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IDTI > SEC Filings for IDTI > Form 10-Q on 6-Nov-2013All Recent SEC Filings

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Form 10-Q for INTEGRATED DEVICE TECHNOLOGY INC


6-Nov-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


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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 and six months ended September 29, 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 six months ended September 29, 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.

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.


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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, 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. During the second quarter of fiscal 2014, we paid Alvand $1.4 million which decreased the fair value of the remaining contingent consideration to $2.0 million.
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 the Company $58.7 million in cash consideration, of which $6.0 million had been withheld in an escrow account for a period of two years and was paid to the Company during the second quarter of fiscal 2014. In the second quarter of fiscal 2012, the Company recorded a gain of $45.9 million related to this divestiture. The Company's HQV and FRC product lines represented a significant portion of the Company's video business assets.
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


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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 $96.1 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 recorded a gain of $82.3 million on divestiture in the second quarter of fiscal 2014. See Note 5 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 and six months ended September 29, 2013 and September 30, 2012:

                                         Three Months Ended                     Six Months Ended

(in thousands, except for         September 29,      September 30,      September 29,      September 30,
percentage)                            2013               2012               2013               2012
Revenues                         $      124,649     $     133,401      $     242,631      $     263,562
Gross profit                     $       70,849     $      74,627      $     137,022      $     147,140
As a % of revenues                           57 %              56  %              56  %              56  %
Operating loss                   $          588     $        (510 )    $      (1,931 )    $      (5,953 )
As a % of revenues                            - %               -  %              (1 )%              (2 )%
Net income (loss) from
continuing operations            $       83,651     $        (683 )    $      81,387      $        (140 )
As a % of revenues                           67 %              (1 )%              34  %               -  %

Our revenues decreased by $8.8 million, or 7%, to $124.6 million in the quarter ended September 29, 2013 compared to the quarter ended September 30, 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 second quarter of fiscal 2013. This decrease was offset in part by increased revenues in our Communications segment primarily as a result of increased demand 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 income from continuing operations was $83.7 million in the second quarter of fiscal 2014 as compared to a net loss of $0.7 million in the second quarter of fiscal 2013. This increase in net income was primarily due to the gain recorded on the sale of PCIe Enterprise Flash Controller Business.


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Results of Operations
Revenues
Revenues by segment:                       Three Months Ended                       Six Months Ended
                                   September 29,        September 30,       September 29,       September 30,
(in thousands)                          2013                2012                2013                2012
Communications                   $         72,948     $        69,293     $       141,153     $       132,363
Computing and Consumer                     51,701              64,108             101,478             131,199
Total revenues                   $        124,649     $       133,401     $       242,631     $       263,562



Product groups representing
greater than 10% of net
revenues:                                Three Months Ended                     Six Months Ended
                                  September 29,      September 30,     September 29,       September 30,
As a percentage of net revenues       2013               2012              2013                2012
Communications:
Communications timing products           24 %               22 %              25 %                 22 %
Serial RapidIO products                  13 %                8 %              13 %                  7 %
All others less than 10%
individually                             22 %               22 %              20 %                 21 %
   Total communications                  59 %               52 %              58 %                 50 %

Computing and Consumer:
Consumer and computing timing
products                                 18 %               18 %              18 %                 19 %
Memory interface products                15 %               17 %              15 %                 18 %
All others less than 10%
individually                              8 %               13 %               9 %                 13 %
Total computing and consumer             41 %               48 %              42 %                 50 %

Total                                   100 %              100 %             100 %                100 %

* Represents less than 10% of net revenues

Communications Segment
Revenues in our Communications segment increased $3.7 million, or 5%, to $72.9 million in the quarter ended September 29, 2013 as compared to the quarter ended September 30, 2012, primarily due to a $6.0 million increase in shipments of our Rapid I/O switching solutions products combined with a $0.8 million increase in demand for our Netcom products and a $0.2 million increase in revenue from Fox Enterprises which we 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. Revenues in our Communications segment increased $8.8 million, or 7%, to $141.2 million in the six months ended September 29, 2013 as compared to the six months ended September 30, 2012, primarily due to a $12.9 million increase in shipments of our Rapid I/O switching solutions products combined with a $2.1 million increase in demand for our Netcom products and a $1.7 million increase in revenue from Fox Enterprises which we 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 $12.4 million, or 19%, to $51.7 million in the quarter ended September 29, 2013 as compared to the quarter ended September 30, 2012. We experienced a general decrease in overall demand for most product lines within this market segment when compared to the second quarter of fiscal 2013. Computing and Consumer Timing products and Audio products decreased $2.1 million and $2.7 million, respectively, and Memory Interface products and Switching Solutions products decreased by $3.8 million and $2.4 million, respectively, as compared to the quarter ended September 30, 2012.


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Revenues in our Computing and Consumer segment decreased $29.7 million, or 23%, to $101.5 million in the six months ended September 29, 2013 as compared to the six months ended September 30, 2012.We experienced a general decrease in overall demand for most product lines within this market segment when compared to fiscal 2013. Computing and Consumer Timing products and Audio products decreased $6.9 million and $4.7 million, respectively, and Memory Interface products and Switching Solutions products decreased by $10.3 million and $5.9 million, respectively, as compared to the six months ended September 30, 2012. Revenues by Region
Revenues in the quarter ended September 29, 2013 decreased primarily in APAC (Asia Pacific region excluding Japan), which was offset by increases in Europe as compared to the quarter ended September 30, 2012. Revenues in APAC, the Americas, Japan and Europe accounted for 63%, 15%, 8% and 14%, respectively, of consolidated revenues in the quarter ended September 29, 2013 compared to 65%, 15%, 8% and 12%, respectively, of our consolidated revenues in the quarter ended September 30, 2012. The Asia Pacific region continues to be our strongest region, as many of our largest customers utilize manufacturers in that region. For the six months ended September 29, 2013, revenue decreased primarily in APAC (excluding Japan) and Europe as compared to the six months ended September 30, 2012. For the six months ended September 29, 2013, revenues in APAC region, Americas, Japan and Europe accounted for 62%, 16%, 8% and 14%, respectively, of consolidated revenues as compared to 66%, 15%, 8% and 11%, respectively, for the first six months of fiscal 2013.

