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| DSPG > SEC Filings for DSPG > Form 10-K on 13-Mar-2009 | All Recent SEC Filings |
13-Mar-2009
Annual Report
The following discussion and analysis is intended to provide an investor with a narrative of our financial results and an evaluation of our financial condition and results of operations. The discussion should be read in conjunction with our consolidated financial statements and notes thereto.
Business Overview
DSP Group is a fabless semiconductor company that is a leader in providing chipsets to telephone equipment and design manufacturers (OEMs and ODMs) for incorporation into consumer products for the short-range residential wireless communications market.
In recent years, we have become a worldwide leader in developing and marketing Total Telephony Solutions™ for the wireless residential market by taking advantage of the market transformation from analog-based technologies to digital-based technologies for telephony products and the shift from 900MHz to 2.4GHz to 5.8GHz technologies. One additional primary factor that contributed to our success in recent years is our penetration of the DECT market in Europe and our current presence in the U.S. DECT market (known as DECT 6.0).
In September 2007, we acquired the cordless and VoIP terminals business (the "CIPT Business") of NXP B.V. ("NXP") (the "Acquisition"). In connection with the Acquisition, we paid NXP approximately $200 million in cash and issued 4,186,603 shares of our common stock to NXP. We also agreed to a contingent cash payment of up to $75 million payable based on future revenue performance of the products of the CIPT Business for the first four financial quarters following the closing of the Acquisition. Such revenue milestones were not achieved and no cash payments were made to NXP. On March 12, 2009, we repurchased the shares of common stock issued to NXP in connection with the Acquisition for an aggregate consideration of approximately $20,028,000.
Our current primary focus is digital cordless telephony with sales of our in-house developed Cordless over Internet Protocol (CoIP), 1.9GHz (Digital Enhanced Cordless Telephony (DECT)), 2.4GHz and 5.8GHz chipsets representing approximately 89% of our total revenues for 2008. Our revenues were $305.8 million for 2008, an increase of 23% in comparison to 2007. This increase was mainly the result of increased sales of our DECT and CoIP products, mainly due to the Acquisition, which increase was partially offset by decreased sales of our 2.4GHz and 5.8GHz products. During 2008, we experienced a decrease in sales of 2.4GHz and 5.8GHz products in the U.S. market, our primary market, where the shift to DECT 6.0 products is occurring faster than anticipated. We believe that U.S. sales of our 2.4GHz and 5.8GHz products will continue to decrease during 2009 with a sharper decrease in sales of our 5.8GHz products. We also anticipate that the shift to DECT 6.0 products in the U.S. market will continue at a fast pace during 2009.
Notwithstanding our successes to date, our business operates in a highly competitive environment. Competition has historically increased pricing pressures for our products and decreased our average selling prices. To address pricing pressures, we may need to offer our products in the future at lower prices which may result in lower gross profits. Our gross margin decreased to a level of 37.3% of total revenues in 2008 from 40.5% in 2007, primarily due to the continued decline in the average selling prices of our products and the increased sales of DECT products with lower gross margin on account of 5.8GHz products with higher gross margin. The cordless telephony market is additionally undergoing a challenging period of transition characterized by stagnation due to the lack of new model launches and market anticipation of next generation products. As a result, we expect the market to remain price sensitive in 2009 and expect price erosion to continue. Moreover, various other factors, including increases in raw materials and commodity costs (including gold and oil) and our suppliers passing such increases onto us, increases in silicon wafer costs and increases in production, assembly and testing costs, all may decrease our gross profit in future periods. Furthermore, the current general worldwide
economic downturn has resulted in a decrease in product demand, excess customer inventories, accelerated erosion of prices, longer product cycles and decision-making processes at our customers' organizations, reduced corporate profits and capital, liquidity concerns and general adverse business conditions. The recent worldwide economic downturn also has resulted in a significant downturn of the semiconductor industry, the industry in which we operate. Moreover, our semiconductor OEM customers incorporate our chipsets into consumer electronics products, the demand for which has significantly slowed due to the economic downturn and more specifically decreased consumer confidence. We currently anticipate that our revenues and gross profit will decrease in 2009 as compared to 2008 mainly due to the severe global economic downturn generally and the significant declines in the semiconductor and consumer electronics industries specifically.
