56
     
(208
)
Inventories
   
(939
)
   
(21,426
)
   
(10,287
)
Trade accounts payable
   
234
     
1,809
     
1,698
 
Other accounts payable and accrued expenses
   
853
     
1,098
     
(1,144
)
Contingent consideration benefit
   
(3,090
)
   
(334
)
   
(4,642
)
Accounts payable - related parties
   
(8
)
   
(8
)
   
6
 
Net cash provided by (used in) operating activities
   
13,287
     
(2,707
)
   
1,408
 
                         
Cash flows from investing activities
                       
Proceeds from short term bank deposits, net
   
4,000
     
-
     
-
 
Sale of property, plant and equipment
   
19
     
-
     
-
 
Purchase of property, plant and equipment
   
(2,984
)
   
(1,441
)
   
(1,690
)
Investment in intangible assets
   
-
     
-
     
(11
)
Proceeds from maturity of marketable securities
   
15,100
     
8,575
     
16,175
 
Purchases of marketable securities
   
(12,935
)
   
-
     
(5,961
)
Business acquisition, net of acquired cash (see Note 3)
   
(10,000
)
   
-
     
-
 
Net cash provided by (used in) investing activities
   
(6,800
)
   
7,134
     
8,513
 
                         
Cash flows from financing activities
                       
Exercise of options
   
943
     
952
     
2,651
 
Dividend
   
(7,274
)
   
(7,312
)
   
(7,382
)
Payment made in connection with contingent consideration
   
-
     
(4,463
)
   
-
 
Net cash used in  financing activities
   
(6,331
)
   
(10,823
)
   
(4,731
)
                         
Effect of exchange rate changes on cash balances held
   
132
     
135
     
(86
)
                         
Increase (decrease) in cash and cash equivalents
   
288
     
(6,261
)
   
5,104
 
                         
Cash and cash equivalents at beginning of year
   
17,890
     
18,178
     
11,917
 
Cash and cash equivalents at end of year
   
18,178
     
11,917
     
17,021
 
                         
Supplementary cash flow information
                       
A. Non-cash transactions:
                       
Investments in PPE and intangible assets
   
72
     
39
     
119
 
B. Cash paid during the year for:
                       
Income taxes
   
4,487
     
4,648
     
4,584
 
 
The accompanying notes are an integral part of these consolidated financial statements.

F-9

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements
 
Note 1 - General
 
Silicom Ltd. is an Israeli corporation engaged in designing, manufacturing, marketing and supporting high performance networking and data infrastructure solutions for a broad range of servers, server based systems and communications devices.
 
The Company's shares have been traded in the United States on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") since February 1994. Since January 2, 2014 the Company's shares have been traded on the NASDAQ Global Select Market (prior thereto they were traded on the NASDAQ Global Market).  The Company's shares were traded in Israel on the Tel Aviv Stock Exchange ("TASE") from December 2005 through January 26, 2016, after which, on January 28, 2016, the Company delisted from trading on the TASE.
 
In these financial statements the terms "Company" or "Silicom" refer to Silicom Ltd. and its wholly owned subsidiaries, Silicom Connectivity Solutions, Inc. (hereinafter - "Silicom Inc.") and Silicom Denmark A/S (Fiberblaze A/S) (hereinafter – "Silicom Denmark"), whereas the term "subsidiaries" refers to Silicom Inc. and Silicom Denmark.
 
Note 2 - Summary of Significant Accounting Policies
 
The significant accounting policies, which are applied consistently throughout the periods presented, are as follows:
 
A.
Financial statements in US dollars
 
Substantially all sales of the Company are made outside of Israel (see Note 12A regarding geographical distribution), in US dollars ("dollars"). Most purchases of materials and components, and a significant part of the marketing costs are made or incurred, primarily in dollars. Therefore, the functional currency of the Company is the dollar.
 
Transactions and monetary balances in other currencies are translated into the functional currency using the current exchange rate.
 
All exchange gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in earnings when they arise.
 
F-10

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 2 - Summary of significant Accounting Policies (cont’d)
 
B.
Basis of presentation
 
The accompanying consolidated financial statements have been prepared with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
 
C.
Estimates and assumptions
 
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include income taxes, inventories, marketable securities, goodwill, intangible assets and share-based compensation.
 
D.
Business combinations
 
The Company accounts for business combination in accordance with ASC No. 805, "Business Combinations". ASC No. 805 requires recognition of assets acquired and liabilities assumed at the acquisition date, measured at their fair values as of that date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in the consolidated statements of operations.
 
E.
Cash and cash equivalents
 
The Company considers highly liquid investments with original maturities of three months or less from the date of deposit to be cash equivalents.
 
F.
Marketable securities
 
The Company classifies its marketable securities as held-to-maturity as they are debt securities in which the Company has the intent and ability to hold to maturity. Held-to-maturity (HTM) debt securities are recorded at amortized cost adjusted for the amortization or accretion of premiums or discounts.
 
Premiums and discounts on debt securities are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method.
 
F-11

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 2 - Summary of significant Accounting Policies (cont’d)
 
F.             Marketable securities (cont’d)
 
Such amortization and accretion is included in the "Financial income, net" line item in the consolidated statements of operations.
 
When other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss.
 
A decline in the market value of HTM security below cost that is deemed to be other than temporary results in an impairment to reduce the carrying amount to fair value. To determine whether an impairment is other than temporary, the Company considers all available information relevant to the collectibility of the security, including past events, current conditions, and reasonable and supportable forecasts when developing estimate of cash flows expected to be collected. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in.
 
If the Company intends to sell the security or it is more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings.
 
G.
Trade accounts receivable, net
 
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on trade accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and its customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns.
 
As of December 31, 2016 and 2017, the provision for doubtful accounts receivable amounted to US$ 20 thousand.
 
H.
Inventories
 
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the "weighted average-cost" method.
The Company writes down obsolete or slow moving inventory to its market value, on a quarterly basis.
 
