Attached files
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EXCEL - IDEA: XBRL DOCUMENT - Tower US Holdings Inc. | Financial_Report.xls |
EX-31.2 - EXHIBIT 31.2 - Tower US Holdings Inc. | exhibit_31-2.htm |
EX-32.1 - EXHIBIT 32.1 - Tower US Holdings Inc. | exhibit_32-1.htm |
EX-31.1 - EXHIBIT 31.1 - Tower US Holdings Inc. | exhibit_31-1.htm |
EX-32.2 - EXHIBIT 32.2 - Tower US Holdings Inc. | exhibit_32-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2011
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Or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number: 001-32832
Jazz Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware
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20-3320580
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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4321 Jamboree Road
Newport Beach, California
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92660
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(Address of principal executive offices)
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(Zip Code)
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(949) 435-8000
Registrant’s telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer x
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Smaller reporting company o
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format permitted by General Instruction H(2).
JAZZ TECHNOLOGIES, INC.
PART I — FINANCIAL INFORMATION
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1
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2
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3
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4-9
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9-12
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12
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PART II — OTHER INFORMATION
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12
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12
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12
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12
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13
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13
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i
Jazz Technologies, Inc. (A Wholly Owned Subsidiary of
Tower Semiconductor, Ltd.) and Subsidiaries
(in thousands)
September
30, 2011
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December
31, 2010
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|||||||
(unaudited)
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ASSETS
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Current assets:
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||||||||
Cash and cash equivalents
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$ | 51,801 | $ | 29,031 | ||||
Receivables:
Trade receivables, net of allowance for doubtful accounts of $1,044 and $326 at September 30, 2011 and December 31, 2010, respectively
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16,488 | 29,687 | ||||||
Other receivables
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7,394 | 3,376 | ||||||
Inventories
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26,466 | 19,096 | ||||||
Deferred tax asset
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4,728 | 4,728 | ||||||
Prepaid expenses and other current assets
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4,319 | 3,768 | ||||||
Total current assets
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111,196 | 89,686 | ||||||
Property, plant and equipment, net
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102,916 | 96,908 | ||||||
Investments
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-- | 17,100 | ||||||
Intangible assets, net
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44,919 | 48,394 | ||||||
Goodwill
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7,000 | 7,000 | ||||||
Other assets – related parties
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17,056 | 22,392 | ||||||
Other assets - others
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2,423 | 1,895 | ||||||
Total assets
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$ | 285,510 | $ | 283,375 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
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Short-term bank debt and current maturities of notes
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$ | 40,599 | $ | 53,338 | ||||
Accounts payable
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13,014 | 13,023 | ||||||
Due to related party
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3,519 | 3,389 | ||||||
Accrued compensation and benefits
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5,436 | 5,677 | ||||||
Deferred revenues
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2,577 | 1,834 | ||||||
Accrued interest
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2,581 | 5,393 | ||||||
Other current liabilities
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3,510 | 7,418 | ||||||
Total current liabilities
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71,236 | 90,072 | ||||||
Long term liabilities:
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Long-term debt from banks
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10,000 | 10,000 | ||||||
Notes
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67,823 | 64,463 | ||||||
Deferred tax liability
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9,876 | 9,876 | ||||||
Accrued pension, retirement medical plan obligations
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12,776 | 12,522 | ||||||
Other long-term liabilities
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14,507 | 5,533 | ||||||
Total liabilities
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186,218 | 192,466 | ||||||
Stockholder’s equity:
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Additional paid-in capital
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63,531 | 63,531 | ||||||
Cumulative stock based compensation
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1,382 | 887 | ||||||
Accumulated other comprehensive loss (*)
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(1,970 | ) | (1,903 | ) | ||||
Retained earnings
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36,349 | 28,394 | ||||||
Total stockholders’ equity
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99,292 | 90,909 | ||||||
Total liabilities and stockholders’ equity
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$ | 285,510 | $ | 283,375 |
(*)
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Accumulated other comprehensive loss includes mainly plan assets and benefit obligation, net of taxes.
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See accompanying notes.
