Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - INTEGRATED SILICON SOLUTION INC | Financial_Report.xls |
| EX-31.1 - CERTIFICATION OF PRESIDENT AND CEO PURSUANT TO SECTION 302 - INTEGRATED SILICON SOLUTION INC | issi-12312011xex311.htm |
| EX-31.2 - CERTIFICATION OF VICE PRESIDENT AND CFO PURSUANT TO SECTION 302 - INTEGRATED SILICON SOLUTION INC | issi-12312011xex312.htm |
| EX-32.1 - CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906 - INTEGRATED SILICON SOLUTION INC | issi-12312011xex32.htm |
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 December 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-23084
__________________________________________
Integrated Silicon Solution, Inc.
(Exact name of registrant as specified in its charter)
___________________________________________
Delaware | 77-0199971 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1940 Zanker Road, San Jose, California | 95112 | |
(Address of principal executive offices) | (Zip Code) | |
(408) 969-6600
(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 ý 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 ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ý |
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 ý
The number of outstanding shares of the registrant’s Common Stock as of February 3, 2012 was 27,043,602.
TABLE OF CONTENTS
PART I | Financial Information | |
References in this Quarterly Report on Form 10-Q to “we,” “us,” “our” and “ISSI” mean Integrated Silicon Solution, Inc. and all entities controlled by Integrated Silicon Solution, Inc.
Item 1. | Financial Statements |
Integrated Silicon Solution, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
Three Months Ended December 31, | ||||||||
2011 | 2010 | |||||||
Net sales | $ | 66,164 | $ | 66,103 | ||||
Cost of sales | 43,966 | 43,638 | ||||||
Gross profit | 22,198 | 22,465 | ||||||
Operating expenses: | ||||||||
Research and development | 7,601 | 6,750 | ||||||
Selling, general and administrative | 9,497 | 9,367 | ||||||
Total operating expenses | 17,098 | 16,117 | ||||||
Operating income | 5,100 | 6,348 | ||||||
Interest and other income, net | 213 | 307 | ||||||
Gain on sale of investments | — | 560 | ||||||
Income before income taxes | 5,313 | 7,215 | ||||||
Provision for income taxes | 1,544 | 1 | ||||||
Consolidated net income | 3,769 | 7,214 | ||||||
Net loss (income) attributable to noncontrolling interests | 21 | (2 | ) | |||||
Net income attributable to ISSI | $ | 3,790 | $ | 7,212 | ||||
Basic net income per share | $ | 0.14 | $ | 0.27 | ||||
Shares used in basic per share calculation | 26,638 | 26,308 | ||||||
Diluted net income per share | $ | 0.13 | $ | 0.26 | ||||
Shares used in diluted per share calculation | 28,333 | 27,865 | ||||||
See accompanying notes to condensed consolidated financial statements.
1
Integrated Silicon Solution, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
December 31, 2011 | September 30, 2011 | |||||||
(unaudited) | (1) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 90,973 | $ | 83,863 | ||||
Restricted cash | 6,834 | 6,786 | ||||||
Short-term investments | 4,409 | 4,761 | ||||||
Accounts receivable, net | 35,357 | 39,460 | ||||||
Inventories | 51,119 | 56,796 | ||||||
Deferred tax assets | 8,121 | 10,044 | ||||||
Other current assets | 7,051 | 6,325 | ||||||
Total current assets | 203,864 | 208,035 | ||||||
Property, equipment and leasehold improvements, net | 29,511 | 28,959 | ||||||
Purchased intangible assets, net | 10,615 | 11,081 | ||||||
Goodwill | 9,463 | 9,463 | ||||||
Deferred tax assets | 19,366 | 19,028 | ||||||
Other assets | 17,383 | 15,421 | ||||||
Total assets | $ | 290,202 | $ | 291,987 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 29,319 | $ | 36,395 | ||||
Accrued compensation and benefits | 5,563 | 6,363 | ||||||
Accrued expenses | 4,284 | 4,711 | ||||||
Total current liabilities | 39,166 | 47,469 | ||||||
Other long-term liabilities | 9,288 | 9,272 | ||||||
Total liabilities | 48,454 | 56,741 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Common stock | 3 | 3 | ||||||
Additional paid-in capital | 323,158 | 321,131 | ||||||
Accumulated deficit | (83,538 | ) | (87,328 | ) | ||||
Accumulated other comprehensive loss | (608 | ) | (1,252 | ) | ||||
Total ISSI stockholders’ equity | 239,015 | 232,554 | ||||||
Noncontrolling interest | 2,733 | 2,692 | ||||||
Total stockholders’ equity | 241,748 | 235,246 | ||||||
Total liabilities and stockholders’ equity | $ | 290,202 | $ | 291,987 | ||||
(1) | Derived from audited financial statements. |
See accompanying notes to condensed consolidated financial statements.
2
Integrated Silicon Solution, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended December 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities | ||||||||
Consolidated net income | $ | 3,769 | $ | 7,214 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,354 | 1,046 | ||||||
Stock-based compensation | 1,185 | 886 | ||||||
Amortization of intangibles | 466 | 236 | ||||||
Gain on sale of investments | — | (560 | ) | |||||
Loss on the deconsolidation of Giantec | — | 30 | ||||||
Net foreign currency transaction losses | 149 | 27 | ||||||
Deferred tax assets | 1,616 | — | ||||||
Other non-cash items | 79 | 66 | ||||||
Net effect of changes in current and other assets and current liabilities | (1,022 | ) | (13,798 | ) | ||||
Net cash provided by (used in) operating activities | 7,596 | (4,853 | ) | |||||
Cash flows from investing activities | ||||||||
Acquisition of property, equipment and leasehold improvements | (1,734 | ) | (528 | ) | ||||
Proceeds from sale of investments | — | 560 | ||||||
Reduction in cash balances upon deconsolidation of Giantec | — | (6,455 | ) | |||||
Increase in restricted cash | — | (1,709 | ) | |||||
Proceeds from sales of available-for-sale securities | 322 | 1,502 | ||||||
Cash used in investing activities | (1,412 | ) | (6,630 | ) | ||||
Cash flows from financing activities | ||||||||
Repurchases and retirement of common stock | (455 | ) | — | |||||
Proceeds from issuance of common stock | 1,288 | 529 | ||||||
Proceeds from borrowings under short-term lines of credit | 4,036 | — | ||||||
Principal payments of short-term lines of credit | (4,036 | ) | — | |||||
Cash provided by financing activities | 833 | 529 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 93 | 389 | ||||||
Net increase (decrease) in cash and cash equivalents | 7,110 | (10,565 | ) | |||||
Cash and cash equivalents at beginning of period | 83,863 | 81,665 | ||||||
Cash and cash equivalents at end of period | $ | 90,973 | $ | 71,100 | ||||
See accompanying notes to condensed consolidated financial statements.
3
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Basis of Presentation |
The accompanying unaudited condensed consolidated financial statements include the accounts of Integrated Silicon Solution, Inc. (the "Company" or "ISSI") and its consolidated majority owned subsidiaries, after elimination of all significant intercompany accounts and transactions. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (which are of a normal, recurring nature) considered necessary for fair presentation have been included.
In January 2010, the Company formed a separate business unit, Giantec Semiconductor, Inc. (Giantec), which designs and markets application specific standard products (ASSP) primarily EEPROMs and SmartCards. As part of this formation, Shanghai Zhang Jiang Science & Technology Investment Corporation invested approximately $3.8 million in Giantec. On December 30, 2010, Giantec received an additional direct investment of $4.0 million from outside investors, and as a result the Company’s ownership interest was reduced to approximately 44% and the Company was required to deconsolidate Giantec. In August 2011, the Company sold approximately 37% of its shares in Giantec and on August 31, 2011, Giantec merged with Maxllent Corp. thereby reducing the Company's ownership interest in Giantec to approximately 19.85%. The Company's consolidated statements of income reflect accounting for Giantec on a consolidated basis from January 1, 2010 through December 30, 2010. For the period from December 31, 2010 through August 31, 2011, the Company accounted for Giantec on the equity method and the Company's results included its percentage share of Giantec’s results of operations. Effective September 1, 2011, the Company accounts for Giantec on the cost basis.
On January 31, 2011, the Company acquired Si En Integration Holdings Limited (Si En) and the Company’s financial results reflect accounting for Si En on a consolidated basis from the date of acquisition.
The Company’s operating results for the three months ended December 31, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2012 or for any other period. The financial statements included herein should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011.
2. | Use of Estimates |
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Such estimates include the useful lives and fair value of fixed assets, the fair value of investments, allowances for doubtful accounts and customer returns, inventory write-downs, potential reserves relating to litigation matters, accrued liabilities, and other reserves. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and its beliefs of what could occur in the future, given available information. Actual results may differ from those estimates, and such differences, may be material to the financial statements.
3. | Impact of Recently Issued Accounting Pronouncements |
Accounting Pronouncements
Fair Value Measurement
In May 2011, the Financial Accounting Standards Board (FASB) amended its guidance to converge fair value measurement and disclosure guidance in U.S. GAAP with International Financial Reporting Standards (IFRS). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board. The amendment changes 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. For many of the requirements, the FASB does not intend for the amendment to result in a change in the application of the requirements in the current authoritative guidance. The amendment is effective for the Company's interim period beginning January 1, 2012. The Company does not anticipate that the amendment will have a material impact on its consolidated financial statements.
4
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Comprehensive Income
In June 2011, the FASB amended its guidance on the presentation of comprehensive income. This amendment eliminates the currently available option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. Under this amendment, an entity will have 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 addition, this amendment, requires that an entity present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. In December 2011, the FASB further amended its guidance to defer changes related to the presentation of reclassification adjustments indefinitely as a result of concerns raised that the new presentation requirements would be difficult for preparers and add unnecessary complexity to financial statements. The amendment (other than the portion regarding the presentation of reclassification adjustments which, as noted above, has been deferred indefinitely) becomes effective for the Company beginning in the first quarter of fiscal 2013 and is to be applied retrospectively. This amendment will impact the presentation of the financial statements but will not impact the Company's financial position, results of operations or cash flows.
Impact of Recently Adopted Accounting Standards
During the first quarter of fiscal 2012, the Company adopted the following accounting standards, which did not have a material effect on its consolidated results of operations during such period or financial condition at the end of such period:
Business Combinations
In December 2010, the FASB amended its guidance on business combinations. Under the amended guidance, a public entity that presents comparative financial statements must disclose the revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the prior annual reporting period.
Intangibles – Goodwill and Other
In December 2010, the FASB amended its guidance on goodwill and other intangible assets. The amendment modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if there are qualitative factors indicating that it is more likely than not that a goodwill impairment exists. The qualitative factors are consistent with the existing guidance which requires the goodwill of a reporting unit to be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
4. | Fair Value Measurements |
Under FASB guidance, fair value is defined as the price expected to be received from the sale of an asset or paid to transfer a liability in a transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. The FASB guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that the market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a company’s judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available at that time. The fair value hierarchy is broken down into the following three levels based on the reliability of inputs:
• | Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices which are readily and regularly available in an active market, valuation of these products can be done without a significant degree of judgment. |
• | Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments and model-derived valuations in which all significant inputs and significant value drives are observable in active markets. |
• | Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. |
5
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
As of December 31, 2011, the Company’s financial assets utilizing Level 1 inputs included a short-term investment security traded on an active securities exchange. The Company did not have any financial assets utilizing Level 2 or Level 3 inputs at December 31, 2011 and September 30, 2011.