We had operating losses of $206.7 million for 2008, compared to $12.9 million for 2007. The increase in operating losses for 2008 was primarily attributable to (i) the impairment and amortization of intangible assets related to the Acquisition in the amount of $204.4 million for 2008, in comparison to $21.5 million for 2007, (ii) an increase in IP, tape-out and payroll expenses related to research and development, (iii) the decline in gross margins, (iv) the inclusion of the operating expenses of the CIPT Business for the full year in 2008, in comparison to the inclusion of the operating expenses of the CIPT Business since September 4, 2007 in 2007, and (v) restructuring expenses in the amount of $1.87 million for 2008 in comparison to no such expenses incurred for 2007. Operating expenses increased by 183% in 2008 compared to 2007, reaching a level of $320.7 million. The increase in operating expenses was mainly due to the same factors as noted above for the increase in operating losses, except for the gross margin factor. During 2008, we implemented an additional restructuring plan, subsequent to the initial restructuring plan undertaken following the Acquisition, to improve operating efficiency at our various operating sites and to reduce our operating expenses for 2009. We recognized an expense of $1.87 million during 2008 associated with the additional restructuring plan. Notwithstanding the increase in our operating expenses primarily due to the absorption of the operating expenses of the CIPT Business, there are no assurances that the proposed benefits of the Acquisition can be achieved or achieved at the levels currently anticipated, which could materially harm our business.
There are also several emerging market trends that challenge our continued business growth potential. For example, the rapid deployment of new communication access methods, including mobile, wireless broadband, cable and other connectivity, as well as the projected lack of growth in products using fixed-line telephony, may reduce our revenues derived from, and unit sales of, cordless telephony products, which are currently our primary focus. Our business also may be affected by the outcome of the current competition between cellular phone operators and fixed-line operators for the provision of residential communication. Our revenues are currently generated from sales of chipsets used in cordless phones that are based on fixed-line telephony. Another market trend that could affect the results of our operations is the shift in the U.S. digital telephony market, our primary market, from sales of 2.4GHz and 5.8GHz products towards DECT products, a trend that is occurring faster than anticipated. The shift resulted in an overall decrease in our revenues and gross margin as our DECT 6.0 products are sold at lower average selling prices and gross margin than our 2.4GHz and 5.8GHz products. We also are witnessing a move of manufacturing activities from large systems suppliers in the U.S., Japan and Europe to Southeast Asia, a trend that also could adversely affect our business.
We recognize the competitive landscape and are actively engaged in addressing these market challenges and trends. We continue to expand our presence in the U.S. and European DECT markets to maintain our business. Revenues derived from the sale of DECT products represented 70% of our total revenues for 2008. In addition to DECT technologies, we are investing in developing CoIP technologies in-house. Our strategic focus is to launch next generation products to capitalize on the transition underway in the residential communications market with the move from wireless voice communication to voice communication over IP networks and ultimately the convergence of voice, video and data communication. As an initial step, we introduced products to facilitate the deployment of residential broadband services. Our long term goal is to leverage the Wi-Fi technology acquired in 2004 from Bermai Inc. to develop and offer products for home communication that integrate voice, data and video with broadband offerings. To that end, we recently introduced to the market the XpandR platform that integrates DECT and Wi-Fi capabilities to enable multimedia and web-related applications in our future
products. However, our success in introducing new products and penetrating new markets may not occur and may require us to substantially increase our operating expenses. As a result, our past operating results should not be relied upon as an indication of future performance.
As of December 31, 2008, our principal source of liquidity consisted of cash and cash equivalents of approximately $68.9 million and marketable securities of approximately $52.5 million, totaling to $121.5 million. Our cash, investments and securities materially decreased in 2008 due to repurchases of our common stock during 2008 pursuant to our stock repurchase program.
Critical Accounting policies
Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of the financial statements, we are required to make assumptions and estimates about future events, and apply judgment that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosure. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time the consolidated financial statements are prepared. On a regular basis, management reviews our accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumption and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 3, Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Management believes that the following accounting policies require management's most difficult, subjective and complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and related disclosures with our independent auditors and audit committee.
