Attached files
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EX-32 - EX-32 - ACTEL CORP | f55871exv32.htm |
EX-31.2 - EX-31.2 - ACTEL CORP | f55871exv31w2.htm |
EX-31.1 - EX-31.1 - ACTEL CORP | f55871exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 4, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 000-21970
ACTEL CORPORATION
(Exact name of Registrant as specified in its charter)
California (State or other jurisdiction of incorporation or organization) |
77-0097724 (I.R.S. Employer Identification No.) |
|
2061 Stierlin Court | ||
Mountain View, California (Address of principal executive offices) |
94043-4655 (Zip Code) |
(650) 318-4200
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
o Large accelerated filer | þ Accelerated filer | o Non-accelerated filer | o Smaller reporting company | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Number of
shares of Common Stock outstanding as of May 12, 2010: 26,243,790
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ACTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
Three Months Ended | ||||||||
Apr. 4, 2010 | Apr. 5, 2009 | |||||||
Net revenues |
$ | 52,263 | $ | 48,459 | ||||
Costs and expenses: |
||||||||
Cost of revenues |
19,741 | 20,785 | ||||||
Research and development |
14,727 | 16,393 | ||||||
Selling, general, and administrative |
15,013 | 13,490 | ||||||
Restructuring charges |
14 | 1,119 | ||||||
Amortization of acquisition related intangibles |
193 | 193 | ||||||
Total costs and expenses |
49,688 | 51,980 | ||||||
Income (loss) from operations |
2,575 | (3,521 | ) | |||||
Interest income and other, net of expense |
597 | 1,752 | ||||||
Income (loss) before tax provision |
3,172 | (1,769 | ) | |||||
Tax provision |
234 | 1,187 | ||||||
Net income (loss) |
$ | 2,938 | $ | (2,956 | ) | |||
Net income (loss) per share: |
||||||||
Basic |
$ | 0.11 | $ | (0.11 | ) | |||
Diluted |
$ | 0.11 | $ | (0.11 | ) | |||
Shares used in computing net income (loss) per share: |
||||||||
Basic |
26,313 | 26,027 | ||||||
Diluted |
26,527 | 26,027 | ||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
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ACTEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Apr. 4, | Jan. 3, | |||||||
2010 | 2010 (1) | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 30,297 | $ | 45,994 | ||||
Short-term investments |
118,336 | 106,007 | ||||||
Accounts receivable, net |
33,166 | 19,112 | ||||||
Inventories |
38,380 | 37,324 | ||||||
Deferred income taxes |
1,729 | 1,729 | ||||||
Prepaid expenses and other current assets |
7,056 | 8,166 | ||||||
Total current assets |
228,964 | 218,332 | ||||||
Long-term investments |
656 | 663 | ||||||
Property and equipment, net |
21,977 | 22,969 | ||||||
Goodwill and other intangible assets, net |
34,746 | 34,939 | ||||||
Other assets, net |
29,839 | 30,099 | ||||||
Total assets |
$ | 316,182 | $ | 307,002 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 11,988 | $ | 10,262 | ||||
Accrued compensation and employee benefits |
6,824 | 8,206 | ||||||
Accrued licenses |
6,016 | 4,996 | ||||||
Other accrued liabilities |
3,777 | 5,422 | ||||||
Deferred income on shipments to distributors |
30,158 | 22,867 | ||||||
Total current liabilities |
58,763 | 51,753 | ||||||
Deferred compensation plan liability |
5,807 | 5,470 | ||||||
Deferred rent liability |
1,345 | 1,590 | ||||||
Accrued sabbatical compensation |
2,743 | 2,805 | ||||||
Other long-term liabilities, net |
11,250 | 11,921 | ||||||
Total liabilities |
79,908 | 73,539 | ||||||
Commitments and contingencies (Notes 9 and 10) |
||||||||
Shareholders equity: |
||||||||
Common stock |
26 | 26 | ||||||
Additional paid-in capital |
243,497 | 242,109 | ||||||
Accumulated deficit |
(7,843 | ) | (9,250 | ) | ||||
Accumulated other comprehensive income |
594 | 578 | ||||||
Total shareholders equity |
236,274 | 233,463 | ||||||
Total liabilities and shareholders equity |
$ | 316,182 | $ | 307,002 | ||||
(1) | Derived from audited financial statements included in the Form 10-K filed with the Securities and Exchange Commission for the year ended January 3, 2010 (2009 Form 10-K). |
See Notes to Unaudited Condensed Consolidated Financial Statements
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Table of Contents
ACTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three Months Ended | ||||||||
Apr. 4, 2010 | Apr. 5, 2009 | |||||||
Operating activities: |
||||||||
Net income (loss) |
$ | 2,938 | $ | (2,956 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
3,002 | 3,497 | ||||||
Stock compensation costs |
1,739 | 1,686 | ||||||
Deferred income taxes |
| 216 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(14,054 | ) | (10,169 | ) | ||||
Inventories |
(1,126 | ) | 4,570 | |||||
Prepaid expenses and other current assets |
1,110 | (988 | ) | |||||
Other assets, net |
732 | 1,207 | ||||||
Accounts payable, accrued compensation and employee benefits, and other accrued liabilities |
(1,339 | ) | (9,747 | ) | ||||
Deferred income on shipments to distributors |
7,291 | 6,190 | ||||||
Net cash provided by (used in) operating activities |
293 | (6,494 | ) | |||||
Investing activities: |
||||||||
Purchases of property and equipment |
(1,817 | ) | (2,145 | ) | ||||
Purchases of available-for-sale securities |
(26,075 | ) | (15,626 | ) | ||||
Sales of available-for-sale securities |
2,672 | 4,093 | ||||||
Maturities of available-for-sale securities |
11,109 | 14,401 | ||||||
Changes in other long term assets |
(67 | ) | 155 | |||||
Net cash provided by (used in) investing activities |
(14,178 | ) | 878 | |||||
Financing activities: |
||||||||
Issuance of common stock under employee stock plans |
2,093 | 2,293 | ||||||
Tax withholding on restricted stock |
(497 | ) | (280 | ) | ||||
Repurchase of common stock |
(3,408 | ) | | |||||
Net cash provided by (used in) financing activities |
(1,812 | ) | 2,013 | |||||
Net decrease in cash and cash equivalents |
(15,697 | ) | (3,603 | ) | ||||
Cash and cash equivalents, beginning of period |
45,994 | 49,639 | ||||||
Cash and cash equivalents, end of period |
$ | 30,297 | $ | 46,036 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the period for income taxes, net |
$ | 67 | $ | 43 | ||||
Accrual of non cash long-term license agreement |
$ | 1,297 | $ | 807 |
See Notes to Unaudited Condensed Consolidated Financial Statements
5
Table of Contents
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 U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these condensed consolidated 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.
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make judgments, estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ materially
from those estimates.
Actel Corporation and its consolidated subsidiaries are referred to as we, us, or our.
Our fiscal year ends the first Sunday on or after December 31, and our fiscal quarters end the
first Sunday on or after March 31, June 30 and September 30.
These unaudited condensed consolidated financial statements include our accounts and the
accounts of our wholly owned subsidiaries. All 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 2009 Form 10-K filed with
the Securities and Exchange Commission. The results of operations for the three months ended April
4, 2010, are not necessarily indicative of future operating results.
Impact of Recently Issued Accounting Standards
In October 2009, the FASB issued new accounting guidance for revenue arrangements with
multiple deliverables. The new guidance requires an entity to allocate arrangement consideration at
the inception of an arrangement to all of its deliverables based on their relative selling
prices. In addition, the new guidance eliminates the use of the residual method of allocation and
requires the relative-selling-price method in all circumstances in which an entity recognizes
revenue for an arrangement with multiple deliverables. The new accounting guidance is effective in
the fiscal year beginning on or after June 15, 2010. Early adoption is permitted. This guidance is
applicable to the Company beginning in the first quarter of fiscal 2011. We are currently
evaluating the impact this adoption will have on our consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06 relating to Fair
Value Measurements and Disclosures. This update provides amendments that require new disclosures
regarding transfers in and out of Levels 1 and 2 and give guidance regarding disclosure of activity
in Level 3 fair value measurements using significant unobservable inputs. The guidance also
clarifies existing disclosures regarding level of disaggregation and disclosures relating to inputs
and valuation techniques. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15, 2009, except for
disclosures relating to activity in Level 3, which are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. Our adoption of the guidance
that is effective from the first quarter of fiscal 2010 did not affect our consolidated financial
position, results of operations or cash flows.
2. Fair Value Measurement of Financial Instruments
In accordance with Fair Value Measurements and Disclosures, the objective of the fair-value
measurement of our financial instruments is to reflect the hypothetical amounts at which we could
sell an asset or transfer a liability in an orderly transaction between market participants at the
measurement date (exit price). Fair Value Measurements and Disclosures describes three levels of
inputs that may be used to measure fair value, as follows:
| Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. | ||
| Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. |
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| Level 3 inputs are unobservable inputs for the asset or liability that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. |
Our available-for-sale securities are classified within Level 1 or Level 2 of the fair-value
hierarchy. The types of securities valued based on Level 1 inputs include money market securities.
The types of securities valued based on Level 2 inputs include U.S. government agency notes,
corporate and municipal bonds, and asset-backed obligations. The Company uses observable pricing
inputs including reported trades and broker/dealer quotes for valuing Level 2 securities.
