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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-51349

 

 

Advanced Analogic Technologies

Incorporated

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 

 

Delaware		77-0462930
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
3230 Scott Blvd., Santa Clara, California		95054
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:

(408) 737-4600

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant 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  x    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 definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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 12b-2 of the Exchange Act).    Yes  ¨    No  x

There were 44,152,495 shares of the registrant’s common stock outstanding as of August 3, 2011.

 

 

 

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TABLE OF CONTENTS

 

				PAGE
PART I. FINANCIAL INFORMATION					3
ITEM 1.		FINANCIAL STATEMENTS (UNAUDITED)			3
		CONDENSED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2011 AND DECEMBER 31, 2010			3
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND JUNE 30, 2010			4
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND JUNE 30, 2010			5
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS			6
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			17
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			24
ITEM 4.		CONTROLS AND PROCEDURES			25
PART II. OTHER INFORMATION					25
ITEM 1.		LEGAL PROCEEDINGS			25
ITEM 1A.		RISK FACTORS			26
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			36
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES			36
ITEM 4.		REMOVED AND RESERVED			36
ITEM 5.		OTHER INFORMATION			36
ITEM 6.		EXHIBITS			37

 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except shares and par value)

 

		June 30, 2011				December 31, 2010
Assets
Current assets
Cash and cash equivalents		$	25,569			$	37,158
Short-term investments			61,192				50,245
Total cash, cash equivalents and short-term investments			86,761				87,403
Accounts receivable, net of allowances			14,387				13,629
Inventories			12,136				11,390
Prepaid expenses and other current assets			1,773				1,803
Total current assets			115,057				114,225
Property and equipment, net			4,855				5,061
Other assets			3,056				3,182
Deferred income taxes			188				188
Intangibles, net			17				50
Goodwill			16,116				16,116
Total assets		$	139,289			$	138,822
Liabilities and stockholders’ equity
Current liabilities
Accounts payable		$	11,720			$	9,315
Accrued liabilities			5,132				4,481
Income tax payable			148				146
Total current liabilities			17,000				13,942
Long-term income tax payable			2,433				2,221
Other long-term liabilities			299				297
Total liabilities			19,732				16,460
Commitments and contingencies (Note 11)
Stockholders’ equity
Common stock, $0.001 par value—100,000,000 shares authorized; 48,202,226 and 44,008,785 shares issued and outstanding, respectively, as of June 30, 2011; 46,551,317 and 42,357,876 shares issued and outstanding, respectively, as of December 31, 2010			48				47
Treasury stock, at cost; 4,193,441 shares as of June 30, 2011 and December 31, 2010, respectively			(12,251	)			(12,251	)
Additional paid-in capital			196,585				188,921
Accumulated other comprehensive gain (loss)			265				(11	)
Accumulated deficit			(65,090	)			(54,344	)
Total stockholders’ equity			119,557				122,362
Total liabilities and stockholders’ equity		$	139,289			$	138,822

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Net revenue		$	24,050			$	23,146			$	44,536			$	45,064
Cost of revenue			13,255				12,609				24,978				23,924
Gross profit			10,795				10,537				19,558				21,140
Operating expenses:
Research and development			6,588				7,836				13,056				14,938
Sales, general and administrative			7,072				6,109				14,676				12,270
Patent litigation			5				245				2,188				1,329
Total operating expenses			13,665				14,190				29,920				28,537
Loss from operations			(2,870	)			(3,653	)			(10,362	)			(7,397	)
Interest and other income (expense), net:
Interest and investment income			44				77				84				177
Other expense, net			(51	)			(62	)			(122	)			(93	)
Total interest and other income (expense), net			(7	)			15				(38	)			84
Loss before income taxes			(2,877	)			(3,638	)			(10,400	)			(7,313	)
Provision for income taxes			175				273				346				802
Net loss		$	(3,052	)		$	(3,911	)		$	(10,746	)		$	(8,115	)
Net loss per share:
Basic		$	(0.07	)		$	(0.09	)		$	(0.25	)		$	(0.19	)
Diluted		$	(0.07	)		$	(0.09	)		$	(0.25	)		$	(0.19	)
Weighted average shares used in net loss per share calculation:
Basic			43,229				42,887				42,875				42,923
Diluted			43,229				42,887				42,875				42,923

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

		Six Months Ended June 30,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(10,746	)		$	(8,115	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			1,385				2,125
Stock-based compensation			2,998				2,574
Provision for doubtful accounts			(3	)			(1	)
Net unrealized gain on trading securities			—				(3	)
Loss on sales of property and equipment			8				1
Changes in operating assets and liabilities:
Accounts receivable			(755	)			(3,469	)
Inventories			(749	)			(2,345	)
Prepaid expenses and other current assets			455				952
Other assets			(98	)			17
Accounts payable			2,393				3,917
Accrued liabilities and other long-term liabilities			650				1,091
Income taxes payable			208				727
Net cash used in operating activities			(4,254	)			(2,529	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(683	)			(1,195	)
Purchases of short-term investments			(58,850	)			(67,988	)
Proceeds from sales and maturities of short-term investments			47,512				49,147
Sale of long-term investment			275				50
Purchase of long-term investment			(300	)			—
Net cash used in investing activities			(12,046	)			(19,986	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options			4,670				423
Common stock repurchases			—				(3,602	)
Net cash provided by (used in) financing activities			4,670				(3,179	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			41				(8	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(11,589	)			(25,702	)
CASH AND CASH EQUIVALENTS—Beginning of period			37,158				36,120
CASH AND CASH EQUIVALENTS—End of period		$	25,569			$	10,418
NONCASH INVESTING AND FINANCING ACTIVITY:
Decreases in accounts payable and accrued liabilities related to property and equipment purchases		$	(8	)		$	(330	)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes		$	137			$	70

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Advanced Analogic Technologies Incorporated (the “Company”) have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with these rules and regulations. The information in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in its annual report on Form 10-K filed with the SEC on February 25, 2011.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or for any other future period. The condensed consolidated balance sheet as of December 31, 2010 is derived from the audited consolidated financial statements as of and for the year then ended.

Immaterial Restatement

In connection with the preparation of its annual consolidated financial statements for the year ended December 31, 2010, the Company identified immaterial classification errors within its previously issued condensed consolidated statements of cash flows for the six months ended June 30, 2010. For the six months ended June 30, 2010, $1.2 million of amortization of premiums on the Company’s available-for-sale investments was included within cash flows from investing activities, whereas it should have been classified within cash flows from operating activities. The Company has restated its condensed consolidated statement of cash flows for the six months ended June 30, 2010 in this Quarterly Report on Form 10-Q by increasing depreciation and amortization within cash flows from operating activities from $0.9 million to $2.1 million and increasing purchases of short-term investments within cash flows from investing activities from $66.8 million to $68.0 million. Net cash used in operating activities previously reported of $(3.7) million and Net cash used in investing activities previously reported of $(18.8) million have been corrected to $(2.5) million and $(20.0) million, respectively. This immaterial restatement had no impact on the Company’s condensed consolidated balance sheet or condensed consolidated statement of operations. The Company does not consider this correction to be material.

2. INVESTMENTS

As of June 30, 2011 and December 31, 2010, the Company had investments in short-term debt instruments and long-term auction rate securities (ARS), which were classified as available-for-sale. As of June 30, 2011, the Company also had $0.8 million of investments in ARS that were classified as trading securities. Short-term investments consist primarily of investment grade debt securities with a maturity of greater than 90 days at the time of purchase. Interest earned on securities is included in “Interest and investment income” in the Condensed Consolidated Statements of Operations.

 

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The Company’s available-for-sale investments are carried at fair market value with the related unrealized gains and losses included in accumulated other comprehensive gain (loss), which is a separate component of stockholders’ equity. The Company records other-than-temporary impairment charges for its available-for-sale investments when it intends to sell the securities, it is more likely than not that it will be required to sell the securities before a recovery, or when it does not expect to recover the entire amortized cost basis of the securities. Trading securities are carried at fair value with unrealized gains and losses recognized in earnings. The cost of securities sold is based on the specific identification method.

The following table, which excludes cash, is a summary of cash equivalents, short-term investments and long-term investments classified as available-for-sale as of June 30, 2011 and December 31, 2010:

 

		June 30, 2011
		Amortized Cost				Unrealized Gains				Unrealized (Losses)				Estimated Fair Value
		(in thousands)
Money market funds		$	13,005			$	—			$	—			$	13,005
U.S. Treasury bills			61,172				20				—				61,192
Auction rate securities			650				—				(31	)			619
Total		$	74,827			$	20			$	(31	)		$	74,816
Amounts included in:
Cash and cash equivalents		$	13,005			$	—			$	—			$	13,005
Short-term investments			61,172				20				—				61,192
Other assets			650				—				(31	)			619
Total		$	74,827			$	20			$	(31	)		$	74,816

 

		December 31, 2010
		Amortized Cost				Unrealized Gains				Unrealized (Losses)				Estimated Fair Value
		(in thousands)
Money market funds		$	29,219			$	—			$	—			$	29,219
U.S. Treasury bills			48,949				2				(4	)			48,947
Municipal bonds			1,298				—				—				1,298
Auction rate securities			1,750				—				(101	)			1,649
Total		$	81,216			$	2			$	(105	)		$	81,113
Amounts included in:
Cash and cash equivalents		$	29,219			$	—			$	—			$	29,219
Short-term investments			50,247				2				(4	)			50,245
Other assets			1,750				—				(101	)			1,649
Total		$	81,216			$	2			$	(105	)		$	81,113

3. FAIR VALUE MEASUREMENTS

The Company’s financial assets are measured at fair value. Fair value is the price that the Company estimates would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fair Value Hierarchy

The Company classifies investments within Level 1 of the fair value hierarchy when the fair value is based on quoted prices in active markets for identical assets or liabilities. The Company considers a market to be active when transactions for the asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. As of June 30, 2011, the Company’s Level 1 investments consisted of money market funds and U.S. Treasury bills.

 

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The Company classifies investments within Level 2 of the fair value hierarchy when the fair value is based on broker/dealer quotes which use observable market inputs instead of quoted market prices in active markets. As of June 30, 2011, the Company did not have Level 2 investments.

Investments are classified within Level 3 of the fair value hierarchy if the fair value is determined using unobservable inputs that are not corroborated by market data. The valuation of Level 3 investments requires the use of significant management judgments or estimation. As of June 30, 2011, the Company’s Level 3 investments consisted of ARS. The methodology used for determining the fair value of these Level 3 financial assets is described below.

The following table, which excludes cash, presents the fair value of the Company’s cash equivalents, short-term investments and long-term investments as of June 30, 2011 and December 31, 2010:

 

										Fair Value Measurements as of June 30, 2011 Using:
		Carrying Amount				Total fair value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(in thousands)
Available-for-sale securities:
Money market funds		$	13,005			$	13,005			$	13,005			$	—			$	—
U.S. Treasury bills			61,192				61,192				61,192				—				—
Auction rate securities			619				619				—				—				619
Total Available-for-sale securities		$	74,816			$	74,816			$	74,197			$	—			$	619
Other investments:
Auction rate securities classified as trading securities		$	778			$	778			$	—			$	—			$	778
ARS put option			47				47				—				—				47
Total Other investments		$	825			$	825			$	—			$	—			$	825
Amounts included in:
Cash and cash equivalents		$	13,005
Short-term investments			61,192
Prepaid expenses and other current assets			157
Other assets			1,287
Total		$	75,641

 

										Fair Value Measurements as of December 31, 2010  Using:
		Carrying Amount				Total Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(in thousands)
Available-for-sale investments:
Money market funds		$	29,219			$	29,219			$	29,219			$	—			$	—
U.S. Treasury bonds			48,947				48,947				48,947				—				—
Municipal bonds			1,298				1,298				—				1,298				—
Auction rate securities			1,649				1,649				—				—				1,649
Total		$	81,113			$	81,113			$	78,166			$	1,298			$	1,649
Amounts included in:
Cash and cash equivalents		$	29,219
Short-term investments			50,245
Other assets			1,649
Total		$	81,113

 

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The following table provides a reconciliation of the beginning and ending balances for the assets measured at fair value using unobservable inputs (Level 3):

 

		Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
		Auction Rate Securities				ARS Put Option
Beginning balances as of December 31, 2010		$	1,649			$	—
Unrealized gain included in accumulated other comprehensive loss			59				—
Unrealized loss recognized in earnings			(53	)			—
Purchases, sales, issuances and settlements, net			(175	)			53
Ending balances as of March 31, 2011			1,480				53
Unrealized gain included in accumulated other comprehensive loss			11				—
Unrealized gain (loss) recognized in earnings			6				(6	)
Purchases, sales, issuances and settlements, net			(100	)			—
Ending balances as of June 30, 2011		$	1,397			$	47
The amount of total unrealized gain for the period included in accumulated other comprehensive loss attributable to assets still held at the reporting date		$	3			$	—
The amount of total unrealized gain (loss) for the period recognized in earnings attributable to assets still held at the reporting date		$	(47	)		$	47

Auction Rate Securities

As of June 30, 2011, the Company’s investment portfolio included $1.5 million of ARS with a fair value of $1.4 million. As of December 31, 2010, the Company’s investment portfolio included $1.8 million of ARS with a fair value of $1.6 million.

