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IDTI > SEC Filings for IDTI > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for INTEGRATED DEVICE TECHNOLOGY INC

Form 10-Q for INTEGRATED DEVICE TECHNOLOGY INC


6-Aug-2014

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


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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 30, 2014 filed with the SEC. Operating results for the three months ended June 29, 2014 are not necessarily indicative of operating results for an entire fiscal year. Critical Accounting Policies
Our condensed 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 30, 2014. 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 29, 2014 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 30, 2014.
Business Overview
We develop a broad range of low-power, high-performance mixed-signal semiconductor solutions that optimize our customers' applications in key markets. In addition to our market-leading timing products, we offer semiconductors targeting communications infrastructure - both wired and wireless
- high-performance computing and power management. These products are used for next-generation development in areas such as 4G infrastructure, network communications, cloud data centers and power management for computing and mobile devices. Our top talent and technology paired with an innovative product-development philosophy allows us to solve complex customer problems when designing communications, computing and consumer applications. Through system-level analog and digital innovation, we consistently deliver extraordinary value 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 30, 2014. Recent developments Discontinued Operations - High-Speed Converter ("HSC") Business In the third quarter of fiscal 2014, we initiated a project to divest our HSC business. We believe that this divestiture will allow us to strengthen our focus on analog-intensive mixed-signal, timing and synchronization, and interface and connectivity solutions. We envision fully divesting our HSC business within the twelve months from the initiation date of the plan and have classified these assets as held for sale and accordingly these assets are no longer being depreciated or amortized. The HSC business includes the assets of NXP B.V.'s Data Converter Business and Alvand Technologies, Inc., which we acquired during fiscal 2013. The total purchase consideration we paid to acquire Alvand Technologies, Inc. included a liability representing the fair value of contingent cash consideration which is paid based upon the achievement of future product development milestones to be completed within 3 years following the acquisition date. As of March 30, 2014, the remaining estimated fair value of the unpaid contingent consideration was $2.1 million, of which the Company paid $1.6 million and released the remaining contingent consideration of $0.5 million to discontinued operations in the Condensed Consolidated Statement of Operations for the three months ended June 29, 2014, as the remaining future milestones will not be achieved as a result of the asset sale discussed below. On May 30, 2014, we completed the sale of certain assets related to the Alvand portion of the HSC business to a buyer pursuant to an Asset Purchase Agreement. Upon the closing of the transaction, the buyer paid the Company $18.0 million in cash consideration, of which $2.7 million will be held in an escrow account for a period of 18 months. For the three months ended June 29, 2014, we recorded a gain of $16.8 million related to this divestiture. Following the sale of assets related to the Alvand portion of the HSC business, the business had remaining long-lived assets classified as held for sale amounting to $8.5 million, which consisted of $2.9 million in fixed assets and $5.6 million in intangible assets. We evaluated the carrying value of these assets and determined that it exceeded estimated fair value based on estimated selling price less cost to sell. Accordingly, we recorded total impairment charge of $8.5 million for the three months ended June 29, 2014.


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The HSC business was included in the Company's 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 the Company's condensed consolidated financial statements as discontinued operations.
Overview
The following table and discussion provides an overview of our operating results from continuing operations for the three months ended June 29, 2014 and June 30, 2013:

                                         Three Months Ended
                                       June 29,      June 30,
(in thousands, except for percentage)    2014          2013
Revenues                              $ 126,302     $ 117,464
Gross profit                          $  74,009     $  66,122
As a % of revenues                           59 %          56 %
Operating income                      $  16,500     $   1,345
As a % of revenues                           13 %           1 %
Net income from continuing operations $  17,111     $   1,501
As a % of revenues                           14 %           1 %

Our revenues increased by $8.8 million, or 8%, to $126.3 million in the quarter ended June 29, 2014 compared to the quarter ended June 30, 2013. The increase was primarily due to increased unit shipments in our Communications segment as we continued to experience increased demand for our Rapid I/O switching solutions products. This was partly offset by the loss of revenue from the sale of our Audio business during the quarter ended December 29, 2013. Gross profit percentage improved primarily due to an improved shipment mix of higher margin products, reduced manufacturing costs and improved inventory management. Net income from continuing operations was $17.1 million in the first quarter of fiscal 2015 as compared to $1.5 million in the first quarter of fiscal 2014. This increase in net income was primarily due to increased revenues and gross margin combined with decreased operating expenses.