F-12

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 2 - Summary of significant Accounting Policies (cont’d)
 
I.
Assets held for employees’ severance benefits
 
Assets held for employees’ severance benefits represent contributions to severance pay funds and cash surrender value of insurance policies. The assets are recorded at their current cash redemption value.
 
J.
Property, plant and equipment
 
Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated on the straight-line basis over the estimated useful life of the assets at the following annual rates:
 
     
%
 
Machinery and equipment
15 - 33
 
Office furniture and equipment
6 - 33
 
Leasehold improvements
*
 
*  Over the shorter term of the lease or the life of the asset
 
K.
Goodwill and other intangible assets
 
Goodwill reflects the excess of the purchase price of business acquired over the fair value of net assets acquired. Goodwill is not amortized but instead is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
 
The Company operates in one operating segment and this segment comprises one reporting unit.
 
Goodwill is reviewed for impairment at least annually in accordance with ASU 2011-08, Testing Goodwill for Impairment. ASU 2011-08 provides an entity the option to perform a qualitative assessment to determine whether it is more likely than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill impairment test. If this is the case, the two-step goodwill impairment test is required. If it is more likely than-not that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required.
 
F-13

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 2 - Summary of significant Accounting Policies (cont’d)
 
K.            Goodwill and other intangible assets (cont’d)
 
If the two-step goodwill impairment test is required, first, the fair value of the reporting unit is compared with its carrying amount (including goodwill). If the fair value of the reporting unit is less than its carrying amount, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. If the fair value of the reporting unit exceeds its carrying amount, step two does not need to be performed. During the year ended December 31, 2017, no impairments were found and therefore no impairment losses were recorded.
 
Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives of 3 years. The acquired customer relationships and current technology are amortized over their estimated useful lives in proportion to the economic benefits realized. This accounting policy results in amortization of such intangible assets in the straight-line method.
 
L.
Impairment of Long-Lived Assets
 
In accordance with Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment - Overall long-lived assets, such as property, plant, equipment and purchase intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or an asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third party independent appraisals, as considered necessary.
 
M.
Revenue recognition
 
Revenues from sales of products are recognized upon delivery provided that the collection of the resulting receivable is reasonably assured, there is persuasive evidence of an arrangement, no significant obligations in respect of installation remain and the price is fixed or determinable.
 
Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from revenues in the consolidated statements of operations.
 
N.
Research and development costs
 
Research and development costs are expensed as incurred.
 
F-14

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 2 - Summary of significant Accounting Policies (cont’d)
 
O.
Allowance for product warranty
 
The Company grants service warranties related to certain products to end-users. The Company estimates its obligation for such warranties to be immaterial on the basis of historical experience. Accordingly, these financial statements do not include an accrual for warranty obligations.
 
P.
Treasury shares
 
Treasury shares are recorded at cost and presented as a reduction of shareholders' equity.
 
Q.
Income taxes
 
Deferred taxes are accounted for under the asset and liability method based on the estimated future tax effects of temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are presented as non-current assets and liabilities and measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
 
R.
Share-based compensation
 
The Company recognizes compensation expense based on estimated grant date fair value in accordance with ASC Topic 718, Compensation -Stock Compensation as follows:
When portions of an award vest in increments during the requisite service period (graded-vesting award), the Company’s accounting policy is to recognize compensation cost for the award over the requisite service period for each separately vesting portion of the award.
 
S.
Basic and diluted earnings per share
 
Basic income per ordinary share is calculated by dividing the net income attributable to ordinary shares, by the weighted average number of ordinary shares outstanding. Diluted income per ordinary share calculation is similar to basic income per ordinary share except that the weighted average of common shares outstanding is increased to include outstanding potential common shares during the period if dilutive. Potential common shares arise from stock options and RSUs, and the dilutive effect is reflected by the application of the treasury stock method.
 
F-15

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 2 - Summary of significant Accounting Policies (cont’d)
 
S.
Basic and diluted earnings per share (cont’d)
 
The following table summarizes information related to the computation of basic and diluted income per ordinary share for the years indicated.
 
   
Year ended December 31
 
   
2015
   
2016
   
2017
 
Net income attributable to ordinary shares (US$ thousands)
   
16,520
     
13,137
     
21,714
 
                         
Weighted average number of ordinary shares outstanding used in basic income per ordinary share calculation
   
7,268,536
     
7,343,696
     
7,455,528
 
                         
Add assumed exercise of outstanding dilutive potential ordinary shares
   
99,448
     
91,485
     
146,443
 
                         
Weighted average number of ordinary shares outstanding used in diluted income per ordinary share calculation
   
7,367,984
     
7,435,181
     
7,601,971
 
                         
Basic income per ordinary shares (US$)
   
2.273
     
1.789
     
2.912
 
                         
Diluted income per ordinary shares (US$)
   
2.242
     
1.767
     
2.856
 
                         
The weighted average number of shares related  to options and RSUs excluded from the diluted earnings per share calculation because of anti-dilutive effect
   
43,181
     
9,633
     
-
 
 
T.
Comprehensive Income
 
For the years ended December 31, 2015, 2016 and 2017, comprehensive income equals net income.
 
U.
Fair Value Measurements
 
The Company's financial instruments consist mainly of cash and cash equivalents, marketable securities, trade and other receivables and trade accounts payable. The carrying amounts of these financial instruments, except for marketable securities, approximate their fair value because of the short maturity of these investments. The fair value of marketable securities is presented in Note 5 to these consolidated financial statements. Assets held for severance benefits are recorded at their current cash redemption value.
 
