d10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
/x/
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 27, 2009
OR
/ /
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from to
.
Commission
File No. 0-12695
INTEGRATED
DEVICE TECHNOLOGY, INC.
(Exact
Name of Registrant as Specified in Its Charter)
DELAWARE
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
94-2669985
(I.R.S.
Employer
Identification
No.)
|
6024
SILVER CREEK VALLEY ROAD, SAN JOSE, CALIFORNIA
(Address
of Principal Executive Offices)
|
|
95138
(Zip
Code)
|
Registrant's
Telephone Number, Including Area Code: (408) 284-8200
|
|
|
Title of each
class
|
|
Name of each exchange on which
registered
|
|
|
|
Common
stock, $.001 par value
|
|
The
NASDAQ Stock Market LLC
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
x Large
accelerated
filer ¨ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller reporting
company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes ¨ No x
The
number of outstanding shares of the registrant's Common Stock, $.001 par value
per share, as of October 26, 2009, was approximately 166,031,372.
INTEGRATED
DEVICE TECHNOLOGY, INC.
QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 27, 2009
PART I—FINANCIAL
INFORMATION
Item
1.
|
|
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
7
|
Item
2.
|
|
35
|
Item
3.
|
|
46
|
Item
4.
|
|
47
|
|
|
|
PART II—OTHER
INFORMATION
|
|
|
|
Item
1.
|
|
48
|
Item
1A.
|
|
49
|
Item
2.
|
|
57
|
Item
3.
|
|
57
|
Item
4.
|
|
58
|
Item
5.
|
|
58
|
Item
6.
|
|
59
|
|
60
|
PART
I FINANCIAL INFORMATION
INTEGRATED
DEVICE TECHNOLOGY, INC.
(UNAUDITED;
IN THOUSANDS, EXCEPT PER SHARE DATA)
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
Revenues
|
|
$ |
139,504 |
|
|
$ |
200,541 |
|
|
$ |
255,458 |
|
|
$ |
388,749 |
|
Cost
of revenues
|
|
|
88,373 |
|
|
|
113,388 |
|
|
|
157,162 |
|
|
|
217,137 |
|
Gross
profit
|
|
|
51,131 |
|
|
|
87,153 |
|
|
|
98,296 |
|
|
|
171,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
41,455 |
|
|
|
41,532 |
|
|
|
77,770 |
|
|
|
85,151 |
|
Selling,
general and administrative
|
|
|
30,662 |
|
|
|
32,211 |
|
|
|
56,097 |
|
|
|
65,176 |
|
Total
operating expenses
|
|
|
72,117 |
|
|
|
73,743 |
|
|
|
133,867 |
|
|
|
150,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(20,986
|
) |
|
|
13,410 |
|
|
|
(35,571
|
) |
|
|
21,285 |
|
Gain
on divestiture
|
|
|
82,747 |
|
|
|
-- |
|
|
|
82,747 |
|
|
|
-- |
|
Interest
expense
|
|
|
(11
|
) |
|
|
(15
|
) |
|
|
(30
|
) |
|
|
(33
|
) |
Interest
income and other, net
|
|
|
1,199 |
|
|
|
384 |
|
|
|
2,624 |
|
|
|
1,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
62,949 |
|
|
|
13,779 |
|
|
|
49,770 |
|
|
|
23,101 |
|
Provision
for income taxes
|
|
|
2,409 |
|
|
|
2,104 |
|
|
|
3,351 |
|
|
|
2,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
60,540 |
|
|
$ |
11,675 |
|
|
$ |
46,419 |
|
|
$ |
20,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$ |
0.37 |
|
|
$ |
0.07 |
|
|
$ |
0.28 |
|
|
$ |
0.12 |
|
Diluted
net income per share
|
|
$ |
0.36 |
|
|
$ |
0.07 |
|
|
$ |
0.28 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
165,591 |
|
|
|
169,570 |
|
|
|
165,511 |
|
|
|
170,325 |
|
Diluted
|
|
|
166,075 |
|
|
|
169,752 |
|
|
|
165,853 |
|
|
|
170,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
INTEGRATED
DEVICE TECHNOLOGY, INC.
(UNAUDITED;
IN THOUSANDS, EXCEPT PER SHARE DATA)
|
|
September
27,
2009
|
|
|
March
29,
2009
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
176,460 |
|
|
$ |
136,036 |
|
Short-term
investments
|
|
|
182,401 |
|
|
|
160,037 |
|
Accounts
receivable
|
|
|
59,897 |
|
|
|
54,894 |
|
Inventories
|
|
|
64,634 |
|
|
|
69,722 |
|
Deferred
tax assets
|
|
|
1,696 |
|
|
|
1,696 |
|
Prepayments
and other current assets
|
|
|
21,674 |
|
|
|
19,881 |
|
Total
current assets
|
|
|
506,762 |
|
|
|
442,266 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
72,287 |
|
|
|
71,561 |
|
Goodwill
|
|
|
101,225 |
|
|
|
89,404 |
|
Acquisition-related
intangibles, net
|
|
|
65,201 |
|
|
|
50,509 |
|
Other
assets
|
|
|
26,495 |
|
|
|
24,627 |
|
Total
assets
|
|
$ |
771,970 |
|
|
$ |
678,367 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
35,988 |
|
|
$ |
25,837 |
|
Accrued
compensation and related expenses
|
|
|
19,251 |
|
|
|
18,820 |
|
Deferred
income on shipments to distributors
|
|
|
17,010 |
|
|
|
16,538 |
|
Income
taxes payable
|
|
|
3,471 |
|
|
|
457 |
|
Other
accrued liabilities
|
|
|
30,336 |
|
|
|
21,206 |
|
Total
current liabilities
|
|
|
106,056 |
|
|
|
82,858 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
3,381 |
|
|
|
3,220 |
|
Long-term
income tax payable
|
|
|
21,011 |
|
|
|
20,907 |
|
Other
long-term obligations
|
|
|
25,794 |
|
|
|
14,314 |
|
Total
liabilities
|
|
|
156,242 |
|
|
|
121,299 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 16 and 17)
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock; $.001 par value: 10,000 shares authorized; no shares
issued
|
|
|
-- |
|
|
|
-- |
|
Common
stock; $.001 par value: 350,000 shares authorized; 166,026 and
165,298 shares outstanding at September 27, 2009 and March 29, 2009,
respectively
|
|
|
166 |
|
|
|
165 |
|
Additional
paid-in capital
|
|
|
2,294,729 |
|
|
|
2,283,601 |
|
Treasury
stock; at cost: 57,752 shares at September 27, 2009 and
March 29, 2009, respectively
|
|
|
(777,847
|
) |
|
|
(777,847
|
) |
Accumulated
other comprehensive income
|
|
|
1,982 |
|
|
|
870 |
|
Accumulated
deficit
|
|
|
(903,302
|
) |
|
|
(949,721
|
) |
Total
stockholders' equity
|
|
|
615,728 |
|
|
|
557,068 |
|
Total
liabilities and stockholders' equity
|
|
$ |
771,970 |
|
|
$ |
678,367 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
INTEGRATED
DEVICE TECHNOLOGY, INC.
(UNAUDITED;
IN THOUSANDS)
|
|
Six
months ended |
|
|
|
September
27,
2009
|
|
|
September
28
2008
|
|
Cash
flows provided by operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
46,419 |
|
|
$ |
20,829 |
|
Adjustments:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
11,970 |
|
|
|
13,263 |
|
Amortization
of intangible assets
|
|
|
11,327 |
|
|
|
41,451 |
|
Gain
from divestiture of the NWD assets
|
|
|
(82,747
|
) |
|
|
-- |
|
Stock-based
compensation expense, net of amounts capitalized in
inventory
|
|
|
8,178 |
|
|
|
16,771 |
|
Note
receivable net of deferred gain write off
|
|
|
2,002 |
|
|
|
-- |
|
Deferred
tax provision
|
|
|
161 |
|
|
|
474 |
|
Changes
in assets and liabilities (net of effects of acquisitions and
divestiture):
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(3,743
|
) |
|
|
(5,163
|
) |
Inventories
|
|
|
17,457 |
|
|
|
3,517 |
|
Prepayments
and other assets
|
|
|
3,091 |
|
|
|
8,645 |
|
Accounts
payable
|
|
|
8,066 |
|
|
|
332 |
|
Accrued
compensation and related expenses
|
|
|
(1,235
|
) |
|
|
556 |
|
Deferred
income on shipments to distributors
|
|
|
(1,876
|
) |
|
|
(1,935
|
) |
Income
taxes payable and receivable
|
|
|
3,565 |
|
|
|
6,044 |
|
Other
accrued liabilities and long term liabilities
|
|
|
7,375 |
|
|
|
1,451 |
|
Net
cash provided by operating activities
|
|
|
30,010 |
|
|
|
106,235 |
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used for) investing activities
|
|
|
|
|
|
|
|
|
Acquisitions,
net of cash acquired
|
|
|
(64,482
|
) |
|
|
-- |
|
Proceeds
from divestiture of the NWD assets
|
|
|
100,000 |
|
|
|
-- |
|
Purchases
of property, plant and equipment
|
|
|
(6,291
|
) |
|
|
(8,434
|
) |
Purchases
of short-term investments
|
|
|
(144,973
|
) |
|
|
(103,988
|
) |
Proceeds
from sales of short-term investments
|
|
|
78,327 |
|
|
|
17,216 |
|
Proceeds
from maturities of short-term investments
|
|
|
44,516 |
|
|
|
72,415 |
|
Net
cash provided by (used for) investing activities
|
|
|
7,097 |
|
|
|
(22,791
|
) |
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used for) financing activities
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
2,227 |
|
|
|
8,921 |
|
Repurchase
of common stock
|
|
|
-- |
|
|
|
(37,426
|
) |
Net
cash provided by (used for) financing activities
|
|
|
2,227 |
|
|
|
(28,505
|
) |
|
|
|
|
|
|
|
|
|
Effect
of exchange rates on cash and cash equivalents
|
|
|
1,090 |
|
|
|
(854
|
) |
Net
increase in cash and cash equivalents
|
|
|
40,424 |
|
|
|
54,085 |
|
Cash
and cash equivalents at beginning of period
|
|
|
136,036 |
|
|
|
131,986 |
|
Cash
and cash equivalents at end of period
|
|
$ |
176,460 |
|
|
$ |
186,071 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Common
stock options assumed in connection with Tundra
acquisition
|
|
$ |
721 |
|
|
$ |
-- |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
INTEGRATED
DEVICE TECHNOLOGY, INC.
(UNAUDITED)
Note 1
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements of Integrated
Device Technology, Inc. (“IDT” or the “Company”) contain all adjustments
that are, in the opinion of management, necessary to state fairly the interim
financial information included therein. The year-end condensed
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts in the Company’s financial
statements and the accompanying notes. Actual results could differ from those
estimates.
These
financial statements should be read in conjunction with the audited consolidated
financial statements and accompanying notes included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 29,
2009. Operating results for the three months and six months ended
September 27, 2009 are not necessarily indicative of operating results for an
entire fiscal year.
In
accordance with authoritative guidance for subsequent events, the Company has
evaluated the period from September 27, 2009, the date of the financial
statements, through November 5, 2009, the date of the issuance of the financial
statements and the date of the filing of this Form 10-Q for subsequent
events. See Note
21 — “Subsequent Event” for further discussion.
Note
2
Significant
Accounting Policies
Investments:
Available-for-Sale
Investments. Investments designated as available-for-sale
include marketable debt and equity securities. Available-for-sale
investments are classified as short-term, as these investments generally consist
of highly marketable securities that are intended to be available to meet
near-term cash requirements. Marketable securities classified as
available-for-sale are reported at market value, with net unrealized gains or
losses recorded in accumulated other comprehensive income, a separate component
of stockholders' equity, until realized. Realized gains and losses on
investments are computed based upon specific identification and are included in
interest income and other, net.
Trading
Securities. Trading securities are stated at fair value, with
gains or losses resulting from changes in fair value recognized currently in
earnings. The Company elects to classify as “trading” assets a portion of its
marketable equity securities, which are included in the other assets on the
Company's Condensed Consolidated Balance Sheets. These investments consist
exclusively of a marketable equity portfolio held to generate returns that seek
to offset changes in liabilities related to certain deferred compensation
arrangements. Gains or losses from changes in the fair value of these equity
securities are recorded as non-operating earnings which are offset by losses or
gains on the related liabilities recorded as compensation expense.
Non-Marketable Equity
Securities. Non-marketable equity securities are accounted for
at historical cost or, if the Company has significant influence over the
investee, using the equity method of accounting.
Other-Than-Temporary
Impairment. All of the Company’s available-for-sale
investments and non-marketable equity securities are subject to a periodic
impairment review. Investments are considered to be impaired when a
decline in fair value is judged to be other-than-temporary. This
determination requires significant judgment. For publicly traded
investments, impairment is determined based upon the specific facts and
circumstances present at the time, including a review of the closing price over
the previous six months, general market conditions and the Company’s intent and
ability to hold the investment for a period of time sufficient to allow for
recovery. For non-marketable equity securities, the impairment
analysis requires the identification of events or circumstances that would
likely have a significant adverse effect on the fair value of the investment,
including revenue and earnings trends, overall business prospects and general
market conditions in the investees’ industry or geographic
area. Investments identified as having an indicator of impairment are
subject to further analysis to determine if the investment is
other-than-temporarily impaired, in which case the investment is written down to
its impaired value.
Inventories.
Inventories are recorded at the lower of standard cost (which approximates
actual cost on a first-in, first-out basis) or market
value. Inventory held at consignment locations is included in
finished goods inventory as the Company retains full title and rights to the
product. Inventory valuation include provisions for obsolete and
excess inventory based on management’s forecasts of demand over specific future
time horizons and reserves to value our inventory at the lower of cost or market
which rely on forecasts of average selling prices (ASPs) in future
periods.
Revenue
Recognition. The Company’s revenue results from semiconductors
sold through three channels: direct sales to original equipment manufacturers
(“OEMs”) and electronic manufacturing service providers (“EMSs”), consignment
sales to OEMs and EMSs, and sales through distributors. The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed or
determinable, and its ability to collect is reasonably assured. For
direct sales, the Company recognizes revenue in accordance with the applicable
shipping terms. Revenue related to the sale of consignment inventory is not
recognized until the product is pulled from inventory stock by the
customer.
For
distributors outside of the Asia Pacific (“APAC”) region, who have stock
rotation, price protection and ship from stock pricing adjustment rights, the
Company defers revenue and related cost of revenues on sales to these
distributors until the product is sold through by the distributor to an
end-customer. Subsequent to shipment to the distributor, the Company
may reduce product pricing through price protection based on market conditions,
competitive considerations and other factors. Price protection is
granted to distributors on the inventory that they have on hand at the date the
price protection is offered. The Company also grants certain credits to
its distributors on specifically identified portions of the distributors’
business to allow them to earn a competitive gross margin on the sale of the
Company’s products to their end customers. As a result of its inability to
estimate these credits, the Company has determined that the sales price to these
distributors is not fixed or determinable until the final sale to the
end-customer.
In the
APAC region, the Company has distributors for which revenue is recognized upon
shipment, with reserves recorded for the estimated return and pricing adjustment
exposures. The determination of the amount of reserves to be
recorded for stock rotation rights requires the Company to make estimates as to
the amount of product which will be returned by customers within their limited
contractual rights. The Company utilizes historical return rates to
estimate the exposure in accordance with authoritative guidance
for Revenue Recognition When Right of Return Exists. In addition, from
time-to-time, the Company is required to give pricing adjustments to
distributors for product purchased in a given quarter that remains in their
inventory. These amounts are estimated by management based on
discussions with customers, assessment of market trends, as well as historical
practice.
Based on
the terms in the agreements with its distributors and the application of this
policy, the Company recognizes revenue once the distributor sells our products
to an end-customer for North American and European distributors and recognizes
revenue upon shipment to Japanese and other Asian distributors.
Stock-based Compensation. The
fair value of employee restricted stock units is equal to the market value of
the Company’s common stock on the date the award is granted. The
Company estimates the fair value of employee stock options and the right to
purchase shares under the employee stock purchase plan using the Black-Scholes
valuation model, consistent with the Financial Accounting Standard Board's
(FASB) authoritative guidance for share-based payment. Option-pricing
models require the input of highly subjective assumptions, including the
expected term of options and the expected price volatility of the stock
underlying such options. In addition, the Company is required to
estimate the number of stock-based awards that will be forfeited due to employee
turnover based on historical trends. The Company attributes the value
of stock-based compensation to expense on an accelerated
method. Finally, the Company capitalizes into inventory a portion of
the periodic stock-based compensation expense that relates to employees working
in manufacturing activities.
The
Company updates the expected term of stock option grants annually based on its
analysis of the stock option exercise behavior over a period of
time. The interest rate is based on the average U.S. Treasury
interest rate in effect during the applicable quarter. The Company
believes that the implied volatility of its common stock is an important
consideration of overall market conditions and a good indicator of the expected
volatility of its common stock. However, due to the limited volume of
options freely traded over the counter, the Company believes that implied
volatility, by itself, is not representative of the expected volatility of its
common stock. Therefore, upon the adoption of FASB authoritative
guidance for stock-based payment at the beginning of fiscal 2007, the Company
revised the volatility factor used to estimate the fair value of its stock-based
awards which now reflects a blend of historical volatility of its common stock
and implied volatility of call options and dealer quotes on call options,
generally having a term of less than twelve months. The Company has
not paid, nor does it have current plans to pay dividends on its common stock in
the foreseeable future.
Income Taxes. The
Company accounts for income taxes under an asset and liability approach that
requires the expected future tax consequences of temporary differences between
book and tax bases of assets and liabilities be recognized as deferred tax
assets and liabilities. Generally accepted accounting principles require the
Company to evaluate the ability to realize the value of its net deferred tax
assets on an ongoing basis. A valuation allowance is recorded to reduce the net
deferred tax assets to an amount that will more likely than not be realized.
Accordingly, the Company considers various tax planning strategies, forecasts of
future taxable income and its most recent operating results in assessing the
need for a valuation allowance. In the consideration of the ability to realize
the value of net deferred tax assets, recent results must be given substantially
more weight than any projections of future profitability. Since the fourth
quarter of fiscal 2003, the Company has determined that, under applicable
accounting principles, it could not conclude that it was more likely than not
that the Company would realize the value of its net deferred tax assets. The
Company’s assumptions regarding the ultimate realization of these assets
remained unchanged in the second quarter of fiscal 2010 and accordingly, the
Company continues to record a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized.
On
April 2, 2007, the Company adopted FASB authoritative guidance which
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements. This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. As
a result of the implementation of this guidance, the Company recognizes the tax
liability for uncertain income tax positions on the income tax return based on
the two-step process prescribed in the interpretation. The first step is to
determine whether it is more likely than not that each income tax position would
be sustained upon audit. The second step is to estimate and measure the tax
benefit as the amount that has a greater than 50% likelihood of being realized
upon ultimate settlement with the tax authority. Estimating these amounts
requires the Company to determine the probability of various possible outcomes.
The Company evaluates these uncertain tax positions on a quarterly basis. This
evaluation is based on the consideration of several factors including changes in
facts or circumstances, changes in applicable tax law, settlement of issues
under audit, and new exposures. If the Company later determines that the
exposure is lower or that the liability is not sufficient to cover its revised
expectations, the Company adjusts the liability and effect a related change in
its tax provision during the period in which the Company makes such
determination.
Note
3
Recent
Accounting Pronouncements
In June
2009, the FASB issued the FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles (“Codification”). This authoritative guidance
establishes the Codification, which officially launched on July 1, 2009, to
become the source of authoritative U.S. generally accepted accounting principles
(GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules
and interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. The subsequent issuances of new standards will be in the
form of Accounting Standards Updates that will be included in the Codification.
Generally, the Codification is not expected to change U.S. GAAP. All other
accounting literature excluded from the Codification will be considered
non-authoritative. This guidance is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. The Company
adopted this guidance in the second quarter of fiscal 2010. The adoption of this
guidance did not have a significant impact on the Company’s condensed
consolidated financial statements or related footnotes.
In May
2009, the FASB issued accounting guidance for subsequent events, which establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. This guidance sets forth the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements. This guidance also requires the disclosure of the
date through which an entity has evaluated subsequent events and the basis for
that date—that is, whether that date represents the date the financial
statements were issued or were available to be issued. This guidance is
effective for interim or annual reporting periods ending after June 15, 2009.
The Company adopted this guidance in the first quarter of fiscal 2010. The
adoption of this guidance did not have a significant impact on the Company’s
condensed consolidated financial statements or related footnotes. See note 21 -
"Subsequent Event" for further discussion.
In
April 2009, the FASB issued authoritative fair value disclosure guidance
for financial instruments. This guidance requires an entity to provide interim
disclosures about the fair value of all financial instruments as well as in
annual financial statements. Additionally, this guidance requires
disclosures of the methods and significant assumptions used in estimating the
fair value of financial instruments on an interim basis as well as changes of
the methods and significant assumptions from prior periods. This guidance is
effective for interim and annual periods ending after June 15, 2009. The
Company adopted this guidance in the first quarter of fiscal 2010. The adoption
of this guidance did not have a significant impact on the Company condensed
consolidated financial position and results of operations.
In
April 2009, the FASB issued authoritative guidance for determining fair
value when the volume and level of activity for the asset or liability have
significantly decreased and identifying transactions that are not order. This
standard provides guidance on how to determine the fair value of assets and
liabilities. The guidance relates to determining fair values when there is no
active market or where the price inputs being used represent distressed sales.
It reaffirms that the objective of fair value measurement––to reflect how much
an asset would be sold for in an orderly transaction (as opposed to a distressed
forced transaction) at the date of the financial statements under current market
conditions. Specifically, it reaffirms the need to use judgment to ascertain if
a formerly active market has become inactive and in determining fair values when
markets have become inactive. The guidance is effective for interim and fiscal
years beginning after June 15, 2009. The Company adopted this guidance in
the first quarter of fiscal 2010. The adoption of this guidance did not have a
significant impact on the Company’s condensed consolidated financial position
and results of operations.