Jazz Technologies, Inc. (A Wholly Owned Subsidiary of
Tower Semiconductor, Ltd.) and Subsidiaries
(in thousands)
Three months ended
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Nine months ended
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September 30, 2011
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September 30, 2010
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September 30, 2011
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September 30, 2010
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Net revenues
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$ | 35,240 | $ | 64,019 | $ | 131,866 | $ | 178,075 | ||||||||
Cost of revenues
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32,233 | 39,158 | 98,249 | 108,938 | ||||||||||||
Gross profit
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3,007 | 24,861 | 33,617 | 69,137 | ||||||||||||
Operating expenses:
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Research and development
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3,028 | 3,451 | 8,986 | 10,047 | ||||||||||||
Selling, general and administrative
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4,616 | 3,531 | 12,089 | 13,733 | ||||||||||||
Amortization of intangible assets
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197 | 197 | 590 | 591 | ||||||||||||
Total operating expenses
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7,841 | 7,179 | 21,665 | 24,371 | ||||||||||||
Operating income (loss)
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(4,834 | ) | 17,682 | 11,952 | 44,766 | |||||||||||
Financing expense, net
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(4,272 | ) | (6,422 | ) | (12,738 | ) | (14,398 | ) | ||||||||
Other income, net
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14,048 | 27 | 13,728 | 27 | ||||||||||||
Net income before income taxes
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4,942 | 11,287 | 12,942 | 30,395 | ||||||||||||
Income tax expense
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(2,274 | ) | (3,666 | ) | (4,987 | ) | (9,859 | ) | ||||||||
Net income
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$ | 2,668 | $ | 7,621 | $ | 7,955 | $ | 20,536 |
See accompanying notes.
2
Jazz Technologies, Inc. (A Wholly Owned Subsidiary of
Tower Semiconductor, Ltd.) and Subsidiaries
(in thousands)
Nine months ended
September 30, 2011
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Nine months ended
September 30, 2010
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Operating activities:
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Net income
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$ | 7,955 | $ | 20,536 | ||||
Adjustments to reconcile net income for the period to net cash provided by operating activities:
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Depreciation and amortization of intangible assets
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24,439 | 23,393 | ||||||
Notes accretion and amortization of deferred financing costs
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5,189 | 4,231 | ||||||
Loss from notes exchange, net.
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-- | 2,350 | ||||||
Stock based compensation expense
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495 | 348 | ||||||
Other income, net
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(13,728 | ) | (27 | ) | ||||
Changes in operating assets and liabilities:
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Trade receivables
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14,250 | (9,533 | ) | |||||
Other receivables
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(4,618 | ) | -- | |||||
Inventories
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(7,370 | ) | (2,000 | ) | ||||
Prepaid expenses and other current assets
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(551 | ) | 555 | |||||
Deferred tax assets
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-- | 1,958 | ||||||
Accounts payable
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(2,969 | ) | (69 | ) | ||||
Due to related party, net
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(1,256 | ) | (4,487 | ) | ||||
Accrued compensation and benefits
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(241 | ) | 1,111 | |||||
Deferred Revenue
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743 | (240 | ) | |||||
Accrued interest
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(2,812 | ) | 2,030 | |||||
Other current liabilities
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(3,908 | ) | 4,698 | |||||
Accrued pension, retirement medical plan obligations and long-term liabilities
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9,264 | 214 | ||||||
Net cash provided by operating activities
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24,882 | 45,068 | ||||||
Investing activities:
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Purchases of property and equipment
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(24,264 | ) | (48,902 | ) | ||||
Proceeds related to property and equipment
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5,463 | 600 | ||||||
Purchases of intangible assets
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-- | (400 | ) | |||||
Proceeds from investment realization
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31,400 | -- | ||||||
Net cash provided by (used in) investing activities
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12,599 | (48,702 | ) | |||||
Financing activities:
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Debt repayment
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(14,644 | ) | (5000 | ) | ||||
Net cash used in financing activities
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(14,644 | ) | (5000 | ) | ||||
Effect of foreign currency on cash
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(67 | ) | -- | |||||
Net increase in cash and cash equivalents
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22,770 | (8,634 | ) | |||||
Cash and cash equivalents at beginning of period
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29,031 | 28,622 | ||||||
Cash and cash equivalents at end of period
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$ | 51,801 | $ | 19,988 |
Supplemental disclosure of interest and taxes paid and non-cash investing and financing activities:
Investments in property, plant and equipment
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$ | 1,662 | $ | 2,992 | ||||
Warrant contributed by Tower, see note 5
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$ | -- | $ | 13,249 | ||||
Interest paid
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$ | 11,153 | $ | 5,832 | ||||
Tax paid
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$ | 3,403 | $ | 3,637 |
See accompanying notes.