Effect if Actual Results
Differ
Description Judgments & Uncertainties from Assumptions
Tax Contingencies: The estimate of our tax Although management
Like most companies, contingency reserve believes that its
domestic and foreign tax contains uncertainty estimates and judgments
authorities periodically because management must about tax contingencies
audit our income tax use judgment to estimate are reasonable, actual
returns. These audits the exposure associated results could differ, and
include questions regarding with our various tax we may be exposed to
our tax filing positions, filing positions. gains or losses that
including the timing and could be material. To the
amount of deductions and According to FIN 48, the extent we prevail in
the allocation of income first step is to evaluate matters for which reserve
among various tax the tax position for has been established, or
jurisdictions. In recognition by are required to pay
evaluating the exposure determining if the weight amounts in excess of the
associated with our various of available evidence reserve, our effective
tax filing positions, indicates it is more tax rate in a given
including state, foreign likely than not that the financial statement
and local taxes, we record position will be period could be
reserve for probable sustained on audit, materially affected. An
exposures. A number of including resolution of unfavorable tax
years may elapse before a related appeals or settlement would require
particular matter, for litigation processes, if use of our cash and
which we have established a any. The second step is result in an increase in
reserve, is audited and to measure the tax our effective tax rate in
fully resolved. benefit as the largest the year of resolution. A
amount which is more than favorable tax settlement
50% likely of being would be recognized as a
realized upon ultimate reduction in our
settlement. effective tax rate in the
year of resolution.
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Effect if Actual Results
Differ
Description Judgments & Uncertainties from Assumptions
The Company accounts for FIN 48 was effective for
uncertain tax positions in us at the beginning of
accordance with FIN 48. fiscal 2007.
Accordingly, the Company
reports a liability for
unrecognized tax benefits
resulting from uncertain
tax positions taken or
expected to be taken in a
tax return. The Company
recognizes interest and
penalties, if any, related
to unrecognized tax
benefits in income tax
expense.
Tax Valuation Allowance: Our management inherently Although management
The Company has a valuation must make estimates to believes that its
allowance for deferred tax determine the ultimate estimates and judgments
assets based on the realization of these about expected results
determination that it is assets. The estimate of for tax purposes are
more likely than not that our tax valuation reasonable, actual
some of these assets will allowance contains results could differ, and
not be realized. uncertainty because we may be required to
management must use record an additional
judgment to estimate the valuation allowance for
expected results for tax our deferred tax assets.
purposes.
Goodwill and Other We determine fair value If our estimates or their
Intangible Assets: using widely accepted related assumptions
Goodwill represents the valuation techniques, change in the future, we
excess of purchase price including discounted cash may be required to record
over the fair value of flow and market multiple additional impairment
identifiable net assets analyses. These types of charges for our
acquired in business analyses require us to intangible assets. We
combinations. The goodwill make assumptions and determined, based on the
on our balance sheet is a estimates regarding valuation conducted
result of our acquisition industry economic factors during the fourth quarter
of VoicePump, Inc. and the profitability of of fiscal 2008, that
(VoicePump) and the CIPT future business goodwill, trade name and
Business. The identifiable strategies. It is our trademark, acquired in
intangible assets, other policy to conduct the Acquisition, were
than goodwill, included in impairment testing based impaired and that there
our balance sheet are on our current business was partial impairment of
patents acquired from strategy in light of our other intangible
Bermai, current technology, present industry and assets, namely current
customer relations, trade economic conditions, as technology and customer
name, trademark, and well as future relations. The impairment
backlog acquired from NXP expectations. was prompted primarily by
as a result of the the continued
Acquisition. deterioration in market
conditions in general and
We review goodwill and the decrease in our
other intangible assets for projected income for
potential impairment future periods.
annually in the second
quarter of each fiscal year
and when events or changes
in circumstances indicate
the carrying value of the
goodwill or other
intangible assets may be
impaired, we may obtain an
appraisal from an
independent valuation firm
to determine the amount of
impairment, if any. In
addition to the use of an
independent valuation firm,
we perform internal
valuation analyses and
consider other publicly
available market
information.
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Effect if Actual Results
Differ
Description Judgments & Uncertainties from Assumptions
Contingencies and Other A determination of the If actual results are not
Accrued Expenses: amount of reserve consistent with our
We are from time to time required, if any, for any assumptions and
involved in legal contingencies and judgments, we may be
proceedings and other accruals is made after exposed to gains or
claims. We are required to careful analysis of each losses that could be
assess the likelihood of individual issue. The material.
any adverse judgments or required reserve may
outcomes to these matters, change due to future
as well as potential ranges developments, such as a
of probable losses. We have change in the settlement
not made any material strategy in dealing with
changes in the accounting any contingencies, which
methodology used to may result in higher net
establish our self-insured losses.
liabilities during the past
three fiscal years.
