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IDTI > SEC Filings for IDTI > Form 10-K on 28-May-2014All Recent SEC Filings

Show all filings for INTEGRATED DEVICE TECHNOLOGY INC

Form 10-K for INTEGRATED DEVICE TECHNOLOGY INC


28-May-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with "Item
6. Selected Financial Data" and "Item 8. Financial Statements and Supplementary Data," included elsewhere in this Annual Report on Form 10-K. The information in this Annual Report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking. Forward-looking statements are based upon current expectations that involve a number of risks and uncertainties. These risks and uncertainties include, but are not limited to: operating results; new product introductions and sales; competitive conditions; capital expenditures and resources; manufacturing capacity utilization; customer demand and inventory levels; intellectual property issues; and the risk factors set forth in the section "Risk Factors" in Part I, Item 1A, of this Annual Report on Form 10-K. As a result of these risks and uncertainties, actual results and timing of events could differ significantly from those anticipated in the forward-looking statements. We undertake no obligation to publicly release any revisions to the forward-looking statements for future events or new information after the date of this Annual Report on Form 10-K. 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.
We believe that the following 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.
Revenue Recognition. Our revenue results from semiconductors sold through three channels: direct sales to original equipment manufacturers (OEMs) and electronic manufacturing service providers (EMSs), consignment sales to OEMs and EMSs, and sales through distributors. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and our ability to collect is reasonably assured. For direct sales, we recognize revenue in accordance with the applicable shipping terms. Revenue related to the sale of consignment inventory is not recognized until the product is pulled from inventory stock by the customer.
Distributors who serve our customers worldwide and distributors serving our customers in the U.S. and Europe, have rights to price protection, ship from stock pricing credits and stock rotation. We defer revenue and related cost of revenues on sales to these distributors until the product is sold through by the distributor to an end-customer. Subsequent to shipment to the distributor, we may reduce product pricing through price protection based on market conditions, competitive considerations and other factors. Price protection is granted to distributors on the inventory that they have on hand at the date the price protection is offered. We also grant certain credits to our distributors on specifically identified portions of the distributors' business to allow them to earn a competitive gross margin on the sale of our products to their end-customers. As a result of our inability to estimate these credits, we have determined that the sales price to these distributors is not fixed or determinable until the final sale to the end-customer.
In the APAC region and Japan, we have distributors for which revenue is recognized upon shipment, with reserves recorded for the estimated return and pricing adjustment exposures. The determination of the amount of reserves to be recorded for stock rotation rights requires that we make estimates as to the amount of product which will be returned by customers within their limited contractual rights. We utilize historical return rates to estimate the exposure in accordance with authoritative guidance for Revenue Recognition When Right of Return Exists. In addition, from time to time, we offer pricing adjustments to distributors for product purchased in a given quarter that remains in their inventory. These amounts are estimated by management based on discussions with customers, assessment of market trends, as well as historical experience. Income Taxes. We account for income taxes under an asset and liability approach that requires the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities be recognized as deferred tax assets and liabilities. Generally accepted accounting principles require us to evaluate the ability to realize the value of our net deferred tax assets on an ongoing basis. A valuation allowance is recorded to reduce the net deferred tax assets to an amount that will more likely than not be realized. Accordingly, we consider various tax planning strategies, forecasts of future taxable income and our most recent operating results in assessing the need for a valuation allowance. In consideration of the ability to realize the value of net deferred tax assets, recent results must be given substantially more weight than any projections of future profitability. Since the fourth quarter of fiscal 2003, we have determined that, under applicable accounting principles, it is more likely than not that we will not realize the value of our net deferred tax assets. Our assumptions regarding the ultimate realization of these assets remained