In
April 2009, the FASB amended the existing guidance on accounting for assets
acquired and liabilities assumed in a business combination that arise from
contingencies, including the initial recognition and measurement, subsequent
measurement and accounting and disclosures for assets and liabilities arising
from contingencies in business combinations. This guidance is effective for
contingent assets and contingent liabilities acquired in business combinations
for which the acquisition date is on or after the beginning of the fiscal year
beginning after December 15, 2008. The Company adopted this guidance in the
first quarter of fiscal 2010. See Note 11 – “Business Combinations”
in Part I, Item 1 for further discussion.
In
April 2009, the FASB amended the existing guidance on determining whether an
impairment for investments in debt securities is
other-than-temporary. This guidance does not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities. The Company adopted this guidance in the first quarter of
fiscal 2010 and the adoption of this guidance did not have a material impact on
the Company’s condensed consolidated financial position and results of
operations.
In June
2008, the FASB issued the authoritative guidance for determining whether
instruments granted in share-based payment transactions are participating
securities. This guidance states that unvested share-based payment
awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class method. This
guidance is effective for fiscal years beginning after December 15, 2008. The
Company adopted this guidance in the first quarter of fiscal 2010 and the
adoption of this guidance did not have a material impact on the Company’s
condensed consolidated financial position and results of
operations.
In April
2008, the FASB amended the existing guidance on determination of the
useful life of intangible assets. This guidance amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset. The intent of the guidance is
to improve the consistency between the useful life of a recognized intangible
asset and the period of expected cash flows used to measure the fair value of
the intangible asset. This guidance is effective for fiscal years beginning
after December 15, 2008. The Company adopted this guidance in the first
quarter of fiscal 2010.
In
February 2008, the FASB amended the existing guidance on fair value measurements
for purposes of lease classification to remove certain leasing transactions from
its scope and was effective upon issuance. In addition, FASB issued
authoritative guidance that provided a one year deferral for application of the
new fair value measurement principles for all non-financial assets and
non-financial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually),
until the beginning of the first quarter of fiscal 2010. The Company adopted
this guidance in the first quarter of fiscal year 2010. In October
2008, the FASB issued authoritative guidance on determining the fair value of a
financial asset when the market for that asset is not active. This guidance was
effective upon issuance. The adoption of this guidance did not have a
material impact on the Company’s condensed consolidated financial position and
results of operations.
In
December 2007, the FASB revised the authoritative guidance for business
combinations. The guidance changes the accounting for business combinations
including the measurement of acquirer shares issued in consideration for a
business combination, the recognition of contingent consideration, the
accounting for pre-acquisition gain and loss contingencies, the recognition of
capitalized in-process research and development, the accounting for
acquisition-related restructuring cost accruals, the treatment of acquisition
related transaction costs and the recognition of changes in the acquirer’s
income tax valuation allowance. This guidance is effective for fiscal years
beginning after December 15, 2008, with early adoption prohibited. The
Company adopted this guidance in the first quarter of fiscal
2010. See Note 11 – “Business Combinations” in Part I, Item 1 for
further discussion.
Note 4
Net
Income Per Share
Net
income per share has been computed using weighted-average common shares
outstanding.
|
|
Three
months ended
|
|
|
Six
months ended
|
|
(in
thousands, except per share amounts)
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
Net
income
|
|
$ |
60,540 |
|
|
$ |
11,675 |
|
|
$ |
46,419 |
|
|
$ |
20,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
165,591 |
|
|
|
169,570 |
|
|
|
165,511 |
|
|
|
170,325 |
|
Dilutive
effect of employee stock options and restricted stock
units
|
|
|
484 |
|
|
|
182 |
|
|
|
342 |
|
|
|
261 |
|
Weighted
average common shares outstanding, assuming dilution
|
|
|
166,075 |
|
|
|
169,752 |
|
|
|
165,853 |
|
|
|
170,586 |
|
Basic
net income per share
|
|
$ |
0.37 |
|
|
$ |
0.07 |
|
|
$ |
0.28 |
|
|
$ |
0.12 |
|
Diluted
net income per share
|
|
$ |
0.36 |
|
|
$ |
0.07 |
|
|
$ |
0.28 |
|
|
$ |
0.12 |
|
Stock
options to purchase 29.5 million shares and 29.6 million shares for the three
and six month periods ended September 27, 2009, respectively, and 30.0 million
for the three and six month periods ended September 28, 2008, respectively, were
outstanding, but were excluded from the calculation of diluted earnings per
share because the exercise price of the stock options was greater than the
average share price of the common shares and therefore, the effect would have
been anti-dilutive. In addition, unvested restricted stock units of
0.4 million and less than 0.1 million for the three and six months ended
September 27, 2009, respectively, and 0.7 million and 0.5 million for the
three and six months ended September 28, 2008, respectively, were excluded
from the calculation because they were anti-dilutive after considering
unrecognized stock-based compensation expense.
Note
5
Stock-Based
Employee Compensation
Compensation
Expense
The
following table summarizes stock-based compensation expense by line items
appearing in the Company’s Condensed Consolidated Statement of
Operations:
|
|
Three
months ended
|
|
|
Six
months ended
|
|
(in
thousands)
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
Cost
of revenue
|
|
$ |
994 |
|
|
$ |
1,183 |
|
|
$ |
1,620 |
|
|
$ |
1,969 |
|
Research
and development
|
|
|
2,930 |
|
|
|
5,149 |
|
|
|
5,675 |
|
|
|
10,301 |
|
Selling,
general and administrative
|
|
|
(6
|
) |
|
|
2,310 |
|
|
|
883 |
|
|
|
4,501 |
|
Total
stock-based compensation expense
|
|
|
3,918 |
|
|
|
8,642 |
|
|
|
8,178 |
|
|
|
16,771 |
|
Tax
effect on stock-based compensation expense (1)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Total
stock-based compensation expense, net of related tax
effects
|
|
$ |
3,918 |
|
|
$ |
8,642 |
|
|
$ |
8,178 |
|
|
$ |
16,771 |
|
(1)
|
Assumes
a zero tax rate for each period presented as the Company has a full
valuation allowance.
|
Stock-based
compensation expense recognized in the Condensed Consolidated Statement of
Operations is based on awards ultimately expected to vest. The
authoritative guidance for stock-based compensation requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. In the second quarter of
fiscal 2010, based on the new
functionality
available in the software used by the Company to administer its stock
compensation programs, the Company has elected to true up its stock based
compensation expense upon termination of employment at the forfeiture date
rather than the vest date. This change resulted in a $1.5 million
credit to the Company’s stock-based compensation expense ($0.3 million increase
in cost of revenue, $0.3 million decrease in research and development expense,
and $1.5 million decrease in selling, general and administrative expense) for
the three and six months ended September 27, 2009,
respectively. In
addition, this change resulted in an increase of $0.01 per share in the basic
net income per share for the three months ended September 27, 2010 and an
increase of $0.01 per share in the basic and diluted net income per share for
the six months ended September 27, 2010, respectively. This change
does not impact the total amount of stock based compensation expense that the
Company will record. However, it impacts the timing of when certain
of the actual terminations and their impact on forfeitures are recorded.
The
Company attributes the value of stock-based compensation to expense on an
accelerated method.
The
following table summarizes stock-based compensation expense associated with each
type of award:
|
|
Three
months ended
|
|
|
Six
months ended
|
|
(in
thousands)
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
Employee
stock options
|
|
$ |
1,981 |
|
|
$ |
6,315 |
|
|
$ |
4,988 |
|
|
$ |
12,443 |
|
Employee
stock purchase plan (“ESPP”)
|
|
|
718 |
|
|
|
626 |
|
|
|
718 |
|
|
|
1,504 |
|
Restricted
stock units (“RSUs”)
|
|
|
1,184 |
|
|
|
1,415 |
|
|
|
2,475 |
|
|
|
2,760 |
|
Change
in amounts capitalized in inventory
|
|
|
35 |
|
|
|
286 |
|
|
|
(3
|
) |
|
|
64 |
|
Total
stock-based compensation expense
|
|
$ |
3,918 |
|
|
$ |
8,642 |
|
|
$ |
8,178 |
|
|
$ |
16,771 |
|
On March
29, 2009, the Company’s 1984 ESPP expired. No stock was issued under
this employee stock purchase plan in the first quarter of fiscal
2010. In the second quarter of fiscal 2010, the Company issued 0.4
million shares of common stock under its 2009 ESPP.
Valuation
Assumptions
Assumptions
used in the Black-Scholes valuation model and resulting weighted average
grant-date fair values were as follows:
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
Stock
option plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
Term
|
|
4.67
years
|
|
|
4.69
years
|
|
|
4.67
years
|
|
|
4.56
years
|
|
Risk-free
interest rate
|
|
|
2.27 |
% |
|
|
2.87 |
% |
|
|
2.12 |
% |
|
|
3.00 |
% |
Volatility
|
|
|
42.3 |
% |
|
|
39.3 |
% |
|
|
45.8 |
% |
|
|
39.3 |
% |
Dividend
Yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Weighted
average grant-date fair value
|
|
$ |
2.44 |
|
|
$ |
3.95 |
|
|
$ |
2.15 |
|
|
$ |
4.31 |
|
ESPP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
Term
|
|
0.25
years
|
|
|
0.25
years
|
|
|
0.25
years
|
|
|
0.25
years
|
|
Risk-free
interest rate
|
|
|
0.2 |
% |
|
|
1.9 |
% |
|
|
0.2 |
% |
|
|
1.57 |
% |
Volatility
|
|
|
62.5 |
% |
|
|
38.8 |
% |
|
|
62.5 |
% |
|
|
36.6 |
% |
Dividend
Yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Weighted
average fair value
|
|
$ |
1.65 |
|
|
$ |
2.29 |
|
|
$ |
1.65 |
|
|
$ |
2.04 |
|
Equity
Incentive Programs
The
Company currently issues awards under three equity based plans in order to
provide additional incentive and retention to directors and employees who are
considered to be essential to the long-range success of the
Company. These plans are further described below.
1994 Stock Option Plan (1994
Plan)
In May
1994, the Company’s stockholders approved the 1994 Plan. In September
2000, the Company’s stockholders elected to extend the plan to expire on July
26, 2010. Under the 1994 Plan, 13,500,000 shares of common stock have
been made available for issuance as stock options to employees, officers,
directors, consultants, independent contractors and advisors of the Company and
its affiliates. Shares issuable upon exercise of stock options
granted pursuant to the Company’s 1985 Incentive and Nonqualified Stock Option
Plan that expire or become un-exercisable for any reason without having been
exercised in full are also available for issuance under the 1994 Plan (not to
exceed 10,000,000 shares). Options granted by the Company under the
1994 Plan generally expire seven years from the date of grant and generally vest
over a four-year period from the date of grant. The exercise price of
the options granted by the Company under the
1994 Plan shall not be less than 100% of the fair market value for a common
share subject to such option on the date the option is granted. As of
September 27, 2009, 1,033,748 shares remain available for future grant under the
1994 Plan.
2004 Equity Plan (2004
Plan)
In
September 2004, the Company’s stockholders approved the 2004
Plan. Under the 2004 Plan, 28,500,000 shares of common stock have
been made available for issuance as stock options, restricted stock awards,
stock appreciation rights, performance awards, restricted stock unit awards, and
stock-based awards to employees, directors and consultants, of which a maximum
of 4,000,000 shares are eligible for non-option “full value”
awards. The 2004 Plan allows for time-based and performance-based
vesting for the awards. Options granted by the Company under the 2004
Plan generally expire seven years from the date of grant and generally vest over
a four-year period from the date of grant, with one-quarter of the shares of
common stock vesting on the one-year anniversary of the grant date and the
remaining shares vesting monthly for the 36 months thereafter. The
exercise price of the options granted by the Company under the 2004 Plan shall
not be less than 100% of the fair market value for a common share subject to
such option on the date the option is granted. Full value awards made
under the 2004 Plan shall become vested over a period of not less than three
years (or, if vesting is performance-based, over a period of not less than one
year) following the date such award is made; provided, however, that full value
awards that result in the issuance of an aggregate of up to 5% of common stock
available for issuance under the 2004 Plan may be granted to any one or more
participants without respect to such minimum vesting provisions. As
of September 27, 2009, 7,200,859 shares remain available for future grant under
the 2004 Plan.
Restricted
stock units available for grant by the Company under the 2004 Plan generally
vest over a 48-month period from the grant date. Prior to vesting,
participants holding restricted stock units do not have shareholder
rights. Shares are issued on or as soon as administratively
practicable following the vesting date of the restricted stock units and upon
issuance, recordation and delivery, the participant will have all the rights of
a shareholder of the Company with respect to voting such stock and receipt of
dividends and distributions on such stock. As of September 27, 2009,
1,876,638 restricted stock unit awards were outstanding under the 2004
Plan.
The
following table summarizes the Company’s stock option activities for the six
months ended September 27, 2009:
|
|
|
|
|
(in
thousands, except per share amounts)
|
Shares
|
|
Weighted
Average Exercise Price
|
|
Options
outstanding as of March 29, 2009
|
27,544
|
|
$
|
12.30
|
|
Granted
|
4,100
|
|
|
6.55
|
|
Exercised
|
(2)
|
|
|
1.57
|
|
Canceled,
forfeited or expired
|
(1,450)
|
|
|
13.33
|
|
Options
outstanding as of September 27, 2009
|
30,192
|
|
|
11.47
|
|
Options
exercisable at September 27, 2009
|
22,499
|
|
$
|
12.42
|
|
As of
September 27, 2009, the weighted average remaining contractual life of options
outstanding was 3.4 years and the aggregate intrinsic value was $6.0
million. The weighted average remaining contractual life of options
exercisable was 2.6 years and the aggregate intrinsic value was $0.2
million. Unrecognized compensation cost related to non-vested
stock-based awards, net of estimated forfeitures, was $10.0 million and will be
recognized over a weighted average period of 1.4 years.
As of
September 27, 2009, stock options vested and expected to vest totaled
approximately 28.9 million shares, with a weighted-average exercise price of
$11.64 per share and a weighted average remaining contractual life of 3.3
years. The aggregate intrinsic value was approximately $4.8
million.
|
|
Three
months ended
|
|
|
Six
months ended
|
|
(in
thousands)
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
Net
cash proceeds from options exercised
|
|
$ |
1 |
|
|
$ |
1,971 |
|
|
$ |
3 |
|
|
$ |
3,226 |
|
Total
intrinsic value of options exercised
|
|
$ |
2 |
|
|
$ |
589 |
|
|
$ |
6 |
|
|
$ |
734 |
|
Realized
excess tax benefits from options exercised (1)
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
(1)
Excess tax benefits from the exercise of stock options, if any, are presented in
the Company’s Condensed Consolidated Statement of Cash Flows as financing cash
flows rather than operating expenses.
The
following table summarizes the Company’s restricted stock unit activities for
the six months ended September 27, 2009:
|
|
Shares
(in
thousands)
|
|
|
Weighted
Average Grant Date Fair Value
|
|
RSU’s
outstanding as of March 29, 2009
|
|
|
1,238 |
|
|
$ |
12.09 |
|
Granted
|
|
|
1,010 |
|
|
|
5.23 |
|
Released
|
|
|
(292 |
) |
|
|
12.95 |
|
Forfeited
|
|
|
(79 |
) |
|
|
11.19 |
|
Outstanding
at September 27, 2009
|
|
|
1,877 |
|
|
$ |
8.30 |
|
As of
September 27, 2009, there was approximately $6.8 million of unrecognized
compensation cost related to restricted stock units granted under the Company’s
equity incentive plans. The unrecognized compensation cost is
expected to be recognized over a weighted average period of 1.9
years.
As of
September 27, 2009, restricted stock units vested and expected to vest totaled
approximately 1.5 million shares, with a weighted average remaining contractual
life of 1.7 years. The aggregate intrinsic value was approximately
$9.7 million.
2009 Employee Stock Purchase
Plan (2009 ESPP)
On June
18, 2009, the Board approved implementation of the 2009 ESPP and authorized the
reservation and issuance of up to 9,000,000 shares of the Company’s common stock
under the 2009 ESPP. On September 17, 2009, the Company’s stockholders approved
the 2009 ESPP at the 2009 Annual Meeting of Stockholders. The 2009
ESPP is intended to be implemented in successive quarterly purchase periods
commencing on the first day of each fiscal quarter of the Company. In
order to maintain its qualified status under Section 423 of the Internal Revenue
Code, the 2009 ESPP imposes certain restrictions, including the limitation that
no employee is permitted to participate in the 2009 ESPP if the rights of such
employee to purchase common stock of the Company under the 2009 ESPP and all
similar purchase plans of the Company or its subsidiaries would accrue at a rate
which exceeds $25,000 of the fair market value of such stock (determined at the
time the right is granted) for each calendar year. During the three
months ended September 27, 2009, the Company issued 0.4 million shares of
common stock with a weighted-average purchase price of $5.13 per share under the
2009 ESPP.
Note 6
Balance
Sheet Detail
(in
thousands)
Inventories
|
|
September
27,
2009
|
|
|
March
29,
2009
|
|
Raw
materials
|
|
$ |
5,329 |
|
|
$ |
6,876 |
|
Work-in-process
|
|
|
35,444 |
|
|
|
35,252 |
|
Finished
goods
|
|
|
23,861 |
|
|
|
27,594 |
|
Total
inventories
|
|
$ |
64,634 |
|
|
$ |
69,722 |
|
|
|
|
|
|
|
|
|
|
Other
long-term obligations
|
|
|
|
|
|
|
|
|
Deferred
compensation related liabilities
|
|
$ |
13,552 |
|
|
$ |
10,946 |
|
Long-term
portion of fair market value of the supply agreement with
Netlogic
|
|
|
1,814 |
|
|
|
-- |
|
Long-term
portion of deferred gain on equipment sales
|
|
|
232 |
|
|
|
940 |
|
Long-term
portion of restructuring liability
|
|
|
5,551 |
|
|
|
890 |
|
Long-term
portion of supplier obligations
|
|
|
4,413 |
|
|
|
1,384 |
|
Other
|
|
|
232 |
|
|
|
154 |
|
Total
other long-term obligations
|
|
$ |
25,794 |
|
|
$ |
14,314 |
|
|
|
|
|
|
|
|
|
|
Note
7
Deferred
Income on Shipments to Distributors
Included
in the caption “Deferred
income on shipments to distributors” on the Condensed Consolidated
Balance Sheets are amounts related to shipments to certain distributors for
which revenue is not recognized until the Company’s product has been sold by the
distributor to an end customer. The components at September
27, 2009 and March 29, 2009 were as follows:
(in
thousands)
|
|
September
27,
2009
|
|
|
March
29,
2009
|
|
Gross
deferred revenue
|
|
$ |
21,030 |
|
|
$ |
21,302 |
|
Gross
deferred costs
|
|
|
4,020 |
|
|
|
4,764 |
|
Deferred
income on shipments to distributors
|
|
$ |
17,010 |
|
|
$ |
16,538 |
|
The gross
deferred revenue represents the gross value of shipments to distributors at the
list price billed to the distributor less any price protection credits provided
to them in connection with reductions in list price while the products remain in
their inventory. The amount ultimately recognized as revenue will be
lower than this amount as a result of future price protection and ship from
stock pricing credits which are issued in connection with the sell through of
the Company’s products to end customers. Historically this amount has
represented an average of approximately 25% of the list price billed to the
customer. The gross deferred costs represent the standard costs, which
approximate actual costs of products, the Company sells to the
distributors. Although the Company monitors the levels and quality of
inventory in the distribution channel, the experience is that product returned
from these distributors are able to be sold to a different distributor or in a
different region of the world. As such, inventory write-downs for
product in the distribution channel have not been significant.
Note
8
Fair
Value Measurement
Effective
March 31, 2009, the Company adopted the authoritative guidance for fair value
measurement, which defines fair value as the price that would be received from
selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing assets or liabilities. When
determining the fair value measurements for assets and liabilities required or
permitted to be recorded at fair value, the Company considers the principal or
most advantageous market in which it would transact.
Fair Value
Hierarchy
The
authoritative guidance for fair value measurement establishes a fair value
hierarchy that requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The hierarchy
which prioritizes the inputs used to measure fair value from market based
assumptions to entity specific assumptions are as follows:
Level 1:
Inputs based on quoted market prices for identical assets or liabilities in
active markets at the measure date.
Level 2:
Observable inputs other than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets; quoted prices for
identical or similar assets and liabilities in markets that are not active; or
other inputs that are observable or can be corroborated by observable market
data.
Level 3:
Inputs reflect management’s best estimate of what market participants would use
in pricing the asset or liability at the measurement date. The inputs
are unobservable in the market and significant to the instrument’s
valuation.