The following table summarizes our financial instruments measured at fair value on a recurring
basis in accordance with Fair Value Measurements and Disclosures as of April 4, 2010 and January 3,
2010 (in thousands):
April 4,
2010
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable Inputs | Unobservable | ||||||||||||||
Description | Total | Assets (Level 1) | (Level 2) | Inputs (Level 3) | ||||||||||||
Available-for-sale securities (1) |
||||||||||||||||
Money market mutual funds |
$ | 18,524 | $ | 18,524 | $ | | $ | | ||||||||
Asset backed obligations |
11,310 | | 11,310 | | ||||||||||||
Commercial paper |
4,424 | | 4,424 | | ||||||||||||
Corporate bonds |
28,967 | | 28,967 | | ||||||||||||
U.S. Treasury obligations |
7,225 | | 7,225 | | ||||||||||||
U.S. government agency securities |
24,969 | | 24,969 | | ||||||||||||
Bonds issued by foreign countries |
19,539 | | 19,539 | | ||||||||||||
Municipal bonds |
6,628 | | 6,628 | | ||||||||||||
Certificate of Deposit |
2,050 | | 2,050 | | ||||||||||||
Floating rate notes |
19,053 | | 19,053 | | ||||||||||||
Total available-for-sale securities |
$ | 142,689 | $ | 18,524 | $ | 124,165 | $ | | ||||||||
January 3,
2010
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||
for Identical | Observable Inputs | Unobservable | ||||||||||||||
Description | Total | Assets (Level 1) | (Level 2) | Inputs (Level 3) | ||||||||||||
Available-for-sale securities (1) |
||||||||||||||||
Money market mutual funds |
$ | 17,147 | $ | 17,147 | $ | | $ | | ||||||||
Asset backed obligations |
11,208 | | 11,208 | | ||||||||||||
Commercial paper |
9,583 | | 9,583 | | ||||||||||||
Corporate bonds |
27,662 | | 27,662 | | ||||||||||||
U.S. Treasury obligations |
7,210 | | 7,210 | | ||||||||||||
U.S. government agency securities |
25,781 | | 25,781 | | ||||||||||||
Bonds issued by foreign countries |
10,483 | | 10,483 | | ||||||||||||
Municipal bonds |
7,090 | | 7,090 | | ||||||||||||
Certificate of Deposit |
1,000 | | 1,000 | | ||||||||||||
Floating rate notes |
15,838 | | 15,838 | | ||||||||||||
Total available-for-sale securities |
$ | 133,002 | $ | 17,147 | $ | 115,855 | $ | | ||||||||
(1) | Included in cash and cash equivalents, short-term and long-term investments on our condensed consolidated balance sheet. |
We periodically evaluate indicators of impairment during our review of our investment
portfolio. With respect to determining an other-than-temporary impairment charge, our evaluation
includes a review of:
| The length of time and extent to which the market value of the investment has been less than cost. |
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| The financial condition and near-term prospects of the issuer, including any specific events that may influence the operations of the issuer. | ||
| Our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. |
Although the current credit environment continues to be volatile and uncertain, we do not
believe that sufficient evidence exists at this point in time to conclude that any of our remaining
investments have experienced an other-than-temporary impairment in the three months ended April 4,
2010. We continue to monitor our investments closely to determine if additional information becomes
available that may have an adverse effect on the fair value and ultimate realizability of our
investments.
Available-for-sale securities are carried at fair value, with the unrealized gains and losses
reported as a component of accumulated other comprehensive income (loss) in shareholders equity.
The amortized cost of debt securities in this category is adjusted for amortization of premiums and
accretion (loss) of discounts to maturity. Such amortization and accretion is included in interest
income and other, net of expense. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as available-for-sale are
included in interest income and other, net of expense.
Realized gains and losses from sales of available-for-sale securities included in net income
(loss) for the periods presented are reported in interest income and other, net of expense on the
condensed consolidated statements of operations, as follows:
Three Months Ended | ||||||||
Apr. 4, | Apr. 5, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Gross realized gains |
$ | 22 | $ | 5 | ||||
Gross realized losses |
| |
The following is a summary of available-for-sale securities at April 4, 2010 and January 3,
2010:
Gross | Gross | Estimated | ||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Values | |||||||||||||
(In thousands) | ||||||||||||||||
April 4, 2010 |
||||||||||||||||
Money market mutual funds |
$ | 18,524 | $ | | $ | | $ | 18,524 | ||||||||
Asset backed obligations |
11,437 | 218 | (345 | ) | 11,310 | |||||||||||
Commercial paper |
4,423 | 1 | | 4,424 | ||||||||||||
Corporate bonds |
28,508 | 467 | (8 | ) | 28,967 | |||||||||||
U.S. Treasury obligations |
7,145 | 80 | | 7,225 | ||||||||||||
U.S. government agency securities |
24,561 | 429 | (21 | ) | 24,969 | |||||||||||
Bonds issued by foreign countries |
19,468 | 83 | (12 | ) | 19,539 | |||||||||||
Municipal bonds |
6,576 | 53 | (1 | ) | 6,628 | |||||||||||
Certificate of Deposit |
2,054 | | (4 | ) | 2,050 | |||||||||||
Floating rate notes |
18,997 | 58 | (2 | ) | 19,053 | |||||||||||
Total available-for-sale securities |
$ | 141,693 | $ | 1,389 | $ | (393 | ) | $ | 142,689 | |||||||
Included in cash and cash equivalents |
$ | 23,697 | ||||||||||||||
Included in short term investments |
118,336 | |||||||||||||||
Included in long term investments |
656 | |||||||||||||||
Total available-for-sale securities |
$ | 142,689 | ||||||||||||||
January 3, 2010 |
||||||||||||||||
Money market mutual funds |
$ | 17,147 | $ | | $ | | $ | 17,147 | ||||||||
Asset backed obligations |
11,437 | 214 | (443 | ) | 11,208 | |||||||||||
Commercial paper |
9,582 | 1 | | 9,583 | ||||||||||||
Corporate bonds |
27,184 | 512 | (34 | ) | 27,662 |
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Gross | Gross | Estimated | ||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Values | |||||||||||||
(In thousands) | ||||||||||||||||
U.S. Treasury obligations |
7,140 | 73 | (3 | ) | 7,210 | |||||||||||
U.S. government agency securities |
25,285 | 516 | (20 | ) | 25,781 | |||||||||||
Bonds issued by foreign countries |
10,418 | 77 | (12 | ) | 10,483 | |||||||||||
Municipal bonds |
7,062 | 31 | (3 | ) | 7,090 | |||||||||||
Certificate of Deposit |
1,000 | | | 1,000 | ||||||||||||
Floating rate notes |
15,779 | 63 | (4 | ) | 15,838 | |||||||||||
Total available-for-sale securities |
$ | 132,034 | $ | 1,487 | $ | (519 | ) | $ | 133,002 | |||||||
Included in cash and cash equivalents |
$ | 26,332 | ||||||||||||||
Included in short term investments |
106,007 | |||||||||||||||
Included in long term investments |
663 | |||||||||||||||
Total available-for-sale securities |
$ | 133,002 | ||||||||||||||
The following is a summary of available-for-sale securities that were in an unrealized loss
position as of April 4, 2010:
Aggregate | Aggregate | |||||||
Value of | Fair Value | |||||||
Unrealized | of | |||||||
Loss | Investments | |||||||
(In thousands) | ||||||||
Unrealized loss position for less than twelve months |
$ | (50 | ) | $ | 31,553 | |||
Unrealized loss position for greater than or equal to twelve months |
$ | (343 | ) | $ | 656 |
It is our intention to hold securities in an unrealized loss position for a period of time
sufficient to allow for an anticipated recovery of fair value up to (or greater than) the cost of
the investment. In addition, we have assessed the creditworthiness of the issuers of the securities
and have concluded on the basis of all these factors that other-than-temporary impairment of these
securities did not exist at April 4, 2010. We classified $0.7 million at April 4, 2010 and January
3, 2010, of the investments we intend to hold to recovery as long-term because these investment
securities have been in an unrealized loss position for greater than six months and carry maturity
dates greater than twelve months from the balance sheet date.
The adjustments to unrealized gains (losses) on investments, net of taxes, included as a
separate component of shareholders equity was not significant for the three months ended April 4,
2010.
The expected maturities of our investments in debt securities at April 4, 2010, are shown
below. Expected maturities can differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment penalties.
(In thousands) | ||||
Available-for-sale debt securities: |
||||
Due in less than one year |
$ | 69,920 | ||
Due in one to five years |
53,589 | |||
Due in five to ten years |
| |||
Due greater than ten years |
656 | |||
$ | 124,165 | |||
3. Stock Based Compensation
The Employee Stock Purchase Plan (ESPP) gives employees the opportunity to purchase shares
of common stock through payroll deductions. The Company recorded $0.2 million and $0.5 million of
stock-based compensation expense related to the ESPP for the three months ended April 4, 2010 and
April 5, 2009, respectively.
The Company granted approximately 150,000 stock appreciation rights (SARs) in the first quarter of
2010 of which 110,000 were performance based grants to executives. These will vest only if we
achieve certain profitability levels in the third and fourth quarter of 2010 and the first quarter
of 2011. The balance were routine new hire and promotion grants. These SARs were granted at an
average strike price of $11.54 per share. The fair value of the SARs, which was determined on the
grant date using a Black-Scholes model, was $5.11 per share and will be amortized over the vesting
period of four years. The SARs expire ten years from the date of the grant. In the first quarter of
2010, the Company issued 231,401 shares of its common stock of which 215,698 shares were issued to
employees participating in the ESPP and 15,703 shares were issued under employee stock plans.
The Company recorded $1.7 million of pre-tax stock-based compensation expense for each of
the three month periods ended April 4, 2010 and April 5, 2009.
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4. Credits to Distributors
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 our OEMs upon shipment. Because
sales to our 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 by the distributor and price
adjustments are determined at which time our final net sales price is fixed. Deferred revenue net
of the corresponding deferred cost of sales are recorded in Deferred income on shipments to
distributors in the liability section of the consolidated balance sheet. Deferred income
effectively represents the gross margin on the sale to the distributor; however, the amount of
gross margin we recognize in future periods will be less than the originally recorded deferred
income as a result of negotiated price concessions. Distributors resell our products to end
customers at negotiated price that vary by end customer, product, quantity, geography and
competitive pricing environments. When a distributors resale is priced at a discount from list
price, we often credit back to the distributor a portion of their original purchase price after the
resale transaction is complete. Thus, a portion of the deferred income on shipments to distributors
carried on our balance sheet will be credited back to the distributor in the future. Based upon
historical trends and inventory levels on hand at each of our distributors as of April 4, 2010, we
currently estimate that $11.3 million of the deferred income on shipments to distributors on the
Companys consolidated balance sheet as of April 4, 2010, will be credited back to the distributors
in the future. These amounts will not be recognized as revenue and gross margin in our consolidated
statement of operations. As of April 4, 2010, we had $36.1 million of deferred revenue and $5.9
million of deferred cost of goods sold recognized as a net $30.2 million of deferred income on
shipments to distributors. As of January 3, 2010, we had $28.1 million of deferred revenue and $5.2
million of deferred cost of goods sold recognized as a net $22.9 million of deferred income on
shipments to distributors.
Our payment terms generally require the distributor to settle amounts owed to us based on list
price, which are in excess of the distributors actual cost due to price adjustments and credits.
