Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
IDCC > SEC Filings for IDCC > Form 10-Q on 26-Jul-2013All Recent SEC Filings

Show all filings for INTERDIGITAL, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for INTERDIGITAL, INC.


26-Jul-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The following discussion should be read in conjunction with the unaudited, condensed consolidated financial statements and notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, in addition to our 2012 Form 10-K, other reports filed with the SEC and the Statement Pursuant to the Private Securities Litigation Reform Act of 1995 - Forward-Looking Statements below.
Patent Licensing
Patent licensing royalties of $67.2 million in second quarter 2013 increased $20.3 million, or 43%, over first quarter 2013. This sequential increase was primarily driven by the Pegatron Corporation ("Pegatron") arbitration award as discussed below.
On April 18, 2013, our wholly owned subsidiaries InterDigital Technology Corporation and IPR Licensing, Inc. filed an action in the U.S. District Court for the Northern District of California to confirm an arbitration award against Pegatron. The arbitration award issued on April 17, 2013 from a three-member panel constituted by the American Arbitration Association's International Centre for Dispute Resolution in a proceeding we initiated to resolve a dispute surrounding our 2008 patent license agreement with Pegatron. Under the award, Pegatron is required to pay us approximately $29.9 million, including $23.5 million for past royalties through June 30, 2012, $6.2 million of interest, and additional amounts for certain arbitration costs and expenses. On May 15, 2013, InterDigital received $29.9 million.
Technology Solutions
We are engaged in arbitration to determine whether royalties are owed on specific product classes pursuant to one of our technology solutions agreements. The arbitration hearing took place in late June 2012, and a decision is expected in 2013. As of June 30, 2013, we have deferred related revenue of $52.6 million pending the resolution of this arbitration and recorded such amount within short-term deferred revenue since we expect a decision within the next twelve months. We have collected $45.5 million of this amount and the remaining $7.1 million is recorded in accounts receivable as of the current balance sheet date. Repositioning
On October 23, 2012, we announced that, as part of our ongoing expense management effort, we had initiated a voluntary early retirement program ("VERP"). In connection with the VERP, we incurred a related repositioning charge of $12.5 million in 2012. We recognized an additional charge of $1.5 million related to the VERP in first half 2013. During 2013 and 2012, cash payments of $12.6 million and $1.4 million, respectively, were made for severance and related costs associated with the VERP. As of June 30, 2013 and December 31, 2012, our accrued repositioning charge was zero and $11.1 million, respectively. We did not incur any repositioning charges during second quarter 2013, and we do not expect to incur any additional charges related to the VERP. Intellectual Property Enforcement
Please see Note 5, "Litigation and Legal Proceedings," in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a full discussion of the following and other matters:
Samsung, Nokia, Huawei and ZTE 2013 USITC Proceeding (337-TA-868) and Related Delaware District Court Proceedings
On January 2, 2013, the company's wholly owned subsidiaries InterDigital Communications, Inc., InterDigital Technology Corporation, IPR Licensing, Inc. and InterDigital Holdings, Inc. filed a complaint with the USITC against Samsung Electronics Co., Ltd., Samsung Electronics America, Inc. and Samsung Telecommunications America (collectively, "Samsung"), LLC, Nokia Corporation and Nokia Inc. (collectively, "Nokia"), Huawei Technologies Co., Ltd., Huawei Device USA, Inc. and FutureWei Technologies, Inc. d/b/a Huawei Technologies (USA) (collectively, "Huawei") and ZTE Corporation and ZTE (USA) Inc. (collectively, "ZTE" and together with Samsung, Nokia and Huawei the "337-TA-868 Respondents"), alleging violations of Section 337 of the Tariff Act of 1930 in that they engaged in unfair trade practices by selling for importation into the United States, importing into the United States and/or selling after importation into the United States certain 3G and 4G wireless devices (including WCDMA-, cdma2000- and LTE-capable mobile phones, USB sticks, mobile hotspots, laptop computers and tablets and components of such devices) that infringe one or more of up to seven of InterDigital's U.S. patents. The complaint also extends to certain WCDMA and cdma2000 devices incorporating WiFi


