Attached files
file | filename |
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EX-31.1 - EX-31.1 - IXYS, LLC | f58106exv31w1.htm |
EX-31.2 - EX-31.2 - IXYS, LLC | f58106exv31w2.htm |
EX-10.1 - EX-10.1 - IXYS, LLC | f58106exv10w1.htm |
EX-32.1 - EX-32.1 - IXYS, LLC | f58106exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One) |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2010
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 000-26124
IXYS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE | 77-0140882 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1590 BUCKEYE DRIVE
MILPITAS, CALIFORNIA 95035-7418
(Address of principal executive offices and Zip Code)
MILPITAS, CALIFORNIA 95035-7418
(Address of principal executive offices and Zip Code)
(408) 457-9000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of shares of the registrants common stock, $0.01 par value, outstanding as of January
31, 2011 was 31,250,473.
IXYS CORPORATION
FORM 10-Q
December 31, 2010
December 31, 2010
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IXYS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 68,956 | $ | 60,524 | ||||
Restricted cash |
882 | 813 | ||||||
Accounts receivable, net of allowances of $3,243 at December 31, 2010 and
$3,466 at March 31, 2010 |
50,626 | 47,158 | ||||||
Inventories |
78,001 | 65,583 | ||||||
Prepaid expenses and other current assets |
5,435 | 5,219 | ||||||
Deferred income taxes |
10,339 | 10,467 | ||||||
Total current assets |
214,239 | 189,764 | ||||||
Property, plant and equipment, net |
50,494 | 47,878 | ||||||
Intangible assets, net |
9,533 | 15,013 | ||||||
Goodwill |
9,170 | 9,125 | ||||||
Deferred income taxes |
17,145 | 17,081 | ||||||
Other assets |
7,824 | 6,435 | ||||||
Total assets |
$ | 308,405 | $ | 285,296 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current portion of capitalized lease obligations |
$ | 2,796 | $ | 2,845 | ||||
Current portion of loans payable |
8,363 | 8,434 | ||||||
Accounts payable |
17,479 | 17,762 | ||||||
Accrued expenses and other current liabilities |
25,782 | 24,998 | ||||||
Total current liabilities |
54,420 | 54,039 | ||||||
Long term income tax payable |
6,192 | 6,233 | ||||||
Capitalized lease obligations, net of current portion |
4,667 | 1,696 | ||||||
Long term loans, net of current portion |
23,279 | 24,371 | ||||||
Pension liabilities |
15,689 | 15,822 | ||||||
Total liabilities |
104,247 | 102,161 | ||||||
Commitments and contingencies (Note 17) |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.01 par value: |
||||||||
Authorized: 5,000,000 shares; none issued and outstanding
|
||||||||
Common stock, $0.01 par value: |
||||||||
Authorized: 80,000,000 shares; 37,116,853 issued and 31,217,266 outstanding at
December 31, 2010 and 36,796,751 issued
and 31,335,764 outstanding at March 31,
2010 |
371 | 368 | ||||||
Additional paid-in capital |
187,929 | 183,242 | ||||||
Treasury stock, at cost: 5,899,587 common shares at December 31, 2010 and
5,460,987 common shares at March 31, 2010 |
(49,667 | ) | (45,662 | ) | ||||
Retained earnings |
64,020 | 43,307 | ||||||
Accumulated other comprehensive income |
1,505 | 1,880 | ||||||
Total stockholders equity |
204,158 | 183,135 | ||||||
Total liabilities and stockholders equity |
$ | 308,405 | $ | 285,296 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents
IXYS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net revenues |
$ | 91,727 | $ | 64,032 | $ | 266,512 | $ | 166,663 | ||||||||
Cost of goods sold |
62,647 | 48,321 | 176,131 | 128,000 | ||||||||||||
Gross profit |
29,080 | 15,711 | 90,381 | 38,663 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research, development and engineering |
6,684 | 5,144 | 20,293 | 14,202 | ||||||||||||
Selling, general and administrative |
10,595 | 8,315 | 31,471 | 24,678 | ||||||||||||
Amortization of acquisition-related intangible assets |
1,630 | 502 | 5,476 | 505 | ||||||||||||
Restructuring charges |
515 | 32 | 566 | 1,042 | ||||||||||||
Total operating expenses |
19,424 | 13,993 | 57,806 | 40,427 | ||||||||||||
Operating income (loss) |
9,656 | 1,718 | 32,575 | (1,764 | ) | |||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
67 | 108 | 219 | 317 | ||||||||||||
Interest expense |
(389 | ) | (426 | ) | (1,204 | ) | (1,203 | ) | ||||||||
Other income (expense), net |
625 | 691 | 1,443 | (1,702 | ) | |||||||||||
Income (loss) before income tax |
9,959 | 2,091 | 33,033 | (4,352 | ) | |||||||||||
Provision for income tax |
(2,653 | ) | (1,692 | ) | (12,320 | ) | (347 | ) | ||||||||
Net income (loss) |
$ | 7,306 | $ | 399 | $ | 20,713 | $ | (4,699 | ) | |||||||
Net income (loss) per share |
||||||||||||||||
Basic |
$ | 0.23 | $ | 0.01 | $ | 0.66 | $ | (0.15 | ) | |||||||
Diluted |
$ | 0.23 | $ | 0.01 | $ | 0.65 | $ | (0.15 | ) | |||||||
Weighted average shares used in per share calculation |
||||||||||||||||
Basic |
31,096 | 31,100 | 31,210 | 30,893 | ||||||||||||
Diluted |
32,071 | 31,269 | 31,877 | 30,893 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents
IXYS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 20,713 | $ | (4,699 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
13,705 | 9,130 | ||||||
Provision for receivable allowances |
5,860 | 2,873 | ||||||
Net change in inventory provision |
(4,344 | ) | 3,056 | |||||
Foreign currency adjustments on intercompany amounts |
(794 | ) | 1,235 | |||||
Stock-based compensation |
2,547 | 2,443 | ||||||
(Gain) on investments and disposal of fixed assets |
(177 | ) | (157 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(9,262 | ) | (685 | ) | ||||
Inventories |
(7,837 | ) | 10,006 | |||||
Prepaid expenses and other current assets |
308 | 465 | ||||||
Other assets |
(362 | ) | 45 | |||||
Accounts payable |
(534 | ) | 2,164 | |||||
Accrued expenses and other liabilities |
826 | (2,579 | ) | |||||
Pension liabilities |
(306 | ) | (61 | ) | ||||
Net cash provided by operating activities |
20,343 | 23,236 | ||||||
Cash flows from investing activities: |
||||||||
Change in restricted cash |
(69 | ) | (63 | ) | ||||
Business combination, net of cash and cash equivalents acquired |
| (2,625 | ) | |||||
Purchases of investments |
(135 | ) | (554 | ) | ||||
Purchases of property and equipment |
(6,765 | ) | (2,565 | ) | ||||
Proceeds from sale of investments |
255 | 398 | ||||||
Net cash used in investing activities |
(6,714 | ) | (5,409 | ) | ||||
Cash flows from financing activities: |
||||||||
Principal payments on capital lease obligations |
(2,373 | ) | (3,058 | ) | ||||
Repayments of loans and notes payable |
(1,040 | ) | (1,136 | ) | ||||
Proceeds from line of credit |
| 15,000 | ||||||
Proceeds from employee equity plans |
2,142 | 1,026 | ||||||
Purchase of treasury stock |
(4,005 | ) | (288 | ) | ||||
Net cash provided by (used in) financing activities |
(5,276 | ) | 11,544 | |||||
Effect of exchange rate fluctuations on cash and cash equivalents |
79 | 1,684 | ||||||
Net increase in cash and cash equivalents |
8,432 | 31,055 | ||||||
Cash and cash equivalents at beginning of period |
60,524 | 55,441 | ||||||
Cash and cash equivalents at end of period |
$ | 68,956 | $ | 86,496 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Table of Contents
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Unaudited Condensed Consolidated Financial Statements
The accompanying interim unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all of the information
and footnotes required by accounting principles generally accepted in the United States of America
for complete financial statements. The unaudited condensed consolidated financial statements
include the accounts of IXYS Corporation and its wholly-owned subsidiaries. The preparation of
financial statements in conformity with accounting principles generally accepted in the United
States requires management to make estimates and judgments that affect the amounts reported in the
financial statements and accompanying notes. The accounting estimates that require managements
most difficult judgments include, but are not limited to, revenue reserves, inventory valuation,
accounting for income taxes, allocation of purchase price in business combinations and
restructuring costs. All significant intercompany transactions have been eliminated in
consolidation. All adjustments of a normal recurring nature that, in the opinion of management, are
necessary for a fair statement of the results for the interim periods have been made. The condensed
balance sheet as of March 31, 2010 has been derived from our audited balance sheet as of that date.
It is recommended that the interim financial statements be read in conjunction with our audited
consolidated financial statements and notes thereto for the fiscal year ended March 31, 2010, or
fiscal 2010, contained in our Annual Report on Form 10-K. Interim results are not necessarily
indicative of the operating results expected for later quarters or the full fiscal year.
2. Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board, or FASB, issued authoritative
guidance on the disclosures about supplementary pro forma information for business combinations.
The objective of the guidance is to clarify the acquisition date that should be used for reporting
the pro forma financial information disclosures when comparative financial statements are
presented. The guidance also improves the usefulness of the pro forma revenue and earnings
disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma
adjustments that are directly attributable to the business combinations. The guidance is effective
for us for the fiscal year beginning on April 1, 2011. We are currently evaluating the impact that
the adoption of the guidance will have on our condensed consolidated financial statements.
In December 2010, FASB issued authoritative guidance on the application of the goodwill
impairment test for a reporting unit having a zero or negative carrying amount. The guidance
modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying
amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill impairment exists. The guidance is
effective for us for the fiscal year beginning on April 1, 2011. We are currently evaluating the
impact that the adoption of the guidance will have on our condensed consolidated financial
statements.
In July 2010, FASB issued authoritative guidance on the disclosures about the credit quality
of financing receivables and the allowance for credit losses. The objective of the guidance is for
an entity to provide disclosures that facilitate financial statement users evaluation of the
nature of the credit risk, the analysis and assessment of the risk and the changes and reasons for
those changes in the allowance for credit losses. We adopted the guidance in the quarter ended
December 31, 2010. The adoption of the guidance did not have a significant impact on our condensed
consolidated financial statements.
In June 2009, FASB issued authoritative guidance on the consolidation of variable interest
entities. The guidance eliminates a mandatory quantitative approach to determine whether a variable
interest gives the entity a controlling financial interest in a variable interest entity in favor
of a qualitatively focused analysis. It also requires an ongoing reassessment of whether an entity
is the primary beneficiary. We adopted the guidance in the quarter ending June 30, 2010. The
adoption of the guidance did not have a significant impact on our condensed consolidated financial
statements.
3. Business Combination
Zilog, Inc.
On February 18, 2010, we completed the acquisition of Zilog, Inc., or Zilog, a supplier of
application specific, embedded microcontroller units that are system-on-chip solutions for
industrial and consumer markets. We acquired all outstanding shares as of the acquisition date for
a cash consideration of $62.5 million, and Zilog became our wholly-owned subsidiary. The
acquisition is intended to add digital control to our power management and to create more
cost-effective system integration solutions for our diversified customer base.
The following table summarizes the consideration paid for Zilog and the preliminary values of
the assets acquired and liabilities assumed at the acquisition date.
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Recognized amounts of identifiable assets acquired and liabilities assumed (in
thousands):
Preliminary Purchase | ||||
Price Allocation | ||||
Cash, restricted cash and cash equivalents |
$ | 35,237 | ||
Trade receivables |
2,088 | |||
Inventories |
3,406 | |||
Property, plant and equipment |
1,373 | |||
Deferred tax assets |
4,244 | |||
Other assets |
4,163 | |||
Identifiable intangible assets |
14,000 | |||
Trade payables |
(1,869 | ) | ||
Accruals and other liabilities |
(9,017 | ) | ||
Total identifiable net assets |
53,625 | |||
Goodwill |
8,865 | |||
Total purchase price |
$ | 62,490 | ||
The fair value of assets acquired included trade receivables of $3.3 million, of which an
estimated $1.2 million was not expected to be collected, resulting in a fair value of $2.1 million.
Other receivables, included above in other assets, were stated at their fair value and also
approximate the gross contractual value of the receivable.
Identifiable intangible assets consisted of developed intellectual property, customer
relationships, contract backlog, trade name and information technology related assets. The
valuation of the acquired intangibles was classified as a level 3 measurement under the fair value
measurement guidance, because the valuation was based on significant unobservable inputs and
involved management judgment and assumptions about market participants and pricing. In determining
fair value of the acquired intangible assets, we determined the appropriate unit of measure, the
exit market and the highest and best use for the assets. The income approach and royalty savings
approach were used to estimate the fair value. The income approach indicates the fair value of an
asset based on the value of the cash flows that the asset can be expected to generate in the future
through a discounted cash flow method. The income approach was used to determine the fair values of
developed intellectual property, contract backlog and customer relationships. We utilized a
discount rate of 22% to value these intangibles using the income approach. The royalty savings
approach was used to determine the fair value of the trade name and indicates the fair value of an
asset based upon a 22% discount rate and a 1% royalty rate. The purchase price allocation table
presented above reflects our preliminary determination of the fair values of the assets acquired
and liabilities assumed. We are in the process of completing our review of income tax related
effects in order to finalize the purchase price allocation during the quarter ended March 31, 2011.
The goodwill is not deductible for tax purposes.
Supplemental Pro Forma Financial Information (unaudited):
The following pro forma summary gives effect to the acquisition of Zilog as if it had occurred
at the beginning of fiscal 2010. The pro forma financial information reflects the business
combination accounting effects resulting from this acquisition including our amortization charges
from acquired intangible assets. The summary is provided for illustrative purposes only and is not
necessarily indicative of the consolidated results of operations for future periods. The unaudited
pro forma financial information includes the historical results of IXYS Corporation for the three
and nine months ended December 31, 2009 and Zilog for the three and nine months ended December 26,
2009. The unaudited pro forma financial information for the three and nine months ended December
31, 2009 was as follows (in thousands, except per share data):
Three Months Ended | Nine Months Ended | |||||||
December 31, 2009 | December 31, 2009 | |||||||
(unaudited) | ||||||||
Pro forma net revenues |
$ | 72,702 | $ | 190,638 | ||||
Pro forma net income (loss) |
$ | 47 | $ | (5,536 | ) | |||
Pro forma net income (loss) per share (basic) |
$ | | $ | (0.18 | ) | |||
Pro forma net income (loss) per share (diluted) |
$ | | $ | (0.18 | ) | |||
7
Table of Contents
4. Fair Value
We account for certain assets and liabilities at fair value. In determining fair value, we
consider its principal or most advantageous market and the assumptions that market participants
would use when pricing, such as inherent risk, restrictions on sale and risk of nonperformance. The
fair value hierarchy is based upon the observability of inputs used in valuation techniques.
Observable inputs (highest level) reflect market data obtained from independent sources, while
unobservable inputs (lowest level) reflect internally developed market assumptions. The fair value
measurements are classified under the following hierarchy:
Level 1 Quoted prices for identical instruments in active markets.
Level 2 Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived
valuations in which all significant inputs or significant value-drivers are observable in
active markets.
Level 3 Model-derived valuations in which one or more significant inputs or significant
value-drivers are unobservable.