Accordingly, we credit back to the distributor a portion of their original purchase price, usually
within 30 days after the resale transaction has been reported to the Company. This practice has an
adverse effect on the working capital of our distributors as they are required to pay the full list
price to Actel and receive a discount only after the product has been sold. As a consequence,
beginning in the third quarter of fiscal 2007, we entered into written business arrangements with
certain distributors under which we issue advance credits to the distributors to minimize the
adverse effect on the distributors working capital. The advance credits amount to a month of
estimated credits based on an average of actual historical credits over the prior quarter. The
advance credits are updated and settled on a quarterly basis. The advance credits have no affect on
our revenue recognition since revenue from distributors is not recognized until the distributor
sells the product, but the advance credits reduce our accounts receivable and deferred income on
shipments to distributors as reflected in our condensed consolidated balance sheets. The amount of
the advance credits as of April 4, 2010 and January 3, 2010 were $6.2 million, already netted
against deferred income on shipments to distributors of $30.2 million and $6.7 million already
netted against deferred income on shipments to distributors of $22.9 million, respectively.
5. Goodwill and other intangible assets, net
Goodwill is recorded when consideration paid in an acquisition exceeds the fair value of the
net tangible and intangible assets acquired. We do not amortize goodwill, but instead test for impairment annually
or more frequently if certain triggering 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 2009 and noted no indicators of impairment. There were no triggering events that
would lead us to believe our goodwill has been impaired as of the first quarter of 2010.
Our goodwill and other intangible assets, net were $34.7 million at the end of the first
quarter of 2010 and $34.9 million at the end of the fourth quarter of 2009. As a result of the
Pigeon Point Systems acquisition during the third quarter of 2008, we recorded $0.2 million in
amortization of identified intangible assets for the three month periods ended April 4, 2010, and
April 5, 2009.
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6. Inventories
Inventories consist of the following:
Apr. 4, | Jan. 3, | |||||||
2010 | 2010 | |||||||
(In thousands) | ||||||||
Purchased parts and raw materials |
$ | 8,695 | $ | 8,948 | ||||
Work-in-process |
16,628 | 16,743 | ||||||
Finished goods |
13,057 | 11,633 | ||||||
$ | 38,380 | $ | 37,324 | |||||
Inventories, net are 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 demand, strategic relationships with foundries, and
competitive situations in the marketplace.
We write down our inventory for estimated obsolescence or lack of sales activity 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 has been previously written down in prior
periods. 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. 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.
Inventory at April 4, 2010 and January 3, 2010 included $6.1 million and $4.8 million of net
inventory purchased in last-time buys, respectively. There were no write downs of last time buy
inventory during the first three months of 2010.
7. Net Income (Loss) per Share
The following table sets forth the computation of basic and diluted earnings per share:
Three months ended | ||||||||
Apr. 4, | Apr. 5, | |||||||
2010 | 2009 | |||||||
(In thousands except per share data) | ||||||||
Basic: |
||||||||
Weighted-average common shares outstanding |
26,313 | 26,027 | ||||||
Net income (loss) |
$ | 2,938 | $ | (2,956 | ) | |||
Net income (loss) per share |
$ | 0.11 | $ | (0.11 | ) | |||
Diluted: |
||||||||
Weighted-average common shares outstanding |
26,313 | 26,027 | ||||||
Net effect of dilutive employee stock
options based on the treasury stock method |
214 | | ||||||
Shares used in computing net income per share |
26,527 | 26,027 | ||||||
Net income (loss) |
$ | 2,938 | $ | (2,956 | ) | |||
Net income (loss) per share |
$ | 0.11 | $ | (0.11 | ) | |||
Basic earnings per share are calculated based on net earnings and the weighted-average number
of shares of common stock outstanding during the reported period. Diluted earnings per share are
calculated similarly, except that the weighted-average number of common shares outstanding during
the period are increased by the number of additional shares of common stock that would have been
outstanding if dilutive potential shares of common stock had been issued. The dilutive effect of
potential common stock (including outstanding stock options, unvested restricted stock, ESPP shares
and non-employee director stock options) is reflected in diluted earnings per share by application
of the treasury stock method, which includes consideration of
share-based compensation.
The following table reflects the number of potentially dilutive shares that were excluded from
diluted net income per share, as their inclusion would have had an anti-dilutive effect on net
income per share:
Three months ended | ||||||||
Apr. 4, 2010 | Apr. 5, 2009 | |||||||
Potentially dilutive shares related to: |
||||||||
Stock options, SARs and unvested restricted stock |
5,369,608 | 6,179,376 |
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8. Comprehensive Income
The components of comprehensive income (loss), net of tax, are as follows:
Three Months Ended | ||||||||
Apr. 4, | Apr. 5, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Net income (loss) |
$ | 2,938 | $ | (2,956 | ) | |||
Change in gain (loss) on available-for-sale securities, net of tax
of $20 and $(80), respectively |
29 | (129 | ) | |||||
Reclassification adjustment for gains included in net income, net
of tax amounts of $(8) and ($2), respectively |
(13 | ) | (3 | ) | ||||
Other comprehensive gain (loss), net of tax amounts of $12
and $(82), respectively |
16 | (132 | ) | |||||
Total comprehensive income (loss) |
$ | 2,954 | $ | (3,088 | ) | |||
Accumulated other comprehensive income is presented on the accompanying condensed consolidated
balance sheets and consists of the accumulated net unrealized gains(losses) on available-for-sale
securities.
9. Legal Matters and Loss Contingencies
From time to time we are notified of claims, including claims asserted against us or our
customers, that our products may infringe patents or other intellectual property rights 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, and/or results of operations. Our failure to resolve a claim could
result in litigation or arbitration, which can result in significant expense and divert the efforts
of our technical and management personnel, whether or not determined in our favor. Our evaluation
of the effect 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 financial position as of
April 4, 2010, or results of operations or cash flows for the quarter then ended.
10. Commitments
As of April 4, 2010, the Company had $15.1 million of remaining non-cancelable license fee
payment obligations to providers of electronic design automation software expiring at various dates
through 2012. The current portion of these obligations is recorded in Accrued licenses and the
long-term portion of these obligations is recorded at net present value in Other long-term
liabilities, net on the accompanying balance sheets. As of April 4, 2010 we have $0.2 million and
$22.9 million of related license fees recorded in Prepaid expenses and other current assets and
Other assets, net, respectively. In addition, we have a non-cancelable purchase commitment of
$3.3 million for last-time-buy wafers from one of our suppliers over the next 12 months.
11. Shareholders Equity
Our Board of Directors authorized a stock repurchase program in September 1998 for the purpose
of replenishing some or all of the shares of Common Stock issued upon exercise of stock options and
in connection with other stock compensation plans. Repurchases may be made in the open market or in
privately negotiated transactions. In the first three months of 2010, we repurchased 254,737
shares for $3.4 million. To date, Actels Board of Directors has authorized the repurchase of
7,000,000 shares under the program, and 5,580,995 shares of Common Stock have been repurchased on
the open market. The Company has remaining authority to repurchase 1,419,005 shares under the
program. To facilitate repurchases under the Companys stock repurchase program, Actels Board of
Directors has adopted a plan under Rule 10b5-1 of the Securities and Exchange Commission. Under
the Rule 10b5-1 plan, the Company repurchases shares of Actel Common Stock whenever the price and
other criteria set forth in the plan are met, including times when the Company would not otherwise
be in the market due to the Companys trading policies or the possession of material non-public
information.
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12. Restructuring
In the fourth quarter of fiscal 2008, we initiated a restructuring program in order to reduce
our operating costs and focus our resources on key strategic priorities. A total of 133 full-time
positions have been eliminated globally as of April 4, 2010. In connection with this restructuring
plan, we recorded restructuring charges totaling $14,000 and $1.1 million related to termination
benefits in the first quarter of 2010 and the first quarter of 2009, respectively. Restructuring
charges consisted primarily of employee compensation and related charges, including stock-based
compensation expenses.
The following represents a summary of our restructuring activity:
Restructuring | ||||
Liabilities | ||||
(In thousands) | ||||
Restructuring charges for 2008 |
$ | 2,424 | ||
Payments |
(1,224 | ) | ||
Balance at January 4, 2009 |
1,200 | |||
Restructuring charges |
2,593 | |||
Payments |
(3,150 | ) | ||
Balance at January 3, 2010 |
643 | |||
Restructuring charges |
14 | |||
Payments |
(560 | ) | ||
Balance at April 4, 2010 |
$ | 97 | ||
13. Income Taxes
The tax provision recorded for the three months ended April 4, 2010 is lower than the amount
that would be recorded if the U.S. statutory tax rate of 35% was applied to the Companys income
before taxes primarily due to the benefit received from the utilization of net operating losses.
The tax provision recorded for the quarter ended April 5, 2009 was greater than the amount that
would be recorded if the U.S. statutory tax rate of 35% was applied to the Companys net loss
primarily due to the composite state tax rate, the recognition of certain deferred tax assets
subject to valuation allowances and non-deductible stock-based compensation expense.
The Companys consolidated balance sheets includes deferred tax assets that consist of net
operating loss carryovers, tax credit carryovers, depreciation and amortization, employee
stock-based compensation expenses, deferred revenue and certain liabilities that have a full
valuation allowance recorded on these deferred tax assets. Management periodically evaluates the
realizability of the Companys net deferred tax assets based on all available evidence, both
positive and negative. The realization of net deferred tax assets is solely dependent on the
Companys ability to generate sufficient future taxable income during periods prior to the
expiration of tax statutes to fully utilize these assets. The Company intends to maintain the full
valuation allowance until sufficient positive evidence exists to support reversal of the valuation
allowance.
14. Subsequent Events
As part of our program to reduce
operating costs, we notified 24 employees
that their positions were or will be eliminated during the second quarter of 2010. Operating
results for the second quarter of 2010 will be adversely affected by accounting charges related to
the reduction in force for severance, which the Company currently
estimates will be about $1.1
million. In addition, the Company anticipates expenses of $1.6 million in 2010 to relocate
employees and inventory to other facilities and sublease excess
capacity, and approximately $1.7
million for leasehold improvements to facilitate the relocation. The Company anticipates that all
cash payments related to the reduction in force and relocation will be made by the end of the
third quarter of 2010.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion of our financial condition and results of operations
in conjunction with our Consolidated Financial Statements and the related Notes to Consolidated
Financial Statements included in this Quarterly Report on Form 10-Q. This Quarterly Report on Form
10-Q, including Managements Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements regarding future events and the future results of
our Company that are based on current expectations, estimates, forecasts, and projections about the
industry in which we operate and the beliefs and assumptions of our management. Words such as
expects, anticipates, targets, goals, projects, intends, plans, believes, seeks,
estimates, variations of such words, and similar expressions are intended to identify such
forward-looking statements. These
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forward-looking statements are made in reliance upon the safe harbor provision of the Private
Securities Litigation Reform Act of 1995 and are subject to a multitude of risks and uncertainties
that could cause actual results to differ materially (and perhaps adversely) from those expressed
in any forward-looking statements. Factors that might cause or contribute to such differences
include, but are not limited to, those discussed in this Quarterly Report under the caption Risk
Factors in Item 1A of Part II. We undertake no obligation to revise or update publicly any
forward-looking statements for any reason.
