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| HITT > SEC Filings for HITT > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
This information should be read in conjunction with our audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in our Annual Report on Form 10-K for the year ended December 31, 2007.
Description of Our Revenue, Costs and Expenses
Revenue. Our revenue is derived primarily from the sale of standard and custom products. We develop standard products from our own specifications, which we sell through our direct sales organization, our network of independent sales representatives, a distributor and our website. We also develop custom products to meet the specialized requirements of individual customers, which are sold by our direct sales organization.
We sell our products to OEMs, that supply advanced electronic systems to commercial and military end users, and to these OEMs' contract manufacturers. In general, the decision to purchase our product is made by the OEM, which has designed our product into its system. In the event that we sell to an OEM's contract manufacturer, the contract manufacturer typically does not have discretion to replace our product with one from a different supplier.
Our sales cycle varies substantially, ranging from a period of a month or less when a customer selects a standard product from our catalog or website, to as long as two years or more for custom products. In the sales process, our sales and application engineers work closely with the OEM customer to analyze the customer's system requirements and select an appropriate standard product or establish a technical specification for a custom product. In the case of a custom product, we also select a semiconductor process and foundry, and evaluate test wafers and finished components before manufacturing in commercial quantities can begin. Volume purchases of our products by an OEM customer, or its contract manufacturer, generally do not occur until the OEM customer has made the decision to begin production of the system incorporating our product. Our receipt of substantial revenue from sales of a product to an OEM customer depends on that customer's commercial success in manufacturing and selling its system incorporating our product. It may take several years for a newly introduced standard product to generate substantial revenue, if ever. However, the life cycles of our standard products tend to be lengthy.
Although most of our revenue is derived from sales of our products, we also receive a small percentage of our revenue from customer-sponsored research and development activities. These activities range from pure research, in which we investigate IC design techniques on new semiconductor technologies at the request of a government agency or commercial customer, to custom development projects in which we are paid to enhance or modify an existing product or develop a new product to meet a customer's specifications.
Historically, a portion of our customer-sponsored research and development activities have been funded by U.S. government agencies under the Small Business Innovation Research (SBIR) program. As a result of certain technical Small Business Administration requirements, we are no longer eligible to compete for new SBIR awards. Over the next four fiscal quarters, we will complete substantially all of our existing SBIR projects and phase out our participation in the SBIR program. Revenue from SBIR contracts was immaterial in 2007. There will be no impact on our other U.S. government- or commercial-sponsored research and development activities. Research and development expense will increase as we reassign engineering resources from government-sponsored SBIR programs to Hittite funded research and development projects.
Cost of revenue. Cost of revenue consists primarily of the cost of semiconductor wafers that we purchase from our foundries and other materials such as packages, epoxies, connectors and production masks. Cost of revenue also includes personnel costs and overhead related to our manufacturing and engineering operations, including occupancy and equipment costs, shipping costs, charges for inventory obsolescence and warranty obligations and amortization of certain intangible assets.
Research and development. Research and development expense consists primarily of personnel costs of our research and development organization, costs of development wafers, license fees for computer-aided design software, costs of development testing and evaluation, costs of developing automated test software, and related occupancy and equipment costs. We expense all research and development costs as incurred.
Sales and marketing. Sales and marketing expense consists primarily of personnel costs of our sales and marketing organization, sales commissions paid to independent sales representatives, costs of advertising, trade shows, corporate marketing, promotion, travel, related occupancy and equipment costs, amortization of certain intangible assets and other marketing costs.
General and administrative. General and administrative expense consists primarily of personnel costs of our executive management, finance, and other administrative staff, outside professional fees, related occupancy and equipment costs and other corporate expenses.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. 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 of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we re-evaluate our judgments and estimates including those related to uncollectible accounts receivable, inventories, intangible assets, stock-based compensation, income taxes, warranty obligations, accrued expenses and other contingencies. We base our estimates and judgments on our historical experience and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates, and material effects on our operating results and financial position may result.
In September 2006, the FASB issued SFAS 157, which clarifies the definition of fair value, establishes guidelines for measuring fair value and expands the related disclosure requirements. In February 2008, the FASB issued FSP SFAS 157-2, which delayed the effective date of SFAS 157 for us to January 1, 2009 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We adopted SFAS 157 effective January 1, 2008, except as it applies to those non-financial assets and non-financial liabilities as described in FSP SFAS 157-2. Such adoption did not have a material impact on our financial position or results of operations. See Note 4 to the Condensed Consolidated Financial Statements included in this Form 10-Q for disclosures regarding the fair value of our financial instruments.