Inventory Write-Off: Our write-off represents If our estimates
We value our inventory at the excess of the regarding consumer demand
the lower of the cost of carrying value, typically are inaccurate or changes
the inventory or fair cost, over the amount we in technology affect
market value through the expect to realize from demand for certain
establishment of write-off the ultimate sale or products in an unforeseen
and inventory loss reserve. other disposal of manner, we may be exposed
We have not made any inventory based upon our to losses or gains in
material changes in the assumptions regarding excess of our established
accounting methodology used forecasted consumer write-off that could be
to establish our markdown demand, the promotional material.
or inventory loss reserves environment, inventory
during the past three aging and technological
fiscal years. obsolescence.
Equity-based compensation Determining the fair Although management
expense: value of equity-based believes that their
We account for equity-based awards on the grant date estimates and judgments
compensation in accordance requires the exercise of about equity-based
with SFAS No. 123(R), judgment, including the compensation expense are
"Equity-Based Payment." amount of equity-based reasonable, actual
Under the fair value awards that are expected results could differ.
recognition provisions of to be forfeited. We
this statement, consider many factors
equity-based compensation when estimating expected
cost is measured on the forfeitures, including
grant date based on the types of awards, employee
fair value of the award and class, and historical
is recognized as an expense experience. Actual
over the requisite service results, and future
periods. We utilize the changes in estimates, may
accelerated attribution differ substantially from
method, rather than a our current estimates.
straight-line method, for
recognizing compensation
expense. Under this method,
over 50% of the
compensation cost would be
expensed in the first year
of a four year vesting
term. The accelerated
method also adds a level of
complexity in estimating
forfeitures. If employees
leave early in the life of
an award, the forfeited
amount is much greater
under an accelerated method
than under a straight-line
method.
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Effect if Actual Results
Differ
Description Judgments & Uncertainties from Assumptions
Pension Liability: The costs and obligations Although management
We account for pension of our defined benefit believes that their
liability in accordance pension plans are estimates and judgments
with SFAS No. 158 dependent on actuarial about pension liability
"Employers' Accounting for assumptions. The two are reasonable, actual
Defined Benefit Pension and critical assumptions results could differ, and
Other Postretirement Plans" used, which impact the we may be exposed to
and SFAS No. 87 "Employers' net periodic pension cost gains or losses that
Accounting for Pensions." (income) and the benefit could be material.
obligations, are the
discount rate and
expected return on plan
assets. The discount rate
represents the market
rate for a high quality
government bond, and the
expected return on plan
assets is based on
current and expected
asset allocations,
historical trends and
expected returns on plan
assets. These key
assumptions are evaluated
annually. Changes in
these assumptions can
result in different
expense and liability
amounts.
Business Combination: The Company makes The valuations require
In September 2007, we estimates of fair value significant estimates and
acquired the assets and using reasonable assumptions, especially
assumed the liabilities of assumptions based on with respect to
the CIPT Business for historical experience and acquisition-related
approximately $270 million. information obtained from intangible assets.
The acquisition was the management of NXP in Although management
accounted in accordance order to allocate the believes that their
with business combination purchase price to the estimates and judgments
accounting. We have tangible and intangible about the business
allocated the purchase assets. combination are
price of the CIPT Business reasonable, actual
to tangible and Assumptions are also made results could differ.
acquisition-related regarding the estimated
intangible assets acquired useful life of the
and liabilities assumed, as intangible assets.
well as to in-process
research and development,
based on their estimated
fair values.
Marketable Securities: Determining whether the Although management
We account for investments decline in fair value is believes that their
in debt and equity other-than-temporary considerations and
securities in accordance requires our management's judgments about fair
with SFAS No. 115, judgment based on the value and whether a loss
"Accounting for Certain specific facts and associated with a
Investments in Debt and circumstances of each marketable security is
Equity Securities." investment. For other-than-temporary,
Management determines the investments in debt actual results could
appropriate classification instruments, these differ. Given current
of its investments in debt judgments primarily market conditions,
and equity securities at consider: (i) the length management's judgments
the time of purchase and of time and the extent to could prove to be wrong,
re-evaluates such which the fair value has and companies with
determination at each been less than cost, relatively high credit
balance sheet date. FASB (ii) the financial ratings and solid
Staff Position ("FSP") condition and near-term financial conditions may
No. 115-1/124-1, "The prospects of the issuer, not be able to fulfill
Meaning of and (iii) our intent and their obligations and
ability to thereby cause other-
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Effect if Actual Results
Differ
Description Judgments & Uncertainties from Assumptions
Other-Than-Temporary retain our investment in than-temporary losses. In
. . .
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