Assets and liabilities measured at fair value on a recurring basis, excluding accrued interest
components, consisted of the following types of instruments as of December 31, 2010 and March 31,
2010 (in thousands):
December 31, 2010 (1) | March 31, 2010 (1) | |||||||||||||||||||||||
Fair Value Measured at | Fair Value Measured at | |||||||||||||||||||||||
Reporting Date Using | Reporting Date Using | |||||||||||||||||||||||
Description | Total | Level 1 | Level 2 | Total | Level 1 | Level 2 | ||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||||
Marketable equity securities (2) |
$ | 308 | $ | 308 | $ | | $ | 198 | $ | 198 | $ | | ||||||||||||
Auction rate preferred securities (2) |
375 | | 375 | 375 | | 375 | ||||||||||||||||||
Derivative contract (3) (4) |
8 | | 8 | (109 | ) | | (109 | ) | ||||||||||||||||
Total |
$ | 691 | $ | 308 | $ | 383 | $ | 464 | $ | 198 | $ | 266 | ||||||||||||
(1) | We did not have any recurring assets whose fair value was measured using significant unobservable inputs. | |
(2) | Included in Other assets on our unaudited condensed consolidated balance sheets. | |
(3) | The derivative contract as of December 31, 2010 was included in Prepaid expenses and other current assets on our unaudited condensed consolidated balance sheets. | |
(4) | The derivative contract as of March 31, 2010 was included in Accrued expenses and other current liabilities on our unaudited condensed consolidated balance sheets. |
We measure our marketable securities and derivative contracts at fair value. Marketable
securities are valued using the quoted market prices and are therefore classified as Level 1
estimates.
We use derivative instruments to manage exposures to changes in interest rates, and the fair
values of these instruments are recorded on the balance sheets. We have elected not to designate
these instruments as accounting hedges. The changes in the fair value of these instruments are
recorded in the current periods statement of operations and are included in other income
(expense), net. All of our derivative instruments are traded on over-the-counter markets where
quoted market prices are not readily available. For those derivatives, we measure fair value using
prices obtained from the counterparties with whom we have traded. The counterparties price the
derivatives based on models that use primarily market observable inputs, such as yield curves and
option volatilities. Accordingly, we classify these derivatives as Level 2. See Note 9, Borrowing
Arrangements for further information regarding the terms of the derivative contract.
Auction Rate Preferred Securities, or ARPS, are stated at par value based upon observable
inputs including historical redemptions received from the ARPS issuers. All of our ARPS have AAA
credit ratings, are 100% collateralized and continue to pay interest in accordance with their
contractual terms. Additionally, the collateralized asset value ranges exceed the value of our ARPS
by approximately 300 percent. Accordingly, the remaining ARPS balance of $375,000 is categorized as
Level 2 for fair value measurement in accordance with the authoritative guidance provided by FASB
and was recorded at full par value on the unaudited condensed consolidated balance sheets as of
December 31, 2010 and March 31, 2010. We currently believe that the ARPS values are not impaired
and as such, no impairment has been recognized against the investment. If future auctions fail to
materialize and the credit rating of the issuers deteriorates, we may be required to record an
impairment charge against the value of our ARPS.
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Cash and cash equivalents are recognized and measured at fair value in our consolidated
financial statements. Accounts receivable and prepaid expenses and other current assets are
financial assets with carrying values that approximate fair value. Accounts payable and accrued
expenses and other current liabilities are financial liabilities with carrying values that
approximate fair value.
Long term loans, which primarily consist of loans from banks, approximate fair value as the
interest rates either adjust according to the market rates or the interest rates approximate the
market rates at December 31, 2010. See Note 11, Pension Plans for a discussion of pension
liabilities.
5. Other Assets
Other assets consist of the following (in thousands):
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
(unaudited) | ||||||||
Available-for-sale investment securities |
$ | 683 | $ | 573 | ||||
Long term equity investment |
4,475 | 4,446 | ||||||
Advance to vendors and other items |
2,666 | 1,416 | ||||||
Total |
$ | 7,824 | $ | 6,435 | ||||
6. Inventories
Inventories consist of the following (in thousands):
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
(unaudited) | ||||||||
Raw materials |
$ | 21,425 | $ | 12,216 | ||||
Work in process |
36,888 | 35,339 | ||||||
Finished goods |
19,688 | 18,028 | ||||||
Total |
$ | 78,001 | $ | 65,583 | ||||
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (in thousands):
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
(unaudited) | ||||||||
Uninvoiced goods and services |
$ | 12,052 | $ | 11,029 | ||||
Compensation and benefits |
6,210 | 6,876 | ||||||
Income taxes |
3,766 | 2,763 | ||||||
Restructuring accrual |
993 | 1,205 | ||||||
Commission, royalties, deferred revenue and other |
2,761 | 3,125 | ||||||
Total |
$ | 25,782 | $ | 24,998 | ||||
8. Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the estimated fair value of the net
assets acquired in connection with two acquisitions completed during fiscal 2010. The acquisition
of businesses from Leadis Technology, Inc., or Leadis, was completed in September 2009 and resulted
in goodwill of $304,000. The acquisition of Zilog was completed in February 2010 and resulted in
preliminary goodwill of $8.9 million.
9
Table of Contents
The following table summarizes the components of the acquired identifiable intangible assets
associated with the Zilog and Leadis acquisitions. The fair value of the amortizable intangible
assets was determined using the income approach, royalty savings approach and cost approach.
Acquisition Date | Estimated | |||||||||||
Fair Value | Amortization | Useful Life | ||||||||||
(In thousands) | Method | (In months) | ||||||||||
Leadis |
||||||||||||
Developed intellectual property |
$ | 1,200 | Straight-line | 24 | ||||||||
Customer relationships |
210 | Straight-line | 24 | |||||||||
Contract backlog |
1,170 | Straight-line | 12 | |||||||||
Non-compete agreement |
20 | Straight-line | 24 | |||||||||
Trade name |
210 | Straight-line | 24 | |||||||||
Total for Leadis |
$ | 2,810 | ||||||||||
Zilog |
||||||||||||
Developed intellectual property |
$ | 4,800 | Straight-line | 72 | ||||||||
Customer relationships |
6,100 | Accelerated | 37 | |||||||||
Contract backlog |
2,000 | Straight-line | 12 | |||||||||
Trade name |
1,100 | Straight-line | 72 | |||||||||
Total for Zilog |
$ | 14,000 | ||||||||||
Total acquired intangible assets |
$ | 16,810 | ||||||||||
Identified intangible assets consisted of the following as of December 31, 2010 (in
thousands):
Gross Intangible | Accumulated | Net Intangible | ||||||||||
Assets | Amortization | Assets | ||||||||||
Developed intellectual property |
$ | 6,000 | $ | 1,410 | $ | 4,590 | ||||||
Customer relationships |
6,310 | 2,765 | 3,545 | |||||||||
Contract backlog |
3,170 | 2,845 | 325 | |||||||||
Other intangible assets |
1,414 | 341 | 1,073 | |||||||||
Total identifiable intangible assets |
$ | 16,894 | $ | 7,361 | $ | 9,533 | ||||||
Identified intangible assets consisted of the following as of March 31, 2010 (in thousands):
Gross Intangible | Accumulated | Net Intangible | ||||||||||
Assets | Amortization | Assets | ||||||||||
Developed intellectual property |
$ | 6,000 | $ | 366 | $ | 5,634 | ||||||
Customer relationships |
6,310 | 644 | 5,666 | |||||||||
Contract backlog |
3,170 | 753 | 2,417 | |||||||||
Other intangible assets |
1,414 | 118 | 1,296 | |||||||||
Total identifiable intangible assets |
$ | 16,894 | $ | 1,881 | $ | 15,013 | ||||||
As of December 31, 2010, estimated amortization expenses for the next five years are as
follows (in thousands): remainder of fiscal year 2011, $1,451; fiscal year 2012, $2,972; fiscal
year 2013, $2,150; fiscal year 2014, $968; and thereafter, $1,992.
9. Borrowing Arrangements
Bank of the West
On November 13, 2009, we entered into a credit agreement for a revolving line of credit with
Bank of the West, or BOW, under which we could borrow up to $15.0 million and all amounts owed
under the credit agreement were due and payable on October 31,
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2011. On December 29, 2010, we entered into an amendment with BOW to increase the line of
credit to $20.0 million and to extend the expiration date to October 31, 2013. Borrowings may be
repaid and re-borrowed during the term of the credit agreement. The obligations are guaranteed by
two of our subsidiaries. At December 31, 2010, the outstanding principal balance under the credit
agreement was $15.0 million.
The credit agreement provides different interest rate alternatives under which we may borrow
funds. We may elect to borrow based on LIBOR plus a margin, an alternative base rate plus a margin
or a floating rate plus a margin. The margin can range from 1.5% to 3.25%, depending on interest
rate alternatives and on our leverage of liabilities to effective tangible net worth. The effective
interest rate as of December 31, 2010 was 3.04%.
The credit agreement is subject to a set of financial covenants, including minimum effective
tangible net worth, the ratio of cash, cash equivalents and accounts receivable to current
liabilities, profitability, a ratio of EBITDA to interest expense and a minimum amount of U.S.
domestic cash on hand. At December 31, 2010, we complied with all of these financial covenants.
The credit agreement also includes a $3.0 million letter of credit subfacility. See Note 17,
Commitments and Contingencies for further information regarding the terms of the subfacility.
IKB Deutsche Industriebank
On June 10, 2005, IXYS Semiconductor GmbH, our German subsidiary, borrowed 10.0 million, or
about $12.2 million at the time, from IKB Deutsche Industriebank for a term of 15 years. The
outstanding balance at December 31, 2010 was 6.3 million, or $8.4 million.
The interest rate on the loan is determined by adding the then effective three month Euribor
rate and a margin. The margin can range from 70 basis points to 125 basis points, depending on the
calculation of a ratio of indebtedness to cash flow for our German subsidiary. In June 2010, we
entered into an interest rate swap agreement commencing June 30, 2010. The swap agreement has a
fixed interest rate of 1.99% and expires on June 30, 2015. It is not designated as a hedge in the
financial statements. See Note 4, Fair Value for further information regarding the derivative
contract.
During each fiscal quarter, a principal payment of 167,000, or about $221,000, and a payment
of accrued interest are required. Financial covenants for a ratio of indebtedness to cash flow, a
ratio of equity to total assets and a minimum stockholders equity for the German subsidiary must
be satisfied for the loan to remain in good standing. The loan may be prepaid in whole or in part
at the end of a fiscal quarter without penalty. At December 31, 2010, we complied with the
financial covenants. The loan is partially collateralized by a security interest in the facility
owned by our company in Lampertheim, Germany.
LaSalle Bank National Association
On August 2, 2007, IXYS Buckeye, LLC, a subsidiary of our company, entered into an Assumption
Agreement with LaSalle Bank National Association, trustee for Morgan Stanley Dean Witter Capital I
Inc., for the assumption of a loan of $7.5 million in connection with the purchase of property in
Milpitas, California. The loan carried a fixed annual interest rate of 7.455%. Monthly payments of
principal and interest of $56,000 were due under the loan. In addition, monthly impound payments
aggregating $14,000 were made for items such as real property taxes, insurance and capital
expenditures. The loan was repaid in full on February 1, 2011.
Note payable issued in acquisition
On September 10, 2008, we issued a note payable with a face value of $2.0 million in
connection with the purchase of real property and the acquisition of the shares of Reaction
Technology Incorporated, or RTI. The note is repayable in 60 equal monthly installments of $38,666,
which includes interest at an annual rate of 6.0%. The note is collateralized by a security
interest in the property acquired and the current assets of RTI.
10. Restructuring Charges
In the quarter ended September 30, 2009, we initiated plans to restructure our European
manufacturing and assembly operations to align them to current market conditions. The plans
primarily involved the termination of employees and centralization of certain positions. Costs
related to termination of employees represented severance payments and benefits.
During the quarter ended December 31, 2010, we relocated the Zilog employees to our
headquarters in Milpitas and vacated the facility in San Jose, California, as a part of our
integration plan to reduce costs. As a result, we took a charge of $442,000 for future costs that
will continue to be incurred during the remaining term of the San Jose lease.
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The costs in connection with restructuring plan in Europe and Zilog lease and exit costs have
been included under Restructuring charges in our unaudited condensed consolidated statements of
operations. The restructuring accrual as of December 31, 2010 was included under Accrued expenses
and other current liabilities on our unaudited condensed consolidated balance sheets.
Restructuring activity as of and for the three and nine months ended December 31, 2010 was as
follows (in thousands):
Severance and | Lease | |||||||||||
Related Benefits | Commitment Accrual | Total | ||||||||||
Balance at March 31, 2010 |
$ | 1,205 | $ | | $ | 1,205 | ||||||
Charges |
47 | | 47 | |||||||||
Cash payments |
(512 | ) | | (512 | ) | |||||||
Currency translation adjustment |
(89 | ) | | (89 | ) | |||||||
Balance at June 30, 2010 |
$ | 651 | $ | | $ | 651 | ||||||
Charges |
4 | | 4 | |||||||||
Cash payments |
(175 | ) | | (175 | ) | |||||||
Currency translation adjustment |
65 | | 65 | |||||||||
Balance at September 30, 2010 |
$ | 545 | $ | | $ | 545 | ||||||
Charges |
73 | 442 | 515 | |||||||||
Cash payments |
(53 | ) | | (53 | ) | |||||||
Currency translation adjustment |
(14 | ) | | (14 | ) | |||||||
Balance at December 31, 2010 |
$ | 551 | $ | 442 | $ | 993 | ||||||
We anticipate that the remaining restructuring obligations of $993,000 as of December 31, 2010
will be paid by September 30, 2012.
11. Pension Plans
We maintain three defined benefit pension plans: one for United Kingdom employees, one for
German employees, and one for Philippine employees. These plans cover most of the employees in the
United Kingdom, Germany and the Philippines. Benefits are based on years of service and the
employees compensation. We deposit funds for these plans, consistent with the requirements of
local law, with investment management companies, insurance companies, banks or trustees and/or
accrue for the unfunded portion of the obligations. The measurement date for the projected benefit
obligations and the plan assets is March 31. The United Kingdom and German plans have been
curtailed. As such, the plans are closed to new entrants and no credit is provided for additional
periods of service. We expect to contribute approximately $752,000 to these two plans in the fiscal
year ending March 31, 2011. This contribution is primarily contractual.
In connection with the Zilog acquisition in February 2010, we assumed the defined benefit plan
for the local employees of Zilogs Philippine subsidiary. As of December 31, 2010, the pension plan
was overfunded by approximately $257,000. The overfunding was included under Other assets on our
unaudited condensed consolidated balance sheet.
The net periodic pension expense includes the following components (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Service cost |
$ | 18 | $ | | $ | 52 | $ | | ||||||||
Interest cost on projected benefit obligation |
529 | 497 | 1,542 | 1,458 | ||||||||||||
Expected return on plan assets |
(393 | ) | (257 | ) | (1,149 | ) | (759 | ) | ||||||||
Recognized actuarial loss |
47 | 31 | 137 | 91 | ||||||||||||
Net periodic pension expense |
$ | 201 | $ | 271 | $ | 582 | $ | 790 | ||||||||
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12. Employee Equity Incentive Plans
Stock Purchase and Stock Option Plans
The 2009 Equity Incentive Plan
Stock Options
On September 10, 2009, our stockholders approved the 2009 Equity Incentive Plan, or the 2009
Plan, under which 900,000 shares of our common stock are reserved for the grant of stock options.
Under the 2009 Plan, nonqualified and incentive stock options may be granted to employees,
consultants and non-employee directors. Generally, the per share exercise price shall not be less
than 100% of the fair market value of a share on the grant date. The Board of Directors has the
full power to determine the provisions of each option issued under the 2009 Plan. While we may
grant options that become exercisable at different times or within different periods, we have
granted options that primarily vest over four years. The options, once granted, expire ten years
from the date of grant.
Restricted Stock
Restricted stock awards may be granted to any employee, director or consultant under the 2009
Plan. Pursuant to a restricted stock award, we will issue shares of common stock that will be
released from restriction if certain requirements, including continued performance of services, are
met.
Stock Appreciation Rights
Awards of stock appreciation rights, or SARs, may be granted to employees, consultants and
nonemployee directors pursuant to the 2009 Plan. In any event, the exercise price of a SAR shall be
not less than 100% of the fair market value of a share on the grant date and shall expire no later
than ten years from the grant date. Upon exercise, the holder of SAR shall be entitled to receive
payment either in cash or a number of shares by dividing such cash amount by the fair market value
of a share on the exercise date.