Table of Contents

functionality. InterDigital's complaint with the USITC seeks an exclusion order that would bar from entry into the United States infringing 3G or 4G wireless devices (and components), including LTE devices, that are imported by or on behalf of the 337-TA-868 Respondents, and also seeks a cease-and-desist order to bar further sales of infringing products that have already been imported into the United States. Certain of the asserted patents have been asserted against Nokia, Huawei and ZTE in earlier pending USITC proceedings (including the Nokia, Huawei and ZTE 2011 USITC Proceeding (337-TA-800) and the Nokia 2007 USITC Proceeding (337-TA-613), as set forth below) and therefore are not being asserted against those 337-TA-868 Respondents in this investigation. On February 6, 2013, the Administrative Law Judge ("ALJ") overseeing the proceeding issued an order setting a target date of June 4, 2014 for the Commission's final determination in the investigation, with the ALJ's Initial Determination on alleged violation due on February 4, 2014. Trial before the ALJ is currently scheduled to begin in December 2013.
On January 2, 2013, the company's wholly owned subsidiaries InterDigital Communications, Inc., InterDigital Technology Corporation, IPR Licensing, Inc. and InterDigital Holdings, Inc. filed four related district court actions in the Delaware District Court against the 337-TA-868 Respondents. These complaints allege that each of the defendants infringes the same patents with respect to the same products alleged in the complaint filed by InterDigital in USITC Proceeding (337-TA-868). The complaints seek permanent injunctions and compensatory damages in an amount to be determined, as well as enhanced damages based on willful infringement and recovery of reasonable attorneys' fees and costs. On March 13, 2013, InterDigital filed an amended complaint against Nokia and Samsung, respectively, in Delaware District Court to assert allegations of infringement of recently-issued U.S. Patent No. 8,380,244. On March 21, 2013, pursuant to stipulation, the Delaware District Court granted InterDigital leave to file an amended complaint against Huawei and ZTE, respectively, to assert allegations of infringement of recently-issued U.S. Patent No. 8,380,244. Nokia, Huawei and ZTE 2011 USITC Proceeding (337-TA-800) and Related Delaware District Court Proceeding
On July 26, 2011, InterDigital's wholly owned subsidiaries InterDigital Communications, LLC (now InterDigital Communications, Inc.), InterDigital Technology Corporation and IPR Licensing, Inc. filed a complaint with the USITC against Nokia Corporation and Nokia Inc., Huawei Technologies Co., Ltd. and FutureWei Technologies, Inc. d/b/a Huawei Technologies (USA) and ZTE Corporation and ZTE (USA) Inc. (collectively, the "337-TA-800 Respondents"), alleging violations of Section 337 of the Tariff Act of 1930 in that they engaged in unfair trade practices by selling for importation into the United States, importing into the United States and/or selling after importation into the United States certain 3G wireless devices (including WCDMA- and cdma2000-capable mobile phones, USB sticks, mobile hotspots and tablets and components of such devices) that infringe seven of InterDigital's U.S. patents. The action also extends to certain WCDMA and cdma2000 devices incorporating WiFi functionality. InterDigital's complaint with the USITC seeks an exclusion order that would bar from entry into the United States any infringing 3G wireless devices (and components) that are imported by or on behalf of the 337-TA-800 Respondents, and also seeks a cease-and-desist order to bar further sales of infringing products that have already been imported into the United States.
The ALJ's Initial Determination issued on June 28, 2013, finding no violation because the asserted patents were not infringed and/or invalid. Specifically, the ALJ found infringement with respect to claims 1-9 of U.S. Patent No. 7,616,970 (the "'970 patent"), but not as to the other asserted claims of the '970 patent, or any of the other asserted patents. In addition, the ALJ found that the asserted claims of the '970 patent, U.S. Patent No. 7,536,013, and U.S. Patent No. 7,970,127 were invalid in light of the prior art. The ALJ further found that InterDigital had established a licensing-based domestic industry. With respect to the 337-TA-800 Respondents' FRAND and other equitable defenses, the ALJ found that Respondents had failed to prove either that InterDigital violated any FRAND obligations, that InterDigital failed to negotiate in good faith, or that InterDigital's licensing offers were discriminatory. The ALJ also found that InterDigital is not precluded from seeking injunctive relief based on any alleged FRAND commitments. Further, the ALJ found that the 337-TA-800 Respondents had not shown that they were licensed under the asserted patents. On July 10, 2013, the ALJ issued a Recommended Determination on Remedy, concluding that if a violation is found by the Commission, the ALJ recommends the issuance of a Limited Exclusion Order as to all 337-TA-800 Respondents, and cease and desist orders as to 337-TA-800 Respondents Nokia and Huawei.

