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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 3, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-21970
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ACTEL CORPORATION
(Exact name of Registrant as specified in its charter)
California 77-0097724
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2061 Stierlin Court
Mountain View, California 94043-4655
(Address of principal executive offices) (Zip Code)
(650) 318-4200
(Registrant's 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 X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
Number of shares of Common Stock outstanding as of May 10, 2005: 25,174,062
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
ACTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
Three Months Ended
--------------------------------------
Apr. 3, Apr. 4, Jan. 2,
2005 2004 2005
---------- ---------- ----------
Net revenues............................................................ $ 43,984 $ 42,153 $ 40,256
Costs and expenses:
Cost of revenues..................................................... 17,916 16,497 20,864
Research and development............................................. 11,617 10,663 11,160
Selling, general, and
administrative.................................................... 13,078 11,811 12,969
Amortization of acquisition-related
intangibles....................................................... 558 663 663
---------- ---------- ----------
Total costs and expenses....................................... 43,169 39,634 45,656
---------- ---------- ----------
Income (loss) from operations........................................... 815 2,519 (5,400)
Interest income and other, net.......................................... 780 656 782
Income (loss) before tax (benefit) provision............................ 1,595 3,175 (4,618)
---------- ---------- ----------
Tax provision (benefit)................................................. 158 635 (1,451)
---------- ---------- ----------
Net income (loss)....................................................... $ 1,437 $ 2,540 $ (3,167)
========== ========== ==========
Net income (loss) per share:
Basic................................................................ $ 0.06 $ 0.10 $ (0.12)
========== ========== ==========
Diluted.............................................................. $ 0.06 $ 0.09 $ (0.12)
========== ========== ==========
Shares used in computing net income per share:
Basic................................................................ 25,111 25,620 25,368
========== ========== ==========
Diluted.............................................................. 25,652 27,324 25,368
========== ========== ==========
See Notes to Unaudited Condensed Consolidated Financial Statements
ACTEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Apr. 3, Jan. 2,
2005 (1) 2005 (2)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 7,449 $ 6,405
Short-term investments.............................................................. 138,877 148,297
Accounts receivable, net............................................................ 22,060 17,686
Inventories, net.................................................................... 44,844 41,218
Deferred income taxes............................................................... 22,124 22,230
Prepaid expenses and other current assets........................................... 5,235 4,831
------------ ------------
Total current assets................................................................... 240,589 240,667
Property and equipment, net............................................................ 22,575 22,804
Goodwill............................................................................... 32,142 32,142
Other assets, net...................................................................... 18,595 19,677
------------ ------------
$ 313,901 $ 315,290
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 11,120 $ 11,397
Accrued salaries and employee benefits.............................................. 4,797 6,776
Other accrued liabilities........................................................... 3,668 4,364
Deferred income on shipments to distributors........................................ 29,244 23,658
------------ ------------
Total current liabilities.............................................................. 48,829 46,195
Deferred compensation plan liability................................................... 3,238 3,258
Deferred rent liability................................................................ 1,097 1,044
------------ ------------
Total liabilities...................................................................... 53,164 50,497
------------ ------------
Commitments and contingencies..........................................................
Shareholders' equity:
Common stock....................................................................... 25 25
Additional paid-in capital.......................................................... 188,605 188,631
Retained earnings .................................................................. 72,920 76,577
Accumulated other comprehensive (loss) ............................................. (813) (440)
------------ ------------
Total shareholders' equity............................................................. 260,737 264,793
------------ ------------
$ 313,901 $ 315,290
============ ============
- ----------------------------------------
(1) Unaudited.
(2) Derived from the consolidated audited financial statements included in our
report on Form 10-K for the fiscal year ended January 2, 2005 (2004 Form
10-K).
See Notes to Unaudited Condensed Consolidated Financial Statements
ACTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Three Months Ended
--------------------------
Apr. 3, Apr. 4,
2005 2004
------------ ------------
Operating activities:
Net income......................................................................... $ 1,437 $ 2,540
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 2,741 2,508
Stock compensation cost recognized.............................................. -- 33
Changes in operating assets and liabilities:
Accounts receivable.......................................................... (4,374) (3,338)
Inventories.................................................................. (3,626) 1,493
Deferred income taxes........................................................ 219 92
Prepaid expenses and other current assets.................................... (404) (1,046)
Accounts payable, accrued salaries and employee benefits, and other accrued
liabilities.............................................................. (2,899) (4,871)
Deferred income on shipments to distributors................................. 5,586 4,092
------------ ------------
Net cash (used in) provided by operating activities................................ (1,320) 1,503
Investing activities:
Purchases of property and equipment................................................ (1,954) (2,879)
Purchases of available-for-sale securities......................................... (13,389) (44,052)
Sales and maturities of available for sale securities.............................. 22,188 45,245
Changes in other long term assets.................................................. 639 181
------------ ------------
Net cash provided by (used in) investing activities................................ 7,484 (1,505)
Financing activities:
Repurchase of Common Stock......................................................... (9,796) --
Issuance of Common Stock under employee stock plans................................ 4,676 3,944
------------ ------------
Net cash (used in) provided by financing activities................................ (5,120) 3,944
------------ ------------
Net increase in cash and cash equivalents.............................................. 1,044 3,942
Cash and cash equivalents, beginning of period......................................... 6,405 13,648
------------ ------------
Cash and cash equivalents, end of period............................................... $ 7,449 $ 17,590
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for taxes, net............................................. $ 74 $ 65
See Notes to Unaudited Condensed Consolidated Financial Statements
ACTEL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of
Actel Corporation have been prepared in accordance with generally accepted
accounting principles in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included.
Actel Corporation and its consolidated subsidiaries are referred to as
"we," "us," or "our." Management's Discussion and Analysis of Financial
Condition and Results of Operations is based upon our unaudited condensed
consolidated financial statements.
These unaudited condensed consolidated financial statements include our
accounts and the accounts of our wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
These unaudited condensed consolidated financial statements should be read in
conjunction with the audited financial statements included in our 2004 Form
10-K. The results of operations for the three months ended April 3, 2005, are
not necessarily indicative of results that may be expected for the entire fiscal
year, which ends January 1, 2006.
Income Taxes
Our tax provision is based on an estimated annual tax rate in compliance
with SFAS No. 109 "Accounting for Income Taxes." Significant components
affecting the tax rate include R&D credits, income from tax-exempt securities,
the composite state tax rate and recognition of certain deferred tax assets
subject to valuation allowances.
Impact of Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
"Share-Based Payment" (SFAS No. 123(R)), which replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123(R)
requires all share-based payments to employees including grants of employee
stock options, to be recognized in the financial statements based on their fair
value. The pro forma disclosures previously permitted under SFAS No. 123 no
longer will be an alternative to financial statement recognition. On April 14,
2005, the SEC issued a press release announcing that it would require
registrants that are not small business issuers to adopt SFAS No. 123(R)'s fair
value method of accounting for share-based payments to employees no later than
the beginning of the first fiscal year beginning after July 15, 2005. Actel is
required to adopt SFAS No. 123(R) in the first quarter of fiscal 2006. We are
evaluating the requirements of SFAS No. 123(R) and expect the adoption of SFAS
No. 123(R) will have a material effect on Actel's consolidated results of
operations and earnings per share. We have not yet determined the method of
adoption or whether the adoption will result in amounts that are similar to the
current pro forma disclosures under SFAS No. 123.
2. Stock Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123." SFAS No. 148 provided alternative methods of transition for companies
making a voluntary change to fair value-based accounting for stock-based
employee compensation. We continue to account for our stock option plans under
the intrinsic value recognition and measurement principles of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related FASB Interpretations (FINs). Effective for interim
periods beginning after December 15, 2002, SFAS No. 148 also requires disclosure
of pro-forma results on a quarterly basis as if the company had applied the fair
value recognition provisions of SFAS No. 123.
As the exercise price of all options granted under our stock option plans
was equal to the market price of the underlying Common Stock on the grant date,
no stock-based employee compensation cost is recognized in net income. The
following table illustrates the effect on net income and earnings per share if
we had applied the fair value recognition provisions of SFAS No. 123, as
amended, to options granted under our stock option plans and Employee Stock
Purchase Plan. For purposes of pro forma disclosures, the estimated fair value
of our stock-based awards to employees is amortized to expense using the graded
method for options and during the purchase periods for employee stock purchase
rights. Our pro forma information is as follows:
Three Months Ended
--------------------------------------
Apr. 3, Apr. 4, Jan. 2,
2005 2004 2005
---------- ---------- ----------
(unaudited, in thousands except per
share amounts)
Net income applicable to common shareholders, as reported............... $ 1,437 $ 2,540 $ (3,167)
Add back:
Stock-based employee compensation included in reported net income (loss) 0 33 74
Less:
Total stock-based employee compensation expense determined under the fair
value method for all awards, net of tax.............................. (3,468) (2,547) (3,804)
---------- ---------- ----------
Pro forma net income (loss) applicable to common shareholders........... $ (2,031) $ 26 $ (6,897)
========== ========== ==========
Earnings (loss) per share as reported:
Basic................................................................... $ 0.06 $ 0.10 $ (0.12)
========== ========== ==========
Diluted................................................................. $ 0.06 $ 0.09 $ (0.12)
========== ========== ==========
Pro forma earnings (loss) per share:
Basic................................................................... $ (0.08) $ 0.00 $ (0.27)
========== ========== ==========
Diluted................................................................. $ (0.08) $ 0.00 $ (0.27)
========== ========== ==========
SFAS No. 123 requires the use of option pricing models that were not
developed for use in valuing employee stock options. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of
short-lived exchange traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including the option's expected life and the
price volatility of the underlying stock. Because our employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in our opinion the existing models do not necessarily
provide a reliable single measure of the fair value of employee stock options.
ACTEL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Goodwill and Other Acquisition-Related Intangibles
We account for goodwill and other intangible assets under SFAS No. 142,
"Goodwill and Other Intangible Assets." Under this standard, goodwill is tested
for impairment annually or more frequently if certain events or changes in
circumstances indicate that the carrying value may not be recoverable. We
completed our annual goodwill impairments tests as of January 2, 2005, and noted
no impairment. Our next annual impairment test will be performed in the fourth
quarter of 2005. No indicators of impairment were present during the three
months ended April 3, 2005.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," we recognize impairment losses on long-lived assets when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the net book value of those
assets. The impairment loss, if any, is measured by comparing the fair value of
the asset to its carrying value. Fair value is based on discounted cash flows
using present value techniques identified in SFAS No. 144. No indicators of
impairment were present during the three months ended April 3, 2005.
We made no acquisitions of intangible assets during the first quarter of
2005. Identified intangible assets as of April 3, 2005, consisted of the
following:
Gross Accumulated
Assets Amortization Net
---------- ---------- ----------
(unaudited, in thousands)
Acquisition-related developed technology................................ $ 11,454 $ (10,301) $ 1,153
Other acquisition-related intangibles................................... 2,600 (2,425) 175
Acquired patents........................................................ 516 (479) 37
---------- ---------- ----------
Total identified intangible assets............................. $ 14,570 $ (13,205) $ 1,365
========== ========== ==========
Identified intangible assets as of January 2, 2005, consisted of the following:
Gross Accumulated
Assets Amortization Net
---------- ---------- ----------
(unaudited, in thousands)
Acquisition-related developed technology................................ $ 11,454 $ (9,833) $ 1,621
Other acquisition-related intangibles................................... 2,600 (2,343) 257
Acquired patents........................................................ 516 (471) 45
---------- ---------- ----------
Total identified intangible assets............................. $ 14,570 (12,647) $ 1,923
========== ========== ==========
ACTEL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All of our identified intangible assets are subject to amortization.