F-16

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 2 - Summary of Significant Accounting Policies (cont’d)
 
U.
Fair Value Measurements (cont’d)
 
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
 
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
 
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
 
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
 
V.
Concentrations of risks
 
(1)           Credit risk
 
Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash and cash equivalents, marketable securities, trade receivables and assets held for employees’ severance benefits. Cash and cash equivalents balances of the Company, which are subject to credit risk, consist of cash accounts held with major financial institutions. Marketable securities consist of held to maturity marketable securities issued by highly rated corporations. As of December 31, 2016 and 2017, the ratings of the securities in the Company's portfolio was at least A. Nonetheless, these investments are subject to general credit and counterparty risks (such as that the counterparty to a financial instrument fails to meet its contractual obligations). The Company closely monitors extensions of credit and has never experienced significant credit losses. See note 12.
 
Subsequent to the balance sheet date, on March 13, 2018, the Company announced that the top-10 Cloud player that awarded its largest-ever design win has decided to abort the new cloud infrastructure architecture for which it had ordered the Company’s products. As of December 31, 2017, the Company had open receivables from few of the Company’s customers that are related to this design win, out of which, an amount of approximately $10 million is still outstanding as of the date of announcement (March 13, 2018). The Company expects that these customers will fully meet their contractual obligations and that these outstanding amounts are not impaired.
 
(2)           Significant customers
 
The Company's top two customers accounted for approximately 34% of its revenues in 2017. The Company expects that a small number of customers will continue to account for a significant portion of its revenues for the foreseeable future. See note 12.
 
W.
Liabilities for loss contingencies
 
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
 
F-17

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 2 - Summary of Significant Accounting Policies (cont’d)
 
X.
Recent Accounting Pronouncements
 
(1)
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The standard can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company will adopt this ASU on January 1, 2018 with no cumulative effect. In 2017 the company examined the new standard's impact on its financial statements. Based on the Company's examination as of the date of these financial statements, the standard will not have a material effect.

(2)
In February 2016, the FASB issued ASU 2016-02, which requires lessees to recognize most of their leases on balance sheet as a right-of-use asset and a lease liability. This ASU is effective for interim and annual periods in fiscal years beginning after December 15, 2018. Early adoption is permitted. Based on the Company’s current assessment, it doesn’t expect this ASU to have a material impact on the results of its operations.
 
F-18

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 2 - Summary of Significant Accounting Policies (cont’d)
 
X.
Recent Accounting Pronouncements (cont’d)
 
(3)
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual and interim periods in fiscal years beginning after December 15, 2018. The impact of adopting the new standard on the net income is not expected to be material.

(4)
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill in Step 2 of the goodwill impairment test. Under ASU 2017-04, goodwill impairment charges will be based on the excess of a reporting unit’s carrying amount over its fair value as determined in Step 1 of the testing. ASU 2017-04 is effective for interim and annual testing dates after December 15, 2019, with early adoption permitted for interim and annual goodwill impairment testing dates after January 1, 2017. The Company do not expect the adoption of ASU 2017-04 to have material impact on its financial position, results of operations, cash flows or presentation thereof.

F-19


Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 3 - Acquisitions
 
A.
ADI Engineering, Inc.
 
On October 28, 2015 (hereinafter – "closing date") the Company acquired certain assets from ADI Engineering, Inc. (hereinafter – "ADI"), a privately-held, US-based provider of custom embedded communications and networking products, for an aggregate purchase price of US$ 10,000 thousand in cash and estimated contingent consideration of US$ 7,802 thousand in cash and in options to ordinary shares, payable in three yearly payments, after the closing, subject to the attainment of certain performance milestones until December 31, 2017. The fair value measurement of the contingent consideration is classified at level 2 and level 3 of the fair value hierarchy (see Note 2U). Of the total purchase price of US$ 17,802 thousand, US$ 222 thousand was attributed to tangible assets, US$ 4,261 thousand was attributed to intangible assets and US$ 13,319 thousand was attributed to goodwill. The goodwill is primarily attributable to the synergies expected to arise after the acquisition. The recognized goodwill is deductible for income tax purposes for 10 years.

In connection with the contingent consideration, during 2016 the Company paid ADI an amount of US$ 3,000 thousand.

Any amount not paid was charged to the statement of operations as an income.

B.
Silicom Denmark
 
On December 10, 2014 (hereinafter – "closing date"), the Company completed the acquisition of all of the outstanding shares and voting interests of Silicom Denmark, a provider of high performance application acceleration solutions, for an aggregate purchase price of US$ 10,161 thousand in cash and estimated contingent consideration of US$ 4,683 thousand in cash and in options to ordinary shares, subject to the attainment of certain performance milestones until August 31, 2015. The fair value measurement of the contingent consideration is classified at level 3 of the fair value hierarchy (see Note 2U). Of the total estimated purchase price of US$ 14,844 thousand, US$ 2,022 thousand was attributed to tangible assets, US$ 1,996 thousand was attributed to intangible assets, US$ 12,242 thousand was attributed to goodwill and US$ 1,416 was attributed to liabilities assumed. The goodwill is primarily attributable to the synergies expected to arise after the acquisition. None of the recognized goodwill is expected to be deductible for income tax purposes.

In connection with the contingent consideration, during 2016 the Company paid to the Silicom Denmark sellers an amount of US$ 1,463 thousand, of which 90% was paid in cash and 10% in options to ordinary shares of the Company.
In relation to this acquisition, on April 18, 2016, the Company granted, in the aggregate, 22,795 options to the Silicom Denmark sellers and to the Silicom Denmark employees (see Note 11I).

Any amount not paid was charged to the statement of operations as an income.
 
F-20

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 4 - Cash and Cash Equivalents
       
 
   
December 31
 
   
2016
   
2017
 
   
US$ thousands
 
             
Cash
   
5,858
     
12,834
 
Cash equivalents *
   
6,059
     
4,187
 
     
11,917
     
17,021
 
 
*
 
Comprised mainly of deposits in banks as at December 31, 2016 and 2017 carrying a weighted average interest rate of 0.30% and 0.07%, respectively.
 

