Attached files
file | filename |
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EX-31.1 - PERICOM SEMICONDUCTOR CORP | v201661_ex31-1.htm |
EX-31.2 - PERICOM SEMICONDUCTOR CORP | v201661_ex31-2.htm |
EX-32.1 - PERICOM SEMICONDUCTOR CORP | v201661_ex32-1.htm |
EX-32.2 - PERICOM SEMICONDUCTOR CORP | v201661_ex32-2.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
|
OF
THE SECURITIES EXCHANGE ACT OF 1934
|
|
For
the quarterly period ended October 2, 2010
|
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
|
OF
THE SECURITIES EXCHANGE ACT OF 1934
|
|
For
the Transition Period from _______ to _______
|
|
Commission
File Number
0-27026
|
Pericom
Semiconductor Corporation
(Exact
Name of Registrant as Specified in Its Charter)
California
|
77-0254621
|
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
|
Incorporation
or Organization)
|
Identification
No.)
|
3545
North First Street
San Jose,
California 95134
(408)
435-0800
(Address
of Principal Executive Offices and
Issuer’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes £ No
£
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
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer
|
¨
|
Accelerated
Filer
|
x
|
|
Non-accelerated
Filer
|
¨
|
Smaller
Reporting Company
|
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
126-2 of the Exchange Act)
Yes ¨ No x
As of
November 8, 2010 the Registrant had outstanding 24,898,000 shares of Common
Stock.
Pericom
Semiconductor Corporation
Form 10-Q
for the Quarter Ended October 2, 2010
INDEX
Page
|
|||
PART
I. FINANCIAL INFORMATION
|
|||
Item
1:
|
Condensed
Consolidated Financial Statements (Unaudited)
|
||
Condensed
Consolidated Balance Sheets as of October 2, 2010 and July 3,
2010
|
3
|
||
Condensed
Consolidated Statements of Operations for the three months ended October
2, 2010 and September 26, 2009
|
4
|
||
Condensed
Consolidated Statements of Cash Flows for the three months ended October
2, 2010 and September 26, 2009
|
5
|
||
Notes
to Condensed Consolidated Financial Statements
|
6
|
||
Item
2:
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
23
|
|
Item
3:
|
Quantitative
and Qualitative Disclosures about Market Risk
|
32
|
|
Item
4:
|
Controls
and Procedures
|
33
|
|
PART
II. OTHER INFORMATION
|
|||
Item
1A:
|
Risk
Factors
|
34
|
|
Item
2:
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
44
|
|
Item
6:
|
Exhibits
|
44
|
|
Signatures
|
2
PART
I. FINANCIAL INFORMATION
Item 1:
Condensed Consolidated Financial Statements
Pericom
Semiconductor Corporation
Condensed
Consolidated Balance Sheets
(In
thousands, except share data)
(Unaudited)
October
2,
|
July
3,
|
|||||||
2010
|
2010
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 27,904 | $ | 29,495 | ||||
Restricted
cash
|
3,807 | - | ||||||
Short-term
investments
|
80,501 | 76,454 | ||||||
Accounts
receivable
|
||||||||
Trade
(net of allowances of $2,335 and $2,665)
|
26,089 | 25,365 | ||||||
Other
receivables
|
5,708 | 3,940 | ||||||
Inventories
|
31,015 | 23,431 | ||||||
Prepaid
expenses and other current assets
|
1,496 | 2,885 | ||||||
Deferred
income taxes
|
3,216 | 3,119 | ||||||
Total
current assets
|
179,736 | 164,689 | ||||||
Property,
plant and equipment – net
|
58,593 | 50,760 | ||||||
Investments
in unconsolidated affiliates
|
2,423 | 13,183 | ||||||
Deferred
income taxes – non-current
|
3,671 | 3,868 | ||||||
Long-term
investments in marketable securities
|
4,746 | 12,977 | ||||||
Goodwill
|
15,909 | 1,681 | ||||||
Intangible
assets
|
17,195 | 1,452 | ||||||
Other
assets
|
9,754 | 7,438 | ||||||
Total
assets
|
$ | 292,027 | $ | 256,048 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Short-term
debt
|
$ | 6,279 | $ | - | ||||
Accounts
payable
|
13,959 | 15,585 | ||||||
Accrued
liabilities and other
|
22,177 | 10,781 | ||||||
Total
current liabilities
|
42,415 | 26,366 | ||||||
Industrial
development subsidy
|
8,156 | 6,577 | ||||||
Deferred
income taxes
|
6,979 | - | ||||||
Other
long-term liabilities
|
1,153 | 1,199 | ||||||
Total
liabilities
|
58,703 | 34,142 | ||||||
Commitments
(Note 7)
|
||||||||
Shareholders’
equity:
|
||||||||
Common
stock and paid in capital - no par value, 60,000,000
shares
|
||||||||
authorized;
shares issued and outstanding: October 2, 2010,
|
||||||||
24,818,000;
July 3, 2010, 24,898,000
|
130,519 | 130,536 | ||||||
Retained
earnings
|
98,809 | 89,299 | ||||||
Accumulated
other comprehensive income
|
3,996 | 2,071 | ||||||
Total
shareholders' equity
|
233,324 | 221,906 | ||||||
Total
liabilities and shareholders' equity
|
$ | 292,027 | $ | 256,048 |
See notes
to condensed consolidated financial statements.
3
Pericom
Semiconductor Corporation
Condensed
Consolidated Statements of Operations
(In
thousands, except per share amounts)
(Unaudited)
Three
Months Ended
|
||||||||
October
2,
|
September
26,
|
|||||||
2010
|
2009
|
|||||||
Net
revenues
|
$ | 42,775 | $ | 32,952 | ||||
Cost
of revenues
|
28,240 | 22,416 | ||||||
Gross
profit
|
14,535 | 10,536 | ||||||
Operating
expenses:
|
||||||||
Research
and development
|
4,397 | 4,046 | ||||||
Selling,
general and administrative
|
7,742 | 6,828 | ||||||
Total
operating expenses
|
12,139 | 10,874 | ||||||
Income
(loss) from operations
|
2,396 | (338 | ) | |||||
Interest
and other income
|
11,936 | 1,643 | ||||||
Income
before income taxes
|
14,332 | 1,305 | ||||||
Income
tax expense
|
5,378 | 475 | ||||||
Net
income from consolidated companies
|
8,954 | 830 | ||||||
Equity
in net income of unconsolidated affiliates
|
556 | 527 | ||||||
Net
income
|
9,510 | 1,357 | ||||||
Net
income attributable to noncontrolling interests
|
- | (22 | ) | |||||
Net
income attributable to Pericom shareholders
|
$ | 9,510 | $ | 1,335 | ||||
Basic
income per share to Pericom shareholders
|
$ | 0.38 | $ | 0.05 | ||||
Diluted
income per share to Pericom shareholders
|
$ | 0.38 | $ | 0.05 | ||||
Shares
used in computing basic income per share
|
24,890 | 25,509 | ||||||
Shares
used in computing diluted income per share
|
25,263 | 25,678 |
See notes
to condensed consolidated financial statements.
4
Pericom
Semiconductor Corporation
Condensed
Consolidated Statements of Cash Flows
(In
thousands)
(Unaudited)
Three
Months Ended
|
||||||||
October
2,
|
September
26,
|
|||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 9,510 | $ | 1,357 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
2,231 | 1,939 | ||||||
Share-based
compensation
|
1,063 | 930 | ||||||
Tax
benefit resulting from stock option transactions
|
81 | - | ||||||
Excess
tax benefit resulting from stock option transactions
|
(11 | ) | - | |||||
Gain
on previously held shares in PTI
|
(11,004 | ) | - | |||||
Gain
on sale of investments
|
(604 | ) | (946 | ) | ||||
Equity
in net income of unconsolidated affiliates
|
(556 | ) | (527 | ) | ||||
Deferred
taxes
|
3,886 | 465 | ||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
(8 | ) | 1,361 | |||||
Inventories
|
(3,916 | ) | 473 | |||||
Prepaid
expenses and other current assets
|
1,906 | 756 | ||||||
Other
assets
|
(344 | ) | (219 | ) | ||||
Accounts
payable
|
(2,759 | ) | 740 | |||||
Accrued
liabilities and other
|
(506 | ) | (3,137 | ) | ||||
Other
long-term liabilities
|
2,317 | 483 | ||||||
Net
cash provided by operating activities
|
1,286 | 3,675 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
of property, plant and equipment
|
(5,439 | ) | (2,888 | ) | ||||
Purchase
of available-for-sale investments
|
(50,808 | ) | (22,650 | ) | ||||
Maturities
and sales of available-for-sale and trading investments
|
67,167 | 27,616 | ||||||
Acquisition
of PTI, net of cash acquired
|
(15,592 | ) | - | |||||
Change
in restricted cash balance
|
(3,807 | ) | - | |||||
Net
cash provided by (used in) investing activities
|
(8,479 | ) | 2,078 | |||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from common stock issuance under stock plans
|
330 | 282 | ||||||
Proceeds
from short-term debt
|
6,160 | - | ||||||
Excess
tax benefit resulting from stock option transactions
|
11 | - | ||||||
Repurchase
of common stock
|
(1,409 | ) | - | |||||
Net
cash provided by financing activities
|
5,092 | 282 | ||||||
EFFECT
OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
|
510 | 160 | ||||||
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
(1,591 | ) | 6,195 | |||||
CASH
AND CASH EQUIVALENTS:
|
||||||||
Beginning
of period
|
29,495 | 37,321 | ||||||
End
of period
|
$ | 27,904 | $ | 43,516 |
See notes
to condensed consolidated financial statements.
5
Pericom
Semiconductor Corporation
Notes To
Condensed Consolidated Financial Statements
(Unaudited)
1.
BASIS OF PRESENTATION
The
condensed consolidated financial statements have been prepared by Pericom
Semiconductor Corporation (“Pericom” or the “Company”) pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, these unaudited condensed consolidated financial statements include
all adjustments, consisting only of normal recurring adjustments and accruals,
necessary for a fair presentation of the Company’s financial position as of
October 2, 2010, the results of operations for the three months ended October 2,
2010 and September 26, 2009 and cash flows for the three months ended October 2,
2010 and September 26, 2009. This unaudited quarterly information should
be read in conjunction with the audited consolidated financial statements of
Pericom and the notes thereto included in the Company’s Annual Report on Form
10-K as filed with the Securities and Exchange Commission on August 31,
2010.
The
preparation of the interim condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the interim condensed consolidated financial
statements and the reported amounts of revenue and expenses during the
period. Actual amounts could differ from these estimates. The
results of operations for the three months ended October 2, 2010 and September
26, 2009 are not necessarily indicative of the results to be expected for the
entire year. The three month periods ended October 2, 2010 and September
26, 2009 each had 13 weeks.
The
Company participates in a dynamic high technology industry and believes that
changes in any of the following areas could have a material adverse effect on
the Company’s future financial position or results of
operations: advances and trends in new technologies; competitive
pressures in the form of new products or price reductions on current products;
changes in the overall demand for products offered by the Company; changes in
customer relationships; acquisitions and the subsequent integration of the
acquired entity with the Company; litigation or claims against the Company based
on intellectual property, patent, product, regulatory or other factors; risks
associated with changes in domestic and international economic and/or political
conditions or regulations and environmental laws; availability of necessary
components; interruptions at wafer suppliers and subcontractors; fluctuations in
currencies given the Company’s sales and operations heavily weighted and paid in
foreign currencies; and the Company’s ability to attract and retain employees
necessary to support its growth.
These
interim condensed consolidated financial statements include the accounts of
Pericom Semiconductor Corporation and its wholly owned subsidiaries, PSE
Technology Corporation (“SRe”), Pericom Semiconductor Hong Kong Limited
(“PSC-HK”) and Pericom Asia Limited (“PAL”). In addition, PAL has three
wholly-owned subsidiaries, PSE Technology (Shandong) Corporation ("PSE-SD") and
Pericom Technology Yangzhou Corporation (“PSC-YZ”) for the Jinan, China and
Yangzhou, China operations, respectively, and Pericom Technology Inc. (“PTI”)
from August 31, 2010. The Company eliminates all intercompany balances and
transactions in consolidation.
FISCAL
PERIOD – For purposes of reporting the financial results, the Company’s
fiscal years end on the Saturday closest to the end of June. The year ended July
3, 2010 contained 53 weeks and is referred to as fiscal year 2010 or fiscal
2010, whereas the current fiscal year 2011 or fiscal 2011 includes 52 weeks and
will end on July 2, 2011.
WARRANTY –
The Company offers a standard one-year product replacement warranty. In
the past, the Company has not had to accrue for a general warranty reserve, but
assesses the level and materiality of RMAs and determines whether it is
appropriate to accrue for estimated returns of defective products at the time
revenue is recognized. On occasion, management may determine to accept
product returns beyond the standard one-year warranty period. In those
instances, the Company accrues for the estimated cost at the time management
decides to accept the return. Because of the Company’s standardized
manufacturing processes and product testing procedures, returns of defective
product are infrequent and the quantities have not been significant.
Accordingly, historical warranty costs have not been material.
6
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued an
Accounting Standards Update (“ASU”) which clarifies and provides additional
disclosure requirements on the transfers of assets and liabilities between Level
1 (quoted prices in active market for identical assets or liabilities) and Level
2 (significant other observable inputs) of the fair value measurement hierarchy,
including the reasons for and the timing of the transfers. Additionally, the
guidance requires a roll forward of activities on purchases, sales, issuance,
and settlements of the assets and liabilities measured using significant
unobservable inputs (Level 3 fair value measurements). The guidance was
effective for Pericom with the reporting period beginning December 27, 2009,
except for the disclosure on the roll forward activities for Level 3 fair value
measurements, which will become effective for Pericom with the fiscal year
beginning after December 15, 2010. Other than requiring additional disclosures,
adoption of this new guidance will not have a material impact on our financial
statements.
In June
2009, the FASB amended certain guidance for determining whether an entity is a
variable interest entity (VIE), requires a qualitative rather than a
quantitative analysis to determine the primary beneficiary for a VIE, requires
continuous assessments of whether an enterprise is the primary beneficiary of a
VIE and requires enhanced disclosures about an enterprise’s involvement with a
VIE. The guidance is effective for Pericom for the fiscal year beginning July 4,
2010, for interim periods within that fiscal year, and for interim and annual
reporting periods thereafter. The adoption of this guidance did not have an
impact on our consolidated financial position, results of operations and cash
flows.
2.
GOODWILL AND INTANGIBLE ASSETS
The
following table summarizes the activity related to the carrying value of our
goodwill during the quarter ended October 2, 2010 and September 26, 2009 (in
thousands):
October 2,
2010
|
September
26, 2009
|
|||||||
Beginning
balance
|
$ | 1,681 | $ | 1,673 | ||||
PTI
acquisition
|
15,543 | — | ||||||
Elimination
of previous PTI goodwill
|
(1,325 | ) | — | |||||
Other
adjustments
|
10 | 6 | ||||||
Ending
balance
|
$ | 15,909 | $ | 1,679 |
The
following table summarizes the components of other intangible assets and related
accumulated amortization balances, which were recorded as a result of business
combinations (in thousands):
7
October 2, 2010
|
July 3, 2010
|
|||||||||||||||||||||||
(in thousands)
|
Gross
|
Accumulated
Amortization
|
Net
|
Gross
|
Accumulated
Amortization
|
Net
|
||||||||||||||||||
Trade
name
|
$ | 42 | $ | (30 | ) | $ | 12 | $ | 40 | $ | (28 | ) | $ | 12 | ||||||||||
Customer
relationships
|
5,368 | (75 | ) | 5,293 | - | - | - | |||||||||||||||||
Existing
and core technology
|
9,053 | (1,200 | ) | 7,853 | 1,856 | (1,021 | ) | 835 | ||||||||||||||||
Order
backlog
|
365 | (140 | ) | 225 | - | - | - | |||||||||||||||||
Supplier
relationship
|
398 | (224 | ) | 174 | 398 | (208 | ) | 190 | ||||||||||||||||
Total
amortizable purchased intangible assets
|
15,226 | (1,669 | ) | 13,557 | 2,294 | (1,257 | ) | 1,037 | ||||||||||||||||
In-process
research and development
|
3,223 | - | 3,223 | - | - | - | ||||||||||||||||||
SaRonix
trade name
|
415 | - | 415 | 415 | - | 415 | ||||||||||||||||||
Total
purchased intangible assets
|
$ | 18,864 | $ | (1,669 | ) | $ | 17,195 | $ | 2,709 | $ | (1,257 | ) | $ | 1,452 |
The
increase in intangible assets during the quarter ended October 2, 2010 is the
result of obtaining control of PTI by completing the purchase of the balance of
outstanding shares in PTI the Company did not own. PTI is now a wholly-owned
subsidiary of the Company. Amortization expense related to finite-lived
purchased intangible assets was approximately $398,000 and $82,000 for the three
month periods ended October 2, 2010 and September 26, 2009,
respectively.