Performance Units
Performance units may be granted to employees, consultants and nonemployee directors under the
2009 Plan. Each performance unit shall have a value equal to the fair market value of one share.
After the applicable performance period has ended, the holder will be entitled to receive a
payment, either in cash or in the form of shares, based on the number of performance units earned
over the performance period, to be determined as a function of the extent to which the
corresponding performance goals or other vesting provisions have been achieved.
Zilog 2004 Omnibus Stock Incentive Plan
The Zilog 2004 Omnibus Stock Incentive Plan, or the Zilog 2004 Plan, was approved by the
stockholders of Zilog in 2004, and was amended and approved by the stockholders of Zilog in 2007.
In connection with the acquisition of Zilog, our Board of Directors approved assumption of the
Zilog 2004 Plan. Employees of Zilog and persons first employed by our company after the closing of
the acquisition of Zilog may receive grants under the Zilog 2004 Plan. Under the 2004 Plan,
incentive stock options, non-statutory stock options, or restricted shares may be granted. At the
time of the assumption of the Zilog 2004 Plan by our company, up to 652,963 shares of our common
stock were available for grant under the plan.
Zilog 2002 Omnibus Stock Incentive Plan
The Zilog 2002 Omnibus Stock Incentive Plan, or the Zilog 2002 Plan, was adopted in 2002. In
connection with the acquisition of Zilog, our Board of Directors approved the assumption of the
Zilog 2002 Plan with respect to the shares available for grant as stock options. Employees of Zilog
and persons first employed by our company after the closing of the acquisition of Zilog may receive
grants under the Zilog 2002 Plan. At the time of the assumption of the Zilog 2002 Plan by our
company, up to 366,589 shares of our common stock were available for grant under the plan.
Employee Stock Purchase Plan
In May 1999, the Board of Directors approved the 1999 Employee Stock Purchase Plan, or the
Purchase Plan, and reserved 500,000 shares of common stock for issuance under the Purchase Plan.
Under the Purchase Plan, all eligible employees may purchase our common stock at a price equal to
85% of the lower of the fair market value at the beginning of the offer period or the semi-annual
purchase date. Stock purchases are limited to 15% of an employees eligible compensation. On July
31, 2007 and July 9, 2010, the Board of Directors amended the Purchase Plan and on each occasion
reserved an additional 350,000 shares of common stock for
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issuance under the Purchase Plan. During the three and nine months ended December 31, 2010,
there were 49,339 shares and 92,306 shares purchased under the Purchase Plan, leaving approximately
406,000 shares available for purchase under the plan in the future.
Stock-Based Compensation
The following table summarizes the effects of stock-based compensation charges (in thousands):
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||
Income Statement Classifications | 2010 | 2009 | 2010 | 2009 | ||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Selling, general and administrative expenses |
$ | 914 | $ | 702 | $ | 2,547 | $ | 2,443 | ||||||||
Stock-based compensation effect in income before
taxes |
914 | 702 | 2,547 | 2,443 | ||||||||||||
Provision for income taxes (1) |
347 | 267 | 968 | 928 | ||||||||||||
Net stock-based compensation effects in net income |
$ | 567 | $ | 435 | $ | 1,579 | $ | 1,515 | ||||||||
(1) | Estimated at a statutory income tax rate of 38% in fiscal year 2011 and 38% in fiscal year 2010. |
During the three and nine months ended December 31, 2010, the unaudited condensed consolidated
statements of operations and cash flows do not reflect any tax benefit for the tax deduction from
option exercises and other awards. As of December 31, 2010, approximately $5.6 million in
stock-based compensation is to be recognized for unvested stock options granted under our equity
incentive plans. The unrecognized compensation cost is expected to be recognized over a weighted
average period of 2.3 years.
The Black-Scholes option pricing model is used to estimate the fair value of options granted
under our equity incentive plans and rights to acquire stock granted under our stock purchase plan.
The weighted average estimated fair values of employee stock option grants and rights granted under
the 1999 Employee Stock Purchase Plan, as well as the weighted average assumptions that were used
in calculating such values during the three and nine months ended December 31, 2010 and 2009, were
based on estimates at the date of grant as follows:
Stock Options (1) | Purchase Plan (2) | |||||||||||||||||||||||||||
Three Months | Nine Months | Three Months | Nine Months | |||||||||||||||||||||||||
Ended December 31, | Ended December 31, | Ended December 31, | Ended December 31, | |||||||||||||||||||||||||
2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||
Weighted average estimated fair
value of grant per share |
$ | 2.94 | $ | 4.70 | $ | 3.49 | $ | 2.51 | $ | 3.20 | $ | 2.85 | $ | 4.19 | ||||||||||||||
Risk-free interest rate |
2.3 | % | 1.9 | % | 2.3 | % | 0.2 | % | 0.3 | % | 0.3 | % | 0.4 | % | ||||||||||||||
Expected term in years |
4.6 | 5.82 | 5.00 | 0.5 | 0.5 | 0.5 | 0.5 | |||||||||||||||||||||
Volatility |
51.6 | % | 56.1 | % | 57.0 | % | 45.1 | % | 53.2 | % | 49.3 | % | 80.1 | % | ||||||||||||||
Dividend yield |
0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % |
(1) | No stock options were granted during the quarter ended December 31, 2010. | |
(2) | Under the stock purchase plan, rights to purchase shares are only granted during the first and third quarters of each fiscal year. |
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Activity with respect to outstanding stock options for the nine months ended December 31, 2010
was as follows:
Weighted Average | ||||||||||||
Number of | Exercise Price Per | Intrinsic | ||||||||||
Shares | Share | Value (1) | ||||||||||
(000) | ||||||||||||
Balance at March 31, 2010 |
5,188,273 | $ | 9.32 | |||||||||
Options granted |
655,000 | $ | 8.90 | |||||||||
Options exercised |
(204,246 | ) | $ | 7.34 | $ | 722 | ||||||
Options cancelled |
(20,000 | ) | $ | 6.97 | ||||||||
Options expired |
(217,853 | ) | $ | 19.55 | ||||||||
Balance at December 31, 2010 |
5,401,174 | $ | 8.94 | |||||||||
Exercisable at December 31, 2010 |
3,715,670 | $ | 9.24 | |||||||||
Exercisable at March 31, 2010 |
3,468,398 | $ | 9.98 |
(1) | Represents the difference between the exercise price and the value of our common stock at the time of exercise. |
Activity with respect to outstanding restricted stock units for the nine months ended December 31, 2010 was as follows:
Number of | Weighted Average Grant | Aggregate Fair | ||||||||||
Shares | Date Fair Value | Value (1) | ||||||||||
(000) | ||||||||||||
Balance at March 31, 2010 |
32,200 | $ | 9.58 | |||||||||
RSUs vested (2) |
(32,200 | ) | $ | 9.58 | $ | 292 | ||||||
Balance at December 31, 2010 |
| |||||||||||
(1) | For restricted stock units, represents value of our common stock on the date the restricted stock unit vests. | |
(2) | The number of restricted stock units vested includes shares that were withheld on behalf of employees to satisfy the statutory tax withholding requirements. |
13. Comprehensive Income (Loss)
The components of total comprehensive income (loss) and related tax effects were as follows
(in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Net income (loss) |
$ | 7,306 | $ | 399 | $ | 20,713 | $ | (4,699 | ) | |||||||
Unrealized gain (loss) on available-for-sale investment securities,
net of taxes of $13 and $(13) for the
three and nine months ended
December 31, 2010 and net of taxes of
$4 and $22 for the three
and nine months ended December 31, 2009 |
24 | 7 | (24 | ) | 41 | |||||||||||
Adjustment to unrecognized actuarial net loss |
| | 58 | | ||||||||||||
Foreign currency translation adjustments |
(2,030 | ) | (1,053 | ) | (409 | ) | 5,667 | |||||||||
Total comprehensive income (loss) |
$ | 5,300 | $ | (647 | ) | $ | 20,338 | $ | 1,009 | |||||||
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The components of accumulated other comprehensive income, net of tax, at
the end of each period were as follows (in thousands):
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
(unaudited) | ||||||||
Accumulated net unrealized gain on available-for-sale investments securities,
net of taxes of $2 at December 31, 2010 and $15 at March 31, 2010 |
$ | 3 | $ | 27 | ||||
Unrecognized actuarial loss, net of tax of $(1,532) at December 31, 2010
and $(1,685) at March 31, 2010 |
(3,976 | ) | (4,034 | ) | ||||
Accumulated foreign currency translation adjustments |
5,478 | 5,887 | ||||||
Total accumulated other comprehensive income |
$ | 1,505 | $ | 1,880 | ||||
14. Computation of Net Income (Loss) per Share
Basic and diluted earnings (loss) per share are calculated as follows (in thousands, except per
share amounts):
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Basic: |
||||||||||||||||
Weighted average shares |
31,096 | 31,100 | 31,210 | 30,893 | ||||||||||||
Net income (loss) |
$ | 7,306 | $ | 399 | $ | 20,713 | $ | (4,699 | ) | |||||||
Net income (loss) per share |
$ | 0.23 | $ | 0.01 | $ | 0.66 | $ | (0.15 | ) | |||||||
Diluted: |
||||||||||||||||
Weighted average shares |
31,096 | 31,100 | 31,210 | 30,893 | ||||||||||||
Common equivalent shares from stock options |
975 | 169 | 667 | | ||||||||||||
Weighted average shares used in diluted
per share calculation |
32,071 | 31,269 | 31,877 | 30,893 | ||||||||||||
Net income (loss) |
$ | 7,306 | $ | 399 | $ | 20,713 | $ | (4,699 | ) | |||||||
Net income (loss) per share |
$ | 0.23 | $ | 0.01 | $ | 0.65 | $ | (0.15 | ) | |||||||
Basic net income (loss) available per common share is computed using net income (loss) and the
weighted average number of common shares outstanding during the period. Diluted net income (loss)
per common share is computed using net income (loss) and the weighted average number of common
shares outstanding, assuming dilution, which includes potentially dilutive common shares
outstanding during the period. Potentially dilutive common shares include the assumed exercise of
stock options and assumed vesting of restricted stock units using the treasury stock method. During
the three and nine months ended December 31, 2010, there were outstanding weighted average options
to purchase 1,663,531 and 2,114,978 shares that were not included in the computation of diluted net
income per share since the exercise prices of the options exceeded the market price of the common
stock. These options could dilute earnings per share in future periods if the market price of the
common stock increases. For the quarter ended December 31, 2009, we excluded 4.7 million
outstanding stock options from the calculation of net income per share because the exercise price
of these stock options were greater than or equal to the average market value of the common shares.
Due to our net loss for the nine months ended December 31, 2009, outstanding stock options
and restricted stock units to purchase 1.1 million shares of our common stock were excluded from
the diluted net loss per share calculation because their inclusion would have been anti-dilutive.
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15. Segment Information
We have a single operating segment. This operating segment is comprised of semiconductor
products used primarily in power-related applications. While we have separate legal subsidiaries
with discrete financial information, we have one chief operating decision maker with highly
integrated businesses. Our net revenues by major geographic area (based on destination) were as
follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
United States |
$ | 23,521 | $ | 17,315 | $ | 74,785 | $ | 49,810 | ||||||||
Europe and the Middle East |
||||||||||||||||
France |
1,972 | 1,297 | 5,085 | 3,104 | ||||||||||||
Germany |
10,493 | 6,807 | 29,596 | 18,571 | ||||||||||||
United Kingdom |
6,941 | 3,770 | 21,169 | 9,808 | ||||||||||||
Other |
12,984 | 9,297 | 34,595 | 23,871 | ||||||||||||
Asia Pacific |
||||||||||||||||
China |
18,770 | 14,584 | 50,829 | 32,788 | ||||||||||||
Japan |
2,683 | 3,145 | 9,439 | 7,363 | ||||||||||||
Korea |
2,238 | 2,216 | 7,312 | 5,114 | ||||||||||||
Singapore |
3,177 | 399 | 8,455 | 1,238 | ||||||||||||
Taiwan |
2,546 | 1,113 | 7,491 | 2,373 | ||||||||||||
Other |
2,739 | 1,375 | 7,888 | 4,914 | ||||||||||||
Rest of the World |
||||||||||||||||
India |
2,451 | 1,631 | 5,697 | 4,721 | ||||||||||||
Other |
1,212 | 1,083 | 4,171 | 2,988 | ||||||||||||
Total |
$ | 91,727 | $ | 64,032 | $ | 266,512 | $ | 166,663 | ||||||||
The following table sets forth net revenues for each of our product groups for the three and
nine months ended December 31, 2010 and 2009 (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Power semiconductors |
$ | 63,563 | $ | 43,662 | $ | 182,074 | $ | 122,950 | ||||||||
Integrated circuits |
20,267 | 15,306 | 64,742 | 30,047 | ||||||||||||
Systems and RF power semiconductors |
7,897 | 5,064 | 19,696 | 13,666 | ||||||||||||
Total |
$ | 91,727 | $ | 64,032 | $ | 266,512 | $ | 166,663 | ||||||||
For the three months ended December 31, 2010, two distributors accounted for 12.7% and
10.9% of our net revenues, respectively. For the nine months ended December 31, 2010, two
distributors accounted for 12.3% and 11.7% of our net revenues, respectively. For the three and
nine months ended December 31, 2009, one distributor accounted for 10.4% and 11.3% of our net
revenues, respectively.
16. Income Taxes
For the three and nine months ended December 31, 2010, we recorded income tax provisions of
$2.7 million and $12.3 million, reflecting effective tax rates of 26.6% and 37.3%, respectively.
For the three and nine months ended December 31, 2009, we recorded income tax provisions of $1.7
million and $347,000, reflecting effective tax rates of 80.9% and 8.0%, respectively. For the three
months ended December 31, 2010, the effective tax rate was affected by certain discrete items
offset by changes in the estimates of
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annual income in foreign jurisdictions based on nine months of experience. For the nine months
ended December 31, 2010, the effective tax rate was affected by certain discrete items. For the
three months ended December 31, 2009, the provision for income tax represented the adjustment of
the income tax account to reflect a change in our estimated income taxes for the year based on nine
months of experience, offset by a favorable impact on the reversal of accrued income tax expenses
following conclusion of an audit in a foreign tax jurisdiction. The provision for income tax for
the nine months ended December 31, 2009, was incurred because we had losses in certain
jurisdictions with comparatively lower tax rates, partially offset by the release of valuation
allowance.
17. Commitments and Contingencies
Legal Proceedings
We are currently involved in a variety of legal matters that arise in the normal course of
business. Based on information currently available, management does not believe that the ultimate
resolution of these matters will have a material adverse effect on our financial condition, results
of operations and cash flows. Were an unfavorable ruling to occur, there exists the possibility of
a material adverse impact on the results of operations of the period in which the ruling occurs.
Bank of the West
On November 13, 2009, we entered into a credit agreement with BOW. The credit agreement
includes a letter of credit subfacility, under which BOW agrees to issue letters of credit of up to
$3.0 million. However, borrowing under this subfacility is limited to the extent of availability
under the revolving line of credit. See Note 9, Borrowing Arrangements for further information
regarding the terms of the credit agreement.
Other Commitments and Contingencies
On occasion, we provide limited indemnification to customers against intellectual property
infringement claims related to our products. To date, we have not experienced significant activity
or claims related to such indemnifications. We also provide in the normal course of business
indemnification to our officers, directors and selected parties. We are unable to estimate any
potential future liability, if any. Therefore, no liability for these indemnification agreements
has been recorded as of December 31, 2010 and March 31, 2010.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion contains forward-looking statements, which are subject to certain risks and
uncertainties, including, without limitation, those described elsewhere in this Form 10-Q and, in
particular, in Item 1A of Part II hereof. Actual results may differ materially from the results
discussed in the forward-looking statements. For a discussion of risks that could affect future
results, see Item 1A. Risk Factors. All forward-looking statements included in this document are
made as of the date hereof, based on the information available to us as of the date hereof, and we
assume no obligation to update any forward-looking statement, except as may be required by law.