Gross Profit
                                      Three Months Ended                    Six Months Ended
                               September 29,      September 30,     September 29,      September 30,
                                    2013              2012               2013               2012
Gross Profit (in thousands)   $       70,849     $      74,627     $      137,022     $      147,140
Gross Profit Percentage                 56.8 %            55.9 %             56.5 %             55.8 %

Gross profit decreased $3.8 million in the quarter ended September 29, 2013 compared to the quarter ended September 30, 2012 as a result of decreased revenues. Gross profit as a percentage of revenues increased 0.9% in the quarter ended September 29, 2013 compared to the quarter ended September 30, 2012. Despite lower revenue levels, gross profit percentage improved primarily due to an improved shipment mix of higher margin products as the Communication segment revenue as a percentage of total revenue increased from 51.9% in the second quarter of fiscal 2013 to 58.5% in the corresponding quarter of fiscal 2014. As of September 29, 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 $2.9 million.
Gross profit decreased $10.1 million in the six months ended September 29, 2013 compared to the six months ended September 30, 2012 as a result of decreased revenues. Gross profit as a percentage of revenues increased 0.7% in the six months ended September 29, 2013 compared to the six months ended September 30, 2012. Despite lower revenue levels, gross profit percentage improved primarily due to an improved shipment mix of higher margin products as the Communication segment revenue as a percentage of total revenue increased from 50.0% in the first six month period of fiscal 2013 to 58.2% in the corresponding period of fiscal 2014.


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Operating Expenses
The following table presents our operating expenses for the three and six months
ended September 29, 2013 and September 30, 2012:
                                     Three Months Ended                                                 Six Months Ended
                     September 29, 2013               September 30, 2012               September 29, 2013               September 30, 2012

(in thousands,
except for                         % of Net                         % of Net                         % of Net                         % of Net
percentages)    Dollar Amount      Revenues      Dollar Amount      Revenues      Dollar Amount      Revenues      Dollar Amount      Revenues
Research and
development    $      42,216           34 %     $      42,387           32 %     $      83,065           34 %     $      83,931           32 %
Selling,
general and
administrative $      28,045           22 %     $      32,750           25 %     $      55,888           23 %     $      69,162           26 %

Research and Development (R&D)
R&D expense decreased $0.2 million, or 0.4%, to $42.2 million in the quarter ended September 29, 2013 compared to the quarter ended September 30, 2012. The decrease was primarily due to a $2.6 million decrease in R&D labor and benefits related costs driven by lower headcount, a $1.3 million decrease in transitional services related expenses incurred in the second quarter of fiscal 2013 in connection with the acquisition of NXP high-speed data converter assets, and a $1.3 million reduction in stock-based compensation expense as a result of equity grant cancellations triggered by departure of our CEO, CFO, and VP of Worldwide Sales and the divestiture of PCIe Enterprise Flash Controller Business during the second quarter of fiscal 2014. These decreases were offset in part by a $5.6 million increase in severance costs and accelerated amortization of CAD licenses caused by reduction in headcount.
R&D expense decreased $0.9 million, or 1%, to $83.1 million in the six months ended September 29, 2013 compared to the six months ended September 30, 2012. The decrease was primarily due to a $2.7 million decrease in R&D labor and benefits related costs driven by lower headcount, a $1.1 million reduction in health insurance costs due to lower claims and a $2.2 million decrease in transitional services related expense incurred in the second quarter of fiscal 2013 in connection with the acquisition of NXP high-speed data converter assets and other outside service costs. These decreases were offset in part by a $5.4 million increase in severance costs and accelerated amortization of CAD licenses caused by reduction in headcount.
Selling, General and Administrative (SG&A) SG&A expense decreased $4.7 million, or 14%, to $28.0 million in the quarter ended September 29, 2013 as compared to the quarter ended September 30, 2012.
The decrease was primarily the result of an approximately $4.8 million decrease in acquisition related legal, consulting, broker and other fees related to the proposed acquisition of PLX and the completed acquisition of NXP high-speed data converter assets. Cost savings associated with the reduction in headcount were offset by $0.7 million increase in severance costs recorded in the second quarter of fiscal 2013.
SG&A expense decreased $13.3 million, or 19%, to $55.9 million in the six months ended September 29, 2013 as compared to the six months ended September 30, 2012.
The decrease was primarily the result of an approximately $11.5 million decrease in acquisition related legal, consulting, broker and other fees incurred in connection with the proposed acquisition of PLX, the completed acquisitions of the NXP high-speed data converter assets, Fox Enterprises and Alvand Technologies and a $2.6 million reduction in consulting fees incurred during the first half of fiscal 2013 in response to activities and inquiries of Starboard Value LP. Cost savings associated with the reduction in headcount were offset by $0.8 million increase in severance costs recorded during the six month period ended September 29, 2013.

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