Petitions for review of the Initial Determination to the Commission were filed by InterDigital and the 337-TA-800 Respondents on July 15, 2013. Responses to the various petitions were filed on July 23, 2013. The Commission is expected to determine whether to review the ID, in whole or in part, by August 30, 2013. The target date for the Commission to issue its Final Determination is October 28, 2013.
Nokia 2007 USITC Proceeding (337-TA-613), Related Delaware District Court Proceeding and Federal Circuit Appeal
On August 1, 2012, the Federal Circuit issued its decision in InterDigital's appeal of the USITC's Final Determination in this proceeding, holding that the Commission had erred in interpreting the claim terms at issue and reversing the Commission's finding of non-infringement. The Federal Circuit adopted InterDigital's interpretation of such claim terms and


Table of Contents

remanded the case back to the Commission for further proceedings. In addition, the Federal Circuit rejected Nokia's argument that InterDigital did not satisfy the domestic industry requirement. On January 17, 2013, the Federal Circuit issued its mandate remanding USITC Proceeding (337-TA-613) to the Commission for further proceedings. On May 10, 2013, Nokia filed a petition for a writ of certiorari to the United States Supreme Court (No. 12 -1352). Briefs in opposition to Nokia's petition are due August 14, 2013. Comparability of Financial Results
When comparing second quarter 2013 financial results against other periods, the following items should be taken into consideration:
•Our second quarter 2013 revenue and other income includes:
?$24.2 million of past sales primarily related to the Pegatron arbitration award; and
?$6.2 million of interest income related to the Pegatron arbitration award.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in our 2012 Form 10-K. A discussion of our critical accounting policies, and the estimates related to them, are included in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2012 Form 10-K. There have been no material changes in our existing critical accounting policies from the disclosures included in our 2012 Form 10-K. Refer to Note 1, "Basis of Presentation," in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for updates related to new accounting pronouncements.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL REQUIREMENTS Our primary sources of liquidity are cash, cash equivalents and short-term investments, as well as cash generated from operations. We also have the ability to obtain additional liquidity through debt and equity financings. Based on our past performance and current expectations, we believe our available sources of funds, including cash, cash equivalents and short-term investments and cash generated from our operations, will be sufficient to finance our operations, capital requirements, debt obligations, existing stock repurchase program and dividend program for the next twelve months. Cash, cash equivalents and short-term investments At June 30, 2013 and December 31, 2012, we had the following amounts of cash, cash equivalents and short-term investments (in thousands):

                                                                                           Increase /
                                               June 30, 2013       December 31, 2012       (Decrease)
Cash and cash equivalents                    $       459,023     $           349,843     $     109,180
Short-term investments                               310,769                 227,436            83,333
Total Cash and cash equivalents and
short-term investments                       $       769,792     $           577,279     $     192,513

The increase in cash, cash equivalents and short-term investments was primarily attributable to $219.8 million of cash provided by operating activities, which was primarily offset by $28.2 million in capital investments, including patent acquisitions and other long-term investments. Cash flows from operations
We generated or used the following cash flows from our operating activities in first half 2013 and 2012 (in thousands):

                                                             For the six months ended June 30,
                                                                                           Increase /
                                                           2013               2012         (Decrease)
Net cash provided by (used in) operating activities $    219,750          $  (41,330 )   $    261,080

The positive operating cash flow during first half 2013 was derived principally from cash receipts of $343.4 million from patent license and technology solutions agreements. We received $310.7 million of per-unit royalty payments, including past sales, current royalties and prepayments, from existing customers and $23.4 million of fixed-fee payments. Included in the


Table of Contents

$310.7 million of per-unit cash receipts are prepayments totaling $242.4 million from existing licensees. Cash receipts from our technology solutions agreements totaled $9.2 million, primarily related to royalties and other license fees associated with our SlimChip modem core. These cash receipts and other changes in working capital were partially offset by cash operating expenses (operating expenses less depreciation of fixed assets, amortization of patents, non-cash cost of patent sales and non-cash compensation) of $93.4 million, cash payments for short-term and long-term incentive compensation of $17.3 million, cash payments for foreign source withholding taxes of $2.6 million and other changes in working capital.