The
following table summarizes the Company’s financial assets and liabilities
measured at fair value on a recurring basis as of September 27,
2009:
|
|
Fair
Value at Reporting Date Using:
|
|
(in
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Total
Balance
|
|
Cash
Equivalents and Short Term Investments:
|
|
|
|
|
|
|
|
|
|
US
government treasuries and agencies securities
|
|
$ |
109,252 |
|
|
$ |
-- |
|
|
$ |
109,252 |
|
Money
market funds
|
|
|
114,270 |
|
|
|
-- |
|
|
|
114,270 |
|
Bank
deposits
|
|
|
-- |
|
|
|
24,636 |
|
|
|
24,636 |
|
Corporate
bonds
|
|
|
-- |
|
|
|
68,304 |
|
|
|
68,304 |
|
Corporate
commercial paper
|
|
|
-- |
|
|
|
23,040 |
|
|
|
23,040 |
|
Other
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
related to non-qualified deferred compensation plan
|
|
|
-- |
|
|
|
11,999 |
|
|
|
11,999 |
|
Total
assets measured at fair value
|
|
$ |
223,522 |
|
|
$ |
127,979 |
|
|
$ |
351,501 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified
deferred compensation obligations
|
|
|
-- |
|
|
|
13,552 |
|
|
|
13,552 |
|
|
|
$ |
-- |
|
|
$ |
13,552 |
|
|
$ |
13,552 |
|
The
following table summarizes the Company’s financial assets and liabilities
measured at fair value on a recurring basis as of March 29, 2009:
|
|
Fair
Value at Reporting Date Using:
|
|
(in
thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Total
Balance
|
|
Cash
Equivalents and Short Term Investments:
|
|
|
|
|
|
|
|
|
|
US
government treasuries and agencies securities
|
|
$ |
108,935 |
|
|
$ |
-- |
|
|
$ |
108,935 |
|
Money
market funds
|
|
|
75,531 |
|
|
|
-- |
|
|
|
75,531 |
|
Bank
deposits
|
|
|
-- |
|
|
|
10,110 |
|
|
|
10,110 |
|
Corporate
bonds
|
|
|
-- |
|
|
|
47,436 |
|
|
|
47,436 |
|
Corporate
commercial paper
|
|
|
-- |
|
|
|
39,637 |
|
|
|
39,637 |
|
Municipal
bonds
|
|
|
-- |
|
|
|
1,056 |
|
|
|
1,056 |
|
Asset-backed
securities
|
|
|
-- |
|
|
|
146 |
|
|
|
146 |
|
Other
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
related to non-qualified deferred compensation plan
|
|
|
-- |
|
|
|
9,668 |
|
|
|
9,668 |
|
Total
assets measured at fair value
|
|
$ |
184,466 |
|
|
$ |
108,053 |
|
|
$ |
292,519 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified
deferred compensation obligations
|
|
|
-- |
|
|
|
10,946 |
|
|
|
10,946 |
|
Total
liabilities measured at fair value
|
|
$ |
-- |
|
|
$ |
10,946 |
|
|
$ |
10,946 |
|
The
Company’s cash equivalent, short term investment and derivative instruments are
classified within Level 1 or Level 2 of the fair value hierarchy because they
are valued using quoted market prices, broker or dealer quotation, spot rates or
alternative pricing sources with reasonable levels of price
transparency. The securities in Level 1 are highly liquid and
actively traded in exchange markets or over-the-counter markets. The securities
in Level 2 represent securities with quoted prices in markets that are not as
active or for which all significant inputs are observable.
The
Company maintains an unfunded deferred compensation plan to provide benefits to
executive officers and other key employees. Under the plan,
participants can defer any portion of their salary and bonus compensation into
the plan and may choose from a portfolio of funds from which earnings are
measured. Participant balances are always 100%
vested. The deferred compensation plan obligation is recorded
at fair value based on the quoted prices of the underlying mutual funds and
included in other long-term obligations on the Company’s Condensed Consolidated
Balance Sheets. Increases or decreases related to the obligations are recorded
in operating expenses. Additionally, the Company has set aside assets
in a separate trust that is invested in corporate owned life insurance intended
to substantially offset the liability under the plan. The Company has
identified both its assets and liability related to the plan within Level 2 in
the fair value hierarchy as these valuations are based on observable market data
obtained directly from the dealer or observable price quotes for similar assets
such as the underlying mutual fund pricing.
Cash
equivalents are highly liquid investments with original maturities of three
months or less at the time of purchase. The Company maintains its cash and cash
equivalents with reputable major financial institutions. Deposits
with these banks may exceed the Federal Deposit Insurance Corporation (“FDIC”)
insurance limits or similar limits in foreign jurisdictions. These deposits
typically may be redeemed upon demand and, therefore, bear minimal
risk. While the Company monitors daily the cash balances in its
operating accounts and adjusts the balances as appropriate, these balances could
be impacted if one or more of the financial institutions with which the Company
deposits fails or is subject to other adverse conditions in the financial
markets. As of September 27, 2009, the Company has not experienced
any losses in its operating accounts.
All of
the Company’s available-for-sale investments are subject to a periodic
impairment review. Investments are considered to be impaired when a decline in
fair value is judged to be other-than-temporary. This determination requires
significant judgment. For publicly traded investments, impairment is determined
based upon the specific facts and circumstances present at the time, including a
review of the closing price over the length of time, general market conditions
and the Company’s intent and ability to hold the investment for a period of time
sufficient to allow for recovery. Although the Company believes its portfolio
continues to be comprised of sound investments due to high credit ratings and
government guarantees of the underlying investments, a further decline in the
capital and financial markets would adversely impact the market values of its
investments and their liquidity. The Company continually monitors the credit
risk in its portfolio and future developments in the credit markets and makes
appropriate changes to its investment policy as deemed necessary. The
Company did not record any impairment charges related to its short-term
investments in the three and six months ended September 27,
2009.
Note 9
Investments
Available
for Sale Securities
Available-for-sale
investments at September 27, 2009 were as follows:
(in
thousands)
|
|
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Fair Value
|
|
Money
market funds |
|
$ |
114,270 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
114,270 |
|
U.S.
government agency securities |
|
|
109,008 |
|
|
|
244 |
|
|
|
-- |
|
|
|
109,252 |
|
Corporate
bonds |
|
|
67,999 |
|
|
|
338 |
|
|
|
(33 |
) |
|
|
68,304 |
|
Bank
deposits |
|
|
24,636 |
|
|
|
-- |
|
|
|
-- |
|
|
|
24,636 |
|
Corporate
commercial paper
|
|
|
23,040 |
|
|
|
-- |
|
|
|
-- |
|
|
|
23,040 |
|
Total
available-for-sale investments
|
|
|
338,953 |
|
|
|
582 |
|
|
|
(33 |
) |
|
|
339,502 |
|
Less
amounts classified as cash equivalents
|
|
|
(157,101 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(157,101 |
) |
Short-term
investments
|
|
$ |
181,852 |
|
|
$ |
582 |
|
|
$ |
(33 |
) |
|
$ |
182,401 |
|
Available-for-sale
investments at March 29, 2009 were as follows:
(in
thousands)
|
|
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized Losses
|
|
|
Estimated
Fair Value
|
|
U.S.
government treasuries and agency securities
|
|
$ |
108,528 |
|
|
$ |
445 |
|
|
$ |
(38 |
) |
|
$ |
108,935 |
|
Money
market funds
|
|
|
75,531 |
|
|
|
-- |
|
|
|
-- |
|
|
|
75,531 |
|
Corporate
bonds
|
|
|
47,452 |
|
|
|
102 |
|
|
|
(118 |
) |
|
|
47,436 |
|
Corporate
commercial paper
|
|
|
39,634 |
|
|
|
3 |
|
|
|
-- |
|
|
|
39,637 |
|
Bank
deposits
|
|
|
10,110 |
|
|
|
-- |
|
|
|
-- |
|
|
|
10,110 |
|
Municipal
bonds
|
|
|
1,027 |
|
|
|
29 |
|
|
|
-- |
|
|
|
1,056 |
|
Asset-backed
securities
|
|
|
145 |
|
|
|
1 |
|
|
|
-- |
|
|
|
146 |
|
Total
available-for-sale investments
|
|
|
282,427 |
|
|
|
580 |
|
|
|
(156 |
) |
|
|
282,851 |
|
Less
amounts classified as cash equivalents
|
|
|
(122,818 |
) |
|
|
(1 |
) |
|
|
5 |
|
|
|
(122,814 |
) |
Short-term
investments
|
|
$ |
159,609 |
|
|
$ |
579 |
|
|
$ |
(151 |
) |
|
$ |
160,037 |
|
The cost
and estimated fair value of available-for-sale debt securities at September 27,
2009, by contractual maturity, were as follows:
(in
thousands)
|
|
Cost
|
|
|
Estimated
Fair Value
|
|
Due
in 1 year or less
|
|
$ |
308,845 |
|
|
$ |
309,128 |
|
Due
in 1-2 years
|
|
|
26,090 |
|
|
|
26,351 |
|
Due
in 2-5 years
|
|
|
4,018 |
|
|
|
4,023 |
|
Total
investments in available-for-sale debt securities
|
|
$ |
338,953 |
|
|
$ |
339,502 |
|
The
following table shows the gross unrealized losses and fair value of the
Company’s investments with unrealized losses as of September 27, 2009,
aggregated by length of time that individual securities have been in a
continuous loss position.
|
|
Less
than 12 months
|
|
|
12
months or Greater
|
|
|
Total
|
|
(in
thousands)
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
Corporate
bonds
|
|
$ |
22,174 |
|
|
$ |
(33 |
) |
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
22,174 |
|
|
$ |
(33 |
) |
Corporate
commercial paper
|
|
|
2,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
2,000 |
|
|
|
-- |
|
Total
|
|
$ |
24,174 |
|
|
$ |
(33 |
) |
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
24,174 |
|
|
$ |
(33 |
) |
The
following table shows the gross unrealized losses and fair value of the
Company’s investments with unrealized losses as of March 29, 2009, aggregated by
length of time that individual securities have been in a continuous loss
position.
|
|
Less
than 12 months
|
|
|
12
months or Greater
|
|
|
Total
|
|
(in
thousands)
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
Corporate
bonds
|
|
$ |
28,629 |
|
|
$ |
(105 |
) |
|
$ |
795 |
|
|
$ |
(13 |
) |
|
$ |
29,424 |
|
|
$ |
(118 |
) |
U.S.
government agency securities
|
|
|
19,212 |
|
|
|
(38 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
19,212 |
|
|
|
(38 |
) |
Total
|
|
$ |
47,841 |
|
|
$ |
(143 |
) |
|
$ |
795 |
|
|
$ |
(13 |
) |
|
$ |
48,636 |
|
|
$ |
(156 |
) |
Currently,
a significant portion of our available-for-sale investments that the Company
holds are all high grade instruments. As of September 27, 2009, the
unrealized losses on our available-for-sale investments represented an
insignificant amount in relation to our total available-for-sale portfolio.
Substantially all of our unrealized losses on our available-for-sale marketable
debt instruments can be attributed to fair value fluctuations in an unstable
credit environment that resulted in a decrease in the market liquidity for debt
instruments. Because the Company has the ability to hold these
investments until a recovery of fair value, which may be maturity, the Company
did not consider these investments to be other-than-temporarily impaired at
September 27, 2009 and March 29, 2009.
Trading
Securities
Trading
securities are stated at fair value, with gains or losses resulting from changes
in fair value recognized currently in non-operating earnings. As of September
27, 2009 and March 29, 2009, the deferred compensation plan assets were
approximately $12.0 million and $9.7 million, which were included in other
assets in the Condensed Consolidated Balance Sheets. The Company recorded net
gains of $1.8 million during the first six months of fiscal 2010 and net loss of
$0.9 million during the first six months of fiscal 2009 in interest income and
other, net in the Condensed Consolidated Statement of Operations.
Non-Marketable
Equity Securities
In
conjunction with the merger with Integrated Circuit Systems, Inc. (ICS), the
Company acquired an investment in Best Elite International Limited (“Best
Elite”). Best Elite is a private company, which owns a wafer fabrication
facility in Suzhou, China. The Company purchases wafers from Best
Elite’s wafer fabrication facility for certain legacy ICS
products. In accordance with authoritative guidance for the equity
method of accounting for investment in common stock, the Company accounts for
this investment under cost method. This investment is subject to periodic
impairment review. In determining whether a decline in value of its
investment in Best Elite has occurred and is other than temporary, an assessment
was made by considering available evidence, including the general market
conditions in the wafer fabrication industry, Best Elite’s financial condition,
near-term prospects, market comparables and subsequent rounds of
financing. The valuation also takes into account the Best
Elite’s capital structure, liquidation preferences for its capital and other
economic variables. The valuation methodology for determining
the
decline
in value of non-marketable equity securities is based on inputs that require
management judgment. The carrying value of the
Company’s investment in Best Elite was approximately $2.0 million and is
classified within other assets on the Company’s Condensed Consolidated Balance
Sheets as of September 27, 2009 and March 29, 2009.
Note 10
Derivative
Financial Instruments
As a
result of its international operations, sales and purchase transactions, the
Company is subject to risks associated with fluctuating currency exchange rates.
The Company may use derivative financial instruments to hedge these risks when
instruments are available and cost effective in an attempt to minimize the
impact of currency exchange rate movements on its operating results and on the
cost of capital equipment purchases. The Company may enter into
hedges of forecasted transactions when the underlying transaction is highly
probable and reasonably certain to occur within the subsequent twelve months.
Examples of these exposures would include forecasted expenses of a foreign
manufacturing plant, design center or sales office. The Company may additionally
enter into a derivative to hedge the foreign currency risk of a capital
equipment purchase if the capital equipment purchase order is executed and
designated as a firm commitment.
The
Company may also utilize currency forward contracts to hedge currency exchange
rate fluctuations related to certain short term foreign currency assets and
liabilities. As of September 27, 2009 and March 29, 2009, the Company did not
have any outstanding foreign currency contracts that were designated as hedges
of forecasted cash flows or capital equipment purchases. The Company
does not enter into derivative financial instruments for speculative or trading
purposes.
Gains and
losses on these undesignated derivatives substantially offset gains and losses
on the assets and liabilities being hedged and the net amount is included in
interest income and other, net in the Condensed Consolidated Statements of
Operations. The Company did not have any outstanding foreign currency contracts
that were designated as hedges of certain short term foreign currency assets and
liabilities at the end of the second quarter of fiscal 2009. An
immaterial amount of net gains and losses were included in interest income and
other, net during the first six months of fiscal 2010 and 2009.
Besides
foreign exchange rate exposure, the Company’s cash and investment portfolios are
subject to risks associated with fluctuations in interest
rates. While the Company’s policies allow for the use of derivative
financial instruments to hedge the fair values of such investments, the Company
has yet to enter into this type of hedging arrangement.
Note
11
Business
Combinations
Acquisition
of Tundra Semiconductor Corporation (“Tundra”)
On June
29, 2009, the Company completed its acquisition of Tundra, pursuant to which the
Company acquired 100% of the voting common stock of Tundra at a price of
CDN$6.25 per share, or an aggregate purchase price of approximately CDN$120.8
million. The Company paid approximately $104.3 million in
cash. In addition, as part of the consideration in the
acquisition, the Company assumed options to purchase up to 0.8 million
shares of IDT common stock with a fair value of $0.7 million. The
total consideration was approximately $105.0 million. The options
were valued using the Black-Scholes option pricing model. Approximately
$3.4 million of acquisition-related costs were included in the selling,
general and administrative expenses on the Condensed Consolidated Statement of
Operations for the three months ended September 27, 2009.
(in
thousands)
|
|
|
|
Cash
paid
|
|
$ |
104,316 |
|
Assumed
stock options
|
|
|
721 |
|
Total
purchase price
|
|
$ |
105,037 |
|
In
accordance with authoritative guidance for business combinations, the Company
has allocated the purchase price to the tangible and intangible assets acquired
and liabilities assumed, based on their estimated fair values. The excess
purchase price over those fair values is recorded as goodwill. Tundra’s
technology and development capabilities are complementary to the Company’s
existing product portfolios for RapidIO and PCI Express. The Company
expects that this strategic combination will provide customers with a broader
product offering as well as improved service, support and a future roadmap for
serial connectivity. These are significant contributing factors
to the establishment of the purchase price, resulting in the recognition of
goodwill. The fair values assigned to tangible and intangible assets
acquired and liabilities assumed are based on management’s estimates and
assumptions, including third-party valuations that utilize established valuation
techniques appropriate for the high-technology industry. Goodwill is
not expected to be deductible for tax purposes. Goodwill is not amortized but
will be reviewed at least annually for impairment. Purchased intangibles with
finite lives are amortized over their respective estimated useful lives on a
straight line basis.
The
purchase price has been allocated as follows:
(in
thousands)
|
|
Fair
Value
|
|
Identifiable
tangible assets acquired
|
|
|
|
Cash
and cash equivalents
|
|
$ |
46,085 |
|
Accounts
receivable
|
|
|
1,260 |
|
Inventories
|
|
|
19,881 |
|
Prepayments
and other current assets
|
|
|
6,119 |
|
Property,
plant and equipment, net
|
|
|
7,692 |
|
Other
assets
|
|
|
4,025 |
|
Accounts
payable and accruals
|
|
|
(11,918 |
) |
Other
long-term obligations
|
|
|
(3,549 |
) |
Net
identifiable tangible assets acquired
|
|
|
69,595 |
|
Amortizable
intangible assets
|
|
|
19,979 |
|
Goodwill
|
|
|
15,463 |
|
Total
purchase price
|
|
$ |
105,037 |
|
A summary
of the allocation of amortizable intangible assets is as follows:
|
|
Fair
Value
(in
thousands)
|
|
Amortizable
intangible assets:
|
|
|
|
Existing
technologies
|
|
$ |
8,476 |
|
Customer
relationships
|
|
|
7,973 |
|
Trade
name
|
|
|
2,911 |
|
In-process
research and development (IPR&D)
|
|
|
619 |
|
Total
|
|
$ |
19,979 |
|
Useful
lives are primarily based on the underlying assumptions used in the discounted
cash flow (“DCF”) models.
Identifiable
Tangible Assets
Tundra’s
assets and liabilities were reviewed and adjusted, if required, to their
estimated fair value.
Inventories – The value
allocated to inventories reflects the estimated fair value of the acquired
inventory based on the expected sales price of the inventory, less reasonable
selling margin.
Property, plant and equipment
– The fair value was determined under the continued use premise as the assets
were valued as part of a going concern. This premise assumes that the
assets will remain “as-is, where is” and continue to be used at their present
location for the continuation of business operations. Value in use
includes all direct and indirect costs necessary to acquire, install, fabricated
and make the assets operational. The fair value was estimated using a
cost approach methodology.
Amortizable Intangible
Assets
Existing
technology consists of products that have reached technological feasibility. The
Company valued the existing technology utilizing a DCF model, which uses
forecasts of future revenues and expenses related to the intangible
asset. The Company utilized discount factors of 20% - 22% for the
existing technology and is amortizing the intangible assets over 5 years on a
straight-line basis.
Customer
relationship values have been estimated utilizing a DCF model, which uses
forecasts of future revenues and expenses related to the intangible
asset. The Company utilized discount factors of 20%-22% for the
customer relationship and is amortizing the intangible assets over 5 years on a
straight-line basis.
The
Tundra trade name value was determined using the relief from royalty method,
which represents the benefit of owning this intangible asset rather than paying
royalties for its use. The Company utilized a discount rate of 20%
for the trade name and is amortizing this intangible asset over 7 years on a
straight-line basis.
Projects
that qualify as IPR&D represent those at the development stage and require
further research and development to determine technical feasibility and
commercial viability. Technological feasibility is established when an
enterprise has completed all planning, designing, coding, and testing activities
that are necessary to establish that a product can be produced to meet its
design specifications, including functions, features, and technical performance
requirements. The value of IPR&D was determined by considering the
importance of each project to the Company’s overall development plan, estimating
costs to develop the purchased IPR&D into commercially viable products,
estimating the resulting net cash flows from the projects when completed and
discounting the net cash flows to their present value based on the percentage of
completion of the IPR&D projects. The Company utilized the DCF method to
value the IPR&D, using a discount factor of 22-24%% and will amortize this
intangible asset once the projects are complete. The IPR&D projects underway
at Tundra at the acquisition date were two projects. As of September 27, 2009,
the projects were 85% and 95% complete and approximately $3.4 million and $0.3
million costs were incurred. The Company estimates that an additional investment
of approximately $1.0 million will be required to complete the projects
with an estimated completion date by the third quarter of fiscal
2010.
Pro
Forma Financial Information (unaudited)
The
following unaudited pro forma financial information presents the combined
results of operations of the Company and Tundra as if the acquisition had
occurred as of the beginning of fiscal 2010. The unaudited pro forma financial
information is presented for informational purposes only and is not indicative
of the results of operations that would have been achieved if the acquisition
had been taken place at the beginning of fiscal 2010. The unaudited
pro forma financial information presented below combines the historical IDT and
historical Tundra results for the six months ended September 27, 2009 and
September 28, 2008, respectively, and includes the business combination effect
of the amortization charges from acquired
intangible
assets, the amortization of fair market value (FMV) inventory write-up,
adjustments to interest income and related tax effects.
|
|
Six
months ended
|
|
(Unaudited)
(in
thousands, except per share amounts)
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
Actual
included in the second quarter of fiscal 2010
|
|
|
|
|
|
|
Tundra’s
net revenues (6/29/09 through 9/27/09)
|
|
$ |
9,230 |
|
|
$ |
-- |
|
Tundra’s
net income (6/29/09 through 9/27/09)
|
|
|
(708
|
) |
|
|
-- |
|
Supplement
pro forma
|
|
|
|
|
|
|
|
|
Net
revenues (1)
|
|
|
265,698 |
|
|
|
424,079 |
|
Net
income (1)
|
|
|
35,784 |
|
|
|
14,890 |
|
Basic
income per share
|
|
$ |
0.21 |
|
|
$ |
0.09 |
|
Diluted
income per share
|
|
$ |
0.22 |
|
|
$ |
0.09 |
|
(1)
Supplement pro forma information includes Tundra’s financial results for the
periods March 30, 2009 through June 28, 2009 and March 24, 2008 through
September 28, 2008, respectively.
Acquisition
of certain assets of Leadis Technology, Inc. (“Leadis”)
On June
10, 2009, the Company completed its acquisition of certain sensor technology and
related assets from Leadis, along with members of Leadis’ engineering team. The
total purchase price of approximately $6.3 million was paid in cash.
Approximately $ 0.2 million of acquisition-related costs was included in
the selling, general and administrative expenses on the Condensed Consolidated
Statement of operations for the six months ended September 27,
2009.
In
accordance with authoritative guidance for the business combinations, the
Company has allocated the purchase price to the tangible and intangible assets
acquired and liabilities assumed, based on their estimated fair values. The
excess purchase price over those fair values is recorded as goodwill. The
acquisition provided the Company with a touch sensor technology, team of
engineers, certain assets and a product line involving touch sensor technology.
The Company believes these technologies will allow it to address a broader range
of multimedia applications with highly integrated processing, interfacing and
connectivity solutions. This transaction is intended to enable the Company to
provide OEMs and ODMs with lower power, higher functionality
Application-Specific Standard Products (ASSPs) that will enable them to provide
consumers with a richer, more complete digital media experience. These
opportunities, along with the ability to sell touch sensor products to the
existing base of the Company’s customers, were significant contributing factors
to the establishment of the purchase price. The fair values assigned to tangible
and intangible assets acquired and liabilities assumed are based on management
estimates and assumptions, including third-party valuations that utilize
established valuation techniques appropriate for the high-technology industry.
