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| HITT > SEC Filings for HITT > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
Annual Report
Our discussion and analysis of financial condition and results of operations contains "forward-looking" statements and information, which involve risks and uncertainties. Actual future results may differ materially. Statements indicating that we "expect," "estimate," "believe," "are planning" or "plan to" are forward-looking, as are other statements concerning future financial results, product offerings or other events that have not yet occurred. There are several important factors that could cause actual results or events to differ materially from those anticipated by the forward-looking statements. Such factors include those described below and in "Risk Factors." Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized. We also cannot assure that we have identified all possible issues which we might face. We undertake no obligation to update any forward-looking statements that we make.
Overview
We were organized as a Massachusetts corporation in 1985 and reincorporated under the laws of Delaware in 1988. Since our founding, we have established a 24-year track record of innovation in RF, microwave and millimeterwave semiconductor technology.
º •
º From 1985 to 1993, our principal activity was government-sponsored
research and development relating to advanced, application-specific
radio frequency integrated circuits, or RFICs, and monolithic
microwave integrated circuits, or MMICs, primarily for military and
other government-related programs. During this period, we developed
many innovative technologies that we continue to incorporate in our
products today.
º •
º In 1993, we began to transition our focus from government-sponsored
research and development activities to the design, development and
production of our own ICs, modules and subsystems. Our early products
were custom MMICs designed for use in specific defense programs, such
as radar applications.
º •
º In 1996, we published our first catalog, which contained 50 standard
products, and began to expand our operations to support our growing
commercial business. We also established a dedicated direct technical
sales force to promote our emerging standard product line.
º •
º In 2001, we opened our first international sales office in the United
Kingdom, and began to focus on expanding our international business.
We have since opened sales and technical support offices in China,
Germany, Japan, Korea and Sweden, to complement our United States
offices. In 2008, we derived 59% of our revenue from customers outside
the United States.
º •
º In 2005, we established our first remote design center in Istanbul,
Turkey.
º •
º In July 2005, we sold 3,375,000 shares of common stock in an initial
public offering at $17.00 per share, for net proceeds, after the
underwriting discount and offering costs, of $51,630,000. Related to
the initial public offering, in July 2005, 1,288,628 shares of
Series A redeemable convertible preferred stock were converted into
2,414,887 shares of our common stock. In April 2005, our Board of
Directors declared a cash dividend in the aggregate amount of
$34,190,000, which was paid to those persons who were holders of
record of our common stock and of our Series A preferred stock on
June 24, 2005.
º •
º In August 2005, we acquired substantially all the assets and employees
of Q-Dot, Inc., a research and development organization based in
Colorado Springs, Colorado.
º •
º In December 2006, we opened a design center in Ottawa, Ontario,
Canada.
º •
º In October 2007, we entered into a strategic agreement with Northrop
Grumman Space Technology sector to market a specified list of existing
Velocium products worldwide, to license related technology and to
assume the associated customer relationships, at a cost of
$7.1 million.
º •
º In 2008, we introduced the 13th annual edition of our product catalog.
We currently offer more than 730 standard products in our catalog and
many more custom products, spanning 20 product lines.
We employ a fabless business strategy, which means that we do not own a semiconductor fabrication facility, or fab, and purchase all of our semiconductor wafer requirements from third-party wafer fabrication facilities, known as foundries. We believe that our fabless business model enables us to access a broad range of technologies and quickly respond to new market opportunities, while significantly reducing our capital requirements.
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. We are no longer eligible to compete for new SBIR awards and over the next three fiscal quarters 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 2008. 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 of America, 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. The accounting policies described below are those 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.
Revenue recognition. We recognize revenue in accordance with SEC Staff
Accounting Bulletin, or SAB, No. 104, "Revenue Recognition." SAB No. 104
requires that four basic criteria be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred or
services have been rendered; (3) the fee is fixed or determinable; and
(4) collectibility is reasonably assured. Revenue from the sale of our products
is recognized upon shipment, provided that no obligations remain and collection
of the receivable is reasonably assured. For arrangements that involve multiple
elements, we record revenue in accordance with Financial Accounting Standards
Board (FASB) Emerging Issues Task Force Issue (EITF) No. 00-21, "Revenue
Arrangements with Multiple Deliverables." Revenue earned on these arrangements
is allocated among the elements based on the relative fair values of those
elements as determined using objective and reliable evidence of fair value. If
the fair value of an undelivered element cannot be established, the arrangement
is accounted for as a single unit of accounting and revenue is recognized when
all performance obligations are met. We
maintain a reserve for potential sales returns and allowances. Returns and customer credits are infrequent and are recorded as a reduction to revenue. A portion of our sales are made to a distributor under an agreement that provides for limited product return privileges. As a result, we defer recognition of such revenue until the product is resold by the distributor.