Cash used in operating activities during first half 2012 included cash operating expenses (operating expenses less depreciation of fixed assets, amortization of patents, non-cash cost of patent sales and non-cash compensation) of $87.8 million, cash payments for short-term and long-term incentive compensation of $10.3 million, estimated federal tax payments of $1.5 million and cash payments for foreign source withholding taxes of $1.3 million. These cash uses were partially offset by $47.7 million of cash receipts from patent license, patent sale, and technology solutions agreements along with other changes in working capital. We received $8.0 million of fixed fee payments, $3.0 million of patent sales payments and $27.8 million of per-unit royalty payments, including past sales, current royalties and prepayments, from existing customers and a new licensee. Cash receipts from our technology solutions agreements totaled $8.9 million, primarily related to royalties and other license fees associated with our SlimChip modem core.

Working capital
We believe that working capital, adjusted to exclude cash, cash equivalents, short-term investments, and current deferred revenue provides additional information about non-cash assets and liabilities that might affect our near-term liquidity. While we believe cash and short-term investments are important measures of our liquidity, the remaining components of our current assets and current liabilities, with the exception of deferred revenue, could affect our near-term liquidity and or cash flow. We have no material obligations associated with our deferred revenue, and the amortization of deferred revenue has no impact on our future liquidity and or cash flow. Our adjusted working capital, a non-GAAP financial measure, reconciles to working capital, the most directly comparable GAAP financial measure, at June 30, 2013 and December 31, 2012 (in thousands) as follows:

                                        June 30, 2013       December 31, 2012      Increase / (Decrease)
Current assets                        $       903,878     $           814,347     $              89,531
Less: current liabilities                     166,047                 172,913                    (6,866 )
Working capital                               737,831                 641,434                    96,397
Subtract:
Cash and cash equivalents                     459,023                 349,843                   109,180
Short-term investments                        310,769                 227,436                    83,333
Add:
Current deferred revenue                      116,858                 106,305                    10,553
Adjusted working capital              $        84,897     $           170,460     $             (85,563 )

The $85.6 million net decrease in adjusted working capital is primarily attributable to decreases in in accounts receivable of $109.3 million due to cash receipts from patent license and technology solutions agreements. This decrease was partially offset by net decreases in accrued compensation and other accrued expenses totaling $22.6 million. The decreases to accrued compensation and other accrued expenses were primarily attributable to the cash payments for short-term and long-term compensation discussed above and accrued repositioning payments related to the VERP.
Cash flows from investing and financing activities We used net cash in investing activities of $112.9 million in first half 2013 and $47.1 million in first half 2012. We purchased $83.5 million and $18.2 million of short-term marketable securities, net of sales, in first half 2013 and 2012, respectively. This increase in net purchases in first half 2013 was driven by higher cash receipts in first half 2013. Investment costs associated with capitalized patent costs and acquisition of patents decreased to $27.7 million in first half 2013 from $27.9 million in first half 2012, primarily due to timing differences associated with capitalized patent costs.


Table of Contents

Net cash provided by financing activities for first half 2013 was $2.3 million, an $87.1 million increase from first half 2012 that was primarily due to our repurchases of common stock of $77.7 million in second quarter 2012, which did not recur in first half 2013, $4.9 million due to timing of dividend payments, and $5.1 million related to proceeds from non-controlling interests. Other
Our combined short-term and long-term deferred revenue balance at June 30, 2013 was approximately $382.0 million, an increase of $113.8 million from December 31, 2012. We have no material obligations associated with such deferred revenue. In first half 2013, deferred revenue increased $113.8 million due to a gross increase in deferred revenue of $166.4 million, primarily associated with new prepayments, which were partially offset by $52.5 million of deferred revenue recognized. The deferred revenue recognized was comprised of $33.8 million of amortized fixed-fee royalty payments and $18.7 million in per-unit exhaustion of prepaid royalties (based upon royalty reports provided by our licensees).
Based on current license agreements, we expect the amortization of fixed-fee royalty payments and the resolution of the technology solutions agreement arbitration to reduce the June 30, 2013 deferred revenue balance of $382.0 million by $116.9 million over the next twelve months. Additional reductions to deferred revenue will be dependent upon the level of per-unit royalties our licensees report against prepaid balances.