3
Jazz Technologies, Inc.
September 30, 2011
Note 1: Organization
Unless specifically noted otherwise, as used throughout these notes to the unaudited condensed consolidated financial statements, “Jazz” and “Company” refers to the business of Jazz Technologies, Inc., and “Jazz Semiconductor” refers only to the business of Jazz Semiconductor, Inc. References to the “Company” for dates prior to September 19, 2008 mean the predecessor which on September 19, 2008 was merged with a subsidiary of Tower Semiconductor Ltd., an Israeli company (“Tower”), and references to the “Company” for periods on or after September 19, 2008 are references to the successor Tower subsidiary.
The Company
Jazz, formerly known as Acquicor Technology Inc., was incorporated in Delaware on August 12, 2005. The Company was formed to serve as a vehicle for the acquisition of one or more domestic and/or foreign operating businesses through a merger, capital stock exchange, stock purchase, asset acquisition or other similar business combination.
The Company is based in Newport Beach, California and following the acquisition of Jazz Semiconductor, became an independent semiconductor foundry focused on specialty process technologies for the manufacture of analog intensive mixed-signal semiconductor devices. The Company’s specialty process technologies include advanced analog, radio frequency, high voltage, bipolar and silicon germanium bipolar complementary metal oxide (“SiGe”) semiconductor processes. The Company’s semiconductor devices are used in cellular phones, wireless local area networking devices, digital TVs, set-top boxes, gaming devices, switches, routers and broadband modems.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
We prepare our consolidated financial statements in accordance with SEC and U.S. generally accepted accounting principles (“US GAAP”) requirements and include all adjustments of a normal recurring nature that are necessary to fairly present our condensed consolidated results of operations, financial position, and cash flows for all periods presented. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Interim period results are not necessarily indicative of full year results. This quarterly report should be read in conjunction with our most recent Annual Report on Form 10-K.
The condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring adjustments that, in the opinion of management, are necessary to present fairly the Company’s consolidated financial position at September 30, 2011 and December 31, 2010, and the consolidated results of its operations and cash flows for the three months and nine months ended September 30, 2011 and 2010. All intercompany accounts and transactions have been eliminated. Certain amounts have been reclassified in order to conform to 2011 presentation.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate fair value due to their short maturities.
4
Comprehensive Income
Nine months ended September 30, 2011
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Nine months ended September 30, 2010
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(In thousands)
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Net income
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$ | 7,955 | $ | 20,536 | ||||
Foreign currency translation adjustment
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(67 | ) | -- | |||||
Comprehensive income
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$ | 7,888 | $ | 20,536 |
Concentrations
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history, age of the balance and the customer’s current creditworthiness, as determined by a review of the customer’s current credit information. The Company monitors collections and payments from its customers and maintains an allowance for doubtful accounts based upon historical experience and any specific customer collection issues that have been identified. A considerable amount of judgment is required in assessing the ultimate realization of these receivables. Customer receivables are generally unsecured.