During the three months ended March 31, 2011, the Company entered into a settlement agreement with a financial institution under which the financial institution agreed to purchase from the Company, up to an aggregate amount of $1.0 million of the Company’s ARS at par value. Under the agreement, the Company has the right, but not the obligation, to resell its ARS to the financial institution. In accordance with the settlement agreement, the financial institution repurchased at par value $0.2 million of the Company’s ARS during the three months ended March 31, 2011 and will repurchase $0.8 million of the Company’s ARS by December 31, 2012. Due to the Company’s intention to resell $0.8 million of ARS by December 31, 2012 per the terms of this agreement, it reclassified $0.8 million of ARS from available-for-sale to trading securities during the three months ended March 31, 2011. During the three months ended March 31, 2011, the Company elected to account for the rights to resell its ARS (“ARS Put Option”) at fair value. Changes in the fair value of the ARS classified as trading securities and changes in the fair value of the ARS Put Option are recorded within interest and other expense on the condensed consolidated statement of operations.

The Company’s ARS are interest-bearing investments in debt obligations collateralized by Federal Family Education Program student loans. The Company considers the ARS market to be inactive because auctions have failed to settle on their respective settlement dates since 2008. Further, the secondary market for ARS is inactive and there have been few issuer repurchases. The Company believes that available pricing information is not determinative of the ARS fair value. As such, the Company estimated the fair value of its ARS as of June 30, 2011 and December 31, 2010 using a discounted cash flow model.

 

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To determine the fair value of its ARS, the Company estimated the contractual interest that will be earned during the expected time to liquidity, and discounted these cash flows to reflect liquidity and credit risk. The discount factor represents the current market conditions for instruments with similar credit quality, adjusted by 300 basis points to reflect the risk in the marketplace for the ARS. The following average assumptions were used to determine the ARS fair value as of June 30, 2011 and December 31, 2010:

 

		June 30, 2011		December 31, 2010
Expected time to liquidity		2 years		2 years
Expected annual rate of return		1.2% to 1.7%		1.3% to 1.8%
Discount rate		4.2%		4.5%

4. STOCKHOLDERS’ EQUITY

Common Stock Repurchases

On October 29, 2008, the Company’s board of directors authorized a program to repurchase shares of the Company’s outstanding common stock. Under the stock repurchase program, the Company authorized the use of up to $30 million to repurchase shares of its outstanding common stock in the open market or through privately negotiated transactions. The timing and actual number of shares repurchased depends upon market conditions and other factors, in accordance with SEC requirements.

During the three and six months ended June 30, 2011, the Company did not repurchase any shares of its common stock. During the three and six months ended June 30, 2010, the Company repurchased 1.0 million shares of its common stock. As of June 30, 2011, the Company has $17.7 million of remaining funds authorized to purchase shares under the stock repurchase program. Shares repurchased are accounted for as treasury stock and the total cost of shares repurchased is recorded as a reduction to stockholders’ equity.

Stock-Based Compensation Expense and Valuation of Awards

The following table summarizes stock-based compensation expense included in the Company’s condensed consolidated statements of operations for the three and six months ended June 30, 2011 and 2010:

 

		Three Months Ended June 30,								Six Months Ended June 30,
Statement of operations classifications		2011				2010				2011				2010
Cost of revenue		$	65			$	65			$	119			$	138
Research and development			475				559				940				1,137
Sales, general and administrative			489				635				1,939				1,299
Total stock-based compensation expense		$	1,029			$	1,259			$	2,998			$	2,574

In connection with the departure of certain of its employees during the six months ended June 30, 2011, the Company modified stock option and restricted stock unit agreements to provide for an extended post-termination exercise period and accelerated vesting of stock options and restricted stock units resulting in a one-time charge of $0.9 million.

There was no related tax effect for stock-based compensation expense for the three and six months ended June 30, 2011 and 2010 as the Company had a full valuation allowance against its U.S. deferred tax assets.

 

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The Company uses the Black-Scholes option pricing model to calculate the grant date fair value of stock options. The Company did not grant any stock options during the three months ended June 30, 2011. For the three months ended June 30, 2010, the Company used the following weighted average assumptions to calculate the fair value of stock options granted:

 

		Three Months Ended June 30, 2010
Volatility			63	%
Expected option term (in years)			4.80
Expected annual dividend yield			0	%
Risk-free interest rate			2.18	%

The Company used the following weighted average assumptions to calculate the fair values of stock options granted during the six months ended June 30, 2011 and 2010:

 

		Six Months Ended June 30,
		2011				2010
Volatility			63	%			63	%
Expected option term (in years)			4.53				4.80
Expected annual dividend yield			0	%			0	%
Risk-free interest rate			2.11	%			2.27	%

The expected term of the Company’s stock options represents the estimated weighted-average period that the stock options are expected to remain outstanding. Beginning in 2010, to determine the expected term, the Company estimates future employee exercise behavior by considering its historical option exercise and post-vest cancellation experience as well as the contractual term of its stock option grants. The Company bases its expected volatility assumption on its daily historical volatility data over a period commensurate with the expected term. Due to the low volume of traded options on the Company’s common stock and because the term of traded options was much shorter than the expected term of the Company’s stock options, implied volatility was not included in the valuation of options granted during 2011 and 2010.

The risk-free interest rate used to value our stock options approximates the interest rate of a zero-coupon Treasury bond with a maturity date that approximates the expected term of the stock option grant. The dividend yield is based on the Company’s history and expectation of dividend payouts. The Company has never declared or paid any cash dividends on common stock, and it does not anticipate paying cash dividends in the foreseeable future.

During the three months ended June 30, 2011, the Company granted 0.8 million restricted stock units with a total fair value of $3.2 million. During the six months ended June 30, 2011, the Company granted 1.2 million restricted stock units with a fair value of $5.1 million. For restricted stock units, the fair value is based on the closing stock price of the Company’s common stock on the grant date, multiplied by the number of restricted stock units granted.

Compensation expense for all share based payment awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period. Stock options and restricted stock units generally vest over four years.

5. NET LOSS PER SHARE

The Company calculates basic net loss per common share by dividing net loss by the weighted-average number of common shares outstanding during the period. To determine diluted net loss per common share, the effect of potentially dilutive securities, which consist of common stock options and restricted stock units, is calculated under the treasury stock method. The effect of potentially dilutive securities is excluded from the computation of diluted net loss per share when their effect is anti-dilutive.

 

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A reconciliation of shares used in the calculation of basic and diluted net loss per share is as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
		(in thousands)
Weighted average shares used to calculate basic net loss per share			43,229				42,887				42,875				42,923
Effect of dilutive securities:
Stock options			—				—				—				—
Dilutive potential common stock			—				—				—				—
Weighted average shares used to calculate diluted net loss per share			43,229				42,887				42,875				42,923

For the three months ended June 30, 2011 and 2010, the Company excluded 6.2 million and 9.0 million, respectively, of potentially dilutive securities from the computation of diluted net loss per share. For the six months ended June 30, 2011 and 2010, the Company excluded 7.1 million and 9.1 million, respectively, of potentially dilutive securities from the computation of diluted net loss per share. Potentially dilutive securities were excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive.

6. OTHER COMPREHENSIVE LOSS

Comprehensive loss includes charges or credits to equity that are not the result of transactions with owners. The components of comprehensive loss are as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
		(in thousands)								(in thousands)
Net loss, as reported		$	(3,052	)		$	(3,911	)		$	(10,746	)		$	(8,115	)
Changes in cumulative translation adjustment			90				8				376				9
Changes in unrealized gains(losses) on investments, net of taxes			54				20				(86	)			18
Total other comprehensive loss		$	(2,908	)		$	(3,883	)		$	(10,456	)		$	(8,088	)

7. DETAILS OF CERTAIN BALANCE SHEET COMPONENTS

 

		June 30, 2011				December 31, 2010
		(in thousands)
Inventories
Work in process		$	6,957			$	5,204
Finished goods			5,179				6,186
Total inventories		$	12,136			$	11,390
Property and equipment, net
Computers and software		$	5,933			$	5,588
Office and test equipment			9,398				8,918
Leasehold improvements			1,614				1,584
Gross property and equipment			16,945				16,090
Accumulated depreciation and amortization			(12,090	)			(11,029	)
Total property and equipment, net		$	4,855			$	5,061
Accrued liabilities
Accrued legal and accounting services		$	446			$	234
Accrued payroll and benefits			2,609				2,494
Accrued severance and related			277				—
Warranty reserve			157				89
Deferred revenue			53				35
Restructuring reserve			10				37
Accrued payables and other			1,580				1,592
Total accrued liabilities		$	5,132			$	4,481

 

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8. GOODWILL AND INTANGIBLE ASSETS

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired in a business combination. As of June 30, 2011 and December 31, 2010, the Company’s goodwill balance was $16.1 million, of which $15.7 million relates to the Company’s October 2006 acquisition of Analog Power Semiconductor Corporation and $0.4 million relates to the Company’s June 2008 acquisition of Elite Micro Devices, Inc.

The Company evaluates goodwill for impairment, at a minimum, on an annual basis on September 30 and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. During the three and six months ended June 30, 2011 and 2010, the Company determined that goodwill impairment indicators were not present.

Intangible Assets

The Company’s intangible asset balance was less than $0.1 million as of June 30, 2011 and $0.1 million as of December 31, 2010. The Company amortizes intangible assets on a straight-line basis over the estimated useful life of the assets. The intangible assets balance of less than $0.1 million will be amortized over the remainder of 2011.

9. SEGMENT INFORMATION

The Company operates in one reportable segment: the design, development, marketing and sale of power management semiconductor products and solutions for the communications, computing and consumer portable and personal electronics marketplace. The Company’s chief operating decision maker is its chief executive officer.

The following is a summary of net revenue by geographic region based on the location to which the product is shipped:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
		(in thousands)
South Korea		$	10,986			$	10,798			$	22,115			$	23,041
China			4,362				5,233				7,757				9,709
Taiwan			7,771				5,998				13,206				10,172
Europe			242				276				362				643
North America			228				247				438				550
Japan			461				594				658				949
Total		$	24,050			$	23,146			$	44,536			$	45,064

The following table summarizes net revenue and accounts receivable for customers who accounted for 10% or more of accounts receivable or net revenue, respectively:

 

		Accounts Receivable as of								Net Revenue Three Months Ended June 30,								Net Revenue Six Months Ended June 30,
		June 30, 2011				December 31, 2010				2011				2010				2011				2010
Customer
A			33	%			31	%			27	%			18	%			28	%			22	%
B			20	%			24	%			15	%			17	%			17	%			18	%
C			14	%			*				21	%			*				11	%			*
D			13	%			16	%			*				*				*				*
E			*				*				*				12	%			*				11	%

 

*	Amount represents less than 10%.