For a description of the other accounting policies which, in our opinion, involve the most significant application of judgment, or involve complex estimation, and which could, if different judgments or estimates were made, materially affect our reported results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2007.
Results of Operations
Comparison of the Three Month Periods Ended September 30, 2008 and 2007
Revenue. In the three months ended September 30, 2008, our revenue increased $5.6 million, or 14.0%, to $45.5 million, compared with $39.9 million in the corresponding period of 2007. The growth was primarily attributable to increased sales to the cellular infrastructure, microwave and millimeterwave communications and military markets, partially offset by a decrease in sales to the broadband market. Our sales growth was primarily due to the increased breadth of our product offerings and the increased market acceptance of the products we introduced in prior years. Revenue from sales to customers outside the United States accounted for 60.2% of our total revenue in the three months ended September 30, 2008, compared with 57.5% in the corresponding period of 2007.
Cost of revenue and gross margin. In the three months ended September 30, 2008, our cost of revenue increased $0.9 million, or 7.9%, to $12.5 million, compared with $11.6 million in the corresponding period of 2007, primarily as a result of our increased revenue. In the three months ended September 30, 2008, our gross margin was 72.5%, compared with 71.0% in the corresponding period of 2007. The increase in gross margin was primarily attributable to a favorable change in product mix and a decrease in direct production material costs, partially offset by an increase in higher volume orders, on which we offer higher discounts, an increase in indirect manufacturing costs and higher project costs on certain government contracts.
Research and development expense. In the three months ended September 30, 2008, our research and development expense increased $1.6 million, or 33.6%, to $6.4 million, and represented 14.1% of our revenue, compared with $4.8 million, or 12.0% of our revenue, in the corresponding period of 2007. The increase in our research and development expense was attributable to a $1.1 million increase in personnel costs, primarily associated with the growth of our engineering organization and a shift in engineering resources from customer sponsored activities, the costs for which are charged to cost of revenue, to internal research and development activities. In addition, we experienced a $0.2 million increase in depreciation, a $0.1 million increase in engineering material expenses and a $0.2 million net increase in other costs. We believe that a significant amount of research and development activity will be required for us to remain competitive in the future. As a result, we expect our research and development expense to increase as we add personnel and other costs to invest in the development of new products.
Sales and marketing expense. In the three months ended September 30, 2008, our sales and marketing expense increased $0.7 million, or 21.4%, to $4.0 million, and represented 8.8% of our revenue, compared with $3.3 million, or 8.2% of our revenue, in the corresponding period of 2007. The increase in our sales and marketing expense was primarily attributable to a $0.3 million increase in personnel costs, associated with the growth of our worldwide direct sales and marketing organization, $0.2 million of intangible asset amortization related to the October 2007 Velocium strategic agreement, a $0.1 million increase in third party commissions and a $0.1 million net increase in other costs. We expect sales and marketing expense will increase as we hire additional personnel, continue to expand our worldwide sales and marketing activities and, to the extent that our revenue increases, pay additional commissions.
General and administrative expense. In the three months ended September 30, 2008, our general and administrative expense increased $0.2 million, or 10.1%, to $2.1 million, and represented 4.6% of our revenue, compared with $1.9 million, or 4.8% of our revenue, in the corresponding period of 2007. The increase in our general and administrative expense was primarily attributable to a $0.2 million increase in professional fees. We expect general and administrative expense will increase as a result of additional personnel, professional and other costs to support the growth of our business.
Interest income. In the three months ended September 30, 2008, our interest income decreased $0.6 million to $0.8 million, compared with $1.4 million in the corresponding period of 2007, as the increase in our cash and investment balances was more than offset by lower effective yields, due to prevailing market conditions.
Other income (expense), net. In the three months ended September 30, 2008, other expense was $0.1 million, compared with other income of $0.3 million in the corresponding period of 2007. Activity in both periods related primarily to foreign currency transaction gains and losses recognized arising in the normal course of business.