The following table represents the Company’s fair value hierarchy for financial assets measured at fair value on a recurring basis:
December 31, 2011 (Level 1) | September 30, 2011 (Level 1) | |||||||
(In thousands) | ||||||||
Money market instruments (1) | $ | 34,288 | $ | 34,281 | ||||
Semiconductor Manufacturing International Corp. | ||||||||
(SMIC) common stock (2) | 1,443 | 1,497 | ||||||
$ | 35,731 | $ | 35,778 | |||||
(1) | Included in cash and cash equivalents |
(2) | Included in short-term investments |
There were no transfers in or out of our Level 1 assets during the three months ended December 31, 2011.
As of December 31, 2011, the Company did not have any liabilities or non-financial assets that are measured on a fair value basis on a recurring basis.
Available-for-sale marketable securities consisted of the following:
December 31, 2011 | Amortized Cost | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
Money market instruments | $ | 34,288 | $ | — | $ | — | $ | 34,288 | ||||||||
Certificates of deposit | 11,658 | — | — | 11,658 | ||||||||||||
SMIC common stock | 3,426 | — | (1,983 | ) | 1,443 | |||||||||||
Total | 49,372 | — | (1,983 | ) | 47,389 | |||||||||||
Less: Amounts included in cash, cash equivalents | ||||||||||||||||
and restricted cash | (42,980 | ) | — | — | (42,980 | ) | ||||||||||
$ | 6,392 | $ | — | $ | (1,983 | ) | $ | 4,409 | ||||||||
September 30, 2011 | Amortized Cost | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
Money market instruments | $ | 34,281 | $ | — | $ | — | $ | 34,281 | ||||||||
Certificates of deposit | 12,051 | — | — | 12,051 | ||||||||||||
SMIC common stock | 3,426 | — | (1,929 | ) | 1,497 | |||||||||||
Total | 49,758 | — | (1,929 | ) | 47,829 | |||||||||||
Less: Amounts included in cash, cash equivalents | ||||||||||||||||
and restricted cash | (43,068 | ) | — | — | (43,068 | ) | ||||||||||
$ | 6,690 | $ | — | $ | (1,929 | ) | $ | 4,761 | ||||||||
6
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The Company determined that the decline in the fair value of SMIC was not other than temporary based on the Company's assessment that the decline was primarily a result of historically volatile semiconductor stock prices. The Company also considered the severity and the duration of the impairment of its SMIC investment which had risen above the Company's cost basis during fiscal 2011. The Company uses the weighted-average cost method to determine the cost basis of shares of SMIC.
The Company had no debt securities at December 31, 2011 and September 30, 2011. As of December 31, 2011 and September 30, 2011, the Company had cash, cash equivalents and short-term investments of $35.9 million ($4.1 million of which is in China and subject to exchange control regulations) and $41.6 million, respectively, in foreign financial institutions.
5. | Stock-based Compensation |
Stock-Based Benefit Plans
The Company grants stock-based compensation awards under its 2007 Incentive Compensation Plan (the 2007 Plan) which permits the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units (RSUs), performance shares and performance units. The Company has outstanding grants under prior plans, though no further grants can be made under these prior plans. At December 31, 2011, 1,674,000 shares were available for future grant under the 2007 Plan. Options generally vest ratably over a four-year period with a 6-month or 1-year cliff vest and then vesting ratably over the remaining period. Options granted prior to October 1, 2005 expire ten years after the date of grant; options granted after October 1, 2005 expire seven years after the date of the grant. RSUs generally vest annually over periods ranging from two years to four years based upon continued employment with the Company.
In addition, the Company has an Employee Stock Purchase Plan (ESPP) that is available to employees. The ESPP permits eligible employees to purchase the Company’s common stock through payroll deductions. Offering periods prior to August 1, 2010 under the ESPP had a duration of six months and the purchase price was equal to 85% of the fair value of the common stock on the purchase date. As approved by the Board of Directors, effective August 1, 2010, shares under the ESPP will be purchased at a price equal to 85% of the lesser of the fair market value of the Company’s common stock as of the first day or the last day of each six-month offering period. The offering periods under the ESPP commence on approximately February 1 and August 1 of each year. At December 31, 2011, 1,000,000 shares were available for future issuance under the ESPP.
Stock-Based Compensation
The following table outlines the effects of total stock-based compensation.
Three Months Ended December 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Stock-based compensation | ||||||||
Cost of sales | $ | 33 | $ | 39 | ||||
Research and development | 315 | 259 | ||||||
Selling, general and administrative | 837 | 588 | ||||||
Total stock-based compensation | 1,185 | 886 | ||||||
Tax effect on stock-based compensation | — | — | ||||||
Net effect on net income | $ | 1,185 | $ | 886 | ||||
As of December 31, 2011, there was approximately $9.8 million of total unrecognized stock-based compensation expense under the Company’s stock option plans that will be recognized over a weighted-average period of approximately 2.66 years. Future stock option grants will add to this total whereas quarterly amortization and the vesting of the existing stock option grants will reduce this total. In addition, as of December 31, 2011, there was approximately $36,000 of total unrecognized stock-based compensation expense under the Company’s ESPP that will be recognized over a weighted-average period of approximately 1 month.
7
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The Company uses the Black-Scholes option pricing model to estimate the fair value of the options granted and rights to acquire stock granted under the ESPP. The weighted average estimated fair values of stock option grants and rights granted under the ESPP, as well as the weighted average assumptions used in calculating these values during the three month periods ended December 31, 2011 and 2010 were based on estimates at the date of grant as follows:
Three Months Ended December 31, | ||||||||
2011 | 2010 | |||||||
Options | ||||||||
Weighted-average fair value of grants | $ | 4.48 | $ | 3.46 | ||||
Expected term in years | 4.37 | 4.37 | ||||||
Estimated volatility | 60 | % | 58 | % | ||||
Risk-free interest rate | 0.68 | % | 1.01 | % | ||||
Dividend yield | — | % | — | % | ||||
The Company issues RSUs from time to time. The estimated fair value of RSU awards is calculated based on the market price of the Company’s common stock on the date of grant. The weighted average grant date fair value of RSUs granted in the three month periods ended December 31, 2011 and 2010, was $9.36 and $7.41, respectively.
A summary of the Company’s stock option activity and related information for the three months ended December 31, 2011 follows (number of shares and aggregate intrinsic value are presented in thousands):
Number of Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||
Outstanding at September 30, 2011 | 4,851 | $ | 5.57 | |||||||||||
Granted | 839 | $ | 9.38 | |||||||||||
Exercised | (242 | ) | $ | 5.32 | $ | 975 | ||||||||
Cancelled/Expired | (57 | ) | $ | 11.16 | ||||||||||
Outstanding at December 31, 2011 | 5,391 | $ | 6.11 | 4.54 | $ | 17,005 | ||||||||
Exercisable at December 31, 2011 | 2,863 | $ | 5.22 | 3.47 | $ | 11,391 | ||||||||
Vested and expected to vest after December 31, 2011 | 5,220 | $ | 6.05 | 4.49 | $ | 16,766 | ||||||||
A summary of the Company’s RSU activity and related information for the three months ended December 31, 2011 under the 2007 Plan follows (number of shares and aggregate intrinsic value are presented in thousands):
Number of Shares | Weighted-Average Grant Date Fair Value | Aggregate Intrinsic Value | |||||||||
Outstanding at September 30, 2011 | 382 | $ | 7.84 | ||||||||
Granted | 100 | $ | 9.36 | ||||||||
Vested | (132 | ) | $ | 7.38 | $ | 1,240 | |||||
Forfeited | — | $ | — | ||||||||
Outstanding at December 31, 2011 | 350 | $ | 8.45 | $ | 3,199 | ||||||
6. | Concentrations |
In the three months ended December 31, 2011, revenue from the Company's largest and second largest distributor accounted for approximately 13% and 12%, respectively, of its total net sales. In the three months ended December 31, 2010, revenue from the Company's largest and second largest distributor accounted for approximately 14% and 13%, respectively, of its total net sales.
8
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
7. | Inventories |
The following is a summary of inventories by major category:
December 31, 2011 | September 30, 2011 | |||||||
(In thousands) | ||||||||
Purchased components | $ | 16,064 | $ | 15,826 | ||||
Work-in-process | 10,319 | 12,323 | ||||||
Finished goods | 24,736 | 28,647 | ||||||
$ | 51,119 | $ | 56,796 | |||||
During the three month periods ended December 31, 2011 and 2010, the Company recorded inventory write-downs of $1.6 million and $0.7 million, respectively. The inventory write-downs were predominantly for excess and obsolescence and lower of cost or market issues on certain of the Company’s products.
8. | Other Assets |
Other assets consisted of the following:
December 31, 2011 | September 30, 2011 | |||||||
(In thousands) | ||||||||
Restricted assets | $ | 231 | $ | 230 | ||||
Deposits to foundry for capacity | 10,000 | 10,000 | ||||||
Investment in Giantec | 4,025 | 4,025 | ||||||
Other | 3,127 | 1,166 | ||||||
$ | 17,383 | $ | 15,421 | |||||
The Company has various deposits including deposits with suppliers for purchase guarantees and for customs clearance. These deposits are included in restricted assets.
On December 30, 2010, Giantec received an additional direct investment of $4.0 million from outside investors, and as a result the Company’s ownership interest was reduced to approximately 44% and the Company was required to deconsolidate Giantec and to record its retained interest in Giantec at fair value at the date of deconsolidation. As the additional investment received by Giantec was from new investors, the Company used the price paid by the new investors as a basis for determining the fair value of its investment in Giantec. As a result, the Company recorded a loss of approximately $30,000 in “Interest and other income, net,” which was the difference between the fair value of the Company’s retained interest in Giantec, and the carrying value of Giantec’s net assets and noncontrolling interest before the deconsolidation. In August 2011, the Company sold approximately 37% of its shares in Giantec for $2.2 million resulting in no gain and on August 31, 2011, Giantec merged with Maxllent Corp. thereby reducing the Company's ownership interest in Giantec to approximately 19.85%. The Company's consolidated financial statements reflect accounting for Giantec on a consolidated basis from January 1, 2010 through December 30, 2010. For the period from December 31, 2010 through August 31, 2011, the Company accounted for Giantec on the equity method and the Company's results included its percentage share of Giantec’s results of operations in interest and other income, net. Effective September 1, 2011, the Company accounts for Giantec on the cost basis and its investment in Giantec in included in Other assets on the Company's balance sheets.
9
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
9. | Purchased Intangible Assets |
The following tables present details of the Company’s total purchased intangible assets:
Gross | Accumulated Amortization | Net | ||||||||||
(In thousands) | ||||||||||||
December 31, 2011 | ||||||||||||
Developed technology | $ | 6,760 | $ | 1,262 | $ | 5,498 | ||||||
In-process technology (IPR&D) | 1,595 | — | 1,595 | |||||||||
Customer relationships | 3,800 | 697 | 3,103 | |||||||||
Other | 570 | 151 | 419 | |||||||||
Total | $ | 12,725 | $ | 2,110 | $ | 10,615 | ||||||
September 30, 2011 | ||||||||||||
Developed technology | $ | 6,760 | $ | 1,028 | $ | 5,732 | ||||||
In-process technology (IPR&D) | 1,595 | — | 1,595 | |||||||||
Customer relationships | 3,800 | 506 | 3,294 | |||||||||
Other | 570 | 110 | 460 | |||||||||
Total | $ | 12,725 | $ | 1,644 | $ | 11,081 | ||||||
The following table presents details of the amortization expense of purchased intangible assets as reported in the consolidated statements of income:
Three Months Ended December 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Reported as: | ||||||||
Cost of sales | $ | 234 | $ | 236 | ||||
Operating expenses | 232 | — | ||||||
Total | $ | 466 | $ | 236 | ||||
The following table presents the estimated future amortization expense of the Company’s purchased intangible assets at December 31, 2011 (in thousands). The weighted-average remaining amortization period for developed technology, customer relationships and other intangibles is 7.03 years, 2.64 years and 4.08 years, respectively. If the Company acquires additional purchased intangible assets in the future, its future amortization may be increased by those assets. Furthermore, upon completion of the IPR&D projects, the Company will amortize the IPR&D over the useful life of the asset.