 

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10. INCOME TAXES

The Company adjusts its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company also records the tax effect of unusual or infrequently occurring discrete items, including changes in judgment about valuation allowances and effects of changes in tax laws or tax rates, in the interim period in which they occur. The Company’s effective tax rate reflects the impact of a significant amount of its earnings being taxed in foreign jurisdictions at tax rates below the United States statutory tax rate and a valuation allowance maintained on the Company’s U.S. deferred tax assets.

The Company recorded tax provisions of $0.2 million and $0.3 million for the three months ended June 30, 2011 and 2010, respectively. The Company recorded tax provisions of $0.3 million and $0.8 million for the six months ended June 30, 2011 and 2010, respectively.

The Company established a full valuation allowance against its United States deferred tax assets on December 31, 2008. The Company has established valuation allowances for deferred tax assets based on a “more likely than not” threshold. The Company’s ability to realize its deferred tax assets depends on its ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company considers the following possible sources of taxable income when assessing the realization of its deferred tax assets:

 

•

Future reversals of existing taxable temporary differences;

 

•

Future taxable income exclusive of reversing temporary differences and carryforwards;

 

•

Taxable income in prior carryback years; and

 

•

Tax-planning strategies.

The Company concludes that a valuation allowance is required when there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. The Company utilizes a rolling three years of actual results as its primary measure of its cumulative losses in recent years. As of June 30, 2011, the Company continues to have a three year cumulative loss and, therefore, concluded that a valuation allowance is still required.

During the six months ended June 30, 2011, the Company increased its total amount of unrecognized tax benefits by approximately $0.6 million, including an accrual of interest and penalties of $0.2 million.

In April 2010, the Company received an IRS examination report showing proposed changes to its income tax for the 2007 tax year. The Company filed a timely protest to the April 2010 IRS examination report in May 2010 and is currently in discussions with the IRS Appeals Division. The Company believes the adjustments proposed in the IRS examination report are not supported by the facts and are inconsistent with applicable tax laws and existing Treasury regulations. No payments, if any, will be made related to the disputed proposed adjustments until the issues are resolved with either the IRS Appeals Division or the tax court. The Company believes that it has adequately provided in its financial statements for any additional taxes that it may be required to pay as a result of the examination.

Although the timing of the resolution and/or closure on audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, the Company is unable to estimate the range of possible adjustments to the balance of gross unrecognized tax benefits.

11. COMMITMENTS AND CONTINGENCIES

Indemnification and Product Warranty

The Company indemnifies certain customers, distributors, suppliers, and subcontractors for attorneys’ fees and damages and costs awarded against these parties in certain circumstances in which the Company’s products are alleged to infringe third party intellectual property rights, including patents, trade secret, trademarks, or copyrights.

 

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The Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. To date, the Company has not paid any claim or been required to defend any action related to its indemnification obligations, and accordingly, it has not accrued any amounts for such indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.

The Company provides a warranty against defects in materials and workmanship and will either repair the goods, provide replacement products at no charge to the customer or refund amounts to the customer for defective products. The Company records estimated warranty costs, based on historical experience over the preceding 12 months by product, at the time it recognizes product revenues. The Company’s warranty reserve balance was $0.2 million as of June 30, 2011 and $0.1 million as of December 31, 2010.

Litigation Related to the Merger

On June 6, 2011, a putative stockholder class action lawsuit was filed in California Superior Court in Santa Clara County (Case No. 111CV202403) (the “Bushansky action”) naming the Company (“AATI”), the members of AATI’s board of directors, Skyworks Solutions, Inc. (“Skyworks”) and PowerCo Acquisition Corp. (“Merger Sub”) as defendants. The complaint alleges, among other things, (1) that the members of AATI’s board of directors breached their fiduciary duties by (a) failing to take steps to maximize the value of the merger consideration to AATI’s stockholders, (b) taking steps to avoid competitive bidding, and (c) failing to protect against conflicts of interest resulting from change-of-control and transaction-related benefits received by AATI directors in connection with the merger that are not available to all stockholders, and (2) that AATI, the members of AATI’s board of directors, Skyworks and Merger Sub aided and abetted these purported breaches of fiduciary duties. The complaint seeks to enjoin consummation of the merger or, if the merger is completed, to recover damages caused by the alleged breaches of fiduciary duties. The complaint also seeks recovery of attorney’s fees and costs of the lawsuit.

On June 7, 2011, a putative stockholder class action lawsuit was filed in California Superior Court in Santa Clara County (Case No. 111CV202501) (the “Venette action”) naming AATI, the members of AATI’s board of directors, Skyworks and Merger Sub as defendants. Plaintiffs filed an amended complaint on July 14, 2011 (the “Amended Complaint”). The Amended Complaint alleges, among other things, (1) that the members of AATI’s board of directors breached their fiduciary duties by (a) agreeing to the merger for inadequate consideration on unfair terms, (b) failing to protect against conflicts of interest resulting from change-of-control and transaction-related benefits received by AATI directors in connection with the merger that are not available to all stockholders, (c) selling the company in response to alleged pressure from Dialectic Capital Partners, LP (“Dialectic”), (d) taking steps to avoid competitive bidding (including the entry by certain AATI officers and directors into agreements with Skyworks relating to voting commitments and inclusion in the merger agreement of nonsolicitation provisions and a termination fee), and (e) by causing the issuance of a materially misleading Form S-4 Registration Statement which, inter alia, purportedly fails to disclose material facts surrounding (i) Dialectic’s impact on the proposed merger process, (ii) the AATI board of directors’ evaluation of Skyworks and its offer for the Company, and (iii) supporting figures and analysis regarding the fairness opinion that the AATI Board obtained from its financial advisor, Needham & Company, LLC, in connection with the transaction and (2) that AATI, the members of AATI’s board of directors, Skyworks and Merger Sub aided and abetted these purported breaches of fiduciary duties. The Amended Complaint seeks to enjoin consummation of the merger, and to have the court direct the defendants to implement procedures and processes to maximize shareholder value. The Amended Complaint also seeks recovery of attorney’s fees and costs of the lawsuit.

On July 26, 2011, the Court issued an order consolidating the Bushansky action and Venette action into a single, consolidated action captioned In re Advanced Analogic Technologies Inc. Shareholder Litigation, Lead Case No. 111CV202403, and designating the Amended Complaint as the operative complaint in the litigation.

AATI and AATI’s board of directors believe that the claims in the consolidated action are without merit and intend to defend against such claims vigorously. Further, the Company does not believe that it is probable that a liability has been incurred as of the date of the financial statements or that a loss can be reasonably estimated. Accordingly, no liability has been recorded as of the date of the financial statements for the shareholder class action lawsuits. See Note 13 – “Merger Agreement with Skyworks Solutions, Inc.” below for more information about the merger agreement between the Company and Skyworks.

Patent Litigation Settlement

On March 31, 2011, the Company entered into a settlement agreement with Linear Technology Corporation ending all litigation between the two companies as previously disclosed in its annual report on Form 10-K for the fiscal year ended December 31, 2010. This settlement ends the enforcement proceeding in the United States Court of

 

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Appeals for the Federal Circuit entitled Advanced Analogic Technologies, Inc. v. International Trade Commission (Case No. 2010-1543) and ends the Company’s lawsuit in the United States District Court for the Northern District of California entitled Advanced Analogic Technologies, Inc. v. Linear Technology Corp. (Case No. C06-0735, N.D. Cal.). The Company recorded the patent litigation settlement within patent litigation expense in its condensed consolidated statement of operations for the six months ended June 30, 2011.

12. RECENT ACCOUNTING PRONOUNCEMENTS

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. The Company has adopted the provisions of ASU 2009-13 and the impact was not material to its results of operations or financial position.

In June 2011, the FASB issued new authoritative guidance on comprehensive income that eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. This guidance will be effective for public companies during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. The adoption of this guidance will not have any impact on the Company’s consolidated financial statements.

13. MERGER AGREEMENT WITH SKYWORKS SOLUTIONS, INC.

On May 26, 2011, the Company’s board of directors unanimously approved a merger agreement among AATI, Skyworks Solutions, Inc. (“Skyworks”) and PowerCo Acquisition Corp. (“Merger Sub”) that contemplates the merger of Merger Sub with and into AATI, with AATI surviving the merger as a wholly owned subsidiary of Skyworks.

If AATI stockholders adopt the merger agreement and the parties subsequently complete the merger, each outstanding share of AATI common stock will become the right to receive a combination of cash and Skyworks common stock with a nominal total combined value of $6.13, consisting of 0.08725 of a share of Skyworks common stock (the “stock consideration”), par value of $0.25 per share and cash (the “cash consideration” and, together with the stock consideration, the “merger consideration”) in the initial calculated amount of $3.68, without interest, less applicable withholding taxes, and subject to adjustment as provided in the merger agreement and further described in the proxy statement/prospectus. Under certain circumstances, Skyworks has the right to pay the entire $6.13 in cash, and in that event, AATI stockholders would not receive any shares of Skyworks common stock in the merger for their outstanding shares of AATI common stock, and would instead receive $6.13 entirely in cash.

If AATI stockholders adopt the merger agreement and the parties subsequently complete the merger, each outstanding option to purchase AATI common stock (each, a “Company Option”), whether vested or unvested, and all stock option plans or other equity-related plans of the Company themselves, insofar as they relate to outstanding Company Options, shall be assumed by Skyworks and each Company Option shall become an option to acquire, on the same terms and conditions as were applicable under the Company Option immediately prior to the effective time of the merger using an option exchange ratio.

If AATI stockholders adopt the merger agreement and the parties subsequently complete the merger, each outstanding award of restricted stock units that is to be settled in shares of the Company’s common stock that is outstanding immediately prior to the completion of the merger shall be assumed by Skyworks.

The Company and Skyworks have made customary representations and warranties in the merger agreement. The completion of the merger agreement is subject to customary closing conditions. The merger cannot be completed unless the holders of at least a majority of all the votes entitled to be cast by holders of outstanding shares of AATI common stock vote to adopt the merger agreement and approve the merger.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our most recently filed Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to, those set forth under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. When used in this Quarterly Report on Form 10-Q the words “anticipate,” “objective,” “may,” “might,” “should,” “could,” “can,” “intend,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” “is designed to” or the negative of these and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

•

our expectations regarding our expenses, sales and operations;

 

•

our anticipated cash needs and our estimates regarding our capital requirements and our need for additional financing;

 

•

our ability to anticipate the future needs of our customers;

 

•

our plans for future products and enhancements of existing products;

 

•

our growth strategy elements;

 

•

our intellectual property;

 

•

our anticipated trends and challenges in the markets in which we operate; and

 

•

our ability to attract customers.

These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. While we believe our plans, intentions and expectations reflected in those forward-looking statements are reasonable, we cannot assure you that these plans, intentions or expectations will be achieved. Our actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q, including those under the heading “Risk Factors.”

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this Quarterly Report on Form 10-Q. Other than as required by applicable laws, we are under no obligation to, and do not intend to, update any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

Our net revenue for the three months ended June 30, 2011 increased 4% compared to the three months ended June 30, 2010 primarily due to a 30% increase in net revenue in Taiwan and higher sales of our display and lighting solutions product family. Gross margin for the three months ended June 30, 2011 decreased to 44.9% compared to 45.5% for the three months ended June 30, 2010 primarily due to unfavorable product mix and average selling prices, partially offset by favorable manufacturing variances and a lower charge for excess and obsolete inventory.

Our net revenue for the six months ended June 30, 2011 decreased 1% compared to the six months ended June 30, 2010 primarily due to lower sales of our products in all regions other than Taiwan, which increased by 30% year over year. Gross margin for the six months ended June 30, 2011 was 43.9% compared to 46.9% for the six months ended June 30, 2010 primarily due to unfavorable product mix, partially offset by favorable manufacturing variances.

Cash, cash equivalents and short-term investments as of June 30, 2011 decreased by $0.6 million to $86.8 million compared to $87.4 million as of December 31, 2010. We continue to be debt free as of June 30, 2011.

 

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Merger Agreement with Skyworks Solutions, Inc.

On May 26, 2011, our board of directors unanimously approved a merger agreement among AATI, Skyworks Solutions, Inc. (“Skyworks”) and PowerCo Acquisition Corp. (“Merger Sub”) that contemplates the merger of Merger Sub with and into AATI, with AATI surviving the merger as a wholly owned subsidiary of Skyworks.

