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TSRA > SEC Filings for TSRA > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for TESSERA TECHNOLOGIES INC

Form 10-K for TESSERA TECHNOLOGIES INC


3-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion (presented in thousands, except for percentages) should be read in conjunction with our consolidated financial statements and notes thereto.
Business Overview
Tessera Technologies, Inc. is a holding company with operating subsidiaries in two segments: Intellectual Property and DigitalOptics.

Our Intellectual Property segment generates revenue from manufacturers and other implementers that use our technology. We pioneered chip-scale packaging solutions, which we license to the semiconductor industry. We also develop and acquire interconnect solutions and intellectual property in areas such as mobile computing and communications, memory and data storage, and 3DIC technologies. Our DigitalOptics segment has undergone many changes during 2013 and 2014 through the date of this report, as summarized under the heading "Overview" in

Part I, Item 1- Business of this Annual Report.


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In 2014, we plan to continue the DigitalOptics embedded image processing development operations based in Romania and Ireland (which includes FaceToolsTM, FacePowerTM, FotoSavvyTM, face beautification, red-eye removal, HDR, panorama, and image stabilization products), which are not impacted by the restructuring and workforce reduction we announced in January 2014. Additionally, we plan to seek additional ways to monetize the DigitalOptics intellectual property portfolio and technology, through a sale, licensing or other means.

In this document, the operations and financial results of the Micro-Optics business and the Zhuhai Facility outlined under the heading "Overview" in Part I, Item 1- Business of this Annual Report, will be considered discontinued operations. All other financial results, including the mems|cam operations noted in the "Overview", are included in continuing operations.

Results of Operations
Restructuring Activities
As noted under the heading "Overview" in Part I, Item I - Business of this Annual Report, we have had three major restructuring actions in 2013. Key financial impacts of these actions are as follows:
1) We sold most of the assets of the Micro-Optics business located in Charlotte, North Carolina in exchange for $14.9 million in cash, which resulted in a disposal gain of $8.7 million. We incurred $2.6 million in restructuring and impairment charges related to this action. All financial results of this business are included in discontinued operations.
2) We closed our Zhuhai Facility and consolidated our manufacturing capabilities into Taiwan. We incurred $4.1 million in restructuring and impairment charges related to this action. All financial results of this business are included in discontinued operations.
3) In January of 2014, we announced the cessation of all mems|cam manufacturing operations. As a result, we incurred approximately $49.0 million in long-lived asset impairment and other charges related to the mems|cam operations in the fourth quarter of 2013. In addition, we anticipate that this decision may result in severance and other charges of between $6.0 million to $9.0 million in the first half of 2014. The 2013 financial results of this business and this restructuring action are included in continuing operations as the decision to discontinue the operations and dispose of the assets was not made until January 2014. For more information regarding these actions, see Note 6 - "Discontinued Operations", Note 8 - "Goodwill and Identified Intangible Assets" and Note 15 - "Restructuring, Impairment of Long-Lived Assets and Other Charges" in the Notes to Consolidated Financial Statements. All financial results and discussions below relate to continuing operations unless otherwise specified. Revenues
Our revenues are generated primarily from royalty and license fees. Royalty and license fees are generated from licensing the right to use our technologies or intellectual property. Licensees generally report shipment information 30 to 60 days after the end of the quarter in which such activity takes place. Since there is no reliable basis on which we can estimate our royalty revenues prior to obtaining these reports from the licensees, we generally recognize royalty revenues on a one quarter lag. The timing of revenue recognition and the amount of revenue actually recognized for each type of revenues depends upon a variety of factors, including the specific terms of each arrangement, our ability to derive fair value of the element and the nature of our deliverables and obligations. In addition, our royalty revenues will fluctuate based on a number of factors such as: (a) the timing of receipt of royalty reports; (b) the rate of adoption and incorporation of our technology by licensees; (c) the demand for products incorporating semiconductors that use our licensed technology; (d) the cyclicality of supply and demand for products using our licensed technology; (e) volume incentive pricing terms in licensing agreements that may result in significant variability in quarterly revenue recognition from customers and
(f) the impact of economic downturns. From time to time we enter into license agreements that have fixed expiration dates. Upon expiration of such agreements, we need to renew or replace these agreements in order to maintain our revenue base. We may not be able to continue licensing customers on terms favorable to us, under the existing terms or at all, which would harm our results of operations. For example, our license agreement with Micron Technology, Inc. expired in May 2012. Micron Technology, Inc. accounted for 10% or more of total revenues for the year ended December 31, 2012. This expiration has caused a substantial adverse impact to our royalty revenue as compared to periods prior to such expiration. If we are not able to enter into a new license agreement with Micron Technology, Inc., it will continue to have a substantial adverse impact on our royalty revenue.