The
finite-lived purchased intangible assets consist of supplier and customer
relationships, order backlog, trade names and existing and core technology,
which have remaining weighted average useful lives from three months to six
years. We expect our future amortization expense associated with the
Company’s intangible assets to be:
Months from October 2, 2010
|
||||||||||||||||||||||||
(in thousands)
|
Next 12
Months
|
13-24
Months
|
25-36
Months
|
37-48
Months
|
49-60
Months
|
Over
60
Months
|
||||||||||||||||||
Expected
amortization-PTI
|
$ | 2,313 | $ | 2,089 | $ | 2,089 | $ | 2,089 | $ | 2,089 | $ | 1,915 | ||||||||||||
Expected
amortization-PTL
|
191 | 191 | 191 | 16 | - | - | ||||||||||||||||||
Expected
amortization-SaRonix
|
117 | 117 | 94 | - | - | - | ||||||||||||||||||
Expected
amortization-eCERA
|
30 | 27 | - | - | - | - | ||||||||||||||||||
$ | 2,651 | $ | 2,424 | $ | 2,374 | $ | 2,105 | $ | 2,089 | $ | 1,915 |
3.
INCOME PER SHARE
Basic
income per share is based upon the weighted average number of common shares
outstanding. Diluted income per share reflects the additional potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
Basic and
diluted income per share attributable to Pericom shareholders for the three
month periods ended October 2, 2010 and September 26, 2009 are computed as
follows:
8
Three
Months Ended
|
||||||||
October
2,
|
September
26,
|
|||||||
(in
thousands, except per share data)
|
2010
|
2009
|
||||||
Net
income attributable to Pericom shareholders
|
$ | 9,510 | $ | 1,335 | ||||
Computation
of common shares outstanding – basic earnings per share:
|
||||||||
Weighted
average shares of common stock
|
24,890 | 25,509 | ||||||
Basic
earnings per share attributable to Pericom shareholders
|
$ | 0.38 | $ | 0.05 | ||||
Computation
of common shares outstanding – diluted earnings per share:
|
||||||||
Weighted
average shares of common stock
|
24,890 | 25,509 | ||||||
Dilutive
shares using the treasury stock method
|
373 | 169 | ||||||
Shares
used in computing diluted earnings per share
|
25,263 | 25,678 | ||||||
Diluted
earnings per share attributable to Pericom shareholders
|
$ | 0.38 | $ | 0.05 |
Options
to purchase 2,405,000 and 2,908,000 shares of common stock, and restricted stock
units of 113,000 and 89,000 were outstanding as of October 2, 2010 and September
26, 2009 respectively, but not included in the computation of diluted earnings
per share because the options and units would be anti-dilutive under the
treasury stock method.
4.
INVENTORIES
Inventories
consist of:
October
2,
|
July
3,
|
|||||||
(in
thousands)
|
2010
|
2010
|
||||||
Raw
materials
|
$ | 15,461 | $ | 9,037 | ||||
Work
in process
|
4,971 | 6,793 | ||||||
Finished
goods
|
10,583 | 7,601 | ||||||
$ | 31,015 | $ | 23,431 |
The
Company considers raw material inventory obsolete and reserves it if the raw
material has not moved in 365 days. The Company reviews its assembled
devices for excess and records a reserve if the quantity of assembled devices in
inventory is in excess of the greater of the quantity shipped in the previous
twelve months, the quantity in backlog or the quantity forecasted to be shipped
in the following twelve months. In certain circumstances, management will
determine, based on expected usage or other factors, that inventory considered
excess by these guidelines should not be reserved. The Company does occasionally
determine that last twelve months’ sales levels will not continue and reserves
inventory in line with the quantity forecasted. As of October 2, 2010, the
Company had reserved for $3.3 million of inventory as compared to $3.4 million
at July 3, 2010. The Company attributes this reduction of approximately
$143,000 in obsolete inventory between October 2, 2010 and July 3, 2010 to sales
of previously reserved inventory and physically scrapping products previously
reserved, partially offset by additional inventory reserves.
5.
ACCRUED LIABILITIES AND OTHER
Accrued
liabilities and other consist of:
October
2,
|
July
3,
|
|||||||
(in
thousands)
|
2010
|
2010
|
||||||
Accrued
compensation
|
$ | 5,227 | $ | 5,632 | ||||
Acquisition-related
liabilities
|
5,648 | - | ||||||
Contingent
earnout liability
|
4,160 | - | ||||||
Accrued
construction liabilities
|
3,786 | 1,960 | ||||||
Income
tax payable
|
1,039 | 1,357 | ||||||
Accrued
commissions
|
716 | 639 | ||||||
Other
accrued expenses
|
1,601 | 1,193 | ||||||
$ | 22,177 | $ | 10,781 |
9
The
acquisition-related liabilities consist of approximately $90,000 of acquisition
expenses with the balance being unpaid purchase consideration consisting of $3.0
million in an escrow fund in respect of certain indemnity obligations, $750,000
in a purchase price adjustment fund related to working capital, and $1.8 million
of purchase consideration, with approximately $0.7 million to be paid in the
quarter ending January 1, 2011 and approximately $1.1 million to be paid in the
quarter ending October 1, 2011.
6.
BUSINESS COMBINATION
Acquisition
of PTI
On August
31, 2010, the Company completed the acquisition and obtained control of PTI
pursuant to the terms of the Agreement and Plan of Merger (the “Merger
Agreement”) for cash consideration of $30.6 million, of which
acquisition-related liabilities of $5.6 million remain outstanding. Up to
an additional approximately $6 million in earn-out consideration and bonus
payments is also payable by the Company pursuant to the Merger Agreement upon
achievement of gross profit milestones during fiscal year 2011. Portions
of the merger consideration are being held in an escrow fund in respect of the
PTI shareholders’ indemnity obligations owed to Pericom and in a fund relating
to a potential working capital adjustment.
Fair Value of Consideration
Transferred (in
thousands):
Cash
consideration
|
$
|
30,570
|
||
Fair
value of contingent earn-out consideration
|
|
4,087
|
|
|
Fair
value of previously held interest in PTI
|
|
23,672
|
|
|
|
||||
Total
|
|
$
|
58,329
|
|
Immediately
prior to the acquisition, remeasurement of our interest in PTI led to a gain of
$11 million, which amount is recorded in interest and other income in the
condensed consolidated statement of operations. This fair value measurement was
based on the per share consideration paid in the transaction, including the fair
value of the earn-out, applied to the number of shares held by the Company
immediately prior to closing.
In
accordance with Accounting Standards Codification (“ASC”) 805, Business
Combinations, a liability was recognized for the estimated acquisition date fair
value of the contingent consideration based on the probability of the
achievement of PTI’s gross profit target. Any change in the fair value of
the contingent earn-out consideration subsequent to the acquisition date,
including changes from events after the acquisition date, such as changes in the
Company’s estimate of the gross profit expected to be achieved, will be
recognized in earnings in the period as estimated fair value changes. The fair
value estimate assumes that the probability-weighted gross profit is achieved
over the earn-out period. If actual achievement of PTI gross profit is at
100% of the threshold, the PTI stockholders will receive the maximum
consideration of $4,774,000. If the amount of PTI gross profit is equal to or
greater than $8,718,000, the PTI stockholders will receive an earn-out
consideration of at least $2,387,000. A change in the fair value of the
contingent earn-out consideration could have a material impact on the Company’s
statement of operations and financial position in the period of the change in
estimate.
The
estimated initial earn-out liability was based on the Company’s probability
assessment of PTI’s gross profit achievements during the earn-out period, which
is from July 4, 2010 to July 3, 2011. In developing these estimates, the Company
considered the revenue and gross profit projections of PTI management, PTI’s
historical results, and general macro-economic environment and industry trends.
This fair value measurement is based on significant revenue and gross profit
inputs not observed in the market and thus represents a Level 3 measurement as
defined by ASC 820, Fair Value Measurements and Disclosures. Level 3 instruments
are valued based on unobservable inputs that are supported by little or no
market activity and reflect the Company’s own assumptions in measuring fair
value.
Preliminary
Allocation of Consideration Transferred
The
acquisition was accounted for as a business combination under ASC 805. The
estimated total preliminary purchase price of $58.3 million was allocated to the
net tangible and intangible assets acquired and liabilities assumed based on
their fair values as of the date of the completion of the acquisition as follows
(in thousands):
10
Net
tangible assets
|
$ | 26,665 | ||
Amortizable
intangible assets:
|
||||
Existing
and core technology
|
7,165 | |||
Customer relationships
|
5,368 | |||
Backlog
|
365 | |||
Indefinite-lived
intangible asset:
|
||||
In-process
research and development
|
3,223 | |||
Goodwill
|
15,543 | |||
Total
|
$ | 58,329 |
As of the
date of acquisition, inventories are required to be measured at fair value. The
preliminary fair value of inventory of $3.4 million was based on assumptions
applied to the PTI acquired inventory balance. In estimating the fair value of
finished goods and work-in-progress inventory, the Company made assumptions
about the selling prices and selling cost associated with the inventory. The
Company assumed that estimated selling prices would yield gross margins
consistent with actual margins earned by PTI during the second half of fiscal
year 2010. The Company assumed that selling cost as a percentage of revenue
would be consistent with actual rates experienced by PTI during the second half
of fiscal year 2010.
The fair
value of the acquired land and buildings in Shanghai, China was estimated based
on the recent real estate transactions of comparable properties in the same
geographic area. The acquired land and buildings are being depreciated
over estimated useful lives of 15 to 48 years.
Existing
and core technology consisted of products which have reached technological
feasibility and relate to the PTI products. The value of the developed
technology was determined by discounting estimated net future cash flows of
these products. The Company is amortizing the existing and core technology on a
straight-line basis over an estimated life of 6 years.
Customer
relationships relate to the Company’s ability to sell existing and future
versions of products to existing PTI customers. The fair value of the customer
relationships was determined by discounting estimated net future cash flows from
the customer contracts. The Company is amortizing customer relationships on a
straight-line basis over an estimated life of 6 years.
The
backlog fair value relates to the estimated selling cost to generate backlog at
August 31, 2010. The fair value of backlog at closing is being amortized over an
estimated life of 3 months.
In-process
research and development (“IPRD”) consisted of the in-process projects to
complete development of certain PTI products. The value assigned to IPRD was
determined by considering the importance of products under development to the
overall development plan, estimating costs to develop the purchased IPRD into
commercially viable products, estimating the resulting net cash flows from the
projects when completed and discounting the net cash flows to their present
value. This methodology is referred to as the income approach, which discounts
expected future cash flows to present value. The discount rate used in the
present value calculations was derived from a weighted-average cost of capital
analysis, adjusted to reflect additional risks related to the product’s
development and success as well as the product’s stage of completion. Acquired
IPRD assets are initially recognized at fair value and are classified as
indefinite-lived assets until the successful completion or abandonment of the
associated research and development efforts. Accordingly, during the development
period after the acquisition date, these assets will not be amortized as charges
to earnings; instead this asset will be subject to periodic impairment testing.
Upon successful completion of the development process for the acquired IPRD
projects, the asset would then be considered a finite-lived intangible asset and
amortization of the asset will commence. Development of the PTI products is
currently estimated to be approximately 20% complete and expected to be
completed in the fourth quarter of fiscal year 2011. Validation, testing and
further re-work may be required prior to achieving volume production which is
anticipated to occur from fiscal year 2011 through fiscal year 2013. The
estimated incremental cost to complete the product technology is approximately
$2.2 million.
11
The
deferred tax liability of $3.0 million associated with the estimated fair value
adjustments of assets acquired and liabilities assumed was recorded using the
estimated statutory tax rate in the jurisdictions where the fair value
adjustments occurred.
Of the
total estimated purchase price paid at the time of acquisition, approximately
$15.5 million has been allocated to goodwill. Goodwill represents the excess of
the purchase price of an acquired business over the fair value of the underlying
net tangible and intangible assets and is not deductible for tax purposes. Among
the factors that contributed to a purchase price in excess of the fair value of
the net tangible and intangible assets was the acquisition of an assembled
workforce of experienced semiconductor engineers, synergies in products,
technologies, skill sets, operations, customer base and organizational cultures
that can be leveraged to enable the Company to build an enterprise greater than
the sum of its parts. In accordance with ASC 350, Intangibles—Goodwill and
Other, goodwill will not be amortized but instead will be tested for impairment
at least annually and more frequently if certain indicators of impairment are
present. In the event that management determines that the value of goodwill has
become impaired, the Company will record an expense for the amount impaired
during the fiscal quarter in which the determination is made.
The
amount of revenue included in the Company’s condensed consolidated statement of
operations from the PTI acquisition date of August 31, 2010 to October 2, 2010,
was approximately $1.8 million, with a net loss of $22,000.
Pro
Forma Data for the PTI Acquisition
The
following table presents the unaudited pro forma results of the Company as
though the PTI acquisition described above occurred at the beginning of the
periods indicated. The data below includes the historical results of the Company
and each of these acquisitions on a standalone basis through the closing date of
acquisition. The pro forma information presented does not purport to be
indicative of the results that would have been achieved had the acquisition been
made as of those dates nor of the results which may occur in the
future.
(Unaudited)
|
||||||||
Three
months ended
|
||||||||
October
2, 2010
|
September
26, 2009
|
|||||||
(in
thousands)
|
||||||||
Revenue
|
$ | 46,941 | $ | 36,533 | ||||
Net
income
|
8,675 | 8,267 | ||||||
Net
income per share—basic
|
0.35 | 0.32 | ||||||
Net
income per shar —diluted
|
0.34 | 0.32 |
7.
COMMITMENTS
The
Company’s future minimum commitments at October 2, 2010 are as
follows:
Months from October 2, 2010
|
||||||||||||||||||||||||
(in thousands)
|
Less
than
12
Months
|
12-24
Months
|
24-36
Months
|
36-48
Months
|
48-60
Months
|
Total
|
||||||||||||||||||
Operating
lease payments
|
$ | 1,404 | $ | 1,266 | $ | 1,277 | $ | 385 | $ | - | $ | 4,332 | ||||||||||||
Yangzhou
capital injection
|
7,000 | 8,000 | - | - | - | 15,000 | ||||||||||||||||||
Capital
equipment purchase commitments
|
1,236 | 997 | - | - | - | 2,233 | ||||||||||||||||||
Total
|
$ | 9,640 | $ | 10,263 | $ | 1,277 | $ | 385 | $ | - | $ | 21,565 |
12
The
operating lease commitments are primarily the lease on the Company’s corporate
headquarters, which expires in 2013 but with two consecutive options to extend
for an additional five years each.
We have
no purchase obligations other than routine purchase orders and the capital
equipment purchase commitments shown in the table as of October 2,
2010.
On
December 1, 2009, the Company entered into an R&D Center Investment
Agreement (the “R&D Agreement”) with the Administrative Committee of the
Yangzhou Economic and Technology Development Zone (the “Zone”) for the Company’s
investment in the Zone, located in Jiangsu Province, People’s Republic of China.
Under the R&D Agreement, the Company or its majority-owned affiliate will
invest in and establish a research and development center to engage in the
research and development of the IC design technologies related to “high-speed
serial connectivity” and the “XO crystal oscillator” and the manufacture of
relevant products. It is expected that the Company’s total investment,
over a period of two to three years, will be approximately $30 million U.S.
Dollars. As of October 2, 2010, the Company’s further commitment for the
Yangzhou project is $15 million, which is included in the table
above.
8.
INDUSTRY AND SEGMENT INFORMATION
The
Company operates and tracks its results in one reportable segment. The
Company designs, develops, manufactures and markets a broad range of interface
integrated circuits and frequency control products.