Revenue from contracts with the United States government, government prime contractors and some commercial customers is recorded under the provisions of the American Institute of Certified Public Accountants Statement of Position No. 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." Generally, revenue from these contracts is recorded on a percentage of completion basis using costs incurred as the measurement basis for progress toward completion. Where appropriate, we use an output measure, such as units delivered, to measure progress toward completion. Estimated revenue in excess of amounts billed are reported as unbilled receivables. Contract accounting requires judgment in estimating costs and assumptions related to technical issues and delivery schedule. Contract costs include material, subcontract costs, labor and an allocation of indirect costs. The estimation of costs at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Changes in contract performance and estimated gross margin, including the impact of final contract settlements, are recognized in the period in which the changes are determined. Estimated losses on a contract are recognized in full in the period when they become known.
Allowance for doubtful accounts. We perform ongoing credit evaluations of our customers and adjust credit limits, as determined by our review of current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience, our anticipation of uncollectible accounts receivable and any specific customer collection issues that we have identified. While our credit losses have historically been within our expectations and the allowance established, we may not continue to experience the same credit loss rates that we have in the past.
Inventory. Inventory is stated at the lower of cost (first-in, first-out method) or market. We review the inventory and compare product costs with current market value, and write down any with costs in excess of current market value to its net realizable value. Estimating demand is inherently difficult, particularly given the cyclical nature of the semiconductor industry, which can result in excess or obsolete inventory. We recorded expense of $1,678,000, $655,000 and $270,000 in 2008, 2007 and 2006, respectively, to reduce inventory to its net realizable value. Once we have written down inventory to its estimated net realizable value, we establish a new cost basis for that inventory and do not increase its carrying value due to subsequent changes in demand forecasts. Accordingly, if inventory previously written down is subsequently sold, we may realize improved gross profit margins on these transactions.
Long-lived assets. We periodically evaluate our long-lived assets for potential impairment under Statement of Financial Accounting Standards, or SFAS, No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." We perform these evaluations whenever events or circumstances suggest that the carrying amount of an asset or group of assets is not recoverable. Our judgments regarding the existence of impairment indicators are based on market and operational performance. Indicators of potential impairment include:
º •
º a significant change in the manner in which an asset is used;
º •
º a significant decrease in the market value of an asset;
º •
º a significant adverse change in the business or industry in which the
asset is used or sold;
º •
º a current period operating cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the asset; and
º •
º significant advances in our technologies that require changes in one
or more of our manufacturing processes.
If we believe that an indicator of potential impairment exists, we test to determine whether the impairment recognition criteria in SFAS No. 144 have been met. To analyze a potential impairment, we project undiscounted future cash flows over the remaining life of the asset or the primary asset in the asset group, using a probability-weighted multiple scenario approach, reflecting a range of possible outcomes. If these projected cash flows are less than the carrying amount, an impairment loss is recognized based on the fair value of the asset or asset group less any costs of disposition. Evaluating the impairment requires judgment by our management to estimate future operating results and cash flows. If different estimates were used, the amount and timing of asset impairments could be affected. We charge impairments of the long-lived assets to operations if our evaluations indicate that the carrying values of these assets are not fully recoverable.
Warranty Obligations. We accrue for warranty costs at the time revenue is recognized based on the historical rate of claims and costs to provide warranty services. If we experience an increase in warranty claims above historical experience or our costs to provide warranty services increase, we would increase our warranty accrual, which would adversely impact our gross margins.
Stock-based compensation. Effective January 1, 2006, we adopted SFAS No. 123 (Revised 2004), "Share-Based Payment" (SFAS 123R), using the modified prospective method. SFAS 123(R) requires for all share-based payments that compensation cost be measured at fair value on date of grant and that this cost be recognized as expense over the service period the awards are expected to vest, net of estimated forfeitures. The fair value of restricted stock is determined based on the excess of the quoted price of our common stock on the date of grant over the exercise price of the restricted stock. The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." Determining the appropriate fair value model and calculating the fair value of share-based awards requires judgment, including estimating stock price volatility, the expected life of each equity instrument and the amount of share-based payments that will ultimately either vest or be forfeited. We consider many factors when estimating expected forfeitures, including the type of the award, employee group, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates. See Note 12 to the Consolidated Financial Statements included in this Form 10-K for further disclosure regarding our stock-based compensation.