If our stockholders adopt the merger agreement and the parties subsequently complete the merger, each outstanding share of our common stock will become the right to receive a combination of cash and Skyworks common stock with a nominal total combined value of $6.13, consisting of 0.08725 of a share of Skyworks common stock (the “stock consideration”), par value of $0.25 per share and cash (the “cash consideration” and, together with the stock consideration, the “merger consideration”) in the initial calculated amount of $3.68, without interest, less applicable withholding taxes, and subject to adjustment as provided in the merger agreement and further described in the proxy statement/prospectus. Under certain circumstances, Skyworks has the right to pay the entire $6.13 in cash, and in that event, our stockholders would not receive any shares of Skyworks common stock in the merger for their outstanding shares of AATI common stock, and would instead receive $6.13 entirely in cash.

If our stockholders adopt the merger agreement and the parties subsequently complete the merger, each outstanding option to purchase AATI common stock (each, a “Company Option”), whether vested or unvested, and all stock option plans or other of our equity-related plans themselves, insofar as they relate to outstanding Company Options, shall be assumed by Skyworks and each Company Option shall become an option to acquire, on the same terms and conditions as were applicable under the Company Option immediately prior to the effective time of the merger using an option exchange ratio.

If our stockholders adopt the merger agreement and the parties subsequently complete the merger, each outstanding award of restricted stock units that is to be settled in shares of our common stock that is outstanding immediately prior to the completion of the merger shall be assumed by Skyworks.

Our board of directors has unanimously determined that it is advisable and in the best interests of our stockholders for AATI to enter into the merger agreement and to consummate the merger and the transactions contemplated by the merger agreement, and that the merger consideration provided in the merger agreement is fair to our stockholders who will be entitled to receive such merger consideration.

We and Skyworks have made customary representations and warranties in the merger agreement. The completion of the merger agreement is subject to customary closing conditions. The merger cannot be completed unless the holders of at least a majority of all the votes entitled to be cast by holders of our outstanding shares of common stock vote to adopt the merger agreement and approve the merger.

For more information on the merger, please see the Preliminary Proxy Statement/Prospectus contained in Amendment No. 1 to the Registration Statement on Form S-4 that was filed by Skyworks with the SEC on August 9, 2011 and the definitive Proxy Statement/Prospectus when available.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts in our condensed consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenues, inventory valuation, stock-based compensation, income taxes, goodwill, investments and long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.

Management believes that there have been no significant changes during the three and six months ended June 30, 2011 to the items that we disclosed as our critical accounting policies and estimates in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2010.

 

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Results of Operations

The following table sets forth our unaudited historical operating results, in dollar amounts and as a percentage of net revenue for the periods indicated:

 

		Three Months Ended June 30,																Six Months Ended June 30,
(in thousands, except percentages)		2011								2010								2011								2010
Net revenue		$	24,050				100.0	%		$	23,146				100.0	%		$	44,536				100.0	%		$	45,064				100.0	%
Cost of revenue			13,255				55.1				12,609				54.5				24,978				56.1				23,924				53.1
Gross profit			10,795				44.9				10,537				45.5				19,558				43.9				21,140				46.9
Operating expenses:
Research and development			6,588				27.4				7,836				33.9				13,056				29.3				14,938				33.1
Sales, general and administrative			7,072				29.4				6,109				26.4				14,676				33.0				12,270				27.2
Patent litigation			5				0.0				245				1.1				2,188				4.9				1,329				2.9
Total operating expenses			13,665				56.8				14,190				61.3				29,920				67.2				28,537				63.3
Loss from operations			(2,870	)			(11.9	)			(3,653	)			(15.8	)			(10,362	)			(23.3	)			(7,397	)			(16.4	)
Interest and other income (expense), net:
Interest and investment income			44				0.2				77				0.3				84				0.2				177				0.4
Other expense, net			(51	)			(0.2	)			(62	)			(0.3	)			(122	)			(0.3	)			(93	)			(0.2	)
Total interest and other income (expense), net			(7	)			(0.0	)			15				0.1				(38	)			(0.1	)			84				0.2
Loss before income taxes			(2,877	)			(12.0	)			(3,638	)			(15.7	)			(10,400	)			(23.4	)			(7,313	)			(16.2	)
Provision for income taxes			175				0.7				273				1.2				346				0.8				802				1.8
Net loss		$	(3,052	)			(12.7	)%		$	(3,911	)			(16.9	)%		$	(10,746	)			(24.1	)%		$	(8,115	)			(18.0	)%

Comparison of Three and Six Months ended June 30, 2011 and June 30, 2010

Net Revenue

The following table illustrates our net revenue by principal product families:

 

		Three Months Ended June 30,																Six Months Ended June 30,
		2011								2010								2011								2010
		Amount				Percent of net revenue				Amount				Percent of net revenue				Amount				Percent of net revenue				Amount				Percent of net revenue
		(in thousands, except percentages)
Display and Lighting Solutions		$	13,949				58	%		$	12,680				55	%		$	25,495				57	%		$	25,650				57	%
Voltage Regulation and DC/DC Conversion			5,125				21	%			5,197				22	%			10,032				23	%			9,440				21	%
Interface and Power Management			3,776				16	%			3,624				16	%			6,834				15	%			6,619				15	%
Battery Management			1,200				5	%			1,645				7	%			2,175				5	%			3,355				7	%
Total		$	24,050				100	%		$	23,146				100	%		$	44,536				100	%		$	45,064				100	%

Our net revenue for the three months ended June 30, 2011 increased by $0.9 million or 3.9% compared to the three months ended June 30, 2010. Total unit shipments in the three months ended June 30, 2011 increased 9% compared to the three months ended June 30, 2010 while the average selling prices decreased by approximately 5%.

Our net revenue for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010 decreased by $0.1 million, or 1.2%. Total unit shipments increased 5% during the first six months of 2011 compared to the first six months of 2010 while average selling prices decreased 6%.

During the three and six months ended June 30, 2011 higher sales in Taiwan were offset by lower sales in all other regions compared to the three and six months ended June 30, 2010.

 

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Gross Profit

 

		Three Months Ended June 30,								Increase (Decrease)								Six Months Ended June 30,								Increase (Decrease)
(in thousands, except percentages)		2011				2010												2011				2010
Net revenue		$	24,050			$	23,146			$	904				4	%		$	44,536			$	45,064			$	(528	)			(1	)%
Cost of revenue			13,255				12,609				646				5	%			24,978				23,924				1,054				4	%
Gross profit		$	10,795			$	10,537											$	19,558			$	21,140
Gross profit margin percentage			44.9	%			45.5	%			(0.6	)%							43.9	%			46.9	%			(3.0	)%

Our gross margin was 44.9% for the three months ended June 30, 2011, compared to 45.5% for the three months ended June 30, 2010. This decrease in gross margin was primarily due to unfavorable product mix, partially offset by favorable manufacturing variances.

Our gross margin was 43.9% for the six months ended June 30, 2011, compared to 46.9% for the six months ended June 30, 2010. This decrease in gross margin was primarily due to unfavorable product mix, partially offset by favorable manufacturing variances.

Research and Development

 

		Three Months Ended June 30,								Increase (Decrease)								Six Months Ended June 30,								Increase (Decrease)
(in thousands, except percentages)		2011				2010												2011				2010
Research and development		$	6,588			$	7,836			$	(1,248	)			(16	)%		$	13,056			$	14,938			$	(1,882	)			(13	)%
Percentage of net revenue			27.4	%			33.9	%			(6.5	)%							29.3	%			33.1	%			(3.8	)%

Research and development expenses for the three months ended June 30, 2011 decreased by $1.2 million as compared to the three months ended June 30, 2010 primarily due to a $0.8 million decrease in payroll and personnel related expenses due to a reduction in force and a $0.3 million decrease in non-recurring engineering expenses.

Research and development expenses for the six months ended June 30, 2011 decreased by $1.9 million as compared to the six months ended June 30, 2010 primarily due to a $1.5 million decrease in payroll and personnel related expenses as a result of a reduction in force and a $0.4 million decrease in patent related expenses.

Sales, General and Administrative

 

		Three Months Ended June 30,								Increase (Decrease)								Six Months Ended June 30,								Increase (Decrease)
(in thousands, except percentages)		2011				2010												2011				2010
Sales, general and administrative		$	7,072			$	6,109			$	963				16	%		$	14,676			$	12,270			$	2,406				20	%
Percentage of net revenue			29.4	%			26.4	%			3.0	%							33.0	%			27.2	%			5.7	%

Sales, general and administrative expenses for the three months ended June 30, 2011 increased by $1.0 million as compared to the three months ended June 30, 2010 primarily due to $2.0 million of acquisition related expenses primarily for valuation and legal services (see “Merger Agreement with Skyworks Solutions, Inc.” above), partially offset by a $0.4 million decrease in outside service expenses, a $0.3 million decrease in travel expenses and a $0.1 million decrease in payroll and personnel related expenses.

Sales, general and administrative expenses for the six months ended June 30, 2011 increased by $2.4 million as compared to the six months ended June 30, 2010 primarily due to $2.0 million of acquisition related expenses primarily for valuation and legal services, a $0.8 million increase in severance expense for former executives and a $0.6 million increase in stock-based compensation expense primarily due to stock option modifications for former executives, partially offset by a $0.4 million decrease in outside service expenses, a $0.3 million decrease in payroll and personnel related expenses and a $0.2 million decrease in travel expenses.

 

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Patent Litigation

 

		Three Months Ended June 30,								Increase (Decrease)								Six Months Ended June 30,								Increase (Decrease)
(in thousands, except percentages)		2011				2010												2011				2010
Patent litigation		$	5			$	245			$	(240	)			(98	)%		$	2,188			$	1,329			$	859				65	%
Percentage of net revenue			0.0	%			1.1	%			(1.0	)%							4.9	%			2.9	%			2.0	%

Patent litigation expense consists of ongoing attorney’s fees incurred in connection with our outstanding patent litigation activities and losses incurred as a result of the resolution or settlement of outstanding litigation. Patent litigation expense decreased during the three months ended June 30, 2011 compared to the three months ended June 30, 2010 due to lower attorney fees incurred in connection with our outstanding patent litigation activities.

Patent litigation expense increased during the six months ended June 30, 2011 compared to the six months ended June 30, 2010 due to a loss incurred in connection with a litigation settlement during the six months ended June 30, 2011. For a description of our litigation, please see Part II, Item 1—Legal Proceedings—for further details.

Provision for Income Taxes

We adjust our effective tax rate each quarter to be consistent with the estimated annual effective tax rate. We also record the tax effect of unusual or infrequently occurring discrete items, including changes in judgment about valuation allowances and effects of changes in tax laws or tax rates, in the interim period in which they occur. Our effective tax rate reflects the impact of a significant amount of our earnings being taxed in foreign jurisdictions at tax rates below the United States statutory tax rate and a valuation allowance maintained on our U.S. deferred tax assets.

We recorded tax provisions of $0.2 million and $0.3 million for the three months ended June 30, 2011 and 2010, respectively. We recorded tax provisions of $0.3 million and $0.8 million for the six months ended June 30, 2011 and 2010, respectively.

We established a full valuation allowance against our United States deferred tax assets on December 31, 2008. We have established valuation allowances for deferred tax assets based on a “more likely than not” threshold. Our ability to realize our deferred tax assets depends on our ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. We consider the following possible sources of taxable income when assessing the realization of our deferred tax assets:

 

•

Future reversals of existing taxable temporary differences;

 

•

Future taxable income exclusive of reversing temporary differences and carryforwards;

 

•

Taxable income in prior carryback years; and

 

•

Tax-planning strategies.

We conclude that a valuation allowance is required when there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. We utilize a rolling three years of actual results as our primary measure of our cumulative losses in recent years. As of June 30, 2011, we continue to have a three year cumulative loss and, therefore, concluded that a valuation allowance is still required.

During the six months ended June 30, 2011, we increased our total amount of unrecognized tax benefits by approximately $0.6 million, including an accrual of interest and penalties of $0.2 million.