Provision for income taxes. Our provision for income taxes increased by $1.2 million to $7.6 million in the three months ended September 30, 2008, from $6.4 million in the corresponding period of 2007, representing an effective tax rate of 35.5% and 31.7% in 2008 and 2007, respectively. The effective tax rate increased primarily as a result of an increase in state income taxes and a decrease in tax-exempt interest. Generally, the effective tax rates differ from the federal and state statutory tax rates primarily due to the impact of federal and state tax credits, tax-exempt interest income and incentives provided for under the American Jobs Creation Act of 2004.
Comparison of the Nine month Periods Ended September 30, 2008 and 2007
Revenue. In the nine months ended September 30, 2008, our revenue increased $19.9 million, or 17.5%, to $133.9 million, compared with $113.9 million in the corresponding period of 2007. The growth was primarily attributable to increased sales to the cellular infrastructure, microwave and millimeterwave communications, military and test and measurement markets. Our sales growth was primarily due to the increased breadth of our product offerings and the increased market acceptance of the products we introduced in prior years. Revenue from sales to customers outside the United States accounted for 59.4% of our total revenue in the nine months ended September 30, 2008, compared with 57.1% in the corresponding period of 2007.
Cost of revenue and gross margin. In the nine months ended September 30, 2008, our cost of revenue increased $5.7 million, or 17.2%, to $38.6 million, compared with $32.9 million in the corresponding period of 2007, primarily as a result of our increased revenue. In the nine months ended September 30, 2008, our gross margin was 71.2%, compared with 71.1% in the corresponding period of 2007. The increase in gross margin was primarily attributable to a favorable change in product mix and a decrease in direct production material costs, partially offset by an increase in higher volume orders, on which we offer higher discounts, an increase in indirect manufacturing costs and higher project costs on certain government contracts.
Research and development expense. In the nine months ended September 30, 2008, our research and development expense increased $4.2 million, or 30.5%, to $18.0 million, and represented 13.4% of our revenue, compared with $13.8 million, or 12.1% of our revenue, in the corresponding period of 2007. The increase in our research and development expense was attributable to a $3.0 million increase in personnel costs, primarily associated with the growth of our engineering organization and a shift in engineering resources from customer sponsored activities, the costs for which are charged to cost of revenue, to internal research and development activities. In addition, we experienced a $0.7 million increase in depreciation, a $0.4 million increase in engineering material and a $0.1 million net increase in other costs.
Sales and marketing expense. In the nine months ended September 30, 2008, our sales and marketing expense increased $2.7 million, or 29.0%, to $12.0 million, and represented 9.0% of our revenue, compared with $9.3 million, or 8.2% of our revenue, in the corresponding period of 2007. The increase in our sales and marketing expense was primarily attributable to a $1.2 million increase in personnel costs, associated with the growth of our worldwide direct sales and marketing organization, $0.7 million of intangible asset amortization related to the October 2007 Velocium strategic agreement, a $0.5 million increase in third party commissions and a $0.3 million net increase in other costs.
General and administrative expense. In the nine months ended September 30, 2008, our general and administrative expense increased $0.9 million, or 16.8%, to $6.3 million, and represented 4.7% of our revenue, compared with $5.4 million, or 4.7% of our revenue, in the corresponding period of 2007. The increase in our general and administrative expense was primarily attributable to a $0.7 million increase in professional fees and a $0.3 million increase in personnel costs, primarily due to equity compensation expense, partially offset by a $0.1 million net decrease in other costs.
Interest income. In the nine months ended September 30, 2008, our interest income decreased $1.2 million to $2.8 million, compared with $4.0 million in the corresponding period of 2007, as the increase in our cash and investment balances was more than offset by lower effective yields, due to prevailing market conditions.
Other income (expense), net. In the nine months ended September 30, 2008, other expense was $0.2 million, compared with other income of $0.2 million in the corresponding period of 2007. Activity in both periods related primarily to foreign currency transaction gains and losses recognized arising in the normal course of business.
Provision for income taxes. Our provision for income taxes increased by $2.6 million to $21.4 million in the nine months ended September 30, 2008, from $18.8 million in the corresponding period of 2007, representing an effective tax rate of 34.7% and 33.2% in 2008 and 2007, respectively. The effective tax rate increased primarily as a result of an increase in state income taxes and a decrease in tax-exempt interest. Generally, the effective tax rates differ from the federal and state statutory tax rates primarily due to the impact of federal and state tax credits, tax-exempt interest income and incentives provided for under the American Jobs Creation Act of 2004.
