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PLXT > SEC Filings for PLXT > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for PLX TECHNOLOGY INC


9-Nov-2012

Quarterly Report


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

This Report on Form 10-Q contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our expectations, hopes, intentions, beliefs or strategies regarding the future, but excluding from such "safe harbor" any statements made or deemed made in connection with the agreement described in Note 1 of the condensed consolidated financial statements. Forward-looking statements include statements regarding our expectations or other prospective statements concerning the Merger Agreement and related transactions described in Note 1 of the condensed consolidated financial statements, future gross margin, our future research and development expenses, our future unrecognized tax benefits, our ability to meet our capital requirements for the next twelve months, our future capital requirements, current high turns fill requirements and our anticipation that sales to a small number of customers will account for a significant portion of our sales. Actual results could differ materially from those projected in such forward-looking statements. Factors that could cause actual results to differ include unexpected changes in the mix of our product sales, unexpected pricing pressures, unexpected capital requirements that may arise due to other possible acquisitions or other events, unanticipated changes in the businesses of our suppliers, and unanticipated cash shortfalls. Actual results could also differ for the reasons noted under the sub-heading "Factors That May Affect Future Operating Results" in Item 1A, Risk Factors in Part II of this report on Form 10-Q and in other sections of this report on Form 10-Q. All forward-looking statements included in this Form 10-Q are based on information available to us on the date of this report on Form 10-Q, and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements.

The following discussion should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in our Current Report on Form 8-K, filed on November 9, 2012.

OVERVIEW

PLX Technology, Inc. ("PLX" or the "Company"), a Delaware corporation established in 1986, designs, develops, manufactures, and sells integrated circuits that perform critical system connectivity functions. These interconnect products are fundamental building blocks for standards-based electronic equipment. We market our products to major customers that sell electronic systems in the enterprise, consumer, server, storage, communications, PC peripheral and embedded markets.

On April 30, 2012, we announced that we entered into an agreement to be acquired by IDT, summarized in Note 1 of Notes to Condensed Consolidated Financial Statements.

The explosive growth of cloud-based computing has provided a significant opportunity for PLX, since the data centers that house these systems are limited by their ability to offer high performance, low cost, low power, scalable interconnection. The level of integration is increasing, and the need for rapid expansion forces these customers to build their systems using standard-based, off-the-shelf devices. The industry has converged around two general purpose interconnection standards, PCI Express and Ethernet.

PLX is a market share leader in PCI Express switches and bridges. We recognized the trend towards this serial, switched interconnect technology early, launched products for this market long before our competitors, and have deployed multiple generations of products to serve a general-purpose market. In addition to enabling customer differentiation through our product features, the breadth of our product offering is in itself a significant benefit to our customers, since we can serve the complete needs of our customers with cost-effective solutions tailored to specific system requirements. PLX supplies an extensive portfolio of PCI Express switches; PCI Express bridges that allow backward compatibility to the previous PCI standard; and our newest bridge enables seamless interoperability between two of the most popular mainstream interconnects: PCI Express and USB 3.0. Our long experience with PCI Express connectivity products enables PLX to deliver reliable devices that operate in non-ideal real-world, system environments.

PLX offers a complete solution consisting of semiconductor devices, software development kits, hardware design kits, software drivers, and firmware solutions that enable added-value features in our products. We differentiate our products by offering higher performance at lower power, by enabling a richer customer experience based on proprietary features that enable system-level customer advantages, and by providing capabilities that enable a customer to get to market more quickly.


We utilize a "fabless" semiconductor business model whereby we purchase wafers and packaged and tested semiconductor devices from independent manufacturing foundries. This approach allows us to focus on defining, developing, and marketing our products and eliminates the need for us to invest large amounts of capital in manufacturing facilities and work-in-process inventory.

We rely on a combination of direct sales personnel, distributors and manufacturers' representatives throughout the world to sell a significant portion of our products. We pay manufacturers' representatives a commission on sales while we sell products to distributors at a discount from the selling price.