Fiscal year | |||
Remainder of 2012 | $ | 1,397 | |
2013 | 1,863 | ||
2014 | 1,700 | ||
2015 | 1,475 | ||
2016 | 943 | ||
Thereafter | 1,642 | ||
Total | $ | 9,020 | |
10
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
10. | Stockholders’ Equity |
The changes in the components of Stockholders’ Equity since the beginning of fiscal 2012 are as follows:
Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Non- Controlling Interest | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Balance at September 30, 2011 | $ | 3 | $ | 321,131 | $ | (87,328 | ) | $ | (1,252 | ) | $ | 2,692 | ||||||||
Net income | — | — | 3,790 | — | (21 | ) | ||||||||||||||
Change in cumulative translation adjustment, net of tax | — | — | — | 669 | — | |||||||||||||||
Change in unrealized loss on investments, net of tax | — | — | — | (34 | ) | — | ||||||||||||||
Change in retirement plan obligations, net of tax | — | — | — | 9 | — | |||||||||||||||
Shares issued under equity compensation plans | — | 1,288 | — | — | — | |||||||||||||||
Stock-based compensation | — | 1,185 | — | — | — | |||||||||||||||
Repurchase of shares | — | (455 | ) | — | — | — | ||||||||||||||
Change in noncontrolling interest in Wintram | — | 9 | — | — | 62 | |||||||||||||||
Balance at December 31, 2011 | $ | 3 | $ | 323,158 | $ | (83,538 | ) | $ | (608 | ) | $ | 2,733 | ||||||||
Comprehensive income includes net income as well as other comprehensive income (loss). The Company’s other comprehensive income (loss) consists of changes in cumulative translation adjustment, unrealized gains and losses on investments and retirement plan transition and actuarial gains and losses.
Comprehensive income (loss), net of taxes (which were immaterial for all other comprehensive income items for the periods presented), was as follows:
Three Months Ended December 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Consolidated net income | $ | 3,769 | $ | 7,214 | ||||
Other comprehensive income (loss), net of tax: | ||||||||
Change in cumulative translation adjustment | 669 | 2,230 | ||||||
Change in unrealized gains (losses) on investments | (34 | ) | (3 | ) | ||||
Change in retirement plan actuarial losses | 24 | 15 | ||||||
Change in retirement plan transition obligation | (15 | ) | (15 | ) | ||||
Comprehensive income | $ | 4,413 | $ | 9,441 | ||||
Comprehensive (income) loss attributable to noncontrolling interest | 21 | (2 | ) | |||||
Comprehensive income attributable to ISSI | $ | 4,434 | $ | 9,439 | ||||
11
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The components of accumulated other comprehensive income (loss), net of tax, were as follows:
December 31, 2011 | September 30, 2011 | |||||||
(In thousands) | ||||||||
Accumulated foreign currency translation adjustments | $ | 2,785 | $ | 2,116 | ||||
Accumulated net unrealized loss on SMIC | (1,247 | ) | (1,213 | ) | ||||
Accumulated net retirement plan transition obligation | 296 | 311 | ||||||
Accumulated net retirement plan actuarial losses | (2,442 | ) | (2,466 | ) | ||||
Total accumulated other comprehensive loss | $ | (608 | ) | $ | (1,252 | ) | ||
11. | Income Taxes |
The income tax provision includes U.S. federal, state and local, and foreign income taxes and is based on the application of a forecasted annual income tax rate applied to the current quarter's year-to-date pre-tax income (loss) for fiscal 2012. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including projections of the Company's annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, the Company's ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than being included in the estimated annual effective income tax rate.
For the three months ended December 31, 2011, the Company recorded income tax expense of $1.5 million that represents an effective tax rate of approximately 29%. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the differential in foreign tax rates and non-deductible stock-based compensation expense.
For the three months ended December 31, 2010, the Company recorded an income tax expense of $1,000 which is comprised of foreign tax and foreign withholding tax. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the utilization of federal and foreign net operating loss carryforwards that resulted in minimal tax being required in the period.
As of December 31, 2011, the Company had no unrecognized tax positions that would impact its effective tax rate.
12. | Per Share Data |
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):
Three Months Ended December 31, | ||||||||
2011 | 2010 | |||||||
Numerator for basic and diluted net income per share: | ||||||||
Net income attributable to ISSI | $ | 3,790 | $ | 7,212 | ||||
Denominator for basic net income per share: | ||||||||
Weighted average common shares outstanding | 26,638 | 26,308 | ||||||
Dilutive stock options and awards | 1,695 | 1,557 | ||||||
Denominator for diluted net income per share | 28,333 | 27,865 | ||||||
Basic net income per share | $ | 0.14 | $ | 0.27 | ||||
Diluted net income per share | $ | 0.13 | $ | 0.26 | ||||
For the three months ended December 31, 2011 and December 31, 2010, stock options and RSU awards for 1,832,000 and 644,000 shares, respectively, were excluded from diluted earnings per share by the application of the treasury stock method.
12
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
13. | Common Stock Repurchase Program |
In the three months ended December 31, 2011, the Company did not repurchase any shares of its common stock in the open market. As of December 31, 2011, the Company had repurchased and retired an aggregate of 14,179,711 shares of common stock at a cost of approximately $88.5 million since September 2007. As of December 31, 2011, $19.8 million remained available under the existing share repurchase authorization.
The Company issues RSUs as part of its equity incentive plan. For a portion of RSUs granted, the number of shares issued on the date the RSUs vest is net of the statutory withholding requirements that the Company pays on behalf of its employees. During the three months ended December 31, 2011, the Company withheld 48,492 shares to satisfy approximately $455,000 of employee tax obligations. Although the shares withheld are not issued, they are treated as common stock repurchases for accounting purposes, as they reduce the number of shares that would have been issued upon vesting.
14. | Commitments and Contingencies |
Patents and Licenses
In the semiconductor industry, it is not unusual for companies to receive notices alleging infringement of patents or other intellectual property rights of others. The Company has been, and from time-to-time expects to be, notified of claims that it may be infringing patents, maskwork rights or copyrights owned by third parties. If it appears necessary or desirable, the Company may seek licenses under patents that it is alleged to be infringing. Although patent holders commonly offer such licenses, licenses may not be offered and the terms of any offered licenses may not be acceptable to the Company. The failure to obtain a license under a key patent or intellectual property right from a third party for technology used by the Company could cause it to incur substantial liabilities and to suspend the manufacture of the products utilizing the invention or to attempt to develop non-infringing products, any of which could materially and adversely affect the Company’s business and operating results. Furthermore, there can be no assurance that the Company will not become involved in protracted litigation regarding its alleged infringement of third party intellectual property rights or litigation to assert and protect its patents or other intellectual property rights. Any litigation relating to patent infringement or other intellectual property matters could result in substantial cost and diversion of the Company’s resources.
Legal Proceedings
DRAM Memory Technologies LLC v. Integrated Silicon Solution, Inc., et al.
On March 11, 2011, a patent infringement suit was filed against the Company and several other semiconductor companies in the United States District Court for the Central District of California by DRAM Memory Technologies LLC, for the alleged infringement of various patents related to certain technology allegedly applicable to DRAM devices (Case No. SACV11-00332). The complaint also alleges willful infringement of the patents by the Company and seeks a permanent injunction of the alleged infringing acts by the Company, as well as up to the trebling of unspecified damages. On April 1, 2011, an amended complaint naming additional defendants was filed. On October 18, 2011, the scheduling order for the litigation was issued setting a discovery cut-off date of August 17, 2012 and a jury trial date of May 14, 2013. Plaintiff has served discovery on the Company and the Company is preparing to vigorously defend the allegations in the complaint.
Goodman v. Integrated Silicon Solution, Inc., et al.
On June 1, 2011, a patent infringement suit was filed against the Company and several other semiconductor companies in the United States District Court for the Northern District of California by James B. Goodman, for the alleged infringement of U.S. Patent No. 6,243,315 by the Company's products (Case No. 3:11-CV-02607). The complaint seeks unspecified damages, interest and costs, but does not allege willful infringement or seek a permanent injunction. A pretrial preparation order was issued on November 18, 2011 setting a discovery cut-off date of November 30, 2012 and a jury trial date of September 30, 2013. Plaintiff has served discovery on the Company and the Company is preparing to vigorously defend the allegations in the complaint.
Other Legal Proceedings
In the ordinary course of its business, the Company has been involved in a limited number of legal actions (including the actions described above), both as plaintiff and defendant, and could incur uninsured liability in any one or more of them. Although the outcome of these actions is not presently determinable, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position, cash flows or results of operations. However, no assurances can be given with respect to the extent or outcome of any such litigation in the future.
13
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Commitments to Wafer Fabrication Facilities and Contract Manufacturers
The Company issues purchase orders for wafers to various wafer foundries. These purchase orders are generally considered to be cancelable. However, to the degree that the wafers have entered into work-in-process at the foundry, as a matter of practice, it becomes increasingly difficult to cancel the purchase order. As of December 31, 2011, the Company had approximately $13.9 million of purchase orders for which the related wafers had been entered into wafer work-in-process (i.e., manufacturing had begun).
15. | Geographic and Segment Information |
The Company has one operating segment, which is to design, develop, and market high-performance SRAM, DRAM, and other memory and non-memory semiconductor products. The following table summarizes the Company’s operations in different geographic areas:
Three Months Ended December 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Net sales | ||||||||
United States | $ | 11,853 | $ | 9,816 | ||||
China | 2,531 | 3,690 | ||||||
Hong Kong | 14,248 | 15,459 | ||||||
Japan | 8,229 | 6,216 | ||||||
Korea | 3,026 | 3,461 | ||||||
Taiwan | 6,366 | 7,300 | ||||||
Other Asia Pacific countries | 6,171 | 5,850 | ||||||
Europe | 13,382 | 13,887 | ||||||
Other | 358 | 424 | ||||||
Total net sales | $ | 66,164 | $ | 66,103 | ||||
December 31, 2011 | September 30, 2011 | |||||||
(In thousands) | ||||||||
Long-lived assets | ||||||||
United States | $ | 1,025 | $ | 1,216 | ||||
Hong Kong | 4 | 5 | ||||||
China | 1,147 | 706 | ||||||
Taiwan | 27,335 | 27,032 | ||||||
$ | 29,511 | $ | 28,959 | |||||
14
INTEGRATED SILICON SOLUTION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
16. | Related Party Transactions |
The Company sells semiconductor products to Chrontel International Ltd. (Chrontel). Jimmy S.M. Lee, the Company’s Executive Chairman, has been a director of Chrontel since July 1995. Sales to Chrontel were $114,000 and $337,000 during the three month periods ended December 31, 2011, and December 31, 2010, respectively. Accounts receivable from Chrontel was approximately $114,000 and $50,000 at December 31, 2011 and September 30, 2011, respectively.
