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IDTI > SEC Filings for IDTI > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for INTEGRATED DEVICE TECHNOLOGY INC

Form 10-Q for INTEGRATED DEVICE TECHNOLOGY INC


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking. Forward-looking statements, which are generally identified by words such as "anticipates," "expects," "plans," "intends," "seeks," "targets," "believes," "can," "may," "might," "could," "should," "would," "will" and similar terms, include statements related to, among others, revenues and gross profit, research and development activities, selling, general and administrative expenses, restructuring costs, 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. Forward-looking statements are based upon current expectations, estimates, forecasts and projections that involve a number of risks and uncertainties. These risks and uncertainties 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; product performance; 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 significantly from those expressed or implied 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 year ended April 1, 2012 filed with the SEC. Operating results for the three and six months ended September 30, 2012 are not necessarily indicative of operating results for an entire fiscal year.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates and assumptions are based on historical experience and other factors that we consider to be appropriate in the circumstances. However, actual future results may vary from our estimates and assumptions.

For a discussion of our critical accounting policies, see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended April 1, 2012. We believe that these accounting policies are "critical," as defined by the SEC, in that they are both highly important to the portrayal of our financial condition and results, and they require difficult management judgments, estimates and assumptions about matters that are inherently uncertain. We believe that there have been no significant changes during the six months ended September 30, 2012 to the items that we disclosed as our critical accounting policies in our Annual Report on Form 10-K for the fiscal year ended April 1, 2012.

Business overview

We design, develop, manufacture, and market a broad range of low-power, high-performance mixed signal semiconductor solutions for the advanced communications, computing and consumer industries. Currently, we offer communications solutions for customers within the enterprise, data center, and wireless markets. Our computing products are designed specifically for desktop, notebook, sub-notebook, storage and server applications, optimized gaming consoles, set-top boxes, digital TV and smart phones for consumer-based clients. Ultimately, we envision equipping every digital system with an interface based on our silicon.

We are focused on the following:

• aggressively managing, maintaining and refining our product portfolio including focus on the development and growth of new applications;

• maintaining existing customers, pursuing and winning new customers;

• developing and marketing new products in a timely and efficient manner;

• differentiating and enhancing our products;

• deploying research and development investment in the areas of displays, silicon timing, power management, signal integrity and radio frequency; and


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• rationalizing our operating expenses to improve profitability.

For more information on our business, please see Part I, Item 1, "Business," in our Annual Report on Form 10-K for the fiscal year ended April 1, 2012.