PTI, a customer that accounted for 10% or more of total revenues for the year ended December 31, 2012, ceased making payments in 2012, which caused a substantial adverse impact to our royalty revenue as compared to prior periods. On February 27, 2014, we announced a settlement with PTI related to Tessera, Inc.'s and PTI's pending cases in the United States District


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Court for the Northern District of California. The settlement provides that PTI will pay $196 million to Tessera, Inc. with two required payments to be made in 2014 and quarterly recurring payments beginning in 2015 through the end of 2018.

In the past, we have engaged in litigation and arbitration proceedings to directly or indirectly enforce our intellectual property rights and the terms of our license agreements, including proceedings to ensure proper and full payment of royalties by our current licensees and by third parties whose products incorporate our intellectual property rights. For example, on February 20, 2013 the International Court of Arbitration of the International Chamber of Commerce issued an award in favor of Tessera, Inc. in its dispute with Amkor. Tessera, Inc. cannot predict the precise amount or the timing of Amkor's payment. We believe that the dispute with Amkor and similar future proceedings may result in fluctuations in our revenue and expenses.
The following table presents our historical operating results for the periods indicated as a percentage of revenues:

                                                               Years ended December 31,
                                                            2013          2012        2011
Revenues:
Royalty and license fees (1)                                100  %        100  %       100  %
Total Revenues                                              100           100          100
Operating expenses:
Cost of revenues                                              3             4            4
Research, development and other related costs                51            42           28
Selling, general and administrative                          49            44           33
Litigation expense                                           36            17           13
Restructuring, impairment of long-lived assets and other
charges                                                      41             1            2
Total operating expenses                                    180           108           95
Operating income (loss) from continuing operations          (80 )          (8 )          5
Other income and expense, net                                 1             3            1
Income (loss) from continuing operations before taxes       (79 )          (5 )          7
Provision for income taxes                                   14             1            6
Income (loss) from continuing operations                    (93 )          (5 )          1
Loss from discontinued operations, net of tax               (17 )          (9 )         (9 )

Net loss (110 )% (14 )% (8 )%

(1) Revenue previously classified as past production payments, defined as royalty payments for the use of our intellectual property and where payments are made as part of a settlement of a patent infringement dispute from previously unlicensed parties, has been reclassified and is included in "Royalty and License Fees"

The following table sets forth our revenues by year (in thousands, except for percentages):

                              Years Ended December 31,
                                                               Increase/        %
                                 2013               2012       (Decrease)    Change
Royalty and license fees $     168,908           $ 209,838    $  (40,930 )    (20 )%

Total revenue for the years ended December 31, 2013 and 2012 was $168.9 million and $209.8 million, respectively. See "Segment Operating Results" below for an explanation of the changes in revenue between the reporting periods. Cost of Revenues
Cost of revenues primarily consists of amortization of intangible assets related to acquired technologies, direct compensation and depreciation expense. Amortization of certain acquired intangible assets and depreciation expense of property and equipment are generally classified as a component of cost of revenues from research, development and other related costs when an in-process development project reaches commercialization. For each associated period, cost of revenues as a percentage of