The Company purchases ASSP products from Giantec. At December 31, 2011, the Company had approximately a 19.85% ownership interest in Giantec. The Company’s Executive Chairman, Jimmy S.M. Lee, is a director of Giantec. The Company also provides logistic services to Giantec for which it is reimbursed and receives certain licensing fees from Giantec. Through December 30, 2010, the Company consolidated the results of Giantec. During the three months ended December 31, 2011, the Company purchased no products from Giantec. Accounts payable to Giantec was approximately $0 and $418,000 at December 31, 2011 and September 30, 2011, respectively. During the three months months ended December 31, 2011, the Company provided Giantec services of approximately $18,000 and received licensing fees from Giantec of approximately $10,000. Accounts receivable from Giantec was approximately $16,000 and $104,000 at December 31, 2011 and September 30, 2011, respectively.
15
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this report that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of our operations. Also, when we use words such as “believes,” “expects,” “anticipates” or similar expressions, we are making forward-looking statements. You should note that an investment in our securities involves certain risks and uncertainties that could affect our future financial results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in “Risk Factors” and elsewhere in this report.
We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risks described in “Risk Factors” included in this report, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in “Risk Factors” and elsewhere in this report could harm our business and adversely affect our results.
All forward-looking statements made by us or persons acting on our behalf are expressly qualified in their entirety by the Risk Factors and other cautionary statements set forth in this report. Except as required by federal securities laws, we are under no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a fabless semiconductor company that designs and markets high performance integrated circuits for the following key markets: (i) automotive, (ii) communications, (iii) industrial, medical and military, and (iv) digital consumer. Our primary products are low and medium density DRAM in both package and Known Good Die (KGD) form and high speed and low power SRAM. In the first quarter of fiscal 2012 and in fiscal 2011, approximately 96% and 92%, respectively, of our revenue was derived from our DRAM and SRAM products. Sales of our DRAM products have represented a majority of our net sales in each year since fiscal 2003.
In January 2010, we formed a separate business unit, Giantec Semiconductor, Inc. (Giantec) which designs and markets application specific standard products (ASSP) primarily EEPROMs and SmartCards. As part of this formation, Giantec raised approximately $3.8 million from an outside investor. On December 30, 2010, Giantec received an additional direct investment of $4.0 million from outside investors, and as a result our ownership interest was reduced to approximately 44% and we were required to deconsolidate Giantec. In August 2011, we sold approximately 37% of our shares in Giantec and on August 31, 2011, Giantec merged with Maxllent Corp. thereby reducing our ownership interest in Giantec to approximately 19.85%. Our consolidated financial statements reflect accounting for Giantec on a consolidated basis from January 1, 2010 through December 30, 2010. For the period from December 31, 2010 through August 31, 2011, we accounted for Giantec on the equity method and our results included our percentage share of Giantec’s results of operations. Effective September 1, 2011, we account for Giantec on the cost basis.
On January 31, 2011, we acquired Si En Integration Holdings Limited (Si En), a privately held fabless provider of high performance analog and mixed signal integrated circuits headquartered in Xiamen, China. Si En targets the mobile communications, digital consumer, networking, and automotive markets with high quality analog products. Si En’s current products include audio power amplifiers, LED drivers, voltage converters and temperature sensors.
In order to control our operating expenses, for the past several years we have limited our headcount in the U.S. and maintained much of our operations in Taiwan and China. We believe this strategy has enabled us to limit our operating expenses while simultaneously locating these operations closer to our manufacturing partners and our customers. As a result of these efforts, we currently have significantly more employees in Asia than we do in the U.S. We intend to continue these strategies going forward.
As a fabless semiconductor company, our business model is less capital intensive because we rely on third parties to manufacture, assemble and test our products. Because of our dependence on third-party wafer foundries, our ability to increase our unit sales volumes depends on our ability to increase our wafer capacity allocation from current foundries, add additional foundries and improve yields of good die per wafer.
The average selling prices of our DRAM and SRAM products are sensitive to supply and demand conditions in our target markets and have generally declined over time. We experienced declines in the average selling prices for many of our products in the first quarter of fiscal 2012 and in fiscal 2011. We expect average selling prices for our products to decline in the future,
16
principally due to market demand, market competition and the supply of competitive products in the market. Any future decreases in our average selling prices could have an adverse impact on our revenue growth rate, gross margins and operating margins. Our ability to maintain or increase revenues will be highly dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products in quantities sufficient to compensate for the anticipated declines in average selling prices of existing products. Declining average selling prices will adversely affect our gross margins unless we are able to offset such declines with commensurate reductions in per unit costs or changes in product mix in favor of higher margin products.
Revenue from product sales to our direct customers is recognized upon shipment provided that persuasive evidence of a sales arrangement exists, the price is fixed or determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements and there are no remaining significant obligations. A portion of our sales is made to distributors under agreements that provide for the possibility of certain sales price rebates and limited product return privileges. Given the uncertainties associated with credits that will be issued to these distributors, we defer recognition of such sales until our products are sold by the distributors to their end customers. Revenue from sales to distributors who do not have sales price rebates or product return privileges is recognized at the time our products are sold by us to the distributors.
We market and sell our products in Asia, the U.S., Europe and other locations through our direct sales force, distributors and sales representatives. The percentage of our sales shipped outside the U.S. was approximately 82% in the first three months of fiscal 2012, and approximately 85% in each of the first three months of fiscal 2011, and in fiscal 2011 and fiscal 2010. We measure sales location by the shipping destination. We anticipate that sales to international customers will continue to represent a significant percentage of our net sales. The percentages of our net sales by region are set forth in the following table:
Three Months Ended December 31, | Fiscal Years Ended September 30, | |||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||
Asia | 61 | % | 63 | % | 64 | % | 66 | % | ||||
Europe | 20 | 21 | 20 | 18 | ||||||||
U.S. | 18 | 15 | 15 | 15 | ||||||||
Other | 1 | 1 | 1 | 1 | ||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||
Our sales are generally made by purchase orders. Because industry practice allows customers to reschedule or cancel orders on relatively short notice, backlog may not be a good indicator of our future sales. Cancellations of customer orders or changes in product specifications could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and operating expenses.
Due to the complex nature of the markets we serve and the broad fluctuations in economic conditions in the U.S. and other countries, it is difficult for us to assess the impact of seasonal factors on our business.
We are subject to the risks of conducting business internationally, including economic conditions in Asia, particularly Taiwan and China, changes in trade policy and regulatory requirements, duties, tariffs and other trade barriers and restrictions, the burdens of complying with foreign laws and, possibly, political instability. Most of our foundries and all of our assembly and test subcontractors are located in Asia. Although our international sales are largely denominated in U.S. dollars, we do have sales transactions in New Taiwan dollars, in Hong Kong dollars and in Chinese renminbi. In addition, we have foreign operations where expenses are generally denominated in the local currency. Such transactions expose us to the risk of exchange rate fluctuations. We monitor our exposure to foreign currency fluctuations, but have not adopted any hedging strategies to date. There can be no assurance that exchange rate fluctuations will not harm our business and operating results in the future.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make difficult and subjective estimates, judgments and assumptions. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The estimates and judgments that we use in applying our accounting policies have a significant impact on the results we report in our financial statements. We base our estimates and judgments on our historical experience combined with knowledge of current conditions and our beliefs of what could occur in the future, considering the information available at the time. Actual results could differ from those estimates and such differences may be material to our financial statements. We reevaluate our estimates and judgments on an ongoing basis.
17
Our critical accounting policies which are impacted by our estimates are: (i) the valuation of our inventory, which impacts cost of goods sold and gross profit; (ii) the valuation of our allowance for sales returns and allowances, which impacts net sales; (iii) the valuation of our allowance for doubtful accounts, which impacts general and administrative expense; (iv) accounting for acquisitions and goodwill, which impacts operating expense when we record impairments (v) accounting for stock-based compensation which impacts costs of goods sold, research and development expense and selling, general and administrative expense and (vi) accounting for income taxes. Each of these policies is described in more detail below. We also have other key accounting policies that may not require us to make estimates and judgments that are as subjective or difficult. For instance, our policies with regard to revenue recognition, including the deferral of revenues on sales to distributors with sales price rebates and product return privileges. These policies are described in the notes to our financial statements contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011.
Valuation of inventory. Our inventories are stated at the lower of cost or market value. Determining the market value of inventories on hand and at distributors as of the balance sheet date involves numerous judgments, including projecting average selling prices and sales volumes for future periods and costs to complete products in work in process inventories. When market values are below our costs, we record a charge to cost of goods sold to write down our inventories to their estimated market value in advance of when the inventories are actually sold. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that may adversely affect our operating results. If actual market conditions are more favorable, we may have higher gross margins when the written down products are sold. In addition to lower of cost or market write-downs, we also analyze inventory to determine whether any of it is excess, obsolete or defective. We write down to zero dollars (which is a charge to cost of goods sold) the carrying value of inventory on hand that has aged over one year (two years for wafer and die bank) to cover estimated excess and obsolete exposures, unless adjustments are made based on management’s judgments for newer products, end of life products, planned inventory increases or strategic customer supply. In making such judgments to write down inventory, we take into account the product life cycles which can range from six to 30 months, the stage in the life cycle of the product, and the impact of competitors’ announcements and product introductions on our products. Once established, these write-downs are considered permanent.
Valuation of allowance for sales returns and allowances. Net sales consist principally of total product sales less estimated sales returns and allowances. To estimate sales returns and allowances, we analyze potential customer specific product application issues, potential quality and reliability issues and historical returns. We evaluate quarterly the adequacy of the allowance for sales returns and allowances. This allowance is reflected as a reduction to accounts receivable in our consolidated balance sheets. Increases to the allowance are recorded as a reduction to net sales. Because the allowance for sales returns and allowances is based on our judgments and estimates, particularly as to product application, quality and reliability issues, our allowances may not be adequate to cover actual sales returns and other allowances. If our allowances are not adequate, our net sales could be adversely affected.
Valuation of allowance for doubtful accounts. We maintain an allowance for doubtful accounts for losses that we estimate will arise from our customers’ inability to make required payments for goods and services purchased from us. We make our estimates of the uncollectibility of our accounts receivable by analyzing historical bad debts, specific customer creditworthiness and current economic trends. Once an account is deemed unlikely to be fully collected, we write down the carrying value of the receivable to the estimated recoverable value, which results in a charge to general and administrative expense, which decreases our profitability.
Accounting for acquisitions and goodwill. We account for acquisitions using the purchase accounting method. Under this method, the total consideration paid is allocated over the fair value of the net assets acquired, including in-process research and development, with any excess allocated to goodwill. Goodwill is defined as the excess of the purchase price over the fair value allocated to the net assets. Our judgments as to fair value of the assets will, therefore, affect the amount of goodwill that we record. Management is responsible for the valuation of tangible and intangible assets. For tangible assets acquired in any acquisition, such as plant and equipment, the useful lives are estimated by considering comparable lives of similar assets, past history, the intended use of the assets and their condition. In estimating the useful life of the acquired intangible assets with definite lives, we consider the industry environment and unique factors relating to each product relative to our business strategy and the likelihood of technological obsolescence. Acquired intangible assets primarily include developed and in-process technology (IPR&D), customer relationships, trade names and non-compete agreements. The amounts allocated to IPR&D projects are not expensed until technological feasibility is reached for each project. Upon completion of development for each project, the acquired IPR&D will be amortized over its useful life. We are currently amortizing our acquired intangible assets with definite lives over periods generally ranging from three to eight years.