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 are primarily
focused for both the short and long term.
We design, develop, and market FPGAs and supporting products and services. FPGAs are
programmable logic devices (PLDs) that adapt the processing and memory capabilities of electronic
systems to specific applications. We are the leading supplier of FPGAs based on antifuse and flash
technologies. Both of these technologies are non-volatile, which means that (unlike FPGAs based on
SRAM technology), they retain their programmed configuration after power is removed. While our
flash-based FPGAs can be reprogrammed, our antifuse-based FPGAs can be programmed only once. While
the one-time programmability of our antifuse based FPGAs is desirable in certain system-critical
military and aerospace applications, commercial customers generally prefer reprogrammable PLDs.
Our newest offering, called SmartFusion, is a flash-based mixed signal PLD that integrates
microcontroller, and analog circuitry, with an FPGA. This product was announced in March of 2010
and, along with our existing Fusion, IGLOO, and ProASIC3 products, it is manufactured on 130nm
flash process technology. We are also currently developing future FPGA products using 65nm flash
process technology.
Strategy
Our strategy is to offer FPGAs to markets in which our nonvolatile flash and antifuse-based
technologies have an inherent competitive advantage. Our strategy involves considerable risk as
unique technologies and products can take years to develop, if at all, and markets that we target
may fail to emerge. However, in addition to single-chip, live-at-power-up, security, and
neutron-immunity benefits, we believe that our nonvolatile FPGA solutions offer substantial
low-power advantages over volatile devices based on SRAM technology and we plan to exploit those
advantages.
Key Indicators
Although we measure the condition and performance of our business in numerous ways, 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, backlog and margins are the best indicators of
short-term performance and that design wins and product development progress are the best
indicators of long-term performance.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States (GAAP). 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 has defined 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, complex, and subjective judgments, often as a result of the
need to make estimates about the effect of matters that are inherently uncertain. Based upon this
definition, our most critical policies include revenue recognition, inventories, stock-based
compensation, legal matters, goodwill and long-lived asset impairments and income taxes. 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 are less likely to have a material effect 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, material expenses may be recognized on the consolidated statements of
operations for the periods in which we revise our estimates or assumptions. There were no
significant changes in our critical accounting estimates during the three months
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ended April 4, 2010 compared with the critical accounting policies and estimates
disclosed in Managements Discussion and Analysis of Financial Condition and Results of Operations
included in our Annual Report on Form 10-K for the year ended January 3, 2010.
Results of Operations
Three Months Ended | ||||||||||||||||||||
(a) | (b) | % | (c) | % | ||||||||||||||||
Apr. 4, | Jan. 3, | change | Apr. 5, | change | ||||||||||||||||
2010 | 2010 | (a-b)/b | 2009 | (a-c)/c | ||||||||||||||||
Net revenues |
$ | 52,263 | $ | 49,699 | 5 | % | $ | 48,459 | 8 | % | ||||||||||
Gross profit |
$ | 32,522 | $ | 30,984 | 5 | % | $ | 27,674 | 18 | % | ||||||||||
% of net revenues |
62 | % | 62 | % | 57 | % | ||||||||||||||
Research and development |
$ | 14,727 | $ | 14,160 | 4 | % | $ | 16,393 | (10 | %) | ||||||||||
% of net revenues |
28 | % | 28 | % | 34 | % | ||||||||||||||
Selling, general, and administrative |
$ | 15,013 | $ | 14,401 | 4 | % | $ | 13,490 | 11 | % | ||||||||||
% of net revenues |
29 | % | 29 | % | 28 | % | ||||||||||||||
Restructuring charges |
$ | 14 | $ | 1,202 | (99 | %) | $ | 1,119 | (99 | %) | ||||||||||
% of net revenues |
0 | % | 2 | % | 2 | % | ||||||||||||||
Tax provision |
$ | 234 | $ | 137 | 71 | % | $ | 1,187 | (80 | %) | ||||||||||
% of net revenues |
0 | % | 0 | % | 2 | % |
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Net Revenues
We derive our revenues primarily from the sale of FPGAs, which accounted for over 94% of net
revenues in the first quarter of 2010, 90% in the fourth quarter of 2009 and 93% in the first
quarter of 2009. Non-FPGA revenues are derived from our Protocol Design Services organization,
royalties, and the licensing of software and sale of hardware used to design and program our FPGAs.
The following table represents our revenues by technology:
Three Months Ended | ||||||||||||||||||||
Apr. 4, 2010 | Jan. 3, 2010 | % Change | Apr. 5, 2009 | % Change | ||||||||||||||||
Flash |
$ | 12,634 | $ | 12,086 | 4.5 | % | $ | 11,783 | 7.2 | % | ||||||||||
Antifuse |
36,559 | 32,590 | 12.2 | % | 33,113 | 10.4 | % | |||||||||||||
Non-Silicon and royalties |
3,070 | 5,023 | (38.8 | )% | 3,563 | (13.8 | )% | |||||||||||||
Total |
$ | 52,263 | $ | 49,699 | 5.2 | % | $ | 48,459 | 7.8 | % | ||||||||||
Our antifuse-based FPGAs consist of radiation tolerant products for the space market and
non-radiation tolerant products that are sold primarily to industrial and avionics customers. Sales
of antifuse products comprised 70% of net revenues for the first quarter of 2010, 66% for the
fourth quarter of 2009 and 68% for the first quarter 2009. Our flash products are sold into
military, avionics, industrial, communications, and consumer market segments. Sales of flash
products comprised 24% of net revenues in first quarter of 2010, fourth quarter of 2009 and first
quarter of 2009, respectively. Our non silicon products are made up of royalties, systems and
services.
Net revenues were $52.3 million for the first quarter of 2010, an increase of 5.2% from the
fourth quarter of 2009. The increase resulted primarily from a $6.7 million increase in sales of
radiation-tolerant antifuse products to satellite customers which was offset in part by a $2.7
million reduction in sales of other antifuse products and a $2.4 million reduction in royalties.
Sales of flash and non-silicon products each increased sequentially by $0.5 million.
Net revenues increased from the first quarter of 2009 to the first quarter of 2010 by 7.8%.
The increase resulted primarily from a $4.6 million increases in sales of radiation-tolerant
antifuse products to satellite customers which was offset in part by a $1.1 million reduction in
sales of other antifuse products and a $0.8 million reduction in royalties. Sales of flash and
non-silicon products increased sequentially by $0.8 and $0.3 million, respectively.
We recognized 63% of our net revenues through the distribution sales channel in the first
quarter of 2010 compared with 72% in the fourth quarter of 2009 and 67% in the first quarter of
2009. We generally do not recognize revenue on product shipped to a distributor until the
distributor resells the product to its customer. The decline in net revenues through the
distribution sales channel in the first quarter of 2010 was due to the increase in sales of
radiation-tolerant products, most of which is not sold through distributors.
Gross Margin
Three Months Ended | ||||||||||||||||||||||||
Apr. 4, 2010 | Jan. 3, 2010 | Change | Apr. 5, 2009 | Change | ||||||||||||||||||||
(a) | (b) | (a-b) | c | (a-c) | ||||||||||||||||||||
Revenue |
$ | 52,263 | $ | 49,699 | $ | 2,564 | $ | 48,459 | $ | 3,804 | ||||||||||||||
Cost of
revenues |
19,741 | 18,715 | 1,026 | 20,785 | (1,044 | ) | ||||||||||||||||||
Gross profit |
32,522 | 30,984 | 1,538 | 27,674 | 4,848 | |||||||||||||||||||
Gross margin |
62.2 | % | 62.3 | % | (0.1 | )% | 57.1 | % | 5.1 | % |
Gross profit dollars increased $1.5 million in the first quarter of 2010 compared with fourth
quarter of 2009 due to the increase in net revenues as discussed above. Gross margin was flat from
the fourth quarter of 2009 to the first quarter of 2010.
Gross profit dollars increased $4.8 million in the first quarter of 2010 compared with first
quarter of 2009 due primarily to the increase in net revenues discussed above. Gross margin
increased from 57.1% in first quarter of 2009 to 62.2% in first quarter of 2010 in part because of
increased sales of radiation-tolerant products, which generally have higher margins, and in part
because of cost reductions resulting from the Companys restructuring program.
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Research & Development (R&D)
R&D expenditures were $14.7 million, or 28% of net revenues for the first quarter of 2010
compared with $14.2 million, or 28% of net revenues for the fourth quarter of 2009 and $16.4
million, or 34% of net revenues for the first quarter of 2009. R&D spending increased in the first
quarter of 2010 as compared with the fourth quarter of 2009 by $0.5 million due to increased
employee costs resulting from bonus accruals and higher payroll taxes for the new year. Recognition
of R&D related stock-based compensation expense was $0.8 million for the three month period ended
April 4, 2010, compared with $0.9 million for the fourth quarter of 2009 and $0.9 million for the
first quarter of 2009.
R&D expenditures decreased by $1.7 million in the first quarter of 2010 compared with the
first quarter of 2009. This decrease was due primarily to aggregate savings of approximately $1.0
million in employee costs resulting from reductions in headcount and the related savings in payroll
tax, sabbatical and stock-based compensation expenses. Other expenses decreased by $0.7 million as
a result of our continuing efforts to reduce cost.
Selling, General and Administrative (SG&A)
SG&A expenses were $15.0 million, or 29% of net revenues for the first quarter of 2010
compared with $14.4 million, or 29% of net revenues for the fourth quarter of 2009 and $13.5
million, or 28% of net revenues for the first quarter of 2009.
SG&A expenses increased in the first quarter of 2010 by $0.6 million compared with the fourth
quarter of 2009 due to a worldwide sales conference related to the
rollout of our Smart Fusion
product line for $0.4 million and outside services of $0.3 million related to implementation of a
new customer relationship management system. Recognition of SG&A related stock-based compensation
expense was $0.9 million for the three month period ended April 4, 2010, compared with $0.9 million
for the fourth quarter of 2009 and $0.6 million for the first quarter of 2009.