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total revenues varies based on the rate of adoption of our technologies and the timing of property and equipment being placed in service.
Cost of revenues for the year ended December 31, 2013 was $4.5 million, as compared to $7.8 million for the year ended December 31, 2012, a decrease of $3.3 million, or 42%. The decrease was primarily related to the $2.3 million decrease in amortization due to the impairment of intangibles in 2013 (see Note
8 - "Goodwill and Identified Intangibles Assets" in the Notes to Consolidated Financial Statements), and a $0.9 million decrease in outside services. Research, Development and Other Related Costs Research, development and other related costs consist primarily of compensation and related costs for personnel, as well as costs related to patent applications and examinations, product "tear downs" and reverse engineering, amortization of intangible assets, materials, supplies and equipment depreciation. Research and development is conducted primarily in-house and targets development of chip-scale packaging, circuitry design, 3D architecture, wafer-level packaging technology, high-density substrate, image sensor packaging, and image enhancement technology. All research, development and other related costs are expensed as incurred.
Research, development and other related costs for the year ended December 31, 2013 were $86.7 million, as compared to $88.8 million for the year ended December 31, 2012, a decrease of $2.1 million, or 2%. The decrease was primarily related to a reduction in outside services of $3.3 million, personnel related expenses of $3.4 million, and stock-based compensation of $1.7 million. These decreases were partially offset by an increase in depreciation expense of $3.0 million, facilities related expense of $1.6 million, and materials expense of $1.2 million due to the expansion of the DigitalOptics mems|cam manufacturing operation in Taiwan.
We believe that a significant level of research and development expenses will be required for us to remain competitive in the future, we also expect research and development costs to decline in 2014 from current levels as a result of the shutdown of the DigitalOptics mems|cam manufacturing operation (see Note 17 - "Subsequent Events" in the Notes to Consolidated Financial Statements). Selling, General and Administrative
Selling expenses consist primarily of compensation and related costs for sales and marketing personnel, reverse engineering personnel and services, marketing programs, public relations, promotional materials, travel, trade show expenses, and stock-based compensation expense. General and administrative expenses consist primarily of compensation and related costs for general management, information technology, and finance personnel, legal fees and expenses, facilities costs, stock-based compensation expense, and professional services. Our general and administrative expenses, other than facilities related expenses, are not allocated to other expense line items. Our selling, general and administrative expenses declined in 2013 as we have implemented cost savings strategies. We anticipate these costs to decline further in 2014 from current levels as we continue to restructure our operations.
Selling, general and administrative expenses for the year ended December 31, 2013 were $82.2 million, as compared to $92.5 million for the year ended December 31, 2012, a decrease of $10.3 million, or 11%. The decrease was primarily attributable to decreases in outside services of $4.7 million, personnel related expenses of 3.2 million, facilities related expenses of $1.9 million, and travel related expenses of $1.0 million. The decreases were primarily the result of the overall streamlining of our administrative personnel and outside services (see Note 15 - "Restructuring, Impairment of Long-Lived Assets and Other Charges" in the Notes to Consolidated Financial Statements) and were partially offset by a $1.9 million increase in depreciation expense. Litigation Expense
Litigation expense for the year ended December 31, 2013 was $60.4 million, as compared to $34.0 million for the year ended December 31, 2012, an increase of $26.4 million, or 78%. The increase was primarily attributable to the increase of case activities in our docket of legal proceedings.
We expect that litigation expense will continue to be a material portion of our operating expenses in future periods, and may fluctuate significantly between periods, because of our ongoing litigation, as described in Part I, Item 3 - Legal Proceedings, and because of litigation initiated from time to time in the future in order to enforce and protect our intellectual property and contract rights.


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Upon expiration of the current terms of our customers' licenses, if those licenses are not renewed, litigation may become a necessary element of a campaign to secure payment of reasonable royalties for the use of our patented technology. If we initiate such litigation, our future litigation expenses may increase.
Restructuring, Impairment of Long-Lived Assets and Other Charges In 2013, we continued the restructuring of our DigitalOptics business and assessed the recoverability of our manufacturing assets during the year. We incurred $70.0 million of restructuring, impairment of long-lived assets and other charges for the year ended December 31, 2013 which were mainly due to $58.3 million of impairments of long-lived assets and $9.8 million of purchase obligations (see Note 15 - "Restructuring, Impairment of Long-Lived Assets and Other Charges" in the Notes to Consolidated Financial Statements for additional details).
Stock-based Compensation Expense
The following table sets forth our stock-based compensation expense for the years ended December 31, 2013 and 2012 (in thousands):