F-21

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 5 - Marketable Securities
             
 
The Company's investment in marketable securities as of December 31, 2016 and 2017 are classified as ''held-to-maturity'' and consist of the following:
 
         
Gross
   
Gross
       
         
unrealized
   
unrealized
       
   
Amortized
   
holding
   
holding
   
Aggregate
 
   
cost basis**
   
gains
   
(losses)
   
fair value*
 
   
US$ thousands
 
At December 31, 2017
                       
Held to maturity:
                       
Corporate debt securities
                       
Current
   
7,798
     
-
     
(49
)
   
7,749
 
Non-Current
   
5,976
     
-
     
(95
)
   
5,881
 
                                 
     
13,774
     
-
     
(144
)
   
13,630
 
                                 
At December 31, 2016
                               
Held to maturity:
                               
Corporate debt securities
                               
Current
   
16,390
     
-
     
(97
)
   
16,293
 
Non-Current
   
7,815
     
-
     
(62
)
   
7,753
 
                                 
     
24,205
     
-
     
(159
)
   
24,046
 
 
*
Fair value is being determined using quoted market prices in active markets (Level 1).
**
Including accrued interest in the amount of US$ 173 thousand and US$ 77 thousand as of December 31, 2016 and 2017 respectively.
The accrued interest is presented as part of other account receivable on the balance sheet.
 
Activity in marketable securities in 2017
 
US$ thousands
 
       
Balance at January 1, 2017
   
24,205
 
         
Purchases of marketable securities
   
5,961
 
Discount on marketable securities, net
   
(217
)
Proceeds from maturity of marketable securities
   
(16,175
)
Balance at December 31, 2017
   
13,774
 
 
F-22

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 5 - Marketable Securities (Cont’d)
 
 
The following table summarizes the gross unrealized losses on investment securities for which other-than-temporary impairments have not been recognized and the fair value of those securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2017:
 
   
Less than 12 months
   
12 months or more
   
Total
 
   
Unrealized
Losses
   
Fair value
   
Unrealized
Losses
   
Fair value
   
Unrealized
Losses
   
Fair value
 
Held to maturity:
                                     
Corporate debt securities
   
(95
)
   
5,881
     
(49
)
   
7,749
     
(144
)
   
13,630
 
 
The unrealized losses on the investments were caused by changes in interest rate. The Company has the ability and intent to hold these investments until maturity and it is more likely than not that the Company will not be required to sell any of the securities before recovery; therefore these investments are not considered other than temporarily impaired.
 
Note 6 - Inventories
       
 
   
December 31
 
   
2016
   
2017
 
   
US$ thousands
 
             
Raw materials and components
   
16,435
     
24,407
 
Products in process
   
19,098
     
15,079
 
Finished products
   
8,747
     
12,001
 
     
44,280
     
51,487
 

F-23

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 7 - Property, Plant and Equipment, Net
       
 
   
December 31
 
   
2016
   
2017
 
   
US$ thousands
 
             
Machinery and equipment
   
8,507
     
10,531
 
Office furniture and equipment
   
634
     
665
 
Leasehold improvements
   
2,277
     
2,309
 
                 
Property, plant and equipment
   
11,418
     
13,505
 
                 
Accumulated depreciation
   
(7,503
)
   
(9,384
)
                 
Property, Plant and equipment, net
   
3,915
     
4,121
 
 
Depreciation expense for the years ended December 31, 2015, 2016 and 2017 were US$ 1,599 thousand, US$ 1,616 thousand and US$ 1,911 thousand, respectively.
 

F-24

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 8 - Intangible Assets
             
 
Intangible assets
 
Net intangible assets as of December 31, 2017 are as follows:
 
         
December 31
 
         
2016
   
2017
 
   
Useful life
   
US$ thousands
 
Original cost:
                 
Current technology
   
3
     
3,833
     
3,844
 
Customer relationships
   
3
     
1,937
     
1,937
 
             
5,770
     
5,781
 
Accumulated amortization:
                       
Current technology
           
1,930
     
3,181
 
Customer relationships
           
916
     
1,553
 
             
2,846
     
4,734
 
                         
Intangible assets, Net:
                       
Current technology
           
1,903
     
663
 
Customer relationships
           
1,021
     
384
 
             
2,924
     
1,047
 
 
 
Amortization expense for the years ended December 31, 2015, 2016 and 2017 were US$ 1,168 thousand, US$ 2,240 thousand and US$ 1,888 thousand, respectively.

F-25

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 9 - Assets Held and Liability for Employees' Severance Benefits
 
A.
Under Israeli law and labor agreements, Silicom is required to make severance payments to retired or dismissed employees and to employees leaving employment in certain other circumstances.
 
In respect of the liability to the employees, individual insurance policies are purchased and deposits are made with recognized severance pay funds.
 
The liability for severance pay is calculated on the basis of the latest salary paid to each employee multiplied by the number of years of employment. The liability is covered by the amounts deposited including accumulated income thereon as well as by the unfunded provision.
 
B.
According to Section 14 to the Severance Pay Law ("Section 14") the payment of monthly deposits by a company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to the employees that have entered into agreements with the company pursuant to such Section 14. Commencing July 1, 2008, the Company has entered into agreements with a majority of its employees in order to implement Section 14. Therefore, as of that date, the payment of monthly deposits by the Company into recognized severance and pension funds or insurance policies releases it from any additional severance obligation to those employees that have entered into such agreements and therefore the Company incurs no additional liability since that date with respect to such employees. Amounts accumulated in the pension funds or insurance policies pursuant to Section 14 are not supervised or administrated by the Company and therefore neither such amounts nor the corresponding accrual are reflected in the balance sheet.
 
C.
Consequently, the assets held for employees' severance benefits reported on the balance sheet, in respect of deposits for those employees who have signed agreements pursuant to Section 14, represent the redemption value of deposits made through June 30, 2008. The liability for employee severance benefits, with respect to those employees, represents the liability of the Company for employees' severance benefits as of June 30, 2008.
 