The
following table indicates the percentage of our net revenues and accounts
receivable in excess of 10 percent with any single customer:
Net
Revenues
|
||||||||
Three
Months Ended
|
||||||||
October
2,
|
September
26,
|
|||||||
2010
|
2009
|
|||||||
Customer
A
|
26 | % | 23 | % | ||||
Customer
B
|
11 | % | 15 | % | ||||
Customer
C
|
10 | % | 10 | % | ||||
All
others
|
53 | % | 52 | % | ||||
100 | % | 100 | % | |||||
Accounts
Receivable
|
||||||||
October
2,
|
July
3,
|
|||||||
2010
|
2010
|
|||||||
Customer
A
|
28 | % | 26 | % | ||||
All
others
|
72 | % | 74 | % | ||||
100 | % | 100 | % |
For
geographical reporting, the Company attributes net revenues to the country where
customers are located (the “bill to” location). The Company neither conducts
business in nor sells to persons in Iran, Syria, Sudan, or North Korea,
countries located in referenced regions identified as state sponsors of
terrorism by the U.S. Department of State and subject to U.S. economic sanctions
and export controls. The following table sets forth net revenues by country for
the three month periods ended October 2, 2010 and September 26,
2009:
Net
Revenues
|
||||||||
Three
Months Ended
|
||||||||
October
2,
|
September
26,
|
|||||||
2010
|
2009
|
|||||||
Taiwan
|
$ | 21,501 | $ | 17,604 | ||||
China
(including Hong Kong)
|
12,442 | 8,940 | ||||||
2,735 | 2,267 | |||||||
Other
(less than 10% each)
|
6,097 | 4,141 | ||||||
Total
net revenues
|
$ | 42,775 | $ | 32,952 |
13
Long-lived
assets consist of all non-monetary assets, excluding financial assets, deferred
taxes, goodwill and intangible assets. The Company attributes long-lived assets
to the country where they are located. The following table sets forth the
Company’s long-lived assets by country of location as of October 2, 2010 and
July 3, 2010:
October
2,
|
July
3,
|
|||||||
2010
|
2010
|
|||||||
China
(including Hong Kong)
|
$ | 34,864 | $ | 27,883 | ||||
Taiwan
|
18,761 | 17,519 | ||||||
United
States
|
3,578 | 3,751 | ||||||
Other
countries
|
1,390 | 1,607 | ||||||
Total
|
$ | 58,593 | $ | 50,760 |
9.
STOCK REPURCHASE PROGRAM
On April
26, 2007, the Company’s Board of Directors authorized the repurchase of 2.0
million shares of the Company’s common stock, and on April 29, 2008, the Board
of Directors authorized the repurchase of an additional $30 million of common
stock. The Company may repurchase the shares from time to time in open market or
private transactions, at the discretion of the Company’s
management.
During
the three month period ended October 2, 2010, the Company repurchased
approximately 163,200 shares for an aggregate cost of approximately $1.4
million. During the three month period ended September 26, 2009, the Company did
not repurchase any shares of common stock.
Current
cash balances and the proceeds from stock option exercises and purchases in the
stock purchase plan have funded stock repurchases in the past, and the Company
expects to fund future stock repurchases from these same sources.
10.
SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
PREFERRED
STOCK
The
Company’s shareholders have authorized the Board of Directors to issue 5,000,000
shares of preferred stock from time to time in one or more series and to fix the
rights, privileges and restrictions of each series. As of October 2, 2010,
the Company has issued no shares of preferred stock.
STOCK OPTION
PLANS
At
October 2, 2010 the Company had four stock option plans and an employee stock
purchase plan, consisting of the 1995 Stock Option Plan, 2001 Stock Option Plan,
SaRonix Acquisition Stock Option Plan, 2004 Stock Incentive Plan and the 2000
Employee Stock Purchase Plan.
Under the
four stock option plans, the Company has reserved an aggregate of 7.0 million
shares of common stock as of October 2, 2010 for issuance to employees,
officers, directors, independent contractors and consultants of the Company in
the form of incentive or nonqualified stock options, or grants of restricted
stock.
The
Company may grant options at the fair value on the grant date for incentive
stock options and nonqualified stock options. Options vest over periods of
generally 48 months as determined by the Board of Directors. Options
granted under the Plans expire 10 years from the grant date.
The
Company estimates the fair value of each employee option on the date of grant
using the Black-Scholes option valuation model and expenses that value as
compensation using a straight-line method over the option’s vesting period,
which corresponds to the requisite employee service period. The Company
estimates expected stock price volatility based on actual historical volatility
for periods that the Company believes represent predictors of future
volatility. The Company uses historical data to estimate option exercises,
expected option holding periods and option forfeitures. The Company bases
the risk-free interest rate for periods within the contractual life of the
option on the U.S. Treasury yield corresponding to the expected life of the
underlying option.
14
The value
of the Company’s stock options granted under its stock option plans during the
three months ended October 2, 2010 was estimated at the date of grant using the
following weighted average assumptions:
Three
|
||||
Months
Ended
|
||||
October
2,
|
||||
2010
|
||||
Expected
Life
|
5.5
years
|
|||
Risk-free
interest rate
|
2.46 | % | ||
Volatility
|
54 | % | ||
Dividend
Yield
|
- |
The
weighted average fair value of options granted during the three months ended
October 2, 2010 was $4.35. We did not grant any stock options during the three
months ended September 26, 2009.
The
following table summarizes the Company’s stock option activity for the three
months ended October 2, 2010:
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic Value
|
|||||||||||||
(in thousands)
|
(years)
|
(in
thousands)
|
||||||||||||||
Options
outstanding at July 3, 2010
|
3,477 | $ | 11.85 | 5.15 | $ | 872 | ||||||||||
Granted
(weighted average grant date fair value of $4.35)
|
154 | 8.55 | ||||||||||||||
Exercised
|
(5 | ) | 7.95 | |||||||||||||
Cancelled
or expired
|
(50 | ) | 20.27 | |||||||||||||
Options
outstanding at October 2, 2010
|
3,576 | $ | 11.60 | 5.13 | $ | 402 | ||||||||||
Options
vested and expected to vest at October 2, 2010
|
3,465 | $ | 11.64 | 5.00 | $ | 393 | ||||||||||
Options
exercisable at October 2, 2010
|
2,726 | $ | 11.80 | 3.99 | $ | 329 |
At
October 2, 2010, 2.5 million shares were available for future grants under the
option plans. The aggregate intrinsic value of options exercised during
the three months ended October 2, 2010 was approximately $8,400.
At
October 2, 2010, expected future compensation expense relating to options
outstanding is $3.4 million, which will be amortized to expense over a weighted
average period of 2.7 years.
Additional
information regarding options outstanding and exercisable as of October 2, 2010
is as follows:
Options
Outstanding
|
Exercisable Options
|
|||||||||||||||||||||||||
Range of Exercise
Prices
|
Number
Outstanding as
Of October 2,
2010
|
Weighted
Average
Remaining
Contractual
Term (years)
|
Weighted
Average
Exercise
Price
|
Number
Exercisable as
Of October 2,
2010
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||||||
$ | 4.89 | $ | 8.55 | 861,000 | 6.07 | $ | 8.10 | 657,000 | $ | 8.07 | ||||||||||||||||
$ | 8.60 | $ | 10.25 | 734,000 | 6.65 | $ | 9.62 | 429,000 | $ | 9.42 | ||||||||||||||||
$ | 10.49 | $ | 11.50 | 769,000 | 4.95 | $ | 11.08 | 618,000 | $ | 11.08 | ||||||||||||||||
$ | 11.63 | $ | 15.60 | 718,000 | 3.52 | $ | 14.32 | 597,000 | $ | 14.17 | ||||||||||||||||
$ | 15.62 | $ | 27.38 | 494,000 | 3.84 | $ | 17.49 | 425,000 | $ | 17.71 | ||||||||||||||||
$ | 4.89 | $ | 27.38 | 3,576,000 | 5.13 | $ | 11.60 | 2,726,000 | $ | 11.80 |
15
Restricted
Stock Units
Restricted
stock units (“RSUs”) are converted into shares of the Company’s common stock
upon vesting on a one-for-one basis. Typically, vesting of RSUs is subject to
the employee’s continuing service to the Company. RSUs generally vest over a
period of 4 years and are expensed ratably on a straight-line basis over their
respective vesting period net of estimated forfeitures. The fair value of
RSUs granted pursuant to the Company’s 2004 Stock Incentive Plan is the product
of the number of shares granted and the grant date fair value of our common
stock. A summary of activity of RSUs for the three months ended October 2, 2010
is presented below:
Shares
|
Weighted
Average
Award
Date Fair
Value
|
Weighted
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic Value
|
|||||||||||||
(in
thousands)
|
(years)
|
(in
thousands)
|
||||||||||||||
RSUs
outstanding at July 3, 2010
|
591 | $ | 10.18 | 1.66 | $ | 5,403 | ||||||||||
Awarded
|
97 | 8.72 | ||||||||||||||
Released
|
(25 | ) | 15.34 | |||||||||||||
Forfeited
|
(6 | ) | 10.67 | |||||||||||||
RSUs
outstanding at October 2, 2010
|
657 | $ | 9.76 | 1.62 | $ | 5,628 | ||||||||||
RSUs
expected to vest after October 2, 2010
|
557 | $ | 9.74 | 1.50 | $ | 4,775 |
At
October 2, 2010, expected future compensation expense relating to RSUs is $4.0
million, which will be amortized to expense over a weighted average period of
2.9 years.
2000 EMPLOYEE STOCK PURCHASE
PLAN
The
Company’s 2000 Employee Stock Purchase Plan (the “Stock Purchase Plan”) allows
eligible employees of the Company to purchase shares of Common Stock through
payroll deductions. The Company reserved 3.3 million shares of the
Company’s Common Stock for issuance under this Plan, of which 1.9 million remain
available at October 2, 2010 and which may be released at the Board of
Directors’ discretion. The Stock Purchase Plan permits eligible employees
to purchase Common Stock at a discount through payroll deductions during
24-month purchase periods, with such periods to be terminated due to expiration
of the 2000 plan as of October 31, 2010. The Company divides each purchase
period into eight consecutive three-month accrual periods. Participants in
the Stock Purchase Plan may purchase stock at 85% of the lower of the stock’s
fair market value on the first day of the purchase period or the last day of the
accrual period. The maximum number of shares of Common Stock that any
employee may purchase under the Stock Purchase Plan during any three-month
accrual period is 1,000 shares. During the first three months of fiscal
years 2011 and 2010, the Company issued approximately 54,300 and 53,200 shares
of common stock under the Stock Purchase Plan at weighted average prices of
$5.39 and $5.31, respectively. The weighted average fair value of the
awards for the first three months of fiscal 2011 and 2010 were $1.70 and $3.76
per share, respectively.
The
Company estimates the fair value of stock purchase rights granted under the
Company’s Stock Purchase Plan on the date of grant using the Black-Scholes
option valuation model. ASC Topic 718 states
that a “lookback” pricing provision with a share limit should be considered a
combination of stock and a call option. The valuation results for these elements
have been combined to value the specific features of the stock purchase
rights. The Company bases volatility on the expected volatility of
the Company’s stock during the accrual period. The expected term is
determined by the time from enrollment until purchase, and the Company uses the
U.S. Treasury yield for the risk-free interest rate for the contractual
period.
The
following table lists the values of the assumptions the Company used to
calculate stock compensation in the Stock Purchase Plan:
16
Three
Months Ended
|
||||||||
October
2,
|
September
26,
|
|||||||
2010
|
2009
|
|||||||
Expected
Life
|
3
months
|
13.5
months
|
||||||
Risk-free
interest rate
|
0.16 | % | 0.63 | % | ||||
Volatility
|
58 | % | 69 | % | ||||
Dividend
Yield
|
- | - |
The
following table summarizes activity in the Company’s employee stock purchase
plan during the three months ended October 2, 2010:
Shares
|
Weighted
Average
Purchase
Price
|
|||||||
Beginning
Available
|
1,964,173 | |||||||
Purchases
|
(54,319 | ) | $ | 5.39 | ||||
Ending
Available
|
1,909,854 |
At
October 2, 2010, the Company had $36,000 in unamortized share-based compensation
related to its employee stock purchase plan which will be amortized and
recognized in the consolidated statement of operations over the next
month.
2010 EMPLOYEE STOCK PURCHASE
PLAN
The
Company’s 2010 Employee Stock Purchase Plan (the “2010 Plan”) was approved at
the annual meeting of shareholders on December 11, 2009 as replacement for the
2000 Stock Purchase Plan which is scheduled to expire on October 30, 2010. The
2010 Plan becomes effective on the day preceding the last exercise date of the
2000 Stock Purchase Plan. The Company reserved 2.0 million shares of the
Company’s Common Stock for issuance under this Plan. The 2010 Plan permits
eligible employees to purchase Common Stock at a discount through payroll
deductions during 6-month purchase periods. Participants in the 2010 Plan may
purchase stock at 85% of the lower of the stock’s fair market value on the first
day and last day of the offering period. The maximum number of shares of Common
Stock that any employee may purchase during any offering period under the plan
is 1,000 shares, and an employee may not accrue more than $10,000 for share
purchases in any offering period.
SHARE-BASED
COMPENSATION
The
following table shows total share-based compensation expense classified by
Consolidated Statements of Operations reporting caption for the three months
ended October 2, 2010 and September 26, 2009 generated from the plans described
above:
Three
Months Ended
|
||||||||
October
2,
|
Sept
26,
|
|||||||
(In
Thousands)
|
2010
|
2009
|
||||||
Cost
of goods sold
|
$ | 73 | $ | 63 | ||||
Research
and development
|
390 | 352 | ||||||
Selling,
general and administrative
|
600 | 515 | ||||||
Pre-tax
share-based compensation expense
|
1,063 | 930 | ||||||
Income
tax impact
|
333 | 236 | ||||||
Net
share-based compensation expense
|
$ | 730 | $ | 694 |
17
Share-based
compensation by type of award is as follows:
Three
Months Ended
|
||||||||
October
2,
|
Sept
26,
|
|||||||
(In
Thousands)
|
2010
|
2009
|
||||||
Stock
options
|
$ | 537 | $ | 500 | ||||
Restricted
stock units
|
401 | 197 | ||||||
Stock
purchase plan
|
125 | 233 | ||||||
Total
share-based compensation expense
|
$ | 1,063 | $ | 930 |
The
amount of share-based compensation expense in inventory at October 2, 2010 and
July 3, 2010 is immaterial.
11.
INCOME TAXES
Accounting
for Uncertainty in Income Taxes
The
Company’s total amount of unrecognized tax benefits as of October 2, 2010 was
$545,000. All of this amount would affect the corporation’s tax rate if
recognized. In addition, as of October 2, 2010 the Company had accrued $38,000
for any interest and penalties related to unrecognized tax
benefits.
The
Company is subject to examination by Federal, foreign, and various state
jurisdictions for the years 2004 through 2009. To the Company’s knowledge, there
are currently no examinations underway.
Income Tax
Expense
Income
tax expense for the three months ended October 2, 2010 and September 26, 2009
was $5.4 million and $475,000, respectively, and was comprised of domestic
federal and state income tax and foreign income and withholding tax. As of
October 2, 2010, the Company has recorded a valuation allowance of $965,000
against its deferred tax assets.
12.
INVESTMENTS IN AFFILIATES
Our
investments in unconsolidated affiliates are comprised of the
following:
October
2,
|
July
3,
|
|||||||
(in
thousands)
|
2010
|
2010
|
||||||
Jiyuan
Crystal Photoelectric Frequency Technology Ltd.
|
$ | 2,423 | $ | 2,307 | ||||
Pericom
Technology, Inc.
|
- | 10,876 | ||||||
Total
|
$ | 2,423 | $ | 13,183 |
Prior to
completing the PTI acquisition on August 31, 2010, the Company had a 42.04%
ownership interest PTI (40.3% on a fully-diluted basis). Pericom accounted
for its investment in PTI prior to the acquisition using the equity method due
to the Company’s significant influence over its operations. PTI was incorporated
in 1994 and in 1995 established a design center and sales office to pursue
opportunities and participate in joint ventures in the People’s Republic of
China. For July and August 2010, and the three months ended September 26,
2009, the Company’s allocated portion of PTI’s results was income of $467,000
and $468,000, respectively. Condensed operating results of PTI were as
follows:
18
Two
Months
|
Three
Months
|
|||||||
Ended
|
Ended
|
|||||||
August
28,
|
September
26,
|
|||||||
(in
thousands)
|
2010
|
2009
|
||||||
Revenue
|
$ | 4,549 | $ | 3,817 | ||||
Gross
profit
|
2,261 | 1,877 | ||||||
Operating
income
|
1,201 | 852 | ||||||
Net
income
|
1,105 | 1,096 |
SRe has a
49% equity interest in Jiyuan Crystal Photoelectric Frequency Technology Ltd.
(“JCP”), an FCP manufacturing company located in Science Park of Jiyuan City,
Henan Province, China. JCP is a key manufacturing partner of SRe and supplies SRe with
blanks for its surface mount device (SMD) production lines. For the first
three months of fiscal 2011 and 2010, the Company’s allocated portion of JCP’s
results was income of $89,000 and $59,000, respectively.
13. EQUITY AND
COMPREHENSIVE INCOME
The
Company recognizes noncontrolling interest as a component of equity in the
consolidated financial statements and separate from the parent’s equity. The
amount of net income attributable to noncontrolling interest is shown on the
face of the condensed consolidated statement of operations.