                                                   Years Ended December 31,
                                                       2013               2012
Cost of revenues                              $          50             $    641
Research, development and other related costs         3,591                6,455
Selling, general and administrative                   9,862                9,940
Total stock-based compensation expense        $      13,503             $ 17,036

Stock-based compensation awards included employee stock options, restricted stock awards and units, and employee stock purchases. For the year ended December 31, 2013, stock-based compensation expense was $13.5 million, of which $7.8 million related to employee stock options, $4.3 million related to restricted stock awards and units and $1.4 million related to employee stock purchases. For the year ended December 31, 2012, stock-based compensation expense was $17.0 million, of which $10.3 million related to employee stock options, $4.8 million related to restricted stock awards and units and $1.9 million related to employee stock purchases. The decrease in stock-based compensation from 2012 to 2013 primarily resulted from forfeitures of options and restricted stock awards and units due to reduction in staff, offset by increased expenses related to the modification of expenses related to stock awards of $3.5 million in the year ended December 31, 2013 versus $0.1 million in the year ended December 31, 2012. Modifications typically occur when we enter into consulting agreements with departing employees. Future stock-based compensation expense will vary due to volatility in our stock price, number and type of stock awards granted and timing of modifications to stock awards, if any.
Other Income and Expense, Net
Other income and expense, net for the year ended December 31, 2013 was $1.8 million, as compared to $5.9 million, for the year ended December 31, 2012. The decrease was primarily attributable to a $5.4 million payment we received from Amkor in 2012 related to the International Court of Arbitration of the International Chamber of Commerce interim award in favor of Tessera, Inc. that was recorded as interest income.
Provision for (benefit from) Income Taxes The provision for income taxes for the year ended December 31, 2013 was $24.5 million, and was comprised of a tax expense for domestic and selected foreign jurisdictions as well as foreign withholding and income taxes. The provision for income taxes for the year ended December 31, 2012 was $1.1 million, and was largely comprised of a foreign withholding and income taxes offset by a benefit for domestic federal tax. The increase in the tax expense for the year ended December 31, 2013 as compared to the prior year was largely attributable to the valuation allowance on substantially all the Company's federal deferred tax assets.
During 2013, we recorded a valuation allowance against substantially all of our federal deferred tax assets as we concluded such assets were no longer fully realizable. The need for a valuation allowance requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. In making such assessment, significant weight is given to evidence that can be objectively verified. After considering both negative and positive evidence to assess the recoverability of our net deferred tax assets during 2013, we determined that it was not more likely than not we would realize the full value of our federal deferred tax assets given current uncertainties regarding the timing of profits that has caused the Company to be in a


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cumulative three year loss position as of December 31, 2013. We continue to monitor the likelihood that we will be able to recover our deferred tax assets in the future. This determination includes objectively verifiable positive evidence that outweighs potential negative evidence. Discontinued Operations
In 2013, we sold our Micro-Optics business located in Charlotte, North Carolina, and shut-down our camera module manufacturing facility in Zhuhai, China. Both of these operations were part of our DigitalOptics segment. In 2013 and all previous periods presented, these operations are reported as discontinued operations. For further information about discontinued operations, see Note 6 - "Discontinued Operations" in the Notes to Consolidated Financial Statements for additional details.
Fiscal Year 2012 and 2011
The following table sets forth our revenues by type (in thousands, except for percentages):

                                Years Ended December 31,
                                                                 Increase/
                                   2012               2011       (Decrease)    Change
Royalty and license fees   $     209,838           $ 237,925    $  (28,087 )    (12 )%