The time period between initial customer evaluation and design completion is generally between six and twelve months, though it can be longer in some circumstances. Furthermore, there is typically an additional six to twelve month or greater period after design completion before a customer requests volume production of our products. Due to the variability and length of these design cycles and variable demand from customers, we may experience significant fluctuations in new orders from month to month. In addition, we typically make inventory purchases prior to receiving customer orders. Consequently, if anticipated sales and shipments in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our results for that quarter and potentially future quarters would be materially and adversely affected.

Our long-term success will depend on our ability to successfully introduce new products. While new products typically generate little or no revenue during the first twelve months following their introduction, our revenues in subsequent periods depend upon these new products. Due to the lengthy sales cycle and additional time before our customers request volume production, significant revenues from our new products typically occur twelve to twenty-four months after product introduction. As a result, revenues from newly introduced products have, in the past, produced a small percentage of our total revenues in the year the product was introduced. See -"Our Lengthy Sales Cycle Can Result in Uncertainty and Delays with Regard to Our Expected Revenues" in Item 1A, Risk Factors, in Part II of this report on Form 10-Q.

Discontinued operations

On September 20, 2012, the Company completed the sale of its physical layer 10GBase-T integrated circuit ("PHY") family of products pursuant to an Asset Purchase Agreement between the Company and Aquantia Corporation dated September 14, 2012. On July 6, 2012, the Company had also entered into an Asset Purchase Agreement (the "Entropic APA") with Entropic Communications, Inc., pursuant to which the Company completed the sale of its digital channel stacking switch product line within the PHY product family, including certain assets exclusively related to the product line. The 10G Ethernet market has developed more slowly than had previously been anticipated and the divestiture was intended to reduce future spending and operating losses associated with this business. The operations of the PHY related business have been segregated from continuing operations and are presented as discontinued operations in the Company's consolidated statement of operations. Unless otherwise indicated, the following discussions in Results of Operations pertain only to our continuing operations.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND
SEPTEMBER 30, 2011

Net Revenues

The following table shows the revenue by type (in thousands) and as a percentage
of net revenues:

                           Three Months Ended                              Nine Months Ended
                             September 30,                                   September 30,
                      2012                    2011                    2012                    2011
PCI Express                       %                                               %
Revenue        $  17,484     65.1      $  16,263     54.6 %    $  50,523     65.8      $  47,312     54.9 %
Connectivity
Revenue            9,382     34.9 %       13,500     45.4 %       26,311     34.2 %       38,944     45.1 %
               $  26,866               $  29,763               $  76,834               $  86,256

Net revenues consist primarily of product revenues generated principally by sales of our semiconductor devices. Net revenues for the three months ended September 30, 2012 decreased 9.7%, or $2.9 million compared to same period in 2011. The decrease was due to lower sales of our consumer storage devices within the Connectivity product grouping as a result of the decline in demand for products used in systems nearing end of life and the customer transition from our legacy products to our PCI Express products, partially offset by higher sales of our PCI Express products due to the ramp of our Gen 2 and Gen 3 products.


Net revenues for the nine months ended September 30, 2012 decreased 10.9%, or $9.4 million compared to the same period in 2011. The decrease was due to lower sales of our consumer storage devices within the Connectivity product grouping as a result of the decline in demand for products used in systems nearing end of life, increased sales in the second quarter of 2011 in connection with the March 2011 Japan Tsunami and the customer transition from our legacy products to our PCI Express products, partially offset by higher sales of our PCI Express products due to the ramp of our Gen 2 and Gen 3 products.