Recent developments
Acquisition of NXP B.V's Data Converter Business On July 19, 2012, we completed an acquisition of certain assets related to technology and products developed for communications analog mixed-signal market applications from NXP B.V. We believe that this acquisition will enhance our efforts to increase silicon content in wireless infrastructure markets. We believe that with this acquisition we can offer our customers a one-stop shop for wireless base stations, including radio frequency (RF) components, analog-to-digital converters (ADCs), digital-to-analog converters (DACs), Serial RapidIO® switches and bridges, high-performance timing devices, data compression IP, and power management ICs and it will help us increase our dollar content in the base station by offering all the key components in the signal chain. We acquired the communications analog mixed-signal assets for an aggregate cash purchase price of approximately $31.2 million, less a $4.0 million credit from NXP B.V for certain accrued liabilities assumed by us from NXP B.V, resulting in a net aggregate purchase price of $27.2 million. We assumed certain assets and specified liabilities and recorded amortizable intangible assets of $12.5 million and goodwill of $13.7 million. During the three and six months ended September 30, 2012, we incurred approximately $1.8 million and $3.9 million in acquisition related costs, respectively, which were included in SG&A expenses on the Consolidated Statements of Operations. Acquisition of Fox Enterprises, Inc.
On April 30, 2012, the Company completed the acquisition of Fox Enterprises, Inc. (Fox), a leading supplier of frequency control products including crystals and crystal oscillators, for total compensation of approximately $28.9 million, which included $25.7 million in cash paid at closing and $3.2 million in fair value of contingent cash consideration of up to $4.0 million based upon the achievement of future financial milestones. We believe that the combination of Fox's product portfolio with our award-winning CrystalFree™ oscillators makes us the industry's most comprehensive one-stop shop for frequency control products. In addition, we expect that this acquisition will help accelerate the adoption of CrystalFree™ by enabling customers to purchase pMEMS and CMOS solid-state oscillators alongside traditional quartz-based components through an established and trusted sales channel. As a result of this acquisition we recorded amortizable intangible assets of $12.3 million and goodwill of $16.3 million during the first quarter of fiscal 2013. In addition, we recorded approximately $0.2 million in acquisition related costs during the first quarter of fiscal 2013, which were included in SG&A expenses on the Consolidated Statements of Operations.
Acquisition of Alvand Technologies, Inc. On April 16, 2012, the Company completed the acquisition of Alvand Technologies Inc., a leading analog integrated circuits company specializing in data converters, for total compensation of approximately $23.3 million, which included $20.5 million in cash was paid at closing and $2.8 million in fair value of contingent cash consideration of up to $4.0 million based upon the achievement of future product development milestones. We believe that Alvand Technologies provides critical IP needed for our next-generation roadmap. As a result of this acquisition we recorded amortizable intangible assets of $3.8 million and goodwill of $19.7 million during the first quarter of fiscal 2013. In addition, we recorded approximately $0.1 million in acquisition related costs in the first quarter of fiscal 2013, which were included in SG&A expenses on the Consolidated Statements of Operations.
Proposed Acquisition of PLX Technology
On April 30, 2012, we entered into an Agreement and Plan of Merger with PLX Technology, Inc (PLX). The Merger Agreement provides that subject to the terms of the Merger Agreement, we will commence an exchange offer (the Offer) to purchase all of the outstanding shares of PLX common stock, $0.001 par value, in exchange for consideration, per Share, comprised of (i) $3.50 in cash plus (ii) 0.525 of a share of IDT common stock, without interest and less any applicable withholding taxes, and upon the consummation of the offer and subject to the satisfaction of certain conditions, PLX will merge with and into Pinewood Acquisition Corp, our wholly-owned subsidiary (the Merger). We expect the proposed acquisition to expand our core serial switching and interface business. We believe that we and PLX have complementary product sets, technologies and customer bases.
On May 22, 2012, we commenced the exchange offer to purchase the outstanding shares of PLX common stock. The exchange offer was scheduled to expire at the end of the day on July 12, 2012. On July 11, 2012, we extended the expiration date of our exchange offer for all outstanding shares of common stock of PLX since the applicable waiting period for regulatory review has not yet been expired or been terminated and the exchange offer was set to expire at the end of the day on August 9, 2012. The expiration date was further extended and the exchange offer is now set to expire at the end of the day November 9, 2012 unless further extended.
During the three and six months ended September 30, 2012, we incurred approximately $3.1 million and $7.2 million in acquisition related costs, respectively, which were included in SG&A expenses on the Consolidated Statements of Operations.


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Discontinued operations and assets held for sale In the second quarter of fiscal 2012, we completed the transfer of certain assets related to IDT's Hollywood Quality Video (HQV) and Frame Rate Conversion (FRC) video processing product lines to Qualcomm pursuant to an Asset Purchase Agreement and had classified the remaining video business as held for sale. On August 1, 2012, the we completed the transfer of the remaining assets of our video business to Synaptics for $5 million in cash pursuant to an Asset Purchase Agreement. In connection with the divestiture, 47 employees were transferred to Synaptics. In the second quarter of fiscal 2013, we recorded a gain of $0.9 million related to this divestiture. Prior to second quarter of fiscal 2012, the video business were previously included as part of our Computing and Consumer reportable segment. For financial statement purposes, the results of operations for these discontinued businesses have been presented in the consolidated financial statements as discontinued operations. Unless otherwise indicated, the following discussion pertains only to our continuing operations.