Total revenue for the year ended December 31, 2012 was $209.8 million compared to $237.9 million for the year ended December 31, 2011. See "Segment Operating Results" below for an explanation of the changes in revenue between the reporting periods.
Cost of Revenues
Cost of revenues for the year ended December 31, 2012 was $7.8 million, as compared to $8.4 million for the year ended December 31, 2011, a decrease of $0.6 million, or 7%. This decrease resulted from a $1.7 million decrease in outside services offset by a $1.3 million increase in intangible amortization. Research, Development and Other Related Costs Research, development and other related costs for the year ended December 31, 2012 were $88.8 million, as compared to $65.7 million for the year ended December 31, 2011, an increase of $23.1 million, or 35%. The increase was primarily due to increases in personnel related expenses of $7.8 million, in material costs of $3.5 million, in consulting fees of $2.5 million, in patent prosecution, application and examination expenses of $2.0 million, mask and tooling expenses of $1.8 million, travel related expenses of $1.7 million and in the amortization of intangible assets of $1.6 million. These increases were primarily the result of the expansion of the DigitalOptics business, and were partially offset by a decrease in stock-based compensation expense of $1.5 million.
We believe that a significant level of research and development expenses will be required for us to remain competitive in the future. Selling, General and Administrative
Selling, general and administrative expenses for the year ended December 31, 2012 were $92.5 million, as compared to $79.2 million for the year ended December 31, 2011, an increase of $13.4 million, or 17%. The increase was primarily attributable to increases in outside service of $5.3 million related to our acquisition activities, amortization of intangible assets of $5.2 million resulting from purchases of intangible assets, personnel related expenses of $4.0 million, travel related expenses of $1.3 million, general legal expenses of $1.6 million, audit and tax fees of $1.0 million and depreciation of $1.0 million, offset by a decrease in stock-based compensation expense of $6.9 million. The decrease in stock-based compensation is mainly due to the decrease in modifications as noted in the "Stock-based Compensation Expense" discussion below.
Litigation Expense
Litigation expense for the year ended December 31, 2012 was $34.0 million, as compared to $29.4 million for the year ended December 31, 2011, an increase of $4.6 million, or 16%. The increase was primarily attributable to the timing of case activities in our docket of legal proceedings.


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Restructuring and Other Charges

In January 2011, we announced a reorganization of our DigitalOptics segment to focus on key growth opportunities including EDoF, Zoom and MEMS-based autofocus, and a reduction up to 15% of our worldwide employee base. In August 2011, we announced a commitment to undertake a workforce reduction at our Yokohama, Japan development facility and to close that facility in order to optimize our operations. Restructuring and other charges primarily consisted of severance, costs related to the continuation of employee benefits, expenses related to the closure of facilities, and other costs related to the closure of the leased facility in Japan. Restructuring and other charges were $5.2 million for the year ended December 31, 2011.
In November 2012, we announced further restructuring of our DigitalOptics segment to focus our efforts on our core MEMS camera module business. In connection with this effort, we reduced our workforce and ceased operations at our facility in Tel Aviv, Israel. In connection with these actions, we incurred total charges of $2.5 million in the fourth quarter of 2012. Impairment of Goodwill
In 2011, we recorded a goodwill impairment charge of $49.7 million due primarily to the low market price of our common stock, which resulted in our market capitalization being significantly lower than the book value of equity for an extended period of time.
Stock-based Compensation Expense
The following table sets forth our stock-based compensation expense for the periods indicated (in thousands):

                                                     Years Ended
                                                    December 31,
                                                  2012        2011
Cost of revenues                                $    641    $    458
Research, development and other related costs      6,455       8,233
Selling, general and administrative                9,940      16,879
Total stock-based compensation expense          $ 17,036    $ 25,570

Stock-based compensation awards included employee stock options, restricted stock awards and units, and employee stock purchases. For the year ended December 31, 2012, stock-based compensation expense was $17.0 million, of which $10.3 million related to employee stock options, $4.8 million related to restricted stock awards and units and $1.9 million related to employee stock purchases. For the year ended December 31, 2011, stock-based compensation expense was $25.6 million, of which $16.5 million related to employee stock options, $7.0 million related to restricted stock awards and units and $2.1 million related to employee stock purchases. The $8.5 million decrease in stock-based compensation in 2012 when compared to 2011 was primarily the result of a $5.1 million decrease in expense related to modifications. Modifications typically occur when we enter into consulting agreements with departing employees. Some of these agreements may include continued vesting of the departing employees' stock awards and an extension of the exercise period from the standard 90 days from employment termination date to the termination of the consulting agreement. . . .

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