In April 2010, we received an IRS examination report showing proposed changes to our income tax for the 2007 tax year. We filed a timely protest to the April 2010 IRS examination report in May 2010 and are currently in discussions with the IRS Appeals Division. We believe the adjustments proposed in the IRS examination report are not supported by the facts and are inconsistent with applicable tax laws and existing Treasury regulations. No payments, if any, will be made related to the disputed proposed adjustments until the issues are resolved with either the IRS Appeals Division or the tax court. We believe that we have adequately provided in our financial statements for any additional taxes that we may be required to pay as a result of the examination.

 

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Although the timing of the resolution and/or closure on audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the range of possible adjustments to the balance of gross unrecognized tax benefits.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. We have adopted the provisions of ASU 2009-13 and the impact was not material to our results of operations or financial position.

In June 2011, the FASB issued new authoritative guidance on comprehensive income that eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, we must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. This guidance will be effective for public companies during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. The adoption of this guidance will not have any impact on our consolidated financial statements.

Liquidity and Capital Resources

 

		Six Months Ended June 30,								Increase (Decrease)
		2011				2010*
		(in thousands)
Net cash used in operating activities		$	(4,254	)		$	(2,529	)		$	(1,725	)
Net cash used in investing activities			(12,046	)			(19,986	)			7,940
Net cash provided by (used in) financing activities			4,670				(3,179	)			7,849
Effect of exchange rate changes on cash and cash equivalents			41				(8	)			49
Net decrease in cash and cash equivalents		$	(11,589	)		$	(25,702	)		$	14,113

 

*	Reflects the immaterial restatement disclosed in Item 1, Note 1 – Basis of Presentation.

Net Cash Used in Operating Activities

For the six months ended June 30, 2011, cash used in operating activities was $4.3 million. Cash used in operating activities consisted primarily of the net loss of $10.7 million, less non-cash items including $3.0 million of stock-based compensation expense and $1.4 million of depreciation and amortization, and a $0.8 million increase in accounts receivable due to the timing of shipments during the three months ended June 30, 2011. These uses of cash were partially offset by the $2.4 million increase in accounts payable due to the timing of our purchases.

Cash used in operating activities was $2.5 million for the six months ended June 30, 2010. Cash used in operating activities was comprised of the net loss of $8.1 million, less non-cash adjustments including $2.6 million of stock-based compensation expense and $2.1 million of depreciation and amortization. Cash used in operating activities was also comprised of $3.5 million used to increase accounts receivable as a result of higher sales and $2.3 million used to increase inventory. These uses were offset by a $3.9 million increase in accounts payable due to the timing of our purchases, a $1.1 million increase in accrued liabilities and other long-term liabilities primarily due an increase in the accrual for payroll and related expenses, a $1.0 million decrease in prepaid expenses and other current assets primarily due to a decrease in interest receivable and a $0.7 million increase in income taxes payable due to the current year income taxes.

Net Cash Used in Investing Activities

Net cash used in investing activities was $12.0 million for the six months ended June 30, 2011, primarily due to $58.9 million used to purchase short-term investments and $0.7 million used to purchase property, plant and equipment, and $0.3 million used to purchase a long-term investment, partially offset by $47.5 million of proceeds from sales and maturities of short-term investments and $0.3 million due to sales of auction rate securities.

 

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Net cash used in investing activities of $20.0 million for the six months ended June 30, 2010 was primarily comprised of $68.0 million used to purchase short-term investments and $1.2 million used to purchase property and equipment, partially offset by $49.1 million of proceeds from sales and maturities of short-term investments.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $4.7 million for the six months ended June 30, 2011 due to proceeds from the exercise of common stock options.

Net cash used in financing activities was $3.2 million for the six months ended June 30, 2010, primarily due to $3.6 million used to repurchase our common stock during the period, partially offset by $0.4 million of proceeds from stock option exercises.

Liquidity

Our cash, cash equivalents and short term investments were $86.7 million as of June 30, 2011 and $87.4 million as of December 31, 2010. We believe our existing cash, cash equivalents and short-term investment balances, as well as any cash expected to be generated from operating activities, will be sufficient to meet our anticipated cash needs for at least the next 12 months.

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 activities, the timing of our introductions of new products, the costs to ensure access to adequate manufacturing capacity, our level of acquisition activity or other strategic transactions, the continuing market acceptance of our products and the amount and intensity of our litigation activity. 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.

Off Balance Sheet Arrangements

We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us.

Contractual Obligations

The following table describes our principal contractual cash obligations as of June 30, 2011:

 

		Total				Remaining 2011				2012				2013				2014				2015				2016 and beyond
		(in thousands)
Operating leases		$	7,721			$	1,554			$	2,383			$	1,539			$	1,049			$	1,074			$	122
Purchase commitments(1)			5,694				5,694				—				—				—				—				—
Total contractual obligations		$	13,415			$	7,248			$	2,383			$	1,539			$	1,049			$	1,074			$	122

 

(1)	Purchase commitments consist primarily of our commitment to purchase wafers and assembly services.

Common Stock Repurchases

On October 29, 2008, our board of directors authorized a program to repurchase shares of our outstanding common stock. Under the stock repurchase program, we are authorized to use up to $30 million to repurchase shares of our outstanding common stock in the open market or through privately negotiated transactions. The timing and actual number of shares repurchased under the stock repurchase program depends upon market conditions and other factors, in accordance with SEC requirements. During the three and six months ended June 30, 2011, we did not repurchase any shares of our common stock. During the three and six months ended June 30, 2010, we repurchased 1.0 million shares of our common stock.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At June 30, 2011, we had cash and cash equivalents totaling $25.6 million, compared to $37.1 million at December 31, 2010. At June 30, 2011, we had $61.2 million in short-term investments as compared to $50.2 million at December 31, 2010. Cash equivalents have an original or remaining maturity when purchased of 90 days or less; short-term investments generally have an original or remaining maturity when purchased of greater than 90 days. Our investment policy places emphasis on instruments with more liquidity.

The taxable equivalent interest rates for the three months ended June 30, 2011 and 2010, on those cash equivalents and short-term investments average approximately 0.2% and 0.3%, respectively. The taxable equivalent interest rates for the six months ended June 30, 2011 and 2010, on those cash equivalents and short-term investments average approximately 0.2% and 0.4%, respectively. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. While none of the securities in which we have invested are secured by real estate, these securities may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate.

A hypothetical increase in market interest rates of 100 basis points from the market rates in effect at June 30, 2011 would cause the fair value of our investments to decrease by approximately $0.2 million, which would not significantly impact our financial position or results of operations. A hypothetical decrease in market interest rates of 100 basis points from the market rates in effect at June 30, 2011 would cause the fair value of these investments to increase by less than $0.1 million. Declines in interest rates over time will result in lower interest income. Based upon our analysis the fair values did not change materially as our investments are of short duration.

As of June 30, 2011, our investment portfolio included interest bearing auction rate securities (“ARS”) with a fair value of $1.4 million, of which $0.6 million was classified as available-for-sale and $0.8 million was classified as trading securities.

During the three months ended March 31, 2011, we entered into a settlement agreement with a financial institution under which the financial institution agreed to purchase from us, up to an aggregate amount of $1.0 million of our ARS at par value. Under the agreement, we have the right, but not the obligation, to resell our ARS to the financial institution. In accordance with the settlement agreement, the financial institution repurchased at par value $0.2 million of our ARS during the three months ended March 31, 2011 and will repurchase $0.8 million of our ARS by December 31, 2012. Due to our intention to resell $0.8 million of ARS by December 31, 2012 per the terms of this agreement, we reclassified $0.8 million of ARS from available-for-sale to trading securities during the three months ended March 31, 2011. During the three months ended March 31, 2011, we elected to account for the rights to resell its ARS (“ARS Put Option”) at fair value. Changes in the fair value of the ARS classified as trading securities and changes in the fair value of the ARS Put Option are recorded within interest and other expense on the condensed consolidated statement of operations.

We used a discounted cash flow model to determine the estimated fair value of our ARS and the ARS Put Option as of June 30, 2011. The assumptions used in preparing the discounted cash flow model included estimates for interest rates, estimates for discount rates using yields of comparable traded instruments adjusted for illiquidity and other risk factors, and estimates for the amount of cash flows and expected holding periods of the ARS and the ARS Put Option. These inputs reflect our own assumptions about the assumptions market participants would use in pricing the ARS and the ARS Put Option, including assumptions about risk, developed based on the best information available in the circumstances.

To determine the fair value of our ARS, we estimated the contractual interest that will be earned during the expected time to liquidity, and discounted these cash flows to reflect liquidity and credit risk. The discount factor represents the current market conditions for instruments with similar credit quality, adjusted by 300 basis points to reflect the risk in the marketplace for the ARS. The following average assumptions were used to determine the ARS fair value as of June 30, 2011 and December 31, 2010:

 

		June 30, 2011		December 31, 2010
Expected time to liquidity		2 years		2 years
Expected annual rate of return		1.2% to 1.7%		1.3% to 1.8%
Discount rate		4.2%		4.5%

 

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ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and our interim Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. As of June 30, 2011, our management, with the participation of our Chief Executive Officer and our interim Chief Financial Officer, concluded that our disclosure controls and procedures were effective to ensure that information that we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 was (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls Over Financial Reporting

There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2011 covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

Litigation Related to the Merger

On June 6, 2011, a putative stockholder class action lawsuit was filed in California Superior Court in Santa Clara County (Case No. 111CV202403) (the “Bushansky action”) naming AATI, the members of AATI’s board of directors, Skyworks Solutions, Inc. (“Skyworks”) and PowerCo Acquisition Corp. (“Merger Sub”) as defendants. The complaint alleges, among other things, (1) that the members of AATI’s board of directors breached their fiduciary duties by (a) failing to take steps to maximize the value of the merger consideration to AATI’s stockholders, (b) taking steps to avoid competitive bidding, and (c) failing to protect against conflicts of interest resulting from change-of-control and transaction-related benefits received by AATI directors in connection with the merger that are not available to all stockholders, and (2) that AATI, the members of AATI’s board of directors, Skyworks and Merger Sub aided and abetted these purported breaches of fiduciary duties. The complaint seeks to enjoin consummation of the merger or, if the merger is completed, to recover damages caused by the alleged breaches of fiduciary duties. The complaint also seeks recovery of attorney’s fees and costs of the lawsuit.

On June 7, 2011, a putative stockholder class action lawsuit was filed in California Superior Court in Santa Clara County (Case No. 111CV202501) (the “Venette action”) naming AATI, the members of AATI’s board of directors, Skyworks and Merger Sub as defendants. Plaintiffs filed an amended complaint on July 14, 2011 (the “Amended Complaint”). The Amended Complaint alleges, among other things, (1) that the members of AATI’s board of directors breached their fiduciary duties by (a) agreeing to the merger for inadequate consideration on unfair terms, (b) failing to protect against conflicts of interest resulting from change-of-control and transaction-related benefits received by AATI directors in connection with the merger that are not available to all stockholders, (c) selling the company in response to alleged pressure from Dialectic Capital Partners, LP (“Dialectic”), (d) taking steps to avoid competitive bidding (including the entry by certain AATI officers and directors into agreements with Skyworks relating to voting commitments and inclusion in the merger agreement of nonsolicitation provisions and a termination fee), and (e) by causing the issuance of a materially misleading Form S-4 Registration Statement which, inter alia, purportedly fails to disclose material facts surrounding (i) Dialectic’s impact on the proposed merger process, (ii) the AATI board of directors’ evaluation of Skyworks and its offer for the Company, and (iii) supporting figures and analysis regarding the fairness opinion that the AATI Board obtained from its financial advisor, Needham & Company, LLC, in connection with the transaction and (2) that AATI, the members of AATI’s board of directors, Skyworks and Merger Sub aided and abetted these purported breaches of fiduciary duties. The Amended Complaint seeks to enjoin consummation of the merger, and to have the court direct the defendants to implement procedures and processes to maximize shareholder value. The Amended Complaint also seeks recovery of attorney’s fees and costs of the lawsuit.