The
Company does not have any noncontrolling interest in fiscal 2011. The Company’s
subsidiary SRe had a noncontrolling interest for the first four months of fiscal
2010. Parties other than the Company owned approximately 2.71% of the
outstanding shares of SRe, and these shares were acquired by the Company in
November 2009 for approximately $1.2 million.
Comprehensive
income consists of net income, changes in net unrealized gains (losses) on
available-for-sale investments and changes in cumulative currency translation
adjustments at consolidated subsidiaries. Changes in equity including
comprehensive income for the three months ended September 26, 2009 and October
3, 2010 are as follows:
(In Thousands)
|
Shareholders'
Equity
|
Noncontrolling
Interests
|
Total Equity
|
|||||||||
Balance
June 27, 2009
|
$ | 212,208 | $ | 1,233 | $ | 213,441 | ||||||
Net
income
|
1,335 | 22 | 1,357 | |||||||||
Other
comprehensive income
|
||||||||||||
Unrealized
gain (loss) on securities available for sale, net
|
469 | - | 469 | |||||||||
Translation
gain (loss), net
|
641 | - | 641 | |||||||||
Total
comprehensive income
|
2,445 | 22 | 2,467 | |||||||||
Issuance
of common stock - options and ESPP
|
284 | - | 284 | |||||||||
Stock
expense - APIC
|
930 | - | 930 | |||||||||
Stock
repurchases
|
- | - | 0 | |||||||||
Balance
September 26, 2009
|
$ | 215,867 | $ | 1,255 | $ | 217,122 | ||||||
Balance
July 3, 2010
|
$ | 221,906 | $ | - | $ | 221,906 | ||||||
Net
income
|
9,510 | - | 9,510 | |||||||||
Other
comprehensive income
|
||||||||||||
Unrealized
gain (loss) on securities available for sale, net
|
311 | - | 311 | |||||||||
Translation
gain (loss), net
|
1,614 | - | 1,614 | |||||||||
Total
comprehensive income
|
11,435 | - | 11,435 | |||||||||
Issuance
of common stock - options and ESPP
|
329 | - | 329 | |||||||||
Stock
expense - APIC
|
1,063 | - | 1,063 | |||||||||
Stock
repurchases
|
(1,409 | ) | - | (1,409 | ) | |||||||
Balance
October 3, 2010
|
$ | 233,324 | $ | - | $ | 233,324 |
19
As of
October 2, 2010, accumulated other comprehensive income consists of $1.1 million
of unrealized gains net of tax and $2.9 million of accumulated currency
translation gains.
14.
SHORT-TERM DEBT
During
the quarter ended October 2, 2010, the Company’s subsidiary SRe made short-term
borrowings under its credit facilities totaling approximately $6.3 million. The
loans are denominated in New Taiwan Dollars and Japanese Yen and carry variable
rates of interest currently ranging from 1.15% to 1.33% per annum. The loans
have maturities ranging from 90 to 365 days.
15. INVESTMENTS IN MARKETABLE
SECURITIES
The
Company’s policy is to invest in instruments with investment grade credit
ratings. The Company classifies its short-term investments as
“available-for-sale” securities and the Company bases the cost of securities
sold using the specific identification method. The Company accounts for
unrealized gains and losses on its available-for-sale securities as a separate
component of shareholders’ equity in the consolidated balance sheets in the
period in which the gain or loss occurs. The Company recognizes unrealized
gains and losses in its trading securities in other income in the consolidated
statements of operations in the period in which the gain or loss occurs.
The Company classifies its available-for-sale securities as current or
noncurrent based on each security’s attributes. At October 2, 2010 a
summary of our investments by major security type is as follows:
As
of October 2, 2010
|
||||||||||||||||||||
(in
thousands)
|
Amortized Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Net
Unrealized
Gains
(Losses)
|
Fair Market
Value
|
|||||||||||||||
Available-for-Sale
Securities
|
||||||||||||||||||||
Time
deposits
|
$ | 8,434 | $ | - | $ | - | $ | - | $ | 8,434 | ||||||||||
National
government and agency securities
|
7,762 | 140 | (2 | ) | 138 | 7,900 | ||||||||||||||
State
and municipal bond obligations
|
3,260 | 59 | - | 59 | 3,319 | |||||||||||||||
Corporate
bonds and notes
|
46,104 | 1,451 | (13 | ) | 1,438 | 47,542 | ||||||||||||||
Asset
backed securities
|
9,504 | 58 | (19 | ) | 39 | 9,543 | ||||||||||||||
Mortgage
backed securities
|
8,476 | 106 | (73 | ) | 33 | 8,509 | ||||||||||||||
Total
|
$ | 83,540 | $ | 1,814 | $ | (107 | ) | $ | 1,707 | $ | 85,247 |
At July
3, 2010 a summary of our investments by major security type is as
follows:
As
of July 3, 2010
|
||||||||||||||||||||
(in
thousands)
|
Amortized Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Net
Unrealized
Gains
(Losses)
|
Fair Market
Value
|
|||||||||||||||
Available-for-Sale
Securities
|
||||||||||||||||||||
US
Treasury securities
|
$ | 204 | $ | 6 | $ | - | $ | 6 | $ | 210 | ||||||||||
National
government and agency securities
|
14,832 | 178 | (3 | ) | 175 | 15,007 | ||||||||||||||
State
and municipal bond obligations
|
8,029 | 80 | - | 80 | 8,109 | |||||||||||||||
Corporate
bonds and notes
|
44,595 | 1,094 | (76 | ) | 1,018 | 45,613 | ||||||||||||||
Asset
backed securities
|
11,670 | 35 | (30 | ) | 5 | 11,675 | ||||||||||||||
Mortgage
backed securities
|
8,848 | 62 | (93 | ) | (31 | ) | 8,818 | |||||||||||||
Total
|
$ | 88,178 | $ | 1,455 | $ | (202 | ) | $ | 1,253 | $ | 89,431 |
The above
investments are included in short-term and long-term investments in marketable
securities on our condensed consolidated balance sheets.
The
following tables show the unrealized losses and fair market values of the
Company’s investments that have unrealized losses, aggregated by investment
category and length of time that individual securities have been in a continuous
unrealized loss position, at October 2, 2010 and July 3, 2010:
20
Continuous Unrealized Losses at October 2, 2010
|
||||||||||||||||||||||||
Less Than 12 Months
|
12 Months or Longer
|
Total
|
||||||||||||||||||||||
(In thousands)
|
Fair Market
Value
|
Unrealized
Losses
|
Fair Market
Value
|
Unrealized
Losses
|
Fair Market
Value
|
Unrealized
Losses
|
||||||||||||||||||
National
government and agency securities
|
$ | 164 | $ | 2 | $ | - | $ | - | $ | 164 | $ | 2 | ||||||||||||
State
and municipal bond obligations
|
- | - | - | - | - | - | ||||||||||||||||||
Corporate
bonds and notes
|
4,085 | 13 | - | - | 4,085 | 13 | ||||||||||||||||||
Asset
backed securities
|
2,646 | 19 | - | - | 2,646 | 19 | ||||||||||||||||||
Mortgage
backed securities
|
382 | - | 476 | 73 | 858 | 73 | ||||||||||||||||||
$ | 7,277 | $ | 34 | $ | 476 | $ | 73 | $ | 7,753 | $ | 107 |
Continuous Unrealized Losses at July 3, 2010
|
||||||||||||||||||||||||
Less Than 12 Months
|
12 Months or Longer
|
Total
|
||||||||||||||||||||||
(In thousands)
|
Fair Market
Value
|
Unrealized
Losses
|
Fair Market
Value
|
Unrealized
Losses
|
Fair Market
Value
|
Unrealized
Losses
|
||||||||||||||||||
National
government and agency securities
|
574 | 3 | - | - | 574 | 3 | ||||||||||||||||||
State
and municipal bond obligations
|
- | - | - | - | - | - | ||||||||||||||||||
Corporate
bonds and notes
|
9,279 | 76 | - | - | 9,279 | 76 | ||||||||||||||||||
Asset
backed securities
|
4,959 | 29 | 472 | 1 | 5,431 | 30 | ||||||||||||||||||
Mortgage
backed securities
|
2,090 | 2 | 497 | 91 | 2,587 | 93 | ||||||||||||||||||
$ | 16,902 | $ | 110 | $ | 969 | $ | 92 | $ | 17,871 | $ | 202 |
The
unrealized losses are of a temporary nature due to the Company’s intent and
ability to hold the investments until maturity or until the cost is
recoverable. The unrealized losses are primarily due to fluctuations in
market interest rates. The Company reports unrealized gains and losses on its
“available-for-sale” securities in accumulated other comprehensive income in
shareholders’ equity.
The
Company records gains or losses realized on sales of available-for-sale
securities in interest and other income on its condensed consolidated income
statement. The cost of securities sold is based on the specific identification
of the security and its amortized cost. For the three months ended October 2,
2010 and September 26, 2009, proceeds from sales and maturities of
available-for-sale securities were $67.2 million and $27.6 million,
respectively, and realized gains were $604,000 and $946,000, respectively.
Securities sales were higher than normal for the three months ended October 2,
2010 both to raise cash for the PTI share acquisition and to reposition the
portfolio for changing market conditions and opportunities.
There was
no further activity for the three months ended October 2, 2010 related to the
pretax available-for-sale credit loss of $414,000 reflected within retained
earnings for securities still held at October 2, 2010.
The
following table lists the fair market value of the Company’s short- and
long-term investments by length of time to maturity as of October 2, 2010.
Securities with maturities over multiple dates are mortgage-backed (MBS) or
asset-backed securities (ABS) featuring periodic principle paydowns through
2059.
(in
thousands)
|
October
2,
2010
|
|||
Contractual
Maturities
|
||||
Less
than 12 months
|
$ | 13,797 | ||
One
to three years
|
27,011 | |||
Over
three years
|
27,464 | |||
Multiple
dates
|
16,975 | |||
Total
|
$ | 85,247 |
16. FAIR VALUE
MEASUREMENTS
The
Company defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. Valuation techniques used to
measure fair value must maximize the use of observable inputs and minimize the
use of unobservable inputs. The standard describes a fair value hierarchy based
on three levels of inputs that may be used to measure fair value, of which the
first two are considered observable and the last is considered
unobservable:
21
|
•
|
Level
1 - Quoted prices in active markets for identical assets or
liabilities.
|
|
•
|
Level
2 - Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
|
|
•
|
Level
3 - Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
|
The
adoption of this statement with respect to our financial assets and liabilities
did not impact our consolidated results of operations and financial condition,
but requires additional disclosure for assets and liabilities measured at fair
value. All of our investments are classified as Level 2 at October 2,
2010. Level 2 investment valuations are obtained from readily-available pricing
sources for comparable instruments. A majority of our investments are priced by
pricing vendors and are classified as Level 2 investments based on the use of
observable inputs from comparable securities.
The
Company had no transfers into or out of Level 2 during the three months ended
October 2, 2010.
As
described in Note 6, the Company’s estimate of the earn-out liability in the PTI
acquisition represented a Level 3 measurement. Any change in the
fair value of the earn-out liability subsequent to the acquisition date,
including changes from events after the acquisition date, will be recognized in
earnings in the period the estimated fair value changes. The change
in fair value of the earn-out liability of $73,000 during the quarter ended
October 2, 2010 was as a result of change in the time value of money, and was
recognized as interest expense in the condensed consolidated statement of
operations. The following table represents a reconciliation of the change in the
fair value measurement of the earn-out liability for the quarter ended October
2, 2010 and September 26, 2009:
October
2, 2010
|
September
26,
2009
|
|||||||
Beginning
balance
|
$ | — | $ | — | ||||
Acquisition
date fair value measurement of earn-out liability
|
4,087 | — | ||||||
Adjustment
to fair value measurement
|
73 | — | ||||||
Ending
balance
|
$ | 4,160 | $ | — |
The
Company’s investment in debt securities includes time deposits, government
securities, commercial paper, corporate debt securities and mortgage-backed and
asset-backed securities. Government securities include US treasury securities,
US federal agency securities, foreign government and agency securities, and US
state and municipal bond obligations. Many of the municipal bonds are insured;
those that are not are nearly all AAA/Aaa rated. The corporate debt securities
are all investment grade and nearly all are single A-rated or better. The
asset-backed securities are AAA/Aaa rated and are backed by auto loans, student
loans, credit card balances and residential or commercial mortgages. When
assessing marketable securities for other-than-temporary declines in value, we
consider a number of factors. Our analyses of the severity and duration of price
declines, portfolio manager reports, economic forecasts and the specific
circumstances of issuers indicate that it is reasonable to expect marketable
securities with unrealized losses at October 2, 2010 to recover in fair value up
to our cost bases within a reasonable period of time. We do not intend to sell
investments with unrealized losses before maturity, when the obligors are
required to redeem them at full face value or par, and we believe the obligors
have the financial resources to redeem the debt securities. Accordingly, we do
not consider our investments to be other-than-temporarily impaired at October 2,
2010.
The
Company has determined that the amounts reported for cash and cash equivalents,
accounts receivable, deposits, accounts payable, accrued liabilities and debt
approximate fair value because of their short
maturities and/or variable interest rates.
22
Item 2:
Management’s Discussion and Analysis
of
Financial Condition and Results of Operations
Pericom
Semiconductor Corporation
The
following information should be read in conjunction with the unaudited financial
statements and notes thereto included in Part 1 - Item 1 of this Quarterly
Report and the audited financial statements and notes thereto and Management’s
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company’s Annual Report on Form 10-K for the year ended July 3,
2010 (the “Form 10-K”).
Factors
That May Affect Operating Results
This
Quarterly Report on Form 10-Q includes “forward-looking statements” within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. All statements other than statements of historical fact are
“forward-looking statements” for purposes of these provisions, including any
statements regarding the Company’s sales to Taiwan and China, plans to remediate
the material weaknesses in our internal control over financial reporting, the
Company’s total investment in the Jinan Hi-Tech Industries Development Zone and
the Yangzhou Economic and Technology Development Zone, the continuation of a
high level of turns orders, higher or lower levels of inventory, future gross
profit and gross margin; the plans and objectives of management for future
operations; the Company’s tax rate; currency fluctuations; the adequacy of
allowances for returns, price protection and other concessions; the sufficiency
of cash generated from operations and cash balances; the Company’s exposure to
interest rate risk; expectations regarding our research and development and
selling, general and administrative expenses; and our possible future
acquisitions and assumptions underlying any of the foregoing. In some cases,
forward-looking statements can be identified by the use of terminology such as
“may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” or
“continue,” or the negative thereof or other comparable terminology. Although
the Company believes that the expectations reflected in the forward-looking
statements contained herein are reasonable, there can be no assurance that such
expectations or any of the forward-looking statements will prove to be correct,
and actual results could differ materially from those projected or assumed in
the forward-looking statements. The Company’s future financial condition and
results of operations, as well as any forward-looking statements, are subject to
risks and uncertainties, including but not limited to the factors set forth (i)
in Item 1A, Risk Factors, of Part II of this Form 10-Q, and (ii) in Note 1 to
the Notes to Condensed Consolidated Financial Statements. All forward-looking
statements and reasons why results may differ included in this Quarterly Report
are made as of the date hereof, and the Company assumes no obligation to update
any such forward-looking statement or reason why actual results may
differ.
23
Results
of Operations
The
following table sets forth certain statement of operations data as a percentage
of net revenues for the periods indicated.
Three
Months Ended
|
||||||||
October
2,
|
September
26,
|
|||||||
2010
|
2009
|
|||||||
Net
revenues
|
100.0 | % | 100.0 | % | ||||
Cost
of revenues
|
66.0 | % | 68.0 | % | ||||
Gross
profit
|
34.0 | % | 32.0 | % | ||||
Operating
expenses:
|
||||||||
Research
and development
|
10.3 | % | 12.3 | % | ||||
Selling,
general and administrative
|
18.1 | % | 20.7 | % | ||||
Total
|
28.4 | % | 33.0 | % | ||||
Income
(loss) from operations
|
5.6 | % | (1.0 | )% | ||||
Interest
and other income
|
27.9 | % | 5.0 | % | ||||
Income
before income taxes
|
33.5 | % | 4.0 | % | ||||
Income
tax expense
|
12.6 | % | 1.5 | % | ||||
Income
from consolidated companies
|
20.9 | % | 2.5 | % | ||||
Equity
in net income of unconsolidated affiliates
|
1.3 | % | 1.6 | % | ||||
Net
income
|
22.2 | % | 4.1 | % | ||||
Net
income attributable to the noncontrolling interests
|
- | - | ||||||
Net
income attributable to Pericom shareholders
|
22.2 | % | 4.1 | % |
Net
Revenues
The
following table sets forth our revenues and the customer concentrations with
respect to such revenues for the periods indicated.