Accounts receivable from significant customers representing 10% or more of the net accounts receivable balance as of September 30, 2011 and December 31, 2010 consists of the following customers:
September 30, 2011
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December 31, 2010
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Customer 1
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15 | % | 20 | % | ||||
Customer 2
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13 | 15 | ||||||
Customer 3
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-- | 16 |
Net revenues from significant customers representing 10% or more of net revenues consist of the following:
Three months ended
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Nine months ended
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September 30, 2011
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September 30, 2010
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September 30, 2011
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September 30, 2010
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Customer A
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17 | % | 15 | % | 17 | % | 15 | % | ||||||||
Customer B
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9 | 18 | 10 | 27 | ||||||||||||
Customer C
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-- | 10 | 6 | 8 |
As a result of the Company’s concentration of its customer base, loss or cancellation of business from, or significant changes in scheduled deliveries of products sold to these customers or a change in their financial position could materially and adversely affect the Company’s consolidated financial position, results of operations and cash flows.
The Company operates a single manufacturing facility located in Newport Beach, California. A major interruption in the manufacturing operations at this facility would have a material adverse affect on the consolidated financial position and results of operations of the Company.
Initial Adoption of New Standards
ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (Topic 350) - Intangibles - Goodwill and Other.
In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (Topic 350) - Intangibles - Goodwill and Other (“ASU 2010-28”). ASU 2010-28 which amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. The amendments to this update are effective in the first quarter of 2011. Any impairment to be recorded upon adoption will be recognized as an adjustment to the beginning retained earnings. The adoption of this update did not impact the Company’s consolidated financial position, results of operations or cash flows.
5
Recently Issued Accounting Standards
ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations (Topic 805) - Business Combinations
In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations (Topic 805) - Business Combinations (“ASU 2010-29”), to improve consistency in how the pro forma disclosures are calculated. Additionally, ASU 2010-29 enhances the disclosure requirements and requires description of the nature and amount of any material, nonrecurring pro forma adjustments directly attributable to a business combination. ASU 2010-29 is effective in fiscal year 2011 and should be applied prospectively to business combinations for which the acquisition date is after the effective date. Early adoption is permitted. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
ASU 2011-1, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20
In January 2011, the FASB issued ASU 2011-1, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (“ASU 2011-1”). The FASB determined that certain provisions relating to troubled debt restructurings (TDRs) should be deferred until additional guidance and clarification on the definition of TDRs is issued. In April 2011, the FASB issued ASU No. 2011-2, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (“ASU 2011-2”). ASU 2011-2 amends ASC Topic 310 - Receivables, by clarifying guidance for creditors in determining whether a concession has been granted and whether a debtor is experiencing financial difficulties. The amendments are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. ASU 2011-2 also makes disclosure requirements deferred under ASU 2011-1 effective for interim and annual periods beginning on or after June 15, 2011. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
ASU 2011-04, Fair Value Measurement (Accounting Standards Codification (“ASC”) Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Accounting Standards Codification (“ASC”) Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this ASU result in common fair value measurement and disclosure requirements in U.S. GAAP and international financial reporting standards (“IFRS”). Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. To improve consistency in application across jurisdictions some changes in wording are necessary to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way. The ASU also provides for certain changes in current GAAP disclosure requirements, for example with respect to the measurement of level 3 assets and for measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity. The amendments in this ASU are to be applied prospectively, and are effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance is not anticipated to have an impact on our consolidated financial position, results of operations or cash flows.
ASU No. 2011-05, Comprehensive Income (ASC Topic 220) - Presentation of Comprehensive Income.
In May 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (ASC Topic 220) - Presentation of Comprehensive Income. The amendments from this update will result in more converged guidance on how comprehensive income is presented under both U.S. GAAP and IFRS. With this update to ASC 220, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor does it affect how earnings per share is calculated or presented. Current U.S. GAAP allows reporting entities three alternatives for presenting other comprehensive income and its components in financial statements. One of those presentation options is to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This update eliminates that option. The amendments in this ASU should be applied retrospectively, and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance is not anticipated to have an impact on our consolidated financial position, results of operations or cash flows.
6
ASU 2011-08 Intangibles – Goodwill and Other (Topic 350) – An Amendment on Goodwill Impairment Testing
In September 2011, the Financial Accounting Standards Board (FASB) issued authoritative guidance related to intangibles — goodwill and other, which allows for companies to first consider qualitative factors as a basis for assessing impairment and determining the necessity of a detailed impairment test. This guidance is effective for fiscal years beginning after December 15, 2011 with early adoption permitted. The adoption of the new guidance will not have an impact on the Company’s consolidated financial statements.