 

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On July 26, 2011, the Court issued an order consolidating the Bushansky action and Venette action into a single, consolidated action captioned In re Advanced Analogic Technologies Inc. Shareholder Litigation, Lead Case No. 111CV202403, and designating the Amended Complaint as the operative complaint in the litigation.

AATI and AATI’s board of directors believe that the claims in the consolidated action are without merit and intend to defend against such claims vigorously. Further, the Company does not believe that it is probable that a liability has been incurred as of the date of the financial statements or that a loss can be reasonably estimated. Accordingly, no liability has been recorded as of the date of the financial statements for the shareholder class action lawsuits. See Note 13—“Merger Agreement with Skyworks Solutions, Inc.” to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for more information.

Patent Litigation Settlement

On March 31, 2011, we entered into a settlement agreement with Linear Technology Corporation ending all litigation between the two companies as previously disclosed in its annual report on Form 10-K for the fiscal year ended December 31, 2010. This settlement ends the enforcement proceeding in the United States Court of Appeals for the Federal Circuit entitled Advanced Analogic Technologies, Inc. v. International Trade Commission (Case No. 2010-1543) and ends our lawsuit in the United States District Court for the Northern District of California entitled Advanced Analogic Technologies, Inc. v. Linear Technology Corp. (Case No. C06-0735, N.D. Cal.). We recorded the patent litigation settlement within patent litigation expense in our condensed consolidated statement of operations for the six months ended June 30, 2011.

 

ITEM 1A.

RISK FACTORS

The failure to complete our proposed merger with Skyworks Solutions, Inc. could adversely affect our business and stock price.

On May 26, 2011, we entered into a merger agreement with Skyworks Solutions Inc. (“Skyworks”) and PowerCo Acquisition Corp. (“Merger Sub”), pursuant to which Merger Sub will merge with and into us, and we will continue as the surviving corporation and become a wholly owned subsidiary of Skyworks. The merger is subject to customary closing conditions, including but not limited to the approval of our stockholders. There is no assurance that the merger will occur. If the proposed merger is not completed, the share price of our common stock may drop to the extent that the current market price of our common stock reflects an assumption that the merger will be completed. In addition, under certain circumstances following the termination of the merger agreement, we may be required to pay a termination fee of $8.5 million to Skyworks or up to $500,000 in expense reimbursements to Skyworks. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community and could adversely impact our relationship with our customers or suppliers. Finally, the pending merger could result in disruptions to our business, and any such disruptions could continue or accelerate in the event the merger is not consummated. There can be no assurance that our business, these relationships or our financial condition would not be adversely affected, as compared to the condition prior to the announcement of the merger, if the merger is not consummated.

We will be subject to business uncertainties while our proposed merger with Skyworks is pending which may cause a loss of employees and may otherwise affect our business.

Uncertainty about the effect of our merger with Skyworks on our employees, customers, suppliers and other business partners may have an adverse effect on us. These uncertainties could cause customers, suppliers, business partners and others that deal with us to defer entering into contracts with us or making other decisions concerning us or seek to change existing business relationships with us which could materially harm our business. In addition, except as expressly permitted by the merger agreement or as required by applicable law, subject to certain exceptions, until the effective time of the merger, the merger agreement restricts our ability to take certain action and engage in certain transactions.

In addition, prior to the merger, our employees may experience uncertainty about their roles with Skyworks following the merger. This may adversely affect our ability to retain key management, sales, technical and other personnel. Key employees may depart or their efforts may be impeded because of issues relating to the uncertainty and difficulty of integration with Skyworks or a desire not to remain with Skyworks following the merger. If key employees depart or their efforts on our behalf are otherwise impeded, our business could be materially harmed.

 

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If we fail to forecast demand for our products accurately, we may incur product shortages, delays in product shipments or excess or insufficient product inventory.

We generally do not obtain firm, long-term purchase commitments from our customers. Because production lead times often exceed the amount of time required to fulfill orders, we often must build in advance of orders, relying on an imperfect demand forecast to project volumes and product mix. Our demand forecast accuracy can be adversely affected by a number of factors, including inaccurate forecasting by our customers, changes in market conditions, new part introductions by our competitors that lead to our loss of previous design wins, adverse changes in our product order mix and demand for our customers’ products or models. Even after an order is received, our customers may cancel these orders or request a decrease in production quantities. Any such cancellation or decrease subjects us to a number of risks, most notably that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls and excess or obsolete inventory which we may be unable to sell to other customers. Alternatively, if we are unable to project customer requirements accurately, we may not build enough products, which could lead to delays in product shipments and lost sales opportunities in the near term, as well as force our customers to identify alternative sources, which could affect our ongoing relationships with these customers. We have in the past had customers dramatically increase their requested production quantities with little or no advance notice and after they had submitted their original order. We have on occasion been unable to fulfill these revised orders within the time period requested. Either overestimating or underestimating demand would lead to excess, obsolete or insufficient inventory, which could harm our operating results, cash flow and financial condition, as well as our relationships with our customers.

We receive a substantial portion of our net revenue from a small number of OEM customers and distributors, and the loss of, or a significant reduction in, orders from those customers or our other largest customers would adversely affect our operations and financial condition.

We received an aggregate of approximately 93% and 89% of our net revenue from our ten largest customers for the three months ended June 30, 2011 and 2010, respectively. Any action by one of our largest customers that affects our orders, product pricing or vendor status could significantly reduce our net revenue and harm our financial results.

We receive a substantial portion of our net revenue from a small number of customers. For example, for the three months ended June 30, 2011 and 2010, Samsung was our largest customer. Sales to Samsung represented 27% and 18% of our net revenue for the three months ended June 30, 2011 and 2010, respectively. Additionally, we sell to a number of contract manufacturers of Samsung. Sales to Samsung and its contract manufacturers represented 28% of our net revenue for both the three months ended June 30, 2011 and 2010, respectively. Sales to LG Electronics represented 15% and 17% of our net revenue for the three months ended June 30, 2011 and 2010, respectively. We anticipate that we will continue to be dependent on these customers for a significant portion of our net revenue in the immediate future; however, we do not have long-term contractual purchase commitments from them, and we cannot assure you that they will continue to be our customers. Because our largest customers account for such a significant part of our business, the loss of, or a decline in sales to, any of our major customers would negatively impact our business.

Our operating results have fluctuated in the past and we expect our operating results to continue to fluctuate.

Our revenues are difficult to predict and have varied significantly in the past from period to period. We expect our revenues and expense levels to continue to vary in the future, making it difficult to predict our future operating results. In particular, we experience seasonality and variability in demand for our products as our customers manage their inventories. Our customers tend to increase inventory of our products in anticipation of the peak fourth quarter buying season for the mobile consumer electronic devices in which our products are used, which often leads to sequentially lower sales of our products in the first calendar quarter and, potentially, late in the fourth calendar quarter.

Additional factors that could cause our results to fluctuate include:

 

•

the forecasting, scheduling, rescheduling or cancellation of orders by our customers, particularly in China and other emerging markets;

 

•

costs associated with litigation, especially related to intellectual property;

 

•

liquidity and cash flow of our distributors, suppliers and end-market customers;

 

•

changes in manufacturing costs, including wafer, test and assembly costs, and manufacturing yields, product quality and reliability;

 

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•

the timing and availability of adequate manufacturing capacity from our manufacturing suppliers;

 

•

our ability to successfully define, design and release new products in a timely manner that meet our customers’ needs;

 

•

the timing, performance and pricing of new product introductions by us and by our competitors;

 

•

general economic conditions in the countries where we operate or our products are used;

 

•

changes in exchange rates, interest rates, tax rates and tax withholding;

 

•

geopolitical stability, especially affecting China, Taiwan and Asia in general; and

 

•

changes in domestic and international tax laws.

Unfavorable changes in any of the above factors, most of which are beyond our control, could significantly harm our business and results of operations.

We may be required to record additional significant charges to earnings if our goodwill becomes impaired.

Under accounting principles generally accepted in the United States, we review our goodwill for impairment each year as of September 30^th and when events or changes in circumstances indicate the carrying value may not be recoverable. The carrying value of our goodwill may not be recoverable due to factors indicating a decrease in the value of the Company, such as a decline in stock price and market capitalization, reduced estimates of future cash flows and slower growth rates in our industry. Estimates of future cash flows are based on an updated long-term financial outlook of our operations. However, actual performance in the near-term or long-term could be materially different from these forecasts, which could impact future estimates. For example, a significant decline in our stock price and/or market capitalization may result in goodwill impairment. We may be required to record a charge to earnings in our financial statements during a period in which an impairment of our goodwill is determined to exist, which may negatively impact our results of operations.

We may be required to record impairment charges in future quarters as a result of the decline in value of our investments in auction rate securities.

As of June 30, 2011, our investment portfolio included interest bearing auction rate securities (ARS) with a fair value of $1.4 million. Our ARS represent investments in debt obligations collateralized by Federal Family Education Program student loans. At the time of acquisition, these ARS investments were intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. The monthly auctions historically provided a liquid market for these securities. However, beginning in 2008, uncertainties in the credit markets have affected all of our holdings in ARS and auctions for our investments in these securities have failed to settle on their respective settlement dates. Auctions for our investments in these securities continued to fail through June 30, 2011.

If the current market conditions deteriorate further, the anticipated recovery in market values does not occur, or if we determine that we intend to sell the ARS, it is possible that we will be required to sell the ARS before a recovery of the auction process, or that we will not recover the entire amortized cost basis of the ARS, and we may be required to record impairment charges in future quarters which may negatively impact our results of operations.

We may be unsuccessful in developing and selling new products or in penetrating new markets.

We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. Our competitiveness and future success depends on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. A fundamental shift in technologies in any of our product markets could harm our competitive position within these markets. Our failure to anticipate these shifts, to develop new technologies or to react to changes in existing technologies could materially delay our development of new products, which could result in product obsolescence, decreased net revenue and a loss of design wins to our competitors. Our understanding is that our overall product acceptance rate is typical for the semiconductor analog sector due to ongoing competition, long design-in and qualification cycles, late introduction and/or product not meeting exact customer requirements. In some instances, our products were designed into a customer’s product or system but our customer’s product failed to gain market acceptance so no substantial business resulted. In other cases, we may introduce a product before the market is ready to accept or require the features offered in our product, in which revenues may result at a later and somewhat unpredictable date in the future.

 

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As part of our continued efforts to grow and diversify our product offerings, we continue to expand our family of LED driver system solutions for LED backlit LCD televisions and also recently introduced our first µSwitcher converter family of ultra-compact switching regulators. The success of these and all of our new products depends on accurate forecasts of long-term market demand and future technological developments, as well as on a variety of specific implementation factors, including:

 

•

effective marketing, sales and service;

 

•

timely and efficient completion of process design and device structure improvements and implementation of manufacturing, assembly and test processes; and

 

•

the quality, performance and reliability of the product.

If we fail to introduce new products or penetrate new markets, our revenues will likely decrease over time and our financial condition could suffer.

We may not have the expertise we need to successfully define or develop products for new market opportunities, and we may lack the sales connections and applications expertise to secure orders for such products. Identifying and hiring such resources may be difficult and we may not be successful in identifying and hiring necessary personnel. Attempts to balance product development and sales efforts between new and existing applications may delay our entrance into new markets and make it more difficult to penetrate new customers and application opportunities in the future.

Due to defects and failures that may occur, our products may not meet specifications, which may cause customers to return or stop buying our products and may expose us to product liability claims.

Our customers generally establish demanding specifications for quality, performance and reliability that our products must meet. Integrated circuits as complex as ours often encounter development delays and may contain undetected defects or failures when first introduced or after commencement of commercial shipments, which might require product replacement or recall. In addition, our customers may not use our products in a way that is consistent with our published specifications. If defects and failures occur in our products during the design phase or after, or our customers use our products in ways that are not consistent with their intended use, we could experience lost revenues, increased costs, including warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or shipments, or product returns or discounts, any of which would harm our operating results. We cannot assure you that we will have sufficient resources, including any available insurance, to satisfy any asserted claims.