We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances where indicators of impairment may exist. For instance, in response to changes in industry and market conditions, we could be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of tangible and intangible assets, including goodwill.
18
Accounting for stock-based compensation. Stock option fair value is calculated on the date of grant using the Black-Scholes valuation model. The compensation cost is then recognized on a straight-line basis over the requisite service period of the option, which is generally the option vesting term of four years. We use the Black-Scholes valuation model to determine the fair value of our stock options at the date of grant. The Black-Scholes valuation model requires us to estimate key assumptions such as expected term, volatility, dividend yield and risk free interest rates that determine the stock option fair value. In addition, we estimate forfeitures at the time of grant. In subsequent periods, if actual forfeitures differ from the estimate, the forfeiture rate may be revised. We estimate our expected forfeitures rate based on our historical activity and judgment regarding trends. We estimate the expected term for option grants based upon historical exercise data. If we determined that another method used to estimate expected life was more reasonable than our current method, or if another method for calculating these input assumptions was prescribed by authoritative guidance, the fair value calculated could change materially.
Accounting for income taxes. We account for income taxes under the asset and liability approach. We record a valuation allowance to reduce our net deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, projections of future income, expectations and risks associated with estimates of future taxable income, and ongoing prudent and practical tax planning strategies. To the extent we believe it is more likely than not that some portion of our deferred tax assets will not be realized, we would increase the valuation allowance against the deferred tax assets. Realization of our deferred tax assets is dependent primarily upon future U.S. and foreign taxable income. Our judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require possible material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made.
We are subject to income taxes in the U.S. and foreign countries, and we are subject to routine corporate income tax audits in certain of these jurisdictions. We believe that our tax return positions are fully supported, but tax authorities may challenge certain positions, which may not be fully sustained. Our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges. Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgment and estimates. We evaluate our uncertain tax positions and believe that our provision for uncertain tax positions, including related interest and penalties, is adequate based on information currently available to us. However, the amount ultimately paid upon resolution of audits could be materially different from the amounts previously included in income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. Our overall provision requirement could change due to the issuance of new regulations or new case law, management's judgments on undistributed foreign earnings including judgments about and intentions concerning our future operations, negotiations with tax authorities, resolution with respect to individual audit issues, or the entire audit, or the expiration of statutes of limitations.
Accounting Changes and Recent Accounting Pronouncements
For a description of accounting changes and recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated condensed financial statements, see “Note 3: Impact of Recently Issued Accounting Pronouncements” in the Notes to Consolidated Condensed Financial Statements of this Form 10-Q.
Three Months Ended December 31, 2011 Compared to Three Months Ended December 31, 2010
Net Sales. Net sales consist principally of total product sales less estimated sales returns. Net sales increased to $66.2 million in the three months ended December 31, 2011 from $66.1 million in the three months ended December 31, 2010. Increases in our DRAM revenue and analog revenue from our acquisition of Si En which closed on January 31, 2011 was largely offset by decreases in our ASSP revenue as a result of our deconsolidation of Giantec and decreases in our SRAM revenue. Our DRAM revenue increased by 17% in the three months ended December 31, 2011 compared to the three months ended December 31, 2010 principally as a result of a shift in product mix whereas our SRAM revenue decreased by 13% in the three months ended December 31, 2011 compared to the three months ended December 31, 2010 primarily as a result of a decrease in unit shipments combined with a decrease in average selling prices. Our ASSP revenue decreased by $6.0 million in in the three months ended December 31, 2011 compared to the three months ended December 31, 2010 as a result of our deconsolidation of Giantec. The three months ended December 31, 2011, included $2.4 million in analog revenue. We anticipate that the average selling prices of our existing products will generally decline over time, although the rate of decline may fluctuate for certain products. There can be no assurance that any future price declines will be offset by higher volumes or by higher prices on newer products.
In the three months ended December 31, 2011, revenue from our largest and second largest distributor accounted for approximately 13% and 12%, respectively, of our total net sales. In the three months ended December 31, 2010, revenue from our largest and second largest distributor accounted for approximately 14% and 13%, respectively, of our total net sales.
19
Gross profit. Cost of sales includes die cost from wafers acquired from foundries, subcontracted package, assembly and test costs, costs associated with in-house product testing, quality assurance and import duties. Gross profit decreased by $0.3 million to $22.2 million in the three months ended December 31, 2011 from $22.5 million in the three months ended December 31, 2010. Our gross margin was 33.5% in the three months ended December 31, 2011 which included a charge of 2.5% for inventory write-downs compared to 34.0% in the three months ended December 31, 2010 which included a 1.1% charge for inventory write-downs. Excluding the impact of the inventory write-downs, the increase in gross margin and gross profit in the three months ended December 31, 2011 compared to the three months ended December 31, 2010 can be attributed to the favorable impact in the current period from a decrease in product costs partially offset by an unfavorable impact as a result of a change in product mix. The decrease in gross profit dollars for our ASSP products in the three months ended December 31, 2011 compared to December 31, 2010 as a result of our deconsolidation of Giantec was partially offset by gross profit dollars contributed by our analog products as a result of our acquisition of Si En. We believe that the average selling prices of our products will decline over time and, unless we are able to reduce our cost per unit to the extent necessary to offset such declines, the decline in average selling prices could result in a material decline in our gross margin. In addition, our product costs could increase if our suppliers raise prices, which could result in a material decline in our gross margin. Although we have product cost reduction programs in place that involve efforts to reduce internal costs and supplier costs, there can be no assurance that product costs will be reduced or that such reductions will be sufficient to offset the expected declines in average selling prices. We do not believe that such cost reduction efforts are likely to have a material adverse impact on the quality of our products or the level of service provided by us.
Research and Development. Research and development expenses increased by 13% to $7.6 million in the three months ended December 31, 2011 compared to $6.8 million in the three months ended December 31, 2010. As a percentage of net sales, research and development expenses increased to 11.5% in the three months ended December 31, 2011 from 10.2% in the three months ended December 31, 2010. The increase in research and development expenses of $0.8 million can be attributed to an increase in mask and other product development costs in the three months ended December 31, 2011 compared to the three months ended December 31, 2010. A $0.7 million increase in research and development expenses for our analog products as a result of our acquisition of Si En was offset by a $0.9 million decrease in research and development expenses as a result of our deconsolidation of Giantec. We expect the dollar amount of our research and development expenses to remain relatively flat in the March 2012 quarter and expect such expenses to fluctuate as a percentage of net sales depending on our overall level of sales.
Selling, General and Administrative. Selling, general and administrative expenses increased by 1% to $9.5 million in the three months ended December 31, 2011 from $9.4 million in the three months ended December 31, 2010. As a percentage of net sales, selling, general and administrative expenses increased to 14.4% in the three months ended December 31, 2011 from 14.2% in the three months ended December 31, 2010. The increase in selling, general and administrative expenses of $0.1 million was mainly attributable to an increase of $0.2 million in stock-based compensation expense and an increase in headcount related expenses partially offset by a decrease in sales commissions and a decrease in legal expenses in the three months ended December 31, 2011 compared to the three months ended December 31, 2010. Selling, general and administrative expenses for the three months ended December 31, 2010 includes approximately $0.2 million in legal expenses in connection with our acquisition of Si En. We expect the dollar amount of our selling, general and administrative expenses to remain relatively flat in the March 2012 quarter and expect such expenses to fluctuate as a percentage of net sales depending on our overall level of sales.
Interest and other income, net. Interest and other income, net was $0.2 million in the three months ended December 31, 2011 compared to $0.3 million in the three months ended December 31, 2010. The $0.2 million of interest and other income in the three months ended December 31, 2011 is comprised primarily of rental income of $0.3 million from the lease of excess space in our Taiwan facility offset by foreign exchange losses of $0.1 million. The $0.3 million of interest and other income in the three months ended December 31, 2010 is comprised primarily of rental income from the lease of excess space in our Taiwan facility.
Gain on the sale of investments. The gain on the sale of investments was $0.6 million in the three months ended December 31, 2010 as we sold an investment for approximately $0.6 million and recorded a pre-tax gain of approximately $0.6 million.
Provision for income taxes. For the three months ended December 31, 2011, we recorded income tax expense of $1.5 million that represents an effective tax rate of approximately 29%. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the differential in foreign tax rates and non-deductible stock-based compensation expense. For the three months ended December 31, 2010, we recorded an income tax expense of $1,000 in which is comprised of foreign tax and foreign withholding tax. The difference between the recorded provision for income taxes and the tax provision, based on the federal statutory rate of 35%, was primarily attributable to the utilization of federal and foreign net operating loss carryforwards that resulted in minimal tax being required in the period.
Net (income) loss attributable to noncontrolling interests. The net (income) loss attributable to noncontrolling interests was a loss of $21,000 in the three months ended December 31, 2011 compared to income of $2,000 in the three months ended December 31, 2010.
20
Liquidity and Capital Resources
As of December 31, 2011, our principal sources of liquidity included cash, cash equivalents, restricted cash and short-term investments of approximately $102.2 million. During the three months ended December 31, 2011, we generated cash of $7.6 million from operating activities compared to $4.9 million used in the three months ended December 31, 2010. The cash provided by operations in the three months ended December 31, 2011 was primarily due to our net income of $3.8 million adjusted for non-cash items of $4.8 million and decreases in inventories of $5.9 million and decreases in accounts receivable of $4.2 million. This was partially offset by decreases in accounts payable of $7.3 million, decreases in accrued liabilities of $1.2 million, and increases in other assets of $2.6 million. The cash used for operations in the three months ended December 31, 2010 was primarily due to decreases in accounts payable of $6.6 million, increases in inventories of $3.5 million, increases in other assets of $2.3 million and decreases in accrued liabilities of $2.2 million. This was partially offset by our net income of $7.2 million adjusted for non-cash items of $1.7 million and decreases in accounts receivable of $0.8 million.
In the three months ended December 31, 2011, we used $1.4 million for investing activities compared to $6.6 million used in the three months ended December 31, 2010. The cash used in the three months ended December 31, 2011 included $1.7 million for the acquisition of property, equipment and leasehold improvements. In the three months ended December 31, 2011, we generated $0.3 million from net sales of available-for-sale securities. The cash used in the three months ended December 31, 2010 included a $6.5 million cash impact from the deconsolidation of Giantec, $1.7 million to collateralize accounts payable to a supplier and $0.5 million for the acquisition of property, equipment and leasehold improvements. In the three months ended December 31, 2010, we generated $1.5 million from the sale of available-for-sale securities and $0.6 million from the sale of an investment resulting in a pre-tax gain of $0.6 million.
In the three months ended December 31, 2011, we made capital expenditures of approximately $1.7 million for test equipment, engineering tools, and computer hardware and software compared to $0.5 million in the three months ended December 31, 2010. We expect to spend approximately $5.0 million to $8.0 million to purchase capital equipment during the next twelve months, principally for the purchase of additional test equipment, design and engineering tools, and computer hardware and software. We expect to fund our capital expenditures from our existing cash and cash equivalent balances.
We generated $0.8 million from financing activities during the three months ended December 31, 2011 compared to $0.5 million during the three months ended December 31, 2010. Our source of financing for the three months ended December 31, 2011 was proceeds from the issuance of common stock of $1.3 million from stock option exercises and borrowings of $4.0 million under short-term lines of credit. In the three months ended December 31, 2011, we used $4.0 million for the repayment of short-term borrowings and $0.5 million to settle shares withheld for statutory withhold requirements upon the vesting of RSUs. Our source of financing for the three months ended December 31, 2010 was proceeds of $0.5 million from stock option exercises.