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Results of Continuing Operations

Revenues
Revenues by segment:      Three Months Ended
                        June 29,      June 30,
(in thousands)            2014          2013
Communications         $   80,986    $  67,687
Computing and Consumer     45,316       49,777
Total revenues         $  126,302    $ 117,464

Product groups representing greater than 10% of net revenues: Three Months Ended

                                                              June 29,     June 30,
As a percentage of net revenues                                 2014         2013
Communications:
Communications timing products                                    26 %         28 %
Serial RapidIO products                                           20 %         13 %
All others less than 10% individually                             18 %         17 %
   Total communications                                           64 %         58 %

Computing and Consumer:
Consumer and computing timing products                            16 %         18 %
Memory interface products                                         15 %         16 %
All others less than 10% individually                              5 %          8 %
Total computing and consumer                                      36 %         42 %

Total                                                            100 %        100 %

Communications Segment
Revenues in our Communications segment increased $13.3 million, or 20%, to $81.0 million in the quarter ended June 29, 2014 as compared to the quarter ended June 30, 2013. The increase was primarily due to a $10.3 million increase in shipments of our Rapid I/O switching solutions products combined with $2.9 million increase in Radio Frequency product revenues, offset in part by lower revenue from legacy products.
Computing and Consumer Segment
Revenues in our Computing and Consumer segment decreased $4.5 million, to $45.3 million in the quarter ended June 29, 2014 as compared to the quarter ended June 30, 2013. The decrease was primarily due to the loss of revenue amounting to $5.4 million from sale of our Audio business and PCIe enterprise flash controller business during the three month periods ended December 29 and September 29, 2013 and respectively. This was offset in part by the $1.1 million increase in shipments of our wireless power products. Revenues by Region
Revenues in the quarter ended June 29, 2014 increased primarily in APAC (Asia Pacific region excluding Japan), which was offset by decreases in Europe as compared to the quarter ended June 30, 2013. Revenues in APAC, the Americas, Japan and Europe accounted for 65%, 13%, 8% and 14%, respectively, of consolidated revenues in the quarter ended June 29, 2014 compared to 61%, 16%, 9% and 14% of our consolidated revenues in the quarter ended June 30, 2013. The APAC 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 29, 2014     June 30, 2013
Gross Profit (in thousands) $      74,009     $      66,122
Gross Profit Percentage              58.6 %            56.3 %

Gross profit increased $7.9 million in the quarter ended June 29, 2014 compared to the quarter ended June 30, 2013 as a result of increased revenues combined with a higher gross margin percentage. Gross profit as a percentage of revenues increased 2.3% in the quarter ended June 29, 2014 compared to the quarter ended June 30, 2013. Gross profit percentage improved primarily due to an improved shipment mix of higher margin products, reduced manufacturing costs and improved inventory management. During the fourth quarter of fiscal 2012, we completed the transition of wafer fabrication activities from our Oregon fab to third party foundries. As of June 29, 2014 and March 30, 2014, the balance of net buffer stock inventory which was built in anticipation of the transition of wafer fabrication activities to third party foundries totaled approximately $0.7 million and $1.0 million, respectively.
Operating Expenses
The following table presents our operating expenses for the three months ended June 29, 2014 and June 30, 2013:

                                                                     Three Months Ended
                                                       June 29, 2014                     June 30, 2013
                                                                   % of Net                          % of Net
(in thousands, except for percentages)          Dollar Amount       Revenue       Dollar Amount       Revenue
Research and development                      $        32,050          25 %     $        37,939          32 %
Selling, general and administrative           $        25,459          20 %     $        26,838          23 %

Research and Development (R&D)
R&D expense decreased $5.9 million, or 15.5%, to $32.1 million in the quarter ended June 29, 2014 compared to the quarter ended June 30, 2013. The decrease was primarily due to a $4.8 million decrease in R&D labor and benefits related costs and a $1.5 million decrease in engineering design tool license costs resulting from the divestitures of our Audio business and PCIe enterprise flash controller business, combined with other headcount reduction actions taken in fiscal 2014. Other significant decreases included $0.8 million in outside services and $0.6 million in R&D materials. These decreases were partly offset by a $1.6 million increase in accrued employee bonus expense. Selling, General and Administrative (SG&A) SG&A expense decreased $1.4 million, or 5.1%, to $25.5 million in the quarter ended June 29, 2014 as compared to the quarter ended June 30, 2013. The decrease was primarily driven by reduced headcount costs of $1.5 million resulting from the divestitures of our Audio business and PCIe enterprise flash controller business, combined with other headcount reduction actions taken in fiscal 2014. Other significant decreases included $0.8 million in acquisition related legal and consulting costs due to a reduction in acquisition and divestiture related activities as compared to the same period last year, and $0.2 million in sales commissions. These decreases were partly offset by a $1.2 million increase in accrued employee bonus expense.
Interest Income and Other, Net
The components of interest income and other, net are summarized as follows:

                                        Three Months Ended
(in thousands)                   June 29, 2014       June 30, 2013
Interest income                $     552            $        264
Other income (expense), net          310                    (207 )
Interest income and other, net $     862            $         57

Interest income is derived from earnings on our cash and short-term investments. 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 increase in interest income in the quarter ended June 29, 2014 as compared to the same quarter in the prior