Liquidity and Capital Resources
Our principal sources of liquidity as of September 30, 2008 consisted of our cash and cash equivalents of $185.7 million and a $30.0 million bank credit facility, from which we had no borrowings outstanding as of September 30, 2008.
In the nine months ended September 30, 2008, cash provided by our operations was $44.7 million, of which the principal components were our net income of $40.2 million and non-cash charges of $10.4 million, partially offset by a net increase in deferred taxes of $1.1 million and a net increase in operating assets and liabilities of $4.8 million. The net increase in operating assets and liabilities includes an increase in accounts receivable of $6.0 million and a decrease in deferred revenue and customer advances of $2.4 million, due to our increase in revenue and the timing of customer invoices, and an increase in other net operating assets and liabilities of $0.2 million, partially offset by a $2.4 million increase in accounts payable and accrued expenses, due to the growth of our business and the timing of disbursements, and a $1.4 million decrease in net income taxes receivable.
In the nine months ended September 30, 2008, we invested $4.2 million in the purchase of capital equipment, primarily for engineering and production equipment. We invested $28.3 million in short-term available-for-sale investments and received $127.3 million in proceeds from the sales and maturities of such securities in the normal course of business. We received $2.0 million from the exercise of stock options and $0.8 million from the tax benefit related to these exercises.
On April 23, 2008, our board of directors authorized a stock repurchase program. The program authorizes the repurchase of up to 1.7 million shares over a period of three years and authorizes additional stock repurchases to offset future equity grants. The shares may be repurchased from time to time on the open market or in privately negotiated transactions. Through September 30, 2008, we repurchased 637,685 shares of our common stock for $22.2 million. The timing, price and volume of additional repurchases will be based on market conditions, relevant securities laws and other factors, as appropriate, and may be suspended or discontinued at any time.
We believe that our cash, cash equivalents and cash generated from operations will be sufficient to meet our anticipated cash requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support product development efforts, the expansion of our sales and marketing activities, the timing and introduction of new products, the costs to ensure access to adequate manufacturing capacity and the continuing market acceptance of our products. There is no assurance that additional financing, if required or desired, will be available in amounts or on terms acceptable to us, if at all.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS 157, which clarifies the definition of fair value, establishes guidelines for measuring fair value and expands the related disclosure requirements. In February 2008, the FASB issued FSP SFAS 157-2 which delayed the effective date of SFAS 157 for us to January 1, 2009 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We adopted SFAS 157 effective January 1, 2008, except as it applies to those non-financial assets and non-financial liabilities as described in FSP SFAS 157-2. Such adoption did not have a material impact on our financial position or results of operations. See Note 4 to the Condensed Consolidated Financial Statements included in this Form 10-Q for disclosures regarding the fair value of our financial instruments.
In February 2007, the FASB issued SFAS 159, which provides the option to measure at fair value certain financial instruments and other items that are not currently required to be measured at fair value. We adopted SFAS 159 effective January 1, 2008. We did not elect to measure at fair value any additional assets or liabilities that are not already measured at fair value under existing standards. Therefore, the adoption of this standard had no impact on our financial position or results of operations.
In December 2007, the FASB issued SFAS 141R, which establishes principles and requirements for how an acquirer recognizes and measures the identifiable assets and goodwill acquired, liabilities assumed and any noncontrolling interests. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R will be effective for us on January 1, 2009, and will be applied to any business combination with an acquisition date, as defined therein, that is subsequent to the effective date.
In December 2007, the FASB issued SFAS 160, which amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 will be effective for us on January 1, 2009. We do not believe that the adoption of SFAS 160 will have a material effect on our financial position or results of operations.
In March 2008, the FASB issued SFAS 161, which requires enhanced disclosures to enable investors to better understand the effects of derivative instruments and hedging activities on an entity's financial position, results of operations and cash flows. SFAS 161 will be effective for us on January 1, 2009. We do not believe that the adoption of SFAS 161 will have a material effect on our financial position or results of operations.
In April 2008, the FASB issued FSP 142-3, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. FSP SFAS 142-3 improves the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other applicable accounting literature. FSP SFAS 142-3 will be effective for us on January 1, 2009. We do not believe that the adoption of FSP SFAS 142-3 will have a material effect on our financial position or results of operations.
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