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PLXT > SEC Filings for PLXT > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Form 10-K for PLX TECHNOLOGY INC


15-Mar-2013

Annual Report


ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Annual Report on Form 10-K and certain information incorporated herein by reference contain forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements contained in this Report on Form 10-K that are not purely historical are forward-looking statements, including, without limitation, statements regarding our expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies regarding the future. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements.


Forward-looking statements include, without limitation, the statements regarding the following:

the growing demand for standards-based components such as our semiconductor devices that connect systems together;

our objective to expand our advantages in data transfer technology;

our expectation that we will support new I/O standards where appropriate;

the statements regarding our objective to continue to expand our market position as a developer and supplier of I/O connectivity solutions for high performance systems;

our plan to target those applications where we believe we can attain a leadership position;

our plan to seek to integrate additional I/O-related functions into our semiconductor devices;

our belief that our understanding of I/O technology trends and market requirements allows us to bring to market more quickly new products that support the latest I/O technology;

that we continue to integrate more functionality in our semiconductor devices and continue to enhance and expand our software development kits;

our belief with respect to the principal factors of competition in the business;

our belief that we compete favorably with respect to each of those factors;

our expectation that revenues related to sales through distributors will continue to account for a large portion of total revenues;

our belief that providing customers with comprehensive product support is critical to remaining competitive in the markets we serve;

our belief that our close contact with customer design engineers provides valuable input into existing product enhancements and next generation product specifications;

our expectation that we will continue to make significant investments in research and development in order to continually enhance the performance and functionality of our products to keep pace with competitive products and customer demands for improved performance;

our belief that we must continuously develop our devices using more advanced processes to remain competitive on a cost and performance basis;

our belief that the transition of our products to smaller geometries will be important for us to remain competitive;

our intention to retain earnings for use in our business and not to pay any cash dividend in the foreseeable future;

our belief that our long-term success will depend on our ability to introduce new products;

our belief that we may be required to carry higher levels of inventory because of the difficulty in predicting future levels of sales and profitability;

our expectation that selling, general and administrative and research and development expenses in absolute dollars will increase in future periods; and

our belief that our existing resources, together with cash expected to be generated from our operations, will be sufficient to meet our capital requirements for at least the next twelve months.

All forward-looking statements included in this document are subject to additional risks and uncertainties further discussed under "Item 1A: Risk Factors - Factors That May Affect Future Operating Results" and are based on information available to us on the date hereof. We assume no obligation to update any such forward-looking statements. It is important to note that our actual results could differ materially from those included in such forward-looking statements. The factors that could cause our actual results to differ from those included in such forward-looking statements are set forth under the heading "Item 1A: Risk Factors - Factors That May Affect Future Operating Results," as well as those disclosed from time to time in our reports on Forms 10-Q and 8-K and our Annual Reports to Stockholders.

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this report.

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.


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 interconnections. 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.

PLX is a market share leader in stand-alone 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 bridges enable seamless interoperability between two of the most popular mainstream interconnects: PCI Express and USB. 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 introduce new products. While new products typically generate little or no revenues 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 "Item 1A, Risk Factors - Certain Factors That May Affect Future Operating Results -- Our Lengthy Sales Cycle Can Result in Uncertainty and Delays with Regard to Our Expected Revenues" in this Form 10-K.


Discontinued operations

On September 20, 2012, the Company completed the sale of a portion 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. The Company had also entered into an Asset Purchase Agreement (the "Entropic APA") with Entropic Communications, Inc., on July 6, 2012, as amended on November 21, 2012, 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. Together, these divestitures completed the sale of the PHY business. The 10G Ethernet market developed more slowly than had previously been anticipated and the divestitures were 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

Comparison of Years Ended December 31, 2012, 2011 and 2010

Net Revenues. Net revenues consist of revenues generated principally by sales of
our semiconductor devices as well as occasional IP and service development
revenue.

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

                                       Years Ended December 31,
                            2012                 2011                 2010
PCI Express revenue    $   66,780 66.6 %    $   61,557 55.4 %    $   54,361 47.0 %
Connectivity revenue       33,468 33.4 %        49,595 44.6 %        61,179 53.0 %
                       $  100,248           $  111,152           $  115,540

Net revenues for the year ended December 31, 2012 were $100.2 million, a decrease of $10.9 million or 9.8% from $111.2 million in 2011. In 2011, we recorded licensed IP and development service revenue of $1.9 million primarily associated with our consumer storage technology. Excluding IP and development service revenue, revenues decreased $9.0 million or 8.3% compared to 2011. The decrease in 2012 was due to lower sales of our Connectivity products 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 Gen2 and Gen3 products.

