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IDTI > SEC Filings for IDTI > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for INTEGRATED DEVICE TECHNOLOGY INC


8-Aug-2013

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 (the Exchange Act). 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 Quarterly 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 Quarterly 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 March 31, 2013 filed with the SEC. Operating results for the three months ended June 30, 2013 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 March 31, 2013. 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 three months ended June 30, 2013 to the items that we disclosed as our critical accounting policies in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013.
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 storage and server applications and personal computers, while our consumer products focus on solutions for gaming consoles, set-top boxes, digital TV and smart phones.
We seek to differentiate our products from our competitors' products through the following capabilities:
• Focus on market leadership in timing, serial switching and memory interfaces and substantiate the foundation by adding new technologies, including analog, power management and systems expertise;

• Investments in applications expertise, system-level knowledge and whole product solution elements that solve difficult technology challenges for our customers and enable them to reduce their overall bill-of-materials (BOM), increase system performance and lower power consumption while accelerating their time-to-market;

• Application of our diverse skill, expertise and technology to help our customers achieve maximum benefit from evolving technology standards relevant in the market;

• Dependability and reliability of an experienced, high-volume vendor with a long-term view;

• Combination of our digital design silicon heritage and the latest in analog, mixed-signal capabilities to provide highly integrated Application Specific Standard Products (ASSPs); and

• Customizable model and design services to offer user-configured, application-optimized, quick turn benefits to our customers.


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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 March 31, 2013. Recent developments
Termination of Proposed Acquisition of PLX Technology, Inc. (PLX) On April 30, 2012, IDT and PLX had entered into an Agreement and Plan of Merger with PLX Technology, Inc. (PLX) for the acquisition of PLX by IDT (the Agreement). On December 19, 2012, the United States Federal Trade Commission (FTC) filed an administrative complaint challenging IDT's proposed acquisition of PLX. In response to the FTC's determination to challenge the proposed acquisition of PLX by IDT, effective December 19, 2012, IDT and PLX mutually agreed to terminate the Agreement. Also on December 19, 2012, IDT withdrew its related exchange offer (the Offer) to acquire all of the issued and outstanding shares of common stock, $0.001 par value, of PLX and instructed Computershare, the exchange agent for the Offer, to promptly return all previously tendered shares.
Associated with the proposed acquisition of PLX, during the first quarter of fiscal 2013, IDT incurred approximately $4.1 million in acquisition related costs, which were included in selling, general and administrative (SG&A) expense on the Condensed Consolidated Statements of Operations. Acquisition of NXP B.V.'s Data Converter Business On July 19, 2012, IDT 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 this acquisition will enhance our efforts to increase silicon content in wireless infrastructure markets and 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.
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 from NXP B.V. resulting in a net aggregate purchase price of $27.2 million. During the first quarter of fiscal 2013, we incurred approximately $2.1 million in acquisition related costs, which were included in SG&A expense in the Condensed Consolidated Statements of Operations.
Acquisition of Fox Enterprises, Inc.
On April 30, 2012, IDT completed the acquisition of Fox Enterprises, Inc. (Fox), a leading supplier of frequency control products including crystals and crystal oscillators, in an all-cash transaction for approximately $28.9 million, which included $25.7 million in cash paid at closing and $3.2 million which was recorded as a liability representing the fair value of contingent cash consideration of up to $4.0 million based upon the achievement of future financial milestones, which would be payable after 12 months from the acquisition date. During the three month period ended June 30, 2013, we settled the contingent consideration and paid Fox $3.3 million. We believe that the combination of Fox's product portfolio with our CrystalFree™ oscillators makes IDT the industry's 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 our established sales channels.
Acquisition of Alvand Technologies, Inc. On April 16, 2012, the IDT completed the acquisition of Alvand Technologies Inc., a leading analog integrated circuits company specializing in data converters, for total purchase consideration of approximately $23.3 million, of which $20.5 million was paid in cash at closing and $2.8 million was recorded as a liability representing the fair value of contingent cash consideration of up to $4.0 million based upon the achievement of future product development milestones to be completed within 36 months following the acquisition date. Payments will be made on a proportionate basis upon the completion of each milestone. As of June 30, 2013, the fair value of the contingent consideration was re-measured based on a revised product development forecast for the business. As a result, the fair value of the contingent consideration increased to $3.4 million. We recorded $0.5 million of the change in the fair value of the contingent consideration in selling, general and administrative expense in fiscal 2013 and recorded $0.1 million in selling, general and administrative expense in the first quarter of fiscal 2014. Discontinued operations
On September 26, 2011, 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. The sale of these HQV and FRC video processing assets was intended to allow us to intensify focus on our analog-intensive mixed-signal, timing, and interface and solutions. Upon the closing of the transaction, Qualcomm paid us $58.7 million in cash consideration, of which $6.0 million will be withheld in an escrow account for a period of two years and is included in our consolidated balance sheet as other current assets. Our HQV and FRC product lines represented a significant portion of our video business assets. In the second quarter of fiscal 2012, we recorded a gain of $45.9 million related to this divestiture.