Amortization of identified intangibles included the following:
Three Months Ended
--------------------------------------
Apr. 3, Apr. 4, Jan. 2,
2005 2004 2005
---------- ---------- ----------
(unaudited, in thousands)
Acquisition-related developed technology................................ $ 468 $ 573 $ 573
Other acquisition-related intangibles................................... 83 83 83
Acquired patents........................................................ 7 7 7
---------- ---------- ----------
Total amortization expense..................................... $ 558 $ 663 $ 663
========== ========== ==========
Based on the carrying value of identified intangible assets recorded at April 3,
2005, and assuming no subsequent impairment of the underlying assets or
acquisition of other identified intangible assets, the annual amortization
expense is expected to be $1.9 million for 2005, $.02 million for 2006, and none
thereafter.
4. Inventories
Inventories consist of the following:
Apr. 3, Jan. 2,
2005 2005
------------ ------------
(unaudited, in thousands)
Inventories, net:
Purchased parts and raw materials................................................... $ 9,837 $ 8,636
Work-in-process..................................................................... 27,026 27,358
Finished goods...................................................................... 7,981 5,224
------------ ------------
$ 44,844 $ 41,218
============ ============
Inventory is stated at the lower of cost (first-in, first-out) or market
(net realizable value). We believe that a certain level of inventory must be
carried to maintain an adequate supply of product for customers. This inventory
level may vary based upon orders received from customers or internal forecasts
of demand for these products. Other considerations in determining inventory
levels include the stage of products in the product life cycle, design win
activity, manufacturing lead times, customer demands, strategic relationships
with foundries, "last time buy" inventory purchases, and competitive situations
in the marketplace. Should any of these factors develop other than anticipated,
inventory levels may be materially and adversely affected.
ACTEL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated realizable value based upon assumptions about future demand and market
conditions. To address this difficult, subjective, and complex area of judgment,
we apply a methodology that includes assumptions and estimates to arrive at the
net realizable value. First, we identify any inventory that was written down in
prior periods. This inventory remains written down until sold, destroyed, or
otherwise dispositioned. Second, we examine inventory line items that may have
some form of non-conformance with electrical and mechanical standards. Third, we
assess the inventory not otherwise identified to be written down against product
history and forecasted demand (typically for the next six months). Finally, we
analyze the result of this methodology in light of the product life cycle,
design win activity, and competitive situation in the marketplace to derive an
outlook for consumption of the inventory and the appropriateness of the
resulting inventory levels. If actual future demand or market conditions are
less favorable than those we have projected, additional inventory write downs
may be required.
"Last time buy" inventory purchases are excluded from our standard excess
and obsolescence write down policy and are instead subject to a discrete write
down policy. Last time buys occur when a wafer supplier is about to shut down
the manufacturing line used to make a product and current inventories are
insufficient to meet foreseeable future demand. We made last time buys of
certain products from our wafer suppliers during 2003 and the first quarter of
2005. Since this inventory was not acquired to meet current demand, we do not
believe the application of our standard inventory write down policy would be
appropriate. Inventory purchased in last time buy transactions is evaluated on
an ongoing basis for indications of excess or obsolescence based on rates of
actual sell through; expected future demand for those products over a longer
time horizon; and any other qualitative factors that may indicate the existence
of excess or obsolete inventory. In the event that actual sell through does not
meet expectations or estimations of expected future demand decrease, inventory
write downs of last time buy inventory may be required. Evaluations of last time
buy inventory during the first three months of 2005 did not result in any write
downs of this material. Inventory at the end of the first quarter of 2005
included $6.4 million of material purchased in last time buys.
ACTEL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
--------------------------------------
Apr. 3, Apr. 4, Jan. 2,
2005 2004 2005
---------- ---------- ----------
(unaudited, in thousands except per
share amounts)
Basic:
Weighted-average common shares outstanding........................... 25,111 25,620 25,368
========== ========== ==========
Net income (loss).................................................... $ 1,437 $ 2,540 $ (3,167)
========== ========== ==========
Net income (loss) per share.......................................... $ 0.06 $ 0.10 $ (0.12)
========== ========== ==========
Diluted:
Weighted-average common shares outstanding........................... 25,111 25,620 25,368
========== ========== ==========
Net effect of dilutive employee stock options - based on the treasury
stock method....................................................... 541 1,704 0
---------- ---------- ----------
Shares used in computing net income per share........................ 25,652 27,324 25,368
========== ========== ==========
Net income (loss).................................................... $ 1,437 $ 2,540 $ (3,167)
========== ========== ==========
Net income (loss) per share.......................................... $ 0.06 $ 0.09 $ (0.12)
========== ========== ==========
For the three months ended April 3, 2005, and April 4, 2004, options outstanding
under our stock option plans to purchase approximately 6,184,000 and 1,814,000
shares, respectively, of our Common Stock were excluded from the treasury stock
method used to determine the net effect of dilutive employee stock options
because their inclusion would have had an anti-dilutive effect on net income per
share.
6. Comprehensive Income (Loss)
The components of comprehensive income (loss), net of tax, are as follows:
Three Months Ended
--------------------------------------
Apr. 3, Apr. 4, Jan. 2,
2005 2004 2005
---------- ---------- ----------
(unaudited, in thousands)
Net income (loss)....................................................... $ 1,437 $ 2,540 $ (3,167)
Change in (loss) gain on available-for-sale securities, net of tax amounts
of ($254), $39, and ($182), respectively............................. (381) 59 (273)
Less reclassification adjustment for gains (losses) included in net
income, net of tax amounts of $6, ($9), and $9, respectively......... 8 (14) 14
---------- ---------- ----------
Other comprehensive (loss) income, net of tax amounts of ($248), $30, and
($173), respectively................................................. (373) 45 (259)
---------- ---------- ----------
Total comprehensive income (loss)....................................... $ 1,064 2,585 (3,426)
========== ========== ==========
Accumulated other comprehensive income is presented on the accompanying
condensed consolidated balance sheets and consists of the accumulated net
unrealized gain (loss) on available-for-sale securities.
ACTEL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Legal Matters and Loss Contingencies
From time to time we are notified of claims, including claims that we may
be infringing patents owned by others, or otherwise become aware of conditions,
situations, or circumstances involving uncertainty as to the existence of a
liability or the amount of a loss. When probable and reasonably estimable, we
make provisions for estimated liabilities. As we sometimes have in the past, we
may settle disputes and/or obtain licenses under patents that we are alleged to
infringe. We can offer no assurance that any pending or threatened claim or
other loss contingency will be resolved or that the resolution of any such claim
or contingency will not have a materially adverse effect on our business,
financial condition, or results of operations. In addition, our evaluation of
the impact of these claims and contingencies could change based upon new
information. Subject to the foregoing, we do not believe that the resolution of
any pending or threatened legal claim or loss contingency is likely to have a
materially adverse effect on our business, financial condition, or results of
operations.
8. Shareholder's Equity
Our Board of Directors authorized a stock repurchase program, whereby
shares of our Common Stock may be purchased from time to time in the open market
at the discretion of management. In the three months ended April 3, 2005 we
repurchased 627,500 shares for $9.8 million. During the year ended December 31,
2004, we repurchased 661,697 shares for $9.6 million. As of April 3, 2005, we
have remaining authorization to repurchase up to 1,610,803 shares.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
In this Quarterly Report on Form 10-Q, Actel Corporation and its
consolidated subsidiaries are referred to as "we," "us," "our," or "Actel." You
should read the information in this Quarterly Report with the Risk Factors at
the end of Part I. Unless otherwise indicated, the information in this Quarterly
Report is given as of May 13, 2005 and we undertake no obligation to update any
of the information, including forward-looking statements. All forward-looking
statements are made under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Statements containing words such as
"anticipates," "believes," "estimates," "expects," intends," "plans," "seeks,"
and variations of such words and similar expressions are intended to identify
the forward-looking statements. Our actual results may differ materially from
those projected in the forward-looking statements for many reasons, including
those set forth in the Risk Factors.
Overview
The purpose of this overview is to provide context for the discussion and
analysis of our financial statements that follows by briefly summarizing the
most important known trends and uncertainties, as well as the key performance
indicators, on which our executives were focused during the first quarter of
2005.
We design, develop, and market field programmable gate arrays (FPGAs) and
supporting products and services. FPGAs are integrated circuits that adapt the
processing and memory capabilities of electronic systems to specific
applications. FPGAs are used by designers of communications, computer, consumer,
industrial, military and aerospace, and other electronic systems to
differentiate their products and get them to market faster. We are the leading
supplier of FPGAs based on Flash and antifuse technologies.
Technology and Markets
Our Flash and antifuse technologies are non-volatile, so they retain their
circuit configuration even in the absence of power. In contrast to the SRAM
technology used by our larger competitors, our FPGAs don't need a separate boot
device, are "live" at power-up, generally require less power, and offer
practically unbreakable design security. We believe that our long-term future
lies with Flash technology, which permits us to make FPGAs that are both
non-volatile and reprogrammable. We also believe that the best fit for our Flash
technology is the low end of the FPGA market, which we anticipate will grow the
most. During the first quarter of 2005, we announced the ProASIC3 and ProASIC3E
families, our third generation of Flash-based programmable logic solutions,
which are targeted specifically at the value-based FGPA market.
We were the first company to sell Flash-based FPGAs. However, Altera
Corporation and Lattice Corporation announced the development of programmable
logic devices (PLDs) manufactured on embedded Flash processes during 2004 and
January of 2005, respectively. While these announcements confirm the advantages
of Flash technology, we don't believe that the announced products will generally
compete directly with us in our target market. We believe that the Altera
product will compete primarily in the lower-price complex PLD (CPLD) market, and
that the Lattice product will compete primarily in higher-density FPGA markets.
In addition, the Altera and Lattice PLDs still employ SRAM-based architectures,
with the embedded Flash memory blocks controlling only the initial configuration
of the devices during power-up, so they cannot offer the full advantages of
Flash technology already provided by our FPGAs.
Although we don't foresee much direct competition in our target market with
the embedded Flash products announced by Altera and Lattice, all of our larger
competitors (which include Xilinx Corporation as well as Altera and Lattice)
announced products during 2004 and 2005 aimed directly at the low end of the
FPGA market. The increased attention being paid by our competitors to the
"value-based" FPGA market, which we had expected, again confirms the validity of
the assumptions underlying our strategy. But more important than a strategy with
accurate assumptions is a strategy that succeeds. We have in the past been a
late entrant to markets in which we were technologically disadvantaged. With
respect to the value-based market and Flash PLDs, we believe that we are an
early entrant with technical advantages.
Key Indicators
We measure the condition and performance of our business in numerous ways,
but the key quantitative indicators that we generally use to manage the business
are bookings, design wins, margins, yields, and backlog. We also carefully
monitor the progress of our product development efforts. Of these, we think that
bookings and backlog are the best indicators of short-term performance and that
designs wins and product development progress are the best indicators of
long-term performance.