As a result of the implementation of Section 14, as described above, the liability with respect to those employees is calculated on the basis of number of years of employment as of June 30, 2008, multiplied by the latest salary paid. The liability is covered by the amounts deposited, including accumulated income thereon, as well as by the unfunded provision. Such liability will be removed, either upon termination of employment or retirement.
 
D.
Expenses recorded with respect to employees' severance payments for the years ended December 31, 2015, 2016 and 2017 were US$ 543 thousand, US$ 761 thousand and US$ 830 thousand, respectively.
 
F-26

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 10 - Commitments and Contingencies
 
Lease commitments
 
The premises and facilities occupied by the Company are leased under various operating lease agreements. Furthermore, the Company has entered into several operating lease agreements for motor vehicles in Israel.
 
The agreements related to leases in Israel are in Israeli Shekel ("ILS") or in ILS, linked to the Israeli Consumer Price Index or to the US Dollars. The agreements related to leases in the USA are in US Dollars and the agreements related to leases in Denmark are in Danish Krone ("DKK").
 
The minimum future rental payments under the above leases at exchange rates in effect on December 31, 2017, are as follows:
 
Year ended December 31
 
US$ thousands
 
2018
   
1,665
 
2019
   
1,211
 
2020 and on
   
226
 
 
Of the amounts above, US$ 50 thousand in 2018, relate to related parties.
 
Rental expenses under the lease agreements for the years ended December 31, 2015, 2016 and 2017 were US$ 1,403 thousand, US$ 1,563 thousand and US$ 1,760 thousand, respectively.
F-27

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 11 - Shareholders' Equity
 
Share based compensation
 
A.
On July 21, 2004, the Board resolved, subject to shareholders’ approval that was given on December 30, 2004, to adopt the Share Option Plan (2004) (the "2004 Plan"). Option grants to employees under the 2004 Plan, including terms of vesting and the exercise price, are subject to the Board of Directors' approval. Option grants to directors and certain other officers are generally subject to the approvals of the Compensation Committee as well as Board of Directors, and grants to directors or a CEO will also generally have to be approved by the Shareholders. The term of the options shall not exceed 10 years from the date that the option was granted.
 
The 2004 Plan initially covered up to 282,750 options and subsequent to an amendment by the board in 2007 it covered up to 582,750 options.   In August 2012, the Board of Directors increased the number of the ordinary shares available for issuance under the 2004 Plan by an additional 500,000. All options are at a conversion rate of 1:1.
 
On October 21, 2013 the Board resolved to adopt the Global Share Incentive Plan (2013) (the "2013 Plan") and to reserve up to 500,000 ordinary shares for issuance under the 2013 Plan to employees, directors, officers and consultants of the Company or of any subsidiary or affiliate of the Company. Grants under the 2013 Plan, whether as options, restricted stock units, restricted stock or other equity based awards, including their terms, are subject to the Board of Directors' approval. Grants to directors and certain other officers are generally subject to the approvals of the Compensation Committee as well as Board of Directors, and grants to directors or a CEO (and under certain circumstances certain other officers) will also have to be approved by the Shareholders.
 
B.
Options or RSUs granted to Israeli residents may be granted under Section 102 of the Israeli Income Tax Ordinance pursuant to which the awards of options, or the ordinary shares issued upon their exercise, must be deposited with a trustee for at least two years following the date of grant. Under Section 102, any tax payable by an employee from the grant or exercise of the awards is deferred until the transfer of the awards or ordinary shares by the trustee to the employee or upon the sale of the awards or ordinary shares.
Capital gains on awards granted under the plans are subjected to tax of 25% to be paid by the employee, and the Company is not entitled to a tax deduction.
Gains which are not capital gains on awards under the plans are subjected to regular tax rates on individuals, and the Company is entitled to a tax deduction for such gains.
 
F-28

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 11 - Shareholders' Equity (cont'd)
 
Share based compensation (cont'd)
 
C.
During 2014 and 2015, the Company granted 74,000 and 8,000 RSUs respectively to certain of its directors, employees and consultants under the 2013 Plan. In relation to those grants:
 
1.
The vesting period of the RSUs ranges between 2 to 3 years from the date of grant.
 
2.
The fair value of RSUs is estimated based on the market value of the Company’s stock on the date of grant, less an estimate of dividends that will not accrue to RSUs holders prior to vesting.
 
3.
The Company recognizes compensation expenses on these RSUs based on estimated grant date fair value, with the following assumptions:
 
   
2014
   
2015
 
Expected dividend yield
   
2.06
%
   
3.22
%
Termination rate
   
4.35
%
   
0
%
 
F-29

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 11 - Shareholders' Equity (cont'd)
 
Share based compensation (cont'd)
 
D.
On July 28, 2015, the Company granted, in the aggregate, 89,907 options to certain of its directors and employees under the 2013 Plan.  In relation to this grant:
 
1.
The exercise price for the options (per ordinary share) was US$ 26.91 and the Option expiration date was the earlier to occur of: (a) July 28, 2023; and (b) the closing price of the shares falling below US$ 13.46 at any time after the date of grant. The options vest and become exercisable on the second anniversary of the date of grant.
 
2.
The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:
 
Average Risk-free interest rate (a)
   
2.08
%
Expected dividend yield
   
2.09
%
Average expected volatility  (b)
   
53.01
%
Termination rate
   
9
%
Suboptimal factor(c)
   
3.4
 
 
 
(a)
Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
 
(b)
Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
 
(c)
Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.

F-30

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 11 - Shareholders' Equity (cont'd)
 
Share based compensation (cont'd)
 
E.
On June 8, 2016, the Company granted, in the aggregate, 93,660 options to certain of its directors and employees under the 2013 Plan. In relation to this grant:
 
1.
The exercise price for the options (per ordinary share) was US$ 28.38 and the Option expiration date was the earlier to occur of: (a) June 8, 2024; and (b) the closing price of the shares falling below US$ 14.19 at any time after the date of grant. The options vest and become exercisable on the second anniversary of the date of grant.
 