Overview
We are a multi-market integrated semiconductor company. Our three principal product groups
are: power semiconductors; integrated circuits, or ICs; and systems and radio frequency, or RF,
power semiconductors.
Our power semiconductors improve system efficiency and reliability by converting electricity
at relatively high voltage and current levels into the finely regulated power required by
electronic products. We focus on the market for power semiconductors that are capable of processing
greater than 200 watts of power.
We also design, manufacture and sell integrated circuits for a variety of applications. Our
analog and mixed signal ICs are principally used in telecommunications applications. Our mixed
signal application specific ICs, or ASICs, address the requirements of the medical imaging
equipment and display markets. Our power management and control ICs are used in conjunction with
power semiconductors. Our microcontrollers provide application specific, embedded system-on-chip,
or SoC, solutions for the industrial and consumer markets.
Our systems include laser diode drivers, high voltage pulse generators and modulators, and
high power subsystems, sometimes known as stacks, that are principally based on our high power
semiconductor devices. Our RF power semiconductors enable circuitry that amplifies or receives
radio frequencies in wireless and other microwave communication applications, medical imaging
applications and defense and space applications.
In the quarter ended December 31, 2010 as compared to the immediately preceding quarter, sales
of power semiconductors and systems and RF power semiconductors increased, whereas the sale of ICs
declined, primarily because of reduced sales to the telecom market. Demand for our power
semiconductors has led to capacity issues, which we are addressing by increasing capital
expenditures. In the quarter ended December 31, 2010 as compared to the immediately preceding
quarter, gross profit margin fell because of increased unabsorbed manufacturing overhead caused in
part by holiday shutdowns, adverse product mix, including decreased revenues from power
semiconductors sold to the higher margin medical market and decreased revenues from ICs, and
reduced utilization or sale of previously written down inventory.
During the current fiscal year, distribution revenues have remained largely constant while
revenues from original equipment manufacturers increased. In addition, our selling, general and
administrative expenses, or SG&A expenses, and our research, development and engineering expenses,
or R&D expenses, have remained relatively flat. In future periods, both our SG&A and R&D expenses
are expected to continue at approximately these levels in terms of percentages of net revenues.
Critical Accounting Policies and Significant Management Estimates
The discussion and analysis of our financial condition and results of operations are based
upon our unaudited condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. On an ongoing basis, management evaluates the reasonableness
of its estimates. Management bases its estimates on historical experience and on various
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not
readily available from other sources. Actual results may differ materially from these estimates
under different assumptions or conditions.
We believe the following critical accounting policies require that we make significant
judgments and estimates in preparing our consolidated financial statements.
Revenue recognition. We sell to distributors and original equipment manufacturers.
Approximately 56.0% of our net revenues in the nine months ended December 31, 2010 and 49.7% of our
net revenues in the nine months ended December 31, 2009 were from distributors. We provide some of
our distributors with the following programs: stock rotation and ship and debit. Ship and debit is
a sales incentive program for products previously shipped to distributors. We recognize revenue
from product sales upon shipment provided that we have received a purchase order, the price is
fixed and determinable, the risk of loss has transferred, collection of
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resulting receivables is reasonably assured, there are no customer acceptance requirements and
there are no remaining significant obligations. Our shipping terms are generally FOB shipping
point. Reserves for allowances are also recorded at the time of shipment. Our management must make
estimates of potential future product returns and so called ship and debit transactions related
to current period product revenue. Our management analyzes historical returns and ship and debit
transactions, current economic trends and changes in customer demand and acceptance of our products
when evaluating the adequacy of the sales returns and allowances. Significant management judgments
and estimates must be made and used in connection with establishing the allowances in any
accounting period. We have visibility into inventory held by our distributors to aid in our reserve
analysis. Different judgments or estimates would result in material differences in the amount and
timing of our revenue for any period.
Accounts receivable from distributors are recognized and inventory is relieved when title to
inventories transfer, typically upon shipment from our company, at which point we have a legally
enforceable right to collection under normal payment terms. Under certain circumstances, where our
management is not able to reasonably and reliably estimate the actual returns, revenues and costs
relating to distributor sales are deferred until products are sold by the distributors to their end
customers. Deferred amounts are presented net and included under accrued expenses and other
liabilities.
We state our net revenues net of any taxes collected from customers that are required to be
remitted to the various government agencies. The amount of taxes collected from customers and
payable to government agencies is included under accrued expenses and other liabilities. Shipping
and handling costs are included in cost of sales.
Allowance for sales returns. We maintain an allowance for sales returns for estimated product
returns by our customers. We estimate our allowance for sales returns based on our historical
return experience, current economic trends, changes in customer demand, known returns we have not
received and other assumptions. If we were to make different judgments or utilize different
estimates, the amount and timing of our revenue could be materially different. Given that our
revenues consist of a high volume of relatively similar products, to date our actual returns and
allowances have not fluctuated significantly from period to period, and our returns provisions have
historically been reasonably accurate. This allowance is included as part of the accounts
receivable allowance on the balance sheet and as a reduction of revenues in the statement of
operations.
Allowance for stock rotation. We also provide stock rotation to select distributors. The
rotation allows distributors to return a percentage of the previous six months sales in exchange
for orders of an equal or greater amount. In the nine months ended December 31, 2010 and 2009,
approximately $599,000 and $1.0 million, respectively, of products were returned to us under the
program. We establish the allowance for all sales to distributors except in cases where the revenue
recognition is deferred and recognized upon sale by the distributor of products to the
end-customer. The allowance, which is managements best estimate of future returns, is based upon
the historical experience of returns and inventory levels at the distributors. This allowance is
included as part of the accounts receivable allowance on the balance sheet and as a reduction of
revenues in the statement of operations. Should distributors increase stock rotations beyond our
estimates, our statements would be adversely affected.
Allowance for ship and debit. Ship and debit is a program designed to assist distributors in
meeting competitive prices in the marketplace on sales to their end customers. Ship and debit
requires a request from the distributor for a pricing adjustment for a specific part for a customer
sale to be shipped from the distributors stock. We have no obligation to accept this request.
However, it is our historical practice to allow some companies to obtain pricing adjustments for
inventory held. We receive periodic statements regarding our products held by our distributors. Our
distributors had approximately $15.0 million in inventory of our products on hand at December 31,
2010. Ship and debit authorizations may cover current and future distributor activity for a
specific part for sale to the distributors customer. At the time we record sales to the
distributors, we provide an allowance for the estimated future distributor activity related to such
sales since it is probable that such sales to distributors will result in ship and debit activity.
The sales allowance requirement is based on sales during the period, credits issued to
distributors, distributor inventory levels, historical trends, market conditions, pricing trends we
see in our direct sales activity with original equipment manufacturers and other customers, and
input from sales, marketing and other key management. We believe that the analysis of these inputs
enable us to make reliable estimates of future credits under the ship and debit program. This
analysis requires the exercise of significant judgments. Our actual results to date have
approximated our estimates. At the time the distributor ships the part from stock, the distributor
debits us for the authorized pricing adjustment. This allowance is included as part of the accounts
receivable allowance on the balance sheet and as a reduction of revenues in the statement of
operations. If competitive pricing were to decrease sharply and unexpectedly, our estimates might
be insufficient, which could significantly adversely affect our operating results.
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Additions to the ship and debit allowance are estimates of the amount of expected future ship
and debit activity related to sales during the period and reduce revenues and gross profit in the
period. The following table sets forth the beginning and ending balances of, additions to, and
deductions from, our allowance for ship and debit during the nine months ended December 31, 2010
(in thousands):
Balance at March 31, 2010 |
$ | 1,419 | ||
Additions |
1,286 | |||
Deductions |
(1,008 | ) | ||
Balance at June 30, 2010 |
$ | 1,697 | ||
Additions |
951 | |||
Deductions |
(1,222 | ) | ||
Balance at September 30, 2010 |
$ | 1,426 | ||
Additions |
1,543 | |||
Deductions |
(1,599 | ) | ||
Balance at December 31, 2010 |
$ | 1,370 | ||
Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated
losses from the inability of our customers to make required payments. We evaluate our allowance for
doubtful accounts based on the aging of our accounts receivable, the financial condition of our
customers and their payment history, our historical write-off experience and other assumptions. If
we were to make different judgments of the financial condition of our customers or the financial
condition of our customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. This allowance is reported on the balance sheet as
part of the accounts receivable allowance and is included on the statement of operations as part of
selling, general and administrative expenses. This allowance is based on historical losses and
managements estimates of future losses.
Inventories. Inventories are recorded at the lower of standard cost, which approximates
actual cost on a first-in-first-out basis, or market value. Our accounting for inventory costing is
based on the applicable expenditure incurred, directly or indirectly, in bringing the inventory to
its existing condition. Such expenditures include acquisition costs, production costs and other
costs incurred to bring the inventory to its use. As it is impractical to track inventory from the
time of purchase to the time of sale for the purpose of specifically identifying inventory cost,
our inventory is, therefore, valued based on a standard cost, given that the materials purchased
are identical and interchangeable at various steps in the production process. We review our
standard costs on an as-needed basis but in any event at least once a year, and update them as
appropriate to approximate actual costs. The authoritative guidance provided by FASB requires
certain abnormal expenditures to be recognized as expenses in the current period instead of
capitalized in inventory. It also requires that the amount of fixed production overhead allocated
to inventory be based on the normal capacity of the production facilities.
We typically plan our production and inventory levels based on internal forecasts of customer
demand, which are highly unpredictable and can fluctuate substantially. The value of our
inventories is dependent on our estimate of future demand as it relates to historical sales. If our
projected demand is overestimated, we may be required to reduce the valuation of our inventories
below cost. We regularly review inventory quantities on hand and record an estimated provision for
excess inventory based primarily on our historical sales and expectations for future use. We also
recognize a reserve based on known technological obsolescence, when appropriate. However, for new
products, we do not consider whether there is excess inventory until we develop sufficient sales
history or experience a significant change in expected product demand, based on backlog. Actual
demand and market conditions may be different from those projected by our management. This could
have a material effect on our operating results and financial position. If we were to make
different judgments or utilize different estimates, the amount and timing of our write-down of
inventories could be materially different. For example, during fiscal 2009, we examined our
inventory and as a consequence of the dramatic retrenchment in some of our markets, certain of our
inventory that normally would not be considered excess was considered as such. Therefore, we booked
additional charges of about $14.9 million to recognize this exposure.
Excess inventory frequently remains saleable. When excess inventory is sold, it yields a gross
profit margin of up to 100%. Sales of excess inventory have the effect of increasing the gross
profit margin beyond that which would otherwise occur, because of previous write-downs. Once we
have written down inventory below cost, we do not subsequently write it up when it is subsequently
sold or scrapped. We do not physically segregate excess inventory nor do we assign unique tracking
numbers to it in our accounting systems. Consequently, we cannot isolate the sales prices of excess
inventory from the sales prices of non-excess inventory. Therefore, we are unable to report the
amount of gross profit resulting from the sale of excess inventory or quantify the favorable impact
of such gross profit on our gross profit margin.
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The following table provides information on our excess and obsolete inventory reserve charged
against inventory at cost (in thousands):
Balance at March 31, 2010 |
$ | 35,574 | ||
Utilization or sale |
(3,561 | ) | ||
Additional accrual |
1,553 | |||
Foreign currency translation adjustments |
(913 | ) | ||
Balance at June 30, 2010 |
$ | 32,653 | ||
Utilization or sale |
(3,015 | ) | ||
Scrap |
(1,027 | ) | ||
Additional accrual |
2,024 | |||
Foreign currency translation adjustments |
1,051 | |||
Balance at September 30, 2010 |
$ | 31,686 | ||
Utilization or sale |
(2,022 | ) | ||
Scrap |
(387 | ) | ||
Additional accrual |
1,009 | |||
Foreign currency translation adjustments |
(257 | ) | ||
Balance at December 31, 2010 |
$ | 30,029 | ||
The practical efficiencies of wafer fabrication require the manufacture of semiconductor
wafers in minimum lot sizes. Often, when manufactured, we do not know whether or when all the
semiconductors resulting from a lot of wafers will sell. With more than 10,000 different part
numbers for semiconductors, excess inventory resulting from the manufacture of some of those
semiconductors will be continual and ordinary. Because the cost of storage is minimal when compared
to potential value and because our products do not quickly become obsolete, we expect to hold
excess inventory for potential future sale for years. Consequently, we have no set time line for
the sale or scrapping of excess inventory.
In addition, our inventory is also being written down to the lower of cost or market or net
realizable value. We review our inventory listing on a quarterly basis for an indication of losses
being sustained for costs that exceed selling prices less direct costs to sell. When it is evident
that our selling price is lower than current cost, inventory is marked down accordingly. At
December 31, 2010, our lower of cost or market reserve was $557,000.
Furthermore, we perform an annual inventory count and periodic cycle counts for specific parts
that have a high turnover. We also periodically identify any inventory that is no longer usable and
write it off.
Income tax. As part of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we operate. This
process involves estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included within our unaudited
condensed consolidated balance sheets. We then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and, to the extent we believe that recovery is not
likely, we establish a valuation allowance. A valuation allowance reduces our deferred tax assets
to the amount that is more likely than not to be realized. In determining the amount of the
valuation allowance, we consider estimated future taxable income as well as feasible tax planning
strategies in each taxing jurisdiction in which we operate. If we determine that it is more likely
than not that we will not realize all or a portion of our remaining deferred tax assets, then we
will increase our valuation allowance with a charge to income tax expense. Conversely, if we
determine that it is likely that we will ultimately be able to utilize all or a portion of the
deferred tax assets for which a valuation allowance has been provided, then the related portion of
the valuation allowance will reduce goodwill, intangible assets or income tax expense. Significant
management judgment is required in determining our provision for income taxes and potential tax
exposures, our deferred tax assets and liabilities and any valuation allowance recorded against our
net deferred tax assets. In the event that actual results differ from these estimates or we adjust
these estimates in future periods, we may need to establish a valuation allowance, which could
materially impact our financial position and results of operations. Our ability to utilize our
deferred tax assets and the need for a related valuation allowance are monitored on an ongoing
basis.
Furthermore, computation of our tax liabilities involves examining uncertainties in the
application of complex tax regulations. We recognize liabilities for uncertain tax positions based
on the two-step process as prescribed by the authoritative guidance provided by FASB. The first
step is to evaluate the tax position for recognition by determining if there is sufficient
available evidence to indicate if it is more likely than not that the position will be sustained on
audit, including resolution of any related appeals or litigation processes. The second step
requires us to measure and determine the approximate amount of the tax benefit at the largest
amount that is more
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than 50% likely of being realized upon ultimate settlement with the tax authorities. It is
inherently difficult and requires significant judgment to estimate such amounts, as this requires
us to determine the probability of various possible outcomes. We reexamine these uncertain tax
positions on a quarterly basis. This reassessment is based on various factors during the period
including, but not limited to, changes in worldwide tax laws and treaties, tax rates, changes in
facts or circumstances, effectively settled issues under audit and any new audit activity. A change
in recognition or measurement would result in the recognition of a tax benefit or an additional
charge to the tax provision in the period.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including the expected dates of
adoption and estimated effects, if any, on our consolidated condensed financial statements, see
Note 2, Recent Accounting Pronouncements in the Notes to Unaudited Condensed Consolidated
Financial Statements of this Form 10-Q.
Results of Operations Three and Nine Months Ended December 31, 2010 and 2009
The following table sets forth selected consolidated statements of operations data for the
fiscal periods indicated and the percentage change in such data from period to period. These
historical operating results may not be indicative of the results for any future period.