There were no direct end customers that accounted for more than 10% of net revenues. Sales to the following distributors accounted for 10% or more of net revenues:

                                  Three Months Ended           Nine Months Ended
                                    September 30,                September 30,
                                 2012             2011        2012            2011
Excelpoint Systems Pte Ltd            30 %           24 %          27 %          24 %
Avnet, Inc.                           24 %           21 %          24 %          23 %
Answer Technology, Inc.               18 %           21 %          20 %          20 %
Promate Electronics Co., Ltd           *             10 %           *             *

* Less than 10%

Future demand for our products is uncertain and is highly dependent on general economic conditions and the demand for products that contain our chips. Customer demand for semiconductors can change quickly and unexpectedly. Our revenue levels have been highly dependent on the amount of new orders that are received for products to be delivered to the customer within the same quarter, also called "turns fill" orders. Because of the long cycle time to build our products and our lack of visibility into demand when turns fill orders are high, it is difficult to predict which products to build to match future demand. We believe the current high turns fill requirements will continue indefinitely. The high turns fill orders pattern, together with the uncertainty of product mix and pricing, makes it difficult to predict future levels of sales and profitability and may require us to carry higher levels of inventory.

Gross Margin

Gross margin represents net revenues less the cost of revenues. Cost of revenues
includes the cost of (1) purchasing semiconductor devices or wafers from our
independent foundries, (2) packaging, assembly and test services from our
independent foundries, assembly contractors and test contractors and (3) our
operating costs associated with the procurement, storage, and shipment of
products as allocated to production.

                 Three Months Ended          Nine Months Ended
                    September 30,              September 30,
                  2012          2011         2012          2011
                                 in thousands

Gross profit $ 16,058 $ 17,183 $ 45,102 $ 49,218 Gross margin 59.8 % 57.7 % 58.7 % 57.1 %

Gross profit for the three months ended September 30, 2012 decreased by 6.6%, or $1.1 million compared to the same period in 2011 while gross margin increased 2.1 percentage points or 3.6%. The increase in product gross margin was due primarily to increased sales and improved costs on our PCI Express Gen 3 builds as we move from our early revision products to our production revision products and into production volume builds as well decreased sales of the low margin Storage products within the Connectivity product grouping. The decrease in absolute dollars was due to the decrease in overall product sales.


Gross profit for the nine months ended September 30, 2012 decreased by 8.4%, or $4.1 million compared to the same period in 2011 while gross margin increased 1.6 percentage points or 2.8%. The increase in product gross margin was due primarily to decreased sales of the low margin Storage products within the Connectivity product grouping. The decrease in absolute dollars was due to the decrease in overall product sales.

Future gross profit and gross margin are highly dependent on the product and customer mix, timing of development service and IP mix, provisions and sales of previously written down inventory, the position of our products in their respective life cycles and specific manufacturing costs. Accordingly, we are not able to predict future gross profit levels or gross margins with certainty.

Research and Development Expenses

Research and development ("R&D") expenses consist primarily of tape-out costs at
our independent foundries, salaries and related costs, including share-based
compensation and expenses for outside engineering consultants.

                                Three Months Ended          Nine Months Ended
                                   September 30,              September 30,
                                 2012          2011         2012          2011
                                                in thousands

R&D expenses $ 8,823 $ 7,007 $ 21,362 $ 22,929 As a percentage of revenues 32.8 % 23.5 % 27.8 % 26.6 %

R&D expenses increased by $1.8 million or 25.9% in the three months ended September 30, 2012 compared to the same period in 2011. In the three months ended September 30, 2011 expenses relating to the divested UK design team were $1.7 million. Excluding the impact of the UK design team divestiture in the fourth quarter of 2011, R&D expenses increased by $3.5 million or 67.6%. The increase in R&D in absolute dollars and as a percentage of revenue was primarily due to increases in R&D spending on tape-out related activities of $3.1 million due to timing of projects taped-out and compensation and benefit expenses of $0.4 million due to an increase in headcount and the issuance of restricted stock units (RSUs) in 2012.