2.
The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:
 
Average Risk-free interest rate (a)
   
1.58
%
Expected dividend yield
   
2.42
%
Average expected volatility  (b)
   
47.90
%
Termination rate
   
9
%
Suboptimal factor(c)
   
3.32
 
 
 
(a)
Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
 
(b)
Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
 
(c)
Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.
 
F-31


Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 11 - Shareholders' Equity (cont'd)
 
Share based compensation (cont'd)
 
F.
On January 30, 2017, the Company granted, in the aggregate, 119,925 options to certain of its directors and employees under the 2013 Plan. In relation to this grant:
 
1.
The exercise price for the options (per ordinary share) was US$ 39.62 and the Option expiration date was the earlier to occur of: (a) January 30, 2025; and (b) the closing price of the shares falling below US$ 19.81 at any time after the date of grant. The options vest and become exercisable on the second anniversary of the date of grant.
 
2.
The Company recognizes compensation expenses on these options based on estimated grant date fair value using the Binomial option-pricing model with the following assumptions:
 
Average Risk-free interest rate (a)
   
2.35
%
Expected dividend yield
   
2.42
%
Average expected volatility  (b)
   
43.71
%
Termination rate
   
9
%
Suboptimal factor (c)
   
3.28
 
 
 
(a)
Risk-free interest rate represents risk free US$ zero-coupon US Government Bonds at time of grant.
 
(b)
Expected average volatility represents a weighted average standard deviation rate for the price of the Company’s ordinary shares on the NASDAQ National Market.
 
(c)
Suboptimal factor represents the multiple of the increase in the market share price on the day of grant of the option which, should it come to pass, will lead to exercise of the option by the employee. It is the average suboptimal factor of the Company and similar companies.
 
F-32

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 11 - Shareholders' Equity (cont'd)
 
Share based compensation (cont'd)
 
G.
On January 30, 2017, the Company granted, in the aggregate, 78,000 RSUs to certain of its directors and employees under the 2013 Plan. In relation to those grants:
 
1.
50% of the RSUs vest on the second anniversary of the date of the grant and the additional 50% of the RSUs vest on the third anniversary of the date of the grant.
 
2.
The fair value of RSUs is estimated based on the market value of the Company's stock on the date of grant, less an estimate of dividends that will not accrue to RSUs holders prior to vesting.
 
3.
The Company recognizes compensation expenses on these RSUs based on estimated grant date fair value, with the following assumptions:
 
Expected dividend yield
   
2.68
%
Termination rate
   
1.74
%
 
F-33

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 11 - Shareholders' Equity (cont'd)
 
 
 
Share based compensation (cont'd)
 
     
   H.
The following table summarizes information regarding stock options as at December 31, 2017:
 
 
   
Options outstanding
 
Options exercisable
 
       
Weighted average
     
Weighted average
 
       
remaining
     
remaining
 
Exercise price
 
Number
 
contractual life
 
Number
 
contractual life
 
US$
 
of options
 
(in years)
 
of options
 
(in years)
 
                   
15.28
     
7,825
     
2.7
     
7,825
     
2.7
 
                                   
26.91
     
19,582
     
5.6
     
19,582
     
5.6
 
                                   
33.27
     
19,706
     
8.3
     
13,137
     
8.3
 
                                   
28.38
     
88,124
     
6.4
     
-
     
-
 
                                   
39.62
     
114,674
     
7.1
     
-
     
-
 
                                   
       
249,911
             
40,544
         

The aggregate intrinsic value of options outstanding as of December 31, 2016 and 2017 is US$ 4,283 thousand and US$ 9,175 thousand, respectively.
The aggregate intrinsic value of options exercisable as of December 31, 2016 and 2017 is US$ 1,777 thousand and US$ 1,759 thousand, respectively.
The total intrinsic value of options exercised during the year ended December 31, 2016 and 2017, is US$ 1,166 thousand and US$ 4,194 thousand, respectively.
The intrinsic value of the options at the date of grant is zero.
 
F-34

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 11 - Shareholders' Equity (cont'd)
   
                     
 
Share based compensation (cont'd)
   
 
                     
 
 
I.
The stock option activity under the abovementioned plans is as follows:
   
 
               
Weighted
 
         
Weighted
   
average
 
   
Number
   
average
   
grant date
 
   
of options
   
exercise price
   
fair value
 
         
US$
   
US$
 
                   
Balance at January 1, 2015
   
192,130
             
                     
Granted
   
89,907
     
26.91
     
10.04
 
Exercised
   
(61,711
)
   
15.28
     
6.54
 
Forfeited
   
(5,625
)
   
24.07
     
9.19
 
                         
Balance at December 31, 2015
   
214,701
                 
                         
Granted*
   
116,455
     
29.34
     
10.96
 
Exercised
   
(62,269
)
   
15.28
     
6.54
 
Forfeited
   
(2,882
)
   
29.71
     
11.79
 
                         
Balance at December 31, 2016
   
266,005
                 
                         
Granted
   
119,925
     
39.62
     
11.89
 
Exercised
   
(124,918
)
   
21.46
     
8.46
 
Forfeited
   
(11,101
)
   
33.18
     
10.87
 
                         
Balance at December 31, 2017
   
249,911
                 
Exercisable at December 31, 2017
   
40,544
                 
 
*
 
In 2016 the Company granted in the aggregate, 116,455 options. Regarding the grant of 93,660 options, see Note 11E. Regarding the grant of 22,795 options, see Note 3B.
 