SG&A expenses were $1.5 million higher in the first quarter of 2010 than in the first quarter
of 2009. Travel expenses were higher by $0.4 million due to a worldwide sales conference related
to the rollout of our SmartFusion product line, an increased headcount in sales of $0.2 million
and outside services of $0.3 million relating to implementation of a new customer relationship
management system. The allowance for doubtful accounts increased by $0.2 million due to higher
receivable balances and other employee related expenses increased by $0.2 million. Stock-based
compensation expenses were higher by $0.2 million.
Restructuring
During the first quarter of 2009, we announced a Company-wide restructuring plan that, in
conjunction with cost-reduction initiatives taken in the fourth quarter of 2008, is expected to
result in a quarterly reduction in expenses of $6.5 million in the third quarter of 2010 compared
with the third quarter of 2008. From the fourth quarter of 2008
through the first quarter of 2010, we
have incurred $5.0 million for severance and other costs related to reductions in force. In
addition, the Company has recorded $5.5 million in restructuring costs related to asset
impairments. The Company expects to record approximately $1.1 million in additional reduction in
force expenses through the second quarter of 2010. In addition, the Company anticipates expenses
of $1.6 million in 2010 to relocate employees and inventory to other facilities and sublease excess
capacity and approximately $1.7 million on leasehold improvements to facilitate the relocation.
Tax Provision
The tax provision recorded for the three months ended April 4, 2010 is lower than the amount
that would be recorded if the U.S. statutory tax rate of 35% was applied to the Companys income
before taxes primarily due to the benefit received from the utilization of net operating losses.
The tax provision recorded for the quarter ended April 5, 2009 was greater than the amount that
would be recorded if the U.S. statutory tax rate of 35% was applied to the Companys net loss
primarily due to the composite state tax rate, the recognition of certain deferred tax assets
subject to valuation allowances and non-deductible stock-based compensation expense.
The Companys consolidated balance sheets includes deferred tax assets that consist of net
operating loss carryovers, tax credit carryovers, depreciation and amortization, employee
stock-based compensation expenses, deferred revenue and certain liabilities that have a full
valuation allowance recorded on these deferred tax assets. Management periodically evaluates the
realizability of the Companys net deferred tax assets based on all available evidence, both
positive and negative. The realization of net deferred tax
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assets is solely dependent on the Companys ability to generate sufficient future taxable
income during periods prior to the expiration of tax statutes to fully utilize these assets. The
Company intends to maintain the full valuation allowance until sufficient positive evidence exists
to support reversal of the valuation allowance.
Financial Condition
Our total assets were $316.2 million at the end of the first quarter of 2010 compared with
$307.0 million at the end of the fourth quarter of 2009. The following table sets forth certain
financial data from the condensed consolidated balance sheets.
As of | As of | |||||||||||||||||||
In thousands | Apr. 4, 2010 | Jan. 3, 2010 | $ change | % change | ||||||||||||||||
Cash and cash equivalents, short and long term investments |
$ | 149,289 | $ | 152,664 | $ | (3,375 | ) | (2 | %) | |||||||||||
Accounts receivable, net |
$ | 33,166 | $ | 19,112 | $ | 14,054 | 74 | % | ||||||||||||
Inventories |
$ | 38,380 | $ | 37,324 | $ | 1,056 | 3 | % |
Accounts
receivable at April 4, 2010 increased 74% compared with
January 3, 2010. Days sales
outstanding were 58 days at the end of first quarter of 2010 compared with 35 days at the end of
the fourth quarter 2009. The increased accounts receivable was due primarily to a holiday shutdown
in December 2009, which resulted in December 2009 shipments being approximately 73% lower than in
March 2010.
Inventory was $38.3 million at April 4, 2010, which was an increase of $1.1 million from the
end of 2009. We had 177 days of inventory at the end of the first quarter compared with 181 days
at the end of 2009. The increased inventory was due primarily to last-time-buy purchases of $1.6
million during the quarter.
Liquidity and Capital Resources
We currently meet all of our funding needs for ongoing operations with cash flows generated
from operations and with existing cash and short and long-term investments. A portion of available
cash may be used for investment in or acquisition of complementary businesses, products, or
technologies. Wafer manufacturers have at times asked for financial support from customers in the
form of equity investments and advance purchase 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.
Cash from operations for the first quarter of 2010 was $0.3 million, an increase of $6.8
million from the first quarter of 2009. The increase was due primarily to an increase in net
income. Our cash, cash equivalents, and short-term and long-term investments were $149.3 million as
of April 4, 2010.
Investing activities used cash of $14.2 million, compared with providing cash of $0.9 million
in the first quarter of 2009. Net reductions in short-term investments from purchases, sales and
maturities provided cash of $2.9 million in the first quarter of 2008 compared with a net increase
in short-term investments of $12.3 million in the current quarter.
Net cash used in financing activities was $1.8 million, compared with providing cash of $2.0
million in the first quarter of 2009. We used $3.4 million in cash in the first quarter of 2010 to
repurchase 254,000 shares of our common stock. There was no repurchase in the prior year.
We believe that existing cash, cash equivalents, and short and long-term investments, together
with cash generated from operations, will be sufficient to meet our cash requirements for the next
four quarters.
Impact of Recently Issued Accounting Standards
See Note 1 to the Financial Statements for detailed information regarding the status of new
accounting standards.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As of April 4, 2010, our investment portfolio consisted primarily of asset backed obligations,
corporate bonds, floating rate 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 excess liquidity in high credit quality debt
securities generally 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.
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Our investments in debt securities, which totaled $124.2 million at April 4, 2010, are subject
to interest rate risk. An 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 for a
period of time sufficient to recover the carrying value of the investment, which may not be until
maturity. A hypothetical 100 basis point increase in interest rates compared with interest rates at
April 4, 2010, and January 3, 2010, would result in a reduction of $1.3 million and $0.8 million in
the fair value of our available-for-sale debt securities held at April 4, 2010, and January 3,
2010, respectively.
In addition to interest rate risk, we are subject to market risk on our investments. We
monitor all of our investments for impairment on a periodic basis. In the event that the carrying
value of the investment exceeds its fair value and the decline in value is determined to be other
than temporary, the carrying value is reduced to its current fair market value. In the absence of
other overriding factors, we consider a decline in market value to be a potential indicator of
an-other-than temporary impairment when a publicly traded stock or a debt security has traded below
amortized cost for a consecutive six-month period. If an investment continues to trade below
amortized cost for more than six months, and mitigating factors such as general economic and
industry specific trends, including the creditworthiness of the issuer are not present, this
investment would be evaluated for impairment and written down to a balance equal to the estimated
fair value at the time of impairment, with the amount of the write-down recorded in Interest income
and other, net of expense, on the consolidated statements of operations. If management concludes it
does not intend to sell an impaired debt security before recovery of its amortized cost basis, and
the issuers of the securities are creditworthy, no other-than-temporary impairment is deemed to
exist.
Item 4. 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 defined in Rule
13a-15(e) under the Securities Exchange Act of 1934) 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 as of
the end of the period covered by this Quarterly Report on Form 10-Q.
In addition, there were no changes to our internal controls during the quarter ended April 4, 2010
that have materially affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
ITEM 1A. RISK FACTORS
This Quarterly Report on Form 10-Q, including any information incorporated by reference
herein, contains forward looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934,
as amended (the Exchange Act). In some cases, you can identify forward looking statements by
terms such as may, will, should, expect, plan, intend, forecast, anticipate,
believe, estimate, predict, potential, continue or the negative of these terms or other
comparable terminology. The forward looking statements contained in this Form 10-Q involve known
and unknown risks, uncertainties, and situations that may cause our or our industrys actual
results, level of activity, performance, or achievements to be materially different from any
results, levels of activity, performance, or achievements expressed or implied by these statements.
These factors include those listed below in this Item 1A and those discussed elsewhere in this Form
10-Q. We encourage investors to review these factors carefully. We may from time to time make
additional written and oral forward looking statements, including statements contained in our
filings with the SEC. We do not undertake to update any forward looking statement that may be made
from time to time by or on behalf of us, whether as a result of new information, future events, or
otherwise, except as required by law.
Before deciding to purchase, hold, or sell our securities, you should be aware that our
business faces numerous financial and market risks, including those described below, as well as
general economic and business risks. The following discussion provides information concerning the
material risks and uncertainties that we have identified and believe may adversely affect our
business, our
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financial condition, and our results of operations. Before deciding to purchase, hold, or sell
our securities, you should carefully consider these risks and uncertainties, together with all of
the other information included in this Quarterly Report on Form 10-Q.
Risks Related to Our Failure to Meet Expectations
Our quarterly revenues and operating results fluctuate due to general economic conditions and
a variety of risks specific to Actel 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 predict quarterly revenues and operating results, which may
fail to meet our expectations. When we fall short of our quarterly revenue expectations, our
operating results will probably also be adversely affected because the majority of our expenses are
fixed and therefore do not vary with revenues. Any failure to meet expectations could cause our
stock price to decline, perhaps significantly.
The current economic environment makes quarterly revenues difficult to predict.
Our quarterly revenues and operating results are affected, both positively and negatively, by
fluctuations in general economic conditions and in the specific economic conditions affecting the
semiconductor industry. Overall conditions in the worldwide economy and financial markets in
general, and in the semiconductor industry in particular, have improved since the second half of
2008, but visibility continues to be limited and forecasting remains extremely difficult. Our
failure, or the failure of our distributors, to accurately forecast customer demand for our
products could adversely (and perhaps materially) affect our operating efficiencies and quarterly
financial results.
We derive a significant percentage of our quarterly revenues from bookings received during the
quarter, making quarterly revenues difficult to predict.
We generate a significant percentage of our quarterly revenues from orders received during the
quarter and turned for shipment within the quarter. Any shortfall in expected turns orders will
adversely affect quarterly revenues. 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, and conversion of our products to ASICs or other competing
products for price or other reasons. In addition, we sometimes book a disproportionately large
percentage of turns orders during the final weeks of the quarter. Any failure to receive, or delay
in receiving, expected turns orders would adversely (and perhaps materially) affect quarterly
revenues.
We sometimes 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 sometimes ship a disproportionately large percentage of our quarterly revenues during the
final weeks of the quarter, and any delays in making those shipments are more likely to cause them
to slip into the following quarter. Any failure to effect scheduled shipments by the end of a
quarter would adversely (and perhaps materially) affect quarterly revenues.