Income taxes. We account for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." Under this method, we determine the deferred tax assets and liabilities based upon the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year's financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenue, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and the tax basis of assets or liabilities and their reported amounts in the financial statements. Because we assume that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related assets or liabilities are settled or the reported amount of the assets are recovered, hence giving rise to a deferred tax asset or liability. We must then periodically assess the likelihood that our deferred tax assets will be recovered from our future taxable income, and, to the extent we believe that it is more likely than not our deferred tax assets will not be recovered, we must establish a valuation
allowance against our deferred tax assets. Effective January 1, 2007, we adopted Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109" (FIN 48), which prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. In particular, the Interpretation requires that a tax benefit related to a given tax position be reflected in the financial statements only if it is more likely than not that it would be sustained on its technical merits in the event of a tax audit. The assessment of each tax position and the application of the measurement methodology of FIN 48 requires significant judgment. All tax positions are periodically analyzed and adjusted as a result of events, such as the resolution of tax audits or the expiration of statutes of limitations, which may result in charges or credits to the provision for income taxes. See Note 13 to the Consolidated Financial Statements included in this Form 10-K for further disclosure regarding FIN 48.
Factors and Trends That Affect Our Results of Operations
In reading our financial statements, you should be aware of the following factors and trends that our management believes are important in understanding our financial performance.
Revenue. From 2003 to 2008, our revenue grew from $42.0 million to $180.3 million, representing a compound annual growth rate of 33.8%. However, while we achieved record results in 2008, our year-over-year revenue growth has slowed, from 61.4% in 2006 to 20.0% in 2007 and 15.2% in 2008. Furthermore, we have seen an abrupt decrease in customer bookings across our major end-markets thus far in 2009, as the current global economic downturn and related credit crisis have begun to affect us along with the entire semiconductor industry. Although we believe that our prospects for long-term growth once global economic conditions improve are excellent, we believe that we currently are in a period of low to negative growth, the duration of which we cannot predict. Taking into account the likely impact of the current global economic downturn and related disruption in credit markets on our major end-markets, we expect revenues in the first quarter of 2009 to decrease to $36.0 to $38.0 million, compared to $46.4 million for the fourth quarter of 2008. Further reductions in demand and the possibility that economic conditions will deteriorate further may cause us to be unable to meet our expected revenues for the first quarter of 2009. Further, there can be no assurance that our revenues for the next three or more fiscal quarters will meet or exceed that level. In light of the current global recession, we have taken steps beginning in the first quarter of 2009 to limit increases in and, in some cases, reduce our operating expenses. Should economic conditions deteriorate further, we may decide to reduce operating expenses further.
Gross margin. One of our objectives is to maintain and improve our gross margin, which is our gross profit expressed as a percentage of our revenue. In the last three years our gross margins were 71.4% in 2008, 71.0% in 2007 and 72.8% in 2006. In general, we seek to introduce high performance products that are valued by our customers for their ability to address technically challenging applications, rather than commodity ICs for use in high volume applications where cost, rather than performance, is the highest priority. We also seek continuously to reduce our costs and to improve the efficiency of our manufacturing operations.
Our gross margin in any period is significantly affected by industry demand and the intensity of competition in the markets into which we sell our products. Gross margins are also significantly affected by product mix, that is, the percentage of our revenue in that period that is attributable to higher or lower margin products and by fluctuations in the relative proportion of high volume orders, on which we offer higher discounts. Additional factors affecting our gross margins include changes in the cost of wafers and materials, the timing of indirect costs for pre-production masks and evaluation materials, changes in estimates for contracts recognized on a percentage of completion basis, variations in overhead absorption rates and other manufacturing efficiencies, and numerous other factors, some of which are not under our control. Our margins can be substantially affected by changes in our
manufacturing yields. Our yields depend on many factors that we control, such as product design and the effectiveness of our own assembly and test operations, but they are also affected by the activities of third parties, such as the foundries and packaging subcontractors that supply us with critical materials and services, which are beyond our control. As a result of these or other factors, we may be unable to maintain or increase our gross margin in future periods.
Purchasing patterns of our standard products. A majority of our revenue in each quarter is typically derived from sales of our standard products. Purchasers of our standard products generally do not enter into long-term contracts with us. Customers that purchase large volumes of our standard products generally provide us with periodic forecasts of their requirements for those products, but these forecasts do not commit the customer to minimum purchases, and customers generally may revise these forecasts without penalty. A significant portion of our revenue in each quarter is attributable to purchase orders for standard products that are received and fulfilled in that quarter, often including a large number of orders from diverse customers and end markets. The price list for our standard products includes discounts based on purchase order volume, and, as a result, the revenue we receive from sales of a particular product in any period is influenced by the average order size for that product during that period. Our forecasting of sales of standard products takes into account a number of factors, including historical sales patterns for each individual product, our assessment of overall market conditions and our . . .
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