R&D expenses decreased by $1.6 million or 6.8% in the nine months ended September 30, 2012 compared to the same period in 2011. In the nine months ended September 30, 2011 expenses relating to the divested UK design team were $5.7 million. Excluding the impact of the UK design team divestiture in the fourth quarter of 2011, R&D expenses increased by $4.1 million or 23.7%. The increase in R&D in absolute dollars and as a percentage of revenue was primarily due to increases in R&D spending on tape-out related activities of $2.3 million due to timing of projects taped-out, compensation and benefit expenses of $0.7 million due to an increase in headcount and the issuance of RSUs in 2012, variable compensation of $0.5 million as a result of the changes in the plan to tie payouts to personal and group performance objectives and consulting fees of $0.5 million.

We believe continued spending on research and development to develop new products is critical to our success. R&D spending will continue to fluctuate due to timing of projects and tape-out related activities.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses consist primarily of
salaries and related costs, including share-based compensation, commissions to
manufactures' representatives and professional fees, as well as trade show and
other promotional expenses.

                                Three Months Ended          Nine Months Ended
                                   September 30,              September 30,
                                 2012          2011         2012          2011
                                                in thousands

SG&A expenses $ 6,654 $ 6,745 $ 22,764 $ 20,402 As a percentage of revenues 24.8 % 22.7 % 29.6 % 23.7 %


SG&A expenses were flat at $6.7 million in the three months ended September 30, 2012 compared to the same period in 2011. SG&A spending in compensation and benefit expenses decreased $0.4 million due to the decrease in headcount, which was offset by an increase in share-based compensation expense of $0.3 million due to the issuance of RSUs in 2012.

SG&A expenses increased by $2.4 million or 11.6% in the nine months ended September 30, 2012 compared to the same period in 2011. The increase in SG&A in absolute dollars and a percentage of revenue was due primarily to an increase in legal fees of $2.3 million relating to the Internet Machines patent infringement lawsuit in which a significant portion of the increase was due to the February 2012 trial of the first suit. In addition to increased legal fees, increases in variable compensation as a result of the changes in the plan to tie payouts to personal and group performance objectives and share-based compensation expense due to the issuance of RSUs in 2012 were offset by a decrease in headcount as a result of cost control efforts.

Acquisition and Restructuring Related Costs

                              Three Months Ended          Nine Months Ended
                                September 30,               September 30,
                               2012           2011         2012          2011
                                             in thousands
Deal costs                 $      2,830       $   -     $     5,179      $  88
Severance costs                       -           -               -        501
Lease commitment accrual              -          42               -        301
                           $      2,830       $  42     $     5,179      $ 890

In the three and nine month ended September 30, 2012, we recorded acquisition related costs of $2.8 million and $5.2 million, respectively, primarily for outside legal and investment banking expenses associated with the pending IDT acquisition of PLX.

Due primarily to our entering into an agreement to be acquired by IDT summarized in Note 1 of the condensed consolidated financial statements, we expect to incur, in the fourth quarter and possibly additional future periods, significant additional expenses in connection with the transactions contemplated by the agreement. See "Item 1A Risk Factors - Risks Related to the Proposed Acquisition of the Company by IDT" for a discussion of risks related to the proposed acquisition.

In the nine months ended September 30, 2011, we recorded acquisition related costs of $88,000 primarily for outside legal and accounting costs associated with the October 1, 2010 acquisition of Teranetics.

In the nine months ended September 30, 2011, we recorded approximately $0.5 million of severance and benefit related costs, included in acquisition and restructuring related costs in the Condensed Consolidated Statement of Operations, related to the termination of 14 employees as a result of the downsizing and refocus of the operations in the UK and cost control efforts as a result of the Teranetics acquisition.

In the three and nine months ended September 30, 2011, in connection with the downsizing of the UK operations, we recorded lease commitment accrual charges of $42,000 and $0.3 million, respectively. See Note 9 of the condensed consolidated financial statements for additional information.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets consists of amortization expense related to developed core technology, trade name and customer base acquired as a result of the Oxford acquisition in January 2009.