 
F-35

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 11 - Shareholders' Equity (cont'd)
                 
 
Share based compensation (cont'd)
                 
 
J.
The Restricted Share Units activity under the abovementioned plans is as follows:
                 
 
         
Weighted
 
   
Number of
   
average
 
   
Restricted
   
grant date
 
   
Share Units
   
fair value
 
   
US$
   
US$
 
             
Balance at January 1, 2015
   
74,000
       
               
Granted
   
8,000
     
29.09
 
Vested
   
(4,000
)
   
46.07
 
                 
Balance at  December 31, 2015
   
78,000
         
                 
Vested
   
(35,000
)
   
46.54
 
                 
Balance at  December 31, 2016
   
43,000
         
                 
Granted
   
78,000
     
34.90
 
Vested
   
(43,000
)
   
42.52
 
                 
Balance at December 31, 2017
   
78,000
         

The aggregate intrinsic value of RSUs outstanding as of December 31, 2016 and December 31, 2017 is US$ 1,767 thousand and US$ 5,469 thousand, respectively.
The aggregate intrinsic value of RSUs vested during the year ended December 31, 2017 is US$ 2,458 thousand.
 
F-36

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 11 - Shareholders' Equity (cont'd)
       
                 
 
Share based compensation (cont'd)
           
                 
 
K.
During 2015, 2016 and 2017, the Company recorded share-based compensation expenses. The following summarizes the allocation of the stock-based compensation expenses:
 
   
Year ended December 31
 
   
2015
   
2016
   
2017
 
   
US$ thousands
   
US$ thousands
   
US$ thousands
 
                   
Cost of sales
   
150
     
180
     
320
 
Research and development costs
   
455
     
504
     
832
 
Selling and marketing expenses
   
502
     
366
     
537
 
General and administrative expenses
   
806
     
500
     
736
 
                         
     
1,913
     
1,550
     
2,425
 

As of December 31, 2017, there were US$ 2,420 thousand of unrecognized compensation costs related to outstanding stock options and RSUs to be recognized over a weighted average period of 1.36 years.

The total tax benefit recognized in the consolidated statements of operations related to share based compensation expenses amounted to US$ 216 thousand for the year ended December 31, 2017.
 
F-37

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 12 - Geographic areas and major customers
     
 
                   
 
A.
Information on sales by geographic distribution:
 
                   
   
The Company has one operating segment.
 
       
   
Sales are attributed to geographic distribution based on the location of the customer.
 
                   
 
   
Year ended December 31
 
   
2015
   
2016
   
2017
 
   
US$ thousands
 
                   
North America
   
54,537
     
65,590
     
100,434
 
Europe
   
16,331
     
24,208
     
20,156
 
Asia-Pacific
   
11,870
     
10,549
     
5,100
 
                         
     
82,738
     
100,347
     
125,690
 
 
 
B.
Sales to single customers exceeding 10% of sales (US$ thousands):
 
   
Year ended December 31
 
   
2015
   
2016
   
2017
 
   
US$ thousands
 
                   
Customer "A"
   
*
     
*
     
25,888
 
Customer "B"
   
16,320
     
17,366
     
16,915
 
Customer "C"
   
*
     
11,628
     
*
 
 
*
Less than 10% of sales.
 
 
C.
Major Customers - as percentage of net Accounts Receivable balance:
 
   
Accounts receivable from significant customers representing 10% or more of the net accounts receivable balance as of December 31, 2016 and 2017, consist of the following customers:
 
   
Year ended December 31
 
   
2016
   
2017
 
   
Percentage
 
             
Customer 1
   
*
     
30
%
Customer 2
   
*
     
22
%
Customer 3
   
11
%
   
10
%
Customer 4
   
11
%
   
*
 
 
*
Less than 10% of Trade accounts receivable, net.
 
F-38

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 12 - Geographic areas and major customers (cont'd)
   
 
 
D.
Information on Long lived assets - Property, Plant and Equipment by geographic areas:
 
   
The following table presents the locations of the Company’s long lived assets - Property, Plant and Equipment as of December 31, 2016 and 2017:
 
   
Year ended December 31
 
   
2016
   
2017
 
   
US$ thousands
 
             
North America
   
16
     
20
 
Europe
   
76
     
225
 
Israel
   
3,823
     
3,876
 
                 
     
3,915
     
4,121
 

Note 13 - Financial Income (Expenses), Net
 
   
Year ended December 31
 
   
2015
   
2016
   
2017
 
   
US$ thousands
 
                   
Interest income
   
1,026
     
751
     
527
 
Discount on marketable securities, net
   
(561
)
   
(358
)
   
(217
)
Exchange rate differences, net
   
(148
)
   
(236
)
   
(45
)
Bank charges
   
(97
)
   
(122
)
   
(109
)
                         
     
220
     
35
     
156
 

F-39

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 14 - Taxes on Income
 
A.
Measurement of results for tax purposes under the Israeli Income Tax Regulations (Rules for Maintaining Accounting Records of Foreign Invested Companies and Certain Partnerships and Determining Their Taxable Income) - 1986
 
As a "foreign invested company" (as defined in the Israeli Law for the Encouragement of Capital Investments-1959), the Company's taxable income or loss is calculated in US Dollars.
 
B.
Corporate tax rate in Israel
 
Taxable income of Israeli companies is subject to tax at the rate of 26.5% in 2014 and 2015, and in January 2016, the regular tax rate in Israel was reduced to 25% as from 2016 and thereafter.
 
Furthermore, In December 2016, the regular tax rate in Israel was reduced to 23% in two steps. The first step will be to a rate of 24% as from 2017 and the second step will be to a rate of 23% as from 2018 and thereafter.
 
C.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the "Law")
 
1.
On December 29, 2010 the Knesset approved the Economic Policy Law for 2011-2012, which includes an amendment to the Law for the Encouragement of Capital Investments – 1959 (hereinafter – "the Amendment to the Law"). The Amendment to the Law is effective from January 1, 2011 and its provisions will apply to preferred income derived or accrued in 2011 and thereafter by a Preferred Company, per the definition of these terms in the Amendment to the Law.
 
Companies can choose to not be included in the scope of the Amendment to the Law and to stay in the scope of the law before its amendment until the end of the benefits period.
 