Our bookings (measured as end-customer orders placed on us and our
distributors) were lower during the first quarter of 2005 than during the fourth
quarter of 2004. Our backlog was also lower at the end of the first quarter of
2005 than it was at the end of the fourth quarter of 2004, but still higher than
at the end of any other quarter since the first quarter of 2001. Our margins
were higher in the first quarter of 2005 than the preceding quarter, primarily
due to charges of $3.2 million taken in the fourth quarter of 2004 for expenses
associated with the testing of the RTSX-S space quality FPGAs and the write down
of RTSX-S inventory from the original manufacturer. Our design wins were
somewhat higher in the first quarter of 2005 than the preceding quarter, and
about triple the level they were in the first quarter of 2001. We believe that
design wins for ProASIC Plus, our second generation Flash family, may have
reached a plateau, and anticipate that future momentum in design wins will come
from our new ProASIC3/E families. Our product development progress was generally
positive during the first quarter of 2005, particularly on a new class of
product that we anticipate introducing during the second half of 2005.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations is based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States (GAAP) for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues, and expenses and
the related disclosure of contingent assets and liabilities. The U.S. Securities
and Exchange Commission (SEC) has defined the most critical accounting policies
as those that are most important to the portrayal of our financial condition and
results and also require us to make the most difficult and subjective judgments,
often as a result of the need to make estimates of matters that are inherently
uncertain. Based upon this definition, our most critical policies include
inventories, goodwill, income taxes, legal matters and loss contingencies, and
revenue recognition. These policies, as well as the estimates and judgments
involved, are discussed below. No significant changes to critical accounting
policies or to the related estimates and judgments involved in applying these
policies were made during the three months ended April 3, 2005. We also have
other key accounting policies that either do not generally require us to make
estimates and judgments that are as difficult or as subjective or they are less
likely to have a material impact on our reported results of operations for a
given period. We base our estimates on historical experience and on various
other assumptions that we believe 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 apparent from other sources.
Actual results may differ materially from these estimates. In addition, if these
estimates or their related assumptions change in the future, it could result in
material changes in the income statement.
Inventories
We believe that a certain level of inventory must be carried to maintain an
adequate supply of product for customers. This inventory level may vary based
upon orders received from customers or internal forecasts of demand for these
products. Other considerations in determining inventory levels include the stage
of products in the product life cycle, design win activity, manufacturing lead
times, customer demands, strategic relationships with foundries, and competitive
situations in the marketplace. Should any of these factors develop other than
anticipated, inventory levels may be materially and adversely affected.
We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated realizable value based upon assumptions about future demand and market
conditions. To address this difficult, subjective, and complex area of judgment,
we apply a methodology that includes assumptions and estimates to arrive at the
net realizable value. First, we identify any inventory that was written down in
prior periods. This inventory remains written down until sold, destroyed or
otherwise dispositioned. Second, we examine inventory line items that may have
some form of non-conformance with electrical and mechanical standards. Third, we
assess the inventory not otherwise identified to be written down against product
history and forecasted demand (typically for the next six months). Finally, we
analyze the result of this methodology in light of the product life cycle,
design win activity, and competitive situation in the marketplace to derive an
outlook for consumption of the inventory and the appropriateness of the
resulting inventory levels. If actual future demand or market conditions are
less favorable than those we have projected, additional inventory write-downs
may be required.
"Last time buy" inventory purchases are excluded from our standard excess
and obsolescence write down policy and are instead subject to a discrete write
down policy. Last time buys occur when a wafer supplier is about to shut down
the manufacturing line used to make a product and current inventories are
insufficient to meet foreseeable future demand. We made last time buys of
certain products from our wafer suppliers during 2003 and the first quarter of
2005. Since this inventory was not acquired to meet current demand, we do not
believe the application of our standard inventory write down policy would be
appropriate. Inventory purchased in last time buy transactions is evaluated on
an ongoing basis for indications of excess or obsolescence based on rates of
actual sell through; expected future demand for those products over a longer
time horizon; and any other qualitative factors that may indicate the existence
of excess or obsolete inventory. In the event that actual sell through does not
meet expectations or estimations of expected future demand decrease, inventory
write downs of last time buy inventory may be required. Evaluations of last time
buy inventory during the first three months of 2005 did not result in any write
downs of this material. Inventory at the end of the first quarter of 2005
included $6.4 million of material purchased in last time buys.
Goodwill
In past years we made business acquisitions that resulted in the recording
of a significant amount of goodwill. At the beginning of 2002, we adopted SFAS
No. 142, "Goodwill and Other Intangible Assets," which addresses the financial
accounting and reporting standards for goodwill and other intangible assets
subsequent to their acquisition. In accordance with SFAS No. 142, we ceased to
amortize goodwill and instead test for impairment annually or more frequently if
certain events or changes in circumstances indicate that the carrying value may
not be recoverable. We completed our annual goodwill impairment tests during the
fourth quarter of 2004 and noted no impairment. The initial test of goodwill
impairment requires us to compare our fair value with our book value, including
goodwill. We are a single reporting unit as defined by SFAS 142 and use the
entity wide approach to compare fair value to book value. Based on our total
market capitalization, which we believe represents the best indicator of our
fair value, we determined that our fair value was in excess of our book value.
Since we found no indication of impairment, we did not proceed with the next
step of the annual impairment analysis. Our next annual impairment test will be
performed at the end of the fourth quarter of 2005. No indicators of impairment
were present during the three months ended April 3, 2005.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes," which requires that deferred tax assets and liabilities be
recognized using enacted tax rates for the effect of temporary differences
between the book basis and the tax basis of recorded assets and liabilities.
SFAS No. 109 also requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some or all of the deferred tax
assets will not be realized. We evaluate annually the realizability of our
deferred tax assets by assessing our valuation allowance and, if necessary, we
adjust the amount of such allowance. The factors used to assess the likelihood
of realization include our forecast of future taxable income and available tax
planning strategies that could be implemented to realize the net deferred tax
assets. We assessed our deferred tax assets at the end of 2004 and determined
that it was more likely than not that we would be able to realize approximately
$34.4 million of net deferred tax assets based upon our forecast of future
taxable income and other relevant factors.
Legal Matters and Loss Contingencies
From time to time we are notified of claims, including claims that we may
be infringing patents owned by others, or otherwise become aware of conditions,
situations, or circumstances involving uncertainty as to the existence of
liability or the amount of the loss. When probable and reasonably estimable, we
make provision for estimated liabilities. As we sometimes have in the past, we
may settle disputes and/or obtain licenses under patents that we are alleged to
infringe. We can offer no assurance that any pending or threatened claim or
other loss contingency will be resolved or that the resolution of any such claim
or contingency will not have a materially adverse effect on our business,
financial condition, or results of operations. In addition, our evaluation of
the impact of these claims and contingencies could change based upon new
information. Subject to the foregoing, we do not believe that the resolution of
any pending or threatened legal claim or loss contingency is likely to have a
materially adverse effect on our business, financial condition, or results of
operations.
Revenues
We sell our products to OEMs and to distributors who resell our products to
OEMs or their contract manufacturers. We recognize revenue on products sold to
OEMs upon shipment. Because sales to distributors are generally made under
agreements allowing for price adjustments, credits and right of return under
certain circumstances, we generally defer recognition of revenue on products
sold to distributors until the products are resold. Deferred revenue and the
corresponding deferred cost of sales are recorded in the caption deferred income
on shipments to distributors in the liability section of the consolidated
balance sheet. Revenue recognition depends on notification from the distributor
that product has been resold. This reported information includes product resale
price, quantity, and end customer information as well as inventory balances on
hand. Our revenue reporting is dependent on us receiving timely and accurate
data from our distributors. In determining the appropriate amount of revenue to
recognize, we use this data from our distributors and apply judgment in
reconciling differences between their reported inventory and sell through
activities.
Results of Operations
Net Revenues
Net revenues were $44.0 million for the first quarter of 2005, a 9%
increase from the fourth quarter of 2004 and a 4% increase from the first
quarter of 2004. Quarterly net revenues increased sequentially due to a 19%
increase in the average selling price (ASP) of FPGAs offset by an 8% decrease in
unit shipments. Quarterly net revenues increased from a year ago due to a 4%
increase in ASPs and a 1% increase in unit shipments compared with the first
quarter of 2004. Unit volumes and ASP levels fluctuate principally because of
changes in the mix of products sold. Our product portfolio includes products
ranging from devices with lower ASPs, which typically sell in higher volumes, to
devices with higher ASPs, which typically sell in lower volumes.
Gross Margin
Gross margin was 59.3% of net revenues for the first quarter of 2005
compared with 48.2% for the fourth quarter of 2004 and 60.9% for the first
quarter of 2004. Gross margin in the fourth quarter of 2004 was lower primarily
due to charges of $3.2 million for expenses associated with the testing of the
RTSX-S space quality FPGAs and the write down of RTSX-S inventory from the
original manufacturer. The decrease in gross margin between the first quarter of
2005 and the first quarter of 2004 was attributed to proportionately greater
sales of new products which tend to have lower gross margins than mature
products.
We strive to reduce costs by improving wafer yields, negotiating price
reductions with suppliers, increasing the level and efficiency of our testing
and packaging operations, achieving economies of scale by means of higher
production levels, and increasing the number of die produced per wafer,
principally by shrinking the die size of our products. No assurance can be given
that these efforts will be successful. Our capability to shrink the die size of
our FPGAs is dependent on the availability of more advanced manufacturing
processes. Due to the custom steps involved in manufacturing antifuse and (to a
lesser extent) Flash FPGAs, we typically obtain access to new manufacturing
processes later than our competitors using standard manufacturing processes.
Research and Development (R&D)
R&D expenditures were $11.6 million, or 26% of net revenues, for the first
quarter of 2005 compared with $11.2 million, or 28% of net revenues, for the
fourth quarter of 2004 and $10.7 million, or 25% of revenues, for the first
quarter of 2004. R&D expenditures were higher in the first quarter of 2005 and
the fourth quarter of 2004 than in the first quarter of 2004 due primarily to
expanded R&D efforts and increased headcount and the institution during the
second quarter of 2004 of the first Company-wide salary increase since 2000.
Selling, General, and Administrative (SG&A)
SG&A expenses were $13.1 million, or 30% of net revenues, for the first
quarter of 2005 compared with $13.0 million, or 32% of net revenues, for the
fourth quarter of 2004 and $11.8 million, or 28% of net revenues, for the first
quarter of 2004. The increases in SG&A expense in the fourth quarter of 2004 and
the first quarter of 2005 over the first quarter of 2004 were largely due to the
first Company-wide salary increases since the year 2000, which were paid
beginning in the second quarter of 2004, and higher selling expenses associated
with higher net revenues.
Amortization of Acquisition-Related Intangibles
Amortization of acquisition-related intangibles was $0.6 million for the
first quarter of 2005 compared with $0.7 million for the first and fourth
quarters of 2004. The decrease in amortization expense in the first quarter of
2005 was attributable to a non-goodwill intangible, related to an acquisition
completed in the year 2000, becoming fully amortized in December 2004.