Our military and aerospace shipments tend to be large and are subject to complex scheduling
uncertainties, making quarterly revenues and operating results difficult to predict.
Orders from our military and aerospace customers tend to be large monetarily 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 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 pass and, if not, 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 adversely (and perhaps materially) affect quarterly
revenues.
We derive a majority of our quarterly revenues from products resold by our distributors,
making quarterly revenues difficult to predict.
We generate the 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 therefore highly dependent on the accuracy
of shipment forecasts from
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our distributors in setting our quarterly revenue expectations. Any failure by our
distributors to effect scheduled shipments by the end of a quarter would adversely (and perhaps
materially) affect our quarterly revenues. 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 a quarter, contribute to our difficulty in predicting and reporting our
quarterly revenues and/or operating results.
An unanticipated shortage of products available for sale may cause our quarterly revenues
and/or operating results to fall short of expectations.
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 photomasks, impurities in the materials used,
contaminants in the environment, and performance failures by personnel and equipment. In addition,
we may not discover defects or other errors in new products until after we have commenced volume
production. Semiconductor products intended for military and aerospace applications and new
products, such as our SmartFusion, ProASIC 3, and Igloo FPGAs, are often more complex and more
difficult to produce, increasing the risk of manufacturing- and design-related defects. Our failure
to effect scheduled shipments by the end of a quarter due to production difficulties or other
unexpected supply constraints would adversely (and perhaps materially) affect our quarterly
revenues.
Unanticipated increases, or the failure to achieve anticipated reductions, in the cost of our
products may cause our quarterly operating results to fall short of expectations.
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 Actel
that utilizes independent foundries, almost all of which are offshore. Yield problems are most
common at new foundries (particularly when new technologies are involved) or on new processes or
new products (particularly when new products and new processes are both 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 or other
unanticipated increases in the cost of our products could reduce our gross margin, which would
adversely affect (and perhaps materially) 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. We also seek to reduce
costs by 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 shrinking the die size of our products. The failure to achieve expected manufacturing
or other cost reductions during a quarter could reduce our gross margin, which would adversely (and
perhaps materially) affect our quarterly operating results. Also, if we discover defects or other
errors in a new product that require us to re-spin some or all of the products photomask set, we
must write-off the photomasks that are replaced. This type of expense is becoming more significant
as the cost of photomasks continues to increase. The write-off of any photomasks will adversely,
and perhaps materially, affect our operating results for the quarter in which the write-off is
taken. The same is true of any other property and equipment write-offs. During the second quarter
of 2009, for example, we recorded non-cash asset impairment charges totaling $5.5 million for
certain manufacturing fixed assets that were determined to be excess of current and expected future
manufacturing requirements.
Unanticipated reductions in the average selling prices of our products may cause our quarterly
revenues and operating results to fall short of expectations.
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 direct
sales for strategic or other reasons, and provide price concessions to our distributors for a
portion of their original purchase price in order to permit them to address individual negotiations
involving high-volume or competitive situations. Typically, a customer purchasing a small quantity
of product for prototyping or development from a distributor will pay list price. However, a
customer using our products in volume production will often negotiate a substantial price discount
from the distributor. Under such circumstances, the distributor will in turn often negotiate and
receive a price concession from Actel. This is a standard practice in the semiconductor industry
and we provide some level of price concession to every distributor. We have also sometimes offered
price reductions on certain products to reduce inventory levels. Unanticipated declines in the
average selling prices of our products could cause our quarterly revenues and/or gross margin to
fall short of expectations, which would adversely (and perhaps materially) affect our quarterly
financial results.
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In preparing our financial statements, we make good faith estimates and judgments that may
change or turn out to be erroneous, making our financial results difficult to predict.
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
goodwill and long-lived asset impairment, income taxes, inventories, legal matters and loss
contingencies, revenues, and stock-based compensation expense. 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. If these estimates or their related assumptions change, our
operating results for the periods in which we revise our estimates or assumptions could be
adversely (and perhaps materially) affected.
Our net inventories were $38.4 million as of April 4, 2010 compared with $37.3 million as at
January 3, 2010. We determined (as part of our normal quarterly inventory review) that reserves for
excess inventory of $13.3 million, $0.6 million, and $1.2 million were required as of the end of
the second, third, and fourth quarters of 2009, respectively. If we conclude in the future that
additional inventory write-downs are required, our operating results for the periods in which the
write-downs occur would also be adversely (and perhaps materially) affected.
Risks Related to Our Business Strategies
Our short- and long-term revenues and operating results are dependent in large part upon the
success of our business strategies, which include developing and offering FPGAs to markets in which
we believe our technologies have a competitive advantage, such as the radiation-tolerant
mixed-signal and value-based FPGA markets, and conducting more of our operations offshore (i.e.,
overseas) in order to reduce costs. Our failure to execute any of our business strategies, or the
failure of any of our business strategies to achieve the desired results, could (and probably
would) have an adverse (and perhaps material) effect on our business, financial condition, and/or
operating results.
In order for us to sell an FPGA, our customer must incorporate our FPGA into the customers
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 customers 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, and/or operating results.
The products that we develop may fail to adequately address the markets at which they are
targeted, or the markets that we target may fail to emerge or grow as much as we project, which
might prevent us from winning sufficient customer designs to maintain or expand our business.
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 product development and marketing strategy is to define, develop, and
offer FPGAs to markets in which we believe that our nonvolatile flash- and antifuse-based
technologies have a competitive advantage. Our strategy involves considerable risk because our
unique technologies and products can take years to develop (if at all), and markets that we target
may fail to develop as we predict. Our failure to design, develop, market, and sell new or improved
products that satisfy customer needs, compete effectively, and generate acceptable margins may
adversely (and perhaps materially) affect our business, financial condition, and/or operating
results.
The Actel Fusion and SmartFusion mixed-signal FPGAs present numerous significant challenges.
Our experience generally suggests that the development and market risks related to new
products are greatest when we attempt to develop products based in whole or in part on technologies
with which we have limited experience. During 2005, we introduced our Actel Fusion mixed-signal
technology, which integrates analog capabilities, flash memory, and FPGA fabric into a single
mixed-signal FPGA that may be used with soft processor cores. Before the development of Actel
Fusion mixed-signal FPGAs, we had
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limited experience with analog circuitry and soft processor cores and no experience with
mixed-signal FPGAs. As our experience also suggests, the development and market risks related to
the second-generation product, SmartFusion, ought to be significantly lower. Unlike Fusion, which
relies primarily on soft 8-bit cores to provide processing functionality, SmartFusion integrates a
hard 32-bit microcontroller from ARM.
To realize the advantages of being the initial entrant in the mixed-signal FPGA market, we
needed to understand the market, the competition, and the value proposition; identify the early
adopters and understand their buying process, decision criteria, and support requirements; and
select the appropriate sales channels and provide the appropriate customer service, logistical, and
technical support, including training. Meeting these challenges has been a priority for Actel
generally and for our sales and marketing organizations in particular. While Actel Fusion has
achieved limited success, a great deal of understanding and experience has been gained, which we
are applying to SmartFusion. Nonetheless, the risks associated with the market acceptance of
SmartFusion are still substantial. When entering a new market, the first-mover typically faces the
greatest technological and market challenges, and that remains true of the mixed-signal FPGA
market. Our failure to meet these challenges could have a materially adverse effect on our
business, financial condition, and/or operating results.
Our gross margin may decline as we increasingly compete with 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 ASIC and it is easier to convert
between competing PLDs or between a PLD and an ASIC. The increased price competition may also be
due in part to the increasing penetration of PLDs into price-sensitive markets previously dominated
by 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, we will generate an increasingly
greater percentage of our net revenues from low-price products, which may make it more difficult to
maintain gross margin at our historic levels. In addition, gross margins on new products are
generally lower than on mature products. Thus, if we generate a greater percentage of our net
revenues from new products, our overall gross margin could be adversely affected. We have also
sometimes offered price reductions on certain products to reduce inventory levels. Any long-term
decline in our overall gross margin may have an adverse effect on our operating results.
Our restructuring plan may not properly realign our cost structure and our increased reliance on
offshore and outsourced operations may adversely affect our business, financial condition, and/or
operating results.
During the first quarter of 2009, we announced a Company-wide restructuring plan that, in
conjunction with cost-reduction initiatives taken in the fourth quarter of 2008, is expected to
result in a quarterly reduction in expenses of $6.5 million in the third quarter of 2010 compared
with the third quarter of 2008. From the fourth quarter of 2008 through first quarter of 2010, we
have incurred $5.0 million for severance and other costs related to reductions in force. In
addition, the Company has recorded $5.5 million in restructuring costs related to asset
impairments. The Company expects to record approximately $1.1 million in additional reduction in
force expenses through the second quarter of 2010. In addition, the Company anticipates expenses
of $1.6 million in 2010 to relocate employees and inventory to other facilities and sublease excess
capacity, and approximately $1.7 million for leasehold improvements for the relocation.
In addition, part of our restructuring plan involves increased offshoring and outsourcing,
which involves numerous risks, including operational business issues such as productivity,
efficiency, and quality; geographic, cultural, and communication issues; and information security,
intellectual property protection, and other legal issues. The increased offshoring and outsourcing
activities will also be subject to the general uncertainties associated with international business
operations, including trade barriers and other restrictions; governmental regulations (including
taxation) and changes in governmental regulations (including trade policies); currency exchange
fluctuations; war and other military activities; terrorism; changes in social, political, or
economic conditions; and other disruptions or delays in production or shipments. Any of these risks
could render our offshoring and outsourcing plans ineffective, which could have an adverse (and
perhaps material) effect on our business, financial condition, and/or operating results.
Risks Related to Defective Products
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 to use ever more advanced manufacturing
processes, adding 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.
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Any error or defect in our products could have a material adverse effect on our business, financial
condition, and operating results.
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 could also 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 problems and impair our business
reputation. Any error or defect might require product replacement or recall or obligate us to
accept product returns. Any of the foregoing could have an adverse (and perhaps material) effect on
our financial results and business in the short and/or long term.
Any product liability claim could pose a significant risk to our business, financial
condition, and operating results.
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 customers
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 those products. Any product liability claim, whether or not determined in
our favor, can result in significant expense, divert the efforts of our technical and management
personnel, and harm our business. In the event of an adverse settlement of any product liability
claim or an adverse ruling in any product liability litigation, we could incur significant monetary
liabilities, which may not be covered by any insurance that we carry and might have a materially
adverse effect on our financial condition and/or operating results.