Three
Months Ended
|
||||||||||||
October
2,
|
September
26,
|
%
|
||||||||||
(In
thousands)
|
2010
|
2009
|
Change
|
|||||||||
Net
revenues
|
$ | 42,775 | $ | 32,952 | 29.8 | % | ||||||
%
of net sales accounted for by top 5 direct customers (1)
|
55.4 | % | 56.0 | % | ||||||||
Number
of direct customers that each account for more than 10% of net
sales
|
3 | 3 | ||||||||||
%
of net sales accounted for by top 5 end customers (2)
|
28.9 | % | 34.4 | % | ||||||||
Number
of end customers that each account for more than 10% of net
sales
|
1 | 1 |
(1)
|
Direct
customers purchase products directly from the Company. These include
distributors and contract manufacturers that in turn sell to many end
customers as well as OEMs that also purchase directly from the
Company.
|
(2)
|
End
customers are OEMs whose products include the Company’s products.
End customers may purchase directly from the Company or from distributors
or contract manufacturers. We rely on the end customer data provided
by our direct distribution and contract manufacturing customers to provide
this information.
|
The
Company designs, develops and markets high-performance integrated circuits
(“ICs” or IC products) and frequency control products (“FCPs” or FCP products)
used in many of today's advanced electronic systems. Our IC products include
products that support the connectivity, timing and signal conditioning of
high-speed parallel and serial protocols that transfer data among a system's
microprocessor, memory and various peripherals, such as displays and monitors,
and between interconnected systems. Our FCPs are electronic components that
provide frequency references such as crystals, oscillators, and hybrid timing
generation products for computer, communication and consumer electronic
products. Our analog, digital and mixed-signal ICs, together with our FCP
products enable higher system bandwidth and signal quality, resulting in better
operating reliability, signal integrity, and lower overall system cost in
applications such as notebook computers, servers, network switches and routers,
storage area networks, digital TVs, cell phones, GPS and digital media
players.
24
Net
revenues consist of product sales, which are recognized upon shipment, less an
estimate for returns and allowances. Net revenue increased $9.8 million or 29.8%
in the first quarter of fiscal 2011 versus the first quarter of fiscal 2010.
This significant increase is primarily the result of improving business
conditions since the quarter ended September 26, 2009, which was our low point
of quarterly sales during the 2009 global recession. Net revenue for IC and FCP
products in the first quarter of fiscal 2011 versus the first quarter of fiscal
2010 reflected:
|
·
|
a
$6.3 million increase in sales of IC products to $27.4 million, for a
29.8% sales increase,
|
|
·
|
an
increase of $1.7 million or 14.8% in sales of our FCP products to $13.6
million, and
|
|
·
|
an
addition of $1.8 million in sales at PTI after close of the
acquisition.
|
The
following table sets forth net revenues by country as a percentage of total net
revenues for the three months ended October 2, 2010 and September 26,
2009:
Three Months Ended
|
||||||||
October 2,
2010
|
September 26,
2009
|
|||||||
Taiwan
|
50 | % | 54 | % | ||||
China
(including Hong Kong)
|
29 | % | 27 | % | ||||
United
States
|
7 | % | 7 | % | ||||
Other
(less than 10% each)
|
14 | % | 12 | % | ||||
Total
|
100 | % | 100 | % |
For the
three months ended October 2, 2010 as compared with the same period of the prior
year, the percentage of our net revenues derived from sales to Taiwan decreased
modestly in favor of China as a result of continued demand for technological
devices and an increasing concentration of contract manufacturing there. We
expect our future sales to continue to grow, as a percentage of net revenues, in
both Taiwan and China in future periods. As the migration of assembly
operations to Asia continues, we expect our net revenues from sales in North
America to continue a modest decline.
Gross
Profit
The
following table sets forth our gross profit for the periods
indicated.
Three Months Ended
|
||||||||||||
October 2,
|
September 26,
|
%
|
||||||||||
(In thousands)
|
2010
|
2009
|
Change
|
|||||||||
Net
revenues
|
$ | 42,775 | $ | 32,952 | 29.8 | % | ||||||
Gross
profit
|
14,535 | 10,536 | 38.0 | % | ||||||||
Gross
profit as a percentage of net revenues (gross margin)
|
34.0 | % | 32.0 | % |
25
The
increase in gross profit in the first three months of fiscal 2011 as compared to
the first three months of fiscal 2010 of $4.0 million is the result
of:
|
·
|
A
29.8% increase in sales, which led to $3.3 million of increased gross
profit, and
|
|
·
|
A
gross margin increase from 32% to 34%, resulting in a $660,000 improvement
in gross profit.
|
Future
gross profit and gross margin are highly dependent on the level and product mix
of net revenues. This includes the mix of sales between lower margin FCP
products and our higher margin integrated circuit products. Although
we have been successful at favorably improving our integrated circuit product
mix and penetrating new end markets, there can be no assurance that this will
continue. Accordingly, we are not able to predict future gross profit levels or
gross margins with certainty.
During
the three months ended October 2, 2010 and September 26, 2009, gross profit and
gross margin benefited as a result of the sale of inventory of $19,000 and
$63,000 respectively, that we had previously identified as excess and written
down to zero value.
Research
and Development (“R&D”)
Three Months Ended
|
||||||||||||
October 2,
|
September 26,
|
%
|
||||||||||
(In thousands)
|
2010
|
2009
|
Change
|
|||||||||
Net
revenues
|
$ | 42,775 | $ | 32,952 | 29.8 | % | ||||||
Research
and development
|
4,397 | 4,046 | 8.7 | % | ||||||||
R&D
as a percentage of net revenues
|
10.3 | % | 12.3 | % |
Research
and development expenses consist primarily of costs related to personnel and
overhead, non-recurring engineering charges, and other costs associated with the
design, prototyping, testing, manufacturing process design support, and
technical customer applications support of our products. The $351,000
expense increase for the three month period ended October 2, 2010 as compared to
the same period of the prior year is primarily attributable to $434,000 of
increased expenditures for employee wages and benefits, partially offset by a
$69,000 reduction in expenditures for outside consulting and legal services.
$272,000 of the expense increase is the result of consolidating PTI after August
31, 2010.
The
Company believes that continued spending on research and development to develop
new products and improve manufacturing processes is critical to the Company’s
long-term success, and as a result expects to continue to invest in research and
development projects. In the short term, the Company intends to
continue to focus on cost control as business conditions improve. If
business conditions deteriorate or the rate of improvement does not meet our
expectations, the Company may implement further cost-cutting
actions.
Selling,
General and Administrative (“SG&A”)
Three Months Ended
|
||||||||||||
October 2,
|
September 26,
|
%
|
||||||||||
(In thousands)
|
2010
|
2009
|
Change
|
|||||||||
Net
revenues
|
$ | 42,775 | $ | 32,952 | 29.8 | % | ||||||
Selling,
general and administrative
|
7,742 | 6,828 | 13.4 | % | ||||||||
SG&A
as a percentage of net revenues
|
18.1 | % | 20.7 | % |
Selling,
general and administrative expenses consist primarily of personnel and related
overhead costs for sales, marketing, finance, administration, human resources
and general management. The expense increase of $914,000 for the
three month period ended October 2, 2010 as compared to the same period of the
prior year is attributable primarily to increased expenditures of $703,000 for
wages and benefits including share-based compensation, increased sales
commissions of $163,000, increased travel and entertainment expenses of
$137,000, increased depreciation and amortization of $172,000 primarily related
to the PTI acquisition, and $468,000 for various other department expenses,
partially offset by decreased expenditures of $770,000 for legal and accounting
fees related to the fiscal 2009 year-end accounting review, quarterly
restatements and delayed 10-K filing.
26
The
Company anticipates that selling, general and administrative expenses will
increase in future periods over the long term due to increased staffing levels,
particularly in sales and marketing, as well as increased commission expense to
the extent the Company achieves higher sales levels. The Company
intends to continue its focus on controlling costs. If business
conditions deteriorate or the rate of improvement does not meet our
expectations, the Company may implement further cost-cutting
actions.
Interest
and Other Income
Three Months Ended
|
||||||||||||
October 2,
|
September 26,
|
%
|
||||||||||
(In thousands)
|
2010
|
2009
|
Change
|
|||||||||
Interest
income
|
$ | 1,205 | $ | 1,746 | -31.0 | % | ||||||
Gain
on previously held interest in PTI
|
11,004 | - | ||||||||||
Other
income (expense)
|
(52 | ) | 15 | |||||||||
Exchange
gain (loss)
|
(221 | ) | (118 | ) | ||||||||
Interest
and other income
|
$ | 11,936 | $ | 1,643 |
Interest
and other income for the three month period ended October 2, 2010 increased
$10.3 million as compared with the same period of the prior year due primarily
to the gain recorded on the Company’s previously held interest in PTI. Interest
income also includes any realized gains on sales of short-term investments. The
31% decrease in interest income for the three month period ended October 2, 2010
was primarily the result of $604,000 of realized gains on sales of short-term
investments this year as compared with realized gains of $946,000 in the prior
year, as well as somewhat lower rates of interest on invested balances in the
current fiscal year.
Income
Tax Expense
Three Months Ended
|
||||||||||||
October 2,
|
September 26,
|
%
|
||||||||||
(In thousands)
|
2010
|
2009
|
Change
|
|||||||||
Pre-tax
income
|
$ | 14,332 | $ | 1,305 | 998.2 | % | ||||||
Income
tax expense
|
5,378 | 475 | 1032.2 | % | ||||||||
Effective
tax rate
|
37.5 | % | 36.4 | % |
The
increase in income tax expense for the three months ended October 2, 2010 over
the same period of the prior year is due to the significant increase in income
before income taxes resulting from improved operating performance on increased
sales and deferred taxes on the one-time gain on the Company’s previously held
interest in PTI. The effective tax rates for the three month periods ended
October 2, 2010 and September 26, 2009 were 37.5% and 36.4%, respectively, with
the slightly increased tax rate in the current period due to earnings mix
between tax jurisdictions.
Our
effective tax rate may differ from the federal statutory rate primarily due to
state income taxes, research and development tax credits, stock-based
compensation from incentive stock options, tax-exempt interest income, and
differing tax rates in income-earning foreign jurisdictions.
Equity
in Net Income of Unconsolidated Affiliates
Three Months Ended
|
||||||||||||
October 2,
|
September 26,
|
|||||||||||
(In thousands)
|
2010
|
2009
|
Change
|
|||||||||
Equity
in net income of JCP
|
$ | 89 | $ | 59 | $ | 30 | ||||||
Equity
in net income of PTI
|
467 | 468 | (1 | ) | ||||||||
Total
|
$ | 556 | $ | 527 | $ | 29 |
27
Equity in
net income of unconsolidated affiliates includes our allocated portion of the
net income of Pericom Technology Inc. (“PTI”), a British Virgin Islands
corporation based in Shanghai, People’s Republic of China and Hong Kong prior to
the acquisition of the rest of PTI at the end of August 2010. Our allocated
portion of PTI’s results was income of $467,000 for July and August 2010 as
compared with income of $468,000 for the three month period ended September 26,
2009.
Equity in
net income of unconsolidated affiliates also includes the Company’s allocated
portion of the net income of Jiyuan Crystal Photoelectric Frequency Technology
Ltd. (“JCP”), an FCP manufacturing company located in Science Park of Jiyuan
City, Henan Province, China. JCP is a key manufacturing partner of SRe, and SRe
has acquired a 49% equity interest in JCP. For the three month period ended
October 2, 2010, the Company’s allocated portion of JCP’s results was income of
$89,000 as compared with income of $59,000 for the three month period ended
September 26, 2009.
Liquidity
and Capital Resources
As of
October 2, 2010, the Company’s principal sources of liquidity included cash,
cash equivalents and short-term and long-term investments of approximately
$113.2 million as compared with $118.9 million on July 3, 2010.
The
Company’s investment in debt securities includes government securities,
commercial paper, corporate debt securities and mortgage-backed and asset-backed
securities. Government securities include US treasury securities, US federal
agency securities, foreign government and agency securities, and US state and
municipal bond obligations. Many of the municipal bonds are insured; those that
are not are nearly all AAA/Aaa rated. The corporate debt securities are all
investment grade and nearly all are single A-rated or better. The asset-backed
securities are AAA/Aaa rated and are backed by auto loans, student loans, credit
card balances and residential or commercial mortgages. Most of our
mortgage-backed securities are collateralized by prime residential mortgages
issued by government agencies including FNMA, FHLMC and FHLB. Those issued by
banks are AAA-rated. At October 2, 2010, unrealized gains on marketable
securities net of taxes were $1,113,000. When assessing marketable securities
for other than temporary declines in value, we consider a number of factors. Our
analyses of the severity and duration of price declines, portfolio manager
reports, economic forecasts and the specific circumstances of issuers indicate
that it is reasonable to expect marketable securities with unrealized losses at
October 2, 2010 to recover in fair value up to our cost bases within a
reasonable period of time. We have the ability and intent to hold investments
with unrealized losses until maturity, when the obligors are required to redeem
them at full face value or par, and we believe the obligors have the financial
resources to redeem the debt securities. Accordingly, we do not consider our
investments to be other than temporarily impaired at October 2,
2010.
As of
October 2, 2010, $27.9 million was classified as cash and cash equivalents
compared with $29.5 million as of July 3, 2010. The maturities of the
Company’s short term investments are staggered throughout the year so that cash
requirements are met. Because the Company is a fabless semiconductor
manufacturer, it has lower capital equipment requirements than other
semiconductor manufacturers that own wafer fabrication
facilities. For the three month period ended October 2, 2010, the
Company spent approximately $5.4 million on property and equipment compared to
$2.9 million for the three month period ended September 26, 2009. The
Company generated approximately $1.2 million of interest income for the three
month period ended October 2, 2010, as compared with $1.6 million of interest
income for the three month period ended September 26, 2009. In the longer term
the Company may generate less interest income if its total invested balance
decreases and these decreases are not offset by rising interest rates or
increased cash generated from operations or other sources.
The
Company’s net cash provided by operating activities of $1.3 million for the
three months ended October 2, 2010 was primarily the result of net income of
$9.5 million, non-cash expenses of $2.2 million in depreciation and
amortization, $1.1 million of share-based compensation expense and $3.9 million
of deferred taxes, partially offset by an $11.0 million gain on previously held
shares of PTI, a $604,000 gain on sale of investments in marketable securities
and $557,000 equity in net income of unconsolidated affiliates. Additional
contributions to cash included decreases of $1.9 million in prepaid expenses and
other current assets, and an increase of $2.3 million in long-term liabilities..
Such contributions were partially offset by increases of $3.9 million in
inventory and $344,000 in other assets, and decreases of $2.8 million in
accounts payable and $506,000 in other current liabilities. The increased
inventory was a result of the PTI acquisition, which contributed approximately
$1.3 million of the increase, and lower than expected first quarter shipments
which contributed approximately $2.6 million. The Company’s net cash provided by
operating activities was $3.7 million in the three months ended September 26,
2009.
28
Generally,
as sales levels rise, the Company expects accounts receivable and accounts
payable, and to a lesser extent inventories, to increase. However, there will be
routine fluctuations in these accounts from period to period that may be
significant in amount.
The
Company’s cash used in investing activities of $8.5 million for the three months
ended October 2, 2010 was due to the use of $15.6 million for the acquisition of
PTI net of cash acquired, additions to property and equipment of approximately
$5.4 million and a $3.8 million increase in restricted cash balances, partially
offset by sales and maturities of short term investments exceeding purchases of
short-term investments by approximately $16.4 million. The Company’s cash
provided by investing activities was $2.1 million for the three months ended
September 26, 2009.
The
Company’s cash provided by financing activities for the three months ended
October 2, 2010 of $5.1 million was primarily the result of $6.2 million
generated from short-term bank loans and $330,000 in proceeds generated from the
issuance of common stock in the Company’s employee stock plans, partially offset
by using $1.4 million for repurchase of the Company’s common stock. The Company
cash provided by financing activities was $282,000 for the three months ended
September 26, 2009.
On August
31, 2010, the Company completed the acquisition of PTI for approximately $30.6
million, of which $25 million was paid out at close and $5.6 million held in
escrow and certain other accounts pending satisfaction of terms and conditions
in the Merger Agreement. In addition up to an additional approximately $6
million in earn-out consideration and bonus payments is also payable by the
Company upon achievement of gross profit objectives during fiscal year
2011.
A portion
of our cash may be used to acquire or invest in complementary businesses or
products or to obtain the right to use complementary
technologies. From time to time, in the ordinary course of business,
we may evaluate potential acquisitions of such businesses, products or
technologies.