The nature of the design process requires us to incur expenses prior to earning revenues associated with those expenses, and we will have difficulty selling our products if system designers do not design our products into their electronic systems.

We devote significant time and resources to working with our customers’ system designers to understand their future needs and to provide products that we believe will meet those needs. If a customer’s system designer initially chooses a competitor’s product for a particular electronic system, it becomes significantly more difficult for us to sell our products for use in that electronic system because changing suppliers can involve significant cost, time, effort and risk for our customers.

We often incur significant expenditures in the development of a new product without any assurance that our customers’ system designers will select our product for use in their electronic systems. We often are required to anticipate which product designs will generate demand in advance of our customers expressly indicating a need for that particular design. In some cases, there is minimal or no demand for our products in our anticipated target applications. Even if our products are selected by our customers’ system designers, a substantial period of time will elapse before we generate revenues related to the significant expenses we have incurred. The reasons for this delay generally include the following elements of our product sales and development cycle timeline and related influences:

 

•

our customers usually require a comprehensive technical evaluation of our products before they incorporate them into their electronic systems;

 

•

it can take up to 12 months from the time our products are selected to complete the design process;

 

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•

it can take an additional 9 to 12 months or longer to complete commercial introduction of the electronic systems that use our products, if they are introduced at all;

 

•

original equipment manufacturers typically limit the initial release of their electronic systems to evaluate performance and consumer demand; and

 

•

the development and commercial introduction of products incorporating new technology are frequently delayed.

We estimate that the overall sales and development cycle timeline of an average product is approximately 16 months.

Additionally, even if system designers use our products in their electronic systems, we cannot assure you that these systems will be commercially successful. As a result, we are unable to accurately forecast the volume and timing of our orders and revenues associated with any new product introductions.

Any increase in the manufacturing cost of our products could reduce our gross margins and operating profit.

The semiconductor business exhibits ongoing competitive pricing pressure from customers and competitors. Accordingly, any increase in the cost of our products, whether by adverse purchase price variances or adverse manufacturing cost variances, will reduce our gross margins and operating profit. We do not have many long-term supply agreements with our manufacturing suppliers and, consequently, we may not be able to obtain price reductions or anticipate or prevent future price increases from our suppliers.

The average selling price of our products may decline, or a change in the mix of product orders may occur, either of which could reduce our gross margins.

During a power management product’s life, its selling price tends to decrease for a particular application. As a result, to maintain gross margins on our products, we must continue to identify new applications for our products, reduce manufacturing costs for our existing products and introduce new products. If we are unable to identify new, high gross margin applications for our existing products, reduce our production costs or sell new, high gross margin products, our gross margins will suffer. A sustained reduction in our gross margins could harm our future operating results, cash flow and financial condition, which could lead to a significant drop in the price of our common stock.

Because we receive a substantial portion of our net revenue through distributors, their financial viability and ability to access the capital markets could impact our ability to continue to do business with them and could result in lower net revenue, which could adversely affect our operating results and our customer relationships.

We obtain a portion of our net revenue through sales to distributors located in Asia who act as our fulfillment representatives. For example, sales to distributors accounted for 47% and 43% of our net revenue for the three months ended June 30, 2011 and 2010, respectively. In the normal course of their operation as fulfillment representatives, these distributors typically perform functions such as order scheduling, shipment coordination, inventory stocking, payment and collections and, when applicable, currency exchange between purchasers of our products and these distributors. Our distributors’ compensation for these functions is reflected in the price of the products we sell to these distributors. Many of our current distributors also serve as our sales representatives procuring orders for us to fill directly. If these distributors are unable to pay us in a timely manner or if we anticipate that they will not pay us, we may elect to withhold future shipments, which could adversely affect our operating results. If one of our distributors experiences severe financial difficulties, becomes insolvent or declares bankruptcy, we could lose product inventory held by that distributor and we could be required to write off the value of any receivables owed to us by that distributor. We could also be required to record bad debt expense in excess of our reserves. We may not be successful in recognizing these indications or in finding replacement distributors in a timely manner, or at all, any of which could harm our operating results, cash flow and financial condition.

Our distributor arrangements often require us to accept product returns and to provide price protection and if we fail to properly estimate our product returns and price protection reserves, this may adversely impact our reported financial information.

A substantial portion of our sales are made through third-party distribution arrangements, which include stock rotation rights that generally permit the return of up to 5% of the previous three months’ purchases. We generally accept these returns quarterly. We record estimated returns for stock rotation at the time of shipment. Our arrangements with our distributors typically also include price protection provisions if we reduce our list prices. We record reserves for price protection at the time we decide to reduce our list prices. In the future, we could receive returns or claims that are in excess of our estimates and reserves, which could harm our operating results.

 

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If our relationship with any of our distributors deteriorates or terminates, it could lead to a temporary or permanent loss of revenues until a replacement sales channel can be established to service the affected end-user customers, as well as inventory write-offs or accounts receivable write-offs. In addition, we also may be obligated to repurchase unsold products from a distributor if we decide to terminate our relationship with that distributor.

Our current backlog may not be indicative of future sales.

Due to the nature of our business, in which order lead times may vary, and the fact that customers are generally allowed to reschedule or cancel orders on short notice, we believe that our backlog is not necessarily a good indicator of our future sales. Our quarterly net revenue also depends on orders booked and shipped in that quarter. Because our lead times for the manufacturing of our products generally take six to ten weeks, we often must build in advance of orders. This exposes us to certain risks, most notably the possibility that expected sales will not occur, which may lead to excess inventory, and we may not be able to sell this inventory to other customers. In addition, we supply LG Electronics, one of our largest customers, through its central hub and we do not record backlog with respect to the products we ship to the hub. Therefore, our backlog may not be a reliable indicator of future sales.

We face risks in connection with our internal control over financial reporting and any related remedial measures that we undertake to correct any material weaknesses in our internal control over financial reporting.

In accordance with Section 404 of the Sarbanes-Oxley Act, we are required to report annually on the effectiveness of our internal control over financial reporting as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934. This report must include disclosure of any material weakness in our internal control over financial reporting. In preparation for issuing this management report, we document, evaluate, and test our internal control over financial reporting.

No material weakness will be considered remediated until our remedial efforts have operated for an appropriate period, have been tested, and management has concluded that they are operating effectively. We cannot be certain that any measures we take to remediate a material weakness will ensure that we implement and maintain adequate internal control over financial reporting and that we will successfully remediate the material weakness. In addition, we cannot assure you that we will not in the future identify further material weaknesses in our internal control over financial reporting that we have not discovered to date, which may impact the reliability of our financial reporting and financial statements.

If consumer demand for mobile consumer electronic devices declines, our net revenue will decrease.

Our products are used primarily in the mobile consumer electronic devices market. For the foreseeable future, we expect to see the significant majority of our net revenue continues to come from this market, especially in wireless handsets. If consumer demand for these products declines and fewer mobile customer electronic devices are sold, our net revenue will decrease significantly. For example, in the second half of 2008, we experienced a significant decrease in worldwide billings to our customers, suggesting that our customers were reacting to decreased consumer demand for their end products. In an adverse economic climate, consumers are less likely to prioritize purchasing new mobile consumer electronic devices or upgrading existing devices. In addition, if we are unsuccessful in identifying alternative markets for our products in a timely manner, our operating results will suffer dramatically.

 

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Substantially all of our manufacturing suppliers, customers and operations are located in Asia, which subjects us to additional risks, including regional economic influences, logistical complexity, political instability and natural disasters including earthquakes.

We conduct, and expect to continue to conduct, almost all of our business with companies that are located outside the United States. Based on ship-to locations, substantially all of our net revenue for the three and six months ended June 30, 2011 and 2010 came from customers in Asia, particularly South Korea, Taiwan, China and Japan. A vast majority of our contract manufacturing operations are located in South Korea, Taiwan, Malaysia and China. In addition, we have a design center in Shanghai, China. As a result of our international focus, we face several challenges, including:

 

•

increased complexity and costs of managing international operations;

 

•

longer and more difficult collection of receivables;

 

•

political and economic instability;

 

•

limited protection of our intellectual property;

 

•

unanticipated changes in local regulations, including tax regulations;

 

•

timing and availability of import and export licenses; and

 

•

foreign currency exchange fluctuations relating to our international operating activities.

Our corporate headquarters in Santa Clara, California, our operations office in Chupei, Taiwan, and the production facilities of one of our wafer fabrication suppliers and several of our assembly and test suppliers in Hsinchu and across Taiwan are located near seismically active regions and are subject to periodic earthquakes. We do not maintain earthquake insurance and our business could be damaged in the event of a major earthquake or other natural disaster.

In addition to risks in our operations from natural disasters, our customers are also subject to these risks. Any disaster impacting our customers could result in loss of orders, delay of business and temporary regional economic recessions.

We are also more susceptible to the regional economic impact of health crises. Because we anticipate that we will continue to rely heavily on foreign companies or United States companies operating in Asia for our future growth, the above risks and issues that we do not currently anticipate could adversely affect our ability to conduct business and our results of operations.

We outsource our wafer fabrication, testing, packaging, warehousing and shipping operations to third parties, and rely on these parties to produce and deliver our products according to requested demands in specification, quantity, cost and time.

We rely on third parties for substantially all of our manufacturing operations, including wafer fabrication, wafer probe testing, wafer thinning, assembly, final test, warehousing and shipping. Furthermore, for certain packages, at times we rely on a single manufacturer. We depend on these parties to supply us with material of a requested quantity in a timely manner that meets our standards for yield, cost and manufacturing quality. Any problems with our manufacturing supply chain could adversely impact our ability to ship our products to our customers on time and in the quantity required, which in turn could cause an unanticipated decline in our sales and possibly damage our customer relationships. An economic downturn, such as the one experienced during the last few years, could adversely affect the financial strength of our vendors and adversely impact their ability to manufacture product, resulting in a shortage or delay in product shipments to our customers.

Our products are manufactured at a limited number of locations. If we experience manufacturing problems at a particular location or with a particular supplier, we would be required to transfer manufacturing to a backup supplier. Converting or transferring manufacturing from a primary supplier to a backup fabrication facility could be expensive and could take as long as 6 to 12 months. During such a transition, we would be required to meet customer demand from our then-existing inventory, as well as any partially finished goods that can be modified to the required product specifications. We do not seek to maintain sufficient inventory to address a lengthy transition period because we believe it is uneconomical to keep more than minimal inventory on hand. As a result, we may not be able to meet customer needs during such a transition, which could delay shipments, cause a production delay or stoppage for our customers, result in a decline in our sales and damage our customer relationships. Should we be required to manufacture safety stock and finished goods to insure against any supply interruptions to our customers, there is no guarantee that our customers would necessarily purchase the extra material and excess inventory may result. There is no guarantee we would be able to sell that excess inventory to other customers and we may have to write-off this material as an expense adversely affecting our financial performance.

In addition, a significant portion of our sales are to customers that practice just-in-time order management from their suppliers, which gives us a very limited amount of time in which to process and complete these orders. As a result, delays in our production or shipping by the parties to whom we outsource these functions could reduce our sales, damage our customer relationships and damage our reputation in the marketplace, any of which could harm our business, results of operations and financial condition.

 

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The loss of any of our key personnel could seriously harm our business, and our failure to attract or retain specialized technical and management talent could impair our ability to grow our business.

The loss of services of one or more of our key personnel could seriously harm our business. In particular, our ability to define and design new products, gain new customers and grow our business depends on the continued contributions of Richard K. Williams, our President, Chief Executive Officer and Chief Technical Officer, as well as our senior level sales, finance, operations, technology and engineering personnel. Our future growth will also depend significantly on our ability to recruit and retain qualified and talented managers and engineers, along with key manufacturing, quality, sales and marketing staff members. There remains intense competition for these individuals in our industry, especially those with power and analog semiconductor design and applications expertise. We cannot assure you we will be successful in finding, hiring and retaining these individuals. If we are unable to recruit and retain such talent, our product and technology development, manufacturing, marketing and sales efforts could be impaired.