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
December 31, | December 31, | |||||||||||||||||||||||
2010 | %change | 2009 | 2010 | %change | 2009 | |||||||||||||||||||
(000) | (000) | (000) | (000) | |||||||||||||||||||||
Net revenues |
$ | 91,727 | 43.3 | % | $ | 64,032 | $ | 266,512 | 59.9 | % | $ | 166,663 | ||||||||||||
Cost of goods sold |
62,647 | 29.6 | % | 48,321 | 176,131 | 37.6 | % | 128,000 | ||||||||||||||||
Gross profit |
$ | 29,080 | 85.1 | % | $ | 15,711 | $ | 90,381 | 133.8 | % | $ | 38,663 | ||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Research, development and
engineering |
$ | 6,684 | 29.9 | % | $ | 5,144 | $ | 20,293 | 42.9 | % | $ | 14,202 | ||||||||||||
Selling, general and administrative |
10,595 | 27.4 | % | 8,315 | 31,471 | 27.5 | % | 24,678 | ||||||||||||||||
Amortization of acquisition-
related intangible assets |
1,630 | 224.7 | % | 502 | 5,476 | 984.4 | % | 505 | ||||||||||||||||
Restructuring charges |
515 | 1509.4 | % | 32 | 566 | -45.7 | % | 1,042 | ||||||||||||||||
Total operating expenses |
$ | 19,424 | 38.8 | % | $ | 13,993 | $ | 57,806 | 43.0 | % | $ | 40,427 | ||||||||||||
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The following table sets forth selected statements of operations data as a percentage of net
revenues for the fiscal periods indicated. These historical operating results may not be indicative
of the results for any future period.
% of Net Revenues | % of Net Revenues | |||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of goods sold |
68.3 | % | 75.5 | % | 66.1 | % | 76.8 | % | ||||||||
Gross profit |
31.7 | % | 24.5 | % | 33.9 | % | 23.2 | % | ||||||||
Operating expenses: |
||||||||||||||||
Research, development and engineering |
7.3 | % | 8.0 | % | 7.6 | % | 8.5 | % | ||||||||
Selling, general and administrative |
11.6 | % | 13.0 | % | 11.8 | % | 14.8 | % | ||||||||
Amortization of acquisition-
related intangible assets |
1.8 | % | 0.8 | % | 2.1 | % | 0.3 | % | ||||||||
Restructuring charges |
0.6 | % | 0.0 | % | 0.2 | % | 0.6 | % | ||||||||
Total operating expenses |
21.3 | % | 21.8 | % | 21.7 | % | 24.2 | % | ||||||||
Operating income (loss) |
10.4 | % | 2.7 | % | 12.2 | % | -1.0 | % | ||||||||
Other income (expense), net |
0.3 | % | 0.6 | % | 0.2 | % | -1.6 | % | ||||||||
Income (loss) before income tax |
10.7 | % | 3.3 | % | 12.4 | % | -2.6 | % | ||||||||
Provision for income tax |
-2.9 | % | -2.7 | % | -4.6 | % | -0.2 | % | ||||||||
Net income (loss) |
7.8 | % | 0.6 | % | 7.8 | % | -2.8 | % | ||||||||
Net Revenues.
The following tables set forth the revenues for each of our product groups for the fiscal periods indicated:
Revenues (1)
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||
2010 | % change | 2009 | 2010 | % change | 2009 | |||||||||||||||||||
(000) | (000) | (000) | (000) | |||||||||||||||||||||
Power semiconductors |
$ | 63,563 | 45.6 | % | $ | 43,662 | $ | 182,074 | 48.1 | % | $ | 122,950 | ||||||||||||
Integrated circuits |
20,267 | 32.4 | % | 15,306 | 64,742 | 115.5 | % | 30,047 | ||||||||||||||||
Systems and RF power
semiconductors |
7,897 | 55.9 | % | 5,064 | 19,696 | 44.1 | % | 13,666 | ||||||||||||||||
Total |
$ | 91,727 | 43.3 | % | $ | 64,032 | $ | 266,512 | 59.9 | % | $ | 166,663 | ||||||||||||
(1) | Revenues by product group include royalties. |
The following tables set forth the average selling prices, or ASPs, and units for the fiscal periods indicated:
Average Selling Prices
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||
2010 | % change | 2009 | 2010 | % change | 2009 | |||||||||||||||||||
Power semiconductors |
$ | 1.83 | -23.1 | % | $ | 2.38 | $ | 1.85 | -22.6 | % | $ | 2.39 | ||||||||||||
Integrated circuits |
$ | 0.92 | 33.3 | % | $ | 0.69 | $ | 0.89 | 25.4 | % | $ | 0.71 | ||||||||||||
Systems and RF power
semiconductors |
$ | 30.61 | 30.0 | % | $ | 23.55 | $ | 27.24 | 26.0 | % | $ | 21.62 |
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Units
Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||
2010 | % change | 2009 | 2010 | % change | 2009 | |||||||||||||||||||
(000) | (000) | (000) | (000) | |||||||||||||||||||||
Power semiconductors |
34,679 | 89.1 | % | 18,338 | 98,661 | 92.0 | % | $ | 51,374 | |||||||||||||||
Integrated circuits |
21,003 | -5.9 | % | 22,317 | 69,693 | 65.2 | % | 42,177 | ||||||||||||||||
Systems and RF
power
semiconductors |
258 | 20.0 | % | 215 | 723 | 14.4 | % | 632 | ||||||||||||||||
Total |
55,940 | 36.9 | % | 40,870 | 169,077 | 79.5 | % | 94,183 | ||||||||||||||||
The 43.3% increase in net revenues in the three months ended December 31, 2010 as compared to
the three months ended December 31, 2009 reflected an increase of $19.9 million, or 45.6%, in the
sale of power semiconductors, an increase of $5.0 million, or 32.4%, in the sale of ICs and an
increase of $2.8 million, or 55.9%, in the sale of systems and RF power semiconductors. The
increase in power semiconductors included a $12.1 million increase in the sale of bipolar products,
primarily to the industrial and commercial market, and a $7.6 million increase in the sale of MOS
products, principally to the consumer products market and the industrial and commercial market. The
increase in revenues from the sale of ICs was primarily driven by the acquisition of Zilog, offset
by reduced sales of display driver ICs. The revenues from the sale of systems and RF power
semiconductors increased primarily due to a $2.3 million increase in the sale of subassemblies to
the industrial and commercial market.
For the three months ended December 31, 2010 as compared to the three months ended December
31, 2009, the unit growth in power semiconductors was broad-based. The unit decline in ICs was
principally caused by reduced shipments of display driver ICs to the consumer products market and
by reduced shipments of solid state relays, or SSRs, to the telecom market, offset by shipments of
microcontroller products. The increase in unit shipments in systems and RF power semiconductors was
largely the result of increased shipments of subassemblies.
The 59.9% increase in net revenues in the nine months ended December 31, 2010 as compared to
the nine months ended December 31, 2009 reflected an increase of $59.1 million, or 48.1%, in the
sale of power semiconductors, an increase of $34.7 million, or 115.5%, in the sale of ICs and an
increase of $6.0 million, or 44.1%, in the sale of systems and RF power semiconductors. The
increase in power semiconductors included a $36.0 million increase in the sale of bipolar products,
primarily to the industrial and commercial market, and a $21.4 million increase in the sale of MOS
products, principally to the consumer products market and the industrial and commercial market. The
increase in revenues from the sale of ICs was primarily driven by the acquisition of Zilog and a
$4.7 million increase in the sale of SSRs to the telecom market. The revenues from the sale of
systems and RF power semiconductors increased primarily due to a $5.1 million increase in the sale
of subassemblies to the industrial and commercial market.
For the nine months ended December 31, 2010 as compared to the nine months ended December 31,
2009, IC unit growth was principally due to shipments of Zilog microcontrollers and shipments of
SSRs, whereas in power semiconductors the unit growth was broad-based. The unit increase in systems
and RF power semiconductors was principally due to increased shipments of subassemblies.
For the three and nine months ended December 31, 2010 as compared to the comparable periods of
the previous fiscal year, the changes in the ASPs of power semiconductor and the systems and RF
power semiconductors were due to changes in the mix of products sold. The ASP of power
semiconductors declined with markedly increased sales to all of our major market segments, except
for the higher priced medical market. The ASP of systems and RF power semiconductors increased with
the increased sales of subassemblies. The ASP of ICs increased as a result of the addition of
microcontroller product sales from the recently acquired Zilog division.
For the quarter ended December 31, 2010, sales to customers in the United States represented
approximately 25.6% of our net revenues and sales to international customers represented
approximately 74.4% of our net revenues. Of our international sales, approximately 47.5% were
derived from sales in Europe and the Middle East, approximately 47.1% were derived from sales in
the Asia Pacific region and approximately 5.4% were derived from sales in the rest of the world. By
comparison, for the quarter ended December 31, 2009, sales to customers in the United States
represented approximately 27.0% of our net revenues and sales to international customers
represented approximately 73.0% of our net revenues. Of our international sales, approximately
45.3% were derived from sales in Europe and the Middle East, approximately 48.9% were derived from
sales in the Asia Pacific region and approximately 5.8% were derived from sales in the rest of the
world.
For the nine months ended December 31, 2010, sales to customers in the United States
represented approximately 28.1% of our net revenues and sales to international customers
represented approximately 71.9% of our net revenues. Of our international sales, approximately
47.2% were derived from sales in Europe and the Middle East, approximately 47.7% were derived from
sales in the Asia Pacific region and approximately 5.1% were derived from sales in the rest of the
world. By comparison, for the nine months
ended December 31, 2009, sales to customers in the United States represented approximately
29.8% of our net revenues and sales to international customers represented approximately 70.2% of
our net revenues. Of our international sales, approximately 47.3% were
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derived from sales in Europe and the Middle East, approximately 46.0% were derived from sales
in the Asia Pacific region and approximately 6.7% were derived from sales in the rest of the world.
For the three and nine months ended December 31, 2010 as compared to the three and nine months
ended December 31, 2009, we experienced sales growth in all major geographic areas including the
U.S., Europe and the Middle East, and the Asia Pacific area. For the three months ended December
31, 2010 as compared to the three months ended December 31, 2009, our sales to the telecom market
and the industrial and commercial market increased significantly, while our sales to the medical
market and to the consumer products market declined. For the nine months ended December 31, 2010 as
compared to the same period in prior year, our sales to the telecom market, the consumer products
market and the industrial and commercial market increased significantly, whereas our sales to the
medical market were largely unchanged.
For the three and nine months ended December 31, 2010, one distributor accounted for 12.7% and
12.3% of our net revenues, respectively, and another distributor accounted for 10.9% and 11.7% of
our net revenues, respectively. For the three and nine months ended December 31, 2009, one
distributor accounted for 10.4% and 11.3%, respectively, of our net revenues.
Our net revenues were reduced by allowances for sales returns, stock rotations and ship and
debit. See Critical Accounting Policies and Significant Management Estimates elsewhere in this
Managements Discussion and Analysis of Financial Condition and Results of Operations.
Gross Profit.
Gross profit margin increased to 31.7% in the three months ended December 31, 2010 from 24.5%
in the three months ended December 31, 2009. Gross profit margin increased to 33.9% in the nine
months ended December 31, 2010 from 23.2% in the nine months ended December 31, 2009. The gross
profit margin improved due to changes in product mix, better utilization of facilities caused by
increased production to support the growth in revenues and increased utilization or sale of
previously written down inventory. During the current fiscal year, our net revenues included higher
margin microcontroller products sold by the Zilog division acquired in February 2010, resulting in
higher gross profit margins. The increased utilization and sale of previously written down
inventory resulted in increased gross profit for the three and nine months ended December 31, 2010,
respectively. See Critical Accounting Policies and Significant Management Estimates Inventories
elsewhere in this Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Research, Development and Engineering.
R&D expenses typically consist of internal engineering efforts for product design and
development. As a percentage of net revenues, our R&D expenses for the three and nine months ended
December 31, 2010 were 7.3% and 7.6%, respectively, as compared to 8.0% and 8.5% for the three and
nine months ended December 31, 2009. The reduction in the percentages resulted from increased net
revenues. Expressed in dollars, for the three and nine months ended December 31, 2010 as compared
to the same periods of the prior year, our R&D expenses increased by approximately $1.5 million and
$6.1 million, or 29.9% and 42.9%, respectively. The increase in R&D spending was primarily caused
by the acquisitions of Zilog and our display and LED driver businesses in fiscal year 2010, which
resulted in increases in R&D headcount and expenses in the three and nine months ended December 31,
2010 as compared to the same periods in the prior fiscal year.
Selling, General and Administrative.
As a percentage of net revenues, our SG&A expenses for the three and nine months ended
December 31, 2010 were 11.6% and 11.8% as compared to 13.0% and 14.8% for the three and nine months
ended December 31, 2009. The reduction in the percentages resulted from increased net revenues.
Expressed in dollars, SG&A expenses increased by $2.3 million and $6.8 million, or 27.4% and 27.5%,
respectively, for the three and nine months ended December 31, 2010 as compared to the same periods
in the prior fiscal year, primarily due to the acquisition of Zilog, as well as higher commission
and freight expenses incurred because of increased revenues.
Amortization of Acquisition-Related Intangible Assets.
We recorded certain intangible assets during fiscal 2010 in connection with the acquisitions
of Zilog and the display and LED driver businesses from Leadis. These assets are amortized based
upon their estimated useful lives that range from 12 months to 72 months. For the three and nine
months ended December 31, 2010, we recorded amortization expenses on acquisition-related intangible
assets of $1.6 million and $5.5 million, respectively. For the three and nine months ended December
31, 2009, we recorded amortization expenses on acquisition-related intangible assets of $502,000
and $505,000, respectively.
Restructuring Charges.
In the quarter ended September 30, 2009, we initiated plans to restructure our European
manufacturing and assembly operations to align them to current market conditions. The plans
primarily involved the termination of employees and centralization of certain
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positions. Costs related to termination of employees represented severance payments and
benefits. The restructuring charges recorded in conjunction with the plan represented severance
costs and have been included under Restructuring charges in our unaudited condensed consolidated
statements of operations.
During the quarter ended December 31, 2010, we relocated the Zilog employees to our
headquarters in Milpitas and vacated the facility in San Jose, California, as a part of our
integration plan to reduce costs. As a result, we took a charge of $442,000 for future costs that
will continue to be incurred during the remaining term of the San Jose lease.
As a consequence of these restructuring actions, we incurred restructuring charges of $515,000
and $566,000 during the three and nine months ended December 31, 2010. During the three and nine
months ended December 31, 2009, we incurred restructuring charges of $32,000 and $1.0 million,
respectively. The restructuring accrual as of December 31, 2010 was included under Accrued
expenses and other current liabilities on our unaudited condensed consolidated balance sheets. See
Note 10, Restructuring Charges in the Notes to Unaudited Condensed Consolidated Financial
Statements of this Form 10-Q.
Other Income (Expense), net.
In the quarter ended December 31, 2010, other income, net was $625,000 as compared to other
income, net of $691,000 in the quarter ended December 31, 2009. The other income, net in the three
months ended December 31, 2010 principally consisted of $572,000 in gains associated with changes
in exchange rates for foreign currency transactions. The other income, net in the three months
ended December 31, 2009 consisted principally of $682,000 in gains associated with changes in
exchange rates for foreign currency transactions.
For the nine months ended December 31, 2010, other income, net was $1.4 million, as compared
to other expense, net of $1.7 million in the nine months ended December 31, 2009. For the nine
months ended December 31, 2010, other income, net consisted principally of $1.3 million in gains
associated with changes in exchange rates for foreign currency transactions. For the nine months
ended December 31, 2009, other expense, net consisted principally of losses associated with changes
in exchange rates for foreign currency transactions of $1.6 million.
Provision for Income Tax.
For the three and nine months ended December 31, 2010, we recorded income tax provisions of
$2.7 million and $12.3 million, reflecting effective tax rates of 26.6% and 37.3%, respectively.