                                                 Three Months Ended              Nine Months Ended
                                                    September 30,                  September 30,
                                                2012             2011           2012            2011
                                                                   in thousands

Amortization of acquired intangible assets $ 64 $ 382 $ 223 $ 1,145 As a percentage of revenues 0.2 % 1.3 % 0.3 % 1.3 %

Amortization of acquired intangible assets decreased by $0.3 million or 83.3% and $0.9 million or 80.5% in the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. The decrease in amortization expense was due to the Oxford Serial and USB core technology becoming fully amortized in December 2011 and the fourth quarter 2011 acceleration of the Oxford NAS developed core technology as a result of the UK design team divestiture.

Interest Income (Expense) and Other, Net

                            Three Months Ended           Nine Months Ended
                               September 30,               September 30,
                           2012            2011          2012           2011
                                            in thousands
Interest income          $       8       $      15     $      27       $   60
Interest expense               (72 )           (60 )        (162 )       (188 )
Other income (expense)           4               3            16          (81 )
                         $     (60 )     $     (42 )   $    (119 )     $ (209 )

Interest income reflects interest earned on cash, cash equivalents and short-term and long-term investment balances. Interest income decreased for the three and nine months ended September 30, 2012 compared to the same period in 2011 due to lower investment balances largely due to operating losses and the payment of the note related to the Teranetics acquisition.

Interest expense for the three and nine months ended September 30, 2012, primarily consisted of interest recorded on the line of credit borrowings and capital lease obligations. For the same periods in 2011, interest expense consisted of interest recorded on the notes associated with the acquisition of Teranetics and interest recorded on our capital lease obligations.

Other income includes foreign currency transaction gains and losses and other miscellaneous transactions. Other income may fluctuate significantly due to currency fluctuations.

Provision for Income Taxes

A provision for income tax of $0.5 million has been recorded for the nine month period ended September 30, 2012, compared to a provision of $1.8 million for the same period in 2011. Income tax expense for the nine months ended September 30, 2012 and September 30, 2011 is a result of applying the estimated annual effective tax rate to cumulative profit before taxes adjusted for certain discrete items which are fully recognized in the period they occur and miscellaneous state income taxes. We excluded from our calculation of the effective tax rate losses in the US since we cannot benefit those losses.

We have determined that negative evidence supports the need for a full valuation allowance against our net deferred tax assets at this time. We will maintain a full valuation allowance until sufficient positive evidence exists to support a reversal of the valuation allowance.

As of September 30, 2012, we had unrecognized tax benefits of approximately $4.4 million of which none, if recognized, would result in a reduction of our effective tax rate. There were no material changes in the amount of unrecognized tax benefits during the nine months ended September 30, 2012. Future changes in the balance of unrecognized tax benefits will have no impact on the effective tax rate as they are subject to a full valuation allowance. We do not believe the amount of our unrecognized tax benefits will significantly change within the next twelve months.


The Company is subject to taxation in the United States and various states and foreign jurisdictions. The tax years 2007 through 2011 remain open to examination by the federal and most state tax authorities. Net operating loss and tax credit carryforwards generated in prior periods remain open to examination.

Liquidity and Capital Resources

Cash and Investments

We invest excess cash predominantly in debt instruments that are highly liquid, of high-quality investment grade, and predominantly have maturities of less than one year with the intent to make such funds readily available for operating purposes. As of September 30, 2012 cash, cash equivalents, short and long-term marketable securities were $17.9 million, a decrease of $1.9 million from $19.8 million at December 31, 2011.

Operating Activities

Cash used in operating activities primarily consists of net loss adjusted for certain non-cash items including depreciation, amortization, share-based compensation expense, impairments, fair value remeasurements, provisions for excess and obsolete inventories, other non-cash items, and the effect of changes in working capital and other activities. Cash used in operating activities for the nine months ended September 30, 2012 was $7.3 million compared to cash used in operating activities of $4.2 million in the same period in 2011 and included net loss from discontinued operations, adjusted for non-cash items, of $13.0 million and $13.9 million, respectively. The increase in cash flow used in operations was primarily due to an increased net loss, adjusted for non-cash and . . .

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