Overview

The following table and discussion provides an overview of our operating results
from continuing operations for the three and six months ended September 30, 2012
and October 2, 2011:
                                            Three Months Ended                  Six Months Ended
                                       September 30,      October 2,     September 30,      October 2,
(in thousands, except for percentage)       2012             2011             2012             2011
Revenues                              $     133,401      $  138,318     $     263,562      $   287,603
Gross profit                          $      74,627      $   73,633     $     147,140      $   153,069
As a % of revenues                               56  %           53 %              56  %            53 %
Operating income (loss)               $        (510 )    $    9,561     $      (5,953 )    $    23,253
As a % of revenues                                -  %            7 %              (2 )%             8 %
Net income (loss) from continuing
operations                            $        (683 )    $    8,100     $        (140 )    $    20,869
As a % of revenues                               (1 )%            6 %               -  %             7 %

Net loss from continuing operations was $0.7 million in the second quarter of fiscal 2013 as compared to net income of $8.1 million in the second quarter of fiscal 2012. Net loss from continuing operations was $0.1 million in the first six months of fiscal 2013 as compared to net income of $20.9 million in the first six months of fiscal 2012. This decrease in net income in both the periods was primarily due to lower revenues and higher operating expenses which were partially offset by improved gross margin. Income tax expense in the second quarter of fiscal 2013 was higher than income tax expense in the second quarter of fiscal 2012 primarily due to higher U.S. income related to the purchase of Alvand intellectual property. Overall operating expenses were higher in the three and six months period ended September 30, 2012 as compared to the three and six months period ended October 2, 2011 due to higher research and development and sales and administrative costs combined with additional expenses resulting from Fox Enterprise, Alvand and NXP B.V's data converter business acquisitions. During the second quarter of fiscal 2013, we recorded $2.2 million of severance cost for reduction in workforce.

Results of Operations

Revenues
Revenues by segment:          Three Months Ended                  Six Months Ended
                        September 30,      October 2,      September 30,      October 2,
(in thousands)               2012             2011              2012             2011
Communications         $        69,293    $     66,613    $       132,363    $    136,535
Computing and Consumer          64,108          71,705            131,199         151,068
Total revenues         $       133,401    $    138,318    $       263,562    $    287,603


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Product groups representing greater
than 10% of net revenues:                   Three Months Ended                  Six Months Ended
                                       September 30,      October 2,     September 30,      October 2,
As a percentage of net revenues            2012              2011            2012              2011
Communications:
Communications timing products                22 %             19 %             22 %              18 %
All others less than 10% individually         30 %             29 %             28 %              29 %
   Total communications                       52 %             48 %             50 %              47 %

Computing and Consumer:
Consumer and computing timing
products                                      18 %             24 %             19 %              23 %
Memory interface products                     17 %             14 %             18 %              17 %
All others less than 10% individually         13 %             14 %             13 %              13 %
Total computing and consumer                  48 %             52 %             50 %              53 %

Total                                        100 %            100 %            100 %             100 %

Communications Segment
Revenues in our Communications segment increased $2.7 million, or 4% to $69.3 million in the quarter ended September 30, 2012 as compared to the quarter ended October 2, 2011, primarily due to additional revenues resulting from the acquisition of Fox Enterprise in the first quarter of fiscal 2013 and an increase in demand of our flow control management products. An increase in revenue of $5.4 million resulting from Fox enterprise acquisition was partially offset by a decrease in revenue for most products within this market segment as the demand for these products declined in-line with market conditions, with the exception of revenues from our flow control management products which increased approximately 36% as compared to the prior year as we continued to experience growth in demand for our Rapid I/O switching solutions products.
Revenues in our Communications segment decreased $4.2 million, or 3% to $132.4 million in the six months ended September 30, 2012 as compared to the six months ended October 2, 2011, as a result of reduced customer demand for products in this segment. In general, demand for most products within this market segment declined in-line with market conditions, with the exception of revenues from our flow control management products which increased approximately 30% as compared to the prior year as we continued to experience growth in demand for our Rapid I/O switching solutions products. The decrease in revenue for the six months ended September 30, 2012 was also partially offset by $9.4 million of additional revenue resulting from the acquisition of Fox Enterprises in the first six months of fiscal 2013.