For the three and nine months ended December 31, 2009, we recorded income tax provisions of $1.7
million and $347,000, reflecting effective tax rates of 80.9% and 8.0%, respectively. For the three
months ended December 31, 2010, the effective tax rate was affected by certain discrete items
offset by changes in the estimates of annual income in foreign jurisdictions based on nine months
of experience. For the nine months ended December 31, 2010, the effective tax rate was affected by
certain discrete items. For the three months ended December 31, 2009, the provision for income tax
represented the adjustment of the income tax account to reflect a change in our estimated income
taxes for the year based on nine months of experience, offset by a favorable impact on the reversal
of accrued income tax expenses following conclusion of an audit in a foreign tax jurisdiction. The
provision for income tax for the nine months ended December 31, 2009 was incurred because we had
losses in certain jurisdictions with comparatively lower tax rates, partially offset by the release
of valuation allowance.
Liquidity and Capital Resources
At December 31, 2010, cash and cash equivalents were $69.0 million as compared to $60.5
million at March 31, 2010.
Our cash provided by operating activities for the nine months ended December 31, 2010 was
$20.3 million, a decrease of $2.9 million as compared to the $23.2 million in the comparable period
of the prior year. The change in our operating cash flow was primarily due to a decrease of $26.5
million in net changes in operating assets and liabilities, offset by an increase of $23.6 million
in net income and total adjustments to reconcile net income.
The increase in net income and total adjustments to reconcile net income was driven by the
increase in net revenues. The changes in operating assets and liabilities for the nine months ended
December 31, 2010 compared to the nine months ended December 31, 2009 were primarily caused by the
following: Accounts receivables increased due to higher revenues and inventory purchases increased
to meet our production plans.
Our net cash used in investing activities for the nine months ended December 31, 2010 was $6.7
million, as compared to net cash used in investing activities of $5.4 million during the nine
months ended December 31, 2009. During the nine months ended December 31, 2010, our uses of cash
for investing activities principally reflected $6.8 million in purchases of property and equipment.
During the nine months ended December 31, 2009, our uses of cash for investing activities
principally reflected $2.6 million for a business combination and $2.6 million in purchases of
property and equipment.
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For the nine months ended December 31, 2010, net cash used in financing activities was $5.3
million, as compared to net cash provided by financing activities of $11.5 million in the nine
months ended December 31, 2009. During the nine months ended December 31, 2010, we used $4.0
million for the purchase of treasury stock and $3.4 million for principal repayment on capital
lease and loan obligations, offset by proceeds from employee equity plans of $2.1 million. During
the nine months ended December 31, 2009, net cash provided by financing activities primarily
reflected $15.0 million in proceeds borrowed under the line of credit, offset by $4.2 million in
principal payments on capital lease and loan obligations.
At December 31, 2010, capital lease obligations and loans payable totaled $39.1 million. This
represented 56.7% of our cash and cash equivalents and 19.2% of our stockholders equity.
We are obligated on a 6.3 million, or $8.4 million, loan. The loan has a remaining term of
about 10 years, ending in June 2020, and bears a variable interest rate, dependent upon the current
Euribor rate and the ratio of indebtedness to cash flow for the German subsidiary. Each fiscal
quarter a principal payment of 167,000, or about $221,000, and a payment of accrued interest are
required. Financial covenants for a ratio of indebtedness to cash flow, a ratio of equity to total
assets and a minimum stockholders equity for the German subsidiary must be satisfied for the loan
to remain in good standing. At December 31, 2010, we complied with all of these financial
covenants. The loan may be prepaid in whole or in part at the end of a fiscal quarter without
penalty. The loan is collateralized by a security interest in the facility in Lampertheim, Germany,
which is owned by our U.S. parent.
On August 2, 2007, we completed the purchase of a building in Milpitas, California. We moved
our corporate office and a facility for operations to this location in January 2008. In connection
with the purchase, we assumed a loan, secured by the building, of $7.5 million. The loan bore
interest at the rate of 7.455% per annum. Monthly payments of principal and interest of $56,000
were due under the loan. In addition, monthly impound payments aggregating $14,000 were made for
items such as real property taxes, insurance and capital expenditures. The loan was repaid in full
on February 1, 2011.
On November 13, 2009, we entered into a credit agreement for a revolving line of credit with
BOW, under which we could borrow up to $15.0 million and all amounts owed under the credit
agreement were due and payable on October 31, 2011. On December 29, 2010, we entered into an
amendment with BOW to increase the line of credit to $20.0 million and to extend the expiration
date to October 31, 2013. Borrowings may be repaid and re-borrowed during the term of the credit
agreement. The obligations are guaranteed by two of our subsidiaries. At December 31, 2010, the
outstanding principal balance under the credit agreement was $15.0 million. See Note 9, Borrowing
Arrangements in the Notes to Unaudited Condensed Consolidated Financial Statements of this Form
10-Q for further information regarding the credit agreement. The credit agreement also includes a
$3.0 million letter of credit subfacility. See Note 17, Commitments and Contingencies in the
Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Q for further
information regarding the terms of the subfacility.
Additionally, we maintain three defined benefit pension plans: one for the United Kingdom
employees, one for German employees and one for Philippine employees. These plans cover most of the
employees in the United Kingdom, Germany and the Philippines. Benefits are based on years of
service and the employees compensation. We deposit funds for these plans, consistent with the
requirements of local law, with investment management companies, insurance companies, banks,
trustees or accrue for the unfunded portion of the obligations. The United Kingdom and German plans
have been curtailed. As such, the plans are closed to new entrants and no credit is provided for
additional periods of service. The total pension liability accrued for the United Kingdom and
German plans at December 31, 2010 was $15.7 million. The Philippines plan is overfunded and the
overfunding of $257,000 is included under Other assets on our unaudited condensed consolidated
balance sheet.
We believe that our cash and cash equivalents, together with cash generated from operations,
will be sufficient to meet our anticipated cash requirements for the next 12 months. Our liquidity
could be negatively affected by a decline in demand for our products, increases in the cost of
materials or labor, investments in new product development or one or more acquisitions. From time
to time, we use derivative contracts in the normal course of business to manage our foreign
currency exchange and interest rate risks. We did not have any significant open derivative
contracts at December 31, 2010. There can be no assurance that additional debt or equity financing
will be available when required or, if available, can be secured on terms satisfactory to us.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our market risk has not changed materially from the market risk disclosed in Item 7A,
Quantitative and Qualitative Disclosures About Market Risk, of our Annual Report on Form 10-K for
the fiscal year ended March 31, 2010.
ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Based on their evaluation as of December 31, 2010, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective to
ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q
was recorded, processed, summarized and reported within the time periods specified in the SECs
rules and regulations. Furthermore, these controls and procedures were also effective to ensure
that information required to be disclosed by us in this Quarterly Report on Form 10-Q was
accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosure.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not
expect that our procedures or our internal controls will prevent or detect all errors and all
fraud. An internal control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Because of
the inherent limitations in all control systems, no evaluation of our controls can provide absolute
assurance that all control issues, errors and instances of fraud, if any, have been detected.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We currently are involved in a variety of legal matters that arise in the normal course of
business. Based on information currently available, management does not believe that the ultimate
resolution of these matters will have a material adverse effect on our financial condition, results
of operations and cash flows. Were an unfavorable ruling to occur, there exists the possibility of
a material adverse impact on the results of operations of the period in which the ruling occurs.
ITEM 1A. RISK FACTORS
In addition to the other information in this Quarterly Report on Form 10-Q, the following risk
factors should be considered carefully in evaluating our business and us. Additional risks not
presently known to us or that we currently believe are not serious may also impair our business and
its financial condition.
Our operating results fluctuate significantly because of a number of factors, many of which are
beyond our control.
Given the nature of the markets in which we participate, we cannot reliably predict future
revenues and profitability and unexpected changes may cause us to adjust our operations. Large
portions of our costs are fixed, due in part to our significant sales, research and development and
manufacturing costs. Thus, small declines in revenues could seriously negatively affect our
operating results in any given quarter. Our operating results may fluctuate significantly from
quarter to quarter and year to year. For example, from fiscal 2005 to fiscal 2006 and from fiscal
2008 to fiscal 2009, net income in one year shifted to net loss in the next year. Some of the
factors that may affect our quarterly and annual results are:
| changes in business and economic conditions, including a downturn in demand or decrease in the rate of growth in demand, whether in the global economy, a regional economy or in the semiconductor industry; | ||
| changes in consumer and business confidence caused by changes in market conditions, including changes in the credit market, change in currency exchange rates, expectations for inflation and energy prices; | ||
| the reduction, rescheduling or cancellation of orders by customers; | ||
| fluctuations in timing and amount of customer requests for product shipments; | ||
| changes in the mix of products that our customers purchase; | ||
| changes in the level of customers component inventory; | ||
| loss of key customers; | ||
| the cyclical nature of the semiconductor industry; | ||
| competitive pressures on selling prices; | ||
| strategic actions taken by our competitors; | ||
| market acceptance of our products and the products of our customers; | ||
| fluctuations in our manufacturing yields and significant yield losses; | ||
| difficulties in forecasting demand for our products and the planning and managing of inventory levels; | ||
| the availability of production capacity, whether internally or from external suppliers; | ||
| the availability of raw materials, supplies and manufacturing services from third parties; | ||
| the amount and timing of investments in research and development; | ||
| damage awards or injunctions as the result of litigation; | ||
| changes in our product distribution channels and the timeliness of receipt of distributor resale information; |
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| the impact of vacation schedules and holidays, largely during the second and third fiscal quarters of our fiscal year; and | ||
| the amount and timing of costs associated with product returns. |
As a result of these factors, many of which are difficult to control or predict, as well as
the other risk factors discussed in this Quarterly Report on Form 10-Q, we may experience
materially adverse fluctuations in our future operating results on a quarterly or annual basis. If
product demand decreases, our manufacturing or assembly and test capacity could be underutilized,
and we may be required to record an impairment on our long-lived assets including facilities and
equipment, as well as intangible assets, which would increase our expenses. In addition, factory
planning decisions may shorten the useful lives of long-lived assets, including facilities and
equipment, and cause us to accelerate depreciation. These changes in demand for our products and in
our customers product needs could have a variety of negative effects on our competitive position
and our financial results, and, in certain cases, may reduce our revenue, increase our costs, lower
our gross margin percentage or require us to recognize impairments of our assets. In addition, if
product demand decreases or we fail to forecast demand accurately, we could be required to write
off inventory or record underutilization charges, which would have a negative impact on our gross
margin.
We may not be able to increase production capacity to meet the present and future demand for our
products.
The semiconductor industry has been characterized by periodic limitations on production
capacity. Currently, we are experiencing constraints on our ability to manufacture power
semiconductors that result in longer lead times for product delivery than desired by many of our
customers. If we are unable to increase our production capacity to meet current or possible future
demand, some of our customers may seek other sources of supply or our future growth may be limited.
Our backlog may not result in future revenues.
Customer orders typically can be cancelled or rescheduled without penalty to the customer.
Further, in periods of increasing demand, particularly when production is allocated or delivery
delayed, customers of semiconductor companies have on occasion placed orders without expectation of
accepting delivery to increase their share of allocated product or in an effort to improve the
timeliness of delivery. While we are attuned to the potential for such behavior and attempt to
identify such orders, we could accept orders of this nature and subsequently experience order
cancellation unexpectedly. As a result, our backlog at any particular date is not necessarily
indicative of actual revenues for any succeeding period. A reduction of backlog during any
particular period, or the failure of our backlog to result in future revenues, could harm our
results of operations.
Fluctuations in the mix of products sold may adversely affect our financial results.
Changes in the mix and types of products sold may have a substantial impact on our revenues
and gross profit margins. In addition, more recently introduced products tend to have higher
associated costs because of initial overall development costs and higher start-up costs.
Fluctuations in the mix and types of our products may also affect the extent to which we are able
to recover our fixed costs and investments that are associated with a particular product, and, as a
result, can negatively impact our financial results.
Our international operations expose us to material risks.
For the nine months ended December 31, 2010, our net revenues by region were approximately
28.1% in the United States, approximately 33.9% in Europe and the Middle East, approximately 34.3%
in Asia Pacific and approximately 3.7% in Canada and the rest of the world. We expect revenues from
foreign markets to continue to represent a significant portion of total net revenues. We maintain
significant operations in Germany, the United Kingdom and the Philippines and work with
subcontractors, suppliers and manufacturers in South Korea, Japan, the Philippines and elsewhere in
Europe and Asia Pacific. Some of the risks inherent in doing business internationally are:
| foreign currency fluctuations, particularly in the Euro and the British pound; | ||
| longer payment cycles; | ||
| challenges in collecting accounts receivable; | ||
| changes in the laws, regulations or policies of the countries in which we manufacture or sell our products; | ||
| trade restrictions; | ||
| cultural and language differences; | ||
| employment regulations; |
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| limited infrastructure in emerging markets; | ||
| transportation delays; | ||
| seasonal reduction in business activities; | ||
| work stoppages; | ||
| labor and union disputes; | ||
| electrical outages; | ||
| terrorist attack or war; and | ||
| economic or political instability. |
Our sales of products manufactured in our Lampertheim, Germany facility and our costs at that
facility are primarily denominated in Euros, and sales of products manufactured in our Chippenham,
U.K. facility and our costs at that facility are primarily denominated in British pounds.
Fluctuations in the value of the Euro and the British pound against the U.S. dollar could have a
significant adverse impact on our balance sheet and results of operations. We generally do not
enter into foreign currency hedging transactions to control or minimize these risks. Reductions in
the value of the Euro or British pound would reduce our revenues recognized in U.S. dollars, all
other things being equal. Increases in the value of the Euro or the British pound could cause
losses associated with changes in exchange rates for foreign currency transactions. Fluctuations in
currency exchange rates could cause our products to become more expensive to customers in a
particular country, leading to a reduction in sales or profitability in that country. If we expand
our international operations or change our pricing practices to denominate prices in other foreign
currencies, we could be exposed to even greater risks of currency fluctuations.
Our financial performance is dependent on economic stability and credit availability in
international markets. Actions by governments to address deficits or sovereign debt issues could
adversely affect gross domestic product or currency exchange rates in countries where we operate,
which in turn could adversely affect our financial results. If our customers or suppliers are
unable to obtain the credit necessary to fund their operations, we could experience increased bad
debts, reduced product orders and interruptions in supplier deliveries leading to delays or
stoppages in our production.
In addition, the laws of certain foreign countries may not protect our products or
intellectual property rights to the same extent as do U.S. laws regarding the manufacture and sale
of our products in the U.S. Therefore, the risk of piracy of our technology and products may be
greater when we manufacture or sell our products in these foreign countries.
The semiconductor industry is cyclical, and an industry downturn could adversely affect our
operating results.
Business conditions in the semiconductor industry may rapidly change from periods of strong
demand and insufficient production to periods of weakened demand and overcapacity. The industry in
general is characterized by:
| changes in product mix in response to changes in demand; | ||
| alternating periods of overcapacity and production shortages, including shortages of raw materials supplies and manufacturing services; | ||
| cyclical demand for semiconductors; | ||
| significant price erosion; | ||
| variations in manufacturing costs and yields; | ||
| rapid technological change and the introduction of new products; and | ||
| significant expenditures for capital equipment and product development. |
These factors could harm our business and cause our operating results to suffer.
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Our dependence on subcontractors to assemble and test our products subjects us to a number of
risks, including an inadequate supply of products and higher materials costs.
We depend on subcontractors for the assembly and testing of our products. The substantial
majority of our products are assembled by subcontractors located outside of the United States.