We have $12.9 million available through a number of short-term lines of credit with various financial institutions in Taiwan. These lines of credit expire at various times through November 2012. As of December 31, 2011, we had no outstanding borrowings under these short-term lines of credit.
We lease approximately 30,000 square feet of office space in San Jose for our headquarters and the lease on this building expires in June 2013. Outside of the U.S., we have operations in leased sites in China and Hong Kong. In addition to these sites, we lease sales offices in the U.S., Europe and Asia. These leases expire at various dates through 2014. In Taiwan, we own and occupy our building and the land upon which our building is situated is leased under an operating lease that expires in March 2016. Our outstanding commitments under these leases were approximately $2.1 million at December 31, 2011.
We generally warrant our products against defects in materials and workmanship for a period of 12 months. Liability for a stated warranty period is usually limited to the replacement of defective items or return of amounts paid. Warranty expense has historically been immaterial to our financial statements.
At December 31, 2011, we had outstanding authorization from our Board to purchase up to $19.8 million of our common stock from time to time.
We believe our existing funds will satisfy our anticipated working capital and other cash requirements through at least the next 12 months. We may from time to time take actions to further increase our cash position through equity or debt financings, sales of shares of investments, bank borrowings, or the disposition of certain assets. From time to time, we may also commit to acquisitions or equity investments, including strategic investments in or prepayments to wafer fabrication foundries or assembly and test subcontractors. To the extent we enter into such transactions, any such transaction could require us to seek additional equity or debt financing to fund such activities. There can be no assurance that any such additional financing could be obtained on terms acceptable to us, if at all.
21
Off-Balance Sheet Arrangements
We may be obligated to indemnify certain customers, distributors, suppliers, and subcontractors for attorney 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, including patents, registered trademarks, or copyrights. In certain cases, there are limits on and exceptions to our potential liability for indemnification relating to intellectual property infringement claims. In addition, we have entered into indemnification agreements with our officers and directors, and the Company’s bylaws provide that indemnification may be provided to our agents. We have directors’ and officers’ insurance pursuant to which we may be reimbursed for certain indemnity expenses, subject to the terms of the insurance policy. We cannot estimate the amount of potential future indemnity expenses that we may be required to make. The amount of available directors’ and officers’ insurance may not be sufficient to cover our indemnity obligations, which may have a material adverse effect on our results of operations in future periods.
Other than as set forth above, we are not currently party to any off-balance sheet arrangements as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.
Item 3.Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk. We anticipate that international sales will continue to account for a significant portion of our revenue. Our international sales are largely denominated in U.S. dollars and therefore are not subject to material foreign currency exchange risk. However, we have operations in China, Europe, Taiwan, Hong Kong, India, Japan, Korea and Singapore where our expenses are denominated in each country’s local currency and are subject to foreign currency exchange risk. In the three months ended December 31, 2011, we recorded exchange losses of approximately $0.1 million, whereas in fiscal 2011, we recorded exchange gains of approximately $0.4 million. We could be negatively impacted by exchange rate fluctuations in the future. We do not currently engage in any hedging activities. In the future, if we feel our foreign currency exposure has significantly increased, we may consider entering into hedging transactions to help mitigate that risk.
Interest Rate Risk. We had cash, cash equivalents, restricted cash and short-term investments of $102.2 million at December 31, 2011. These funds were primarily invested in money market funds and certificates of deposit. Due to the relatively short-term nature of our investment portfolio, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. We believe a hypothetical 100 basis point increase in interest rates would not materially affect the fair value of our interest-sensitive financial instruments. Since we believe we have the ability to liquidate this portfolio, we do not expect our operating results or cash flows to be materially affected to any significant degree by a sudden change in market interest rates on our investment portfolio.
Investments in Publicly Traded Companies. We own ordinary shares in SMIC which has been a publicly traded company since March 2004. Our investment in SMIC is classified as an available-for-sale investment and is recorded at fair value with the unrealized gain or loss reported as a component in “Accumulated other comprehensive loss” in the Consolidated Balance Sheets. The cost basis of our shares in SMIC is approximately $3.4 million and the market value at December 31, 2011 was approximately $1.4 million and is included in short-term investments. The market value of SMIC shares is subject to fluctuations and our carrying value will be subject to adjustments to reflect changes in SMIC’s market value in future periods. The fair value of our SMIC stock would be approximately $1.6 million or $1.3 million, respectively, based on a hypothetical 10 percent increase or 10 percent decrease in SMIC’s stock price. In the event the decline in the market value of our SMIC shares below our cost basis is determined to be other-than-temporary, we would be required to recognize a loss on our investment through our operating results.
Item 4.Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, based on the evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that, as of December 31, 2011, our disclosure controls and procedures were effective to ensure that the information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the three months ended December 31, 2011, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
22
Part II. OTHER INFORMATION
Item 1.Legal Proceedings
DRAM Memory Technologies LLC v. Integrated Silicon Solution, Inc., et al.
On March 11, 2011, a patent infringement suit was filed against us and several other semiconductor companies in the United States District Court for the Central District of California by DRAM Memory Technologies LLC, for the alleged infringement of various patents related to certain technology allegedly applicable to DRAM devices (Case No. SACV11-00332). The complaint also alleges willful infringement of the patents by us and seeks a permanent injunction of the alleged infringing acts by us, as well as up to the trebling of unspecified damages. On April 1, 2011, an amended complaint naming additional defendants was filed. On October 18, 2011, the scheduling order for the litigation was issued setting a discovery cut-off date of August 17, 2012 and a jury trial date of May 14, 2013. Plaintiff has served discovery on us and we are preparing to vigorously defend the allegations in the complaint.
Goodman v. Integrated Silicon Solution, Inc., et al.
On June 1, 2011, a patent infringement suit was filed against us and several other semiconductor companies in the United States District Court for the Northern District of California by James B. Goodman, for the alleged infringement of U.S. Patent No. 6,243,315 by our products (Case No. 3:11-CV-02607). The complaint seeks unspecified damages, interest and costs, but does not allege willful infringement or seek a permanent injunction. A pretrial preparation order was issued on November 18, 2011 setting a discovery cut-off date of November 30, 2012 and a jury trial date of September 30, 2013. Plaintiff has served discovery on us and we are preparing to vigorously defend the allegations in the complaint.
Other Legal Proceedings
In the ordinary course of our business, as is common in the semiconductor industry, we have been involved in a limited number of legal actions (including the actions described above), both as plaintiff and defendant, and could incur uninsured liability in any one or more of them. Although the outcome of these actions is not presently determinable, we believe that the ultimate resolution of these matters will not have a material adverse effect on our financial position, cash flows or results of operations. However, no assurances can be given with respect to the extent or outcome of any such litigation in the future.
Item 1A. Risk Factors
Uncertain general economic conditions and any future downturn in the markets we serve are expected to adversely affect our business and financial results.
Substantially all of our products are incorporated into products for the digital consumer electronics, networking, telecommunications, mobile communications, automotive electronics and industrial markets. Historically, these markets have experienced cyclical depressed business conditions, often in connection with, or in anticipation of, a decline in general economic conditions, or due to adverse supply and demand conditions in such markets. Industry downturns have resulted in reduced demand and declining average selling prices for our products which adversely affected our business. During uncertain economic conditions, our current or potential customers may delay or reduce purchases of our products which would adversely affect our revenues and harm our business and financial results. In addition, any uncertainty in the economy may negatively impact the spending patterns of businesses including our current and potential customers. We expect our business to be adversely impacted by any further downturn in the U.S. or global economies.
Our sales depend on DRAM and SRAM products and reduced demand for these products or a decline in average selling prices could harm our business.
In the first quarter of fiscal 2012 and in fiscal 2011, approximately 96% and 92%, respectively, of our net sales were derived from the sale of DRAM and SRAM products, which are subject to unit volume fluctuations and declines in average selling prices that could harm our business. We experienced a sequential decline in revenue from $71.3 million in our September 2011 quarter to $66.2 million in our December 2011 quarter which was partially a result of a decrease in unit shipments of our SRAM products. We experienced a sequential decline in revenue from $73.6 million in our September 2010 quarter to $66.1 million in our December 2010 quarter primarily as a result of a decrease in unit shipments of both our DRAM and SRAM products. We experienced a sequential decline in revenue from $37.7 million in our December 2008 quarter to $31.3 million in our March 2009 quarter primarily as a result of a significant decrease in unit shipments of our SRAM products and a decline in the average selling prices for our DRAM products. We may not be able to offset any future price declines for our products by higher volumes or by higher prices on newer products. While we experienced increases in the average selling prices for certain of our products in fiscal 2010 and
23
fiscal 2011, historically, average selling prices for semiconductor memory products have declined, and we expect that average selling prices for our products will decline in the future. Our ability to maintain or increase revenues will depend upon our ability to increase unit sales volume of existing products and introduce and sell new products that compensate for the anticipated declines in the average selling prices of our existing products.
If we are unable to obtain an adequate supply of wafers, our business will be harmed.
If we are unable to obtain an adequate supply of wafers from our current suppliers or any alternative sources in a timely manner, our business will be harmed. Our principal manufacturing relationships are with Nanya, Powerchip Semiconductor, SMIC, TSMC, IBM, Hynix and GlobalFoundries. Each of our wafer foundries also supplies wafers to other semiconductor companies, including certain of our competitors or for their own account. Although we are allocated wafer capacity from our key suppliers, we may not be able to obtain such capacity in periods of tight supply. If any of our suppliers experience manufacturing failures or yield shortfalls, severe financial or operational difficulties, choose to prioritize capacity for other uses, or reduce or eliminate deliveries to us for any other reason, we may not be able to obtain enough wafers to meet the market demand for our products which would adversely affect our revenues. From time to time, certain of our wafer foundries announce that they will no longer produce a specific type of wafer we may need. In such event, we have had to and may in the future have to place large last time buy orders which expose us to the risk of inventory obsolescence. Once a product is in production at a particular foundry, it is time consuming and costly to have such product manufactured at a different foundry. In addition, we may not be able to qualify additional manufacturing sources for existing or new products in a timely manner and we cannot be certain that other manufacturing sources would be able to deliver an adequate supply of wafers to us or at the same cost.
Foundry capacity can be limited, resulting in higher wafer prices, and we may be required to enter into costly arrangements to secure foundry capacity in the future.
If we are not able to obtain sufficient foundry capacity as required, our relationships with our customers would be harmed and our future sales would be adversely impacted. In order to secure foundry capacity, we have entered into in the past, and may enter into in the future, various arrangements with suppliers, which could include:
• | option payments or other prepayments to foundries; |
• | increased prices for wafers; |
• | purchases of equity or debt securities in foundries; |
• | joint ventures; |
• | process development relationships with foundries; |
• | contracts that commit us to purchase specified quantities of wafers over extended periods; and |
• | nonrefundable deposits with, or loans to, foundries in exchange for capacity commitments. |
We may not be able to make any such arrangements in a timely fashion or at all, and such arrangements, if any, may not be on terms favorable to us. Once we make commitments to secure foundry capacity, we may incur significant financial penalties if we subsequently determine that we are not able to utilize all of that capacity. Such penalties may be substantial and could harm our financial results. In addition, we must be able to secure sufficient assembly and test capacity from third-party contractors. In order to secure such capacity, we are exposed to some of the same risks we face when securing foundry capacity. In the past, we have purchased testing equipment for use by our contractors to satisfy a portion of our capacity needs. If we are not able to secure required assembly and test capacity, our business and customer relationships would be harmed.