Our
long-term future capital requirements will depend on many factors, including our
level of revenues, the timing and extent of spending to support our product
development efforts, the expansion of sales and marketing efforts, the timing of
our introductions of new products, the costs to ensure access to adequate
manufacturing capacity, and the continuing market acceptance of our products. We
could be required, or could elect, to seek additional funding through public or
private equity or debt financing and additional funds may not be available on
terms acceptable to us or at all. We believe our current cash balances and cash
flows generated by operations will be sufficient to satisfy our anticipated cash
needs for working capital and capital expenditures.
Contractual
Obligations and Commitments
The
Company’s contractual obligations and commitments at October 2, 2010 are as
follows:
Payments Due by Period
|
||||||||||||||||
(In
thousands)
|
Total
|
Less than 1
Year
|
1 – 3
Years
|
3 – 5
Years
|
Thereafter
|
|||||||||||
Operating
leases
|
$ | 4,332 | $ | 1,404 | $ | 2,543 | $ | 385 | $ | - | ||||||
Yangzhou
capital injection commitment
|
15,000 | 7,000 | 8,000 | - | - | |||||||||||
Capital
equipment purchase obligations
|
2,233 | 1,236 | 997 | - | - | |||||||||||
Total
obligations
|
$ | 21,565 | $ | 9,640 | $ | 11,540 | $ | 385 | $ | - |
The
Company leases certain facilities under operating leases with termination dates
on or before December 2013. Generally, these leases have multiple
options to extend for a period of years upon termination of the original lease
term or previously exercised option to extend.
We have
no purchase obligations other than routine purchase orders and the capital
equipment purchase commitments shown in the table as of October 2,
2010.
29
We
completed the initial phase of our new FCP facility in Jinan, People’s Republic
of China, during fiscal 2010 and the plant commenced operations in the quarter
ended March 27, 2010. While further expansion of the plant is anticipated in the
future, we have not yet begun planning for the next phase and do not anticipate
significant outlays in the next twelve months.
On
December 1, 2009, the Company entered into an R&D Center Investment
Agreement (the “R&D Agreement”) with the Administrative Committee of the
Yangzhou Economic and Technology Development Zone (the “Zone”) for the Company’s
investment in the Zone, located in Jiangsu Province, People’s Republic of China.
Under the R&D Agreement, the Company or its majority-owned affiliate will
invest in and establish a research and development center to engage in the
research and development of the IC design technologies related to “high-speed
serial connectivity” and the “XO crystal oscillator” and the manufacture of
relevant products. It is expected that the Company’s total
investment, over a period of two to three years, will be approximately $30
million U.S. Dollars. As of October 2, 2010, the Company’s remaining commitment
for the Yangzhou project is $15 million, which is included in the table
above.
Off-Balance
Sheet Arrangements
The
Company has no off-balance sheet arrangements, defined by Regulation S-K Item
303(a)(4).
Critical
Accounting Policies
Our
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America. The preparation of such statements requires us to make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting period and the reported amounts of assets and
liabilities as of the date of the financial statements. Our estimates
are based on historical experience and other assumptions that we consider to be
reasonable given the circumstances. Actual results may vary from our
estimates.
The
methods, estimates and judgments the Company uses in applying its most critical
accounting policies have a significant impact on the results the Company reports
in its financial statements. The Securities and Exchange Commission has defined
the most critical accounting policies as the ones that are most important to the
portrayal of the Company’s financial condition and results of operations, and
require the Company to make its most difficult and subjective accounting
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based on this definition, the Company’s most critical
accounting policies include revenue recognition and accounts receivable
allowances, which impact the recording of revenues; valuation of inventories,
which impacts costs of goods sold and gross margins; accounting for income
taxes, which impacts the income tax provision and net
income; impairment of goodwill, other intangible assets and
investments, which impacts the goodwill, intangible asset and investment
accounts; and stock-based compensation, which impacts costs of goods sold and
operating expenses. These policies and the estimates and judgments involved are
discussed further below.
REVENUE
RECOGNITION. The Company recognizes revenue from the sale of its products
upon shipment, provided title and risk of loss has passed to the customer, the
price is fixed or determinable and collection of the revenue is reasonably
assured. A provision for estimated future returns and other charges
against revenue is recorded at the time of shipment. For the three
months ended October 2, 2010 the majority of the Company’s revenues were from
sales to distributors.
The
Company sells products to large, domestic distributors at the price listed in
its price book for that distributor. The Company recognizes revenue at the time
of shipment. At the time of sale the Company books a sales reserve for ship from
stock and debits (“SSD”s), stock rotations, return material authorizations
(“RMA”s), authorized price protection programs, and any special programs
approved by management. The sales reserve is offset against revenues, which then
leads to the net revenue amount reported.
The
market price for the Company’s products can be significantly different from the
book price at which the product was sold to the distributor. When the market
price, as compared with the book price, of a particular sales opportunity from
the distributor to their customer would result in low or negative margins to the
distributor, a ship from stock and debit is negotiated with the distributor. SSD
history is analyzed and used to develop SSD rates that form the basis of the SSD
sales reserve booked each period. The Company captures these
historical SSD rates from its historical records to estimate the ultimate net
sales price to the distributor.
30
The
Company’s distribution agreements provide for semi-annual stock rotation
privileges of typically 10% of net sales for the previous three-month period.
The contractual stock rotation applies only to shipments at book price. Asian
distributors typically buy the Company’s product at less than book price and
therefore are not entitled to the 10% stock rotation privilege. In order to
provide for routine inventory refreshing, for the Company’s benefit as well as
theirs, the Company grants Asian distributors stock rotation privileges between
1% and 5% even though the Company is not contractually obligated to do so. Each
month a sales reserve is recorded for the estimated stock rotation privilege
anticipated to be utilized by the distributors that month. This reserve is the
sum of product of each distributor’s net sales for the month and their stock
rotation percentage.
From time
to time, customers may request to return parts for various reasons including the
customers’ belief that the parts are not performing to specification. Many such
return requests are the result of customers incorrectly using the parts, not
because the parts are defective. These requests are reviewed by management and
when approved result in a RMA being established. The Company is only obligated
to accept returns of defective parts. For customer convenience, the Company may
approve a particular return request even though it is not obligated to do so.
Each month a sales reserve is recorded for the approved RMAs that have not yet
been returned. The Company does not keep a general warranty reserve
because historically valid warranty returns, which are the result of a part not
meeting specifications or being non-functional, have been immaterial and parts
can frequently be re-sold to other customers for use in other
applications.
Price
protection is granted solely at the discretion of Pericom management. The
purpose of price protection is to reduce the distributor’s cost of inventory as
market prices fall, thus reducing SSD rates. Pericom sales management
prepares price protection proposals for individual products located at
individual distributors. Pericom general management reviews these proposals and
if a particular price protection arrangement is approved, the dollar impact will
be estimated based on the book price reduction per unit for the products
approved and the number of units of those products in the distributor’s
inventory. A sales reserve is then recorded in that period for the estimated
amount.
At the
discretion of Pericom management, the Company may offer rebates on specific
products sold to specific end customers. The purpose of the rebates is to allow
for pricing adjustments for large programs without affecting the pricing the
Company charges its distributor customers. The rebate is recorded at
the time of shipment.
Customers
are typically granted payment terms of between 30 and 60 days and they generally
pay within those terms. Relatively few customers have been granted
terms with cash discounts. Distributors are invoiced for shipments at
book price. When they pay those invoices, they claim debits for SSDs,
stock rotations, cash discounts, RMAs and price protection when appropriate.
Once claimed, these debits are then processed against the
approvals.
The
revenue the Company records for sales to its distributors is net of estimated
provisions for these programs. When determining this net revenue, the Company
must make significant judgments and estimates. The Company’s estimates are based
on historical experience rates, inventory levels in the distribution channel,
current trends and other related factors. However, because of the
inherent nature of estimates, there is a risk that there could be significant
differences between actual amounts and the Company’s estimates. The Company’s
financial condition and operating results depend on its ability to make reliable
estimates and management believes such estimates are reasonable.
PRODUCT WARRANTY.
The Company offers a standard one-year product replacement
warranty. In the past the Company has not had to accrue for a general
warranty reserve, but assesses the level and materiality of RMAs and determines
whether it is appropriate to accrue for estimated returns of defective products
at the time revenue is recognized. On occasion, management may determine to
accept product returns beyond the standard one-year warranty period. In those
instances, the Company accrues for the estimated cost at the time the decision
to accept the return is made. As a consequence of the Company’s
standardized manufacturing processes and product testing procedures, returns of
defective product are infrequent and the quantities have not been
significant. Accordingly, historical warranty costs have not been
material.
SHIPPING
COSTS. Shipping costs are charged to cost of revenues as
incurred.
31
INVENTORIES. Inventories are recorded at
the lower of standard cost (which generally approximates actual cost on a
first-in, first-out basis) or market value. We adjust the carrying
value of inventory for excess and obsolete inventory based on inventory age,
shipment history and our forecast of demand over a specific future period of
time. Raw material inventory is considered obsolete and reserved if it has not
moved in 365 days. The Company reviews its assembled devices for
excess and writes them off if the quantity of assembled devices in inventory is
in excess of the greater of the quantity shipped in the previous twelve months,
the quantity in backlog or the quantity forecasted to be shipped in the
following twelve months. In certain
circumstances, management will determine, based on expected usage or other
factors, that inventory considered obsolete by these guidelines should not be
written off. The Company does occasionally determine that the last twelve
months’ sales levels will not continue and reserves inventory in line with the
quantity forecasted. The
semiconductor markets that we serve are volatile and actual results may vary
from our forecast or other assumptions, potentially impacting our assessment of
excess and obsolete inventory and resulting in material effects on our gross
margin.
IMPAIRMENT OF
INTANGIBLE ASSETS. The Company performs an
impairment review of its intangible assets at least annually. Based on the
results of its most recent impairment review, the Company determined that no
impairment of its intangible assets existed as of July 3, 2010. However, future
impairment reviews could result in a charge to earnings.
INVESTMENTS.
We have made investments including loans, bridge loans convertible to equity, or
asset purchases as well as direct equity investments. These loans and
investments are made with strategic intentions and have been in privately held
technology companies, which by their nature are high risk. These investments are
included in other assets in the balance sheet and are carried at the lower of
cost, or market if the investment has experienced an other-than-temporary
decline in value. We monitor these investments quarterly and make appropriate
reductions in carrying value if a decline in value is deemed to be other than
temporary.
DEFERRED TAX
ASSETS. The Company’s deferred income tax assets represent temporary
differences between the financial statement carrying amount and the tax basis of
existing assets and liabilities that will result in deductible amounts in future
years, including net operating loss carryforwards. Based on estimates, the
carrying value of our net deferred tax assets assumes that it is more likely
than not that the Company will be able to generate sufficient future taxable
income in certain tax jurisdictions. Our judgments regarding future
profitability may change due to future market conditions, changes in U.S. or
international tax laws and other factors. If, in the future, the Company
experiences losses for a sustained period of time, the Company may not be able
to conclude that it is more likely than not that the Company will be able to
generate sufficient future taxable income to realize our deferred tax assets. If
this occurs, the Company may be required to increase the valuation allowance
against the deferred tax assets resulting in additional income tax
expense.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At
October 2, 2010 our investment portfolio consisted of investment-grade fixed
income securities, excluding those classified as cash equivalents, of $85.2
million. These securities are subject to interest rate risk and will
decline in value if market interest rates increase. However, we do not believe
that such a decrease would have a material effect on our results of operations
over the next fiscal year. Due to the short duration and conservative
nature of these instruments, we do not believe that we have a material exposure
to interest rate risk.
When the
general economy weakens significantly, as it did in 2008 and 2009, the credit
profile, financial strength and growth prospects of certain issuers of
interest-bearing securities held in our investment portfolios may deteriorate,
and our interest-bearing securities may lose value either temporarily or other
than temporarily. We may implement investment strategies of different types with
varying duration and risk/return trade-offs that do not perform well. At October
2, 2010, we held a significant portion of our corporate cash in diversified
portfolios of investment-grade marketable securities, mortgage- and asset-backed
securities, and other securities that had unrealized gains net of tax of $1.1
million. Although we consider unrealized gains and losses on individual
securities to be temporary, there is a risk that we may incur
other-than-temporary impairment charges if credit and equity markets are
unstable and adversely impact securities issuers.
32
The
Company transacts business in various non-U.S. currencies, primarily the New
Taiwan Dollar, the Hong Kong Dollar, the Chinese Renminbi and the Japanese Yen.
The Company is exposed to fluctuations in foreign currency exchange rates on
accounts receivable and accounts payable from sales and purchases in these
foreign currencies and the net monetary assets and liabilities of our foreign
subsidiaries. A hypothetical 10% favorable or unfavorable change in
foreign currency exchange rates would have a material impact on our financial
position and results of operations.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the
Exchange Act”)) that are designed to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
Our
management, with the participation of our principal executive officer and
principal financial officer has evaluated the effectiveness of our disclosure
controls and procedures. Based on such evaluation, our principal executive
officer and principal financial officer have concluded that our disclosure
controls and procedures were not effective as of October 2, 2010 due to the fact
that management had not fully remediated the material weakness described in our
annual report on Form 10-K for the year ended July 3, 2010.
Changes
in Internal Control over Financial Reporting
As
previously disclosed in our Form 10-K for the year ended July 3, 2010, our
Company’s management identified and reported to our Audit Committee the
following control deficiencies, each of which constitutes a material weakness in
our internal control over financial reporting as of July 3, 2010:
|
·
|
We
did not maintain sufficient controls over the review of period-end
inventory accounting. In addition, as a result of the
implementation of our new enterprise resource planning (“ERP”) system in
fiscal 2009, certain cost data was inadvertently misclassified which led
to an error in cost of goods sold.
|
|
·
|
We
did not maintain a sufficient complement of personnel with an appropriate
level of accounting knowledge, experience and training in the application
of generally accepted accounting principles commensurate with the
Company’s financial reporting requirements. As a result, the
Company concluded that controls over the financial statement close process
related to account reconciliations and analyses, including investment
accounts, accounts receivable reserves, inventories, accounts payable and
accrued liabilities, were not
effective.
|
As a
result, we concluded that as of July 3, 2010 our internal control over
financial reporting was not effective.
The
Company is committed to continuing to improve its internal control processes and
will continue to diligently and vigorously review its internal control over
financial reporting in order to ensure compliance with the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002. In response to the material
weaknesses discussed above, we plan to continue to review and make necessary
changes to improve our internal control over financial reporting, including the
roles and responsibilities of each functional group within the organization and
reporting structure, as well as the appropriate policies and procedures to
improve the overall internal control over financial reporting.
We
consider the remediation of our material weaknesses in our internal control over
financial reporting which we identified in the fiscal year ended July 3, 2010 a
significant priority for the Company. We will continue our efforts in this
regard. While we
believe we have made progress, we will not be able to establish that remediation
has been effective until testing is completed later in our fiscal
year.
33
Except
for the changes described above, there were no changes in our internal control
over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
three months ended October 2, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
Item
1A: Risk Factors
This
quarterly report on Form 10-Q contains forward-looking statements which involve
risks and uncertainties. Our actual results could differ materially from those
anticipated by such forward-looking statement as a result of various factors,
including those set forth below. The listing below includes any material changes
to and supersedes the description of the risk factors affecting our business
previously disclosed in “Part I, Item 1A. Risk Factors” of our Annual
Report on Form 10-K for the fiscal year ended July 3, 2010.
FACTORS
THAT MAY AFFECT OPERATING RESULTS`
In
the past, our operating results have varied significantly and are likely to
fluctuate in the future.
We
continue to face a challenging business
environment and limited visibility on end-market demands.
Wide
varieties of factors affect our operating results. These factors include the
following:
·
|
changes
in the quantity of our products
sold;
|
·
|
changes
in the average selling price of our
products;
|
·
|
general
conditions in the semiconductor
industry;
|
·
|
changes
in our product mix;
|
·
|
a
change in the gross margins of our
products;
|
·
|
the
operating results of the FCP product line, which normally has a lower
profit margin than IC products;
|
·
|
expenses
incurred in obtaining, enforcing, and defending intellectual property
rights;
|
·
|
the
timing of new product introductions and announcements by us and by our
competitors;
|
·
|
customer
acceptance of new products introduced by
us;
|
·
|
delay
or decline in orders received from
distributors;
|
·
|
growth
or reduction in the size of the market for interface
ICs;
|
·
|
the
availability of manufacturing capacity with our wafer suppliers,
especially to support sales growth and new
products;
|
·
|
changes
in manufacturing costs;
|
·
|
fluctuations
in manufacturing yields;
|
·
|
disqualification
by our customers for quality or performance related
issues;
|
·
|
the
ability of customers to pay us; and
|
·
|
increased
research and development expenses associated with new product
introductions or process changes.
|
All of
these factors are difficult to forecast and could seriously harm our operating
results. Our expense levels are based in part on our expectations
regarding future sales and are largely fixed in the short
term. Therefore, we may be unable to reduce our expenses fast enough
to compensate for any unexpected shortfall in sales. Any significant
decline in demand relative to our expectations or any material delay of customer
orders could harm our operating results. In addition, if our
operating results in future quarters fall below public market analysts' and
investors' expectations, the market price of our common stock would likely
decrease.