Note 3: Other Balance Sheet Details
Inventories
Inventories, net of reserves, consist of the following at September 30, 2011 and December 31, 2010 (in thousands):
September
30, 2011
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December
31, 2010
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Raw material
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$ | 5,269 | $ | 4,684 | ||||
Work in process
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7,119 | 11,821 | ||||||
Finished goods
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14,078 | 2,591 | ||||||
$ | 26,466 | $ | 19,096 |
Property, Plant and Equipment
Property, plant and equipment consist of the following at September 30, 2011 and December 31, 2010 (in thousands):
Useful life (In years)
|
September
30, 2011
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December
31, 2010
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Building improvements
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10-12 | $ | 24,305 | $ | 24,230 | |||||||
Machinery and equipment
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7 | 142,011 | 115,790 | |||||||||
Furniture and equipment
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5-7 | 2,308 | 2,308 | |||||||||
Computer software
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3 | 1,280 | 850 | |||||||||
169,904 | 143,178 | |||||||||||
Accumulated depreciation
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(66,988 | ) | (46,270 | ) | ||||||||
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$ | 102,916 | $ | 96,908 |
Intangible Assets
Intangible assets consist of the following at September 30, 2011 (in thousands):
Weighted Average Life (years)
|
Cost
|
Accumulated Amortization
|
Net
|
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Technology
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4;9 | $ | 2,300 | $ | 907 | $ | 1,393 | |||||||||
Patents and other core technology rights
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9 | 15,100 | 5,096 | 10,004 | ||||||||||||
In-process research and development
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-- | 1,800 | 1,800 | -- | ||||||||||||
Customer relationships
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15 | 2,600 | 526 | 2,074 | ||||||||||||
Trade name
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9 | 5,200 | 1,754 | 3,446 | ||||||||||||
Facilities lease
|
19 | 33,500 | 5,498 | 28,002 | ||||||||||||
Total identifiable intangible assets
|
14 | $ | 60,500 | $ | 15,581 | $ | 44,919 |
7
Intangible assets consist of the following at December 31, 2010 (in thousands):
Weighted Average Life (years)
|
Cost
|
Accumulated Amortization
|
Net
|
|||||||||||||
Technology
|
4;9 | $ | 2,300 | $ | 612 | $ | 1,688 | |||||||||
Patents and other core technology rights
|
9 | 15,100 | 3,836 | 11,264 | ||||||||||||
In-process research and development
|
-- | 1,800 | 1,800 | -- | ||||||||||||
Customer relationships
|
15 | 2,600 | 396 | 2,204 | ||||||||||||
Trade name
|
9 | 5,200 | 1,321 | 3,879 | ||||||||||||
Facilities lease
|
19 | 33,500 | 4,141 | 29,359 | ||||||||||||
Total identifiable intangible assets
|
14 | $ | 60,500 | $ | 12,106 | $ | 48,394 |
The amortization related to technology, patents, other core technologies, and the facilities’ lease is charged to cost of revenues. The amortization related to customer relationships and trade name is charged to operating expenses.
Note 4: Credit Facility
Borrowing availability under the facility as of September 30, 2011, was $6.7 million. Outstanding borrowings were $16 million and $1.3 million of the facility supporting outstanding letters of credits on that date. The Company considers borrowings of $10 million to be long-term debt as of September 30, 2011. As of September 30, 2011, the Company was in compliance with all the covenants under this facility.
Note 5: Notes
In 2006, the Company completed private placements of convertible notes. The convertible notes bear interest at a rate of 8% per annum payable semi-annually and mature in December, 2011 (“Old Notes”). In the exchange agreement described below, approximately $79.6 million principal amount of the Old Notes were converted to New Notes. As of September 30, 2011, approximately $35.1 million in principal amount of Old Notes remained outstanding as compared to $43.7 million as of December 31, 2010. In October 2011, the Company completed a voluntary transaction to redeem early the entire remaining $35.1 million in Old Notes, none of which remain outstanding.