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On August 1, 2012, we completed the transfer of the remaining assets of our video business to Synaptics for $5.0 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. Divestitures
Sale of Smart Meter Business. On March 7, 2013, we completed the sale of our smart metering business and related assets to Atmel Corporation for $10.3 million in cash, of which $1.0 million will be withheld in an escrow account for a period of one year. In the fourth quarter of fiscal 2013, we recorded a gain of $8.0 million related to this divestiture. Prior to the divestiture, the smart meter business was part of a larger cash-flow generating product group and did not, on its own, represent a separate operation of the Company and, therefore, this sale did not qualify as discontinued operations.
Sale of PCIe Enterprise Flash Controller Business. On July 12, 2013, we completed the sale of certain assets of our PCIe enterprise flash controller business to PMC-Sierra, Inc. for approximately $96 million in cash. Prior to the divestiture, the operating results for IDTs PCIe flash controller business was included in our Computing and Consumer reportable segment. Related to this transaction, we expect to record a gain of approximately $83 million on divestiture in the second quarter of fiscal 2014. See Note 19 of Notes to Condensed Consolidated Financial Statements. Overview
The following table and discussion provides an overview of our operating results from continuing operations for the three months ended June 30, 2013 and July 1, 2012:

                                                 Three Months Ended
                                               June 30,       July 1,
(in thousands, except for percentage)            2013           2012
Revenues                                     $ 117,982      $ 130,161
Gross profit                                 $  66,173      $  72,513
As a % of revenues                                  56  %          56  %
Operating loss                               $  (2,519 )    $  (5,443 )
As a % of revenues                                  (2 )%          (4 )%
Net income (loss) from continuing operations $  (2,264 )    $     543
As a % of revenues                                  (2 )%           -  %

Our revenues decreased by $12.2 million, or 9%, to $118.0 million in the quarter ended June 30, 2013 compared to the quarter ended July 1, 2012. The decrease was primarily due to a decrease in unit shipments in our Computing and Consumer segment as we experienced a general decrease in overall demand for most product lines within this market segment when compared to the first quarter of fiscal 2013. This decrease was offset in part by increased revenues in our Communications segment primarily as a result of increased demand as for our Rapid I/O switching solutions products. Despite lower revenue levels, gross profit percentage improved primarily due to an improved shipment mix of higher margin products. Net loss from continuing operations was $2.3 million in the first quarter of fiscal 2014 as compared to a net income of $0.5 million in the first quarter of fiscal 2013. This decrease in net income was primarily due to lower revenues and higher operating expenses which were partially offset by improved gross margin.


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Results of Operations
Revenues
Revenues by segment:           Three Months Ended
(in thousands)          June 30, 2013      July 1, 2012
Communications         $        68,205    $       63,070
Computing and Consumer          49,777            67,091
Total revenues         $       117,982    $      130,161



Product groups representing greater than 10% of net revenues:        Three Months Ended
As a percentage of net revenues                                June 30, 2013     July 1, 2012
Communications:
Communications timing products                                        26 %              21 %
Serial RapidIO products                                               13 %               *
All others less than 10% individually                                 19 %              27 %
   Total communications                                               58 %              48 %

Computing and Consumer:
Consumer and computing timing products                                18 %              20 %
Memory interface products                                             16 %              19 %
All others less than 10% individually                                  8 %              13 %
Total computing and consumer                                          42 %              52 %

Total                                                                100 %             100 %