In economic downturns where consumer demand for our customer’s products is reduced or delayed, we expect lower net revenue and reduced profitability. In response to these downturns, we may implement certain cost reduction actions including spending controls, forced holidays and company shutdowns, employee layoffs, shortened work-weeks and involuntary salary reductions. For example, in 2010 we reduced our US workforce by approximately 15%. It is uncertain what affect such measures may have on our ability to retain key talent and staff members, or our ability to rehire employees should business improve.

Changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.

Our future effective tax rates could be adversely affected by lower than anticipated earnings in countries where we have lower statutory rates and higher than anticipated earnings in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or interpretations thereof. Further, as a result of certain ongoing employment and capital investment commitments made by us, our income in certain countries is subject to reduced tax rates, and in some cases is wholly exempt from tax. Our failure to meet such commitments could adversely impact our effective tax rate. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition.

We compete against companies with substantially greater financial and other resources, and our market share or gross margins may be reduced if we are unable to respond to competitive challenges effectively.

The analog, mixed-signal, or analog with digital, and power management semiconductor industry in which we operate is highly competitive and dynamic, and we expect it to remain so. Our ability to compete effectively depends on defining, designing and regularly introducing new products that meet or anticipate the power management needs of our customers’ next-generation products and applications. We compete with numerous domestic and international semiconductor companies, many of which have greater financial and other resources with which to pursue marketing, technology development, product design, manufacturing, quality, sales and distribution of their products.

We consider our primary competitors to be Maxim Integrated Products, Inc., Linear Technology Corporation, Intersil Corporation, Texas Instruments Incorporated, Semtech Corporation, National Semiconductor Corporation, Richtek Technology Corporation, austriamicrosystems and Rohm Co., LTD. We expect continued competition from existing competitors as well as from new entrants into the power management semiconductor market. Our ability to compete depends on a number of factors, including:

 

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our success in identifying new and emerging markets, applications and technologies, and developing power management solutions for these markets;

 

•

our products’ performance and cost effectiveness relative to that of our competitors’ products;

 

•

our ability to deliver products in large volume on a timely basis at a competitive price;

 

•

our success in utilizing new and proprietary technologies to offer products and features previously not available in the marketplace;

 

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•

our ability to recruit application engineers and designers; and

 

•

our ability to protect our intellectual property.

We cannot assure you that our products will compete favorably or that we will be successful in the face of increasing competition from new products and enhancements introduced by our existing competitors or new companies entering this market.

Intellectual property litigation could result in significant costs, reduce sales of our products and cause our operating results to suffer.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies. We have in the past received, and expect that in the future we may receive, communications from various industry participants alleging our infringement of their patents, trade secrets or other intellectual property rights. Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:

 

•

stop selling products or using technology that contain the allegedly infringing intellectual property;

 

•

incur significant legal expenses;

 

•

pay damages to the party claiming infringement;

 

•

redesign those products that contain the allegedly infringing intellectual property; and

 

•

attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.

Furthermore, we have in the past agreed, and may in the future agree, to indemnify certain of our customers, distributors, suppliers, subcontractors and their affiliates for attorneys’ fees and damages and costs awarded against these parties in certain circumstances in which our products are alleged to infringe third-party intellectual property rights. These obligations could lead us to incur additional costs in related intellectual property litigation involving these parties, which could cause our operating results to suffer.

Uncertainty over the outcome of litigation may cause our customers or potential customers to elect not to include our products that are the subject of this litigation into the design of their systems. Once a customer’s system designer initially chooses a competitor’s product for a particular electronic system, it becomes significantly more difficult for us to sell our products for use in that electronic system, because changing suppliers can involve significant cost, time, effort and risk for our customers. As a result, any future litigation may result in on-going expenses on a quarterly basis. If we are unsuccessful in any such litigation, our business and our ability to compete in foreign markets could be harmed, and we could be enjoined from selling the accused products, either directly or indirectly, which could have a material adverse impact on our net revenue, financial condition, results of operations and cash flows. See Part II, Item 1 – Legal Proceedings.

Our failure to protect our intellectual property rights adequately could impair our ability to compete effectively or to defend ourselves from litigation, which could harm our business, financial condition and results of operations.

We rely primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality and non-disclosure agreements to protect our proprietary technologies and know-how. While we have been issued over 100 patents, the rights granted to us may not be meaningful or provide us with any commercial advantage. For example, these patents could be challenged or circumvented by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings. The failure of our patents to adequately protect our technology might make it easier for our competitors to offer similar products or technologies. Our foreign patent protection is generally not as comprehensive as our United States patent protection and may not protect our intellectual property in some countries where our products are sold or may be sold in the future. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. Many United States-based companies have encountered substantial intellectual property infringement in foreign countries, including countries where we sell products.

Monitoring unauthorized use of our intellectual property is difficult and costly. It is possible that unauthorized use of our intellectual property may occur without our knowledge. We cannot assure you that the steps we have

 

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taken will prevent unauthorized use of our intellectual property. Our failure to effectively protect our intellectual property could reduce the value of our technology in licensing arrangements or in cross-licensing negotiations, and could harm our business, results of operations and financial condition. We may in the future need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business, whether or not such litigation results in a determination favorable to us.

Any acquisitions we make could disrupt our business, result in integration difficulties or fail to realize anticipated benefits, which could adversely affect our financial condition and operating results.

We may choose to acquire companies, technologies, assets and personnel that are complementary to our business, including for the purpose of expanding our new product design capacity, introducing new design, market or application skills or enhancing and expanding our existing product lines. In October 2006, we acquired Analog Power Semiconductor Corporation and related assets and personnel, primarily located in Shanghai, China. In June 2008, we acquired Elite Micro Devices, located in Shanghai, China. Acquisitions involve numerous risks, including the following:

 

•

difficulties in integrating the operations, systems, technologies, products and personnel of the acquired companies;

 

•

diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from acquisitions;

 

•

difficulties in entering markets in which we may have no or limited direct prior experience and where competitors may have stronger market positions;

 

•

the potential loss of key employees, customers, distributors, suppliers and other business partners of the companies we acquire following and continuing after announcement of acquisition plans;

 

•

improving and expanding our management information systems to accommodate expanded operations;

 

•

insufficient revenue to offset increased expenses associated with acquisitions; and

 

•

addressing unforeseen liabilities of acquired businesses.

Acquisitions may also cause us to:

 

•

issue capital stock that would dilute our current stockholders’ percentage ownership;

 

•

use a substantial portion of our cash resources or incur debt;

 

•

assume liabilities;

 

•

record goodwill or incur amortization expenses related to certain intangible assets; and

 

•

incur large and immediate write-offs and other related expenses.

Any of these factors could prevent us from realizing the anticipated benefits of an acquisition, and our failure to realize these benefits could adversely affect our business. In addition, we may not be successful in identifying future acquisition opportunities or in consummating any acquisitions that we may pursue on favorable terms, if at all. Any transactions that we complete may impair stockholder value or otherwise adversely affect our business and the market price of our stock. Failure to manage and successfully integrate acquisitions could materially harm our financial condition and operating results.

Our operating results, financial condition and cash flows may be adversely impacted by worldwide political and economic uncertainties and specific conditions in the markets we address, including the cyclical nature of and volatility in the semiconductor industry.

The semiconductor industry has historically exhibited cyclical behavior which at various times has included significant downturns in customer demand. These conditions have caused significant variations in product orders and production capacity utilization, as well as price erosion. Because a significant portion of our expenses is fixed in the near term or is incurred in advance of anticipated sales, we may not be able to decrease our expenses rapidly enough to offset any unanticipated shortfall in net revenue. If this situation were to occur, it could adversely affect our operating results, cash flow and financial condition.

 

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Additionally, during the last few years general worldwide economic conditions experienced a downturn due to slower economic activity, concerns about inflation and deflation, fears of recession, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in the wired and wireless communications markets, recent international conflicts and terrorist and military activity and the impact of natural disasters and public health emergencies. Our operations and performance depend significantly on worldwide economic conditions and their impact on consumer spending, which has recently deteriorated significantly in many countries and regions, including the United States and Asia, and may remain depressed for the foreseeable future. For example, some of the factors that could influence consumer spending include conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results. Although these conditions have abated somewhat during the last year, these conditions make it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and they could cause United States and foreign businesses to slow spending on our products and services, which would delay and lengthen sales cycles. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide, or in the semiconductor industry. If the economy or markets in which we operate do not continue at their present levels, our business, financial condition and results of operations will likely be materially and adversely affected.

We could be adversely affected by violations of the United States’ Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.

The United States’ Foreign Corrupt Practices Act (“FCPA”) and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. There can be no assurance that our internal controls and procedures always will protect us from reckless or criminal acts committed by our employees or agents. If we are found to be liable for FCPA violations, we could suffer from criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

We repurchase shares of our common stock under our stock repurchase program announced on October 29, 2008. Under the stock repurchase program, we are authorized to use up to $30 million to repurchase shares of our outstanding common stock. We may repurchase shares in the open market or through privately negotiated transactions. The timing and actual number of shares repurchased under the stock repurchase program depends upon market conditions and other factors, in accordance with SEC requirements.

We have entered into agreements pursuant to SEC Rule 10b5-1 pursuant to which we authorized a third-party broker to purchase shares on our behalf during our normal blackout periods in accordance with predetermined trading instructions. In addition, we may repurchase shares of our common stock under the guidelines of SEC Rule 10b-18.

During the three and six months ended June 30, 2011, we did not repurchase any shares of our common stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

Not applicable.

 

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ITEM 6. EXHIBITS

 

2.1 (1)		Agreement and Plan of Merger by and among Skyworks Solutions, Inc., PowerCo Acquisition Corp. and Advanced Analogic Technologies Incorporated, dated May 26, 2011.
10.21 (2)		Separation Agreement and Release by and between Advanced Analogic Technologies Incorporated and Brian R. McDonald dated March 31, 2011.
10.22 (3)		Stockholder Agreement by and among Skyworks Solutions, Inc. and certain stockholders of Advanced Analogic Technologies Incorporated, dated May 26, 2011.
10.23 (4)		Non-Competition, Non-Solicitation and Confidentiality Agreement by and between Skyworks Solutions, Inc. and Richard K. Williams, dated May 26, 2011.
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema Document
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

 

(1)	Incorporated by reference to the same number exhibit of the Registrant’s Current Report on Form 8-K filed on May 27, 2011.

(2)	Incorporated by reference to the same number exhibit of the Registrant’s Current Report on Form 8-K/A filed on June 17, 2011.

(3)	Incorporated by reference to exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on May 27, 2011.

(4)	Incorporated by reference to exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on May 27, 2011.

 

*

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

**

In accordance with Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language) information deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

				ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED
Dated: August 9, 2011				By:		/S/    ASHOK CHANDRAN
						Ashok Chandran
						Vice President, Chief Accounting Officer and
						interim Chief Financial Officer

 

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EXHIBIT INDEX

 

2.1(1)		Agreement and Plan of Merger by and among Skyworks Solutions, Inc., PowerCo Acquisition Corp. and Advanced Analogic Technologies Incorporated, dated May 26, 2011.
10.21(2)		Separation Agreement and Release by and between Advanced Analogic Technologies Incorporated and Brian R. McDonald dated March 31, 2011.
10.22(3)		Stockholder Agreement by and among Skyworks Solutions, Inc. and certain stockholders of Advanced Analogic Technologies Incorporated, dated May 26, 2011.
10.23(4)		Non-Competition, Non-Solicitation and Confidentiality Agreement by and between Skyworks Solutions, Inc. and Richard K. Williams, dated May 26, 2011.
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**		XBRL Instance Document
101.SCH**		XBRL Taxonomy Extension Schema Document
101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**		XBRL Taxonomy Extension Label Linkbase Document
101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

 

(1)	Incorporated by reference to the same number exhibit of the Registrant’s Current Report on Form 8-K filed on May 27, 2011.

(2)	Incorporated by reference to the same number exhibit of the Registrant’s Current Report on Form 8-K/A filed on June 17, 2011.

(3)	Incorporated by reference to exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on May 27, 2011.

(4)	Incorporated by reference to exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed on May 27, 2011.

 

*

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

**

In accordance with Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language) information deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

39