In July 2010, the Company, together with its domestic subsidiaries and its parent, Tower, entered into an exchange agreement (the “Exchange Agreement”) with certain note holders (the “Participating Holders”) holding approximately $79.6 million principal amount of the Old Notes. Under the Exchange Agreement, the Participating Holders exchanged their Old Notes for newly-issued 8% non-convertible notes of the Company due June 2015 (the “New Notes”) with an exchange ratio of 1.175 New Notes for each 1.000 Old Notes. In addition, the Participating Holders received warrants to purchase approximately 25.3 million ordinary shares of Tower for a consideration of $1.70 per share (“Warrants J”). The Company’s obligations under the Old Notes and New Notes are not guaranteed by Tower. Interest on the New Notes at a rate of 8% per annum is payable semiannually. As of September 30, 2011, approximately $93.6 million in principal amount of New Notes is outstanding.
The Company’s obligations under the New Notes are guaranteed by the Company’s wholly owned domestic subsidiaries. The Company has not provided condensed consolidated financial information for such subsidiaries because the Company has no independent assets or operations, the subsidiary guarantees are full and unconditional and joint and several and any subsidiaries of the Company other than the subsidiary guarantors are minor. Other than the restrictions in the credit facility agreement, there are no significant restrictions on the ability of the Company and its subsidiaries to obtain funds from their subsidiaries by loan or dividend.
The Company applied the provisions of ASC 470-50 "Modifications and Extinguishments" to account for debt exchange. The Company first determined that the exchange is not considered troubled debt, mainly due to the fact that no concession was given by the creditor. Based on the provisions of the ASC 470-50 the Company determined that the exchange resulted in an extinguishment of the old debt and the issuance of a new debt. As described above, warrants and New Notes were issued to settle the Old Notes. The Company considered the transaction to be at arm's length (the transaction was made between willing unrelated parties) and as such needed to provide evidence of fair value. Since the new debt was not traded and no quotes were available, the Company determined the fair value of the New Notes in a manner consistent with the manner used in the purchase price allocation in connection with the acquisition of the Company by Tower in September 2008, by giving weights to the present value techniques. This, together with the fair value of the warrants were used to determine the value of the Old Notes and resulted in an expense of approximately $2.4 million, which has been recorded in the statement of operations report for the year ended December 31, 2010.
The fair value of Warrants J was calculated based on the Black-Scholes formula. This fair value was also confirmed by independent calculation made by the investors as evidenced by the contract. The Company used the following assumptions:
Risk–free rate based on US Treasury bills of 1.79% per annum, term of the warrants of five years, Tower’s market price per share immediately prior to the closing date of $1.36 as Warrants J are exercisable to Tower’s shares, the exercise price of the warrants as agreed with the investors of $1.70 and the volatility of Tower shares of approximately 50%.
8
Note 6: Holdings in Hua Hong Semiconductor Ltd.
In connection with the acquisition of Jazz Semiconductor in February 2007, the Company acquired an investment in Hua Hong Semiconductor Ltd (“HHSL”), which owns 100% of Shanghai Hua Hong NEC Electronics Company Ltd (also known as “HHNEC”).
During the third quarter of 2011, the Company sold its 10% holdings in “HHSL”, in an HHSL buyback transaction for gross amount of approximately $32 million in cash, before tax and other payments. The Company recorded a gross gain of approximately $15 million from this transaction.
Note 7: Income Taxes
The Company’s effective tax rate for the nine months ended September 30, 2011 of 38% differs from the statutory rate primarily due to interest expense on unrecognized tax benefits. The interest expense related to unrecognized tax benefits increases the effective tax rate for the nine months ended September 30, 2011 by approximately 3 percent.
Note 8: Employee Benefit Plans
The pension and other post retirement benefit plans expenses for the three and nine months ended September 30, 2011 were $0.2 million and $0.7 million, respectively. The amounts for the pension and other post retirement benefit plans expenses for the three and nine months ended September 30, 2010 were $0.2 million and $0.7 million, respectively.