We rely on third-party contractors to fabricate, assemble and test our products. Our business is highly dependent on the continued operations of such contractors and our failure to successfully manage our relationships with these contractors could damage our relationships with our customers, decrease our sales and limit our growth.
We rely on third-party contractors located in Asia to fabricate, assemble and test our products. Any uncertain economic conditions or uncertainty in the U.S. and global credit markets could materially impact the financial condition or operations of our third-party contractors such as our wafer foundries, test contractors and assembly contractors. Our business is highly dependent on the continued operations of such contractors. Any deterioration in the financial condition of our contractors or any disruption in the operations of our contractors could adversely impact the flow of our products to our end customers and materially adversely impact our business and results of operation. There are significant risks associated with our reliance on these third-party contractors, including:
• | potential price increases; |
• | possible capacity shortages; |
• | financial viability of our contractors; |
• | reduced control over product quality; |
24
• | reduced control over delivery schedules; |
• | their inability to increase production and achieve acceptable yields on a timely basis; |
• | absence of long-term agreements; |
• | limited warranties on products supplied to us; |
• | impact of foreign exchange rates on our product costs; and |
• | general risks related to conducting business internationally. |
If any of these risks are realized, our business and results of operations could be adversely affected until our subcontractor is able to remedy the problem or until we are able to secure an alternative subcontractor.
Our foundries may experience lower than expected yields which could adversely affect our business.
The manufacture of integrated circuits is a highly complex and technically demanding process. Production yields and device reliability can be affected by a large number of factors. As is typical in the semiconductor industry, our outside foundries have from time to time experienced lower than anticipated manufacturing yields and device reliability problems, particularly in connection with the introduction of new products and changes in such foundry’s processing steps. There can be no assurance that our foundries will not experience lower than expected manufacturing yields or device reliability problems in the future, which could materially and adversely affect our business and operating results.
Our operating results are expected to continue to fluctuate and may not meet our financial guidance or published analyst forecasts. This may cause the price of our common stock to decline significantly.
Our future quarterly and annual operating results are subject to fluctuations due to a wide variety of factors, including:
• | changes in the global economy; |
• | the cyclicality of the semiconductor industry; |
• | declines in average selling prices of our products; |
• | shortages in foundry, assembly or test capacity; |
• | disruption in the supply of wafers, assembly or test services; |
• | changes in the pricing for wafers or assembly or test services; |
• | oversupply of memory or analog products in the market; |
• | inventory write-downs for lower of cost or market or excess and obsolete; |
• | cancellation of existing orders or the failure to secure new orders; |
• | excess inventory levels at our customers; |
• | decreases in the demand for our memory or analog products; |
• | our ability to control or reduce our operating expenses; |
• | fluctuations in foreign currencies relative to the U.S. dollar |
• | increased expenses associated with new product introductions, masks or process changes; |
• | the ability of customers to make payments to us; |
• | changes in our product mix which could reduce our gross margins; |
• | a failure to introduce new products and to implement technologies on a timely basis; |
• | market acceptance of ours and our customers’ products; |
• | a failure to anticipate changing customer product requirements; |
• | fluctuations in manufacturing yields at our suppliers; |
• | fluctuations in product quality resulting in rework, replacement, or loss due to damages; |
• | a failure to deliver products to customers on a timely basis; |
• | the timing of significant orders; |
• | the outcome of any pending or future litigation; and |
• | the commencement of any future litigation or antidumping proceedings. |
25
Shifts in industry-wide capacity may cause our results to fluctuate. These shifts may occur quickly with little or no advance notice. Such shifts have historically resulted in significant inventory write-downs.
The semiconductor industry is highly cyclical and is subject to significant downturns resulting from excess capacity, overproduction, reduced demand or technological obsolescence. Shifts in industry-wide capacity from shortages to oversupply or from oversupply to shortages may result in significant fluctuations in our quarterly or annual operating results. These shifts in industry conditions can occur quickly with little or no advance notice to us. Adverse changes in industry conditions are likely to result in a decline in average selling prices and the stated value of our inventory. In the first quarter of fiscal 2012, in fiscal 2011, and in fiscal 2010, we recorded inventory write-downs of $1.6 million, $3.5 million, and $2.9 million, respectively. These inventory write-downs related to valuing our inventory at the lower-of-cost-or-market, and adjusting our inventory valuation for certain excess and obsolete products.
Differences in forecasted average selling prices used in calculating lower of cost or market adjustments can result in significant changes in the estimated net realizable value of inventory and accordingly the amount of write-down recorded. If the estimated market value of products in inventory at quarter-end is below the manufacturing cost of these products, we will recognize charges to write down the carrying value of our inventories to market value. In addition, we write down to zero dollars the carrying value of inventory on hand that has aged over one year (two years for wafer and die bank) to cover estimated excess and obsolete exposures, unless adjustments are made based on management’s judgments for newer products, end of life products, planned inventory increases or strategic customer supply. In making such judgments to write down inventory, management takes into account the product life cycles which can range from six to 30 months, the stage in the life cycle of the product, the impact of competitors’ announcements and product introductions on our products. Future additional inventory write-downs may occur due to lower of cost or market accounting, excess inventory or inventory obsolescence.
Strong competition in the semiconductor market may harm our business.
The semiconductor market is intensely competitive and has been characterized by an oversupply of product, price erosion, rapid technological change, short product life cycles, cyclical market patterns, and heightened foreign and domestic competition. Many of our competitors offer broader product lines and have greater financial, technical, marketing, distribution and other resources than us. We may not be able to compete successfully against any of these competitors. Our ability to compete successfully in our markets depends on factors both within and outside of our control, including:
• | the pricing of our products; |
• | the supply and cost of wafers; |
• | product design, functionality, performance and reliability; |
• | successful and timely product development; |
• | the performance of our competitors and their pricing policies; |
• | wafer manufacturing over or under capacity; |
• | real or perceived imbalances in supply and demand for our products; |
• | the rate at which OEM customers incorporate our products into their systems; |
• | the success of our customers’ products and end-user demand; |
• | access to advanced process technologies at competitive prices; |
• | achievement of acceptable yields of functional die; |
• | the capacity of our third-party contractors to assemble and test our products; |
• | the gain or loss of significant customers; |
• | the nature of our competitors; |
• | our financial strength and the financial strength of our competitors; and |
• | general economic conditions. |
In addition, we are vulnerable to technology advances utilized by competitors to manufacture higher performance or lower cost products. We may not be able to compete successfully in the future as to any of these factors. Our failure to compete successfully in these or other areas could harm our business and financial results.
26
We may encounter difficulties in effectively integrating newly acquired businesses.
From time to time, we have acquired and expect in the future to acquire other companies or assets that we believe to be complementary to our business. In this regard, in January 2011, we acquired Si En Integration Holding Limited (Si En), a privately held fabless provider of high performance analog and mixed signal integrated circuits headquartered in Xiamen, China. Acquisitions may result in the use of our cash resources, potentially dilutive issuances of equity securities, incurrence of debt and contingent liabilities, amortization expenses related to intangible assets, and the possible impairment of goodwill, which could harm our profitability. In addition, acquisitions (including our acquisition of Si En) involve numerous risks, including:
• | higher than estimated acquisition expenses; |
• | difficulties in successfully assimilating the operations, technologies and personnel of the acquired company; |
• | difficulties in continuing to develop new technologies and deliver products to market on time; |
• | diversion of management’s attention from other business concerns; |
• | risks of entering markets in which we have no, or limited, direct prior experience; |
• | lower than expected sales of any acquired products; |
• | the risk that the markets for acquired products do not develop as expected; and |
• | the potential loss of key employees and customers as a result of the acquisition. |
There is no assurance that any of our recent or future acquisitions will contribute positively to our business or operating results.
The loss of a significant customer or a reduction in orders from one or more large customers could adversely affect our operating results.
As sales to our customers are executed pursuant to purchase orders and no purchasing contracts typically exist, our customers can cease doing business with us at any time. We may not be able to retain our key customers, such customers may cancel or reschedule orders, and in the event of canceled orders, such orders may not be replaced by other sales. In addition, sales to any particular customer may fluctuate significantly from quarter to quarter, and such fluctuating sales could harm our business and financial results.
We have significant international sales and operations and risks related to our international activities could harm our operating results.
In the three months ended December 31, 2011, approximately 18% of our net sales was attributable to customers located in the U.S., 20% was attributable to customers located in Europe and 61% was attributable to customers located in Asia. In fiscal 2011, approximately 15% of our net sales was attributable to customers located in the U.S., 20% was attributable to customers located in Europe and 64% was attributable to customers located in Asia. In fiscal 2010, approximately 15% of our net sales was attributable to customers located in the U.S., 18% was attributable to customers located in Europe and 66% was attributable to customers located in Asia. We anticipate that sales to international sites will continue to represent a significant percentage of our net sales. Although our international sales are largely denominated in U.S. dollars, we do have sales transactions in New Taiwan dollars, in Hong Kong dollars and in Chinese renminbi. In addition, our wafer foundries and assembly and test subcontractors are primarily located in Taiwan and China and, while our wafer purchases are denominated in U.S. dollars, most of our assembly and test costs are denominated in New Taiwan dollars. A substantial majority of our employees are located outside of the U.S and the expenses for our foreign operations are generally denominated in local currency. As a result, a devaluation of the U.S. dollar compared to the New Taiwan dollar or Chinese renminbi could substantially increase the cost of our products and our operations in Taiwan or China.
We are subject to the risks of conducting business internationally, including:
• | global economic conditions, particularly in Taiwan and China; |
• | duties, tariffs and other trade barriers and restrictions; |
• | foreign currency fluctuations; |
• | changes in trade policy and regulatory requirements; |
• | transportation delays; |
• | the burdens of complying with foreign laws; |
• | imposition of foreign currency controls; |
• | language barriers; |
• | difficulties in hiring and retaining experienced engineers in countries such as China and Taiwan; |
27
• | difficulties in collecting foreign accounts receivable; |
• | difficulties in protecting our intellectual property rights; |
• | political instability, including any changes in relations between China and Taiwan; |
• | public health outbreaks such as SARS or avian flu; and |
• | earthquakes and other natural disasters such as the events in Japan in March 2011. |
Changes in our effective tax rate will harm our results of operations.
A number of factors may increase our future effective tax rates, including:
• | changes in the valuation of our deferred tax assets and liabilities, and changes in deferred tax valuation allowances; |
• | exhaustion of our existing federal and foreign net operating loss carryforwards and credits; |
• | the jurisdictions in which profits are determined to be earned and taxed; |
• | limitations on the utilization of federal net operating loss carryforwards and credits; |
• | the resolution of issues arising from tax audits with various tax authorities; |
• | adjustments to income taxes upon finalization of various tax returns; |
• | increases in expenses not deductible for tax purposes, including impairments of goodwill in connection with acquisitions; |
• | changes in available tax credits; |
• | changes in tax laws or the interpretation of such tax laws, and changes in U.S. generally accepted accounting principles; and |
• | our decision to repatriate non-U.S. earnings for which we have not previously provided for U.S. taxes. |
Any significant increase in our future effective tax rates will reduce our net income for future periods.
Our revenues and business would be harmed if we are not able to successfully develop, introduce and sell new products and develop and implement new manufacturing technologies in a timely manner. Our research and development expenses could increase and our business could be harmed if the implementation of these new manufacturing technologies is unsuccessful.