The goodwill as a result of this acquisition is expected to be deductible for
tax purposes over 15 years. Goodwill is not amortized but will be reviewed at
least annually for impairment. Purchased intangibles with finite lives are being
amortized over their respective estimated useful lives on a straight line
basis.
The
purchase price has been allocated as follows:
(in
thousands)
|
|
Fair
Value
|
|
Net
tangible assets acquired
|
|
$ |
151 |
|
Amortizable
intangible assets
|
|
|
6,040 |
|
Goodwill
|
|
|
59 |
|
Total
purchase price
|
|
$ |
6,250 |
|
A summary
of the allocation of amortizable intangible assets is as follows:
(in
thousands)
|
|
Fair
Value
|
|
Amortizable
intangible assets:
|
|
|
|
Existing
Technologies
|
|
$ |
4,670 |
|
Customer
Relationships
|
|
|
1,092 |
|
IPR&D
|
|
|
278 |
|
Total
|
|
$ |
6,040 |
|
Useful
lives are primarily based on the underlying assumptions used in the DCF
models.
Net
Tangible Assets
Assets
were reviewed and adjusted, if required, to their estimated fair
value.
Amortizable
Intangible Assets
Existing
technologies consists of products that have reached technological feasibility.
The Company valued the existing technologies utilizing a DCF model, which used
forecasts of future revenues and expenses related to the intangible assets. The
Company utilized discount factors of 42% and 44% for existing technologies and
is amortizing the intangible assets on a straight-line basis over 7
years.
The value
of the customer relationships intangible asset was estimated using a DCF model,
which used forecasts of future revenues and expenses related to the intangible
assets. The Company utilized discount factors of 42% - 45% and is amortizing
this intangible asset on a straight-line basis over 5 years.
Projects
that qualify as IPR&D represent those at the development stage and require
further research and development to determine technical feasibility and
commercial viability. Technological feasibility is established when an
enterprise has completed all planning, designing, coding, and testing activities
that are necessary to establish that a product can be produced to meet its
design specifications, including functions, features, and technical performance
requirements. The value of IPR&D was determined by considering the
importance of each project to the Company’s overall development plan, estimating
costs to develop the purchased IPR&D into commercially viable products,
estimating the resulting net cash flows from the projects when completed and
discounting the net cash flows to their present value based on the percentage of
completion of the IPR&D projects. The Company utilized the DCF method to
value the IPR&D, using discount factors of 45% and 46% and will amortize
this intangible asset once the projects are complete. Currently, the Company
expects to complete these projects within the next twelve months.
Leadis
acquisition related financial results have been included in the Company’s
Condensed Consolidated Statement of Operations from the closing date of the
acquisition on June 28, 2009. Pro forma earnings information has not been
presented because the effect of the acquisition is not material to the Company’s
historical financials results.
Acquisition
of certain assets of Silicon Optix
On
October 20, 2008, the Company completed its acquisition of certain video signal
processing technology and related assets along with members of the Silicon
Optix’s engineering teams. The total purchase price was approximately $20.1
million, including approximately $0.7 million of acquisition-related transaction
costs. A summary of the total purchase price is as
follows:
(in
thousands)
|
|
|
|
Cash
paid
|
|
$ |
19,406 |
|
Acquisition-related
transaction costs
|
|
|
691 |
|
Total
purchase price
|
|
$ |
20,097 |
|
In
accordance with authoritative guidance for the business combinations, the
Company has allocated the purchase price to the tangible and intangible assets
acquired and liabilities assumed, including in-process research and development,
based on their estimated fair values. The excess purchase price over those fair
values is recorded as goodwill. The acquisition provided the Company with a
video signal processing technology, team of engineers, certain assets and a
product line involving video technologies. The Company believes these
technologies will allow it to pursue expanded opportunities, particularly in the
emerging high-definition video market. These opportunities, along with the
ability to sell video products to the existing base of IDT customers, were
significant contributing factors to the establishment of the purchase price. The
fair values assigned to tangible and intangible assets acquired and liabilities
assumed are based on management estimates and assumptions, including third-party
valuations that utilize established valuation techniques appropriate for the
high-technology industry. As of September 27, 2009, approximately $0.9 million
of the total goodwill is expected to be deductible for tax purposes over 15
years. Goodwill is not amortized but will be reviewed at least annually for
impairment. Purchased intangibles with finite lives are being amortized over
their respective estimated useful lives on a straight line basis. The purchase
price has been allocated as follows:
(in
thousands)
|
|
Fair
Value
|
|
Net
tangible assets acquired
|
|
$ |
537 |
|
Amortizable
intangible assets
|
|
|
4,746 |
|
IPR&D
|
|
|
5,597 |
|
Goodwill
|
|
|
9,217 |
|
Total
purchase price
|
|
$ |
20,097 |
|
A summary
of the allocation of amortizable intangible assets is as follows:
(in
thousands)
|
|
Fair
Value
|
|
Amortizable
intangible assets:
|
|
|
|
Existing
Technologies
|
|
$ |
3,654 |
|
Customer
Relationships
|
|
|
582 |
|
Trade
Name
|
|
|
510 |
|
Total
|
|
$ |
4,746 |
|
Useful
lives are primarily based on the underlying assumptions used in the DCF
models.
Net
Tangible Assets
Assets
were reviewed and adjusted, if required, to their estimated fair
value.
Amortizable
Intangible Assets
Existing
technologies consists of products that have reached technological feasibility.
The Company valued the existing technologies utilizing a DCF model, which used
forecasts of future revenues and expenses related to the intangible assets. The
Company utilized discount factors of 24% and 32% for existing technologies and
is amortizing the intangible assets on a straight-line basis over 3 to 7
years.
The value
of the customer relationships intangible asset was estimated using a DCF model,
which used forecasts of future revenues and expenses related to the intangible
assets. The Company utilized a discount factor of 24% and is amortizing this
intangible asset on a straight-line basis over 3 years.
The
Silicon Optix’s trade names were valued using the relief from royalty method,
which represents the benefit of owning this intangible asset rather than paying
royalties for its use. The Company utilized a discount factor of 27% and is
amortizing this intangible asset on a straight-line basis over 7
years.
IPR&D
Of the
total purchase price, $5.6 million was allocated to IPR&D. Projects that
qualify as IPR&D represent those that have not yet reached technological
feasibility and which have no alternative future use. Technological feasibility
is established when an enterprise has completed all planning, designing, coding,
and testing activities that are necessary to establish that a product can be
produced to meet its design specifications, including functions, features, and
technical performance requirements. The value of IPR&D was determined by
considering the importance of each project to the Company’s overall development
plan, estimating costs to develop the purchased IPR&D into commercially
viable products, estimating the resulting net cash flows from the projects when
completed and discounting the net cash flows to their present value based on the
percentage of completion of the IPR&D projects. The Company utilized the DCF
method to value the IPR&D, using a discount factor of 32%.
Note
12
Divestiture
On July
17, 2009, the Company completed the sale of certain assets related to its
network search engine business (the "NWD assets") to NetLogic Microsystems,
Inc ("Netlogic"), pursuant to an Asset Purchase Agreement by and between the
Company and NetLogic dated April 30, 2009. Upon closing of the transaction,
NetLogic paid the Company $100 million in cash consideration, which included
inventory valued at approximately $10 million, subject to
adjustment. As of September 27, 2009, the inventory the Company sold
to Netlogic was valued at $8.2 million and the excess cash for the inventory in
the amount of $1.8 million was recorded as a payable to Netlogic. The
Company’s NWD assets are part of the Communications reportable segment. In
connection with the divestiture, the Company entered into a supply agreement
with NetLogic whereby they agreed to buy and the Company agreed to sell Netlogic
certain network search engine products for a limited time following the closing
of the sale. According to the terms set forth in the agreement, the
Company has committed to supply certain products either at its standard costs or
below its normal gross margins for such products, which are lower than their
estimated fair values. As a result, the Company recorded $3.0 million related to
the estimated fair value of this agreement, of which $0.2 million was recognized
as revenue in the second of quarter of fiscal 2010. The Company expects to
complete sales under this agreement within 2 years. In the second
quarter of fiscal 2010, the Company recorded a gain of $82.7 million. The
following table summarizes the components of the gain:
(in
thousands)
|
|
|
|
Cash
proceeds from sale
|
|
$ |
98,183 |
|
Assets
sold to Netlogic
|
|
|
|
|
Net
inventory sold to Netlogic
|
|
|
(7,593
|
) |
Fixed
assets and license transferred to Netlogic
|
|
|
(583
|
) |
Goodwill
write off
|
|
|
(3,701
|
) |
Transaction
and other costs
|
|
|
(579
|
) |
Fair
market value of the supply agreement with Netlogic
|
|
|
(2,980
|
) |
Gain
on divestiture of the NWD assets
|
|
$ |
82,747 |
|
Note
13
Goodwill
and Other Intangible Assets
The
changes in the carrying amounts of goodwill by segment for the three and six
months ended September 27, 2009 were as follows:
(in
thousands)
|
|
Communications
|
|
|
Computing
and Consumer
|
|
|
Total
|
|
Balance
as of March 29, 2009
|
|
$ |
63,204 |
|
|
$ |
26,200 |
|
|
$ |
89,404 |
|
Additions
(1)
|
|
|
-- |
|
|
|
59 |
|
|
|
59 |
|
Balance
as of June 29, 2009
|
|
|
63,204 |
|
|
|
26,259 |
|
|
|
89,463 |
|
Additions
(2)
|
|
|
13,321 |
|
|
|
2,142 |
|
|
|
15,463 |
|
Adjustments
(3)
|
|
|
(3,701
|
) |
|
|
-- |
|
|
|
(3,701
|
) |
Balance
as of September 27, 2009
|
|
$ |
72,824 |
|
|
$ |
28,401 |
|
|
$ |
101,225 |
|
(1)
|
Additions
were from the Leadis acquisition.
|
(2)
|
Additions
were from the Tundra acquisition.
|
(3)
|
Adjustments
to goodwill primarily represented the write off the goodwill associated
with the divestiture of NWD assets. See Note 12 —
“Divestiture” for further
discussion.
|
Identified
intangible asset balances are summarized as follows:
|
|
September
27, 2009
|
|
|
|
|
|
(in
thousands)
|
|
Gross
assets
|
|
|
Accumulated
amortization
|
|
|
Net
assets
|
|
Identified
intangible assets:
|
|
|
|
|
|
|
|
|
|
Existing
technology
|
|
$ |
249,569 |
|
|
$ |
(206,313 |
) |
|
$ |
43,256 |
|
Trademarks
|
|
|
12,271 |
|
|
|
(9,018
|
) |
|
|
3,253 |
|
Customer
relationships
|
|
|
147,382 |
|
|
|
(129,590
|
) |
|
|
17,792 |
|
Foundry
& Assembler relationships
|
|
|
64,380 |
|
|
|
(64,377
|
) |
|
|
3 |
|
Non-compete
agreements
|
|
|
52,958 |
|
|
|
(52,958
|
) |
|
|
-- |
|
IPR&D
|
|
|
897 |
|
|
|
-- |
|
|
|
897 |
|
Other
|
|
|
31,053 |
|
|
|
(31,053
|
) |
|
|
-- |
|
Total
identified intangible assets
|
|
$ |
558,510 |
|
|
$ |
(493,309 |
) |
|
$ |
65,201 |
|
|
|
March
29, 2009
|
|
|
|
|
|
(in
thousands)
|
|
Gross
assets
|
|
|
Accumulated
amortization
|
|
|
Net
assets
|
|
Identified
intangible assets:
|
|
|
|
|
|
|
|
|
|
Existing
technology
|
|
$ |
236,423 |
|
|
$ |
(198,133 |
) |
|
$ |
38,290 |
|
Trademarks
|
|
|
9,360 |
|
|
|
(8,878
|
) |
|
|
482 |
|
Customer
relationships
|
|
|
138,317 |
|
|
|
(126,586
|
) |
|
|
11,731 |
|
Foundry
& assembler relationships
|
|
|
64,380 |
|
|
|
(64,374
|
) |
|
|
6 |
|
Non-compete
agreements
|
|
|
52,958 |
|
|
|
(52,958
|
) |
|
|
-- |
|
Other
|
|
|
31,053 |
|
|
|
(31,053
|
) |
|
|
-- |
|
Total
identified intangible assets
|
|
$ |
532,491 |
|
|
$ |
(481,982 |
) |
|
$ |
50,509 |
|
Amortization
expense for identified intangibles is summarized below:
|
|
Three
months ended
|
|
|
Six
months ended
|
|
(in
thousands)
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
Existing
technology
|
|
$ |
4,262 |
|
|
$ |
13,998 |
|
|
$ |
8,180 |
|
|
$ |
28,093 |
|
Trademarks
|
|
|
122 |
|
|
|
303 |
|
|
|
140 |
|
|
|
605 |
|
Customer
relationships
|
|
|
1,723 |
|
|
|
5,820 |
|
|
|
3,004 |
|
|
|
11,730 |
|
Foundry
& assembler relationships
|
|
|
1 |
|
|
|
351 |
|
|
|
3 |
|
|
|
702 |
|
Non-compete
agreements
|
|
|
-- |
|
|
|
67 |
|
|
|
-- |
|
|
|
201 |
|
Other
|
|
|
-- |
|
|
|
53 |
|
|
|
-- |
|
|
|
120 |
|
Total
|
|
$ |
6,108 |
|
|
$ |
20,592 |
|
|
$ |
11,327 |
|
|
$ |
41,451 |
|
Based on
the identified intangible assets recorded at September 27, 2009, the future
amortization expense of identified intangibles for the next five fiscal years is
as follows (in
thousands):
Fiscal
year
|
|
Amount
|
|
Remainder
of FY 2010
|
|
$ |
9,864 |
|
2011
|
|
|
18,546 |
|
2012
|
|
|
14,145 |
|
2013
|
|
|
9,154 |
|
2014
|
|
|
6,592 |
|
Thereafter
|
|
|
6,003 |
|
Total
|
|
$ |
64,304 |
|
Comprehensive
Income
The
components of comprehensive income were as follows:
|
|
Three
months ended
|
|
|
Six
months ended
|
|
(in
thousands)
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
Net
income
|
|
$ |
60,540 |
|
|
$ |
11,675 |
|
|
$ |
46,419 |
|
|
$ |
20,829 |
|
Currency
translation adjustments
|
|
|
300 |
|
|
|
(762
|
) |
|
|
987 |
|
|
|
(731
|
) |
Change
in net unrealized gain (loss) on investment
|
|
|
(2
|
) |
|
|
(330
|
) |
|
|
125 |
|
|
|
(629
|
) |
Comprehensive
income
|
|
$ |
60,838 |
|
|
$ |
10,583 |
|
|
$ |
47,531 |
|
|
$ |
19,469 |
|
The
components of accumulated other comprehensive income were as
follows:
|
|
|
(in
thousands)
|
September
27,
2009
|
|
March
29,
2009
|
|
Cumulative
translation adjustments
|
|
$ |
1,433 |
|
|
$ |
446 |
|
Unrealized
gain on available-for-sale investments
|
|
|
549 |
|
|
|
424 |
|
Total
accumulated other comprehensive income
|
|
$ |
1,982 |
|
|
$ |
870 |
|
Note 15
Industry
Segments
In the
first quarter of fiscal 2010, as part of a refinement of its business strategy,
the Company incorporated multi-port products from the Communications segment
into the Computing and Consumer segment. This change
in segment reporting had no impact on the Company’s consolidated balance sheets,
statements of operations, statements of cash flows or statements of
stockholders’ equity for any periods. The segment information for three month
and six months ended September 28, 2008 has been adjusted retrospectively to
conform to the current period presentation.
The
Company’s Chief Executive Officer has been identified as the Chief Operating
Decision Maker.
The
Company’s reportable segments include the following:
·
|
Communications
segment: includes Rapid I/O switching solutions, flow-control management
devices, FIFOs, integrated communications processors, high-speed SRAM,
military application, digital logic, telecommunications and network search
engines (divested in the second quarter of fiscal
2010).
|
·
|
Computing
and Consumer segment: includes clock generation and distribution products,
PCI Express switching and bridging solutions, high-performance server
memory interfaces, multi-port products, PC audio and video
products.
|
The
tables below provide information about these segments:
Revenues
by segment
|
|
Three
months ended |
|
|
Six
months ended |
|
(in
thousands)
|
|
Sept.
27,
2009
|
|
Sept.
28,
2008
|
|
|
Sept.
27,
2009
|
|
Sept.
28,
2008
|
|
Communications
|
|
$ |
60,314 |
|
|
$ |
86,239 |
|
|
$ |
117,974 |
|
|
$ |
172,900 |
|
Computing
and Consumer
|
|
|
79,190 |
|
|
|
114,302 |
|
|
|
137,484 |
|
|
|
215,849 |
|
Total
consolidated revenues
|
|
$ |
139,504 |
|
|
$ |
200,541 |
|
|
$ |
255,458 |
|
|
$ |
388,749 |
|
Income
(loss) by segment
|
|
Three
months ended
|
|
|
Six
months ended
|
|
(in
thousands)
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
Communications
|
|
$ |
18,627 |
|
|
$ |
33,045 |
|
|
$ |
36,573 |
|
|
$ |
63,184 |
|
Computing
and Consumer
|
|
|
(6,130
|
) |
|
|
9,335 |
|
|
|
(21,199
|
) |
|
|
17,003 |
|
Amortization
of intangible assets
|
|
|
(6,108
|
) |
|
|
(20,592
|
) |
|
|
(11,327
|
) |
|
|
(41,451
|
) |
Acquisition
related costs and other
|
|
|
(353
|
) |
|
|
3 |
|
|
|
(3,946
|
) |
|
|
6 |
|
Gain
on divestiture of the NWD assets
|
|
|
82,747 |
|
|
|
-- |
|
|
|
82,747 |
|
|
|
-- |
|
Inventory
FMV amortization
|
|
|
(7,634
|
) |
|
|
-- |
|
|
|
(7,634
|
) |
|
|
-- |
|
Restructuring
and related costs
|
|
|
(14,023
|
) |
|
|
(471
|
) |
|
|
(15,499
|
) |
|
|
(1,305
|
) |
Facility
closure costs
|
|
|
(13
|
) |
|
|
(19
|
) |
|
|
(36
|
) |
|
|
(96
|
) |
Fabrication
product transfer costs
|
|
|
(322
|
) |
|
|
-- |
|
|
|
(322
|
) |
|
|
-- |
|
Net
impact of deferred compensation plan
|
|
|
(1
|
) |
|
|
40 |
|
|
|
(14
|
) |
|
|
26 |
|
Note
receivable net of deferred gain write off
|
|
|
-- |
|
|
|
-- |
|
|
|
(2,002
|
) |
|
|
-- |
|
Stock-based
compensation expense
|
|
|
(3,918
|
) |
|
|
(8,642
|
) |
|
|
(8,178
|
) |
|
|
(16,771
|
) |
Interest
income and other
|
|
|
88 |
|
|
|
1,095 |
|
|
|
637 |
|
|
|
2,538 |
|
Interest
expense
|
|
|
(11
|
) |
|
|
(15
|
) |
|
|
(30
|
) |
|
|
(33
|
) |
Income
before income taxes
|
|
$ |
62,949 |
|
|
$ |
13,779 |
|
|
$ |
49,770 |
|
|
$ |
23,101 |
|
The
Company does not allocate amortization of intangible assets, restructuring
and related costs, gain on divestiture, acquisition-related costs, stock-based
compensation expense, interest income and other, and interest expense to its
segments. In addition, the Company does not allocate assets to its
segments. The Company excludes these items consistent with the manner in which
it internally evaluates its results of operations.
Note
16
Commitments
and Guarantees
Guarantees
As of
September 27, 2009, the Company’s financial guarantees consisted of guarantees
and standby letters of credit, which are primarily related to the Company’s
electrical utilities in Malaysia, utilization of non-country nationals in
Malaysia and Singapore, consumption tax in Japan and value-added tax obligations
in Singapore and Holland, and a workers’ compensation plan in the United States.
The maximum amount of potential future payments under these arrangements is
approximately $2.5 million.
The
Company indemnifies certain customers, distributors, and subcontractors for
attorney fees and damages awarded against these parties in certain circumstances
in which the Company’s products are alleged to infringe third party intellectual
property rights, including patents, registered trademarks, or copyrights. The
terms of the Company’s indemnification obligations are generally perpetual from
the effective date of the agreement. In certain cases, there are limits on and
exceptions to the Company’s potential liability for indemnification relating to
intellectual property infringement claims. The Company cannot estimate the
amount of potential future payments, if any, that might be required to make as a
result of these agreements. The Company has not paid any claim or been required
to defend any claim related to its indemnification obligations, and accordingly,
the Company has not accrued any amounts for its indemnification obligations.
However, there can be no assurances that the Company will not have any future
financial exposure under these indemnification obligations.
The
Company maintains an accrual for obligations it incurs under its standard
product warranty program and customer, part, or process specific matters. The
Company’s standard warranty period is one year, however in certain instances the
warranty period may be extended to as long as two years. Management
estimates the fair value of the Company’s warranty liability based on actual
past warranty claims experience, its policies regarding customer warranty
returns and other estimates about the timing and disposition of product returned
under the standard program. Customer, part, or process specific
reserves are estimated using a specific identification
method. Historical profit and loss impact related to warranty returns
activity has been minimal. The total accrual was $0.5 million as of September
27, 2009 and March 29, 2009, respectively.
Note 17
Litigation
On
October 24, 2006, the Company was served with a civil antitrust complaint
filed by Reclaim Center, Inc., et. al. as plaintiffs in the U.S. District Court
for the Northern District of California against the Company and 37
other entities on behalf of a purported class of indirect purchasers of Static
Random Access Memory (SRAM) products. The Complaint alleges that the Company and
other defendants conspired to raise the prices of SRAM, in violation of
Section 1 of the Sherman Act, the California Cartwright Act, and several
other states’ antitrust, unfair competition, and consumer protection statutes.