The
demand for our products depends on the growth of our end users'
markets.
Our
continued success depends in large part on the continued growth of markets for
the products into which our semiconductor and frequency control products are
incorporated. These markets include the following:
34
·
|
computers
and computer related peripherals;
|
·
|
data
communications and telecommunications
equipment;
|
·
|
electronic
commerce and the Internet; and
|
·
|
consumer
electronics equipment.
|
Any
decline in the demand for products in these markets could seriously harm our
business, financial condition and operating results. These markets
have also historically experienced significant fluctuations in
demand. We may also be seriously harmed by slower growth in the other
markets in which we sell our products.
Our
earnings are subject to substantial quarterly and annual fluctuations and to
adverse economic conditions and market downturns
Our
revenues and earnings have fluctuated significantly in the past and may
fluctuate significantly in the future. General economic or other conditions
could cause a downturn in the market for our products or technology. The
2008-2009 financial disruption affecting the banking system, investment banks,
insurance companies and financial markets resulted in a tightening in the credit
markets, a low level of liquidity in many financial markets and extreme
volatility in fixed income, credit and equity markets. In addition to the
potential impact of such disruptions on our marketable securities portfolio,
there could be a number of follow-on effects on our business that could also
adversely affect our operating results. Disruptions may result in the insolvency
of key suppliers resulting in product delays; the inability of our customers to
obtain credit to finance purchases of our products and/or customer insolvencies
that cause our customers to change delivery schedules, cancel or reduce orders;
a slowdown in global economies which could result in lower end-user demand for
our products; and increased impairments of our investments. Net investment
income could vary from expectations depending on the gains or losses realized on
the sale or exchange of securities, gains or losses from equity method
investments, and impairment charges related to marketable securities. Our cash
and marketable securities investments represent significant assets that may be
subject to fluctuating or even negative returns depending upon interest rate
movements and financial market conditions in fixed income securities. Volatility
in the financial markets and overall economic uncertainty increases the risk of
substantial quarterly and annual fluctuations in our earnings.
If
we do not develop products that our customers and end-users design into their
products, or if their products do not sell successfully, our business and
operating results would be harmed.
We have
relied in the past and continue to rely upon our relationships with our
customers and end-users for insights into product development strategies for
emerging system requirements. We generally incorporate new products
into a customer's or end-user's product or system at the design
stage. However, these design efforts, which can often require
significant expenditures by us, may precede product sales, if any, by a year or
more. Moreover, the value to us of any design win will depend in
large part on the ultimate success of the customer or end-user's product and on
the extent to which the system's design accommodates components manufactured by
our competitors. If we fail to achieve design wins or if the design
wins fail to result in significant future revenues, our operating results would
be harmed. If we have problems developing or maintaining our
relationships with our customers and end-users, our ability to develop
well-accepted new products may be impaired.
The
markets for our products are characterized by rapidly changing technology, and
our financial results could be harmed if we do not successfully develop and
implement new manufacturing technologies or develop, introduce and sell new
products.
The
markets for our products are characterized by rapidly changing technology,
frequent new product introductions and declining selling prices over product
life cycles. We currently offer a comprehensive portfolio of silicon
and quartz based products. Our future success depends upon the timely
completion and introduction of new products, across all our product lines, at
competitive price and performance levels. The success of new products
depends on a variety of factors, including the following:
·
|
product
performance and functionality;
|
·
|
customer
acceptance;
|
·
|
competitive
cost structure and pricing;
|
35
·
|
successful
and timely completion of product
development;
|
·
|
sufficient
wafer fabrication capacity; and
|
·
|
achievement
of acceptable manufacturing yields by our wafer
suppliers.
|
We may
also experience delays, difficulty in procuring adequate fabrication capacity
for the development and manufacture of new products, or other difficulties in
achieving volume production of these products. Even relatively minor
errors may significantly affect the development and manufacture of new
products. If we fail to complete and introduce new products in a
timely manner at competitive price and performance levels, our business would be
significantly harmed.
Intense
competition in the semiconductor industry may reduce the demand for our products
or the prices of our products, which could reduce our revenues and gross
profits.
The
semiconductor industry is intensely competitive. Our competitors include Analog
Devices, Cypress Semiconductor Corporation, Fairchild Semiconductor, Hitachi,
Integrated Device Technology, Inc., Intel Corp., Maxim Integrated Products,
Inc., Motorola, On Semiconductor Corp., Tundra Semiconductor Corp., PLX
Technology, STMicroelectronics, Texas Instruments, Inc., and Toshiba. Most of
those competitors have substantially greater financial, technical, marketing,
distribution and other resources, broader product lines and longer-standing
customer relationships than we do. We also compete with other major or emerging
companies that sell products to certain segments of our markets. Competitors
with greater financial resources or broader product lines may have a greater
ability to sustain price reductions in our primary markets in order to gain or
maintain market share.
We
believe that our future success will depend on our ability to continue to
improve and develop our products and processes. Unlike us, many of
our competitors maintain internal manufacturing capacity for the fabrication and
assembly of semiconductor products. This ability may provide them
with more reliable manufacturing capability, shorter development and
manufacturing cycles and time-to-market advantages. In addition,
competitors with their own wafer fabrication facilities that are capable of
producing products with the same design geometries as ours may be able to
manufacture and sell competitive products at lower prices. Any
introduction of products by our competitors that are manufactured with improved
process technology could seriously harm our business. As is typical in the
semiconductor industry, our competitors have developed and marketed products
that function similarly or identically to ours. If our products do
not achieve performance, price, size or other advantages over products offered
by our competitors, our products may lose market share. Competitive pressures
could also reduce market acceptance of our products, reduce our prices and
increase our expenses.
We also
face competition from the makers of ASICs and other system devices. These
devices may include interface logic functions which may eliminate the need or
sharply reduce the demand for our products in particular
applications.
Downturns
in the semiconductor industry, rapidly changing technology, accelerated selling
price erosion and evolving industry standards can harm our operating
results.
The
semiconductor industry has historically been cyclical and periodically subject
to significant economic downturns, characterized by diminished product demand,
accelerated erosion of selling prices and overcapacity, as well as rapidly
changing technology and evolving industry standards. In the future, we may
experience substantial period-to-period fluctuations in our business and
operating results due to general semiconductor industry conditions, overall
economic conditions or other factors. Our business is also subject to
the risks associated with the effects of legislation and regulations relating to
the import or export of semiconductor products.
Our
potential future acquisitions may not be successful.
Our
potential future acquisitions could result in the following:
·
|
large
one-time write-offs;
|
·
|
the
difficulty in integrating newly-acquired businesses and operations in an
efficient and effective manner;
|
·
|
the
challenges in achieving strategic objectives, cost savings, and
other benefits from acquisitions as
anticipated;
|
36
·
|
the
risk of diverting the attention of senior management from other business
concerns;
|
·
|
risks
of entering geographic and business markets in which we have no or limited
prior experience and potential loss of key employees of acquired
organizations;
|
·
|
the
risk that our markets do not evolve as anticipated and that the
technologies and capabilities acquired do not prove to be those needed to
be successful in those markets;
|
·
|
potentially
dilutive issuances of equity
securities;
|
·
|
the
incurrence of debt and contingent liabilities or amortization expenses
related to intangible assets;
|
·
|
difficulties
in the assimilation of operations, personnel, technologies, products and
the information systems of the acquired companies;
and
|
·
|
difficulties
in expanding information technology systems and other business processes
to accommodate the acquired
businesses.
|
In August
2010, we completed the acquisition of outstanding PTI shares not owned by us, as
described in Note 6 of Notes to Condensed Consolidated Financial
Statements. We are in the process of integrating PTI as a
wholly-owned subsidiary and may experience one or more of the risks summarized
above in the process of completing that integration.
As part
of our business strategy, we expect to seek acquisition prospects that would
complement our existing product offerings, improve our market coverage or
enhance our technological capabilities. Although we are evaluating
acquisition and strategic investment opportunities on an ongoing basis, we may
not be able to locate suitable acquisition or investment
opportunities. In addition, from time to time, we invest in other
companies, without actually acquiring them, and such investments involve many of
the same risks as are involved with acquisitions.
The
trading price of our common stock and our operating results are likely to
fluctuate substantially in the future.
The
trading price of our common stock has been and is likely to continue to be
highly volatile. Our stock price could fluctuate widely in response
to factors some of which are not within our control, including:
·
|
general
conditions in the semiconductor and electronic systems
industries;
|
·
|
quarter-to-quarter
variations in operating results;
|
·
|
announcements
of technological innovations or new products by us or our competitors;
and
|
·
|
changes
in earnings estimates by analysts; and price and volume fluctuations in
the overall stock market, which have particularly affected the market
prices of many high technology
companies.
|
Implementation
of new FASB rules and the issuance of new laws or other accounting regulations,
or reinterpretation of existing laws or regulations, could materially impact our
business or stated results.
In
general, from time to time, the government, courts and the financial accounting
boards may issue new laws or accounting regulations, or modify or reinterpret
existing ones. There may be future changes in laws, interpretations or
regulations that would affect our financial results or the way in which we
present them. Additionally, changes in the laws or regulations could have
adverse effects on hiring and many other aspects of our business that would
affect our ability to compete, both nationally and internationally.
We
and our independent registered public accounting firm determined that we had
material weaknesses in our internal control over financial reporting as of the
end of our fiscal year ended July 3, 2010. There can be no assurance
that a material weakness will not arise in the future. As a result, current and
potential stockholders could lose confidence in our financial reporting, which
would harm our business and the trading price of our stock.
Under SEC
rules, we are required to maintain, and evaluate the effectiveness of, our
internal control over financial reporting and disclosure controls and
procedures.
In our
annual reports on Form 10-K for the years ended July 3, 2010, June 27,
2009, June 30, 2007 and July 2, 2005, we reported material weaknesses
in our internal control over financial reporting. The June 30, 2007 and July 2,
2005 material weaknesses were subsequently
remediated.
37
As
reported in Item 4 of this Form 10-Q, Pericom had material weaknesses in
internal control over financial reporting as of July 3, 2010, and management and
our independent registered public accounting firm determined that as of July 3,
2010, our internal control over financial reporting was not
effective. As set forth in this Form 10-Q, we also determined that
our disclosure controls and procedures were not effective as of October 2, 2010
due to the fact that management had not fully remediated the material weaknesses
described in the prior year Form 10-K. The material weaknesses are also
described in Item 4 of this report.
In
addition, we are expanding our overseas operations, and as we grow in these
locations, we may have difficulty in recruiting and retaining a complement of
personnel with an appropriate level of accounting knowledge, experience and
training in the application of generally accepted accounting principles
commensurate with our financial reporting requirements. Our current and future
results of operations may be adversely affected by significant costs related to
our investigation of and remedial measures relating to internal control of
financial reporting. Although we have renewed our efforts to maintain effective
internal control of financial reporting as described in Item 4 of this report on
Form 10-Q, there can be no assurance that we will succeed in remediating the
material weaknesses that have been identified. There also can be no assurance
that other material weaknesses or significant deficiencies will not arise in the
future. Should we or our independent registered public accounting firm determine
in future periods that we have a material weakness in our internal control over
financial reporting, the reliability of our financial reports may be impacted,
and investors could lose confidence in the accuracy and completeness of our
financial reports, which could have an adverse effect on our stock price and we
could suffer other materially adverse consequences if our future internal
control over financial reporting and disclosure controls and procedures are not
effective.
Our
finance department has undergone, and continues to undergo, significant
changes.
The
Company has recently undergone significant turnover of personnel in the finance
department, including in significant positions. During the prior fiscal year,
the Company hired a new Chief Financial Officer, Corporate Controller, Director
of Internal Audit, General Accounting Manager and Cost Accounting Manager. The
Company is in the process of implementing changes in its finance department,
including but not limited to implementing improved processes and procedures and
enhancing training in certain areas. There can be no assurance that these
changes will sufficiently improve the Company's finance functions, or that the
finance personnel turnover the Company has experienced will not
continue. In either event, the reliability of our financial reports
may be impacted, and investors may lose confidence in the accuracy or
completeness of our financial reports, which could have an adverse impact on our
stock price.
Customer
demands for the Company’s products are volatile and difficult to
predict.
The
Company’s customers continuously adjust their inventories in response to changes
in end market demand for their products and the availability of semiconductor
components. This results in frequent changes in demand for the Company’s
products. The volatility of customer demand limits the Company’s ability to
predict future levels of sales and profitability. The supply of semiconductors
can quickly and unexpectedly match or exceed demand because end customer demand
can change very quickly. Also, semiconductor suppliers can rapidly increase
production output. This can lead to a sudden oversupply situation and a
subsequent reduction in order rates and revenues as customers adjust their
inventories to true demand rates. A rapid and sudden decline in customer demand
for the Company’s products can result in excess quantities of certain of the
Company’s products relative to demand. In this event, the Company’s operating
results might be adversely affected as a result of charges to reduce the
carrying value of the Company’s inventory to the estimated demand level or
market price.
Changes
to environmental laws and regulations applicable to manufacturers of electrical
and electronic equipment are causing us to redesign our products, and may
increase our costs and expose us to liability.
The
implementation of new environmental regulatory legal requirements, such as lead
free initiatives, may affect our product designs and manufacturing processes.
The impact of such regulations on our product designs and manufacturing
processes could affect the timing of compliant product introductions as well as
their commercial success. Redesigning our products to comply with new
regulations may result in increased research and development and manufacturing
and quality control costs. In addition, the products we manufacture
that comply with new regulatory standards may not perform as well as our current
products. Moreover, if we are unable to successfully and timely redesign
existing products and introduce new products that meet new standards set by
environmental regulation and our customers, sales of our products could decline,
which could materially adversely affect our business, financial condition and
results of operations.
38
Our
contracts with our wafer suppliers do not obligate them to a minimum supply or
set prices. Any inability or unwillingness of our wafer suppliers
generally, and GlobalFoundries, Inc. and MagnaChip Semiconductor, Inc. in
particular, to meet our manufacturing requirements would delay our production
and product shipments and harm our business.
In recent
years, we purchased over 70% of our wafers from MagnaChip and GlobalFoundries,
with the balance coming from three to five other suppliers. Our reliance on
independent wafer suppliers to fabricate our wafers at their production
facilities subjects us to possible risks such as:
·
|
lack
of adequate capacity;
|
·
|
lack
of available manufactured products;
|
·
|
lack
of control over delivery schedules;
and
|
·
|
unanticipated
changes in wafer prices.
|
Any
inability or unwillingness of our wafer suppliers generally, and GlobalFoundries
and MagnaChip in particular, to provide adequate quantities of finished wafers
to meet our needs in a timely manner would delay our production and product
shipments and seriously harm our business. In March 2004, GlobalFoundries shut
down one of their production facilities that was used to manufacture our
products. We transitioned the production of these products to different
facilities. The transfer of production of our products to other facilities
subjects us to the above listed risks as well as potential yield or other
production problems, which could arise as a result of any change.
At
present, we purchase wafers from our suppliers through the issuance of purchase
orders based on our rolling nine-month forecasts. The purchase orders
are subject to acceptance by each wafer supplier. We do not have
long-term supply contracts that obligate our suppliers to a minimum supply or
set prices. We also depend upon our wafer suppliers to participate in
process improvement efforts, such as the transition to finer
geometries. If our suppliers are unable or unwilling to do so, our
development and introduction of new products could be
delayed. Furthermore, sudden shortages of raw materials or production
capacity constraints can lead wafer suppliers to allocate available capacity to
customers other than us or for the suppliers' internal uses, interrupting our
ability to meet our product delivery obligations. Any significant
interruption in our wafer supply would seriously harm our operating results and
our customer relations. Our reliance on independent wafer suppliers
may also lengthen the development cycle for our products, providing
time-to-market advantages to our competitors that have in-house fabrication
capacity.
In the
event that our suppliers are unable or unwilling to manufacture our key products
in required volumes, we will have to identify and qualify additional wafer
foundries. The qualification process can take up to nine months or
longer. Furthermore, we are unable to predict whether additional
wafer foundries will become available to us or will be in a position to satisfy
any of our requirements on a timely basis.