* Represents less than 10% of net revenues

Communications Segment
Revenues in our Communications segment increased $5.1 million, or 8%, to $68.2 million in the quarter ended June 30, 2013 as compared to the quarter ended July 1, 2012, primarily due to a $6.9 million increase in shipments of our Rapid I/O switching solutions products combined with a $1.5 million increase in demand for our Netcom products and a $1.5 million increase in revenue from Fox Enterprises which was acquired mid-first quarter of fiscal 2013. These increases were offset in part due to a general decrease in demand for our FIFO memory products, multi-port memory products, SRAM products, and digital logic products. Computing and Consumer Segment
Revenues in our Computing and Consumer segment decreased $17.3 million, or 26%, to $49.8 million in the quarter ended June 30, 2013 as compared to the quarter ended July 1, 2012. While we have recently experienced a partial recovery in demand for this market segment, resulting in a 9% increase in revenues for the first quarter of fiscal 2014 as compared to the fourth quarter of fiscal 2013, we experienced a general decrease in overall demand for most product lines within this market segment when compared to the first quarter of fiscal 2013. We believe that these decreases are in-line with market conditions. Revenues by Region
Revenues in the quarter ended June 30, 2013 decreased primarily in APAC (Asia Pacific region excluding Japan), which was offset by increases in Europe as compared to the quarter ended July 1, 2012. Revenues in APAC, the Americas, Japan and Europe accounted for 61%, 16%, 9% and 14%, respectively, of consolidated revenues in the quarter ended June 30, 2013 compared to 66%, 15%, 9% and 10%, respectively, of our consolidated revenues in the quarter ended July 1, 2012. The Asia Pacific region continues to be our strongest region, as many of our largest customers utilize manufacturers in that region.


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Gross Profit
                                   Three Months Ended
                             June 30, 2013     July 1, 2012
Gross Profit (in thousands) $      66,173     $     72,513
Gross Profit Percentage              56.1 %           55.7 %

Gross profit decreased $6.3 million in the quarter ended June 30, 2013 compared to the quarter ended July 1, 2012 as a result of decreased revenues. Gross profit as a percentage of revenues increased 0.4% in the quarter ended June 30, 2013 compared to the quarter ended July 1, 2012. Despite lower revenue levels, gross profit percentage improved primarily due to an improved shipment mix of higher margin products. As of June 30, 2013, the balance of inventory buffer stock which was built in anticipation of the transition of wafer fabrication activities to third party foundries, which was completed in the fourth quarter of fiscal 2012, totaled approximately $4.6 million. Operating Expenses
The following table presents our operating expenses for the three months ended June 30, 2013 and July 1, 2012:

                                                                Three Months Ended
                                                  June 30, 2013                     July 1, 2012
                                                              % of Net                          % of Net
(in thousands, except for percentages)     Dollar Amount      Revenues       Dollar Amount      Revenues
Research and development                 $        40,849          35 %     $        41,544          32 %
Selling, general and administrative      $        27,843          24 %     $        36,412          28 %

Research and Development (R&D)
R&D expense decreased $0.7 million, or 2%, to $40.8 million in the quarter ended June 30, 2013 compared to the quarter ended July 1, 2012. The decrease was primarily due to a $0.8 million decrease in R&D employee costs due to lower headcount, a $1.0 million reduction in health insurance costs due to lower claims and a $0.8 million decrease in photomasks, materials and outside service costs. These decreases were offset in part by a $0.9 million increase in stock-based compensation, a $0.5 million increase in severance costs and a $0.5 million increase in depreciation expenses. Selling, General and Administrative (SG&A) SG&A expense decreased $8.6 million, or 24%, to $27.8 million in the quarter ended June 30, 2013 as compared to the quarter ended July 1, 2012. The decrease was primarily the result of an approximately $6.1 million decrease in acquisition related legal, consulting, broker and other fees related to the proposed acquisition of PLX and the acquisitions of the NXP high-speed data converter assets, Fox Enterprises and Alvand Technologies which were incurred in the first quarter of fiscal 2013. In addition, the first quarter of fiscal 2013 included $2.6 million of expenses related to stockholder activities.