Net revenues for the year ended December 31, 2011 were $111.2 million, a decrease of $4.4 million or 3.8% from $115.5 million in 2010. Excluding IP and development service revenue recorded in 2011, revenues decreased $6.3 million or 5.4% compared to 2010. The decrease in 2011 was due to lower sales of our Connectivity and Consumer Storage products as well as lower average selling prices (ASPs) of our Consumer Storage products as a result of the transition to the low ASP markets, partially offset by higher sales of our PCI Express.

We currently expect to see revenue growth through 2013 for our PCI Express products and continued declines of our Connectivity 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:

                                  Years Ended December 31,
                               2012          2011         2010

Excelpoint Systems Pte Ltd.        27 %          24 %        27 %
Avnet, Inc.                        24 %          24 %        23 %
Answer Technology, Inc.            19 %          18 %        18 %


We continue to generate significant revenues from Asia. For the year ended December 31, 2012, 2011 and 2010, approximately 71%, 68% and 71%, respectively, of net revenues were generated from Asia.

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 primarily includes the cost of (1) purchasing semiconductor devices 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.

Years Ended December 31,

                 2012         2011         2010
                          in thousands
Gross profit   $ 58,786     $ 64,552     $ 67,787
Gross margin       58.6 %       58.1 %       58.7 %

Gross profit for the year ended December 31, 2012 decreased by 8.9%, or $5.8 million compared to 2011. Excluding the IP and development service revenue of $1.9 million which were recorded at a 100% margin in 2011, 2011 gross margin was 57.4% and gross profit was $62.7 million, a decrease of 6.2% or $3.9 million. The decrease in absolute dollars was due to the decrease in overall product sales, while the increase in gross margin percentage was due primarily to decreased sales of the low margin Consumer Storage devices within the Connectivity product grouping.

Gross profit for the year ended December 31, 2011 decreased by 4.8%, or $3.2 million compared to 2010. Excluding the IP and development service revenue recorded in 2011, gross margin was 57.4% and gross profit was $62.7 million, a decrease of 7.5% or $5.1 million compared to 2010. The decrease in absolute dollars and as a percentage was primarily due to decreased Consumer Storage product margins as a result of the transition to the low ASP markets and the decrease in Connectivity product shipments which generally have higher margins.

We expect gross margin to remain relatively flat in 2013. Future gross profit and gross margin are highly dependent on the product and customer 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 the independent foundries, salaries and related costs, including share-based compensation, software licenses, and expenses for outside engineering consultants included in R&D expenses.

                                   Years Ended December 31,
                                2012         2011         2010
                                         in thousands
R&D expenses                  $ 27,532     $ 28,218     $ 30,799
As a percentage of revenues       27.5 %       25.4 %       26.7 %


R&D expenses decreased by $0.7 million, or 2.4% in the year ended December 31, 2012 compared to 2011. Expenses relating to the 2011 divested UK design team were $0.2 million and $6.0 million in 2012 and 2011, respectively. Excluding the impact of the divestiture, R&D expenses increased by $5.1 million or 23.0%. The increase was primarily due to increases in tape-out-related activities of $3.1 million due to timing of projects taped-out, compensation and benefit expenses of $0.9 million due to an increase in headcount and variable compensation of $0.5 million as a result of the changes in the plan to tie variable compensation to personal and group performance objectives as well as financial metrics. In addition, due to the IDT acquisition activities, which were subsequently terminated, retention measures were put in place, particularly RSU grants resulting in an increase in share-based compensation expense of $0.4 million.

R&D expenses decreased by $2.6 million, or 8.4% in the year ended December 31, 2011 compared to 2010. The decrease was primarily due to decreases in engineering tools of $1.9 million due to license term expirations and decreased renewal rates of licenses, compensation and benefit expenses of $1.4 million as a result of downsizing of the operations in the UK in the first quarter of 2011 and the subsequent divestiture of the remaining UK team in October 2011, and consulting services of $0.5 million, partially offset by an increase in tape-out related activities of $1.4 million due to timing of projects taped-out.

We believe continued spending on research and development to develop new products is critical to our success. In addition, we expect research and development expenses to modestly increase in future periods with the introduction of new products.

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

                                   Years Ended December 31,
                                2012         2011         2010
                                         in thousands
SG&A expenses                 $ 28,927     $ 28,037     $ 26,720
As a percentage of revenues       28.9 %       25.2 %       23.1 %

SG&A expenses increased by $0.9 million or 3.2% in the year ended December 31, 2012 compared to 2011. The increase was primarily due to an increase in variable compensation of $0.9 million as a result of the changes in the plan to tie variable compensation to personal and group performance objectives as well as financial metrics. In addition, due to the IDT acquisition activities, which were subsequently terminated, retention measures were put in place, particularly RSU grants and a one-time increase in employee related commissions, resulting in increases in share-based compensation expense of $0.6 million and employee commissions of $0.5 million. These increases were partially offset by a decrease in compensation and benefit expenses of $1.2 million due to a decrease in headcount.