Tax Provision (Benefit)
Our tax provision is based on the estimated annual tax rate in compliance
with SFAS No. 109, "Accounting for Income Taxes." Significant components
affecting the tax rate include R&D credits, income from tax-exempt securities,
the state composite rate, and recognition of certain deferred tax assets subject
to valuation allowances. The tax provision for the first quarter of 2005 was a
provision of $0.2 compared with a benefit of $1.5 million for the fourth quarter
of 2004 and a provision of $0.6 million for the first quarter of 2004. The tax
provision for the first quarter of 2005 was based on an annual tax rate of 10%,
which was calculated on the basis of our expected level of profitability and
included items such as income from tax-exempt securities, the composite state
tax rate, and the benefit of a full year of R&D tax credit. The tax benefit
booked in the fourth quarter of 2004 was largely the result of an extension of
the R&D tax credit being signed into law in the fourth quarter. This allowed us
to reflect in our rate calculation a full year of R&D credit, which more than
offset the tax expense associated with the profit before tax for the same
period.
Financial Condition, Liquidity, and Capital Resources
Our cash, cash equivalents, and short-term investments were $146.3 million
at the end of the first quarter of 2005 compared with $154.7 million at the
beginning of the year.
Our net accounts receivable was $22.0 million at the end of the first
quarter of 2005 compared with $17.7 million at the end of 2004. This $4.4
million increase was due primarily to the linearity of sales in the fourth
quarter of 2004, which allowed us to collect a higher percentage of the
quarter's receivables prior to year end, compared with the first quarter of
2005. Net accounts receivable represented 43 days of sales outstanding at the
end of the first quarter of 2005 compared with 37 days of sales outstanding at
the end of 2004.
Our net inventories were $44.8 million at the end of the first quarter of
2005 compared with $41.2 million at the end of 2004. The $3.7 million growth in
inventory was primarily the result of a $3.0 million "last time buy" of
inventory for one of our mature product families during the first quarter of
2005. Inventory at the end of the first quarter of 2005 included $6.4 million of
inventory purchased in last time buys. Inventory days of supply increased from
180 days at the end of 2004 to 228 days at the end of the first quarter of 2005
due primarily to $3.2 million of write-downs of excess and obsolete inventory
and test equipment, which significantly increased cost of sales recorded in the
fourth quarter of 2004.
Cash used by operating activities was $1.3 million for the first three
months of 2005. Lower net income of $1.4 million in the first quarter of 2005
contributed to cash used in operating activities coupled with an increase in
accounts receivable balances and a significant growth in inventory. Net cash
provided in investing activities was $7.5 million during the first three months
of 2005 and included net sales and maturities of available for sale securities
of $8.8 million, offset by $2.0 million for purchases of property, and
equipment. Net cash used in financing activities was $5.1 million for the first
three months of fiscal 2005 and consisted of $9.8 million for the repurchase of
Common Stock offset by $4.7 million of proceeds from the issuance of Common
Stock under employee stock plans.
We currently meet all of our funding needs for ongoing operations with
internally generated cash flows from operations and with existing cash and
short-term investment balances. We believe that existing cash, cash equivalents,
and short-term investments, together with cash generated from operations, will
be sufficient to meet our cash requirements for the next four quarters. A
portion of available cash may be used for investment in or acquisition of
complementary businesses, products, or technologies. Wafer manufacturers have at
times demanded financial support from customers in the form of equity
investments and advance purchase price deposits, which in some cases have been
substantial. If we require additional capacity, we may be required to incur
significant expenditures to secure such capacity.
Impact of Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair value. The pro forma disclosures previously permitted under SFAS No.
123 no longer will be an alternative to financial statement recognition. On
April 14, 2005, the SEC issued a press release announcing that it would require
registrants that are not small business issuers to adopt SFAS No. 123(R)'s fair
value method of accounting for share-based payments to employees no later than
the beginning of the first fiscal year beginning after July 15, 2005. Actel is
required to adopt SFAS No. 123(R) in the first quarter of fiscal 2006. We are
evaluating the requirements of SFAS No. 123(R) and expect the adoption of SFAS
No. 123(R) will have a material effect on Actel's consolidated results of
operations and earnings per share. We have not yet determined the method of
adoption or whether the adoption will result in amounts that are similar to the
current pro forma disclosures under SFAS No. 123.
Risk Factors
Our shareholders and prospective investors should carefully consider, along
with the other information in this Quarterly Report on Form 10-Q, the following:
o Our future revenues and operating results are likely to fluctuate and may
fail to meet expectations, which could cause our stock price to decline.
Our quarterly revenues and operating results are subject to fluctuations
resulting from general economic conditions and a variety of risks specific to us
or characteristic of the semiconductor industry, including booking and shipment
uncertainties, supply problems, and price erosion. These and other factors make
it difficult for us to accurately project quarterly revenues and operating
results, which may fail to meet our expectations. Any failure to meet
expectations could cause our stock price to decline significantly.
o A variety of booking and shipping uncertainties may cause us to fall
short of our quarterly revenue expectations.
When we fall short of our quarterly revenue expectations, our
operating results will most likely also be adversely affected because the
majority of our expenses are fixed and therefore do not vary with revenues.
o We derive a large percentage of our quarterly revenues from
bookings received during the quarter, making quarterly revenues
difficult to predict.
Our backlog (which generally may be cancelled or deferred by
customers on short notice without significant penalty) at the
beginning of a quarter typically accounts for about half of our
revenues during the quarter. This means that we generate about half of
our quarterly revenues from orders received during the quarter and
"turned" for shipment within the quarter, and that any shortfall in
"turns" orders will have an immediate and adverse impact on quarterly
revenues. In addition, we sometimes book a disproportionately large
percentage of turns orders during the final weeks of the quarter.
There are many factors that can cause a shortfall in turns orders,
including declines in general economic conditions or the businesses of
our customers, excess inventory in the channel, or conversion of our
products to hard-wired ASICs or other competing products for price or
other reasons. Any failure or delay in receiving expected turns orders
would have an immediate and adverse impact on quarterly revenues.
o We derive a significant percentage of our quarterly revenues from
shipments made in the final weeks of the quarter, making
quarterly revenues difficult to predict.
We often ship a disproportionately large percentage of our
quarterly revenues in the final weeks of the quarter, which makes it
difficult to accurately project quarterly revenues. Any failure to
effect scheduled shipments by the end of a quarter would have an
immediate and adverse impact on quarterly revenues.
o Our military and aerospace shipments tend to be large and are
subject to complex scheduling uncertainties, making quarterly
revenues difficult to predict.
Orders from the military and aerospace customers tend to be large
and irregular, which contributes to fluctuations in our net revenues
and gross margins. These sales are also subject to more extensive
governmental regulations, including greater import and export
restrictions. Historically, it has been difficult to predict if and
when export licenses will be granted, if required. In addition,
products for military and aerospace applications require processing
and testing that is more lengthy and stringent than for commercial
applications, which increases the complexity of scheduling and
forecasting as well as the risk of failure. It is often impossible to
determine before the end of processing and testing whether products
intended for military or aerospace applications will fail and, if they
do fail, it is generally not possible for replacements to be processed
and tested in time for shipment during the same quarter. Any failure
to effect scheduled shipments by the end of a quarter would have an
immediate and adverse impact on quarterly revenues.
o We derive a majority of our quarterly revenues from products
resold by our distributors, making quarterly revenues difficult
to predict.
We typically generate a majority of our quarterly revenues from
sales made through distributors. Since we generally do not recognize
revenue on the sale of a product to a distributor until the
distributor resells the product, our quarterly revenues are dependent
on, and subject to fluctuations in, shipments by our distributors. We
are also highly dependent on the timeliness and accuracy of resale
reports from our distributors. Late or inaccurate resale reports,
particularly in the last month of the quarter, contribute to our
difficulty in predicting and reporting our quarterly revenues and
results of operations.
o An unanticipated shortage of products available for sale may cause us
to fall short of expected quarterly revenues and operating results.
In a typical semiconductor manufacturing process, silicon wafers
produced by a foundry are sorted and cut into individual die, which are
then assembled into individual packages and tested. The manufacture,
assembly, and testing of semiconductor products is highly complex and
subject to a wide variety of risks, including defects in masks, impurities
in the materials used, contaminants in the environment, and performance
failures by personnel and equipment. Semiconductor products intended for
military and aerospace applications and new products, such as our
Flash-based ProASIC 3/E and antifuse-based Axcelerator FPGA families, are
often more complex and/or more difficult to produce, increasing the risk of
manufacturing-related defects. In addition, we may not discover defects or
other errors in new products until after we have commenced volume
production. Our failure to effect scheduled shipments by the end of a
quarter due to unexpected supply constraints would have an immediate and
adverse impact on quarterly revenues.
o Unanticipated increases, or the failure to achieve anticipated
reductions, in the cost of our products may cause us to fall short of
expected quarterly operating results.
As is also common in the semiconductor industry, our independent wafer
suppliers from time to time experience lower than anticipated yields of
usable die. Wafer yields can decline without warning and may take
substantial time to analyze and correct, particularly for a company like us
that utilizes independent facilities, almost all of which are offshore.
Yield problems are most common on new processes or at new foundries,
particularly when new technologies are involved. Our FPGAs are also
manufactured using customized processing steps, which may increase the
incidence of production yield problems as well as the amount of time needed
to achieve satisfactory, sustainable wafer yields on new processes and new
products. Lower than expected yields of usable die could reduce our gross
margin, which would adversely affect our quarterly operating results. In
addition, in order to win designs, we generally must price new products on
the assumption that manufacturing cost reductions will be achieved, which
often do not occur as soon as expected. The failure to achieve expected
manufacturing or other cost reductions during a quarter could reduce our
gross margin, which would adversely affect our quarterly operating results.
o Unanticipated reductions in the average selling prices of our products
may cause us to fall short of expected quarterly revenues and
operating results.
The semiconductor industry is characterized by intense price
competition. The average selling price of a product typically declines
significantly between introduction and maturity. We sometimes are required
by competitive pressures to reduce the prices of our new products more
quickly than cost reductions can be achieved. We also sometimes approve
price reductions on specific sales for strategic or other reasons. Declines
in the average selling prices of our products will reduce quarterly
revenues unless offset by greater unit sales or a shift in the mix of
products sold toward higher-priced products. Declines in the average
selling prices of our products will also reduce quarterly gross margin
unless offset by reductions in manufacturing costs or by a shift in the mix
of products sold toward higher-margin products.
o In preparing our financial statements, we make good faith estimates and
judgments that may change or turn out to be erroneous.
In preparing our financial statements in conformity with accounting
principles generally accepted in the United States, we must make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues, and
expenses and the related disclosure of contingent assets and liabilities. The
most difficult estimates and subjective judgments that we make concern income
taxes, goodwill, inventories, legal matters and loss contingencies, and
revenues. We base our estimates on historical experience and on various other
assumptions that we believe 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 apparent from other sources.
Actual results may differ materially from these estimates. In addition, if these
estimates or their related assumptions change in the future, our operating
results for the periods in which we revise our estimates or assumptions could be
adversely and perhaps materially affected.
o Our gross margin may decline as we increasingly compete with hard-wired
ASICs and serve the value-based market.