Note 9: Employee Stock Option Expense
During the nine months ended September 30, 2011, Tower awarded 1.5 million non-qualified stock options exercisable to Tower ordinary shares to the Company employees that vest over a three year period from the date of grant. The weighted average exercise price was $1.42. The Company recorded $149,000 and $496,000 of compensation expenses relating to options granted to employees, for the three months and nine months ended September 30, 2011, respectively. The Company recorded $46,000 and $348,000 of compensation expenses relating to employees options, during the corresponding periods in 2010.
Note 10: Related Party Transactions
As of September
30, 2011
|
As of December
31, 2010
|
|||||||
Due from related party (included in the accompanying balance sheets)
|
$ | 21,209 | $ | 25,768 | ||||
Due to related party (included in the accompanying balance sheets)
|
$ | 3,519 | $ | 3,389 |
Related party balances are with Tower and TowerJazz Japan Ltd. and are mainly for purchases and payments on behalf of the other party, tools sale, tools lease and service charges.
The following discussion and analysis should be read in conjunction with the financial statements and related notes contained elsewhere in this report. See our Annual Report on Form 10-K and subsequent quarterly reports filed with the Securities and Exchange Commission for information regarding certain risk factors known to us that could cause reported financial information not to be necessarily indicative of future results.
FORWARD LOOKING STATEMENTS
This report on Form 10-Q may contain “forward-looking statements” within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Report Act of 1995. These statements, which represent our expectations or beliefs concerning various future events, may contain words such as “may,” “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or other words indicating future results. Such statements may include but are not limited to statements concerning the following:
|
·
|
anticipated trends in revenues;
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9
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·
|
growth opportunities in domestic and international markets;
|
|
·
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new and enhanced channels of distribution;
|
|
·
|
customer acceptance and satisfaction with our products;
|
|
·
|
expected trends in operating and other expenses;
|
|
·
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purchase of raw materials at levels to meet forecasted demand;
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|
·
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anticipated cash and intentions regarding usage of cash;
|
|
·
|
changes in effective tax rates; and
|
|
·
|
anticipated product enhancements or releases.
|
This report, including these forward-looking statements, are subject to risks and uncertainties, including those risks and uncertainties described in our Annual Report on Form 10-K and subsequent quarterly reports filed with the Securities and Exchange Commission. Such risks and uncertainties could cause actual results to differ materially from those anticipated as of the date of this report. We assume no obligation to update any forward-looking statements to reflect events or circumstances arising after the date of this report.
For the nine months ended September 30, 2011, we had a net profit $8.0 million compared to $20.5 million for the nine months ended September 30, 2010.
The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated.
Nine Months Ended
|
||||||||
September 30, 2011
|
September 30, 2010
|
|||||||
Net revenues
|
100 | % | 100 | % | ||||
Cost of revenues
|
74.5 | 61.2 | ||||||
Gross profit
|
25.5 | 38.8 | ||||||
Operating expenses:
|
||||||||
Research and development
|
6.8 | 5.6 | ||||||
Selling, general and administrative
|
9.2 | 7.7 | ||||||
Amortization of intangible assets
|
0.4 | 0.3 | ||||||
Total operating expenses
|
16.4 | 13.7 | ||||||
Operating income
|
9.0 | 25.1 | ||||||
Financing expense, net
|
(9.6 | ) | ( 8.1 | ) | ||||
Other income, net
|
10.4 | -- | ||||||
Income tax expense
|
(3.8 | ) | (5.5 | ) | ||||
Net income
|
6.0 | % | 11.5 | % |
Comparison of nine months ended September 30, 2011 and September 30, 2010
Revenues
Our net revenues for the nine months ended September 30, 2011 decreased by $46.2 million, or 26%, to $131.9 million from $178.1 million in the corresponding period in 2010, mainly due to reduction in wafers shipped during the nine months ended September 30, 2011. The decrease in revenues is mainly due to a reduced customer demand resulting from the world wide economic slowdown which resulted in approximately 27% lower wafers shipped offset by 2% increase in average selling price.