We
depend on single or limited source assembly subcontractors with whom we do not
have written contracts. Any inability or unwillingness of our
assembly subcontractors to meet our assembly requirements would delay our
product shipments and harm our business.
We
primarily rely on foreign subcontractors for the assembly and packaging of our
products and, to a lesser extent, for the testing of finished
products. Some of these subcontractors are our single source supplier
for some of our new packages. In addition, changes in our or a
subcontractor's business could cause us to become materially dependent on a
single subcontractor. We have from time to time experienced
difficulties in the timeliness and quality of product deliveries from our
subcontractors and may experience similar or more severe difficulties in the
future. We generally purchase these single or limited source
components or services pursuant to purchase orders and have no guaranteed
arrangements with these subcontractors. These subcontractors could
cease to meet our requirements for components or services, or there could be a
significant disruption in supplies from them, or degradation in the quality of
components or services supplied by them. Any circumstance that would
require us to qualify alternative supply sources could delay shipments, result
in the loss of customers and limit or reduce our revenues.
39
We
may have difficulty accurately predicting revenues for future
periods.
Our
expense levels are based in part on anticipated future revenue levels, which can
be difficult to predict. Our business is characterized by short-term
orders and shipment schedules. We do not have long-term purchase
agreements with any of our customers. Customers can typically cancel or
reschedule their orders without significant penalty. We typically
plan production and inventory levels based on forecasts of customer demand
generated with input from customers and sales
representatives. Customer demand is highly unpredictable and can
fluctuate substantially. If customer demand falls significantly below
anticipated levels, our gross profit would be reduced.
We
compete with others to attract and retain key personnel, and any loss of or
inability to attract key personnel would harm us.
To a
greater degree than non-technology companies, our future success will depend on
the continued contributions of our executive officers and other key management
and technical personnel. None of these individuals has an employment
agreement with us and each one would be difficult to replace. We do
not maintain any key person life insurance policies on any of these
individuals. The loss of the services of one or more of our executive
officers or key personnel or the inability to continue to attract qualified
personnel could delay product development cycles or otherwise harm our business,
financial condition and results of operations.
Our
future success also will depend on our ability to attract and retain qualified
technical, marketing and management personnel, particularly highly skilled
design, process and test engineers, for whom competition can be
intense. During strong business cycles, we expect to experience
difficulty in filling our needs for qualified engineers and other
personnel.
Our
limited ability to protect our intellectual property and proprietary rights
could harm our competitive position.
Our
success depends in part on our ability to obtain patents and licenses and
preserve other intellectual property rights covering our products and
development and testing tools. In the United States, we currently
hold 109 patents covering certain aspects of our product designs and have 12
additional patent applications pending. Copyrights, mask work
protection, trade secrets and confidential technological know-how are also key
to our business. Additional patents may not be issued to us or our
patents or other intellectual property may not provide meaningful
protection. We may be subject to, or initiate, interference
proceedings in the U.S. Patent and Trademark Office. These
proceedings can consume significant financial and management
resources. We may become involved in litigation relating to alleged
infringement by us of others' patents or other intellectual property
rights. This type of litigation is frequently expensive to both the
winning party and the losing party and takes up significant amounts of
management's time and attention. In addition, if we lose such a
lawsuit, a court could require us to pay substantial damages and/or royalties or
prohibit us from using essential technologies. For these and other
reasons, this type of litigation could seriously harm our
business. Also, although we may seek to obtain a license under a
third party's intellectual property rights in order to bring an end to certain
claims or actions asserted against us, we may not be able to obtain such a
license on reasonable terms or at all.
Because
it is important to our success that we are able to prevent competitors from
copying our innovations, we intend to continue to seek patent, trade secret and
mask work protection for our technologies. The process of seeking
patent protection can be long and expensive, and we cannot be certain that any
currently pending or future applications will actually result in issued patents,
or that, even if patents are issued, they will be of sufficient scope or
strength to provide meaningful protection or any commercial advantage to
us. Furthermore, others may develop technologies that are similar or
superior to our technology or design around the patents we own.
We also
rely on trade secret protection for our technology, in part through
confidentiality agreements with our employees, consultants and third
parties. However, these parties may breach these
agreements. In addition, the laws of some territories in which we
develop, manufacture or sell our products may not protect our intellectual
property rights to the same extent as do the laws of the United
States.
40
Our
independent foundries use a process technology that may include technology we
helped develop with them, that may generally be used by those foundries to
produce their own products or to manufacture products for other companies,
including our competitors. In addition, we may not have the right to implement
key process technologies used to manufacture some of our products with foundries
other than our present foundries.
We
may not provide adequate allowances for exchanges, returns and
concessions.
We
recognize revenue from the sale of products when shipped, less an allowance
based on future authorized and historical patterns of returns, price protection,
exchanges and other concessions. We believe our methodology and
approach are appropriate. However, if the actual amounts we incur
exceed the allowances, it could decrease our revenue and corresponding gross
profit.
We
are subject to risks related to taxes.
A number
of factors, including unanticipated changes in the mix of earnings in countries
with differing statutory tax rates or by unexpected changes in existing tax laws
or our interpretation of them, could unfavorably affect our future effective tax
rate. In the event our management determines it is no longer more
likely than not that we will realize a portion of our deferred tax assets we
will be required to increase our valuation allowance which will result in an
increase in our effective tax rate. Furthermore, our tax returns are
subject to examination in all the jurisdictions in which we operate which
subjects us to potential increases in our tax liabilities. All of
these factors could have an adverse effect on our financial condition and
results of operations.
The
complexity of our products makes us susceptible to manufacturing problems, which
could increase our costs and delay our product shipments.
The
manufacture and assembly of our products is highly complex and sensitive to a
wide variety of factors, including:
·
|
the
level of contaminants in the manufacturing
environment;
|
·
|
impurities
in the materials used; and
|
·
|
the
performance of manufacturing personnel and production
equipment.
|
In a
typical semiconductor manufacturing process, silicon wafers produced by a
foundry are cut into individual die. These die are assembled into individual
packages and tested for performance. Our wafer fabrication suppliers have from
time to time experienced lower than anticipated yields of suitable die. In the
event of such decreased yields, we would incur additional costs to sort wafers,
an increase in average cost per usable die and an increase in the time to market
or availability of our products. These conditions could reduce our
net revenues and gross margin and harm our customer relations.
We do not
manufacture any of our IC products. Therefore, we are referred to in
the semiconductor industry as a "fabless" producer. Consequently, we
depend upon third party manufacturers to produce semiconductors that meet our
specifications. We currently have third party manufacturers that can
produce semiconductors that meet our needs. However, as the industry continues
to progress to smaller manufacturing and design geometries, the complexities of
producing semiconductors will increase. Decreasing geometries may
introduce new problems and delays that may affect product development and
deliveries. Due to the nature of the industry and our status as a
"fabless" IC semiconductor company, we could encounter fabrication-related
problems that may affect the availability of our products, delay our shipments
or increase our costs. We are directly involved in the manufacture of our FCP
products. As technologies continue to evolve there may be manufacturing related
problems that affect our FCP products. In addition, we have opened up a new FCP
facility located in the Jinan Development Zone in Shandong Province, China,
which adds the uncertainties involved with staffing and operating a new facility
in a country where we have no previous operating experience.
41
A
large portion of our revenues is derived from sales to a few customers, who may
cease purchasing from us at any time.
A
relatively small number of customers have accounted for a significant portion of
our net revenues in each of the past several fiscal years. In general we expect
this to continue for the foreseeable future. We had three direct
customers that each accounted for more than 10% of net revenues during the three
months ended October 2, 2010. As a percentage of net revenues, sales to our top
five direct customers during the three months ended October 2, 2010 totaled
55%.
We do not
have long-term sales agreements with any of our customers. Our
customers are not subject to minimum purchase requirements, may reduce or delay
orders periodically due to excess inventory and may discontinue purchasing our
products at any time. Our distributors typically offer competing products in
addition to ours. For the three months ended October 2, 2010 and the
fiscal year ended July 3, 2010, sales to our distributors were approximately 68%
and 62% of net revenues, respectively, as compared to approximately 56% of net
revenues in the fiscal year ended June 27, 2009 and approximately 49% of net
revenues in the fiscal year ended June 28, 2008. The increase in the percentage
of sales to our distributors as compared with the prior periods was due to
growth in sales to Asian distributor customers. The loss of one or more
significant customers, or the decision by a significant distributor to carry
additional product lines of our competitors could decrease our
revenues.
Almost
all of our wafer suppliers and assembly subcontractors are located in Southeast
Asia, as are our FCP manufacturing facilities, which exposes us to the problems
associated with international operations.
Risks
associated with international business operations include the
following:
·
|
disruptions
or delays in shipments;
|
·
|
changes
in economic conditions in the countries where these subcontractors are
located;
|
·
|
currency
fluctuations;
|
·
|
changes
in political conditions;
|
·
|
potentially
reduced protection for intellectual
property;
|
·
|
foreign
governmental regulations;
|
·
|
import
and export controls; and
|
·
|
changes
in tax laws, tariffs and freight
rates.
|
Although
most of our products are sold in U.S. dollars, we incur a significant amount of
certain types of expenses, such as payroll, utilities, capital equipment
purchases and taxes in local currencies. The impact of currency exchange rate
movements could harm our results and financial condition. In addition, changes
in tariff and import regulations and in U.S. and non-U.S. monetary policies
could harm our results and financial condition by increasing our expenses and
reducing our revenue. Varying tax rates in different jurisdictions could harm
our results of operations and financial condition by increasing our overall tax
rate.
In
addition, there is a potential risk of conflict and further instability in the
relationship between Taiwan and the People's Republic of China
(PRC). Conflict or instability could disrupt the operations of one of
our principal wafer suppliers, several of our assembly subcontractors located in
Taiwan, and our FCP manufacturing operations in Taiwan and the PRC.
We are
expanding our presence in China with manufacturing and research and development
activities. We will be subject to increased risks relating to foreign currency
exchange rate fluctuations that could have a material adverse affect on our
business, financial condition and operating results. The value of the Chinese
renminbi against the United States dollar and other currencies may fluctuate and
is affected by, among other things, changes in China's political and economic
conditions. Significant future appreciation of the renminbi could increase our
component and other raw material costs as well as our labor costs, and could
adversely affect our financial results. To the extent that we need to convert
United States dollars into renminbi for our operations, appreciation of renminbi
against the United States dollar could have a material adverse effect on our
business, financial condition and results of operations. Conversely, if we
decide to convert our renminbi into United States dollars for other business
purposes and the United States dollar appreciates against the renminbi, the
United States dollar equivalent of the renminbi we convert would be reduced. The
Chinese government recently announced that it is pegging the exchange rate of
the renminbi against a number of currencies, rather than just the United States
dollar. Fluctuations in the renminbi exchange rate could increase and could
adversely affect our ability to operate our business.
42
Because
we sell products in foreign markets and have operations outside of the United
States, we face foreign business, political and economic risks that could
seriously harm us.
In the
three months ended October 2, 2010, we generated approximately 89% of our net
revenues from sales in Asia and approximately 4% from sales outside of Asia and
the United States. In fiscal year 2010, we generated approximately 87% of our
net revenues from sales in Asia and approximately 4% from sales outside of Asia
and the United States. In fiscal 2009, we derived approximately 88% of our net
revenues from sales in Asia and approximately 4% from sales outside of Asia and
the United States. We expect that export sales will continue to represent a
significant portion of net revenues. We intend to continue the expansion of our
sales efforts outside the United States. This expansion will require significant
management attention and financial resources and further subject us to
international operating risks. These risks include:
·
|
tariffs
and other barriers and
restrictions;
|
·
|
unexpected
changes in regulatory requirements;
|
·
|
the
burdens of complying with a variety of foreign laws;
and
|
·
|
delays
resulting from difficulty in obtaining export licenses for
technology.
|
We have
subsidiaries located in Asia. We manufacture certain of our frequency
control products in Taiwan as well as a recently completed factory in the
Jinan Development Zone in the Shandong Province of the People's Republic of
China. We are also in the process of developing a research and development and
manufacturing center in Yangzhou, People's Republic of China. The
development of these facilities depends upon various
tax concessions, tax rebates and other support from the local
governmental bodies in the areas where the facilities are
located. There can be no assurance that these local governmental
bodies will not change their position regarding such tax and other support and
such a change might adversely affect the successful completion and
profitability of these projects.
We are
also subject to general geopolitical risks in connection with our international
operations, such as political and economic instability and changes in diplomatic
and trade relationships. In addition, because our international sales
are often denominated in U.S. dollars, increases in the value of the U.S. dollar
could increase the price in local currencies of our products in foreign markets
and make our products relatively more expensive than competitors' products that
are denominated in local currencies. Regulatory, geopolitical and other factors
could seriously harm our business or require us to modify our current business
practices.
Our
shareholder rights plan may adversely affect existing shareholders.
On March
6, 2002, we adopted a shareholder rights plan that may have the effect of
deterring, delaying, or preventing a change in control that otherwise might be
in the best interests of our shareholders. Under the rights plan, we
issued a dividend of one preferred share purchase right for each share of our
common stock held by shareholders of record as of March 21, 2002. Each right
entitles shareholders to purchase one one-hundredth of our Series D Junior
Participating Preferred Stock.
In
general, the share purchase rights become exercisable when a person or group
acquires 15% or more of our common stock or a tender offer for 15% or more of
our common stock is announced or commenced. After such event, our
other stockholders may purchase additional shares of our common stock at 50% off
of the then-current market price. The rights will cause substantial
dilution to a person or group that attempts to acquire us on terms not approved
by our Board of Directors. The rights should not interfere with any
merger or other business combination approved by our Board of Directors since
the rights may be redeemed by us at $0.001 per right at any time before any
person or group acquire 15% or more of our outstanding common
stock. These rights expire in March 2012.
Our
operations and financial results could be severely harmed by natural
disasters.
Our
headquarters and some of our major suppliers' manufacturing facilities are
located near major earthquake faults. One of the foundries we use is located in
Taiwan, which suffered a severe earthquake during fiscal 2000. We did not
experience significant disruption to our operations as a result of that
earthquake. Taiwan is also exposed to typhoons, which can affect not only
foundries we rely upon but also our SaRonix-eCERA subsidiary. If a major
earthquake, typhoon or other natural disaster were to affect our operations or
those of our suppliers, our product supply could be interrupted, which would
seriously harm our business.
43
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
On April
29, 2008, the Board authorized the repurchase of $30 million worth of common
stock. The Company was authorized to repurchase the shares from time to time in
the open market or private transactions, at the discretion of the Company’s
management. The following table summarizes the stock repurchase activity during
the three months ended October 2, 2010:
Period
|
Total
Number of
Shares
Purchased
|
Average Price
Paid per Share
|
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
|
Maximum $ Value
That May Yet be
Purchased Under the
Plans or Programs
|
|||||||||
July
4 - July 31, 2010
|
35,104 | $ | 8.96 | 35,104 | $ | 17,461,367 | |||||||
August
1 - August 28, 2010
|
200 | 9.02 | 200 | 17,459,563 | |||||||||
August
29 - October 2, 2010
|
127,857 | 8.55 | 127,857 | 16,366,561 | |||||||||
Total
|
163,161 | $ | 8.64 | 163,161 | $ | 16,366,561 |
Current
cash balances and the proceeds from stock option exercises and purchases in the
stock purchase plan have funded stock repurchases in the past, and the Company
expects to fund future stock repurchases from these same sources.
Item
6. Exhibits.
Exhibit
Number
|
Exhibit
Description
|
|
2.1
|
Agreement
and Plan of Merger dated as of August 8, 2010, by and among Pericom
Semiconductor Corporation, PTI Acquisition Subsidiary Inc., Pericom
Technology Inc., and Yuk Kin Wong in his capacity as the representative of
the Securityholders, which was filed as Exhibit 2.1 to Pericom’s Form 8-K,
filed on August 12, 2010 and incorporated by reference
herein. The schedules to the agreement, as set forth in the
agreement, have not been filed herewith pursuant to Item 601(b)(2) of
Regulation S-K. Pericom agrees to furnish supplementally a copy
of any omitted schedule to the Securities and Exchange Commission upon
request.
|
|
31.1
|
Certification
of Alex C. Hui, Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of Aaron Tachibana, Chief Financial Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
of Alex C. Hui, Chief Executive Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
32.2
|
Certification
of Aaron Tachibana, Chief Financial Officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002
|
44
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Pericom
Semiconductor Corporation
|
|||
(Registrant)
|
|||
Date:
November 9, 2010
|
By:
|
/s/ Alex C. Hui
|
|
Alex
C. Hui
|
|||
Chief
Executive Officer
|
|||
By:
|
/s/ Aaron Tachibana
|
||
Aaron
Tachibana
|
|||
Chief
Financial Officer
|
45