The price we can charge for our products is constrained principally by our
competition. While it has always been intense, we believe that price competition
for new designs is increasing. This may be due in part to the transition toward
high-level design methodologies. Designers can now wait until later in the
design process before selecting a PLD or hard-wired ASIC and it is easier to
convert between competing PLDs or between PLDs and hard-wired ASICs. The
increased price competition may also be due in part to the increasing
penetration of PLDs into price-sensitive markets previously dominated by
hard-wired ASICs. We have strategically targeted many of our products at the
value-based market which is defined primarily by low prices. If our strategy is
successful, low-price products will constitute increasingly greater percentages
of our net revenues, which may make it more difficult to maintain our gross
margin at our historic levels. Any long-term decline in our gross margin may
have an adverse effect on our operating results.
o We may not win sufficient designs, or the designs we win may not generate
sufficient revenues, for us to maintain or expand our business.
In order for us to sell an FPGA to a customer, the customer must
incorporate our FPGA into the customer's product in the design phase. We devote
substantial resources, which we may not recover through product sales, to
persuade potential customers to incorporate our FPGAs into new or updated
products and to support their design efforts (including, among other things,
providing design and development software). These efforts usually precede by
many months (and often a year or more) the generation of FPGA sales, if any. In
addition, the value of any design win depends in large part upon the ultimate
success of our customer's product in its market. Our failure to win sufficient
designs, or the failure of the designs we win to generate sufficient revenues,
could have a materially adverse effect on our business, financial condition, or
results of operations.
o Our products are complex and may contain errors or defects that could lead
to product liability, an increase in our costs, and/or a reduction in our
revenues.
Our products are complex and may contain errors, manufacturing defects,
design defects, or otherwise fail to comply with our specifications,
particularly when first introduced or as new versions are released. Our new
products are being designed in ever more complex processes, which add cost,
complexity, and elements of experimentation to the development, particularly in
the areas of mixed-voltage and mixed-signal design. We rely primarily on our
in-house personnel to design test operations and procedures to detect any errors
prior to delivery of our products to customers.
During 2003, several U.S. government contractors reported a small
percentage of functional failures in our RTSX-S and SX-A antifuse devices
manufactured on a 0.25 micron antifuse process at the original manufacturer of
those FPGAs. On February 13, 2004, The Aerospace Corporation (Aerospace)
proposed a series of experiments to test various hypotheses on the root cause of
the failures and to generate reliability data that could be used by space
industry participants in deciding whether or not to launch spacecraft with
RTSX-S FPGAs that were already integrated. On May 19, 2004, we released a new
programming algorithm for our 0.25-micron antifuse devices from the original
manufacturer. On February 16, 2005, Aerospace summarized the results of its
experiments, estimating a failure rate ranging from 2.3% to 2.8% for RTSX-S
devices from the original manufacturer programmed with the original algorithm,
and a failure rate ranging from 1.0% to 1.9% for RTSX-S devices from the
original manufacturer programmed with the new algorithm.
On June 21, 2004, we announced the availability of RTSX-S devices from UMC.
Based on the experiments and analysis being conducted, Aerospace and Actel each
recommended during 2004 that customers switch to UMC devices if their schedules
permitted, and we offered to accept RTSX-S parts from the original manufacturer
in exchange for UMC parts. While the testing of UMC parts is continuing, the
0.25-micron process at UMC used to manufacture our RTSX-S and SX-A devices
appears to create antifuses that are less vulnerable to the failure mechanisms
identified to date. We are in the process of offering certain customers with
high-reliability commercial applications the opportunity to exchange SX-A parts
from the original manufacturer for UMC parts.
Three programs to test UMC parts are in progress: the NASA Office of Logic
Design Based is testing space-grade RTSX-S devices, and Aerospace is separately
testing RTSX-S devices and commercial-grade SX-A devices. We also previously
tested hundreds of RTSX-S and SX-A devices. Based on the results of our testing
and the NASA testing to date, we calculate that RTSX-S and SX-A devices
manufactured at UMC have a failure in time (FIT) rate of substantially less than
50. A FIT is one failure per billion device-hours, so if a group of devices has
a FIT rate of 50, the customer should expect there to be 50 failures per billion
device-hours. However, based on the results of the Aerospace testing of SX-A
devices to date, we calculate a FIT rate of substantially more than 50. While
Aerospace is testing commercial-grade parts and NASA is testing space-grade
parts, we have tested both. Reconciling these differing test results is the
focus of ongoing investigations and analysis. The three test programs have
different objectives and utilize different test vehicles, protocols, and
accelerated stress conditions. With overstress acceleration, one or more
environmental factors that cause the product to fail under normal conditions
(such as temperature, voltage, speed, noise, and design sensitivity) are
increased in order to stimulate the product to fail more quickly. A relatively
new subject in reliability engineering, accelerated life testing is complicated
by the presence of multiple stress conditions and multiple failure mechanisms.
Given the complexity, reconciling the test results may take many months. In
addition, accelerated life testing requires special analysis techniques to
"translate" the times-to-failure data obtained under the overstress conditions
to normal use conditions. Relatively small differences in the underlying data or
models used in the analysis can extrapolate into greatly different conclusions.
The multi-step task of fitting mathematical models to the overstress data is
also likely to be a topic of continuing deliberation. In any event, we
anticipate that the ongoing testing and analysis of the testing results will
continue for at least the rest of this year.
On January 24, 2005, we released a critical software update for our
Flash-based ProASIC and ProASIC PLUS families of devices. We believe that
ProASIC and ProASIC PLUS devices programmed with the updated software should
achieve a minimum performance retention period of 20 years after programming.
Any ProASIC and ProASIC PLUS device that is not programmed (or reprogrammed)
with the updated software could have a shorter performance retention period.
This means that the performance of the device might degrade below specification
and cause a functional failure in less than 20 years. The actual performance
retention period of any particular ProASIC or ProASIC PLUS device programmed
with an older version of the software is design specific. For most designs, the
performance retention period is greater than 20 years. When it is not
practicable to reprogram deployed devices with the updated software, we have
worked with customers on a case-by-case basis to assess the performance
retention periods of the particular ProASIC and ProASIC PLUS devices in their
designs.
o Any error or defect in our products could have a material adverse
effect on our revenues, operating results, and/or reputation.
If problems occur in the operation or performance of our products, we
may experience delays in meeting key introduction dates or scheduled
delivery dates to our customers, in part because our products are
manufactured by third parties. These problems also could cause us to incur
significant re-engineering costs, divert the attention of our engineering
personnel from our product development efforts, and cause significant
customer relations and business reputation problems. Any error or defect
could require product replacement or recall or could obligate us to accept
product returns. Any of the foregoing could have a material adverse effect
on our financial results and business in both the short and long term.
o Any product liability claim could pose a significant risk to our
financial condition.
Product liability claims may be asserted with respect to our products.
Our products are typically sold at prices that are significantly lower than
the cost of the end-products into which they are incorporated. A defect or
failure in our product could cause failure in our customer's end-product,
so we could face claims for damages that are much higher than the revenues
and profits we receive from the products involved. In addition, product
liability risks are particularly significant with respect to aerospace,
automotive, and medical applications because of the risk of serious harm to
users of these products. There can be no assurance that any insurance we
carry would sufficiently protect us from any such claims.
o We may be unsuccessful in defining, developing, or selling competitive new
or improved products at acceptable margins.
The market for our products is characterized by rapid technological change,
product obsolescence, and price erosion, making the timely introduction of new
or improved products critical to our success. Our failure to design, develop,
and sell new or improved products that satisfy customer needs, compete
effectively, and generate acceptable margins may adversely affect our business,
financial condition, and results of operations. While most of our product
development programs have achieved a level of success, some have not. For
example:
o We announced our intention to develop SRAM-based FPGA products in 1996
and abandoned the development in 1999 principally because the product
would no longer have been competitive.
o We introduced our VariCore embeddable reprogrammable gate array (EPGA)
logic core based on SRAM technology in 2001. Revenues from VariCore
EPGAs did not materialize and the development of a more advanced
VariCore EPGA was cancelled. In this case, a market that we believed
would develop did not emerge.
o In 2001, we also launched our BridgeFPGA initiative to address the I/O
problems created within the high-speed communications market by the
proliferation of interface standards. The adoption of these interface
standards created the need for designers to implement bridging
functions to connect incompatible interface standards. We introduced
Axcelerator, a high-speed antifuse FPGA with dedicated high-speed I/O
circuits that can support multiple interface standards, in 2002.
However, the development of subsequent BridgeFPGA products, which were
expected to include embedded high-speed interface protocol
controllers, was postponed in 2002. This was due principally to the
prolonged downturn in the high-speed communications market. The
development was cancelled in 2003 principally because the subsequent
BridgeFPGA products would no longer have been competitive.
Our experience generally suggests that the risk is greater when we attempt to
develop products based in whole or in part on technologies with which we have
limited experience.
o Numerous factors can cause the development or introduction of new
products to fail or be delayed.
To develop and introduce a product, we must successfully accomplish all of
the following:
o anticipate future customer demand and the technology that will be
available to meet the demand;
o define the product and its architecture, including the
technology, silicon, programmer, IP, software, and packaging
specifications;
o obtain access to advanced manufacturing process technologies;
o design and verify the silicon;
o develop and release evaluation software;
o layout the architecture and implement programming;
o tapeout the product (i.e., compile a database containing the
design information about the product for use in the preparation
of masks);
o generate masks for use in manufacturing the product and evaluate
the software;
o manufacture the product at the foundry;
o verify the product; and
o qualify the process, characterize the product, and release
production software.
Each of these steps is difficult and subject to failure or delay. In addition,
the failure or delay of any step can cause the failure or delay of the entire
development and introduction. No assurance can be given that our development and
introduction schedules for new products or the supporting software or hardware
will be met, that new products will gain market acceptance, or that we will
respond effectively to new technological changes or new product announcements by
others. Any failure to successfully define, develop, market, manufacture,
assemble, test, or program competitive new products could have a materially
adverse effect on our business, financial condition, and results of operations.
o New products are subject to greater operational risks.
Our future success is highly dependent upon the timely development and
introduction of competitive new products at acceptable margins. However, there
are greater operational risks associated with new products. The inability of our
wafer suppliers to produce advanced products; delays in commencing or
maintaining volume shipments of new products; the discovery of product, process,
software, or programming defects or failures; and any related product returns
could each have a materially adverse effect on our business, financial
condition, or results of operation.
o New products are subject to greater technology risks.
As is common in the semiconductor industry, we have experienced from time
to time in the past, and expect to experience in the future, difficulties and
delays in achieving satisfactory, sustainable yields on new products. The
fabrication of antifuse and Flash wafers is a complex process that requires a
high degree of technical skill, state-of-the-art equipment, and effective
cooperation between us and the foundry to produce acceptable yields. Minute
impurities, errors in any step of the fabrication process, defects in the masks
used to print circuits on a wafer, and other factors can cause a substantial
percentage of wafers to be rejected or numerous die on each wafer to be
non-functional. Yield problems increase the cost of as well as time it takes us
to bring our new products to market, which can create inventory shortages and
dissatisfied customers. Any prolonged inability to obtain adequate yields or
deliveries of new products could have a materially adverse effect on our
business, financial condition, or results of operations.
o New products generally have lower gross margins.