Assembly subcontractors generally work on narrow margins and have limited capital. We have
experienced assembly subcontractors who have ceased or reduced production because of financial
problems. We engage assembly subcontractors who operate while in insolvency proceedings or whose
financial stability is uncertain. The unexpected cessation of production or reduction in production
by one or more of our assembly subcontractors could adversely affect our production, our customer
relations, our revenues and our financial condition. Our reliance on these subcontractors also
involves the following significant risks:
| reduced control over delivery schedules and quality; | ||
| the potential lack of adequate capacity during periods of excess demand; | ||
| difficulties selecting and integrating new subcontractors; | ||
| limited or no warranties by subcontractors or other vendors on products supplied to us; | ||
| potential increases in prices due to capacity shortages and other factors; | ||
| potential misappropriation of our intellectual property; and | ||
| economic or political instability in foreign countries. |
These risks may lead to delayed product delivery or increased costs, which would harm our
profitability and customer relationships.
In addition, we use a limited number of subcontractors to assemble a significant portion of
our products. If one or more of these subcontractors experience financial, operational, production
or quality assurance difficulties, we could experience a reduction or interruption in supply.
Although we believe alternative subcontractors are available, our operating results could
temporarily suffer until we engage one or more of those alternative subcontractors. Moreover, in
engaging alternative subcontractors in exigent circumstances, our production costs could increase
markedly.
Semiconductors for inclusion in consumer products have short product life cycles.
We believe that consumer products are subject to shorter product life cycles, because of
technological change, consumer preferences, trendiness and other factors, than other types of
products sold by our customers. Shorter product life cycles result in more frequent design
competitions for the inclusion of semiconductors in next generation consumer products, which may
not result in design wins for us.
We may not be successful in our acquisitions.
We have in the past made, and may in the future make, acquisitions of other companies and
technologies. These acquisitions involve numerous risks, including:
| failure to retain key personnel of the acquired business; | ||
| diversion of managements attention during the acquisition process; | ||
| disruption of our ongoing business; | ||
| the potential strain on our financial and managerial controls and reporting systems and procedures; | ||
| unanticipated expenses and potential delays related to integration of an acquired business; | ||
| the risk that we will be unable to develop or exploit acquired technologies; | ||
| failure to successfully integrate the operations of an acquired company with our own; | ||
| the challenges in achieving strategic objectives, cost savings and other benefits from acquisitions; | ||
| the risk that our markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets; |
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| the risks of entering new markets in which we have limited experience; | ||
| difficulties in expanding our information technology systems or integrating disparate information technology systems to accommodate the acquired businesses; | ||
| the challenges inherent in managing an increased number of employees and facilities and the need to implement appropriate policies, benefits and compliance programs; | ||
| customer dissatisfaction or performance problems with an acquired companys products or personnel; | ||
| adverse effects on our relationships with suppliers; | ||
| the reduction in financial stability associated with the incurrence of debt or the use of a substantial portion of our available cash; | ||
| the costs associated with acquisitions, including in-process R&D charges and amortization expense related to intangible assets, and the integration of acquired operations; and | ||
| assumption of known or unknown liabilities or other unanticipated events or circumstances. |
We cannot assure that we will be able to successfully acquire other businesses or product
lines or integrate them into our operations without substantial expense, delay in implementation or
other operational or financial problems.
As a result of an acquisition, our financial results may differ from the investment
communitys expectations in a given quarter. Further, if market conditions or other factors lead us
to change our strategic direction, we may not realize the expected value from such transactions. If
we do not realize the expected benefits or synergies of such transactions, our consolidated
financial position, results of operations, cash flows or stock price could be negatively impacted.
We depend on external foundries to manufacture many of our products.
Of our net revenues for the nine months ended December 31, 2010, 41.6% came from wafers
manufactured for us by external foundries. Our dependence on external foundries may grow. We
currently have arrangements with a number of wafer foundries, three of which produce the wafers for
power semiconductors that we purchase from external foundries. Samsung Electronics facility in
Kiheung, South Korea is our principal external foundry.
Our relationships with our external foundries do not guarantee prices, delivery or lead times
or wafer or product quantities sufficient to satisfy current or expected demand. These foundries
manufacture our products on a purchase order basis. We provide these foundries with rolling
forecasts of our production requirements. However, the ability of each foundry to provide wafers to
us is limited by the foundrys available capacity. At any given time, these foundries could choose
to prioritize capacity for their own use or other customers or reduce or eliminate deliveries to us
on short notice. If growth in demand for our products occurs, these foundries may be unable or
unwilling to allocate additional capacity to our needs, thereby limiting our revenue growth.
Accordingly, we cannot be certain that these foundries will allocate sufficient capacity to satisfy
our requirements. In addition, we cannot be certain that we will continue to do business with these
or other foundries on terms as favorable as our current terms. If we are not able to obtain foundry
capacity as required, our relationships with our customers could be harmed, we could be unable to
fulfill contractual requirements and our revenues could be reduced or our growth limited. Moreover,
even if we are able to secure foundry capacity, we may be required, either contractually or as a
practical business matter, to utilize all of that capacity or incur penalties or an adverse effect
to the business relationship. The costs related to maintaining foundry capacity could be expensive
and could harm our operating results. Other risks associated with our reliance on external
foundries include:
| the lack of control over delivery schedules; | ||
| the unavailability of, or delays in obtaining access to, key process technologies; | ||
| limited control over quality assurance, manufacturing yields and production costs; and | ||
| potential misappropriation of our intellectual property. |
Our requirements typically represent a small portion of the total production of the external
foundries that manufacture our wafers and products. We cannot be certain these external foundries
will continue to devote resources to the production of our wafers and products or continue to
advance the process design technologies on which the manufacturing of our products is based. These
circumstances could harm our ability to deliver our products or increase our costs.
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Our success depends on our ability to manufacture our products efficiently.
We manufacture our products in facilities that are owned and operated by us, as well as in
external wafer foundries and subcontract assembly facilities. The fabrication of semiconductors is
a highly complex and precise process, and a substantial percentage of wafers could be rejected or
numerous dies on each wafer could be nonfunctional as a result of, among other factors:
| contaminants in the manufacturing environment; | ||
| defects in the masks used to print circuits on a wafer; | ||
| manufacturing equipment failure; or | ||
| wafer breakage. |
For these and other reasons, we could experience a decrease in manufacturing yields.
Additionally, if we increase our manufacturing output, the additional demands placed on existing
equipment and personnel or the addition of new equipment or personnel may lead to a decrease in
manufacturing yields. As a result, we may not be able to cost-effectively expand our production
capacity in a timely manner.
Our gross margin is dependent on a number of factors, including our level of capacity utilization.
Semiconductor manufacturing requires significant capital investment, leading to high fixed
costs, including depreciation expense. We are limited in our ability to reduce fixed costs quickly
in response to any shortfall in revenues. If we are unable to utilize our manufacturing, assembly
and testing facilities at a high level, the fixed costs associated with these facilities will not
be fully absorbed, resulting in lower gross margins. Increased competition and other factors may
lead to price erosion, lower revenues and lower gross margins for us in the future.
Increasing raw material prices could impact our profitability.
Our products use large amounts of silicon, metals and other materials. In recent periods, we
have experienced price increases for many of these items. If we are unable to pass price increases
for raw materials onto our customers, our gross margins and profitability could be adversely
affected.
We order materials and commence production in advance of anticipated customer demand. Therefore,
revenue shortfalls may also result in inventory write-downs.
We typically plan our production and inventory levels based on our own expectations for
customer demand. Actual customer demand, however, can be highly unpredictable and can fluctuate
significantly. In response to anticipated long lead times to obtain inventory and materials, we
order materials and production in advance of customer demand. This advance ordering and production
may result in excess inventory levels or unanticipated inventory write-downs if expected orders
fail to materialize. For example, additional inventory write downs occurred in the quarter ended
March 31, 2009.
Our debt agreements contain certain restrictions that may limit our ability to operate our
business.
The agreements governing our debt contain, and any other future debt agreement we enter into
may contain, restrictive covenants that limit our ability to operate our business, including, in
each case subject to certain exceptions, restrictions on our ability to:
| incur additional indebtedness; | ||
| grant liens; | ||
| consolidate, merge or sell our assets, unless specified conditions are met; | ||
| acquire other business organizations; | ||
| make investments; | ||
| redeem or repurchase our stock; and | ||
| change the nature of our business. |
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In addition, our debt agreements contain financial covenants and additional affirmative and
negative covenants. Our ability to comply with these covenants is dependent on our future
performance, which will be subject to many factors, some of which are beyond our control, including
prevailing economic conditions. If we are not able to comply with all of these covenants for any
reason and we have debt outstanding at the time of such failure, some or all of our outstanding
debt could become immediately due and payable and the incurrence of additional debt under the
credit facilities provided by the debt agreements would not be allowed. If our cash is utilized to
repay any outstanding debt, depending on the amount of debt outstanding, we could experience an
immediate and significant reduction in working capital available to operate our business.
As a result of these covenants, our ability to respond to changes in business and economic
conditions and to obtain additional financing, if needed, may be significantly restricted, and we
may be prevented from engaging in transactions that might otherwise be beneficial to us, such as
strategic acquisitions or joint ventures.
Changes in our decisions about restructuring could affect our results of operations and financial
condition.
Factors that could cause actual results to differ materially from our expectations about
restructuring actions include:
| timing and execution of a plan that may be subject to local labor law requirements, including consultation with appropriate work councils; | ||
| changes in assumptions related to severance costs; | ||
| changes in employment levels and turnover rates; and | ||
| changes in product demand and the business environment, including changes in global economic conditions. |
Our royalties are uncertain and unpredictable in amount.
We are unable to discern a pattern in or otherwise predict the amount of any royalty payments
that we may receive. Consequently, we are unable to plan on the receipt of royalties and our
results of operations may be adversely affected in an unanticipated manner by a reduction in the
amount of royalties received.
Our markets are subject to technological change and our success depends on our ability to develop
and introduce new products.
The markets for our products are characterized by:
| changing technologies; | ||
| changing customer needs; | ||
| frequent new product introductions and enhancements; | ||
| increased integration with other functions; and | ||
| product obsolescence. |
To develop new products for our target markets, we must develop, gain access to and use
leading technologies in a cost-effective and timely manner and continue to expand our technical and
design expertise. Failure to do so could cause us to lose our competitive position and seriously
impact our future revenues.
Products or technologies developed by others may render our products or technologies obsolete
or noncompetitive. A fundamental shift in technologies in our product markets would have a material
adverse effect on our competitive position within the industry.
Our revenues are dependent upon our products being designed into our customers products.
Many of our products are incorporated into customers products or systems at the design stage.
The value of any design win largely depends upon the customers decision to manufacture the
designed product in production quantities, the commercial success of the customers product and the
extent to which the design of the customers electronic system also accommodates incorporation of
components manufactured by our competitors. In addition, our customers could subsequently redesign
their products or systems so that they no longer require our products. The development of the next
generation of products by our customers generally results in new design competitions for
semiconductors, which may not result in design wins for us, potentially leading to reduced revenues
and profitability. We may not achieve design wins or our design wins may not result in future
revenues.
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We could be harmed by intellectual property litigation.
As a general matter, the semiconductor industry is characterized by substantial litigation
regarding patent and other intellectual property rights. We have been sued for purported patent
infringement and have been accused of infringing the intellectual property rights of third parties.
We also have certain indemnification obligations to customers and suppliers with respect to the
infringement of third party intellectual property rights by our products. We could incur
substantial costs defending ourselves and our customers and suppliers from any such claim.
Infringement claims or claims for indemnification, whether or not proven to be true, may divert the
efforts and attention of our management and technical personnel from our core business operations
and could otherwise harm our business. For example, in June 2000, we were sued for patent
infringement by International Rectifier Corporation. The case was ultimately resolved in our favor,
but not until October 2008. In the interim, the U.S. District Court entered multimillion dollar
judgments against us on two different occasions, each of which was subsequently vacated.
In the event of an adverse outcome in any intellectual property litigation, we could be
required to pay substantial damages, cease the development, manufacturing, use and sale of
infringing products, discontinue the use of certain processes or obtain a license from the third
party claiming infringement with royalty payment obligations upon us. An adverse outcome in an
infringement action could materially and adversely affect our financial condition, results of
operations and cash flows.
We may not be able to protect our intellectual property rights adequately.
Our ability to compete is affected by our ability to protect our intellectual property rights.
We rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality
procedures and non-disclosure and licensing arrangements to protect our intellectual property
rights. Despite these efforts, we cannot be certain that the steps we take to protect our
proprietary information will be adequate to prevent misappropriation of our technology, or that our
competitors will not independently develop technology that is substantially similar or superior to
our technology. More specifically, we cannot assure that our pending patent applications or any
future applications will be approved, or that any issued patents will provide us with competitive
advantages or will not be challenged by third parties. Nor can we assure that, if challenged, our
patents will be found to be valid or enforceable, or that the patents of others will not have an
adverse effect on our ability to do business. We may also become subject to or initiate
interference proceedings in the U.S. Patent and Trademark Office, which can demand significant
financial and management resources and could harm our financial results. Also, others may
independently develop similar products or processes, duplicate our products or processes or design
their products around any patents that may be issued to us.
Because our products typically have lengthy sales cycles, we may experience substantial delays
between incurring expenses related to research and development and the generation of revenues.
The time from initiation of design to volume production of new semiconductors often takes 18
months or longer. We first work with customers to achieve a design win, which may take nine months
or longer. Our customers then complete the design, testing and evaluation process and begin to ramp
up production, a period that may last an additional nine months or longer. As a result, a
significant period of time may elapse between our research and development efforts and our
realization of revenues, if any, from volume purchasing of our products by our customers.
The markets in which we participate are intensely competitive.
Many of our target markets are intensely competitive. Our ability to compete successfully in
our target markets depends on the following factors:
| proper new product definition; | ||
| product quality, reliability and performance; | ||
| product features; | ||
| price; | ||
| timely delivery of products; | ||
| technical support and service; | ||
| design and introduction of new products; | ||
| market acceptance of our products and those of our customers; and | ||
| breadth of product line. |
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In addition, our competitors or customers may offer new products based on new technologies,
industry standards or end-user or customer requirements, including products that have the potential
to replace our products or provide lower cost or higher performance alternatives to our products.
The introduction of new products by our competitors or customers could render our existing and
future products obsolete or unmarketable.
Our primary power semiconductor competitors include Fairchild Semiconductor, Fuji, Hitachi,
Infineon, International Rectifier, Microsemi, Mitsubishi, On Semiconductor, Powerex, Renesas
Technology, Semikron International, STMicroelectronics, Toshiba and Vishay Intertechnology. Our IC
products compete principally with those of Atmel, Cypress Semiconductor, Freescale Semiconductor,
Matsushita, Microchip, NEC, Silicon Labs and Supertex. Our RF power semiconductor competitors
include RF Micro Devices. Many of our competitors have greater financial, technical, marketing and
management resources than we have. Some of these competitors may be able to sell their products at
prices below which it would be profitable for us to sell our products or benefit from established
customer relationships that provide them with a competitive advantage. We cannot assure that we
will be able to compete successfully in the future against existing or new competitors or that our
operating results will not be adversely affected by increased price competition.
We rely on our distributors and sales representatives to sell many of our products.
Most of our products are sold to distributors or through sales representatives. Our
distributors and sales representatives could reduce or discontinue sales of our products. They may
not devote the resources necessary to sell our products in the volumes and within the time frames
that we expect. In addition, we depend upon the continued viability and financial resources of
these distributors and sales representatives, some of which are small organizations with limited
working capital. These distributors and sales representatives, in turn, depend substantially on
general economic conditions and conditions within the semiconductor industry. We believe that our
success will continue to depend upon these distributors and sales representatives. If any
significant distributor or sales representative experiences financial difficulties, or otherwise
becomes unable or unwilling to promote and sell our products, our business could be harmed. For
example, All American Semiconductor, Inc., one of our former distributors, filed for bankruptcy in
April 2007.
Our future success depends on the continued service of management and key engineering personnel
and our ability to identify, hire and retain additional personnel.