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unchanged in fiscal 2014 and accordingly, we continue to maintain a valuation allowance to reduce our deferred tax assets to an amount that is more likely than not to be realized.
We recognize the tax liabilities for uncertain income tax positions taken on our income tax return based on the two-step process prescribed under U.S. GAAP. The first step is to determine whether it is more likely than not that each income tax position would be sustained upon audit. The second step is to estimate and measure the tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority. Estimating these amounts requires us to determine the probability of various possible outcomes. We evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on the consideration of several factors including changes in facts or circumstances, changes in applicable tax law, settlement of issues under audit, and new exposures. If we later determine that the exposure is lower or that the liability is not sufficient to cover our revised expectations, we adjust the liability and effect a related change in our tax provision during the period in which we make such determination.
Inventories. Inventories are recorded at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market value. We record provisions for obsolete and excess inventory based on our forecasts of demand over specific future time horizons. We also record provisions to value our inventory at the lower of cost or market value, which rely on forecasts of average selling prices (ASPs) in future periods. Actual market conditions, demand and pricing levels in the volatile semiconductor markets that we serve may vary from our forecasts, potentially impacting our inventory reserves and resulting in material impacts to our gross margin.
Valuation of Long-Lived Assets and Goodwill. We own and operate our own manufacturing testing facilities (see Part I of this Form 10-K), and have also acquired certain businesses and product portfolios in recent years. As a result, we have property, plant and equipment, goodwill and other intangible assets. We evaluate these items for impairment on an annual basis, or sooner, if events or changes in circumstances indicate that carrying values may not be recoverable. Triggering events for impairment reviews may include adverse industry or economic trends, significant restructuring actions, significantly lowered projections of profitability, or a sustained decline in our market capitalization. Evaluations of possible impairment and if applicable, adjustments to carrying values, require us to estimate among other factors, future cash flows, useful lives and fair values of our reporting units and assets. Actual results may vary from our expectations.
We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. We utilize a discounted cash flow analysis to estimate the fair value of our reporting units. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units. For the annual impairment testing in fiscal 2014, there was no evidence of any impairments.
Stock-based Compensation. In accordance with FASB guidance on share-based payments, we measure and recognize compensation expense for all stock-based payments awards, including employee stock options, restricted stock units and rights to purchase shares under employee stock purchase plans, based on their estimated fair value and recognize the costs in the financial statements over the employees' requisite service period.
The fair value of employee restricted stock units is equal to the market value of our common stock on the date the award is granted. We estimate the fair value of employee stock options and the right to purchase shares under the employee stock purchase plan using the Black-Scholes valuation model. Option-pricing models require the input of highly subjective assumptions, including the expected term of options and the expected price volatility of the stock underlying such options. In addition, we are required to estimate the number of stock-based awards that will be forfeited due to employee turnover and true up these forfeiture rates when actual results are different from our estimates. We attribute the value of stock-based compensation to expense using an accelerated method. Finally, we capitalize into inventory a portion of the periodic stock-based compensation expense that relates to employees working in manufacturing activities.
We update the expected term of stock option grants annually based on our analysis of the stock option exercise behavior over a period of time. The interest rate is based on the average U.S. Treasury interest rate over the expected term during the applicable quarter. We believe that the implied volatility of our common stock is an important consideration of overall market conditions and a good indicator of the expected volatility of our common stock. However, due to the limited volume of options freely traded over the counter, we believe that implied volatility, by itself, is not representative of the expected volatility of our common stock and therefore we use a volatility factor to estimate the fair value of our stock-based awards which reflects a blend of historical volatility of our common stock and implied volatility of call options and dealer quotes on call options, generally having a term of less than twelve months. We have not paid, nor do we have current plans to pay dividends on our common stock in the foreseeable future.