Our gross margin is the difference between the amount it costs us to make
our products and the revenues we receive from the sale of our products. One of
the most important variables affecting the cost of our products is manufacturing
yields. With our customized antifuse and Flash manufacturing process
requirements, we almost invariably experience difficulties and delays in
achieving satisfactory, sustainable yields on new products. Until satisfactory
yields are achieved, gross margins on new products are generally lower than on
mature products. Depending upon the rate at which sales of new products ramp and
the extent to which they displace mature products, the lower gross margins
typically associated with new products could have a materially adverse effect on
our operating results.
o We face intense competition and have some competitive disadvantages that we
may not be able to overcome.
The semiconductor industry is intensely competitive. Our competitors
include suppliers of hard-wired ASICs, CPLDs, and FPGAs. Our direct competitors
are Xilinx, a supplier of SRAM-based FPGAs; Altera, a supplier of CPLDs and
SRAM-based FPGAs; Lattice, a supplier of CPLDs and SRAM-based FPGAs; and
QuickLogic, a supplier of antifuse-based FPGAs. Altera and Lattice also recently
announced the development of FPGAs manufactured on embedded Flash processes. We
also face competition from companies that specialize in converting our products
into hard-wired ASICs. In addition, we may face competition from suppliers of
logic products based on new or emerging technologies. While we seek to monitor
developments in existing and emerging technologies, our technologies may not
remain competitive.
o Most of our current and potential competitors are larger and have more
resources.
We are much smaller than Xilinx and Altera, and additional competition is
possible from major domestic and international semiconductor suppliers. All such
companies are larger and have broader product lines, more extensive customer
bases, and substantially greater financial and other resources than us,
including the capability to manufacture their own wafers. We may not be able to
overcome these competitive disadvantages.
o Our antifuse technology is not reprogrammable, which is a competitive
disadvantage in most cases.
All existing FPGAs not based on antifuse technology and certain CPLDs are
reprogrammable. The one-time programmability of our antifuse FPGAs is necessary
or desirable in some applications, but logic designers generally prefer to
prototype with a reprogrammable logic device. This is because the designer can
reuse the device if an error is made. The visibility associated with discarding
a one-time programmable device often causes designers to select a reprogrammable
device even when an alternative one-time programmable device offers significant
advantages. This bias in favor of designing with reprogrammable logic devices
appears to increase as the size of the design increases. Although we now offer
reprogrammable Flash devices, we may not be able to overcome this competitive
disadvantage.
o Our Flash and antifuse technologies are not manufactured on standard
processes, which is a competitive disadvantage.
Our antifuse-based FPGAs and (to a lesser extent) Flash-based ProASIC FPGAs
are manufactured using customized steps that are added to otherwise standard
manufacturing processes of independent wafer suppliers. There is considerably
less operating history for the customized process steps than for the foundries'
standard manufacturing processes. Our dependence on customized processing steps
means that, in contrast with competitors using standard manufacturing processes,
we generally have more difficulty establishing relationships with independent
wafer manufacturers; take longer to qualify a new wafer manufacturer; take
longer to achieve satisfactory, sustainable wafer yields on new processes; may
experience a higher incidence of production yield problems; must pay more for
wafers; and will not obtain early access to the most advanced processes. For
example, we expect that our next generation Flash product families will be
manufactured on a 90-nanometer process and have found it challenging to identify
and procure fabrication process arrangements for our technology development
activities. Any of these factors could be a material disadvantage against
competitors using standard manufacturing processes. As a result of these
factors, our products typically have been fabricated using processes at least
one generation behind the processes used by competing products. As a
consequence, we generally have not fully realized the benefits of our
technologies. Although we are attempting to accelerate the rate at which our
products are reduced to finer process geometries and obtain earlier access to
advanced processes, we may not be able to overcome these competitive
disadvantages.
o Our business and operations may be disrupted by events that are beyond our
control or the control of our business partners.
Our performance is subject to events or conditions beyond our control, and
the performance of each of our foundries, suppliers, subcontractors,
distributors, agents, and customers is subject to events or conditions beyond
their control. These events or conditions include labor disputes, acts of public
enemies or terrorists, war or other military conflicts, blockades,
insurrections, riots, epidemics, quarantine restrictions, landslides, lightning,
earthquakes, fires, storms, floods, washouts, arrests, civil disturbances,
restraints by or actions of governmental bodies acting in a sovereign capacity
(including export or security restrictions on information, material, personnel,
equipment, or otherwise), breakdowns of plant or machinery, and inability to
obtain transport or supplies. This type of disruption could impair our ability
to ship products in a timely manner, which may have a materially adverse effect
on our business, financial condition, and results of operations.
Our corporate offices are located in California, which was subject to power
outages and shortages during 2001 and 2002. More extensive power shortages in
the state could disrupt our operations and interrupt our research and
development activities. Our foundry partners in Japan and Taiwan as well as our
operations in California are located in areas that have been seismically active
in the recent past. In addition, many of the countries outside of the United
States in which our foundry partners and assembly and other subcontractors are
located have unpredictable and potentially volatile economic, social, or
political conditions, including the risks of conflict between Taiwan and the
People's Republic of China or between North Korea and South Korea. These
countries may also be more susceptible to epidemics. For example, an outbreak of
Severe Acute Respiratory Syndrome (SARS) occurred in Hong Kong, Singapore, and
China in 2003. The occurrence of these or similar events or circumstances could
disrupt our operations and may have a materially adverse effect on our business,
financial condition, and results of operations.
o We have only limited insurance coverage.
Our insurance policies provide coverage for only certain types of losses
and may not be adequate to fully offset even covered losses.
o Our business depends on numerous independent third parties whose interests
may diverge from our interests.
We rely heavily on, but generally have little control over, our independent
foundries, suppliers, subcontractors, and distributors.
o Our independent wafer manufacturers may be unable or unwilling to
satisfy our needs in a timely manner, which could harm our business.
We do not manufacture any of the semiconductor wafers used in the
production of our FPGAs. Our wafers are currently manufactured by Chartered
in Singapore, Infineon in Germany, Matsushita in Japan, UMC in Taiwan, and
Winbond in Taiwan. Our reliance on independent wafer manufacturers to
fabricate our wafers involves significant risks, including lack of control
over capacity allocation, delivery schedules, the resolution of technical
difficulties limiting production or reducing yields, and the development of
new processes. Although we have supply agreements with some of our wafer
manufacturers, a shortage of raw materials or production capacity could
lead any of our wafer suppliers to allocate available capacity to other
customers, or to internal uses in the case of Infineon, which could impair
our ability to meet our product delivery obligations and may have a
materially adverse effect on our business, financial condition, and results
of operations.
o Our limited volume and customized process requirements generally
make us less attractive to independent wafer manufacturers.
The semiconductor industry has from time to time experienced
shortages of manufacturing capacity. When production capacity is
tight, the relatively small amount of wafers that we purchase from any
foundry and the customized process steps that are necessary for our
technologies put us at a disadvantage to foundry customers who
purchase more wafers manufactured on standard processes. To secure an
adequate supply of wafers, we may consider various transactions,
including the use of substantial nonrefundable deposits, contractual
purchase commitments, equity investments, or the formation of joint
ventures. Any of these transactions could have a materially adverse
effect on our business, financial condition, and results of
operations.
o Identifying and qualifying new independent wafer manufacturers is
difficult and might be unsuccessful.
If our current independent wafer manufacturers were unable or
unwilling to manufacture our products as required, we would have to
identify and qualify additional foundries. No additional wafer
foundries may be able or available to satisfy our requirements on a
timely basis. Even if we are able to identify a new third party
manufacturer, the costs associated with manufacturing our products may
increase. In any event, the qualification process typically takes one
year or longer, which could cause product shipment delays, and
qualification may not be successful.
o Our independent assembly subcontractors may be unable or unwilling to
meet our requirements, which could delay product shipments and result
in the loss of customers or revenues.
We rely primarily on foreign subcontractors for the assembly and
packaging of our products and, to a lesser extent, for testing of our
finished products. Our reliance on independent subcontractors involves
certain risks, including lack of control over capacity allocation and
delivery schedules. We generally rely on one or two subcontractors to
provide particular services and have from time to time experienced
difficulties with the timeliness and quality of product deliveries. We have
no long-term contracts with our subcontractors and certain of those
subcontractors sometimes operate at or near full capacity. Any significant
disruption in supplies from, or degradation in the quality of components or
services supplied by, our subcontractors could have a materially adverse
effect on our business, financial condition, and results of operations.
o Our independent software and hardware developers and suppliers may be
unable or unwilling to satisfy our needs in a timely manner, which
could impair the introduction of new products or the support of
existing products.
We are dependent on independent software and hardware developers for
the development, supply, maintenance, and support of some of our IP cores,
design and development software, programming hardware, design diagnostics
and debugging tool kits, and demonstration boards (or certain elements of
those products). Our reliance on independent software and hardware
developers involves certain risks, including lack of control over delivery
schedules and customer support. Any failure of or significant delay by our
independent developers to complete software and/or hardware under
development in a timely manner could disrupt the release of our software
and/or the introduction of our new FPGAs, which might be detrimental to the
capability of our new products to win designs. Any failure of or
significant delay by our independent suppliers to provide updates or
customer support could disrupt our ability to ship products or provide
customer support services, which might result in the loss of revenues or
customers. Any of these disruptions could have a materially adverse effect
on our business, financial condition, or results of operations.
o Our future performance will depend in part on the effectiveness of our
independent distributors in marketing, selling, and supporting our
products.
In 2004, sales made through distributors accounted for 67% of our net
revenues. Our distributors offer products of several different companies,
so they may reduce their efforts to sell our products or give higher
priority to other products. A reduction in sales effort, termination of
relationship, failure to pay us for products, or discontinuance of
operations because of financial difficulties or for other reasons by one or
more of our current distributors could have a materially adverse effect on
our business, financial condition, and results of operations.
o Distributor contracts generally can be terminated on short
notice.
Although we have contracts with our distributors, the agreements
are terminable by either party on short notice. On March 1, 2003, we
consolidated our distribution channel by terminating our agreement
with Pioneer, which accounted for 26% of our net revenues in 2002. We
also consolidated our distribution channel in 2001 by terminating our
agreement with Arrow, which accounted for 13% of our net revenues in
2001.
Unique, which accounted for 33% of our net revenues in 2004, has
been our sole distributor in North America since March 1, 2003. On
April 26, 2005, Avnet, Inc. (Avnet) and Memec Group Holdings Limited
(Memec) announced that they had reached a definitive agreement for
Avnet to acquire Memec in a stock and cash transaction. The closing of
the transaction, which is subject to customary regulatory approvals,
is anticipated in 60 to 90 days. Unique is a sales division of Memec.
The loss of Unique as a distributor could have a materially adverse
effect on our business, financial condition, or results of operations.
o Fluctuations in inventory levels at our distributors can affect
our operating results.
Our distributors have occasionally built inventories in
anticipation of significant growth in sales and, when such growth did
not occur as rapidly as anticipated, substantially reduced the amount
of product ordered from us in subsequent quarters. Such a slowdown in
orders generally reduces our gross margin on future sales of newer
products because we are unable to take advantage of any manufacturing
cost reductions while the distributor depletes its inventory at lower
average selling prices.
o We are subject to all of the risks and uncertainties associated with the
conduct of international business.
o We depend on international operations for almost all of our products.