Our success depends upon our ability to attract and retain highly skilled technical,
managerial, marketing and finance personnel, and, to a significant extent, upon the efforts and
abilities of Nathan Zommer, Ph.D., our Chief Executive Officer, and other members of senior
management. The loss of the services of one or more of our senior management or other key employees
could adversely affect our business. We do not maintain key person life insurance on any of our
officers, employees or consultants. There is intense competition for qualified employees in the
semiconductor industry, particularly for highly skilled design, applications and test engineers. We
may not be able to continue to attract and retain engineers or other qualified personnel necessary
for the development of our business or to replace engineers or other qualified individuals who
could leave us at any time in the future. If we grow, we expect increased demands on our resources,
and growth would likely require the addition of new management and engineering staff as well as the
development of additional expertise by existing management employees. If we lose the services of or
fail to recruit key engineers or other technical and management personnel, our business could be
harmed.
Acquisitions and expansion place a significant strain on our resources, including our information
systems and our employee base.
Presently, because of our acquisitions, we are operating a number of different information
systems that are not integrated. In part because of this, we use spreadsheets, which are prepared
by individuals rather than automated systems, in our accounting. In our accounting, we perform many
manual reconciliations and other manual steps, which result in a high risk of errors. Manual steps
also increase the possibility of control deficiencies and material weaknesses.
We are also transferring some accounting functions to our recently acquired Philippine
subsidiary from other locations. These transfers involve changing accounting systems and
implementing different software from that previously used.
If we do not adequately manage and evolve our financial reporting and managerial systems and
processes, our ability to manage or grow our business may be harmed. Our ability to successfully
implement our goals and comply with regulations, including those adopted under the Sarbanes-Oxley
Act of 2002, requires an effective planning and management system and process. We will need to
continue to improve existing, and implement new, operational and financial systems, procedures and
controls to manage our business effectively in the future.
In improving or consolidating our operational and financial systems, procedures and controls,
we would expect to periodically implement new or different software and other systems that will
affect our internal operations regionally or globally. The conversion process from one system to
another is complex and could require, among other things, that data from the existing system be
made compatible with the upgraded or different system.
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In connection with any of the foregoing, we could experience errors, delays and other
inefficiencies, which could adversely affect our business. Any error, delay, disruption, transition
or conversion, including with respect to any new or different systems, procedures or controls,
could harm our ability to forecast sales demand, manage our supply chain, achieve accuracy in the
conversion of electronic data and record and report financial and management information on a
timely and accurate basis. In addition, as we add or change functionality, problems could arise
that we have not foreseen. Such problems could adversely impact our ability to do the following in
a timely manner: provide quotes; take customer orders; ship products; provide services and support
to our customers; bill and track our customers; fulfill contractual obligations; and otherwise run
our business. Failure to properly or adequately address these issues could result in the diversion
of managements attention and resources, adversely affect our ability to manage our business and
our results of operations, cash flows and stock price could be negatively affected.
Any future growth would also require us to successfully hire, train, motivate and manage new
employees. In addition, continued growth and the evolution of our business plan may require
significant additional management, technical and administrative resources. We may not be able to
effectively manage the growth or the evolution of our current business.
We depend on a limited number of suppliers for our substrates, most of whom we do not have long
term agreements with.
We purchase the bulk of our silicon substrates from a limited number of vendors, most of whom
we do not have long term supply agreements with. Any of these suppliers could reduce or terminate
our supply of silicon substrates at any time. Our reliance on a limited number of suppliers
involves several risks, including potential inability to obtain an adequate supply of silicon
substrates and reduced control over the price, timely delivery, reliability and quality of the
silicon substrates. We cannot assure that problems will not occur in the future with suppliers.
Costs related to product defects and errata may harm our results of operations and business.
Costs associated with unexpected product defects and errata (deviations from published
specifications) due to, for example, unanticipated problems in our manufacturing processes, include
the costs of:
| writing off the value of inventory of defective products; | ||
| disposing of defective products that cannot be fixed; | ||
| recalling defective products that have been shipped to customers; | ||
| providing product replacements for, or modifications to, defective products; and/or | ||
| defending against litigation related to defective products. |
These costs could be substantial and may, therefore, increase our expenses and lower our gross
margin. In addition, our reputation with our customers or users of our products could be damaged as
a result of such product defects and errata, and the demand for our products could be reduced.
These factors could harm our financial results and the prospects for our business.
We face the risk of financial exposure to product liability claims alleging that the use of
products that incorporate our semiconductors resulted in adverse effects.
Approximately 8.7% of our net revenues for the nine months ended December 31, 2010 were
derived from sales of products used in medical devices, such as defibrillators. Product liability
risks may exist even for those medical devices that have received regulatory approval for
commercial sale. We cannot be sure that the insurance that we maintain against product liability
will be adequate to cover our losses. Any defects in our semiconductors used in these devices, or
in any other product, could result in significant product liability costs to us.
If our goodwill or long-lived assets become impaired, we may be required to record a significant
charge to earnings.
Under generally accepted accounting principles, we review our long-lived assets for impairment
when events or changes in circumstances indicate the carrying value may not be recoverable.
Goodwill is required to be tested for impairment at least annually. Factors that may be considered
a change in circumstances indicating that the carrying value of our goodwill or long-lived assets
may not be recoverable include a decline in stock price and market capitalization, future cash
flows and slower growth rates in our industry. In fiscal 2009, we recorded an impairment charge for
the entire goodwill balance of $6.4 million, based on our estimates of the future operating results
and discounted cash flows of the reporting units with goodwill.
We estimate tax liabilities, the final determination of which is subject to review by domestic and
international taxation authorities.
We are subject to income taxes and other taxes in both the United States and the foreign
jurisdictions in which we currently operate or have historically operated. We are also subject to
review and audit by both domestic and foreign taxation authorities. The
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determination of our worldwide provision for income taxes and current and deferred tax assets
and liabilities requires significant judgment and estimation. The provision for income taxes can be
adversely affected by a variety of factors, including but not limited to changes in tax laws,
regulations and accounting principles, including accounting for uncertain tax positions, or
interpretation of those changes. Significant judgment is required to determine the recognition and
measurement attributes prescribed in the authoritative guidance issued by FASB in connection with
accounting for income taxes. Although we believe our tax estimates are reasonable, the ultimate tax
outcome may materially differ from the tax amounts recorded in our consolidated financial
statements and may materially affect our income tax provision, net income, goodwill or cash flows
in the period or periods for which such determination is made.
Our results of operations could vary as a result of the methods, estimates, and judgments that we
use in applying our accounting policies.
The methods, estimates, and judgments that we use in applying our accounting policies have a
significant impact on our results of operations (see Critical Accounting Policies and Significant
Management Estimates in Part I, Item 2 of this Form 10-Q). Such methods, estimates, and judgments
are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may
arise over time that lead us to change our methods, estimates, and judgments. Changes in those
methods, estimates, and judgments could significantly affect our results of operations.
We are exposed to various risks related to the regulatory environment.
We are subject to various risks related to: (1) new, different, inconsistent or even
conflicting laws, rules and regulations that may be enacted by legislative bodies and/or regulatory
agencies in the countries in which we operate; (2) disagreements or disputes between national or
regional regulatory agencies; and (3) the interpretation and application of laws, rules and
regulations. If we are found by a court or regulatory agency not to be in compliance with
applicable laws, rules or regulations, our business, financial condition and results of operations
could be materially and adversely affected.
In addition, approximately 8.7% of our net revenues for the nine months ended December 31,
2010 were derived from the sale of products included in medical devices that are subject to
extensive regulation by numerous governmental authorities in the United States and internationally,
including the U.S. Food and Drug Administration, or FDA. The FDA and certain foreign regulatory
authorities impose numerous requirements for medical device manufacturers to meet, including
adherence to Good Manufacturing Practices, or GMP, regulations and similar regulations in other
countries, which include testing, control and documentation requirements. Ongoing compliance with
GMP and other applicable regulatory requirements is monitored through periodic inspections by
federal and state agencies, including the FDA, and by comparable agencies in other countries. Our
failure to comply with applicable regulatory requirements could prevent our products from being
included in approved medical devices.
Our business could also be harmed by delays in receiving or the failure to receive required
approvals or clearances, the loss of previously obtained approvals or clearances or the failure to
comply with existing or future regulatory requirements.
We invest in companies for strategic reasons and may not realize a return on our investments.
We make investments in companies to further our strategic objectives and support our key
business initiatives. Such investments include investments in equity securities of public companies
and investments in non-marketable equity securities of private companies, which range from
early-stage companies that are often still defining their strategic direction to more mature
companies whose products or technologies may directly support a product or initiative. The success
of these companies is dependent on product development, market acceptance, operational efficiency,
and other key business success factors. The private companies in which we invest may fail for
operational reasons or because they may not be able to secure additional funding, obtain favorable
investment terms for future financings or take advantage of liquidity events such as initial public
offerings, mergers, and private sales. If any of these private companies fail, we could lose all or
part of our investment in that company. If we determine that an other-than-temporary decline in the
fair value exists for the equity securities of the public and private companies in which we invest,
we write down the investment to its fair value and recognize the related write-down as an
investment loss. Furthermore, when the strategic objectives of an investment have been achieved, or
if the investment or business diverges from our strategic objectives, we may decide to dispose of
the investment even at a loss. Our investments in non-marketable equity securities of private
companies are not liquid, and we may not be able to dispose of these investments on favorable terms
or at all. The occurrence of any of these events could negatively affect our results of operations.
Our ability to access capital markets could be limited.
From time to time, we may need to access the capital markets to obtain long term financing.
Although we believe that we can continue to access the capital markets on acceptable terms and
conditions, our flexibility with regard to long term financing activity could be limited by our
existing capital structure, our credit ratings and the health of the semiconductor industry. In
addition, many of the factors that affect our ability to access the capital markets, such as the
liquidity of the overall capital markets and the current state of the economy, are outside of our
control. There can be no assurance that we will continue to have access to the capital markets on
favorable terms.
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Geopolitical instability, war, terrorist attacks and terrorist threats, and government responses
thereto, may negatively affect all aspects of our operations, revenues, costs and stock price.
Any such event may disrupt our operations or those of our customers or suppliers. Our markets
currently include South Korea, Taiwan and Israel, which are currently experiencing political
instability. Additionally, we have accounting operations in the Philippines, our principal external
foundry is located in South Korea and assembly subcontractors are located in Indonesia, the
Philippines and South Korea.
Business interruptions may damage our facilities or those of our suppliers.
Our operations and those of our suppliers are vulnerable to interruption by fire, earthquake
and other natural disasters, as well as power loss, telecommunications failure and other events
beyond our control. We do not have a detailed disaster recovery plan and do not have backup
generators. Our facilities in California are located near major earthquake faults and have
experienced earthquakes in the past. If any of these events occur, our ability to conduct our
operations could be seriously impaired, which could harm our business, financial condition and
results of operations and cash flows. We cannot be sure that the insurance we maintain against
general business interruptions will be adequate to cover all our losses.
We may be affected by environmental laws and regulations.
We are subject to a variety of laws, rules and regulations in the United States, England and
Germany related to the use, storage, handling, discharge and disposal of certain chemicals and
gases used in our manufacturing process. Any of those regulations could require us to acquire
expensive equipment or to incur substantial other expenses to comply with them. If we incur
substantial additional expenses, product costs could significantly increase. Failure to comply with
present or future environmental laws, rules and regulations could result in fines, suspension of
production or cessation of operations.
Nathan Zommer, Ph.D. owns a significant interest in our common stock.
Nathan Zommer, Ph.D., our Chief Executive Officer, beneficially owned, as of January 31, 2011,
approximately 21.5% of the outstanding shares of our common stock. As a result, Dr. Zommer can
exercise significant control over all matters requiring stockholder approval, including the
election of the board of directors. His holdings could result in a delay of, or serve as a
deterrent to, any change in control of our company, which may reduce the market price of our common
stock.
Our stock price is volatile.
The market price of our common stock has fluctuated significantly to date. The future market
price of our common stock may also fluctuate significantly in the event of:
| variations in our actual or expected quarterly operating results; | ||
| announcements or introductions of new products; | ||
| technological innovations by our competitors or development setbacks by us; | ||
| conditions in the communications and semiconductor markets; | ||
| the commencement or adverse outcome of litigation; | ||
| changes in analysts estimates of our performance or changes in analysts forecasts regarding our industry, competitors or customers; | ||
| announcements of merger or acquisition transactions or a failure to achieve the expected benefits of an acquisition as rapidly or to the extent anticipated by financial analysts; | ||
| terrorist attack or war; | ||
| sales of our common stock by one or more members of management, including Nathan Zommer, Ph.D., our Chief Executive Officer; or | ||
| general economic and market conditions. |
In addition, the stock market in recent years has experienced extreme price and volume
fluctuations that have affected the market prices of many high technology companies, including
semiconductor companies. These fluctuations have often been unrelated or disproportionate to the
operating performance of companies in our industry, and could harm the market price of our common
stock.
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The anti-takeover provisions of our certificate of incorporation and of the Delaware General
Corporation Law may delay, defer or prevent a change of control.
Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by our stockholders. The rights of the
holders of common stock will be subject to, and may be harmed by, the rights of the holders of any
shares of preferred stock that may be issued in the future. The issuance of preferred stock may
delay, defer or prevent a change in control because the terms of any issued preferred stock could
potentially prohibit our consummation of any merger, reorganization, sale of substantially all of
our assets, liquidation or other extraordinary corporate transaction, without the approval of the
holders of the outstanding shares of preferred stock. In addition, the issuance of preferred stock
could have a dilutive effect on our stockholders.
Our stockholders must give substantial advance notice prior to the relevant meeting to
nominate a candidate for director or present a proposal to our stockholders at a meeting. These
notice requirements could inhibit a takeover by delaying stockholder action. The Delaware
anti-takeover law restricts business combinations with some stockholders once the stockholder
acquires 15% or more of our common stock. The Delaware statute makes it more difficult for us to be
acquired without the consent of our board of directors and management.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
(d) Maximum Number | ||||||||||||||||
(or Approximate | ||||||||||||||||
(c) Total Number of | Dollar Value) of | |||||||||||||||
Shares Purchased as | Shares that May Yet | |||||||||||||||
Part of Publicly | Be Purchased Under | |||||||||||||||
(a) Total Number of | (b) Average Price | Announced Plans or | the Plans or | |||||||||||||
Period | Shares Purchased | Paid per Share | Programs | Programs | ||||||||||||
October 1, 2010 October 31, 2010 |
| (1 | ) | | 1,905,600 | |||||||||||
November 1, 2010 November 31, 2010 |
32,000 | $ | 10.59 | 32,000 | | (2) | ||||||||||
December 1, 2010 December 31, 2010 |
| (1 | ) | | | |||||||||||
Total |
32,000 | $ | 10.59 | 32,000 | ||||||||||||
(1) | Not applicable. | |
(2) | A stock purchase program to purchase up to 2,000,000 shares of common stock was approved on November 14, 2008. On August 26, 2010, an additional 932,100 shares of common stock were added to the program. The program expired on November 13, 2010. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
See the Index to Exhibits, which is incorporated by reference herein.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
IXYS CORPORATION |
||||
By: | /s/ Uzi Sasson | |||
Date: February 4, 2011 | Uzi Sasson, President and Chief Financial Officer | |||
(Principal Financial Officer) | ||||
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EXHIBIT INDEX
Exhibit | ||
No. | Description | |
10.1
|
Second Amendment to the Credit Agreement by and between Bank of the West and IXYS Corporation dated as of December 29, 2010. | |
31.1
|
Certificate of Chief Executive Officer required under Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certificate of Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification required under Section 906 of the Sarbanes-Oxley Act of 2002. (1) |
(1) | This exhibit is furnished and shall not be deemed filed for purposes of Section 18 of the Securities and Exchange Act of 1933, as amended (the Exchange Act), or incorporated by reference in any filing under the Securities and Exchange Act of 1993, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. |
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