Shortly thereafter, a number of other plaintiffs filed similar complaints on
behalf of direct and indirect purchasers of SRAM products. Given the similarity
of the complaints, the Judicial Panel on Multidistrict Litigation transferred
the cases to a single judge in the Northern District of California and
consolidated the cases for pretrial proceedings in February 2007. The
consolidated cases are captioned In re Static Random Access Memory (SRAM)
Antitrust Litigation. In August 2007, direct purchasers of SRAM products and
indirect purchasers of SRAM products filed separate Consolidated Amended
Complaints. The Company was not named as a defendant in either complaint.
Pursuant to tolling agreements with the indirect and direct purchaser
plaintiffs, the statute of limitations was tolled until January 10, 2009 as
to potential claims against the
Company. The
tolling agreements have now expired and the statute of limitations is running on
potential claims against the Company. Both cases are in the discovery
stage. The Company cannot predict the outcome or provide an estimate
of any possible losses. The Company intends to vigorously defend
itself against these claims.
In April
2008, LSI Corporation and its wholly owned subsidiary Agere Systems Inc.
(collectively “LSI”) instituted an action in the United States International
Trade Commission (ITC or “Commission”), naming the Company and 17 other
respondents. The ITC action seeks an exclusion order to prevent
importation into the U.S. of semiconductor integrated circuit devices and
products made by methods alleged to infringe an LSI patent relating to tungsten
metallization in semiconductor manufacturing. LSI also filed a companion case in
the U.S. District Court for the Eastern District of Texas seeking an injunction
and damages of an unspecified amount relating to such alleged infringement.
Since the initiation of both actions, five additional parties have been named as
respondents/defendants in the respective actions. Some of the defendants in the
action have since settled the claims against them. The action in the U.S.
District Court has been stayed pending the outcome of the ITC action. The
hearing in the ITC action was conducted July 20 through July 27, 2009. On
September 21, 2009, the Administrative Law Judge (“ALJ”) issued his Initial
Determination finding that the patent claims asserted by LSI were invalid in
light of the prior art. Based on the finding of invalidity, the ALJ
held that no violation of section 337 has occurred with respect to the asserted
claims. On October 5, 2009, LSI filed a Petition to Review by the
Commission. Also on October 5, 2009, the defendants filed a Common
Contingent Petition for Review on common matters in the case, and the Company
separately filed a Contingent Petition for Review on Company-specific matters in
the case. Each side filed a Response Brief on October 13,
2009. The Commission will decide by November 21, 2009 whether to
review the Initial Determination. If the Commission decides to review
the Initial Determination, a final decision will be issued by January 21,
2010. If the Commission declines to review the Initial Determination,
it becomes final at that time. The Company cannot predict the outcome
or provide an estimate of any possible losses. The Company will
continue to vigorously defend itself against the claims in these
actions.
Note
18
Restructuring
The
following table shows the breakdown of the restructuring charges and the
liability remaining as of September 27, 2009:
(in
thousands)
|
|
Cost
of goods sold
|
|
|
Operating
Expenses
|
|
|
|
Restructuring
|
|
|
Restructuring
|
|
Balance
as of March 29, 2009
|
|
$ |
575 |
|
|
$ |
3,649 |
|
Provision
|
|
|
55 |
|
|
|
1,421 |
|
Cash
payments
|
|
|
(274
|
) |
|
|
(2,578
|
) |
Balance
as of June 28, 2009
|
|
$ |
356 |
|
|
$ |
2,492 |
|
Provision
|
|
|
5,708 |
|
|
|
8,315 |
|
Cash
payments
|
|
|
(500
|
) |
|
|
(7,292
|
) |
Balance
as of September 27, 2009
|
|
$ |
5,564 |
|
|
|
3,515 |
|
As part
of an effort to streamline operations with changing market conditions and to
create a more efficient organization, the Company took restructuring actions
through September 27, 2009, to reduce its workforce and consolidate
facilities. The Company’s restructuring expenses have been comprised
primarily of: (i) severance and termination benefit costs related to the
reduction of its workforce; and (ii) lease termination costs and costs
associated with permanently vacating certain facilities. The Company
accounted for each of these costs in accordance with accounting guidance on
accounting for costs associated with exit or disposal activities or accounting
guidance on employer’s accounting for post employment benefits. The determination of when
the Company accrues for severance costs, and which standard applies, depends on
whether the termination benefits are provided under a one-time benefit
arrangement or under an on-going benefit arrangement.
During
the second quarter of fiscal 2010, the Company initiated a restructuring action
following its acquisition of Tundra and an assessment of ongoing personnel needs
in light of the acquisition. The restructuring action included a reduction of
approximately 133 positions worldwide. In addition, the Company also
impaired some facilities due to vacating certain locations. As a result,
the Company recorded restructuring expenses of $8.6 million for severance
payments, payments under federal, state and province notice statutes and
retention and other benefits associated with this restructuring action in the
second quarter of fiscal 2010, of which $8.4 million was related to severance,
retention and other benefits to the terminated employees and $0.2 million was
for facilities impairment charges which was recorded as selling, general and
administrative (SG&A) expense. As of September 27, 2009, the
Company made severance and retention payments totaling $5.6 million related to
this restructuring action. The Company expects to complete this restructuring
action in the fourth quarter of fiscal 2010. The facility lease charges will be
settled through the second quarter of fiscal 2011. In addition, in
connection with its plan to transition the manufacture of products to Taiwan
Semiconductor Manufacturing Company Limited ("TSMC"), the Company’s management
approved a plan to exit wafer production operations at its Oregon fabrication
facility. As a result, the Company accrued restructuring expenses of
$4.8 million for severance payments and other benefits associated with this
restructuring action in the second quarter of fiscal 2010. The
Company expects to complete this restructuring action in the second quarter of
fiscal 2012.
During
the fourth quarter of fiscal 2009, the Company initiated a restructuring action
intended to align its spending with demand that has weakened in the slowing
economy. The restructuring action included a reduction of approximately 124
positions across multiple divisions worldwide. In March 2009, after carefully
considering the market, revenues and prices for search engines, the Company
decided to restructure its NWD division. As part of this
restructuring action, the Company reduced approximately 56 positions in this
division and ceased investment in new search engine product
development. In addition, the Company initiated restructuring
actions, which affected its sales personnel in Germany and
Japan. During the first six months of fiscal 2010, the Company
reduced an additional 12 positions related to these actions. As a
result, the Company recorded restructuring expenses of $2.2 million and $5.3
million for severance payments, payments under federal, state and province
notice statutes and retention and other benefits associated with these
restructuring actions in the first six months of fiscal 2010 and the fourth
quarter of fiscal 2009. As of September 27, 2009, severance, retention and
other benefits of $7.1 million were settled. The Company expects to
complete these restructuring actions in the third quarter of fiscal
2010.
During
the third quarter of fiscal 2009, the Company initiated restructuring actions,
which primarily affected its military business and Corporate Technology Group.
These restructuring actions were taken to better allocate the Company’s
engineering resources to maximize revenue potential. These actions resulted in
the reduction of approximately 26 positions. The Company recorded restructuring
expenses of approximately $0.7 million for severance benefits associated with
these restructuring actions in fiscal 2009. During the first quarter of
fiscal 2010, the Company incurred additional restructuring expenses of less than
$0.1 million related to these restructuring actions. The Company completed
this restructuring plan in the second quarter of fiscal 2010.
During
the second quarter of fiscal 2006, the Company completed the consolidation of
its Northern California workforce into its San Jose headquarters and exited a
leased facility in Salinas, California. Upon exiting the building the Company
recorded lease impairment charges of approximately $2.3 million, which
represented the future rental payments under the agreement, reduced by an
estimate of sublease income, and discounted to present value using an interest
rate applicable to the Company. These charges were recorded as cost of revenues
of $0.7 million, research and development expense (R&D) of $0.9 million and
SG&A expense of $0.7 million. In fiscal 2008, the Company entered into a
sublease agreement for this facility, resulting in a reduction to its accrued
lease liabilities by $0.2 million. Since the initial restructuring,
the Company has made lease payments of $1.1 million related to vacated facility
in Salinas. As of September 27, 2009, the remaining accrued lease
liabilities were $1.0 million.
Note
19
Income
Taxes
The
Company recorded an income tax provision of $2.4 million in the second quarter
of fiscal 2010, an increase of $0.3 million compared to $2.1 million recorded in
the second quarter of fiscal 2009. The income tax provision in the
second quarter of fiscal 2010 was attributable to the discrete income tax
provision of $2.5 million for the sale of the NWD assets, estimated U.S.
Federal and state taxes and estimated foreign income taxes. The provision
for income taxes in the second quarter of fiscal 2009 primarily reflected
estimated foreign income and withholding taxes and estimated U.S. Federal and
state taxes. The provision for income taxes for the first six months of fiscal
2009 was determined using the annual effective tax rate method.
In
February 2009, the Internal Revenue Service (IRS) commenced a tax audit for
fiscal years 2006 through 2008. The IRS field audit is still in
progress. The Company has received various information requests from the IRS.
Although the final outcome is uncertain, based on currently available
information, the Company believes that the ultimate outcome will not have a
material adverse effect on its financial position, cash flows or results of
operations
As of
September 27, 2009 and March 29, 2009, the Company was subject to examination in
various state and foreign jurisdictions for tax years 2004 forward, none of
which were individually material.
Note
20
Share
Repurchase Program
On
January 18, 2007, the Company’s Board of Directors initiated a $200 million
share repurchase program. During fiscal 2008, the Company’s Board of Directors
approved a $200 million expansion of the share repurchase program to a total
$400 million. In fiscal 2008 and 2007, the Company repurchased
approximately 28.9 million and 1.6 million shares at an average price of $11.60
per share and $15.95 per share for a total purchase price of $334.8 million and
$25.0 million, respectively. On April 30, 2008, the Company’s Board
of Directors approved an additional $100 million expansion of the share
repurchase program to a total of $500 million. In fiscal 2009, the
Company repurchased approximately 8.4 million shares at an average price of
$7.46 per share for a total purchase price of $62.3 million. The
Company did not repurchase any shares in the first six months of fiscal
2010. As of September 27, 2009, approximately $77.9 million was
available for future purchase under the share repurchase
program. Share repurchases were recorded as treasury stock and
resulted in a reduction of stockholders’ equity.
Note
21
Subsequent
Event
On September
17, 2009, at the 2009 Annual Meeting of Stockholders, the Company's stockholders
approved a one-time stock option exchange program (option exchange) for the
Company's employees other than members of its Board of Directors and
executive officers subject to the provisions of Section 16 of the Exchange
Act, which allowed employees of the Company to surrender certain outstanding
stock options for cancellation in exchange for the grant of new replacement
options to purchase a lesser number of shares having an exercise price equal to
the fair market value of its common stock on the replacement grant
date. On October 30, 2009, the Company completed an offer to exchange
certain options to purchase shares of the Company’s common stock, par value
$0.001 per share. A total of 992 eligible employees participated in
the option exchange. Pursuant to the terms and conditions of the option
exchange, the Company accepted for exchange options to purchase an aggregate of
9,992,195 shares of its common stock, representing 61% of the total number of
options eligible for exchange. All surrendered options were cancelled effective
as of the expiration of the option exchange, and immediately thereafter, in
exchange thereof, the Company granted new options with an exercise price of
$5.88 per share (representing the per share closing price of the Company’s
common stock on October 30, 2009, as reported on the Nasdaq Global Select
Market) to purchase an aggregate of 3,329,036 shares of common stock under the
2004 Plan.
This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange
Act"). Forward-looking statements involve a number of risks and
uncertainties. These include, but are not limited to: global business
and economic conditions; operating results; new product introductions and sales;
competitive conditions; capital expenditures and resources; manufacturing
capacity utilization; customer demand and inventory levels; intellectual
property matters; mergers and acquisitions and integration activities; and the
risk factors set forth in Part II, Item 1A “Risk Factors” to this Report on Form
10-Q. As a result of these risks and uncertainties, actual results
could differ from those anticipated in the forward-looking
statements. Unless otherwise required by law, we undertake no
obligation to publicly revise these statements for future events or new
information after the date of this Report on Form 10-Q.
This
discussion and analysis should be read in conjunction with our Condensed
Consolidated Financial Statements and accompanying Notes included in this report
and the Audited Consolidated Financial Statements and Notes thereto included in
our Annual Report on Form 10-K for the fiscal year ended March 29, 2009 filed
with the SEC. Operating results for the three months and six months ended
September 27, 2009 are not necessarily indicative of operating results for an
entire fiscal year.
Forward-looking
statements, which are generally identified by words such as “anticipates,”
“expects,” “plans,” and similar terms, include statements related to revenues
and gross profit, research and development activities, selling, general and
administrative expenses, intangible expenses, interest income and other, taxes,
capital spending and financing transactions, as well as statements regarding
successful development and market acceptance of new products, industry and
overall economic conditions and demand, and capacity utilization.
Results
of Operations
We
design, develop, manufacture and market a broad range of high-performance,
mixed-signal semiconductor solutions for the advanced communications, computing
and consumer industries. This is achieved by developing detailed
systems-level knowledge, and applying our fundamental semiconductor heritage in
high speed serial interfaces, timing, switching and memory to create solutions
to compelling technology problems faced by customers.
In the
first quarter of fiscal 2010, as part of a refinement of our business strategy,
we incorporated multi-port products from the Communications segment into the
Computing and Consumer segment. This change
in segment reporting had no impact on our consolidated balance sheets,
statements of operations, statements of cash flows or statements of
stockholders’ equity for any periods. The segment information for three month
and six months ended September 28, 2008 has been adjusted retrospectively to
conform to the current period presentation. The Chief Executive
Officer has been identified as the Chief Operating Decision Maker.
Our
reportable segments include the following:
§
|
Communications
segment: includes Rapid I/O switching solutions, flow-control management
devices, FIFOs, integrated communications processors, high-speed SRAM,
military application, digital logic, telecommunications and network search
engines (divested in the second quarter of fiscal
2010),.
|
§
|
Computing
and Consumer segment: includes clock generation and distribution products,
PCI Express switching and bridging solutions, high-performance server
memory interfaces, PC audio, video products and multi-port
products.
|
Revenues
(in
thousands)
|
|
Three
months ended |
|
|
Six
months ended |
|
|
|
Sept.
27, 2009
|
|
Sept.
28, 2008
|
|
|
Sept.
27, 2009
|
|
Sept.
28, 2008
|
|
Communications
|
|
$ |
60,314 |
|
|
$ |
86,239 |
|
|
$ |
117,974 |
|
|
$ |
172,900 |
|
Computing
and Consumer
|
|
|
79,190 |
|
|
|
114,302 |
|
|
|
137,484 |
|
|
|
215,849 |
|
Total
|
|
$ |
139,504 |
|
|
$ |
200,541 |
|
|
$ |
255,458 |
|
|
$ |
388,749 |
|
Communications
Segment
Revenues
in our Communications segment decreased $25.9 million, or 30% in the second
quarter of fiscal 2010 as compared to the second quarter of fiscal 2009. The
decrease was primarily driven by revenue declines in our networking division, as
a result of divestiture of the NWD assets on July 17, 2009, as well as overall
weakness in our communications end market due to the economic
downturn. Revenues from our SRAM, multi-port, FIFO, and digital
logic products decreased 22% year over year due to the softness in the
communications integrated circuit market. Revenues from our
communications timing and telecom products decreased 12% year over year due to
reduced demand for our timing products in the communications markets. Our
military products also decreased 33% year over year. Partially
offsetting these decreases was an increase in our flow control management
products as a result of the Tundra acquisition.
Computing
and Consumer Segment
Revenues
in our Computing and Consumer segment decreased $35.1 million, or 31% in the
second quarter of fiscal 2010 as compared to the second quarter of fiscal 2009
as a result of the global economic downturn and increased competition in the
consumer market. Revenues within our Computing and Multimedia
division decreased 26%, driven by lower end customer demand for systems using
our personal computing and consumer products and erosion of average selling
prices. Revenues within our Enterprise Computing division decreased
42%, driven by the continued ramp down of our Advanced Memory Buffer (AMB)
products. Partially offsetting these decreases was an increase in our Video and
Display division as a result of the Silicon Optix acquisition in the third
quarter of fiscal 2009 and new products ramp up in the the second quarter of
fiscal 2010.
Revenues
in Asia Pacific (APAC), North America, Japan and Europe accounted for 68%, 17%,
9% and 6%, respectively, of our consolidated revenues in the second quarter of
fiscal 2010 compared to 66%, 18%, 8% and 8%, respectively, in the second quarter
of fiscal 2009. We expect that a significant portion of our revenue
will continue to be represented by sales to our customers in Asia, as many of
our largest customers utilize manufacturers in the APAC region.
Revenues (recent trends and
outlook). We currently anticipate overall revenues will be
flat in the third quarter of fiscal 2010.
Revenues (first six months of fiscal
2010 compared to first six months of fiscal 2009). Our year-to-date
revenues through the second quarter of fiscal 2010 were $255.5 million, a
decrease of $133.3 million, or 34% when compared to the same period one year
ago. Revenues in our Communications segment decreased $54.9 million, or 32%,
driven by our divestiture of the NWD assets on July 17, 2009 and lower revenues
from SRAM, multi-port, FIFO, and digital logic products. These decreases were
partially offset by the increased sales of our flow control management products
as a result of the Tundra acquisition. Revenues in our Computing and Consumer
segment decreased $78.5 million, or 36%, due to broad demand
weakness from our personal computing and consumer products end markets. The
decreases were partially offset by the growth in Video products revenues as a
result of the Silicon Optix’s acquisition and new products ramp
up.
Included
in the caption “Deferred
income on shipments to distributors” on the Condensed Consolidated
Balance Sheets are amounts related to shipments to certain distributors for
which revenue is not recognized until our product has been sold by the
distributor to an end customer. The components of deferred
income on shipments to distributors as of September 27, 2009 and March 29,
2009 were as follows:
(in
thousands)
|
|
Sept.
29,
2009
|
|
|
March
29,
2009
|
|
Gross
deferred revenue
|
|
$ |
21,030 |
|
|
$ |
21,302 |
|
Gross
deferred costs
|
|
|
4,020 |
|
|
|
4,764 |
|
Deferred
income on shipments to distributors
|
|
$ |
17,010 |
|
|
$ |
16,538 |
|
The gross
deferred revenue represents the gross value of shipments to distributors at the
list price billed to the distributor less any price protection credits provided
to them in connection with reductions in list price while the products remain in
their inventory. Based on our history, the amount ultimately
recognized as revenue will be lower than this amount as a result of ship from
stock pricing credits which are issued in connection with the sell through of
the product to an end customer. As the amount of price adjustments
subsequent to shipment is dependent on the overall market conditions, the levels
of these adjustments can fluctuate significantly from period to period.
Historically, this amount has represented an average of approximately 25% of the
list price billed to the customer. As these credits are issued, there
is no impact to working capital as this reduces both accounts receivable and
deferred revenue. The gross deferred costs represent the standard
costs (which approximate actual costs) of products we sell to the
distributors. The deferred income on shipments to distributors
increased $0.5 million or 3% in the first six months of fiscal 2010 compared to
the fourth quarter of fiscal 2009. The increase was primarily
attributable to the inclusion of Tundra shipments to distributors in the second
quarter of fiscal 2010, which had higher margins than IDT products.
Gross
Profit
(in
thousands)
|
Three
months ended
|
|
Six
months ended
|
|
|
Sept.
27, 2009
|
|
Sept.
28, 2008
|
|
Sept.
27, 2009
|
|
Sept.
28, 2008
|
|
Gross
profit
|
|
$ |
51,131 |
|
|
$ |
87,153 |
|
|
$ |
98,296 |
|
|
$ |
171,612 |
|
Gross
margin
|
|
|
37 |
% |
|
|
43 |
% |
|
|
38 |
% |
|
|
44 |
% |
Gross profit (the second quarter of
fiscal 2010 compared to the second quarter of fiscal 2009). Gross
profit for the second quarter of fiscal 2010 was $51.1million, a decrease of
$36.0 million compared to the second quarter of fiscal 2009. Gross margin for
the second quarter of fiscal 2010 was 37% compared to 43% in the second quarter
of fiscal 2009. The decrease in gross profit was primarily driven by
lower revenue, lower utilization of our fabrication facility and an unfavorable
shift in the mix of products sold. The utilization of our manufacturing capacity
in Oregon decreased from approximately 79% of equipped capacity in the second
quarter of fiscal 2009 to 77% of equipped capacity in the second quarter of
fiscal 2010. In addition, our gross profit was negatively impacted by
$7.6 million related to the sale of acquired inventory valued at fair market
value, less an estimated selling cost, associated with our acquisition of
Tundra. We also recorded $5.7 million of severance and benefit costs related to
a reduction in force associated with our acquisition of Tundra and the
restructuring action within our Oregon fabrication
facility. Partially offsetting these decreases, our gross margin
benefited from a $10.3 million decrease in intangible asset amortization as we
wrote down the carrying value of intangible assets in fiscal 2009. In
addition, a portion of the intangible assets are being amortized on an
accelerated method, resulting in decreased amortization over time. Furthermore,
our gross margin benefited from $0.7 million and $1.1 million decreases in
performance related bonuses and equipment expenses, respectively, as a result of
our cost control efforts in response to the challenging economic
times. Finally, in the second quarter of fiscal 2010 and 2009, gross
profit benefited by approximately $0.9 million and $1.1 million, respectively,
from the sale of inventory previously written down.
Gross Profit (first six months of
fiscal 2010 compared to the first six months of fiscal 2009). Our year to
date gross profit through the second quarter of fiscal 2010 was $87.2 million, a
decrease of $84.5 million, or 49% compared to the same period one year ago. Our
gross margin for the six months of fiscal 2010 was 43% compared to 44% for the
same period a year ago. The decrease in gross profit was primarily attributable
to the factors discussed above, including lower utilization of our fabrication
facility, a shift in the mix of products sold, sale of inventory valued at fair
market value and restructuring expenses. In addition, our gross
profit was negatively impacted by an impairment charge related to a note
receivable net of deferred gain for the assets we sold to our subcontractor in
fiscal 2007 and restructuring actions in fiscal 2010. Partially
offsetting these decreases, our gross margin benefited from a $21.2 million
decrease in intangible asset amortization. Furthermore, our gross
margin benefited from $3.2 million and $1.4 million decreases in equipment
expenses and performance related bonuses. Finally, in the first six
months of fiscal 2010 and 2009, gross profit benefited by approximately $3.3
million and $2.0 million, respectively, from the sale of inventory previously
written down.