We purchase almost all of our wafers from foreign foundries and have
almost all of our commercial products assembled, packaged, and tested by
subcontractors located outside the United States. These activities are
subject to the uncertainties associated with international business
operations, including trade barriers and other restrictions, changes in
trade policies, governmental regulations, currency exchange fluctuations,
reduced protection for intellectual property, war and other military
activities, terrorism, changes in social, political, or economic
conditions, and other disruptions or delays in production or shipments, any
of which could have a materially adverse effect on our business, financial
condition, or results of operations.
o We depend on international sales for a substantial portion of our
revenues.
Sales to customers outside North America accounted for 45% of net
revenues in 2004, and we expect that international sales will continue to
represent a significant portion of our total revenues. International sales
are subject to the risks described above as well as generally longer
payment cycles, greater difficulty collecting accounts receivable, and
currency restrictions. We also maintain foreign sales offices to support
our international customers, distributors, and sales representatives, which
are subject to local regulation.
In addition, international sales are subject to the export laws and
regulations of the United States and other countries. The Strom Thurmond
National Defense Authorization Act for 1999 required, among other things,
that communications satellites and related items (including components) be
controlled on the U.S. Munitions List. The effect of the Act was to
transfer jurisdiction over commercial communications satellites from the
Department of Commerce to the Department of State and to expand the scope
of export licensing applicable to commercial satellites. The need to obtain
additional export licenses has caused significant delays in the shipment of
some of our FPGAs. Any future restrictions or charges imposed by the United
States or any other country on our international sales could have a
materially adverse effect on our business, financial condition, or results
of operations.
o Our revenues and operating results have been and may again be adversely
affected by downturns or other changes in the general economy, in the
semiconductor industry, in our major markets, or at our major customers.
We have experienced substantial period-to-period fluctuations in revenues
and results of operations due to conditions in the overall economy, in the
general semiconductor industry, in our major markets, or at our major customers.
We may again experience these fluctuations, which could be adverse and may be
severe.
o Our revenues and operating results may be adversely affected by future
downturns in the semiconductor industry.
The semiconductor industry historically has been cyclical and
periodically subject to significant economic downturns, which are
characterized by diminished product demand, accelerated price erosion, and
overcapacity. Beginning in the fourth quarter of 2000, we experienced (and
the semiconductor industry in general experienced) reduced bookings and
backlog cancellations due to excess inventories at communications,
computer, and consumer equipment manufacturers and a general softening in
the overall economy. During this downturn, which was severe and prolonged,
we experienced lower revenues, which had a substantial negative effect on
our results of operations. Any future downturns in the semiconductor
industry may likewise have an adverse effect on our revenues and results of
operations.
o Our revenues and operating results may be adversely affected by future
downturns in the communications market.
We estimate that sales of our products to customers in the
communications market accounted for 27% of our net revenues for 2004, 26%
for 2003, and 25% for 2002, compared with 49% for 2001 and 56% for 2000.
Like the semiconductor industry in general, the communications market has
been cyclical and periodically subject to significant downturns. Beginning
with the fourth quarter of 2000, the communications market suffered its
worst downturn in recent history. As a result, we experienced reduced
revenues and results of operations. Any future downturns in the
communications market may likewise have an adverse effect on our revenues
and results of operations.
o Our revenues and operating results may be adversely affected by future
downturns in the military and aerospace market.
We estimate that sales of our products to customers in the military
and aerospace industries, which carry higher overall gross margins than
sales of products to other customers, accounted for 36% of our net revenues
for 2004 and 2003, compared with 41% for 2002 and 26% for 2001. In general,
we believe that the military and aerospace industries have accounted for a
significantly greater percentage of our net revenues since the introduction
of our Rad Hard FPGAs in 1996 and our Rad Tolerant FPGAs in 1998. Any
future downturn in the military and aerospace market could have an adverse
effect on our revenues and results of operations.
o Our revenues and operating results may be adversely affected by
changes in the military and aerospace market.
In 1994, Secretary of Defense William Perry directed the Department of
Defense to avoid government-unique requirements when making purchases and
rely more on the commercial marketplace. Under the "Perry initiative," the
Department of Defense must strive to increase access to commercial
state-of-the-art technology and facilitate the adoption by its suppliers of
business processes characteristic of world-class suppliers. Integration of
commercial and military development and manufacturing facilitates the
development of "dual-use" processes and products and contributes to an
expanded industrial base that is capable of meeting defense needs at lower
costs. To that end, many of the cost-driving specifications that had been
part of military procurements for many years were cancelled in the interest
of buying best-available commercial products. We believe that this trend
toward the use of commercial off-the-shelf products has on balance helped
our business. However, if this trend continued to the point where defense
contractors customarily purchased commercial-grade parts rather than
military-grade parts, the revenues and gross margins that we derive from
sales to customers in the military and aerospace industries would erode,
which could have a materially adverse effect on our business, financial
condition, and results of operations. On the other hand, there are some
signs that this trend toward the use of commercial off-the-shelf products
is reversing. If defense contractors were to begin using more customized
ASICs and fewer commercial off-the-shelf products, the revenues and gross
margins that we derive from sales to customers in the military and
aerospace industries may erode, which could have a materially adverse
effect on our business, financial condition, and results of operations.
o Our revenues and operating results may be adversely affected by future
downturns at any our major customers.
A relatively small number of customers are responsible for a
significant portion our net revenues. We have experienced periods in which
sales to our major customers declined as a percentage of our net revenues.
For example, Lockheed Martin accounted for 4% of our net revenues during
2004, compared with 11% during 2003 and 3% during 2002 and 2001. We believe
that sales to a limited number of customers will continue to account for a
substantial portion of net revenues in future periods. The loss of a major
customer, or decreases or delays in shipments to major customers, could
have a materially adverse effect on our business, financial condition, and
results of operations.
o Any acquisition we make may harm our business, financial condition, or
operating results.
We have a mixed history of success in our acquisitions. For example:
o In 1999, we acquired AGL for consideration valued at $7.2 million. We
acquired AGL for technology used in the unsuccessful development of an
SRAM-based FPGA.
o In 2000, we acquired Prosys Technology, Inc. (Prosys) for
consideration valued at $26.2 million. We acquired Prosys for
technology used in our VariCore EPGA logic core, which was introduced
in 2001 but for which no market emerged.
o Also in 2000, we completed our acquisition of GateField for
consideration valued at $45.7 million. We acquired GateField for its
Flash technology and ProASIC FPGA family. We introduced the
second-generation ProASIC PLUS product family in 2002, the
third-generation ProASIC3/E families in 2005, and are currently the
only company offering FPGAs with a nonvolatile, reprogrammable
architecture.
In pursuing our business strategy, we may acquire other products,
technologies, or businesses from third parties. Identifying and negotiating
these acquisitions may divert substantial management time away from our
operations. An acquisition could absorb substantial cash resources, require us
to incur or assume debt obligations, and/or involve the issuance of additional
Actel equity securities. The issuance of additional equity securities may
dilute, and could represent an interest senior to the rights of, the holders of
our Common Stock. An acquisition could involve significant write-offs (possibly
resulting in a loss for the fiscal year(s) in which taken) and would require the
amortization of any identifiable intangibles over a number of years, which would
adversely affect earnings in those years. Any acquisition would require
attention from our management to integrate the acquired entity into our
operations, may require us to develop expertise outside our existing business,
and could result in departures of management from either us or the acquired
entity. An acquired entity could have unknown liabilities, and our business may
not achieve the results anticipated at the time we acquire it. The occurrence of
any of these circumstances could disrupt our operations and may have a
materially adverse effect on our business, financial condition, or results of
operations.
o Changing accounting, corporate governance, public disclosure, or tax rules
or practices could have a materially adverse effect on our business,
financial condition, or results of operations.
Pending or new accounting pronouncements, corporate governance or public
disclosure requirements, or tax regulatory rulings could have an impact,
possibly material and adverse, on our business, financial condition, or results
of operations. Any change in accounting pronouncements, corporate governance or
public disclosure requirements, or taxation rules or practices, as well as any
change in the interpretation of existing pronouncements, requirements, or rules
or practices, could call into question our SEC or tax filings and may even
affect our reporting of transactions completed before the change.
o Proposed changes in accounting for equity compensation could adversely
affect our operating results and our ability to attract and retain
employees.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment: An Amendment of FASB Statements No. 123 and 95." SFAS No. 123(R)
eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
will instead require companies to recognize compensation expense, using a
fair-value based method, for costs related to share-based payments
including stock options and employee stock purchase plans. We will be
required to implement the standard no later than the fiscal year that
begins January 2, 2006, and we expect that the adoption of SFAS No. 123(R)
will have a material effect on our consolidated results of operations and
earnings per share.
In addition, we have historically used stock options as a key
component of employee compensation in order to align employees' interests
with the interests of our shareholders, encourage employee retention, and
provide competitive compensation packages. To the extent that SFAS No.
123(R) or other new regulations make it more difficult or expensive to
grant options to employees, we may incur increased compensation costs,
change our equity compensation strategy, or find it difficult to attract,
retain, and motivate employees. Any of these results could materially and
adversely affect our business and operating results.
o Compliance with the Sarbanes-Oxley Act of 2002 and related corporate
governance and public disclosure requirements has resulted in
significant additional expense and uncertainty.
Changing laws, regulations, and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002
and new SEC regulations and Nasdaq National Market rules, has resulted in
significant additional expense and uncertainty for companies such as ours.
These new or changed laws, regulations, and standards are subject to
varying interpretations, in many cases due to their lack of specificity. As
a result, their application in practice may evolve over time as new
guidance is provided by regulatory and governing bodies, which could result
in continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance practices.
We are committed to maintaining high standards of corporate governance and
public disclosure, and therefore intend to invest the resources necessary
to comply with evolving laws, regulations, and standards. This investment
may result in increased general and administrative expenses as well as a
diversion of management time and attention from revenue-generating
activities to compliance activities. If our efforts to comply with new or
changed laws, regulations, and standards differ from the activities
intended by regulatory or governing bodies, we might be subject to
sanctions or investigation by regulatory authorities, such as the SEC or
The Nasdaq National Market, or lawsuits and our reputation may be harmed.
We evaluated our internal controls systems in order to allow
management to report on, and our independent public accountants to attest
to, our internal controls, as required by Section 404 of the Sarbanes-Oxley
Act. In performing the system and process evaluation and testing required
to comply with the management certification and auditor attestation
requirements of Section 404, we incurred significant additional expenses,
which adversely affected our operating results and financial condition, and
diverted a significant amount of management's time. While we believe that
our internal control procedures are adequate, no assurance can be given
that we will be able to continue to comply with the requirements relating
to internal controls and all other aspects of Section 404 in a timely
fashion. If we were not able to comply with the requirements of Section 404
in a timely manner or with adequate compliance in the future, we may be
subject to sanctions or investigation by regulatory authorities or
lawsuits. Any such action could adversely affect our financial results and
the market price of our Common Stock. In any event, we expect that we will
continue to incur significant expenses and diversion of management's time
to comply with the management certification and auditor attestation
requirements of Section 404.
o We may face significant business and financial risk from claims of
intellectual property infringement asserted against us, and we may be
unable to adequately enforce our intellectual property rights.