Computing and Consumer Segment

Revenues in our Computing and Consumer segment decreased $7.6 million, or 11% to $64.1 million in the quarter ended September 30, 2012 as compared to the quarter ended October 2, 2011, as a result of reduced demand. In general, demand for most products within this market segment declined in-line with market conditions except for a 14% increase in revenues from our Memory interface products.

Revenues in our Computing and Consumer segment decreased $19.9 million, or 13% to $131.2 million in the six months ended September 30, 2012 as compared to the six months ended October 2, 2011, as a result of reduced demand. Demand for most products within this market segment declined in-line with market conditions.

Revenues by Region

Revenues in the quarter ended September 30, 2012 decreased primarily in APAC (Asia Pacific region excluding Japan) and Europe as compared to the quarter ended October 2, 2011. Revenues in APAC, Americas, Japan and Europe accounted for 65%, 15%, 8% and 12%, respectively, of consolidated revenues in the quarter ended September 30, 2012 compared to 66%, 13%, 9% and 12%, respectively, of our consolidated revenues in the quarter ended October 2, 2011. The Asia Pacific region continues to be our strongest region, as many of our largest customers utilize manufacturers in that region.

For the six months ended September 30, 2012, revenue decreased primarily in APAC (excluding Japan) and Europe as compared to the six months ended October 2, 2011. For the six months ended September 30, 2012, revenues in APAC region, Americas,


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Japan and Europe accounted for 66%, 15%, 8% and 11%, respectively, of consolidated revenues as compared to 67%, 13%, 8% and 12%, respectively, for the first six months of fiscal 2012.

Gross Profit
                                              Three Months Ended                      Six Months Ended
                                                                               September 30,      October 2,
                                    September 30, 2012     October 2, 2011          2012             2011
Gross Profit (in thousands)        $          74,627      $        73,633     $      147,140     $   153,069
Gross Profit Percentage                           56 %                 53 %               56 %            53 %

Gross profit increased $1.0 million or 1% in the quarter ended September 30, 2012 compared to the quarter ended October 2, 2011. Gross profit as a percentage of revenues increased 3% in the quarter ended September 30, 2012 compared to the quarter ended October 2, 2011. Despite lower revenue levels, gross profit and gross profit percentage improved primarily due to an improved mix of higher margin products combined with a reduction in inventory reserve charges and a reduction in expenses associated with the transfer of fabrication production to third party foundries which was completed in the fourth quarter of fiscal 2012.

Gross profit decreased $5.9 million or 3.9% in the six months ended September 30, 2012 compared to the six months ended October 2, 2011 primarily due to lower revenue levels. Gross profit as a percentage of revenues increased 3% in the six months ended September 30, 2012 compared to the six months ended October 2, 2011. Improvement in gross profit percentage in the six months ended September 30, 2012 as compared to the six months ended October 2, 2011was primarily due to an improved mix of higher margin products combined with a reduction in inventory reserve charges and reduction in expenses associated with the transfer of fabrication production to third party foundries which was completed in the fourth quarter of fiscal 2012. As of September 30, 2012, the balance of inventory buffer stock which has been built in anticipation of the transition of wafer fabrication activities totaled approximately $8.3 million.