Under the Amendment to the Law, which the Company started applying in 2014, upon an irrevocable election made by a company, a uniform corporate tax rate will apply to all preferred income of such company. Under the law, when the election is made, the uniform tax rate (for 2014 and on) will be 9% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel. The profits of these Preferred Companies will be freely distributable as dividends, subject to a withholding tax of 20%.
 
In December 2016, under the Amendment to the Law, the uniform tax rate in areas in Israel designated as Development Zone A was reduced to 7.5% as from 2017 and thereafter.
 
F-40

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 14 - Taxes on Income (cont’d)
 
 
C.
Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (hereinafter - the "Law") (cont'd)
 
1.
(cont'd)
 
Should the Company derive income from sources other than the "Preferred Enterprise" during the relevant period of benefits, such income will be taxable at the regular corporate tax rates for the applicable year.
 
2.
In the event of distribution by the Company of cash dividends out of its retained earnings that were generated prior to 2014 tax year and were tax exempt due to the "Approved Enterprise" or "Benefited Enterprise" status, the Company would be subjected to a maximum of 25% corporate tax on the amount distributed, and a further 15% withholding tax would be deducted from the amounts distributed to the shareholders.
 
Out of the Company’s retained earnings as of December 31, 2016 and 2017, approximately US$ 45,405 thousand and US$ 50,356 thousand respectively are tax-exempt, due to "Approved Enterprise" and "Benefited Enterprise" status. If such tax-exempt income is distributed by cash dividend (including a liquidation dividend), it would be taxed at the reduced corporate tax rate applicable to such profits (up to 25%) and an income tax liability of up to approximately US$ 11,351 thousand and US$ 12,589 thousand would be incurred as of December 31, 2016 and 2017, respectively. The Company anticipates that any future dividends distributed pursuant to its dividend policy, will be distributed from income sources which will not impose additional tax liabilities on the Company. The Company intends to reinvest the amount of its tax-exempt income. Accordingly, no deferred income taxes have been provided on income attributable to the Company’s "Approved Enterprise" or "Benefited Enterprise". If the Company was to declare a dividend from its tax-exempt income, an income tax expense would be recognized in the period a dividend is declared.
 
F-41

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 14 - Taxes on Income (cont’d)
 
D.            Taxation of the subsidiaries
 
1.
The subsidiary Silicom Connectivity Solutions, Inc. files tax returns to US federal tax authorities and to state tax authorities in the states of New Jersey, California, Virginia, New York and New Mexico.
On December 22, 2017, the Tax Cuts and Jobs Acts was enacted into law. The new legislation will impact the company by reduction of the corporate income tax rate to 21% effective January 1, 2018.
 
2.
The subsidiary Silicom Denmark is taxed according to the tax laws in Denmark.
 
3.
The Company has not provided for Israeli income and foreign withholding taxes on US$ 4,043 thousand of its non-Israeli subsidiaries' undistributed earnings as of December 31, 2017. The earnings could become subject to tax if earnings are remitted or deemed remitted as dividends or upon sale of a subsidiary.
The Company currently has no plans to repatriate those funds and intends to indefinitely reinvest them in its non-Israeli operations. The unrecognized deferred tax liability associated with these temporary differences was approximately US$ 445 thousand at December 31, 2017. 
 
4.
As of December 31, 2017, the net operating loss carry-forwards of the Company’s subsidiaries for tax purposes amounted to approximately US$ 500 thousand. These losses are available to offset any future taxable income.
 
E.             Tax assessments
 
For the Israeli jurisdiction the Company has final tax assessments for all years up to and including the tax year ended December 31, 2012.
 
For the US Federal jurisdictions, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2013. For the New Jersey and California state jurisdictions, Silicom Inc. has final tax assessments for all years up to and including the tax year ended December 31, 2012. For the Virginia state jurisdiction, Silicom Inc. has open tax assessments for the years 2015 through 2017. For the Tennessee state jurisdiction, Silicom Inc. has open tax assessments for the years 2016 through 2017.  For the New Mexico, New York and Texas state jurisdictions, Silicom Inc. has open tax assessments for the year 2017.
 
For the Danish jurisdiction, Silicom Denmark has final tax assessments for all years up to and including the tax year ended August 31, 2013.
 
F-42

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 14 - Taxes on Income (cont'd)
                 
 
 
F.
Income before income taxes and income taxes expense (benefit) included in the consolidated statements of operations
 
   
Year ended December 31
 
   
2015
   
2016
   
2017
 
   
US$ thousands
 
                   
Income (loss) before income taxes:
                 
Israel
   
19,486
     
15,541
     
23,226
 
Foreign jurisdiction
   
(1,061
)
   
324
     
2,356
 
     
18,425
     
15,865
     
25,582
 
                         
Current taxes:
                       
Israel
   
2,383
     
2,242
     
2,379
 
Foreign jurisdiction
   
465
     
720
     
1,095
 
     
2,848
     
2,962
     
3,474
 
                         
Current tax (benefits) expenses relating to prior years:
                       
Israel
   
-
     
26
     
12
 
Foreign jurisdiction
   
(36
)
   
-
     
(71
)
     
(36
)
   
26
     
(59
)
                         
Deferred taxes:
                       
Israel
   
(437
)
   
10
     
549
 
Foreign jurisdiction
   
(470
)
   
(270
)
   
(96
)
     
(907
)
   
(260
)
   
453
 
                         
Income tax expense
   
1,905
     
2,728
     
3,868
 

F-43

 
Silicom Ltd. and its Subsidiaries
Notes to the Consolidated Financial Statements

 
Note 14 - Taxes on Income (cont’d)
 
G.            Deferred income taxes
 
The tax effects of significant items comprising the Company’s deferred tax assets are as follows:
 
   
December 31
   
December 31
 
   
2016
   
2017
 
   
US$ thousands
   
US$ thousands
 
             
Deferred tax assets:
           
Accrued employee benefits
   
261
     
282
 
Research and development costs
   
921
     
846
 
Tax loss carryforwards
   
338
     
111
 
PPE
   
15
     
15