As is typical in the semiconductor industry, we are notified from time to
time of claims that we may be infringing patents owned by others. As we
sometimes have in the past, we may obtain licenses under patents that we are
alleged to infringe. Although patent holders commonly offer licenses to alleged
infringers, no assurance can be given that licenses will be offered or that we
will find the terms of any offered licenses acceptable. No assurance can be
given that any claim of infringement will be resolved or that the resolution of
any claims will not have a materially adverse effect on our business, financial
condition, or results of operations.
Our failure to obtain a license for technology allegedly used by us could
result in litigation. In addition, we have agreed to defend our customers from
and indemnify them against claims that our products infringe the patent or other
intellectual rights of third parties. All litigation, whether or not determined
in our favor, can result in significant expense and divert the efforts of our
technical and management personnel. In the event of an adverse ruling in any
litigation involving intellectual property, we could suffer significant (and
possibly treble) monetary damages, which could have a materially adverse effect
on our business, financial condition, or results of operations. We may also be
required to discontinue the use of infringing processes; cease the manufacture,
use, and sale or licensing of infringing products; expend significant resources
to develop non-infringing technology; or obtain licenses under patents that we
are infringing. In the event of a successful claim against us, our failure to
develop or license a substitute technology on commercially reasonable terms
could also have a materially adverse effect on our business, financial
condition, and results of operations.
We have devoted significant resources to research and development and
believe that the intellectual property derived from such research and
development is a valuable asset important to the success of our business. We
rely primarily on patent, trademark, and copyright laws combined with
nondisclosure agreements and other contractual provisions to protect our
proprietary rights. No assurance can be given that the steps we have taken will
be adequate to protect our proprietary rights. In addition, the laws of certain
territories in which our products are developed, manufactured, or sold,
including Asia and Europe, may not protect our products and intellectual
property rights to the same extent as the laws of the United States. Our failure
to enforce our patents, trademarks, or copyrights or to protect our trade
secrets could have a materially adverse effect on our business, financial
condition, or results of operations.
o We may be unable to attract or retain the personnel necessary to
successfully develop our technologies, design our products, or operate,
manage, or grow our business.
Our success is dependent in large part on our ability to attract and retain
key managerial, engineering, marketing, sales, and support employees.
Particularly important are highly skilled design, process, software, and test
engineers involved in the manufacture of existing products and the development
of new products and processes. The failure to recruit employees with the
necessary technical or other skills or the loss of key employees could have a
materially adverse effect on our business, financial condition, or results of
operations. We have from time to time experienced growth in the number of our
employees and the scope of our operations, resulting in increased
responsibilities for management personnel. To manage future growth effectively,
we will need to attract, hire, train, motivate, manage, and retain a growing
number of employees. During strong business cycles, we expect to experience
difficulty in filling our needs for qualified engineers and other personnel. Any
failure to attract and retain qualified employees, or to manage our growth
effectively, could delay product development and introductions or otherwise have
a materially adverse effect on our business, financial condition, or results of
operations.
o We have some arrangements that may not be neutral toward a potential change
of control and our Board of Directors could adopt others.
We have adopted an Employee Retention Plan that provides for payment of a
benefit to our employees who hold unvested stock options in the event of a
change of control. Payment is contingent upon the employee remaining employed
for six months after the change of control (unless the employee is terminated
without cause during the six months). Each of our executive officers has also
entered into a Management Continuity Agreement, which provides for the
acceleration of stock options unvested at the time of a change of control in the
event the executive officer's employment is actually or constructively
terminated other than for cause following the change of control. While these
arrangements are intended to make executive officers and other employees neutral
towards a potential change of control, they could have the effect of biasing
some or all executive officers or employees in favor of a change of control.
Our Articles of Incorporation authorize the issuance of up to 5,000,000
shares of "blank check" Preferred Stock with designations, rights, and
preferences determined by our Board of Directors. Accordingly, our Board is
empowered, without approval by holders of our Common Stock, to issue Preferred
Stock with dividend, liquidation, redemption, conversion, voting, or other
rights that could adversely affect the voting power or other rights of the
holders of our Common Stock. Issuance of Preferred Stock could be used to
discourage, delay, or prevent a change in control. In addition, issuance of
Preferred Stock could adversely affect the market price of our Common Stock.
On October 17, 2003, our Board of Directors adopted a Shareholder Rights
Plan. Under the Plan, we issued a dividend of one right for each share of Common
Stock held by shareholders of record as of the close of business on November 10,
2003. The provisions of the Plan can be triggered only in certain limited
circumstances following the tenth day after a person or group announces
acquisitions of, or tender offers for, 15% or more of our Common Stock. The
Shareholder Rights Plan is designed to guard against partial tender offers and
other coercive tactics to gain control of Actel without offering a fair and
adequate price and terms to all shareholders. Nevertheless, the Plan could make
it more difficult for a third party to acquire Actel, even if our shareholders
support the acquisition.
o Our stock price may decline significantly, possibly for reasons unrelated
to our operating performance.
The stock markets broadly, technology companies generally, and our Common
Stock in particular have experienced extreme price and volume volatility in
recent years. Our Common Stock may continue to fluctuate substantially on the
basis of many factors, including:
o quarterly fluctuations in our financial results or the financial
results of our competitors or other semiconductor companies;
o changes in the expectations of analysts regarding our financial
results or the financial results of our competitors or other
semiconductor companies;
o announcements of new products or technical innovations by us or by our
competitors; or
o general conditions in the semiconductor industry, financial markets,
or economy.
Additional Quarterly Information
The following table presents certain unaudited quarterly results for each
of the eight quarters in the period ended April 3, 2005. In our opinion, all
necessary adjustments (consisting only of normal recurring accruals) have been
included in the amounts stated below to present fairly the unaudited quarterly
results when read in conjunction with our audited consolidated condensed
financial statements and notes thereto included in our 2004 Form 10-K. However,
these quarterly operating results are not indicative of the results for any
future period.
Three Months Ended
---------------------------------------------------------------------------------------------
Apr. 3, Jan. 2, Oct. 3, Jul. 4, Apr. 4, Jan. 4, Oct. 5, Jul. 6,
2005 2005 2004 2004 2004 2004 2003 2003
--------- --------- --------- --------- --------- --------- --------- ---------
(unaudited, in thousands except per share amounts)
Statements of Operations Data:
Net revenues......................... $ 43,984 $ 40,256 $ 39,439 $ 43,688 $ 42,153 $ 40,555 $ 38,405 $ 36,609
Gross profit......................... 26,068 19,392 23,403 26,634 25,656 25,220 23,319 22,025
Income (loss) from operations........ 815 (5,400) (855) 2,541 2,519 2,462 1,965 441
Net income (loss).................... 1,437 (3,167) 517 2,504 2,540 2,328 2,283 1,386
Net income (loss) per share:
Basic............................. $ 0.06 $ (0.12) $ 0.02 $ 0.10 $ 0.10 $ 0.09 $ 0.09 $ 0.06
========= ========= ========= ========= ========= ========= ========= =========
Diluted........................... $ 0.06 $ (0.12) $ 0.02 $ 0.09 $ 0.09 $ 0.09 $ 0.08 $ 0.05
========= ========= ========= ========= ========= ========= ========= =========
Shares used in computing net income (loss) per
share:
Basic............................. 25,111 25,368 25,600 25,749 25,620 25,339 25,005 24,550
========= ========= ========= ========= ========= ========= ========= =========
Diluted........................... 25,652 25,368 25,930 26,584 27,324 27,235 27,101 25,776
========= ========= ========= ========= ========= ========= ========= =========
Three Months Ended
---------------------------------------------------------------------------------------------
Apr. 3, Jan. 2, Oct. 3, Jul. 4, Apr. 4, Jan. 4, Oct. 5, Jul. 6,
2005 2005 2004 2004 2004 2004 2003 2003
--------- --------- --------- --------- --------- --------- --------- ---------
As a Percentage of Net Revenues:
Net revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit......................... 59.3 48.2 59.3 61.0 60.9 62.2 60.7 60.2
Income (loss) from operations........ 1.9 (13.4) (2.2) 5.8 6.0 6.1 5.1 1.2
Net income (loss).................... 3.3 (7.9) 1.3 5.7 6.0 5.7 5.9 3.8
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of April 3, 2005, our investment portfolio consisted primarily of
corporate bonds, floating rate short term notes, and federal and municipal
obligations. The principal objectives of our investment activities are to
preserve principal, meet liquidity needs, and maximize yields. To meet these
objectives, we invest only in high credit quality debt securities with average
maturities of less than two years. We also limit the percentage of total
investments that may be invested in any one issuer. Corporate investments as a
group are also limited to a maximum percentage of our investment portfolio.
We are exposed to financial market risks, including changes in interest
rates. All of the potential changes noted below are based on sensitivity
analysis performed on our financial position and expected operating levels at
April 3, 2005. Actual results may differ materially.
Our investments are subject to interest rate risk. During the three months
ended April 3, 2005, interest rates available in the market for government and
corporate bonds experienced an increase. During that time our investment
portfolio consisting of government and corporate bonds decreased $0.4 million. A
further increase in interest rates could subject us to a decline in the market
value of our investments. These risks are mitigated by our ability to hold these
investments to maturity. A hypothetical 100 basis point increase in interest
rates would result in a reduction of approximately $1.4 million in the fair
value of our available-for-sale securities held at April 3, 2005.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management evaluated, with the participation of our Chief Executive
Officer and our Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and
our Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
Changes in internal control over financial reporting.
There was no change in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II -- OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth all repurchases of Actel Common Stock made
in the first quarter of 2005 by Actel and any affiliated purchasers:
ISSUER REPURCHASES OF EQUITY SECURITIES
Total
Number of Maximum
Shares Number of
Purchased Shares that
as Part of May Yet Be
Total Publicly Purchased
Number of Average Announced Under the
Shares Price Paid Plans or Plans or
Period purchased per Share Programs Programs
- ---------------------------------------------------------- ---------- ---------- ---------- ----------
Month #1 (January 2 through January 30, 2005)............. 627,500 $ 15.61 3,389,197 610,803
Month #2 (January 31 through February 27, 2005)........... 0 $ 0 3,389,197 610,803
Month #3 (February 28 through April 3, 2005).............. 0 $ 0 3,389,197 610,803
Actel's repurchase program was initially adopted and publicly announced in 1998
with authorization to repurchase 1,000,000 shares of Common Stock. Actel's Board
of Directors authorized the repurchase of another 1,000,000 shares under the
program in each of the years 1999, 2002, and 2004. On April 22, 2005, Actel's
Board of Directors authorized the repurchase of an additional 1,000,000 shares
under the program, so that the maximum number of shares available for repurchase
under the program as of the date of this Quarterly Report on Form 10-Q is
1,610,803.
Item 6. Exhibits
Exhibit Number Description
---------------- ------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) (17 CFR 240.13a-14(a)), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURE
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.
ACTEL CORPORATION
Date: May 11, 2005 /s/ Jon A. Anderson
----------------------------------
Jon A. Anderson
Vice President of Finance
and Chief Financial Officer
(as principal financial officer
and on behalf of Registrant)