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Risks Related to New Products
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, market, and sell new or improved products
that satisfy customer needs, compete effectively, and generate acceptable margins may adversely
affect our business, financial condition, and/or operating results.
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:
| anticipate future customer demand and the technology that will be available to meet the demand; | ||
| define the product and its architecture, including the technology, silicon, programmer, IP, software, and packaging specifications; | ||
| obtain access to advanced manufacturing process technologies; | ||
| design and verify the silicon; | ||
| develop and release evaluation software; | ||
| layout the FPGA and other functional blocks along with the circuitry required for programming; | ||
| integrate the FPGA block with the other functional blocks; | ||
| simulate (i.e., test) the design of the product; | ||
| tapeout the product (i.e., compile a database containing the design information about the product for use in the preparation of photomasks); | ||
| generate photomasks for use in manufacturing the product and evaluate the software; | ||
| manufacture the product at the foundry; | ||
| verify the product; and | ||
| qualify the process, characterize the product, and release production software. |
Each of these steps is difficult and subject to failure or delay, and the failure or delay of any
step can cause the failure or delay of the entire development and introduction. In addition to
failing to meet our development and introduction schedules for new products or the supporting
software or hardware, our new products may not gain market acceptance, and we may not 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/or
operating results.
New products are subject to greater design and 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 design and 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, and/or results of
operation.
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New products are subject to greater technology risks.
As is common in the semiconductor industry, we have experienced, and expect to experience in
the future, difficulties and delays in achieving satisfactory, sustainable yields on new products.
The fabrication of wafers is complex, requiring a high degree of technical skill, state-of-the-art
equipment, and effective cooperation between Actel and the foundry to produce acceptable yields.
Minute impurities, errors in any step of the fabrication process, defects in the photomasks 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
our new products as well as time it takes us to bring them to market, which can create inventory
shortages and dissatisfied customers. Any prolonged inability to obtain adequate yields or make
deliveries of new products could have a materially adverse effect on our business, financial
condition, and/or operating results.
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 those products. We must generally sell new products at low
gross margins in order to win designs, establish a market for the products, and create demand for
volume production, which is an important variable affecting the cost of our products. Another
important variables affecting the cost of our products is manufacturing yields. With our customized
manufacturing process requirements, we almost invariably experience difficulties and delays in
achieving satisfactory, sustainable yields on new products. The lower gross margins typically
associated with new products could have a materially adverse effect on our operating results.
Risks Related to Competitive Disadvantages
The semiconductor industry is intensely competitive. Our competitors include suppliers of
ASICs, CPLDs, and FPGAs. Our biggest direct competitors are Xilinx, Altera, and Lattice, all of
which are suppliers of CPLDs and SRAM-based FPGAs. Altera and Lattice have announced the
development of FPGAs manufactured on embedded flash processes. We also directly compete with
QuickLogic, a supplier of antifuse-based FPGAs. In addition, we 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. We also face
competition from companies that specialize in converting our products into ASICs.
Many of our current and potential competitors are larger and have more resources.
We are much smaller than Xilinx and Altera, which have broader product lines, more extensive
customer bases, and substantially greater financial and other resources. Additional competition is
also possible from major domestic and international semiconductor suppliers, all of which are
larger and have broader product lines, more extensive customer bases, and substantially greater
financial and other resources than Actel, including the capability to manufacture their own wafers.
We may not be able to overcome these competitive disadvantages.
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 develop using 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 logic devices
increases. We have attempted to overcome this competitive disadvantage by offering reprogrammable
flash devices, but antifuse FPGAs account for the bulk of our revenues and will continue to do so
for some time.
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Our technologies are not manufactured on standard processes, which is a competitive disadvantage.
Our antifuse-based FPGAs and (to a lesser extent) flash-based 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 may not obtain early access to the most advanced processes. 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 generally attempt to obtain earlier
access to advanced processes, we may not be able to overcome these competitive disadvantages.
Risks Related to Events Beyond Our Control
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 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 (including export,
import, and security restrictions on information, material, personnel, equipment, software, and the
like), breakdowns of plant or machinery, and inability to obtain transport or supplies. These
events or conditions could impair our operations, which may have a materially adverse effect on our
business, financial condition, and/or operating results.
Our operations and those of our partners are located in areas subject to volatile natural,
economic, social, and political conditions.
Our corporate offices are located in California, which has been subject to power outages and
shortages. More extensive power shortages in the state could disrupt our operations and interrupt
our research and development activities. Our foundry partners in Asia 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,
and/or political conditions. 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/or operating results.
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. If we were to incur substantial liabilities not
adequately covered by insurance, our business, financial condition, and/or operating results could
be adversely (and perhaps materially) affected.
Risks Related to Dependence on Third Parties
We rely heavily on, but generally have little control over, our independent foundries,
suppliers, subcontractors, and distributors, whose interests may diverge from our interests.
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 GLOBALFOUNDRIES Inc. (formerly Chartered Semiconductor
Manufacturing Ltd) in Singapore, Infineon Technologies AG in Germany, Panasonic Corporation
(formerly Matsushita Electric Industrial Co. Ltd.) in Japan, and United Microelectronics
Corporation (UMC) 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/or operating results.
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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 in manufacturing
capacity. When production capacity is tight, the relatively small number 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.
Our capability to shrink the die size of our FPGAs is dependent on the availability of more
advanced manufacturing processes. Due to the customized steps involved in manufacturing our FPGAs,
we typically obtain access to new manufacturing processes later than our competitors using standard
manufacturing processes. No assurance can be given that our efforts to reduce costs by improving
wafer yields will be successful. 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/or operating
results.
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 need to identify and qualify additional foundries. No additional
wafer foundries may be able or willing to satisfy our requirements on a timely basis. Even if we
were 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. Any of these
developments could have a materially adverse effect on our business, financial condition, and/or
operating results.
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 the 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
for each product and from time to time have 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/or
operating results.
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 design, development,
supply, maintenance, and support of some of our analog capabilities, 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
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 products, 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, and/or operating
results.
Our future performance will depend in part on the effectiveness of our independent distributors in
marketing, selling, and supporting our products.
We recognized 63% of our net revenues through the distribution sales channel in the first
quarter of 2010 compared with 72% in the fourth quarter of 2009 and 67% in the first quarter of
2009. Our distributors offer products of several different companies, so they may reduce their
efforts to win new designs or sell our products or give higher priority to other products. This is
particularly a concern with respect to any distributor that also sells products of our direct
competitors. A reduction in design wins or sales effort, termination of relationship, failure to
pay 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/or operating results.
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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. Avnet accounted for 35% of our net revenues in 2009 compared with 36% in
2008 and 40% in 2007. The loss of Avnet as a distributor, or a significant reduction in the level
of design wins or sales generated by Avnet, could have a materially adverse effect on our business,
financial condition, and/or operating results.
Fluctuations in inventory levels at our distributors can affect our operating results.
Our distributors occasionally build inventories in anticipation of significant growth in sales
and, when such growth does not occur as rapidly as anticipated, substantially reduce the amount of
product ordered from us in subsequent quarters. Such a slowdown in orders generally reduces our
gross margin because we are unable to take advantage of any manufacturing cost reductions while the
distributor depletes its inventory.
Risk Related to the Conduct of International Business
Substantially all of our operations, an increasing proportion of our internal functions, and a
significant portion of our sales are subject to the uncertainties associated with international
business operations.
We depend on international operations for almost all of our products and will become increasingly
dependent on international employees and contractors for many of our functions.
We purchase all of our wafers from foreign foundries and have almost all of our commercial
products assembled, packaged, and tested by subcontractors located outside of the United States. In
addition, beginning in the fourth quarter of fiscal 2008, we initiated a restructuring program in
order to reduce our operating costs and focus our resources on key strategic priorities. A part of
our restructuring plan involves (i) increased offshoring, as a result of which many of our internal
engineering, marketing, sales, and support functions will be conducted by employees located outside
of the United States, and (ii) increased outsourcing, as a result of which many of our operational
functions will be conducted by contractors located outside of 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, and/or operating results. Our employees and facilities located
outside of the United States are also subject to local regulation.
We depend on international sales for a substantial portion of our revenues.
Sales to customers outside North America accounted for 46%, 45% and 48% of net revenues for
the three months ended April 4, 2010, January 3, 2010, and April 3, 2009, respectively, 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, import, and other security laws
and regulations of the United States and other countries. Unlike our older RTSX-S space-grade
FPGAs, our newer RTAX-S space-grade FPGAs are subject to the International Traffic in Arms
Regulations (ITAR), which are administered by the U.S. Department of State. ITAR controls not only
the export of products, but also the export of related technical data and defense services as well
as foreign production. While we believe that we have obtained and will continue to obtain all
required licenses for RTAX-S FPGA exports, we have undertaken corrective actions with respect to
the other ITAR controls and are implementing improvements in our internal compliance program. If
the corrective actions and improvements were to fail or be ineffective for a prolonged period of
time, it could have a materially adverse effect on our business, financial condition, and/or
operating results. Changes in United States export laws or regulations (or in the administration of
such laws and regulations) that require us to obtain additional export licenses can cause
significant shipment delays, as was the case in connection with a recent determination by the U.S.
Department of State that our RTSX-SU space-grade FPGAs (a slightly modified version of our RTSX-S
FPGAs manufactured for Actel by UMC in Taiwan) are subject to the ITAR. In addition, the fact that
our RTAX-S and RTAX-SU space-grade FPGAs are ITAR-controlled makes them less attractive to foreign
customers, which could have a materially adverse effect on our business, financial condition,
and/or operating results. Any future restrictions or assessments imposed by the United States or
any other country on our international sales or sales offices could have a materially adverse
effect on our business, financial condition, and/or operating results.
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Risk Related to Economic and Market Fluctuations
We have experienced substantial period-to-period fluctuations in revenues and operating
results due to conditions in the overall economy, in the general semiconductor industry, in our
major markets, and at our major customers. We may again experience these fluctuations, which could
be adverse and may be severe.
Our business has been, and may in the future be, adversely affected by economic downturns.
During the second half of 2008, the global economy experienced a downturn due to the subprime
lending crisis, general credit market crisis, collateral effects on the finance and banking
industries, concerns about liquidity, slower economic activity, increased unemployment rates,
decreased consumer confidence, reduced corporate profits and capital spending, and generally
adverse business conditions. The worldwide economic downturn caused many of our customers to
curtail their spending, which in turn caused sharp declines in our revenues and operating results.
Any future downturns in the global economy may have similar adverse effects on our business,
financial condition, and/or operating results.