Operating Expenses

The following table presents our operating expenses for the quarter and six
months ended September 30, 2012, and the quarter and six months ended October 2,
2011, respectively:
                                        Three Months Ended                                                   Six Months Ended
                       September 30, 2012                 October 2, 2011                  September 30, 2012                 October 2, 2011

(in thousands,
except for                           % of Net                           % of Net                         % of Net                           % of Net
percentages)      Dollar Amount      Revenues       Dollar Amount       Revenues      Dollar Amount      Revenues       Dollar Amount       Revenues
Research and
development      $      42,387           32 %     $        39,184           28 %     $      83,931           32 %     $        78,999           27 %
Selling,
General and
administrative   $      32,750           25 %     $        24,888           18 %     $      69,162           26 %     $        50,817           18 %

Research and Development (R&D)

R&D expense increased $3.2 million, or 8%, to $42.4 million in the quarter ended September 30, 2012 compared to the quarter ended October 2, 2011. The increase was primarily due to a $1.7 million increase in salaries and wages associated with increased R&D headcount primarily due to acquisitions of Fox Enterprise, NXP B.V's data converter business and Alvand technologies, a $0.4 million in increase in rent expenses, $1.3 million of expenses related to transitional services provided to us by NXP B.V in connection with the purchase of their data converter assets, $1.0 million in severance cost for reduction in workforce offset in-part by $1.4 million reduction in variable incentive compensation expense.

R&D expense increased $4.9 million, or 6%, to $83.9 million in the six months ended September 30, 2012 compared to the six months ended October 2, 2011. The increase was primarily due to a $3.6 million increase in salaries and wages associated with increased R&D headcount primarily due to acquisitions of Fox Enterprise, NXP B.V's data converter business and Alvand technologies, a $0.8 million in increase in rent expenses, $1.3 million of expenses related to transitional services provided by


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NXP B.V in connection with the purchase of their data converter assets, $1.0 million in severance cost for reduction in workforce offset in-part by a $1.9 million reduction in accrued variable incentive compensation expenses.

Selling, General and Administrative (SG&A)

SG&A expenses increased $7.9 million, or 32%, to $32.8 million in the quarter ended September 30, 2012 as compared to the quarter ended October 2, 2011. The increase was primarily the result of $3.1 million increase in acquisition related legal, consulting and broker costs, $1.0 million increase in salaries and wages associated with increased SG&A headcount partly due to acquisition of Fox Enterprise, $1.2 million in accrued late-fees associated with the delay of the closing of the acquisition of NXP's high-speed data converter assets, $0.8 million increase in sales representative commissions and bonus, $0.8 million in severance cost for reduction in workforce, $0.7 million increase in amortization expense due to increase in intangibles acquired from Fox Enterprise and NXP B.V acquisitions partially offset by $0.4 million reduction in accrued variable incentive compensation expenses.

SG&A expenses increased $18.3 million, or 36%, to $69.2 million in the six months ended September 30, 2012 compared to the six months ended October 2, 2011. The increase was primarily the result of $7.0 million increase in acquisition related legal, consulting and broker costs, $1.8 million increase in salaries and wages associated with increased SG&A headcount partly due to acquisition of Fox Enterprise, $3.0 million in accrued late-fees associated with the delay of the closing of the acquisition of NXP's high-speed data converter assets, $2.6 million in expenses related to stockholder activities, $1.4 million increase in sales representative commissions and bonuses, $1.2 million increase in employee medical claims expense, $0.6 million in severance cost for reduction in workforce in the second quarter of fiscal 2013, $1.1 million increase in amortization expense due to increase in intangibles acquired from Fox Enterprise and NXP B.V's data converter business partially offset by $0.6 million reduction in accrued variable incentive compensation expenses.

Restructuring Charges
In connection with our plans to fully divest our remaining video processing product lines, during fiscal 2012, we recorded $3.6 million in restructuring expenses for employee retention costs. During the first and second quarter of fiscal 2013, we recorded an additional $0.8 million and $0.2 million for employee retention costs under this plan, respectively. These costs have been classified within discontinued operations. We paid $4.6 million in retention bonuses in the second quarter of fiscal 2013 and completed this restructuring action.
During the second quarter of fiscal 2013, we recorded restructuring charges of $2.2 million for reduction in workforce. We reduced our headcount by approximately 51 employees with reductions affecting all functional areas and various locations. As of September 30, 2012, the total accrued balance for employee severance costs related to this restructuring action was $1.4 million. We expect to complete this restructuring action in the third quarter of fiscal 2013. . . .

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