Operating
Expenses
The
following table shows our operating expenses:
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
Sept.
27,
2009
|
|
|
%
of Net Revenues
|
|
|
Sept.
28,
2008
|
|
|
%
of Net Revenues
|
|
|
Sept.
27,
2009
|
|
|
%
of Net Revenues
|
|
|
Sept.
28,
2008
|
|
|
%
of Net Revenues
|
|
Research
and Development
|
|
$ |
41,455 |
|
|
|
30 |
% |
|
$ |
41,532 |
|
|
|
21 |
% |
|
$ |
77,770 |
|
|
|
30 |
% |
|
$ |
85,151 |
|
|
|
22 |
% |
Selling,
General and Administrative
|
|
$ |
30,662 |
|
|
|
22 |
% |
|
$ |
32,211 |
|
|
|
16 |
% |
|
$ |
56,097 |
|
|
|
22 |
% |
|
$ |
65,176 |
|
|
|
17 |
% |
Research and
development. R&D expenses were flat in the second quarter
of fiscal 2010 compared to the second quarter of fiscal 2009. We
completed our acquisition of Leadis and Tundra in the first and second quarter
of fiscal 2010, respectively. As a result, our labor-related costs
increased $3.5 million as the benefits of a Company-wide shut down and
divestiture of our NWD assets were offset by additional personnel related costs
from Tundra and Leadis and the restructuring expenses associated with the Tundra
acquisition. In addition, our indirect material expense and equipment
expense increased $0.2 million and $0.7 million, respectively, primarily
attributable to the higher product development activities and inclusion of
Tundra and Leadis related costs in our results of operations. Offsetting these
increases was a $4.6 million decrease in other labor-related costs, including a
$2.0 million reduction in performance related bonuses as a result of our cost
control efforts, a $2.2 million decrease in stock based compensation expense as
a result of lower valuation of new grants compared to the second quarter of
fiscal 2009 due to lower stock prices in the second quarter of fiscal 2010 and a
$0.4 million decrease in the expense related to our 401(K) match expense as a
result of the temporary suspension of our U.S. 401(K) employer match
program.
Research
and development (the first six months of fiscal 2010 compared to the first six
months of fiscal 2009). Our year to date R&D expenses through the second
quarter of fiscal 2010 were $77.8 million, a decrease of $7.4 million, or 9%
compared to the same period one year ago. The decrease was primarily
attributable to a $4.3 million reduction in performance related bonuses; a $4.6
million decrease in stock based compensation expense and a $1.1 million decrease
in the 401(K) match, a Company-wide shutdown and reduction of R&D expenses
associated with our divestiture of the NWD assets. In addition,
indirect material expense and outside service decreased $0.4 million and $0.3
million, respectively. Partially offsetting these decreases was a
$4.2 million increase in labor-related costs resulting from the Tundra and
Leadis acquisitions and a $0.3 million and a $0.5 million increase in facilities
and equipment expenses.
We
currently anticipate that R&D spending in the third quarter of fiscal 2010
will be flat as compared to the second quarter of fiscal 2010.
Selling, general and
administrative. SG&A expenses decreased $1.5 million, or
5% to $30.7 million in the second quarter of fiscal 2010 compared to the second
quarter of fiscal 2009. The decrease was primarily attributable to a
$4.2 million reduction in intangible asset amortization as we wrote down the
fair value of intangible assets in fiscal 2009 and a portion of intangible
assets, which is being amortized on an accelerated method, resulting in
decreased amortization expense over time. Compared to the second
quarter of fiscal 2009, sales representative commissions decreased $2.4 million
attributable to lower revenues in the second quarter of fiscal
2010. In addition, stock based compensation expense decreased $2.3
million as a result of lower valuation of new grants in the second quarter of
fiscal 2010 compared to the second quarter of fiscal 2009 and performance
related bonuses decreased $1.1million as a result of our cost control
efforts. Partially offsetting these decreases was a $7.7 million
increase in labor-related expenses, primarily attributable to the addition of
Tundra personnel and the restructuring expenses associated with the Tundra
acquisition. We also experienced a $0.4 million increase in legal and
consulting services spending primarily attributable to the on-going litigation
and a $0.2 million increase in equipment expense as a result of Tundra
acquisition.
Selling,
General and Administrative (the first six months of fiscal 2010 compared to the
first six months of fiscal 2009). Our year to date SG&A expenses through the
second quarter of fiscal 2010 were $56.1 million, a decrease of $9.1 million, or
14% compared to the same period one year ago. The decreases was primarily
attributable to an $8.9 million reduction of intangible asset amortization, a
decrease of $5.0 million in sales representative commissions due to decreased
sales, a $3.6 million decrease in stock based compensation expense and a $2.0
million reduction in performance related bonuses. Partially
offsetting these decreases was a $7.2 million increase in labor-related expenses
as a result of the Tundra acquisition and restructuring actions. We
also experienced a $3.8 million increase in legal and consulting services
spending and a $0.4 million increase in equipment expense as a result of the
Tundra acquisition.
We
currently anticipate that SG&A spending in the third quarter of fiscal 2010
will decrease slightly compared to the second quarter of fiscal
2010.
Restructuring. During the second quarter of fiscal
2010, we initiated restructuring actions following our acquisition of Tundra and
an assessment of ongoing personnel needs in light of the
acquisition. In connection with these actions, we reduced
approximately 133 positions worldwide. As a result, we recorded
restructuring expenses of $8.6 million for severance payments, payments under
federal, state and province notice statutes and retention and other benefits
associated with these restructuring actions in the second quarter of fiscal
2010, of which $8.4 million was related to severance, retention and other
benefits to the terminated employees and $0.2 million was for facilities
impairment charges which was recorded as SG&A expense. As of September 27,
2009, we made the severance and retention payments totaling $5.6 million related
to this restructuring action. We expect to complete these restructuring actions
in the fourth quarter of fiscal 2010. In addition, in connection with
our plan to transition the manufacture of products to Taiwan Semiconductor
Manufacturing Company Limited ("TSMC"), our management approved a plan to exit
wafer production operations at our Oregon fabrication facility. As a
result, we accrued restructuring expenses of $4.8 million for severance payments
and other benefits associated with this restructuring action in the second
quarter of fiscal 2010. We expect to complete these restructuring
actions in the second quarter of fiscal 2012.
During
the fourth quarter of fiscal 2009, we initiated a restructuring action intended
to align our spending with demand that has weakened in the slowing economy. The
restructuring action included a reduction of approximately 124 positions across
multiple divisions worldwide. In March 2009, after carefully considering the
market, revenues and prices for search engines, we decided to restructure our
NWD division. As part of this restructuring action, we reduced
approximately 56 positions in this division and ceased investment in new search
engine product development. In addition, we initiated restructuring
actions, which affected our sales personnel in Germany and
Japan. During the first six months of fiscal 2010, we reduced
additional 12 positions related to these actions. As a result, we
recorded restructuring
expenses
of $2.2 million and $5.3 million for severance payments, payments under federal,
state and province notice statutes and retention and other benefits associated
with these restructuring actions in the first six months of fiscal 2010 and the
fourth quarter of fiscal 2009. As of September 27, 2009, we settled
severance retention and other benefits of $7.1 million related to these
restructuring actions. We expect to complete these restructuring
actions in the third quarter of fiscal 2010.
During
the third quarter of fiscal 2009, we initiated restructuring actions, which
primarily affected our military business and Corporate Technology Group. These
restructuring actions were taken to better allocate our engineering resources to
maximize revenue potential. These actions resulted in the reduction of
approximately 26 positions. We recorded restructuring expenses of approximately
$0.7 million for severance benefits associated with these restructuring actions
in fiscal 2009. During the first quarter of fiscal 2010, we incurred
additional restructuring expenses of less than $0.1 million related to these
restructuring actions. We completed this restructuring plan in the second
quarter of fiscal 2010.
During
the second quarter of fiscal 2006, we completed the consolidation of our
Northern California workforce into our San Jose headquarters and exited a leased
facility in Salinas, California. Upon exiting the facility we recorded lease
impairment charges of approximately $2.3 million, which represented the future
rental payments under the agreements, reduced by an estimate of sublease income,
and discounted to present value using an interest rate applicable to us. These
charges were recorded as cost of revenues of $0.7million, research and
development of $0.9 million and selling, general and administrative of $0.7
million. In fiscal 2008, we entered into a sublease agreement for our Salinas
facility, resulting in a reduction to our accrued lease liabilities by $0.2
million. Since the initial restructuring, we have made lease payments
of $1.1 million related to vacated facility in Salinas. As of
September 27, 2009, the remaining accrued lease liabilities were $1.0
million.
Divestiture. On
July 17, 2009, we completed the sale of certain assets related to our
network search engine business (the "NWD assets") to NetLogic Microsystems,
Inc ("Netlogic"), pursuant to an Asset Purchase Agreement by and between the
Company and NetLogic dated April 30, 2009 (the "Agreement"). Upon closing of the
transaction, NetLogic paid us $100 million in cash consideration, which included
inventory valued at approximately $10 million (subject to
adjustment). As of September 27, 2009, the inventory we sold to
Netlogic was valued at $8.2 million and the excess cash for the inventory in the
amount of $1.8 million was recorded as a payable to Netlogic. The NWD
assets are part of the Communications reportable segment. In connection with the
divestiture, we entered into a supply agreement with NetLogic whereby they
agreed to buy and we agreed to sell Netlogic certain network search engine
products for a limited time following the closing of the
sale. According to the terms set forth in the agreement, we committed
to sell certain products either at our standard costs or below our normal gross
margins, which are lower than the estimated fair values. As a result,
we recorded $3.0 million related to the estimated fair value of this
agreement. In the second quarter of fiscal 2010, $0.2 million was
recognized as revenue. We expect to complete the sale under this agreement
within 2 years. In the second quarter of fiscal 2010, we recorded a
gain of $82.7 million related to the divestiture.
Interest income and other,
net. Changes in interest income and other, net are
summarized as follows:
(in
thousands)
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
|
Sept.
27,
2009
|
|
|
Sept.
28,
2008
|
|
Interest
income
|
|
$ |
480 |
|
|
$ |
1,616 |
|
|
$ |
1,024 |
|
|
$ |
3,210 |
|
Other
income (expense), net
|
|
|
719 |
|
|
|
(1,232
|
) |
|
|
1,600 |
|
|
|
(1,361
|
) |
Interest
income and other, net
|
|
|
1,199 |
|
|
|
384 |
|
|
|
2,624 |
|
|
|
1,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income decreased $1.1 million in the second quarter of fiscal 2010 compared to
the second quarter of fiscal 2009. The decrease was primarily
attributable to a decrease in interest rates in the quarter. Other
income (expense), net increased $2.0 million in the second quarter of fiscal
2010 compared to the second quarter of fiscal 2009. The increase was
primarily attributable to a gain of $1.0 million on our investment portfolio of
marketable equity securities related to deferred compensation arrangements in
the second quarter of fiscal 2010 while we recorded a loss of $0.8 million in
the second quarter of fiscal 2009.
Interest
income decreased $2.2 million in the first six months of fiscal 2010 compared to
the first six months of fiscal 2009. The decrease is primarily
attributable to less favorable interest rates. Other income,
(expense), net increased $3.0 million in the first six months of fiscal 2010 as
compared to the first six months of fiscal 2009. The increase is
primarily attributable to a gain of $1.8 million on our investment portfolio of
marketable equity securities related to deferred compensation arrangements while
we recorded a loss of $0.9 million in the same period one year ago.
Provision for income
taxes. We recorded an income tax provision of $2.4
million in the second quarter of fiscal 2010, an increase of $0.3 million
compared to the second quarter of fiscal 2009. The income tax
provision in the second quarter of fiscal 2010 is attributable to the discrete
income tax provision of $2.5 million for the sale of the NWD assets, estimated
U.S. Federal and state taxes and estimated foreign income taxes. The provision
for income taxes in the second quarter of fiscal 2009 primarily reflected
estimated foreign income and withholding taxes and estimated U.S. Federal and
state taxes.
We
recorded an income tax provision of $3.4 million in the first six months of
fiscal 2010, an increase of $1.1 million, or 48% compared to the first six
months of fiscal 2009. The provision for income taxes in the first six months of
fiscal 2010 primarily reflects a discrete income tax provision of $2.5 million
for the sale of the NWD assets and the estimated U.S. Federal and state taxes
and estimated foreign income taxes. The income tax provision for the first six
months of fiscal 2009 primarily reflects estimated foreign income and
withholding taxes and estimated U.S. Federal and state taxes. In addition, on
May 27, 2009, the Ninth Circuit Court of Appeals issued its ruling in the case
of Xilinx, Inc. v. Commissioner (“Xilinx Case”), holding that stock-based
compensation expense was required to be included in certain transfer pricing
arrangements between a U.S. company and its foreign subsidiary. As a result of
the ruling in the Xilinx Case, certain tax attributes were reduced and we
recognized an incremental income tax expense of $0.6 million during the first
six months of fiscal 2010.
As of
September 27, 2009, we continued to maintain a full valuation allowance against
our net U.S. deferred tax assets as we could not conclude that it was more
likely than not that we will be able to realize our U.S. deferred tax assets in
the foreseeable future. We will continue to evaluate the release of the
valuation allowance on a quarterly basis.
As
of September 27, 2009, we are subject to examination in the U.S.
federal tax jurisdiction for the fiscal years beginning with 2004. In February
2009, the IRS commenced a tax audit for fiscal years beginning 2006 through
2008. The audit is in its early stages and there have not been any
notices of proposed audit adjustments. Typically, these field audits
last from 12 to 18 months before taxpayers have an indication of the tax
positions with which the IRS disagrees. Although the final outcome is
uncertain, based on currently available information, we believe that the
ultimate outcome will not have a material adverse effect on our financial
position, cash flows or results of operations
Liquidity
and Capital Resources
Our cash,
cash equivalents and available for sale investments were $358.9 million as of
September 27, 2009, an increase of $62.8 million compared to March 29,
2009. The increase is primarily attributable to $100 million cash
received from our divestiture of the NWD assets, $30.0 million in cash from
operations, offset by net cash payments of $64.5 million to purchase Tundra and
Leadis assets in the first six months of fiscal 2010. We had no
outstanding debt at September 27, 2009 or March 29, 2009.
Cash
equivalents are highly liquid investments with original maturities of three
months or less at the time of purchase. We maintain the cash and cash
equivalents with reputable major financial institutions. Deposits with these
banks may exceed the Federal Deposit Insurance Corporation (FDIC) insurance
limits or similar limits in foreign jurisdictions. These deposits typically may
be redeemed upon demand and, therefore, bear minimal risk. In addition, a
significant portion of cash equivalents is concentrated in money market
funds which are invested in U.S. government treasuries only. While we monitor
daily the cash balances in our operating accounts and adjust the balances as
appropriate, these balances could be impacted if one or more of the financial
institutions with which we deposit fails or is subject to other adverse
conditions in the financial markets. As of today, we have not experienced any
loss or lack of access to our invested cash or cash equivalents in our operating
accounts; however, we can provide no assurances that access to our invested cash
and cash equivalents will not be impacted by adverse conditions in the financial
markets.
In
addition, as much of our revenues are generated outside the U.S., a significant
portion of our cash and investment portfolio accumulates in offshore locations.
At September 27, 2009, we had cash, cash equivalents and investments of
approximately $223.8 million invested overseas in accounts belonging to various
IDT foreign operating subsidiaries. While these amounts are primarily invested
in U.S. dollars, a portion is held in foreign currencies, and all offshore
balances are exposed to local political, banking, currency control and other
risks. In addition, these amounts may be subject to tax and other transfer
restrictions.
All of
our available-for-sale investments are subject to a periodic impairment review.
Investments are considered to be impaired when a decline in fair value is judged
to be other-than-temporary. This determination requires significant judgment.
For publicly traded investments, impairment is determined based upon the
specific facts and circumstances present at the time, including a review of the
closing price over the length of time, general market conditions and our intent
and ability to hold the investment for a period of time sufficient to allow for
recovery. Although we believe the portfolio continues to be comprised of sound
investments due to high credit ratings and government guarantees of the
underlying investments, a further decline in the capital and financial markets
would adversely impact the market values of its investments and their liquidity.
We continually monitor the credit risk in our portfolio and future developments
in the credit markets and make appropriate changes to our investment policy as
deemed necessary. We did not record any other-than-temporary impairment charges
related to our short-term investments in the first six months of fiscal 2010 and
fiscal 2009.
We
recorded a net income of $46.4 million in the first six months of fiscal 2010
compared to a net income of $20.8 million in the first six months of fiscal
2009. Net cash provided by operating activities decreased $76.2
million to $30.0 million for the first six months of fiscal 2010 compared to
$106.2 million for the first six months of fiscal 2009. A summary of
the significant non-cash items included in net income and net loss were as
follows:
·
|
We
recorded an $82.7 million gain in connection with the sale of our NWD
assets in the second quarter of fiscal 2010. We recorded no
such gain in the first six months of fiscal
2009.
|
·
|
Amortization
of intangible assets was $11.3 million in the first six months of fiscal
2010 compared to $41.5 million in the same period one year
ago. The decrease was primarily attributable to the lower
carrying value of intangible assets in the first six months of fiscal 2010
as we recorded significant impairment charges in the third and fourth
quarter of fiscal 2009. In addition, the decrease was due to a
portion of intangible assets, which are being amortized on an accelerated
method, resulting in decreased amortization expense over
time.
|
·
|
Stock-based
compensation expense was $8.2 million in the first six months of fiscal
2010 compared to $16.8 million in the same period one year
ago. The decrease was due to lower valuation of new grants and
lower headcount in the first six months of fiscal 2010 as compared to the
first six months of fiscal 2009 and expiration of 1984 ESPP on March 29,
2009.
|
Net cash
provided by working capital-related items increased $19.3 million, from a net
$13.4 million cash provided in the first six months of fiscal 2009 to net $32.7
million cash provided in the first six months of fiscal 2010. A summary of
significant working capital items providing relatively more cash in the first
six months of fiscal 2010 included:
·
|
A
decrease in inventory of $17.5 million in first six months of fiscal 2010
compared to a decrease in inventory of $3.5 million in the first six
months of fiscal 2009. The decrease in inventory in both
periods was due to our efforts to align our inventory levels to meet
current demand.
|
·
|
An
increase in accounts payable of $8.1 million in the first six months of
fiscal 2010 compared to an increase of $0.3 million in the first six
months of fiscal 2009. The increase in both periods was
primarily attributable to the timing of payments and increase in the
volume of foundry and subcontractor
activity.
|
·
|
An
increase in accounts receivable of $3.7 million in the first six months of
fiscal 2010 compared to an increase of $5.2 million in the first six
months of fiscal 2009. The increase in accounts receivable in
the first six month of fiscal 2010 was primarily attributable to revenue
increase. The decrease in accounts receivable in the first six
months of fiscal 2009 reflected our cash collection efforts and timing of
shipments.
|
·
|
An
increase in other accrued and long term liabilities of $7.4 million in the
first six months of fiscal 2010 compared to an increase of $1.5 million in
the first six months of fiscal 2009. The increase in the first six months
of fiscal 2010 was primarily attributable to a $5.0 million increase in
accruals related to our restructuring actions, $2.8
million fair value of the supply agreement signed in
connection with divestiture of our NWD assets and $2.6 million increase in
the fair value of our executive deferred compensation plan due to stock
market performance improvement in the first six months of fiscal
2010. In addition, accrued commissions increased $0.4 million
as a result of increased revenues and commission rates in the first six
months of fiscal 2010. The increase in the first six months of fiscal 2009
was primarily attributable to an increase in contractual obligation
related to licenses and research agreements, partially offset by a payment
of $1.2 million related to the executive transition agreement signed with
our former CEO.
|
The
factors listed above were partially offset by other working capital items that
used relatively more cash in the first six months of fiscal 2010:
·
|
A
decrease in prepayments and other assets of $3.1million in the first six
months of fiscal 2010 compared to a decrease of $8.6 million in the first
six months of fiscal 2009. The decrease in the first six months
of fiscal 2010 was primarily attributable to $1.1 million reduction in the
receivable from one of our foundries related to defective products, a $0.3
million VAT refund from a foreign government and normal recurring
prepaid amortization, partially offset by additional software maintenance
agreements signed and paid during the quarter. The decrease in
fiscal 2009 was primarily attributable to the receipts of interest from
the IRS for the tax settlement related to the ICS pre-acquisition income
tax returns and VAT refund from the foreign government along with the
normal recurring prepaid
amortization.
|
·
|
A
decrease in income taxes receivable/payable of $3.6 million in the first
six months of fiscal 2010 compared to a decrease of $6.0 million in the
first six months of fiscal 2009. The decrease in the first six
months of fiscal 2010 is primarily attributable to the refund of R&D
tax credits in the U.S. The decrease in the first six months of fiscal
2009 is primarily attributable to the tax settlement with the IRS for ICS
pre-acquisition tax returns.
|
·
|
A
decrease in accrued compensation expense of $1.2 million in the first six
months of fiscal 2010 compared to an increase of $0.6 million in the first
six months of fiscal 2009. The increase in accrued
compensation expense in the first six months of fiscal 2009 is primarily
attributable to accruals related to our fiscal 2009 bonus program,
partially offset by a $1.8 million reduction in performance-related
bonuses as a result of our year end payout in May 2008; while there is no
decrease related to the performance-related bonuses as we did not accrue
the expense in the fourth quarter of fiscal 2009 and fiscal
2010.
|
Net cash provided by investing
activities was $7.1 million in the first six months of fiscal 2010, compared to
net cash used by investing activities of $22.8 million in the first six months
of fiscal 2009. In the first six months of fiscal 2010, net cash
proceeds from the divestiture of NWD assets was $100.0 million and sale and
maturity of short-term investments were $122.8 million, partially offset by cash
used to purchase short-term investments of $145.0 million. In addition, we paid
approximately $58.2 million and $6.0 million, net of cash acquired, in
conjunction with the acquisitions of Tundra and Leadis. We used $6.3
million to purchase capital equipment. In the first six months of
fiscal 2009, net cash used to purchase short-term investments were $104.0
million and the purchase of capital equipment totaled approximately $8.4
million, partially offset
by cash proceeds from sale and maturity of short-term investments of $89.6
million.