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Recent developments
Termination of Proposed Acquisition of PLX Technology, Inc. (PLX) On April 30, 2012, we had entered into an Agreement and Plan of Merger with PLX Technology, Inc. (PLX) for the acquisition of PLX by us (the Agreement). On December 19, 2012, the United States Federal Trade Commission (FTC) filed an administrative complaint challenging our proposed acquisition of PLX. In response to the FTC's determination to challenge the proposed acquisition of PLX by us, effective December 19, 2012, we mutually agreed with PLX to terminate the Agreement. Also on December 19, 2012, we withdrew our 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 fiscal year ended March 31, 2013, we incurred approximately $10.7 million in acquisition related costs, respectively, which were included in selling, general and administrative (SG&A) expenses in the Consolidated Statements of Operations. Credit Facility Termination
In connection with the termination of the proposed PLX acquisition, our management determined that it was in our best interest to allow the Master Repurchase Agreement with Bank of America, N.A. to lapse undrawn. Associated with the lapse of this credit facility, we expensed $2.5 million in unamortized financing costs to SG&A expense in fiscal 2013. Acquisition of NXP B.V.'s Data Converter Business On July 19, 2012, we completed an acquisition of certain assets related to technology and products developed for communications analog mixed-signal market applications from NXP B.V. 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. We incurred approximately $3.9 million in acquisition related costs, which has been included in loss from discontinued operations for the year ended March 31, 2013. Acquisition of Fox Enterprises, Inc.
On April 30, 2012, we 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. In June 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 us the industry's one-stop shop for frequency control products. In addition, we expect 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, we 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 March 31, 2013, the fair value of the contingent consideration was re-measured based on a revised product development forecast for the business and increased $0.5 million to $3.3 million. As of March 30, 2014, the fair value of the contingent consideration was again re-measured based on a revised product development forecast for the business and increased $0.6 million to $3.9 million. The change in the fair value of the contingent consideration has been recorded in loss from discontinued operations.

Discontinued Operations

High-Speed Converter ("HSC") Business. In the third quarter of fiscal 2014, we initiated a project to divest our HSC business. Our management believes that this divestiture will allow us to strengthen our focus on our analog-intensive mixed-signal, timing and synchronization, and interface and connectivity solutions. We envision fully divesting our HSC business within the next twelve months and have classified these assets as held for sale. As of March 30, 2014, the HSC business long-lived assets classified as held for sale was $9.5 million and consisted of $2.9 million in fixed assets and $6.6 million in intangible assets. In addition, associated with the HSC business, we recorded a $2.2 million goodwill impairment loss and a $2.6 million intangible asset impairment loss during the third quarter of fiscal 2014. The impairment losses were included in loss from discontinued operations. The fair value of the HSC business was based on the estimated sales price less estimated costs of disposal.


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The HSC business was included in our Communications reportable segment. For financial statements purposes, the results of operations for the HSC business have been segregated from those of the continuing operations and are presented in our consolidated financial statements as discontinued operations.

Video Business. 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 was withheld in an escrow account for a period of two years during fiscal 2014 this amount was received in full. 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.
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 Certain Assets of Audio Business. On December 13, 2013, we completed the sale of certain assets of our Audio business to Stravelis, Inc. for $0.2 million in cash and up to a maximum potential of $1.0 million additional consideration contingent upon future revenues. The fair value of the contingent consideration was estimated to be zero based on the estimated probability of attainment of future revenue targets. In addition, we recorded a $0.3 million liability for services to be provided at no charge by us for the first year following the acquisition date. We recorded a loss of $3.7 million on divestiture related to this transaction in fiscal 2014. Prior to the divestiture, the Audio 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 Certain Assets of PCI Express ("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. We recorded a gain of $82.3 million on divestiture related to this transaction in the second quarter of fiscal 2014. Prior to the divestiture, the Enterprise Flash Controller business was part of a larger cash-flow generating product group and did not, on its own, represent a separate operation of our company and, therefore, this sale did not qualify as discontinued operations. 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 was withheld in an escrow until received in the fourth quarter of fiscal 2014. 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. Overview
The following table and discussion provide an overview of our operating results from continuing operations for fiscal 2014, 2013 and 2012:

                                                    Fiscal Year End
                                       March 30,       March 31,        April 1,
(in thousands, except for percentage)    2014             2013            2012
Revenues                              $ 484,779       $ 484,452        $ 526,696
Gross profit                          $ 272,902       $ 269,724        $ 280,506
As a % of revenues                         56.3 %          55.7  %          53.3 %
Operating expense                     $ 241,947       $ 277,119        $ 259,026
As a % of revenues                         49.9 %          57.2  %          49.2 %
Operating income (loss)               $  30,955       $  (7,395 )      $  21,480
As a % of revenues                          6.4 %          (1.5 )%           4.1 %
Net income from continuing operations $ 111,313       $   2,711        $  37,953
As a % of revenues                         23.0 %           0.6  %           7.2 %