We operate in highly competitive, quickly changing markets which are characterized by rapid obsolescence of existing products. As a result, our future success depends on our ability to develop and introduce new products that our customers choose to buy in significant quantities. If we fail to introduce new products in a timely manner or if our customers’ products do not achieve commercial success, our business and results of operations could be seriously harmed. The design and introduction of new products is challenging as such products typically incorporate more functions and operate at faster speeds than prior products. Increasing complexity generally requires smaller features on a chip. This makes developing new generations of products substantially more difficult than prior generations. The cost to develop products utilizing these new technologies is expensive and requires significant research and development spending and, as a result, our research and development expenses could increase in the future. Further, new products may not work properly in our customers’ applications. If we are unable to design, introduce, manufacture, market and sell new products successfully, our business and financial results would be seriously harmed.
Our products are complex and could contain defects, which could reduce sales of those products or result in claims against us.
We develop complex and evolving products. Despite testing by us and our customers, errors may be found in existing or new products. This could result in a delay in recognition or loss of revenues, loss of market share or failure to achieve market acceptance. The occurrence of defects could also cause us to incur significant warranty, support and repair costs, could divert the attention of our engineering personnel from our product development efforts, and could harm our relationships with our customers. The occurrence of these problems could also result in the delay or loss of market acceptance of our products and would likely harm our business. Defects, integration issues or other performance problems in our products could result in financial or other damages to our customers. Our customers could also seek and obtain damages from us for their losses. From time to time, we have been involved in disputes regarding product warranty issues. Although we seek to limit our liability, a product liability claim brought against us, even if unsuccessful, would likely be time consuming and could be costly to defend.
28
Potential intellectual property claims and litigation could subject us to significant liability for damages and could invalidate our proprietary rights.
In the semiconductor industry, it is not unusual for companies to receive notices alleging infringement of patents or other intellectual property rights. We have been, and from time-to-time expect to be, notified of claims that we may be infringing patents, maskwork rights or copyrights owned by third-parties. If it appears necessary or desirable, we may seek licenses under patents that we are alleged to be infringing. However, licenses may not be offered and the terms of any offered licenses may not be acceptable to us.
The failure to obtain a license under a key patent or intellectual property right from a third party for technology used by us could cause us to incur substantial liabilities and to suspend the manufacture of the products utilizing the invention or to attempt to develop non-infringing products, any of which could harm our business. Furthermore, we may become involved
in protracted litigation regarding the alleged infringement by us of third-party intellectual property rights or litigation to assert and protect our patents or other intellectual property rights. Any litigation relating to patent infringement or other intellectual property matters could result in substantial costs and diversion of our resources, which could harm our business.
We may be unable to effectively protect our intellectual property, which would negatively impact our ability to compete.
We believe that the protection of our intellectual proprietary rights will continue to be important to the success of our business. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and business partners, and take actions to control access to and distribution of our documentation and other proprietary information. Despite these efforts, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology. Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as do the laws of the U.S. Many U.S. companies have encountered substantial infringement problems in foreign countries, including countries in which we design and sell our products. We cannot be certain that patents will be issued as a result of our pending applications nor can we be certain that any issued patents would protect or benefit us or give us adequate protection from competing products. For example, issued patents may be circumvented or challenged and declared invalid or unenforceable. We also cannot be certain that others will not develop our unpatented proprietary technology or develop competing technologies on their own.
We may experience difficulties in complying with Sarbanes-Oxley Section 404 in future periods.
We concluded that our internal control over financial reporting was effective at September 30, 2011. If in the future, we are unable to conclude that our internal control over financial reporting is effective or we are unable to conclude that our disclosure controls and procedures are effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.
Our results of operations could vary as a result of the methods, estimates, and judgments we use in applying our accounting policies.
The methods, estimates, and judgments we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies” in Part I, Item 2 of this Form 10-Q). Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in those methods, estimates, and judgments could significantly affect our results of operations. In particular, the calculation of share-based compensation expense requires us to use valuation methodologies (which were not developed for use in valuing employee stock options) and a number of assumptions, estimates, and conclusions regarding matters such as expected forfeitures, expected volatility of our share price, the expected dividend rate with respect to our common stock, and the option exercise behavior of our employees. Furthermore, there are no means, under applicable accounting principles, to compare and adjust our expense if and when we learn about additional information that may affect the estimates that we previously made, with the exception of changes in expected forfeitures of share-based awards. In the future, factors may arise that lead us to change our estimates and assumptions with respect to future share-based compensation arrangements, resulting in variability in our share-based compensation expense over time. Changes in forecasted share-based compensation expense could impact our gross margin percentage, research and development expenses, and selling, general and administrative expenses.
We depend on our ability to attract and retain our key technical and management personnel.
Our success depends upon the continued service of our key technical and management personnel. Several of our important manufacturing and other subcontractor relationships are based on personal relationships between our senior executive officers and such parties. In particular, our Executive Chairman has long-term relationships with our key foundries. If we were to lose the services of any key executives, it may negatively impact the related business relationships since we have no long-term contractual
29
agreements with such parties. Our success also depends on our ability to continue to attract, retain and motivate qualified technical personnel, particularly experienced circuit designers and process engineers. The competition for such employees depends on general economic and industry conditions but such competition has been intense in prior periods of industry growth. We have no employment contracts or key person life insurance policies with or for any of our employees. The loss of the service of one or more of our key personnel could harm our business.
Our stock price is expected to continue to be volatile.
The trading price of our common stock has been and is expected to be subject to wide fluctuations in response to:
• | quarter-to-quarter variations in our operating results; |
• | general conditions or cyclicality in the semiconductor industry or the end markets that we serve; |
• | new or revised earnings estimates or guidance by us or industry analysts; |
• | comments or recommendations issued by analysts who follow us, our competitors or the semiconductor industry; |
• | aggregate valuations and movement of stocks in the broader semiconductor industry; |
• | announcements of new products, strategic relationships or acquisitions by us or our competitors; |
• | increases or decreases in available wafer capacity; |
• | governmental regulations, trade laws and import duties; |
• | announcements related to future or existing litigation involving us or any of our competitors; |
• | announcements of technological innovations by us or our competitors; |
• | announcements regarding our share repurchase program and the timing and amount of shares we purchase under such program; |
• | additions or departures of senior management; and |
• | other events or factors, many of which are beyond our control. |
In addition, stock markets have from time to time experienced extreme price and trading volume volatility. This volatility has had a substantial effect on the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations have adversely affected the market price of our common stock in the past and are likely to continue to do so in the future.
We have used and may in the future use a significant amount of our cash resources to repurchase shares of our common stock and such repurchases present potential risks and disadvantages to us and our continuing stockholders.
While we did not repurchase any shares in the three months ended December 31, 2011, from September 2007 through September 2011, we repurchased and retired an aggregate of 14,179,711 shares of our common stock in the open market under Rule 10b-18 and pursuant to our tender offers at a cost of approximately $88.5 million. At December 31, 2011, we had outstanding authorization from our Board to purchase up to an additional $19.8 million of our common stock from time to time. Although our Board of Directors has determined that these repurchase programs are in the best interests of our stockholders, these repurchases expose us to a number of risks including:
• | the use of a substantial portion of our cash reserves, which may reduce our ability to engage in significant cash acquisitions or to pursue other business opportunities that could create significant value to our stockholders; |
• | the risk that we would not be able to replenish our cash reserves by raising debt or equity financing in the future on terms acceptable to us, or at all; |
• | the risk that these repurchases have reduced our “public float,” which is the number of our shares owned by non-affiliate stockholders and available for trading in the securities markets, and likely reduced the number of our stockholders, which may reduce the volume of trading in our shares and may result in lower stock prices and reduced liquidity in the trading of our shares; and |
• | the risk that our stock price could decline and that we would be able to repurchase shares of our common stock at a lower price per share than the prices we pay in our repurchase programs. |
30
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our worldwide operations, including the operations of our foundries and other suppliers, could be subject to natural disasters and other business disruptions, which could seriously harm our revenue and financial condition and increase our costs and expenses. Our corporate headquarters, and a portion of our research and development activities, are located in San Jose, California, and our other critical business operations and many of our suppliers are located in Asia, near major earthquake faults. The ultimate impact on us, our significant suppliers and our general infrastructure of being located near major earthquake faults is unknown, but our revenue, profitability and financial condition could suffer in the event of a major earthquake or other natural disaster. Losses and interruptions could also be caused by earthquakes, power shortages, telecommunications failures, water shortages, tsunamis, floods, typhoons, volcanic eruptions, fires, extreme weather conditions, medical epidemics such as a flu outbreak and other natural or manmade disasters such as the events in Japan in March 2011.
We have incurred significant losses in certain prior periods, and there can be no assurance that we will be able to sustain profitability in the future.
Though we have been profitable for ten consecutive quarters beginning with the September 2009 quarter, we incurred a loss of $5.1 million in fiscal 2009, which included a $0.7 million charge for acquired in-process technology. Though we were profitable in each of the first three quarters of fiscal 2008, we incurred a loss of $17.8 million in fiscal 2008, which included charges for the impairment of goodwill of $25.3 million. There can be no assurance that we will maintain profitability in future periods. Our ability to maintain profitability on a quarterly or fiscal year basis in the future will depend on a variety of factors, including the need for future inventory write-downs, our ability to increase net sales, maintain or expand gross margins, introduce new products on a timely basis, secure sufficient wafer fabrication and assembly and test capacity and control operating expenses, including stock-based compensation. Adverse developments with respect to these or other factors could result in quarterly or annual operating losses in the future.
Our operations involve the use of hazardous and toxic materials, and we must comply with environmental laws and regulations, which can be expensive, and may adversely affect our business and operating results.
We are subject to federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to hazardous and toxic materials. If we were to violate or become liable under environmental laws in the future as a result of our inability to obtain permits, human error, accident, equipment failure or other causes, we could be subject to fines, costs, or civil or criminal sanctions, face property damage or personal injury claims or be required to incur substantial investigation or remediation costs or experience disruptions in our operations, any of which could have a material adverse effect on our business. In addition, environmental laws could become more stringent over time imposing greater compliance costs and increasing the risks and penalties associated with violations, which could harm our business.
We also face increasing complexity in our product design as we adjust to new and future requirements relating to the materials composition of our products, including the restrictions on lead and other hazardous substances applicable to specified electronic products placed on the market in the European Union (Restriction on the Use of Hazardous Substances Directive 2002/95/EC, also known as the RoHS Directive). We also expect that our operations will be affected by other new environmental laws and regulations on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws and regulations, they will likely result in additional costs, and could require that we change the design or manufacturing of our products, any of which could have a material adverse effect on our business.
31
Item 6. Exhibits
(a) The following exhibits are filed as a part of this report.
Exhibit 31.1 | Certification Pursuant to SEC Release No. 33-8238, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 31.2 | Certification Pursuant to SEC Release No. 33-8238, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 101.INS | ** | XBRL Instance Document |
Exhibit 101.SCH | ** | XBRL Taxonomy Extension Schema Document |
Exhibit 101.CAL | ** | XBRL Taxonomy Extension Calculation Linkbase Document |
Exhibit 101.DEF | ** | XBRL Taxonomy Extension Definition Linkbase Document |
Exhibit 101.LAB | ** | XBRL Taxonomy Extension Label Linkbase Document |
Exhibit 101.PRE | ** | XBRL Taxonomy Extension Presentation Linkbase Document |
** | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Integrated Silicon Solution, Inc. | ||||
(Registrant) | ||||
Dated: | February 9, 2012 | /s/ John M. Cobb | ||
John M. Cobb | ||||
Vice President and Chief Financial Officer | ||||
(Principal Financial and | ||||
Accounting Officer) | ||||
33