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year was primarily attributable to higher level of short-term investments. The increase in other income in the quarter ended June 29, 2014 as compared to the same quarter in the prior year was primarily due to gains in the value of deferred compensation plan assets and favorable impact of foreign exchange fluctuations.
Income Tax Expense (Benefit)
During quarter ended June 29, 2014 and June 30, 2013, we recorded income tax expense (benefit) from continuing operations of $0.3 million and $(0.1) million, respectively. The income tax expense recorded in the quarter ended June 29, 2014 was primarily due to U.S. federal and state taxes on U.S. earnings. The income tax benefit recorded in the quarter ended June 30, 2013 was primarily due to the reversal of uncertain tax positions resulting from statute lapse. We continued to maintain a valuation allowance as a result of uncertainties related to the realization of our net deferred tax assets at June 29, 2014. The valuation allowance was established as a result of weighing all positive and negative evidence. The valuation allowance reflects the conclusion of management that it is more likely than not that benefits from certain deferred tax assets will not be realized. If actual results differ from estimates or management estimates are adjusted in future periods, the valuation allowance may require adjustment which could materially impact the Company's financial position and results of operations. It is reasonably possible that sometime in the next twelve months, positive evidence will be sufficient to release a material amount of the Company's valuation allowance; however, there is no assurance that this will occur. The required accounting for the potential release would have significant deferred tax consequences and would increase earnings in the quarter in which the allowance is released.
The Company benefits from tax incentives granted by local tax authorities in certain foreign jurisdictions. In the fourth quarter of fiscal 2011, the Company agreed with the Malaysia Industrial Development Board to enter into a new tax holiday which is a full tax exemption on statutory income for a period of 10 years commencing April 4, 2011. This tax holiday is subject to the Company meeting certain financial targets, investments, headcounts and activities in Malaysia.
We believe that it is reasonably possible that a decrease of up to $2.0 million in unrecognized tax benefits may occur within the next twelve months due to settlements with tax authorities or statute lapses.

Liquidity and Capital Resources
Our cash and cash equivalents and short-term investments were $464.2 million at June 29, 2014, an increase of $10.4 million compared to March 30, 2014. We had no outstanding debt at June 29, 2014 and March 30, 2014. Cash Flows from Operating Activities
Net cash provided by operating activities totaled $24.1 million in the three months ended June 29, 2014 compared to $13.9 million in the three months ended June 30, 2013. Cash provided by operating activities in the three months ended June 29, 2014 consisted of our net income of $21.8 million, adjusted to add back depreciation, amortization, impairment charges and other non-cash items which totaled $21.8 million less net gain on divestitures of $16.8 million; and cash used by working capital requirements. In the three months ended June 29, 2014, excluding the effects of non-cash activities, cash used by working capital requirements was $2.7 million and consisted primarily of a $3.2 million increase in accounts receivable due to an increase in revenues as compared to the fourth quarter of fiscal 2014, a $2.1 million decrease in accounts payables, a $1.4 million decrease in other accrued liabilities, and a $1.1 million decrease in accrued compensation. These working capital uses were offset in part by cash provided from a $3.9 million decrease in inventories and $1.3 million decrease in prepaid and other assets.
Cash Flows from Investing Activities
Net cash used by investing activities in the three months ended June 29, 2014 was $14.8 million compared to cash used of $34.9 million in the three months ended June 30, 2013. Net cash provided by investing activities in the three months ended June 29, 2014 was primarily due to $15.3 million of proceeds from divestiture of assets of Alvand portion of HSC business and $3.3 million for the net sale of short-term investments, offset in part by $4.8 million of expenditures to purchase capital equipment. Cash Flows from Financing Activities
Net cash used by financing activities was $26.1 million in the three months ended June 29, 2014 as compared to net cash provided by financing activities of $4.4 million in the three months ended June 30, 2013. Cash used by financing activities in the three months ended June 29, 2014, was primarily due to $30.7 million in stock buyback, offset in part by proceeds of approximately $6.2 million from the exercise of employee stock options and the issuance of stock under our employee stock purchase plan.
We anticipate capital expenditures of approximately $15 million to $25 million during the next 12 months to be financed through cash generated from operations and existing cash and investments.
In addition, as much of our revenues are generated outside the U.S., a significant portion of our cash and investment portfolio accumulates in the foreign countries in which we operate. At June 29, 2014, we had cash, cash equivalents and investments of


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approximately $355.4 million invested overseas in accounts belonging to various IDT foreign operating entities. While these amounts are primarily invested in U.S. dollars, a portion is held in foreign currencies, and all offshore balances are exposed to local political, banking, currency control and other risks. In addition, these amounts may be subject to tax and other transfer restrictions. We believe that existing cash and investment balances, together with cash flows from operations, will be sufficient to meet our working capital and capital expenditure needs through at least the next 12 months. We may choose to investigate other financing alternatives to supplement U.S. liquidity; however, we cannot be certain that additional financing will be available on satisfactory terms.
Off-Balance Sheet Arrangements
As of June 29, 2014, we did not have any off-balance sheet arrangements, as defined under SEC Regulation S-K Item 303(a)(4)(ii).

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