Interest Income and Other, Net
The components of interest income and other, net are summarized as follows:
                                      Three Months Ended
(in thousands)                  June 30, 2013      July 1, 2012
Interest income                $        264       $         86
Interest expense                         (3 )             (396 )
Other income (expense), net            (204 )            2,310
Interest income and other, net $         57       $      2,000


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Interest income is derived from earnings on our cash and short-term investments. Interest expense is primarily due to charges associated with the credit facility with Bank of America which was terminated in the fourth quarter of fiscal 2013.
Other income (expense), net primarily consists of gains or losses in the value of deferred compensation plan assets, foreign currency gains or losses and other non-operating gains or losses. The decrease in other income of $2.0 million in the three months ended June 30, 2013 as compared to the same period in the prior year was primarily attributable to $2.3 million in death benefit proceeds received in fiscal 2013 under life insurance policies purchased with the intention of funding deferred compensation plan liabilities. Income Tax Benefit
During the three months ended June 30, 2013, the Company recorded an income tax benefit of $0.2 million from continuing operations. The Company recorded an income tax benefit of $4.0 million in the three months ended July 1, 2012 from continuing operations.
The income tax benefit recorded in the three months ended June 30, 2013 was primarily due to the reversal of uncertain tax positions resulting from statute lapse.
The income tax benefit for the three months ended July 1, 2012 was primarily due to the recognition of a deferred tax asset offset by the recognition of a deferred tax liability due to the acquisition of Fox Enterprises. The increase in the deferred tax liability was a part of the purchase accounting step-up adjustment that was recorded against goodwill while the increase in the deferred tax asset was recorded as a tax benefit. Liquidity and Capital Resources
Our cash and cash equivalents and short-term investments were $310.2 million at June 30, 2013, an increase of $13.1 million compared to March 31, 2013. We had no outstanding debt at June 30, 2013 and March 31, 2013. Cash Flows from Operating Activities
Net cash provided by operating activities totaled $13.9 million in the three months ended June 30, 2013 compared to $11.1 million in the three months ended July 1, 2012. Cash provided by operating activities in the three months ended June 30, 2013 consisted of our net loss of $2.3 million, adjusted to add back depreciation, amortization, and other non-cash items which totaled $14.8 million; and cash used by working capital requirements. In the three months ended June 30, 2013, excluding the effects of non-cash activities, cash used by working capital requirements was $1.4 million and consisted primarily of a $3.6 million increase in accounts receivable due to an increase in revenues as compared to the fourth quarter of fiscal 2013, combined with a $1.1 million reduction in income taxes payable and a $0.6 million decrease in deferred income. These working capital uses were offset in part by cash provided from a $3.3 million decrease in prepaid and other assets due to normal amortization of prepaid design engineering software tools, a $1.9 million increase in accounts payable and a $1.5 million reduction in accrued compensation due to the timing of liabilities incurred versus payments.
In the three months ended July 1, 2012, net cash provided by operating activities totaled $11.1 million. Cash provided by operating activities in the quarter ended July 1, 2012 consisted of our net loss of $4.3 million, adjusted to exclude depreciation, amortization and other non-cash items which totaled $8.5 million; and cash provided by working capital changes. In the quarter ended July 1, 2012, excluding the effects of acquisitions, cash provided from working capital changes was $6.9 million and primarily consisted of an inventory decrease of $7.4 million primarily attributable to shipments exceeding inventory build combined with increased inventory reserves, $0.8 million decrease in prepaid assets combined with an increase in accrued liabilities of $2.0 million primarily due to increases in accrued acquisition related costs and accrued shareholder activities costs which were partially offset by payments of other accrued supplier obligations. These working capital provisions were offset in part by an accounts payable decrease of $1.6 million attributable to the timing of payments during the quarter and a $1.9 million decrease in deferred income as a result of reduced distributor inventories. Cash Flows Used in Investing Activities
Net cash used by investing activities in the three months ended June 30, 2013 was $34.9 million compared to cash used of $40.1 million in the three months ended July 1, 2012. Net cash used by investing activities in the three months ended June 30, 2013 was primarily due to the use of $30.9 million for the net purchase of short-term investments and $4.0 million of expenditures to purchase capital equipment.
Net cash used by investing activities in the quarter ended July 1, 2012 was primarily due to $45.0 million paid for the acquisitions of Fox Enterprises and Alvand Technologies, $9.3 million of expenditures to purchase capital equipment partially offset by net proceeds of $14.1 million from sale of short-term investments.


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Cash Flows from Financing Activities
Net cash provided by financing activities was $4.4 million in the three months ended June 30, 2013 as compared to net cash provided by financing activities of $3.1 million in the three months ended July 1, 2012. Cash provided by financing activities in the three months ended June 30, 2013, was primarily due to proceeds of approximately $7.7 million from the exercise of employee stock options and the issuance of stock under our employee stock purchase plan which was offset in part by a $3.3 million payout of the contingent consideration associated with the acquisition of Fox Enterprises. . . .

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