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 operating results. Any
future downturns in the semiconductor industry may have a similar adverse effect on our business,
financial condition, and/or operating results.
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
41% of our net revenues in 2009 compared with 38% in 2008 and 32% in 2007. Any future downturn in
the military and aerospace market could have a materially adverse effect on our revenues and/or
operating results.
Our revenues and/or operating results may be adversely affected by future downturns at any of 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 one or more of our major customers declined
significantly as a percentage of our net revenues. 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/or operating results.
We are exposed to fluctuations in the market values of our investment portfolio.
Our investments are subject to interest rate and other risks. Our investment portfolio
consists primarily of asset-backed obligations, corporate bonds, floating-rate notes, and federal
and municipal obligations. An increase in interest rates could subject us to a decline in the
market value of our investments. This risk is mitigated by our ability to hold these investments
for a period of time sufficient to recover the carrying value of the investment, which may not be
until maturity. In addition, if the issuers of our investment securities default on their
obligations, or their credit ratings are negatively affected by liquidity, credit deterioration or
losses, financial results, or other factors, the value of our investments could decline and result
in a material impairment. To mitigate these risks, we invest only in high credit quality debt
securities with average maturities (when purchased) of less than two years. We also limit, as a
percentage of total investments, our investment in any one issuer and in corporate issuers as a
group.
In the event that the carrying value of the investment exceeds its fair value and the decline
in value is determined to be other than temporary, the carrying value is reduced to its current
fair market value. We continue to monitor our investments closely to determine if additional
information becomes available that may have an adverse impact on the fair value and ultimate
realizability of our investments. If we concluded that any of our remaining investments were
other-than-temporarily impaired, our financial results for the periods in which the write-downs
occurred would be adversely (and perhaps materially) affected.
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Other Risks
We may be materially and adversely affected by changing rules and practices.
Pending or new accounting pronouncements, corporate governance or public disclosure
requirements, or tax laws or regulatory rulings, environmental or safety regulations, or rulings,
or other federal, state, local, or foreign laws, regulations, rulings, or practices could have an
effect, possibly material and adverse, on our business, financial condition, and/or operating
results. Any change in accounting pronouncements, corporate governance or public disclosure
requirements, taxation or other rules or practices, as well as any change in the interpretation of
existing pronouncements, requirements, or rules or practices, may call into question our SEC or tax
filings or other compliance efforts and could affect our treatment and reporting of transactions
completed before the change.
We may be unable to comply with the requirements of the Sarbanes-Oxley Act of 2002 and more recent
related corporate governance and public disclosure requirements.
We are committed to maintaining high standards of corporate governance and public disclosure,
and therefore have invested the resources necessary to comply with the evolving laws, regulations,
and standards. This investment has resulted 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 lawsuits or sanctions or investigation by regulatory authorities, such as the SEC or The
Nasdaq Global Market, 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 managements time. While we believe that
our internal control procedures are adequate, we may not be able to continue complying with the
requirements relating to internal controls or 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 in the future,
we may be subject to lawsuits or sanctions or investigation by regulatory authorities. 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
managements time to comply with the management certification and auditor attestation requirements
of Section 404.
Any acquisition we make may harm our business, financial condition, and/or operating results.
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 Actel equity or debt
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 would involve
subsequent deal-related expenses and 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 Actel or the acquired entity. An acquired entity could have
unknown liabilities, and our business may not achieve the results anticipated at the time of the
acquisition. The occurrence of any of these circumstances could disrupt our operations and may have
a materially adverse effect on our business, financial condition, and/or operating results.
We may face significant business and financial risk from claims of intellectual property
infringement asserted against us, and we may be unable to adequately obtain or enforce our own
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 or other intellectual property rights owned by others. As we sometimes
have in the past, we may obtain licenses under patents or other intellectual property rights that
we are alleged to infringe. Although holders of patents or other intellectual property rights
commonly offer licenses to alleged infringers, we may not be offered a license for patents or other
intellectual property rights that we are alleged to infringe or we may not find the terms of any
offered licenses acceptable. We may not be able to resolve any claim of infringement, and the
ultimate resolution of any claim may have a materially adverse effect on our business, financial
condition, and/or operating results.
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Our failure to resolve any claim of infringement could result in litigation or
arbitration. 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 and arbitration proceedings, 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 or arbitration involving intellectual property, we could
suffer significant (and possibly treble) monetary damages, which could have a materially adverse
effect on our business, financial condition, and/or operating results. 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 or other intellectual property rights 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/or operating results.
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 and trade secret laws to protect the
intellectual property developed as a result of our research and development efforts. As part of the
Companys cost-reduction efforts, we expect to reduce our rate of patent application filings in
2010. Every year we abandon some of our existing U.S. and foreign patents and pending applications
that we perceive to have lesser value. As part of the Companys cost-reduction efforts, we expect
to increase the number of existing patents and pending patent applications that we abandon in 2010.
These cost-reduction measures may reduce our ability to protect our products by enforcing, or
defend the Company by asserting, our intellectual property rights against others.
In addition to patent and trade secret laws, we rely on trademark and copyright laws in
combination with nondisclosure agreements and other contractual provisions to protect our
proprietary rights. The steps we have taken may not 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, and/or operating results.
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. Our 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, and/or operating results.
From time to time we have 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. In addition, part of our restructuring plan
involves increased offshoring, which will require us to attract and retain key managerial,
engineering, marketing, sales, and support employees outside of the United States. 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, and/or operating results.
In February 2010, we announced that John C. East will retire as President and Chief Executive
Officer of the Company and as a member of the Board of Directors. He will remain in his current
role until a new Chief Executive Officer is in place, and will then serve as a consultant until
August 2, 2011. Our Board of Directors has retained an executive search firm and formed a committee
to conduct a search for a new President and Chief Executive Officer. Mr. East is participating in
the search, which includes both internal and external candidates. Our Board may not be able to
identify and hire a suitable successor in the anticipated time period and the succession process
may cause disruptions to our business.
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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, stock appreciation rights (SARs), or restricted stock
units (RSUs) 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 has also entered into a Management Continuity
Agreement, which provides for the acceleration of stock options, SARs, and RSUs unvested at the
time of a change of control in the event the executives employment is actually or constructively
terminated other than for cause following the change of control. While these arrangements are
intended to make executive and other employees neutral towards a potential change of control, they
could have the effect of biasing some or all executive 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.
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 historically experienced price and volume volatility. Our Common Stock may continue to
fluctuate substantially on the basis of many factors, including:
| quarterly fluctuations in our financial results or the financial results of our competitors or other semiconductor companies; | ||
| changes in the expectations of analysts regarding our financial results or the financial results of our competitors or other semiconductor companies; | ||
| announcements of new products or technical innovations by Actel or by our competitors; or | ||
| general conditions in the semiconductor industry, financial markets, or economy. |
Like many other stocks, the price of our Common Stock was adversely affected by the global economic
crisis that began in 2008 and our stock price may similarly be subject to future declines.
If our stock price declines sufficiently, we may write down our goodwill, which could have a
materially adverse affect on our operating results.
We account for goodwill and other intangible assets under 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 amount of goodwill exceeds
its implied fair value. The two-step impairment test identifies potential goodwill impairment and
measures the amount of a goodwill impairment loss to be recognized (if any). The first step of the
goodwill impairment test, used to identify potential impairment, compares the fair value of a
reporting unit with its carrying amount, including goodwill. We are a single reporting unit under
Goodwill and Other Intangible Assets, so we use an enterprise approach to determine our total fair
value. Since the best evidence of fair value is quoted market prices in active markets, we start
with our market capitalization as the initial basis for the analysis. We also consider other
factors including control premiums from observable transactions involving controlling interests in
comparable companies as well as overall market conditions. As long as we determine our total
enterprise fair value is greater than our book value and we remain a single reporting unit, our
goodwill will be considered not impaired, and the second step of the impairment test under Goodwill
and Other Intangible Assets will be unnecessary. If our total enterprise fair value were to fall
below our book value, we would proceed to the second step of the goodwill impairment test, which
measures the amount of impairment loss by comparing the implied fair value of our goodwill with the
carrying amount of our goodwill. As a result of this analysis, we may be required to write down our
goodwill, and recognize a goodwill impairment loss, equal to the difference between the book value
of goodwill and its implied fair value.
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If our long-lived assets become impaired, our operating results will be adversely affected.
Goodwill and Other Intangible Assets also requires that intangible assets with definite lives
be amortized over their estimated useful lives and reviewed for impairment whenever events or
changes in circumstances indicate an assets carrying value may not be recoverable in accordance
with Impairment or Disposal of Long Live Assets. During the second quarter of 2009, we recorded
non-cash asset impairment charges totaling $5.5 million for certain manufacturing fixed assets that
were determined to be in excess of current and expected future manufacturing requirements.
Circumstances may arise in the future, such as a sustained decline in our forecasted cash flows,
indicating that the carrying value of other long-lived assets may be impaired. If we are required
to record a charge to earnings because an impairment of our long-lived assets is determined, our
operating results will be adversely effected for the periods in which the charge is recorded.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||||||||
(d) | ||||||||||||||||
(c) | Maximum Number (or | |||||||||||||||
Total Number of | Approximate Dollar | |||||||||||||||
(a) | (b) | Shares (or Units) | Value) of Shares (or | |||||||||||||
Total Number of | Average Price Paid | Purchased as Part of | Units) that May Yet Be | |||||||||||||
Shares (or Units) | per | Publicly Announced | Purchased Under the | |||||||||||||
Period | Purchases | Share (or Unit) | Plans or Programs | Plans or Programs | ||||||||||||
Month #1 (identify beginning and ending dates) |
0 | 0 | 5,326,258 | 1,673,742 | ||||||||||||
Month #2 |
70,300 | |||||||||||||||
(identify
beginning and ending dates) |
2-10-10 to 2/26/10 | $ | 12.40 | 5,396,558 | 1,603,442 | |||||||||||
Month #3 |
184,437 | |||||||||||||||
(identify
beginning and ending dates) |
3-1/10 to 4/1/10 | $ | 13.76 | 5,580,995 | 1,419,005 | |||||||||||
Total |
254,737 | $ | 13.39 | 5,580,995 | 1,419,005 |
34
Table of Contents
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. |
35
Table of Contents
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 14, 2010 | /s/ Maurice E. Carson | |||
Maurice E. Carson | ||||
Executive Vice President and Chief Financial Officer (on behalf of Registrant) (as Principal Financial and Accounting Officer) |
||||
36
Table of Contents
Exhibit Index
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. |
37