Net cash
provided by financing activities was $2.2 million in the first six months of
fiscal 2010, compared to net cash used for financing activities of $28.5 million
in the first six months of fiscal 2009, primarily due to the absence of
repurchases of common stock during the first six months of fiscal
2010. In the first six months of fiscal 2010, we received
approximately $2.2 million from the exercise of employee stock
options. In the first six months of fiscal 2009, we repurchased
approximately $37.4 million of common stock, partially offset by proceeds of
approximately $8.9 million from the exercise of employee stock options and the
issuance of stock under our employee stock purchase plan.
We
anticipate capital expenditures of approximately $21.0 million during fiscal
2010 to be financed through cash generated from operations and existing cash and
investments. This estimate includes $6.3 million in capital
expenditures in the first six months of fiscal 2010.
We
believe that existing cash and investment balances, together with cash flows
from operations, will be sufficient to meet our working capital and capital
expenditure needs for at least the next twelve months. We may choose to
investigate other financing alternatives; however, we cannot be certain that
additional financing will be available on satisfactory terms.
Off-balance
Sheet Arrangements
As of
September 27, 2009, we had no off-balance sheet arrangements, as defined under
SEC Regulation S-K Item 303(a)(4).
Subsequent
Event
On September
17, 2009, at the 2009 Annual Meeting of Stockholders, our stockholders approved
a one-time stock option exchange program (option exchange) for our
employees other than members of our Board of Directors and executive
officers subject to the provisions of Section 16 of the Exchange Act, which
allowed employees of us to surrender certain outstanding stock options for
cancellation in exchange for the grant of new replacement options to purchase a
lesser number of shares having an exercise price equal to the fair market value
of our common stock on the replacement grant date. On
October 30, 2009, we completed an offer to exchange certain options to purchase
shares of our common stock, par value $0.001 per share. A total of
992 eligible employees participated in the option exchange. Pursuant to the
terms and conditions of the option exchange, we accepted for exchange options to
purchase an aggregate of 9,992,195 shares of our common stock, representing 61%
of the total number of options eligible for exchange. All surrendered options
were cancelled effective as of the expiration of the option exchange, and
immediately thereafter, in exchange thereof, we granted new options with an
exercise price of $5.88 per share (representing the per share closing price
of our common stock on October 30, 2009, as reported on the Nasdaq
Global Select Market) to purchase an aggregate of 3,329,036 shares of common
stock under the 2004 Plan.
Recent
Accounting Pronouncements
In June
2009, the Financial Accounting Standard Board (FASB) issued the FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
(“Codification”). This authoritative guidance establishes the
Codification, which officially launched on July 1, 2009, to become the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by
the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative U.S. GAAP for SEC
registrants. The subsequent issuances of new standards will be in the form of
Accounting Standards Updates that will be included in the Codification.
Generally, the Codification is not expected to change U.S. GAAP. All other
accounting literature excluded from the Codification will be considered
non-authoritative. This guidance is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. We adopted this
guidance in the second quarter of fiscal 2010. The adoption of this guidance did
not have a significant impact on our condensed consolidated financial statements
or related footnotes.
In May
2009, the FASB issued accounting guidance for subsequent events, which establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. This guidance sets forth the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial
statements. This guidance also requires the disclosure of the date through which
an entity has evaluated subsequent events and the basis for that date—that is,
whether that date represents the date the financial statements were issued or
were available to be issued. This guidance is effective for interim or annual
reporting periods ending after June 15, 2009. We adopted this guidance in the
first quarter of fiscal 2010. The adoption of this guidance did not have a
significant impact on our condensed consolidated financial statements or related
footnotes. See note 21 - "Subsequent Event" in Part I, item 1 for further
discussion.
In
April 2009, the FASB issued authoritative fair value disclosure guidance
for financial instruments. This guidance requires an entity to provide interim
disclosures about the fair value of all financial instruments as well as in
annual financial statements. Additionally, this guidance requires
disclosures of the methods and significant assumptions used in estimating the
fair value of financial instruments on an interim basis as well as changes of
the methods and significant assumptions from prior periods. This guidance is
effective for interim and annual periods ending after June 15, 2009. We
adopted this guidance in the first quarter of fiscal 2010. The adoption of this
guidance did not have a significant impact on our condensed consolidated
financial position and results of operations.
In
April 2009, the FASB issued authoritative guidance for determining fair
value when the volume and level of activity for the asset or liability have
significantly decreased and identifying transactions that are not order. This
standard provides guidance on how to determine the fair value of assets and
liabilities. The guidance relates to determining fair values when there is no
active market or where the price inputs being used represent distressed sales.
It reaffirms that the objective of fair value measurement––to reflect how much
an asset would be sold for in an orderly transaction (as opposed to a distressed
forced transaction) at the date of the financial statements under current market
conditions. Specifically, it reaffirms the need to use judgment to ascertain if
a formerly active market has become inactive and in determining fair values when
markets have become inactive. The guidance will be effective for interim and
fiscal years beginning after June 15, 2009. We adopted this guidance in the
first quarter of fiscal 2010. The adoption of this guidance did not have a
significant impact on our condensed consolidated financial position and results
of operations.
In
April 2009, the FASB amended the existing guidance on accounting for assets
acquired and liabilities assumed in a business combination that arise from
contingencies, including the initial recognition and measurement, subsequent
measurement and accounting and disclosures for assets and liabilities arising
from contingencies in business combinations. This guidance is effective for
contingent assets and contingent liabilities acquired in business combinations
for which the acquisition date is on or after the beginning of the fiscal year
beginning after December 15, 2008. We adopted this pronouncement in the
first quarter of fiscal 2010. See Note 11 – “Business Combinations”
in Part I, Item 1 for further discussion.
In
April 2009, the FASB amended the existing guidance on determining whether an
impairment for investments in debt securities is
other-than-temporary. This guidance does not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities. We adopted this guidance in the first quarter of fiscal
2010 and the adoption of this guidance did not have a material impact on our
condensed consolidated financial position and results of
operations.
In June
2008, the FASB issued authoritative guidance for determining whether instruments
granted in share-based payment transactions are participating
securities. This guidance states that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class method. This
guidance is effective for fiscal years beginning after December 15, 2008. We
adopted this guidance in the first quarter of fiscal 2010 and the adoption of
this guidance did not have a material impact on our condensed consolidated
financial position and results of operations.
In April
2008, the FASB amended the existing guidance on determination of the
useful life of intangible assets. This guidance amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset. The intent of the guidance is
to improve the consistency between the useful life of a recognized intangible
asset and the period of expected cash flows used to measure the fair value of
the intangible asset. This guidance is effective for fiscal years beginning
after December 15, 2008. We adopted this guidance in the first quarter of
fiscal 2010.
In
February 2008, FASB issued amended the existing guidance on fair value measurements
for purposes of lease classification to remove certain leasing transactions from
its scope and was effective upon issuance. In addition, FASB issued
authoritative guidance that provided a one year deferral for application of the
new fair value measurement principles for all non-financial assets
and non-financial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least
annually), until the beginning of the first quarter of fiscal 2010. We adopted
this guidance in the first quarter of fiscal year 2010. In October
2008, the FASB issued authoritative guidance on determining the fair value of a
financial asset when the market for that asset is not active. This guidance was
effective upon issuance. The adoption of this guidance did not have a
material impact on our condensed consolidated financial position and results of
operations.
In
December 2007, the FASB revised the authoritative guidance for business
combinations. The guidance changes the accounting for business combinations
including the measurement of acquirer shares issued in consideration for a
business combination, the recognition of contingent consideration, the
accounting for pre-acquisition gain and loss contingencies, the recognition of
capitalized in-process research and development, the accounting for
acquisition-related restructuring cost accruals, the treatment of acquisition
related transaction costs and the recognition of changes in the acquirer’s
income tax valuation allowance. This guidance is effective for fiscal years
beginning after December 15, 2008, with early adoption prohibited. We
adopted this guidance in the first quarter of fiscal 2010. See Note
11 – “Business Combinations” in Part I, Item 1 for further
discussion.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
interest rate risk relates primarily to our short-term investments of $182.4
million as of September 27, 2009. By policy, we limit our exposure to long-term
investments and mitigate the credit risk through diversification and adherence
to a policy requiring the purchase of highly rated securities. As of September
27, 2009, our cash, cash equivalents and investment portfolio was
concentrated in securities with same day liquidity and at the end of fiscal
2009, a substantial majority of securities in our investment portfolio had
maturities of less than two years. Although a hypothetical 10% change in
interest rates could have a material effect on the value of our investment
portfolio at a given time, we normally hold these investments until maturity,
which results in no realized impact on results of operations or cash
flows. We do not currently use derivative financial instruments in
our investment portfolio.
In
addition, we maintain assets in a separate trust that is invested in corporate
owned life insurance intended to substantially offset the liability under the
deferred compensation plan. The fair value of assets, determined
based on the value of the underlying mutual funds was $12.0 million as of
September 27, 2009. The deferred compensation obligation under the
arrangement is classified in Other Long-Term Liabilities within the Consolidated
Balance Sheet. As of September 27, 2009, the fair value of the
obligation was $13.6 million.
At
September 27, 2009, we had no outstanding debt.
We are
exposed to foreign currency exchange rate risk as a result of international
sales, assets and liabilities of foreign subsidiaries, local operating expenses
of our foreign entities and capital purchases denominated in foreign
currencies. We may use derivative financial instruments to help
manage our foreign currency exchange
exposures. We do not enter into derivatives for speculative or
trading purposes. We performed a sensitivity analysis as of September 27, 2009
and determined that, without hedging the exposure, a 10% change in the value of
the U.S. dollar would result in an approximate 0.4% impact on gross profit
margin percentage, as we operate manufacturing facilities in Malaysia and
Singapore, and an approximate 0.8% impact to operating expenses (as a percentage
of revenue) as we operate sales offices in Japan and throughout Europe and
design centers in the U.S., China and Canada. At September 27, 2009
we did not have any outstanding foreign exchange contract.
We did
not have any currency exposure related to any outstanding capital purchases as
of September 27, 2009.
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms, and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, our management
recognizes that any
disclosure
controls and procedures, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance of achieving the desired control
objectives, and our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures.
At September 27, 2009, the end of the
quarter covered by this report, we carried out an evaluation, under the
supervision and with the participation of the Company’s management, including
the Company’s Chief Executive Officer and the Company’s Chief Financial Officer,
of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective at
a reasonable assurance level. There have been no changes in our
internal controls over financial reporting during the Company’s most recent
fiscal quarter that have materially affected, or are reasonable likely to
materially affect, our internal controls over financial
reporting.
PART
II OTHER INFORMATION
On
October 24, 2006, we were served with a civil antitrust complaint filed by
Reclaim Center, Inc., et. al. as plaintiffs in the U.S. District Court for the
Northern District of California against us and 37 other entities on behalf of a
purported class of indirect purchasers of Static Random Access Memory (SRAM)
products. The Complaint alleges that we and other defendants conspired to raise
the prices of SRAM, in violation of Section 1 of the Sherman Act, the
California Cartwright Act, and several other states’ antitrust, unfair
competition, and consumer protection statutes. Shortly thereafter, a number of
other plaintiffs filed similar complaints on behalf of direct and indirect
purchasers of SRAM products. Given the similarity of the complaints, the
Judicial Panel on Multidistrict Litigation transferred the cases to a single
judge in the Northern District of California and consolidated the cases for
pretrial proceedings in February 2007. The consolidated cases are captioned In
re Static Random Access Memory (SRAM) Antitrust Litigation. In August 2007,
direct purchasers of SRAM products and indirect purchasers of SRAM products
filed separate Consolidated Amended Complaints. We were not named as a defendant
in either complaint. Pursuant to tolling agreements with the indirect and direct
purchaser plaintiffs, the statute of limitations was tolled until
January 10, 2009 as to potential claims against us. The tolling
agreements have now expired and the statute of limitations is running on
potential claims against us. Both cases are in the discovery
stage. We cannot predict the outcome or provide an estimate of any
possible losses. We intend to vigorously defend ourselves against
these claims.
In April
2008, LSI Corporation and its wholly owned subsidiary Agere Systems Inc.
(collectively “LSI”) instituted an action in the United States International
Trade Commission (ITC or “Commission”), naming us and 17 other
respondents. The ITC action seeks an exclusion order to prevent
importation into the U.S. of semiconductor integrated circuit devices and
products made by methods alleged to infringe an LSI patent relating to tungsten
metallization in semiconductor manufacturing. LSI also filed a companion case in
the U.S. District Court for the Eastern District of Texas seeking an injunction
and damages of an unspecified amount relating to such alleged infringement.
Since the initiation of both actions, five additional parties have been named as
respondents/defendants in the respective actions. Some of the defendants in the
action have since settled the claims against them. The action in the U.S.
District Court has been stayed pending the outcome of the ITC action. The
hearing in the ITC action was conducted July 20 through July 27, 2009. On
September 21, 2009, the Administrative Law Judge (“ALJ”) issued his Initial
Determination finding that
the patent claims asserted by LSI were invalid in light of the prior
art. Based on the finding of invalidity, the Court held that no
violation of section 337 has occurred with respect to the asserted
claims. On October 5, 2009, LSI filed a Petition to Review by the
Commission. Also on October 5, 2009, the defendants filed a Common
Contingent Petition for Review on common matters in the case, and we separately
filed a Contingent Petition for Review on Company-specific matters in the
case. Each side filed a Response Brief on October 13,
2009. The Commission will decide by November 21, 2009 whether to
review the Initial Determination. If the Commission decides to review
the Initial determination, a final decision will be issued by January 21,
2010. If the Commission declines to review the Initial Determination,
it becomes final at that time. We cannot predict the outcome or
provide an estimate of any possible losses. We will continue to
vigorously defend ourselves against the claims in these actions.
Investing
in our common stock involves a high degree of risk. You should carefully
consider the risks and uncertainties described below and all information
contained in this report before you decide to purchase our common stock. If any
of the possible adverse events described below actually occurs, we may be unable
to conduct our business as currently planned and our financial condition and
operating results could be harmed. In addition, the trading price of our common
stock could decline as a result of any of these risks and uncertainties, and you
may lose all or part of your investment. The risks described below are not the
only risks facing us. Additional risks not currently known to us or
that we currently believe are immaterial may also impair our business
operations, operating results, and financial condition.
Our operating
results can fluctuate dramatically. Our operating results have
fluctuated in the past and are likely to vary in the future. For
example, we recorded net losses of $1.0 billion in fiscal 2009, net income of
$34.2 million in fiscal 2008 and net losses of $7.6 million in fiscal 2007.
Fluctuations in operating results can result from a wide variety of factors,
including:
·
|
Global
market and economic conditions, including those related to the credit
markets, may adversely affect our business and results of
operations;
|
·
|
The
cyclicality of the semiconductor industry and industry-wide wafer
processing capacity;
|
·
|
Changes
in the demand for and mix of products sold and in the markets we and our
customers serve;
|
·
|
Competitive
pricing pressures;
|
·
|
The
success and timing of new product and process technology announcements and
introductions from us or our
competitors;
|
·
|
Potential
loss of market share among a concentrated group of
customers;
|
·
|
Difficulty
in attracting and retaining key
personnel;
|
·
|
Difficulty
in predicting customer product
requirements;
|
·
|
Production
difficulties and interruptions caused by our complex manufacturing and
logistics operations;
|
·
|
Difficulty
in managing fixed costs of our manufacturing capability in the face of
changes in demand;
|
·
|
Reduced
control over our manufacturing and product delivery as a result of our
increasing reliance on subcontractors, foundry and other manufacturing
services;
|
·
|
Costs
and other issues relating to future
acquisitions;
|
·
|
Availability
and costs of raw materials from a limited number of
suppliers;
|
·
|
Political
and economic conditions in various geographic
areas;
|
·
|
Costs
associated with other events, such as intellectual property disputes or
other litigation; and
|
·
|
Legislative,
tax, accounting, or regulatory changes or changes in their
interpretation.
|
Global market and economic
conditions, including those related to the credit markets, may adversely affect
our business and results of operations.
Subsequent
to adverse changes in global financial markets and rapidly deteriorating
business conditions in the world’s developed economies in late 2008 and the
first half of calendar year 2009, global economic conditions have continued to
be weak through the end of second quarter of our fiscal 2010. For the
period ended September 27, 2009, continued concerns about the impact of high
energy costs, geopolitical issues, the availability and cost of credit, the U.S.
mortgage market, a declining real estate market in the U.S. the federal
government interventions in the U.S. financial and credit markets have
contributed to instability in both U.S. and international capital and credit
markets, reduced corporate
profits
and capital spending, weakened demand and diminished expectations for the U.S.
and global economy. These conditions, combined with volatile oil
prices, low business and consumer confidence and high unemployment have
contributed to substantial volatility and a significant economic
recession.
As a
result of these market and business conditions, the cost and availability of
capital and credit have been and may continue to be adversely affected by
illiquid credit markets and wider credit spreads. If these market
conditions continue, they may limit our ability, and the ability of our
customers, to timely borrow and access the capital and credit markets to meet
liquidity needs, resulting in an adverse effect on our financial condition and
results of operations. Poor credit market conditions and the
contraction of global economic activity has had an adverse effect on the
financial condition of our customers. Should one or more of our major
customers become financially constrained, or insolvent, our revenues and results
of operations may be adversely affected. The economic slowdown has led to
reduced customer spending for semiconductors and weakened demand for our
products has had a negative impact on revenue, gross profit and results of
operations. Reduced customer spending and weakened demand may drive
the semiconductor industry to reduce product pricing, which would also have a
negative impact on revenue, gross profit and results of
operations. In addition, the semiconductor industry has traditionally
been highly cyclical and has often experienced significant downturns in
connection with, or in anticipation of, deterioration in general economic
conditions and we cannot accurately predict how severe and prolonged the
current economic downturn might be.
The cyclicality
of the semiconductor industry exacerbates the volatility of our operating
results. The semiconductor industry is highly cyclical. The
semiconductor industry has experienced significant downturns, often in
connection with product cycles of both semiconductor companies and their
customers, but also related to declines in general economic
conditions. These downturns have been characterized by high inventory
levels and accelerated erosion of average selling prices. The current
economic downturn has, and any future downturns could significantly impact our
business from one period to the next relative to demand and resulting selling
price declines. In addition, the semiconductor industry has
experienced periods of increased demand, during which we may experience internal
and external manufacturing constraints. We may experience substantial
changes in future operating results due to the cyclical nature of the
semiconductor industry.
Demand for our
products depends primarily on demand in the communications, personal computer
(PC), and consumer markets which can be significantly impacted by concerns over
macroeconomic issues. Our product portfolio consists
predominantly of semiconductor solutions for the communications, PC, and
consumer markets. Our strategy and resources will be directed at the
development, production and marketing of products for these
markets. The markets for our products will depend on continued
and growing demand for communications equipment, PCs and consumer
electronics. These end-user markets may experience changes in demand
that could adversely affect our business and the impact could be greater in
periods of economic uncertainty and contraction, as in the current economic
downturn. To the extent demand for our products or markets for our
products do not grow, our business could be adversely affected.
We build most of
our products based on estimated demand forecasts. Demand for
our products can change rapidly and without advance notice. Demand can also be
affected by changes in our customers’ levels of inventory and differences in the
timing and pattern of orders from their end customers. A large
percentage of our revenue in the Asia Pacific region is recognized upon shipment
to our distributors. Consequently, we have less visibility over both
inventory levels at our distributors and end customer demand for our
products. Further, the distributors have assumed more risk associated
with changes in end demand for our products. Accordingly, significant
changes in end demand in the semiconductor business in general, or for our
products in particular, may be difficult for us to detect or otherwise measure,
which could cause us to incorrectly forecast end-market demand for our
products. If we are not able to accurately forecast end demand for
our products, we may be left with large amounts of unsold products, may not be
able to fill all actual orders, and may not be able to efficiently utilize our
existing manufacturing capacity or make optimal investment and other business
decisions. As a result, we may end up with excess and obsolete inventory or we
may be unable to meet customer short-term demands, either of which could have an
adverse impact on our operating results.
We have made and may continue to make acquisitions and divestitures
which could divert management’s attention, cause ownership dilution to our
stockholders, be difficult to integrate and/or adversely affect our financial
results. Acquisitions and divestitures are commonplace in the semiconductor
industry and we have and may continue to acquire or divest businesses or
technologies. Integrating newly acquired businesses or technologies could put a
strain on our resources, could be costly and time consuming, and might not be
successful. Acquisitions or divestitures could divert our management’s attention
from other business concerns. In addition, we might lose key employees while
integrating new organizations. Acquisitions and divestitures could also result
in customer dissatisfaction, performance problems with an acquired company or
technology, dilutive or potentially dilutive issuances of equity securities, the
incurrence of debt, the assumption or incurrence of contingent liabilities, or
other unanticipated events or circumstances, any of which could harm our
business. Consequently, we might not be successful in integrating any acquired
businesses, products or technologies, and might not achieve anticipated revenues
and cost benefits.
Our results are
dependent on the success of new products. The markets we
serve are characterized by competition, rapid technological change, evolving
standards, short product life cycles and continuous erosion of average selling
prices. Consequently, our future success will be highly dependent
upon our ability to continually develop new products using the latest and most
cost-effective technologies, introduce our products in commercial quantities to
the marketplace ahead of the competition and have our products selected
for inclusion in leading system manufacturers’ products. In addition, the
development of new products will continue to require significant R&D
expenditures. If we are unable to successfully develop, produce and market new
products in a timely manner, have our products available in commercial
quantities ahead of competitive products or have our products selected for
inclusion in products of systems manufacturers and sell them at gross margins
comparable to or better than our current products, our future results of
operations could be adversely impacted. In addition, our future revenue growth
is also partially dependent on our ability to penetrate new markets in which we
have limited experience and where competitors are already entrenched. Even if we
are able to develop, produce and successfully market new products in a timely
manner, such new products may not achieve market acceptance.