10
Cost of Revenues
Following the decrease in revenues, our cost of revenues decreased to $98.3 million for the nine months ended September 30, 2011 from $108.9 million for the corresponding period in 2010. The relatively small reduction in cost of revenues as compared to the revenue decrease is due to the high portion of fixed costs associated with operating a foundry and due to higher depreciation expenses resulting from the fab capacity ramp-up.
Gross Profit
Gross profit decreased to $33.6 million in the nine months ended September 30, 2011 as compared to $69.1 million in the corresponding period in 2010 following the revenue decrease.
Operating Expenses
Operating expenses for the nine months ended September 30, 2011 decreased by $2.7 million to $21.7 million, as compared to $24.4 million in the nine months ended September 30, 2010. The decrease in operating expenses is mainly due to cost reduction actions and effects of the revenue decrease.
Financing Expense
Financing expense, net for the nine months ended September 30, 2011 amounted to $12.7 million, as compared to $14.4 million for the nine months ended September 30, 2010. Financing expense, net mainly relate to our notes. Financing expense, net for the nine months ended September 30, 2010 include $2.4 million loss from notes restructuring.
Other Income , net
Other income, net for the nine months ended September 30, 2011 includes mainly gain from the sale of the investment in HHSL.
Tax Expense
Income tax expense amounted to $5.0 million in the nine months ended September 30, 2011, as compared to income tax expense of $9.9 million in the nine months ended September 30, 2010. The decrease in income tax expenses is due to the decrease in the profit before tax. The Company’s effective tax rate for the nine months ended September 30, 2011 of 38% differs from the statutory rate primarily due to interest expense on unrecognized tax benefits. The interest expense related to unrecognized tax benefits increases the effective tax rate for the nine months ended September 30, 2011 by approximately 3 percent.
Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state provisions. These ownership changes may limit the amount of net operating loss carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. Such limitations may be increased by “built-in gains” as provided under the Code, which are realized within a 5 year period as of the ownership change. The Company previously completed Code Section 382 studies to assess whether ownership changes occurred and the limitation with respect to the utilization of its NOLs, related to such ownership changes. During the three months ended September 30, 2011, the Company initiated an additional analysis to examine whether the loss limitations may be further increased as a result of certain realized “built-in gains” as regulated by the Code and the regulations promulgated thereunder. As a result of such analysis, the Company has increased the amount of unrecognized tax benefits by approximately $9.7 million.
11
Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of the end of the period covered by this report.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our principal executive officer and our principal financial officer have concluded that these controls and procedures are effective at the “reasonable assurance” level. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been or will be detected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the period 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.
There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or any of our property is subject.
In addition to the other information contained in this Form 10-Q, you should carefully consider the risk factors associated with our business previously disclosed in Item 1A to Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. Our business, financial condition and/or results of operations could be materially adversely affected by any of these risks. Additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations.
Number
|
Description
|
|
31.1
|
Principal Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a).
|
|
31.2
|
CFO Certification required by Rule 13a-14(a) or Rule 15d-14(a).
|
|
32.1
|
Principal Executive Officer Certification required by Section 1350.
|
|
32.2
|
CFO Certification required by Section 1350.
|
|
101
|
Financial information from the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL
|
12
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: November 14, 2011
|
JAZZ TECHNOLOGIES, INC.
|
|
By:
|
/s/ Rafi Mor
|
|
_____
(Principal Executive Officer)
|
||
By:
|
/s/ SUSANNA H. BENNETT
|
|
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
INDEX TO EXHIBITS
Number
|
Description
|
|
31.1
|
Principal Executive Officer Certification required by Rule 13a-14(a) or Rule 15d-14(a).
|
|
31.2
|
CFO Certification required by Rule 13a-14(a) or Rule 15d-14(a).
|
|
32.1
|
Principal Executive Officer Certification required by Section 1350.
|
|
32.2
|
CFO Certification required by Section 1350.
|
|
101
|
Financial information from the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL
|
13