SG&A expenses increased by $1.3 million or 4.9% in the year ended December 31, 2011 compared to 2010. The increase in SG&A in absolute dollars was primarily due to an accrual of $1.0 million as a result of the jury's February 29, 2012 verdict on the first Internet Machines patent infringement lawsuit and increases in legal fees of $1.8 million relating to the Internet Machines lawsuits, consulting services of $0.3 million and share-based compensation expenses of $0.3 million, partially offset by decreases in compensation and benefit expenses of $1.4 million, primarily variable compensation, as a result of decreased profitability and commission expenses to manufacturer's representatives of $0.3 million due to lower commission rates. See Note 15 of the consolidated financial statements and Item 3 of this report for additional information around the patent infringement complaints.

We expect SG&A expenses to decrease in 2013, primarily in legal expenses, as the result of the stayed Internet Machines lawsuits.


Acquisition and Restructuring Related Costs.

                               Years Ended December 31,
                             2012           2011       2010
                                     in thousands
Deal costs                 $   6,898      $     88     $ 855
Escrow claim settlement            -        (1,397 )       -
Severance costs                    -           501         -
Lease commitment accrual           -           301         -
                           $   6,898      $   (507 )   $ 855

In 2012 we recorded acquisition related costs of $6.9 million, primarily for outside legal and banking expenses associated with the IDT acquisition activities, which were subsequently terminated. In 2011 and 2010 we recorded $0.1 million and $0.9 million, respectively, in acquisition related costs associated with the October 1, 2010 acquisition of Teranetics. As a result of the indemnity claims we communicated to the Teranetics stockholders' representative, we negotiated a $1.9 million reduction against the two promissory notes. The settlement included the cancelation of the $1.5 million note due in October 2013 and was recorded in 2011 as a reduction to acquisition and restructuring related costs in the Consolidated Statement of Operations for the assessed fair value of $1.4 million for the portion of the claims not directly related to the operations of the PHY activity. See Note 8 of the consolidated financial statements for additional information. Deal costs related primarily to outside legal and accounting costs.

In 2011, we recorded approximately $0.5 million of severance and benefit related costs, included in acquisition and restructuring related costs in the 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 early in the year and cost control efforts as a result of the Teranetics acquisition. See Note 9 of the consolidated financial statements for additional information.

In 2011, in connection with the downsizing of the UK operations, we recorded lease commitment accrual and leasehold impairment charges of $0.3 million. See Note 9 of the consolidated financial statements for additional information.

Amortization of Purchased Intangible Assets. Amortization of acquired intangible assets consists of amortization expense related to developed core technology, tradename and customer base acquired in the Oxford acquisition in January 2009.

                                                  Years Ended December 31,
                                               2012          2011        2010
                                                        in thousands
Amortization of purchased intangible assets   $   245       $ 2,801     $ 2,593
As a percentage of revenues                       0.2 %         2.5 %       2.2 %

Amortization of acquired intangible assets decreased by $2.6 million or 91.3% in the year ended December 31, 2012 compared to 2011. The decrease in amortization expense was due to the Oxford USB and Serial developed core technology becoming fully amortized in 2011 and the useful life change and acceleration of the Network Attached Storage (NAS) Connectivity developed core technology as a result of the divestiture of the UK design team in October 2011. As of December 31, 2012 all purchased intangibles are fully amortized.

Amortization of acquired intangible assets increased by $0.2 million or 8.0% in the year ended December 31, 2011 compared to 2010. The increase in amortization expense was due to the useful life change and acceleration of Oxford NAS developed core technology as a result of the divestiture of the UK design team in October 2011, partially offset by the accelerated amortization of the Oxford USB and Serial developed core technology and the Oxford trade name becoming fully amortized in December 2010. See Note 11 to our consolidated financial statements for additional information.


Interest Income, Interest Expense and Other, Net.

                             Years Ended December 31,
                           2012           2011       2010
                                   in thousands
Interest income          $      33       $   73     $  186
Interest expense              (203 )       (165 )     (117 )
Other income (expense)          21          (56 )      (12 )
                         $    (149 )     $ (148 )   $   57

Interest income for the years ended December 31, 2012, 2011 and 2010 of $33,000, $73,000 and $186,000, respectively, reflects interest earned on average cash, cash equivalents and short-term and long-term investment balances. The decreases in 2012 and 2011 were due to lower investments balances largely due to operating losses and the 2012 payment of the note related to the Teranetics acquisition.

Interest expense for the years ended December 31, 2012, 2011 and 2010 of $0.2 million, $0.2 million and $0.1 million, respectively, primarily consisted of interest recorded on the line of credit borrowings, our capital lease obligations and the note associated with the acquisition of Teranetics.

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

Provision for Income Taxes. Provision for income taxes for the year ended December 31, 2012 was $0.2 million on a pretax loss of $5.0 million, compared to a provision of $2.8 million on pretax income of $5.9 million and a provision of $2.2 million on a pretax income of $6.9 million for the periods ended December . . .

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