RESULTS OF OPERATIONS
Second Quarter 2013 Compared to Second Quarter 2012
Revenues
The following table compares second quarter 2013 revenues to second quarter 2012
revenues (in millions):
                                           For the three months ended June
                                                         30,
                                                  2013              2012           Increase/(Decrease)
Per-unit royalty revenue                  $             26.1     $    27.4     $    (1.3 )           (5 )%
Fixed-fee amortized royalty revenue                     16.9          33.8         (16.9 )          (50 )%
Current patent royalties                                43.0          61.2         (18.2 )          (30 )%
Past sales                                              24.2           1.2          23.0          1,917  %
Total patent licensing royalties                        67.2          62.4           4.8              8  %
Patent sales revenue                                       -           9.0          (9.0 )         (100 )%
Technology solutions revenue                             0.5           0.5             -              -  %
Total revenue                             $             67.7     $    71.9     $    (4.2 )           (6 )%

The $4.2 million decrease in total revenue was primarily attributable to the $16.9 million decrease in fixed-fee amortized royalty revenue, as well as a $9.0 million decrease in patent sales, partially offset by a $23.0 million increase in past sales revenue. The majority of the fixed-fee amortized royalty revenue decrease was due to the expiration of the 3G portion of our patent license agreement with Samsung at the end of 2012, which was partially offset by the addition of fixed-fee amortized royalty revenue from the Sony patent license agreement signed in fourth quarter 2012. Per-unit royalty revenue decreased $1.3 million due to lower shipments from our Japanese per-unit licensees and one of our licensees with concentrations in the smartphone market. Past sales of $24.2 million in second quarter 2013 related primarily to the previously discussed Pegatron arbitration award.
In both second quarter 2013 and second quarter 2012, 61% of our total revenues were attributable to companies that individually accounted for 10% or more of our total revenues. In second quarter 2013 and second quarter 2012, the following companies accounted for 10% or more of our total revenues:


Table of Contents

                                                              For the three months
                                                                 ended June 30,
                                                             2013              2012
Pegatron Corporation                                          35%              < 10%
Sony Corporation of America                                   15%               -%
BlackBerry                                                    11%               12%
Nufront Mobile Communications Technology Co. Ltd.             -%                13%
Samsung Electronics Company, Ltd.                             -%                36%

Operating Expenses
The following table summarizes the changes in operating expenses between second
quarter 2013 and second quarter 2012 by category (in millions):
                                            Three months ended June 30,
                                                2013             2012          Increase/ (Decrease)
Patent administration and licensing       $         33.2     $     26.2     $     7.0             27  %
Development                                         13.5           17.2          (3.7 )          (22 )%
Selling, general and administrative                  8.3           10.9          (2.6 )          (24 )%
Total operating expenses                  $         55.0     $     54.3     $     0.7              1  %

Operating expenses increased 1% to $55.0 million in second quarter 2013 from $54.3 million in second quarter 2012. The $0.7 million increase in total operating expenses was primarily due to increases/(decreases) in the following items (in millions):

                                                             Increase/
                                                             (Decrease)
Intellectual property enforcement and non-patent litigation       3.7
Patent amortization                                               2.1
Patent maintenance and patent evaluation                          0.7
Other                                                             0.4
Facilities expense                                                0.2
Cost of patent sale                                              (0.7 )
Personnel-related costs                                          (2.2 )
Long-term compensation                                           (3.5 )
Total increase in operating expenses                        $     0.7

Intellectual property enforcement and non-patent litigation costs increased $3.7 million primarily due to costs associated with the USITC actions. This increase in intellectual property enforcement was partially offset by a decrease in non-patent litigation costs due to lower activity in the previously discussed arbitration proceeding related to one of our technology solutions agreements. Patent amortization increased $2.1 million due to patent acquisitions in recent years. The $0.7 million increase in patent maintenance and patent evaluation was primarily related to due diligence associated with both patent acquisition and patent sale opportunities. The $0.2 million increase in facilities expense related to the expansion of our facilities in second half 2012. The $5.7 million decrease in long-term compensation and personnel-related costs was primarily due to lower accrual rates in 2013 for our performance compensation plans and lower personnel levels as a result of the VERP initiated in third quarter 2012. We recognized $0.7 million of expense during second quarter 2012 to remove the remaining net book value of patents sold during that quarter. Patent Administration and Licensing Expense: The increase in patent administration and licensing expense primarily resulted from the above-noted . . .

  Add IDCC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for IDCC - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.