Intellectual
property claims could adversely affect our business and
operations. The semiconductor industry is
characterized by vigorous protection and pursuit of intellectual property
rights, which has resulted in significant and often protracted and expensive
litigation. We have been involved in patent litigation in the past, which
adversely affected our operating results. Although we have obtained patent
licenses from certain semiconductor manufacturers, we do not have licenses from
a number of semiconductor manufacturers that have broad patent portfolios.
Claims alleging infringement of intellectual property rights have been asserted
against us in the past and could be asserted against us in the future. These
claims could result in our having to discontinue the use of certain processes;
license certain technologies; cease the manufacture, use and sale of infringing
products; incur significant litigation costs and damages; and develop
non-infringing technology. We might not be able to obtain such licenses on
acceptable terms or to develop non-infringing technology. Further, the failure
to renew or renegotiate existing licenses on favorable terms, or the inability
to obtain a key license, could materially and adversely affect our
business.
We are reliant
upon subcontractors and third-party foundries. Beginning in
fiscal 2008, we do not perform assembly services in-house and are now totally
dependent on subcontractors for assembly operations. We are also
dependent on third-party outside foundries for the manufacture of a portion of
our silicon wafers. Our increased reliance on subcontractors and
third-party foundries for our current products increases certain risks because
we will have less control over manufacturing quality and delivery schedules,
maintenance of sufficient capacity to meet our orders and generally, maintaining
the manufacturing processes we require. We expect our use of
subcontractors and third-party foundries to continue to increase. Due
to production lead times and potential capacity constraints, any failure on our
part to
adequately
forecast the mix of product demand and resulting foundry and subcontractor
requirements could adversely affect our operating results. In
addition, we cannot be certain that these foundries and subcontractors will
continue to manufacture, assemble, package and test products for us on
acceptable economic and quality terms, or at all, and it may be difficult for us
to find alternatives in a timely and cost-effective manner if they do not do
so.
We are dependent
on a concentrated group of customers for a significant part of our
revenues. A large portion of our revenues depends
on sales to a limited number of customers. If these relationships
were to diminish, or if these customers were to develop their own solutions or
adopt a competitor’s solution instead of buying our products, our results could
be adversely affected. For example, any diminished relationship with one or more
of our key customers could adversely affect our results.
Many of
our end-customer OEMs have outsourced their manufacturing to a concentrated
group of global EMSs and original design manufacturers (“ODMs”) who then buy
product directly from us or from our distributors on behalf of the
OEM. These EMSs and ODMs have achieved greater autonomy in the design
win, product qualification and product purchasing decisions, especially for
commodity products. Competition for the business of these EMSs and ODMs is
intense and there is no assurance we can remain competitive and retain our
existing market share with these customers. If these companies were to allocate
a higher share of commodity or second-source business to our competitors instead
of buying our products, our results would be adversely affected. Furthermore, as
EMSs and ODMs have represented a growing percentage of our overall business, our
concentration of credit and other business risks with these customers has
increased. Competition among global EMSs and ODMs is intense as they operate on
extremely thin margins. If any one or more of these global EMSs or
ODMs were to file for bankruptcy or otherwise experience significantly adverse
financial conditions, our business would be adversely impacted as
well.
Finally,
we utilize a relatively small number of global and regional distributors around
the world, who buy product directly from us on behalf of their customers. For
example, one family of distributors, Maxtek and its affiliates, represented
approximately 20% of our revenues for the first six months of fiscal 2010 and
represented approximately 28% of our gross accounts receivable as of September
27, 2009. If our business relationships were to diminish or any of
these global distributors were to file for bankruptcy or otherwise experience
significantly adverse financial conditions, our business could be adversely
impacted. Because we continue to be dependent upon continued revenue from a
small group of OEM end customers, global and regional distributors, any material
delay, cancellation or reduction of orders from or loss of these
or other major customers could cause our sales to decline
significantly, and we may not be able to reduce the accompanying expenses at the
same rate.
The costs
associated with the legal proceedings in which we are involved can be
substantial, specific costs are unpredictable and not completely within our
control, and unexpected increases in litigation costs could adversely affect our
operating results. We are currently involved in legal
proceedings, as described above in Part II, Item 1 "Legal
Proceedings." The costs associated with legal proceedings are
typically high, relatively unpredictable and are not completely within our
control. While we do our best to forecast and control such costs, the
costs may be materially more than expected, which could adversely affect our
operating results. Moreover, we may become involved in unexpected litigation
with additional companies at any time, which would increase our aggregate
litigation costs and could adversely affect our operating results. We
are not able to predict the outcome of any of our legal actions and an adverse
decision in any of our legal actions could significantly harm our business and
financial performance.
We are exposed to
potential impairment charges on certain assets. Over the past
several years, we have made several acquisitions. As a result of
these acquisitions, we had over $1 billion of goodwill and over $204 million of
intangible assets on our balance sheet at the beginning of fiscal
2009. As a result of our interim impairment analysis in the third
quarter of 2009 and annual impairment analysis in the fourth
quarter
of fiscal 2009, we recorded a goodwill impairment charge of $946.3 million and
acquisition-related intangible asset impairment charge of $79.4 million in
fiscal 2009. In determining fair value, we consider various factors including
our market capitalization, forecasted revenue and costs, risk-adjusted discount
rates, future economic and market conditions, determination of appropriate
market comparables and expected periods over which our assets will be utilized
and other variables.
If our
assumptions regarding forecasted cash flow, revenue and margin growth rates of
certain long-lived asset groups and reporting units are not achieved, it is
reasonably possible that an impairment review may be triggered for the remaining
balance of goodwill and long-lived assets prior to the next annual review in the
fourth quarter of fiscal 2010, which could result in material charges that could
impact our operating results and financial position. In addition, from time to
time, we have made investments in other companies, both public and
private. If the companies that we invest in are unable to execute
their plans and succeed in their respective markets, we may not benefit from
such investments, and we could potentially lose the amounts we
invest. In addition, we evaluate our investment portfolio on a
regular basis to determine if impairments have occurred. Impairment
charges could have a material impact on our results of operations in any
period.
We are dependent
on key personnel. Our performance is substantially dependent on the
performance of our executive officers and key employees. The loss of the
services of any of our executive officers, technical personnel or other key
employees could adversely affect our business. In addition, our future success
depends on our ability to successfully compete with other technology firms in
attracting and retaining specialized technical and management personnel. If we
are unable to identify, hire and retain highly qualified technical and
managerial personnel, our business could be harmed.
Our product
manufacturing operations are complex and subject to
interruption. From time to time, we have experienced
production difficulties, including lower manufacturing yields or products that
do not meet ours or our customers' specifications, which has resulted in
delivery delays, quality problems and lost revenue opportunities. While delivery
delays have been infrequent and generally short in duration, we could experience
manufacturing problems, capacity constraints and/or product delivery delays in
the future as a result of, among other things, the complexity of our
manufacturing processes, changes to our process technologies (including
transfers to other facilities and die size reduction efforts), and difficulties
in ramping production and installing new equipment at our
facilities. In addition, any significant quality problems could
damage our reputation with our customers and could take focus away from the
development of new and enhanced products. These could have a
significant negative impact on our financial results.
Substantially
all of our revenues are derived from products manufactured at facilities which
are exposed to the risk of natural disasters. If we were unable to use our
facilities or those of our subcontractors and third party foundries as a result
of a natural disaster or otherwise, our operations would be materially adversely
affected. While we maintain certain levels of insurance against
selected risks of business interruption, not all risks can be insured at a
reasonable cost. For example, we do not insure our facilities for
earthquake damage due to the costs involved. Even if we have
purchased insurance, the adverse impact on our business, including both costs
and lost revenue opportunities, could greatly exceed the amounts, if any, that
we might recover from our insurers.
We are
dependent upon electric power and water provided by public utilities where we
operate our manufacturing facilities. We maintain limited backup generating
capability, but the amount of electric power that we can generate on our own is
insufficient to fully operate these facilities, and prolonged power
interruptions and restrictions on our access to water could have a significant
adverse impact on our business.
We rely upon
certain critical information systems for the operation of our
business. We maintain and rely upon certain critical
information systems for the effective operation of our business. These
information systems include telecommunications, the Internet, our corporate
intranet, various computer hardware and software applications, network
communications, and e-mail. These information systems are subject to attacks,
failures, and access denials from a number of potential sources including
viruses, destructive or inadequate code, power failures, and physical damage to
computers, communication lines and networking equipment. To the extent that
these information systems are under our control, we have implemented security
procedures, such as virus protection software and emergency recovery processes,
to address the outlined risks. While we believe that our
information systems are appropriately controlled and that we have processes in
place to adequately manage these risks, security procedures for information
systems cannot be guaranteed to be failsafe and our inability to use or access
these information systems at critical points in time could unfavorably impact
the timely and efficient operation of our business.
We are dependent
on a limited number of suppliers. Our manufacturing operations
depend upon obtaining adequate raw materials on a timely basis. The number of
suppliers of certain raw materials, such as silicon wafers, ultra-pure metals
and certain chemicals and gases needed for our products, is very limited. In
addition, certain packages for our products require long lead times and are
available from only a few suppliers. From time to time, suppliers have extended
lead times or limited supply to us due to capacity constraints. Our
results of operations would be materially and adversely affected if we were
unable to obtain adequate supplies of raw materials in a timely manner or if
there were significant increases in the costs of raw materials, or if foundry or
assembly subcontractor capacity was not available, or was only available at
uncompetitive prices.
We are subject to
a variety of environmental and other regulations related to hazardous materials
used in our manufacturing processes. Any failure by us to
adequately control the use or discharge of hazardous materials under present or
future regulations could subject us to substantial costs or liabilities or cause
our manufacturing operations to be suspended.
We have limited
experience with government contracting, which entails differentiated business
risks. Currently, certain of our subsidiaries derive revenue
from contracts and subcontracts with agencies of, or prime contractors to, the
U.S. government, including U.S. military agencies. Although former
employees of ICS who work for us have experience contracting with agencies of
the U.S. government, historically we have not contracted with agencies of the
U.S. government. As a company engaged, in part, in supplying
defense-related equipment to U.S. government agencies, we are subject to certain
business risks that are particular to companies that contract with U.S.
government agencies. These risks include the ability of the U.S.
government or related contractors to unilaterally:
·
|
Terminate
contracts at its convenience;
|
·
|
Terminate,
modify or reduce the value of existing contracts, if budgetary constraints
or needs change;
|
·
|
Cancel
multi-year contracts and related orders, if funds become
unavailable;
|
·
|
Adjust
contract costs and fees on the basis of audits performed by U.S.
government agencies;
|
·
|
Control
and potentially prohibit the export of our
products;
|
·
|
Require
that the company continue to supply products despite the expiration of a
contract under certain
circumstances;
|
·
|
Require
that the company fill certain types of rated orders for the U.S.
government prior to filling any orders for other
customers; and
|
·
|
Suspend
us from receiving new contracts pending resolution of any alleged
violations of procurement laws or
regulations.
|
In
addition, because we have defense industry contracts with respect to products
that are sold both within and outside of the United States, we are subject to
the following additional risks in connection with government
contracts:
·
|
The
need to bid on programs prior to completing the necessary design, which
may result in unforeseen technological difficulties, delays and/or cost
overruns;
|
·
|
The
difficulty in forecasting long-term costs and schedules and the potential
obsolescence of products related to long-term fixed price contracts;
and
|
·
|
The
need to transfer and obtain security clearances and export licenses, as
appropriate.
|
Tax benefits we
receive may be terminated or reduced in the future, which would increase our
costs. As a result of our international manufacturing
operations, a significant portion of our worldwide profits are in jurisdictions
outside the United States, including Bermuda, Singapore and Malaysia which offer
significant reductions in tax rates. These lower tax rates allow us
to record a relatively low tax expense on a worldwide basis. Under
current Bermuda law, we are not subject to tax on our income and capital
gains. If US corporate income tax laws were to change regarding
deferral of manufacturing profits or other issues impacting our operating
structure, this would have a significant impact to our financial
results. President Obama’s Administration recently announced new U.S.
tax legislative proposals that, if enacted, would adversely impact our effective
tax rate and overall tax paying position in the US.
In
addition, the Economic Development Board of Singapore granted Pioneer Status to
our wholly-owned subsidiary in Singapore in 1997. Initially, this tax exemption
was to expire after ten years, but the Economic Development Board in January
2008 agreed to extend the term to twelve years. As a result, a significant
portion of the income we earn in Singapore during this period will be exempt
from the Singapore income tax. We are required to meet several requirements as
to investment, headcount and activities in Singapore to retain this status. If
our Pioneer Status is terminated early because we do not continue to meet these
requirements, or for other reasons beyond our control, our financial results
could be negatively impacted. Also, in Malaysia, we have been granted a tax
holiday related to certain profits. If we are unable to renew this
tax holiday when it expires, we will be required to start paying income tax at
the statutory tax rate on our operations, which will adversely impact our
effective tax rate.
International
operations add increased volatility to our operating
results. A substantial percentage of our revenues
are derived from international sales, as summarized below:
(percentage
of total revenues)
|
|
First
six months of fiscal 2010
|
|
|
Fiscal
2009
|
|
|
Fiscal
2008
|
|
Americas
|
|
|
18 |
% |
|
|
20 |
% |
|
|
28 |
% |
Asia
Pacific
|
|
|
66 |
% |
|
|
63 |
% |
|
|
56 |
% |
Japan
|
|
|
9 |
% |
|
|
9 |
% |
|
|
9 |
% |
Europe
|
|
|
7 |
% |
|
|
8 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
In
addition, our facilities in Malaysia and Singapore, our design centers in Canada
and China, and our foreign sales offices incur payroll, facility and other
expenses in local currencies. Accordingly, movements in foreign currency
exchange rates can impact our revenues and costs of goods sold, as well as both
pricing and demand for our products.
Our
offshore sites and export sales are also subject to risks associated with
foreign operations, including:
·
|
Political
instability and acts of war or terrorism, which could disrupt our
manufacturing and logistical
activities;
|
·
|
Regulations
regarding use of local employees and
suppliers;
|
·
|
Currency
controls and fluctuations, devaluation of foreign currencies, hard
currency shortages and exchange rate
fluctuations;
|
·
|
Changes
in local economic conditions;
|
·
|
Governmental
regulation of taxation of our earnings and those of our personnel;
and
|
·
|
Changes
in tax laws, import and export controls, tariffs and freight
rates.
|
Contract
pricing for raw materials and equipment used in the fabrication and assembly
processes, as well as for foundry and subcontract assembly services, may also be
impacted by currency controls, exchange rate fluctuations and currency
devaluations. We sometimes hedge currency risk for currencies that
are highly liquid and freely quoted, but may not enter into hedge contracts for
currencies with limited trading volume.
In
addition, as much of our revenues are generated outside the United States, a
significant portion of our cash and investment portfolio accumulates
offshore. At September 27, 2009, we had cash, cash equivalents and
investments of approximately $223.8 million invested overseas in accounts
belonging to various IDT foreign operating subsidiaries. While these
amounts are primarily invested in U.S. dollars, a portion is held in foreign
currencies, and all offshore balances are exposed to local political, banking,
currency control and other risks. In addition, these amounts may be
subject to tax and other transfer restrictions.
Our results of
operations could vary as a result of the methods, estimates and judgments we use
in applying our accounting policies. The methods, estimates
and judgments we use in applying our accounting policies have a significant
impact on our results of operations (see “Significant Accounting Policies” in Part I, Item 1 of this
Form 10-Q). Such methods, estimates and judgments are, by their
nature, subject to substantial risks, uncertainties and assumptions, and factors
may arise over time that leads us to change our methods, estimates and
judgments. Changes in those methods, estimates and judgments could
significantly affect our results of operations. In particular, the
calculation of stock-based compensation expense under the authoritative guidance
requires us to use valuation methodologies that were not developed for use in
valuing employee stock options and make a number of assumptions, estimates and
conclusions regarding matters such as expected forfeitures, expected volatility
of our share price and the exercise behavior of our
employees. Changes in these variables could impact our stock-based
compensation expense and have a significant impact on our gross margins, R&D
and SG&A expenses.
If credit market
conditions worsen, it could have a material adverse impact on our investment
portfolio. Although we manage our investment portfolio by
purchasing only highly rated securities and diversifying our investments across
various sectors, investment types, and underlying issuers, recent volatility in
the short-term financial markets has been unprecedented. We
have a nominal amount of securities in asset backed commercial paper and hold no
auction rated or mortgage backed securities. However it is uncertain
as to the full extent of the current credit and liquidity crisis and with
possible further deterioration, particularly within one or several of the large
financial institutions, the value of our investments could be negatively
impacted.
Our common stock
has experienced substantial price volatility. Volatility in
the price of our common stock may occur in the future, particularly as a result
of the current economic downturn and quarter-to-quarter variations in our actual
or anticipated financial results, or the financial results of other
semiconductor companies or our customers. Stock price volatility may also result
from product announcements by us or our competitors, or from changes in
perceptions about the various types of products we manufacture and
sell. In addition, our stock price may fluctuate due to price and
volume fluctuations in the stock market, especially in the technology sector,
and as a result of other considerations or events described in this
section.
We depend on the
ability of our personnel, raw materials, equipment and products to move
reasonably unimpeded around the world. Any political,
military, world health or other issue which hinders the worldwide movement of
our personnel, raw materials, equipment or products or restricts the import or
export of materials could lead to significant business disruptions. Furthermore,
any strike, economic failure, or other material disruption on the part of major
airlines or other transportation companies could also adversely affect our
ability to conduct business. If such disruptions result in cancellations of
customer orders or contribute to a general decrease in economic activity or
corporate spending on information technology, or directly impact our marketing,
manufacturing, financial and logistics functions, our results of operations and
financial condition could be materially and adversely affected.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On
January 18, 2007, our Board of Directors initiated a $200 million share
repurchase program. During fiscal 2008, our Board of Directors approved a $200
million expansion of the share repurchase program to a total $400
million. In fiscal 2008 and fiscal 2007, we repurchased approximately
28.9 million shares and 1.6 million shares at an average price of $11.60 per
share and $15.95 per share for a total purchase price of $334.8 million and
$25.0 million, respectively. On April 30, 2008, our Board of
Directors approved an additional $100 million expansion of the share repurchase
program to a total of $500 million. In fiscal 2009, we repurchased
approximately 8.4 million shares at an average price of $7.46 per share for a
total purchase price of $62.3 million. We did not repurchase any
shares in the first six months of fiscal 2010. As of September 27,
2009, approximately $77.9 million was available for future purchase under the
share repurchase program. Share repurchases were recorded as treasury
stock and resulted in a reduction of stockholders’
equity.
None.
On
September 17, 2009, we held our 2009 Annual Meeting of Stockholders at our
corporate headquarters, located at 6024 Silver Creek Valley Road, San Jose,
California, 95138. On July 22, 2009, the record date, 165,569,816
shares of our common stock were outstanding and entitled to be voted. Tabulated
proxies at the meeting represented 152,110,558 shares, or 92% of the total
number of shares eligible to vote as of the record date. The results of the
voting on the matters submitted to the stockholders are as follows:
Proposal
I: Election of directors.
Name:
|
|
Votes
For
|
|
|
Withheld
|
|
John
Schofield
|
|
|
148,549,853 |
|
|
|
3,560,705 |
|
Lew
Eggebrecht
|
|
|
145,186,357 |
|
|
|
6,924,201 |
|
Umesh
Padval
|
|
|
150,565,910 |
|
|
|
1,544,639 |
|
Gordon
Parnell
|
|
|
150,244,590 |
|
|
|
1,865,968 |
|
Donald
Schrock
|
|
|
150,525,966 |
|
|
|
1,584,592 |
|
Ron
Smith, Ph.D.
|
|
|
148,546,166 |
|
|
|
3,564,392 |
|
Theodore
I, Tewksbury III, Ph.D.
|
|
|
150,339,896 |
|
|
|
1,770,662 |
|
Proposal
II: To approve the adoption of the 2009 Employee Stock Purchase Plan
and authorize the reservation and issuance of up to 9,000,000 shares of the
Company’s common stock under the 2009 Employee Stock Purchase Plan;
Votes
For
|
|
Against
|
|
Abstained
|
|
No
Vote
|
130,237,907
|
|
2,135,844
|
|
294,016
|
|
19,442,791
|
Proposal
III: To approve a proposal to implement a one-time stock option
exchange program;
Votes
For
|
|
Against
|
|
Abstained
|
|
No
Vote
|
98,492,422
|
|
33,848,982
|
|
325,363
|
|
19,443,791
|
Proposal
IV: To ratify the selection of PricewaterhouseCoopers LLP as
the Company’s independent registered public accounting firm for the fiscal year
ending March 28, 2010.
Votes
For
|
|
Against
|
|
Abstained
|
150,985,592
|
|
894,549
|
|
230,417
|
ITEM
6. EXHIBITS
(a) The
following exhibits are filed herewith:
Exhibit
number
|
|
Description
|
31.1
|
|
Certification
of Chief Executive Officer as required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, dated November 5,
2009.
|
31.2
|
|
Certification
of Chief Financial Officer as required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, dated November 5,
2009.
|
32.1
|
|
Certification
of Chief Executive Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350 dated
November 5, 2009.
|
32.2
|
|
Certification
of Chief Financial Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended and 18 U.S.C. Section 1350 dated November
5, 2009.
|
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.
|
|
INTEGRATED
DEVICE TECHNOLOGY, INC.
|
Date:
November 5, 2009
|
|
/S/ THEODORE L. TEWKSBURY III
Theodore
L.Tewksbury III
President and Chief Executive
Officer
|
Date:
November 5, 2009
|
|
/S/ RICHARD D. CROWLEY, JR.
Richard
D. Crowley, Jr.
Vice
President, Chief Financial Officer
(Principal Financial and
Accounting Officer)
|
EXHIBIT
INDEX
Exhibit
number
|
|
Description
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer as required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, dated November 5,
2009.
|
31.2
|
|
Certification
of Chief Financial Officer as required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, dated November 5,
2009.
|
32.1
|
|
Certification
of Chief Executive Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350 dated
November 5, 2009.
|
32.2
|
|
Certification
of Chief Financial Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended and 18 U.S.C. Section 1350 dated November
5, 2009.
|