Our revenues in fiscal 2014 were $484.8 million as compared to $484.5 million in fiscal 2013. During fiscal 2014 we experienced increased demand for our products in the Communications market segment which was offset in part by decreased demand for products in the Computing and Consumer market segment. Gross profit as a percentage of net revenues was 56.3% in fiscal 2014 as compared to 55.7% in fiscal 2013. The fiscal 2014 increase in gross profit percentage was primarily due to improved mix of


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higher margin products as compared to fiscal 2013. Our operating expenses decreased by $35.2 million, or (12.7)%, to $241.9 million in fiscal 2014 as compared to $277.1 million in fiscal 2013, primarily due to divestitures and the implementation of other expense reduction actions. Our operating income increased from a $7.4 million loss in fiscal 2013 to an operating income of $31.0 million in fiscal 2014 primarily due to improved gross profit percentage combined with a decrease in operating expenses. Net income from continuing operations in fiscal 2014 was $111.3 million and included a $78.6 million net gain from the divestitures of the PCI Express enterprise flash controller business and Audio business. This compares to fiscal 2013 net income from continuing operations of $2.7 million which included a $8.0 million gain on the divestiture of the Smart Meter business. We ended fiscal 2014 with cash and cash equivalents and short-term investments of $453.8 million. We generated $75.6 million in cash from operations in fiscal 2014, received $46.1 million in proceeds from employee stock transactions and received $96.3 million in proceeds from divestitures. These proceeds were offset by $44.0 million used for repurchases of common stock and $17.4 million for the purchases of property, plant and equipment.

Results of Operations, Continuing Operations

Revenues
Revenues by segment:             Fiscal Year Ended
                        March 30,     March 31,     April 1,
(in thousands)            2014          2013          2012
Communications         $  292,435    $  258,184    $ 248,370
Computing and Consumer    192,344       226,268      278,326
Total revenues         $  484,779    $  484,452    $ 526,696


Product groups representing greater than 10%
of net revenues:                                            Fiscal Year Ended
                                               March 30,         March 31,        April 1,
As a percentage of net revenues                   2014              2013            2012
Communications:
Communications timing products                       24 %              24 %             18 %
Serial RapidIO solutions                             16 %               *                *
All others less than 10% individually                20 %              29 %             29 %
   Total communications                              60 %              53 %             47 %

Computing and Consumer:
Consumer and computing timing products               18 %              19 %             23 %
Memory interface products                            15 %              16 %             15 %
All others less than 10% individually                 7 %              12 %             15 %
Total computing and consumer                         40 %              47 %             53 %

Total                                               100 %             100 %            100 %

* Represents less than 10% of net revenues Communications Segment Revenues in our Communications segment increased $34.3 million, or 13%, to $292.4 million in fiscal 2014 as compared to $258.2 million in fiscal 2013. This increase was driven primarily by a $36.4 million increase in shipments of our Rapid I/O switching solutions products combined with a $3.5 million increase in Radio Frequency product revenues, offset in part by lower revenue from legacy products. In fiscal 2013, revenues in our Communications segment increased $9.8 million, or 4.0%, to $258.2 million. This increase was driven primarily from a $20.0 million increase in communications timing products which included a $20.0 million increase from the acquisition of Fox which was completed in the first quarter of fiscal 2013 combined with a $14.4 million increase in flow-control management devices as we experienced increased demand driven by customers in the communications wireless


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base station market. These increases were offset in part by a general demand decrease for most other products within this market segment, which declined in-line with market conditions.
Computing and Consumer Segment
Revenues in our Computing and Consumer segment decreased $33.9 million, or 15%, to $192.3 million in fiscal 2014 as compared to $226.3 million in fiscal 2013 as a result of reduced demand. In general, demand for most products within this market segment declined as compared to fiscal 2013.
In fiscal 2013, revenues in our Computing and Consumer segment decreased $52.1 million, or 19%, as compared to fiscal 2012 as a result of reduced demand. In general, demand for most products within this market segment declined in-line with market conditions.
Revenues by Region
Revenues in APAC (excluding Japan), Americas, Japan and Europe accounted for 64%, 15%, 8% and 13%, respectively, of consolidated revenues in fiscal 2014 . . .

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